<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 12, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PETROLEUM HEAT AND POWER CO., INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MINNESOTA 5983 06-1183025
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
2187 ATLANTIC STREET
STAMFORD, CT 06902
(203) 325-5400
(Address, including zip code, and telephone number,
including area code of Registrant's principal executive office)
IRIK P. SEVIN
Chairman and Chief Executive Officer
Petroleum Heat and Power Co., Inc.
2187 Atlantic Street
Stamford, CT 06902
(203) 325-5400
(Name, address, including zip code, and telephone number,
including area code of agent for service)
With a copy to:
ALAN SHAPIRO, ESQ.
Phillips Nizer Benjamin Krim & Ballon LLP
666 Fifth Avenue
New York, NY 10103
(212) 977-9700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
TITLE OF EACH CLASS MAXIMUM AMOUNT OF
OF SECURITIES TO AGGREGATE REGISTRATION
BE REGISTERED OFFERING PRICE FEE
<S> <C> <C>
12 7/8% Series B Exchangeable Preferred Stock due 2009................ $30,000,000 $9,090
</TABLE>
(1) Calculated pursuant to Rule 457(f) and (o) solely for purposes of
calculating the registration fee.
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 OF THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 12, 1997
PROSPECTUS [LOGO]
PETROLEUM HEAT AND POWER CO., INC.
OFFER TO EXCHANGE
UP TO 1,200,000 SHARES OF ITS
12 7/8% SERIES B EXCHANGEABLE PREFERRED STOCK DUE 2009
FOR
UP TO 1,200,000 SHARES OF ITS
12 7/8% SERIES A EXCHANGEABLE PREFERRED STOCK DUE 2009
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1997, UNLESS EXTENDED
Petroleum Heat and Power Co., Inc., a Minnesota corporation ("Petro" or the
"Company"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal (which
together constitute the "Exchange Offer"), to exchange up to 1,200,000 shares of
its 12 7/8% Series B Exchangeable Preferred Stock with a liquidation preference
of $25 per share (the "New Preferred Stock") for an equal number of shares of
its 12 7/8% Series A Exchangeable Preferred Stock with a liquidation preference
of $25 per share (the "Old Preferred Stock" and together with the New Preferred
Stock, the "Preferred Stock") with the holders (the "Holders") thereof. The
terms of the New Preferred Stock are identical in all material respects to the
terms of the Old Preferred Stock, except that the New Preferred Stock has been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and, therefore will not bear legends restricting its transfer and will not
contain certain terms providing for an increase in the dividend on the Old
Preferred Stock under certain circumstances relating to the Registration Rights
Agreement (as defined). The Preferred Stock will be issued pursuant to, and be
entitled to the benefits of, the Certificate of Designation (as defined)
governing the Old Preferred Stock.
On any scheduled dividend payment date on or after February 15, 2000, the
Company may, at its option, exchange all but not less than all of the shares of
Old Preferred Stock and New Preferred Stock then outstanding, respectively, for
the Company's 12 7/8% Junior Exchangeable Debentures due 2009 (the "Exchange
Debentures").
The New Preferred Stock will accrue dividends from and including the date of
consummation of the Exchange Offer. Dividends on the New Preferred Stock will be
payable in cash on February 15, May 15, August 15 and November 15 of each year,
commencing on May 15, 1997. Additionally, dividends will accrue from the last
dividend payment date on which dividends were paid on the Old Preferred Stock
surrendered in exchange therefor, or, if no dividends have been paid on the Old
Preferred Stock, from the date of original issuance of the Old Preferred Stock.
The New Preferred Stock will be redeemable at the option of the Company, in
whole or in part, at any time on or after February 15, 2002 at the redemption
prices set forth herein, plus accumulated and unpaid dividends and Liquidated
Damages (as defined), if any, to the date of redemption. Upon a Change of
Control (as defined), the Company will be required to offer to each Holder of
New Preferred Stock to purchase all or any part of such Holder's New Preferred
Stock at an offer price in cash equal to 101% of the liquidation preference
thereof, plus accumulated an unpaid dividends and Liquidated Damages, if any, to
the date of purchase. See "Description of Preferred Stock."
Prior to this Exchange Offer, there has been no public market for the New
Preferred Stock. If a market for the New Preferred Stock should develop, the New
Preferred Stock could trade at a discount from its liquidation preference. There
can be no assurance that an active public market for the New Preferred Stock
will develop.
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR OLD PREFERRED
STOCK IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OF ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
(COVER PAGE CONTINUED)
The date of this Prospectus is , 1997.
<PAGE>
The New Preferred Stock will rank PARI PASSU in right of payment with
respect to all Parity Securities (as defined), including the 1989 Preferred
Stock (as defined), and junior in right of payment to all Senior Securities (as
defined), including the Class B Stock (as defined). As of December 31, 1996,
after giving pro forma effect to the Private Offering (as defined) the New
Preferred Stock would have been (a) junior in right of payment to approximately
$294.4 million of total Indebtedness (as defined) of the Company, (b) junior in
right of payment to 11,000 shares of Class B Stock, having an aggregate
liquidation preference of $0.1 million, and (c) PARI PASSU in right of payment
to 125,000 shares of 1989 Preferred Stock, having an aggregate liquidation
preference of $12.5 million. In addition, the Company has the ability to issue
up to 800,000 additional shares of New Preferred Stock, subject to certain
conditions. See "Description of Preferred Stock--Preferred Stock--Ranking."
On any scheduled dividend payment date on or after February 15, 2000, the
Company may, at its option, exchange all but not less than all of the shares of
Preferred Stock then outstanding for the Company's 12 7/8% Junior Subordinated
Exchange Debentures due 2009 (the "Exchange Debentures"). See "Description of
Preferred Stock--Preferred Stock--Exchange."
Interest on the Exchange Debentures will be payable semi-annually on
February 15 and August 15 of each year, commencing on the first such date
following issuance of the Exchange Debentures. The Exchange Debentures will be
redeemable at the option of the Company, in whole or in part, at any time on or
after February 15, 2002 at the redemption prices set forth herein, plus accrued
and unpaid interest and Liquidated Damages, if any, to the date of redemption.
Upon a Change of Control, the Company will be required to offer to each holder
of Exchange Debentures to purchase all or any part of such holder's Exchange
Debentures at a repurchase price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages, if any, to the date of
purchase. See "Description of Preferred Stock--The Exchange Debentures".
The New Preferred Stock is being offered hereunder in order to satisfy
certain obligations of the Company contained in the Registration Rights
Agreement dated as of February 18, 1997 (the "Registration Rights Agreement"),
by and between the Company and Donaldson, Lufkin & Jenrette Securities
Corporation (the "Initial Purchaser"). Based on interpretations by the staff of
the Securities and Exchange Commission (the "Commission") set forth in no-action
letters issued to third parties, the Company believes that the New Preferred
Stock issued pursuant to the Exchange Offer in exchange for Old Preferred Stock
may be offered for resale, resold and otherwise transferred by any Holder
thereof (other than any such Holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act), without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that such New Preferred Stock is acquired in the ordinary course of
such Holder's business and such Holder has no arrangement with any person to
participate in the distribution of such New Preferred Stock. Notwithstanding the
foregoing, each broker-dealer that receives New Preferred Stock for its own
account pursuant to the Exchange Offer must acknowledge that (i) Old Preferred
Stock tendered by it in the Exchange Offer was acquired in the ordinary course
of its business as a result of market-making or other trading activities and
(ii) it will deliver a prospectus in connection with any resale of New Preferred
Stock received in the Exchange Offer. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with any resale of the New
Preferred Stock received in exchange for Old Preferred Stock where such Old
Preferred Stock was acquired by such broker-dealer as a result of market-making
or other trading activities (other than Old Preferred Stock acquired directly
from the Company). The Company has agreed that, for a period of one year
following the consummation of the Exchange Offer, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
The Company has been advised by the Initial Purchaser that it intends to
make a market for the New Preferred Stock; however, the Initial Purchaser is not
obligated to do so. Any market-making may be
2
<PAGE>
discontinued at any time, and there is no assurance that an active public market
will develop or, that if such a market develops, that it will continue. This
Prospectus may be used by the Initial Purchaser in connection with offers and
sales of the New Preferred Stock which may be made by it from time to time in
market-making transactions at negotiated prices relating to prevailing market
prices at the time of such sale. The Initial Purchaser may act as principal or
agent in such transaction.
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer (which shall
not include the expenses of any Holder in connection with resales of the New
Preferred Stock). Tenders of Old Preferred Stock pursuant to the Exchange Offer
may be withdrawn at any time prior to 5:00 p.m. New York City time on the
Expiration Date. The Exchange Offer is subject to certain customary conditions.
In the event the Company terminates the Exchange Offer and does not accept for
exchange any Old Preferred Stock, the Company will promptly return the Old
Preferred Stock to the Holders thereof. The Company will give oral or written
notice of any extension, amendment, non-acceptance or termination of the
Exchange Offer to the Holders of the Old Preferred Stock as promptly as
practicable, such notice in the case of any extension to be issued by means of a
press release or other public announcement no later than 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date. The Company can in its sole discretion, extend the Exchange Offer
indefinitely, subject to the Company's obligation to pay Liquidated Damages if
the Exchange Offer is not consummated by , 1997 and, under certain
circumstances, file a shelf registration statement with respect to the Preferred
Stock. See "The Exchange Offer".
The Exchange Offer is not conditioned upon any minimum number of shares of
Old Preferred Stock being tendered for exchange pursuant thereto.
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 AND 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.
3
<PAGE>
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. Such material may
also be accessed electronically at the Commission's site on the World Wide Web
located at http:\\www.sec.gov. 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-4 (the "Exchange Offer Registration Statement") under the
Securities Act with respect to the New Preferred Stock being offered by this
Prospectus. This Prospectus does not contain all of the information set forth in
the Exchange Offer Registration Statement and the exhibits and schedules
thereto, certain portions of which have been omitted pursuant to the rules and
regulations of the Commission. Statements made in this Prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete with respect to each such contract, agreement or other document filed
or incorporated by reference as an exhibit to the Exchange Offer Registration
Statement, reference is made to such exhibit for a more complete description of
the matter involved, and each such statement is qualified in its entirety by
such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996 ("1996 Annual Report"), is 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 termination of the Exchange Offer 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 Finance Petroleum Heat and Power Co.,
Inc., 2187 Atlantic Street, Stamford, CT 06902 (telephone (203) 325-5400).
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act which
represent the Company's expectations or beliefs concerning future events that
involve risks and uncertainties, including those associated with the effect of
national and regional economic conditions, the effect of weather conditions on
the Company's financial performance, the price and supply of home heating oil,
the ability of the Company to obtain new accounts
4
<PAGE>
and retain existing accounts and the ability of the Company to realize cost
reductions from its operational restructuring program. All statements other than
statements of historical facts included in this Prospectus, including, without
limitation, the statements under "Prospectus Summary -- The Company,"
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and "Business" and elsewhere herein, are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from the Company's expectations ("Cautionary
Statements") are disclosed in this Prospectus, including, without limitation, in
conjunction with the forward-looking statements included in this Prospectus and
under "Risk Factors." All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.
5
<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 HOLDERS IN
CONNECTION WITH THE EXCHANGE OFFER.
THE COMPANY
Petroleum Heat and Power Co., Inc. is the largest retail distributor of home
heating oil in the United States, with total sales of $608.2 million and
Adjusted EBITDA (as defined) of $50.3 million for the year ended December 31,
1996. See "--Summary Financial Data." Petro serves approximately 400,000
customers in the Northeast and Mid-Atlantic states, including the metropolitan
areas of New York City, Boston, Washington, D.C., Baltimore, Providence and
Hartford.
In addition to selling home heating oil, the Company installs and repairs
heating equipment. The Company considers such services, which are not typically
designed to generate profits, to be an integral part of its basic fuel oil
business and generally does not provide service to any person who is not a
heating oil customer. The Company provides home heating equipment repair service
24 hours a day, 365 days a year, generally within four hours of request, and
regularly provides various service incentives to obtain and retain customers. To
a limited extent, the Company also markets other petroleum products, including
diesel fuel and gasoline, to commercial customers.
The Company's volume, cash flow and operating profits before depreciation
and amortization have increased significantly since 1980, primarily because of
its acquisition of other home heating oil businesses. 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 consolidator in this
industry and, since 1979, when current management assumed control, has acquired
178 retail heating oil distributors. Petro acquires distributors in both new and
existing markets and integrates them into the Company's existing operations.
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. As a result of its growth strategy, heating
oil volume sold increased from 59.4 million gallons in 1980 to 456.1 million
gallons for the year ended December 31, 1996, a compound annual growth rate of
13.6%. The Company believes that it is uniquely positioned to continue its
strategy given the Company's acquisition expertise, reputation, access to
capital and the absence of competitors 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.
In recent years, the Company has also increased its focus on its operating
strategy. As a result of a major strategic study aimed at improving
organizational and marketing effectiveness, Petro has recently begun to
implement an operational restructuring program designed to improve the Company's
productivity and responsiveness to customers. Based on its size, the Company is
seeking to redefine its organizational structure and to access developments in
communications and computer technology which are currently in use by other large
distribution businesses, but which are generally not used by retail heating oil
companies. In addition, Petro is seeking to create a premium brand image that
will capitalize on both its size and the lack of consumer brand awareness in the
heating oil industry. These efforts are designed to reduce operating costs,
maximize customer satisfaction, build name recognition and minimize net customer
attrition.
As part of the implementation of this operational restructuring program, in
April 1996, the Company opened its first regional customer service center on
Long Island, New York. This state-of-the-art facility
6
<PAGE>
currently conducts all activities which interface with the Company's
approximately 100,000 Long Island customers, including sales, customer service,
credit and accounting. The Company is also now operating under the single brand
name of "Petro" on Long Island, rather than the 12 brand names previously in
use. In connection with the opening of the customer service center, five
full-function branches were consolidated into three strategically located
delivery and service depots to serve the Company's customers more efficiently.
In October 1996, the Company announced the formation of its Mid-Atlantic
operating region. The Company will continue to test and refine its systems in
preparation for implementation of optimal operating structures throughout the
Company. The Company anticipates that the total cost of this program will be
approximately $21.0 million over four years, of which approximately $6.0 million
has been incurred to date.
The Company's business, the sale of home heating oil principally to
residential customers, has been relatively stable primarily due to the following
fundamental industry characteristics: (i) residential demand for heating oil has
been relatively unaffected by general economic conditions due to the
non-discretionary nature of heating oil purchases, (ii) homeowners have tended
to remain with their existing distributors of heating oil 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 weather can have a material effect on the
Company's sales in any particular year, temperatures over the past 30 years have
been relatively stable, and as a result have not had a significant impact on the
Company's long-term performance.
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 eight (8) states and the District of Columbia.
RECENT DEVELOPMENTS
In January 1997, the Company announced that its Board of Directors elected
Thomas M. Isola, the Company's Chief Operating Officer, to the additional post
of President, reflecting his role in designing and implementing the Company's
regionalization and operational restructuring program.
In January 1997, the Company also announced that, in keeping with its
strategy of deleveraging the Company, and in connection with its operational
restructuring, it will reduce its common stock dividend to an annual rate of 30
cents per share, as compared to the previous annual rate of 60 cents per share.
On March 3, 1997 the Company declared a quarterly dividend of $.075 per share
payable on April 1, 1997. In addition, certain members of the Company's Board of
Directors and management and certain affiliated parties have announced their
current intention to reinvest dividends on 3.5 million shares of common stock
through the Company's dividend reinvestment plan.
In February 1997, the Company completed a private placement (the "Private
Offering") under Rule 144A of the Securities Act, pursuant to which the Company
issued and sold $30 million of Old Preferred Stock, from which the Company
received net proceeds of approximately $28 million, after payment of discounts
and commissions to the Initial Purchaser and offering expenses. The Company
intends to use the net proceeds of the Private Offering for general corporate
purposes, including the Company's operational restructuring and acquisition
programs, and, until applied, to reduce the amounts outstanding under the
Company's working capital facilities.
Simultaneously with the closing of the Private Offering, the Company entered
into agreements (the "Private Debt Modification") with the holders of its 11.96%
Notes (as defined) and 1989 Preferred Stock pursuant to which (a) holders of $30
million in aggregate principal amount of senior 11.96% Notes extended the final
maturity date of such Notes from October 1, 1998 to October 1, 2002; (b) the
Company exchanged $30 million in aggregate principal amount of subordinated
11.96% Notes for a like principal amount of newly issued senior 11.96% Notes
with a final maturity of October 1, 2002; and (c) the holders
7
<PAGE>
of the 1989 Preferred Stock agreed to certain covenant modifications that
permitted the Company to issue the Preferred Stock.
For the first quarter of 1997, the Company expects financial results to be
significantly impacted by weather, which, through February, was between 9.0% and
16.1% warmer than normal in the markets in which the Company operates.
STAR GAS TRANSACTIONS
In December 1993, the Company purchased a 29.5% equity interest in Star Gas
Corporation ("Star Gas") for $16.0 million and acquired options to purchase the
remaining equity interest. In December 1994, the Company completed the
acquisition of Star Gas for approximately $25.9 million by exercising its right
to purchase the remaining outstanding common equity of Star Gas through the
payment of $3.8 million in cash and the issuance of 2.5 million shares of the
Company's Class A Common Stock. In November 1995, Star Gas Partners, L.P., a
Delaware limited partnership ("Star Gas Partners"), and Star Gas organized Star
Gas Propane, L.P., a Delaware limited partnership (the "Operating Partnership").
Star Gas is the general partner of both Star Gas Partners and the Operating
Partnership. In December 1995, Petro transferred substantially all of its
propane assets and liabilities to Star Gas, which then transferred substantially
all of its assets and liabilities to the Operating Partnership in exchange for
general and limited partner interests. In December 1995, Star Gas Partners
completed its initial public offering of approximately 2.9 million common units
of limited partner interests at a price of $22 per unit and, concurrently, Star
Gas issued approximately $85.0 million in first mortgage notes to certain
institutional investors.
As a result of the foregoing transactions (the "Star Gas Transactions"),
Star Gas received a 46.5% equity interest in Star Gas Partners and Petro
received net proceeds of $134.7 million, of which $72.6 million was used to
repay $67.8 million in principal amount of long-term debt and $6.0 million was
reserved to guarantee Star Gas Partners' minimum quarterly distribution, leaving
a balance of approximately $56.1 million. The Company expects to receive $5.5
million annually in distributions upon payment by Star Gas Partners of its
minimum quarterly distribution.
With the acquisition of Star Gas on December 7, 1994, and its operation as a
wholly-owned subsidiary of the Company until December 19, 1995, the Company's
operations were consolidated and classified into two business segments: Home
Heating Oil and Propane. For financial information regarding the Company's
business segments, see Note 16 to the Company's Consolidated Financial
Statements included in the 1996 Annual Report and incorporated by reference
herein. As a result of the Star Gas Transactions, the Company currently accounts
for its investment in Star Gas Partners following the equity method of
accounting.
In August 1996, Star Gas Partners announced that it had retained Morgan
Stanley & Co. Incorporated to assist it in the development and consideration of
strategic alternatives including the possibility of a sale or merger. In March
1997, Star Gas Partners announced that as a result of this review, as well as
its assessment of its financial results and prospects, it had determined to
discontinue this effort and to retain its independence and pursue opportunities
for growth in the coming years.
8
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
Registration Rights Agreement... The Old Preferred Stock was sold by the Company on
February 18, 1997 to the Initial Purchaser who placed the
Old Preferred Stock with certain qualified institutional
and accredited investors. In connection therewith, the
Company executed and delivered for the benefit of the
holders of the Old Preferred Stock the Registration Rights
Agreement providing for, among other things, the Exchange
Offer.
The Exchange Offer.............. One share of New Preferred Stock is being offered in
exchange for each issued and outstanding share of Old
Preferred Stock. The Company will issue the New Preferred
Stock to Holders promptly following the Expiration Date.
See "Risk Factors--Consequences of Failure to Exchange."
Holders of the Old Preferred Stock do not have appraisal
or dissenters' rights in connection with the Exchange
Offer under the Minnesota Business Corporation Act, the
governing law of the state of incorporation of the
Company.
Minimum Condition............... The Exchange Offer is not conditioned upon any minimum
number of shares of Old Preferred Stock being tendered or
accepted for exchange.
Expiration Date................. 5:00 p.m., New York City time, on 1997, unless
the Exchange Offer is extended, in which case the term
"Expiration Date" means the latest date and time to which
the Exchange Offer is extended.
Conditions to the Exchange
Offer......................... The Exchange Offer is subject to certain customary
Exchange Offer conditions, which may be waived by the
Company. See "The Exchange Offer--Conditions." The Company
reserves the right to terminate or amend the Exchange
Offer at any time prior to the Expiration Date upon the
occurrence of any such condition. NO VOTE OF THE COMPANY'S
SECURITY HOLDERS IS REQUIRED TO EFFECT THE EXCHANGE OFFER
AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING SOUGHT
HEREBY.
Procedures for Tendering Old
Preferred Stock............... Each Holder of Old Preferred Stock wishing to accept the
Exchange Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or such
facsimile, together with the Old Preferred Stock, or a
Book-Entry Confirmation (as defined), as the case may be,
and any other required documentation to the exchange agent
(the "Exchange Agent") at the address set forth herein. By
executing the Letter of Transmittal, each Holder will
represent to the Company, among other things, that (i) the
New Preferred Stock acquired pursuant to the Exchange
Offer by the Holder and any beneficial owners of Old
Preferred Stock is being obtained in the ordinary course
of business of the person receiving
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
such New Preferred Stock, (ii) neither the Holder, nor
such beneficial owner is participating in, intends to
participate in, or has an arrangement or understanding
with any person to participate in, the distribution of
such New Preferred Stock and (iii) neither the Holder nor
such beneficial owner is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company. Each
broker-dealer that receives New Preferred Stock for its
own account in exchange for Old Preferred Stock, where
such Old Preferred Stock was acquired by such broker or
dealer as a result of market-making activities or other
trading activities (other than Old Preferred Stock
acquired directly from the Company), may participate in
the Exchange Offer but may be deemed an "underwriter"
under the Securities Act and therefore, must acknowledge
in the Letter of Transmittal that it will deliver a
prospectus in connection with any resale of such New
Preferred Stock. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus, a broker
or dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
See "The Exchange Offer--Procedures for Tendering" and
"Plan of Distribution."
Special Procedures for
Beneficial Owners............. Any beneficial owner whose Old Preferred Stock is
registered in the name of a broker, dealer, commercial
bank, trust company or other nominee and who wishes to
tender should contact such registered Holder promptly and
instruct such registered Holder to tender on such
beneficial owner's behalf. If such beneficial owner wishes
to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of
Transmittal and delivering his or her Old Preferred Stock,
either make appropriate arrangements to register ownership
of the Old Preferred Stock in such owner's name or obtain
a properly completed stock power from the registered
Holder. The transfer of registered ownership may take
considerable time. See "The Exchange Offer--Procedures for
Tendering."
Book-Entry Transfer............. Any financial institution that is a participant in the
Book-Entry Transfer Facility's (as defined) system may
make book-entry delivery of Old Preferred Stock by causing
the Book-Entry Transfer Facility to transfer such Old
Preferred Stock into the Exchange Agent's account at the
Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer.
See "The Exchange Offer--Book-Entry Transfer."
Guaranteed Delivery
Procedures.................... Holders of Old Preferred Stock who wish to tender their
Old Preferred Stock and (i) whose Old Preferred Stock is
not immediately available, (ii) who cannot deliver their
Old Preferred Stock, the Letter of Transmittal or any
other documents required by the Letter of Transmittal to
the Exchange Agent prior to the Expiration Date or (iii)
who cannot complete the procedure for book-entry transfer
on a timely basis, must tender their Old Preferred Stock
according to the guaranteed delivery procedures set forth
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
herein. See "The Exchange Offer--Guaranteed Delivery
Procedures."
Withdrawal Rights............... Tenders may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date. See "The
Exchange Offer-- Withdrawal of Tenders."
Acceptance of Old Preferred
Stock and Delivery of New
Preferred Stock............... The Company will accept for exchange any and all shares of
Old Preferred Stock which are properly tendered and not
withdrawn in the Exchange Offer prior to 5:00 p.m., New
York City time, on the Expiration Date. The New Preferred
Stock issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date. See "The
Exchange Offer--Terms of the Exchange Offer."
Federal Income Tax
Consequences.................. The exchange of Old Preferred Stock for New Preferred
Stock by tendering holders will not be a taxable exchange
for federal income tax purposes, and such holders will not
recognize any taxable gain or loss or any interest income
for federal income tax purposes as a result of such
exchange. See "Certain Federal Income Tax Consequences."
Use of Proceeds................. The Company will not receive any proceeds from the
exchange pursuant to the Exchange Offer.
Exchange Agent.................. American Stock Transfer & Trust Company is serving as
Exchange Agent in connection with the Exchange Offer. See
"The Exchange Offer--Exchange Agent."
</TABLE>
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Preferred Stock who do not exchange their Old Preferred Stock
for New Stock pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Old Preferred Stock as set forth in the legend
thereon as a consequence of the issuance of the Old Preferred Stock pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Old Preferred Stock may not be offered or sold, unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. See "Risk Factors-- Consequences of Failure to Exchange.
SUMMARY DESCRIPTION OF THE NEW PREFERRED STOCK
AND THE EXCHANGE DEBENTURES
The terms of the Old Preferred Stock and the New Preferred Stock are
identical in all material respects, except for certain transfer restrictions
relating to the Old Preferred Stock.
In the Exchange Offer, the Holders of Old Preferred Stock will receive New
Preferred Stock having a liquidation preference equal to that of the surrendered
Old Preferred Stock. The New Preferred Stock issued in exchange for Old
Preferred Stock will accrue dividends from and including the date of
consummation of the Exchange Offer. Additionally, dividends will accrue from the
last payment date on which dividends were paid on the Old Preferred Stock
surrendered in exchange therefor, or, if no dividends have been paid on the Old
Preferred Stock, from the date of original issuance of the Old Preferred Stock.
Holders who do not tender their shares of Old Preferred Stock in the Exchange
Offer will continue to accrue dividends on their shares of Old Preferred Stock.
11
<PAGE>
NEW PREFERRED STOCK
<TABLE>
<S> <C>
Securities Offered............ Up to 1,200,000 shares of 12 7/8% Series B Exchangeable
Preferred Stock due 2009.
Dividends..................... Dividends on the New Preferred Stock will accrue at a rate
of 12 7/8% per annum of the liquidation preference thereof
and will be payable in cash on February 15, May 15, August
15 and November 15 of each year commencing May 15, 1997.
Liquidation Preference........ $25 per share.
Ranking....................... The New Preferred Stock will rank senior in right of
payment with respect to all Junior Securities, including
the Company's Class A Common Stock and Class C Common
Stock, PARI PASSU in right of payment with respect to all
Parity Securities, including the 1989 Preferred Stock, and
junior in right of payment to all Senior Securities,
including the Class B Stock. In addition, the New Pre-
ferred Stock will rank junior in right of payment to all
Indebtedness and other obligations of the Company. As of
December 31, 1996, after giving pro forma effect to the
Private Offering, the New Preferred Stock would have been
(a) junior in right of payment to approximately $294.4
million of total Indebtedness of the Company, (b) junior
in right of payment to 11,000 shares of Class B Stock,
having an aggregate liquidation preference of $0.1
million, and (c) PARI PASSU in right of payment to 125,000
shares of 1989 Preferred Stock, having an aggregate
liquidation preference of $12.5 million. In addition, the
Company has the ability to issue up to 800,000 additional
shares of New Preferred Stock, subject to certain
conditions. The New Preferred Stock will be effectively
subordinated to all indebtedness and other liabilities and
commitments of the Company's subsidiaries which, as of
December 31, 1996, totalled approximately $19.0 million,
consisting primarily of trade payables. See "Description
of Preferred Stock--Preferred Stock--Ranking."
Optional Redemption........... The New Preferred Stock will be redeemable at the option
of the Company, in whole or in part, at any time on or
after February 15, 2002 at the redemption prices set forth
herein, plus accumulated and unpaid dividends and
Liquidated Damages, if any, to the date of redemption. See
"Description of Preferred Stock--Preferred Stock--Optional
Redemption."
Change of Control............. Upon a Change of Control, the Company will be required to
offer to each Holder of New Preferred Stock to purchase
all or any part of such Holder's New Preferred Stock at an
offer price in cash equal to 101% of the liquidation
preference thereof, plus accumulated and unpaid dividends
and Liquidated Damages, if any, to the date of purchase.
See "Description of Preferred Stock--Preferred
Stock--Change of Control."
Covenants..................... The Certificate of Designation (as defined) contains
covenants that limit the ability of the Company to issue
new classes of Senior Securities or Parity Securities,
incur Funded Debt (as defined),
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
merge or consolidate with any other entity, sell assets,
enter into transactions with affiliates, incur
indebtedness or issue preferred stock of subsidiaries,
make certain Restricted Payments (as defined) and restrict
distributions from subsidiaries. See "Description of
Preferred Stock--Preferred Stock--Certain Covenants."
Exchange Feature.............. On any scheduled dividend payment date on or after
February 15, 2000, the Company may, at its option,
exchange all but not less than all of the shares of New
Preferred Stock then outstanding for the Company's 12 7/8%
Junior Subordinated Exchange Debentures due 2009. See
"Description of Preferred Stock--Preferred Stock --
Exchange."
EXCHANGE DEBENTURES
Securities Offered............ $30 million principal amount of 12 7/8% Junior
Subordinated Exchange Debentures due 2009.
Maturity Date................. February 15, 2009
Interest Payment Dates........ February 15 and August 15 of each year, commencing on the
first such date following issuance of the Exchange
Debentures.
Optional Redemption........... The Exchange Debentures will be redeemable at the option
of the Company, in whole or in part, at any time on or
after February 15, 2002, at the redemption prices set
forth herein, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of redemption. See
"Description of Preferred Stock--The Exchange
Debentures--Optional Redemption."
Change of Control............. Upon a Change of Control, the Company will be required to
offer to each holder of Exchange Debentures to purchase
all or any part of such holder's Exchange Debentures at a
purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of purchase. See "Description
of Preferred Stock--The Exchange Debentures-- Change of
Control."
Ranking....................... The Exchange Debentures will be general unsecured
obligations of the Company, subordinated in right of
payment to all existing and future Senior Debt (defined to
include certain subordinated obligations of the Company)
of the Company. As of December 31, 1996, after giving pro
forma effect to the Private Offering, the Exchange
Debentures would have been subordinated in right of
payment to approximately $294.4 million of Senior Debt. In
addition, the Exchange Debentures will be effectively
subordinated to all indebtedness and other liabilities and
commitments of the Company's subsidiaries which, as of
December 31, 1996, totalled approximately $19.0 million,
consisting primarily of trade payables. See "Description
of Preferred Stock--The Exchange Debentures--Ranking and
Subordination."
Certain Covenants............. The indenture relating to the Exchange Debentures (the
"Exchange Debenture Indenture") will contain customary
covenants similar to those contained in the Certificate of
Designation.
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
See "Description of Preferred Stock--The Exchange
Debentures-- Certain Covenants."
EXCHANGE OFFER; REGISTRATION
RIGHTS........................ Pursuant to the Registration Rights Agreement, the Company
has agreed to file this registration statement (the
"Exchange Offer Registration Statement") with respect to
an offer to exchange (the "Exchange Offer") (i) the Old
Preferred Stock for a new issue of preferred stock of the
Company registered under the Securities Act, with terms
substantially identical to those of the Old Preferred
Stock or (ii) if the Preferred Stock has previously been
converted into Exchange Debentures, the Exchange
Debentures for a new issue of debentures of the Company
(the "New Exchange Debentures") registered under the
Securities Act, with terms substantially identical to
those of the Exchange Debentures. If (1) the Exchange
Offer is not permitted by applicable law or (2) any holder
of Transfer Restricted Securities (as defined) notifies
the Company that (A) it is prohibited by law or Commission
policy from participating in the Exchange Offer, (B) that
it may not resell the New Preferred Stock or New Exchange
Debentures acquired by it in the Exchange Offer to the
public without delivering a prospectus and the prospectus
contained in the Exchange Offer Registration Statement is
not appropriate or available for such resales or (C) that
it is a broker-dealer and holds Preferred Stock or New
Exchange Debentures acquired directly from the Company or
an affiliate of the Company, the Company will be required
to provide a shelf registration statement (the "Shelf
Registration Statement") to cover resales of such Transfer
Restricted Securities by the holders thereof. If the
Company fails to satisfy these registration obligations,
it will be required to pay liquidated damages ("Liquidated
Damages") to the holders of New Preferred Stock or New
Exchange Debentures under certain circumstances. See
"Description of Preferred Stock--Registration Rights;
Liquidated Damages."
</TABLE>
14
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT RATIOS)
The following table sets forth summary consolidated financial and other data
of the Company and should be read in conjunction with the more detailed
financial statements included in the 1996 Annual Report on Form 10-K
incorporated by reference herein. Although EBITDA should not be considered a
substitute for net income (loss) as an indicator of the Company's operating
performance, it is included in the following tables as one of the bases upon
which the Company assesses its financial performance. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition"
included in the 1996 Annual Report and incorporated herein by reference.
