<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-9358
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PETROLEUM HEAT AND POWER CO., INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 06-1183025
- ---------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2187 Atlantic Street, Stamford, CT 06902
- ---------------------------------------- -------------------
(Address of principal executive Offices) (Zip Code)
Registrant's telephone number, including area code: (203) 325-5400
--------------
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of June 30, 1998 there were 23,961,907 shares of the Registrant's Class A
Common Stock, 11,228 shares of the Registrant's Class B Common Stock and
2,597,519 shares of the Registrant's Class C Common Stock outstanding.
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
INDEX To Form 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part 1 Financial Information:
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 ..................... 3
Condensed Consolidated Statements of Operations for the
Three Months Ended
June 30, 1998 and June 30, 1997
and the Six Months Ended
June 30, 1998 and June 30, 1997 ......................... 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity (Deficiency) for the
Six Months Ended June 30, 1998 .......................... 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended
June 30, 1998 and June 30, 1997 ......................... 6
Notes to Condensed Consolidated Financial Statements .... 7 - 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations ....... 9 - 13
Part 2 Other Information:
Item 4 - Submission of Matters to a Vote of Security Holders . 14
Item 5 - Other Events ........................................ 15 - 16
Item 6 - Exhibits and Reports on Form 8-K .................... 17
Signature .................................................... 18
</TABLE>
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
(In thousands, except per share data) (Unaudited)
June 30, December 31,
Assets 1998 1997
- ------
<S> <C> <C>
Current assets:
Cash ............................................................................ $ 33,223 $ 2,390
Accounts receivable (net of allowance of $1,728 and $980) ....................... 46,960 78,987
Inventories ..................................................................... 11,063 16,285
Prepaid expenses ................................................................ 7,076 6,203
Notes receivable and other current assets ....................................... 1,018 1,259
------- -------
Total current assets ......................................................... 99,340 105,124
------- -------
Property, plant and equipment - net ............................................... 29,964 30,615
Intangible assets (net of accumulated amortization
of $296,914 and $285,850)
Customer lists ................................................................. 60,439 69,265
Deferred charges ............................................................... 22,685 24,924
------- -------
83,124 94,189
------- ------
Investment in and advances to the Star Gas Partnership ............................ 23,851 27,499
Deferred gain on Star Gas Transaction ............................................. (19,964) (19,964)
------- -------
3,887 7,535
------- -----
Cash collateral account ........................................................... 11,800 9,350
Other assets ...................................................................... 1,005 1,033
------- -------
$229,120 $247,846
------- --------
------- --------
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Working capital borrowings ...................................................... $ - $ 3,000
Current debt .................................................................... 2,391 2,391
Current maturities of redeemable preferred stock ................................ 4,167 4,167
Accounts payable ................................................................ 5,688 14,759
Customer credit balances ........................................................ 20,881 20,767
Unearned service contract revenue ............................................... 12,736 15,321
Accrued expenses and other liabilities .......................................... 30,338 32,283
------- -------
Total current liabilities .................................................... 76,201 92,688
------- -------
Supplemental benefits and other long-term liabilities ............................. 5,022 5,043
Pension plan obligation ........................................................... 5,689 5,702
Notes payable and other long-term debt ............................................ 14,237 16,507
Senior notes payable .............................................................. 62,050 63,100
Subordinated notes payable ........................................................ 208,300 209,350
Redeemable and exchangeable preferred stock ....................................... 32,687 32,489
Common stock redeemable at option of stockholder (83 Class A and
21 Class C shares) ............................................................... 656 656
