AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 30, 1995
REGISTRATION NO. 33-57059
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 2
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
PETROLEUM HEAT AND POWER CO., INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C> <C>
MINNESOTA 5983 06-1183025
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
-------------------
2187 ATLANTIC STREET
STAMFORD, CONNECTICUT 06902
(203) 325-5400
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
-------------------
IRIK P. SEVIN,
PRESIDENT
PETROLEUM HEAT AND POWER CO., INC.
2187 ATLANTIC STREET
STAMFORD, CONNECTICUT 06902
(203) 325-5400
(Name and address, including zip code and telephone number,
including area code of agent for service)
-------------------
COPIES TO:
<TABLE>
<S> <C>
ALAN SHAPIRO, ESQ. BETH R. NECKMAN, ESQ.
PHILLIPS, NIZER, BENJAMIN, KRIM & BALLON LATHAM & WATKINS
31 W. 52ND STREET 885 THIRD AVENUE
NEW YORK, NEW YORK 10019-6167 NEW YORK, NEW YORK 10022-4802
(212) 977-9700 (212) 906-1200
</TABLE>
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of the Registration Statement.
-------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. / /
-------------------
CALCULATION OF REGISTRATION FEE
[CAPTION]
<TABLE>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PER SECURITY(1) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
% Subordinated Debentures Due
2005.............................. $125,000,000 100% $125,000,000 $43,104
Class A Common Stock, par value
$.10 per share.................... 3,450,000 shares $8.625(2) $29,756,250 $10,261
Total............................. $154,756,250 $53,365(3)
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
(2) Based on the average of the high and low prices of the Class A Common Stock
reported on the Nasdaq National Market on December 20, 1994, in accordance
with Rule 457 under the Securities Act of 1933, as amended.
(3) Previously paid.
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two separate prospectuses: a prospectus
relating to an offering of $125 million of % Subordinated Debentures and a
prospectus relating to an offering of 3,450,000 shares of Class A Common Stock.
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
CROSS REFERENCE SHEET
PURSUANT TO S-K, ITEM 501(B)
<TABLE>
<CAPTION>
ITEM OF FORM S-2 PROSPECTUS LOCATION
- ------------------------------------------------- -------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus..... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors, Ratio of
Earnings to Fixed Charges.................. Prospectus Summary; Risk Factors; Selected
Financial and Other Data
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Underwriting
6. Dilution................................... Inapplicable to Debenture Prospectus; see
"Dilution" in Common Stock Prospectus
7. Selling Security Holders................... Inapplicable to Debenture Prospectus; see
"Principal and Selling Stockholders" in
Common Stock Prospectus
8. Plan of Distribution....................... Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered................................. Description of Debentures in Debenture
Prospectus; Description of Capital Stock in
Common Stock Prospectus
10. Interests of Named Experts and Counsel..... Legal Matters; Experts
11. Information with Respect to the Registrant
(b)(1) Description of Business............. Prospectus Summary; The Company; Business
(b)(2) Financial Statements................ Consolidated Financial Statements of
Petroleum Heat and Power Co., Inc. and
Subsidiaries
(b)(3) Industry Information................ Business
(b)(4) Dividends and Related Stockholder
Matters............................. Inapplicable
(b)(5) Selected Financial Data............. Selected Financial and Other Data
(b)(6) Supplementary Financial
Information.......................... Consolidated Financial Statements of
Petroleum Heat and Power Co., Inc. and
Subsidiaries
(b)(7) Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... Management's Discussion and Analysis of
Results of Operations and Financial
Condition
(b)(8) Disagreements with Accountants...... Inapplicable
12. Incorporation of Certain Information by
Reference.................................. Incorporation of Documents by Reference
13. Disclosure of Commission Position on
Indemnification for
Securities Act Liabilities................. Inapplicable
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 30, 1995
PROSPECTUS [LOGO]
, 1995
$125,000,000
PETROLEUM HEAT AND POWER CO., INC.
% SUBORDINATED DEBENTURES DUE 2005
The % 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 and selling shareholders are offering 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"). The Debenture Offering is not contingent upon the consummation of
the Common Stock Offering, and there can be no assurance that the Common Stock
Offering will be consummated. See "Common Stock Offering."
Interest on the Debentures is payable semi-annually on and of
each year, commencing , 1995. The Debentures are not redeemable prior to
, 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 , 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 % 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.......................... % % %
Total.................................. $ $ $
- ------------------------------------------------------------------------------------------------------
</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 $ .
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 , 1995.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET 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.
"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 have increased from $84.6 million in 1980 to $538.5 million in 1993, a
compound annual growth rate of 15.3%. EBITDA has increased during such period
from $3.6 million to $48.4 million, a compound annual growth rate of 22.2%.
Similarly, NIDA has increased during such period from $2.9 million to $23.2
million, a compound annual growth rate of 17.2%. 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.
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 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.
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 (based
upon the mid-point estimate of $183.7 million) was attributable to a $6.3
million increase in gross profit in the heating oil division and the $5.7
million of gross profit realized by Star Gas in December 1994.
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 improvement was
primarily due to an increase in gross profit and lower depreciation and
amortization expenses, partially offset by 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
4
<PAGE>
$23.2 million, respectively. 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 period January 1, 1995 through January 26, 1995 were
approximately 21.5% warmer than normal (measured on a degree-day basis).
THE DEBENTURE OFFERING
<TABLE>
<S> <C>
Securities Offered........... $125 million principal amount of % Subordinated
Debentures due 2005 (the "Debentures").
Maturity Date................ , 2005.
Interest Payment Dates....... and of each year, commencing , 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
, 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 , 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 %
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.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
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 and selling stockholders are
offering 500,000 shares of Class A Common Stock to the
public. The Debenture Offering is not contingent upon the
consummation of the Common Stock Offering, and there can be
no assurance that the Common Stock Offering will be
consummated. See "Common Stock Offering."
Use of Proceeds.............. The net proceeds to the Company from the Debenture Offering
and the Common Stock Offering are estimated to be $120.3
million and $20.8 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 $24.2 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. If the Common
Stock Offering is not consummated, the balance of the net
proceeds available to the Company for general corporate
purposes would be approximately $3.4 million. See "Use of
Proceeds."
</TABLE>
6
<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 certain minimum EBITDA to interest expense, net ratios.
For 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 35,750 5,556 1.2x
</TABLE>
OTHER DATA:
<TABLE>
<CAPTION>
GALLONS OF HOME HEATING RATIO OF EBITDA TO
OIL AND INTEREST
YEAR ENDED DECEMBER 31, RETAIL PROPANE SOLD EBITDA(6) NIDA(7) EXPENSE, NET
<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 46,130 2.4x
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: AT SEPTEMBER 30, 1994
--------------------------
ACTUAL AS ADJUSTED(8)
<S> <C> <C>
Cash................................................................ $ 17,055 $ 39,518
Working capital..................................................... 8,357 33,629
Total assets........................................................ 234,138 389,124
Total long-term debt................................................ 219,084 334,034
Redeemable preferred stock (excluding current maturities)........... 16,666 16,666
Stockholders' equity (deficiency)................................... (84,568) (56,754)
</TABLE>
- ------------------------
(1) Depreciation and amortization includes depreciation and amortization of
plant and equipment and amortization of customer lists and deferred charges.
(2) For purposes of calculating the ratio of earnings to fixed charges, (i)
earnings consist of income (loss) before income taxes, net income (loss)
derived from investments accounted for by the equity method, and
extraordinary items, plus fixed charges and (ii) fixed charges consist of
interest expense, amortization of debt 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, including the pro forma operating and
other data in the event that the Common Stock Offering is not consummated.
(6) "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.
(7) "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.
(8) 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 $24.2
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,
including the balance sheet data as adjusted in the event that the Common
Stock Offering is not consummated.
8
<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.
9
<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 $56.8 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 $42.2
million and $4.6 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, $40.6 million and $28.0 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.
10
<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
11
<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 $42.8 million and $5.2 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
12
<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 (26.3% if the Common Stock Offering is consummated). 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,
54.7% of the voting
13
<PAGE>
power of all of the outstanding shares of Common Stock (53.6% if the Common
Stock Offering is consummated). 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 and selling stockholders are offering 500,000 shares of Class A Common
Stock to the public. In addition, the Company or, at the option of a selling
stockholder, such selling stockholder has granted the Underwriters an option to
purchase up to 450,000 additional shares of Class A Common Stock to cover over-
allotments. The Debenture Offering and the Common Stock Offering are not
contingent upon each other and there can be no assurance that the Common Stock
Offering will be consummated.
USE OF PROCEEDS
The net proceeds from the sale of the Debentures are estimated to be
approximately $120.3 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 approximately $20.8 million ($24.6
million if the Underwriters' over-allotment option in connection with the Common
Stock Offering is exercised in full and all of the over-allotment shares are
sold by the Company), assuming a public offering price of $9.00 per share and
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 $24.2 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. If the Common Stock Offering is not consummated, the balance
of the net proceeds available to the Company for general corporate purposes
would be approximately $3.4 million.
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
currently bear interest at 8.75%.
14
<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." See the Pro Forma Financial
Statements contained elsewhere herein for the capitalization of the Company if
the Common Stock Offering is not consummated.
<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
% 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 80,141
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) (56,754)
--------- ----------- ----------
Total capitalization.......................... $ 151,182 $ 261,063 $ 293,946
--------- ----------- ----------
--------- ----------- ----------
</TABLE>
(Footnotes on following page)
15
<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.
16
<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 certain minimum EBITDA to interest
expense, net ratios. For 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.
<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 36,257 15,147 16,721 26,197
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) (42,181) (16,274) (5,721) (4,585)
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) (42,761) (16,492) (6,146) (5,228)
Extraordinary item... -- -- -- -- (867) -- (867) (654) --
-------- -------- -------- -------- -------- ------------ -------- -------- ------------
Net income
(loss)........... $ (4,287) $(29,267) $(16,562) $ (4,389) $ (8,431) $(42,761) $(17,359) $ (6,800) $ (5,228)
-------- -------- -------- -------- -------- ------------ -------- -------- ------------
-------- -------- -------- -------- -------- ------------ -------- -------- ------------
Ratio of earnings to
fixed charges(2)... -- -- -- -- -- -- -- -- --
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------- ---------------------------
PRO PRO
FORMA(1) 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(3)..................... $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 36,257 15,147 16,721 26,197
NIDA(4)....................... 27,573 4,639 15,744 27,721 23,176 36,677 7,025 15,880 24,820
Ratio of EBITDA to interest
expense, net................ 2.2x 1.3x 1.9x 2.8x 2.4x 2.1x 1.7x 2.2x 2.1x
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>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1994
AT DECEMBER 31, ----------------------
---------------------------------------------------- AS
1989 1990 1991 1992 1993 ACTUAL ADJUSTED(5)
(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 $ 39,518
Working capital (deficiency).......... 13,544 (5,520) (12,038) (6,744) 16,694 8,357 33,629
Total assets.......................... 286,435 260,665 220,010 252,783 256,589 234,138 389,124
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) (56,754)
</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, including the pro forma statement of
operations and other data in the event that the Common Stock Offering is not
consummated.
(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 $42.2 million and $4.6 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 $40.6 million and $28.0 million,
respectively, for such periods.
(3) "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.
(4) "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.
(5) 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 $24.2
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,
including the balance sheet data as adjusted in the event that the Common
Stock Offering is not consummated.
18
<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.
Therefore, although net income (loss) calculated in accordance with generally
accepted accounting principles is generally considered by investors to be an
indicator of operating performance, management believes that in evaluating the
Company's results, two additional measures should be considered to supplement
the net income (loss) analysis. The first such measure is operating income
before depreciation, 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 (referred to herein as EBITDA) and the second such measure is 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 (referred to herein as
NIDA). 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, it is important
for an investor to understand these concepts since management's strategy is to
maximize EBITDA and NIDA, rather than net income. The computations of EBITDA and
NIDA are derived from the Company's financial statements as a supplement to the
Company's traditional financial statements. Because of management's acquisition
and other strategies, it believes that EBITDA is an important indicator as a
measure of earnings derived from operations before non-cash expenses and
non-operating expenses, such as other expenses and income taxes. The following
enumerates other factors that investors should consider.
First, the financial results of a given year do not reflect the full impact
of that year's acquisitions. 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, as stated above, the Company's objective is to maximize EBITDA and
NIDA, rather than net income. The large disparity between NIDA and net income
(loss) is primarily attributable to the substantial amortization of customer
lists and other intangibles in connection with acquisitions. Customer lists and
other intangibles acquired in connection with acquisitions represent the
allocation of acquisition costs which are amortized over the future periods
benefitted by such acquisitions. In general, costs are allocated to assets based
upon the fair market value of the assets purchased, as determined by arms'
length negotiations between the Company and the seller. Substantially all
purchased intangibles 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
19
<PAGE>
each year and 35% of its annual volume of propane in each of the first and
fourth quarters of each calendar year. The Company generally realizes positive
NIDA in both of these quarters and negative NIDA during the warmer quarters
ending June and September. As a result, acquisitions made during the spring and
summer months generally have a negative effect on earnings and a limited impact
on NIDA in the calendar year in which they are made. Most of the costs
associated with an acquired distributor are incurred evenly throughout the
remainder of the year, whereas a smaller percentage of the purchased company's
annual volume and gross profit is realized during the same period.
Finally, changes in total dollar sales do not necessarily affect the
Company's gross profit, EBITDA, net income or NIDA. Since the Company
historically has added a per gallon margin onto its wholesale costs, variability
in supply prices has affected net sales but generally has not affected EBITDA,
net income, NIDA or any other measure of earnings. As a result, the Company's
margins are most meaningfully measured on a per gallon basis and not as a
percentage of sales. While fluctuations in wholesale prices have not
significantly affected demand to date, it is possible that significant wholesale
price increases over an extended period of time could have the effect of
encouraging conservation. If demand were reduced and the Company was unable to
increase its gross profit margin or reduce its operating expenses, the effect of
the decrease in volume would be to reduce EBITDA, net income, NIDA and any other
measure of earnings. Given the Company's operating strategy to maximize EBITDA
and NIDA as described above, an investor should also be aware of certain risks
that are inherent in such a strategy. Although an increased level of
acquisitions (which in turn adds to the Company's plant and equipment and
customer lists) is expected to have a positive impact on the long-term viability
of the business, the near term effect of acquisitions would be to increase
EBITDA and NIDA by a significantly greater amount than would be the increase, if
any, of net income because of the substantial impact of depreciation and
amortization expense, items which generally do not impact EBITDA or NIDA, but
which do materially impact net income. A reduced level of acquisitions, which
would be expected to have an adverse impact on the long-term growth of the
business, could lead to decreased EBITDA and NIDA, while possibly increasing net
income. In the year of an acquisition, depending on the month it is consummated,
it is possible that EBITDA and NIDA would not be affected, while net income
could be negatively impacted.
To the extent future acquisitions are financed with debt, the interest
expense associated with such debt would not impact EBITDA, but would reduce NIDA
and net income. If the Company were to finance future acquisitions by issuing
new preferred stock, the preferred stock dividends associated with the new
preferred stock would not affect EBITDA or net income, but would reduce NIDA and
increase the Company's stockholders' deficiency.
Since EBITDA and NIDA are not affected by depreciation and amortization, the
Company's failure to replace long-lived assets or its decision to delay needed
capital expenditures could have the short term effect of improving net income
(by minimizing depreciation and amortization expense), but could have a negative
impact on the long-term viability of the business. Because management is
concerned with the Company's long-term viability, and measures its operating
performance by EBITDA and NIDA, it intends to continue making capital
improvements as required.
Factors that impact the Company's ability to continue following its current
operating strategy in the foreseeable future include its ability to continue to
grow through acquisitions, while continuing to replace lost customers through
internal marketing.
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 revenue associated with
acquisitions ($15.5 million or 4.1%) and to colder weather ($22.1 million or
20
<PAGE>
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
21
<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
22
<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.
23
<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.
24
<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.
<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)
- ------------------------ ------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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 $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
25
<PAGE>
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.
26
<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
27
<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
28
<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:
<TABLE>
<CAPTION>
NATURAL GAS CONVERSIONS
<S> <C>
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
</TABLE>
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
29
<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.
30
<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
31
<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.
32
<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
33
<PAGE>
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
34
<PAGE>
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.
35
<PAGE>
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.
36
<PAGE>
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.
37
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to the directors and executive officers of the
Company is set forth below:
<TABLE>
<CAPTION>
NAME AGE OFFICE
<S> <C> <C>
Irik P. Sevin................ 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
38
<PAGE>
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,
39
<PAGE>
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.
40
<PAGE>
DESCRIPTION OF DEBENTURES
The Debentures will be issued pursuant to an Indenture, to be dated as of
, 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 , 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 and in each year to the holders
of record at the close of business on the and next preceding such
interest payment date. Interest will initially accrue from the date of issuance,
and the first interest payment date will be , 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 , 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 of the
years indicated:
YEAR PERCENTAGE
2000............................................................. %
2001.............................................................
2002.............................................................
2003 and thereafter.............................................. 100.000
In addition, at any time prior to 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 % 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.
41
<PAGE>
SINKING FUND
There will be no mandatory sinking fund payments for the Debentures.
SELECTION OF DEBENTURES TO BE REDEEMED AND NOTICE OF REDEMPTION
In the event of optional redemption, as described above, of less than all of
the Debentures, the Trustee will select the Debentures for redemption pro rata
or by lot or by a method that complies with applicable legal and securities
exchange requirements, if any, and that the Trustee considers fair and
appropriate and in accordance with methods generally used at the time of
selection by fiduciaries in similar circumstances.
Notice of redemption will be mailed at least 30 but not more than 60 days
before the redemption date to each holder of Debentures to be redeemed at such
holder's registered address. The notice of redemption will identify the
Debentures to be redeemed and will state the redemption date; the redemption
price; the name and address of the paying agent; that Debentures called for
redemption must be surrendered to the paying agent to collect the redemption
price plus accrued interest; that, unless the Company defaults in making such
redemption payment or the paying agent is prohibited from making such payment
pursuant to the terms of the Indenture, interest on Debentures called for
redemption ceases to accrue on and after the redemption date; the paragraph of
the Debentures pursuant to which the Debentures called for redemption are being
redeemed; and that no representation is made as to the correctness or accuracy
of the CUSIP number, if any, listed in such notice or printed on the Debentures.
Prior to the redemption date, the Company will deposit with the paying agent
(or, if the Company or a Subsidiary is the paying agent, will segregate and hold
in trust) money sufficient to pay the redemption price of and accrued interest
on all Debentures to be redeemed on that date other than Debentures or portions
of Debentures called for redemption which have been delivered by the Company to
the Trustee for cancellation.
RANKING
The payment of the principal of, premium (if any) and interest on the
Debentures is subordinated in right of payment, as set forth in the Indenture,
to the payment when due of all Senior Debt of the Company. However, payment from
the money or the proceeds of U.S. Government Obligations held in any defeasance
trust described under "Defeasance" below is not subordinate to any Senior Debt
or subject to the restrictions described herein. At September 30, 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.
42
<PAGE>
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
43
<PAGE>
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.
44
<PAGE>
Within 30 days following any Change of Control, the Company will mail a
notice to each holder stating (i) that a Change of Control has occurred and that
such holder has the right to require the Company to purchase such holder's
Debentures at a purchase price in cash equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date); (ii) the
circumstances and relevant facts regarding such Change of Control (including
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to such Change of Control); (iii) the
purchase date (which will be no earlier than 30 days nor later than 60 days from
the date such notice is mailed); and (iv) the instructions, determined by the
Company consistent with the Indenture, that a holder must follow in order to
have its Debentures repurchased.
If, at the time of a Change of Control, the Company is prohibited by the
terms of 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.
45
<PAGE>
CERTAIN COVENANTS
Set forth below are certain covenants contained in the Indenture:
SEC Reports. Whether or not required by the rules and regulations of the
Commission, so long as any Debentures are outstanding, the Company will furnish
to the holders of Debentures all quarterly and annual financial information that
would be required to be contained in a filing with the Commission on Forms 10-Q
and 10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants. In addition, whether or not
required by the rules and regulations of the Commission, the Company will file a
copy of all such information with the Commission for public availability and
make such information available to investors who request it in writing. The
Company also will comply with the provisions of Sec. 314(a) of the Trust
Indenture Act.
Limitation on Funded Debt. The Company will not, directly or indirectly,
create, incur, issue, assume, guaranty or otherwise become directly or
indirectly liable with respect to (collectively, "incur") any Funded Debt
unless, after giving effect thereto, the Company's Consolidated EBITDA Coverage
Ratio exceeds 2.0 to 1.
Notwithstanding the foregoing paragraph, the Company may incur the following
Funded Debt: (i) Funded Debt owed to and held by a Wholly Owned Subsidiary;
provided, however, that any subsequent issuance or transfer of any Capital Stock
which results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned
Subsidiary or any subsequent transfer of such Funded Debt (other than to a
Wholly Owned Subsidiary) will be deemed, in each case, to constitute the
incurrence of such Funded Debt by the Company; (ii) the Debentures and Funded
Debt issued in exchange for, or the proceeds of which are used to refund or
refinance, any Funded Debt permitted by this clause (ii); provided, however,
that (1) the principal amount of the Funded Debt so incurred will not exceed the
principal amount of the Funded Debt so exchanged, refunded or refinanced and (2)
the Funded Debt so incurred (A) will not mature prior to the Stated Maturity of
the Funded Debt so exchanged, refunded or refinanced and (B) will have an
Average Life equal to or greater than the remaining Average Life of the Funded
Debt so exchanged, refunded or refinanced; (iii) Funded Debt (other than Funded
Debt described in clause (i) or (ii) of this paragraph) outstanding on the date
of the Indenture and Funded Debt issued in exchange for, or the proceeds of
which are used to refund or refinance, any Funded Debt permitted by this clause
(iii) or by the first paragraph of this covenant; provided, however, that (1)
the principal amount of the Funded Debt so incurred will not exceed the
principal amount of the Funded Debt so exchanged, refunded or refinanced, (2)
the Funded Debt so incurred (A) will not mature prior to the Stated Maturity of
the Funded Debt so exchanged, refunded or refinanced and (B) will have an
Average Life equal to or greater than the remaining Average Life of the Funded
Debt so exchanged, refunded or refinanced and (3) if the Funded Debt so
exchanged, refunded or refinanced is a Subordinated Obligation, the Funded Debt
so incurred will be subordinated to the Debentures; and (iv) additional Funded
Debt in an aggregate amount not to exceed $50 million at any one time
outstanding; 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.
46
<PAGE>
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
47
<PAGE>
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
48
<PAGE>
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, (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.
49
<PAGE>
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
50
<PAGE>
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.
51
<PAGE>
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").
52
<PAGE>
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.
53
<PAGE>
"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
54
<PAGE>
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;
55
<PAGE>
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
56
<PAGE>
(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;
57
<PAGE>
(ii) all Capital Lease Obligations of such person and all Attributable
Indebtedness in respect of Sale/Leaseback Transactions entered into by such
person;
(iii) all obligations of such person 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-
58
<PAGE>
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.
59
<PAGE>
"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 unless such contingency has
occurred.
"Stated Maturity" means, with respect to any Indebtedness, the date
specified in such Indebtedness, or in any agreement pursuant to which such
Indebtedness was incurred, as the fixed date on which the principal of such
Indebtedness is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
Indebtedness at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligations" means any Indebtedness of the Company (whether
outstanding on the date hereof or hereafter incurred) which is subordinate or
junior in right of payment to the Debentures.
"Subsidiary" means a corporation of which a majority of the Capital Stock
having voting power under ordinary circumstances to elect a majority of the
board of directors is owned by (i) the Company, (ii) the Company and one or more
Subsidiaries or (iii) one or more Subsidiaries; provided, however, that an
Unrestricted Subsidiary shall be deemed not to be a Subsidiary (except as used
in the definition thereof).
"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.
60
<PAGE>
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sec.Sec.
77aaa-77bbbb) as in effect on the date of the Indenture.
"Traber Group" means (i) all the holders of Class C Common Stock as of the
date of the Indenture who are not members of the Sevin Group, (ii) any person
who receives shares from persons described in clause (i) without such transfer
of shares being subject to the first refusal right referred to in the
shareholders agreement among the holders of Class C Common Stock dated November
25, 1986, as amended through the date of the Indenture, and (iii) any trust over
which persons described in clause (i) or (ii) have sole voting power.
"Treasury Rate" as of any date of determination means the yield to maturity
at the time of computation of United States Treasury securities with a constant
maturity (as compiled and published in the most recent federal Reserve
Statistical Release H.15(519) which has become publicly available at least two
business days prior to such date of determination (or, if such Statistical
Release is no longer published, any publicly available source of similar market
data)) of five years.
"Trust Officer" means the chairman 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."
61
<PAGE>
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.
62
<PAGE>
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.
63
<PAGE>
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.
64
<PAGE>
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.......
Bear, Stearns & Co. Inc...................................
PaineWebber Incorporated..................................
-------------------
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 % of the
principal amount. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of % of the principal amount. After the initial
public offering of the Debentures, the offering price and other selling terms
may be changed by the Underwriters.
The Debentures are a new issue of securities, have no established trading
market and may not be widely distributed. The Company has been informed by 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.
65
<PAGE>
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).
66
<PAGE>
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 % Subordinated Notes due 2005 at an assumed interest rate
of 11 1/2% (the "Debenture Offering") and 2.5 million shares of Class A
Common Stock at an assumed price of $9.00 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>
<TABLE>
<CAPTION>
DEBENTURE STOCK
OFFERING OFFERING
PRO FORMA PRO FORMA
SUBTOTAL ADJUSTMENTS SUBTOTAL ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
$ 15,260 $ 120,300(5) $ 18,718 $ 20,800(10) $ 39,518
(85,072)(6)
(14,268)(7)
(13,502)(8)
(4,000)(9)
51,859 51,859 51,859
18,680 18,680 18,680
9,410 9,410 9,410
-------- ----------- -------- ----------- ---------
95,209 3,458 98,667 20,800 119,467
139,869 139,869 139,869
124,738 4,700(5) 129,363 129,363
(75)(7)
425 425 425
-------- ----------- -------- ----------- ---------
$360,241 $ 8,083 $368,324 $ 20,800 $389,124
-------- ----------- -------- ----------- ---------
-------- ----------- -------- ----------- ---------
$ 4,000 $ (4,000)(9) $ -- $ --
4,967 4,967 4,967
11,427 11,427 11,427
30,872 30,872 30,872
13,279 13,279 13,279
25,293 25,293 25,293
-------- ----------- -------- ---------
89,838 (4,000) 85,838 85,838
119,515 (65,350)(6) 47,783 47,783
(6,382)(7)
125,000(5) 125,000 125,000
2,280 2,280 2,280
7,060 7,060 7,060
167,632 (6,381)(7) 161,251 161,251
-------- ----------- -------- ---------
386,325 42,887 429,212 429,212
-------- ----------- -------- ---------
24,930 (8,264)(6) 16,666 16,666
-------- ----------- -------- ---------
11,458 (11,458)(6)
-------- ----------- -------- ---------
2,405 (151)(8) 2,254 $ 250(10) 2,504
72,942 (13,351)(8) 59,591 20,550(10) 80,141
(132,005) (1,580)(7) (133,585) (133,585 )
(4,534) (4,534) (4,534 )
(1,280) (1,280) (1,280 )
-------- ----------- -------- ----------- ---------
(62,472) (15,082) (77,554) 20,800 (56,754 )
-------- ----------- -------- ----------- ---------
$360,241 $ 8,083 $368,324 $ 20,800 $389,124
-------- ----------- -------- ----------- ---------
-------- ----------- -------- ----------- ---------
</TABLE>
- -----------------------
(5) Reflects the Debenture Offering, net of estimated offering expenses of $4.7
million, with net proceeds to the Company of $120.3 million, including
approximately $3.5 million in cash and principal amount of Debentures, the
proceeds of which are not required for the Use of Proceeds.
(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
$1.7 million, with net proceeds to the Company of $20.8 million.
P-3
<PAGE>
This page intentionally left blank.
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; provided, however, that if
both the Debenture Offering and the Common Stock Offering are consummated, the
pro forma data do not give effect to approximately $1.9 million of interest
expense on, or the use of, approximately $16.7 million of proceeds of the
Debenture Offering, the proceeds of which are not required for acquisitions or
refinancings.
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(10):
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:
<TABLE>
<S> <C>
Salaries and related costs.................................................... $2,273
Other......................................................................... 611
------
$2,884
------
------
</TABLE>
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 decreased interest expense of Star Gas as a result of the Star Gas
Recapitalization.
(6) Reflects increased interest expense as a result of the Prior Note Offerings.
If the Prior Note Offerings had occurred on January 1, 1993, the Company
would have recorded a $3.8 million extraordinary loss as the result of the
early retirement of debt.
(7) Reflects the issuance of shares in the Star Gas Acquisition.
P-6
<PAGE>
DEBENTURE STOCK
OFFERING OFFERING
PRO FORMA PRO FORMA
SUBTOTAL ADJUSTMENTS SUBTOTAL ADJUSTMENTS PRO FORMA
$716,072 $716,072 $ 716,072
465,295 465,295 465,295
- -------- -------- ---------
250,777 250,777 250,777
173,777 173,777 173,777
35,440 35,440 35,440
13,142 13,142 13,142
264 264 264
33,913 33,913 33,913
- -------- -------- ---------
(5,759) (5,759) (5,759)
32,405 5,405(8) 37,810 (1,553)(9) 36,257
(165) (165) (165)
- -------- -------- ---------
(38,329) (43,734) (42,181)
580 580 580
- -------- -------- ---------
$(38,909) $(44,314) $ (42,761)
- -------- -------- ---------
- -------- -------- ---------
$ (1.85)
1.88
(1.85)
21,482 (1,522)(11) 2,500(12) 22,460
217 217
2,545 2,545
- ------------------------
(8) Reflects the net increase in interest expense as a result of a portion of
the Debentures issued in the Debenture Offering, the proceeds of which are
required for the Use of Proceeds. Excludes interest expense on, and use of,
$3.2 million of the Debentures, the proceeds of which are not required for
such purposes. If the Note Repurchase had occurred on January 1, 1993, the
Company would have recorded a $1.9 million extraordinary loss as the result
of the early retirement of such debt.
(9) If both the Debenture Offering and the Common Stock Offering are
consummated, there will be an additional $13.5 million of proceeds from the
Debenture Offering which will not be required for the Use of Proceeds. This
adjustment reflects the elimination of interest expense relating to such
Debenture Offering proceeds.
(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 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.
(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-7
<PAGE>
This page intentionally left blank.
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: provided, however, that if both the Debenture Offering and the
Common Stock Offering are consummated, the pro forma data do not give effect to
approximately $1.4 million of interest expense on, or the use of, approximately
$16.7 million of proceeds of the Debenture Offering, the proceeds of which are
not required for acquisitions or refinancings.
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(10):
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 expense as a result of the 9 3/8% Note
Offering. 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).
(7) Reflects the issuance of shares in the Star Gas Acquisition.
P-10
<PAGE>
DEBENTURE STOCK
OFFERING OFFERING
PRO FORMA PRO FORMA
SUBTOTAL ADJUSTMENTS SUBTOTAL ADJUSTMENTS PRO FORMA
$ 486,790 $486,790 $ 486,790
309,501 309,501 309,501
--------- -------- ---------
177,289 177,289 177,289
123,293 123,293 123,293
23,009 23,009 23,009
9,375 9,375 9,375
209 209 209
--------- -------- ---------
21,403 21,403 21,403
23,381 $ 3,981(8) 27,362 (1,165)(9) 26,197
209 209 209
--------- -------- ---------
(1,769) (5,750) (4,585)
643 643 643
--------- -------- ---------
$ (2,412) $ (6,393) $ (5,228)
--------- -------- ---------
--------- -------- ---------
$ (.35)
1.10
(.35)
21,482 (1,522)(11) 2,500(12) 22,460
196 196
2,545 2,545
- ------------------------
(8) Reflects the net increase in interest expense as a result of a portion of
the Debentures issued in the Debenture Offering, the proceeds of which are
required for the Use of Proceeds. Excludes interest expense on, and use of,
$3.2 million of the Debentures, the proceeds of which are not required for
such purposes. If the Note Repurchase had occurred on January 1, 1993, the
Company would have recorded a $1.9 million extraordinary loss as the result
of the early retirement of such debt.
(9) If both the Debenture Offering and the Common Stock Offering are
consummated, there will be an additional $13.5 million of proceeds from the
Debenture Offering which will not be required for the Use of Proceeds. This
adjustment reflects the elimination of interest expense relating to such
Debenture Offering proceeds.
(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 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.
(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-11
<PAGE>
This page intentionally left blank.
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: provided, however, that if both the Debenture Offering and the
Common Stock Offering are consummated, the pro forma data do not give effect to
approximately $1.9 million of interest expense on, or the use of, approximately
$16.7 million of proceeds of the Debenture Offering, the proceeds of which are
not required for acquisitions or refinancings.
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(11):
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 decreased interest expense as a result of the Star Gas
Recapitalization.
(6) Reflects increased interest expense as a result of the 9 3/8% Note Offering.
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 the 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.
P-14
<PAGE>
DEBENTURE STOCK
OFFERING OFFERING
PRO FORMA PRO FORMA
SUBTOTAL ADJUSTMENT SUBTOTAL ADJUSTMENTS PRO FORMA
$696,223 $696,223 $ 696,223
439,921 439,921 439,921
- -------- -------- ---------
256,302 256,302 256,302
169,405 169,405 169,405
30,870 30,870 30,870
12,741 12,741 12,741
280 280 280
- -------- -------- ---------
43,006 43,006 43,006
31,977 $5,326(9) 37,303 (1,553)(10) 35,750
(793) (793) (793)
- -------- -------- ---------
10,236 4,910 6,463
907 907 907
- -------- -------- ---------
$ 9,329 $ 4,003 $ 5,556
- -------- -------- ---------
- -------- -------- ---------
$ .07
1.57
.07
21,482 (1,522)(12) 2,500(13) 22,460
201 201
2,545 2,545
- ------------------------
(9) Reflects the net increase in interest expense as a result of a portion of
the Debentures issued in the Debenture Offering, the proceeds of which are
required for the Use of Proceeds. Excludes interest expense on, and use of,
$3.2 million of the Debentures, the proceeds of which are not required for
such purposes. If the Note Repurchase had occurred on October 1, 1993, the
Company would have recorded a $1.9 million extraordinary loss as the result
of the early retirement of such debt.
(10) If both the Debenture Offering and the Common Stock Offering are
consummated, there will be an additional $13.5 million of proceeds from the
Debenture Offering which will not be required for the Use of Proceeds. This
adjustment reflects the elimination of interest expense relating to such
Debenture Offering proceeds.
(11) 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.
(12) Reflects the repurchase of 1.5 million shares of Class A Common Stock with
a portion of the proceeds of the Offerings.
(13) Reflects the issuance of 2.5 million shares of Class A Common Stock as a
result of the Common Stock Offering.
P-15
<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>
- ------------------------------------------- ------------------------------
- ------------------------------------------- ------------------------------
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 $125,000,000
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 [LOGO]
OF THE DEBENTURES TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE PETROLEUM HEAT
SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. AND POWER CO., INC.
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.
% SUBORDINATED
---------------------- DEBENTURES DUE 2005
TABLE OF CONTENTS
PAGE
Available Information................. 2 ----------------------
Certain Definitions................... 2
Prospectus Summary.................... 3
The Company........................... 9 PROSPECTUS
Risk Factors.......................... 10
Common Stock Offering................. 14 ----------------------
Use of Proceeds....................... 14
Capitalization........................ 15
Selected Financial and Other Data..... 17
Management's Discussion and Analysis
of Results of Operations DONALDSON, LUFKIN & JENRETTE
and Financial Condition............. 19 SECURITIES CORPORATION
Business.............................. 27
Management............................ 38
Description of Debentures............. 41
Description of Other Indebtedness and BEAR, STEARNS & CO. INC.
Redeemable Preferred Stock.......... 62
Underwriting.......................... 65
Legal Matters......................... 65
Experts............................... 66 PAINEWEBBER INCORPORATED
Incorporation of Documents by
Reference............................. 66
Pro Forma Financial Statements........ P-1
Index to Financial Statements......... F-1
- ------------------------------------------- ------------------------------
- ------------------------------------------- ------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 30, 1995
PROSPECTUS
, 1995
[PETRO-logo]
3,000,000 SHARES
PETROLEUM HEAT AND POWER CO., INC.
CLASS A COMMON STOCK
Of the 3,000,000 shares of Class A Common Stock, $0.10 par value (the "Class
A Common Stock"), of Petroleum Heat and Power Co., Inc. (the "Company") offered
hereby (the "Common Stock Offering"), 2,500,000 shares are being sold by the
Company and 500,000 shares are being sold by certain stockholders of the Company
(the "Selling Stockholders"). See "Principal and Selling Stockholders." The
Company will not receive any of the proceeds from the sale of the shares by the
Selling Stockholders.
The authorized common stock of the Company consists of the Class A Common
Stock, Class B Common Stock and Class C Common Stock. 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 on all matters submitted to a vote of
the stockholders. The Class B Common Stock is non-voting, except as otherwise
required by law or as specifically provided by the Restated Articles of
Incorporation of the Company. See "Description of Capital Stock."
The Class A Common Stock is traded on the Nasdaq National Market under the
symbol "HEAT." On January 27, 1995, the last reported sale price of the Class A
Common Stock on the Nasdaq National Market was $7 3/4 per share. The Class B
Common Stock and Class C Common Stock are not publicly traded.
Concurrent with the Common Stock Offering, the Company is offering $125
million aggregate principal amount of its % Subordinated Debentures due 2005
(the "Debentures") to the public (the "Debenture Offering" and, together with
the Common Stock Offering, the "Offerings"). See "Debenture Offering."
Consummation of the Common Stock Offering is not contingent upon consummation of
the Debenture Offering, and there can be no assurance that the Debenture
Offering will be consummated.
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
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 PROCEEDS TO THE
TO THE DISCOUNTS AND PROCEEDS TO THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........... $ $ $ $
Total(3)............ $ $ $ $
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses payable by the Company, estimated at $ .
(3) The Company or, at the option of a Selling Stockholder, such Selling
Stockholder has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of Class A Common Stock on the same terms and
conditions as set forth above solely to cover over-allotments, if any. If
the Underwriters exercise such option in full, the total Price to the
Public, Underwriting Discounts and Commissions, Proceeds to the Company and
Proceeds to the Selling Stockholders will be $ , $ ,
$ and $ , respectively. See "Principal and Selling
Stockholders" and "Underwriting."
The shares are being 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 in part. It is expected that delivery of the shares will be
made in New York, New York on or about , 1995.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
<PAGE>
IN CONNECTION WITH THE COMMON STOCK OFFERING, THE UNDERWRITERS MAY OVER-
ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
CLASS A COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET-MAKING TRANSACTIONS IN THE CLASS A COMMON STOCK ON THE NASDAQ NATIONAL
MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934.
SEE "UNDERWRITING."
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 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 Class A Common Stock. 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 Class A Common Stock 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.
"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 Class A Common Stock offered hereby. Unless otherwise stated,
all information in this Prospectus assumes that the Underwriters' over-allotment
option is not exercised.
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
3
<PAGE>
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.
As a result of the successful implementation of the Company's strategy,
revenues have increased from $84.6 million in 1980 to $538.5 million in 1993, a
compound annual growth rate of 15.3%. EBITDA has increased during such period
from $3.6 million to $48.4 million, a compound annual growth rate of 22.2%.
Similarly, NIDA has increased during such period from $2.9 million to $23.2
million, a compound annual growth rate of 17.2%. 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.
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 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 (based
upon the mid-point estimate of $183.7 million) was attributable to a $6.3
million increase in gross profit in the heating oil division and the $5.7
million of gross profit realized by Star Gas in December 1994.
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 improvement was primarily due
to an increase in gross profit and lower depreciation and amortization expenses,
partially offset by 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. 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 the Company's operating cost control program.
Temperatures for the period January 1, 1995 through January 26, 1995 were
approximately 21.5% warmer than normal measured on a degree-day basis.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock Offered
By the Company..................... 2,500,000 shares
By the Selling Stockholders 500,000 shares
Total............................ 3,000,000 shares
Common Stock Outstanding after the
Common Stock Offering(1)
Class A............................ 22,480,097 shares
Class B............................ 25,963 shares
Class C............................ 2,597,519 shares
Debenture Offering................... Concurrent with the Common Stock Offering, the Com-
pany is offering $125 million aggregate principal
amount of Debentures to the public. The Common Stock
Offering is not contingent upon consummation of the
Debenture Offering, and there can be no assurance
that the Debenture Offering Offer will be
consummated. See "Debenture Offering."
Use of Proceeds...................... The net proceeds to the Company from the Common
Stock Offering and the Debenture Offering are
estimated to be $20.8 million and $120.3 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 $24.2
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. In the event that
the Debenture Offering is not consummated, the
Company would use approximately $13.5 million of the
net proceeds of the Common Stock Offering to
repurchase 1,521,316 shares of its Class A Common
Stock which were issued to a third party in the Star
Gas Acquisition, and would use the balance for gen-
eral corporate purposes. The Company currently does
not have an agreement, however, to repurchase such
shares if it does not also purchase the $65.4
million of Star Gas' long-term debt. If the
Debenture Offering is not consummated and the
Company is unable to reach an acceptable agreement
to repurchase such shares, the Company would use
approximately $14.3 million of the net proceeds of
the Common Stock Offering to redeem $12.8 million
principal amount of notes of the Company, and would
use the balance for general corporate purposes. See
"Use of Proceeds."
Nasdaq Trading Symbol................ HEAT
</TABLE>
- ------------
(1) Excludes 943,480 and 24,000 shares of Class A Common Stock and Class C
Common Stock, respectively, issuable upon exercise of vested options which
have not yet been exercised. Assumes that a portion of the proceeds of the
Common Stock Offering are used to purchase 1,521,316 shares of Class A
Common Stock. See "Use of Proceeds."
6
<PAGE>
SUMMARY DATA
(IN THOUSANDS)
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.
<TABLE>
<CAPTION>
OPERATING DATA: OTHER DATA:
--------------------------------------------------- -------------------------------------
DEPRECIATION HEATING OIL
GROSS AND NET INCOME AND RETAIL
YEAR ENDED DECEMBER 31, NET SALES PROFIT AMORTIZATION(1) (LOSS) PROPANE SOLD EBITDA(2) NIDA(3)
<S> <C> <C> <C> <C> <C> <C> <C>
1980....................... $ 84,582 $ 11,938 $ 1,542 $ 1,407 59,399 $ 3,581 $ 2,949
1981....................... 125,946 17,229 1,336 1,612 72,653 4,351 2,947
1982....................... 168,061 28,370 2,595 3,690 104,583 9,713 6,285
1983....................... 159,794 33,806 3,633 4,723 123,019 13,560 8,357
1984....................... 245,249 50,323 7,069 4,165 180,998 19,756 11,234
1985....................... 283,493 59,241 11,016 1,427 212,183 19,106 12,443
1986....................... 279,889 81,843 15,131 4,116 255,319 30,274 19,247
1987....................... 354,508 96,444 20,782 194 317,380 30,557 20,976
1988....................... 462,150 133,601 27,151 1,565 414,535 44,470 28,717
1989....................... 541,521 139,343 32,093 (4,287) 449,040 40,076 27,573
1990....................... 567,414 132,383 36,313 (29,267) 398,989 26,307 4,639
1991....................... 523,243 144,471 35,575 (16,562) 385,557 40,036 15,744
1992....................... 512,430 161,489 34,394 (4,389) 423,354 51,325 27,721
1993....................... 538,526 171,717 34,664 (8,431) 443,487 48,437 23,176
</TABLE>
<TABLE><CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30, 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Actual(4).................. 546,434 184,752 31,696 2,128 458,563 58,745 32,031
Pro Forma(4)(5)............ 696,223 256,302 43,611 5,556 584,807 86,897 46,130
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1994
--------------------------
ACTUAL AS ADJUSTED(6)
<S> <C> <C>
Cash.................................................................. $ 17,055 $ 39,518
Working capital....................................................... 8,357 33,629
Total assets.......................................................... 234,138 389,124
Total long-term debt.................................................. 219,084 334,034
Redeemable preferred stock (excluding current maturities)............. 16,666 16,666
Stockholders' equity (deficiency)..................................... (84,568) (56,754)
</TABLE>
- ------------------------
(1) Depreciation and amortization includes depreciation and amortization of
plant and equipment and amortization of customer lists and deferred charges.
(2) "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.
(3) "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.
(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 data 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, including the pro
forma operating and other data in the event that the Debenture Offering is
not consummated.
(6) 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 $24.2
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,
including the balance sheet data as adjusted in the event that the Debenture
Offering is not consummated.
7
<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.
8
<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 Class A
Common Stock offered hereby.
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 temperature 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.
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.