OPERATING DATA:
<TABLE>
<CAPTION>
RATIO OF
EARNINGS TO
FIXED CHARGES
DEPRECIATION INTEREST NET PREFERRED AND PREFERRED
GROSS AND EXPENSE, INCOME STOCK STOCK
YEAR ENDED DECEMBER 31, NET SALES PROFITS AMORTIZATION(1) NET (LOSS) DIVIDENDS DIVIDENDS(2)
- ------------------------------- ---------- ---------- -------------- --------- ---------- ----------- -----------------
<S> <C> <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 -- 7.2
1982........................... 168,061 28,370 2,595 245 3,690 -- 7.0
1983........................... 159,794 33,806 3,633 375 4,723 -- 9.3
1984........................... 245,249 50,323 7,069 3,394 4,165 -- 3.2
1985........................... 283,493 59,241 11,016 5,053 1,427 -- 1.5
1986........................... 279,889 81,843 15,131 6,580 4,116 -- 2.1
1987........................... 354,508 96,444 20,782 9,212 194 -- 1.0
1988........................... 462,150 133,601 27,151 13,536 1,565 -- 1.2
1989........................... 541,521 139,343 32,093 17,915 (4,287) -- -- (3)
1990........................... 567,414 132,383 36,313 20,900 (29,267) 1,357 -- (3)
1991........................... 523,243 144,471 35,575 20,728 (16,562) 3,292 -- (3)
1992........................... 512,430 161,489 34,393 18,622 (4,389) 4,452 -- (3)
1993........................... 538,526 171,717 34,664 20,509 (8,431) 3,367 -- (3)
1994........................... 546,677 183,696 32,395 23,766 (4,265) 3,511 -- (3)
1995........................... 609,507 221,682 39,043 38,792 (23,479) 3,263 -- (3)
1996........................... 608,161 180,773 29,945 32,412 (28,315) 2,389 -- (3)
</TABLE>
SUMMARY CASH FLOW DATA:
<TABLE>
<CAPTION>
NET CASH
PROVIDED BY (USED
NET CASH PROVIDED BY IN) NET CASH PROVIDED BY
(USED IN) OPERATING INVESTING (USED IN) FINANCING
YEAR ENDED DECEMBER 31, ACTIVITIES ACTIVITIES ACTIVITIES
- ------------------------------------ -------------------------- ------------------- --------------------------
<S> <C> <C> <C>
1988................................ $ 26,268 $ (38,938) $ 11,741
1989................................ (19,168) (40,294) 59,864
1990................................ 24,392 (33,329) 11,256
1991................................ 39,616 (16,583) (25,654)
1992................................ 26,713 (49,143) 23,381
1993................................ 36,637 (34,337) (1,546)
1994................................ 31,449 (31,672) 11,083
1995................................ (1,707) 16,613 47,905
1996................................ (3,852) (26,193) (44,983)
</TABLE>
15
<PAGE>
OTHER DATA:
<TABLE>
<CAPTION>
GALLONS OF HOME
HEATING RATIO OF EBITDA TO
OIL AND INTEREST EXPENSE, NET
RETAIL PROPANE RATIO OF EBITDA TO AND PREFERRED STOCK
YEAR ENDED DECEMBER 31, SOLD EBITDA(5) INTEREST EXPENSE, NET DIVIDENDS
- ----------------------------------- ------------------ ----------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
1980............................... 59,399 $ 3,581 N/A N/A
1981............................... 72,653 4,351 N/A N/A
1982............................... 104,583 9,713 39.6x 39.6x
1983............................... 123,019 13,560 36.2 36.2
1984............................... 180,998 19,756 5.8 5.8
1985............................... 212,183 19,106 3.8 3.8
1986............................... 255,319 30,274 4.6 4.6
1987............................... 317,380 30,557 3.3 3.3
1988............................... 414,535 44,470 3.3 3.3
1989............................... 449,040 40,076 2.2 2.2
1990............................... 398,989 26,307 1.3 1.2
1991............................... 385,557 40,036 1.9 1.7
1992............................... 423,354 51,325 2.8 2.2
1993............................... 443,487 48,437 2.4 2.0
1994............................... 456,719 55,386 2.3 2.0
1995............................... 503,610 56,753 1.5 1.4
1996 Actual........................ 456,141 37,704 1.2 1.1
1996 Adjusted (4).................. 462,792 50,263 1.6 1.3
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
--------------------------
<S> <C> <C>
ACTUAL PRO FORMA(6)
----------- -------------
Cash.................................................................................. $ 3,257 $ 9,257
Working capital....................................................................... 18,093 46,093
Total assets.......................................................................... 275,025 281,025
Total long-term debt (excluding current maturities)................................... 291,337 291,337
Preferred stock (excluding current maturities)........................................ 8,333 38,333
Stockholders' deficiency.............................................................. (145,733) (147,733)
</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 and
preferred stock dividends, (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 and preferred stock dividends consist of interest expense,
amortization of debt discount, the interest factor in rental expense and
preferred stock dividends.
(3) Earnings were insufficient to cover fixed charges and preferred stock
dividends by $7.4 million, $32.5 million, $19.6 million, $8.4 million, $10.5
million, $4.5 million, $25.5 million, and $26.1 million for the years ended
December 31, 1989, 1990, 1991, 1992, 1993, 1994, 1995 and 1996,
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 and preferred stock dividends by $24.7
million, $3.8 million, $16.0 million, $27.9 million, $24.4 million, $28.2
million, $14.9 million and $4.7 million, respectively, for such periods.
16
<PAGE>
(4) The adjusted other data for the year ended December 31, 1996 represents the
historical data for such period as adjusted to (a) exclude $4.4 million of
restructuring charges, corporate identity expenses and pension curtailment
expense, (b) give effect to the receipt by the Company of $5.5 million of
annual distributions from Star Gas Partners, assuming the payment by Star
Gas Partners of its minimum quarterly distribution for a full year, (c) give
effect to (i) the acquisition by the Company of thirteen individually
insignificant distributorships during the year ended December 31, 1996, and
the disposal of one individual insignificant distributorship (collectively,
the "1996 Acquisitions"), including as a result thereof the addition of $8.8
million of net sales, $3.5 million of gross profits, $1.3 million of
depreciation and amortization charges and $1.4 million of operating income;
and (ii) the Private Offering and the investment of the net proceeds in
interest bearing instruments reducing interest expense by $1.2 million (at
an assumed interest rate of 5%), as if all such transactions had been
completed as of January 1, 1996.
(5) "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.
(6) The pro forma balance sheet data as of December 31, 1996 represents the
historical data as adjusted to give effect to the Private Offering. See "Pro
Forma Balance Sheet."
17
<PAGE>
RISK FACTORS
Holders of Old Preferred Stock should carefully consider the specific
factors set forth below as well as the other information included in this
Prospectus in connection with the Exchange Offer. Unless otherwise indicated,
the risk factors set forth below are generally applicable to the Old Preferred
Stock as well as the New Preferred Stock.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Preferred Stock who do not exchange their Old Preferred Stock
for New Preferred Stock pursuant to the Exchange Offer will continue to be
subject to the restrictions on transfer of such Old Preferred Stock, as set
forth in the legend thereon, as a consequence of the issuance of the Old
Preferred Stock pursuant to exemptions from, or in transactions not subject to,
the registration requirements of the Securities Act and applicable state
securities laws. In general, the Old Preferred Stock may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. Except under certain limited circumstances, the Company
does not currently anticipate that it will register the Old Preferred Stock
under the Securities Act. Based on interpretations by the staff of the
Commission set forth in no-action letters issued to third parties, the Company
believes that the New Preferred Stock issued pursuant to the Exchange Offer in
exchange for Old Preferred stock may be offered for resale, resold or otherwise
transferred by any Holder thereof (other than any such Holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act provided that such New Preferred Stock is acquired in the
ordinary course of such Holder's business and such Holder has no arrangement
with any person to participate in the distribution of such New Preferred Stock.
Notwithstanding the foregoing, each broker-dealer that receives New Preferred
Stock for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such New Preferred
Stock. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with any resale of New Preferred Stock received in
exchange for Old Preferred Stock where such Old Preferred Stock was acquired by
such broker-dealer as a result of market-making activities or other trading
activities (other than Old Preferred Stock acquired directly from the Company).
The Company has agreed that, for a period of one year following the consummation
of the Exchange Offer, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution." However, the ability of any Holder to Resell the New Preferred
Stock is subject to applicable state securities laws as described in "--Blue Sky
Restrictions on Resale of New Preferred Stock" below. To the extent that the Old
Preferred Stock is tendered and accepted in the Exchange Offer, the trading
market, if any, for the Old Preferred Stock not so tendered could be adversely
affected. See "The Exchange Offer."
FAILURE TO COMPLY WITH EXCHANGE OFFER PROCEDURES
To participate in the Exchange Offer and avoid the consequences of failing
to exchange the Old Preferred Stock, Holders of Old Preferred Stock must
transmit a properly completed Letter of Transmittal, including all other
documents required by such Letter of Transmittal, to the Exchange Agent at one
of the addresses set forth below under "The Exchange Offer--Exchange Agent" on
or prior to the Expiration Date. In addition, either (i) certificates for such
Old Preferred Stock must be received by the Exchange Agent along with the Letter
of Transmittal or (ii) a timely confirmation of a book-entry transfer of such
Old Preferred Stock, if such procedure is available, into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the procedure for
book-entry transfer described herein, must be received by
18
<PAGE>
the Exchange Agent prior to the Expiration Date, or (iii) the Holder must comply
with the guaranteed delivery procedures described herein and in the Letter of
Transmittal. See "The Exchange Offer."
BLUE SKY RESTRICTIONS ON RESALE OF NEW PREFERRED STOCK
In order to comply with the securities laws of certain jurisdictions, the
New Preferred Stock may not be offered or resold by any Holder unless registered
or qualified for sale in such jurisdictions or an exemption from registration or
qualification is available and the requirements of such exemption have been
satisfied. The Company has agreed to register or qualify the resale of the New
Preferred Stock in such jurisdictions only in limited circumstances and subject
to certain conditions.
LEVERAGE; ABILITY TO SERVICE DEBT AND PAY PREFERRED STOCK DIVIDENDS
At December 31, 1996 (after giving pro forma effect to the Private
Offering), the Company would have had outstanding an aggregate of $294.4 million
of long-term debt, $42.5 million of redeemable preferred stock and stockholders'
deficiency of $147.7 million. See "Capitalization." Of such long-term debt and
preferred stock, $7.2 million, $6.5 million and $14.4 million matures in 1997,
1998 and 1999, respectively. In addition, the Company may incur additional
indebtedness and issue additional redeemable preferred stock 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 New Preferred
Stock or the Exchange Debentures including the following: (i) a substantial
portion of the Company's cash flow from operations will be dedicated to the
payment of interest, dividends, 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.
Although no assurance can be given, the Company believes that it will be able to
meet its obligations as they come due and will not be required to restructure
its debt obligations or preferred stock, although it may elect to do so.
Earnings were insufficient to cover fixed charges and preferred stock
dividends by $10.5 million, $4.5 million, $25.5 million and $26.1 million for
the years ended December 31, 1993, 1994, 1995 and 1996, 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 and
preferred stock dividends by $24.4 million, $28.2 million, $14.9 million and
$4.7 million, respectively, for such periods.
RANKING AND SUBORDINATION
The New Preferred Stock will rank senior in right of payment with respect to
all Junior Securities, including the Company's Class A Common Stock and Class C
Common Stock, PARI PASSU in right of payment with respect to all Parity
Securities, including the 1989 Preferred Stock, and junior in right of payment
to all Senior Securities, including the Class B Stock. In addition, the New
Preferred Stock will rank junior in right of payment to all Indebtedness and
other obligations of the Company. As of December 31, 1996, after giving pro
forma effect to the Private Offering, the New Preferred Stock would have been
(a) junior in right of payment to approximately $294.4 million of total
Indebtedness of the Company, (b) junior in right of payment to 11,000 shares of
Class B Stock, having an aggregate liquidation preference of $0.1 million, and
(c) PARI PASSU in right of payment to 125,000 shares of 1989 Preferred Stock,
having an aggregate liquidation preference of $12.5 million. In addition, the
Company has the ability to issue up to 800,000 additional shares of New
Preferred Stock having an aggregate liquidation preference of up to $20 million,
subject to certain conditions. In addition, the Exchange Debentures will be
subordinated to the prior payment of all existing and future Senior Debt
(defined to include certain subordinated obligations) of the Company. As of
December 31, 1996, after giving pro forma effect to the Private Offering, the
Exchange Debentures would have been subordinated to approximately $294.4 million
of
19
<PAGE>
Senior Debt. The New Preferred Stock and the Exchange Debentures will also be
effectively subordinated to all indebtedness and other liabilities and
commitments of the Company's subsidiaries which, as of December 31, 1996,
totalled approximately $19.0 million, consisting primarily of trade payables. In
the event of bankruptcy, liquidation or reorganization of the Company, the
assets of the Company will be available to pay obligations on the New Preferred
Stock only after all Senior Securities and all indebtedness of the Company has
been paid, and there may not be sufficient assets remaining to pay amounts due
on any or all of the shares of New Preferred Stock then outstanding. In
addition, in the event of bankruptcy, liquidation or reorganization of the
Company, the assets of the Company will be available to pay obligations on the
Exchange Debentures only after all Senior Debt has been paid, and there may not
be sufficient assets remaining to pay amounts due on any or all of the Exchange
Debentures then outstanding. See "Description of Preferred Stock--Preferred
Stock--Ranking" and "--The Exchange Debentures--Ranking and Subordination."
RESTRICTIONS ON PAYMENT OF DIVIDENDS
Under the terms of the Company's currently outstanding indebtedness, the
Company generally may not pay any dividend or make a distribution on its capital
stock, including the New Preferred 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,
after giving pro forma effect to the Private Offering, approximately $36.8
million would have been available as of December 31, 1996 for dividends or
distributions in respect of the Company's capital stock, including the New
Preferred Stock. There can be no assurance that the Company will generate
sufficient Cash Flow in the future to continue to pay dividends on the New
Preferred Stock. See "Description of Other Indebtedness."
CHANGE OF CONTROL
Upon a Change of Control, the Company will be required to offer to each
Holder of New Preferred Stock to purchase all or any part of such Holder's New
Preferred Stock at an offer price in cash equal to 101% of the liquidation
preference thereof, plus accumulated and unpaid dividends and Liquidated
Damages, if any, to the date of purchase. If, at the time of a Change of
Control, the Company is prohibited by the terms of any indebtedness from
purchasing shares of New Preferred Stock then, within 30 days following any
Change of Control, the Company must (i) repay in full such indebtedness or (ii)
obtain the requisite consent under such indebtedness to permit the purchase of
the New Preferred Stock. The Company must first comply with such covenant before
it will be required to repurchase shares of New Preferred Stock in the event of
a Change of Control; PROVIDED, that the Company's failure to comply with such
covenant will constitute a Voting Rights Triggering Event (as defined). As a
result, a Holder of the New Preferred Stock may not be able to compel the
Company to purchase his New Preferred Stock unless the Company is able at the
time to refinance all such indebtedness. Except as described under "Description
of Preferred Stock--Preferred Stock--Change of Control," the Certificate of
Designation does not contain provisions that permit the holder of New Preferred
Stock to require the Company to redeem the New Preferred Stock in the event of a
takeover, recapitalization or similar restructuring, including an issuer
recapitalization or similar transaction with management. Consequently, the
Change of Control provisions will not afford any protection in a highly
leveraged transaction, including any such transaction initiated by the Company,
management of the Company or an affiliate of the Company, if such transaction
does not result in a Change of Control. See "Description of Preferred
Stock--Preferred Stock--Change of Control."
20
<PAGE>
SENSITIVITY TO WEATHER; SEASONALITY
Because the Company's business is directly related to heating, weather
patterns during the winter months can have a material effect on the Company's
sales of heating oil. Although temperature levels for the heating season have
been relatively stable over time, variations do occur from year to year, and
warmer than normal weather may adversely affect the Company's results, while
colder than normal weather may favorably affect the Company's results. For the
year ended December 31, 1996, temperatures were approximately 1.6% colder (on a
heating degree-day basis) than normal, while for the year ended December 31,
1995, temperatures were approximately 2.3% warmer (on a heating degree-day
basis) than normal. Heating 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. In addition, the timing of heating degree days can
impact the consumption of heating oil due to the general tendency of consumers
to heat their homes to a greater extent during the winter months rather than at
the beginning or the end of the heating season. As an example, as a result of
colder than normal weather in October and November 1996, the fourth quarter of
1996 was only 0.7% warmer than normal. However, the Company believes that warmer
than normal weather in December 1996 had a greater negative impact on volume,
sales and cash flow than the positive contribution of the colder than normal
weather in October and November 1996.
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. Accordingly, the Company generally realizes higher levels of EBITDA and
net income in both of these quarters and net losses during the second and third
quarters of each year.
CUSTOMER ATTRITION
The Company's net attrition of existing home heating oil customers has been
between approximately 5% to 6% per annum over the past five years. This rate
represents the net of the Company's annual gross customer loss rate of
approximately 15% to 16%, offset by customer gains of approximately 10% per
annum. Gross customer losses are a result of various factors, including
customers moving, changing suppliers due to price sensitivity or service issues,
natural gas conversions and credit problems. Customer gains are a result of the
Company's active marketing and service programs and other incentives. There can
be no assurance that the Company will be able to maintain or reduce its average
home heating oil customer net attrition rate in the future.
SUPPLY AND PRICING OF HOME HEATING OIL
Home heating oil is available from numerous sources, including integrated
international oil companies, independent refiners and independent wholesalers.
The Company purchases home heating oil from a variety of suppliers pursuant to
supply contracts or on the spot market. While there can be no assurance that
there will be no foreign crude oil disruptions which may adversely affect the
Company's home heating oil business, past disruptions have affected the price of
home heating oil to the Company.
While the Company historically has been able to a great extent to pass
through wholesale price increases to its customers and has attempted to minimize
inventory risk by maintaining relatively low home heating oil inventory levels,
during certain periods of sudden and sharp fluctuations in supply cost, such as
those experienced during 1996, the Company may be unwilling or unable to pass
the entire increase in supply costs on to its customers. This may result in
reduced gross profit margin and may negatively impact the Company's financial
performance. It is also possible that significant wholesale price increases over
an extended period of time could have the effect of reducing demand by
encouraging conservation or conversion to alternative energy sources. If demand
was reduced and the Company was unable to increase its gross profit margin or
reduce its operating expenses, the decrease in volume would adversely effect the
Company's financial performance.
21
<PAGE>
In addition, approximately 20% of the Company's heating oil volume is sold
to individual customers under agreements pre-establishing the maximum sales
price of oil over a period of up to 12 months. The maximum price at which oil is
sold to these "capped-price" customers generally is renegotiated in April of
each year in light of then current market conditions. The Company currently
enters into forward purchase contracts for a substantial majority of the oil it
sells to these capped-price customers in advance and at a fixed cost. Should
events occur after a capped sales price is established that increases the cost
of oil above the amount anticipated, margins for the capped-price customers
whose oil was not purchased in advance would be lower than expected, while
margins for those customers whose oil was purchased in advance would be
unaffected. Conversely, if, during this period, the cost of oil decreased below
the amount anticipated, margins for the capped-price customers whose oil was
purchased in advance could be lower than expected, while margins for those
customers whose oil was not purchased in advance would be unaffected or higher
than expected. The Company uses put options to hedge the risk associated with a
decrease in heating oil prices in a majority of the instances where forward
purchase contracts have been entered into to match capped-price customer
commitments. Options outstanding at December 31, 1996 hedged the risk associated
with approximately 66% of the 32.9 million gallons of heating oil forward
purchase contracts, and expire at various times with no option expiring later
than April 1997. In the past few years, the percentage of the Company's
customers with capped price arrangements has increased, and the gross profit
margin of oil sold to these customers has been lower than that of oil sold to
the Company's other retail customers, thereby negatively affecting the Company's
financial performance. There can be no assurance that this trend will not
continue in the future, and thereby continue to negatively affect the Company's
financial performance.
DEPENDENCE ON ACQUISITIONS
In recent years, demand for home heating oil 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 financial
performance will depend on its ability to continue to identify and successfully
consummate acquisitions.
There is no assurance that the Company will be able to continue to identify
new acquisitions or that it will have the access to capital necessary to
consummate such acquisitions. The Company is subject to certain debt incurrence
covenants in the Certificate of Designation and in certain agreements governing
other borrowings that might restrict the Company's ability to incur indebtedness
to finance acquisitions. In addition, factors which may adversely affect the
Company's operating and financial results may, in turn, limit the Company's
access to capital and its acquisition activities.
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. The Company cannot predict the impact of
future conservation measures or the effect of any technological advances.
COMPETITION FOR NEW RETAIL CUSTOMERS
The Company's business is highly competitive. The Company competes with fuel
oil distributors offering a broad range of services and prices, from full
service distributors, like the Company, to those offering delivery only.
Competition with other companies in the fuel oil industry is based primarily on
customer service and price.
22
<PAGE>
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 making an affirmative purchase
decision each time oil is needed. In addition, most companies, including Petro,
provide home heating equipment repair service on a 24-hour per day basis, which
tends to build customer loyalty.
As a result of, among others, the factors noted above, the Company may
experience difficulty in acquiring new retail customers due to existing
relationships between potential customers and other home heating oil
distributors. In addition, in certain instances, homeowners have formed buying
cooperatives which seek to purchase fuel oil from distributors at a price lower
than individual customers are otherwise able to obtain. To date, these buying
groups have not had a material impact on the Company's fuel oil operations.
COMPETITION FROM ALTERNATE ENERGY SOURCES
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 customers from heating 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, since the spring of
1991, gas conversions by the Company's home heating oil customers have returned
to their approximate 1% historical annual rate as the prices for the two
products returned to approximate parity. As fuel oil is a less expensive heating
source than electricity, the Company believes that an insignificant number of
its customers switch to electric heat from oil heat. See "Business--Fundamental
Characteristics."
RECENT NET LOSSES
The Company incurred net losses of $8.4 million, $4.3 million, $23.5 million
and $28.3 million for the years ended December 31, 1993, 1994 and 1995 and 1996,
respectively. These net losses were primarily a result of the amortization
expense associated with the numerous acquisitions consummated since 1980. In
connection with each acquisition of a home heating oil distributor, the Company
amortizes for book purposes 90% of the amount allocated to customer lists over a
six-year period and the balance over a 25-year period. In addition, the Company
depreciates fixed assets on average over an eight-year period. The aggregate
amortization of customer lists and deferred charges and depreciation and
amortization of property and equipment in 1993, 1994, 1995 and 1996 amounted to
$34.7 million, $32.4 million, $39.0 million and $29.9 million, respectively.
Management's strategy is to maximize EBITDA, rather than net income, and net
losses are likely to continue in the near term. Continued net losses could
adversely affect the Company.
ENVIRONMENTAL MATTERS
The Company has implemented environmental programs and policies designed to
avoid potential liability under applicable environmental laws. The Company has
not incurred any significant environmental compliance costs and compliance with
environmental regulations has not had a material effect on the Company's
operating 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. There can be no assurance, however,
that environmental compliance will not have a material effect on its operations
and financial condition in the future. The Company's policy for determining the
timing
23
<PAGE>
and amount of any environmental cost is to reflect an expense as and when the
cost becomes probable and reasonably capable of estimation.
RISKS OF PROPANE BUSINESS
Petro's ownership interest in and associated distributions from Star Gas
Partners are subordinated to Star Gar Partners' outstanding publicly-traded
common units of limited partner interest and their associated distributions.
Material changes in Star Gas Partners' earnings and distributable cash flow may,
accordingly, have a disproportionate impact on the Company's receipt of
distributions from Star Gas Partners. Star Gas Partners' earnings are subject to
the risks of the propane distribution business generally, including changes in
weather, cost and availability of propane, competition from other propane
distributors and alternate energy supplies and Star Gas Partners' ability to
retain its customers. See "Business-- Propane Business."
DEPENDENCE ON KEY PERSON
The Company is dependent on the continued services of its Chief Executive
Officer, 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
Company's Class C Common Stock. In addition, as of December 31, 1996, the
directors owned 29.7% of the Class A Common Stock. Each share of Class A Common
Stock of the Company is entitled to one vote per share and each share of Class C
Common Stock is entitled to ten votes per share. The shares of Class C Common
Stock owned by the directors and such affiliated parties represent, in the
aggregate, 53.1% of the voting power of all of the outstanding shares of Common
Stock. 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.
CERTAIN TAX CONSIDERATIONS
For a discussion of certain material federal income tax considerations which
are relevant to the acquisition, ownership and disposition of the New Preferred
Stock and if issued, the Exchange Debentures, see "Certain Federal Income Tax
Consequences."
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFERS
The Old Preferred Stock is eligible for trading in the Private Offerings,
Resale and Trading through Automated Linkages ("PORTAL") Market by Qualified
Institutional Buyers ("QIBs"). The New Preferred Stock will be new securities
for which there currently is no market. There can be no assurance as to the
liquidity of any markets that may develop for the New Preferred Stock, the
ability of Holders of the New Preferred Stock to sell their New Preferred Stock,
or the price at which Holders would be able to sell their New Preferred Stock.
Future trading prices of the New Preferred Stock will depend on many factors,
including, among other things, prevailing interest rates, the Company's
operating results and the market for similar securities. If a trading market
does not develop or is not maintained, Holders of the New Preferred Stock may
experience difficulty in reselling the New Preferred Stock or may be unable to
sell it at all. Although the Initial Purchaser has advised the Company that it
currently intends to make a market in the New Preferred Stock and, if issued,
the Exchange Debentures, it is not obligated to do so, and may discontinue any
such market making activities at any time without notice. In addition, such
market making activity will be subject to the limits imposed by the Securities
Act and the Exchange Act. Accordingly, there
24
<PAGE>
can be no assurance as to the development, liquidity or continuation of any
market for the New Preferred Stock and, if issued, the Exchange Debentures. The
Company does not intend to apply for listing of any of the shares of New
Preferred Stock or the New Exchange Debentures on any securities exchange.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER; REGISTRATION RIGHTS; LIQUIDATED
DAMAGES
The Old Preferred Stock was sold by the Company on February 18, 1997 to the
Initial Purchaser, who placed the Old Preferred Stock with certain qualified
institutional and accredited investors. In connection therewith, the Company and
the Initial Purchaser entered into the Registration Rights Agreement, pursuant
to which the Company agreed, for the benefit of the Holders of the Old Preferred
Stock, that the Company would, at its sole cost, (i) within 60 days following
the original issuance of the Old Preferred Stock, file with the Commission the
Exchange Offer Registration Statement (of which this Prospectus is a part) under
the Securities Act with respect to an issue of a series of New Preferred Stock
of the Company identical in all material respects to the series of Old Preferred
Stock and (ii) use its reasonable best efforts to cause such Exchange Offer
Registration Statement to become effective under the Securities Act within 120
days following the original issuance of the Old Preferred Stock. Upon the
effectiveness of the Exchange Offer Registration Statement (of which this
Prospectus is a part), the Company will offer to the Holders of the Old
Preferred Stock the opportunity to exchange their shares of Old Preferred Stock
for a like number of shares of New Preferred Stock, to be issued without a
restrictive legend and which may be reoffered and resold by the Holder without
restrictions or limitations under the Securities Act.
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that New
Preferred Stock issued pursuant to the Exchange Offer in exchange for Old
Preferred Stock may be offered for resale, resold and otherwise transferred by
any Holder of such New Preferred Stock (other than any such Holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such New Preferred Stock is acquired in the
ordinary course of such Holder's business and such Holder has no arrangement or
understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of such New Preferred Stock. However, the Company
has not sought, and does not intend to seek, its own no-action letter, and there
can be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer. Any Holder who tenders in the
Exchange Offer for the purpose of participating in a distribution of the New
Preferred Stock must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction.
Each broker-dealer that receives New Preferred Stock for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Preferred Stock. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Preferred Stock received in exchange for Old Preferred Stock
where such Old Preferred Stock acquired by such broker-dealer as a result of
market-making activities or other trading activities (other than Old Preferred
Stock acquired directly from the Company). The Company has agreed that, for a
period of one year following the consummation of the Exchange Offer, it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution." Each Holder of the Old Preferred
Stock who wishes to exchange Old Preferred Stock for New Preferred Stock in the
Exchange Offer will be required to represent that (i) it is not an affiliate of
the Company, (ii) any New Preferred Stock to be received by it was acquired in
the ordinary course of its business and (iii) at the time of commencement of the
Exchange Offer, it has no arrangement with any person to participate in the
distribution (within the meaning of the Securities Act) of the New Preferred
Stock. In addition, in connection with any resales of New Preferred Stock, any
broker-
25
<PAGE>
dealer (an "Exchanging Dealer") who acquired the Old Preferred Stock for its own
account as a result of market-making activities or other trading activities must
deliver a prospectus meeting the requirements of the Securities Act. The
Commission has taken the position that Exchanging Dealers may fulfill their
prospectus delivery requirements with respect to the New Preferred Stock (other
than a resale of an unsold allotment from the original sale of the Old Preferred
Stock) with the prospectus contained in the Exchange Offer Registration
Statement. Under the Registration Rights Agreement, the Company is required to
allow Exchanging Dealers and other persons, if any, subject to similar
prospectus delivery requirements to use the prospectus contained in the Exchange
Offer Registration Statement in connection with the resale of such New Preferred
Stock.
If (i) the Company is not required to file the Exchange Offer Registration
Statement or permitted to consummate the Exchange Offer because the Exchange
Offer is not permitted by applicable law or Commission policy or (ii) any Holder
of Transfer Restricted Securities (as defined) notifies the Company within a
specified time period that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer, (B) it may not resell the New Preferred
Stock or the New Exchange Debentures acquired by it in the Exchange Offer to the
public without delivering a prospectus and the prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for such
resales or (C) it is a broker-dealer and owns Old Preferred Stock acquired
directly from the Company or an affiliate of the Company, the Company will file
with the Commission a shelf registration statement (the "Shelf Registration
statement") to cover resales of Transfer Restricted Securities by the Holder
thereof who satisfy certain conditions relating to the provision of information
in connection with the Shelf Registration Statement. The Company will use its
reasonable best efforts to cause the Shelf Registration Statement to be declared
effective within 120 days after the date on which the Company becomes obligated
to file such Shelf Registration Statement and, except under certain
circumstances, keep effective such Shelf Registration Statement until three
years after its effective date. For purposes of the foregoing, "Transfer
Restricted Securities" means each share of Old Preferred Stock and each Exchange
Debenture until (i) the date on which such share of Old Preferred Stock or
Exchange Debenture has been exchanged by a person other than a broker-dealer for
a share of New Preferred Stock or New Exchange Debenture in the Exchange Offer,
(ii) following the exchange by a broker-dealer in the Exchange Offer of a share
of Old Preferred Stock for New Preferred Stock or of an Exchange Debenture for
New Exchange Debenture, the date on which such share of New Preferred Stock or
such New Exchange Debenture is sold to a Purchaser who receives from such
broker-dealer on or prior to the date of such sale a copy of the prospectus
contained in the Exchange Offer Registration Statement, (iii) the date on which
such share of Old Preferred Stock or Exchange Debenture has been effectively
registered under the Securities Act and disposed of in accordance with the Shelf
Registration Statement or (iv) the date on which such share of Old Preferred
Stock or Exchange Debenture is distributed to the public pursuant to Rule 144
under the Securities Act. The Company will, in the event of the filing of the
Shelf Registration Statement, provide to each Holder of Transfer Restricted
Securities covered by the Shelf Registration Statement copies of the prospectus
which is a part of the Shelf Registration Statement, notify each such Holder
when the Shelf Registration Statement has become effective and take certain
other actions as are required to permit unrestricted resales of Transfer
Restricted Securities. A Holder of Transfer Restricted Securities that sells
such Transfer Restricted Securities pursuant to the Shelf Registration Statement
generally will be required to be named as a selling security holder in the
related prospectus and to deliver a prospectus to the purchaser, will be subject
to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such Holder (including
certain indemnification obligations). In addition, Holders of Transfer
Restricted Securities will be required to deliver information to be used in
connection with the Shelf Registration Statement and to provide comments on the
Shelf Registration Statement within the time periods set forth in the
Registration Rights Agreement in order to have their Transfer Restricted
Securities included in the Shelf Registration Statement and benefit from the
provisions regarding Liquidated Damages, if any, set forth in the following
paragraph.
26
<PAGE>
If (a) the Company fails to file any of the Registration Statements required
by the Registration Rights Agreement on or before the date specified for such
filing, (b) any of such Registration Statements is not declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), (c) the Company fails to Consummate the Exchange
Offer within 30 business days of the Effectiveness Target Date with respect to
the Exchange Offer Registration Statement, or (d) the Shelf Registration
Statement or the Exchange Offer Registration Statement is declared effective but
thereafter ceases to be effective or usable in connection with resales of
Transfer Restricted Securities during the periods specified in the Registration
Rights Agreement (each such event referred to in clauses (a) through (d) above a
"Registration Default"), then the Company will pay liquidated damages to each
holder of Preferred Stock or Exchange Debenture ("Liquidated Damages"), with
respect to the first 90-day period immediately following the occurrence of such
Registration Default in an amount equal to $.00125 per week per $25 liquidation
preference of Preferred Stock constituting Transfer Restricted Securities, or
$.05 per week per $1,000 principal amount of Exchange Debentures constituting
Transfer Restricted Securities, held by such holder. The amount of the
Liquidated Damages will increase by an additional $.00125 per week per $25
liquidation preference of Preferred Stock or $.05 per week per $1,000 principal
amount of Exchange Debentures with respect to each subsequent 90-day period
until all Registration Defaults have been cured, up to a maximum amount of
Liquidated Damages of $.0125 per week per $25 liquidation preference of
Preferred Stock or $.50 per week per $1,000 principal amount of Exchange
Debentures constituting Transfer Restricted Securities. All accrued Liquidated
Damages will be paid in cash by the Company on each dividend payment date or
interest payment date, as the case may be. Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease.