Note receivable from stockholder (656) (656)
Stockholders' equity (deficiency):
Class A common stock-par value $.10 per share; 60,000 shares
authorized, 23,879 and 23,606 shares issued and outstanding ..................... 2,389 2,361
Class B common stock-par value $.10 per share; 6,500 shares
authorized, 11 shares issued and outstanding .................................... 1 1
Class C common stock-par value $.10 per share; 5,000 shares
authorized, 2,577 shares issued and outstanding ................................. 258 258
Additional paid-in capital ....................................................... 81,821 81,358
Deficit .......................................................................... (254,889) (256,365)
Minimum pension liability adjustment ............................................. (4,646) (4,646)
------- -------
Total stockholders' equity (deficiency) ...................................... (175,066) (177,033)
------- -------
$229,120 $247,846
------- --------
------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
- 3 -
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share data) Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales .......................................... $ 66,227 $ 87,972 $ 249,366 $ 336,067
Cost of sales ...................................... 47,701 64,558 157,320 228,063
-------- -------- -------- --------
Gross profit ..................................... 18,526 23,414 92,046 108,004
Selling, general and administrative expenses ....... 20,436 24,738 43,186 50,034
Direct delivery expense ............................ 4,445 5,621 14,482 17,768
Restructuring charges .............................. - 1,300 535 1,300
Corporate identity expenses ........................ - 2,110 152 2,110
Amortization of customer lists ..................... 4,391 4,431 8,826 8,931
Depreciation of plant and equipment ................ 1,580 1,830 3,428 3,551
Amortization of deferred charges ................... 1,106 1,174 2,238 2,304
Provision for supplemental benefits ................ 90 142 179 283
-------- -------- -------- --------
Operating income (loss) .......................... (13,522) (17,932) 19,020 21,723
Other income (expense):
Interest expense .................................. (8,210) (8,344) (16,485) (17,149)
Interest income .................................. 752 713 1,213 1,123
Other ............................................. 83 13 116 38
-------- -------- -------- --------
Income (loss) before income taxes and
equity interest ................................. (20,897) (25,550) 3,864 5,735
Income taxes (benefit) ............................. (50) (25) 325 350
-------- -------- -------- --------
Income (loss) before equity interest ............. (20,847) (25,525) 3,539 5,385
Share of earnings (loss) of Star Gas Partnership ... (2,127) (1,929) 465 549
-------- -------- -------- --------
Net income (loss) ................................ $ (22,974) $ (27,454) $ 4,004 $ 5,934
-------- -------- -------- --------
-------- -------- -------- --------
Preferred Stock dividends .......................... (965) (921) (2,528) (1,817)
-------- -------- -------- --------
Net income (loss) applicable to common stock ..... $ (23,939) $ (28,375) $ 1,476 $ 4,117
-------- -------- -------- --------
-------- -------- -------- --------
Class C Common Stock .............................. $ (.90) $ (1.09) $ .06 $ .16
Diluted earnings (losses) per Class A and
Class C Common Stock .............................. $ (.90) $ (1.09) $ .06 $ .16
</TABLE>
See accompanying notes to condensed consolidated financial statements.
- 4 -
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficiency)
(Unaudited)
Six Months Ended June 30, 1998
(In thousands)
<TABLE>
<CAPTION>
Common Stock
---------------------------------------------------------
Class A Class B Class C Minimum
--------------------------------------------------------- Additional Pension
No. of No. of No. of Paid-In Liability
Shares Amount Shares Amount Shares Amount Capital Deficit Adj. Total
------- ------ ------ ------ ------ ------ ----------- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 23,606 $2,361 11 $1 2,577 $258 $81,358 $(256,365) $(4,646) $(177,033)
Net income 4,004 4,004
Cash dividends
declared and paid (2,528) (2,528)
Class A Common
Stock issued
under the Dividend
Reinvestment Plan 268 27 578 605
Other 5 1 (115) (114)
Balance at
------ ------ -- -- ----- ---- ------- --------- ------- ---------
June 30, 1998 23,879 $2,389 11 $1 2,577 $258 $81,821 $(254,889) $(4,646) $(175,066)
------ ------ -- -- ----- ---- ------- --------- ------- ---------
------ ------ -- -- ----- ---- ------- --------- ------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
(In thousands) June 30,
---------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income $ 4,004 $ 5,934
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Amortization of customer lists 8,826 8,931
Depreciation of plant and equipment 3,428 3,551
Amortization of deferred charges 2,238 2,304
Share of income of Star Gas (465) (549)
Provision for losses on accounts receivable 913 953
Provision for supplemental benefits 179 283
Other (129) (51)