LEVERAGE
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 $56.8 million ($287.1 million and
$55.2 million, respectively, if the Debenture Offering is not consummated). 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. If the Debenture
Offering is not consummated, $3.1 million, $9.6 million and $16.0 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, 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.
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
9
<PAGE>
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 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
10
<PAGE>
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 $42.8 million and $5.2 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 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
11
<PAGE>
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.
EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
Sales or the availability for sale of a substantial number of shares of
Class A Common Stock in the public market following the Common Stock Offering
could adversely affect the market price of Class A Common Stock and may also
affect the Company's ability to raise capital.
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 will own 26.3% of the Class A
Common Stock of the Company 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 will
represent, in the aggregate, 53.6% of the voting power of all of the outstanding
shares of Common Stock after giving effect to the Common Stock Offering.
Consequently, the directors will 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
12
<PAGE>
of directors and by virtue of their voting power with respect to other actions
requiring stockholder approval.
STOCKHOLDERS' DEFICIENCY AND DIVIDEND POLICY
At September 30, 1994, the Company's stockholders' deficiency was $84.6
million. This deficiency resulted from the net losses in prior periods and the
Company's policy of paying cash dividends based on NIDA rather than net income.
The Company's present policy is to pay dividends on its Common Stock at an
annual rate of at least 30% of NIDA. To the extent that the Company continues to
pay such dividends and to incur net losses, the stockholders' deficiency will
continue to increase. Under Minnesota law, the Company is prohibited from paying
dividends to its shareholders if the Company is unable to pay its debts in the
ordinary course of business after making such payment. Although the Company
fully expects in the future to be able to pay all its debts in the ordinary
course of business, if it were determined by a court that the Company
nevertheless paid dividends at a time when it was unable to pay its debts when
due, an unpaid creditor might be able to recover some or all such dividends from
the Company's shareholders if the court were to find that the Company paid such
dividends with the intent to hinder, delay or defraud creditors. See "Dividend
Policy."
MINNESOTA ANTI-TAKEOVER PROVISIONS
Minnesota law requires approval by a majority vote of the shareholders of
the Company prior to any acquisition of voting stock of the Company (from a
person other than the Company, and other than in connection with certain mergers
and exchanges to which the Company is a party or certain cash offers approved by
a committee of disinterested directors) resulting in the beneficial ownership by
such acquiring person of 20% or more of the voting stock then outstanding. In
general, shares acquired in the absence of such approval are denied voting
rights and are redeemable at their then fair market value by the Company within
30 days after the acquiring person has failed to give a timely information
statement to the Company or the date the shareholders voted not to grant voting
rights to the acquiring person's shares. In addition, Minnesota law generally
prohibits any business combination by the Company with any shareholder which
purchases 10% or more of the Company's voting shares (an "interested
shareholder") within four years following such interested shareholder's share
acquisition date, unless the business combination is approved by a committee of
the disinterested members of the Board of Directors of the Company before the
interested shareholder's share acquisition date. These provisions may have the
effect of delaying, deferring and preventing a change of control of the Company.
13
<PAGE>
DEBENTURE OFFERING
Concurrent with the Common Stock Offering, the Company is offering $125
million aggregate principal amount of its % Subordinated Debentures due
2005. The Common Stock Offering and the Debenture Offering are not contingent
upon each other and there can be no assurance that the Debenture Offering will
be consummated.
Under the terms of the Indenture relating to the Debentures, the Company
generally may not pay any dividend or make any distribution on its capital stock
if the amount expended for such purpose exceeds the sum of (a) 50% of the
aggregate Cash Flow (as defined) of the Company and (b) the aggregate net
proceeds, including the fair value of property other than cash, received by the
Company from the issue or sale of capital stock of the Company. See "Dividend
Policy." The Indenture also contains covenants relating to the maintenance of
corporate existence, timely payment of taxes, preservation of the Company's
assets, engaging in other businesses, limitations on funded debt, mergers,
consolidations, sales of assets and transactions with affiliates.
USE OF PROCEEDS
The net proceeds to the Company of the Common Stock Offering are estimated
to be approximately $20.8 million ($24.6 million if the Underwriters'
over-allotment option is exercised in full and all of the over-allotment shares
are sold by the Company), assuming a public offering price of $9.00 per share
and after deducting underwriting discounts and commissions and estimated
offering expenses. The net proceeds from the sale of the Debentures are
estimated to be approximately $120.3 million, 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
$24.2 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
currently bear interest at 8.75%.
In the event that the Debenture Offering is not consummated, the Company
would use approximately $13.5 million of the net proceeds of the Common Stock
Offering to repurchase 1,521,316 shares of its Class A Common Stock which were
issued to a third party in the Star Gas Acquisition, and would use the balance
for general corporate purposes. The Company currently does not have an
agreement, however, to repurchase such shares if it does not also purchase the
$65.4 million of Star Gas' long-term debt. If the Debenture Offering is not
consummated and the Company is unable to reach an acceptable agreement to
repurchase such shares, the Company would use approximately $14.3 million of the
net proceeds of the Common Stock Offering to redeem $12.8 million principal
amount of notes of the Company, and would use the balance for general corporate
purposes.
14
<PAGE>
DILUTION
The deficiency in net tangible book value of the Company at September 30,
1994 was $187.4 million or $8.69 per share of Common Stock then outstanding. Net
tangible book value per share is determined by dividing the net tangible book
value of the Company (tangible assets less liabilities and the liquidation
preferences of the Redeemable Preferred Stock and Class B Common Stock) by the
number of outstanding shares of Common Stock. After giving effect to the Pro
Forma Adjustments described in the Pro Forma Financial Statements, the pro forma
deficiency in net tangible book value of Common Stock at September 30, 1994
would have been $186.3 million or $7.44 per share. This represents an immediate
increase in net tangible book value of $1.25 per share to present holders of
Common Stock and an immediate dilution of net tangible book value of $16.44 per
share to purchasers of shares of Class A Common Stock in the Offering. The
following table illustrates this per share dilution:
Assumed public offering price....................... $ 9.00
Deficiency in net tangible book value per share at
September 30, 1994................................ $8.69
Increase per share attributable to the Offerings and
Pro Forma Adjustments............................. 1.25
-----
Pro forma deficiency in net tangible book value per
share after the Pro Forma Adjustments............. 7.44
------
Dilution to new investors........................... $16.44
======
PRICE RANGE OF COMMON STOCK
The Company's Class A Common Stock is traded on the Nasdaq National Market
under the symbol "HEAT." The high and low per share price of the Class A Common
Stock and dividends declared on the Class A Common Stock since the initial
public offering of the Class A Common Stock on July 29, 1992 were as follows:
<TABLE>
<CAPTION>
PRICE RANGE
OF COMMON
STOCK
-------------- DIVIDENDS DECLARED
HIGH LOW PER SHARE
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1992:
3rd Quarter............................... $ 12 3/4 $ 10 1/2 $ 0.0703
4th Quarter............................... $ 12 5/8 $ 10 1/4 0.1125
YEAR ENDED DECEMBER 31, 1993:
1st Quarter............................... $ 10 3/4 $ 8 1/4 $ 0.1125
2nd Quarter............................... $ 11 1/4 $ 8 1/4 0.1375
3rd Quarter............................... 9 7 3/4 0.1375
4th Quarter............................... 10 7 0.1375
YEAR ENDED DECEMBER 31, 1994:
1st Quarter............................... $ 9 1/4 $ 8 1/8 $ 0.1375
2nd Quarter............................... 8 5/8 6 3/4 0.1375
3rd Quarter............................... 9 1/2 6 5/8 0.1375
4th Quarter............................... 9 1/4 8 1/4 0.1375
YEAR ENDED DECEMBER 31, 1995:
1st Quarter (through January 27, 1995).... $ 9 1/4 $ 7 1/4 --
</TABLE>
The last sale price of the Class A Common Stock on January 27, 1995 was $7
3/4 per share. As of December 20, 1994, the Company had 111 shareholders of
record of its Class A Common Stock.
The Company's Class B Common Stock and Class C Common Stock currently are
not listed on a national exchange, and there is no established public trading
market for the Class B or Class C Common Stock.
15
<PAGE>
DIVIDEND POLICY
One of Petro's primary financial objectives is to pay dividends on its
Common Stock and to increase such dividends to reflect improvements in the
Company's financial performance. Pursuant to this objective, the Company has
recently adopted a policy of paying annual dividends of at least 30% of NIDA. It
is also the Company's objective to have consistency in dividends. As a result,
the Company will not necessarily increase or decrease dividends based on what it
considers to be temporary increases or decreases in NIDA.
The Company is currently paying quarterly dividends on its Class A and Class
C Common Stock at an annual rate of $0.55 per share. The Company has
historically paid dividends on January 2, April 1, July 1 and October 1 of each
year. It is expected that the Company's next dividend will be paid on April 1,
1995 to shareholders of record on March 15, 1995.
The Company reviews its dividend policy from time to time in light of the
Company's results of operations, financial condition, capital needs, future
projects and other facts deemed relevant by the Board of Directors. While the
Board of Directors may vary the dividend policy to reduce or eliminate
dividends, the approval of the Class C Common Stockholders is required to reduce
dividends lower than the level established by a shareholders' agreement among
the Class C Common Stockholders.
From 1989 to 1993, the Company had no current earnings and profits for
federal income tax purposes. Since the Company had no accumulated earnings and
profits at the end of these years, dividends paid were treated as returns of
capital to the extent of the recipient's adjusted basis in the stock, and not as
taxable dividends to recipients. Future dividends will be treated as returns of
capital to the extent such dividends do not exceed a recipient's adjusted basis
in the stock, or, in any other case, as gain from the sale or exchange of
property (which gain would be long-term capital gain provided the stock is held
as a capital asset for more than one year), to the extent that the Company has
neither current nor accumulated earnings and profits in the years such dividends
are paid or that dividends paid in a particular year are in excess of current or
accumulated earnings and profits in that year.
Under the terms of the Company's currently outstanding indebtedness, the
Company generally may not pay any dividend nor make a distribution on its
capital stock if the amount expended for such purpose exceeds the sum of (a) 50%
of the aggregate Cash Flow (as defined) of the Company and (b) the aggregate net
proceeds, including the fair value of property other than cash, received by the
Company from the issue or sale of capital stock of the Company. Under the most
restrictive of these restrictions, and after giving effect to the Pro Forma
Adjustments (assuming the receipt of $20.8 million of net proceeds from the
Common Stock Offering and the application of approximately $13.5 million of such
net proceeds to repurchase 1,521,316 shares of Class A Common Stock), $39.9
million would have been available as of September 30, 1994 for dividends or
distributions in respect of the Company's capital stock.
The Company may pay dividends on the Class A Common Stock and Class C Common
Stock only upon paying all current and cumulative dividends on the Redeemable
Preferred Stock. The Company has paid all current and cumulative dividends on
such stock. The Company believes that it has sufficient liquidity to meet all
dividend requirements on the Redeemable Preferred Stock and to pay dividends on
the Class A Common Stock and the Class C Common Stock in accordance with its
dividend policy as set forth above.
While many states have statutes requiring that dividends may be paid only
out of certain forms of "surplus," this is not the case under Minnesota law.
Minnesota law provides that a corporation may make a distribution to its
shareholders if the board of directors determines, in good faith, that the
corporation is able to pay its debts in the ordinary course of business after
making the distribution. The Company has always paid its debts in the ordinary
course of its business and expects to be able to do so in the future.
Accordingly, the Minnesota restriction should not have any material adverse
effect on the Company's ability to pay dividends in accordance with the
Company's dividend policy.
16
<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." See the Pro Forma Financial
Statements contained elsewhere herein for the capitalization of the Company if
the Debenture Offering is not consummated.
<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
% 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 80,141
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) (56,754)
--------- ----------- ----------
Total capitalization................................. $ 151,182 $ 261,063 $ 293,946
========= =========== ==========
</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.
18
<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. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition" and the Pro Forma
Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------- -------------------
1989 1990 1991 1992 1993 1993 1993 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <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
Cost of sales............. 402,178 435,031 378,772 350,941 366,809 465,295 262,368 257,240
-------- -------- -------- -------- -------- ------------ -------- --------
Gross profit.......... 139,343 132,383 144,471 161,489 171,717 250,777 115,016 128,051
Operating expenses........ 99,267 106,076 104,435 110,165 123,280 173,777 89,180 91,907
Amortization of customer
lists and deferred
charges.................... 26,966 30,517 30,025 28,859 28,731 35,440 22,373 19,467
Depreciation and
amortization of plant
and equipment.............. 5,127 5,796 5,550 5,534 5,933 13,142 4,368 4,308
Impairment of long-lived
assets..................... -- -- -- -- -- 33,913 -- --
Provision for supplemental
benefit.................... -- -- -- 1,974 264 264 193 210
-------- -------- -------- -------- -------- ------------ -------- --------
Operating income
(loss)..................... 7,983 (10,006) 4,461 14,957 13,509 (5,759) (1,098) 12,159
Interest expense, net..... 17,915 20,900 20,728 18,622 20,508 36,257 15,147 16,721
Other income (expense),
net........................ 2,568 (228) (45) (324) (165) (165) (29) 84
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) (42,181) (16,274) (5,721)
Income taxes (benefit).... (3,077) (1,867) 250 400 400 580 218 425
-------- -------- -------- -------- -------- ------------ -------- --------
Income (loss) before
extraordinary item......... (4,287) (29,267) (16,562) (4,389) (7,564) (42,761) (16,492) (6,146)
Extraordinary item........ -- -- -- -- (867) -- (867) (654)
-------- -------- -------- -------- -------- ------------ -------- --------
Net income (loss)..... $ (4,287) $(29,267) $(16,562) $ (4,389) $ (8,431) $(42,761) $(17,359) $ (6,800)
======== ======== ======== ======== ======== ============ ======== =========
Net income (loss)
applicable to Common
Stock...................... $ (4,287) $(30,624) $(19,855) $ (8,842) $(11,798) $(46,128) $(20,726) $(10,141)
======== ======== ======== ======== ======== ============ ======== =========
Net income (loss) per
common share
Class A Common Stock.... $ (0.77) $ (2.81) $ (1.64) $ (0.81) $ (0.57) $ (1.85) $ (0.98) $ (0.48)
Class B Common Stock.... 1.83 1.70 0.31 1.14 1.88 1.88 1.41 1.10
Class C Common Stock.... (0.77) (2.81) (1.64) (0.81) (0.57) (1.85) (0.98) (0.48)
Weighted average number of
common shares
outstanding:
Class A Common Stock.... 10,181 10,181 10,181 12,854 18,993 22,460 18,993 18,993
Class B Common Stock.... 3,034 3,034 3,034 2,447 217 217 217 196
Class C Common Stock.... 2,545 2,545 2,545 2,545 2,545 2,545 2,545 2,545
</TABLE>
<PAGE>
[CAPTION]
PRO FORMA(1)
1994
STATEMENT OF OPERATIONS
[S] [C]
DATA:
Net sales................. $486,790
Cost of sales............. 309,501
------------
Gross profit.......... 177,289
Operating expenses........ 123,293
Amortization of customer
lists and deferred
charges.................... 23,009
Depreciation and
amortization of plant
and equipment.............. 9,375
Impairment of long-lived
assets..................... --
Provision for supplemental
benefit.................... 209
------------
Operating income
(loss)..................... 21,403
Interest expense, net..... 26,197
Other income (expense),
net........................ 209
Share of loss of Star
Gas........................ --
------------
Income (loss) before
income taxes and
extraordinary item...... (4,585)
Income taxes (benefit).... 643
------------
Income (loss) before
extraordinary item......... (5,228)
Extraordinary item........ --
------------
Net income (loss)..... $ (5,228)
------------
------------
Net income (loss)
applicable to Common
Stock...................... $ (8,569)
------------
------------
Net income (loss) per
common share
Class A Common Stock.... $ (0.35)
Class B Common Stock.... 1.10
Class C Common Stock.... (0.35)
Weighted average number of
common shares
outstanding:
Class A Common Stock.... 22,460
Class B Common Stock.... 196
Class C Common Stock.... 2,545
19
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------- ------------------------------
PRO PRO
FORMA(1) FORMA(1)
1989 1990 1991 1992 1993 1993 1993 1994 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(2)................. $ 40,076 $ 26,307 $ 40,036 $ 51,325 $ 48,437 $ 77,000 $ 25,836 $ 36,144 $ 53,996
NIDA(3)................... 27,573 4,639 15,744 27,721 23,176 36,677 7,025 15,880 24,820
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
Cash dividends declared
per common share:
Class A Common Stock.... $ 0.16 $ 0.08 $ -- $ 0.18 $ 0.53 $ 0.53 $ 0.39 $ 0.41 $ 0.41
Class B Common Stock.... 1.83 1.70 0.31 1.14 1.88 1.88 1.41 1.10 1.10
Class C Common Stock.... 0.16 0.08 -- 0.18 0.53 0.53 0.39 0.41 0.41
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1994
AT DECEMBER 31, ----------------------
---------------------------------------------------- AS
1989 1990 1991 1992 1993 ACTUAL ADJUSTED(4)
(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 $ 39,518
Working capital (deficiency)............... 13,544 (5,520) (12,038) (6,744) 16,694 8,357 33,629
Total assets............................... 286,435 260,665 220,010 252,783 256,589 234,138 389,124
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) (56,754)
</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, including the pro forma statement of
operations and other data in the event that the Debenture Offering is not
consummated.
(2) "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.
(3) "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.
(4) 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 $24.2
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,
including the balance sheet data as adjusted in the event that the Debenture
Offering is not consummated.
20
<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.
Therefore, although net income (loss) calculated in accordance with generally
accepted accounting principles is generally considered by investors to be an
indicator of operating performance, management believes that in evaluating the
Company's results, two additional measures should be considered to supplement
the net income (loss) analysis. The first such measure is operating income
before depreciation, 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, (referred to herein as EBITDA) and the second such measure is 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 (referred to herein as
NIDA). 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, it is important
for an investor to understand these concepts since management's strategy is to
maximize EBITDA and NIDA, rather than net income. The computations of EBITDA and
NIDA are derived from the Company's financial statements as a supplement to the
Company's traditional financial statements. Because of management's acquisition
and other strategies, it believes that EBITDA is an important indicator as a
measure of earnings derived from operations before non-cash expenses and
non-operating expenses, such as other expenses and income taxes. The following
enumerates other factors that investors should consider.
First, the financial results of a given year do not reflect the full impact
of that year's acquisitions. 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, as stated above, the Company's objective is to maximize EBITDA and
NIDA, rather than net income. The large disparity between NIDA and net income
(loss) is primarily attributable to the substantial amortization of customer
lists and other intangibles in connection with acquisitions. Customer lists and
other intangibles acquired in connection with acquisitions represent the
allocation of acquisition costs which are amortized over the future periods
benefitted by such acquisitions. In general, costs are allocated to assets based
upon the fair market value of the assets purchased, as determined by arms'
length negotiations between the Company and the seller. Substantially all
purchased intangibles 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
21
<PAGE>
each year and 35% of its annual volume of propane in each of the first and
fourth quarters of each calendar year. The Company generally realizes positive
NIDA in both of these quarters and negative NIDA during the warmer quarters
ending June and September. As a result, acquisitions made during the spring and
summer months generally have a negative effect on earnings and a limited impact
on NIDA in the calendar year in which they are made. Most of the costs
associated with an acquired distributor are incurred evenly throughout the
remainder of the year, whereas a smaller percentage of the purchased company's
annual volume and gross profit is realized during the same period.
Finally, changes in total dollar sales do not necessarily affect the
Company's gross profit, EBITDA, net income or NIDA. Since the Company
historically has added a per gallon margin onto its wholesale costs, variability
in supply prices has affected net sales but generally has not affected EBITDA,
net income, NIDA or any other measure of earnings. As a result, the Company's
margins are most meaningfully measured on a per gallon basis and not as a
percentage of sales. While fluctuations in wholesale prices have not
significantly affected demand to date, it is possible that significant wholesale
price increases over an extended period of time could have the effect of
encouraging conservation. If demand were reduced and the Company was unable to
increase its gross profit margin or reduce its operating expenses, the effect of
the decrease in volume would be to reduce EBITDA, net income, NIDA and any other
measure of earnings. Given the Company's operating strategy to maximize EBITDA
and NIDA as described above, an investor should also be aware of certain risks
that are inherent in such a strategy. Although an increased level of
acquisitions (which in turn adds to the Company's plant and equipment and
customer lists) is expected to have a positive impact on the long-term viability
of the business, the near term effect of acquisitions would be to increase
EBITDA and NIDA by a significantly greater amount than would be the increase, if
any, of net income because of the substantial impact of depreciation and
amortization expense, items which generally do not impact EBITDA or NIDA, but
which do materially impact net income. A reduced level of acquisitions, which
would be expected to have an adverse impact on the long-term growth of the
business, could lead to decreased EBITDA and NIDA, while possibly increasing net
income. In the year of an acquisition, depending on the month it is consummated,
it is possible that EBITDA and NIDA would not be affected, while net income
could be negatively impacted.
To the extent future acquisitions are financed with debt, the interest
expense associated with such debt would not impact EBITDA, but would reduce NIDA
and net income. If the Company were to finance future acquisitions by issuing
new preferred stock, the preferred stock dividends associated with the new
preferred stock would not affect EBITDA or net income, but would reduce NIDA and
increase the Company's stockholders' deficiency.
Since EBITDA and NIDA are not affected by depreciation and amortization, the
Company's failure to replace long-lived assets or its decision to delay needed
capital expenditures could have the short term effect of improving net income
(by minimizing depreciation and amortization expense), but could have a negative
impact on the long-term viability of the business. Because management is
concerned with the Company's long-term viability, and measures its operating
performance by EBITDA and NIDA, it intends to continue making capital
improvements as required.
Factors that impact the Company's ability to continue following its current
operating strategy in the foreseeable future include its ability to continue to
grow through acquisitions, while continuing to replace lost customers through
internal marketing.
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 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
22
<PAGE>
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 $128.1 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 marketing expenses partially offset by
weather related increases in service, delivery and operating expenses.
23
<PAGE>
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 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.
24
<PAGE>
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
expense 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.
<TABLE>
<CAPTION>
FUNDING SOURCES
----------------------------------------------------------------
INTERNALLY
ACQUISITIONS AND GENERATED FUNDS LONG-TERM DEBT
FIXED ASSET AND ADDITIONAL REDEEMABLE AND NET WORKING
YEAR PURCHASES EQUITY(1) PREFERRED STOCK CAPITAL(2)
- -------------------------- ---------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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 $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
27
<PAGE>
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. 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 Common Stock 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):
<TABLE>
<CAPTION>
AVERAGE
YEAR TEMPERATURE
<S> <C>
1960............ 40.4
1961............ 41.9
1962............ 40.0
1963............ 41.1
1964............ 42.1
1965............ 41.5
1966............ 41.9
1967............ 40.5
1968............ 40.2
1969............ 40.4
1970............ 39.8
1971............ 41.9
<CAPTION>
AVERAGE
YEAR TEMPERATURE
<S> <C>
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
<CAPTION>
AVERAGE
YEAR TEMPERATURE
<S> <C>
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
</TABLE>
- -----------------------
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 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.
30
<PAGE>
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 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
31
<PAGE>
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.
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
32
<PAGE>
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 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
33
<PAGE>
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 NEW JERSEY
Bridgeport--New Haven Camden
Hartford (Metropolitan) Neptune
Litchfield County Newark (Metropolitan)
Southern Fairfield County North Brunswick
MARYLAND/VIRGINIA/WASHINGTON Rockaway
D.C. Trenton
Baltimore (Metropolitan) NEW YORK
Washington, D.C. Bronx, Queens and Kings Counties
(Metropolitan) Dutchess County
MASSACHUSETTS Eastern Long Island
Boston (Metropolitan) Staten Island
Northeastern Massachusetts Western Long Island
(Centered in Lawrence) PENNSYLVANIA
Springfield Allentown
Worcester Berks County (Centered in Reading)
NEW HAMPSHIRE Bucks County (Centered in
Milford Southampton)
Portsmouth 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
35
<PAGE>
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 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
36
<PAGE>
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 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.
37
<PAGE>
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.
38
<PAGE>
Competition within the propane distribution industry stems from primarily
three types of participants: larger multi-state marketers, smaller, local
independent marketers and farm cooperatives. 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.
39
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to the directors and executive officers of the
Company is set forth below:
<TABLE>
<CAPTION>
NAME AGE OFFICE
<S> <C> <C>
Irik P. Sevin................ 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
40
<PAGE>
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,
41
<PAGE>
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.
42
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The table below sets forth certain information as of January 13, 1995
regarding beneficial ownership of the Company's capital stock by each director
of the Company, each beneficial owner of, or institutional investment manager
exercising investment discretion with respect to, 5% or more of the outstanding
shares of capital stock, all directors and officers as a group and each person
whose shares of Class A Common Stock are being offered hereby.
<TABLE>
<CAPTION>
PERCENT OF TOTAL SHARES PERCENT OF TOTAL
PRIOR TO THE OF CLASS A AFTER THE PERCENT
NUMBER OF SHARES(1) OFFERING COMMON OFFERING(2) OF TOTAL
----------------------- ----------------- STOCK ----------------- VOTING
NAME CLASS A CLASS C CLASS A CLASS C TO BE SOLD CLASS A CLASS C POWER(3)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Prudential Insurance
Company of America(4)...... 1,521,316(5) -- 7.08 -- -- -- --
Richard O'Connell(6)....... 1,320,846 302,461 6.14 11.64 100,000 5.43 11.64 8.76
Estate of Malvin P.
Sevin(7)................... 970,963 265,048 4.52 10.20 4.32 10.20 7.47
First Reserve
Corporation(8)............. 1,700,783 -- 7.65 -- 88,185(10) 6.95 -- 3.26
Audrey L. Sevin(7)(9)...... 926,507 212,668 4.31 8.19 4.12 8.19 6.30
Irik P. Sevin(7)(11)....... 1,107,611 225,641 5.10 8.61 4.88 8.61 6.88
Wolfgang
Traber(12)(13)(14)......... 821,572(15) 307,755 3.82 11.85 50,000 3.43 11.85 7.94
Hubertus
Langen(13)(16)(17)......... 750,221 307,755 3.49 11.85 50,000 3.11 11.85 7.80
Barcel Corporation(18)..... 695,151 151,231 3.23 5.82 3.09 5.82 4.56
Phillip Ean Cohen(7)....... 679,262 113,423 3.16 4.37 3.02 4.37 3.74
Thomas J. Edelman(7)....... 593,049(19) 129,019 2.76 4.97 30,000 2.50 4.97 3.82
Gabes, S.A.(20)............ 638,610 124,314 2.97 4.79 50,000 2.62 4.79 3.78
Atalanta Holdings
Ltd.(12)................... 231,628 -- 1.08 -- 131,815 0.44 -- 0.21
Max Warburg(21)............ 324,688 38,481(13) 1.51 1.48 1.44 1.48 1.46
Paul Biddelman(7).......... 2,386 -- 0.01 -- 0.01 -- --
All officers and directors
as a group (15
persons)................... 6,746,884 1,594,496 31.10 60.82 28.96 60.82 46.04
</TABLE>
- ------------------------
(1) For purposes of this table, a person or group is deemed to have "beneficial
ownership" of any shares which such person has the right to acquire within
60 days after the date of this Prospectus. For purposes of calculating the
percentage of outstanding shares held by each person named above, any
shares which such person has the right to acquire within 60 days after the
date of the Prospectus are deemed to be outstanding, but not for the
purpose of calculating the percentage ownership of any other person.
(2) Assumes that the Underwriters' over-allotment option is not exercised.
(3) Total voting power means the total voting power of all shares of Class A
Common Stock and Class C Common Stock. This column reflects the percentage
of total voting power represented by all shares of Class A Common Stock and
Class C Common Stock held by the named persons. See "Description of Capital
Stock."
(4) The address of such person is 3 Gateway Center, 100 Mulberry Street,
Newark, NJ 07107.
(5) These shares will be purchased by the Company with a portion of the
proceeds of the Offerings. See "Use of Proceeds."
(6) The address of such person is 31 rue de Bellechasse, 75007, Paris, France.
(7) The address of such person is c/o the Company at P.O. Box 1457, Stamford,
CT 06904.
(8) The address of such person is 475 Steamboat Road, Greenwich, CT 06830.
First Reserve Corporation acts as managing general partner for the
following funds (the "FRC Funds"), which own an aggregate of 968,310 shares
of Class A Common Stock and options to purchase an additional 732,473
shares of Class A Common Stock, as follows: (a) American Gas & Oil
Investors, Limited Partnership: 423,224 shares and 229,323 options; (b)
AmGO II, Limited Partnership: 289,775 shares and 181,369 options; (c) AmGO
III, Limited Partnership: 88,185 shares and 158,293 options; and (d) First
Reserve Secured Energy Assets Fund L.P.: 167,126 shares and 163,488
options.
(Footnotes continued on following page)
43
<PAGE>
(Footnotes continued from preceding page)
(9) Excludes shares owned by the estate of Malvin P. Sevin (listed above), of
which Audrey Sevin is executrix and primary beneficiary.
(10) The FRC Funds (other than AmGO III, Limited Partnership) have been granted
an option by the Company to sell the shares of Class A Common Stock to be
sold in the event that the Underwriters' over-allotment option is
exercised. If such FRC Funds exercise such option and the Underwriters'
over-allotment option is exercised in full, such FRC Funds would sell an
additional 450,000 shares, as follows: American Gas & Oil Investors,
Limited Partnership: 216,391; AmGO II, Limited Partnership: 148,159; and
First Reserve Secured Energy Assets Fund L.P.: 85,450. In such case, such
FRC Funds would own 5.01% of the Class A Common Stock outstanding after the
Offering.
(11) Includes options to purchase 196,000 shares of Class A Common Stock and
24,000 shares of Class C Common Stock.
(12) The address of such person is 450 Park Avenue, New York, NY 10022.
(13) These shares are owned of record by Deltec Asset Management Corp., 535
Madison Avenue, New York, NY which has the power to vote the shares under
discretionary account arrangements. Such voting power may be revoked at any
time by the beneficial owner.
(14) Includes 100,000 shares of Class A Common Stock and 298,717 shares of Class
C Common Stock owned of record by Deltec Asset Management Corp. on behalf
of Tortosa GmbH of which Mr. Traber may be deemed to be the beneficial
owner.
(15) Includes 75,000 shares of Class A Common Stock beneficially owned by Mr.
Traber's wife.
(16) The address of such person is Heinrich-Vogl-Strasse 17, 81479, Munich,
Germany.
(17) Includes 100,000 shares of Class A Common Stock and 298,717 shares of Class
C Common Stock owned of record by Deltec Asset Management Corp. on behalf
of Tortosa GmbH of which Mr. Langen may be deemed to be the beneficial
owner.
(18) The address of such person is c/o Trust Department, Lloyds Bank
International, King & George Streets, Nassau, Bahamas.
(19) Includes 100,000 shares of Class A Common Stock owned by Mr. Edelman's
wife.
(20) The address of such person is Apartado 87-1371, Panama 7, Republic of
Panama. All shares of Class A Common Stock and Class C Common Stock (other
than 50,000 shares of Class A Common Stock) owned by Gabes, S.A. are held
of record as set forth in Note (13) above.
(21) The address of such person is Ferdinandstrasse 75, 10095 Hamburg, Germany.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 shares of
Class A Common Stock ($0.10 par value), 6,500,000 shares of Class B Common Stock
($0.10 par value), 5,000,000 shares of Class C Common Stock ($0.10 par value),
250,000 shares of Cumulative Redeemable Exchangeable Preferred Stock ($0.10 par
value) ("1989 Preferred Stock"), and 5,000,000 shares of Preferred Stock ($0.10
par value) ("Preferred Stock").
At the date of this Prospectus, there are 21,501,413 shares of Class A
Common Stock, 25,963 shares of Class B Common Stock, 2,597,519 shares of Class C
Common Stock and 208,332 shares of 1989 Preferred Stock issued and outstanding.
No shares of Preferred Stock are outstanding.
The following description of the terms of the Class A Common Stock, Class B
Common Stock and Class C Common Stock and the 1989 Preferred Stock is not
complete and is subject to and qualified in its entirety by reference to the
Company's restated and amended articles of incorporation (the "Restated Articles
of Incorporation"), a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
COMMON STOCK
The holders of Class A Common Stock, Class B Common Stock and Class C Common
Stock have identical rights and privileges except as set forth below. Holders of
shares of each class of Common Stock have no preemptive rights, rights to
maintain their respective percentage ownership interests in the Company or other
rights to subscribe for additional shares of the Company, except that no
additional shares of Class B Common Stock may be issued without the consent of
the holders of more than 50% of the outstanding shares of the Class B Common
Stock. The Restated Articles of Incorporation provide that if the Board of
Directors of the Company approves a merger with an entity that is not controlled
by the holders of Class A Common Stock or their affiliates, each share of Class
B Common Stock is automatically converted into one share of Class A Common
Stock. The shares of Common Stock outstanding after the Common Stock Offering,
including the shares of Class A Common Stock to be issued hereby, when paid for
and issued, will be fully paid and nonassessable.
DIVIDENDS
Holders of shares of Class A Common Stock and Class C Common Stock are
entitled to share pro rata in such dividends, if any, as may be declared by the
Board of Directors of the Company out of funds legally available therefor;
provided, however, that no dividends may be paid on any class of Common Stock
until all dividends have been paid or declared and set apart and all mandatory
redemption requirements have been satisfied on the 1989 Preferred Stock.
Holders of Class B Common Stock were formerly entitled to receive, as and
when declared by the Board of Directors, special dividends per share equal to
.000001666% per share (as adjusted) of the cash flow of the Company (as defined
in the Company's Restated Articles of Incorporation) for its prior fiscal year
(the "Special Dividends").
In July 1994, the Company exercised its right to terminate the Special
Dividends on the Class B Common Stock, effective August 31, 1994. The Company's
Restated Articles of Incorporation provide 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 termination date ($0.2763 per share for the
period July 1, 1994 through August 31, 1994).
As 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
45
<PAGE>
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 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.
VOTING RIGHTS
The holders of Class A Common Stock shall be entitled to one vote per share
and the holders of Class C Common Stock shall be entitled to ten votes per share
upon all matters submitted for a vote to the shareholders of the Company. Except
when required by Minnesota law and in certain special circumstances described in
the Restated Articles of Incorporation, the holders of Class B Common Stock are
not entitled to vote. Generally, the action of the majority of the votes
evidenced by the shares of all classes voting as a single class represented at a
meeting of the shareholders and entitled to vote is sufficient for actions that
require a vote of the shareholders. The Restated Articles of Incorporation of
the Company do not provide for cumulative voting.
RESTRICTIONS OF TRANSFER OF CLASS C COMMON STOCK
The Shareholders' Agreement provides that the consideration per share which
may be received by a holder of Class C Common Stock upon a sale of shares of
Class C Common Stock may not exceed the average of the last reported sales
prices per share of the Class A Common Stock for the 90 trading days preceding
the date of such sale as reported on the Nasdaq National Market, and that any
premium above such consideration will inure to the benefit of the Company. In
addition, the Shareholders' Agreement provides that the above provisions may not
be modified without the consent of the holders of 80% of the issued and
outstanding shares of Class A Common Stock, including shares issued pursuant to
the Common Stock Offering. The Restated Articles of Incorporation of the Company
provide that any transfer of a share of Class C Common Stock (i) to any person
who is not a signatory to the Shareholders' Agreement or (ii) to any person
after the date on which the Shareholders' Agreement is for any reason no longer
in effect, will automatically result in the conversion of such share into a
share of Class A Common Stock. The purpose and effect of the transfer
restrictions and the pricing restriction is to permit the existing shareholders
to continue to elect a majority of the Company's Board of Directors and to
direct most corporation actions after the completion of the Common Stock
Offering, as well as to ensure that holders of Class C Common Stock will not
receive a control premium on any disposition of their shares.
PREFERRED STOCK
Preferred Stock
The Company is authorized to issue 5,000,000 shares of Preferred Stock, in
classes or series with such rights and preferences as the Board of Directors of
the Company may determine, including voting rights, redemption rights, dividend
rates, liquidation preferences and conversion rights (subject to the rights of
the holders of other outstanding capital stock). There are no shares of
Preferred Stock outstanding.
1989 Preferred Stock
The Company has outstanding 208,332 shares of 1989 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 1989 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 1989 Preferred Stock
are exchangeable, in whole or in part, at the option of the Company, for
subordinated notes of the Company, subject to meeting certain debt incurrence
tests. Commencing on August 1, 1994 and on August 1 of each year thereafter, so
long
46
<PAGE>
as any of the shares of 1989 Preferred Stock remain outstanding, one-sixth of
the number of originally issued shares of each series of 1989 Preferred Stock,
less the number of shares of such series previously exchanged for notes, must be
redeemed in cash, with the final redemption of the remaining outstanding shares
on August 1, 1999. The redemption price of the 1989 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 1989 Preferred
Stock. The 1989 Preferred Stock has no voting rights, except as may be provided
by law.
LIQUIDATION PREFERENCES
In the event of any complete liquidation, dissolution or winding up of the
business of the Company, each share of Class B Common Stock would be entitled to
a distribution equal to $5.70 per share, as adjusted, before any distribution is
made with respect to any other class of stock of the Company. Thereafter, each
share of 1989 Preferred Stock would be entitled to a distribution equal to $100
per share plus accrued and unpaid dividends. Thereafter, each share of the Class
A Common Stock, Class B Common Stock and Class C Common Stock would participate
equally in all liquidating distributions.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for shares of the Class A Common Stock and
Class B Common Stock is Chemical Bank.
MINNESOTA ANTI-TAKEOVER PROVISIONS
Section 302A.671, Minnesota Statutes, applies, with certain exceptions, to
any acquisition of voting stock of the Company (from a person other than the
Company, and other than in connection with certain mergers and exchanges to
which the Company is a party or certain cash offers approved by a committee of
disinterested directors) resulting in the beneficial ownership of 20% or more of
the voting stock then outstanding. Section 302A.671 requires approval of any
such acquisitions by a majority vote of the shareholders of the Company prior to
its consummation. In general, shares acquired in the absence of such approval
are denied voting rights and are redeemable at their then fair market value by
the Company within 30 days after the acquiring person has failed to give a
timely information statement to the Company or the date the shareholders voted
not to grant voting rights to the acquiring person's shares.
Section 302A.673, Minnesota Statutes, generally prohibits any business
combination by the Company with any shareholder which purchases 10% or more of
the Company's voting shares (an "interested shareholder") within four years
following such interested shareholder's share acquisition date, unless the
business combination is approved by a committee of the disinterested members of
the Board of Directors of the Company before the interested shareholder's share
acquisition date.
47
<PAGE>
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, as representatives (the "Representatives") of the several
underwriters (collectively, the "Underwriters"), the Underwriters have agreed to
purchase from the Company and the Selling Stockholders, and the Company and the
Selling Stockholders have agreed to sell to the Underwriters, the respective
number of shares of Class A Common Stock set forth in the table below:
NUMBER
UNDERWRITER OF SHARES
Donaldson, Lufkin & Jenrette Securities Corporation.............
Bear, Stearns & Co. Inc.........................................
PaineWebber Incorporated........................................
---------
Total..................................................... 3,000,000
=========
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
Class A Common Stock if any of the Class A Common Stock is purchased.
The Underwriters propose to offer the Class A Common Stock 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 $ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share. After the initial public offering
of the Class A Common Stock, the offering price and other selling terms may be
changed by the Underwriters.
The Company or, at the option of a Selling Stockholder as described under
"Principal and Selling Stockholders", such selling Stockholder has granted an
option to the Underwriters, exercisable for 30 days from the date of this
Prospectus, to purchase up to 450,000 additional shares of Class A Common Stock
on the same terms and conditions as set forth on the cover page of this
Prospectus. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, incurred in the sale of the Class A Common
Stock. To the extent that the Underwriters exercise such options, each of the
Underwriters will become obligated, subject to certain conditions, to purchase
the same proportion of such additional shares as the number set forth opposite
each such Underwriter's name above bears to 3,000,000.
Certain of the Underwriters and selling group members that currently act as
market makers for the Class A Common Stock may engage in "passive market making"
in the Class A Common Stock on the Nasdaq National Market in accordance with
Rule 10b-6A under the Exchange Act. Rule 10b-6A permits, upon satisfaction of
certain conditions, underwriters and selling group members participating in a
distribution that are also Nasdaq market makers in the security being
distributed to engage in limited market making activity. Rule 10b-6A prohibits
underwriters and selling group members engaged in passive market making
generally from entering a bid or effecting a purchase at a price that
48
<PAGE>
exceeds the highest bid for those securities displayed on the Nasdaq National
Market by a market maker that is not participating in the distribution. Under
Rule 10b-6A, each underwriter or selling group member engaged in passive market
making is subject to a daily net purchase limitation equal to 30% of such
entity's average daily trading volume during the two full consecutive calendar
months immediately preceeding the date of the filing of the registration
statement under the Securities Act pertaining to the security to be distributed.
The Company, the Selling Stockholders and certain officers and directors,
who beneficially own an aggregate of 8,639,653 shares of Class A Common Stock,
have agreed not to sell, offer to sell or otherwise dispose of any shares of
Class A Common Stock, or any security convertible into or exercisable or
exchangeable for any shares of Class A Common Stock, for a period of 180 days
after the date of this Prospectus without the prior written consent of the
Representatives.
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 Representatives are acting as
underwriters in connection with the Debenture Offering, for which they will
receive customary discounts and commissions.
LEGAL MATTERS
The validity of the Class A Common Stock 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 Class A Common Stock
will be passed upon for the Underwriters by Latham & Watkins, New York, New
York.
EXPERTS
The audited financial statements and schedules of the Company included in
this Prospectus 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.
49
<PAGE>
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).
50
<PAGE>
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 % Subordinated Notes due 2005 at an assumed interest rate
of 11 1/2% (the "Debenture Offering") and 2.5 million shares of Class A
Common Stock at an assumed price of $9.00 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 Southeast 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>
<TABLE>
<CAPTION>
STOCK DEBENTURE
OFFERING OFFERING
PRO FORMA PRO FORMA
SUBTOTAL ADJUSTMENTS SUBTOTAL ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
$ 15,260 $ 20,800(5) $ 22,558 $ 120,300(7) $ 39,518
(13,502)(6) (85,072)(8)
(14,268)(9)
(4,000)(10)
51,859 51,859 51,859
18,680 18,680 18,680
9,410 9,410 9,410
-------- ----------- -------- ----------- ---------
95,209 7,298 102,507 16,960 119,467
139,869 139,869 139,869
124,738 124,738 4,700(7) 129,363
(75)(9)
425 425 425
-------- ----------- -------- ----------- ---------
$360,241 $ 7,298 $367,539 $ 21,585 $389,124
======== =========== ======== =========== ========
$ 4,000 $ 4,000 $ (4,000)(10)
4,967 4,967 $ 4,967
11,427 11,427 11,427
30,872 30,872 30,872
13,279 13,279 13,279
25,293 25,293 25,293
-------- -------- ----------- ---------
89,838 89,838 (4,000) 85,838
119,515 119,515 (65,350)(8) 47,783
(6,382)(9)
125,000(7) 125,000
2,280 2,280 2,280
7,060 7,060 7,060
167,632 167,632 (6,381)(9) 161,251
-------- -------- ----------- ---------
386,325 386,325 42,887 429,212
-------- -------- ----------- ---------
24,930 24,930 (8,264)(8) 16,666
-------- -------- ----------- ---------
11,458 11,458 (11,458)(8)
-------- -------- ----------- ---------
2,405 250(5) 2,504 2,504
(151)(6)
72,942 20,550(5) 80,141 80,141
(13,351)(6)
(132,005) (132,005) (1,580)(9) (133,585 )
(4,534) (4,534) (4,534 )
(1,280) (1,280) (1,280 )
-------- ----------- -------- ----------- ---------
(62,472) 7,298 (55,174) (1,580) (56,754 )
-------- ----------- -------- ----------- ---------
$360,241 $ 7,298 $367,539 $ 21,585 $389,124
======== =========== ======== =========== =========
</TABLE>
- -----------------------
(5) Reflects the Common Stock Offering, net of estimated offering expenses of
$1.7 million, with net proceeds to the Company of $20.8 million.
(6) Reflects the Common Stock Repurchase.
(7) Reflects the Debenture Offering, net of estimated offering expenses of $4.7
million, with net proceeds to the Company of $120.3 million, including
approximately $17.0 million in cash and principal amount of Debentures, the
proceeds of which are not required for the Use of Proceeds.
(8) Reflects the Star Gas Refinancing.
(9) Reflects the Note Repurchase and the related extraordinary loss
representing the premium paid on the early retirement of such debt.
(10) Reflects the repayment of Star Gas working capital borrowings.
P-3
<PAGE>
This page intentionally left blank.
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; provided, however, that if
both the Debenture Offering and the Common Stock Offering are consummated, the
pro forma data do not give effect to approximately $1.9 million of interest
expense on, or the use of, approximately $16.7 million of proceeds of the
Debenture Offering, the proceeds of which are not required for acquisitions or
refinancings.