Holders of Preferred Stock or Exchange Debentures will be required to make
certain representations to the Company (as described in the Registration Rights
Agreement) in order to participate in the Exchange Offer and will be required to
deliver information to be used in connection with the Shelf Registration
Statement and to provide comments on the Shelf Registration Statement within the
time periods set forth in the Registration Rights Agreement in order to have
their Preferred Stock or Exchange Debentures included in the Shelf Registration
Statement and benefit from the provisions regarding Liquidated Damages set forth
above.
Payment of Liquidated Damages is the sole remedy available to the Holders of
Transfer Restricted Securities in the event that the Company does not comply
with the deadlines set forth in the Registration Rights Agreement with respect
to the registration of Transfer Restricted Securities for resale under the Shelf
Registration Statement.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old
Preferred Stock validly tendered and not withdrawn prior to 5:00 p.m., New York
City time, on the Expiration Date. The Company will issue one share of New
Preferred Stock in exchange for each issued and outstanding share of Old
Preferred Stock accepted in the Exchange Offer. Holders may tender some or all
of their Old Preferred Stock pursuant to the Exchange Offer.
The form and terms of the New Preferred Stock will be identical in all
material respects to the form and terms of the Old Preferred Stock, except that
(i) the New Preferred Stock will have been registered under the Securities Act
and hence will not bear legends restricting the transfer thereof and (ii) the
holders of the New Preferred Stock will not be entitled to certain rights under
the Registration Rights Agreement, including the terms providing for Liquidated
Damages, all of which rights will terminate when the Exchange Offer is
consummated except under limited circumstances. The New Preferred Stock will
have the same liquidation preference as the Old Preferred Stock and will be
entitled to the benefits of the Certificate of Designation under which the Old
Preferred Stock was, and the New Preferred Stock will be, issued.
27
<PAGE>
As of the date of this Prospectus, $30 million in aggregate liquidation
preference of the Old Preferred Stock was outstanding. The Company has fixed the
close of business on , 1997 as the record date for the Exchange Offer for
purposes of determining the persons to whom this Prospectus, together with the
Letter of Transmittal, will initially be sent. As of such date, there was one
registered Holder of the Old Preferred Stock.
Holders of the Old Preferred Stock do not have any appraisal or dissenters'
rights under the Minnesota Business Corporation Act or the Certificate of
Designation in connection with the Exchange Offer. The Company intends to
conduct the Exchange Offer in accordance with the applicable requirements of the
Exchange Act and the rules and regulations of the Commission thereunder.
Holders who tender Old Preferred Stock in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of Old
Preferred Stock pursuant to the Exchange Offer. The Company will pay all charges
and expenses, other than certain applicable taxes, in connection with the
Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1997, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof prior to 9:00 a.m., New York City time, on the next
business day after each previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Preferred Stock, to extend the Exchange Offer or, if any of
the conditions set forth below under the caption "--Conditions" shall not have
been satisfied, to terminate the Exchange Offer, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent, or (ii) to
amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, or termination or amendment will be followed as promptly
as practicable by a public announcement thereof. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered Holders, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the amendment and the manner of disclosure to
the registered Holders, if the Exchange Offer would otherwise expire during such
five to ten business day period.
Without limiting the manner in which the Company may choose to make a public
announcement of any delay, extension, termination or amendment of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
PROCEDURES FOR TENDERING
Only a Holder of Old Preferred Stock may tender such Old Preferred Stock in
the Exchange Offer. A Holder who wishes to tender Old Preferred Stock for
exchange pursuant to the Exchange Offer must transmit a properly completed and
duly executed Letter of Transmittal, or a facsimile thereof, including any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) certificates for such Old
Preferred Stock must be received by the Exchange Agent along with the Letter of
Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Preferred Stock, if such procedure is available, into
the Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility")
28
<PAGE>
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent or (iii) the Holder must comply with the
guaranteed delivery procedures described below. To be tendered effectively, the
Old Preferred Stock, or Book-Entry Confirmation, as the case may be, the Letter
of Transmittal and other required documents must be received by the Exchange
Agent at the address set forth below under "--Exchange Agent" prior to 5:00
p.m., New York City time, on the Expiration Date.
The tender by a Holder will constitute an agreement between such Holder and
the Company in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal.
The method of delivery of the Old Preferred Stock and the Letter of
Transmittal and all other required documents to the Exchange Agent is at the
election and risk of the Holder. Instead of delivery by mail, it is recommended
that Holders use an overnight or hand delivery service. In all cases, sufficient
time should be allowed to assure timely delivery to the Exchange Agent. No
Letter of Transmittal or Old Preferred Stock, or Book-Entry Confirmation, as the
case may be, should be sent to the Company. Holders may request their respective
brokers, dealers, commercial banks, trust companies or nominees to effect the
above transactions for such Holders.
Any beneficial owner whose Old Preferred Stock is registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such beneficial owner's own behalf, such
owner must, prior to completing and executing the Letter of Transmittal and
delivering such beneficial owner's Old Preferred Stock, either make appropriate
arrangements to register ownership of the Old Preferred Stock in such owner's
name or obtain a properly completed stock power from the registered Holder. The
transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below) unless
the Old Preferred Stock tendered pursuant thereto is tendered (i) by a
registered Holder who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Old Preferred Stock listed therein, such Old Preferred Stock must
be endorsed or accompanied by a properly completed stock power and signed by
such registered Holder as such registered Holder's name appears on such Old
Preferred Stock.
If the Letter of Transmittal or any Old Preferred Stock or stock powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Preferred Stock will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Old Preferred Stock not properly tendered or any Old Preferred Stock the
Company's acceptance of which would, in the opinion of counsel for the Company,
be unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Old Preferred Stock. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in
29
<PAGE>
the Letter of Transmittal) will be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old
Preferred Stock must be cured within such time as the Company shall determine.
Although the Company intends to notify Holders of defects or irregularities with
respect to tenders of Old Preferred Stock, neither the Company, the Exchange
Agent nor any other person shall incur any liability for failure to give such
notification. Tenders of Old Preferred Stock will not be deemed to have been
made until such defects or irregularities have been cured or waived. Any Old
Preferred Stock received by the Exchange Agent that is not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering Holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
By tendering, each Holder will represent to the Company, among other things,
that (i) the New Preferred Stock to be acquired by the Holder and any beneficial
owners of Old Preferred Stock pursuant to the Exchange Offer is being obtained
in the ordinary course of business of the person receiving such New Preferred
Stock, (ii) the Holder and each such beneficial owner are not participating, do
not intend to participate and have no arrangement or understanding with any
person to participate in the distribution of such New Preferred Stock and (iii)
neither the Holder nor any such other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company. Each broker or dealer that
receives New Preferred Stock for its own account in exchange for Old Preferred
Stock, where such Old Preferred Stock was acquired by such broker or dealer as a
result of market-making activities or other trading activities (other than Old
Preferred Stock acquired directly from the Company), must acknowledge that it
will deliver a prospectus in connection with any resale of such New Preferred
Stock. See "Plan of Distribution."
ACCEPTANCE OF OLD PREFERRED STOCK FOR EXCHANGE; DELIVERY OF NEW PREFERRED STOCK
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted properly tendered Old Preferred Stock for exchange when, as and if the
Company has given oral or written notice thereof to the Exchange Agent.
In all cases, issuance of New Preferred Stock for Old Preferred Stock that
is accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for such Old Preferred
Stock or a timely Book-Entry Confirmation a properly completed and duly executed
letter of Transmittal and all other required documents. If any tendered shares
of Old Preferred Stock are not accepted for any reason set forth in the terms
and conditions of the Exchange Offer or if a greater number of shares of Old
Preferred Stock are submitted than the Holder desires to exchange, such
unaccepted or non-exchanged Old Preferred Stock will be returned without expense
to the tendering Holder thereof (or, in the case of Old Preferred Stock tendered
by book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility pursuant to the book-entry transfer procedures described
below, such non-exchanged Old Preferred Stock will be credited to an account
maintained with such Book-Entry Transfer Facility) as promptly as practicable
after the Expiration Date.
BOOK-ENTRY TRANSFER
Any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Old Preferred Stock by causing
the Book-Entry Transfer Facility to transfer such Old Preferred Stock into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Preferred Stock may be effected through book-entry transfer at
the Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof
with any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the Exchange Agent on a timely basis
at one of the addresses set forth below under "Exchange Agent" or the guaranteed
delivery procedures described below must by complied with.
30
<PAGE>
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Preferred Stock and (i) whose Old
Preferred Stock is not immediately available, (ii) who cannot deliver their Old
Preferred Stock, the Letter of Transmittal or any other required documents to
the Exchange Agent prior to the Expiration Date or (iii) who cannot complete the
procedure for book-entry transfer on a timely basis, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the Holder, the certificate number(s) of such Old Preferred
Stock and the number of shares of Old Preferred Stock tendered, stating that the
tender is being made thereby and guaranteeing that, within three New York Stock
Exchange trading days after the Expiration Date, the Letter of Transmittal (or
facsimile thereof) together with the certificate(s) representing the Old
Preferred Stock, or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or facsimile
thereof), as well as the certificate(s) representing all tendered shares of Old
Preferred Stock in proper form for transfer, or a Book-Entry Confirmation, as
the case may be, and all other documents required by the letter of Transmittal
are received by the Exchange Agent within three New York Stock Exchange trading
days after the Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Preferred Stock may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
To withdraw a tender of Old Preferred Stock in the Exchange Offer, a written
or facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Old Preferred Stock to be withdrawn (the
"Depositor"), (ii) identify the Old Preferred Stock to be withdrawn (including
the certificate number or numbers and number of shares of such Old Preferred
Stock), (iii) be signed by the Holder in the same manner as the original
signature on the Letter of Transmittal by which such Old Preferred Stock was
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Transfer Agent with respect to the
Old Preferred Stock register the transfer of such Old Preferred Stock into the
name of the person withdrawing the tender and (iv) specify the name in which any
such Old Preferred Stock is to be registered if different from that of the
Depositor. If certificates for Old Preferred Stock have been delivered or
otherwise identified to the Exchange Agent, then, prior to the release of such
certificates, the withdrawing Holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
the signatures guaranteed by an Eligible Institution unless such Holder is an
Eligible Institution. If Old Preferred Stock has been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal must
specify the name and number of the account at the Book-Entry Transfer Facility
to be credited with the withdrawn Old Preferred Stock and otherwise comply with
the procedures of the Book-Entry Transfer Facility. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company in its sole discretion, which determination shall
be final and binding on all parties. Any Old Preferred Stock so withdrawn will
be deemed not to have been validly tendered for purposes of the Exchange Offer
and no New Preferred Stock will be issued with respect thereto unless the Old
Preferred Stock so withdrawn is validly retendered. Properly withdrawn Old
Preferred Stock may be retendered by
31
<PAGE>
following one of the procedures described above "--Procedures for Tendering" at
any time prior to 5:00 pm New York City time on the Expiration Date.
Any Old Preferred Stock which has been tendered but which is not accepted
for payment due to withdrawal, rejection of tender or termination of the
Exchange Offer will be returned as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer to the Holder thereof
without cost to such Holder (or, in the case of Old Preferred Stock tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility pursuant to the book-entry transfer procedures described above, such
Old Preferred Stock will be credited to an account maintained with such
Book-Entry Transfer Facility for the Old Preferred Stock).
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Preferred Stock for, any Old
Preferred Stock, and may terminate the Exchange Offer as provided herein before
the acceptance of such Old Preferred Stock, if:
(a) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the Exchange Offer which, in
the sole judgment of the Company, might materially impair the ability of the
Company to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company, or any material adverse
development has occurred in any existing action or proceeding with respect to
the Company or any of its subsidiaries;
(b) any change, or any development involving a prospective change, in the
business or financial affairs of the Company or any of its subsidiaries has
occurred which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or materially impair
the contemplated benefits of the Exchange Offer to the Company;
(c) any law, statute, rule or regulation is proposed, adopted or enacted,
which, in the sole judgment of the Company, might materially impair the ability
of the Company to proceed with the Exchange Offer or materially impair the
contemplated benefits of the Exchange Offer to the Company; or
(d) any governmental approval has not been obtained, which approval the
Company shall, in its sole discretion, deem necessary for the consummation of
the Exchange Offer as contemplated hereby.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
form time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and form time to time.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Old Preferred Stock
and return all tendered Old Preferred Stock to the tendered Holders, (ii) extend
the Exchange Offer and retain all Old Preferred Stock tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of Holders to
withdraw such Old Preferred Stock (see "--Withdrawal of Tenders" above) or (iii)
waive such unsatisfied conditions with respect to the Exchange Offer and accept
all properly tendered Old Preferred Stock which has not been withdrawn. If such
waiver constitutes a material change to the Exchange Offer, the Company will
promptly disclose such waiver by means of a prospectus supplement that will be
distributed to the registered Holders, and the Company will extend the Exchange
Offer for a period of five to ten business days, depending upon the significance
of the waiver and the manner of disclosure to the registered Holders, if the
Exchange offer would otherwise expire during such five to ten business day
period.
32
<PAGE>
EXCHANGE AGENT
American Stock Transfer & Trust Company has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
To: AMERICAN STOCK TRANSFER & TRUST COMPANY
By Hand/Overnight Courier:
American Stock Transfer & Trust Company
40 Wall Street
46th Floor
New York, New York 10005
Attn: Reorganization Department
Facsimile Transmission:
(718) 234-5001
Confirm by Telephone:
(800) 937 5449
For Information:
(800) 937-5449
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent, accounting and legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Preferred Stock pursuant to the Exchange Offer. If, however, certificates
representing New Preferred Stock or Old Preferred Stock for shares not tendered
or accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered Holder of the Old Preferred Stock
tendered, or if tendered Old Preferred Stock is registered in the name of any
person other than the person signing the Letter of Transmittal, or if a transfer
tax is imposed for any reason other than the exchange of Old Preferred Stock
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered Holder or any other persons) will be payable
by the tendering Holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer will be billed directly to such tendering Holder.
ACCOUNTING TREATMENT
The New Preferred Stock will be recorded at the same carrying value as the
Old Preferred Stock, which is the aggregate liquidation preference as reflected
in the Company's accounting records on the date of the exchange. Accordingly, no
gain or loss for accounting purposes will be recognized. The expenses of
33
<PAGE>
the Exchange Offer and the expenses related to the issuance of the Old Preferred
Stock will be recorded as a reduction of additional paid-in capital.
REGULATORY APPROVALS
The Company does not believe that the receipt of any material federal or
state regulatory approvals will be necessary in connection with the Exchange
Offer.
OTHER
Participation in the Exchange Offer is voluntary and Holders of Old
Preferred Stock should carefully consider whether to accept the terms and
conditions thereof. Holders of the Old Preferred Stock are urged to consult
their financial and tax advisors in making their own decisions on what action to
take with respect to the Exchange Offer.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Preferred Stock pursuant to the terms of this Exchange
Offer, the Company will have fulfilled a covenant contained in the terms of the
Old Preferred Stock and the Registration Rights Agreement. Holders of the Old
Preferred Stock who do not tender their Old Preferred Stock in the Exchange
Offer will continue to hold such Old Preferred Stock and will be entitled to all
the rights, and limitations applicable thereto under the Certificate of
Designation, except for any such rights under the Registration Rights Agreement
which by their terms terminate or cease to have further effect as a result of
the making of this Exchange Offer. All untendered Old Preferred Stock will
continue to be subject to the restrictions on transfer set forth in the
Registration Rights Agreement and on the certificates evidencing the Preferred
Stock. To the extent that Old Preferred Stock are tendered and accepted in the
Exchange Offer, the trading market, if any, for any remaining Old Preferred
Stock could be adversely affected. See "Risk Factors--Consequences of Failure to
Exchange."
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any proceeds from the issuance of the New Preferred Stock in the
Exchange Offer.
34
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at December
31, 1996, and as adjusted to give pro forma effect to the Private Offering.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
------------------------
<S> <C> <C>
ACTUAL PROFORMA
----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents:.............................................................. $ 3,257 $ 9,257
----------- -----------
----------- -----------
Short-term obligations:
Working capital borrowings(1)......................................................... $ 22,000 --
Current maturities of long-term debt.................................................. 3,047 3,047
Current maturities of redeemable preferred stock...................................... 4,167 4,167
----------- -----------
Total short-term obligations...................................................... $ 29,214 $ 7,214
----------- -----------
----------- -----------
Long-term debt:
Senior notes(2)....................................................................... $ 34,150 $ 64,150
Other senior long-term debt........................................................... 16,787 16,787
Subordinated notes(2)................................................................. 34,150 4,150
10 1/8% Subordinated Notes due 2003................................................... 50,000 50,000
12 1/4% Subordinated Debentures due 2005.............................................. 81,250 81,250
9 3/8% Subordinated Debentures due 2006............................................... 75,000 75,000
----------- -----------
Total long-term debt................................................................ 291,337 291,337
----------- -----------
Redeemable preferred stock:
1989 Cumulative Redeemable Preferred Stock, 250,000 shares authorized, 125,000 shares
outstanding, of which 41,667 are reflected as current............................... 8,333 8,333
12 7/8% Exchangeable Preferred Stock due 2009, 2,000,000 shares authorized, 1,200,000
shares issued and outstanding....................................................... -- 30,000
Common Stock redeemable at option of stockholder........................................ 984 984
Note receivable from stockholder........................................................ (984) (984)
Stockholders' equity (deficiency):
Class A Common Stock, 40,000,000 shares authorized, 22,931,000 shares outstanding..... 2,294 2,294
Class B Common Stock, 6,500,000 shares authorized, 11,000 shares
outstanding......................................................................... 1 1
Class C Common Stock, 5,000,000 shares authorized, 2,567,000 shares outstanding....... 257 257
Additional paid-in capital............................................................ 78,804 76,804
Deficit............................................................................... (221,024) (221,024)
Minimum pension liability adjustment.................................................. (6,065) (6,065)
----------- -----------
Total stockholders' equity (deficiency)............................................. (145,733) (147,733)
----------- -----------
Total capitalization.............................................................. $ 153,937 $ 181,937
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) The Company has available under an amended and restated credit agreement
(the "Credit Agreement") a $75.0 million credit facility, consisting of a
$60.0 million working capital commitment and a $15.0 million letter of
credit facility primarily for insurance purposes.
(2) In connection with the Private Debt Modification, the Company will issue
$30.0 million of senior notes to repurchase a like amount of subordinated
notes.
35
<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, 1996 are
derived from the consolidated financial statements of the Company, which
financial statements have been audited by KPMG Peat Marwick LLP, independent
auditors. The adjusted other data for the year ended December 31, 1996 represent
the historical data for such period as adjusted to (a) exclude restructuring
charges, corporate identity expenses and pension curtailment expense incurred by
the Company in 1996, (b) give effect to the receipt by the Company of $5.5
million of annual distributions from Star Gas Partners, assuming the payment by
Star Gas Partners of its minimum quarterly distribution for a full year and (c)
give effect to (i) the 1996 Acquisitions, and (ii) the Private Offering, as if
such transactions had been completed as of January 1, 1996. The adjusted
financial data does not purport to represent what the Company's financial
position or results of operations would have been if the events described in the
notes thereto 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. Although EBITDA should not be considered as a substitute for net income
(loss) as an indicator of the Company's operating performance, it is included in
the following table as it is one of the principal bases upon which the Company
assesses its financial performance.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................. $ 512,430 $ 538,526 $ 546,677 $ 609,507 $ 608,161
Cost of sales............................................. 350,941 366,809 362,981 387,825 427,388
---------- ---------- ---------- ---------- ----------
Gross profit............................................ 161,489 171,717 183,696 221,682 180,773
Operating expenses........................................ 110,165 123,281 128,309 164,929 143,069
Amortization of customer lists and deferred charges....... 28,859 28,731 25,926 26,669 23,371
Depreciation and amortization of plant and equipment...... 5,534 5,933 6,469 12,374 6,574
Provision for supplemental benefit........................ 1,974 263 373 1,407 873
---------- ---------- ---------- ---------- ----------
Operating income (loss)................................. 14,957 13,509 22,619 16,303 6,886
Interest expense--net..................................... 18,622 20,509 23,766 38,792 32,412
Other income (expense)--net............................... (324) (164) 109 218 1,842
Share of income (loss) of Star Gas........................ -- -- (1,973) 728 2,283
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and extraordinary
item.................................................... (3,989) (7,164) (3,011) (21,543) (21,401)
Income taxes (benefit).................................... 400 400 600 500 500
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item................... (4,389) (7,564) (3,611) (22,043) (21,901)
Extraordinary item........................................ -- (867) (654) (1,436) (6,414)
---------- ---------- ---------- ---------- ----------
Net income (loss)....................................... $ (4,389) $ (8,431) $ (4,265) $ (23,479) $ (28,315)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Ratio of earnings to fixed charges and preferred stock
dividends(1)............................................ -- -- -- -- --
SUMMARY CASH FLOW DATA:
Net Cash provided by (used in) operating activities....... $ 26,713 $ 36,637 $ 31,449 $ (1,707) $ (3,852)
Net Cash provided by (used in) investing activities....... (49,143) (34,337) (31,672) 16,613 (26,193)
Net Cash provided by (used in) financing activities....... 23,381 (1,546) 11,083 47,905 (44,983)
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ADJUSTED
(2)
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- --------- -----------
<CAPTION>
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(3)........................................... $ 51,325 $ 48,437 $ 55,386 $ 56,753 $ 37,704 $ 50,263
Interest expense, net............................... 18,622 20,508 23,766 38,792 32,412 31,573
Preferred Stock
Dividends........................................... 4,452 3,367 3,511 3,263 2,389 6,252
Ratio of EBITDA to interest expense,
net............................................... 2.8x 2.4x 2.3x 1.5x 1.2x 1.6x
Ratio of EBITDA to interest expense, net and
preferred stock dividends......................... 2.2x 2.0x 2.0x 1.4x 1.1x 1.3x
Gallons of home heating oil and retail propane
sold.............................................. 423,354 443,487 456,719 503,610 456,141 462,792
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PROFORMA
1992 1993 1994 1995 1996 1996(4)
---------- ---------- ---------- ----------- ----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash........................................ $ 3,860 $ 4,614 $ 15,474 $ 78,285 $ 3,257 $ 9,257
Working capital (deficiency)................ (6,744) 16,694 28,344 65,408 18,093 46,093
Total assets................................ 252,783 256,589 397,174 357,241 275,025 281,025
Total long-term debt (excluding current
maturities)............................... 135,058 185,311 309,945 294,429 291,337 291,337
Redeemable preferred stock (excluding
current maturities)....................... 37,718 20,833 36,632 12,500 8,333 38,333
Stockholders' deficiency.................... (33,917) (61,964) (66,176) (100,903) (145,733) (147,733)
</TABLE>
- ------------------------
(1) For purposes of calculating the ratio of earnings to fixed charges and
preferred stock dividends, (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 and preferred stock dividends consist of interest expense,
amortization of debt discount, the interest factor in rental expense and
preferred stock dividends. Earnings were insufficient to cover fixed charges
and preferred stock dividends by $8.4 million, $10.5 million, $4.5 million,
$25.5 million, $26.1 million, for the years ended December 31, 1992, 1993,
1994, 1995, and 1996 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 and preferred stock dividends by
$27.9 million, $24.4 million, $28.2 million, $14.9 million and $4.7 million,
respectively, for such periods.
(2) Represents the historical other data for the year ended December 31, 1996 as
adjusted to (a) exclude $4.4 million of restructuring charges, corporate
identity expenses and pension curtailment expense; (b) give effect to the
receipt by the Company of $5.5 million of annual distributions from Star Gas
Partners, assuming the payment by Star Gas Partners of its minimum quarterly
distribution for a full year and (c) give effect to (i) the 1996
Acquisitions, including as a result thereof the addition of $8.8 million of
net sales, $3.5 million of gross profits, $1.2 million of depreciation and
amortization charges and $1.4 million of operating income; and (ii) the
Private Offering and the investment of the net proceeds in interest bearing
instruments reducing interest expense by $1.2 million (at an assumed
interest rate of 5%), as if all such transactions had been completed as of
January 1, 1996.
37
<PAGE>
(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) The pro forma balance sheet data as of December 31, 1996 represents the
historical data as adjusted to give pro forma effect to the Private
Offering. See "Pro Forma Balance Sheet."
38
<PAGE>
BUSINESS
Petro is the largest retail distributor of home heating oil in the United
States, with total sales of $608.2 million and Adjusted EBITDA of $50.3 million
for the year ended December 31, 1996. Petro serves approximately 400,000
customers in the Northeast and Mid-Atlantic states, including the metropolitan
areas of New York City, Boston, Washington, D.C., Baltimore, Providence and
Hartford. Despite its leading position in the home heating oil market, the
Company estimates that its heating oil customer base represents approximately 5%
of the residential customers in the Northeast.
In addition to selling home heating oil, the Company installs and repairs
heating equipment. The Company considers such services, which are not designed
to generate profits, to be an integral part of its basic fuel oil business and
generally does not provide service to any person who is not a heating oil
customer. The Company provides home heating equipment repair service 24 hours a
day, 365 days a year, generally within four hours of request, and regularly
provides various service incentives to obtain and retain customers. To a limited
extent, the Company also markets other petroleum products, including diesel fuel
and gasoline, to commercial customers.
The Company's volume, cash flow and operating profits before depreciation
and amortization have increased significantly since 1980, primarily because of
its acquisition of other home heating oil businesses. Since September 1979, the
Company has acquired 178 retail heating oil distributors.
FUNDAMENTAL CHARACTERISTICS
UNAFFECTED BY GENERAL ECONOMY
The Company's business is relatively unaffected by business cycles. As home
heating oil for residential use is a basic necessity, variations in the amount
purchased as a result of general economic conditions have been limited.
CUSTOMER STABILITY
The Company has a relatively stable customer base due to the tendency of
homeowners to remain with their existing distributors and of home buyers to
remain with the previous homeowner's distributor. While the Company often loses
customers when they move from their homes, the Company is able to retain a
majority of such homes by obtaining the new home purchaser as a customer.
Approximately 90% of the Company's customers receive their home heating oil
pursuant to an automatic delivery system without the customer having to make an
affirmative purchase decision. These 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 40% of the Company's
customers are on the Company's budget payment plan, whereby their estimated
annual oil purchases and service contract are paid for in a series of equal
monthly payments over a twelve month period.
WEATHER STABILITY
The Company's business is directly related to the heating needs of its
customers. Accordingly the weather can have a material effect on the Company's
sales in any particular year. Temperatures over the past 30 years have been
relatively stable, and as a result have not had a significant impact on the
Company's long-term performance. The following table presents the average daily
temperature (in degrees
39
<PAGE>
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 AVERAGE AVERAGE
YEAR TEMPERATURE YEAR TEMPERATURE YEAR TEMPERATURE
- -------------------- --------------- -------------------- --------------- -------------------- ---------------
<S> <C> <C> <C> <C> <C>
1960................ 40.4 1972................ 40.5 1984................ 43.4
1961................ 41.9 1973................ 43.8 1985................ 42.5
1962................ 40.0 1974................ 41.9 1986................ 42.5
1963................ 41.1 1975................ 43.5 1987................ 42.1
1964................ 42.1 1976................ 39.3 1988................ 41.1
1965................ 41.5 1977................ 40.1 1989................ 40.8
1966................ 41.9 1978................ 39.5 1990................ 47.0
1967................ 40.5 1979................ 43.0 1991................ 44.3
1968................ 40.2 1980................ 39.8 1992................ 41.9
1969................ 40.4 1981................ 41.1 1993................ 41.9
1970................ 39.8 1982................ 42.6 1994................ 41.8
1971................ 41.9 1983................ 42.9 1995................ 42.1
1996................ 40.8
</TABLE>
- ------------------------
Source: National Oceanic and Atmospheric Administration
SUPPLY AND PRICING OF HEATING OIL
Home heating oil is available from numerous sources, including integrated
international oil companies, independent refiners and independent wholesalers.
The Company purchases home heating oil from a variety of suppliers pursuant to
supply contracts or on the spot market.
The Company historically has been able to a great extent to pass through
wholesale price increases to its customers and has attempted to minimize
inventory risk by maintaining relatively low home heating oil inventory levels.
However, during certain periods of sudden and sharp fluctuations in supply cost,
such as those experienced during 1996, the Company may be unwilling or unable to
pass the entire increase in supply costs on to its customers.
In addition, approximately 20% of the Company's home heating oil volume is
sold to individual customers under agreements pre-establishing the maximum sales
price of oil over a period of up to 12 months. The maximum price at which oil is
sold to these "capped-price" customers generally is renegotiated in April of
each year in light of then current market conditions. The Company typically uses
a variety of hedging techniques to establish a maximum cost for a majority of
the home heating oil it sells to these capped-price customers.
CONVERSIONS TO NATURAL GAS
The rate of conversion from the use of home heating oil to natural gas is
primarily affected by the relative prices of the two products and the cost of
replacing an oil fired heating system with one that uses natural gas. The
Company believes that approximately 1% of its customer base annually converts
from home heating oil to natural gas. Even when natural gas had a significant
price advantage over home heating oil, such as in 1980 and 1981 when there were
government controls on natural gas prices or, for a short time in 1990 and 1991,
during the Persian Gulf crisis, the Company's customers converted to natural gas
at only a 2% annual rate. Since the latter part of 1991, natural gas conversions
have returned to their approximate 1% historical annual rate as the prices for
the two products have been at approximate parity.
40
<PAGE>
BUSINESS STRATEGY
Current management assumed control of the Company in 1979 and restructured
the Company's fuel oil operation by focusing primarily on the retail sale of
home heating oil. Since this reorganization, management has achieved substantial
growth by acquiring and consolidating smaller retail heating oil distributors in
new and existing markets. In recent years, management has also increased its
focus on achieving competitive advantages in the home heating oil industry by
redefining its operating strategy.
OPERATING STRATEGY
As a result of a major strategic study aimed at improving the Company's
organizational and marketing effectiveness, Petro has recently begun to
implement an operational restructuring program designed to improve productivity
and increase customer awareness. Based on its size, the Company is seeking to
access developments in communications and computer technology, which are
currently in use by other large distribution businesses but which are generally
not used by retail heating oil companies. In addition, Petro is seeking to
create a premium brand image that will capitalize on both its size and the lack
of consumer brand awareness in the heating oil industry. These efforts are
designed to reduce operating costs, maximize customer satisfaction, build brand
recognition and minimize net customer attrition.
As part of the implementation of this operational restructuring program, in
April 1996, the Company opened its first regional customer service center on
Long Island, New York. This state-of-the art facility currently conducts all
activities which interface with the Company's approximately 100,000 Long Island
customers, including sales, customer service, credit and accounting. The Company
is also now operating under the single brand name of "Petro" on Long Island,
rather than the 12 brand names previously in use. In connection with the opening
of the customer service center, five full-function branches were also
consolidated into three strategically located delivery and service depots to
more efficiently serve the Company's customers. In October 1996, the Company
announced the formation of the Mid-Atlantic operating region. The Company will
continue to test and refine its systems in preparation for implementation of
optimal operating structures throughout the Company. The Company anticipates
that the total cost of this program will be approximately $21.0 million over
four years, of which approximately $6.0 million has been incurred to date.
ACQUISITION STRATEGY
The Company's acquisition 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's acquisitions typically result in
significant economies of scale through centralization of the accounting, data
processing and fuel oil purchasing functions of the acquired distributor. As the
Company's regionalization program is implemented, the Company believes that it
may realize additional economies in the areas of credit, marketing and customer
service.
MARKETING STRATEGY
The Company's marketing strategy is based on providing service to
quality-minded customers who desire problem-free heating from their heating oil
supplier. As described above, the Company is consolidating its operations under
one brand name, and is building that brand name by employing an upgraded,
professionally trained and managed sales force and using a professionally
developed mass marketing campaign, including radio and print advertising media.
The Company has a nationwide toll free telephone number, 1-800-OIL-HEAT, which
the Company believes helps it to build customer awareness and brand identity.
The Company is employing new means of acquiring customers, including
co-marketing arrangements with realtors, builders, home inspectors and other
affinity groups. In addition, during the first quarter of 1997, the Company
intends to commence a new direct mail marketing initiative targeted at homes in
41
<PAGE>
transition. This program is designed to contact potential customers before they
have moved to their new residences in advance of solicitations from competing
suppliers. The Company is also in the process of refining its product/pricing
strategy to better meet the needs of desired customer segments.
CUSTOMERS
The Company currently serves approximately 400,000 customers in the
Northeast and Mid-Atlantic states, including the metropolitan areas of New York
City, Boston, Washington, D.C., Baltimore, Providence and Hartford.
Approximately 85% of the Company's home heating fuel oil sales are made to
homeowners, with the balance to industrial, commercial and institutional
customers.