Change in Operating Assets and Liabilities, net of
effects of acquisitions and dispositions:
Decrease in accounts receivable 31,114 18,904
Decrease in inventory 5,222 10,687
Increase in other current assets (632) (471)
Decrease (increase) in other assets 28 (137)
Decrease in accounts payable (9,071) (10,894)
Increase (decrease) in customer credit balances 114 (6,472)
Decrease in unearned service contract revenue (2,585) (1,827)
Increase in accrued expenses 18 711
-------- -------
Net cash provided by operating activities 43,202 31,857
------- -------
Cash flows from (used in) investing activities:
Minimum quarterly distributions from Star Gas Partnership 2,842 2,754
Acquisitions - (5,625)
Capital expenditures (2,778) (1,195)
Net proceeds from sales of fixed assets 117 382
-------- -------
Net cash provided by (used in) investing activities 181 (3,684)
-------- -------
Cash flows from (used in) financing activities:
Net proceeds from sale of Star Gas Units 1,271 -
Net proceeds from issuance of common stock 605 1,172
Net proceeds from issuance of preferred stock - 28,362
Repayment of senior notes payable (1,050) (1,050)
Repayment of subordinated notes payable (1,050) (1,050)
Credit facility borrowings 5,000 13,000
Credit facility repayments (8,000) (35,000)
Decrease (increase) in restricted cash (2,450) 1,500
Cash dividends paid (4,491) (7,606)
Other (2,385) (2,586)
------- -------
Net cash used in financing activities (12,550) (3,258)
------- -------
Net increase in cash 30,833 24,915
Cash at beginning of year 2,390 3,257
------- -------
Cash at end of period $ 33,223 $ 28,172
-------- --------
-------- --------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 16,592 $ 17,213
Income taxes $ 37 $ 135
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of Petroleum
Heat and Power Co., Inc., and its subsidiaries ("Petro" or "the Company").
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for the
fair statement of financial condition and results for the interim periods.
The results of operations for the six months ended June 30, 1998 are
not necessarily indicative of the results to be expected for the full
year.
2. Accounting Changes
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130 - "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income and its components in financial statements and notes
thereto. This statement is effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 was adopted and the Company's comprehensive
income consists of net income and the minimum pension liability adjustment.
Comprehensive loss for the three months ended June 30, 1998 and 1997, was
$(22,974) and $(27,454), and comprehensive income for the six months ended
June 30, 1998, was $4,004 and $5,934 respectively. Accumulated other
comprehensive income at June 30, 1998 and December 31, 1997 was $(4,646).
The Company calculates its minimum pension liability adjustment annually in
the fourth quarter in accordance with SFAS No. 87 - "Employers' Accounting
for Pensions" and no adjustment is reflected in quarterly comprehensive
income until such time.
In June 1997 the FASB issued SFAS No. 131 - "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 requires disclosures
about segments of an enterprise and related information such as the
different types of business activities and economic environments in which a
business operates. This statement is effective for fiscal years beginning
after December 15, 1997. The Company is still assessing the disclosure
requirements of this statement and as permitted will implement the
reporting requirements of this SFAS in its year-end financial statements.
<TABLE>
<CAPTION>
3. Earnings Per Share Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic Earnings (Losses) Per Share:
Net income (loss) $(22,974) $(27,454) $ 4,004 $ 5,934
Less: Preferred stock dividends (965) (921) (2,528) (1,817)
------ ------ ------ ------
Income (loss) available to common
stockholders (Numerator) $(23,939) $(28,375) $ 1,476 $ 4,117
-------- -------- -------- -------
-------- -------- -------- -------
Class A Common Stock 23,962 23,326 23,958 23,238
Class B Common Stock 11 11 11 11
Class C Common Stock 2,598 2,598 2,598 2,598
------ ------ ------ ------
Weighted average shares outstanding
(Denominator) 26,571 25,935 26,567 25,847
------ ------ ------ ------
------ ------ ------ ------
Basic earnings (losses) per share $ (.90) $ (1.09) $ .06 $ .16
------ ------ ------ ------
------ ------ ------ ------
Diluted Earnings (Losses) Per Share:
Effect of dilutive securities $ - $ - $ - $ -
------- ------- ------- -----
Income (loss) available to common
stockholders (Numerator) $(23,939) $(28,375) $ 1,476 $ 4,117
------ ------ ------ ------
------ ------ ------ ------
Weighted average shares outstanding 26,571 25,935 26,567 25,847
Effect of dilutive securities -
Stock Grants - * - * 195 22
------- ------- ------ ------
Adjusted weighted average shares
(Denominator) 26,571 25,935 26,762 25,869
------ ------ ------ ------
------ ------ ------ ------
Diluted earnings (losses) per share $ (.90) $ (1.09) $ .06 $ .16
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
* 0 shares included due to loss in the period.