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:
<TABLE>
<S> <C>
Salaries and related costs.................................................... $2,273
Other......................................................................... 611
------
$2,884
------
------
</TABLE>
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 decreased interest expense of Star Gas as a result of the Star Gas
Recapitalization.
(6) Reflects increased interest expense as a result of the Prior Note Offerings.
If the Prior Note Offerings had occurred on January 1, 1993, the Company
would have recorded a $3.8 million extraordinary loss as the result of the
early retirement of debt.
(7) Reflects the issuance of shares in the Star Gas Acquisition.
P-6
<PAGE>
STOCK DEBENTURE
OFFERING OFFERING
PRO FORMA PRO FORMA
SUBTOTAL ADJUSTMENTS SUBTOTAL ADJUSTMENTS PRO FORMA
$716,072 $716,072 $ 716,072
465,295 465,295 465,295
- -------- -------- ---------
250,777 250,777 250,777
173,777 173,777 173,777
35,440 35,440 35,440
13,142 13,142 13,142
264 264 264
33,913 33,913 33,913
- -------- -------- ---------
(5,759) (5,759) (5,759)
32,405 32,405 3,852(8) 36,257
(165) (165) (165)
- -------- -------- ---------
(38,329) (38,329) (42,181)
580 580 580
- -------- -------- ---------
$(38,909) $(38,909) $ (42,761)
======== ======== =========
$ (1.85)
1.88
(1.85)
21,482 978(10) 22,460
217 217
2,545 2,545
- ------------------------
(8) Reflects the net increase in interest expense as a result of a portion of
the Debentures issued in the Debenture Offering, the proceeds of which are
required for the Use of Proceeds. Excludes interest expense on, and use of,
$16.7 million of the Debentures, the proceeds of which are not required for
such purposes. If the Note Repurchase had occurred on January 1, 1993, the
Company would have recorded a $1.9 million extraordinary loss as the 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 issuance of 2.5 million shares of Class A Common Stock as a
result of the Common Stock Offering and the repurchase of 1.5 million
shares of Class A Common Stock issued in connection with the Star Gas
Acquisition with a portion of the proceeds therefrom.
P-7
<PAGE>
This page intentionally left blank.
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: provided, however, that if both the Debenture Offering and the
Common Stock Offering are consummated, the pro forma data do not give effect to
approximately $1.4 million of interest expense on, or the use of, approximately
$16.7 million of proceeds of the Debenture Offering, the proceeds of which are
not required for acquisitions or refinancings.
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 expense as a result of the 9 3/8% Note Offering.
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).
(7) Reflects the issuance of shares in the Star Gas Acquisition.
P-10
<PAGE>
STOCK DEBENTURE
OFFERING OFFERING
PRO FORMA PRO FORMA
SUBTOTAL ADJUSTMENTS SUBTOTAL ADJUSTMENTS PRO FORMA
$ 486,790 $486,790 $ 486,790
309,501 309,501 309,501
--------- -------- ---------
177,289 177,289 177,289
123,293 123,293 123,293
23,009 23,009 23,009
9,375 9,375 9,375
209 209 209
--------- -------- ---------
21,403 21,403 21,403
23,381 23,381 2,816(8) 26,197
209 209 209
--------- -------- ---------
(1,769) (1,769) (4,585)
643 643 643
--------- -------- ---------
$ (2,412) $ (2,412) $ (5,228)
--------- -------- ---------
--------- -------- ---------
$ (.35)
1.10
(.35)
21,482 978(10) 22,460
196 196
2,545 2,545
- ------------------------
( 8) Reflects the net increase in interest expense as a result of a portion of
the Debentures issued in the Debenture Offering, the proceeds of which are
required for the Use of Proceeds. Excludes interest expense on, and use of,
$16.7 million of the Debentures, the proceeds of which are not required for
such purposes. If the Note Repurchase had occurred on January 1, 1993, the
Company would have recorded a $1.9 million extraordinary loss as the 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 issuance of 2.5 million shares of Class A Common Stock as a
result of the Common Stock Offering and the repurchase of 1.5 million
shares of Class A Common Stock issued in connection with the Star Gas
Acquisition with a portion of the proceeds therefrom.
P-11
<PAGE>
This page intentionally left blank.
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: provided, however, that if both the Debenture Offering and the
Common Stock Offering are consummated, the pro forma data do not give effect to
approximately $1.9 million of interest expense on, or the use of, approximately
$16.7 million of proceeds of the Debenture Offering, the proceeds of which are
not required for acquisitions or refinancings.
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 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 cost--Star Gas............................................. $557
Salaries and related cost--Acquired Distributorships............................ 390
----
$947
----
----
</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 decreased interest expense as a result of the Star Gas
Recapitalization.
(6) Reflects increased interest expense as a result of the 9 3/8% Note Offering.
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 the 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.
P-14
<PAGE>
STOCK DEBENTURE
OFFERING OFFERING
PRO FORMA PRO FORMA
SUBTOTAL ADJUSTMENTS SUBTOTAL ADJUSTMENT PRO FORMA
$696,223 $696,223 $ 696,223
439,921 439,921 439,921
- -------- -------- ---------
256,302 256,302 256,302
169,405 169,405 169,405
30,870 30,870 30,870
12,741 12,741 12,741
280 280 280
- -------- -------- ---------
43,006 43,006 43,006
31,977 31,977 3,773(10) 35,750
(793) (793) (793)
- -------- -------- ---------
10,236 10,236 6,463
907 907 907
- -------- -------- ---------
$ 9,329 $ 9,329 $ 5,556
======== ======== =========
$ 0.07
1.57
0.07
21,482 978(11) 22,460
201 201
2,545 2,545
- ------------------------
(9) Reflects the net increase in interest expense as a result of a portion of
the Debentures issued in the Debenture Offering, the proceeds of which are
required for the Use of Proceeds. Excludes interest expense on, and use of,
$16.7 million of the Debentures, the proceeds of which are not required for
such purposes. If the Note Repurchase had occurred on October 1, 1993, the
Company would have recorded a $1.9 million extraordinary loss as the 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 issuance of 2.5 million shares of Class A Common Stock as a
result of the Common Stock Offering and the repurchase of 1.5 million
shares of Class A Common Stock issued in connection with the Star Gas
Acquisition with a portion of the proceeds therefrom.
P-15
<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>
===========================================
===========================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL
HAS BEEN AUTHORIZED TO GIVE INFORMATION OR
TO MAKE ANY REPRESENTATION OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS IN CONNECTION
WITH THE OFFERING MADE HEREBY. 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
PETROLEUM HEAT TO BUY ANY SECURITIES OFFERED
HEREBY IN ANY JURISDICTION IN WHICH OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE 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........................... 8
Risk Factors.......................... 9
Debenture Offering.................... 14
Use of Proceeds....................... 14
Dilution.............................. 15
Price Range of Common Stock........... 15
Dividend Policy....................... 16
Capitalization........................ 17
Selected Financial and Other Data..... 19
Management's Discussion and Analysis
of Results of Operations and
Financial Condition................. 21
Business.............................. 29
Management............................ 40
Principal and Selling Stockholders.... 43
Description of Capital Stock.......... 45
Underwriting.......................... 48
Legal Matters......................... 49
Experts............................... 49
Incorporation of Documents by
Reference............................. 50
Pro Forma Financial Statements........ P-1
- ------------------------------
Index to Consolidated Financial
Statements............................ F-1
===========================================
===========================================
3,000,000 SHARES
[LOGO]
PETROLEUM HEAT
AND POWER CO., INC.
CLASS A COMMON STOCK
----------------------
PROSPECTUS
----------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
===========================================
===========================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC registration fee........................................... $ 53,365
NASD filing fee................................................ 15,976
Printing and engraving......................................... 225,000
Accountants' fees and expenses................................. 150,000
Legal fees and expenses........................................ 200,000
Trustee's fees and expenses.................................... 15,000
Transfer Agent's fees and expenses............................. 10,000
Blue Sky fees and expenses..................................... 30,000
Miscellaneous.................................................. 63,159
----------
Total........................................................ $ 762,500
==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 302A.521 of the Minnesota Business Corporation Act (the "MBCA")
provides mandatory and exclusive standards for indemnification, although the
Articles of Incorporation or by-laws of a corporation can specifically limit the
statutory indemnification. Minnesota law generally provides that a corporation
shall indemnify a person made or threatened to be made a party to a proceeding
by reason of such person's official capacity as an officer, director or employee
of the corporation, against judgments, penalties, fines, including, without
limitation, excise taxes assessed against such person with respect to an
employee benefit plan, settlements, and reasonable expenses, including
attorney's fees and disbursements, incurred by that person in connection with
the proceeding, if such person (a) has not been indemnified by another entity
for the same proceedings and in connection with the same acts or omission; (b)
acted in good faith; (c) received no improper personal benefit; (d) in the case
of a criminal proceeding, had no reason to believe such person's conduct was
unlawful; and (e) in connection with the acts or omissions in question, the
person reasonably believed that such person's conduct was in the best interests
of the corporation (or, in the case of a question of improper personal benefit,
believed that the conduct was not opposed to the best interests of the
corporation; or in the case of an employee benefit plan, believed that the
conduct was in the best interests of the participants or beneficiaries of the
employee benefit plan).
Section 302A.521 of the MBCA further provides that if an officer, director
or employee is made or threatened to be made a party to a proceeding in such
person's official capacity, such person is entitled, upon written request to the
corporation, to payment or reimbursement by the corporation of reasonable
expenses incurred by such person in advance of the final disposition of the
proceeding (a) upon receipt by the corporation of a written confirmation by such
person of such person's good faith belief that the criteria for indemnification
set forth under Minnesota law have been satisfied, an undertaking by such person
to repay all amounts paid or reimbursed by the corporation if it is ultimately
determined that the criteria for indemnification have not been satisfied, and
(b) after a determination that the facts then known to those making the
determination would not preclude indemnification under Minnesota law.
Finally, Section 302A.521 of the MBCA provides that a corporation's Articles
of Incorporation or by-laws may prohibit indemnification or advances or may
impose conditions on such indemnification or advance, as long as those
conditions apply equally to all persons or to all persons with a given class.
II-1
<PAGE>
Registrant's Restated Articles of Incorporation, as amended, contains the
limitation of liability provision set forth below:
"ARTICLE VIII--A director of the corporation shall not be personally
liable to the corporation or its shareholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its
shareholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section
302A.559 of the Minnesota Business Corporation Act or Section 80A.23 of the
Minnesota Securities law, or (iv) for any transaction from which the
director derived an improper personal benefit. If the Minnesota Business
Corporation Act is hereafter amended to authorize any further limitation of
the liability of a director, then the liability of a director of the
corporation shall be eliminated or limited to the fullest extent permitted
by the Minnesota Business Corporation Act, as amended. No amendment to or
repeal of this Article VIII shall apply to or have any effect on the
liability or alleged liability of any director of the corporation for or
with respect to any acts or omissions of such director occurring prior to
such amendment or repeal."
Registrant's by-laws, as amended, contains the indemnification provision set
forth below:
"Section 8.01. The corporation shall indemnify all officers and
directors of the corporation, for such expenses and liabilities, in such
manner, under such circumstances, and to such extent as permitted by
Minnesota Statutes Section 302A.521, as now enacted or hereafter amended.
Unless otherwise approved by the Board of Directors, the corporation shall
not indemnify or advance expenses to any employee of the corporation who is
not otherwise entitled to indemnification pursuant to the prior sentence of
this Section 8.01."
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
<C> <S>
1.1 --Form of Debenture Underwriting Agreement. (1)
1.2 --Form of Common Stock Underwriting Agreement (1)
4.1 --Indenture, dated as of April 1, 1993, between the Company and Chemical Bank, as
trustee, including Form of Notes. (8)
4.2 --Indenture, dated as of October 1, 1985 between the Company and Manufacturers
Hanover Trust Company, as trustee, including Form of Notes. (3)
4.3 --Restated and Amended Articles of Incorporation, as amended, and Articles of
Amendment thereto. (2)
4.4 --Certificate of Designation creating a series of preferred stock designated as
Cumulative Redeemable Exchangeable 1991 Preferred Stock and Certificate of
Amendment relating thereto. (6)
4.5 --Certificate of Designation creating a series of preferred stock designated as
Cumulative Redeemable 1991 Preferred Stock. (6)
4.6 --Form of Indenture between the Company and Chemical Bank, as trustee, including
Form of Debentures. (1)
4.7 --Certificate of Designation creating a series of Preferred Stock designated as
Cumulative Redeemable Exchangeable 1993 Preferred Stock. (10)
5 --Opinion of Phillips, Nizer, Benjamin, Krim & Ballon. (1)
7 --Opinion of Dorsey & Whitney P.L.L.P. (1)
10.1 --Amended and Restated Credit Agreement dated as of December 31, 1992 among the
Company, Maxwhale Corp., certain banks party thereto and Chemical Bank. (8)
10.2 --Pension Plan, as amended, of Petroleum Heat and Power Co., Inc. (2)
10.3 --Savings Plan, as amended of Petroleum Heat and Power Co., Inc. (2)
10.4 --Supplemental Executive Retirement Plan of Petroleum Heat and Power Co., Inc. (2)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
<C> <S>
10.5 --Lease dated July 15, 1981 with respect to offices and garage located at 477 West
John Street and 5 Alpha Plaza, Hicksville, New York. (4)
10.6 --Lease dated February 15, 1982,(4) First Amendment dated February 14, 1986, and
Second Amendment dated July 1, 1989, with respect to offices, garage and terminal
located at 818 Michigan Avenue, N.E., Washington, D.C. (2)
10.7 --Lease dated June 26, 1989 with respect to offices and garage located at 40 Lee
Burbank Highway, Revere, Massachusetts. (2)
10.8 --Lease dated December 1, 1985 with respect to office and garage located at
3600-3620 19th Avenue, Astoria, New York. (3)
10.9 --Lease dated November 1, 1985 with respect to office and garage located at 522
Grand Blvd., Westbury, New York. (5)
10.10 --Lease dated June 5, 1986 with respect to office and garage located at 2541
Richmond Terrace Co., Staten Island, New York. (5)
10.11 --Lease dated July 31, 1986 with respect to office and garage located at 71 Day
Street, Norwalk, Connecticut. (5)
10.12 --Lease dated July 9, 1984 with respect to office located at 1245 Westfield Avenue,
Clark, New Jersey. (5)
10.13 --Lease dated April 5, 1991 with respect to office and garage located at 10 Spring
Street, New Milford, Connecticut. (2)
10.14 --Lease dated October 26, 1990 with respect to office and garage located at 1 Coffey
Street, Brooklyn, New York. (2)
10.15 --Lease dated February 6, 1990 with respect to office and garage located at 62
Oakland Avenue and 64 Oakland Avenue, East Hartford, Connecticut. (2)
10.16 --Lease dated July 29, 1988 and Addendum to lease dated August 1, 1988 with respect
to office, garage and terminal located at 224 North Main Street, Southampton, New
York. (2)
10.17 --Lease dated April 1, 1988 with respect to office and garage located at 171 Ames
Court, Plainview, New York. (2)
10.18 --Lease dated August 12, 1988 with respect to office and garage located at 326 South
Second Street, Emmaus, Pennsylvania. (2)
10.19 --Lease dated July 15, 1990, Addendum to lease dated July 27, 1990 and Second
Addendum to lease dated November 30, 1990, with respect to office and garage
located at 212 Elm Street, North Haven, Connecticut. (2)
10.20 --Lease dated August 14, 1989 with respect to office and garage located at foot of
South Street, Oyster Bay, New York. (2)
10.21 --Lease and Addendum to lease dated September 26, 1990 with respect to office and
garage located at 930 Park Avenue, Lakewood, New Jersey. (2)
10.22 --Lease dated December 1, 1990 with respect to garage located at 10 Coffey Street,
Brooklyn, New York. (2)
10.23 --Lease dated May 9, 1991 with respect to office and garage located at 260 Route 10
East, Whippany, New Jersey. (2)
10.24 --Lease dated June 1, 1987 with respect to garage located at 817 Pennsylvania
Avenue, Linden, New Jersey. (2)
10.25 --Lease dated June 1, 1989 with respect to office and garage located at 2 Selleck
Street, Stamford, Connecticut. (2)
10.26 --Lease dated April 28, 1992 with respect to office and garage located at 8087-8107
Parston Drive, Forestville, Maryland. (8)
10.27 --Demand Promissory Notes of Thomas J. Edelman in favor of Petro, Inc. in the
amounts of $500,000 and $100,000 dated April 15, 1985 and May 17, 1985,
respectively, and Pledge and Security Agreement, as amended, made by Thomas J.
Edelman in favor of Petro, Inc. dated April 15, 1986. (5)
10.28 --Letter dated June 5, 1985 with respect to redemption of 55,250 shares of common
stock of Petroleum Heat and Power Co., Inc. from Thomas J. Edelman and promissory
note of Petroleum Heat and Power Co., Inc. in the amount of $884,000 in favor of
Thomas J. Edelman, dated June 6, 1985. (3)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
<C> <S>
10.29 --Option dated October 18, 1984 granted to Irik P. Sevin to purchase 64,000 shares
of common stock of Petroleum Heat and Power Co., Inc. (3)
10.30 --Form of Equipment Lease and related documentation dated as of October 21, 1983
relating to vehicle leasing transaction between Atlas Oil Corporation and various
equipment lessors. (3)
10.31 --Form of Equipment Lease and related documentation dated as of March 2, 1985
relating to vehicle leasing transaction between Petro, Inc. and various equipment
lessors. (3)
10.32 --Agreement dated October 22, 1986 relating to purchase of 64,000 shares of Class A
Common Stock by
Irik P. Sevin. (5)
10.33 --Agreement dated December 2, 1986 relating to stock options granted to Malvin P.
Sevin. (5)
10.34 --Agreement dated December 2, 1986 relating to stock options granted to Irik P.
Sevin. (5)
10.35 --Agreements dated December 28, 1987 and March 6, 1989 relating to stock options
granted to Irik P. Sevin and Malvin P. Sevin. (2)
10.37 --Subordinated Note Agreement relating to $60 million Subordinated Notes due October
1, 1998 issued to John Hancock Mutual Life Insurance Company and other Investors
(the "Hancock Note Agreement"). (2)
10.38 --Note Agreement, dated as of January 15, 1991, relating to $12.5 million
Subordinated Notes due January 15, 2001, between the Company and Connecticut
General Life Insurance Company (the "Connecticut General Note Agreement"). (2)
10.39 --Purchase Agreement, dated as of September 1, 1991, between the Company and United
States Leasing International, relating to purchase of 159,722 shares of the 1991
Preferred Stock (the "US Leasing Purchase Agreement"). (2)
10.40 --Purchase Agreement, dated as of August 1, 1989, between the Company and John
Hancock Mutual Life Insurance Company and The Northwestern Mutual Life Insurance
Company, relating to the purchase of the 1989 Preferred Stock (the
"Hancock/Northwestern Purchase Agreement"). (2)
10.41 --Agreement dated as of November 1, 1992 relating to stock options granted to George
Leibowitz. (8)
10.42 --Letter Agreement dated March 15, 1993 relating to the Credit Agreement. (8)
10.43 --Lease dated June 17, 1993 with respect to office facilities located at 2187
Atlantic Street in Stamford Connecticut. (10)
10.44 --Note dated December 31, 1993, in the amount of $1,559,827, due December 31, 1994,
from Irik P. Sevin to the Company. (10)
10.45 --Agreement dated December 1993 relating to stock options granted to
Malvin P. Sevin. (10)
10.46 --Purchase Agreement, dated as of December 21, 1993, among Star Gas Holdings, Inc.,
First Reserve Secured Energy Assets Fund, L.P. American Gas & Oil Investors, AmGo
II, AmGo III, FRC Star Gas, Inc., Star Gas and the Company. (11)
10.47 --Option from Star Gas to the Company, dated as of December 21, 1993. (11)
10.48 --Shareholder Put/Call Agreement, dated as of December 21, 1993, among the Company,
the Other Investors and Prudential. (11)
10.49 --Shareholders' Agreement, dated as of December 21, 1993, among the Company, the
Other Investors and Prudential. (11)
10.50 --Management Services Agreement, dated as of December 21, 1993, between the Company
and Star Gas. (11)
10.51 --First Amendment to the Company's 10 1/8% Subordinated Notes Indenture dated as of
January 12, 1994. (10)
10.52 --Form of First Amendment to the US Leasing Purchase Agreement. (10)
10.53 --Form of Third Amendment to the Connecticut General Note Agreement. (10)
10.54 --Form of Second Amendment to the Hancock Note Agreement. (10)
10.55 --Form of First Amendment to the Hancock/Northwestern Purchase Agreement. (10)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
<C> <S>
10.56 --Form of Fourth Amendment dated January 21, 1994 to the Second Amended and Restated
Credit Agreement. (10)
10.57 --Employment Agreement dated July 21, 1994 with Thomas Isola (13)
10.58 --Agreement entered into as of the 7th day of December, 1994, among the Company,
PruSupply, Inc. and the Prudential Insurance Company of America. (2)
10.59 --Agreement dated April 4, 1994 relating to stock options granted to Irik P. Sevin.
(14)
10.60 --Note dated December 31, 1994, in the amount of $1,640,060, due December 31, 1995,
from Irik P. Sevin to the Company. (9)
11.0 --Computation of Per Share Earnings. (14)
12.0 --Computation of Ratio of Earnings to Fixed Charges. (14)
24.1 --Consent of KPMG Peat Marwick LLP. (1)
24.2 --Consent of Ernst & Young LLP. (1)
24.3 --Consent of Phillips, Nizer, Benjamin, Krim & Ballon (included in Exhibit 5).
24.4 --Consent of Sansiveri, Ryan, Sullivan & Co. (1)
24.5 --Consent of Dorsey & Whitney P.L.L.P. (included in Exhibit 7).
25.0 --Power of Attorney (14).
26.0 --Statement of Eligibility of Trustee on Form T-1 of Chemical Bank (separately
bound). (14)
</TABLE>
- ------------
(1) Filed herewith.
(2) Filed as Exhibits to Registration Statement on Form S-1, File No. 33-48051,
and incorporated herein by reference.
(3) Filed as Exhibits to Registration Statement on Form S-1, File No. 2-99794,
and incorporated herein by reference.
(4) Filed as Exhibits to Registration Statement on Form S-1, File No. 2-88526,
and incorporated herein by reference.
(5) Filed as Exhibits to Registration Statement on Form S-1, File No. 33-9088,
and incorporated herein by reference.
(6) Filed as Exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991, File No. 2-88526, and incorporated herein by
reference.
(7) Filed as Exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 1988, File No. 2-88526, and incorporated herein by
reference.
(8) Filed as Exhibits to the Company's Registration Statement on Form S-2, File
No. 33-58034, and incorporated herein by reference.
(9) To be filed by Amendment.
(10) Filed as Exhibits to the Registration Statement on Form S-2, File No.
33-72354, and incorporated herein by reference.
(11) Filed as Exhibits to the Company's Periodic Report on Form 8-K filed on
January 4, 1994, File No. 2-88526, and incorporated herein by reference.
(12) Filed as Exhibits to the Company's Periodic Report on Form 8-K, dated
December 23, 1994.
(13) Filed as an Exhibit to the Company's Period Report on Form 10-Q for the
quarter ended September 1994.
(14) Filed previously.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefor
II-5
<PAGE>
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction, the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or(4)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized in the City of New York,
State of New York, on the 30th of January, 1995.
PETROLEUM HEAT AND POWER CO., INC.
By /s/ IRIK P. SEVIN
...................................
Irik P. Sevin
President, Chairman of the Board,
Chief Executive Officer and Chief
Financial and Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ IRIK P. SEVIN President, Chairman of the Board, January 30, 1995
.................................... Chief Executive Officer,
Irik P. Sevin Financial and Accounting Officer
and Director
* Secretary and Director January 30, 1995
....................................
Audrey L. Sevin
.................................... Director
Phillip E. Cohen
* Director January 30, 1995
....................................
Thomas J. Edelman
* Director January 30, 1995
....................................
Wolfgang Traber
* Director January 30, 1995
....................................
Richard O'Connell
* Director January 30, 1995
....................................
Max Warburg
.................................... Director
Paul Biddelman
</TABLE>
- ------------------------
* By /s/ IRIK P. SEVIN
.........................
Irik P. Sevin,
Attorney-in-Fact
II-7
<PAGE?
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT
NO. INDEX TO EXHIBITS
- ------- ------------------------------------------------------------------------------------
<S> <C>
1.1 --Form of Debenture Underwriting Agreement. (1)
1.2 --Form of Common Stock Underwriting Agreement (1)
4.1 --Indenture, dated as of April 1, 1993, between the Company and Chemical Bank, as
trustee, including Form of Notes. (8)
4.2 --Indenture, dated as of October 1, 1985 between the Company and Manufacturers
Hanover Trust Company, as trustee, including Form of Notes. (3)
4.3 --Restated and Amended Articles of Incorporation, as amended, and Articles of
Amendment thereto. (2)
4.4 --Certificate of Designation creating a series of preferred stock designated as
Cumulative Redeemable Exchangeable 1991 Preferred Stock and Certificate of
Amendment relating thereto. (6)
4.5 --Certificate of Designation creating a series of preferred stock designated as
Cumulative Redeemable 1991 Preferred Stock. (6)
4.6 --Form of Indenture between the Company and Chemical Bank, as trustee, including
Form of Debentures. (1)
4.7 --Certificate of Designation creating a series of Preferred Stock designated as
Cumulative Redeemable Exchangeable 1993 Preferred Stock. (10)
5 --Opinion of Phillips, Nizer, Benjamin, Krim & Ballon. (1)
7 --Opinion of Dorsey & Whitney P.L.L.P. (1)
10.1 --Amended and Restated Credit Agreement dated as of December 31, 1992 among the
Company, Maxwhale Corp., certain banks party thereto and Chemical Bank. (8)
10.2 --Pension Plan, as amended, of Petroleum Heat and Power Co., Inc. (2)
10.3 --Savings Plan, as amended of Petroleum Heat and Power Co., Inc. (2)
10.4 --Supplemental Executive Retirement Plan of Petroleum Heat and Power Co., Inc. (2)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
<S> <C>
10.5 --Lease dated July 15, 1981 with respect to offices and garage located at 477 West
John Street and 5 Alpha Plaza, Hicksville, New York. (4)
10.6 --Lease dated February 15, 1982,(4) First Amendment dated February 14, 1986, and
Second Amendment dated July 1, 1989, with respect to offices, garage and terminal
located at 818 Michigan Avenue, N.E., Washington, D.C. (2)
10.7 --Lease dated June 26, 1989 with respect to offices and garage located at 40 Lee
Burbank Highway, Revere, Massachusetts. (2)
10.8 --Lease dated December 1, 1985 with respect to office and garage located at
3600-3620 19th Avenue, Astoria, New York. (3)
10.9 --Lease dated November 1, 1985 with respect to office and garage located at 522
Grand Blvd., Westbury, New York. (5)
10.10 --Lease dated June 5, 1986 with respect to office and garage located at 2541
Richmond Terrace Co., Staten Island, New York. (5)
10.11 --Lease dated July 31, 1986 with respect to office and garage located at 71 Day
Street, Norwalk, Connecticut. (5)
10.12 --Lease dated July 9, 1984 with respect to office located at 1245 Westfield Avenue,
Clark, New Jersey. (5)
10.13 --Lease dated April 5, 1991 with respect to office and garage located at 10 Spring
Street, New Milford, Connecticut. (2)
10.14 --Lease dated October 26, 1990 with respect to office and garage located at 1 Coffey
Street, Brooklyn, New York. (2)
10.15 --Lease dated February 6, 1990 with respect to office and garage located at 62
Oakland Avenue and 64 Oakland Avenue, East Hartford, Connecticut. (2)
10.16 --Lease dated July 29, 1988 and Addendum to lease dated August 1, 1988 with respect
to office, garage and terminal located at 224 North Main Street, Southampton, New
York. (2)
10.17 --Lease dated April 1, 1988 with respect to office and garage located at 171 Ames
Court, Plainview, New York. (2)
10.18 --Lease dated August 12, 1988 with respect to office and garage located at 326 South
Second Street, Emmaus, Pennsylvania. (2)
10.19 --Lease dated July 15, 1990, Addendum to lease dated July 27, 1990 and Second
Addendum to lease dated November 30, 1990, with respect to office and garage
located at 212 Elm Street, North Haven, Connecticut. (2)
10.20 --Lease dated August 14, 1989 with respect to office and garage located at foot of
South Street, Oyster Bay, New York. (2)
10.21 --Lease and Addendum to lease dated September 26, 1990 with respect to office and
garage located at 930 Park Avenue, Lakewood, New Jersey. (2)
10.22 --Lease dated December 1, 1990 with respect to garage located at 10 Coffey Street,
Brooklyn, New York. (2)
10.23 --Lease dated May 9, 1991 with respect to office and garage located at 260 Route 10
East, Whippany, New Jersey. (2)
10.24 --Lease dated June 1, 1987 with respect to garage located at 817 Pennsylvania
Avenue, Linden, New Jersey. (2)
10.25 --Lease dated June 1, 1989 with respect to office and garage located at 2 Selleck
Street, Stamford, Connecticut. (2)
10.26 --Lease dated April 28, 1992 with respect to office and garage located at 8087-8107
Parston Drive, Forestville, Maryland. (8)
10.27 --Demand Promissory Notes of Thomas J. Edelman in favor of Petro, Inc. in the
amounts of $500,000 and $100,000 dated April 15, 1985 and May 17, 1985,
respectively, and Pledge and Security Agreement, as amended, made by Thomas J.
Edelman in favor of Petro, Inc. dated April 15, 1986. (5)
10.28 --Letter dated June 5, 1985 with respect to redemption of 55,250 shares of common
stock of Petroleum Heat and Power Co., Inc. from Thomas J. Edelman and promissory
note of Petroleum Heat and Power Co., Inc. in the amount of $884,000 in favor of
Thomas J. Edelman, dated June 6, 1985. (3)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
<S> <C>
10.29 --Option dated October 18, 1984 granted to Irik P. Sevin to purchase 64,000 shares
of common stock of Petroleum Heat and Power Co., Inc. (3)
10.30 --Form of Equipment Lease and related documentation dated as of October 21, 1983
relating to vehicle leasing transaction between Atlas Oil Corporation and various
equipment lessors. (3)
10.31 --Form of Equipment Lease and related documentation dated as of March 2, 1985
relating to vehicle leasing transaction between Petro, Inc. and various equipment
lessors. (3)
10.32 --Agreement dated October 22, 1986 relating to purchase of 64,000 shares of Class A
Common Stock by
Irik P. Sevin. (5)
10.33 --Agreement dated December 2, 1986 relating to stock options granted to Malvin P.
Sevin. (5)
10.34 --Agreement dated December 2, 1986 relating to stock options granted to Irik P.
Sevin. (5)
10.35 --Agreements dated December 28, 1987 and March 6, 1989 relating to stock options
granted to Irik P. Sevin and Malvin P. Sevin. (2)
10.37 --Subordinated Note Agreement relating to $60 million Subordinated Notes due October
1, 1998 issued to John Hancock Mutual Life Insurance Company and other Investors
(the "Hancock Note Agreement"). (2)
10.38 --Note Agreement, dated as of January 15, 1991, relating to $12.5 million
Subordinated Notes due January 15, 2001, between the Company and Connecticut
General Life Insurance Company (the "Connecticut General Note Agreement"). (2)
10.39 --Purchase Agreement, dated as of September 1, 1991, between the Company and United
States Leasing International, relating to purchase of 159,722 shares of the 1991
Preferred Stock (the "US Leasing Purchase Agreement"). (2)
10.40 --Purchase Agreement, dated as of August 1, 1989, between the Company and John
Hancock Mutual Life Insurance Company and The Northwestern Mutual Life Insurance
Company, relating to the purchase of the 1989 Preferred Stock (the
"Hancock/Northwestern Purchase Agreement"). (2)
10.41 --Agreement dated as of November 1, 1992 relating to stock options granted to George
Leibowitz. (8)
10.42 --Letter Agreement dated March 15, 1993 relating to the Credit Agreement. (8)
10.43 --Lease dated June 17, 1993 with respect to office facilities located at 2187
Atlantic Street in Stamford Connecticut. (10)
10.44 --Note dated December 31, 1993, in the amount of $1,559,827, due December 31, 1994,
from Irik P. Sevin to the Company. (10)
10.45 --Agreement dated December 1993 relating to stock options granted to
Malvin P. Sevin. (10)
10.46 --Purchase Agreement, dated as of December 21, 1993, among Star Gas Holdings, Inc.,
First Reserve Secured Energy Assets Fund, L.P. American Gas & Oil Investors, AmGo
II, AmGo III, FRC Star Gas, Inc., Star Gas and the Company. (11)
10.47 --Option from Star Gas to the Company, dated as of December 21, 1993. (11)
10.48 --Shareholder Put/Call Agreement, dated as of December 21, 1993, among the Company,
the Other Investors and Prudential. (11)
10.49 --Shareholders' Agreement, dated as of December 21, 1993, among the Company, the
Other Investors and Prudential. (11)
10.50 --Management Services Agreement, dated as of December 21, 1993, between the Company
and Star Gas. (11)
10.51 --First Amendment to the Company's 10 1/8% Subordinated Notes Indenture dated as of
January 12, 1994. (10)
10.52 --Form of First Amendment to the US Leasing Purchase Agreement. (10)
10.53 --Form of Third Amendment to the Connecticut General Note Agreement. (10)
10.54 --Form of Second Amendment to the Hancock Note Agreement. (10)
10.55 --Form of First Amendment to the Hancock/Northwestern Purchase Agreement. (10)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
<S> <C>
10.56 --Form of Fourth Amendment dated January 21, 1994 to the Second Amended and Restated
Credit Agreement. (10)
10.57 --Employment Agreement dated July 21, 1994 with Thomas Isola (13)
10.58 --Agreement entered into as of the 7th day of December, 1994, among the Company,
PruSupply, Inc. and the Prudential Insurance Company of America. (2)
10.59 --Agreement dated April 4, 1994 relating to stock options granted to Irik P. Sevin.
(14)
10.60 --Note dated December 31, 1994, in the amount of $1,640,060, due December 31, 1995,
from Irik P. Sevin to the Company. (9)
11.0 --Computation of Per Share Earnings. (14)
12.0 --Computation of Ratio of Earnings to Fixed Charges. (14)
24.1 --Consent of KPMG Peat Marwick LLP. (1)
24.2 --Consent of Ernst & Young LLP. (1)
24.3 --Consent of Phillips, Nizer, Benjamin, Krim & Ballon (included in Exhibit 5).
24.4 --Consent of Sansiveri, Ryan, Sullivan & Co. (1)
24.5 --Consent of Dorsey & Whitney P.L.L.P. (included in Exhibit 7).
25.0 --Power of Attorney (14).
26.0 --Statement of Eligibility of Trustee on Form T-1 of Chemical Bank(separately
bound). (14)
</TABLE>
- ------------
(1) Filed herewith.
(2) Filed as Exhibits to Registration Statement on Form S-1, File No. 33-48051,
and incorporated herein by reference.
(3) Filed as Exhibits to Registration Statement on Form S-1, File No. 2-99794,
and incorporated herein by reference.
(4) Filed as Exhibits to Registration Statement on Form S-1, File No. 2-88526,
and incorporated herein by reference.
(5) Filed as Exhibits to Registration Statement on Form S-1, File No. 33-9088,
and incorporated herein by reference.
(6) Filed as Exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991, File No. 2-88526, and incorporated herein by
reference.
(7) Filed as Exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 1988, File No. 2-88526, and incorporated herein by
reference.
(8) Filed as Exhibits to the Company's Registration Statement on Form S-2, File
No. 33-58034, and incorporated herein by reference.
(9) To be filed by Amendment.
(10) Filed as Exhibits to the Registration Statement on Form S-2, File No.
33-72354, and incorporated herein by reference.
(11) Filed as Exhibits to the Company's Periodic Report on Form 8-K filed on
January 4, 1994, File No. 2-88526, and incorporated herein by reference.
(12) Filed as Exhibits to the Company's Periodic Report on Form 8-K, dated
December 23, 1994.
(13) Filed as an Exhibit to the Company's Period Report on Form 10-Q for the
quarter ended September 1994.
(14) Filed previously.
Exhibit 1.1
[L&W DRAFT DATED 1/27/95]
PETROLEUM HEAT AND POWER CO., INC.
___% Subordinated Debentures due 2005
UNDERWRITING AGREEMENT
__________, 1995
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
140 Broadway
New York, New York 10005
Ladies and Gentlemen:
Petroleum Heat and Power Co., Inc., a Minnesota corporation (the
"Company"), proposes to issue and sell to Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), Bear, Stearns & Co. Inc. and PaineWebber
Incorporated (collectively, the "Underwriters") an aggregate of $125,000,000
principal amount of its __% Subordinated Debentures due 2005 (the "Securities").
The Securities are to be issued pursuant to the provisions of an Indenture (the
"Indenture") to be dated as of __________, 1995 by and between the Company and
_____________, as Trustee (the "Trustee"). Capitalized terms used herein but
not otherwise defined shall have the definitions given to such terms in the
Indenture.
1. Registration Statement and Prospectus. The Company has prepared and
-------------------------------------
filed with the Securities and Exchange Commission (the "Commission"), in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-2 (No. 33-57059), including a prelim-
inary prospectus, subject to completion, relating to the Securities. The
registration statement, as amended at the time it becomes effective or, if a
post-effective amendment is filed with respect thereto, as amended by such
post-effective amendment at the time of its effectiveness, including, in each
case, all documents incorporated by reference therein, all financial statements
and exhibits thereto, and the information (if any) contained in a prospectus
subsequently filed with the Commission pursuant to Rule 424(b) under the Act and
deemed to be a part of the registration statement at the time of its effec-
tiveness pursuant to Rule 430A under the Act, is hereinafter referred to as the
"Registration Statement"; and the prospectus in the form first used to confirm
sales of the Securities, whether or not
filed with the Commission pursuant to Rule 424(b) under the Act, including all
documents incorporated by reference therein, is hereinafter referred to as the
"Prospectus."
2. Agreements to Sell and Purchase. On the basis of the representations
-------------------------------
and warranties contained in this Agreement, and subject to its terms and
conditions, the Company agrees to issue and sell to the Underwriters, and the
Underwriters agree, severally and not jointly, to purchase from the
<PAGE>
Company, Securities in the respective principal amounts set forth opposite their
names on Schedule A hereto at a purchase price equal to _____% of the principal
amount thereof (the "Purchase Price").
3. Delivery and Payment. Delivery to you of and payment for the
--------------------
Securities shall be made at 9:00 A.M., New York City time, on __________, 1995
(such time and date being referred to as the "Closing Date") at the offices of
Latham & Watkins, 885 Third Avenue, New York, New York. The Closing Date and
the location of delivery of the Securities may be varied by agreement among you
and the Company.
The Securities in definitive form shall be registered in such names and
issued in such denominations as you shall request in writing not later than two
full Business Days prior to the Closing Date, and shall be made available to you
at the offices of DLJ (or at such other place as shall be acceptable to you) for
inspection not later than 9:30 A.M., New York City time, on the business day
next preceding the Closing Date. The Securities shall be delivered to you on
the Closing Date with any transfer taxes payable upon initial issuance thereof
duly paid by the Company, for your respective accounts, against payment of the
Purchase Price by certified or official bank check or checks payable in New York
Clearing House or similar next-day funds to the order of the Company.
4. Agreements of the Company. The Company agrees with each of you that:
-------------------------
(a) The Company will, if necessary, file an amendment to the
Registration Statement or a post-effective amendment to the Registration
Statement, in each case as soon as practicable after the execution and
delivery of this Agreement, and will use its best efforts to cause the
Registration Statement or such post-effective amendment to become effective
at the earliest possible time. The Company will comply fully and in a timely
manner with the applicable provisions of Rule 424 and Rule 430A under the
Act.
(b) The Company will advise you promptly and, if requested by any of
you, confirm such advice in writing, (i) when the Registration Statement has
become effective, if and when the Prospectus is sent for filing pursuant to
Rule 424 under the Act and when any post-effective amendment to the
Registration Statement becomes effective, (ii) of the receipt of any comments
from the Commission or any state securities commission or regulatory
authority that relate to the Registration Statement or requests by the
Commission or any state securities commission or regulatory authority for
amendments to the Registration Statement or amendments or supplements to the
Prospectus or for additional information, (iii) of the issuance by the Com-
mission of any stop order
<PAGE>
suspending the effectiveness of the Registration Statement, or of the
suspension of qualification of the Securities for offering or sale in any
jurisdiction, or the initiation of any proceeding for such purpose by the
Commission or any state securities commission or other regulatory authority,
and (iv) of the happening of any event during such period as in your
reasonable judgment you are required to deliver a prospectus in connection
with sales of the Securities by you which makes any statement of a material
fact made in the Registration Statement untrue or which requires the making
of any additions to or changes in the Registration Statement (as amended or
supplemented from time to time) in order to make the statements therein not
misleading or that makes any statement of a material fact made in the
Prospectus (as amended or supplemented from time to time) untrue or which
requires the making of any additions to or changes in the Prospectus (as
amended or supplemented from time to time) in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The Company shall use its best efforts to prevent the issuance
of any stop order or order suspending the qualification or exemption of the
Securities under any state securities or Blue Sky laws, and, if at any time
the Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, or any state securities commission or other
regulatory authority shall issue an order suspending the qualification or
exemption of the Securities under any state securities or Blue Sky laws, the
Company shall use every reasonable effort to obtain the withdrawal or lifting
of such order at the earliest possible time.
(c) The Company will furnish to you without charge three signed copies
(plus one additional signed copy to your legal counsel) of the Registration
Statement as first filed with the Commission and of each amendment thereto,
including all exhibits filed therewith, and will furnish to you such number
of conformed copies of the Registration Statement as so filed and of each
amendment thereto, without exhibits, as you may reasonably request.
(d) The Company will not file any amendment or supplement to the
Registration Statement, whether before or after the time when it becomes
effective, or make any amendment or supplement to the Prospectus, of which
you shall not previously have been advised and provided a copy within two
business days prior to the filing thereof (or such reasonable amount of time
as is necessitated by the exigency of such amendment or supplement) or to
which you shall reasonably object; and it will prepare and file with the
Commission, promptly upon your reasonable request, any amendment to the
Registration Statement or supplement to the Prospectus which may be necessary
or advisable in connection with the distribution of the Securities by you,
and will use its best efforts to cause the same to become effective as
promptly as possible.
(e) Promptly after the Registration Statement becomes effective, and
from time to time thereafter for such period in your reasonable judgment as a
prospectus is required to be delivered in connection with sales of the Secu-
rities by you, the Company will furnish to each Underwriter and dealer
without charge as many copies of the Prospectus (and of any amendment or
supplement to the Prospectus) as such Underwriters and dealers may reasonably
request.
(f) If during such period as in your reasonable judgment you are
required to deliver a prospectus in connection with sales of the Securities
by you any event shall occur as a result of which it becomes necessary to
amend or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances existing as of the date the Prospectus is
delivered to a purchaser, not misleading, or if it is necessary to amend or
supplement the Prospectus to comply with any law, the Company will promptly
prepare and file with the Commission an appropriate amendment or supplement
to the Prospectus so that the statements in the Prospectus, as so amended or
supplemented, will not, in the light of the circumstances existing as of the
date the Prospectus is so delivered, be misleading, and will comply with
applicable law, and will furnish to each Underwriter and dealer without
charge such number of copies thereof as such Underwriters and dealers may
reasonably request.
(g) The Company will timely complete all required filings and otherwise
fully comply in a timely manner with all provisions of the Securities
Exchange Act of 1934, as amended, including the rules and regulations
thereunder (collectively, the "Exchange Act"), in connection with the
registration, if any, of the Securities thereunder.
(h) So long as any of the Securities are outstanding, the Company will
mail to each of you without charge a copy of each report or other publicly
available information required to be furnished to holders of the Securities
by law or pursuant to the Indenture at the same time as such reports or other
information are required to be furnished to such holders.