SUPPLIERS
The Company obtains its fuel oil in either barge or truckload quantities,
and has contracts with approximately 70 third party storage terminals for the
right to temporarily store its heating oil at their facilities. Purchases are
made pursuant to supply contracts or on the spot market. The Company has market
price based contracts for substantially all its petroleum requirements with 15
different suppliers, the majority of which have significant domestic sources for
their product, and many of which have been suppliers to the Company for over 10
years. The Company's current suppliers are: Amerada Hess Corporation; Bayway
Refining Co.; Citgo Petroleum Corp.; Coastal New England and New York; Exxon
Company USA; George E. Warren Corp.; Global Petroleum Corp.; Koch Refining
Company, L.P.; Louis Dreyfus Energy Corp.; Mieco, Inc.; Mobil Oil Corporation;
Northeast Petroleum, a division of Cargill, Inc.; Sprague Energy; Stuart
Petroleum Company; and Sun Oil Company. Typically the Company's supply contracts
have terms of 12 months. All of the supply contracts provide for maximum and in
some cases minimum quantities, and in most cases do not establish in advance the
price at which fuel oil is sold, which, like the Company's price to most of its
customers, is established from time to time.
The Company believes that its policy of contracting for substantially all
its supply needs with diverse and reliable sources will enable it to obtain
sufficient product should unforeseen shortages develop in worldwide supplies.
The Company further believes that relations with its current suppliers are
satisfactory.
COMPETITION
The Company's business is highly competitive. The Company competes with fuel
oil distributors offering a broad range of services and prices, from full
service distributors, like the Company, to those offering delivery only.
Competition with other companies in the fuel oil industry is based primarily on
customer service and price.
Long-standing customer relationships are typical in the retail home heating
oil industry. Many companies in the industry, including Petro, deliver home
heating oil to their customers based upon weather conditions and historical
consumption patterns without the customer making 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.
EMPLOYEES
As of December 31, 1996, the Company had 2,472 employees, of whom 623 were
office, clerical and customer service personnel, 742 were heating equipment
repairmen, 668 were oil truck drivers and mechanics, 238 were management and
staff and 201 were employed in sales. Approximately 400 of those employees are
seasonal and are rehired annually to support the requirements of the heating
season. Approximately 700 employees are represented by 20 different local
chapters of labor unions.
Management believes that its relations with both its union and non-union
employees are satisfactory.
42
<PAGE>
ENVIRONMENTAL MATTERS
The Company has implemented environmental programs and policies designed to
avoid potential liability under applicable environmental laws. The Company has
not incurred any significant environmental compliance costs and compliance with
environmental regulations has not had a material effect on the Company's
operating 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. 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.
PROPANE BUSINESS
In addition to its heating oil business, the Company owns a 46.5% equity
interest in Star Gas Partners, which is primarily engaged in the retail
distribution of propane and related supplies and equipment to residential,
commercial, industrial, agricultural and motor fuel customers. The Company
believes that Star Gas Partners is the ninth largest retail propane distributor
in the United States, serving approximately 153,000 customers from 67 branch
locations and 34 satellite storage facilities in the Midwest and Northeast. Star
Gas Partners also serves approximately 70 wholesale customers from its wholesale
operation in southern Indiana.
Star Gas Partners' strategy is to maximize its cash flow and profitability,
primarily through acquisitions of small to medium-sized local and regional
independent propane distributors. It focuses on those companies with a
relatively large percentage of residential customers, which generate higher
margins than other types of customers, and those located in the Midwest and
Northeast, where the Company believes that Star Gas Partners can attain higher
margins than in other areas in the United States.
During the fiscal year ended September 30, 1996, approximately 71% of Star
Gas Partners' sales (by volume of gallons sold) were to retail customers (of
which approximately 56%, 22%, 13% and 9% were sales to residential customers,
industrial/commercial customers, agricultural customers and motor fuel
customers, respectively) and approximately 29% were to wholesale customers.
Approximately 70% to 75% of Star Gas Partners' retail propane volume is sold
during the peak heating season from October through March, as many customers use
propane for heating purposes. Consequently, sales, operating profits and cash
flows may vary significantly from quarter to quarter.
Star Gas Partners obtains propane from approximately 30 sources, all of
which are domestic or Canadian companies. Supplies from these sources have
traditionally been readily available, although no assurance can be given that
supplies of propane will be readily available in the future. Substantially all
of Star Gas Partners' propane supply for its Northeast retail operations are
purchased under annual or longer term supply contracts, which generally provide
for pricing in accordance with market prices at the time of delivery. Star Gas
Partners typically supplies its Midwest retail and wholesale operations by a
combination of (i) spot purchases from Mont. Belvieu, Texas, which are
transported by pipeline to Star Gas Partners' 21 million gallon underground
storage facility in Seymour, Indiana, and then delivered to the Midwest branches
and (ii) purchases from a number of Midwest refineries which are transported by
truck to the branches either directly or via the Seymour facility. A portion of
the refinery purchases are purchased under contract.
Star Gas Partners' business is highly competitive. Propane competes
primarily with electricity, natural gas and fuel oil as an energy source on the
basis of price, availability and portability. In addition to competing with
alternative energy sources, Star Gas Partners competes with other companies
engaged in the retail propane distribution business. Competition in the propane
industry is highly fragmented and generally occurs on a local basis with other
large full-service multi-state propane marketers, smaller local
43
<PAGE>
independent marketers and farm cooperatives. Based on industry publications,
Star Gas Partners believes that the ten largest multi-state marketers, including
Star Gas Partners, 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 10%
share of the total retail market in the United States. Most of Star Gas
Partners' retail distribution branches compete with five or more marketers or
distributors.
In August 1996, Star Gas Partners announced that it had retained Morgan
Stanley & Co. Incorporated to assist it in the development and consideration of
strategic alternatives, including the possibility of a sale or merger. In March
1997, Star Gas Partners announced that as a result of this review, as well as
its assessment of its financial results and prospects, it had determined to
retain its independence and pursue opportunities for growth in the coming years.
44
<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....................... 48 Chief Executive Officer, Chairman of the Board and Director
Thomas M. Isola..................... 52 President and Chief Operating Officer
C. Justin McCarthy.................. 51 Senior Vice President--Operations
Joseph P. Cavanaugh................. 59 Senior Vice President--Safety and Compliance
George Leibowitz.................... 60 Senior Vice President--Finance and Corporate Development
Audrey L. Sevin..................... 70 Secretary and Director
Allen T. Levenson................... 34 Vice President--Marketing and Sales
Peter B. Terenzio, Jr............... 39 Vice President--Human Resources
James J. Bottiglieri................ 41 Vice President and Controller
Matthew J. Ryan..................... 40 Vice President--Supply
Angelo Catania...................... 46 Vice President--Acquisitions
Vincent De Palma.................... 40 Vice President and General Manager-Long Island Region
Phillip Ean Cohen(1)................ 48 Director
Thomas J. Edelman................... 46 Director
Richard O'Connell(2)................ 49 Director
Wolfgang Traber(2).................. 52 Director
Paul Biddelman(1)................... 50 Director
Stephen Russell..................... 56 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
IRIK P. SEVIN has been a director of Petro, Inc., a wholly-owned subsidiary
of the Company, since January 1979 and of the Company since its organization in
October 1983. Mr. Sevin has been President of Petro, Inc. since November 1979.
Mr. Sevin has been Chief Executive Officer and Chairman of the Board of the
Company since January 1993 and was President of the Company from 1983 until
January 1997. 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 Chairman of the Board of Star Gas. 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 President of the Company since January 1997 and
Chief Operating Officer of the Company since August 1994. Prior to joining Petro
and beginning in 1988, Mr. Isola served as President and Chief Executive Officer
of three manufacturing 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 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.
45
<PAGE>
Mr. McCarthy is a graduate of Boston College (B.B.A.) and the New York
University Graduate School of Business Administration (M.B.A.).
JOSEPH P. CAVANAUGH has been Senior Vice President--Safety and Compliance of
the Company since January 1993. From October 1985 to January 1993, Mr. Cavanaugh
was a Vice President of the Company. Mr. Cavanaugh was Controller of Petro, Inc.
from 1973 to 1985 and of the Company from its organization in 1983 until 1994.
Mr. Cavanaugh is a graduate of Iona College (B.B.A.) and Pace University (M.S.
in Taxation).
GEORGE LEIBOWITZ has been Senior Vice President--Finance and Corporate
Development of the Company since November 1, 1992. From 1985 to 1992, 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.)
and the Wharton Graduate Division, University of Pennsylvania (M.B.A.).
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 director and Secretary of Star Gas. Mrs. Sevin is a graduate of New York
University (B.S.).
ALLEN T. LEVENSON has been Vice President-Marketing of the Company since
September 1996. From 1995 to 1996, Mr. Levenson was Corporate Vice President of
Marketing and from 1993 to 1995 Vice President of Marketing, Non-Foods Division,
of The Great Atlantic & Pacific Tea Company. From 1989 to 1993, he held various
positions with McKinsey & Company in its Consumer Marketing Practice. Mr.
Levenson received an MBA in Marketing from the Wharton School, University of
Pennsylvania.
PETER B. TERENZIO, JR. joined the Company in June 1995 as Vice
President--Human Resources. Prior to joining the Company, Mr. Terenzio spent one
year as the Vice President--Human Resources for Linens 'N Things and 11 years in
various operational and human resources positions for Filene's Basement,
including Senior Vice President, Human Resources and Distribution from 1990 to
1994. Mr. Terenzio served four years as a United States Army Officer. Mr.
Terenzio is a graduate of Lehigh University (B.A.).
JAMES J. BOTTIGLIERI has been Controller of the Company since 1994. He was
Assistant Controller of the Company from 1985 to 1994 and was elected Vice
President in December 1992. From 1978 to 1984, Mr. Bottiglieri was employed by a
predecessor firm of KPMG Peat Marwick, a public accounting firm. Mr. Bottiglieri
graduated from Pace University with a degree in Business Administration in 1978
and has been a Certified Public Accountant since 1980.
MATTHEW J. RYAN has been Vice President--Supply of the Company since
December 1992. He was Manager of Supply and Distribution of the Company from
1990 to 1992 and has been employed by the Company since 1987. 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.).
ANGELO CATANIA has been Vice President--Acquisitions of the Company since
March 1996. From 1990 to 1996 he was the Company's Regional Operations Manager
and Co-Director of Acquisitions. From 1984 to 1990 he was Chief Financial
Officer and Vice President--Operations of Acme Oil Co., Inc., a retail heating
oil dealer. From 1974 to 1984, Mr. Catania was Corporate Controller and
Assistant Secretary of Meenan Oil Co., Inc., a retail heating oil dealer. Mr.
Catania is a graduate of St. Francis College (B.S.) and St. Johns University
(M.B.A.).
VINCENT DEPALMA, 40, has been Vice President and General Manager--Long
Island Region of the Company since March 1997 and prior thereto he was a
divisional vice-president and General Manager of
46
<PAGE>
the Long Island Region since April 1996. Prior to joining Petro, Mr. De Palma
was a Principal with McKinsey & Company, Inc., an international management
consulting firm which he joined in 1984. From 1979 until 1982, Mr. De Palma held
various engineering positions with Exxon, USA. Mr. De Palma is a graduate of the
Wharton School, University of Pennsylvania (M.B.A.) and Lafayette College
(B.S.).
STEPHEN RUSSELL has been a director of the Company since July 1996. He has
been Chairman of the Board and Chief Executive Officer of Celadon Group Inc., an
international transportation company, since its inception in July 1986. Mr.
Russell has been a member of the Board of Advisors of the Cornell University
Johnson Graduate School of Management since 1983.
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, an independent oil company
based in Fort Worth, Texas. 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 Star Gas.
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, a private investment corporation. Mr. Traber
is a director of Star Gas, Deltec Asset Management Corporation, Blue Ridge Real
Estate Company, Hellespont Tankers Ltd. and M.M. Warburg & Co.
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
Star Gas, 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.
SHAREHOLDERS' AGREEMENT
Certain shareholders of the Company have entered into a Shareholders'
Agreement (the "Shareholders' Agreement") which provides that they will vote
their shares to elect as directors of the Company up to five persons designated
by a group consisting of 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 party to the agreement (the "Traber
Group"). Each group may designate its directors action of the holders of a
majority of the Common Stock held by such group. The by-laws of the Company
provide for the election of not less than six and not more than fifteen
directors. The Board of Directors has fixed the number of directors at eight. 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
47
<PAGE>
Traber and Richard O'Connell have been designated by the Traber Group. All such
obligations to vote for directors shall lapse if Irik P. Sevin and/or Audrey L.
Sevin no longer own, directly or indirectly, and/or have sole voting power over
at least 51% of the shares of Class C Common Stock held by all members of the
Sevin 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. See "Description
of Capital Stock--Restrictions on Transfer of Class C Common Stock."
The Shareholders' Agreement and the Company's Restated Articles of
Incorporation provide 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. These matters include (i) engaging in any business other than the
fuel oil distribution business, (ii) the merger or consolidation of the Company
with a non-subsidiary corporation, (iii) investment of Company funds other than
in specified securities, (iv) the sale, lease, transfer or other disposition of
a significant portion of the Company's assets in any fiscal year, other than the
sale of petroleum products in the ordinary course of business and those
investments described in clause (iii) above, (v) the liquidation, dissolution or
winding up of the business of the Company, (vi) payment of any compensation to
directors, (vii) the incurrence of more than a specified level of long-term
debt, (viii) any issuance or repurchase of securities or any right or option to
purchase Common Stock or any security convertible into capital stock, except in
connection with the Company's dividend policy and (ix) the making of, or any
commitment for, any capital expenditures or purchase of assets at more than
specified levels. Action by Shareholders on matters involving the sale of all or
substantially all the Company's assets, the Company's merger or consolidation
(except the merger of a subsidiary into the Company), the liquidation or
dissolution of the Company, or any amendment to the articles of incorporation
does not require an 80% vote of the directors; however, the parties to the
Shareholders' Agreement have agreed to vote all of their Class C Common Stock
against any proposal for such items unless approved by a vote of the holders of
at least 85% of the Class C Common Stock.
48
<PAGE>
DESCRIPTION OF PREFERRED STOCK
PREFERRED STOCK
The summary contained herein of certain provisions of the New Preferred
Stock and the Old Preferred Stock does not purport to be complete and is
qualified in its entirety by reference to the provisions of the Company's
Restated and Amended Certificate of Incorporation and the Certificate of
Designation relating thereto, copies of which are filed as Exhibits to the
Registration Statement of which this Prospectus constitutes a part. The
definitions of certain terms used in the following summary are set forth below
under "--Certain Definitions."
The terms of the New Preferred Stock and the Old Preferred Stock are
identical in all material respects except for certain transfer restrictions
relating to the Old Preferred Stock. The Old Preferred Stock and the New
Preferred Stock are hereinafter collectively referred to as the "Preferred
Stock."
Holders of Old Preferred Stock which is accepted for exchange will receive
New Preferred Stock having a liquidation preference equal to that of the
surrendered Old Preferred Stock. All Old Preferred Stock and New Preferred Stock
will be treated as a single class of securities under the Certificate of
Designation.
GENERAL
The Company is authorized to issue (a) 250,000 shares of 1989 Preferred
Stock, of which 125,000 shares are outstanding on the date of this Offering
Memorandum, and (b) 5,000,000 additional shares of preferred stock, $.10 par
value per share, of which 1,200,000 shares of Old Preferred Stock are
outstanding on the date of this Prospectus. The Certificate of Incorporation of
the Company authorizes the Board of Directors, without stockholder approval, to
issue classes of preferred stock from time to time in one or more series, with
such designations, preferences and relative, participating, optional or other
special rights, qualifications, limitations or restrictions as may be determined
by the Board of Directors. The Board of Directors has adopted resolutions
creating a maximum of 2,000,000 shares of Old Preferred Stock and 2,000,000
shares of New Preferred Stock (which may be issued in exchange for a like number
of shares of Old Preferred Stock). Subject to certain conditions, the Preferred
Stock is exchangeable for Exchange Debentures at the option of the Company on
any dividend payment date on or after February 15, 2000. The Preferred Stock is
fully paid and non-assessable, and the holders thereof do not have any
subscription or preemptive rights related thereto. American Stock Transfer and
Trust Company is transfer agent and registrar for the Preferred Stock.
RANKING
With respect to dividend distributions and distributions upon the
liquidation, winding-up and dissolution of the Company, the Preferred Stock
ranks (i) senior to all classes of common stock of the Company, other than the
Class B Stock, and to each other class of capital stock or series of preferred
stock established after the date of this Prospectus by the Board of Directors
the terms of which do not expressly provide that it ranks senior to or on a
parity with the Preferred Stock as to dividend distributions and distributions
upon the liquidation, winding-up and dissolution of the Company (collectively
referred to with the common stock of the Company as "Junior Securities"); (ii)
on a parity with the 1989 Preferred Stock, any additional shares of Preferred
Stock issued by the Company in the future and, subject to certain conditions,
any other class of capital stock or series of preferred stock issued by the
Company established after the date of this Prospectus by the Board of Directors,
the terms of which expressly provide that such class or series will rank on a
parity with the Preferred Stock as to dividend distributions and distributions
upon the liquidation, winding-up and dissolution of the Company (collectively
referred to as "Parity Securities"); and (iii) junior to the Class B Stock and,
subject to certain conditions, each other class of capital stock or series of
preferred stock issued by the Company established after the date of this
Prospectus by the Board of Directors the terms of which expressly provide that
such class or series will
49
<PAGE>
rank senior to the Preferred Stock as to dividend distributions and
distributions upon liquidation, winding-up and dissolution of the Company
(collectively referred to as "Senior Securities"). The Preferred Stock is
subject to the issuance of series of Junior Securities, Parity Securities and
Senior Securities, provided that, except as set forth under "--Certain
Covenants--Limitation on Funded Debt and Preferred Stock," the Company may not
issue any new class of Parity Securities or Senior Securities, or issue any
additional shares of Class B Stock or 1989 Preferred Stock, without the approval
of the holders of at least a majority of the shares of Preferred Stock then
outstanding, voting or consenting, as the case may be, together as one class.
In addition, the Preferred Stock ranks junior in right of payment to all
Indebtedness and other obligations of the Company. As of December 31, 1996,
after giving pro forma effect to the Private Offering, the Preferred Stock would
have been (a) junior in right of payment to approximately $294.4 million of
total Indebtedness of the Company, (b) junior in right of payment to 11,000
shares of Class B Stock, having an aggregate liquidation preference of $0.1
million, and (c) pari passu in right of payment to 125,000 shares of 1989
Preferred Stock, having an aggregate liquidation preference of $12.5 million. In
addition, the Company has the ability to issue up to 800,000 additional shares
of Preferred Stock having an aggregate liquidation preference of up to $20
million, subject to certain conditions. See "--Certain Covenants--Limitation on
Funded Debt and Preferred Stock."
DIVIDENDS
Holders of Preferred Stock are entitled to receive, when, as and if declared
by the Board of Directors, out of funds legally available therefor, dividends on
the Preferred Stock at a rate per annum equal to 12 7/8% of the then effective
liquidation preference per share of Preferred Stock, payable quarterly. All
dividends will be cumulative whether or not earned or declared on a daily basis
from the date of issuance of the Preferred Stock and will be payable quarterly
in arrears on February 15, May 15, August 15 and November 15 of each year (each,
"Dividend Payment Date"), commencing on May 15, 1997; provided, however, that
dividends on shares of New Preferred Stock issued in exchange for shares of Old
Preferred Stock will accrue from the last dividend payment date on which
dividends were paid on the Old Preferred Stock surrendered in exchange therefor,
or, if no Dividends have been paid on the Old Preferred Stock, from the date of
original issuance of the Old Preferred Stock. The Credit Agreement, the
indentures relating to the Private Notes and the 14.10% Notes (collectively, the
"Private Debt Indentures") and the indentures relating to the Public Notes
(collectively, the "Public Debt Indentures") restrict the payment of cash
dividends by the Company, and future agreements may provide the same. See "Risk
Factors-- Restrictions on Payment of Dividends" and "Description of Other
Indebtedness."
No full dividends may be declared or paid or funds set apart for the payment
of dividends on any Parity Securities for any period unless full cumulative
dividends shall have been or contemporaneously are declared and paid in cash or
declared and a sum in cash set apart for such payment on the Preferred Stock. If
full dividends in cash are not so paid, the Preferred Stock will share dividends
pro rata with the Parity Securities. No dividends may be paid or set apart for
such payment on Junior Securities (except dividends on Junior Securities in
additional shares of Junior Securities) and no Junior Securities or Parity
Securities may be repurchased, redeemed or otherwise retired, nor may funds be
set apart for payment with respect thereto, if full cumulative dividends have
not been paid in cash on the Preferred Stock.
OPTIONAL REDEMPTION
The Preferred Stock may be redeemed (subject to contractual and other
restrictions, such as those contained in the Credit Agreement, the Private Debt
Indentures and the Public Debt Indentures, with respect thereto and to the legal
availability of funds therefor) for cash on or after February 15, 2002 at the
option of the Company, in whole or from time to time in part, at the redemption
prices set forth herein, together with all accumulated and unpaid dividends
(including an amount in cash equal to a prorated dividend for the period from
the dividend payment date immediately prior to the redemption date to the
50
<PAGE>
redemption date) and Liquidated Damages, if any, to the redemption date. The
redemption prices (expressed as percentages of liquidation preference) are as
follows for shares of Preferred Stock redeemed during the twelve-month period
beginning February 15, of the years indicated:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2002.............................................................................. 106.438
2003.............................................................................. 104.292
2004.............................................................................. 102.146
2005 and thereafter............................................................... 100.000
</TABLE>
No optional redemption may be authorized or made unless prior thereto full
unpaid cumulative dividends shall have been paid in cash or a sum set apart for
such payment on the Preferred Stock.
In the event of partial redemptions of Preferred Stock, the shares to be
redeemed will be determined pro rata or by lot, as determined by the Company.
The Credit Agreement, the Private Debt Indentures and the Public Debt Indentures
restrict the ability of the Company to redeem the Preferred Stock, and future
agreements may contain similar provisions. See "Description of Other
Indebtedness."
MANDATORY REDEMPTION
The Preferred Stock is also subject to mandatory redemption (subject to
contractual and other restrictions with respect thereto and to the legal
availability of funds, therefor) in whole on the Mandatory Redemption Date at a
price equal to the liquidation preference thereof, plus all accumulated and
unpaid dividends and Liquidated Damages, if any, to the date of redemption.
Future agreements of the Company may restrict or prohibit the Company from
redeeming the Preferred Stock.
PROCEDURE FOR REDEMPTION
On and after a redemption date, unless the Company defaults in the payment
of the applicable redemption price, dividends will cease to accrue on shares of
Preferred Stock called for redemption and all rights of holders of such shares
will terminate except for the right to receive the redemption price, without
interest. The Company will send a written notice of redemption by first class
mail to each holder of record of shares of Preferred Stock, not fewer than 30
days nor more than 60 days prior to the date fixed for such redemption. Shares
of Preferred Stock issued and reacquired will, upon compliance with the
applicable requirements of Minnesota law, have the status of authorized but
unissued shares of preferred stock of the Company undesignated as to series and
may with any and all other authorized but unissued shares of preferred stock of
the Company be designated or redesignated and issued or reissued, as the case
may be, as part of any series of preferred stock of the Company, except that any
issuance or reissuance of shares of Preferred Stock must be in compliance with
the Certificate of Designation.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company is required to make
an offer (the "Change of Control Offer") to each holder of Preferred Stock to
purchase all or any part of such holder's Preferred Stock at an offer price
equal to 101% of the liquidation preference thereof, plus an amount in cash
equal to all accumulated and unpaid dividends and Liquidated Damages, if any, to
the date of purchase. 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 Preferred Stock at a purchase price in cash equal to 101%
of the liquidation preference thereof, plus an amount in cash equal to all
accumulated and unpaid dividends and Liquidated Damages, if any, to the date of
purchase, (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 shall be no earlier than 30 days nor later
51
<PAGE>
than 60 days from the date such notice is mailed) and (iv) the instructions,
determined by the Company consistent with the Certificate of Designation, that a
holder must follow in order to have its Preferred Stock repurchased.
If, at the time of a Change of Control, the Company is prohibited by the
terms of any indebtedness from purchasing shares of Preferred Stock that may be
tendered by holders pursuant to a Change of Control Offer, 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 such indebtedness or (ii) obtain the requisite consent under such
indebtedness to permit the purchase of the Preferred Stock as described above.
The Company must first comply with the covenant described in the preceding
sentence before it will be required to repurchase shares of Preferred Stock 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 Voting
Rights Triggering Event (as defined). As a result of the foregoing, a holder of
the Preferred Stock may not be able to compel the Company to purchase the
Preferred Stock unless the Company is able at the time to refinance all such
indebtedness.
The Change of Control purchase feature of the Preferred Stock 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, 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 indebtedness contains provisions that require the
Company to repurchase such indebtedness upon a Change of Control. Such
indebtedness also limits the amount of the Company's cash that may be used to
repurchase shares of Preferred Stock following a Change of Control. In addition,
the Company's ability to pay cash to the holders of Preferred Stock upon a
Change of Control 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
Change of Control Offer.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, holders of Preferred Stock will be entitled to be paid, out of the
assets of the Company available for distribution, $25 per share, plus an amount
in cash equal to accumulated and unpaid dividends and Liquidated Damages, if
any, thereon to the date fixed for liquidation, dissolution or winding-up
(including an amount equal to a prorated dividend for the period from the last
dividend payment date to the date fixed for liquidation, dissolution or
winding-up), before any distribution is made on any Junior Securities. If, upon
any voluntary or involuntary liquidation, dissolution or winding-up of the
Company, the amounts payable with respect to the Preferred Stock and all other
Parity Securities are not paid in full, the holders of the Preferred Stock and
the Parity Securities will share equally and ratably in any distribution of
assets of the Company in proportion to the full liquidation preference and
accumulated and unpaid dividends and Liquidated Damages to which each is
entitled. After payment of the full amount of the liquidation preferences and
accumulated and unpaid dividends and Liquidated Damages to which they are
entitled, the holders of shares of Preferred Stock will not be entitled to any
further participation in any distribution of assets of the Company. However,
neither the sale, conveyance, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all of the property
or assets of the Company nor the consolidation or merger of the Company with or
into one or more corporations shall be deemed to be a liquidation, dissolution
or winding-up of the Company.
52
<PAGE>
The Certificate of Designation for the Preferred Stock does not contain any
provision requiring funds to be set aside to protect the liquidation preference
of the Preferred Stock, although such liquidation preference will be
substantially in excess of the par value of such shares of Preferred Stock. In
addition, the Company is not aware of any provision of Minnesota law or any
controlling decision of the courts of the State of Minnesota (the state of
incorporation of the Company) that requires a restriction upon the surplus of
the Company solely because the liquidation preference of the Preferred Stock
will exceed its par value. Consequently, there will be no restriction upon the
surplus of the Company solely because the liquidation preference of the
Preferred Stock will exceed the par value and there will be no remedies
available to holders of the Preferred Stock before or after the payment of any
dividend, other than in connection with the liquidation of the Company, solely
by reason of the fact that such dividend would reduce the surplus of the Company
to an amount less than the difference between the liquidation preference of the
Preferred Stock and its par value.
VOTING RIGHTS
Holders of the Preferred Stock have no voting rights with respect to general
corporate matters except as provided by law or as set forth in the Certificate
of Designation. The Certificate of Designation provides that if (a) dividends on
the Preferred Stock are in arrears and unpaid for four quarterly periods
(whether or not consecutive), (b) the Company fails to discharge any redemption
obligation with respect to the Preferred Stock, (c) the Company fails to make an
offer to purchase all of the outstanding shares or Preferred Stock following a
Change of Control, (d) a breach or violation of the provisions described under
the caption "--Certain Covenants" occurs and the breach or violation continues
for a period of 30 days or more or (e) a default occurs on the obligation to pay
principal of, interest on or any other payment obligation when due (a "Payment
Default") at final maturity on any Indebtedness of the Company or any Subsidiary
of the Company, whether such Indebtedness exists on the Preferred Stock Issue
Date or is incurred thereafter, having individually or in the aggregate an
outstanding principal amount in excess of $1 million or its foreign currency
equivalent, or any other Payment Default occurs on any such Indebtedness and
such Indebtedness is declared due and payable prior to its maturity, then the
number of directors constituting the Board of Directors will be adjusted to
permit the holders of the majority of the then outstanding shares of Preferred
Stock, voting separately as a class, to elect two directors. Such voting rights
will continue until such time as all dividends and Liquidated Damages, if any,
in arrears on the Preferred Stock are paid in full and the Company has paid
dividends in full on the two consecutive dividend payment dates following the
payment of such arrearage and any failure, breach or default referred to in
clause (b), (c), (d) or (e) is remedied. Each such event described in clauses
(a) through (e) above is referred to herein as a "Voting Rights Triggering
Event."
In addition, the Certificate of Designation provides that, except as stated
under "--Ranking" and "--Certain Covenants--Limitation on Funded Debt and
Preferred Stock," the Company will not authorize any class of Senior Securities
or Parity Securities, or issue any additional shares of Class B Stock or 1989
Preferred Stock, without the approval of holders of at least a majority of the
share of Preferred Stock then outstanding, voting or consenting, as the case may
be, as one class. The Certificate or Designation also provides that the Company
may not amend the Certificate of Designation so as to affect adversely the
specified rights, preferences, privileges or voting rights of holders of shares
of the Preferred Stock, or authorize the issuance of any additional shares of
Preferred Stock, without the approval of the holders of at least a majority of
the then outstanding shares of Preferred Stock, voting or consenting, as the
case may be, as one class; PROVIDED, HOWEVER, that (a) the Company may not amend
the Change of Control provisions of the Certificate of Designation (including
the related definitions) without the approval of the holders of at least 66 2/3%
of the then outstanding shares of Preferred Stock, voting or consenting, as the
case may be, as one class and (b) without the consent of the holders of the
Preferred Stock, the Company will have the ability to issue up to 800,000
additional shares of Preferred Stock, subject to certain conditions. See
"--Certain Covenants--Limitation on Funded Debt and Preferred Stock." The
Certificate of Designation also provides that, except as set forth above, (a)
the creation, authorization or issuance of any shares of
53
<PAGE>
Junior Securities, Parity Securities or Senior Securities or (b) the increase or
decrease in the amount of authorized capital stock of any class, including any
preferred stock, shall not require the consent of the holders of Preferred Stock
and shall not be deemed to affect adversely the rights, preferences, privileges
or voting rights of holders of shares of Preferred Stock.
Under Minnesota law, holders of preferred stock will be entitled to vote as
a class upon a proposed amendment to the Certificate of Incorporation, whether
or not entitled to vote thereon by the certificate of incorporation, if the
amendment would increase or decrease the par value of the shares of such class,
or alter or change the powers, preferences or special rights of the shares or
such class so as to affect them adversely.
CERTAIN COVENANTS
Set forth below are certain covenants contained in the Certificate of
Designation:
SEC REPORTS. In the event that the Company ceases to be subject to the
informational reporting requirements of the Exchange Act, the Company has agreed
that, whether or not it is required to do so by the rules and regulations of the
Commission, for so long as any shares of Preferred Stock remain outstanding, it
will furnish to the holders of the Preferred Stock and file with the Commission
(unless the Commission will not accept such a filing) (i) 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 Results of
Operations and Financial Condition" and, with respect to the annual information
only, a report thereon by the Company's certified independent public accountants
and (ii) all reports that would be required to be filed with the Commission on
Form 8-K if the Company were required to file such reports. In addition, for so
long as any shares of Preferred Stock remain outstanding, the Company has agreed
to make available to any prospective purchaser of shares of Preferred Stock or
beneficial owner of shares of Preferred Stock in connection with any sale
thereof the information required by Rule 144A(d)(4) under the Securities Act.
LIMITATION ON FUNDED DEBT AND PREFERRED STOCK. 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, and the Company will not issue any Parity Securities or any
additional shares of Preferred Stock, unless, after giving effect thereto, the
Company's Consolidated EBITDA Coverage Ratio exceeds 2.0 to 1.
Notwithstanding the foregoing paragraph, the Company may: (i) incur 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) incur Funded Debt (other than Funded Debt
described in clause (i) of this paragraph) outstanding on the Preferred Stock
Issue Date and incur Funded Debt and issue Parity Securities or additional
shares of Preferred Stock in exchange for, or the proceeds of which are used to
refund or refinance, any Funded Debt permitted by this clause (ii) or by the
first paragraph of this covenant; PROVIDED, HOWEVER, that (1) the principal
amount of the Funded Debt so incurred or the aggregate liquidation preference of
the Parity Securities or Preferred Stock so issued will not exceed the principal
amount of the Funded Debt so exchanged, refunded or refinanced and (2) the
Funded Debt so incurred or the Parity Securities or Preferred Stock so issued
(A) will not mature or be mandatorily redeemable 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 (iii) incur additional Funded
Debt and issue Parity Securities or additional shares of Preferred Stock having
an aggregate principal amount and liquidation preference 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
54
<PAGE>
Funded Debt or issue additional shares of Parity Securities or Preferred Stock
pursuant to the Consolidated EBITDA Coverage Ratio test contained in the
immediately preceding paragraph, the Company may elect that amounts of Funded
Debt incurred, and Parity Securities or shares of Preferred Stock issued,
pursuant to this clause (iii) be deemed to have been incurred or issued pursuant
to the immediately preceding paragraph and be deemed not to have been incurred
or issued pursuant to this clause (iii).