7
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. Deferred Gain on the 1995 Star Gas Transaction
In accordance with the Company's accounting policies, the Company deferred
the gain of approximately $20.0 million on the 1995 Star Gas transaction
because the Company received subordinate units which do not have a readily
ascertainable market price creating an uncertainty regarding realization,
and due to the fact that Star Gas as general partner had a $6.0 million
additional capital contribution obligation to enhance the Partnership's
ability to make quarterly distributions on the common units (at June 30,
1998, these funds were no longer restricted at the Star Gas level because
they had been released to Petro since the quarterly guarantee provisions
were fulfilled). The Company will recognize the gain from this transaction
when the Company's subordinated units convert into common units in
accordance with the terms of the partnership agreement. In general, full
conversion of subordinated units to common units will take place no earlier
than the first day of any quarter beginning on or after January 1, 2001,
based upon the satisfaction of certain performance criteria for a period of
at least three non-overlapping consecutive four-quarter periods immediately
preceding the conversion date.
8
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
In analyzing Petro's results for the six-month period ended June 30, 1998, one
should consider the seasonal nature of the Company's business, which results in
the sale by the Company of approximately 50% of its annual volume of fuel oil in
the first quarter, 30% in the fourth quarter, and 20% in the second and third
quarters combined. Unlike this pattern of distribution, however, many of the
Company's costs are incurred evenly throughout the year, resulting in
non-heating season operating and net losses.
Six Months Ended June 30, 1998
Compared to Six Months Ended June 30, 1997
Volume. Home heating oil volume decreased 20.1% to 203.3 million gallons for the
six months ended June 30, 1998, as compared to 254.3 million gallons for the six
months ended June 30, 1997. This decline was largely due to 16.5% warmer weather
for the period, including the 19.8% warmer weather in the first quarter of 1998,
the period during which the company sells approximately 50% of its annual
volume. In addition, volume was negatively impacted by the sale of the Company's
Hartford, CT operations in November 1997 and by net account attrition. Partially
offsetting these factors was the acquisition by the Company of eleven
individually insignificant heating oil companies during 1997.
Net sales. Net sales decreased 25.8% to $249.4 million for the six months ended
June 30, 1998, as compared to $336.1 million for the six months ended June 30,
1997. This decline reflects the impact of decreased volume as well as the impact
of lower selling prices associated with lower wholesale costs.
Gross profit. Gross profit decreased 14.8% to $92.0 million for the six months
ended June 30, 1998, as compared to $108.0 million for the six months ended June
30, 1997, due to the decline in volume described above. Gross profit did not
decline to the same extent as volume due to an increase of 3.3 cents per gallon
in home heating oil margins in 1998 as compared to 1997, as well as a decline in
net service expense, which is included in the Company's calculation of gross
profit. The service expense decline was both a result of productivity
improvements and weather-related.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 13.7% to $43.2 million for the six months
ended June 30, 1998, as compared to $50.0 million for the six months ended June
30, 1997. This $6.8 million decline was due both to reductions in certain
expenses resulting from the Company's operational restructuring programs, and to
the Company's ability to reduce certain overhead costs in response to a decline
in volume. Also contributing to this decline were significant reductions in
corporate staff which were substantially completed in December of 1997 as part
of our corporate restructuring programs.
Direct delivery expenses. Direct delivery expenses decreased 18.5% to $14.5
million for the six months ended June 30, 1998, as compared to $17.8 million for
the six months ended June 30, 1997. This $3.3 million reduction reflects both
the Company's ability to reduce costs in response to a decline in volume and its
productivity improvements.