3
<PAGE>
(i) Whether or not the transactions contemplated hereby are consummated
or this Agreement is terminated, the Company will pay and be responsible for
all costs, expenses, fees and taxes in connection with or incident to (i) the
printing, processing, filing, distribution and delivery under the Act of the
Registration Statement, each preliminary prospectus, the Prospectus and all
amendments or supplements thereto, (ii) the printing, processing, execution,
distribution and delivery of this Agreement, the Indenture, any memoranda
describing state securities or Blue Sky laws or foreign securities or Blue
Sky laws and all other agreements, memoranda, correspondence and other
documents printed, distributed and delivered in connection with the offering
of the Securities, (iii) the registration with the Commission and the
issuance and delivery of the Securities, (iv) the registration or
qualification of the Securities for offer and sale under the securities or
Blue Sky laws of the jurisdictions referred to in paragraph (m) below and of
Canada (including, in each case, the fees and disbursements of counsel for
the Underwriters relating to such registration or qualification and memoranda
relating thereto and any filing fees in connection therewith), (v) furnishing
such copies of the Registration Statement, Prospectus and preliminary
prospectus, and all amendments and supplements to any of them, as may be
reasonably requested by you, (vi) filing, registration and clearance with the
National Association of Securities Dealers, Inc. ("NASD") in connection with
the offering of the Securities (including the fees and disbursements of
counsel relating thereto), (vii) the listing of the Securities, if any, on a
stock exchange or automated quotation system, (viii) the rating of the
Securities by investment rating agencies, (ix) any "qualified independent
underwriter" as required by Schedule E of the Bylaws of the NASD (including
fees and disbursements of counsel for such qualified independent underwriter)
and (x) the performance by the Company of its other obligations under this
Agreement, including (without limitation) the fees of the Trustee, the cost
of the Company's personnel and other internal costs, the cost of printing and
engraving the certificates representing the Securities, and all expenses and
taxes incident to the sale and delivery of the Securities to you.
(j) The Company will use the proceeds from the sale of the Securities in
the manner described in the Prospectus under the caption "Use of Proceeds."
(k) The Company will not voluntarily claim, and will actively resist any
attempts to claim, the benefit of any usury laws against the holders of the
Securities.
(l) The Company will use its best efforts to do and perform all things
required to be done and performed under this Agreement by it prior to or
after the Closing Date and to satisfy all conditions precedent on its part to
the delivery of the Securities.
(m) Prior to any public offering of the Securities, the Company will
cooperate with you and your counsel in connection with the registration or
qualification of the Securities for offer and sale by you under the state
securities or Blue Sky laws of such jurisdiction as you may request
(provided, that the Company shall not be obligated to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified or to take
any action that would subject it to general consent to service of process in
any jurisdiction in which it is not now so subject). The Company will
continue such qualification in effect so long as required by law for
distribution of the Securities.
(n) The Company will mail and make generally available to its security
holders as soon as reasonably practicable a consolidated earning statement
covering a period of at least twelve months beginning after the "effective
date" (as defined in Rule 158 under the Act) of the Registration Statement
(but in no event commencing later than 90 days after such effective date)
which shall
4
<PAGE>
satisfy the provisions of Section 11(a) of the Act and Rule 158 thereunder,
and to advise you in writing when such statement has been so made available.
5. Representations and Warranties. The Company represents and warrants to
------------------------------
each of you that:
(a) When the Registration Statement becomes effective, including at the
date of any post-effective amendment, at the date of the Prospectus (if
different) and at the Closing Date, the Registration Statement will comply in
all material respects with the provisions of the Act and will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading; the Prospectus and any supplements or amendments thereto will not
at the date of the Prospectus, at the date of any such supplements or
amendments and at the Closing Date contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except that the representations and warranties
contained in this paragraph (a) shall not apply to statements in or omissions
from the Registration Statement or the Prospectus (or any supplement or
amendment to them) made in reliance upon and in conformity with information
relating to you furnished to the Company in writing by you expressly for use
therein. The Company acknowledges for all purposes under this Agreement that
the statements set forth in the last paragraph on the cover page and in the
second paragraph below the table under the caption "Underwriting" in the
Prospectus (or any amendment or supplement) constitute the only written
information furnished to the Company by any Underwriter expressly for use in
the Registration Statement or the Prospectus (or any amendment or supplement
to them). When the Registration Statement becomes effective, including at
the date of any post-effective amendment, at the date of the Prospectus and
any amendment or supplement thereto (if different) and at the Closing Date,
the Indenture will have been qualified under and will conform in all material
respects to the requirements of the Trust Indenture Act of 1939, as amended,
and the rules and regulations thereunder (collectively, the "TIA"). No con-
tract or document of a character required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement is not described or filed as required.
(b) Each preliminary prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act.
(c) The Company and each of its subsidiaries (each, a "Subsidiary" and,
collectively, the "Subsidiaries") is a duly organized and validly existing
corporation in good standing under the laws of its jurisdiction of
incorporation, has the requisite corporate power and authority to own, lease
and operate its properties and to conduct its business as it is currently
being conducted, and is duly qualified as a foreign corporation and is in
good standing in each jurisdiction where the ownership, leasing or operation
of property or the conduct of its business requires such qualification,
except where the failure to be so qualified would not, singly or in the
aggregate, have a material adverse effect on the properties, business,
results of operations, condition (financial or otherwise), affairs or
prospects of the Company and the Subsidiaries taken as a whole (a "Material
Adverse Effect").
(d) The Company has full corporate power and authority to execute,
deliver and perform this Agreement and to authorize, issue, sell and deliver
the Securities as contemplated by this Agreement.
5
<PAGE>
(e) This Agreement has been duly authorized and validly executed and
delivered by the Company and constitutes a valid and legally binding
agreement of the Company, enforceable against the Company in accordance with
its terms (assuming the due execution and delivery hereof by you).
(f) The Securities have been duly authorized by the Company and, on the
Closing Date, will have been duly executed by the Company and will conform in
all material respects to the description thereof in the Prospectus. When the
Securities are issued, authenticated and delivered in accordance with the
Indenture and paid for in accordance with the terms of this Agreement, the
Securities will constitute valid and legally binding obligations of the
Company, enforceable against the Company in accordance with their terms and
entitled to the benefits of the Indenture.
(g) The Indenture has been duly authorized by the Company and, on the
Closing Date, will have been duly executed by the Company and will conform in
all material respects to the description thereof in the Prospectus. When the
Indenture has been duly executed and delivered, the Indenture will be a valid
and legally binding agreement of the Company, enforceable against the Company
in accordance with its terms.
(h) All of the issued and outstanding shares of capital stock of, or
other ownership interests in, each Subsidiary have been duly and validly
authorized and issued, and all of the shares of capital stock of, or other
ownership interests in, each Subsidiary are owned, directly or through
Subsidiaries, by the Company. All such shares of capital stock are fully
paid and nonassessable, and are owned free and clear of any security
interest, mortgage, pledge, claim, lien or encumbrance (each, a "Lien").
There are no outstanding subscriptions, rights, warrants, options, calls,
convertible securities, commitments of sale or Liens related to or entitling
any person other than the Company to purchase or otherwise to acquire any
shares of the capital stock of, or other ownership interest in, any
Subsidiary.
(i) Neither the Company nor any of the Subsidiaries is in violation of
its respective charter or bylaws or in default in the performance of any
bond, debenture, note or any other evidence of indebtedness or any indenture,
mortgage, deed of trust or other contract, lease or other instrument to which
the Company or any of the Subsidiaries is a party or by which any of them is
bound, or to which any of the property or assets of the Company or any of the
Subsidiaries is subject.
(j) The execution and delivery of this Agreement and the Indenture by
the Company, the issuance and sale of the Securities, the performance of this
Agreement and the Indenture and the consummation of the transactions con-
templated by this Agreement and the Indenture will not conflict with or
result in a breach or violation of any of the respective charters or bylaws
of the Company or any of the Subsidiaries or any of the terms or provisions
of, or constitute a default or cause an acceleration of any obligation under,
or result in the imposition or creation of (or the obligation to create or
impose) a Lien with respect to, any bond, note, debenture or other evidence
of indebtedness or any indenture, mortgage, deed of trust or other agreement
or instrument to which the Company or any of the Subsidiaries is a party or
by which it or any of them is bound, or to which any properties of the
Company or any of the Subsidiaries is or may be subject, or contravene any
order of any court or governmental agency or body having jurisdiction over
the Company or any of the Subsidiaries or any of their properties, or violate
or conflict with any statute, rule or regulation or administrative or court
decree applicable to the Company or any of the Subsidiaries, or any of their
respective properties.
6
<PAGE>
(k) There is no action, suit or proceeding before or by any court or
arbitrator or governmental agency, body or official, domestic or foreign,
pending against or affecting the Company or any of the Subsidiaries, or any
of their respective properties, which is required to be disclosed in the
Registration Statement or the Prospectus, or which might result, singly or in
the aggregate, in a Material Adverse Effect or which might materially and
adversely affect the consummation of this Agreement or the transactions
contemplated hereby, and to the best of the Company's knowledge, no such
proceedings are contemplated or threatened.
(l) No action has been taken and no statute, rule or regulation or order
has been enacted, adopted or issued by any governmental agency or body which
prevents the issuance of the Securities, suspends the effectiveness of the
Registration Statement, prevents or suspends the use of any preliminary
prospectus or suspends the sale of the Securities in any jurisdiction
referred to in Section 4(m) hereof; no injunction, restraining order or order
of any nature by a federal or state court of competent jurisdiction has been
issued with respect to the Company or any of the Subsidiaries which would
prevent or suspend the issuance or sale of the Securities, the effectiveness
of the Registration Statement, or the use of any preliminary prospectus in
any jurisdiction referred to in Section 4(m) hereof; and every request of the
Commission or any securities authority or agency of any jurisdiction for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise) has been complied with in all material respects.
(m) Neither the Company nor any of the Subsidiaries has violated any
environmental safety or similar law or regulation applicable to its business
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), lacks any permits, licenses or other approvals
required of them under applicable Environmental Laws or is violating any
terms and conditions of any such permit, license or approval, nor has the
Company or any of the Subsidiaries violated any federal, state or local law
relating to discrimination in the hiring, promotion or pay of employees prior
to any applicable wage or hour laws, nor any provisions of the Employee
Retirement Income Security Act of 1974 ("ERISA") or the rules and regulations
promulgated thereunder, nor has the Company or any of the Subsidiaries
engaged in any unfair labor practice, which in each case might result, singly
or in the aggregate, in a Material Adverse Effect. There is (i) no
significant unfair labor practice complaint pending against the Company or
any of the Subsidiaries or, to the best knowledge of the Company, threatened
against any of them before the National Labor Relations Board or any state or
local labor relations board, and no significant grievance or significant
arbitration proceeding arising out of or under any collective bargaining
agreement is so pending against the Company or any of the Subsidiaries or, to
the best knowledge of the Company, threatened against any of them, (ii) no
significant strike, labor dispute, slowdown or stoppage pending against the
Company or any of its Subsidiaries or, to the best knowledge of the Company,
threatened against the Company or any of the Subsidiaries and (iii) to the
best knowledge of the Company, no union representation question existing with
respect to the employees of the Company or any of the Subsidiaries and, to
the best knowledge of the company, no union organizing activities are taking
place, except (with respect to any matter specified in clause (i), (ii) or
(iii) above, singly or in the aggregate) such as could not have a Material
Adverse Effect.
(n) Except as would not result, singly or in the aggregate, in a
Material Adverse Effect, the Company and each of the Subsidiaries has good
and marketable title, free and clear of all Liens (except Liens for taxes not
yet due and payable), to all property and assets reflected in the Company's
consolidated financial statements at and for the nine months ended September
30, 1994.
7
<PAGE>
(o) The firms of accountants that have certified the applicable
consolidated financial statements and supporting schedules of the Company,
Star Gas Corporation ("Star Gas") and DeBlois Oil Company ("DeBlois") filed
with the Commission as part of, and incorporated by reference in, the
Registration Statement and the Prospectus are independent public accountants
with respect to the Company and the Subsidiaries, Star Gas or DeBlois, as the
case may be, as required by the Act. The consolidated historical and pro
forma financial statements, together with related schedules and notes, set
forth and incorporated by reference in the Prospectus and the Registration
Statement comply as to form in all material respects with the requirements of
the Act. Such historical financial statements fairly present the
consolidated financial position of the Company and the Subsidiaries, Star Gas
or De Blois, as the case may be, at the respective dates indicated and the
results of their operations and their cash flows for the respective periods
indicated, in accordance with generally accepted accounting principles
("GAAP") consistently applied throughout such periods. Such pro forma finan-
cial statements have been prepared on a basis consistent with such historical
statements, except for the pro forma adjustments specified therein, and give
effect to assumptions made on a reasonable basis and present fairly the
historical and proposed transactions contemplated by the Prospectus and this
Agreement. The other financial and statistical information and data included
and incorporated by reference in the Prospectus and in the Registration
Statement, historical and pro forma, are, in all material respects,
accurately presented and, as to the financial information, prepared on a
basis consistent with such financial statements and the books and records of
the Company.
(p) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus and up to the Closing Date,
neither the Company nor any of the Subsidiaries has incurred any liabilities
or obligations, direct or contingent, which are material to the Company and
the Subsidiaries taken as a whole, other than purchases of inventory and
commitments to purchase inventory in the ordinary course of business and
consistent with the past practice of the Company, nor entered into any
transaction not in the ordinary course of business and there has not been,
singly or in the aggregate, any material adverse change, or any development
which may reasonably be expected to involve a material adverse change, in the
properties, business, results of operations, condition (financial or other-
wise), affairs or prospects of the Company and the Subsidiaries taken as a
whole (a "Material Adverse Change").
(q) All tax returns required to be filed by the Company or any of the
Subsidiaries in any jurisdiction have been filed, other than those filings
being contested in good faith, and all material taxes, including withholding
taxes, penalties and interest, assessments, fees and other charges due or
claimed to be due from such entities have been paid, other than those being
contested in good faith and for which adequate reserves have been provided or
those currently payable without penalty or interest.
(r) No authorization, approval or consent or order of, or filing with,
any court or governmental body or agency is necessary in connection with the
transactions contemplated by this Agreement, except such as may be required
by the NASD or state securities or Blue Sky laws or regulations or have been
obtained and made under the Act and the TIA. Neither the Company nor any of
its affiliates is presently doing business with the government or Cuba or
with any person or affiliate located in Cuba.
(s) (i) Each of the Company and the Subsidiaries has all certificates,
consents, exemptions, orders, permits, licenses, authorizations, or other
approvals (each, an "Authorization") of and from, and has made all declara-
tions and filings with, all federal, state, local and other governmental
8
<PAGE>
authorities, all self-regulatory organizations and all courts and other
tribunals, necessary or required to own, lease, license and use its
properties and assets and to conduct its business in the manner described in
the Prospectus, except to the extent that the failure to obtain or file would
not, singly or in the aggregate, have a Material Adverse Effect, (ii) all
such Authorizations are valid and in full force and effect and (iii) the
Company and the Subsidiaries are in compliance in all material respects with
the terms and conditions of all such Authorizations and with the rules and
regulations of the regulatory authorities and governing bodies having
jurisdiction with respect thereto.
(t) Neither the Company nor any of the Subsidiaries is (a) an
"investment company" or a company "controlled" by an investment company
within the meaning of the Investment Company Act of 1940, as amended, or (b)
a "holding company" or a "subsidiary company" of a holding company, or an
"affiliate" thereof within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
(u) No holder of any security of the Company has or will have any right
to require the registration of such security by virtue of any transaction
contemplated by this Agreement.
(v) The Company and the Subsidiaries possess all patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks and trade names
(collectively, "Intellectual Property") presently employed by them in
connection with the businesses now operated by them, and neither the Company
nor any of the Subsidiaries has received any notice of infringement of or
conflict with asserted rights of others with respect to the foregoing. The
use of such Intellectual Property in connection with the business and
operations of the Company and the Subsidiaries does not, to the Company's
knowledge, infringe on the rights of any person.
(w) The Company and each of the Subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management's general or
specific authorization and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(x) The Company has not (i) taken, directly or indirectly, any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of
the Securities or (ii) since the initial filing of the Registration Statement
(A) sold, bid for, purchased, or paid anyone any compensation for soliciting
purchases of, the Securities or (B) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities of the
Company.
(y) The Company and each Subsidiary maintains insurance covering their
respective properties, operations, personnel and businesses. Such insurance
insures against such losses and risks as are adequate in accordance with
customary industry practice to protect the Company and its Subsidiaries and
their businesses. Neither the Company nor any Subsidiary has received notice
from any insurer or agent of such insurer that substantial capital
improvements or other expenditures will have to be
9
<PAGE>
made in order to continue such insurance. All such insurance is outstanding
and duly in force on the date hereof and will be outstanding and duly in
force on the Closing Date.
(z) Each certificate signed by any officer of the Company and delivered
to the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the
matters covered thereby.
6. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless (i) each of the
Underwriters, (ii) each person, if any, who controls (within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act) any of the
Underwriters (any of the persons referred to in this clause (ii) being
hereinafter referred to as a "controlling person"), and (iii) the respective
officers, directors, partners, employees, representatives and agents of any
of the Underwriters or any controlling person (any person referred to in
clause (i), (ii) or (iii) may hereinafter be referred to as an "Indemnified
Person") to the fullest extent lawful, from and against any and all losses,
claims, damages, liabilities, judgments, actions and expenses (including
without limitation and as incurred, reimbursement of all reasonable costs of
investigating, preparing, pursuing or defending any claim or action, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, including the reasonable fees and expenses of counsel to any
Indemnified Person) directly or indirectly caused by, related to, based upon,
arising out of or in connection with any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any
amendment thereto) or the Prospectus (including any amendment or supplement
thereto) or any preliminary prospectus or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein (in the case of the Prospectus, in the light of
the circumstances under which they were made) not misleading, except insofar
as such losses, claims, damages, liabilities or expenses are caused by an
untrue statement or omission or alleged untrue statement or omission that is
made in reliance upon and in conformity with information relating to any of
the Underwriters furnished in writing to the Company by such Underwriter
expressly for use in the Registration Statement (or any amendment thereto) or
the Prospectus (or any amendment or supplement thereto) or any preliminary
prospectus. The Company shall notify you promptly of the institution, threat
or assertion of any claim, proceeding (including any governmental
investigation) or litigation in connection with the matters addressed by this
Agreement which involves the Company or an Indemnified Person.
(b) In case any action or proceeding (including any governmental
investigation) shall be brought or asserted against any of the Indemnified
Persons with respect to which indemnity may be sought against the Company,
such Underwriter (or the Underwriter controlled by such controlling person)
shall promptly notify the Company in writing (provided, that the failure to
give such notice shall not relieve the Company of its obligations pursuant to
this Agreement) and the Company shall assume the defense thereof, including
the employment of counsel reasonably satisfactory to such Indemnified Persons
and payment of all fees and expenses. Any Underwriter or any such
controlling person shall have the right to employ separate counsel in any
such action and participate in the defense thereof, but the fees and expenses
of such counsel shall be at the expense of such Underwriters or such
controlling person unless (i) the employment of such counsel has been
specifically authorized in writing by the Company, (ii) the Company shall
have failed to assume the defense and employ counsel or (iii) the named
parties to any such action (including any impleaded parties) include both
such Underwriter or such controlling person and the Company and such
Underwriter or such controlling person shall have been advised by such
counsel that there may be
10
<PAGE>
one or more legal defenses available to it which are different from or
additional to those available to the Company (in which case the Company shall
not have the right to assume the defense of such action on behalf of such
Underwriter or such controlling person). The Company shall not, in
connection with any one such action or proceeding or separate but substan-
tially similar or related actions or proceedings in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for
the reasonable fees and expenses of more than one separate firm of attorneys
(in addition to any local counsel) at any time for such Indemnified Persons,
which firm shall be designated by the Underwriters. The Company shall be
liable for any settlement of any such action or proceeding effected with the
Company's prior written consent, which consent will not be unreasonably
withheld, and the Company agrees to indemnify and hold harmless any In-
demnified Person from and against any loss, claim, damage, liability or
expense by reason of any settlement of any action effected with the written
consent of the Company. The Company shall not, without the prior written
consent of each Indemnified Person, settle or compromise or consent to the
entry of Judgment in or otherwise seek to terminate any pending or threatened
action, claim, litigation proceeding in respect of which indemnification or
contribution may be sought hereunder (whether or not any Indemnified Person
is a party thereto), unless such settlement, compromise, consent or
termination includes an unconditional release of each Indemnified Person from
all liability arising out of such action, claim, litigation or proceeding.
(c) Each of the Underwriters agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement, any person controlling (within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act) the Company, and the
officers, directors, partners, employees, representatives and agents of each
such person, to the same extent as the foregoing indemnity from the Company
to each of the Indemnified Persons, but only with respect to claims and
actions based on information relating to such Underwriter furnished in
writing by such Underwriter expressly for use in the Registration Statement
or the Prospectus.
(d) If the indemnification provided for in this Section 6 is unavailable
to an indemnified party in respect of any losses, claims, damages,
liabilities or expenses referred to herein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages, liabilities and expenses (i) in such proportion as is appropriate to
reflect the relative benefits received by the indemnifying party on the one
hand and the indemnified party on the other hand from the offering of the
Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the indemnifying parties and the indemnified party, as well
as any other relevant equitable considerations. The relative benefits
received by the Company, on the one hand, and any of the Underwriters, on the
other hand, shall be deemed to be in the same proportion as the total
proceeds from the offering (net of underwriting discounts and commissions but
before deducting expenses) received by the Company bear to the total un-
derwriting discounts and commissions received by such Underwriter, in each
case as set forth in the table on the cover page of the Prospectus. The
relative fault of the Company and the Underwriters shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact related to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The indemnity and contribution obligations of the Company set forth herein
shall be in addition to any liability or obligation the Company may otherwise
have to any Indemnified Person.
11
<PAGE>
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 6(d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or expenses referred to in
the immediately preceding paragraph shall be deemed to include, subject to
the limitations set forth above, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of this
Section 6, none of the Underwriters (or its related Indemnified Persons)
shall be required to contribute, in the aggregate, any amount in excess of
the amount by which the total underwriting discount applicable to the
Securities purchased by such Underwriter exceeds the amount of any damages
which such Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute pursuant to this Section 6(d) are several in
proportion to the respective principal amount of Securities purchased by each
of the Underwriters hereunder and not joint.
7. Conditions of Underwriters' Obligations. The several obligations of
---------------------------------------
the Underwriters to purchase the Securities under this Agreement are subject to
the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same
force and effect as if made on and as of the Closing Date. The Company shall
have performed or complied with all of its obligations and agreements herein
contained and required to be performed or complied with by it at or prior to
the Closing Date.
(b) (i) The Registration Statement shall have become effective (or, if a
post-effective amendment is required to be filed pursuant to Rule 430A
promulgated under the Act, such post-effective amendment shall have become
effective) not later than 10:00 A.M., New York City time, on the date of this
Agreement or at such later date and time as you may approve in writing, (ii)
at the Closing Date, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been commenced or shall be pending before or contemplated
by the Commission and every request for additional information on the part of
the Commission shall have been complied with in all material respects and
(iii) no stop order suspending the sale of the Securities in any jurisdiction
referred to in Section 4(m) shall have been issued and no proceeding for that
purpose shall have been commenced or shall be pending or threatened.
(c) No action shall have been taken and no statute, rule, regulation or
order shall have been enacted, adopted or issued by any governmental agency
which would, as of the Closing Date, prevent the issuance of the Securities;
and no injunction, restraining order or order of any nature by a federal or
state court of competent jurisdiction shall have been issued as of the
Closing Date which would prevent the issuance of the Securities.
(d) (i) Since the date hereof or since the dates as of which
information is given in the Registration Statement and the Prospectus, there
shall not have been any Material Adverse Change,
12
<PAGE>
(ii) since the date of the latest balance sheet included in the Registration
Statement and the Prospectus, there shall not have been any material change
in the capital stock or long-term debt, or material increase in short-term
debt, of the Company or any of the Subsidiaries and (iii) the Company and the
Subsidiaries shall have no liability or obligation, direct or contingent,
that is material to the Company and the Subsidiaries taken as a whole and is
required to be disclosed on a balance sheet in accordance with GAAP and is
not disclosed on the latest balance sheet included in the Registration
Statement and the Prospectus.
(e) You shall have received a certificate of the Company, dated the
Closing Date, executed on behalf of the Company by the President or any Vice
President and a principal financial or accounting officer of the Company
confirming, as of the Closing Date, the matters set forth in paragraphs (a),
(b), (c) and (d) of this Section 7.
(f) On the Closing Date, you shall have received:
(1) an opinion (satisfactory to you and your counsel), dated the
Closing Date, of Phillips, Nizer, Benjamin, Krim & Ballon, counsel for the
Company, to the effect that:
(i) the Company and each of the Subsidiaries is a duly organized
and validly existing corporation in good standing under the laws of its
jurisdiction of incorporation, has the requisite corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus,
and is duly qualified as a foreign corporation and in good standing in
each jurisdiction where the ownership, leasing or operation of property
or the conduct of its business requires such qualification, except
where the failure to be so qualified would not, singly or in the
aggregate, have a Material Adverse Effect;
(ii) the Company has full power and authority to execute, deliver
and perform this Agreement and to authorize, issue, sell and deliver
the Securities as contemplated by this Agreement;
(iii) each of this Agreement, the Securities and the Indenture have
been duly authorized, executed and delivered by the Company;
(iv) when authenticated in accordance with the terms of the
Indenture and delivered to and paid for by you in accordance with the
terms of this Agreement, the Securities will constitute valid and
legally binding obligations of the Company, enforceable against the
Company in accordance with their terms and entitled to the benefits of
the Indenture, subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally and to general principles of
equity (regardless of whether enforcement is sought in a proceeding at
law or in equity);
(v) the Indenture, assuming due authorization, execution and
delivery thereof by the Trustee, constitutes a valid and legally
binding agreement of the Company, enforceable against the Company in
accordance with its terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditors' rights and remedies generally and to
general principles of equity (regardless of whether enforcement is
sought in a proceeding at law or in equity);
13
<PAGE>
(vi) the Securities and the Indenture conform in all material
respects to the descriptions thereof contained in the Prospectus;
(vii) all of the issued and outstanding shares of capital stock of,
or other ownership interests in, each Subsidiary have been duly and
validly authorized and issued, and the shares of capital stock of, or
other ownership interests in, each Subsidiary are owned, directly or
through Subsidiaries, by the Company, are fully paid and nonassessable,
and are to such counsel's knowledge (after due inquiry) owned free and
clear of any Lien;
(viii) to such counsel's knowledge (after due inquiry), there are no
outstanding subscriptions, rights, warrants, options, calls,
convertible securities, commitments of sale or Liens related to or
entitling any person other than the Company to purchase or otherwise to
acquire any shares of the capital stock of, or other ownership interest
in, any Subsidiary;
(ix) neither the Company nor any of the Subsidiaries is (a) an
"investment company" or a company "controlled" by an investment company
within the meaning of the Investment Company Act of 1940, as amended,
or (b) a "holding company" or a "subsidiary company" of a holding
company, or an "affiliate" thereof within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
(x) the descriptions in the Registration Statement and the Pro-
spectus of statutes, legal and governmental proceedings and contracts
and other documents are accurate in all material respects and fairly
present the information required to be shown; and such counsel does not
know of any legal or governmental proceedings required to be described
in the Registration Statement or Prospectus which are not described as
required or of any contracts or documents of a character required to be
described in the Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement which are not described and
filed as required; it being understood that such counsel need express
no opinion as to the financial statements, notes or schedules or other
financial data included therein or that part of the Registration
Statement that constitutes the Statement of Eligibility and qualifica-
tion of the Trustee on Form T-1 (the "Form T-1");
(xi) the Registration Statement has become effective under the Act;
any required filing of the Prospectus, and any supplements thereto,
pursuant to Rule 424(b) has been made in the manner and within the time
period required by Rule 424(b); and to the knowledge of such counsel
(after due inquiry) no stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued and no
proceedings therefor have been instituted or are pending or
contemplated under the Act;
(xii) the Indenture has been duly qualified under the TIA;
(xiii) no authorization, approval, consent or order of, or filing
with, any court or governmental body or agency is required for the
consummation by the Company of the transactions contemplated by this
Agreement, except such as have been obtained and made under the Act or
the TIA or such as may be required under state securities or Blue Sky
laws or regulations or by the NASD;
(xiv) at the time it became effective and on the Closing Date, the
Registration Statement (except for financial statements, the notes
thereto and related schedules and other financial data included therein
and the Form T-1, as to which no opinion need be expressed) complied as
to form in all material respects with the Act and the TIA;
(xv) to the knowledge of such counsel (after inquiry to the
Company), neither the Company nor any of the Subsidiaries is in
violation of its respective charter or bylaws or in default in the
performance of any bond, debenture, note or any other evidence of
indebtedness or any indenture, mortgage, deed of trust or other
contract, lease or other instrument to which the Company or any of the
Subsidiaries is a party or by which any of them is bound, or to which
any of the property or assets of the Company or any of the Subsidiaries
is subject; and
(xvi) the execution and delivery of this Agreement and the Indenture
by the Company, the issuance and sale of the Securities, the per-
formance of this Agreement and the Indenture and the consummation of
the transactions contemplated by this Agreement and the Indenture will
not conflict with or result in a breach or violation of any of the
respective charters or bylaws of the Company or any of the Subsidiaries
or any of the terms or provisions of, or constitute a default or cause
14
<PAGE>
an acceleration of any obligation under or result in the imposition or
creation of (or the obligation to create or impose) a Lien with respect
to, any bond, note, debenture or other evidence of indebtedness or any
indenture, mortgage, deed of trust or other agreement or instrument
known to such counsel (after inquiry to the Company) to which the
Company or any of the Subsidiaries is a party or by which it or any of
them is bound, or to which any properties of the Company or any of the
Subsidiaries is or may be subject, or contravene any order of any court
or governmental agency or body having jurisdiction over the Company or
any of the Subsidiaries or any of their properties, or violate or
conflict with any statute, rule or regulation or administrative or
court decree applicable to the Company or any of the Subsidiaries, or
any of their respective properties, based upon such counsel's
consideration of only those statutes, rules and regulations which, in
its experience, are normally applicable to transactions such as those
contemplated hereby and in the Registration Statement.
The opinion of Phillips, Nizer, Benjamin, Krim & Ballon shall be -
rendered to you at the request of the Company and shall so state
therein. Phillips, Nizer, Benjamin, Krim & Ballon may rely on the
opinion of Dorsey & Whitney as to certain matters of Minnesota law.
15
<PAGE>
(2) In giving their opinion required by subsection (f)(1) of this
Section 7, Phillips, Nizer, Benjamin, Krim & Ballon shall additionally
state that such counsel has participated in conferences with officers and
other representatives of the Company, representatives of the independent
public accountants for the Company, your representatives and your counsel
in connection with the preparation of the Registration Statement and
Prospectus and has considered the matters required to be stated therein
and the statements contained therein, although such counsel has not
independently verified the accuracy, completeness or fairness of such
statements (except as indicated above); and such counsel advises you that,
on the basis of the foregoing, no facts came to such counsel's attention
that caused such counsel to believe that the Registration Statement (as
amended or supplemented, if applicable), at the time such Registration
Statement or any post-effective amendment became effective, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, or the Prospectus (as amended or supplemented), as of its
date and the Closing Date, contained an untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
(g) You shall have received an opinion, dated the Closing Date, of
Latham & Watkins, counsel for the Underwriters, in form and substance
reasonably satisfactory to you.
(h) You shall have received letters on and as of the date hereof and as
on and as of the Closing Date (in the latter case constituting an affirmation
of the statements set forth in the former), in form and substance
satisfactory to you, from each of KPMG Peat Marwick, Ernst & Young and
Sansiveri, Ryan, Sullivan & Co., independent auditors, with respect to the
financial statements and certain financial information contained and
incorporated by reference in the Registration Statement and the Prospectus.
(i) Latham & Watkins shall have been furnished with such documents and
opinions, in addition to those set forth above, as they may reasonably
require for the purpose of enabling them to review or pass upon the matters
referred to in this Section 7 and in order to evidence the accuracy,
completeness or satisfaction in all material respects of any of the
representations, warranties or conditions herein contained.
(j) Prior to the Closing Date, the Company shall have furnished to you
such further information, certificates and documents as you may reasonably
request.
8. Defaults. If on the Closing Date, any of the Underwriters shall fail
--------
or refuse to purchase Securities which it has agreed to purchase hereunder on
such date, and the aggregate principal amount of such Securities that such
defaulting Underwriter(s) agreed but failed or refused to purchase does not
exceed 10% of the total principal amount of such Securities that all of the
Underwriters are obligated to purchase on such Closing Date, each non-defaulting
Underwriter shall be obligated severally, in the proportion which the aggregate
principal amount of such Securities set forth opposite its name in Schedule A
bears to the total aggregate principal amount of Securities which all the non-
defaulting Underwriters have agreed to purchase, or in such other proportion as
you may specify, to purchase such Securities which such defaulting
Underwriter(s) agreed but failed or refused to purchase on such date. If, on
the Closing Date, any of the Underwriters shall fail or refuse to purchase
Securities in an aggregate principal amount that exceeds 10% of such total
principal amount of the Securities and arrangements satisfactory to the other
Underwriter(s) and the Company for the purchase of such Securities are not made
within 48 hours after such default, this Agreement shall terminate without
liability on the part of the non-defaulting
16
<PAGE>
Underwriter(s) or the Company, except as otherwise provided in Section 9. In
any such case that does not result in termination of this Agreement, the
Underwriters or the Company may postpone the Closing Date for not longer than
seven days in order that the required changes, if any, in the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected. Any action taken under this paragraph shall not relieve a defaulting
Underwriter from liability in respect of any default by any such Underwriter
under this Agreement.
9. Effective Date of Agreement and Termination.
-------------------------------------------
(a) This Agreement shall become effective upon the later of (i) the
execution and delivery of this Agreement by the parties hereto, (ii) the
effectiveness of the Registration Statement and (iii) if a post-effective
amendment is required to be filed pursuant to Rule 430A under the Act, the
effectiveness of such post-effective amendment.
(b) This Agreement may be terminated at any time on or prior to the
Closing Date by you by notice to the Company if any of the following has
occurred: (i) subsequent to the date the Registration Statement is declared
effective or the date of this Agreement, any Material Adverse Change which, in
the judgment of any Underwriter, materially impairs the investment quality of
the Securities; (ii) any outbreak or escalation of hostilities or other national
or international calamity or crisis or material adverse change in economic
conditions or in the financial markets of the United States or elsewhere, or any
other substantial national or international calamity or emergency, if the effect
of such outbreak, escalation, calamity, crisis, emergency or change in the
economic conditions or in the financial markets of the United States or
elsewhere would, in the judgment of any Underwriter, make it impracticable or
inadvisable to market the Securities or to enforce contracts for the sale of the
Securities on the terms and in the manner contemplated in the Prospectus; (iii)
any suspension or limitation of trading generally in securities on the New York
Stock Exchange or in the over-the-counter markets or any setting of minimum
prices for trading on such exchange or markets; (iv) any declaration of a
general banking moratorium by either federal or New York authorities; (v) the
taking of any action by any federal, state or local government or agency in re-
spect of its monetary or fiscal affairs that in your judgment has a material
adverse effect on the financial markets in the United States and would, in your
judgment, make it impracticable or inadvisable to market the Securities or to
enforce contracts for the sale of the Securities; (vi) the enactment,
publication, decree, or other promulgation of any federal or state statute,
regulation, rule or order of any court or other governmental authority which, in
your judgment, materially and adversely affect the business or operations of the
Company or any Significant Subsidiary; or (vii) any securities of the Company or
any of the Subsidiaries shall have been downgraded or placed on any "watch list"
for possible downgrading by any nationally statistical rating organization,
provided, that in the case of such "watch list" placement, termination shall be
permitted only if such placement would, in the judgment of any Underwriter, make
it impracticable or inadvisable to market the Securities or to enforce contracts
for the sale of the Securities or materially impair the investment quality of
the Securities.
(c) The respective indemnities and contribution provisions of the
Company, its officers and directors and of the Underwriters set forth in or made
pursuant to this Agreement shall remain operative and in full force and effect,
and will survive delivery of and payment for the Securities, regardless, of (i)
any investigation, or statement as to the results thereof, made by or on behalf
of any of the Underwriters or by or on behalf of the Company, the officers or
directors of the Company or any controlling person of the Company, (ii)
acceptance of the Securities and payment for them hereunder and (iii)
termination of this Agreement.
17
<PAGE>
(d) If this Agreement shall be terminated by the Underwriters pursuant
to clauses (i) or (vii) of paragraph (b) of this Section 9 or because of the
failure or refusal on the part of the Company to comply with the terms or to
fulfill any of the conditions of this Agreement, the Company agrees to reimburse
you for all out-of-pocket expenses (including the fees and disbursements of
counsel) incurred by you. Notwithstanding any termination of this Agreement,
the Company shall be liable for all expenses which it has agreed to pay pursuant
to Section 4(i) hereof.
(e) Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the
Underwriters, any Indemnified Person referred to herein and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The terms "successors and assigns" shall not include a purchaser of
any of the Securities from any of the Underwriters merely because of such
purchase.
10. Notices. Notices given pursuant to any provision of this Agreement
-------
shall be addressed as follows: (a) if to the Company, to Petroleum Heat and
Power Co., Inc., 2187 Atlantic Street, Stamford, Connecticut 06904, Attention:
Irik P. Sevin, with a copy to Phillips, Nizer, Benjamin, Krim & Ballon, 31 West
52nd Street, New York, New York 10019, Attention: Alan Shapiro, Esq., and (b)
if to any Underwriter, to it c/o Donaldson, Lufkin & Jenrette Securities
Corporation, 140 Broadway, New York, New York 10005, Attention: Syndicate
Department, with a copy to Latham & Watkins, 885 Third Avenue, New York, New
York 10022, Attention: Beth R. Neckman, Esq., or in any case to such other
address as the person to be notified may have requested in writing.
11. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK AS APPLIED TO
CONTRACTS MADE AND PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK.
18
<PAGE>
This Agreement may be signed in various counterparts which together shall
constitute one and the same instrument. Please confirm that the foregoing
correctly sets forth the agreement among the Company and you.
Very truly yours,
PETROLEUM HEAT AND POWER CO., INC.
By:
--------------------------------------------
Name:
Title:
The foregoing Underwriting Agreement
is hereby confirmed and accepted
as of the date first above written.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
---------------------------
Name:
Title:
BEAR, STEARNS & CO. INC.
By:
---------------------------
Name:
Title:
PAINEWEBBER INCORPORATED
By:
---------------------------
Name:
Title:
<PAGE>
SCHEDULE A
Principal
Underwriter Amount
----------- ------
Donaldson, Lufkin & Jenrette
Securities Corporation . . . . . . . . . . . . . . . . . . . . . $__________
Bear, Stearns & Co. Inc. . . . . . . . . . . . . . . . . . . . . . __________
PaineWebber Incorporated . . . . . . . . . . . . . . . . . . . . . __________
Total . . . . . . . . . . . . . . . . . . . . . . . . $125,000,000
20
Exhibit 1.2
[L&W DRAFT DATED 1/23/95]
PETROLEUM HEAT AND POWER CO., INC.
3,000,000 Shares of Class A Common Stock
UNDERWRITING AGREEMENT
__________, 1995
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
140 Broadway
New York, New York 10005
Ladies and Gentlemen:
Petroleum Heat and Power Co., Inc., a Minnesota corporation (the
"Company"), proposes to issue and sell to the several underwriters listed on
Schedule A hereto (collectively, the "Underwriters") an aggregate of 2,500,000
shares of Class A Common Stock, $0.10 par value per share, of the Company (the
"Firm Company Shares"). In addition, certain individuals listed on Schedule B
hereto (the "Primary Selling Stockholders") propose to sell to the Underwriters
an additional 500,000 shares of Class A Common Stock of the Company (the "Firm
Stockholder Shares"). The Company also proposes to issue and sell, or in the
alternative, to deliver for sale by certain additional stockholders listed on
Schedule C hereto (the "FRC Selling Stockholders"), to the Underwriters not more
than an additional 450,000 shares of its Class A Common Stock (the "Additional
Shares"), if requested by the Underwriters as provided in Section 2 hereof.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), Bear, Stearns &
Co. Inc. and PaineWebber Incorporated shall act as representatives (the
"Representatives") of the several Underwriters. The Primary Selling
Stockholders and the FRC Selling Stockholders are sometimes herein referred to
collectively as the "Selling Stockholders." The Company and the Selling
Stockholders are sometimes herein referred to collectively as the "Sellers."
The Firm Company Sharesand the Firm Stockholder Shares are sometimes herein
referred to collectively as the "Firm Shares." The Firm Company Shares and, if
applicable, any Additional Shares to be sold by the Company are sometimes herein
referred to collectively as the "Company Shares." The Firm Stockholder Shares
and, if applicable, any Additional Shares to be sold by the FRC Selling
Stockholders are sometimes herein referred to collectively as the "Stockholder
Shares." The Firm Shares and the Additional Shares are sometimes herein
referred to collectively as the "Securities."
<PAGE>
1. Registration Statement and Prospectus. The Company has prepared and
-------------------------------------
filed with the Securities and Exchange Commission (the "Commission"), in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-2 (No. 33-57059), including a prelim-
inary prospectus, subject to completion, relating to the Securities. The
registration statement, as amended at
<PAGE>
the time it becomes effective or, if a post-effective amendment is filed with
respect thereto, as amended by such post-effective amendment at the time of its
effectiveness, including, in each case, all documents incorporated by reference
therein, all financial statements and exhibits thereto, and the information (if
any) contained in a prospectus subsequently filed with the Commission pursuant
to Rule 424(b) under the Act and deemed to be a part of the registration
statement at the time of its effectiveness pursuant to Rule 430A under the Act,
is hereinafter referred to as the "Registration Statement"; and the prospectus
in the form first used to confirm sales of the Securities, whether or not filed
with the Commission pursuant to Rule 424(b) under the Act, including all
documents incorporated by reference therein, is hereinafter referred to as the
"Prospectus."
2. Agreements to Sell and Purchase. On the basis of the representations
-------------------------------
and warranties contained in this Agreement, and subject to its terms and
conditions, the Company agrees to issue and sell to the Underwriters the Firm
Company Shares, and the Primary Selling Stockholders agree to sell to the
Underwriters the Firm Stockholder Shares. The Underwriters agree, severally and
not jointly, to purchase such Firm Shares from the Company and the Primary
Stockholders in the respective amounts set forth opposite their names on
Schedule A hereto at a purchase price equal to $___ per share (the "Purchase
Price").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell, or in the alternative, to cause to be sold by the FRC Selling
Stockholders, to the Underwriters the Additional Shares and the Underwriters
shall have the right to purchase, severally and not jointly, up to 450,000
Additional Shares at the Purchase Price. Additional Shares may be purchased
solely for the purpose of covering over-allotments made in connection with the
offering of the Firm Shares. The Underwriters may exercise their right to
purchase Additional Shares in whole or in part from time to time by giving
written notice thereof to the Company and, if applicable, the FRC Selling
Stockholders within 30 days after the date of this Agreement. The
Representatives shall give any such notice on behalf of the Underwriters and
such notice shall specify the aggregate number of Additional Shares to be
purchased pursuant to such exercise and the date for payment and delivery
thereof. The date specified in any such notice shall be a business day (i) no
earlier than the Closing Date (as hereinafter defined), (ii) no later than five
business days after such notice has been given and (iii) no earlier than two
business days after such notice has been given. If any Additional Shares are to
be purchased, each Underwriter, severally and not jointly, agrees to purchase
the number of Additional Shares (subject to such adjustments to eliminate
fractional shares as the Representatives may determine) which bears the same
proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule A bears to the total number of Firm Shares.
The Sellers hereby agree, severally and not jointly, and the Company
shall, concurrently with the execution of this Agreement, deliver an agreement
executed by (i) each of the directors and officers of the Company who is not a
Selling Stockholder and (ii) each Selling Stockholder listed on Schedule B and
Schedule C hereto, pursuant to which each such person agrees not to offer, sell,
contract to sell, grant any option to purchase, or otherwise dispose of any
common stock of the Company or any securities convertible into or exercisable or
exchangeable for such common stock or in any other manner transfer all or a
portion of the economic consequences associated with the ownership of any such
common stock, except to the Underwriters pursuant to this Agreement, for a
period of 180 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding
the foregoing, during such period (i) the Company may grant stock options
pursuant to the Company's existing stock option plan and (ii) the Company may
issue shares of its
3
<PAGE>
common stock upon the exercise of any such option or upon exercise of any option
or warrant or upon the conversion of any security outstanding on the date
hereof.
3. Delivery and Payment. Delivery to you of and payment for the Firm
--------------------
Shares shall be made at 9:00 A.M., New York City time, on __________, 1995 (such
time and date being referred to as the "Closing Date") at the offices of Latham
& Watkins, 885 Third Avenue, New York, New York. The Closing Date and the
location of delivery of the Firm Shares may be varied by agreement among you and
the Company.
Delivery to the Underwriters of and payment for any Additional Shares to
be purchased by the Underwriters shall be made at such place as the
Representatives shall designate at 9:00 A.M., New York City time, on the date
specified in the applicable exercise notice given by you pursuant to Section 2
(an "Option Closing Date"). Any such Option Closing Date and the location of
delivery of and the form of payment for such Additional Shares may be varied by
agreement among the Representatives , the Company and, if applicable, the FRC
Selling Stockholders.