LIMITATION ON INDEBTEDNESS AND PREFERENCE STOCK OF SUBSIDIARIES. The
Company will not permit any Subsidiary to incur any Indebtedness or issue any
Preference Stock except: (i) Indebtedness or Preference 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 Preference 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
Preference Stock, as the case may be, by the issuer thereof; (ii) Indebtedness
incurred or Preference 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 Preference 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 Preference Stock of
such Subsidiary, the Company's Consolidated EBITDA Coverage Ratio exceeds 2.0 to
1; (iii) Indebtedness or Preference Stock (other than Indebtedness or Preference
Stock described in clause (i), (ii), (iv) or (vi) of this covenant) incurred or
issued and outstanding on or prior to the Preferred Stock Issue Date; (iv)
Indebtedness of a Subsidiary consisting of guarantees issued by such Subsidiary
and outstanding on the Preferred Stock Issue Date and Indebtedness of a
Subsidiary consisting of guarantees issued subsequent to the Preferred Stock
Issue Date, in each case, to the extent such guarantee guarantees Working
Capital 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 and
Preferred Stock"; and (vi) Indebtedness or Preference Stock issued in exchange
for, or the proceeds of which are used to refund or refinance, Indebtedness or
Preference Stock referred to in the foregoing clause (ii) or (iii); PROVIDED,
HOWEVER, that (1) the principal amount of such Indebtedness or Preference Stock
so incurred or issued (the "Refinancing Indebtedness") will not exceed the
principal amount of the Indebtedness or Preference 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 Preferred Stock Issue Date (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. In addition to the limitations described
above under "--Ranking," the Company will not, directly or indirectly, (i)
declare or pay any dividend or make any distribution on or in respect of any
Junior Securities (including any payment in connection with any merger or
consolidation involving the Company) or to the direct or indirect holders of any
Junior Securities (except dividends or distributions payable solely in shares of
its Non-Convertible Capital Stock that are Junior Securities or in options,
warrants or other rights to purchase shares of its Non-Convertible Capital Stock
that are Junior Securities), (ii) purchase, redeem or otherwise acquire or
retire for value any Junior Securities or (iii) make any Restricted Investment
(any such dividend, distribution, purchase, redemption or other acquisition, or
any such Restricted Investment, being herein referred to as a "Restricted
Payment") if at the time the Company makes such Restricted Payment: (1) a Voting
Rights Triggering
55
<PAGE>
Event 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 the Preferred Stock Issue Date 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, 1996, 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 any Junior Securities
subsequent to the Preferred Stock Issue Date (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, 1996, of any
Indebtedness of the Company convertible or exchangeable for Junior Securities
(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 Junior Securities made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Junior Securities of the
Company (other than Junior Securities 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 Voting Rights Triggering Event 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; or
(iii) Restricted Investments in an aggregate amount not to exceed the sum of (A)
$30 million, plus (B) $5 million on each anniversary of the Preferred Stock
Issue Date, 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 Preferred Stock Issue Date; PROVIDED,
HOWEVER, that Restricted Investments permitted by this clause (iii) will be
excluded in the calculation of the amount of Restricted Payments.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM SUBSIDIARIES. The Company
will not, and will not permit any Subsidiary to, create or otherwise cause or
permit to exist or become effective any consensual encumbrance or restriction on
the ability of any Subsidiary to: (i) pay dividends or make any other
distributions on its Capital Stock or pay any Indebtedness owed to the Company,
(ii) make any loans or advances to the Company or (iii) transfer any of its
property or assets to the Company, except: (1) any encumbrance or restriction
pursuant to an agreement in effect on the Preferred Stock Issue Date; (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
56
<PAGE>
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 Preferred Stock than the
encumbrances and restrictions contained in such agreements; (4) any such
encumbrance or restriction consisting of customary non-assignment provisions in
leases governing leasehold interests to the extent such provisions restrict the
transfer of the lease; (5) in the case of clause (iii) above, restrictions
contained in security agreements securing Indebtedness of a Subsidiary to the
extent such restrictions restrict the transfer of the property subject to such
security agreements; and (6) any restriction with respect to a Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition of all
or substantially all of the Capital Stock or assets of such Subsidiary pending
the closing of such sale or disposition.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company will not, and will
not permit any Subsidiary to, conduct any business or enter into any transaction
or series of similar transactions in an aggregate amount in excess of $100,000
(including the purchase, sale, lease or exchange of any property or the
rendering of any service) with any Affiliate of the Company or any legal or
beneficial owner of 5% or more of any class of Capital Stock of the Company or
with an Affiliate of any such owner (any such business, transaction or series of
similar transactions, an "Affiliate Transaction") unless the terms of such
Affiliate Transaction are: (i) set forth in writing, (ii) fair to the Company
and its Subsidiaries from a financial point of view (as determined by the Board
of Directors), (iii) in the case of any Affiliate Transaction (other than an
Affiliate Transaction with an Unrestricted Subsidiary of the Company) in an
aggregate amount in excess of $500,000, the disinterested members of the Board
of Directors have determined in good faith that the criteria set forth in clause
(ii) are satisfied and (iv) in the case of any Affiliate Transaction involving
an Unrestricted Subsidiary of the Company in an aggregate amount in excess of
$2.0 million, the members of the Board of Directors have determined in good
faith that the criteria set forth in clause (ii) are satisfied. This covenant
will not prohibit: (a) any Restricted Payment permitted under "--Limitation on
Restricted Payments," (b) 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, (c) loans or advances to employees in the ordinary course of
business, (d) the payment of reasonable fees to directors of the Company and its
subsidiaries who are not employees of the Company or its subsidiaries, (e) any
transaction between the Company and a Wholly Owned Subsidiary or between Wholly
Owned Subsidiaries or (f) the Investment represented by the Sevin Note.
SUCCESSOR COMPANY
Without the approval of the holders of a majority of the shares of Preferred
Stock then outstanding, voting or consenting, as the case may be, together as
one class, 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; (ii) the Preferred Stock shall be
converted into or exchanged for and shall become shares of such successor,
transferee or resulting corporation, having in respect of such successor,
transferee or resulting corporation the same powers, preferences and relative,
participating, optional or other special rights thereof that the Preferred Stock
had immediately prior to such transaction; (iii) 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 Voting Rights Triggering Event has occurred
and is continuing; and (iv) either (a) 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
"--Certain Covenants--Limitation on Funded Debt and Preferred Stock" or (b) the
Company makes an offer to each holder of Preferred Stock to repurchase all or
any part of such holder's Preferred Stock at a purchase price
57
<PAGE>
equal to 101% of the liquidation preference thereof, plus an amount in cash
equal to all accumulated and unpaid dividends and Liquidated Damages, if any, to
the date of purchase.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company is the transfer agent and
registrar for the Preferred Stock.
EXCHANGE
The Company may at its option exchange all, but not less than all, of the
then outstanding shares of Preferred Stock into Exchange Debentures on any
dividend payment date on or after February 15, 2000, PROVIDED that on the date
of such exchange: (a) there are no accumulated and unpaid dividends or
Liquidated Damages on the Preferred Stock (including the dividends payable and
Liquidated Damages on such date) or other contractual impediment to such
exchange; (b) there shall be legally available funds sufficient therefor; (c) a
registration statement relating to the Exchange Debentures shall have been
declared effective under the Securities Act prior to such exchange and shall
continue to be in effect on the date of such exchange or the Company shall have
obtained a written opinion of counsel that an exemption from the registration
requirements of the Securities Act is available for such exchange, and that upon
receipt of such Exchange Debentures pursuant to such exchange made in accordance
with such exemption, the holders (assuming such holder is not an Affiliate of
the Company) thereof will not be subject to any restrictions imposed by the
Securities Act upon the resale thereof, other than any such restriction to which
the holder thereof already is subject on the Exchange Date, and such exemption
is relied upon by the Company for such exchange; (d) the Exchange Debenture
Indenture and the trustee thereunder shall have been qualified under the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"); (e) immediately
after giving effect to such exchange, no Default or Event of Default (each as
defined in the Exchange Debenture Indenture) would exist under the Exchange
Debenture Indenture; and (f) the Company shall have delivered to the Trustee
under the Exchange Debenture Indenture a written opinion of counsel, dated the
date of exchange, regarding the satisfaction of the conditions set forth in
clauses (a), (b), (c) and (d). The Company shall send a written notice of
exchange by mail to each holder of record of shares of Preferred Stock, which
notice shall state (i) that the Company is exercising its option to exchange the
Preferred Stock for Exchange Debentures pursuant to the Certificate of
Designation and (ii) the date of exchange (the "Exchange Date"), which date
shall not be less than 30 days nor more than 60 days following the date on which
such notice is mailed. On the Exchange Date, the Company shall issue Exchange
Debentures in exchange for the Preferred Stock as provided below.
The holders of outstanding shares of Preferred Stock will be entitled to
receive $1,000 principal amount of Exchange Debentures for shares of Preferred
Stock, the liquidation preference of which equals such amount. The Exchange
Debentures will be issued in registered form, without coupons. Exchange
Debentures issued in exchange for Preferred Stock will be issued in principal
amounts of $1,000 and integral multiples thereof to the extent possible, and
will also be issued in principal amounts less than $1,000 so that each holder of
Preferred Stock will receive certificates representing the entire amount of
Exchange Debentures to which his shares of Preferred Stock entitles him,
PROVIDED that the Company may pay cash in lieu of issuing an Exchange Debenture
in a principal amount less than $1,000. On and after the Exchange Date,
dividends will cease to accrue on the outstanding shares of Preferred Stock, and
all rights of the holders of Preferred Stock (except the right to receive the
Exchange Debentures, an amount in cash equal to the accrued and unpaid dividends
and Liquidated Damages, if any, to the Exchange Date and, if the Company so
elects, cash in lieu of any Exchange Debenture which is in an amount that is not
an integral multiple of $1,000) will terminate. The person entitled to receive
the Exchange Debentures issuable upon such exchange will be treated for all
purposes as the registered holder of such Exchange Debentures.
58
<PAGE>
The Company intends to comply with the provisions of Rule 13e-4 promulgated
pursuant to the Exchange Act in connection with any exchange, to the extent
applicable.
BOOK-ENTRY, DELIVERY AND FORM
The Old Preferred Stock was initially issued in the form of one Global
Security (the "Global Old Security") which was deposited on February 18, 1997
with, or on behalf of, the Depository Trust Company (the "Depositary") and
registered in the name of Cede & Co., as nominee of the Depositary (such nominee
being referred to herein as the "Global Security Holder"). Except as set forth
in the next paragraph, it is expected that the New Preferred Stock issued
pursuant to the Exchange Offer will be issued in the form of one Global Security
the "Global New Security" and together with the Global Old Security, the "Global
Security"), deposited with, or on behalf of, the Depositary.
Shares of Preferred Stock that are issued as described below under
"--Certificated Securities" will be issued in the form of registered definitive
certificates (the "Certificated Securities"). Certificated Securities may,
unless the Global Security has previously been exchanged for Certificated
Securities, be exchanged for an interest in the Global Security.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the Initial
Purchaser), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depositary's Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Security, the Depositary will credit
the accounts of Participants designated by the Exchange Agent with shares of the
Global Security and (ii) ownership of the Preferred Stock evidenced by the
Global Security will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by the Depositary (with respect to the
interests of the Depositary's Participants), the Depositary's Participants and
the Depositary's Indirect Participants. Prospective purchasers are advised that
the laws of some states require that certain persons take physical delivery in
definitive form of securities that they own. Consequently, the ability to
transfer shares of Preferred Stock evidenced by the Global Security will be
limited to such extent.
So long as the Global Security Holder is the registered owner of any
Preferred Stock, the Global Security Holder will be considered the sole holder
under the Certificate of Designation of any shares of Preferred Stock evidenced
by the Global Security. Beneficial owners of Preferred Stock evidenced by the
Global Security will not be considered the owners or holders thereof under the
Certificate of Designation for any purpose, including with respect to the giving
of any approvals thereunder. Neither the Company nor the registrar for the
Preferred Stock will have any responsibility or liability for any aspect of the
records of the Depositary or for maintaining, supervising or reviewing any
records of the Depositary relating to the Preferred Stock.
Dividends and redemption payments with respect to shares of Preferred Stock
registered in the name of the Global Security Holder on the applicable record
date will be payable by the Company to or at the direction of the Global
Security Holder in its capacity as the registered holder under the Certificate
of Designation. Neither the Company nor the registrar for the Preferred Stock
has or will have any responsibility or liability for the payment of such amounts
to beneficial owners of Preferred Stock. The
59
<PAGE>
Company believes, however, that it is currently the policy of the Depositary to
immediately credit the accounts of the relevant Participants with such payments,
in amounts proportionate to their respective holdings of beneficial interests in
the relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Preferred Stock will be governed by standing instructions
and customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
CERTIFICATED SECURITIES
Subject to certain conditions, any person having a beneficial interest in
the Global Security may, upon request to the registrar for the Preferred Stock,
exchange such beneficial interest for Preferred Stock in the form of
Certificated Securities. Upon any such issuance, the registrar is required to
register such Certificated Securities in the name of, and cause the same to be
delivered to, such person or persons (or the nominee of any thereof). In
addition, if (i) the Depositary is no longer willing or able to act as a
depositary and the Company is unable to locate a qualified successor within 90
days or (ii) the Company, at its option, elects to cause the issuance of the
Preferred Stock in the form of Certificated Securities, then, upon surrender by
the Global Security Holder of its Global Security, shares of Preferred Stock in
such form will be issued to each person that the Global Security Holder and the
Depositary identify as being the beneficial owner of the related shares of
Preferred Stock.
Neither the Company nor the registrar for the Preferred Stock will be liable
for any delay by the Global Security Holder or the Depositary in identifying the
beneficial owners of Preferred Stock and the Company and the registrar may
conclusively rely on, and will be protected in relying on, instructions from the
Global Security Holder or the Depositary for all purposes.
THE EXCHANGE DEBENTURES
The Exchange Debentures, if issued, will be issued pursuant to the Exchange
Debenture Indenture between the Company and a trustee to be appointed by the
Company in accordance with the Exchange Debenture Indenture (the "Trustee"). The
terms of the Exchange Debentures include those stated in the Exchange Debenture
Indenture and those made part of the Exchange Debenture Indenture by reference
to the Trust Indenture Act. The Exchange Debentures are subject to all such
terms, and prospective investors are referred to the Exchange Debenture
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of certain provisions of the Exchange Debenture Indenture does not
purport to be complete. A copy of the proposed form of Exchange Debenture
Indenture is attached to the Certificate of Designation which has been filed as
an exhibit to the Registration Statement of which this Prospectus forms a part.
Definitions of certain terms used in this section are set forth below under
"--Certain Definitions."
GENERAL
The Exchange Debenture Indenture authorizes the issuance of an aggregate
principal amount of $50.0 million of Exchange Debentures. The Exchange
Debentures will mature on February 15, 2009. The Exchange Debentures will be
general unsecured obligations of the Company and will bear interest at the rate
of 12 7/8% per annum, payable semi-annually in arrears on February 15 and August
15 in each year to the holders of record at the close of business on the
February 1 and August 1 next preceding such interest payment date. Interest will
initially accrue from the Exchange Date. Interest will be computed on the basis
of a 360-day year of twelve 30-day months. The Exchange Debentures will be
issued in fully registered form only in denominations of $1,000 and integral
multiples thereof, other than as described above in "--Preferred
Stock--Exchange."
As indicated under "--Ranking and Subordination" below, the Exchange
Debentures will be subordinated in right of payment to all Senior Debt of the
Company.
60
<PAGE>
Principal, premium, interest and Liquidated Damages, if any, will be
payable, and the Exchange Debentures may be presented for redemption,
repurchase, exchange or transfer, at the office of the paying agent and
registrar and at any other office or agency maintained by the Company for such
purpose. The Trustee will initially act as registrar and paying agent. The
Company may change the registrar or paying agent without prior notice to holders
and the Company or any Subsidiary of the Company may act in such capacity.
OPTIONAL REDEMPTION
The Exchange Debentures will be redeemable for cash on or after February 15,
2002 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 Exchange Debentures redeemed during the twelve-month period beginning
February 15 of the years indicated:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2002.............................................................................. 106.438
2003.............................................................................. 104.292
2004.............................................................................. 102.146
2005 and thereafter............................................................... 100.000
</TABLE>
SINKING FUND
There will be no mandatory sinking fund payments for the Exchange
Debentures.
SELECTION OF EXCHANGE DEBENTURES TO BE REDEEMED AND NOTICE OF REDEMPTION
In the event of optional redemption, as described above, of less than all of
the Exchange Debentures, the Trustee will select the Exchange 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 Exchange Debentures to be redeemed
at such holder's registered address. The notice of redemption will identify the
Exchange Debentures to be redeemed and will state the redemption date, the
redemption price, the name and address of the paying agent, that Exchange
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 Exchange Debenture
Indenture, interest and Liquidated Damages on Exchange Debentures called for
redemption ceases to accrue on and after the redemption date, the paragraph of
the Exchange Debentures pursuant to which the Exchange 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 Exchange 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
and Liquidated Damages, if any, 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.
61
<PAGE>
RANKING AND SUBORDINATION
The payment of the principal of and premium, interest and Liquidated
Damages, if any, on the Exchange Debentures is subordinated in right of payment,
as set forth in the Exchange Debenture 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. As of December 31, 1996, after giving pro forma
effect to the Private Offering, the Exchange Debentures would have been
subordinated in right of payment to approximately $294.4 million of Senior Debt.
The Exchange Debenture 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 Exchange
Debenture 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 Exchange Debentures, even though such
obligations do not constitute Senior Debt. The Exchange Debentures, therefore,
will be effectively subordinated to creditors (including trade creditors) and
preferred stockholders (if any) of Subsidiaries of the Company. As of December
31, 1996, such Subsidiaries had outstanding Indebtedness (other than guarantees
of the Company's Indebtedness under the Credit Agreement) and trade credit of
approximately $19.0 million. Although the Exchange Debenture 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 "--Certain Covenants--Limitation on Indebtedness and
Preference Stock of Subsidiaries."
The Company may not pay principal of or premium, interest or Liquidated
Damages, if any, on the Exchange Debentures or make any deposit pursuant to the
provisions described under "--Defeasance" below and may not repurchase, redeem
or otherwise retire any Exchange 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 Exchange 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 Exchange Debentures
for a period (a "Payment Blockage Period") commencing upon the receipt by the
Company and the Trustee of written notice of such default from the
Representative of the holders of any such Designated Senior Debt specifying an
election to effect such prohibition (a "Payment Blockage Notice") and ending 179
days thereafter (or earlier if such Payment Blockage Period is terminated (i) by
written notice to the Trustee and the Company from the Representative that gave
such Payment Blockage Notice, (ii) by repayment in full of such Designated
Senior Debt or (iii) because such default is no longer continuing).
Notwithstanding the provisions described in the immediately preceding sentence
(but subject to the provisions contained in the first two sentences of this
paragraph), unless the holders of such Designated Senior Debt or the
Representative of such holders have accelerated the maturity of such Designated
Senior Debt, the Company may resume payments on the Exchange Debentures after
the end of such Payment Blockage Period. Not more than one Payment Blockage
Notice may be given in any
62
<PAGE>
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 Exchange
Debentures are entitled to receive any payment.
If payment of the Exchange 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 Exchange
Debenture 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
Exchange Debentures, and creditors of the Company who are not holders of Senior
Debt (including the Exchange Debentures) may recover less, ratably, than holders
of Senior Debt.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Exchange
Debentures will have the right to require the Company to repurchase all or any
part of such holder's Exchange Debentures at a purchase price equal to 101% of
the principal amount thereof plus accrued and unpaid interest and Liquidated
Damages, 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). Within 30 days following any Change of Control, the
Company will mail a notice to each holder with a copy to the Trustee stating (i)
that a Change of Control has occurred and that such holder has the right to
require the Company to purchase such holder's Exchange Debentures at a purchase
price in cash equal to 101% of the principal amount thereof plus accrued and
unpaid interest and Liquidated Damages, 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 Exchange Debenture Indenture, that a holder must follow in order to have its
Exchange Debentures repurchased.
If, at the time of a Change of Control, the Company is prohibited by the
terms of any Senior Debt from purchasing Exchange 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 such Senior Debt or (ii) obtain
the requisite consent from the holders of such Senior Debt to permit the
purchase of the Exchange Debentures as described above. The Company must first
comply with the covenant described in the preceding sentence before it will be
required to purchase Exchange 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 Exchange
Debentures may not be able to compel the Company to purchase the Exchange
Debentures unless the Company is able at the time to refinance any Senior Debt.
The Change of Control purchase feature of the Exchange 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
63
<PAGE>
acquisitions, refinancings or other recapitalizations, that would not constitute
a Change of Control under the Exchange Debenture 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 Senior Debt contains provisions that require the
Company to repurchase such Indebtedness upon a Change of Control. Such Senior
Debt also limits the amount of the Company's cash that may be used to repurchase
Exchange Debentures following a Change of Control. In addition, the Company's
ability to pay cash to the holders of Exchange Debentures upon a Change of
Control 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 Exchange Debentures as a
result of a Change of Control.
CERTAIN COVENANTS
Set forth below are certain covenants contained in the Exchange Debenture
Indenture:
SEC REPORTS. In the event that the Company ceases to be subject to the
informational reporting requirements of the Exchange Act, the Company has agreed
that, whether or not it is required to do so by the rules and regulations of the
Commission, for so long as any of the Exchange Debentures remain outstanding, it
will furnish to the holders of the Exchange Debentures and file with the
Commission (unless the Commission will not accept such a filing) (i) 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 Results of Operations and Financial Condition" and, with respect to
the annual information only, a report thereon by the Company's certified
independent public accountants and (ii) all reports that would be required to be
filed with the Commission on Form 8-K if the Company were required to file such
reports. In addition, for so long as any of the Exchange Debentures remain
outstanding, the Company has agreed to make available to any prospective
purchaser of the Exchange Debentures or beneficial owner of the Exchange
Debentures in connection with any sale thereof the information required by Rule
144A(d)(4) under the Securities 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 Exchange 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, (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 (C) will not constitute Senior Debt; (iii)
Funded Debt (other than Funded Debt described in clause (i) or (ii) of this
paragraph) outstanding on the date of the Exchange Debenture 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
64
<PAGE>
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 or ranks pari passu with the Exchange
Debentures, the Funded Debt so incurred will be subordinated to or PARI PASSU
with, as the case may be, the Exchange Debentures; and (iv) additional Funded
Debt in an aggregate amount at any one time outstanding not to exceed the
aggregate amount of Funded Debt that the Company could have incurred pursuant to
clause (iii) of the second paragraph of the covenant of the Certificate of
Designation described under "--Preferred Stock-- Certain Covenants--Limitation
on Funded Debt and Preferred Stock" on the date that the Exchange Debentures are
issued in exchange for the Preferred Stock (as adjusted to the extent set forth
in clause (b) below); 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 (a) 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) and (b) amounts of Funded Debt incurred, and Parity Securities and
shares of Preferred Stock issued, pursuant to clause (iii) of the second
paragraph of the covenant of the Certificate of Designation described under
"--Preferred Stock--Certain Covenants-- Limitation on Funded Debt and Preferred
Stock" be deemed to have been incurred or issued pursuant to the first paragraph
of the covenant of the Certificate of Designation described under "--Preferred
Stock-- Certain Covenants--Limitation on Funded Debt and Preferred Stock" and be
deemed not to have been incurred or issued pursuant to such clause (iii), so
that the Company may incur up to a maximum of $50.0 million of Funded Debt at
any one time outstanding 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 Exchange Debentures equally and ratably with such Funded Debt for so
long as such Funded Debt is secured by a Lien.
LIMITATION ON INDEBTEDNESS AND PREFERENCE STOCK OF SUBSIDIARIES. The
Company will not permit any Subsidiary to incur any Indebtedness or issue any
Preference Stock except: (i) Indebtedness or Preference 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 Preference 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
Preference Stock, as the case may be, by the issuer thereof; (ii) Indebtedness
incurred or Preference 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 Preference 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 Preference Stock of
such Subsidiary, the Company's Consolidated EBITDA Coverage Ratio exceeds 2.0 to
1; (iii) Indebtedness or Preference Stock (other than Indebtedness or Preference
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 Exchange Debenture
Indenture; (iv) Indebtedness of a Subsidiary consisting of guarantees issued by
such Subsidiary and outstanding on the date of the Exchange Debenture Indenture
and Indebtedness of a Subsidiary consisting of guarantees issued subsequent to
the date of the Exchange Debenture Indenture, in each case, to the extent such
guarantee guarantees Working Capital 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
65
<PAGE>
Subsidiary issues a guarantee for the PRO RATA benefit of the holders of the
Exchange Debentures that is subordinated to such Indebtedness of such Subsidiary
to the same extent as the Exchange Debentures are subordinated to such Funded
Debt of the Company; and (vi) Indebtedness or Preference Stock issued in
exchange for, or the proceeds of which are used to refund or refinance,
Indebtedness or Preference Stock referred to in the foregoing clause (ii) or
(iii); PROVIDED, HOWEVER, that (1) the principal amount of such Indebtedness or
Preference Stock so incurred or issued (the "Refinancing Indebtedness") will not
exceed the principal amount of the Indebtedness or Preference 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
Exchange Debenture 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
(a) 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 (b) 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: (a) a Default will have occurred and be continuing (or would result
therefrom); or (b) the aggregate of (1) the amount of such Restricted Payment,
(2) the amount of all Restricted Payments (as such term is defined in the
Certificate of Designation relating to the Preferred Stock) incurred subsequent
to the Preferred Stock Issue Date and prior to the time that the Preferred Stock
is exchanged for Exchange Debentures and (3) the amount of all other Restricted
Payments (as such term is defined in the Exchange Debenture Indenture)
subsequent to the time that the Preferred Stock is exchanged for Exchange
Debentures 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, 1996, 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 the Preferred Stock Issue Date
(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, 1996, of any Indebtedness of the Company convertible
or exchangeable for Capital Stock of
66
<PAGE>
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 Exchange Debenture
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 Exchange Debenture 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 Exchange Debenture 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 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 Exchange Debenture
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
Exchange 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
67
<PAGE>
to an agreement entered into for the sale or disposition of all or substantially
all of the Capital Stock or assets of such Subsidiary pending the closing of
such sale or disposition.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company will not, and will
not permit any Subsidiary to, conduct any business or enter into any transaction
or series of similar transactions in an aggregate amount in excess of $100,000
(including the purchase, sale, lease or exchange of any property or the
rendering of any service) with any Affiliate of the Company or any legal or
beneficial owner of 5% or more of any class of Capital Stock of the Company or
with an Affiliate of any such owner (any such business, transaction or series of
similar transactions, an "Affiliate Transaction") unless the terms of such
Affiliate Transaction are: (i) set forth in writing, (ii) fair to the Company
and its Subsidiaries from a financial point of view (as determined by the Board
of Directors), (iii) in the case of any Affiliate Transaction (other than an
Affiliate Transaction with an Unrestricted Subsidiary of the Company) in an
aggregate amount in excess of $500,000, the disinterested members of the Board
of Directors have determined in good faith that the criteria set forth in clause
(ii) are satisfied and (iv) in the case of any Affiliate Transaction involving
an Unrestricted Subsidiary of the Company in an aggregate amount in excess of
$2.0 million, the members of the Board of Directors have determined in good
faith that the criteria set forth in clause (ii) are satisfied. This covenant
will not prohibit: (i) any Restricted Payment permitted under "--Limitation on
Restricted Payments," (ii) any issuance of securities, or other payments, awards
or grants in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans approved by the
Board of Directors, (iii) loans or advances to employees in the ordinary course
of business, (iv) the payment of reasonable fees to directors of the Company and
its subsidiaries who are not employees of the Company or its subsidiaries, (v)
any transaction between the Company and a Wholly Owned Subsidiary or between
Wholly Owned Subsidiaries or (vi) the Investment represented by the Sevin Note.
LIMITATION ON LIENS ON SUBSIDIARY STOCK. The Company will not directly or
indirectly create, assume or suffer to exist, any Lien on any Capital Stock of
any of its Subsidiaries, other than Liens securing Senior Debt.
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 Exchange Debenture
Indenture and the Exchange 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)
either (a) 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" or
(b) the Company makes an offer to each holder of Exchange Debentures to
repurchase all or any part of such holder's Exchange Debentures at a purchase
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest and Liquidated Damages, if any, to the date of purchase; 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 Exchange Debenture Indenture.
The resulting, surviving or transferee person will be the successor company.
68
<PAGE>
DEFAULTS
An Event of Default is defined in the Exchange Debenture Indenture as (i) a
default in the payment of interest or Liquidated Damages on the Exchange
Debentures when due, continued for 30 days, whether or not such payment is
prohibited by the provisions described under "--Ranking and Subordination"
above, (ii)(A) a default in the payment of principal of any Exchange 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 and Subordination" above or (B) the failure by the Company to redeem
or purchase Exchange Debentures when required pursuant to the Exchange Debenture
Indenture or the Exchange Debentures, whether or not such redemption or purchase
will be prohibited by the provisions described under "--Ranking and
Subordination" above, (iii) the failure by the Company to comply for 30 days
after notice with its agreements contained in the Exchange Debentures or the
Exchange Debenture 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 Exchange Debentures may
declare the principal of and accrued but unpaid interest on all the Exchange
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
Exchange 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 Exchange Debentures. Under certain circumstances, the holders of a
majority in principal amount of the Exchange Debentures may rescind any such
acceleration with respect to the Exchange Debentures and its consequences. If
payment of the Exchange Debentures is accelerated because of an Event of
Default, the Company or the Trustee must promptly notify the holders of
Designated Senior Debt of the acceleration.
Subject to the provisions of the Exchange Debenture 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 Exchange Debenture Indenture at the request or direction of any of the
holders of the Exchange 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 Exchange Debenture may pursue any remedy with respect to the
Exchange Debenture Indenture or the Exchange 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 Exchange 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 Exchange 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 Exchange 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
69
<PAGE>
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Exchange
Debenture Indenture or, subject to the provisions of the Exchange Debenture
Indenture relating to the duties of the Trustee, that the Trustee determines is
unduly prejudicial to the rights of any other holder of a Exchange 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 Exchange Debenture 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 Exchange 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 Exchange Debenture, the Trustee may withhold
notice if and so long as it determines that withholding notice is in the
interest of the holders of the Exchange 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 Exchange
Debenture Indenture (which require the consent of the holders at least 66 2/3%
in principal amount of the Exchange Debentures), the Exchange Debenture
Indenture may be amended with the consent of the holders of a majority in
principal amount of the Exchange 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 Exchange Debentures then
outstanding However, without the consent of each holder of Exchange Debentures
affected, no amendment may, among other things, (i) reduce the amount of
Exchange Debentures whose holders must consent to an amendment, (ii) reduce the
rate of or extend the time for payment of interest on any Exchange Debenture,
(iii) reduce the principal of or extend the Stated Maturity of any Exchange
Debenture, (iv) reduce the premium payable upon the redemption of any Exchange
Debenture or change the time at which any Exchange Debenture may or will be
redeemed as described under "--Optional Redemption" above, (v) make any Exchange
Debenture payable in money other than that stated in the Exchange Debenture,
(vi) impair the right of any holder of the Exchange Debentures to receive
payment of principal of and interest on such holder's Exchange 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 Exchange Debentures, (vii) make any
change to the subordination provisions of the Exchange Debenture Indenture that
adversely affects the rights of any holder or (viii) make any change in the
amendment provisions which require each holder's consent or in the waiver
provisions.
Without the consent of any holder of the Exchange Debentures, the Company
and the Trustee may amend or supplement the Exchange Debenture 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 Exchange
Debenture Indenture, to provide for uncertificated Exchange Debentures in
addition to or in place of certificated Exchange Debentures (provided that the
uncertificated Exchange Debentures are issued in registered form for purposes of
Section 163(f) of the Code, or in a manner such that the uncertificated Exchange
Debentures are described in Section 163(f)(2)(B) of the Code), to make any
change to the subordination provisions of the Exchange Debenture Indenture that
adversely affects the rights of any holder of Senior Debt (or Representatives
therefor), to add guarantees with respect to the Exchange Debentures, to secure
the Exchange Debentures, to add to the covenants of the Company for the benefit
of the holders of the Exchange 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 Exchange Debentures or to comply with any
requirement of the Commission in connection with the qualification of the
Exchange Debenture Indenture under the Trust Indenture Act. However, no
amendment may be made
70
<PAGE>
to the subordination provisions of the Exchange Debenture 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 Exchange Debentures is not necessary under
the Exchange Debenture 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 Exchange Debenture Indenture becomes effective,
the Company is required to mail to holders of the Exchange Debentures a notice
briefly describing such amendment. However, the failure to give such notice to
all holders of the Exchange Debentures, or any defect therein, will not impair
or affect the validity of the amendment.
DEFEASANCE
The Company at any time may terminate all its obligations under the Exchange
Debentures and the Exchange Debenture Indenture ("legal defeasance"), except for
certain obligations, including those respecting the defeasance trust and
obligations to register the transfer or exchange of the Exchange Debentures, to
replace mutilated, destroyed, lost or stolen Exchange Debentures and to maintain
a registrar and paying agent in respect of the Exchange Debentures. The Company
at any time may terminate its obligations under the covenants described under
"--Certain Covenants" (other than under "--SEC Reports") and "--Change of
Control," the operation of the covenant default provision, the cross
acceleration provision, the bankruptcy provisions which respect to Significant
Subsidiaries and the judgment default provision described under "--Defaults"
above and the limitations contained in clause (iii) described under "--Successor
Company" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Exchange 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 Exchange 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 Exchange
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 Exchange 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).
GOVERNING LAW
The Exchange Debenture Indenture provides that it and the Exchange
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.