Restructuring charges. Restructuring charges of $0.5 million for the six months
ended June 30, 1998 represent the continuation in the first quarter of 1998 of
corporate staff reductions. Charges for the six months ended June 30, 1997,
which total $1.3 million, represent costs associated with the Company's
regionalization and consolidation program in the New York/Long Island region.
Corporate identity expenses. Corporate identity expenses for the six months
ended June 30, 1998 were $0.2 million, as compared to $2.1 million for the six
months ended June 30, 1997. These expenses represent costs associated with the
Company's brand identity program, implemented in the Company's New York and Mid
Atlantic regions during 1997 and 1998. They include the cost of repainting all
delivery and service vehicles to reflect the Company's new identity. Through
this program the Company intends to capitalize on its size by building
significant brand equity in one "Petro" brand name, rather than the multiple
names previously in use.
Amortization of customer lists. Amortization of customer lists decreased 1.2% to
$8.8 million for the six months ended June 30, 1998, as compared to $8.9 million
for the six months ended June 30, 1997, as the impact of certain customer lists
becoming fully amortized exceeded the impact of the Company's recent
acquisitions.
9
<PAGE>
Depreciation and amortization of plant and equipment. Depreciation and
amortization of plant and equipment decreased 3.5% to $3.4 million for the six
months ended June 30, 1998, as compared to $3.6 million for the six months ended
June 30, 1997, as the impact of certain assets becoming fully depreciated
exceeded the impact of the Company's recent fixed asset additions.
Amortization of deferred charges. Amortization of deferred charges decreased
2.9% to $2.2 million for the six months ended June 30, 1998, as compared to $2.3
million for the six months ended June 30, 1997, as the impact of certain
deferred charges becoming fully amortized exceeded the impact of the deferred
charges associated with the Company's recent acquisitions.
Operating income. Operating income decreased 12.4% to $19.0 million for the six
months ended June 30, 1998, as compared to $21.7 million for the six months
ended June 30, 1997. This decline was primarily a result of the weather-related
decline in volume, partially offset by the Company's ability to contain certain
operating expenses in response to the warm weather, by expense reductions
resulting from the Company's operational restructuring programs, and by an
increase in the Company's heating oil margins.
Net interest expense. Net interest expense decreased 4.7% to $15.3 million for
the six months ended June 30, 1998, as compared to $16.0 million for the six
months ended June 30, 1997. This was due to lower working capital borrowings and
to a slight decline in other average borrowings outstanding.
Equity in earnings of Star Gas Partnership. Equity in the earnings of Star Gas
Partnership declined 15.3% to $0.5 million for the six months ended June 30,
1998. This decline was due to the impact of warm weather on Star Gas'
operations, largely offset by the impact of Star's Pearl Gas acquisition which
occurred in October 1997.
Net income. Net income declined 32.5% to $4.0 million for the six months ended
June 30, 1998, as compared to $5.9 million for the six months ended June 30,
1997. This decline was largely due to the impact of the extremely warm weather
on the Company's volume, partially offset by decreased operating expenses,
improved margins, and by lower net interest expense.
EBITDA*. EBITDA decreased 8.4% to $33.7 million for the six months ended June
30, 1998, as compared to $36.8 million for the six months ended June 30, 1997.
Excluding the impact of one-time charges for restructuring and corporate
identity, EBITDA declined 14.5%, to $34.4 million from $40.2 million. This
decline was due to the 20.1% decline in volume, partially offset by margin
improvement, the Company's ability to control certain overhead costs in response
to the decline in volume and expense reductions resulting from the Company's
operational restructuring programs.
*EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is
defined as operating income before depreciation, amortization, non-cash charges
relating to the grant of stock options to executives of the Company, non-cash
charges associated with deferred compensation plans and other non-cash charges
of a similar nature, if any. EBITDA is a non-GAAP measure that may not be
comparable to measures of the same title reported by other companies and should
not be considered as an alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow (as a measure of liquidity or
availability to service debt obligations), but provides additional significant
information in that EBITDA is a principal basis upon which the Company assesses
its financial performance.