The Securities in definitive form shall be registered in such names and
issued in such denominations as you shall request in writing not later than two
full business days prior to the Closing Date or an Option Closing Date, as the
case may be, and shall be made available to you at the offices of DLJ (or at
such other place as shall be acceptable to you) for inspection not later than
9:30 A.M., New York City time, on the business day next preceding the Closing
Date or an Option Closing Date, as the case may be. The Securities shall be
delivered to you on the Closing Date or an Option Closing Date, as the case may
be, with any transfer taxes thereon duly paid by the Company, for the respective
accounts of the several Underwriters, against payment of the Purchase Price by
certified or official bank check or checks payable in New York Clearing House or
similar next-day funds to the order of the applicable Seller.
4. Agreements of the Company. The Company agrees with each of you that:
-------------------------
(a) The Company will, if necessary, file an amendment to the
Registration Statement or a post-effective amendment to the Registration
Statement, in each case as soon as practicable after the execution and
delivery of this Agreement, and will use its best efforts to cause the
Registration Statement or such post-effective amendment to become effective
at the earliest possible time. The Company will comply fully and in a timely
manner with the applicable provisions of Rule 424 and Rule 430A under the
Act.
(b) The Company will advise you promptly and, if requested by any of
you, confirm such advice in writing, (i) when the Registration Statement has
become effective, if and when the Prospectus is sent for filing pursuant to
Rule 424 under the Act and when any post-effective amendment to the
Registration Statement becomes effective, (ii) of the receipt of any comments
from the Commission or any state securities commission or regulatory
authority that relate to the Registration Statement or requests by the
Commission or any state securities commission or regulatory authority for
amendments to the Registration Statement or amendments or supplements to the
Prospectus or for additional information, (iii) of the issuance by the Com-
mission of any stop order suspending the effectiveness of the Registration
Statement, or of the suspension of qualification of the Securities for
offering or sale in any jurisdiction, or the initiation of any proceeding for
such purpose by the Commission or any state securities commission or other
regulatory authority, and (iv) of the happening of any event during such
period as in your reasonable judgment you are required to deliver a
prospectus in connection with sales of the Securities by you which makes any
statement of
4
<PAGE>
a material fact made in the Registration Statement untrue or which requires
the making of any additions to or changes in the Registration Statement (as
amended or supplemented from time to time) in order to make the statements
therein not misleading or that makes any statement of a material fact made in
the Prospectus (as amended or supplemented from time to time) untrue or which
requires the making of any additions to or changes in the Prospectus (as
amended or supplemented from time to time) in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The Company shall use its best efforts to prevent the issuance
of any stop order or order suspending the qualification or exemption of the
Securities under any state securities or Blue Sky laws, and, if at any time
the Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, or any state securities commission or other
regulatory authority shall issue an order suspending the qualification or
exemption of the Securities under any state securities or Blue Sky laws, the
Company shall use every reasonable effort to obtain the withdrawal or lifting
of such order at the earliest possible time.
(c) The Company will furnish to you without charge three signed copies
(plus one additional signed copy to your legal counsel) of the Registration
Statement as first filed with the Commission and of each amendment thereto,
including all exhibits filed therewith, and will furnish to you such number
of conformed copies of the Registration Statement as so filed and of each
amendment thereto, without exhibits, as you may reasonably request.
(d) The Company will not file any amendment or supplement to the
Registration Statement, whether before or after the time when it becomes
effective, or make any amendment or supplement to the Prospectus, of which
you shall not previously have been advised and provided a copy within two
business days prior to the filing thereof (or such reasonable amount of time
as is necessitated by the exigency of such amendment or supplement) or to
which you shall reasonably object; and it will prepare and file with the
Commission, promptly upon your reasonable request, any amendment to the
Registration Statement or supplement to the Prospectus which may be necessary
or advisable in connection with the distribution of the Securities by you,
and will use its best efforts to cause the same to become effective as
promptly as possible.
(e) Promptly after the Registration Statement becomes effective, and
from time to time thereafter for such period in your reasonable judgment as a
prospectus is required to be delivered in connection with sales of the Secu-
rities by you, the Company will furnish to each Underwriter and dealer
without charge as many copies of the Prospectus (and of any amendment or
supplement to the Prospectus) as such Underwriters and dealers may reasonably
request.
(f) If during such period as in your reasonable judgment you are
required to deliver a prospectus in connection with sales of the Securities
by you any event shall occur as a result of which it becomes necessary to
amend or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances existing as of the date the Prospectus is
delivered to a purchaser, not misleading, or if it is necessary to amend or
supplement the Prospectus to comply with any law, the Company will promptly
prepare and file with the Commission an appropriate amendment or supplement
to the Prospectus so that the statements in the Prospectus, as so amended or
supplemented, will not, in the light of the circumstances existing as of the
date the Prospectus is so delivered, be misleading, and will comply with
applicable law, and will furnish to each Underwriter and dealer without
charge such number of copies thereof as such Underwriters and dealers may
reasonably request.
5
<PAGE>
(g) The Company will timely complete all required filings and otherwise
fully comply in a timely manner with all provisions of the Securities
Exchange Act of 1934, as amended, including the rules and regulations
thereunder (collectively, the "Exchange Act"), in connection with the
registration, if any, of the Securities thereunder.
(h) So long as any of the Securities are outstanding, the Company will
mail to each of you without charge a copy of each report or other publicly
available information required to be furnished to holders of the Securities
by law at the same time as such reports or other information are required to
be furnished to such holders.
(i) Whether or not the transactions contemplated hereby are consummated
or this Agreement is terminated, the Company will pay and be responsible for
all costs, expenses, fees and taxes in connection with or incident to (i) the
printing, processing, filing, distribution and delivery under the Act of the
Registration Statement, each preliminary prospectus, the Prospectus and all
amendments or supplements thereto, (ii) the printing, processing, execution,
distribution and delivery of this Agreement, any memoranda describing state
securities or Blue Sky laws or foreign securities or Blue Sky laws and all
other agreements, memoranda, correspondence and other documents printed,
distributed and delivered in connection with the offering of the Securities,
(iii) the registration with the Commission and the issuance and delivery of
the Securities, (iv) the registration or qualification of the Securities for
offer and sale under the securities or Blue Sky laws of the jurisdictions
referred to in (l) below and of Canada (including, in each case, the fees and
disbursements of counsel for the Underwriters relating to such registration
or qualification and memoranda relating thereto and any filing fees in
connection therewith), (v) furnishing such copies of the Registration
Statement, Prospectus and preliminary prospectus, and all amendments and
supplements to any of them, as may be reasonably requested by you, (vi)
filing, registration and clearance with the National Association of
Securities Dealers, Inc. (the "NASD") in connection with the offering of the
Securities (including the fees and disbursements of counsel relating
thereto), (vii) the listing of the Securities, if any, on a stock exchange or
automated quotation system, (viii) fees and expenses of the transfer agent
and registrar with respect to the Securities, (ix) any "qualified independent
underwriter" as required by Schedule E of the Bylaws of the NASD (including
fees and disbursements of counsel for such qualified independent underwriter)
and (x) the performance by the Sellers of their other obligations under this
Agreement, including (without limitation) the fees of the Trustee, the cost
of the Company's personnel and other internal costs, the cost of printing and
engraving the certificates representing the Securities, and all expenses and
taxes incident to the sale and delivery of the Securities to you.
(j) The Company will use the proceeds from the sale of the Securities in
the manner described in the Prospectus under the caption "Use of Proceeds."
(k) The Company will use its best efforts to do and perform all things
required to be done and performed under this Agreement by it prior to or
after the Closing Date and to satisfy all conditions precedent on its part to
the delivery of the Securities.
(l) Prior to any public offering of the Securities, the Company will
cooperate with you and your counsel in connection with the registration or
qualification of the Securities for offer and sale by you under the state
securities or Blue Sky laws of such jurisdiction as you may request
(provided, that the Company shall not be obligated to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified or to take
any action that would subject it to general consent to service
6
<PAGE>
of process in any jurisdiction in which it is not now so subject). The
Company will continue such qualification in effect so long as required by law
for distribution of the Securities.
(m) The Company will mail and make generally available to its security
holders as soon as reasonably practicable a consolidated earning statement
covering a period of at least twelve months beginning after the "effective
date" (as defined in Rule 158 under the Act) of the Registration Statement
(but in no event commencing later than 90 days after such effective date)
which shall satisfy the provisions of Section 11(a) of the Act and Rule 158
thereunder, and to advise you in writing when such statement has been so made
available.
(n) The Company will use its best efforts to maintain the listing of the
Securities on the Nasdaq National Market (or on another national exchange)
for a period of five years after the effective date of the Registration
Statement.
5. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to each of you that:
(a) When the Registration Statement becomes effective, including at the
date of any post-effective amendment, at the date of the Prospectus (if
different) and at the Closing Date, the Registration Statement will comply in
all material respects with the provisions of the Act and will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading; the Prospectus and any supplements or amendments thereto will not
at the date of the Prospectus, at the date of any such supplements or
amendments and at the Closing Date contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except that the representations and warranties
contained in this paragraph (a) shall not apply to statements in or omissions
from the Registration Statement or the Prospectus (or any supplement or
amendment to them) made in reliance upon and in conformity with information
relating to you furnished to the Company in writing by you expressly for use
therein. The Company acknowledges for all purposes under this Agreement that
the statements set forth in the last paragraph on the cover page and in the
second paragraph below the table under the caption "Underwriting" in the
Prospectus (or any amendment or supplement) constitute the only written
information furnished to the Company by any Underwriter expressly for use in
the Registration Statement or the Prospectus (or any amendment or supplement
to them). No contract or document of a character required to be described in
the Registration Statement or the Prospectus or to be filed as an exhibit to
the Registration Statement is not described or filed as required.
(b) Each preliminary prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act.
(c) The Company and each of its subsidiaries (each, a "Subsidiary" and,
collectively, the "Subsidiaries") is a duly organized and validly existing
corporation in good standing under the laws of its jurisdiction of
incorporation, has the requisite corporate power and authority to own, lease
and operate its properties and to conduct its business as it is currently
being conducted, and is duly qualified as a foreign corporation and is in
good standing in each jurisdiction where the ownership, leasing or operation
of property or the conduct of its business requires such qualification,
except where the failure to be so qualified would not, singly or in the
aggregate, have a material adverse
7
<PAGE>
effect on the properties, business, results of operations, condition
(financial or otherwise), affairs or prospects of the Company and the
Subsidiaries taken as a whole (a "Material Adverse Effect").
(d) The Company has full corporate power and authority to execute,
deliver and perform this Agreement and to authorize, issue, sell and deliver
the Company Shares as contemplated by this Agreement.
(e) This Agreement has been duly authorized and validly executed and
delivered by the Company and constitutes a valid and legally binding
agreement of the Company, enforceable against the Company in accordance with
its terms (assuming the due execution and delivery hereof by you).
(f) All the outstanding shares of capital stock of the Company
(including the Stockholder Shares to be sold by the Selling Stockholders)
have been duly authorized and validly issued and are fully paid,
non-assessable and not subject to any preemptive or similar rights; and the
Company Shares to be issued and sold by the Company hereunder have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor as provided by this Agreement, will be validly issued, fully paid
and non-assessable, and the issuance of such Company Shares will not be
subject to any preemptive or similar rights.
(g) The authorized capital stock of the Company, including the
Securities, conforms to the description thereof contained in the Prospectus.
(h) All of the issued and outstanding shares of capital stock of, or
other ownership interests in, each Subsidiary have been duly and validly
authorized and issued, and all of the shares of capital stock of, or other
ownership interests in, each Subsidiary are owned, directly or through
Subsidiaries, by the Company. All such shares of capital stock are fully
paid and nonassessable, and are owned free and clear of any security
interest, mortgage, pledge, claim, lien or encumbrance (each, a "Lien").
There are no outstanding subscriptions, rights, warrants, options, calls,
convertible securities, commitments of sale or Liens related to or entitling
any person, other than the Company, to purchase or otherwise to acquire any
shares of the capital stock of, or other ownership interest in, any
Subsidiary.
(i) Neither the Company nor any of the Subsidiaries is in violation of
its respective charter or bylaws or in default in the performance of any
bond, debenture, note or any other evidence of indebtedness or any indenture,
mortgage, deed of trust or other contract, lease or other instrument to which
the Company or any of the Subsidiaries is a party or by which any of them is
bound, or to which any of the property or assets of the Company or any of the
Subsidiaries is subject.
(j) The execution and delivery of this Agreement by the Company, the
issuance and sale of the Company Shares, the performance of this Agreement
and the consummation of the transactions contemplated by this Agreement will
not conflict with or result in a breach or violation of any of the respective
charters or bylaws of the Company or any of the Subsidiaries or any of the
terms or provisions of, or constitute a default or cause an acceleration of
any obligation under, or result in the imposition or creation of (or the
obligation to create or impose) a Lien with respect to, any bond, note,
debenture or other evidence of indebtedness or any indenture, mortgage, deed
of trust or other agreement or instrument to which the Company or any of the
Subsidiaries is a party or by which it or any of them is bound, or to which
any properties of the Company or any of the Subsidiaries is or may be
subject, or contravene any order of any court or governmental agency or
8
<PAGE>
body having jurisdiction over the Company or any of the Subsidiaries or any
of their respective properties, or violate or conflict with any statute, rule
or regulation or administrative or court decree applicable to the Company or
any of the Subsidiaries or any of their respective properties.
(k) There is no action, suit or proceeding before or by any court or
arbitrator or governmental agency, body or official, domestic or foreign,
pending against or affecting the Company or any of the Subsidiaries, or any
of their respective properties, which is required to be disclosed in the
Registration Statement or the Prospectus, or which might result, singly or in
the aggregate, in a Material Adverse Effect or which might materially and
adversely affect the consummation of this Agreement or the transactions
contemplated hereby, and to the best of the Company's knowledge, no such
proceedings are contemplated or threatened.
(l) No action has been taken and no statute, rule or regulation or order
has been enacted, adopted or issued by any governmental agency or body which
prevents the issuance of the Securities, suspends the effectiveness of the
Registration Statement, prevents or suspends the use of any preliminary
prospectus or suspends the sale of the Securities in any jurisdiction
referred to in Section 4(l) hereof; no injunction, restraining order or order
of any nature by a federal or state court of competent jurisdiction has been
issued with respect to the Company or any of the Subsidiaries which would
prevent or suspend the issuance or sale of the Securities, the effectiveness
of the Registration Statement, or the use of any preliminary prospectus in
any jurisdiction referred to in Section 4(l) hereof; and every request of the
Commission or any securities authority or agency of any jurisdiction for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise) has been complied with in all material respects.
(m) Neither the Company nor any of the Subsidiaries has violated any
environmental, safety or similar law or regulation applicable to its business
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), lacks any permits, licenses or other approvals
required of them under applicable Environmental Laws or is violating any
terms and conditions of any such permit, license or approval, nor has the
Company or any of the Subsidiaries violated any federal, state or local law
relating to discrimination in the hiring, promotion or pay of employees prior
to any applicable wage or hour laws, nor any provisions of the Employee
Retirement Income Security Act of 1974 ("ERISA") or the rules and regulations
promulgated thereunder, nor has the Company or any of the Subsidiaries
engaged in any unfair labor practice, which in each case might result, singly
or in the aggregate, in a Material Adverse Effect. There is (i) no
significant unfair labor practice complaint pending against the Company or
any of the Subsidiaries or, to the best knowledge of the Company, threatened
against any of them before the National Labor Relations Board or any state or
local labor relations board, and no significant grievance or significant
arbitration proceeding arising out of or under any collective bargaining
agreement is so pending against the Company or any of the Subsidiaries or, to
the best knowledge of the Company, threatened against any of them, (ii) no
significant strike, labor dispute, slowdown or stoppage pending against the
Company or any of its Subsidiaries or, to the best knowledge of the Company,
threatened against the Company or any of the Subsidiaries and (iii) to the
best knowledge of the Company, no union representation question existing with
respect to the employees of the Company or any of the Subsidiaries and, to
the best knowledge of the company, no union organizing activities are taking
place, except (with respect to any matter specified in clause (i), (ii) or
(iii) above, singly or in the aggregate) such as could not have a Material
Adverse Effect.
9
<PAGE>
(n) Except as would not result, singly or in the aggregate, in a
Material Adverse Effect, the Company and each of the Subsidiaries has good
and marketable title, free and clear of all Liens (except Liens for taxes not
yet due and payable), to all property and assets reflected in the Company's
consolidated financial statements at and for the nine months ended September
30, 1994.
(o) The firms of accountants that have certified the applicable
consolidated financial statements and supporting schedules of the Company,
Star Gas Corporation ("Star Gas") and DeBlois Oil Company ("DeBlois") filed
with the Commission as part of, and incorporated by reference in, the
Registration Statement and the Prospectus are independent public accountants
with respect to the Company and the Subsidiaries, Star Gas or DeBlois, as the
case may be, as required by the Act. The consolidated historical and pro
forma financial statements, together with related schedules and notes, set
forth and incorporated by reference in the Prospectus and the Registration
Statement comply as to form in all material respects with the requirements of
the Act. Such historical financial statements fairly present the
consolidated financial position of the Company and the Subsidiaries, Star Gas
or DeBlois, as the case may be, at the respective dates indicated and the
results of their operations and their cash flows for the respective periods
indicated, in accordance with generally accepted accounting principles
("GAAP") consistently applied throughout such periods. Such pro forma finan-
cial statements have been prepared on a basis consistent with such historical
statements, except for the pro forma adjustments specified therein, and give
effect to assumptions made on a reasonable basis and present fairly the
historical and proposed transactions contemplated by the Prospectus and this
Agreement. The other financial and statistical information and data included
and incorporated by reference in the Prospectus and in the Registration
Statement, historical and pro forma, are, in all material respects,
accurately presented and, as to the financial information, prepared on a
basis consistent with such financial statements and the books and records of
the Company.
(p) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus and up to the Closing Date,
neither the Company nor any of the Subsidiaries has incurred any liabilities
or obligations, direct or contingent, which are material to the Company and
the Subsidiaries taken as a whole, other than purchases of inventory and
commitments to purchase inventory in the ordinary course of business and
consistent with the past practice of the Company, nor entered into any
transaction not in the ordinary course of business and there has not been,
singly or in the aggregate, any material adverse change, or any development
which may reasonably be expected to involve a material adverse change, in the
properties, business, results of operations, condition (financial or other-
wise), affairs or prospects of the Company and the Subsidiaries taken as a
whole (a "Material Adverse Change").
(q) All tax returns required to be filed by the Company or any of the
Subsidiaries in any jurisdiction have been filed, other than those filings
being contested in good faith, and all material taxes, including withholding
taxes, penalties and interest, assessments, fees and other charges due or
claimed to be due from such entities have been paid, other than those being
contested in good faith and for which adequate reserves have been provided or
those currently payable without penalty or interest.
(r) No authorization, approval or consent or order of, or filing with,
any court or governmental body or agency is necessary in connection with the
transactions contemplated by this Agreement, except such as may be required
by the NASD or state securities or Blue Sky laws or regulations or have been
obtained and made under the Act. Neither the Company nor
10
<PAGE>
any of its affiliates is presently doing business with the government or Cuba
or with any person or affiliate located in Cuba.
(s) (i) Each of the Company and the Subsidiaries has all certificates,
consents, exemptions, orders, permits, licenses, authorizations, or other
approvals (each, an "Authorization") of and from, and has made all declara-
tions and filings with, all federal, state, local and other governmental
authorities, all self-regulatory organizations and all courts and other
tribunals, necessary or required to own, lease, license and use its
properties and assets and to conduct its business in the manner described in
the Prospectus, except to the extent that the failure to obtain or file would
not, singly or in the aggregate, have a Material Adverse Effect, (ii) all
such Authorizations are valid and in full force and effect and (iii) the
Company and the Subsidiaries are in compliance in all material respects with
the terms and conditions of all such Authorizations and with the rules and
regulations of the regulatory authorities and governing bodies having
jurisdiction with respect thereto.
(t) Neither the Company nor any of the Subsidiaries is (a) an
"investment company" or a company "controlled" by an investment company
within the meaning of the Investment Company Act of 1940, as amended, or (b)
a "holding company" or a "subsidiary company" of a holding company, or an
"affiliate" thereof within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
(u) No holder of any security of the Company has or will have any right
to require the registration of such security by virtue of any transaction
contemplated by this Agreement other than certain selling stockholders which
are exercising such rights in connection with the offering of Securities
contemplated hereby.
(v) The Company and the Subsidiaries possess all patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks and trade names
(collectively, "Intellectual Property") presently employed by them in
connection with the businesses now operated by them, and neither the Company
nor any of the Subsidiaries has received any notice of infringement of or
conflict with asserted rights of others with respect to the foregoing. The
use of such Intellectual Property in connection with the business and
operations of the Company and the Subsidiaries does not, to the Company's
knowledge, infringe on the rights of any person.
(w) The Company and each of the Subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management's general or
specific authorization and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(x) The Company has not (i) taken, directly or indirectly, any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of
the Securities or (ii) since the initial filing of the Registration Statement
(A) sold, bid for, purchased, or paid anyone any compensation for soliciting
purchases of, the Securities or (B) paid or agreed to
11
<PAGE>
pay to any person any compensation for soliciting another to purchase any
other securities of the Company.
(y) The Company and each Subsidiary maintains insurance covering their
respective properties, operations, personnel and businesses. Such insurance
insures against such losses and risks as are adequate in accordance with
customary industry practice to protect the Company and its Subsidiaries and
their businesses. Neither the Company nor any Subsidiary has received notice
from any insurer or agent of such insurer that substantial capital
improvements or other expenditures will have to be made in order to continue
such insurance. All such insurance is outstanding and duly in force on the
date hereof and will be outstanding and duly in force on the Closing Date.
(z) Each certificate signed by any officer of the Company and delivered
to the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the
matters covered thereby.
6. Representations and Warranties of the Selling Stockholders. Each
----------------------------------------------------------
Selling Stockholder severally represents and warrants to each Underwriter that:
(a) Such Selling Stockholder, if not an individual, is a duly organized
and validly existing corporation in good standing under the laws of its
jurisdiction of incorporation and has the requisite corporate power and
authority to own, lease and operate its properties and to conduct its
business as it is currently being conducted.
(b) Such Selling Stockholder is the lawful owner of the Stockholder
Shares to be sold by such Selling Stockholder pursuant to this Agreement and
has, and on the Closing Date (and Option Closing Date, if applicable) will
have, good and clear title to such Stockholder Shares, free of all
restrictions on transfer, liens, encumbrances, security interests and claims
whatsoever.
(c) Upon delivery of and payment for such Stockholder Shares pursuant to
this Agreement, good and clear title to such Stockholder Shares will pass to
the Underwriters, free of all restrictions on transfer, liens, encumbrances,
security interests and claims whatsoever.
(d) Such Selling Stockholder hasfull power and authority to execute,
deliver and perform this Agreement and the Custody Agreement between such
Selling Stockholder and Chemical Bank, as Custodian (the "Custody
Agreement"), and to sell, assign, transfer and deliver such Stockholder
Shares in the manner provided herein and therein, and this Agreement and the
Custody Agreement have been duly authorized and validly executed and
delivered by such Selling Stockholder and each of this Agreement and the
Custody Agreement constitutes a valid and binding agreement of such Selling
Stockholder, enforceable against such Selling Stockholder in accordance with
its terms (assuming due execution and delivery thereof by all parties other
than such Selling Stockholder).
(e) The power of attorney signed by such Selling Stockholder appointing
Wolfgang Traber and Irik P. Sevin, or either one of them, as his or its
attorney-in-fact to the extent set forth therein with regard to the
transactions contemplated hereby and by the Registration Statement and the
Custody Agreement has been duly
12
<PAGE>
authorizedand validly executed and delivered by or on behalf of such Selling
Stockholder and constitutes a valid and binding instrument of such Selling
Stockholder, enforceable against such Selling Stockholder in accordance with
its terms, and, pursuant to such power of attorney, such Selling Stockholder
has authorized Wolfgang Traber and Irik P. Sevin, or either one of them, to
execute and deliver on his or its behalf this Agreement and any other
document necessary or desirable in connection with the transactions
contemplated hereby and to deliver the Stockholder Shares to be sold by such
Selling Stockholder pursuant to this Agreement.
(f) Such Selling Stockholder has not (i) taken, directly or indirectly,
any action designed to cause or to result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Securities, (ii) since the initial filing of the Regis-
tration Statement (A) sold, bid for, purchased, or paid anyone any
compensation for soliciting purchases of, the Securities or (B) paid or
agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company or (iii) other than as permitted
by the Act, distributed, nor will such Selling Stockholder distribute, any
prospectus or other offering material in connection with the offering and
sale of the Stockholder Shares.
(g) The execution, delivery and performance of this Agreement by such
Selling Stockholder, the performance of this Agreement and the consummation
of the transactions contemplated by this Agreement will not conflict with or
result in a breach or violation of the charter or bylaws of such Selling
Stockholder, if not an individual, or any of the terms or provisions of, or
constitute a default or cause an acceleration of any obligation under, or
result in the imposition or creation of (or the obligation to create or
impose) a Lien with respect to, any bond, note, debenture or other evidence
of indebtedness or any indenture, mortgage, deed of trust or other agreement
or instrument to which such Selling Stockholder is a party or by which it or
he is bound, or to which any properties of such Selling Stockholder is or may
be subject, or contravene any order of any court or governmental agency or
body having jurisdiction over such Selling Stockholder or any of his or its
properties, or violate or conflict with any statute, rule or regulation or
administrative or court decree applicable to such Selling Stockholder or any
of his or its properties.
(h) Such parts of the Registration Statement under the caption "Principal
and Selling Stockholders" which specifically relate to such Selling
Stockholder do not, and will not on the Closing Date (and any Option Closing
Date, if applicable), contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in light of circumstances under which they were made,
not misleading.
(i) At any time during the period described in paragraph 4(e) hereof, if
there is any change in the information referred to in paragraph 6(h) above,
such Selling Stockholder will immediately notify you of such change.
13
<PAGE>
7. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless (i) each of the
Underwriters, (ii) each person, if any, who controls (within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act) any of the
Underwriters (any of the persons referred to in this clause (ii) being
hereinafter referred to as a "controlling person"), and (iii) the respective
officers, directors, partners, employees, representatives and agents of any
of the Underwriters or any controlling person (any person referred to in
clause (i), (ii) or (iii) may hereinafter be referred to as an "Indemnified
Person") to the fullest extent lawful, from and against any and all losses,
claims, damages, liabilities, judgments, actions and expenses (including
without limitation and as incurred, reimbursement of all reasonable costs of
investigating, preparing, pursuing or defending any claim or action, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, including the reasonable fees and expenses of counsel to any
Indemnified Person) directly or indirectly caused by, related to, based upon,
arising out of or in connection with any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any
amendment thereto) or the Prospectus (including any amendment or supplement
thereto) or any preliminary prospectus or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein (in the case of the Prospectus, in the light of
the circumstances under which they were made) not misleading, except insofar
as such losses, claims, damages, liabilities or expenses are caused by an
untrue statement or omission or alleged untrue statement or omission that is
made in reliance upon and in conformity with information relating to any of
the Underwriters furnished in writing to the Company by such Underwriter
expressly for use in the Registration Statement (or any amendment thereto) or
the Prospectus (or any amendment or supplement thereto) or any preliminary
prospectus. The Company shall notify you promptly of the institution, threat
or assertion of any claim, proceeding (including any governmental
investigation) or litigation in connection with the matters addressed by this
Agreement which involves the Company or an Indemnified Person.
(b) Each Selling Stockholder agrees to indemnify and hold harmless each
Indemnified Person to the same extent as to the foregoing indemnity from the
Company, but only with respect to claims and actions based on information
relating to such Selling Stockholder furnished in writing to the Company by
such Selling Stockholder expressly for use in the Registration Statement or
the Prospectus.
(c) In case any action or proceeding (including any governmental
investigation) shall be brought or asserted against any of the Indemnified
Persons with respect to which indemnity may be sought against an indemnifying
party, such Underwriter (or the Underwriter controlled by such controlling
person) shall promptly notify the indemnifying party in writing (provided,
that the failure to give such notice shall not relieve the indemnifying party
of its obligations pursuant to this Agreement) and the indemnifying party
shall assume the defense thereof, including the employment of counsel
reasonably satisfactory to such Indemnified Persons and payment of all fees
and expenses. Any Underwriter or any such controlling person shall have the
right to employ separate counsel in any such action and participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Underwriters or such controlling
14
<PAGE>
person unless (i) the employment of such counsel has been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense and employ counsel or (iii) the named
parties to any such action (including any impleaded parties) include both
such Underwriter or such controlling person and the indemnifying party and
such Underwriter or such controlling person shall have been advised by such
counsel that there may be one or more legal defenses available to it which
are different from or additional to those available to the indemnifying party
(in which case the indemnifying party shall not have the right to assume the
defense of such action on behalf of such Underwriter or such controlling
person). The indemnifying party shall not, in connection with any one such
action or proceeding or separate but substantially similar or related actions
or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses
of more than one separate firm of attorneys (in addition to any local
counsel) at any time for such Indemnified Persons, which firm shall be
designated by the Underwriters. An indemnifying party shall be liable for
any settlement of any such action or proceeding effected with such
indemnifying party's prior written consent, which consent will not be
unreasonably withheld, and such indemnifying party agrees to indemnify and
hold harmless any Indemnified Person from and against any loss, claim,
damage, liability or expense by reason of any settlement of any action
effected with the written consent of such indemnifying party. No
indemnifying party shall, without the prior written consent of each
Indemnified Person, settle or compromise or consent to the entry of Judgment
in or otherwise seek to terminate any pending or threatened action, claim,
litigation proceeding in respect of which indemnification or contribution may
be sought hereunder (whether or not any Indemnified Person is a party there-
to), unless such settlement, compromise, consent or termination includes an
unconditional release of each Indemnified Person from all liability arising
out of such action, claim, litigation or proceeding.
(d) Each of the Underwriters agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement, any person controlling the Company (within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act), the
officers, directors, partners, employees, representatives and agents of each
such person, each Selling Stockholder and each person, if any, controlling
such Selling Stockholder within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, to the same extent as the foregoing indemnity
from the Company and the Selling Stockholders to each of the Indemnified
Persons, but only with respect to claims and actions based on information
relating to such Underwriter furnished in writing by such Underwriter ex-
pressly for use in the Registration Statement or the Prospectus.
(e) If the indemnification provided for in this Section 7 is unavailable
to an indemnified party in respect of any losses, claims, damages,
liabilities or expenses referred to herein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages, liabilities and expenses (i) in such proportion as is appropriate to
reflect the relative benefits received by the indemnifying party on the one
hand and the indemnified party on the other hand from the offering of the
Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the indemnifying parties and the indemnified party, as well
as any other relevant equitable considerations. The relative benefits
received by the Company and the Selling Stockholders on the one handand the
Underwriters on the other
15
<PAGE>
shall be deemed to be in the same proportion as the total proceeds from the
offering of the Securities (net of underwriting discounts and commissions but
before deducting expenses) received by the Company and the Selling
Stockholders bear to the total underwriting discounts and commissions
received by the Underwriters. The relative fault of the Company, the Selling
Stockholders and the Underwriters shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact related to
information supplied by the Company, the Selling Stockholders or the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The indemnity and contribution obligations of the Company set forth herein
shall be in addition to any liability or obligation the Company may otherwise
have to any Indemnified Person.
The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(e) were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or expenses referred to in
the immediately preceding paragraph shall be deemed to include, subject to
the limitations set forth above, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of this
Section 7, (i) none of the Underwriters (or their related Indemnified
Persons) shall be required to contribute, in the aggregate, any amount in
excess of the amount by which the total underwriting discount applicable to
the Securities purchased by such Underwriter exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission
and (ii) none of the Selling Stockholders shall be required to contribute, in
the aggregate, any amount in excess of the amount by which the total purchase
price received by such Selling Stockholder from the sale of such Selling
Stockholder's Stockholder Shares hereunder exceeds the amount of any damages
which such Selling Stockholder has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute pursuant to this Section 7(e) are several in
proportion to the respective amount of Securities purchased by each of the
Underwriters hereunder and not joint.
(f) Each Seller hereby designates [NAME OF COMPANY], [ADDRESS OF
COMPANY], (a Delaware corporation) as its authorized agent, upon which
process may be served in any action, suit or proceeding which may be
instituted in any state or federal court in the State of New York by any
Underwriter or person controlling an Underwriter asserting a claim for
indemnification or contribution under or pursuant to this Section 7, and each
Seller will accept the jurisdiction of such court in such action, and waives,
to the fullest extent permitted by applicable law, any defense based upon
lack of personal jurisdiction or venue. A copy of any such process shall be
sent or given to such Seller, at the address for notices specified in Section
12 hereof.
8. Conditions of Underwriters' Obligations. The several obligations of
---------------------------------------
the Underwriters to purchase the Firm Shares under this Agreement are subject to
the satisfaction of each of the following conditions:
16
<PAGE>
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same
force and effect as if made on and as of the Closing Date. The Company shall
have performed or complied with all of its obligations and agreements herein
contained and required to be performed or complied with by it at or prior to
the Closing Date.
(b) (i) The Registration Statement shall have become effective (or, if a
post-effective amendment is required to be filed pursuant to Rule 430A
promulgated under the Act, such post-effective amendment shall have become
effective) not later than 10:00 A.M., New York City time, on the date of this
Agreement or at such later date and time as you may approve in writing, (ii)
at the Closing Date, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been commenced or shall be pending before or contemplated
by the Commission and every request for additional information on the part of
the Commission shall have been complied with in all material respects and
(iii) no stop order suspending the sale of the Securities in any jurisdiction
referred to in Section 4(l) shall have been issued and no proceeding for that
purpose shall have been commenced or shall be pending or threatened.
(c) No action shall have been taken and no statute, rule, regulation or
order shall have been enacted, adopted or issued by any governmental agency
which would, as of the Closing Date, prevent the sale of the Securities; and
no injunction, restraining order or order of any nature by a federal or state
court of competent jurisdiction shall have been issued as of the Closing Date
which would prevent the sale of the Securities.
(d) (i) Since the date hereof or since the dates as of which
information is given in the Registration Statement and the Prospectus, there
shall not have been any Material Adverse Change, (ii) since the date of the
latest balance sheet included in the Registration Statement and the
Prospectus, there shall not have been any material change in the capital
stock or long-term debt, or material increase in short-term debt, of the
Company or any of the Subsidiaries and (iii) the Company and the Subsidiaries
shall have no liability or obligation, direct or contingent, that is material
to the Company and the Subsidiaries taken as a whole and is required to be
disclosed on a balance sheet in accordance with GAAP and is not disclosed on
the latest balance sheet included in the Registration Statement and the
Prospectus.
(e) You shall have received a certificate of the Company, dated the
Closing Date, executed on behalf of the Company by the President or any Vice
President and a principal financial or accounting officer of the Company
confirming, as of the Closing Date, the matters set forth in paragraphs (a),
(b), (c) and (d) of this Section 8.
(f) All the representations and warranties of the Selling Stockholders
contained in this Agreement shall be true and correct on the Closing Date
with the same force and effect as if made on and as of the Closing Date .
The Selling Stockholders shall have performed or complied with all of their
obligations and agreements herein contained and required to be performed or
complied with by them at or prior to the Closing Date. You shall have
received a certificate , dated the Closing Date, from each Selling
Stockholder confirming, as of the Closing Date, the matters set forth in
this Section 8(f).
(g) On the Closing Date, you shall have received:
17
<PAGE>
(1) an opinion (satisfactory to you and your counsel), dated the
Closing Date, of Phillips, Nizer, Benjamin, Krim & Ballon, counsel for the
Company, to the effect that:
(i) the Company and each of the Subsidiaries is a duly organized
and validly existing corporation in good standing under the laws of its
jurisdiction of incorporation, has the requisite corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus,
and is duly qualified as a foreign corporation and in good standing in
each jurisdiction where the ownership, leasing or operation of property
or the conduct of its business requires such qualification, except
where the failure to be so qualified would not, singly or in the
aggregate, have a Material Adverse Effect;
(ii) the Company has full power and authority to execute, deliver
and perform this Agreement and to authorize, issue, sell and deliver
the Company Shares as contemplated by this Agreement;
(iii) each of the Selling Stockholders has full power and authority
to execute, deliver and perform this Agreement and to sell and deliver
the Stockholder Shares as contemplated by this Agreement;
(iv) this Agreement has been duly authorized and validly executed
and delivered by the Company and each of the Selling Stockholders;
(v) all of the outstanding shares of capital stock of the Company
(including the Stockholder Shares to be sold by the Selling
Stockholders) have been duly authorized and validly issued and are
fully paid, non-assessable and not subject to any preemptive or similar
rights;
(vi) the Company Shares to be issued and sold by the Company
hereunder have been duly authorized and, when issued and delivered to
the Underwriters against payment therefor as provided by this
Agreement, will be validly issued, fully paid and non-assessable, and
the issuance of such Company Shares will not be subject to any
preemptive or similar rights;
(vii) the authorized capital stock of the Company, including the
Securities, conforms in all material respects to the description
thereof contained in the Prospectus;
(viii) all of the issued and outstanding shares of capital stock of,
or other ownership interests in, each Subsidiary have been duly and
validly authorized and issued, and the shares of capital stock of, or
other ownership interests in, each Subsidiary are owned, directly or
through Subsidiaries, by the Company, are fully paid and nonassessable,
and are to such counsel's knowledge (after due inquiry) owned free and
clear of any Lien;
(ix) to such counsel's knowledge (after inquiry to the Company)
there are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or Liens related to
or entitling any person to purchase or otherwise to acquire any shares
of the capital stock of, or other ownership interest in, any
Subsidiary;
18
<PAGE>
(x) neither the Company nor any of the Subsidiaries is (a) an
"investment company" or a company "controlled" by an investment company
within the meaning of the Investment Company Act of 1940, as amended,
or (b) a "holding company" or a "subsidiary company" of a holding
company, or an "affiliate" thereof within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
(xi) the descriptions in the Registration Statement and the Pro-
spectus of statutes, legal and governmental proceedings and contracts
and other documents are accurate in all material respects and fairly
present the information required to be shown; and such counsel does not
know of any legal or governmental proceedings required to be described
in the Registration Statement or Prospectus which are not described as
required or of any contracts or documents of a character required to be
described in the Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement which are not described and
filed as required; it being understood that such counsel need express
no opinion as to the financial statements, notes or schedules or other
financial data included therein;
(xii) the Registration Statement has become effective under the Act;
any required filing of the Prospectus, and any supplements thereto,
pursuant to Rule 424(b) has been made in the manner and within the time
period required by Rule 424(b); and to the knowledge of such counsel
(after due inquiry) no stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued and no
proceedings therefor have been instituted or are pending or
contemplated under the Act;
(xiii) no authorization, approval, consent or order of, or filing
with, any court or governmental body or agency is required for the
consummation by the Company of the transactions contemplated by this
Agreement, except such as have been obtained and made under the Act or
such as may be required under state securities or Blue Sky laws or
regulations or by the NASD;
(xiv) at the time it became effective and on the Closing Date, the
Registration Statement (except for financial statements, the notes
thereto and related schedules and other financial data included
therein, as to which no opinion need be expressed) complied as to form
in all material respects with the Act;
19
<PAGE>
(xv) to the knowledge of such counsel (after inquiry to the
Company), neither the Company nor any of the Subsidiaries is in
violation of its respective charter or bylaws or in default in the
performance of any bond, debenture, note or any other evidence of
indebtedness or any indenture, mortgage, deed of trust or other
contract, lease or other instrument to which the Company or any of the
Subsidiaries is a party or by which any of them is bound, or to which
any of the property or assets of the Company or any of the Subsidiaries
is subject;
(xvi) the execution and delivery of this Agreement by the Company
and each Selling Stockholder, the issuance and sale of the Securities,
the performance of this Agreement and the consummation of the
transactions contemplated by this Agreement will not conflict with or
result in a breach or violation of any of the respective charters or
bylaws of the Company , any of the Subsidiaries or any Selling
Stockholder that is not an individual or any of the terms or provisions
of, or constitute a default or cause an acceleration of any obligation
under or result in the imposition or creation of (or the obligation to
create or impose) a Lien with respect to, any bond, note, debenture or
other evidence of indebtedness or any indenture, mortgage, deed of
trust or other agreement or instrument known to such counsel (after due
inquiry) to which the Company, any of the Subsidiaries or any Selling
Stockholder is a party or by which it or any of them is bound, or to
which any properties of the Company, any of the Subsidiaries or any
Selling Stockholder is or may be subject, or contravene any order of
any court or governmental agency or body having jurisdiction over the
Company, any of the Subsidiaries or any Selling Stockholder or any of
their respective properties, or violate or conflict with any statute,
rule or regulation or administrative or court decree applicable to the
Company, any of the Subsidiaries, any Selling Stockholder or any of
their respective properties, based upon our consideration of only those
statutes, rules and regulations which, in our experience, are normally
applicable to transactions such as those contemplated hereby and in the
Registration Statement;
(xvii) the Custody Agreement has been duly authorizedand validly
executed and delivered by each of the Selling Stockholders and
constitutes a valid and binding instrument of such Selling Stockholder,
enforceable against such Selling Stockholder in accordance with its
terms;
(xviii) each Selling Stockholder has full power and authority, and any
approval required by law (other than any approval imposed by the
applicable state securities and Blue Sky laws) to sell, assign,
transfer and deliver the Stockholder Shares to be sold by him or it in
the manner provided in this Agreement and the Custody Agreement;
(xix) each Selling Stockholder has good and clear title to the
certificates for the Stockholder Shares to be sold by him and upon
delivery thereof, pursuant hereto and payment therefor, good and clear
title will pass to the Underwriters, severally, free of all
restrictions on transfer, liens, encumbrances, security interests and
claims whatsoever; and
(xx) the power of attorney signed by each Selling Stockholder
appointing Wolfgang Traber and Irik P. Sevin, or either of them, as his
or its attorney-in-fact to the extent set forth therein with regard to
the transactions contemplated hereby and by the Registration Statement
has been duly
20
<PAGE>
authorized and validly executed and delivered by or on behalf of each
Selling Stockholder and constitutes a valid and binding instrument of
such Selling Stockholder, enforceable against such Selling Stockholder
in accordance with its terms, and pursuant to such power of attorney,
each of the Selling Stockholders has authorized Wolfgang Traber and
Irik P. Sevin, or either of them, to execute and deliver on their
behalf this Agreement and any other document necessary or desirable in
connection with transactions contemplated hereby and to deliver the
Stockholder Shares to be sold by them pursuant to this Agreement.
The opinion of Phillips, Nizer, Benjamin, Krim & Ballon shall be rendered
to you at the request of the Company and shall so state therein.
Phillips, Nizer, Benjamin, Krim & Ballon may rely on the opinion of Dorsey
& Whitney as to certain matters of Minnesota law and on the opinion of
counsel to certain of the Selling Stockholders as to certain matters of
law.
(2) In giving their opinion required by subsection (g)(1) of this
Section 8, Phillips, Nizer, Benjamin, Krim & Ballon shall additionally
state that such counsel has participated in conferences with officers and
other representatives of the Company, representatives of the independent
public accountants for the Company, your representatives and your counsel
in connection with the preparation of the Registration Statement and
Prospectus and has considered the matters required to be stated therein
and the statements contained therein, although such counsel has not
independently verified the accuracy, completeness or fairness of such
statements (except as indicated above); and such counsel advises you that,
on the basis of the foregoing, no facts came to such counsel's attention
that caused such counsel to believe that the Registration Statement (as
amended or supplemented, if applicable), at the time such Registration
Statement or any post-effective amendment became effective, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, or the Prospectus (as amended or supplemented), as of its
date and the Closing Date, contained an untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
(h) You shall have received an opinion, dated the Closing Date, of
Latham & Watkins, counsel for the Underwriters, in form and substance
reasonably satisfactory to you.
(i) You shall have received letters on and as of the date hereof and as
on and as of the Closing Date (in the latter case constituting an affirmation
of the statements set forth in the former), in form and substance
satisfactory to you, from each of KPMG Peat Marwick, Ernst & Young and
Sansiveri, Ryan, Sullivan & Co., independent auditors, with respect to the
financial statements and certain financial information contained and
incorporated by reference in the Registration Statement and the Prospectus.
(j) Latham & Watkins shall have been furnished with such documents and
opinions, in addition to those set forth above, as they may reasonably
require for the purpose of enabling them to review or pass upon the matters
referred to in this Section 8 and in order to evidence the accuracy,
completeness or satisfaction in all material respects of any of the
representations, warranties or conditions herein contained.
(k) Prior to the Closing Date, the Sellers shall have furnished to you
such further information, certificates and documents as you may reasonably
request.
21
<PAGE>
(l) The Company shall have delivered to you the agreements specified in
Section 2 hereof.