71
<PAGE>
CERTAIN DEFINITIONS
"10 1/8% Notes" means the Company's 10 1/8% Subordinated Notes due 2003.
"14.10% Notes" means the Company's 14.10% Senior Notes due January 15, 2001
and the Company's 14.10% Subordinated Notes due January 15, 2001.
"1989 Preferred Stock" means the Company's Cumulative Redeemable Preferred
Stock, par value $.10 per share, issued on August 1, 1989.
"Affiliate" of any person specified means (i) any person directly or
indirectly controlling or under direct or indirect common control with such
specified person, (ii) any spouse, immediate family member or other relative who
has the same principal residence as any person described in clause (i) above,
(iii) any trust in which any persons described in clause (i) or (ii) above has a
beneficial interest and (iv) in the case of the Company, any Unrestricted
Subsidiary of the Company. For the purposes of this definition, "control," when
used with respect to any person, means the power to direct the management and
policies of such person, directly or indirectly, whether through the ownership
of voting securities, a contract or otherwise, and the terms "controlling" and
"controlled" have meaning correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) of shares of Capital
Stock of a Subsidiary (other than directors' qualifying shares), property or
other assets (each referred to for the purposes of this definition as a
"disposition") by the Company or any of its Subsidiaries (including any
disposition by means of a merger, consolidation or similar transaction) other
than (i) a disposition by a Subsidiary to the Company or by the Company or a
Subsidiary to a Wholly Owned Subsidiary, (ii) a disposition of property or
assets at fair market value in the ordinary course of business or (iii) a
disposition of obsolete assets in the ordinary course of business.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as of the time of determination, the present value (discounted at the
dividend rate borne by the Preferred Stock or the interest rate borne by the
Exchange Debentures, as the case may be, 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 Preference 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 Preference Stock multiplied
by the amount of such payment by (ii) the sum of all such payments.
"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 Preference Stock,
but excluding any debt securities convertible into or exchangeable for such
equity.
72
<PAGE>
"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 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 "--The Exchange Debentures--Certain
Covenants--Limitations on Restricted Payments" shall be excluded from Cash Flow
of the Company.
"Change of Control" means (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 Private 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 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 Private 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.
"Class B Stock" means the Company's Class B Common Stock, par value $.10 per
share.
73
<PAGE>
"Code" means the Internal Revenue Code of 1986, as amended.
"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), (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 and, in the case of the Certificate of Designation,
(4) if the Company has issued any Parity Securities or additional shares of
Preferred Stock described in subparagraph (c) of the definition "Consolidated
Interest Expense" 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 the issuance of such Parity Securities or such additional
shares of Preferred Stock, or both, EBITDA and Consolidated Interest Expense for
such period will be calculated after giving effect on a pro forma basis to (A)
such issuance as if such issuance had occurred on the first day of such period,
(B) the discharge of any Indebtedness repaid, purchased, defeased or otherwise
discharged with the proceeds of such shares as if such discharge had occurred on
the first day of such period and (C) the interest income realized by the Company
on the proceeds of the sale of such shares, to the extent not yet applied at the
date of determination, assuming such proceeds earned interest at the Treasury
Rate from the dates such proceeds were received through such date of
determination. For purposes of this definition, whenever pro forma effect is to
be given to an acquisition of assets, the amount of income or earnings relating
thereto, and the amount of Consolidated Interest Expense associated with any
Indebtedness incurred in connection therewith, the pro forma calculations will
be determined in good faith by a responsible financial or accounting Officer of
the Company; PROVIDED, HOWEVER, that such Officer shall assume (i) the
historical sales and gross profit margins associated with such assets for any
consecutive 12-month period ended prior to the date of purchase (provided that
the first month of such period will be no more than 18 months prior to such date
of purchase), less estimated post-acquisition loss of customers 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
74
<PAGE>
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) dividends in respect of all Preference
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),
plus, in the case of the Certificate of Designation, (c) the amount of all cash
dividends paid with respect to any Parity Securities or shares of Preferred
Stock issued pursuant to the first paragraph of "--Certain Covenants--Limitation
on Funded Debt and Preferred Stock"; PROVIDED, HOWEVER, that Consolidated
Interest Expense shall include any interest paid by the Company to Star Gas and
Indebtedness owed to Star Gas but only to the extent the amount of such interest
paid during any period exceeds the cash dividends or other cash distributions on
the Capital Stock of Star Gas distributed to the Company or any Subsidiary
during such period.
"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; (iii) notwithstanding clause (i), Consolidated Net Income of the
Company shall include cash dividends or other cash distributions on the Capital
Stock of Star Gas distributed to the Company by Star Gas but only to the extent
such cash dividends or other cash distributions exceed during any period the
amount of any interest paid by the Company during such period to Star Gas on
Indebtedness owed to Star Gas.
"Credit Agreement" means the Amended and Restated Credit Agreement, dated as
of September 27, 1996, between the Company and The Chase Manhattan 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 Working Capital Debt, (ii) the
Company's 14.10% Senior Notes due January 15, 2001 and (iii) any other Senior
Debt which, at the date of determination, has an
75
<PAGE>
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 Exchange Debenture 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" 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
76
<PAGE>
futures contract or other similar agreement or arrangement designed to protect
such person against changes in interest rates or foreign exchange rates.
"Indebtedness" of any person means, without duplication,
(i) the principal of (A) indebtedness of such person for money borrowed
and (B) indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such person is responsible or liable;
(ii) all Capital Lease Obligations of such person and all Attributable
Indebtedness in respect of Sale/Leaseback Transactions entered into by such
person;
(iii) all obligations of such person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such person
and all obligations of such person under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of
business);
(iv) all obligations of such person for the reimbursement of any obligor
on any letter of credit, banker's acceptance or similar credit transaction
(other than obligations with respect to letters of credit securing
obligations (other than obligations described in (i) through (iii) above)
entered into in the ordinary course of business of such person to the extent
such letters of credit are not drawn upon or, if and to the extent drawn
upon, such drawing is reimbursed no later than the third Business Day
following receipt by such person of a demand for reimbursement following
payment on the letter of credit);
(v) all obligations of the type referred to in clauses (i) through (iv)
of other persons and all dividends of other persons for the payment of
which, in either case, such person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including any guarantees of
such obligations and dividends, including by means of any agreement which
has the economic effect of a guarantee; and
(vi) all obligations of the type referred to in clauses (i) through (v)
of other persons secured by any Lien on any property or asset of such person
(whether or not such obligation is assumed by such person), the amount of
such obligation being deemed to be the lesser of the value of such property
or assets or the amount of the obligation so secured.
"Investment" in any person means any loan or advance to, any guarantee of,
any acquisition of any Capital Stock, equity interest, obligation or other
security of, or capital contribution or other investment in, such person.
Investments will exclude advances to customers and suppliers in the ordinary
course of business.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in The City of New York or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue
for the intervening period.
"Lien" means any mortgage, pledge, security interest, conditional sale or
other title retention agreement or other similar lien.
"Mandatory Redemption Date" means February 15, 2009.
"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
77
<PAGE>
any gain (but not loss) realized upon the sale or other disposition (including,
without limitation, dispositions pursuant to leaseback transactions) of any real
property or equipment of such person, which is not sold or otherwise disposed of
in the ordinary course of business, or of any Capital Stock of the Company or a
Subsidiary owned by such person.
"Non-Convertible Capital Stock" means, with respect to any corporation, any
non-convertible Capital Stock of such corporation and any Capital Stock of such
corporation convertible solely into non-convertible common stock of such
corporation; PROVIDED, HOWEVER, that Non-Convertible Capital Stock will not
include any Redeemable Stock or Exchangeable Stock.
"Officer" means the Chairman of the Board, the Chief Executive Officer, the
President, any Vice President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Liens" means (i) Liens existing on the date of the Exchange
Debenture 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.
"Preference 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 Preference Stock will not include the
Company's Class B Common Stock.
"Preferred Stock Issue Date" means the first date on which shares of
Preferred Stock are issued under the Certificate of Designation.
"Private Notes" means the Company's 11.85% Senior Notes due October 1, 2002,
the Company's 12.17% Senior Notes due October 1, 2002 and the Company's 12.18%
Senior Notes due October 1, 2002.
"Public Notes" means the 10 1/8% Notes, the Company's 9 3/8% Subordinated
Debentures due 2006 and the Company's 12 1/4% Subordinated Debentures due 2005.
"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
78
<PAGE>
the option of the holder thereof at any time on or prior to the first
anniversary of the Stated Maturity of the Exchange Debentures.
"Refinancing Agreement" means any credit agreement or other agreement
between the Company and 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; PROVIDED, HOWEVER, that all amounts which the Company is
deemed to have invested in Star Gas by reason of the designation of Star Gas as
an Unrestricted Subsidiary by the Board of Directors of the Company shall not be
included in the definition of Restricted Investment.
"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.
"Senior Debt" means the following obligations, whether outstanding on the
date of the Exchange Debenture Indenture or thereafter issued:
(i) all obligations consisting of Working Capital Debt;
(ii) all obligations with respect to the Private Notes, the 14.10% Notes
and the Public Notes;
(iii) 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;
(iv) all Capital Lease Obligations of the Company;
(v) 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), (iii) and (iv) 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;
(vi) 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
(vii) 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 the instrument creating or evidencing the same or pursuant to which the
same is outstanding provides that such obligations are not superior in right of
payment to the Exchange Debentures; PROVIDED, HOWEVER, that Senior Debt will not
include (1) any obligation of the Company to any Subsidiary or other
79
<PAGE>
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 Exchange
Debenture 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 (as amended
by an agreement dated December 21, 1995), of Irik P. Sevin to the Company in the
original principal amount of $1,640,060 which is due in five equal annual
installments commencing as of December 31, 1995, the principal amount of which
may not be increased in any one year by more than the amount of accrued and
unpaid interest during the immediately preceding year.
"Significant Subsidiary" means (i) any Subsidiary of the Company which at
the time of determination either (A) had assets which, as of the date of the
Company's most recent quarterly consolidated balance sheet, constituted at least
3% of the Company's total assets on a consolidated basis as of such date, or (B)
had revenues for the 12-month period ending on the date of the Company's most
recent quarterly consolidated statement of income which constituted at least 3%
of the Company's total revenues on a consolidated basis for such period, or (ii)
any Subsidiary of the Company which, if merged with all Defaulting Subsidiaries
of the Company, would at the time of determination either (A) have had assets
which, as of the date of the Company's most recent quarterly consolidated
balance sheet, would have constituted at least 10% of the Company's total assets
on a consolidated basis as of such date or (B) have had revenues for the
12-month period ending on the date of the Company's most recent quarterly
consolidated statement of income which would have constituted at least 10% of
the Company's total revenues on a consolidated basis for such period (each such
determination being made in accordance with generally accepted accounting
principles). "Defaulting Subsidiary" means any Subsidiary of the Company with
respect to which an event described under clause (iv), (v) or (vi) under
"--Defaults" above has occurred and is continuing.
"Stated Maturity" means, with respect to any Indebtedness, the date
specified in such Indebtedness, or in any agreement pursuant to which such
Indebtedness was incurred, as the fixed date on which the principal of such
Indebtedness is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
Indebtedness at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligations" means any Indebtedness of the Company (whether
outstanding on the date hereof or hereafter incurred) which is subordinate or
junior in right of payment to the Exchange 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
80
<PAGE>
investments accounted for by the equity method except to the extent of any cash
dividends received by such person and its Subsidiaries.
"Traber Group" means (i) all the holders of Class C Common Stock as of the
Preferred Stock Issue Date 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 Preferred Stock Issue Date, 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 "--Certain Covenants--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 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
81
<PAGE>
Agreement, or any other loan agreement, 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.
"Working Capital Financing Agreement" means any agreement entered into after
the Preferred Stock Issue Date by the Company and lenders pursuant to which the
Company issues Working Capital Borrowings.
82
<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 Stock ($0.10
par value); 5,000,000 shares of Class C Common Stock ($0.10 par value); 250,000
shares of 1989 Preferred Stock; and 5,000,000 shares of preferred stock ($0.10
par value) which may be issued from time to time in one or more series as the
Board of Directors may determine (the "Preference Stock").
At the date of this Prospectus, there are 23,149,769 shares of Class A
Common Stock, 11,228 shares of Class B Stock, 2,597,519 shares of Class C Common
Stock, 125,000 shares of 1989 Preferred Stock, 1,200,000 shares of Old Preferred
Stock issued and outstanding.
COMMON STOCK
The holders of Class A Common Stock, Class B 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 Stock may be issued without the consent of the
holders of more than 50% of the outstanding shares of the Class B 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 Stock is
automatically converted into one share of Class A Common Stock. The shares of
Common Stock outstanding are 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, that no dividends may be paid on the Class A Common Stock or the Class
C 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 and the Preferred Stock.
Holders of Class B Stock formerly were 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 Stock, effective August 31, 1994.
As a result of such termination, Class B Stockholders will not be entitled to
receive 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, 1996, the Common
Stock Allocation amounted to approximately $93.3 million. After the Common Stock
Allocation has been satisfied, each share of Class B 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 are entitled to one vote per share and
the holders of Class C Common Stock are 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 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.
83
<PAGE>
RESTRICTIONS ON 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. 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, 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
PREFERENCE STOCK
The Company is authorized to issue 5,000,000 shares of Preference 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). The Board of Directors has
authorized the issuance of up to 2,000,000 shares of Old Preferred Stock, of
which 1,200,000 shares of Old Preferred Stock are issued and outstanding as of
the date of this Prospectus and 2,000,000 shares of New Preferred Stock (which
may be issued in exchange for shares of Old Preferred Stock). For a description
of the terms of the Preferred Stock, see "Description of Preferred Stock."
1989 PREFERRED STOCK
The Company has outstanding 125,000 shares of 1989 Preferred Stock, of which
25,000 shares are classified as Series A, 25,000 shares are classified as Series
B and 75,000 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. In connection with
receiving consents in 1994 to modify certain covenants under which the 1989
Preferred Stock was issued, the Company agreed to increase dividends on the 1989
Preferred Stock by $2.00 per share per annum which began in February 1994. The
average dividend rate on these shares is $14.33 per share. The shares of 1989
Preferred Stock are exchangeable, in whole or in part, at the option of the
Company, for subordinated notes due August 1, 1999, 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 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 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
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 Stock and the
Preferred 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; however, the Company has agreed
to submit to, and recommend for approval by its shareholders, an amendment to
its Restated and Amended Articles of Incorporation pursuant to which terms
relating to voting rights and
84
<PAGE>
rights upon Change as Ownership applicable to the 1989 Preferred Stock will be
conformed to the corresponding terms applicable to the Preferred Stock.
LIQUIDATION PREFERENCES
In the event of any complete liquidation, dissolution or winding up of the
business of the Company, each share of Class B 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 and each share of 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 Stock and
Class C Common Stock would participate equally in all liquidating distributions.
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.
DESCRIPTION OF OTHER INDEBTEDNESS
CREDIT AGREEMENT
The Credit Agreement provides for maximum aggregate advances of $60 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 60-day clean-up requirement during the period
April 1 to September 30 of each year and the revolving credit portion of the
facility terminates on September 30, 1998. At December 31, 1996, $22 million in
revolving credit loans was outstanding.
The Credit Agreement includes a $17.2 million acquisition letter of credit
facility all of which has been used to support notes given to certain sellers of
heating oil companies. The Credit Agreement provides that on or prior to June
30, 1998, repayments and/or sinking fund deposits equal to two-thirds of the
initial facility outstanding at September 30, 1996 would be payable with the
final payment due June 30, 1999.
Interest under the Credit Agreement is payable monthly on working capital
loans 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 75 basis points on Alternate Base Rate Loans and 125 to 200
basis points on Eurodollar 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 The Chase Manhattan 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 fees for
acquisition letters of credit, which are payable monthly, range from 175 to 250
85
<PAGE>
basis points based upon the same ratio as that used for working capital loans.
To the extent that the letters of credit are cash collateralized then the fee is
reduced to 25 basis points.
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; or
(iii) sell, transfer or convey customer lists, except, among other
exceptions, a sale from which a portion of the net cash proceeds are used to
cash collateralize the acquisition letter of credit.
The Credit Agreement also provides that the Company must meet the following
financial ratios and tests:
(i) the Company may not permit Consolidated Cash Flow (as defined) for
the first fiscal quarter of each fiscal year of the Company to be less than
$40.0 million;
(ii) the Company may not permit EBITDA (as defined) for any fiscal year
of the Company to be less than $40.0 million; and
(iii) the Company may not permit the Consolidated EBITDA Coverage Ratio
(as defined) for any fiscal year to be less than 1.35 to 1.
The Credit Agreement contains various events of default customary for
agreements of such type, 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 will 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,
$15.0 million of such notes on March 31, 1989 bearing interest at the rate of
12.17% per annum and $5.0 million of such notes on May 1, 1990 bearing interest
at the rate of 12.18% per annum (the foregoing notes have a blended interest
rate of 11.96% and are collectively referred to herein as the "11.96% 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. The 11.96% Notes and 14.10% Notes are
collectively referred to herein as the "Private Debt."
On April 6, 1993, the Company issued $50.0 million of 10 1/8% Subordinated
Notes due 2003 (the "10 1/8% Notes"). On February 3, 1994, the Company issued
$75.0 million of 9 3/8% Subordinated Debentures due 2006 (the "9 3/8%
Debentures"). On February 3, 1995, the Company issued $125.0 million of
86
<PAGE>
12 1/4% Subordinated Debentures due 2005 (the "12 1/4% Debentures"). The 10 1/8%
Notes, 9 3/83/8% Debentures and 12 1/4% Debentures are collectively referred to
herein as the "Public Debt." On February 5, 1996, the Company repaid $43.8
million of the 12 1/4% Debentures.
The Company also had outstanding as of December 31, 1996 an aggregate of
$17.7 million of notes, primarily in connection with the purchase of fuel oil
dealers, which notes are due variously in monthly, quarterly and annual
installments with interest at various rates ranging from 6% to 10%, maturing at
various dates through 2004.
In January 1994, the Company solicited and received consents of the holders
of a majority of the Private Debt to certain amendments to the respective
agreements under which the Private Debt was issued. In partial consideration for
the consents, the Company caused approximately $42.6 million of the aggregate
principal amount of the Private Debt to be ranked as senior.
Simultaneously with the closing of the Private Offering, the Company entered
into agreements with the holders of its 11.96% Notes and 1989 Preferred Stock
pursuant to which (a) holders of $30 million in aggregate principal amount of
senior 11.96% Notes extended the final maturity date of such Notes from October
1, 1998 to October 1, 2002; (b) the Company exchanged $30 million in aggregate
principal amount of subordinated 11.96% Notes for a like principal amount of
newly issued senior 11.96% Notes with a final maturity of October 1, 2002; and
(c) the holders of the 1989 Preferred Stock agreed to certain covenant
modifications that permitted the Company to issue the Preferred Stock.
The agreements under which the Company issued the Private Debt and Public
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 Exchange Indenture.
Under the terms of such agreements, the Company generally may not pay any
dividend or 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 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, after giving
effect to the Offering, approximately $36.8 million would have been available as
of December 31, 1996 for dividends or distributions in respect of the Company's
capital stock, including the Preferred Stock.
87
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material United States federal
income tax considerations relevant to the purchase, ownership and disposition of
the Preferred Stock and the Exchange Debentures by the initial holders thereof,
but does not purport to be a complete analysis of the relevant tax issues. The
discussion is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations, Internal Revenue Service ("IRS") rulings and
pronouncements and judicial decisions all in effect as of the date hereof, all
of which are subject to change at any time, and any such change may be applied
retroactively in a manner that could adversely affect a holder of the Preferred
Stock. Certain proposed tax legislation, if enacted in substantially the same
form as proposed, may adversely affect corporate holders of the Preferred Stock
and change some of the tax consequences discussed herein. See "--Proposed
Legislation." The discussion does not address all of the federal income tax
consequences that may be relevant to a holder in light of such holder's
particular circumstances or to holders subject to special rules, such as certain
financial institutions, insurance companies, dealers in securities, foreign
corporations, nonresident alien individuals and persons holding the Preferred
Stock as part of a "straddle," "hedge" or "conversion transaction." Moreover,
the effect of any applicable state, local or foreign tax laws is not discussed.
The discussion deals only with initial investors who hold Preferred Stock and
Exchange Debentures as "capital assets" within the meaning of section 1221 of
the Code.
The Company has not sought and will not seek any rulings from the IRS with
respect to the position of the Company discussed below. There can be no
assurance that the IRS will not take a different position concerning the tax
consequences of the purchase, ownership or disposition of the Preferred Stock or
that any such position would not be sustained.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE APPLICATION
OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR SITUATIONS AS WELL
AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS.
CLASSIFICATION OF PREFERRED STOCK AND EXCHANGE DEBENTURES
Although the matter is not entirely free from doubt, and the classification
of an instrument as debt or equity is a facts and circumstances determination
that cannot be predicted with certainty, for federal income taxes the Preferred
Stock should be treated as equity and the Exchange Debentures should be treated
as indebtedness. The Company intends to treat the Preferred Stock and the
Exchange Debentures consistent with the foregoing classification, and the
balance of the discussion is based on the assumption that such treatment will be
respected.
DISTRIBUTIONS ON PREFERRED STOCK
Distributions on the Preferred Stock will be taxable as ordinary dividend
income to the extent that the amount of cash distributed does not exceed the
Company's current or accumulated earnings and profits (as determined for federal
income tax purposes). To the extent that the amount of such distributions paid
on the Preferred Stock exceeds the Company's current or accumulated earnings and
profits (as determined for federal income tax purposes), the distributions will
be treated as a return of capital, thus reducing the holder's adjusted tax basis
in such Preferred Stock. The amount of any such excess distribution that is
greater than the holder's adjusted basis in the Preferred Stock will be taxed as
capital gain and will be long-term capital gain if the holder's holding period
for such Preferred Stock exceeds one year.
From 1991 through 1996 the Company had no current or accumulated earnings
and profits (as determined for federal income purposes). There can be no
assurance that the Company will have sufficient earnings and profits (as
determined for federal income tax purposes) to cause distributions on the
Preferred Stock to be treated as dividends for federal income tax purposes. For
purposes of the remainder
88
<PAGE>
of this discussion, the term "dividend" refers to a distribution taxed as
ordinary income as described above, unless the context indicates otherwise.
Dividends received by corporate holders will be eligible for the 70%
dividends-received deduction under Section 243 of the Code, subject to
limitations generally applicable to the dividends-received deductions, including
those contained in Sections 246 and 246A of the Code and the corporate
alternative minimum tax. The 70% dividends-received deduction may be reduced if
a holder's shares of Preferred Stock are "debt financed." In addition, under
Section 246(c) of the Code, the 70% dividends-received deduction will not be
available with respect to stock that is held for 45 days or less (90 days in the
case of a dividend on preferred stock attributable to a period or periods
aggregating more that 366 days), including the day of disposition but excluding
the day of acquisition or any day which is more than 45 days (or 90 days in the
case of the more than 366 day period) after the date on which the Preferred
Stock becomes ex-dividend. The length of time that a holder is deemed to have
held stock for these purposes is reduced for periods during which the holder's
risk of loss with respect to the stock is diminished by reason of the existence
of certain options, contracts to sell, short sales or other similar
transactions. Section 246(c) of the Code also denies the 70% dividends-received
deduction to the extent that a corporate holder is under an obligation, with
respect to substantially similar or related property, to make payments
corresponding to the dividend received. Under Section 246(b) of the Code, the
aggregate dividends received deductions allowed may not exceed 70% of the
taxable income, with certain adjustments, of the corporate shareholder.
Legislation has been proposed which, if enacted, would affect the availability
of the dividends-received deduction for dividends on Preferred Stock. See
"--Proposed Legislation."
Under Section 1059 of the Code, the tax basis of Preferred Stock that has
been held by a corporate shareholder for two years or less (determined as of the
earliest of the date on which the Company declares, announces or agrees to the
payment of an actual or constructive dividend) is reduced (but not below zero)
by the non-taxed portion of an "extraordinary dividend" for which a
dividends-received deduction is allowed. To the extent a corporate holder's tax
basis would have been reduced below zero but for the foregoing limitation, such
holder must increase the amount of gain recognized on the ultimate sale or
exchange of such Preferred Stock. Generally, an "extraordinary dividend" is a
dividend that (i) equals or exceeds, in the case of Preferred Stock, 5% of the
holder's basis in such stock (computed by treating all dividends having
ex-dividend dates within an 85-day period as a single dividend) or (ii) exceeds
20% of the holder's adjusted basis in the Preferred Stock (treating all
dividends having ex-dividend dates within a 365-day period as a single
dividend). If an election is made by the holder, under certain circumstances in
applying these tests, the fair market value of the Preferred Stock as of the day
before the ex-dividend date may be substituted for the holder's basis.
Special rules exist with respect to extraordinary dividends for "qualified
preferred dividends," which are any fixed dividends payable with respect to any
share of stock which (i) provides for fixed preferred dividends payable not less
frequently than annually and (ii) is not in arrears as to dividends at the time
the holder acquires such stock. A qualified preferred dividend does not include
any dividend payable with respect to any share if the actual rate of return of
such stock for the period the stock has been held by the holder receiving the
dividend exceeds 15%.
REDEMPTION PREMIUM ON PREFERRED STOCK
If the redemption price of the Preferred Stock to be paid by the Company on
the mandatory redemption ("Mandatory Redemption") or optional redemption
("Optional Redemption") of the Preferred Stock or upon the exercise of the
holder's option to require the Company to redeem his Preferred Stock upon the
occurrence of a Change of Control ("Holder's Put"), exceeds, by more than a DE
MINIMIS amount, its issue price, all or a portion of such excess may, pursuant
to Section 305(c) of the Code, be viewed as constructive distributions (and thus
as dividends depending upon the presence of current or accumulated earnings and
profits) under an economic accrual method similar to the method described under
Section 1272(a) of the Code. The issue price of the Preferred Stock issued for
money is the price at
89
<PAGE>
which a substantial amount of such stock is sold. A redemption premium will
generally be considered DE MINIMIS as long as it is less than the redemption
price of the Preferred Stock multiplied by 1/4 of 1% multiplied by the number of
years until the issuer must redeem the Preferred Stock.
For purposes of determining whether such constructive distribution treatment
applies, the Mandatory Redemption, the Optional Redemption and the Holder's Put
are tested separately. Constructive distribution treatment is required if any of
these tests is satisfied. Because the issue price of the Preferred Stock at
original issuance will equal the Mandatory Redemption price, no redemption
premium will arise as a result of the Mandatory Redemption feature with respect
to such stock.
The IRS has recently issued regulations (the "Section 305(c) Regulations"),
which deal with these issues. Under the Section 305(c) Regulations, such
economic accrual will arise due to the Optional Redemption only if, based on all
the facts and circumstances as of the date the Preferred Stock is issued,
redemption pursuant to the Optional Redemption were more likely than not to
occur. Even if redemption were more likely than not to occur, however,
constructive distribution treatment would not result if the redemption premium
were solely in the nature of a penalty for premature redemption. For this
purpose, a penalty for premature redemption is a premium paid as a result of
changes in economic or market condition over which neither the issuer nor the
holder has control, such as changes in prevailing dividend rates. The Section
305(c) Regulations provide a safe harbor pursuant to which constructive
distribution treatment will not result from an issuer call right if the issuer
and the holder are unrelated, there are no arrangements that effectively require
the issuer to redeem the stock and exercise of the option to redeem would not
reduce the yield of the stock. In addition, such regulations provide that such
economic accrual will not arise due to the Holder's Put if the holder's ability
to require the Company to redeem subject to a contingency that is beyond the
legal or practical control of either the holder or the holders as a group and
that, based on all facts and circumstances as of the issue date, renders remote
the likelihood of redemption. Although the Company believes that the Optional
Redemption would not be treated as more likely than not to be exercised under
these rules, that the redemption premium is in the nature of a penalty for
premature redemption or that the safe harbor would apply, and that the Holder's
Put is subject to a type of contingency which under the Section 305(c)
Regulations would not require economic accrual, this determination cannot be
made with certainty at this time. Thus, no assurance can be given as to the
treatment of the redemption premium with respect to the Preferred Stock under
the Section 305(c) Regulations.
REDEMPTION, SALE OR EXCHANGE OF PREFERRED STOCK
A redemption of shares of Preferred Stock in exchange for Exchange
Debentures or cash, and a sale of Preferred Stock will be taxable events.
A redemption of shares of Preferred Stock for cash will generally be treated
as a sale or exchange if the holder does not own, actually or constructively
within the meaning of Section 318 of the Code, any stock of the Company other
than the stock redeemed. If a holder does own, actually or constructively, such
other stock (including Preferred Stock not redeemed), a redemption of Preferred
Stock may be treated as a dividend to the extent of the Company's current or
accumulated earnings and profits (as determined for federal income tax
purposes). Such dividend treatment would not be applied if the redemption is
"substantially disproportionate" with respect to the holder under Section
302(b)(2) of the Code or is "not essentially equivalent to a dividend" with
respect to the holder under Section 302(b)(1) of the Code. A distribution to a
holder will be "not essentially equivalent to a dividend" if it results in a
"meaningful reduction" in the holder's stock interest in the Company. For these
purposes, a redemption of Preferred Stock for cash that results in a reduction
in the proportionate interest in the Company (taking into account any
constructive ownership) of a holder whose relative stock interest in the Company
is minimal and who exercises no control over corporate affairs may be regarded
as a meaningful reduction in the holder's stock interest in the Company.
90
<PAGE>
If a redemption of Preferred Stock for cash is not treated as a distribution
taxable as a dividend, the redemption would result in capital gain or loss equal
to the difference between the amount of cash received and the holder's adjusted
tax basis in the Preferred Stock redeemed. Such gain or loss would be long term
capital gain or loss if the holding period for the Preferred Stock exceeded one
year. If neither the Preferred Stock nor the Exchange Debentures are regularly
traded on an established securities market, gain realized on the exchange of
Preferred Stock for Exchange Debentures may qualify for installment sale
treatment.
A redemption of Preferred Stock in exchange for Exchange Debentures will be
subject to the same general rules as a redemption for cash, except that if the
redemption is treated as a sale or exchange the holder would have capital gain
or loss equal to the difference between the issue price of the Exchange
Debentures received and the holder's adjusted tax basis in the Preferred Stock
redeemed. The issue price of the Exchange Debentures would be determined in the
manner described below for purposes of computing original issue discount (if
any) on the Exchange Debentures. See the discussion below under "--Original
Issue Discount on Exchange Debentures." If the redemption is treated as a
dividend, the amount of the dividend would be the issue price of the Exchange
Debenture (to the extent of the Company's current or accumulated earnings or
profits).
If a redemption of Preferred Stock is treated as a distribution that is
taxable as a dividend, the amount of the distribution will be measured by the
amount received by the holder. The holder's adjusted tax basis in the redeemed
Preferred Stock will be transferred to his remaining stock holdings in the
Company. If the holder does not retain any stock ownership in the Company, the
holder may lose such basis entirely. Under the "extraordinary dividend"
provision of Section 1059 of the Code, a corporate holder may, under certain
circumstances, be required to reduce its basis in its remaining shares of stock
of the Company (and possibly recognize gain upon a disposition of such shares)
to the extent the holder claims the 70% dividends-received deduction with
respect to the dividend.
ORIGINAL ISSUE DISCOUNT ON EXCHANGE DEBENTURES
If the shares of Preferred Stock are exchanged for Exchange Debentures at a
time when the stated redemption price at maturity of such Exchange Debentures
exceeds their issue price by an amount equal to or greater than 0.25% of the
stated redemption price at maturity multiplied by the number of complete years
to maturity, the Exchange Debentures will be treated as having original issue
discount ("OID") equal to the entire amount of such excess. If the Exchange
Debentures are traded on an established securities market within the meaning of
Section 1273(b)(3) of the Code, the issue price of the Exchange Debentures will
be their fair market value as of the issue date. Similarly, if the Preferred
Stock, but not the Exchange Debentures issued and exchanged therefor, is traded
on an established securities market at the time of the exchange, then the issue
price of each Exchange Debenture should be the fair market value of the
Preferred Stock at the time of the exchange. If neither the Preferred Stock nor
the Exchange Debentures are traded on an established securities market, and
absent any "potentially abusive situation," the issue price of the Exchange
Debentures will be their stated principal amount, or, in the event the Exchange
Debentures do not bear "adequate stated interest" within the meaning of Section
1274 of the Code, their "imputed principal amount" as determined under Section
1274 of the Code using the applicable federal rate (the "AFR") in effect as of
the date of the exchange.
The "stated redemption price at maturity" of the Exchange Debentures would
equal the total of all payments under the Exchange Debentures, other than
payments of "qualified stated interest." "Qualified stated interest" generally
is stated interest that is unconditionally payable in cash or other property
(other than debt instruments of the issuer such as the Exchange Debentures) at
least annually at a single fixed rate. The stated interest on Exchange
Debentures would qualify as qualified stated interest and would be included in
income in accordance with the holder's method of accounting.
91
<PAGE>
A holder of an Exchange Debenture would generally be required under Section
1272 of the Code to include in gross income (irrespective of its method of
accounting) a portion of such OID for each year during which it holds such an
Exchange Debenture, even if the cash to which such income is attributable would
not be received until maturity or redemption of the Exchange Debenture. The
amount of any OID included in income for each year would be calculated under a
constant yield to maturity formula that would result in the allocation of less
OID to the early years of the term of the Exchange Debenture and more OID for
late years.