10
<PAGE>
Three Months Ended June 30, 1998
Compared to Three Months Ended June 30, 1997
Volume. Home heating oil volume decreased 24.3% to 46.8 million gallons for the
three months ended June 30, 1998, as compared to 61.8 million gallons for the
three months ended June 30, 1997. This decline was largely due to 28.4% warmer
weather for the period, as well as the impact of the sale of the Company's
Hartford, CT operations in November 1997. Partially offsetting these factors was
the acquisition by the Company of eleven individually insignificant heating oil
companies during 1997.
Net sales. Net sales decreased 24.7% to $66.2 million for the three months ended
June 30, 1998, as compared to $88.0 million for the three months ended June 30,
1997. This decline reflects the impact of decreased volume as well as the impact
of lower selling prices associated with lower wholesale costs.
Gross profit. Gross profit decreased 20.9% to $18.5 million for the three months
ended June 30, 1998, as compared to $23.4 million for the three months ended
June 30, 1997, due to the decline in volume described above. Gross profit did
not decline to the same extent as volume due to an increase of 1.9 cents per
gallon in home heating oil margins in 1998 as compared to 1997, as well as a
decline in net service expense, which is included in the Company's calculation
of gross profit. The service expense decline was both a result of the Company's
productivity improvements and weather-related.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 17.4% to $20.4 million for the three months
ended June 30, 1998, as compared to $24.7 million for the three months ended
June 30, 1997. This $4.3 million decline was due both to reductions in certain
expenses resulting from the Company's operational restructuring programs, and to
the Company's ability to reduce certain overhead costs in response to a decline
in volume. Also contributing to this decline were significant reductions in
corporate staff which were substantially completed in December of 1997 as part
of the Company's corporate restructuring programs.
Direct delivery expenses. Direct delivery expenses decreased 20.9% to $4.4
million for the three months ended June 30, 1998, as compared to $5.6 million
for the three months ended June 30, 1997. This $1.2 million reduction reflects
both the Company's ability to reduce costs in response to a decline in volume
and its productivity improvements.
Restructuring charges. Restructuring charges for the three months ended June 30,
1997, which total $1.3 million, represent costs associated with the Company's
regionalization and consolidation program in the New York/Long Island region.
There were no restructuring charges for the three months ended June 30, 1998.
Corporate identity expenses. Corporate identity expenses of $2.1 million for the
three months ended June 30, 1997 represent costs associated with the Company's
brand identity program, implemented the Company's New York and Mid Atlantic
regions during 1997. These costs include the cost of repainting all delivery and
service vehicles to reflect the company's new identity. Through this program the
Company intends to capitalize on its size by building significant brand equity
in one "Petro" brand name, rather than the multiple names previously in use.
Amortization of customer lists. Amortization of customer lists remained flat at
$4.4 million for the three months ended June 30, 1998, as the impact of the
Company's recent acquisitions was approximately equal to the impact of certain
customer lists becoming fully amortized.
Depreciation and amortization of plant and equipment. Depreciation and
amortization of plant and equipment decreased 13.7% to $1.6 million for the
three months ended June 30, 1998, as compared to $1.8 million for the three
months ended June 30, 1997, as the impact of certain assets becoming fully
depreciated exceeded the impact of the Company's recent fixed asset additions.
Amortization of deferred charges. Amortization of deferred charges decreased
5.8% to $1.1 million for the three months ended June 30, 1998, as compared to
$1.2 million for the three months ended June 30, 1997, as the impact of certain
deferred charges becoming fully amortized exceeded the impact of the deferred
charges associated with the Company's recent acquisitions.
Operating loss. Operating loss improved 24.6% to a loss of $13.5 million for the
three months ended June 30, 1998, as compared to a loss of $17.9 million for the
three months ended June 30, 1997. The primary reason for this improvement was
the absence in the second quarter of 1998 of restructuring charges and corporate
identity expenses which amounted to $3.4 million for the three months ended June
30, 1997. The remaining improvement of $1.0 million was achieved despite a
significant volume decline and was affected by the Company's ability to reduce
certain operating expenses in response to the warm weather, by expense
reductions resulting from the Company's operational restructuring programs, and
by an increase in the Company's heating oil margins.
Net interest expense. Net interest expense decreased 2.3% to $7.5 million for
the three months ended June 30, 1998, as compared to $7.6 million for the three
months ended June 30, 1997. This was due to a slight decline in average
borrowings outstanding.