The several obligations of the Underwriters to purchase any Additional Shares
hereunder are subject to the delivery to the Representatives on the applicable
Option Closing Date of such documents as you may reasonably request with respect
to the good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
9. Defaults. If on the Closing Date or an Option Closing Date, as the
--------
case may be, any of the Underwriters shall fail or refuse to purchase Securities
which it has agreed to purchase hereunder on such date, and the aggregate amount
of such Securities that such defaulting Underwriter(s) agreed but failed or
refused to purchase does not exceed 10% of the total amount of such Securities
that all of the Underwriters are obligated to purchase on such Closing Date or
Option Closing Date, as the case may be, each non-defaulting Underwriter shall
be obligated severally, in the proportion which the aggregate amount of such
Securities set forth opposite its name in Schedule A bears to the total
aggregate amount of Securities which all the non-defaulting Underwriters have
agreed to purchase on the Closing Date, or in such other proportion as you may
specify, to purchase such Securities which such defaulting Underwriter(s) agreed
but failed or refused to purchase on such date. If, on the Closing Date or an
Option Closing Date, as the case may be, any of the Underwriters shall fail or
refuse to purchase Securities in an aggregate amount that exceeds 10% of such
total amount of the Securities and arrangements satisfactory to the other
Underwriter(s) and the Company for the purchase of such Securities are not made
within 48 hours after such default, this Agreement shall terminate without
liability on the part of the non-defaulting Underwriter(s) or the Company,
except as otherwise provided in Section 11. In any such case that does not
result in termination of this Agreement, the Underwriters or the Company may
postpone the Closing Date or the applicable Option Closing Date, as the case may
be, for not longer than seven days in order that the required changes, if any,
in the Registration Statement and the Prospectus or any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve a defaulting Underwriter from liability in respect of any default by any
such Underwriter under this Agreement.
10. Agreements of the Selling Stockholders. Each Selling Stockholder
--------------------------------------
severally agrees with you and the Company:
(a) To deliver to you on or prior to the Closing Date and, if applicable,
on or prior to any Option Closing Date on which any FRC Selling Stockholder
is selling FRC Stockholder Shares, a properly completed and executed United
States Treasury Department Form W-9 (or other applicable form or statement
provided by Treasury Department regulations in lieu thereof); and
(b) To take all reasonable actions in cooperation with the Company and the
Underwriters to cause the Registration Statement to become effective at the
earliest possible time, to do and perform all things to be done and performed
under this Agreement prior to the Closing Date and to satisfy all conditions
precedent to the delivery of the Stockholder Shares pursuant to this
Agreement.
11. Effective Date of Agreement and Termination.
-------------------------------------------
(a) This Agreement shall become effective upon the later of (i) the
execution and delivery of this Agreement by the parties hereto, (ii) the
effectiveness of the Registration Statement and (iii) if a post-effective
amendment is required to be filed pursuant to Rule 430A under the Act, the
effectiveness of such post-effective amendment.
22
<PAGE>
(b) This Agreement may be terminated at any time on or prior to the
Closing Date by you by notice to the Sellers if any of the following has
occurred: (i) subsequent to the date the Registration Statement is declared
effective or the date of this Agreement, any Material Adverse Change which, in
the judgment of any Underwriter, materially impairs the investment quality of
the Securities; (ii) any outbreak or escalation of hostilities or other national
or international calamity or crisis or material adverse change in economic
conditions or in the financial markets of the United States or elsewhere, or any
other substantial national or international calamity or emergency, if the effect
of such outbreak, escalation, calamity, crisis, emergency or change in the
economic conditions or in the financial markets of the United States or
elsewhere would, in the judgment of any Underwriter, make it impracticable or
inadvisable to market the Securities or to enforce contracts for the sale of the
Securities on the terms and in the manner contemplated in the Prospectus; (iii)
any suspension or limitation of trading generally in securities on the New York
Stock Exchange or in the over-the-counter markets or any setting of minimum
prices for trading on such exchange or markets; (iv) any declaration of a
general banking moratorium by either federal or New York authorities; (v) the
taking of any action by any federal, state or local government or agency in re-
spect of its monetary or fiscal affairs that in your judgment has a material
adverse effect on the financial markets in the United States and would, in your
judgment, make it impracticable or inadvisable to market the Securities or to
enforce contracts for the sale of the Securities; (vi) the enactment,
publication, decree, or other promulgation of any federal or state statute,
regulation, rule or order of any court or other governmental authority which, in
your judgment, materially and adversely affect the business or operations of the
Company or any significant subsidiary; or (vii) any securities of the Company or
any of the Subsidiaries shall have been downgraded or placed on any "watch list"
for possible downgrading by any nationally statistical rating organization,
provided, that in the case of such "watch list" placement, termination shall be
permitted only if such placement would, in the judgment of any Underwriter, make
it impracticable or inadvisable to market the Securities or to enforce contracts
for the sale of the Securities or materially impair the investment quality of
the Securities.
(c) The respective indemnities and contribution provisions of the
Selling Stockholders, the Company, its officers and directors and of the Under-
writers set forth in or made pursuant to this Agreement shall remain operative
and in full force and effect, and will survive delivery of and payment for the
Securities, regardless, of (i) any investigation, or statement as to the results
thereof, made by or on behalf of any of the Underwriters or by or on behalf of
the Company, the officers or directors of the Company or any controlling person
of the Company, (ii) acceptance of the Securities and payment for them hereunder
and (iii) termination of this Agreement.
(d) If this Agreement shall be terminated by the Underwriters pursuant
to clauses (i) or (vii) of paragraph (b) of this Section 11 or because of the
failure or refusal on the part of the Sellers to comply with the terms or to
fulfill any of the conditions of this Agreement, the Company agrees to reimburse
you for all out-of-pocket expenses (including the fees and disbursements of
counsel) incurred by you. Notwithstanding any termination of this Agreement,
the Company shall be liable for all expenses which it has agreed to pay pursuant
to Section 4(i) hereof.
(e) Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Sellers, the
Underwriters, any Indemnified Person referred to herein and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The terms "successors and assigns" shall not include a purchaser of
any of the Securities from any of the Underwriters merely because of such
purchase.
23
<PAGE>
12. Notices. Notices given pursuant to any provision of this Agreement
-------
shall be addressed as follows: (a) if to the Company, to Petroleum Heat and
Power Co., Inc., 2187 Atlantic Street, Stamford, Connecticut 06904, Attention:
Irik P. Sevin, with a copy to Phillips, Nizer, Benjamin, Krim & Ballon, 31 West
52nd Street, New York, New York 10019, Attention: Alan Shapiro, Esq., (b) if to
the Selling Stockholders to Wolfgang Traber and Irik P. Sevin c/o Petroleum Heat
and Power Co., Inc., 2187 Atlantic Street, Stamford, Connecticut 06904 and (c)
if to any Underwriter, to it c/o Donaldson, Lufkin & Jenrette Securities
Corporation, 140 Broadway, New York, New York 10005, Attention: Syndicate
Department, with a copy to Latham & Watkins, 885 Third Avenue, New York, New
York 10022, Attention: Beth R. Neckman, Esq., or in any case to such other
address as the person to be notified may have requested in writing.
13. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK AS APPLIED TO
CONTRACTS MADE AND PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK.
24
<PAGE>
This Agreement may be signed in various counterparts which together shall
constitute one and the same instrument. Please confirm that the foregoing
correctly sets forth the agreement among the Company, the Selling Stockholders
and the several Underwriters.
Very truly yours,
PETROLEUM HEAT AND POWER CO., INC.
By:
--------------------------------------------
Name:
Title:
THE SELLING STOCKHOLDERS NAMED IN SCHEDULE B AND C
HERETO.
By:
--------------------------------------------
Name:
Attorney-in-Fact
The foregoing Underwriting Agreement
is hereby confirmed and accepted
as of the date first above written.
The undersigned are acting severally
on behalf of themselves and the several
Underwriters named in Schedule A hereto.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
---------------------------
Name:
Title:
BEAR, STEARNS & CO. INC.
By:
---------------------------
Name:
Title:
PAINEWEBBER INCORPORATED
By:
---------------------------
Name:
Title:
25
<PAGE>
SCHEDULE A
Underwriter Number of Shares
----------- ----------------
Donaldson, Lufkin & Jenrette
Securities Corporation . . . . . . . . . . . . . . . . . . . . . __________
Bear, Stearns & Co. Inc. . . . . . . . . . . . . . . . . . . . . . __________
PaineWebber Incorporated . . . . . . . . . . . . . . . . . . . . . __________
[Others] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __________
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000
26
<PAGE>
SCHEDULE B
Selling Stockholders Number of Shares
- -------------------- ----------------
AmGO III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,185
Atalanta Holdings. . . . . . . . . . . . . . . . . . . . . . . . . 131,815
Thomas J. Edelman . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
S.A. Gabes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Hubertus Langen. . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Richard O'Connell . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Wolfgang Traber . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
27
<PAGE>
SCHEDULE C
FRC Selling Stockholders
- ------------------------
[To Be Completed]
28
Exhibit 4.6
[L&W DRAFT DATED 1/17/95]
PETROLEUM HEAT AND POWER CO., INC.
____% Subordinated Debentures Due 2005
INDENTURE
Dated as of ___________, 1995
CHEMICAL BANK,
Trustee
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1
Definitions and Incorporation by Reference
------------------------------------------
SECTION 1.01. Definitions . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.02. Other Definitions . . . . . . . . . . . . . . . . . . . 12
SECTION 1.03. Incorporation by Reference of Trust Indenture Act . . . 12
SECTION 1.04. Rules of Construction . . . . . . . . . . . . . . . . . 12
ARTICLE 2
The Debentures
--------------
SECTION 2.01. Form and Dating . . . . . . . . . . . . . . . . . . . . 14
SECTION 2.02. Execution and Authentication . . . . . . . . . . . . . 14
SECTION 2.03. Registrar and Paying Agent . . . . . . . . . . . . . . 14
SECTION 2.04. Paying Agent To Hold Money in Trust . . . . . . . . . . 15
SECTION 2.05. Debentureholder Lists . . . . . . . . . . . . . . . . . 15
SECTION 2.06. Transfer and Exchange . . . . . . . . . . . . . . . . . 15
SECTION 2.07. Replacement Debentures . . . . . . . . . . . . . . . . 16
SECTION 2.08. Outstanding Debentures . . . . . . . . . . . . . . . . 16
SECTION 2.09. Temporary Debentures . . . . . . . . . . . . . . . . . 16
SECTION 2.10. Cancellation . . . . . . . . . . . . . . . . . . . . . 16
SECTION 2.11. Defaulted Interest . . . . . . . . . . . . . . . . . . 16
ARTICLE 3
Redemption
----------
SECTION 3.01. Notices to Trustee . . . . . . . . . . . . . . . . . . 17
SECTION 3.02. Selection of Debentures To Be Redeemed . . . . . . . . 17
SECTION 3.03. Notice of Redemption . . . . . . . . . . . . . . . . . 17
SECTION 3.04. Effect of Notice of Redemption . . . . . . . . . . . . 18
SECTION 3.05. Deposit of Redemption Price . . . . . . . . . . . . . . 18
SECTION 3.06. Debentures Redeemed in Part . . . . . . . . . . . . . . 18
ARTICLE 4
Covenants
---------
SECTION 4.01. Payment of Debentures . . . . . . . . . . . . . . . . . 18
SECTION 4.02. SEC Reports . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 4.03. Limitation on Funded Debt . . . . . . . . . . . . . . . 19
SECTION 4.04. Limitation on Indebtedness and Preferred Stock
of Subsidiaries . . . . . . . . . . . . . . . . . . . . . 20
SECTION 4.05. Limitation on Restricted Payments . . . . . . . . . . . 20
SECTION 4.06. Limitation on Restrictions on Distributions from
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 4.07. Limitation on Transactions with Affiliates . . . . . . 22
<PAGE>
SECTION 4.08. Change of Control . . . . . . . . . . . . . . . . . . . 23
SECTION 4.09. Limitation on Liens on Subsidiary Stock . . . . . . . . 24
SECTION 4.10. Compliance Certificate . . . . . . . . . . . . . . . . 24
SECTION 4.11. Further Instruments and Acts . . . . . . . . . . . . . 24
ARTICLE 5
Successor Company
-----------------
SECTION 5.01. When Company May Merge or Transfer Assets . . . . . . 25
ARTICLE 6
Defaults and Remedies
---------------------
SECTION 6.01. Events of Default . . . . . . . . . . . . . . . . . . . 25
SECTION 6.02. Acceleration . . . . . . . . . . . . . . . . . . . . . 27
SECTION 6.03. Other Remedies . . . . . . . . . . . . . . . . . . . . 27
SECTION 6.04. Waiver of Past Defaults . . . . . . . . . . . . . . . . 27
SECTION 6.05. Control by Majority . . . . . . . . . . . . . . . . . . 27
SECTION 6.06. Limitation on Suits . . . . . . . . . . . . . . . . . . 28
SECTION 6.07. Rights of Holders To Receive Payment . . . . . . . . . 28
SECTION 6.08. Collection Suit by Trustee . . . . . . . . . . . . . . 28
SECTION 6.09. Trustee May File Proofs of Claim . . . . . . . . . . . 28
SECTION 6.10. Priorities . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 6.11. Undertaking for Costs . . . . . . . . . . . . . . . . . 29
SECTION 6.12. Waiver of Stay or Extension Laws . . . . . . . . . . . 29
ARTICLE 7
Trustee
-------
SECTION 7.01. Duties of Trustee . . . . . . . . . . . . . . . . . . . 30
SECTION 7.02. Rights of Trustee . . . . . . . . . . . . . . . . . . . 31
SECTION 7.03. Individual Rights of Trustee . . . . . . . . . . . . . 31
SECTION 7.04. Trustee's Disclaimer . . . . . . . . . . . . . . . . . 31
SECTION 7.05. Notice of Defaults . . . . . . . . . . . . . . . . . . 31
SECTION 7.06. Reports by Trustee to Holders . . . . . . . . . . . . . 31
SECTION 7.07. Compensation and Indemnity . . . . . . . . . . . . . . 32
SECTION 7.08. Replacement of Trustee . . . . . . . . . . . . . . . . 32
SECTION 7.09. Successor Trustee by Merger . . . . . . . . . . . . . . 33
SECTION 7.10. Eligibility; Disqualification . . . . . . . . . . . . . 33
SECTION 7.11. Preferential Collection of Claims Against Company . . . 33
ARTICLE 8
Discharge of Indenture; Defeasance
----------------------------------
SECTION 8.01. Discharge of Liability on Debentures; Defeasance . . . 34
SECTION 8.02. Conditions to Defeasance . . . . . . . . . . . . . . . 34
<PAGE>
SECTION 8.03. Application of Trust Money . . . . . . . . . . . . . . 35
SECTION 8.04. Repayment to Company . . . . . . . . . . . . . . . . . 35
SECTION 8.05. Indemnity for Government Obligations . . . . . . . . . 36
SECTION 8.06. Reinstatement . . . . . . . . . . . . . . . . . . . . 36
ARTICLE 9
Amendments
----------
SECTION 9.01. Without Consent of Holders . . . . . . . . . . . . . . 36
SECTION 9.02. With Consent of Holders . . . . . . . . . . . . . . . . 37
SECTION 9.03. Compliance with Trust Indenture Act . . . . . . . . . . 38
SECTION 9.04. Revocation and Effect of Consents and Waivers . . . . . 38
SECTION 9.05. Notation on or Exchange of Debentures . . . . . . . . . 38
SECTION 9.06. Trustee to Sign Amendments . . . . . . . . . . . . . . 38
SECTION 9.07. Payment for Consent . . . . . . . . . . . . . . . . . . 38
ARTICLE 10
Subordination
-------------
SECTION 10.01. Agreement To Subordinate . . . . . . . . . . . . . . . 39
SECTION 10.02. Liquidation, Dissolution, Bankruptcy . . . . . . . . . 39
SECTION 10.03. Default on Senior Debt . . . . . . . . . . . . . . . . 39
SECTION 10.04. Acceleration of Payment of Debentures . . . . . . . . 40
SECTION 10.05. When Distribution Must Be Paid Over . . . . . . . . . 40
SECTION 10.06. Subrogation . . . . . . . . . . . . . . . . . . . . . 40
SECTION 10.07. Relative Rights . . . . . . . . . . . . . . . . . . . 40
SECTION 10.08. Subordination May Not Be Impaired by Company . . . . . 40
SECTION 10.09. Rights of Trustee and Paying Agent . . . . . . . . . . 41
SECTION 10.10. Distribution or Notice to Representative . . . . . . . 41
SECTION 10.11. Article 10 Not To Prevent Events of Default
or Limit Right To Accelerate . . . . . . . . . . . . . . 41
SECTION 10.12. Trust Moneys Not Subordinated . . . . . . . . . . . . 41
SECTION 10.13. Trustee Entitled To Rely . . . . . . . . . . . . . . . 41
SECTION 10.14. Trustee To Effectuate Subordination . . . . . . . . . 42
SECTION 10.15. Trustee Not Fiduciary for Holders of Senior Debt 42
SECTION 10.16. Reliance by Holders of Senior Debt on Subordination
Provisions . . . . . . . . . . . . . . . . . . . . 42
ARTICLE 11
Miscellaneous
-------------
SECTION 11.01. Trust Indenture Act Controls . . . . . . . . . . . . . 42
SECTION 11.02. Notices . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 11.03. Communication by Holders with Other Holders . . . . . 43
SECTION 11.04. Certificate and Opinion as to Conditions
Precedent . . . . . . . . . . . . . . . . . . . . . . . 43
<PAGE>
SECTION 11.05. Statements Required in Certificate or Opinion . . . . 43
SECTION 11.06. When Debentures Disregarded . . . . . . . . . . . . . 43
SECTION 11.07. Rules by Trustee, Paying Agent and Registrar . . . . . 44
SECTION 11.08. Governing Law . . . . . . . . . . . . . . . . . . . . 44
SECTION 11.09. No Recourse Against Others . . . . . . . . . . . . . . 44
SECTION 11.10. Successors . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 11.11. Multiple Originals . . . . . . . . . . . . . . . . . . 44
SECTION 11.12. Table of Contents; Headings . . . . . . . . . . . . . 44
Exhibit A - Form of Debenture
<PAGE>
INDENTURE dated as of _______________, 1995 between PETROLEUM HEAT AND
POWER CO., INC., a Minnesota corporation (the "Company"), and CHEMICAL BANK, a
New York corporation (the "Trustee").
Each party agrees as follows for the benefit of the other party and
for the equal and ratable benefit of the Holders of the Company's ____%
Subordinated Debentures Due 2005 (the "Debentures"):
ARTICLE 1
Definitions and Incorporation by Reference
------------------------------------------
SECTION 1.01. Definitions.
-----------
"Affiliate" of any Person specified means (i) any Person directly or
indirectly controlling or under direct or indirect common control with such
specified Person; (ii) any spouse, immediate family member or other relative who
has the same principal residence as any Person described in clause (i) above;
(iii) any trust in which any Persons described in clause (i) or (ii) above has a
beneficial interest and (iv) in the case of the Company, any Unrestricted
Subsidiary of the Company. For the purposes of this definition, "control," when
used with respect to any Person, means the power to direct the management and
policies of such Person, directly or indirectly, whether through the ownership
of voting securities, a contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) of
shares of Capital Stock of a Subsidiary (other than directors' qualifying
shares), property or other assets (each referred to for the purposes of this
definition as a "disposition") by the Company or any of its Subsidiaries
(including any disposition by means of a merger, consolidation or similar trans-
action) other than (i) a disposition by a Subsidiary to the Company or by the
Company or a Subsidiary to a Wholly Owned Subsidiary, (ii) a disposition of
property or assets at fair market value in the ordinary course of business or
(iii) a disposition of obsolete assets in the ordinary course of business.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as of the time of determination, the present value (discounted at the
interest rate borne by the Debentures, compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to
any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the
sum of the products of the numbers of years from the date of determination to
the dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bank Debt" means any and all amounts payable under or in respect of
the Credit Agreement, as amended from time to time, any Refinancing Agreement,
any Working Capital Financing Agreement or any other loan agreement with a bank,
including principal, premium (if any), interest (including interest accruing on
or after the filing of any petition in bankruptcy or for reorganization
<PAGE>
relating to the Company to the extent a claim for post-filing interest is
allowed in such proceedings), fees, charges, expenses, reimbursement
obligations, guarantees and all other amounts payable thereunder or in respect
thereof.
"Banks" has the meaning specified in the Credit Agreement.
"Board of Directors" means the Board of Directors of the Company or
any committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" of a Person means any obligation which is
required to be classified and accounted for as a capital lease on the face of a
balance sheet of such Person prepared in accordance with generally accepted
accounting principles; the amount of such obligation shall be the capitalized
amount thereof, determined in accordance with generally accepted accounting
principles; and the Stated Maturity thereof shall be the date of the last
payment of rent or any other amount due under such lease prior to the first date
upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into or exchangeable for
such equity.
"Cash Flow" 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 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
3
<PAGE>
compensation expense referred to in clause (vii) above is reduced during such
period and (c) any amounts included in Section 4.05(b)(iv)(C) hereof 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 shall be calculated
after giving effect on a pro forma basis to (A) such Indebtedness as if such
Indebtedness had been incurred on the first day of such period, (B) the
discharge of any other Indebtedness repaid, repurchased, defeased or otherwise
discharged with the proceeds of such new Indebtedness as if such discharge had
occurred on the first day of such period and (C) the interest income realized by
the Company and its Subsidiaries on the proceeds of such Indebtedness, to the
extent not yet applied at the date of determination, assuming such proceeds
earned interest at the Treasury Rate from the date such proceeds were received
through such date of determination, (2) if since the beginning of such period
the Company or any Subsidiary shall have made any Asset Disposition, EBITDA for
such period shall be reduced by an amount equal to EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset Disposition for
such period, or increased by an amount equal to EBITDA (if negative), directly
attributable thereto for such period and Consolidated Interest Expense for such
period shall be reduced by an amount equal to the Consolidated Interest Expense
directly attributable to any Indebtedness of the Company or any Subsidiary
repaid, repurchased, defeased or otherwise discharged with respect to the
Company and its continuing Subsidiaries in connection with such Asset
Dispositions for such period (or, if the Capital Stock of any Subsidiary is
sold, the Consolidated Interest Expense for such period directly attributable
for the Indebtedness of such Subsidiary to the extent the Company and its
continuing Subsidiaries are no longer liable for such Indebtedness after such
sale) and (3) if since the beginning of such period the Company or any Sub-
sidiary (by merger or otherwise) shall 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 of an operating unit of a business, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto (including the incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such period. For
purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto, and
the amount of Consolidated Interest Expense associated with any Indebtedness
incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting Officer of the Company;
provided, however, that such Officer shall assume (i) the historical sales and
gross profit margins associated with such assets for any consecutive 12-month
period ended prior to the date of purchase (provided that the first month of
such period shall be no more than 18 months prior to such date of purchase),
less estimated post-acquisition loss of customers 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
4
<PAGE>
effect, the interest on such Indebtedness shall be calculated as if the rate in
effect on the date of determination had been the applicable rate for the entire
period.
"Consolidated Interest Expense" means, for any period, the 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 shall be included only to the extent of
the amount of dividends or distributions paid to such Personand
(ii) the cumulative effect of a change in accounting principles shall
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.
"Debentures" means the Debentures issued under this Indenture.
"Default" means any event which is, or after notice or passage of time
or both would be, an Event of Default.
"Designated Senior Debt" means (i) the Bank Debt and (ii) any other
Senior Debt which, at the date of determination, has an aggregate principal
amount outstanding of, or commitments to lend
5
<PAGE>
up to, at least $10 million and is specifically designated by the Company in the
instrument evidencing or governing such Senior Debt as "Designated Senior Debt"
for purposes of this Indenture.
"EBITDA" 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 (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" shall not include endorsements for collection or
6
<PAGE>
deposit in the ordinary course of business. The term "guarantee" used as a verb
has a corresponding meaning.
"Hedging Obligations" of any Person means the obligations of such
Person pursuant to any interest rate swap agreement, foreign currency exchange
agreement, interest rate collar agreement, option or futures contract or other
similar agreement or arrangement designed to protect such Person against changes
in interest rates or foreign exchange rates.
"Holder" or "Debentureholder" means the Person in whose name a
Debenture is registered on the Registrar's books.
"Indebtedness" of any Person means, without duplication,
(i)
(i) the principal of (A) Indebtedness of such Person for money
borrowed and (B) Indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person is
responsible or liable;
(ii) all Capital Lease Obligations of such Person and all Attributable
Indebtedness in respect of Sale/Leaseback Transactions entered into by such
Person;
(iii) all obligations of such Person incurred or assumed as the
deferred purchase price of property, all conditional sale obligations of
such Person and all obligations of such Person under any title retention
agreement (but excluding trade accounts payable arising in the ordinary
course of business);
(iv) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in (i) through (iii)
above) entered into in the ordinary course of business of such Person to
the extent such letters of credit are not drawn upon or, if and to the
extent drawn upon, such drawing is reimbursed no later than the third
Business Day following receipt by such Person of a demand for reimbursement
following payment on the letter of credit);
(v) all obligations of the type referred to in clauses (i) through
(iv) of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including any guarantees of
such obligations and dividends, including by means of any agreement which
has the economic effect of a guarantee; and
(vi) all obligations of the type referred to in clauses (i) through
(v) of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of
such property or assets or the amount of the obligation so secured.
"Indenture" means this Indenture, as amended or supplemented from time
to time.
"Investment" in any Person means any loan or advance to, any guarantee
of, any acquisition of any Capital Stock, equity interest, obligation or other
security of, or capital contribution
7
<PAGE>
or other investment in, such Person. Investments shall exclude advances to
customers and suppliers in the ordinary course of business.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in The City of New York or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue
for the intervening period.
"Lien" means any mortgage, pledge, security interest, conditional sale
or other title retention agreement or other similar lien.
"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 com-
missions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Net Income" of any Person means the net income (loss) of such Person,
determined in accordance with generally accepted accounting principles;
excluding, however, from the determination of Net Income any gain (but not loss)
realized upon the sale or other disposition (including, without limitation,
dispositions pursuant to leaseback transactions) of any real property or
equipment of such Person, which is not sold or otherwise disposed of in the
ordinary course of business, or of any Capital Stock of the Company or a
Subsidiary owned by such Person.
"Non-Convertible Capital Stock" means, with respect to any
corporation, any non-convertible Capital Stock of such corporation and any
Capital Stock of such corporation convertible solely into non-convertible common
stock of such corporation; provided, however, that Non-Convertible Capital Stock
shall not include any Redeemable Stock or Exchangeable Stock.
"Officer" means the Chairman of the Board, the Chief Executive
Officer, the President, any Vice President, the Treasurer or the Secretary of
the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Liens" means (i) Liens existing on the date of this
Indenture and renewals, extensions and refinancings thereof; (ii) rights of
banks to set off deposits against debts owed to said banks; (iii) Purchase Money
Indebtedness; (iv) Liens on the property of any entity existing at the time such
property is acquired by the Company or any of its Subsidiaries and renewals,
extensions and refinancings thereof, whether by merger, consolidation, purchase
of assets or otherwise; provided, however, that in the case of this clause (iv)
that such Liens (x) are not created, incurred or assumed in contemplation of
such assets being acquired by the Company and (y) do not extend to any other
assets of the Company or any of its Subsidiaries; and (v) Liens for taxes not
yet due.
8
<PAGE>
"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 shall not include the
Company's Class B Common Stock.
"Purchase Money Indebtedness" means Indebtedness (i) consisting of the
deferred purchase price of property, conditional sale obligations, obligations
under any title retention agreement and other purchase money obligations, in
each case where the maturity of such Indebtedness does not exceed the
anticipated useful life of the asset being financed, and (ii) incurred to
finance the acquisition by the Company or a Subsidiary of such asset, including
additions and improvements; provided, however, that any Lien arising in
connection with any such Indebtedness shall be limited to the specified asset
being financed or, in the case of real property or fixtures, including additions
and improvements, the real property on which such asset is attached.
"principal" of a Debenture means the principal of the Debenture plus
the premium, if any, payable on the Debenture which is due or overdue or is to
become due at the relevant time.
"Redeemable Stock" means any Capital Stock that by its terms or
otherwise is required to be redeemed on or prior to the first anniversary of the
Stated Maturity of the Debentures or is redeemable at the option of the Holder
thereof at any time on or prior to the first anniversary of the Stated Maturity
of the Debentures.
"Refinancing Agreement" means any credit agreement or other agreement
between the Company and bank lenders pursuant to which the Company refinances
borrowings under the Credit Agreement or another Refinancing Agreement.
"Representative" means the holder, trustee, agent or representative
(if any) for an issue of Senior Debt.
"Restricted Investment" means any Investment in an Unrestricted
Subsidiary. At the time any Subsidiary of the Company is designated by the
Board of Directors of the Company as an Unrestricted Subsidiary, the Company
shall be deemed to have made a Restricted Investment in an amount equal to the
fair market value as of such time of the Company's interest in such Unrestricted
Subsidiary, as determined in good faith by the Board of Directors and set forth
in a Board Resolution.
"Sale/Leaseback Transaction" means an arrangement relating to property
now owned or hereafter acquired whereby the Company or a Subsidiary transfers
such property to a Person and the Company or a Subsidiary leases it from such
Person.
"SEC" means the Securities and Exchange Commission.
"Senior Debt" means the following obligations, whether outstanding on
the date of this Indenture or thereafter issued:
9
<PAGE>
(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 relat-
ing to the Company to the extent post-filing interest is allowed in such
proceeding) in respect of (A) Indebtedness of the Company for money
borrowed and (B) Indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which the Company is
responsible or liable;
(iii)all Capital Lease Obligations of the Company;
(iv) all obligations of the Company (A) for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction, (B) under interest rate swaps, caps, collars, options and
similar arrangements and foreign currency hedges entered into in respect of
any obligations described in clauses (i), (ii) and (iii) or (C) issued or
assumed as the deferred purchase price of property and all conditional sale
obligations of the Company and all obligations of the Company under any
title retention agreement;
(v) all obligations of other Persons of the type referred to in
clauses (ii), (iii) and (iv) and all dividends of other Persons for the
payment of which, in any case, the Company is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including
guarantees of such obligations and dividends; and
(vi) all obligations of the Company consisting of modifications,
renewals, extensions, replacements and refundings of any obligations
described in clauses (i), (ii), (iii), (iv) or (v);
unless, in the instrument creating or evidencing the same or pursuant to which
the same is outstanding, it is provided that such obligations, are not superior
in right of payment to the Debentures; provided, however, that Senior Debt shall
not include (1) any obligation of the Company to any Subsidiary or other
Affiliate of the Company, (2) any liability for federal, state, local or other
taxes owed or owing by the Company, (3) any accounts payable or other liability
to trade creditors arising in the ordinary course of business (including
guarantees thereof or instruments evidencing such liabilities) or (4) that
portion of any Indebtedness that was incurred in violation of this Indenture.
"Sevin Group" means the Estate of Malvin P. Sevin and trusts created
thereunder, Audrey L. Sevin, Irik P. Sevin, Thomas J. Edelman, Margot Gordon and
Phillip Ean Cohen and any trust over which such Persons have sole voting power.
"Sevin Note" means the promissory note, dated December 31, 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
10
<PAGE>
revenues on a consolidated basis for such period, or (ii) any Subsidiary of the
Company which, if merged with all Defaulting Subsidiaries of the Company, would
at the time of determination either (A) have had assets which, as of the date of
the Company's most recent quarterly consolidated balance sheet, would have
constituted at least 10% of the Company's total assets on a consolidated basis
as of such date or (B) have had revenues for the 12-month period ending on the
date of the Company's most recent quarterly consolidated statement of income
which would have constituted at least 10% of the Company's total revenues on a
consolidated basis for such period (each such determination being made in
accordance with generally accepted accounting principles). "Defaulting
Subsidiary" means any Subsidiary of the Company with respect to which an event
described under clause (4), (5), (6) or (7) of Section 6.01 has occurred and is
continuing.
"Stated Maturity" means, with respect to any Indebtedness, the date
specified in such Indebtedness, or in any agreement pursuant to which such
Indebtedness was incurred, as the fixed date on which the principal of such
Indebtedness is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
Indebtedness at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligations" means any Indebtedness of the Company
(whether outstanding on the date hereof or hereafter incurred) which is
subordinate or junior in right of payment to the Debentures.
"Subsidiary" means a corporation of which a majority of the Capital
Stock having voting power under ordinary circumstances to elect a majority of
the board of directors is owned by (i) the Company, (ii) the Company and one or
more Subsidiaries or (iii) one or more Subsidiaries; provided, however, that an
Unrestricted Subsidiary shall be deemed not to be a Subsidiary (except as used
in the definition thereof).
"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.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sec.Sec.
77aaa-77bbbb) as amended and in effect on the date of this Indenture.
"Traber Group" means (i) all the holders of Class C Common Stock as of
the date of this Indenture who are not members of the Sevin Group, (ii) any
Person who receives shares from Persons described in clause (i) without such
transfer of shares being subject to the first refusal right referred to in the
shareholders agreement among the holders of Class C Common Stock dated November
25, 1986, as amended through the date of this Indenture, and (iii) any trust
over which Persons described in clause (i) or (ii) have sole voting power.
11
<PAGE>
"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 assets of the Company or any other
Subsidiary of the Company, directly or indirectly, contingently or otherwise, to
the satisfaction thereof and (b) with which neither the Company nor any other
Subsidiary of the Company has any obligation (i) to subscribe for additional
shares of Capital Stock or other equity interests therein or (ii) to maintain or
preserve such Subsidiary's financial condition or to cause such Subsidiary to
achieve certain levels of operating results. An Unrestricted Subsidiary may be
so designated a Subsidiary, provided that (A) no Default or Event of Default
shall have occurred and be continuing and (B) immediately after giving effect to
such designation, the Company would be able to issue an additional $1.00 of
Funded Debt pursuant to the first paragraph of "Limitation on Funded Debt."
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged and which are not callable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of
such corporation then outstanding and normally entitled to vote in the election
of directors.
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of
which (other than directors' qualifying shares) is owned by the Company or
another Wholly Owned Subsidiary.
"Working Capital Borrowings" means, on any date of determination, all
Indebtedness of the Company and its Subsidiaries on a consolidated basis
incurred to finance current assets.
"Working Capital Financing Agreement" means any agreement entered into
after the date of this Indenture by the Company and bank lenders pursuant to
which the Company issues Working Capital Borrowings.
"1989 Preferred Stock" means the preference stock of the Company
designated as "1989 Preferred Stock, Par Value $0.10."
12
<PAGE>
SECTION 1.02. Other Definitions.
-----------------
Defined in
Term Section
---- ----------
"Affiliate Transaction" . . . . . . . . . . . . . . . . . . 4.07
"Bankruptcy Law" . . . . . . . . . . . . . . . . . . . . . 6.01
"Change of Control" . . . . . . . . . . . . . . . . . . . . 4.08
"covenant defeasance option" . . . . . . . . . . . . . . . 8.01(b)
"Custodian" . . . . . . . . . . . . . . . . . . . . . . . . 6.01
"Event of Default" . . . . . . . . . . . . . . . . . . . . 6.01
"fair value" . . . . . . . . . . . . . . . . . . . . . . . 10.02
"incur" . . . . . . . . . . . . . . . . . . . . . . . . . . 4.03
"legal defeasance option" . . . . . . . . . . . . . . . . . 8.01(b)
"pay the Debentures" . . . . . . . . . . . . . . . . . . . 10.03
"Paying Agent" . . . . . . . . . . . . . . . . . . . . . . 2.03
"Payment Blockage Period" . . . . . . . . . . . . . . . . . 10.03
"Payment in Full" . . . . . . . . . . . . . . . . . . . . . 10.02
"Payment Notice" . . . . . . . . . . . . . . . . . . . . . 10.03
"Registrar" . . . . . . . . . . . . . . . . . . . . . . . . 2.03
"Restricted Payment" . . . . . . . . . . . . . . . . . . . 4.05
SECTION 1.03. Incorporation by Reference of Trust Indenture Act.
-------------------------------------------------
Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture. The following
TIA terms used in this Indenture have the following meanings:
"Commission" means the SEC.
"indenture securities" means the Debentures.
"indenture security holder" means a Debentureholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company and any other
obligor on the Debentures.
All other TIA terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by SEC rule have the
meanings assigned to them by such definitions.
SECTION 1.04. Rules of Construction. Unless the context otherwise
---------------------
requires:
(1) a term has the meaning assigned to it;
13
<PAGE>
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles as in
effect on the date of this Indenture and all accounting calculations shall
be determined in accordance with such principles;
(3) "or" is not exclusive;
(4) "including" means including without limitation;
(5) words in the singular include the plural and words in the plural
include the singular;
(6) unsecured debt shall not be deemed to be subordinate or junior to
secured debt merely by virtue of its nature as unsecured debt;
(7) the principal amount of any noninterest bearing or other discount
security at any date shall be the principal amount thereof that would be
shown on a balance sheet of the issuer dated such date prepared in
accordance with generally accepted accounting principles and accretion of
principal on such security shall be deemed to be the incurrence of
Indebtedness; and
(8) the principal amount of any Preferred Stock shall be (i) the
maximum liquidation value of such Preferred Stock or (ii) the maximum
mandatory redemption or mandatory repurchase price with respect to such
Preferred Stock, whichever is greater.
14
<PAGE>
ARTICLE 2
The Debentures
--------------
SECTION 2.01. Form and Dating. The Debentures and the Trustee's
---------------
certificate of authentication shall be substantially in the form of Exhibit A,
which is hereby incorporated in and expressly made a part of this Indenture.
The Debentures may have notations, legends or endorsements required by law,
stock exchange rule, agreements to which the Company is subject, if any, or
usage (provided that any such notation, legend or endorsement is in a form
acceptable to the Company). Each Debenture shall be dated the date of its
authentication. The terms of the Debentures set forth in Exhibit A are part of
the terms of this Indenture.
SECTION 2.02. Execution and Authentication. Two Officers shall sign
----------------------------
the Debentures for the Company by manual or facsimile signature. The Company's
seal shall be impressed, affixed, imprinted or reproduced on the Debentures and
may be in facsimile form.
If an Officer whose signature is on a Debenture no longer holds that
office at the time the Trustee authenticates the Debenture, the Debenture shall
be valid nevertheless.
A Debenture shall not be valid until an authorized officer of the
Trustee manually signs the certificate of authentication on the Debenture. The
signature shall be conclusive evidence that the Debenture has been authenticated
under this Indenture.
The Trustee shall authenticate and deliver Debentures for original
issue in an aggregate principal amount of up to $125,000,000, upon a written
order of the Company signed by up to two Officers or by an Officer and either an
Assistant Treasurer or an Assistant Secretary of the Company. Such order shall
specify the amount of the Debentures to be authenticated and the date on which
the original issue of Debentures is to be authenticated. The aggregate
principal amount of Debentures outstanding at any time may not exceed that
amount except as provided in Section 2.07.
The Trustee may appoint an authenticating agent reasonably acceptable
to the Company to authenticate the Debentures. Unless limited by the terms of
such appointment, an authenticating agent may authenticate Debentures whenever
the Trustee may do so. Each reference in this Indenture to authentication by
the Trustee includes authentication by such agent. An authenticating agent has
the same rights as any Registrar, Paying Agent or agent for service of notices
and demands.
SECTION 2.03. Registrar and Paying Agent. The Company shall maintain
--------------------------
an office or Agency in the Borough of Manhattan, City of New York where
Securities may be presented for registration of transfer or for exchange (the
"Registrar") and an office or agency where Securities may be presented for
payment (the "Paying Agent"). The Registrar and Paying Agent initially shall be
the Trustee. The Company may change the Registrar or Paying Agent without prior
notice to Holders and the Company or any Subsidiary may act in such capacity.
The Registrar shall keep a register of the Securities and of their transfer and
exchange. The Company may have one or more co-Registrars and one or more
additional Paying Agents. The term "Paying Agent" includes any additional
Paying Agent.
The Company shall enter into an appropriate agency agreement with any
Registrar, Paying Agent or co-registrar not a party to this Indenture, which
shall incorporate the terms of the TIA. The agreement shall implement the
provisions of this Indenture that relate to such agent. The Company shall
notify the Trustee of the name and address of any such agent. If the Company
fails to maintain a Regis
15
<PAGE>
trar or Paying Agent, the Trustee shall act as such and shall be entitled to
appropriate compensation therefor pursuant to Section 7.07. The Company or any
of its domestically incorporated Wholly Owned Subsidiaries may act as Paying
Agent, Registrar, co-registrar or transfer agent.
SECTION 2.04. Paying Agent To Hold Money in Trust. On or prior to
-----------------------------------
each due date of the principal and interest on any Debenture, the Company shall
deposit with the Paying Agent a sum sufficient to pay such principal and
interest when so becoming due. The Company shall require each Paying Agent
(other than the Trustee) to agree in writing that the Paying Agent shall hold in
trust for the benefit of Debentureholders or the Trustee all money held by the
Paying Agent for the payment of principal of or interest on the Debentures and
shall notify the Trustee of any default by the Company in making any such
payment. If the Company or a Subsidiary acts as Paying Agent, it shall
segregate the money held by it as Paying Agent and hold it as a separate trust
fund. The Company at any time may require a Paying Agent to pay all money held
by it to the Trustee and to account for any funds disbursed by the Paying Agent.
Upon complying with this Section, the Paying Agent shall have no further
liability for the money delivered to the Trustee.
SECTION 2.05. Debentureholder Lists. The Trustee shall preserve in
---------------------
as current a form as is reasonably practicable the most recent list available to
it of the names and addresses of Debentureholders. If the Trustee is not the
Registrar, the Company shall furnish to the Trustee, in writing at least five
Business Days before each interest payment date and at such other times as the
Trustee may request in writing, a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of Debentureholders.
SECTION 2.06. Transfer and Exchange. The Debentures shall be issued
---------------------
in registered form and shall be transferable only upon the surrender of a
Debenture for registration of transfer. When a Debenture is presented to the
Registrar or a co-registrar with a request to register a transfer, the Registrar
shall register the transfer as requested if the requirements of Section 8-401(1)
of the Uniform Commercial Code are met. When Debentures are presented to the
Registrar or a co-registrar with a request to exchange them for an equal
principal amount of Debentures of other denominations, the Registrar shall make
the exchange as requested if the same requirements are met. To permit
registration of transfers and exchanges, the Company shall execute and the
Trustee shall authenticate Debentures at the Registrar's or co-registrar's
request. The Company may require payment of a sum sufficient to pay all taxes,
assessments or other governmental charges in connection with any transfer or
exchange pursuant to this Section. The Company shall not be required to make
and the Registrar need not register transfers or exchanges of Debentures
selected for redemption (except, in the case of Debentures to be redeemed in
part, the portion thereof not to be redeemed) for a period of 15 days before a
selection of Debentures to be redeemed or 15 days before an interest payment
date.
Prior to the due presentation for registration of transfer of any
Debenture, the Company, the Trustee, the Paying Agent, the Registrar or any
co-registrar may deem and treat the Person in whose name a Debenture is
registered as the absolute owner of such Debenture for the purpose of receiving
payment of principal of and interest on such Debenture and for all other
purposes whatsoever, whether or not such Debenture is overdue, and none of the
Company, the Trustee, the Paying Agent, the Registrar or any co-registrar shall
be affected by notice to the contrary.
All Debentures issued upon any transfer or exchange pursuant to the
terms of this Indenture shall evidence the same debt and shall be entitled to
the same benefits under this Indenture as the Debentures surrendered upon such
transfer or exchange.
16
<PAGE>
SECTION 2.07. Replacement Debentures. If a mutilated Debenture is
----------------------
surrendered to the Registrar or if the Holder of a Debenture claims that the
Debenture has been lost, destroyed or wrongfully taken, the Company shall issue
and the Trustee shall authenticate a replacement Debenture if the requirements
of Section 8-405 of the Uniform Commercial Code are met and the Holder satisfies
any other reasonable requirements of the Trustee. If required by the Trustee or
the Company, such Holder shall furnish an indemnity bond sufficient in the
judgment of the Company and the Trustee to protect the Company, the Trustee, the
Paying Agent, the Registrar and any co-registrar from any loss which any of them
may suffer if a Debenture is replaced. The Company and the Trustee may charge
the Holder for their expenses in replacing a Debenture.
Every replacement Debenture is an additional obligation of the
Company.
SECTION 2.08. Outstanding Debentures. Debentures outstanding at any
----------------------
time are all Debentures authenticated and delivered by the Trustee except for
those canceled by it, those delivered to it for cancellation and those described
in this Section as not outstanding. A Debenture does not cease to be
outstanding because the Company or an Affiliate of the Company holds the
Debenture.
If a Debenture is replaced pursuant to Section 2.07, it ceases to be
outstanding unless the Trustee and the Company receive proof satisfactory to
them that the replaced Debenture is held by a bona fide purchaser.