If the Exchange Debentures are issued with OID and the Company were found to
have had an intention to call the Exchange Debentures before maturity, any gain
realized on a sale, exchange or redemption of Exchange Debentures prior to
maturity would be considered ordinary income to the extent of any unamortized
OID for the period remaining to the stated maturity of the Exchange Debentures.
The Company cannot predict whether it would have an intention to call the
Exchange Debentures before their maturity at the time, if ever, it issues the
Exchange Debentures.
If issued with OID, the Exchange Debentures may be subject to the provision
of the Code dealing with high yield discount obligations in which case the
Company may not be entitled to claim a deduction with respect to a certain
portion of the OID (the "Disqualified Portion") and the remainder of the OID may
not be claimed as a deduction until paid. In such case, the Disqualified Portion
of the OID may be treated as a dividend with respect to the stock of the Company
and the rules applicable to distributions with respect to the Preferred Stock
may apply.
BOND PREMIUM ON EXCHANGE DEBENTURES
If the shares of Preferred Stock are exchanged for Exchange Debentures at a
time when the issue price of such Exchange Debentures exceeds the amount payable
at the maturity date (or earlier redemption date, if applicable) of the Exchange
Debentures, such excess will be deductible, subject to certain limitations with
respect to individuals, by the holder of such Exchange Debentures as amortizable
bond premium over the term of the Exchange Debentures (taking into account
earlier call dated, as appropriate), under a yield to maturity formula, but only
if an election by the taxpayer under the Section 171 of the Code is in effect or
is made. An election under Section 171 of the Code is available only if the
Exchange Debentures are held as capital assets. Such election is binding once
made and applies to all debt obligations owned or subsequently acquired by the
taxpayer. Under the Code, the amortizable bond premium will be treated as an
offset to interest income on the Exchange Debentures rather than as a separate
deduction item unless otherwise provided in future regulations.
REDEMPTION OR SALE OF EXCHANGE DEBENTURES
Generally, any redemption or sale of Exchange Debentures by a holder would
result in taxable gain or loss equal to the difference between the amount of
cash received (except to the extent that cash received is attributable to
accrued, but previously untaxed, interest) and the holder's tax basis in the
Exchange Debentures. The tax basis of a holder who receives an Exchange
Debenture in exchange for Preferred Stock will generally be equal to the issue
price of the Exchange Debenture on the date the Exchange Debenture is issued
plus any OID on the Exchange Debenture included in the holder's income prior to
sale or redemption of the Exchange Debenture, reduced by any amortizable bond
premium applied against the holders income prior to sale or redemption of the
Exchange Debenture and payments other than payments of "qualified stated
interest." Such gain or loss would be long-term capital gain or loss if the
holding period exceeded one year.
PROPOSED LEGISLATION
Legislation has been proposed, that, if enacted into law substantially as
proposed, would affect the tax treatment of corporate holders of Preferred
Stock. In particular, such proposals would (i) eliminate the
92
<PAGE>
70% and the 80% dividends-received deduction for certain debt-like preferred
stock, effective for stock issued after the date of enactment of such
legislation; and (ii) reduce the 70% dividends-received deduction to 50% for
dividends received or accrued 30 days or more after such date of enactment. It
cannot be predicted with certainty whether these proposals will be enacted into
law or, if enacted, what would be their effective date. Corporate holders of
Preferred Stock or Exchange Debentures are urged to consult their own tax
advisors regarding the possible effects of such proposed legislation.
EXCHANGE OFFER
If the Company effects the Exchange Offer, the holders of Old Preferred
Stock or Exchange Debentures will not recognize taxable gain or loss as a result
of (i) the exchange of the Old Preferred Stock for the New Preferred Stock or
(ii) the exchange of the Old Exchange Debentures for the New Exchange
Debentures.
BACKUP WITHHOLDING
A holder of the Preferred Stock or Exchange Debentures may be subject to
backup withholding at a rate of 31% with respect to dividends on Preferred
Stock, interest on Exchange Debentures and gross proceeds upon sale, exchange or
retirement of the Preferred Stock or Exchange Debentures, as the case may be,
unless such holder (i) is a corporation or other exempt recipient and, when
required, demonstrates that fact, or (ii) provides a correct taxpayer
identification number, certifies, when required, that such holder is not subject
to backup withholding, and otherwise complies with applicable requirements of
the backup withholding rules. Backup withholding is not an additional tax; any
amounts so withheld are creditable against the holder's federal income tax,
provided the required information is provided to the IRS.
SUBSEQUENT PURCHASERS
The foregoing does not discuss special rules which may affect the treatment
of purchasers that acquire the Preferred Stock or the Exchange Debentures other
than at the time of their original issuance.
EACH PROSPECTIVE HOLDER OF PREFERRED STOCK OR EXCHANGE DEBENTURES SHOULD
CONSULT HIS OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OF THE
PREFERRED STOCK OR EXCHANGE DEBENTURES INCLUDING THE APPLICABILITY AND EFFECT OF
ANY STATE, LOCAL, OR FOREIGN INCOME TAX LAWS, AND ANY RECENT OR PROSPECTIVE
CHANGES IN APPLICABLE TAX LAWS.
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that the New
Preferred Stock issued pursuant to the Exchange Offer in exchange for Old
Preferred Stock may be offered for resale, resold or otherwise transferred by
any Holder thereof (other than any such Holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act), without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Preferred Stock is acquired in the
ordinary course of such Holder's business and such Holder has no arrangement
with any person to participate in the distribution of such New Preferred Stock.
Accordingly, any Holder using the Exchange Offer to participate in a
distribution of the New Preferred Stock will not be able to rely on such
no-action letters. Notwithstanding the foregoing, each broker-dealer that
receives New Preferred Stock will not be able to rely on such no-action letters.
Notwithstanding the foregoing, each broker-dealer that receives New Preferred
Stock for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such New Preferred
Stock. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with any resale of New
93
<PAGE>
Preferred Stock received in exchange for Old Preferred Stock where such Old
Preferred Stock was acquired as a result of market-making activities or other
trading activities. The Company has agreed that for a period of one year
following the consummation of the Exchange Offer, it will make this Prospectus,
as amended or supplemented, available to any broker dealer for use in connection
with any such resale. In addition, until , 1997 (40 days from the date
of this Prospectus), all dealers effecting transactions in the New Preferred
Stock may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Preferred
Stock by broker-dealers. New Preferred Stock received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Preferred Stock or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commission or
concessions from any such broker-dealer and/or the purchasers of any such New
Preferred Stock. Any broker-dealer that resells New Preferred Stock that was
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such New Preferred Stock may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver, and by delivering, a prospectus as required, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
For a period of one year from the consummation of the Exchange Offer, the
Company will send a reasonable number of additional copies of this Prospectus
and any amendment or supplement to this Prospectus to any broker-dealer that
requests such documents in the Letter of Transmittal. The Company will pay all
the expenses incident to the Exchange Offer (which shall not include the
expenses of any Holder in connection with the resale of the New Preferred
Stock). The Company has agreed to indemnify the Holders of Old Preferred Stock,
including any broker-dealers participating in the Exchange Offer, against
certain liabilities, including liabilities under the Securities Act.
This Prospectus may be used by the Initial Purchaser in connection with
offers and sales of the New Preferred Stock in market-making transactions at
negotiated prices related to prevailing market prices at the time of sale. The
Initial Purchaser may act as principal or agent in such transactions. The
Initial Purchaser has advised the Company that it currently intends to make a
market in the New Preferred Stock but is not obligated to do so and may
discontinue any such market-making at any time without notice. Accordingly, no
assurance can be given to an active trading market will develop for, or as to
the liquidity of, the New Preferred Stock.
LEGAL MATTERS
The validity of the New Preferred Stock offered hereby will be passed upon
for the Company by Phillips Nizer Benjamin Krim & Ballon LLP, New York, New
York. Phillips Nizer Benjamin Krim & Ballon LLP will rely upon Dorsey & Whitney
LLP, Minneapolis, Minnesota, with respect to certain matters concerning
Minnesota law.
EXPERTS
The audited financial statements and schedule of the Company appearing in
the Company's Annual Report on Form 10-K have been audited by KPMG Peat Marwick
LLP, independent certified public accountants, to the extent and for the periods
set forth in their report appearing in the Company's Annual Report on Form 10-K
and have been incorporated by reference herein in reliance upon such report
given upon the authority of said firm as experts in accounting and auditing.
94
<PAGE>
PRO FORMA BALANCE SHEET
The following Pro Forma Balance Sheet at December 31, 1996 is derived from
the Company's audited consolidated financial statements for the year ended
December 31, 1996. The Pro Forma Balance Sheet does not purport to represent
what the Company's financial position would have been if the events described
therein had occurred on the dates specified, nor is it intended to project the
Company's financial position for any future period. The Pro Forma Balance Sheet
should be read in conjunction with the Consolidated Financial Statements, and
the Notes thereto, appearing in Form 10-K and incorporated herein by reference.
The following transactions are referenced in the Pro Forma Balance Sheet
(collectively, the "Pro Forma Adjustments"):
(a) The "Offering", by the Company of $30 million of 12 7/8% Preferred
Stock due 2009, net of estimated offering costs of $2.0 million.
(b) The simultaneous issue of $30 million of Senior Notes in exchange
for a like amount of Subordinated Notes.
(c) Pending application, repayment of $22 million of Working Capital
Borrowings, with a portion of the "offering" proceeds.
P-1
<PAGE>
PRO FORMA BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PETROLEUM HEAT
AND
POWER CO., PRO FORMA
INC. ADJUSTMENTS PRO FORMA
-------------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................................. $ 3,257 $ 28,000(1) $ 9,257
(22,000)(3)
Restricted Cash.................................................. 3,000 3,000
Accounts Receivable.............................................. 93,362 93,362
Inventories...................................................... 22,084 22,084
Other current assets............................................. 8,307 8,307
-------------- -----------
-----------
Total current assets........................................... 130,010 6,000 136,010
Property plant and equipment--net.................................. 30,666 30,666
Intangibles--net................................................... 103,496 103,496
Other assets....................................................... 910 910
Investment in Star Gas Partnership................................. 9,943 9,943
-------------- -----------
-----------
$ 275,025 $ 281,025
$ 6,000
LIABILITY AND STOCKHOLDERS' EQUITY
Working capital borrowings....................................... $ 22,000 $ (22,000)(3) --
Current maturities of long term debt............................. 3,047 $ 3,047
Current maturities of cumulative redeemable exchangeable
preferred stock................................................ 4,167 4,167
Accounts payable................................................. 18,988 18,988
Customer credit balances......................................... 17,468 17,468
Unearned service contract revenue................................ 15,388 15,388
Accrued expenses................................................. 30,859 30,859
-------------- -----------
-----------
Total current liabilities...................................... 111,917 $ (22,000) 89,917
-------------- -----------
-----------
Long-term debt and notes payable................................... 50,937 30,000(2) 80,937
Subordinated notes payable......................................... 240,400 (30,000) 210,400(2)
Supplemental benefits payable and other payables................... 1,584 1,584
Pension plan obligation............................................ 7,587 7,587
-------------- -----------
-----------
Total liabilities.............................................. 412,425 (22,000) 390,425
-------------- -----------
-----------
Cumulative redeemable exchangeable preferred stock................. 8,333 30,000(1) 38,333
-------------- -----------
-----------
Note receivable from stockholder................................... (984) (984)
Common stock redeemable by stockholder............................. 984 984
Stockholders' equity (deficiency)
Common stock..................................................... 2,552 2,552
Additional paid in capital....................................... 78,804 (2,000)(1) 76,804
Deficit.......................................................... (221,024) (221,024)
Minimum pension liability adjustment............................. (6,065) (6,065)
-------------- -----------
-----------
(145,733) (147,733)
(2,000)
-------------- -----------
-----------
$ 275,025 $ 281,025
$ 6,000
-------------- -----------
-------------- -----------
-----------
-----------
</TABLE>
P-2
<PAGE>
PRO FORMA BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1996
(IN THOUSANDS)
- ------------------------
(1) Reflects the Offering, net of estimated expenses of $2 million, with net
proceeds to the Company of approximately $28 million.
(2) Reflects the exchange by the Company of $30 million in aggregate principal
amount of Subordinated 11.96% Notes for a like principle amount of newly
issued senior 11.96% Notes with a final maturity date of October 1, 2002.
(3) To reflect the repayment of $22 million of Working Capital Borrowings, with
a portion of the "offering" proceeds.
P-3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED HEREIN OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES OR AN OFFER OR SOLICITATION IN ANY JURISDICTIONS IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, 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 TIME SUBSEQUENT TO
THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SUCH.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information............................ 4
Incorporation of Certain Documents by
Reference...................................... 4
Statement Regarding Forward Looking Disclosure... 4
Prospectus Summary............................... 5
Risk Factors..................................... 17
The Exchange Offer............................... 23
Use of Proceeds.................................. 32
Capitalization................................... 33
Selected Financial and Other Data................ 34
Business......................................... 37
Management....................................... 43
Description of Preferred Stock................... 47
Description of Capital Stock..................... 80
Description of Other Indebtedness................ 82
Certain Federal Income Tax Considerations........ 85
Plan of Distribution............................. 91
Legal Matters.................................... 92
Experts.......................................... 92
Pro Forma Balance Sheet.......................... P-1
</TABLE>
UNTIL , 1997, ([40] DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE NEW PREFERRED STOCK OFFERED HEREBY,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
$30,000,000
[PETRO LOGO]
PETROLEUM HEAT AND POWER CO., INC.
12 7/8% SERIES B EXCHANGEABLE PREFERRED
STOCK DUE 2009
---------------------
PROSPECTUS
---------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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 persons'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 persons'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.
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
II-1
<PAGE>
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."
INDEMNIFICATION AGREEMENTS WITH DIRECTORS
In March 1996 the Company entered into Indemnification Agreements with each
of its directors. The Agreements generally provide that the Company will
indemnify the directors against certain liabilities arising out of legal actions
brought or threatened against them for their conduct on behalf of the Company to
the fullest extent permitted by applicable law. The agreements contain
provisions implementing the director's rights thereunder with respect to, among
other things: (i) indemnification of expenses to a party who is wholly or partly
successful; (ii) indemnification of expenses of a witness; (iii) advancement of
expenses; (iv) procedure for determination of entitlement to indemnification;
(v) certain presumptions; (vi) remedies of an indemnitee; (vii) subrogation;
(viii) establishment of a trust and the funding thereof by the Company, upon the
indemnitee's request, in the event of change in Control or Potential Change in
Control (as defined therein); and (ix) contribution in the event indemnification
may be unavailable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
3.1-- Restated and Amended Articles of Incorporation, as amended, and Articles of Amendment thereto.(2)
3.2-- Restated By-Laws of the Registrant.(2)
4.1-- Indenture, dated as of April 1, 1993, between the Company and Chemical Bank, as trustee, including
Form of Notes.(1)
4.2-- Form of Indenture, dated as of October 1, 1985 between the Company and Manufacturers Hanover Trust
Company, as trustee, including Form of Notes.(3)
4.3-- Restated and Amended Articles of Incorporation and Articles of Amendment thereto.(3)
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.(3)
4.6-- Form of Indenture between the Company and Chemical Bank, as trustee, including Form of Debentures.(8)
4.7-- Certificate of Designation creating a series of Preferred Stock designated as Cumulative Redeemable
Exchangeable 1993 Preferred stock.(8)
4.8-- Certificate of Designation, as amended, creating a series of Preferred Stock designated as 12 7/8%
Exchangeable Preferred Stock due 2009.(14)
4.9-- Registration Rights Agreement, dated as of February 18, 1997, by and between the registrant and
Donaldson, Lufkin & Jenrette Securities Corporation.(14)
5.1-- Opinion of Phillips Nizer Benjamin Krim & Ballon LLP.(16)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
9.1-- Shareholders' Agreement dated as of July 1992, among the Company and certain of its stockholders.(2)
10.1-- Fourth Amended and Restated Credit Agreement dated as of September 27, 1996 among the Company,
certain banks party thereto and Chase Manhattan Bank, as Agent.(10)
10.2-- Pension Plan, of Petroleum Heat and Power Co., Inc. (2)
10.3-- Amendment No. 1 to pension plans.(14)
10.4-- Savings Plan, as amended of Petroleum Heat and Power Co., Inc.(16)
10.5-- Supplemental Executive Retirement Plan of Petroleum Heat and Power Co., Inc.(2)
10.6-- Amendment No. 1 to Supplemental Executive Retirement Plan. (14)
10.7-- Lease dated December 1, 1985 with respect to office and garage located at 3600-3620 19th Avenue,
Astoria, New York.(3)
10.8-- Lease dated October 26, 1990 with respect to office and garage located at 1 Coffey Street, Brooklyn,
New York.(2)
10.9-- Lease dated February 6, 1990 with respect to office and garage located at 62 Oakland Avenue and 64
Oakland Avenue, East Hartford, Connecticut.(2)
10.10-- 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)
10.11-- Lease dated December 1, 1990 with respect to garage located at 10 Coffey Street, Brooklyn, New
York.(2)
10.12-- Lease dated November 8, 1996 with respect to office facility located at 467 Creamery Way, Exton, PA
19341. (14)
10.13-- 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)
10.14-- Agreement dated October 22, 1986 relating to purchase of 64,000 shares of Class A Common Stock by
Irik P. Sevin.(5)
10.15-- Agreement dated December 2, 1986 relating to stock options granted to Irik P. Sevin.(5)
10.16-- Agreements dated December 28, 1987 and March 6, 1989 relating to stock options granted to Irik P.
Sevin and Malvin P. Sevin.(2)
10.17-- Employment Agreement dated July 31, 1995 with George Leibowitz.(14)
10.18-- Lease dated June 17, 1993 with respect to office facilities located at 2187 Atlantic Street in
Stamford, Connecticut. (8)
10.19-- First Amendment to the Company's 10 1/8% Subordinated Notes Indenture dated as of January 12,
1994.(8)
10.20-- Employment Agreement dated July 21, 1994 with Thomas Isola.(10)
10.21-- Agreement dated April 4, 1994 relating to stock options granted to Irik P. Sevin.(11)
10.22-- Employment Agreement dated June 2, 1994 with Alex Szabo. (12)
10.23-- Agreement dated December 31, 1995, in the amount of $1,751,468 due December 31, 1999 from Irik P.
Sevin to the Company. (13)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.24-- Lease dated January 25, 1996 with respect to regional office located at 48 Harbor Park Drive, Port
Washington, New York. (10)
10.25-- Note Purchase Agreement dated as of February 1, 1997 re: 60,000,000 in Senior Notes due October 1,
2002.(14)
10.26-- Third Amendment and Restatements of Purchase Agreements dated as of February 1, 1997 re: 250,000
shares of 1989 Preferred Stock.(14)
10.27-- Sixth Amendment and Restatement of Note Agreement dated as of February 1, 1997 re: 14.10% Senior and
Subordinated Notes due January 15, 2001.(14)
11.0-- Computation of Per Share Earnings.(14)
21.0-- Subsidiaries of Registrant.(14)
23.1-- Consent of KPMG Peat Marwick LLP (16)
23.2-- Consent of Phillips Nizer Benjamin Krim & Ballon LLP (to be included as part of Exhibit 5.1).
24.1-- Power of Attorney (included on signature page).
27.0-- Financial Data Schedule (14)
99.1-- Form of Letter of Transmittal. (15)
99.2-- Form of Notice of Guaranteed Delivery.(15)
99.3-- Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees.(15)
99.4-- Form of Letter to Clients.(15)
</TABLE>
- ------------------------
(1) Filed as Exhibits to Registration Statement on Form S-2, File No. 33-58034.
(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 Registration Statement on Form S-2, File No.
33-72354, and incorporated herein by reference.
(9) Filed as Exhibits to the Company's Periodic Report on Form 8-K filed on
January 4, 1994, File No. 2-88526 and incorporated herein by reference.
II-4
<PAGE>
(10) Filed as an Exhibit to the Company's Periodic Report on Form 10-Q and
incorporated herein by reference.
(11) Filed as Exhibits to the Registration Statement on Form S-2, File
No.33-57059, and incorporated herein by reference.
(12) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994, File No. 2-88526, and incorporated herein by
reference.
(13) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, File No. 2-88526, and incorporated herein by
reference.
(14) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, File No. 2-88526 and incorporated herein by
reference.
(15) Filed herewith.
(16) To be filed by amendment.
(b) Financial Statements Schedules
SCHEDULE DESCRIPTION
ITEM 22. UNDERTAKINGS
(1) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statements, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of the
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be anew 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the act and is,
therefore, 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 act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of the Act.
II-5
<PAGE>
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes the information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized in the City of New York, State of New York,
on the 12th of March, 1997.
PETROLEUM HEAT AND POWER CO., INC.
BY: /S/ IRIK P. SEVIN
-----------------------------------------
Irik P. Sevin
CHAIRMAN OF THE BOARD, CHIEF
EXECUTIVE OFFICER AND CHIEF
FINANCIAL AND ACCOUNTING OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints IRIK P. SEVIN, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place or stead, in any and all capacities, to sign the
within registration Statement and any and all amendments to said Registration
Statement, and to file the same, with all exhibits thereto, and any other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agent, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board,
/s/ IRIK P. SEVIN Chief Executive Officer,
- ------------------------------ Financial and Accounting March 12, 1997
Irik P. Sevin Officer and Director
/s/ AUDREY L. SEVIN Secretary and Director
- ------------------------------ March 12, 1997
Audrey L. Sevin
/s/ Director
- ------------------------------ March , 1997
Phillip E. Cohen
/s/ Director
- ------------------------------ March , 1997
Thomas J. Edelman
/s/ WOLFGANG TRABER Director
- ------------------------------ March 12, 1997
Wolfgang Traber
/s/ RICHARD O'Connell Director
- ------------------------------ March 12, 1997
Richard O'Connell
/s/ STEPHEN RUSSELL Director
- ------------------------------ March 12, 1997
Stephen Russell
/s/ PAUL BIDDELMAN Director
- ------------------------------ March 12, 1997
Paul Biddelman
II-7
<PAGE>
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1997, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
PETROLEUM HEAT AND POWER CO., INC.
2187 ATLANTIC STREET
STAMFORD, CONNECTICUT 06902
LETTER OF TRANSMITTAL
FOR 12 7/8% SERIES A EXCHANGEABLE PREFERRED STOCK DUE 2009
EXCHANGE AGENT:
AMERICAN STOCK TRANSFER & TRUST COMPANY
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL: BY OVERNIGHT COURIER:
American Stock Transfer & Trust Company American Stock Transfer & Trust Company
40 Wall Street--46th floor 40 Wall Street--46th Floor
New York, New York 10005 New York, New York 10005
Attn: Reorganization Department Attn: Reorganization Department
BY HAND: BY FACSIMILE:
American Stock Transfer & Trust Company American Stock Transfer & Trust Company
40 Wall Street--46th Floor 40 Wall Street--46th Floor
New York, New York 10005 New York, New York 10005
Attn: Reorganization Department Attn: Reorganization Department
Facsimile Transmission: (718) 234-5001
Confirm by Telephone: (800) 937 5449
For Information: (800) 937-5449
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE DOES NOT
CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges receipt of (i) the Prospectus dated April
,1997 (the "Prospectus") of Petroleum Heat and Power Co., Inc., a
Minnesota corporation (the "Issuer"), and (ii) this Letter of Transmittal which
may be amended from time to time (this "Letter"), which together constitute the
Issuer's offer (the "Exchange Offer") to exchange up to 1,200,000 shares of its
12 7/8% Series B Exchangeable Preferred Stock with a liquidation preference of
$25 per share (the "New Preferred Stock") for an equal number of shares of its
12 7/8% Series A Exchangeable Preferred Stock with a liquidation preference of
$25 per share (the "Old Preferred Stock" and together with the New Preferred
Stock, the "Preferred Stock") with the holders (the "Holders") thereof. The
terms of the New Preferred Stock are identical in all material respects to the
terms of the Old Preferred Stock, except that the New Preferred Stock has been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and, therefore will not bear legends restricting its transfer and will not
contain certain terms providing for an increase in the dividend on the Old
Preferred Stock under certain circumstances.
1
<PAGE>
The undersigned has completed, executed and delivered this Letter to
indicate the action he or she desires to take with respect to the Exchange
Offer. Only a Holder of Old Preferred Stock may tender such Old Preferred Stock
in the Exchange Offer. A Holder who wishes to tender Old Preferred Stock for
exchange pursuant to the Exchange Offer must transmit a properly completed and
duly executed Letter of Transmittal, or a facsimile hereof, including any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) certificates for such Old
Preferred Stock must be received by the Exchange Agent along with the Letter of
Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Preferred Stock, if such procedure is available, into
the Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility"), must be received by the Exchange Agent or (iii) the Holder
must comply with the guaranteed delivery procedures described below. To be
tendered effectively, the Old Preferred Stock, or Book-Entry Confirmation, as
the case may be, the Letter of Transmittal and other required documents must be
received by the Exchange Agent at the address set forth on the front page of
this letter prior to 5:00 p.m., New York City time, on the Expiration Date.
The Instructions included in this Letter must be followed in their entirety.
Questions and requests for assistance or for additional copies of the Prospectus
or this Letter may be directed to the Exchange Agent, at the address listed
above, or Mr. James J. Bottiglieri, Vice President and Controller of the
Company, at (203) 325-5400, 2187 Atlantic Street, Stamford, Connecticut 06902.
PLEASE READ CAREFULLY THE ENTIRE LETTER OF TRANSMITTAL,
INCLUDING THE INSTRUCTIONS TO THIS LETTER,
BEFORE CHECKING ANY BOX BELOW
List in Box 1 below the Old Preferred Stock of which you are the holder. If
the space provided in Box 1 is inadequate, list the certificate numbers and
number of shares of Old Preferred Stock on a separate signed schedule and affix
that schedule to this letter.
BOX 1
TO BE COMPLETED BY ALL TENDERING HOLDERS
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF
OLD PREFERRED NUMBER OF SHARES
STOCK OF
NAME(S) AND ADDRESS(ES) REPRESENTED OLD PREFERRED
OF REGISTERED HOLDER(S) CERTIFICATE BY STOCK
(PLEASE FILL IN IF BLANK) NUMBER(S)(1) CERTIFICATE(S) TENDERED(2)
<S> <C> <C> <C>
TOTALS:
</TABLE>
(1) Need not be completed if Old Preferred Stock is being tendered by
book-entry transfer.
(2) Unless otherwise indicated, the entire number of shares of Old Preferred
Stock represented by a certificate delivered to the Exchange Agent will
be deemed to have been tendered.
2
<PAGE>
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned tenders to the Issuer the number of shares of Old Preferred Stock
indicated above. Subject to, and effective upon, the acceptance for exchange of
the Old Preferred Stock tendered with this Letter, the undersigned exchanges,
assigns and transfers to, or upon the order of, the Issuer all right, title and
interest in and to the shares of Old Preferred Stock so tendered.
The undersigned constitutes and appoints the Exchange Agent as his or her
agent and attorney-in-fact with respect to the tendered Old Preferred Stock,
with full power of substitution, to: (a) deliver certificates for such Old
Preferred Stock; (b) deliver Old Preferred Stock and all accompanying evidence
of transfer and authenticity to or upon the order of the Issuer upon receipt by
the Exchange Agent, as the undersigned's agent, of the New Preferred Stock to
which the undersigned is entitled upon the acceptance by the Issuer of the Old
Preferred Stock tendered under the Exchange Offer; and (c) receive all benefits
and otherwise exercise all rights of beneficial ownership of the Old Preferred
Stock, all in accordance with the terms of the Exchange Offer. The power of
attorney granted in this paragraph shall be deemed irrevocable and coupled with
an interest.
The undersigned hereby represents and warrants that he or she has full power
and authority to tender, exchange, assign and transfer the Old Preferred Stock
tendered hereby and that the Issuer will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim. The undersigned will, upon request, execute
and deliver any additional documents deemed by the Issuer to be necessary or
desirable to complete the assignment and transfer of the Old Preferred Stock
tendered.
The undersigned agrees that acceptance of any tendered Old Preferred Stock
by the Issuer and the issuance of New Preferred Stock in exchange therefor shall
constitute performance in full by the Issuer of its obligations under the
Registration Rights Agreement and that, upon the issuance of the New Preferred
Stock, the Issuer will have no further obligations or liabilities thereunder
(except in certain limited circumstances). By tendering Old Preferred Stock, the
undersigned certifies that: (a) it is not an "affiliate" of the Issuer within
the meaning of Rule 405 under the Securities Act, that it is not a broker-dealer
that owns Old Preferred Stock acquired directly from the Issuer or an affiliate
of the Issuer, that it is acquiring the New Preferred Stock in the ordinary
course of the undersigned's business and that the undersigned has no arrangement
with any person to participate in the distribution of the New Preferred Stock;
or (b) that it is an "affiliate" (as so defined) of the Issuer and that it will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable to it.
The undersigned acknowledges that, if it is a broker-dealer that will
receive New Preferred Stock for its own account, it will deliver a prospectus in
connection with any resale of such New Preferred Stock. By so acknowledging and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
The undersigned understands that the Issuer may accept the undersigned's
tender by delivering oral or written notice of acceptance to the Exchange Agent,
at which time the undersigned's right to withdraw such tender will terminate.
All authority conferred or agreed to be conferred by this Letter shall
survive the death or incapacity of the undersigned, and every obligation of the
undersigned under this Letter shall be binding upon the undersigned's heirs,
personal representatives, successors and assigns. Tenders may be withdrawn only
in accordance with the procedures set forth in the Instructions contained in
this Letter.
Unless otherwise indicated under "Special Delivery Instructions" below, the
Exchange Agent will deliver New Preferred Stock (and, if applicable, a
certificate for any shares of Old Preferred Stock not tendered but represented
by a certificate also encompassing shares of Old Preferred Stock which are
tendered) to the undersigned at the address set forth in Box 1.
This Letter is to be completed by holders if certificates are to be
forwarded herewith pursuant to the procedures set forth in the Prospectus.
Holders whose certificates are not immediately available or who
3
<PAGE>
cannot deliver their certificates and all other documents required hereby to the
Exchange Agent on or prior to the Expiration Date must tender their Old
Preferred Stock according to the guaranteed delivery procedure set forth under
the caption "The Exchange Offer--Guaranteed Delivery Procedures" in the
Prospectus (see Instruction 1). The undersigned understands that the Exchange
Offer is subject to the more detailed terms set forth in the Prospectus and, in
case of any conflict between the terms of the Prospectus and this Letter, the
Prospectus shall prevail.
/ / CHECK HERE IF TENDERED OLD PREFERRED STOCK IS BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE
BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:
- -------------------------------------------------------------
Account Number:
- -------------------------------------------------------------------------
Transaction Code Number:
- -----------------------------------------------------------------
/ / CHECK HERE IF TENDERED OLD PREFERRED STOCK IS BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name(s) of Registered Owner(s):
- --------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
- --------------------------------------------
Window Ticket Number (if available):
- ----------------------------------------------------------
Name of Institution which Guaranteed Delivery:
- ------------------------------------------------
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of the
New Preferred Stock. If the undersigned is a broker-dealer that will receive New
Preferred Stock for its own account in exchange for Old Preferred Stock, it
represents that the shares of Old Preferred Stock to be exchanged for shares of
New Preferred Stock were acquired by it as a result of market-making activities
or other trading activities in the ordinary course of its business and
acknowledges that it will deliver a Prospectus in connection with any resale of
such New Preferred Stock; however, by so acknowledging and by delivering a
Prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The undersigned acknowledges that if he or she were to engage in a
distribution of the New Preferred Stock, he or she (1) could not rely on the
position of the staff of the Securities and Exchange Commission enunciated in
EXXON CAPITAL or interpretive letters of similar effect and (2) must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction.
4
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
BOX 2
PLEASE SIGN HERE
(WHETHER OR NOT OLD PREFERRED STOCK IS BEING
PHYSICALLY TENDERED HEREWITH)
____________________________________________________________________________
____________________________________________________________________________
Signatures of Owners or Date
authorized Signatory
Area Code and Telephone Number: ____________________________________________
This box must be signed by registered holder(s) of Old Preferred Stock as
their name(s) appear(s) on certificate(s) for Old Preferred Stock, or by
person(s) authorized to become registered holder(s) by endorsement and
documents transmitted with this Letter. If signature is by a trustee,
executor, administrator, guardian, officer or other person acting in a
fiduciary or representative capacity, such person must set forth his or her
full title below. (See Instruction 3)
Name(s)
____________________________________________________________________________
____________________________________________________________________________
(Please Print)
Capacity ___________________________________________________________________
Address ____________________________________________________________________
____________________________________________________________________________
(Include Zip Code)
SIGNATURE GUARANTEE
Signature(s) guaranteed ____________________________________________________
(Authorized Signature)
(If required by Instruction 3) _____________________________________________
(Title)
(If required by Instruction 3) _____________________________________________
(Name of Firm)
5
<PAGE>
<TABLE>
<S> <C> <C>
BOX 3
TO BE COMPLETED BY ALL TENDERING HOLDERS
PAYER'S NAME: AMERICAN STOCK TRANSFER & TRUST COMPANY
SUBSTITUTE PART 1--PLEASE PROVIDE YOUR Social Security Number
FORM W-9 TAXPAYER IDENTIFICATION NUMBER OR
(TIN) IN THE BOX AT RIGHT AND Employer Identification
CERTIFY BY SIGNING AND DATING Number
BELOW
PART 2--Check the box if you are NOT subject to back-up
DEPARTMENT OF THE TREASURY withholding under the provisions of Section 2406(a)(1)(C) of
INTERNAL REVENUE SERVICE the Internal Revenue Code because (1) you have not been
notified that you are subject to back-up withholding as a
result of failure to report all interest or dividends or (2)
the Internal Revenue Service has notified you that you are no
longer subject to back up withholding. / /
PAYER'S REQUEST FOR CERTIFICATION--UNDER PENALTIES OR PART 3
TAXPAYER IDENTIFICATION PERJURY, I CERTIFY THAT THE Check If Awaiting TIN / /
NUMBER ("TIN") INFORMATION PROVIDED ON THIS FORM
IS TRUE, CORRECT AND COMPLETE.