11
<PAGE>
Equity in loss of Star Gas Partnership. Equity in the loss of Star Gas
Partnership increased 10.3% to a loss of $2.1 million for the three months ended
June 30, 1998, as compared to a loss of $1.9 million for the three months ended
June 30, 1997. This decline was due to the impact of warm weather on Star Gas'
operations, largely offset by the impact of Star's Pearl Gas acquisition.
Net loss. Net loss improved 16.3% to a loss of $23.0 million for the three
months ended June 30, 1998, as compared to a loss of $27.5 million for the three
months ended June 30, 1997. The primary reason for this improvement was the
absence in the second quarter of 1998 of restructuring charges and corporate
identity expenses which amounted to $3.4 million for the three months ended June
30, 1997. The remaining improvement of $1.1 million was achieved despite a
significant volume decline and was affected by the Company's ability to contain
certain operating expenses in response to the warm weather, by expense
reductions resulting from the Company's operational restructuring programs, and
by an increase in the Company's heating oil margins.
EBITDA. EBITDA improved 38.6% to a loss of $6.4 million for the three months
ended June 30, 1998, as compared to a loss of $10.4 million for the three months
ended June 30, 1997. Excluding the impact of one-time charges for restructuring
and corporate identity, EBITDA improved 8.5%, from a loss of $6.9 million to a
loss of $6.4 million. This improvement was despite a significant volume decline
and was affected by the Company's ability to contain certain operating expenses
in response to the warm weather, by expense reductions resulting from the
Company's operational restructuring programs, and by an increase in the
Company's heating oil margins.
Liquidity and Financial Condition
Net cash provided by operating activities of $43.2 million combined with the
$1.3 million net proceeds from the sale of Star Gas units amounted to $44.5
million. These funds were utilized in investing activities for the purchase of
fixed assets of $2.7 million; and in financing activities to repay notes payable
of $1.05 million, repay subordinated notes of $1.05 million, repay net credit
facility borrowings of $3.0 million, pay preferred stock cash dividends of $4.5
million, increase the cash collateral account maintained with the Company's
lenders to secure certain letter-of-credit obligations of $2.4 million, and for
other financing activities of $2.4 million, which is comprised mainly of the
redemption of $2.3 million of Notes Payables issued in connection with the
purchase of fuel oil dealers. These financing activities were partially offset
by cash provided from the Star Gas minimum quarterly distribution of $2.8
million, and proceeds from dividend reinvestments of $0.6 million. As a result
of the above activities, the Company's cash balance increased by $30.8 million
since December 31, 1997.
In July 1998, the Company renewed its $47.0 million working capital revolving
credit facility which will expire in June 1999. In consideration for the
extension of this facility to June 1999, the Company agreed to, amongst other
things, pay no common cash dividends and not make any acquisitions of other
companies. As the Company's current capital constraints already imposes a limit
to such activity, the impact of these prohibitions is minimal. At June 30, 1998
no amount was outstanding under this credit facility, and the Company had $23.1
million of working capital.
For the remainder of 1998 the Company anticipates repaying $4.2 million of
redeemable preferred stock and paying, subject to declaration by the Board of
Directors, $2.5 million of preferred dividends. Furthermore, the Company
currently has no material commitments for capital expenditures.
Based on the Company's current working capital position and expected net cash
provided by operating activities, the Company expects to be able to meet all its
other current obligations as they become due.
Year 2000
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve the issue. The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications to
existing software and converting to new software, which the Company expects to
implement on a timely basis, the Year 2000 problem will not pose significant
operational problems for the Company's computer systems as so modified and
converted. Estimated costs associated with this conversion is anticipated to be
less then two hundred thousand dollars. However, if such modifications and
conversions are not completed timely, the Year 2000 problem may have a material
adverse impact on the operations of the Company.
Restructuring Charges
12
<PAGE>
Late in 1995 the Company completed a study engaged with a leading consulting
firm to help provide a structure for superior customer service, a brand image,
and reduced operating costs. Over the last few years the Company has dedicated a
large amount of effort toward defining the best organizational structure, and
has implemented various initiatives toward achieving this objective.