If the Paying Agent segregates and holds in trust, in accordance with
this Indenture, on a redemption date or maturity date money sufficient to pay
all principal and interest payable on that date with respect to the Debentures
(or portions thereof) to be redeemed or maturing, as the case may be, and the
Paying Agent is not prohibited from paying such money to the Debentureholders on
that date pursuant to the terms of this Indenture, then on and after that date
such Debentures (or portions thereof) cease to be outstanding and interest on
them ceases to accrue; provided, however, that if the Debentures are to be
redeemed, notice of such redemption has been duly given pursuant to this
Indenture, or provision thereof satisfactory to the Trustee has been made.
SECTION 2.09. Temporary Debentures. Until definitive Debentures are
--------------------
ready for delivery, the Company may prepare and the Trustee shall authenticate
temporary Debentures. Temporary Debentures shall be substantially in the form
of definitive Debentures but may have variations that the Company considers
appropriate for temporary Debentures. Without unreasonable delay, the Company
shall prepare and the Trustee shall authenticate definitive Debentures and
deliver them in exchange for temporary Debentures.
SECTION 2.10. Cancellation. The Company at any time may deliver
------------
Debentures to the Trustee for cancellation. The Registrar and the Paying Agent
shall forward to the Trustee any Debentures surrendered to them for registration
of transfer, exchange or payment. The Trustee and no one else shall cancel and
destroy (subject to the record retention requirements of the Exchange Act) all
Debentures surrendered for registration of transfer, exchange, payment or
cancellation and deliver a certificate of such destruction to the Company unless
the Company directs the Trustee to deliver canceled Debentures to the Company.
The Company may not issue new Debentures to replace Debentures it has redeemed,
paid or delivered to the Trustee for cancellation.
SECTION 2.11. Defaulted Interest. If the Company defaults in a
------------------
payment of interest on the Debentures, the Company shall pay defaulted interest
(plus interest on such defaulted interest to the extent lawful) in any lawful
manner. The Company may pay the defaulted interest to the Persons who
17
<PAGE>
are Debentureholders on a subsequent special record date, which date shall be at
least five Business Days prior to the payment date. The Company shall fix or
cause to be fixed any such special record date and payment date, and, at least
15 days before any such special record date, the Company shall mail to each
Debentureholder a notice that states the special record date, the payment date
and the amount of defaulted interest to be paid.
ARTICLE 3
Redemption
----------
SECTION 3.01. Notices to Trustee. If the Company elects to redeem
------------------
Debentures pursuant to paragraph 5 of the Debentures, it shall notify the
Trustee in writing of the redemption date, the principal amount of Debentures to
be redeemed and the paragraph of the Debentures pursuant to which the redemption
will occur.
The Company shall give each notice to the Trustee provided for in this
Section at least 60 days before the redemption date unless the Trustee consents
to a shorter period. Such notice shall be accompanied by an Officers'
Certificate and an Opinion of Counsel from the Company to the effect that such
redemption will comply with the conditions herein. If fewer than all the
Debentures are to be redeemed, the record date relating to such redemption shall
be selected by the Company and given to the Trustee, which record date shall be
not less than 15 days after the date of notice to the Trustee.
SECTION 3.02. Selection of Debentures To Be Redeemed. If fewer than
--------------------------------------
all the Debentures are to be redeemed, the Trustee shall select the Debentures
to be redeemed pro rata or by lot or by a method that complies with applicable
legal and securities exchange requirements, if any, and that the Trustee
considers fair and appropriate and in accordance with methods generally used at
the time of selection by fiduciaries in similar circumstances. The Trustee
shall make the selection from outstanding Debentures not previously called for
redemption. The Trustee may select for redemption portions of the principal of
Debentures that have denominations larger than $1,000. Debentures and portions
of them the Trustee selects shall be in amounts of $1,000 or a whole multiple of
$1,000. Provisions of this Indenture that apply to Debentures called for
redemption also apply to portions of Debentures called for redemption. The
Trustee shall notify the Company promptly of the Debentures or portions of
Debentures to be redeemed.
SECTION 3.03. Notice of Redemption. At least 30 days but not more
--------------------
than 60 days before a date for redemption of Debentures, the Company shall mail
a notice of redemption by first-class mail to each Holder of Debentures to be
redeemed.
The notice shall identify the Debentures to be redeemed and shall
state:
(1) the redemption date;
(2) the redemption price;
(3) the name and address of the Paying Agent;
(4) that Debentures called for redemption must be surrendered to the
Paying Agent to collect the redemption price;
18
<PAGE>
(5) if fewer than all the outstanding Debentures are to be redeemed,
the identification and principal amounts of the particular Debentures to be
redeemed;
(6) that, unless the Company defaults in making such redemption
payment or the Paying Agent is prohibited from making such payment pursuant
to the terms of this Indenture, interest on Debentures (or portion thereof)
called for redemption ceases to accrue on and after the redemption date;
(7) the paragraph of the Debentures pursuant to which the Debentures
called for redemption are being redeemed; and
(8) that no representation is made as to the correctness or accuracy
of the CUSIP number, if any, listed in such notice or printed on the
Debentures.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense. In such event,
the Company shall provide the Trustee with the information required by this
Section.
SECTION 3.04. Effect of Notice of Redemption. Once notice of
------------------------------
redemption is mailed, Debentures called for redemption become due and payable on
the redemption date and at the redemption price stated in the notice. Upon
surrender to the Paying Agent, such Debentures shall be paid at the redemption
price stated in the notice, plus accrued interest to the redemption date.
Failure to give notice or any defect in the notice to any Holder shall not
affect the validity of the notice to any other Holder.
SECTION 3.05. Deposit of Redemption Price. Prior to the redemption
---------------------------
date, the Company shall deposit with the Paying Agent (or, if the Company or a
Subsidiary is the Paying Agent, shall segregate and hold in trust) money
sufficient to pay the redemption price of and accrued interest on all Debentures
to be redeemed on that date other than Debentures or portions of Debentures
called for redemption which have been delivered by the Company to the Trustee
for cancellation.
SECTION 3.06. Debentures Redeemed in Part. Upon surrender of a
---------------------------
Debenture that is redeemed in part, the Company shall execute and the Trustee
shall authenticate for the Holder (at the Company's expense) a new Debenture
equal in principal amount to the unredeemed portion of the Debenture
surrendered.
ARTICLE 4
Covenants
---------
SECTION 4.01. Payment of Debentures. The Company shall promptly pay
---------------------
the principal of and interest on the Debentures on the dates and in the manner
provided in the Debentures and in this Indenture. Principal and interest shall
be considered paid on the date due if on such date the Trustee or the Paying
Agent holds in accordance with this Indenture money sufficient to pay all
principal and interest then due and the Trustee or the Paying Agent, as the case
may be, is not prohibited from paying such money to the Debentureholders on that
date pursuant to the terms of this Indenture.
19
<PAGE>
The Company shall pay interest on overdue principal at the rate
specified therefor in the Debentures, and it shall pay interest on overdue
installments of interest at the same rate to the extent lawful.
SECTION 4.02. SEC Reports Whether or not required by the rules and
-----------
regulations of the SEC, so long as any Debentures are outstanding, the Company
shall furnish to the Holders of Debentures all quarterly and annual financial
information that would be required to be contained in a filing with the SEC on
Forms 10-Q and 10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants. In addition, whether or not
required by the rules and regulations of the SEC, the Company shall file a copy
of all such information with the SEC for public availability and make such
information available to investors who request it in writing. The Company also
shall comply with the provisions of Sec. 314(a) of the TIA.
SECTION 4.03. Limitation on Funded Debt. (a) The Company shall not,
-------------------------
directly or indirectly, create, incur, issue, assume, 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.
(b) Notwithstanding Section 4.03(a), the Company may incur the
following Funded Debt: (i) Funded Debt owed to and held by a Wholly Owned
Subsidiary; provided, however, that any subsequent issuance or transfer of any
Capital Stock which results in any such Wholly Owned Subsidiary ceasing to be a
Wholly Owned Subsidiary or any subsequent transfer of such Funded Debt (other
than to a Wholly Owned Subsidiary) shall be deemed, in each case, to constitute
the incurrence of such Funded Debt by the Company; (ii) the Debentures and
Funded Debt issued in exchange for, or the proceeds of which are used to refund
or refinance, any Funded Debt permitted by this clause (ii); provided, however,
that (1) the principal amount of the Funded Debt so incurred shall not exceed
the principal amount of the Funded Debt so exchanged, refunded or refinanced and
(2) the Funded Debt so incurred (A) shall not mature prior to the Stated
Maturity of the Funded Debt so exchanged, refunded or refinanced and (B) shall
have an Average Life equal to or greater than the remaining Average Life of the
Funded Debt so exchanged, refunded or refinanced; (iii) Funded Debt (other than
Funded Debt described in clause (i) or (ii) of this paragraph) outstanding on
the date hereof and Funded Debt issued in exchange for, or the proceeds of which
are used to refund or refinance, any Funded Debt permitted by this clause (iii)
or by Section 4.03(a); provided, however, that (1) the principal amount of the
Funded Debt so incurred shall not exceed the principal amount of the Funded Debt
so exchanged, refunded or refinanced, (2) the Funded Debt so incurred (A) shall
not mature prior to the Stated Maturity of the Funded Debt so exchanged,
refunded or refinanced and (B) shall have an Average Life equal to or greater
than the remaining Average Life of the Funded Debt so exchanged, refunded or
refinanced and (3) if the Funded Debt so exchanged, refunded or refinanced is a
Subordinated Obligation, the Funded Debt so incurred shall be subordinated to
the Debentures; and (iv) additional Funded Debt in an aggregate amount not to
exceed $50 million at any one time outstanding; 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 Section 4.03(a), the
Company may elect that amounts of Funded Debt incurred pursuant to this clause
(iv) be deemed to have been incurred pursuant to Section 4.03(a) and be deemed
not to have been incurred pursuant to this clause (iv).
20
<PAGE>
(c) The Company shall not create, incur, assume or permit to exist
any Lien (other than Permitted Liens) upon or with respect to any of the
property of the Company or any Subsidiary to secure Funded Debt that is not
Senior Debt unless contemporaneously therewith effective provision is made to
secure the Debentures equally and ratably with such Funded Debt for so long as
such Funded Debt is secured by a Lien.
SECTION 4.04. Limitation on Indebtedness and Preferred Stock of
-------------------------------------------------
Subsidiaries. The Company shall not permit any Subsidiary to incur any
- ------------
Indebtedness or issue any Preferred Stock except: (i) Indebtedness or Preferred
Stock issued to and held by the Company or a Wholly Owned Subsidiary; provided,
however, that any subsequent issuance or transfer of any Capital Stock which
results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned
Subsidiary or any subsequent transfer of such Indebtedness or Preferred Stock
(other than to the Company or a Wholly Owned Subsidiary) shall be deemed, in
each case, to constitute the incurrence of such Indebtedness or the issuance of
such Preferred Stock, as the case may be, by the issuer thereof; (ii)
Indebtedness incurred or Preferred Stock of a Subsidiary issued and outstanding
on or prior to the date on which such Subsidiary was acquired by the Company
(other than Indebtedness incurred or Preferred Stock issued in contemplation
of, as consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Subsidiary or was
acquired by the Company), provided that at the time such Subsidiary is acquired
by the Company, after giving effect to such Indebtedness or Preferred Stock of
such Subsidiary, the Company's Consolidated EBITDA Coverage Ratio exceeds 2.0 to
1; (iii) Indebtedness or Preferred Stock (other than Indebtedness or Preferred
Stock described in clause (i), (ii), (iv) or (vi) of this Section 4.04) incurred
or issued and outstanding on or prior to the date of this Indenture; (iv)
Indebtedness of a Subsidiary consisting of guarantees issued by such Subsidiary
and outstanding on the date of this Indenture and Indebtedness of a Subsidiary
consisting of guarantees issued subsequent to the date of this Indenture, in
each case, to the extent such guarantee guarantees Bank Debt; (v) Indebtedness
of a Subsidiary (other than Indebtedness described in clause (iv) above)
consisting of guarantees of Funded Debt of the Company permitted by Section
4.03(a), provided that contemporaneously with the incurrence of such
Indebtedness by such Subsidiary, such Subsidiary issues a guarantee for the pro
rata benefit of the Holders of the Debentures that is subordinated to such
Indebtedness of such Subsidiary to the same extent as the Debentures are
subordinated to such Funded Debt of the Company; and (vi) Indebtedness or
Preferred Stock issued in exchange for, or the proceeds of which are used to
refund or refinance, Indebtedness or Preferred Stock referred to in the
foregoing clause (ii) or (iii); provided, however, that (1) the principal amount
of such Indebtedness or Preferred Stock so incurred or issued (the "Refinancing
Indebtedness") shall 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 this 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) shall (A) have a Stated Maturity later
than the Stated Maturity of the Refinanced Indebtedness and (B) shall have an
Average Life equal to or greater than the remaining Average Life of the
Refinanced Indebtedness.
SECTION 4.05. Limitation on Restricted Payments. (a) The Company
---------------------------------
shall not, and shall not permit any Subsidiary, directly or indirectly, to (i)
declare or pay any dividend or make any distribution on or in respect of its
Capital Stock (including any payment in connection with any merger or
consolidation involving the Company) or to the direct or indirect holders of its
Capital Stock (except
21
<PAGE>
(x) dividends or distributions payable solely in its Non-Convertible Capital
Stock or in options, warrants or other rights to purchase its Non-Convertible
Capital Stock and (y) dividends or distributions payable to the Company or a
Subsidiary, and, if a Subsidiary is not wholly owned, to the other shareholders
of such Subsidiary on a pro rata basis in accordance with their ownership
interest in such Subsidiary), (ii) purchase, redeem or otherwise acquire or
retire for value any Capital Stock of the Company or of any direct or indirect
parent of the Company, (iii) purchase, repurchase, redeem, defease or otherwise
acquire or retire for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment, any Subordinated Obligations (other than the
purchase, repurchase or other acquisition of Subordinated Obligations purchased
in anticipation of satisfying a sinking fund obligation, principal installment
or final maturity, in each case due within one year of the date of acquisition)
or (iv) make any Restricted Investment (any such dividend, distribution,
purchase, redemption, repurchase, defeasance, other acquisition or retirement,
or any such Restricted Investment, being herein referred to as a "Restricted
Payment") if at the time the Company or such Subsidiary makes such Restricted
Payment: (1) a Default shall have occurred and be continuing (or would result
therefrom); or (2) the aggregate amount of such Restricted Payment and all other
Restricted Payments subsequent to December 31, 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 shall 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.
(b) The provisions of Section 4.05(a) shall not prohibit: (i) any
purchase or redemption of Capital Stock or Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Capital Stock
issued or sold to a Subsidiary or an employee stock ownership plan or other
trust established by the Company or any Subsidiary); provided, however, that (A)
such purchase or redemption shall be excluded in the calculation of the amount
of Restricted Payments and (B) the Net Cash Proceeds from such sale shall be
excluded from clause (2)(B) of Section 4.05(a); (ii) dividends paid within 60
days after the date of declaration thereof if at such date of declaration such
dividend would have complied with this Section 4.05; provided, however, that at
the time of payment of such dividend, no other Default shall have occurred and
be continuing (or result therefrom); provided further, however, that such
dividend shall be included in the calculation of the amount of Restricted
Payments; (iii) dividends on, and mandatory redemptions and exchanges of, the
1989 Preferred Stock outstanding on the date of this Indenture; provided,
however, that at the time of such dividend, redemption or exchange, no Default
shall have occurred or be continuing; provided further, however, that any such
dividends, redemptions and exchanges shall be included 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 this Indenture, plus (C) the amount of all dividends or other
distributions received in cash by the Company or any of its Wholly Owned
Subsidiaries from, and the amount of any Net Cash Proceeds to the Company or any
of its Wholly Owned Subsidiaries from the sale of Capital Stock (other than a
sale of Capital Stock to the Company, a Subsidiary or Unrestricted Subsidiary of
the Company or
22
<PAGE>
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 this Indenture; provided,
however, that Restricted Investments permitted by this clause (iv) shall be
excluded in the calculation of the amount of Restricted Payments
SECTION 4.06. Limitation on Restrictions on Distributions from
------------------------------------------------
Subsidiaries. The Company shall not, and shall not permit any Subsidiary to,
- ------------
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Subsidiary to: (i) pay
dividends or make any other distributions on its Capital Stock or pay any
Indebtedness owed to the Company, (ii) make any loans or advances to the Company
or (iii) transfer any of its property or assets to the Company, except: (1) any
encumbrance or restriction pursuant to an agreement in effect on the date of
this Indenture; (2) any encumbrance or restriction with respect to a Subsidiary
pursuant to an agreement relating to any Indebtedness issued by such Subsidiary
on or prior to the date on which such Subsidiary was acquired by the Company
(other than Indebtedness issued in contemplation of, as consideration in, or to
provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant to which
such Subsidiary became a Subsidiary or was acquired by the Company) and
outstanding on such date; (3) any encumbrance or restriction pursuant to an
agreement effecting a refinancing of Indebtedness issued pursuant to an
agreement referred to in the foregoing clause (1) or (2) or contained in any
amendment to an agreement referred to in the foregoing clause (1) or (2);
provided, however, that the encumbrances and restrictions contained in any such
refinancing agreement or amendment are no less favorable to Holders of the
Debentures than the encumbrances and restrictions contained in such agreements;
(4) any such encumbrance or restriction consisting of customary 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.
SECTION 4.07. Limitation on Transactions with Affiliates. The
------------------------------------------
Company shall not, and shall not permit any Subsidiary to, conduct any business
or enter into any transaction or series of similar transactions in an aggregate
amount in excess of $100,000 (including the purchase, sale, lease or exchange of
any property or the rendering of any service) with any Affiliate of the Company
or any legal or beneficial owner of 5% or more of any class of Capital Stock of
the Company or with an Affiliate of any such owner (any such business,
transaction or series of similar transactions, an "Affiliate Transaction")
unless the terms of such Affiliate Transaction are: (i) set forth in writing,
(ii) fair to the Company and its Subsidiaries from a financial point of view
(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 shall not prohibit: (i) any Restricted
Payment permitted under Section 4.05, (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
23
<PAGE>
directors of the Company and its Subsidiaries who are not employees of the
Company or its Subsidiaries, (v) any transaction between the Company and a
Wholly Owned Subsidiary or between Wholly Owned Subsidiaries or (vi) the
Investment represented by the Sevin Note.
SECTION 4.08. Change of Control. (a) Upon the occurrence of a Change
-----------------
of Control, each Holder of Debentures shall have the right to require the
Company to repurchase all or any part of such Holder's Debentures at a
repurchase price equal to 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of repurchase (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 this Indenture.
(b) Within 30 days following any Change of Control, the Company shall
mail a notice to each Holder with a copy to the Trustee stating:
(1) that a Change of Control has occurred and that such Holder
has the right to require the Company to purchase such Holder's
Debentures at a purchase price in cash equal to 101% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment
date);
(2) the circumstances and relevant facts regarding such Change
of Control (including information with respect to pro forma historical
income, cash flow and capitalization after giving effect to such
Change of Control);
(3) the purchase date (which shall be no earlier than 30 days
nor later than 60 days from the date such notice is mailed); and
24
<PAGE>
(4) the instructions determined by the Company, consistent with
this Section, that a Holder must follow in order to have its
Debentures purchased.
If, at the time of a Change of Control, the Company is prohibited by the terms
of 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 this paragraph but in
any event within 30 days following any Change of Control, the Company shall (i)
repay in full all Bank Debt or offer to repay in full all Bank Debt and repay
the Bank Debt of each lender who has accepted such offer or (ii) obtain the
requisite consent under the Bank Debt to permit the purchase of the Debentures
as described above. The Company shall first comply with the covenant described
in the preceding sentence before it shall be required to purchase Debentures in
the event of a Change of Control, provided that the Company's failure to comply
with the covenant described in the preceding sentence shall constitute a Default
described in clause 3 of Section 6.01.
(c) Holders electing to have a Debenture purchased shall be required
to surrender the Debenture, with an appropriate form duly completed, to the
Company at the address specified in the notice at least 10 Business Days prior
to the purchase date. Holders shall be entitled to withdraw their election if
the Trustee or the Company receives not later than three Business Days prior to
the purchase date, a facsimile transmission or letter setting forth the name of
the Holder, the principal amount of the Debenture which was delivered for
purchase by the Holder and a statement that such Holder is withdrawing his
election to have such Debenture purchased.
(d) On the purchase date, all Debentures purchased by the Company
under this Section shall be delivered by the Trustee for cancellation, and the
Company shall pay the purchase price plus accrued and unpaid interest, if any,
to the Holders entitled thereto.
(e) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the purchase of Debentures pursuant to this
Section. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this Section, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this Section by virtue thereof.
SECTION 4.09. Limitation on Liens on Subsidiary Stock. The Company
---------------------------------------
shall not directly or indirectly create, assume or suffer to exist, any Lien on
any Capital Stock of any of its Subsidiaries, other than Liens securing Senior
Debt.
SECTION 4.10. Compliance Certificate. The Company shall deliver to
----------------------
the Trustee within 120 days after the end of each fiscal year of the Company
(which, at the date of this Indenture, ends on December 31) an Officers'
Certificate, one signer of which shall be the principal financial officer,
principal executive officer or principal accounting officer, stating that in the
course of the performance by the signers of their duties as Officers of the
Company they would normally have knowledge of any Default by the Company and
whether or not the signers know of any Default that occurred during such period.
If they do, the certificate shall describe the Default, its status and what
action the Company is taking or proposes to take with respect thereto. The
Company also shall comply with TIA Sec. 314(a)(4).
25
<PAGE>
SECTION 4.11. Further Instruments and Acts. Upon request of the
----------------------------
Trustee, the Company shall execute and deliver such further instruments and do
such further acts as may be reasonably necessary or proper to carry out more
effectively the purpose of this Indenture.
ARTICLE 5
Successor Company
-----------------
SECTION 5.01. When Company May Merge or Transfer Assets. The
-----------------------------------------
Company shall not consolidate with or merge with or into, or convey, transfer or
lease all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (if not the
Company) shall be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and
such Person shall expressly assume, by an indenture supplemental hereto,
executed and delivered to the Trustee, in form satisfactory to the Trustee,
all the obligations of the Company under the Debentures and this Indenture;
(ii) immediately after giving effect to such transaction (and
treating any Indebtedness which becomes an obligation of the resulting,
surviving or transferee Person or any Subsidiary as a result of such
transaction as having been issued by such Person or such Subsidiary at the
time of such transaction), no Default shall have occurred and be
continuing;
(iii) immediately after giving effect to such transaction, the
resulting, surviving or transferee Person would be able to incur an
additional $1.00 of Funded Debt pursuant to Section 4.03(a); and
(iv) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with this Indenture.
The resulting, surviving or transferee Person shall be the successor
Company and shall succeed to, and be substituted for, and may exercise every
right and power of, the Company under this Indenture, but the predecessor
Company in the case of a conveyance, transfer or lease shall not be released
from the obligation to pay the principal of and interest on the Debentures.
ARTICLE 6
Defaults and Remedies
---------------------
SECTION 6.01. Events of Default. An "Event of Default" occurs if:
-----------------
(1) the Company defaults in any payment of interest on any Debenture
when the same becomes due and payable, whether or not such payment shall be
prohibited by Article 10, and such Default continues for a period of 30
days;
(2) the Company (i) defaults in the payment of the principal of any
Debenture when the same becomes due and payable at its Stated Maturity,
upon redemption, upon declaration or
26
<PAGE>
otherwise, whether or not such payment shall be prohibited by Article 10 or
(ii) fails to redeem or purchase Debentures when required pursuant to this
Indenture or the Debentures, whether or not such redemption or purchase
shall be prohibited by Article 10;
(3) the Company fails to comply with any of its agreements in the
Debentures or this Indenture (other than those referred to in (1) or (2)
above) and such failure continues for 30 days after the notice specified
below, or if no such notice is given, 30 days after the Trustee gives
notice of such failure;
(4) Indebtedness of the Company or any Significant Subsidiary is not
paid within any applicable grace period after final maturity or is
accelerated by the Holders thereof because of a default, the total amount
of such Indebtedness unpaid or accelerated exceeds $1,000,000 or its
foreign currency equivalent;
(5) the Company or any Significant Subsidiary pursuant to or within
the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief against it in
an involuntary case;
(C) consents to the appointment of a Custodian of it or for any
substantial part of its property; or
(D) makes a general assignment for the benefit of its creditors;
or takes any comparable action under any foreign laws relating to insolvency;
(6) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(A) is for relief against the Company or any Significant
Subsidiary in an involuntary case;
(B) appoints a Custodian of the Company or any Significant
Subsidiary or for any substantial part of its property; or
(C) orders the winding up or liquidation of the Company or any
Significant Subsidiary;
or any similar relief is granted under any foreign laws and the order or decree
remains unstayed and in effect for 60 days; or
(7) any judgment or decree for the payment of money in excess of
$1,000,000 is entered against the Company or any Significant Subsidiary and
is not discharged and either (A) an enforcement proceeding has been
commenced by any creditor upon such judgment or decree or (B) there is a
period of 60 days following the entry of such judgment or decree during
which such judgment or decree is not discharged, waived or the execution
thereof stayed and, in the
27
<PAGE>
case of (B), such default continues for 10 days after the notice specified
below, or no such notice is given, 30 days after the Trustee gives notice
of such failure.
The foregoing shall constitute Events of Default whatever the reason
for any such Event of Default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body.
The term "Bankruptcy Law" means Title 11, United States Code, or any
------------------
similar Federal or state law for the relief of debtors. The term "Custodian"
means any receiver, trustee, assignee, liquidator, custodian or similar official
under any Bankruptcy Law.
The Company shall deliver to the Trustee, within 30 days after the
occurrence thereof, written notice in the form of an Officers' Certificate of
any event which with the giving of notice and the lapse of time would become an
Event of Default under clause (3) or (7), its status and what action the Company
is taking or proposes to take with respect thereto.
SECTION 6.02. Acceleration. If an Event of Default (other than an
------------
Event of Default specified in Section 6.01(5) or (6) with respect to the
Company) occurs and is continuing, the Trustee by notice to the Company, or the
Holders of at least 25% in principal amount of the Debentures by notice to the
Company and the Trustee, may declare the principal of and accrued interest on
all the Debentures to be due and payable. Upon such a declaration, such
principal and interest shall be due and payable immediately. If an Event of
Default specified in Section 6.01(5) or (6) with respect to the Company occurs,
the principal of and interest on all the Debentures shall ipso facto become and
be immediately due and payable without any declaration or other act on the part
of the Trustee or any Debentureholders. The Holders of a majority in principal
amount of the Debentures by notice to the Trustee may rescind an acceleration
and its consequences if the rescission would not conflict with any judgment or
decree and if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
acceleration. No such rescission shall affect any subsequent Default or impair
any right consequent thereto.
SECTION 6.03. Other Remedies. If an Event of Default occurs and is
--------------
continuing, the Trustee may pursue any available remedy to collect the payment
of principal of or interest on the Debentures or to enforce the performance of
any provision of the Debentures or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Debentures or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Debentureholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative.
SECTION 6.04. Waiver of Past Defaults. The Holders of a majority in
-----------------------
principal amount of the Debentures by notice to the Trustee may waive an
existing Default and its consequences except (i) a Default in the payment of the
principal of or interest on a Debenture or (ii) a Default in respect of a
provision that under Section 9.02 cannot be amended without the consent of each
Debentureholder affected. When a Default is waived, it is deemed cured, but no
such waiver shall extend to any subsequent or other Default or impair any
consequent right.
28
<PAGE>
SECTION 6.05. Control by Majority. The Holders of a majority in
-------------------
principal amount of the Debentures may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. However, the Trustee
may refuse to follow any direction that conflicts with law or this Indenture or,
subject to Section 7.01, that the Trustee determines is unduly prejudicial to
the rights of other Debentureholders or would involve the Trustee in personal
liability; provided, however, that the Trustee may take any other action deemed
proper by the Trustee that is not inconsistent with such direction. Prior to
taking any action hereunder, the Trustee shall be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses caused
by taking or not taking such action.
SECTION 6.06. Limitation on Suits. A Debentureholder may not pursue
-------------------
any remedy with respect to this Indenture or the Debentures unless:
(1) the Holder gives to the Trustee written notice stating that an
Event of Default is continuing;
(2) the Holders of at least 25% in principal amount of the Debentures
make a written request to the Trustee to pursue the remedy;
(3) such Holder or Holders offer to the Trustee reasonable security
or indemnity against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of security or indemnity; and
(5) the Holders of a majority in principal amount of the Debentures
do not give the Trustee a direction inconsistent with the request during
such 60-day period.
A Debentureholder may not use this Indenture to prejudice the rights
of another Debentureholder or to obtain a preference or priority over another
Debentureholder.
SECTION 6.07. Rights of Holders To Receive Payment. Notwithstanding
------------------------------------
any other provision of this Indenture, the right of any Holder to receive
payment of principal of and interest on the Debentures held by such Holder, on
or after the respective due dates expressed in the Debentures, or to bring suit
for the enforcement of any such payment on or after such respective dates, shall
not be impaired or affected without the consent of such Holder.
SECTION 6.08. Collection Suit by Trustee. If an Event of Default in
--------------------------
payment of interest or principal specified in Section 6.01(1) or (2) occurs and
is continuing, the Trustee may recover judgment in its own name and as trustee
of an express trust against the Company for the whole amount of principal and
interest remaining unpaid (together with interest on such unpaid interest to the
extent lawful) and the amounts provided for in Section 7.07.
SECTION 6.09. Trustee May File Proofs of Claim. The Trustee may file
--------------------------------
such proofs of claim and other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee and the Debentureholders
allowed in any judicial proceedings relative to the Company, its creditors or
its property and, unless prohibited by law or applicable regulations, may vote
on behalf of the Holders in any election of a trustee in bankruptcy or other
Person performing similar functions, and any Custodian in any such judicial
proceeding is hereby authorized by each Holder to make payments to
29
<PAGE>
the Trustee and, in the event that the Trustee shall consent to the making of
such payments directly to the Holders, to pay to the Trustee any amount due it
for the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and its counsel, and any other amounts due the Trustee under
Section 7.07.
SECTION 6.10. Priorities. If the Trustee collects any money or
----------
property pursuant to this Article 6, it shall pay out the money or property in
the following order:
FIRST: to the Trustee for amounts due under Section 7.07;
SECOND: to holders of Senior Debt to the extent required by Article
10;
THIRD: to Debentureholders for amounts due and unpaid on the
Debentures for principal and interest, ratably, without preference or
priority of any kind, according to the amounts due and payable on the
Debentures for principal and interest, respectively; and
FOURTH: to the Company.
The Trustee may fix a record date and payment date for any payment to
Debentureholders pursuant to this Section. At least 15 days before such record
date, the Company shall mail to each Debentureholder and the Trustee a notice
that states the record date, the payment date and amount to be paid.
SECTION 6.11. Undertaking for Costs. In any suit for the enforcement
---------------------
of any right or remedy under this Indenture or in any suit against the Trustee
for any action taken or omitted by it as Trustee, a court in its discretion may
require the filing by any party litigant in the suit of an undertaking to pay
the costs of the suit, and the court in its discretion may assess reasonable
costs, including reasonable attorneys' fees, against any party litigant in the
suit, having due regard to the merits and good faith of the claims or defenses
made by the party litigant. This Section does not apply to a suit by the
Trustee, a suit by a Holder pursuant to Section 6.07 or a suit by Holders of
more than 10% in principal amount of the Debentures.
SECTION 6.12. Waiver of Stay or Extension Laws. The Company (to the
--------------------------------
extent it may lawfully do so) shall not at any time insist upon, or plead, or in
any manner whatsoever claim or take the benefit or advantage of, any stay or
extension law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of this Indenture; and the Company (to
the extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and shall not hinder, delay or impede the execution
of any power herein granted to the Trustee, but shall suffer and permit the
execution of every such power as though no such law had been enacted.
30
<PAGE>
ARTICLE 7
Trustee
-------
SECTION 7.01. Duties of Trustee. (a) If an Event of Default has
-----------------
occurred and is continuing, the Trustee shall exercise the rights and powers
vested in it by this Indenture and use the same degree of care and skill in
their exercise as a prudent Person would exercise or use under the circumstances
in the conduct of such Person's own affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture and no implied
covenants or obligations shall be read into this Indenture against the
Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture. However,
the Trustee shall examine the certificates and opinions to determine
whether or not they conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own wilful misconduct,
except that:
(1) this paragraph does not limit the effect of paragraph (b) of this
Section;
(2) the Trustee shall not be liable for any error of judgment made in
good faith by a Trust Officer unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05.
(d) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b) and (c) of this Section.
(e) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
(f) Money held in trust by the Trustee need not be segregated from
other funds except to the extent required by law.
(g) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers, if it shall have reasonable grounds to believe that repayment
of such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
31
<PAGE>
(h) Every provision of this Indenture relating to the conduct or
affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Section and to the provisions of the TIA.
SECTION 7.02. Rights of Trustee. (a) The Trustee may rely on any
-----------------
document believed by it to be genuine and to have been signed or presented by
the proper Person. The Trustee need not investigate any fact or matter stated
in the document.
(b) Before the Trustee acts or refrains from acting, it may require
an Officers' Certificate and/or an Opinion of Counsel. The Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance on the
Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be responsible
for the misconduct or negligence of any agent appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits
to take in good faith which it believes to be authorized or within its rights or
powers; provided, however, that the Trustee's conduct does not constitute wilful
misconduct, negligence or bad faith.
(e) The Trustee may consult with counsel, and the advice or opinion
of counsel with respect to legal matters relating to this Indenture and the
Debentures shall be full and complete authorization and protection from
liability in respect to any action taken, omitted or suffered by it hereunder in
good faith and in accordance with the advice or opinion of such counsel.
SECTION 7.03. Individual Rights of Trustee. The Trustee in its
----------------------------
individual or any other capacity may become the owner or pledgee of Debentures
and may otherwise deal with the Company or its affiliates with the same rights
it would have if it were not Trustee. Any Paying Agent, Registrar, co-registrar
or co-paying agent may do the same with like rights. However, the Trustee must
comply with Sections 7.10 and 7.11.
SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be
--------------------
responsible for and makes no representation as to the validity or adequacy of
this Indenture or the Debentures, it shall not be accountable for the Company's
use of the proceeds from the Debentures, and it shall not be responsible for any
statement of the Company in the Indenture or in any document issued in
connection with the sale of the Debentures or in the Debentures other than the
Trustee's certificate of authentication.
SECTION 7.05. Notice of Defaults. If a Default occurs and is
------------------
continuing and if it is known to the Trustee, the Trustee shall mail to each
Debentureholder notice of the Default within 90 days after it occurs. Except in
the case of a Default in payment of principal of or interest on any Debenture
(including payments pursuant to the mandatory redemption provisions of such
Debenture), the Trustee may withhold the notice if and so long as a committee of
its Trust Officers in good faith determines that withholding the notice is in
the interests of Debentureholders.
SECTION 7.06. Reports by Trustee to Holders. As promptly as
-----------------------------
practicable after each May 15 beginning with the May 15 following the date of
this Indenture, and in any event prior to July 15 in each year, the Trustee
shall mail to each Debentureholder a brief report dated as of May 15 that
complies with, and to the extent required under, TIA Sec. 313(a). The
Trustee also shall comply with TIA Sec. 313(b), to the extent applicable.
32
<PAGE>
A copy of each report at the time of its mailing to Debentureholders
shall be filed with the SEC and each stock exchange (if any) on which the
Debentures are listed. The Company agrees to notify promptly the Trustee
whenever the Debentures become listed on any stock exchange and of any delisting
thereof.
SECTION 7.07. Compensation and Indemnity. The Company shall pay to
--------------------------
the Trustee from time to time reasonable compensation for its services. The
Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Company shall reimburse the Trustee upon
request for all reasonable out-of-pocket expenses incurred or made by it,
including costs of collection, in addition to the compensation for its services.
Such expenses shall include the reasonable compensation and expenses,
disbursements and advances of the Trustee's agents, counsel, accountants and
experts. The Company shall indemnify the Trustee against any and all loss,
liability or expense (including attorneys' fees) incurred by it in connection
with the administration of this trust and the performance of its duties
hereunder. The Trustee shall notify the Company promptly of any claim for which
it may seek indemnity. Failure by the Trustee to so notify the Company shall
not relieve the Company of its obligations hereunder. The Company shall defend
the claim and the Trustee may have separate counsel and the Company shall pay
the fees and expenses of such counsel. The Company need not reimburse any
expense or indemnify against any loss, liability or expense incurred by the
Trustee through the Trustee's own wilful misconduct, negligence or bad faith.
To secure the Company's payment obligations in this Section, the
Trustee shall have a lien prior to the Debentures on all money or property held
or collected by the Trustee other than money or property held in trust to pay
principal of and interest on particular Debentures.
The Company's payment obligations pursuant to this Section shall
survive the discharge of this Indenture. When the Trustee incurs expenses after
the occurrence of a Default specified in Section 6.01(5) or (6) with respect to
the Company, the expenses are intended to constitute expenses of administration
under the Bankruptcy Law.
SECTION 7.08. Replacement of Trustee. The Trustee may resign at any
----------------------
time by so notifying the Company. The Holders of a majority in principal amount
of the Debentures may remove the Trustee by so notifying the Trustee and may
appoint a successor Trustee. The Company shall remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes
charge of the Trustee or its property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason (the Trustee in such event being referred to
herein as the retiring Trustee), the Company shall promptly appoint a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become
33
<PAGE>
effective, and the successor Trustee shall have all the rights, powers and
duties of the Trustee under this Indenture. The successor Trustee shall mail a
notice of its succession to Debentureholders. The retiring Trustee shall
promptly transfer all property held by it as Trustee to the successor Trustee,
subject to the lien provided for in Section 7.07.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of a majority in principal amount of the Debentures may petition any
court of competent jurisdiction for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any Debentureholder
may petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.
Notwithstanding the replacement of the Trustee pursuant to this
Section, the Company's obligations under Section 7.07 shall continue for the
benefit of the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger. If the Trustee
---------------------------
consolidates with, merges or converts into, or transfers all or substantially
all its corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee.
In case at the time such successor or successors by merger, conversion
or consolidation to the Trustee shall succeed to the trusts created by this
Indenture any of the Debentures shall have been authenticated but not delivered,
any such successor to the Trustee may adopt the certificate of authentication of
any predecessor Trustee, and deliver such Debentures so authenticated; and in
case at that time any of the Debentures shall not have been authenticated, any
successor to the Trustee may authenticate such Debentures either in the name of
any predecessor hereunder or in the name of the successor to the Trustee; and in
all such cases such certificates shall have the full force which it is anywhere
in the Debentures or in this Indenture provided that the certificate of the
Trustee shall have.
SECTION 7.10. Eligibility; Disqualification. The Trustee shall at
-----------------------------
all times satisfy the requirements of TIA Sec. 310(a). The Trustee shall have a
combined capital and surplus of at least $50,000,000 as set forth in its most
recent published annual report of condition. The Trustee shall comply with TIA
Sec. 310(b); provided, however, that there shall be excluded from the
operation of TIA Sec. 310(b)(1) any indenture or indentures under which
other Debentures or certificates of interest or participation in other
Debentures of the Company are outstanding, including but not limited to the
Indenture, dated as of September 1, 1988, between the Company and the
Trustee, as amended, relating to the Company's Subordinated Notes due 1998,
the Indenture, dated as of January 15, 1991, between the Company and the
Trustee, as amended, relating to the Company's 14.10% Subordinated Notes
due 2001, the Indenture, dated as of April 6, 1993, between the Company and
the Trustee, as amended, relating to the Company's 10.125% Notes and the
Indenture dated as of Februfary 3, 1994, between the Company and the Trustee
relating to the Company's 9.375% Subordinated Debentures, if the
requirements for such exclusion set forth in TIA Sec. 310(b)(1) are met.
SECTION 7.11. Preferential Collection of Claims Against Company. The
-------------------------------------------------
Trustee shall comply with TIA Sec. 311(a), excluding any creditor relationship
listed in TIA Sec. 311(b). A Trustee who has resigned or been removed shall be
subject to TIA Sec. 311(a) to the extent indicated.
34
<PAGE>
ARTICLE 8
Discharge of Indenture; Defeasance
----------------------------------
SECTION 8.01. Discharge of Liability on Debentures; Defeasance. (a)
------------------------------------------------
When (i) the Company delivers to the Trustee all outstanding Debentures (other
than Debentures replaced pursuant to Section 2.07) for cancellation or (ii) all
outstanding Debentures have become due and payable and the Company irrevocably
deposits with the Trustee funds sufficient to pay at maturity all outstanding
Debentures, including interest thereon (other than Debentures replaced pursuant
to Section 2.07), and if in either case the Company pays all other sums payable
hereunder by the Company, then this Indenture shall, subject to Sections 8.01(c)
and 8.06 cease to be of further effect. The Trustee shall acknowledge
satisfaction and discharge of this Indenture on demand of the Company
accompanied by an Officers' Certificate and an Opinion of Counsel and at the
cost and expense of the Company.
(b) Subject to Sections 8.01(c), 8.02 and 8.06, the Company at any
time may terminate (i) all its obligations under the Debentures and this
Indenture ("legal defeasance option") or (ii) its obligations under Sections
4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.09 and 5.01(iii) and the operation of
Sections 6.01(3), 6.01(4), 6.01(5) and (6) (in the case of clauses (5) and (6),
only with respect to Significant Subsidiaries) and 6.01(7) ("covenant defeasance
option"). The Company may exercise its legal defeasance option notwithstanding
its prior exercise of its covenant defeasance option.
If the Company exercises its legal defeasance option, payment of the
Debentures may not be accelerated because of an Event of Default. If the
Company exercises its covenant defeasance option, payment of the Debentures may
not be accelerated because of an Event of Default specified in 6.01(3), 6.01(4),
6.01(5) and (6) (with respect to Significant Subsidiaries) and 6.01(7) or
because of the failure of the Company to comply with Article 4 of this Agreement
(other than Sections 4.01, 4.02, 4.10 and 4.11) or with clause (iii) of Section
5.01.
Upon satisfaction of the conditions set forth herein and upon request
of the Company, the Trustee shall acknowledge in writing the discharge of those
obligations that the Company terminates.
(c) Notwithstanding clauses (a) and (b) above, the Company's
obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 7.07, 7.08, 8.04, 8.05 and
8.06 shall survive until the Debentures have been paid in full. Thereafter, the
Company's obligations in Sections 7.07, 8.04 and 8.05 shall survive.
SECTION 8.02. Conditions to Defeasance. The Company may exercise its
------------------------
legal defeasance option or its covenant defeasance option only if:
(1) the Company irrevocably deposits in trust with the Trustee money
or U.S. Government Obligations for the payment of principal and interest on
the Debentures to maturity or redemption, as the case may be;
(2) the Company delivers to the Trustee a certificate from a
nationally recognized firm of independent accountants expressing their
opinion that the payments of principal and interest when due and without
reinvestment on the deposited U.S. Government Obligations plus any
deposited money without investment will provide cash at such times and in
such amounts as will be sufficient to pay principal and interest when due
on all the Debentures to maturity or redemption, as the case may be;
35
<PAGE>
(3) unless a notice of redemption shall have been mailed pursuant to
Section 3.03 and other arrangements satisfactory to the Trustee for such
redemption shall have been made, 123 days pass after the deposit is made
and during the 123-day period no Default specified in Section 6.01(5) or
(6) with respect to the Company occurs which is continuing at the end of
the period;
(4) no Default has occurred and is continuing on the date of such
deposit and after giving effect thereto;
(5) the deposit does not constitute a default under any other
agreement binding on the Company and is not prohibited by Article 10;
(6) the Company delivers to the Trustee an Opinion of Counsel to the
effect that the trust resulting from the deposit does not constitute, or is
qualified as, a regulated investment company under the Investment Company
Act of 1940;
(7) in the case of the legal defeasance option, the Company shall
have delivered to the Trustee an Opinion of Counsel stating that (i) the
Company has received from, or there has been published by, the Internal
Revenue Service a ruling, or (ii) since the date of this Indenture there
has been a change in the applicable federal income tax law, in either case
to the effect that, and based thereon such Opinion of Counsel shall confirm
that, the Debentureholders will not recognize income, gain or loss for
federal income tax purposes as a result of such defeasance and will be
subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such defeasance had not
occurred;
(8) in the case of the covenant defeasance option, the Company shall
have delivered to the Trustee an Opinion of Counsel to the effect that the
Debentureholders will not recognize income, gain or loss for federal income
tax purposes as a result of such covenant defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such covenant defeasance had not
occurred; and
(9) the company delivers to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that all conditions precedent to the
defeasance and discharge of the Debentures as contemplated by this Article
8 have been complied with.
Before or after a deposit, the Company may make arrangements
satisfactory to the Trustee for the redemption of Debentures at a future date in
accordance with Article 3.
SECTION 8.03. Application of Trust Money. The Trustee shall hold in
--------------------------
trust money or U.S. Government Obligations deposited with it pursuant to this
Article 8. It shall apply the deposited money and the money from U.S. Government
Obligations through the Paying Agent and in accordance with this Indenture to
the payment of principal of and interest on the Debentures. Money and
Debentures so held in trust are not subject to Article 10.