SIGNATURE:
DATE:
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER, PLEASE
REVIEW THE "IMPORTANT TAX INFORMATION" SECTION FOR MORE DETAILS.
BOX 4
SPECIAL ISSUE INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for shares of Old Preferred
Stock that are not being tendered, or New Preferred Stock, are to be
issued in the name of someone other than the person whose signature
appears in Box 2.
Issue and deliver:
(check appropriate boxes)
/ / Old Preferred Stock not tendered
/ / New Preferred Stock to:
Name _______________________________________________________________
Please Print
Address ____________________________________________________________
Please complete the Substitute form W-9 at Box 3
Tax I.D. or Social Security Number:
6
<PAGE>
BOX 5
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Old Preferred Stock
representing shares not tendered, or New Preferred Stock, are to be issued
in the name of someone other than the person whose signature appears in Box
2 or to an address other than that shown in Box 1.
Deliver:
(check appropriate boxes)
/ / Old Preferred Stock not tendered
/ / New Preferred Stock to:
Name________________________________________________________________________
Please Print
Address_____________________________________________________________________
7
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER AND CERTIFICATES. Certificates for Old Preferred
Stock or a Book-Entry Confirmation, as the case may be, as well as a properly
completed and duly executed copy of this Letter and any other documents required
by this Letter, must be received by the Exchange Agent at one of its addresses
set forth herein on or before 5:00 p.m. New York City time on the Expiration
Date. The method of delivery of this Letter, certificates for Old Preferred
Stock or a Book-Entry Confirmation, as the case may be, and any other required
documents is at the election and risk of the tendering holder, but except as
otherwise provided below, the delivery will be deemed made when actually
received by the Exchange Agent. If delivery is by mail, the use of registered
mail with return receipt requested, properly insured, is suggested.
Holders whose certificates for Old Preferred Stock are not immediately
available or who cannot deliver their Old Preferred Stock or a Book-Entry
Confirmation, as the case may be, and all other required documents to the
Exchange Agent on or before the Expiration Date may tender their Old Preferred
Stock pursuant to the guaranteed delivery procedures set forth in the
Prospectus. Pursuant to such procedure: (i) tender must be made by or through an
Eligible Institution (as defined in the Prospectus under the caption "The
Exchange Offer--Procedures for Tendering"); (ii) prior to the Expiration Date,
the Exchange Agent must have received from the Eligible Institution a properly
completed and duly executed Notice of Guaranteed Delivery (by telegram, telex,
facsimile transmission, mail or hand delivery) (x) setting forth the name and
address of the holder, the description of the Old Preferred Stock and the number
of shares of Old Preferred Stock tendered, (y) stating that the tender is being
made thereby and (z) guaranteeing that, within three New York Stock Exchange
trading days after the date of execution of such Notice of Guaranteed Delivery,
this Letter together with the certificates representing the Old Preferred Stock
or a Book-Entry Confirmation, as the case may be, and any other documents
required by this Letter will be deposited by the Eligible Institution with the
Exchange Agent; and (iii) the certificates for all tendered Old Preferred Stock,
as well as all other documents required by this Letter, must be received by the
Exchange Agent within three New York Stock Exchange trading days after the date
of execution of such Notice of Guaranteed Delivery, all as provided in the
Prospectus under the caption "The Exchange Offer--Guaranteed Delivery
Procedures."
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Preferred Stock will be
determined by the Issuer, whose determination will be final and binding. The
Issuer reserves the absolute right to reject any or all tenders that are not in
proper form or the acceptance of which, in the opinion of the Issuer's counsel,
would be unlawful. The Issuer also reserves the right to waive any
irregularities or conditions of tender as to particular Old Preferred Stock. All
tendering holders, by execution of this Letter, waive any right to receive
notice of acceptance of their Old Preferred Stock.
Neither the Issuer, the Exchange Agent nor any other person shall be
obligated to give notice of defects or irregularities in any tender, nor shall
any of them incur any liability for failure to give any such notice.
8
<PAGE>
2. PARTIAL TENDERS; WITHDRAWALS. If less than the entire number of shares of
any Old Preferred Stock evidenced by a submitted certificate or by a Book-Entry
Confirmation is tendered, the tendering holder must fill in the number of shares
tendered in the fourth column of Box 1 above. All of the Old Preferred Stock
represented by a certificate or Book-Entry Confirmation delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise indicated.
A certificate for Old Preferred Stock not tendered will be sent to the holder,
unless otherwise provided in Box 5, as soon as practicable after the Expiration
Date, in the event that less than the entire number of shares of Old Preferred
Stock represented by a submitted certificate is tendered (or, in the case of Old
Preferred Stock tendered by book-entry transfer, such non-exchanged Old
Preferred Stock will be credited to an account maintained by the holder with the
Book-Entry Transfer Facility).
If not yet accepted, a tender pursuant to the Exchange Offer may be
withdrawn prior to 5:00 p.m. New York City time on the Expiration Date. To be
effective with respect to the tender of Old Preferred Stock, a notice of
withdrawal must: (i) be received by the Exchange Agent before the Company
notifies the Exchange Agent that it has accepted the tender of Old Preferred
Stock pursuant to the Exchange Offer; (ii) specify the name of the person who
tendered the Old Preferred Stock; (iii) contain a description of the Old
Preferred Stock to be withdrawn, the certificate numbers shown on the particular
certificates evidencing such Old Preferred Stock and the number of shares of Old
Preferred Stock represented by such certificates; and (iv) be signed by the
holder in the same manner as the original signature on this Letter (including
any required signature guarantee).
3. SIGNATURES ON THIS LETTER; ASSIGNMENTS; GUARANTEE OF SIGNATURES. If this
Letter is signed by the holder(s) of Old Preferred Stock tendered hereby, the
signature must correspond with the name(s) as written on the face of the
certificate(s) for such Old Preferred Stock, without alteration, enlargement or
any change whatsoever.
If any shares of Old Preferred Stock tendered hereby are owned by two or
more joint owners, all owners must sign this Letter. If any tendered Old
Preferred Stock is held in different names on several certificates, it will be
necessary to complete, sign and submit as many separate copies of this Letter as
there are names in which certificates are held.
If this Letter is signed by the holder of record and (i) the entire number
of shares of Old Preferred Stock represented by submitted certificates are
tendered; and/or (ii) the certificates for any untendered Old Preferred Stock,
if any, are to be issued to the holder of record, then the holder of record need
not endorse any certificates for tendered Old Preferred Stock or provide a
separate stock power. In any other case, the holder of record must transmit a
separate stock power with this Letter.
If this Letter or any certificate or assignment is signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and proper evidence satisfactory to the
Issuer of its authority to so act must be submitted, unless waived by the
Issuer.
Signatures on this Letter must be guaranteed by an Eligible Institution,
unless Old Preferred Stock is tendered: (i) by a holder who has not completed
Box 4 or 5 on this Letter; or (ii) for the account of an Eligible Institution.
In the event that the signatures in this Letter or a notice of withdrawal, as
the case may be, are required to be guaranteed, such guarantees must be by an
eligible guarantor institution which is a member of The Securities Transfer
Agents Medallion Program (STAMP), The New York Stock Exchange's Medallion
Signature Program (MSP) or The Stock Exchange's Medallion Program (SEMP)
(collectively, "Eligible Institutions"). If Old Preferred Stock is registered in
the name of a person other than the signer of this Letter, the Old Preferred
Stock surrendered for exchange must be endorsed by, or be accompanied by a
written instrument or instruments of transfer or exchange, in satisfactory form
as determined by the Issuer in its sole discretion, duly executed by the
registered holder with the signature thereon guaranteed by an Eligible
Institution.
9
<PAGE>
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering holders should
indicate, in Box 4 or 5, as applicable, the name and address to which the New
Preferred Stock or certificates for Old Preferred Stock not tendered are to be
sent or issued, if different from the name and address of the person signing
this Letter. In the case of issuance in a different name, the tax identification
number of the person named must also be indicated. Holders tendering Old
Preferred Stock by book-entry transfer may request that Old Preferred Stock not
exchanged be credited to such account maintained at the Book-Entry Transfer
Facility as such holder may designate.
5. RETURN OF UNEXCHANGED OLD PREFERRED STOCK. If any tendered Old Preferred
Stock are not exchanged pursuant to the Exchange Offer for any reason, such
unexchanged Old Preferred Stock shall be returned, without expense, to the
undersigned at the address shown in Box 1 or at a different address as may be
indicated in Box 5.
6. TAX IDENTIFICATION NUMBER. Federal income tax law requires that a holder
whose tendered Old Preferred Stock are accepted for exchange must provide the
exchange agent (as payor) with his or her correct taxpayer identification number
("TIN"), which, in the case of a holder who is an individual, is his or her
social security number. If the Exchange Agent is not provided with the correct
TIN, the holder may be subject to a $50 penalty imposed by the Internal Revenue
Service ("IRS"). In addition, delivery to the holder of the New Preferred Stock
pursuant to the Exchange Offer may be subject to back-up withholding. (If
withholding results in overpayment of taxes, a refund may be obtained). Exempt
holders (including, among others, all corporations and certain foreign
individuals) are not subject to these back-up withholding and reporting
requirements. See "Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9" on page 14 for additional instructions.
Under federal income tax laws, payments that may be made by the Issuer on
account of New Preferred Stock issued pursuant to the Exchange Offer may be
subject to back up withholding at a rate of 31%. In order to prevent back-up
withholding, each tendering holder must provide his or her correct TIN by
completing the "Substitute Form W-9" referred to above, certifying that the TIN
provided is correct (or that the holder is awaiting a TIN) and that: (i) the
holder has not been notified by the IRS that he or she is subject to back-up
withholding as a result of failure to report all interest or dividends; or (ii)
the IRS has notified the holder that he or she is no longer subject to back-up
withholding; or (iii) certify in accordance with the Guidelines that such holder
is exempt from back-up withholding. If the Old Preferred Stock are in more than
one name or are not in the name of the actual owner, consult "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" on page
14 for information on which TIN to report.
7. TRANSFER TAXES. The Issuer will pay all transfer taxes, if any,
applicable to the transfer of Old Preferred Stock to it or its order pursuant to
the Exchange Offer. If, however, the New Preferred Stock or certificates for Old
Preferred Stock not tendered are to be delivered to, or are to be issued in the
name of, any person other than the record holder, or if tendered certificates
are recorded in the name of any person other than the person signing this
Letter, or if a transfer tax is imposed by any reason other than the transfer of
Old Preferred Stock to the Company or its order pursuant to the Exchange Offer,
then the amount of such transfer taxes (whether imposed on the record holder or
any other person) will be payable by the tendering holder. If satisfactory
evidence of payment of taxes or exemption from taxes is not submitted with this
Letter, the amount of transfer taxes will be billed directly to the tendering
holder.
Except as provided in this Instruction 7, it will not be necessary for
transfer tax stamps to be affixed to the certificates listed in this Letter.
8. NO CONDITIONAL TENDER. No alternative, conditional, irregular or
contingent tender of Old Preferred Stock or transmittal of this Letter will be
accepted.
9. WAIVER OF CONDITIONS. The Issuer reserves the absolute right to amend or
waive any of the specified conditions in the Exchange Offer in the case of any
Old Preferred Stock tendered.
10
<PAGE>
10. MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES. Any holder whose
certificates for Old Preferred Stock have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the address indicated above, for
further instructions.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the
procedure for tendering, as well as requests for additional copies of the
Prospectus or this Letter, may be directed to the Exchange Agent.
IMPORTANT: THIS LETTER (TOGETHER WITH CERTIFICATES REPRESENTING TENDERED OLD
PREFERRED STOCK OR A BOOK ENTRY CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS)
MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR BEFORE THE CLOSE OF BUSINESS ON THE
EXPIRATION DATE (AS DEFINED IN THE PROSPECTUS).
IMPORTANT TAX INFORMATION
Under federal income tax law, a holder of Old Preferred Stock (a
"Shareholder") whose Old Preferred Stock is surrendered for exchange is required
to provide the Exchange Agent with such Shareholder's correct TIN on Substitute
Form W-9 (see page 7). If such Shareholder is an individual, the TIN is his
social security number. If the Exchange Agent is not provided with the correct
TIN, the Shareholder may be subject to a $50 penalty imposed by the IRS.
Certain Shareholders (including, among others, all corporations and certain
foreign individuals) are not subject to these back-up withholding and reporting
requirements. In order for a foreign individual to qualify as an exempt
recipient, that Shareholder must submit a statement, signed under penalties of
perjury, attesting to that individual's exempt status. Such statements may be
obtained from the Exchange Agent.
Back-up withholding is not an additional tax. Rather, the tax liability of
persons subject to back-up withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent back-up withholding on payments that are made to a Shareholder
with respect to any Old Preferred Stock, the Shareholder is required to notify
the Exchange Agent of his correct TIN by completing Box 3 on page 7 certifying
that the TIN provided on the Substitute Form W-9 is correct (or that such
Shareholder is awaiting a TIN).
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The Shareholder is required to give the Exchange Agent the social security
number or employer identification number of the record owner of the Old
Preferred Stock. If the Old Preferred Stock are in more than one name or are not
in the name of the actual owner, consult "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" on page 14 for additional
guidelines on which number to report.
PURPOSE OF FORM W-9
A person who is required to file an information return with the IRS must
obtain your correct TIN to report income paid to you, real estate transactions,
mortgage interest you paid, the acquisition or abandonment of secured property,
or contributions you made to an IRA Use Form W-9 to furnish your correct TIN to
the requester (the person asking you to furnish your TIN) and, when applicable,
(1) to certify that the TIN you are furnishing is correct (or that you are
waiting for a number to be issued), (2) to certify that you are not subject to
back-up withholding, and (3) to claim exemption from back-up withholding if you
are an exempt payee. Furnishing your correct TIN and making the appropriate
certifications will prevent certain payments from being subject to back-up
withholding.
11
<PAGE>
NOTE: If a requester gives you a form other than a W-9 to request your TIN,
you must use the requester's form.
HOW TO OBTAIN A TIN
If you do not have a TIN, apply for one immediately. To apply, get FORM
SS-5, application for a Social Security Number Card (for individuals) from your
local office of the Social Security Administration, or FORM SS, Application for
Employer Identification Number (for business and all other entities) from your
IRS office.
To complete Form W-9 if you do not have a TIN, check the space for "Awaiting
TIN" on Part 3 of Box 3, sign and date the form, and give it to the requester.
Generally, you will then have 60 days to obtain a TIN and furnish it to the
requester. If the requester does not receive your TIN within 60 days, back-up
withholding, if applicable, will begin and continue until you furnish your TIN
to the requester. For reportable interest or dividend payments, the payer must
exercise one of the following options concerning back-up withholding during this
60-day period. Under option (1), a payer must backup withhold on any reportable
interest or dividend payments made to your account, regardless of whether you
make any withdrawals. The back-up withholding under option (2) must begin no
later than seven business days after the requester receives this form back.
Under option (2), the payer is required to refund the amounts withheld if your
certified TIN is received within the 60-day period and you were not subject to
back-up withholding during that period.
NOTE: Checking "Awaiting TIN" on the form means that you have already
applied for a TIN, OR that you intend to apply for one in the near future.
As soon as you receive your TIN, complete another Form W-9, include your
TIN, sign and date the form, and give it to the requester.
12
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
Guidelines for Determining the Proper Identification Number to Give the
Payer--Social Security Numbers have nine digits separated by two hyphens: i.e.,
000-00-0000. Employer Identification Numbers have nine digits separated by only
one hyphen: i.e., 00-0000000. The table below will help determine the number to
give the payer.
<TABLE>
<CAPTION>
GIVE THE SOCIAL EMPLOYEE
FOR THIS TYPE SECURITY FOR THIS TYPE IDENTIFICATION
OF ACCOUNT: NUMBER OF: OF ACCOUNT: NUMBER OF:
- ---------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
1. An individual's account The individual 9. A valid trust estate, or Legal entity (Do not furnish
pension fund the identifying number of
the personal representative
or trustee unless the legal
entity itself is not
designated in the account
title)
2. Two or more individuals The actual owner of the 10. Corporate account The corporation
(joint account) account or, if combined
funds, any one of the
individuals
3. Husband and wife (joint The actual owner of the 11. Religious, charitable, The organization
account) joint account or, if joint or educational organization
funds, either person (1)
4. Custodian account of a The minor (2) 12. Partnership account held The partnership
minor (Uniform Gift to in the name of the business
Minors Act)
5. Adult and minor (joint The adult or, if the minor 13. Association The organization
account) is the only contributor, the
minor (1)
6. Account in the name of The ward, minor or 14. A broker or registered The broker or nominee
guardian or committee for a incompetent person nominee
designated ward, minor, or
incompetent person
7. a. The usual revocable The grantor-trustee (1) 15. Account with the The public entity
savings trust account Department of Agriculture in
(grantor is also trustee) the name of a public entity
(such as a State or local
government, school district,
or prison) that receives
agricultural program payment
b. So-called trust account The actual owner (1)
that is not a legal or valid
trust under State law
8. Sole proprietorship The owner (4)
account
</TABLE>
- --------------------------
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor(s) name and furnish the minor(s) social security number.
(3) Circle the ward(s), minor(s) or incompetent person(s) name and furnish such
person s social security number.
13
<PAGE>
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate or pension trust
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
OBTAINING A NUMBER
If you don't have a TIN or you don't know your number, obtain Form SS-5,
Application for a Social Security Number Card, or Form SS, Application for
Employer Identification Number, at the local office of the Social Security
Administration or the IRS and apply for a number. (Section references are to the
Internal Revenue Code.)
14
<PAGE>
PAYEES EXEMPT FROM BACK-UP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include
the following:
/ / A corporation.
/ / A financial institution.
/ / An organization exempt from tax under section 501(a) or an individual
retirement plan.
/ / The United States or any agency or instrumentality thereof
/ / A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof
/ / A foreign government, political subdivision of a foreign government, or
agency or instrumentality thereof.
/ / An international organization or any agency or instrumentality thereof.
A registered dealer in securities or commodities registered in the U.S.
or a possession of the U.S.
/ / A real estate investment trust.
/ / A common trust fund operated by a bank under section 584(a)
/ / An exempt charitable remainder trust or a non-exempt trust described in
section 4947(a)(1).
/ / An entity registered at all times under the Investment Company Act of
1940. A foreign central bank of issue.
Exempt payees described above should file Form W-9 to avoid possible
erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TIN,
WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO THE PAYER. IF THE
PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE
FORM.
Certain payments other than interest dividends, and patronage dividends,
that are not subject to information reporting are also not subject to back-up
withholding. For details, see the regulations under sections 6041, 6041A(a),
6045, and 6050A.
PRIVACY ACT NOTICE. Section 6109 requires you to furnish your correct TIN
to persons who must file information returns with the IRS to report interest,
dividends, and certain other income paid to you, mortgage interest you paid, the
acquisition or abandonment of secured property, or contributions you made to an
IRA. The IRS uses the numbers for identification purposes and to help verify the
accuracy of your tax return. Payers must generally withhold 31% of taxable
interest, dividend, and certain other payments to a payee who does not furnish a
TIN to a payer. Certain penalties may also apply.
PENALTIES
(1) Penalty For Failure To Furnish Taxpayer Identification Number--If you
fail to furnish your taxpayer identification number to a payer, you are subject
to a penalty of $50 for each such failure unless your failure is due to
reasonable causes and not to willful neglect.
(2) Civil Penalty For False Information With Respect To Withholding--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) Criminal Penalty For Falsifying Information With Respect To
Withholding--Willfully falsifying certifications or affirmations may subject you
to criminal penalties including fines and/or imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE IRS.
15
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
NOTICE OF GUARANTEED DELIVERY OF
12- 7/8% SERIES A EXCHANGEABLE PREFERRED STOCK DUE 2009
As set forth in the Prospectus dated , 1997 (as the same may be
amended or supplemented from time to time, the "Prospectus") of Petroleum Heat
and Power Co., Inc. (the "Issuer") under "The Exchange Offer--Guaranteed
Delivery Procedures" and in the Letter of Transmittal for 12-7/8% Series A
Exchangeable Preferred Stock due 2009 (the "Letter of Transmittal"), this form
or one substantially equivalent hereto must be used to accept the Exchange Offer
(as defined below) of the Issuer if: (i) certificates for the above-referenced
Preferred Stock (the "Old Preferred Stock") are not immediately available, (ii)
time will not permit all required documents to reach the Exchange Agent (as
defined below) at or prior to 5:00 p.m. New York City time on the Expiration
Date (as defined in the Prospectus) or (iii) the procedures for book-entry
transfer cannot be completed on or prior to 5:00 p.m. New York City time on the
Expiration Date. Such form may be delivered by hand or transmitted by telegram,
telex, facsimile transmission or letter to the Exchange Agent and must be
received by the Exchange Agent at or prior to 5:00 p.m. New York City time on
the Expiration Date.
To: AMERICAN STOCK TRANSFER & TRUST COMPANY
(the "Exchange Agent")
By Hand/Overnight Courier:
American Stock Transfer & Trust Company
40 Wall Street
46th Floor
New York, New York 10005
Attn: Reorganization Department
Facsimile Transmission:
(718) 234-5001
Confirm by Telephone:
(800) 937-5449
For Information:
(800) 937-5449
Delivery of this instrument to an address other than
as set forth above or transmittal of this instrument to
a facsimile or telex number other than as set forth
above does not constitute a valid delivery.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to the Issuer, upon the terms and conditions
set forth in the Prospectus and the Letter of Transmittal (which together
constitute the "Exchange Offer"), receipt of which are hereby acknowledged, the
number of shares of Old Preferred Stock set forth below pursuant to the
guaranteed delivery procedures described in the Prospectus and the Letter of
Transmittal.
The undersigned understands and acknowledges that the Exchange Offer will
expire at 5:00 p.m., New York City time, on , 1997, unless extended by the
Issuer. With respect to the Exchange Offer, "Expiration Date" means such time
and date, or if the Exchange Offer is extended, the latest time and date to
which the Exchange Offer is so extended by the Issuer.
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death or incapacity of the undersigned and
every obligation of the undersigned under this Notice of Guaranteed Delivery
shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives of the undersigned.
<TABLE>
<S> <C>
SIGNATURES Number of shares of Old Preferred Stock
Exchanged:
Signature of Owner
Certificate Nos. of Old Preferred Stock
(if available)
Signature of Owner (if more than one)
Dated: , 199
Names:
Total:
(Please Print)
If Old Preferred Stock will be delivered
by book-entry transfer, provide the
Depository Trust Company ("DTC") Account
No.:
Address:
Account No.:
(Include Zip Code)
Area Code and
Telephone No.:
Capacity (full title), if signing in a
representative capacity:
Taxpayer Identification or Social Security
No.:
</TABLE>
<PAGE>
<TABLE>
<S> <C>
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member of a recognized signature guarantee medallion program within
the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended,
hereby guarantees (a) that the above-named person(s) own(s) the above-described
securities tendered hereby within the meaning of Rule 10b-4 under the Securities
Exchange Act of 1934, (b) that such tender of the above-described securities complies
with Rule 10b-4, and (c) that delivery to the Exchange Agent of certificates tendered
hereby, in proper form for transfer, or delivery of such certificates pursuant to the
procedure for book-entry transfer, in either case with delivery of a properly
completed and duly executed Letter of Transmittal (or facsimile thereof) and any other
required documents, is being made within three New York Stock Exchange trading days
after the date of execution of a Notice of Guaranteed Delivery of the above-named
person.
Name of Firm:
(Authorized Signature)
Title:
Number and Street or P.O. Box
City State Zip Code Date:
Tel. No.
Fax No.
</TABLE>
NOTE: DO NOT SEND CERTIFICATES REPRESENTING OLD PREFERRED STOCK WITH THIS
NOTICE. OLD PREFERRED STOCK SHOULD BE SENT TO THE EXCHANGE AGENT TOGETHER
WITH A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL.
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
OFFER TO EXCHANGE
1,200,000 SHARES OF
12 7/8% SERIES B EXCHANGEABLE PREFERRED STOCK DUE 2009
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR
1,200,000 SHARES OF
12 7/8% SERIES A EXCHANGEABLE PREFERRED STOCK DUE 2009
THAT WERE ISSUED AND SOLD IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED
To Securities Dealers, Commercial Banks
Trust Companies and Other Nominees:
Enclosed for your consideration is a Prospectus dated April , 1997 (as
the same may be amended or supplemented from time to me, the "Prospectus") and a
form of Letter of Transmittal (the "Letter of Transmittal") relating to the
offer (the "Exchange Offer") by Petroleum Heat and Power Co., Inc., a Minnesota
corporation (the "Issuer"), to exchange up to 1,200,000 shares of its 12 7/8%
Series B Exchangeable Preferred Stock with a liquidation preference of $25 per
share (the "New Preferred Stock") for an equal number of shares of its
outstanding 12 7/8% Series A Exchangeable Preferred Stock with a liquidation
preference of $25 per share (the "Old Preferred Stock") that were issued and
sold in a transaction exempt from registration under the Securities Act of 1933,
as amended.
We are asking you to contact your clients for whom you hold Old Preferred
Stock registered in your name or in the name of your nominee, in addition, we
ask you to contact your clients who, to your knowledge, hold Old Preferred Stock
registered in their own name. The Issuer will not pay any fees or commissions to
any broker, dealer or other person in connection with the solicitation of
tenders pursuant to the Exchange Offer. You will, however, be reimbursed by the
Issuer for customary mailing and handling expenses incurred by you in forwarding
any of the enclosed materials to your clients. The Issuer will pay all transfer
taxes, if any, applicable to the tender of Old Preferred Stock to its order,
except as otherwise provided in the Prospectus and the Letter of Transmittal.
Enclosed are copies of the following documents:
1. The Prospectus:
2. A Letter of Transmittal for your use in connection with the exchange
of Old Preferred Stock and for the information of your clients ( facsimile
copies of the Letter of Transmittal may be used to exchange Old Preferred
Stock);
3. A form of letter that may be sent to your clients for whose accounts
you hold Old Preferred Stock registered in your name and or the name of your
nominee, with space provided for obtaining the clients' instructions with
regard to the Exchange offer;
4. A Notice of Guaranteed Delivery;
5. Guidelines of the Internal Revenue Service for Certification of
Taxpayer Identification Number on Substitute Form W-9; and
6. A return envelope addressed to American Stock Transfer & Trust
Company, the Exchange Agent.
Your prompt action is requested. The Exchange offer will expire at 5:00
p.m., New York City time, on 1997, unless extended (the "Expiration
Date"). Old Preferred Stock tendered pursuant to the Exchange Offer may be
withdrawn, subject to the procedures described in the Prospectus, at any time
prior to 5:00 p.m. New York City time on the Expiration Date.
To tender Old Preferred Stock, certificates for Old Preferred Stock or a
Book-Entry Confirmation, a duly executed and properly completed Letter of
Transmittal or a facsimile thereof, and any other required
<PAGE>
documents, must be received by the Exchange Agent as provided in the Prospectus
and the Letter of Transmittal.
Questions and requests for assistance with respect to the Exchange Offer or
for additional copies of the enclosed material may be directed to the Exchange
Agent at its address set forth in the Prospectus or at (800) 937-5449.
Very truly yours,
PETROLEUM HEAT AND POWER CO., INC.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY PERSON AS AN AGENT OF THE ISSUER OR THE EXCHANGE AGENT, OR ANY AFFILIATE
THEREOF, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENTS OR USE ANY
DOCUMENT ON BEHALF OF ANY OF THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR
THE ENCLOSED DOCUMENTS AND THE STATEMENTS EXPRESSLY MADE IN THE PROSPECTUS AND
THE LETTER OF TRANSMITTAL.
2
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
OFFER TO EXCHANGE
1,200,000 SHARES OF 12 7/8% SERIES B EXCHANGEABLE PREFERRED STOCK DUE 2009
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR
1,200,000 SHARES OF 12 7/8% SERIES A EXCHANGEABLE PREFERRED STOCK DUE 2009
THAT WERE ISSUED AND SOLD IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
To Our Clients:
Enclosed for your consideration is a Prospectus dated April , 1996 (as
the same may be amended or supplemented from time to time, the "Prospectus") and
a form of Letter of Transmittal (the "Letter of Transmittal") relating to the
offer (the "Exchange Offer") by Petroleum Heat and Power Co., Inc., a Minnesota
corporation (the "Issuer") to exchange up to 1,200,000 shares of its 12 7/8%
Series B Exchangeable Preferred Stock with a liquidation preference of $25 per
share (the "New Preferred Stock") for an equal number of shares of its
outstanding 12 7/8% Series A Exchangeable Preferred Stock with a liquidation
preference of $25 per share (the "Old Preferred Stock") that were issued and
sold in a transaction exempt from registration under the Securities Act of 1933,
as amended.
The material is being forwarded to you as the beneficial owner of Old
Preferred Stock carried by us for your account or benefit but not registered in
your name. A tender of any Old Preferred Stock may be made only by us as the
registered holder and pursuant to your instructions. Therefore, the Issuer urges
beneficial owners of Old Preferred Stock registered in the name of a broker,
dealer, commercial bank, trust company or other nominee to contact such
registered holder promptly if they wish to tender Old Preferred Stock in the
Exchange Offer.
Accordingly, we request instructions as to whether you wish to tender any or
all Old Preferred Stock, pursuant to the terms and conditions set forth in the
Prospectus and Letter of Transmittal. We urge you to read carefully the
Prospectus and Letter of Transmittal before instructing us to tender to your Old
Preferred Stock.
Your instructions to us should be forwarded as promptly as possible in order
to permit us to tender Old Preferred Stock on your behalf in accordance with the
provisions of the Exchange Offer. The Exchange Offer will expire at 5:00 p.m.,
New York City time, on , , 1997, unless extended (the "Expiration
Date"). Old Preferred Stock tendered pursuant to the Exchange Offer may be
withdrawn, subject to the procedures described in the Prospectus , at any time
prior to 5:00 p.m.. on the Expiration Date.
Your attention is directed to the following:
1. The Exchange Offer is for the exchange of 1,200,000 shares of the
New Preferred Stock for an equal number of shares of the Old Preferred Stock
with the Holders thereof. The terms of the New Preferred Stock are identical
in all material respects to the terms of the Old Preferred Stock, except
that the New Preferred Stock has been registered under the Securities Act of
1933, as amended, is freely tradable by the holders thereof (except as
provided in the Prospectus) and, therefore will not bear legends restricting
its transfer and will not contain certain terms providing for an increase in
the dividend on the Old Preferred Stock under certain circumstances as
provided in the Registration Rights Agreement dated as of February 18, 1997
between the Company and Donaldson, Lufkin & Jenrette Securities Corporation,
the Initial Purchaser of the Old Preferred Stock. The Company is effecting
the Exchange Offer in order to satisfy certain obligations of the Company
contained in the Registration Rights Agreement.
2. THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CONDITIONS, SEE "THE
EXCHANGE OFFER--CONDITIONS" IN THE PROSPECTUS.
3. The Exchange Offer and withdrawal rights will expire at 5:00 p.m.,
New York City time, on , 1997, unless extended.
<PAGE>
4. The Issuer has agreed to pay the expenses of the Exchange Offer
except as provided in the Prospectus and the Letter of Transmittal.
5. Any transfer taxes incident to the transfer of Old Preferred Stock
from the tendering Holder to the Issuer will be paid by the Issuer, except
as provided in the Prospectus and the Letter of Transmittal.
The Exchange Offer is not being made to nor will exchange be accepted from
or on behalf of holders of Old Preferred Stock in any jurisdiction in which the
making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction.
If you wish to have us tender any or all of your Old Preferred Stock held by
us for your account or benefit, please so instruct us by completing, executing
and returning to us the instruction form that appears below. The accompanying
Letter of Transmittal is furnished to you for informational purposes only and
may not be used by your to tender Old Preferred Stock held by us and registered
in our name for your account or benefit.
INSTRUCTIONS
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer of Petroleum Heat
and Power Co., Inc., including the Prospectus and the Letter of Transmittal.
This form will instruct you to exchange the aggregate number of shares Old
Preferred Stock indicated below (or, if no aggregate number amount is indicated
below, all Old Preferred Stock) held by you for the account or benefit of the
undersigned, pursuant to the terms and conditions set forth in the Prospectus
and Letter of Transmittal.
Number of shares of Old Preferred Stock to be exchanged
$ *
<TABLE>
<S> <C>
* I (we) understand that if I (we) sign these -------------------------------------------------
instruction forms without indicating an aggregate
number of shares Old Preferred Stock in the space
above, all Old Preferred Stock held by you for my
(our) account will be exchanged.
-------------------------------------------------
Signature(s)
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
(Please print name(s) and address above)
Dated: , 1997
-------------------------------------------------
(Area Code & Telephone Number)
-------------------------------------------------
(Taxpayer Identification or
Social Security Number)
</TABLE>
2