SECTION 8.04. Repayment to Company. The Trustee and the Paying Agent
--------------------
shall promptly turn over to the Company upon request any excess money or
Debentures held by them at any time.
36
<PAGE>
Subject to any applicable abandoned property law, the Trustee and the
Paying Agent shall pay to the Company upon request any money held by them for
the payment of principal or interest that remains unclaimed for two years, and,
thereafter, Debentureholders entitled to the money must look to the Company for
payment as general creditors and all liability of the Trustee or such Paying
Agent with respect to such trust money, and all liability of the Company as
paying agent thereof in the event that the Company shall at such time be serving
as the paying agent, shall thereupon cease; provided, however, that the Trustee
or such Paying Agent, before being required to make such repayment, may at the
expense of the Company mail to each such Holder notice that such money remains
unclaimed and that, after a date specified therein, which shall not be less than
30 days from the date of such mailing, any unclaimed balance of such money
remaining shall be repaid to the Company.
SECTION 8.05. Indemnity for Government Obligations. The Company
------------------------------------
shall pay and shall indemnify the Trustee against any tax, fee or other charge
imposed on or assessed against deposited U.S. Government Obligations or the
principal and interest received on such U.S. Government Obligations.
SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is
-------------
unable to apply any money or U.S. Government Obligations in accordance with this
Article 8 by reason of any legal proceeding or by reason of any order or
judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application, the Company's obligations under this
Indenture and the Debentures shall be revived and reinstated as though no
deposit had occurred pursuant to this Article 8 until such time as the Trustee
or Paying Agent is permitted to apply all such money or U.S. Government
Obligations in accordance with this Article 8; provided, however, that, if the
Company has made any payment of interest on or principal of any Debentures
because of the reinstatement of its obligations, the Company shall be subrogated
to the rights of the Holders of such Debentures to receive such payment from the
money or U.S. Government Obligations held by the Trustee or Paying Agent.
ARTICLE 9
Amendments
----------
SECTION 9.01. Without Consent of Holders. The Company when
--------------------------
authorized by a resolution of the Board of Directors of the Company and the
Trustee may amend this Indenture or the Debentures without notice to or consent
of any Debentureholder:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with Article 5;
(3) to provide for uncertificated Debentures in addition to or in
place of certificated Debentures; provided, however, that the
uncertificated Debentures are issued in registered form for purposes of
Section 163(f) of the Code or in a manner such that the uncertificated
Debentures are described in Section 163(f)(2)(B) of the Code;
(4) to make any change in Article 10 that would limit or terminate
the benefits available to any holder of Senior Debt (or Representatives
therefor) under Article 10;
(5) to add guarantees with respect to the Debentures or to secure the
Debentures;
37
<PAGE>
(6) to add to the covenants of the Company for the benefit of the
Holders or to surrender any right or power herein conferred upon the
Company;
(7) to comply with any requirements of the SEC in connection with
qualifying this Indenture under the TIA; or
(8) to make any change that does not adversely affect the rights of
any Debentureholder.
An amendment under this Section may not make any change that adversely
affects the rights under Article 10 of any holder of Senior Debt then
outstanding unless the holders of such Senior Debt (or any group or
representative thereof authorized to give a consent) consent to such change.
After an amendment under this Section becomes effective, the Company
shall mail to Debentureholders a notice briefly describing such amendment. The
failure to give such notice to all Debentureholders, or any defect therein,
shall not impair or affect the validity of an amendment under this Section.
SECTION 9.02. With Consent of Holders. The Company when authorized
-----------------------
by a resolution of the Board of Directors of the Company and the Trustee may
amend this Indenture or the Debentures without notice to any Debentureholder but
with the written consent of the Holders of at least a majority in principal
amount of the Debentures; provided, however, that no amendment may be made to
Section 4.08 without the written consent of the Holders of at least 66 2/3% in
principal amount of the Debentures. However, without the consent of each
Debentureholder affected, an amendment may not:
(1) reduce the amount of Debentures whose Holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest on
any Debenture;
(3) reduce the principal of or extend the Stated Maturity of any
Debenture;
(4) reduce the premium payable upon the redemption of any Debenture
or change the time at which any Debenture may be redeemed in accordance
with Article 3;
(5) make any Debenture payable in money other than that stated in the
Debenture;
(6) impair the right of any Holder to receive payment of principal of
and interest on such Holder's Debentures on or after the due dates therefor
or to institute suit for the enforcement of any payment on or with respect
to such Holder's Debentures;
(7) make any change in Article 10 that adversely affects the rights
of any Debentureholder under Article 10; or
(8) make any change in Section 6.04 or 6.07 or the second sentence of
this Section.
It shall not be necessary for the consent of the Holders under this
Section to approve the particular form of any proposed amendment, but it shall
be sufficient if such consent approves the substance thereof.
38
<PAGE>
An amendment under this Section may not make any change that adversely
affects the rights under Article 10 of any holder of Senior Debt then
outstanding unless the holders of such Senior Debt (or any group or
representative thereof authorized to give a consent) consent to such change.
After an amendment under this Section becomes effective, the Company
shall mail to Debentureholders a notice briefly describing such amendment. The
failure to give such notice to all Debentureholders, or any defect therein,
shall not impair or affect the validity of an amendment under this Section.
SECTION 9.03. Compliance with Trust Indenture Act. Every amendment
-----------------------------------
to this Indenture or the Debentures shall comply with the TIA as then in effect.
SECTION 9.04. Revocation and Effect of Consents and Waivers. A
---------------------------------------------
consent to an amendment or a waiver by a Holder of a Debenture shall bind the
Holder and every subsequent Holder of that Debenture or portion of the Debenture
that evidences the same debt as the consenting Holder's Debenture, even if
notation of the consent or waiver is not made on the Debenture. However, any
such Holder or subsequent Holder may revoke the consent or waiver as to such
Holder's Debenture or portion of the Debenture if the Trustee receives the
notice of revocation before the date the amendment or waiver becomes effective.
After an amendment or waiver becomes effective, it shall bind every Debenture-
holder.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Debentureholders entitled to give their consent
or take any other action described above or required or permitted to be taken
pursuant to this Indenture. If a record date is fixed, then notwithstanding the
immediately preceding paragraph, those Persons who were Debentureholders at such
record date (or their duly designated proxies), and only those Persons, shall be
entitled to give such consent or to revoke any consent previously given or to
take any such action, whether or not such Persons continue to be Holders after
such record date. No such consent shall be valid or effective for more than 120
days after such record date.
SECTION 9.05. Notation on or Exchange of Debentures. If an amendment
-------------------------------------
changes the terms of a Debenture, the Trustee may require the Holder of the
Debenture to deliver it to the Trustee. The Trustee may place an appropriate
notation on the Debenture regarding the changed terms and return it to the
Holder. Alternatively, if the Company or the Trustee so determines, the Company
in exchange for the Debenture shall issue and the Trustee shall authenticate a
new Debenture that reflects the changed terms. Failure to make the appropriate
notation or to issue a new Debenture shall not affect the validity of such
amendment.
SECTION 9.06. Trustee to Sign Amendments. The Trustee shall sign any
--------------------------
amendment authorized pursuant to this Article 9 if the amendment does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
If it does, the Trustee may but need not sign it. In signing such amendment the
Trustee shall be entitled to receive indemnity reasonably satisfactory to it and
to receive, and (subject to Section 7.01) shall be fully protected in relying
upon, an Officers' Certificate and an Opinion of Counsel stating that such
amendment is authorized or permitted by this Indenture.
SECTION 9.07. Payment for Consent. Neither the Company, any
-------------------
Affiliate of the Company nor any Subsidiary shall, directly or indirectly, pay
or cause to be paid any consideration, whether by way of interest, fee or
otherwise, to any Holder for or as an inducement to any consent,
39
<PAGE>
waiver or amendment of any of the terms or provisions of this Indenture or the
Debentures unless such consideration is offered to be paid or agreed to be paid
to all Holders which so consent, waive or agree to amend in the time frame set
forth in solicitation documents relating to such consent, waiver or agreement.
ARTICLE 10
Subordination
-------------
SECTION 10.01. Agreement To Subordinate. The Company agrees, and
------------------------
each Debentureholder by accepting a Debenture agrees, that the Indebtedness
evidenced by the Debentures is subordinated in right of payment, to the extent
and in the manner provided in this Article 10, to the prior payment of all
Senior Debt and that the subordination is for the benefit of and enforceable by
the holders of Senior Debt. Only Indebtedness of the Company which is Senior
Debt shall rank senior to the Debentures in accordance with the provisions set
forth herein. All provisions of this Article 10 shall be subject to Section
10.12.
SECTION 10.02. Liquidation, Dissolution, Bankruptcy. Upon any
------------------------------------
payment or distribution of the assets of the Company to creditors upon a total
or partial liquidation or a total or partial dissolution of the Company or in a
bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to the Company or its property:
(1) holders of Senior Debt shall be entitled to receive payment in
full of the Senior Debt before Debentureholders shall be entitled to
receive any payment of principal of, or premium, if any, or interest on the
Debentures; and
(2) until the Senior Debt is paid in full, any distribution to which
Debentureholders would be entitled but for this Article 10 shall be made to
holders of Senior Debt as their interests may appear, except that
Debentureholders may receive shares of stock and any debt securities that
are subordinated to Senior Debt to at least the same extent as the
Debentures.
For purposes of this Section "payment in full", as used with respect to Senior
Debt, means the receipt of cash or securities (taken at their fair value at the
time of receipt, determined as hereinafter provided) of the principal amount of
the Senior Debt and premium, if any, and interest thereon to the date of such
payment. "Fair value" means (a) if the securities are quoted on a nationally
recognized securities exchange, the closing price on the day such securities are
received or, if there are no sales reported on that day, the reported closing
bid price on that day, and (b) if the securities are not so quoted, a price
determined by a nationally recognized investment banking house selected by the
Debentureholders and the holders of Senior Debt receiving such securities, such
price to be determined as of the date of receipt of such securities by the
holders of Senior Debt.
SECTION 10.03. Default on Senior Debt. The Company may not pay the
----------------------
principal of, premium, if any, or interest on, the Debentures or make any
deposit pursuant to Section 8.01 and may not repurchase, redeem or otherwise
retire any Debentures (collectively, "pay the Debentures") if (i) any Designated
Senior Debt is not paid when due or (ii) any other default on Designated Senior
Debt occurs and the maturity of such Designated Senior Debt is accelerated in
accordance with its terms unless, in either case, (x) the default has been cured
or waived and any such acceleration has been rescinded or (y) such Designated
Senior Debt has been paid in full; provided, however, that the Company may pay
the
40
<PAGE>
Debentures without regard to the foregoing if the Company and the Trustee
receive written notice approving such payment from the Representative of each
issue of Designated Senior Debt. During the continuance of any default (other
than a default described in clause (i) or (ii) of the preceding sentence) with
respect to any Designated Senior Debt pursuant to which the maturity thereof may
be accelerated immediately without further notice (except such notice as may be
required to effect such acceleration) or the expiration of any applicable grace
periods, the Company may not pay the Debentures for a period (a "Payment
Blockage Period") commencing upon the receipt by the Company and the Trustee of
written notice of such default from the Representative of the Bank Debt or a
Representative of the holders of any Designated Senior Debt specifying an
election to effect a Payment Blockage Period (a "Payment Blockage Notice") and
ending 179 days thereafter (or earlier if such Payment Blockage Period is
terminated (i) by written notice to the Trustee and the Company from the
Representative which gave such Payment Blockage Notice, (ii) by repayment in
full of such Designated Senior Debt or (iii) because the default specified in
such Payment Blockage Notice is no longer continuing). Notwithstanding the
provisions described in the immediately preceding sentence (but subject to the
provisions contained in the first sentence of this Section), unless the holders
of such Designated Senior Debt or the Representative of such holders shall have
accelerated the maturity of such Designated Senior Debt, the Company may resume
payments on the Debentures after the end of such Payment Blockage Period. Not
more than one Payment Blockage Notice may be given in any consecutive 360-day
period, irrespective of the number of defaults with respect to Designated Senior
Debt during such period.
SECTION 10.04. Acceleration of Payment of Debentures. If payment of
-------------------------------------
the Debentures is accelerated because of an Event of Default, the Company or the
Trustee shall promptly notify the holders of the Designated Senior Debt or their
Representatives of the acceleration.
SECTION 10.05. When Distribution Must Be Paid Over. If a
-----------------------------------
distribution is made to Debentureholders that because of this Article 10 should
not have been made to them, the Debentureholders who receive the distribution
shall hold it in trust for holders of Senior Debt and pay it over to them as
their interests may appear.
SECTION 10.06. Subrogation. After all Senior Debt is paid in full
-----------
and until the Debentures are paid in full, Debentureholders shall be subrogated
to the rights of holders of Senior Debt to receive distributions applicable to
Senior Debt. A distribution made under this Article 10 to holders of Senior
Debt which otherwise would have been made to Debentureholders is not, as between
the Company and Debentureholders, a payment by the Company on Senior Debt.
SECTION 10.07. Relative Rights. This Article 10 defines the relative
---------------
rights of Debentureholders and holders of Senior Debt. Nothing in this
Indenture shall:
(1) impair, as between the Company and Debentureholders, the
obligation of the Company, which is absolute and unconditional, to pay
principal of, premium, if any, and interest on the Debentures in accordance
with their terms; or
(2) prevent the Trustee or any Debentureholder from exercising its
available remedies upon a Default, subject to the rights of holders of
Senior Debt to receive distributions otherwise payable to Debentureholders.
SECTION 10.08. Subordination May Not Be Impaired by Company. No
--------------------------------------------
right of any holder of Senior Debt to enforce the subordination of the
Indebtedness evidenced by the Debentures shall be impaired by any act or failure
to act by the Company or by its failure to comply with this Indenture.
41
<PAGE>
SECTION 10.09. Rights of Trustee and Paying Agent. Notwithstanding
----------------------------------
Section 10.03, the Trustee or Paying Agent may continue to make payments on the
Debentures and shall not be charged with knowledge of the existence of facts
that would prohibit the making of any such payments unless, not less than two
Business Days prior to the date of such payment, a Trust Officer of the Trustee
receives notice satisfactory to it that payments may not be made under this
Article 10. The Company, the Registrar or co-registrar, the Paying Agent, a
Representative or a holder of Senior Debt may give the notice; provided,
however, that, if an issue of Senior Debt has a Representative, only the
Representative may give the notice.
The Trustee in its individual or any other capacity may hold Senior
Debt with the same rights it would have if it were not Trustee. The Registrar
and co-registrar and the Paying Agent may do the same with like rights. The
Trustee shall be entitled to all the rights set forth in this Article 10 with
respect to any Senior Debt which may at any time be held by it, to the same
extent as any other holder of Senior Debt, and nothing in Article 7 shall
deprive the Trustee of any of its rights as such holder. Nothing in this
Article 10 shall apply to claims of, or payments to, the Trustee under or
pursuant to Section 7.07.
SECTION 10.10. Distribution or Notice to Representative. Whenever a
----------------------------------------
distribution is to be made or a notice given to holders of Senior Debt, the
distribution may be made and the notice given to their Representative (if any).
SECTION 10.11. Article 10 Not To Prevent Events of Default or Limit
----------------------------------------------------
Right To Accelerate. The failure to make a payment pursuant to the Debentures
- -------------------
by reason of any provision in this Article 10 shall not be construed as
preventing the occurrence of a Default. Nothing in this Article 10 shall have
any effect on the right of the Debentureholders or the Trustee to accelerate the
maturity of the Debentures.
SECTION 10.12. Trust Moneys Not Subordinated. Notwithstanding
-----------------------------
anything contained herein to the contrary, payments from money or the proceeds
of U.S. Government Obligations held in trust under Article 8 by the Trustee for
the payment of principal of and interest on the Debentures shall not be
subordinated to the prior payment of any Senior Debt or subject to the
restrictions set forth in this Article 10, and none of the Debentureholders
shall be obligated to pay over any such amount to the Company or any holder of
Senior Debt of the Company or any other creditor of the Company.
SECTION 10.13. Trustee Entitled To Rely. Upon any payment or
------------------------
distribution pursuant to this Article 10, the Trustee and the Debentureholders
shall be entitled to rely (i) upon any order or decree of a court of competent
jurisdiction in which any proceedings of the nature referred to in Section 10.02
are pending, (ii) upon a certificate of the liquidating trustee or agent or
other Person making such payment or distribution to the Trustee or to the
Debentureholders or (iii) upon the Representatives for the holders of Senior
Debt for the purpose of ascertaining the Persons entitled to participate in such
payment or distribution, the holders of the Senior Debt and other indebtedness
of the Company, the amount thereof or payable thereon, the amount or amounts
paid or distributed thereon and all other facts pertinent thereto or to this
Article 10. In the event that the Trustee determines, in good faith, that
evidence is required with respect to the right of any Person as a holder of
Senior Debt to participate in any payment or distribution pursuant to this
Article 10, the Trustee may request such Person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Debt held by
such Person, the extent to which such Person is entitled to participate in such
payment or distribution and other facts pertinent to the rights of such Person
under this Article 10, and, if such evidence is not furnished,
42
<PAGE>
the Trustee may defer any payment to such Person pending judicial determination
as to the right of such Person to receive such payment. The provisions of
Sections 7.01 and 7.02 shall be applicable to all actions or omissions of
actions by the Trustee pursuant to this Article 10.
SECTION 10.14. Trustee To Effectuate Subordination. Each
-----------------------------------
Debentureholder by accepting a Debenture authorizes and directs the Trustee on
his behalf to take such action as may be necessary or appropriate to acknowledge
or effectuate the subordination between the Debentureholders and the holders of
Senior Debt as provided in this Article 10 and appoints the Trustee as
attorney-in-fact for any and all such purposes.
SECTION 10.15. Trustee Not Fiduciary for Holders of Senior Debt. The
------------------------------------------------
Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior
Debt and shall not be liable to any such holders if it shall mistakenly pay over
or distribute to Debentureholders or the Company or any other Person, money or
assets to which any holders of Senior Debt shall be entitled by virtue of this
Article 10 or otherwise.
SECTION 10.16. Reliance by Holders of Senior Debt on Subordination
---------------------------------------------------
Provisions. Each Debentureholder by accepting a Debenture acknowledges and
- ----------
agrees that the foregoing subordination provisions are, and are intended to be,
an inducement and a consideration to each holder of any Senior Debt, whether
such Senior Debt was created or acquired before or after the issuance of the
Debentures, to acquire and continue to hold, or to continue to hold, such Senior
Debt and such holder of Senior Debt shall be deemed conclusively to have relied
on such subordination provisions in acquiring and continuing to hold, or in
continuing to hold, such Senior Debt.
ARTICLE 11
Miscellaneous
-------------
SECTION 11.01. Trust Indenture Act Controls. If any provision of
----------------------------
this Indenture limits, qualifies or conflicts with another provision which is
required to be included in this Indenture by the TIA, the required provision
shall control.
SECTION 11.02. Notices. Any notice or communication shall be in
-------
writing and delivered in Person or mailed by first-class mail addressed as
follows:
if to the Company:
Petroleum Heat and Power Co., Inc.
2187 Atlantic Street
Stamford, CT 06902
Attention of Chief Executive Officer
if to the Trustee:
Chemical Bank
450 West 33rd Street, 15th Floor
43
<PAGE>
New York, NY 10001
Attention of Corporate Trust Group
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Debentureholder shall be
mailed first class to the Debentureholder at the Debentureholder's address as it
appears on the registration books of the Registrar and shall be sufficiently
given if so mailed within the time prescribed.
Failure to mail a notice or communication to a Debentureholder or any
defect in it shall not affect its sufficiency with respect to other
Debentureholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.
SECTION 11.03. Communication by Holders with Other Holders.
-------------------------------------------
Debentureholders may communicate pursuant to TIA Sec.Sec. 312(b) with other
Debentureholders with respect to their rights under this Indenture or the
Debentures. The Company, the Trustee, the Registrar and anyone else shall have
the protection of TIA Sec. 312(c).
SECTION 11.04. Certificate and Opinion as to Conditions Precedent.
--------------------------------------------------
Upon any request or application by the Company to the Trustee to take or refrain
from taking any action under this Indenture, the Company shall furnish to the
Trustee:
(1) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of the signers,
all conditions precedent, if any, provided for in this Indenture relating
to the proposed action have been complied with; and
(2) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of such counsel,
all such conditions precedent have been complied with.
SECTION 11.05. Statements Required in Certificate or Opinion. Each
---------------------------------------------
certificate or opinion with respect to compliance with a covenant or condition
provided for in this Indenture shall include:
(1) a statement that the Person making such certificate or opinion
has read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of such Person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with; and
(4) a statement as to whether or not, in the opinion of such Person,
such covenant or condition has been complied with.
44
<PAGE>
SECTION 11.06. When Debentures Disregarded. In determining whether
---------------------------
the Holders of the required principal amount of Debentures have concurred in any
direction, waiver or consent, Debentures owned by the Company or by any Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the Company shall be disregarded and deemed not to be
outstanding, except that, for the purpose of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent, only
Debentures which the Trustee knows are so owned shall be so disregarded. Also,
subject to the foregoing, only Debentures outstanding at the time shall be
considered in any such determination.
SECTION 11.07. Rules by Trustee, Paying Agent and Registrar. The
--------------------------------------------
Trustee may make reasonable rules for action by or a meeting of
Debentureholders. The Registrar and the Paying Agent may make reasonable rules
for their functions.
SECTION 11.08. Governing Law. This Indenture and the Debentures
-------------
shall be governed by, and construed in accordance with, the laws of the State of
New York but without giving effect to applicable principles of conflicts of law
to the extent that the application of the laws of another jurisdiction would be
required thereby.
SECTION 11.09. No Recourse Against Others. A director, officer,
--------------------------
employee or stockholder, as such, of the Company shall not have any liability
for any obligations of the Company under the Debentures or this Indenture or for
any claim based on, in respect of or by reason of such obligations or their
creation. By accepting a Debenture, each Debentureholder shall waive and
release all such liability. The waiver and release shall be part of the consi-
deration for the issue of the Debentures.
SECTION 11.10. Successors. All agreements of the Company in this
----------
Indenture and the Debentures shall bind its successors. All agreements of the
Trustee in this Indenture shall bind its successors.
SECTION 11.11. Multiple Originals. The parties may sign any number
------------------
of copies of this Indenture. Each signed copy shall be an original, but all of
them together represent the same agreement. One signed copy is enough to prove
this Indenture.
SECTION 11.12. Table of Contents; Headings. The table of contents,
---------------------------
cross-reference sheet and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not intended
to be considered a part hereof and shall not modify or restrict any of the terms
or provisions hereof.
45
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Indenture to be duly
executed as of the date first written above.
PETROLEUM HEAT AND POWER CO., INC.
By: ______________________________
Name:
Title:
CHEMICAL BANK, as Trustee,
By: ______________________________
Name:
Title:
46
<PAGE>
EXHIBIT A
(FORM OF FACE OF DEBENTURE)
No. $_________
___% Subordinated Debenture Due 2005
Petroleum Heat and Power Co., Inc., a Minnesota corporation, promises
to pay to or registered assigns, the
principal sum of Dollars on ______________, 2005.
Interest Payment Dates: _____________ and _____________.
Record Dates: _____________ and _______________.
Additional Provisions of this Debenture are set forth on the other
side of this Debenture.
Dated:
PETROLEUM HEAT AND POWER CO., INC.,
by
--------------------------------------------------
Chief Executive Officer
[Seal]
--------------------------------------------------
Secretary
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
This is one of the Debentures referred to in the within mentioned
Indenture.
CHEMICAL BANK
by
--------------------------
Authorized Officer
<PAGE>
[FORM OF REVERSE SIDE OF DEBENTURE]
___% Subordinated Debenture Due 2005
1. Interest
--------
Petroleum Heat and Power Co., Inc., a Minnesota corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Company"), promises to pay interest on the
principal amount of this Debenture at the rate per annum shown above. The
Company shall pay interest semiannually in arrears on ____________ and
_____________ of each year, commencing _____________, 1995. Interest on the
Debentures shall accrue from the most recent date to which interest has been
paid or, if no interest has been paid, from ___________, 1995. Interest shall
be computed on the basis of a 360-day year of twelve 30-day months. The Company
shall pay interest on overdue principal at the rate borne by the Debentures plus
1% per annum, and it shall pay interest on overdue installments of interest at
the same rate to the extent lawful.
2. Method of Payment
-----------------
The Company shall pay interest on the Debentures (except defaulted
interest) to the Persons who are registered Holders of Debentures at the close
of business on the _____________ or ____________ next preceding the interest
payment date even if Debentures are canceled after the record date and on or
before the interest payment date. Holders must surrender Debentures to a Paying
Agent to collect principal payments. The Company shall pay principal and
interest in money of the United States that at the time of payment is legal
tender for payment of public and private debts. However, the Company may pay
principal and interest by check payable in such money. It may mail an interest
check to a Holder's registered address.
3. Paying Agent and Registrar
--------------------------
Initially, Chemical Bank, a New York corporation ("Trustee"), shall
act as Paying Agent and Registrar. The Company may appoint and change any
Paying Agent, Registrar or co-Registrar without notice. The Company or any of
its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent,
Registrar or co-registrar.
4. Indenture
---------
The Company issued the Debentures under an Indenture dated as of
_______________, 1995 ("Indenture"), between the Company and the Trustee. The
terms of the Debentures include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C.
Sec.Sec. 77aaa-77bbbb) as amended and in effect on the date of the Indenture
(the "Act"). Capitalized terms used herein and not defined herein have the
meanings ascribed thereto in the Indenture. The Debentures are subject to
all such terms, and Debentureholders are referred to the Indenture and the
Act for a statement of those terms.
A-2
<PAGE>
The Debentures are general unsecured obligations of the Company
limited to $125,000,000 aggregate principal amount (subject to Section 2.07 of
the Indenture). The Indenture imposes certain limitations on the issuance of
debt by the Company, the issuance of debt and preferred stock by the
Subsidiaries, the creation of liens on the Capital Stock of any Subsidiary, the
payment of dividends and other distributions and acquisitions or retirements of
the Company's Capital Stock and Subordinated Indebtedness, certain investments
and certain transactions with Affiliates. In addition, the Indenture limits the
ability of the Company and the Subsidiaries to restrict distributions and
dividends from Subsidiaries.
5. Optional Redemption
-------------------
The Debentures will be redeemable for cash on or after __________,
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
_________________ of the years indicated:
If redeemed during the 12-month period beginning ______________,
Year Percentage
---- ----------
2000 . . . . . . . . . . . . . . . . . ________%
2001 . . . . . . . . . . . . . . . . . ________
2002 . . . . . . . . . . . . . . . . . ________
2003 and thereafter . . . . . . . . . . 100.000
In addition, at any time prior to _____________, 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, Star
Gas Corporation ("Star Gas") or of a subsidiary of Star Gas, at a redemption
price of ___% of the principal amount thereof, plus accrued and unpaid interest
thereon, provided that at least 65% of the aggregate principal amount of the
Debentures issued under the Indenture remain outstanding immediately following
any such redemption.
6. Notice of Redemption
--------------------
Notice of redemption shall be mailed at least 30 days but not more
than 60 days before the redemption date to each Holder of Debentures to be
redeemed at his registered address. Debentures in denominations larger than
$1,000 may be redeemed in part but only in whole multiples of $1,000. If money
sufficient to pay the redemption price of and accrued interest on all Debentures
(or portions thereof) to be redeemed on the redemption date is deposited with
the Paying Agent on or before the redemption date and certain other conditions
are satisfied, on and after such date interest ceases to accrue on such
Debentures (or such portions thereof) called for redemption.
A-3
<PAGE>
7. Offer to Purchase Upon a Change of Control
------------------------------------------
Upon the occurrence of a Change of Control, as defined in the
Indenture, each Holder of Debentures shall have the right to require the Company
to repurchase all or any part of such Holder's Debentures at a repurchase price
equal to 101% of the principal amount thereof plus accrued and unpaid interest,
if any, to the date of repurchase pursuant to Section 4.08 of the Indenture.
8. Subordination
-------------
The Debentures are subordinated to Senior Debt, as defined in the
Indenture. To the extent provided in the Indenture, Senior Debt must be paid
before the Debentures may be paid. The Company agrees, and each Holder by
accepting a Debenture agrees, to the subordination provisions contained in the
Indenture and authorizes the Trustee to give it effect and appoints the Trustee
as attorney-in-fact for such purpose.
9. Denominations; Transfer; Exchange
---------------------------------
The Debentures are in registered form without coupons in denominations
of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange
Debentures in accordance with the Indenture. The Registrar may require a
Holder, among other things, to furnish appropriate endorsements or transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture. The Registrar need not register the transfer of or exchange any
Debentures selected for redemption (except, in the case of a Debenture to be
redeemed in part, the portion of the Debenture not to be redeemed) or any
Debentures for a period of 15 days before a selection of Debentures to be
redeemed or 15 days before an interest payment date.
10. Persons Deemed Owners
---------------------
The registered Holder of this Debenture may be treated as the owner of
it for all purposes.
11. Unclaimed Money
---------------
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its request unless an abandoned property law designates another
Person. After any such payment, Holders entitled to the money must look only to
the Company and not to the Trustee for payment.
12. Defeasance
----------
Subject to certain conditions, the Company at any time may terminate
some or all of its obligations under the Debentures and the Indenture if the
Company deposits with the Trustee money or U.S. Government Obligations for the
payment of principal and interest on the Debentures to redemption or maturity,
as the case may be.
A-4
<PAGE>
13. Amendment, Waiver
-----------------
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Debentures may be amended with the written consent of the
Holders of at least a majority in principal amount outstanding of the Debentures
and (ii) any default or noncompliance with any provision may be waived with the
written consent of the Holders of a majority in principal amount outstanding of
the Debentures. Subject to certain exceptions set forth in the Indenture,
without the consent of any Holder, the Company and the Trustee may amend the
Indenture or the Debentures to cure any ambiguity, omission, defect or
inconsistency, or to comply with Article 5 of the Indenture, or to provide for
uncertificated Debentures in addition to or in place of certificated Debentures,
or to add guarantees with respect to the Debentures or to secure the Debentures,
or to add covenants for the benefit of Holders or surrender rights and powers
conferred on the Company, or to comply with any requirements of the SEC in
connection with qualifying the Indenture under the Act, or to make certain
changes in the subordination provisions, or to make any change that does not
adversely affect the rights of any Holder.
14. Defaults and Remedies
---------------------
Under the Indenture, Events of Default include (i) default for 30
days in payment of interest on the Debentures; (ii) default in payment of
principal on the Debentures at maturity, upon redemption pursuant to paragraph 5
hereof, upon declaration or otherwise, or failure by the Company to purchase
Debentures when required; (iii) failure by the Company to comply with other
agreements in the Indenture or the Debentures, in certain cases subject to
notice and lapse of time; (iv) certain accelerations (including failure to pay
within any grace period after final maturity) of other Debt of the Company or
any Significant Subsidiary if the amount accelerated (or so unpaid) exceeds
$1,000,000; (v) certain events of bankruptcy or insolvency with respect to the
Company or any Significant Subsidiary; and (vi) certain judgments or decrees for
the payment of money in excess of $1,000,000. If an Event of Default occurs and
is continuing, the Trustee or the Holders of at least 25% in principal amount of
the Debentures may declare all the Debentures to be due and payable immediately.
Certain events of bankruptcy or insolvency are Events of Default which shall
result in the Debentures being due and payable immediately upon the occurrence
of such Events of Default.
Debentureholders may not enforce the Indenture or the Debentures
except as provided in the Indenture. The Trustee may refuse to enforce the
Indenture or the Debentures unless it receives reasonable indemnity or security.
Subject to certain limitations, Holders of a majority in principal amount of the
Debentures may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Debentureholders notice of any continuing Default
(except a Default in payment of principal or interest) if it determines that
withholding notice is in their interest.
15. Trustee Dealings with the Company
---------------------------------
Subject to certain limitations imposed by the Act, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Debentures and may otherwise deal with and collect obligations owed
to it by the Company or its affiliates and may otherwise deal with the Company
or its affiliates with the same rights it would have if it were not Trustee.
A-5
<PAGE>
16. No Recourse Against Others
--------------------------
A director, officer, employee or stockholder, as such, of the Company
or the Trustee shall not have any liability for any obligations of the Company
under the Debentures or the Indenture or for any claim based on, in respect of
or by reason of such obligations or their creation. By accepting a Debenture,
each Debentureholder waives and releases all such liability. The waiver and
release are part of the consideration for the issue of the Debentures.
17. Authentication
--------------
This Debenture shall not be valid until an authorized officer of the
Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Debenture.
18. Abbreviations
-------------
Customary abbreviations may be used in the name of a Holder or an
assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
19. CUSIP Numbers
-------------
Pursuant to a recommendation promulgated by the Committee on Uniform
Debenture Identification Procedures, the Company has caused CUSIP numbers to be
printed on the Debentures and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Debentureholders. No representation
is made as to the accuracy of such numbers either as printed on the Debentures
or as contained in any notice of redemption and reliance may be placed only on
the other identification numbers placed thereon.
The Company shall furnish to any Debentureholder upon written request
and without charge to the Debentureholder a copy of the Indenture which has in
it the text of this Debenture in larger type. Requests may be made to:
Petroleum Heat and Power Co., Inc.
2187 Atlantic Street
Stamford, CT 06902
Attention of:
James Bottiglieri, Vice President and Controller.
A-6
<PAGE>
ASSIGNMENT FORM
To assign this Debenture, fill in the form below:
I or we assign and transfer this Debenture to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this
Debenture on the books of the Company. The agent may substitute another to act
for him.
Date: Your Signature:
--------------- ----------------------------------------
Sign exactly as your name appears on the other side of this Debenture.
A-7
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Debenture purchased by the
Company pursuant to Section 4.08 of the Indenture, check the box:
/ /
If you want to elect to have only part of this Debenture
purchased by the Company pursuant to Section 4.08 of the indenture, state the
amount:
$
Date: Your Signature:
-------------- ---------------------------------------
(Sign exactly as your name appears on
the other side of the Debenture)
Signature Guarantee:
------------------------------------------------------------
(Signature must be guaranteed by a member firm of the New
York Stock Exchange or a commercial bank or trust company)
A-8
Exhibit 5
January 30, 1995
Petroleum Heat and Power Co., Inc.
2187 Atlantic Street
Stamford, Connecticut 06902
Re: Registration Statement on Form S-2 (33-57059)
---------------------------------------------
Ladies and Gentlemen:
We refer to the above-captioned registration statement
(the "Registration Statement"), under the Securities Act of 1933,
as amended (the "1933"), filed by Petroleum Heat and Power Co.,
Inc., a Minnesota corporation (the "Company"), with the
Securities and Exchange Commission relating to the proposed
public offering by the Company of (i) $125,000,000 principal
amount of __% Subordinated Debentures due 2005 (the
"Debentures"), and (ii) 3,450,000 shares (the "Shares") of Class
A Common Stock, par value $.10 per share (the "Class A Common
Stock"). Each term used herein that is defined in the
Registration Statement and not otherwise defined herein shall
have the meaning specified in the Registration Statement.
We have examined copies of the Restated Articles of
Incorporation of the Company, a copy of the Amended By-Laws of
the Company, the form of Indenture between the Company and
Chemical Bank, as trustee (the "Indenture"), filed as Exhibit 4.6
to the Registration Statement and such other records and
documents as we have deemed relevant and necessary to the
opinions hereinafter expressed. In such examination, we have
assumed the genuineness of all signatures and the authenticity of
all documents submitted to us as certified or photostatic copies.
Based upon the foregoing and relying upon statements of
fact contained in the documents we have examined, we are of the
opinion that:
(i) the issuance and sale of $125,000,000
principal amount of Debentures have been duly authorized, and
when executed and authenticated in accordance with the Indenture
and delivered to and paid for pursuant to the Debenture
Underwriting Agreement, a form of which was filed as Exhibit 1.1
to the Registration Statement, will constitute legal, valid and
binding obligations of the Company, except as may be limited by
bankruptcy, insolvency, reorganization or other similar laws
affecting creditors' rights generally and subject to the general
principles of equity (regardless of whether such enforceability
is considered in a proceeding in equity or at law); and the
holders of the Debentures will be entitled to the benefits of the
Indenture; and
<PAGE>
(ii) the issuance and sale of the Shares of Class
A Common Stock have been duly authorized, and when issued
pursuant to the Common Stock Underwriting Agreement, a form of
which was filed as Exhibit 1.2 to the Registration Statement,
will be legally and validly issued, fully paid and non-
assessable.
We consent to being named in the Registration Statement
and related Prospectus as counsel who are passing upon the
legality of the Debentures and the Shares for the Company, and to
the reference to our name under the caption "Legal Matters" in
such Prospectus. We also consent to your filing copies of this
opinion as an exhibit to the aforesaid Registration Statement.
Very truly yours,
PHILLIPS, NIZER, BENJAMIN,
KRIM & BALLON
By: /s/ Alan Shapiro,
----------------------------
Alan Shapiro, a Partner
Exhibit 7
DORSEY & WHITNEY
A ~~PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS~~
~~
220 SOUTH SIXTH STREET
MINNEAPOLIS, MINNESOTA 5540~2-1498
(6~12) 340-2600~~
TELEX 2~9-O605
F~AX (61~2)~ 340-2868~
Exhibit 7
January 23, 1995
Petroleum Heat and Power Co., Inc.
2187 Atlantic Street
Stamford, Connecticut 06902
Re: Liquidation Preference on Certain Capital Stocks
Gentlemen:
Pursuant to the Securities Act of 1933, Petroleum Heat
and Power Co., Inc., a Minnesota corporation (the "Company"), has
filed with the Securities and Exchange Commission a Registration
Statement (Registration No. 33-57059) for the registration of
$125,000,000 of Subordinated Debentures Due 2005 (the "Debentures")
and 3,450,000 shares of Class A Common Stock. In connection with
the foregoing and as more fully set forth below, the Company has
requested our opinion as to certain matters relating to the
liquidation preferences on the Company's Class B Common Stock and its
Cumulative Redeemable Exchangeable Preferred Stock ("1989 Preferred
Stock"). The Class B Common Stock and the 1989 Preferred Stock
(collectively, the "Subject Capital Stocks") both have liquidation
preferences which exceed their par value.
The Company's authorized capital stock consists of
40,000,000 shares of Class A Common Stock, $.10 par value; 6,500,000
shares of Class B Common Stock, $.10 par value; 5,000,000 shares of
Class C Common Stock, $.10 par value; 250,000 shares of 1989 Preferred
Stock, $.10 par value; 159,722 shares of Cumulative Redeemable
Exchangeable 1991 Preferred Stock (the "1991 PreFerred Stock"), $.10
par value; 10,000 shares of Cumulative Redeemable Exchangeable 1993
Preferred Stock, $1,000 par value (the "1993 Preferred Stock"); and
4,990,000 shares of undesignated Preferred Stock, $.10 par value. You
have advised us that as of September 30, 1994, there were 18,992,579
shares of Class A Common Stock; 25,963 shares of Class B Common
Stock; 2,545,139 shares of Class C Common Stock; and 208,332 shares of
1989 Preferred Stock issued and outstanding. No shares of 1991
Preferred Stock or 1993 Preferred Stock were outstanding.
<PAGE>
DORSEY & WHITNEY
Petroleum Heat and Power Co. Inc.
January 23, 1995
Page 2
Upon liquidation, the holders of the Class B Common
Stock are entitled to receive a preferential distribution of $5.70 per
share and the holders of the 1989 Preferred Stock are entitled to
receive $100 per share plus accrued and unpaid dividends.
With respect to the Subject Capital Stocks, you have
inquired (i) whether there are any restrictions on the Company's
surplus by reason of the excess of the liquidation preference of the
Subject Capital Stocks over their par value and (ii) if so, whether
any remedies are available to security holders before or after payment
of any dividend that would reduce the Company's surplus to an amount
less than the amount of the excess of the liquidation preference of
the Subject Capital Stocks over their par value.
The Company is incorporated under Chapter 302A of the
Minnesota Statutes. Section 302A.551 of the Minnesota Statutes governs
"distributions" by a corporation, which, as defined in Section
302A.011 of the Minnesota Statutes, includes dividends, and provides,
in pertinent part, as follows:
"302A.551. Distributions.
Subdivision 1. When permitted. (a) The board may authorize
and cause the corporation to make a distribution only if the
board determines...that the corporation will be able to pay its
debts in the ordinary course of business after making the
distribution and the board does not know before the distribution
is made that the determination was or has become erroneous.
(b) The corporation may make the distribution if it is
able to pay its debts in the ordinary course of business after
making the distribution.
Subd. 2. Determination presumed proper. A determination
that the corporation will be able to pay its debts in the
ordinary course of business after the distribution is presumed
to be proper if the determination is made in compliance with
the standard of conduct provided in section 302A.25 on the
basis of financial information prepared in accordance with
accounting methods, or a fair valuation or other method,
reasonable in the circumstances. No liability under
<PAGE>
DORSEY & WHITNEY
Petroleum Heat and Power Co., Inc.
January 23, 1995
Page 3
section 302A.251 or 302A.559 will accrue if the requirements
of this subdivision have been met.
Subd. 4. Restrictions. (a) A distribution may be made to
the holders of a class or series of shares only if:
(1) All amounts payable to the holders of shares
having a preference for the payment of that
kind of distribution...are paid; and
(2) The payment of the distribution does not reduce
the remaining net assets of the corporation below
the aggregate preferential amount payable in the
event of liquidation to the holders of shares
having preferential rights, unless the distribution
is made to those shareholders in the order and to
the extent of their respective priorities ....
Based on a review of Section 302A.551 and such other
matters as we have deemed relevant, we advise you that, in our
opinion:
1. Chapter 302A of the Minnesota Statutes was enacted
in 1981, and we are unaware of any controlling decisions under
Minnesota law relating to the foregoing questions. Chapter 302A of
the Minnesota Statutes, generally, and Section 302A.551, in
particular, do not utilize the concept of surplus and, accordingly,
do not place any restrictions on the Company's surplus by reason of
the difference between the par value of the Subject Capital Stocks
and the liquidation preference of such stocks. Section 302A.551,
Subdivision 4(a)(2) does, however, provide that distributions may
not be made if, as a result, the remaining net assets of the Company
would be reduced below the aggregate liquidation preference of the
Subject Capital Stocks and the Company's net assets would, to such
extent, be restricted and would not be available for distribution.
2. In the event a distribution is made by the Company
not in compliance with the provisions of Section 302A.551, the
shareholders of the Company who received a distribution made in
violation of Section 302A.551 and the directors who failed to vote
against (or consented in writing to) a distribution made in violation
of Section 302A.551 may be liable to the Company to the extent
provided by Sections 302A.557 and 302A.559 of the Minnesota Statutes.
<PAGE>
DORSEY & WHITNEY
Petroleum Heat and Power Co., Inc.
January 23, 1995
Page 4
We hereby consent to the filing of this opinion as
an exhibit to the Registration Statement referred to above and to
the references to our firm under "Legal Matters" in the Prospectuses
relating to the Debentures and the Class A Common Stock, respectively,
included in the Registration Statement.
Dated: January 23, 1995
Very truly yours,
JDA
Dorsey & Whitney P.L.L.P. is a
Professional Limited Liability Partnership
Exhibit 24.1
EXHIBIT 24.1
ACCOUNTANT'S CONSENT
The Stockholders and Board of Directors of
PETROLEUM HEAT AND POWER CO., INC.:
We consent to the use of our reports relating to the
consolidated financial statements and financial statement
schedules of Petroleum Heat and Power Co., Inc. and to the
consolidated financial statements of Star Gas Corporation
included and incorporated by reference herein and to the
reference to our firm under the headings "Selected Financial and
Other Data" and "Experts" in the Prospectuses.
KPMG PEAT MARWICK LLP
New York, New York
January 30, 1995
Exhibit 24.2
EXHIBIT 24.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption
"Experts" and the use of our report dated December 3, 1992 except
for Note 5, as to which the date is April 1, 1993, with respect
to the consolidated statements of operations, shareholders'
equity and cash flows of Star Gas Corporation and subsidiaries
for the year ended September 30, 1992 in the Registration
Statement (Form S-2) and related prospectus of Petroleum Heat and
Power Co., Inc. for the registration of $125,000,000 Subordinated
Debentures and 3,450,000 shares of Class A Common Stock.
ERNST & YOUNG LLP
New York, New York
January 28, 1995
Exhibit 24.4
EXHIBIT 24.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this
Registration Statement of our report on the financial statements
of the Fuel Oil and Liquid Propane Divisions of DeBlois Oil
Company as of and for the years ended December 31, 1993 and 1992
and to the reference made to us under the caption "Experts" in
the Prospectuses.
SANSIVERI, RYAN, SULLIVAN & CO.
Providence, Rhode Island
January 30, 1995