As part of the initial implementation of this program, Petro undertook certain
business improvement strategies in its Long Island, New York region. These steps
included the consolidation of the region's five home heating oil branches into
one central customer service center and three depots. The regional customer
service center consolidated accounting, credit, customer service and the sales
function into a single new facility in Port Washington, Long Island. All
external communications and marketing previously undertaken in the five branches
were centralized into this one location freeing the three newly configured
depots to focus on oil delivery and heating equipment repair, maintenance and
installation, in mutually exclusive operating territories. The Company incurred
$1.2 million in restructuring expenses in fiscal 1996, for costs associated with
the initial implementation of the restructuring program.
In 1997 the Company continued with its restructuring program and combined its
three New York City branches into one new central depot that specialized in
delivery, installation, maintenance, and service functions, and like the Long
Island depots, is supported by the Port Washington facility. The Company also
proceeded with its commitment to define the best possible organizational
structure, by restructuring select branch and corporate responsibilities to
eliminate redundant functions and locate responsibilities where they can best
serve customers and the Company. Toward achieving these strategic intentions the
Company incurred $2.9 million in restructuring expenses in fiscal 1997, which
comprised of $2.0 million in termination benefit arrangements with certain
branch and corporate employees and $0.9 million for continuing lease obligations
for unused, non-cancelable, non-strategic facilities.
The Company continued its restructuring and cost reduction initiative, incurring
$0.5 million in termination benefit arrangements with certain corporate
employees for the first six months of 1998. The Company does not have any
additional restructuring plans for the remainder of 1998.
Statement Regarding Forward-Looking Disclosure
This report 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 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 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 Report including, without limitation, the
statements under "Management's Discussion and Analysis of Results of Operations
and Financial Condition" 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.
13
<PAGE>
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) Annual Meeting of Shareholders June 3, 1998.
(c) Proposals
<TABLE>
<CAPTION>
1. Election
of Directors For Against Withheld Abstain
<S> <C> <C> <C> <C>
Irik P. Sevin 40,240,206 * 152,562 *
Audrey L. Sevin 40,240,206 * 152,562 *
Phillip Ean Cohen 40,240,206 * 152,562 *
Thomas J. Edelman 40,240,206 * 152,562 *
Wolfgang Traber 40,240,206 * 152,562 *
Paul Biddelman 40,235,436 * 157,331 *
Stephen Russell 40,240,206 * 152,562 *
</TABLE>
2. Ratification of Appointment of KPMG Peat Marwick LLP as the
Company's Independent Auditors
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
49,369,265 25,686 6,816
</TABLE>
14
<PAGE>
Item 5. Other Events
Petroleum Heat and Power Co., Inc. and Star Gas Partners, L.P., Business
Combination
In August 1998, the Company and Star Gas Partners, L.P. ("Star," "Star Gas,"
or "the Partnership") announced that they have reached an agreement in
principle to enter into a strategic business combination in which Petro would
become a wholly owned subsidiary of Star ("Star Gas/Petro Transaction").
This transaction would be effected through Petro Shareholders exchanging
their approximately 26.6 million shares of Petro Common Stock for
approximately 3.6 million Star master limited partnership Units which will be
subordinated to the existing Star Common Units.
Star Gas currently distributes to its partners, on a quarterly basis, all of its
Available Cash, which is generally all of the cash receipts of the Partnership
less all cash disbursements, with a targeted Minimum Quarterly Distribution
("MQD") of $0.55 per Unit, or $2.20 per Unit on an annualized basis. In
connection with the Petro transaction, the Partnership will increase the MQD to
$.575 per unit or $2.30 per Unit on an annualized basis. This increase in the
MQD reflects the expectation that the transaction will be accretive to the
Partnership. The increase in the MQD will also serve to raise the threshold
needed to end the Subordination Period.
Of the 3.6 million subordinated Partnership units anticipated to be distributed
to Petro shareholders, 2.8 million will be Senior Subordinated Units and
approximately 857,000 will be Junior Subordinated Units and General Partnership
Interests. The Senior Subordinated Units will be publicly registered and
tradable (they are expected to be listed on the NYSE) and will be subordinated
in distributions to Star's Common Units. The Junior Subordinated Units and
General Partnership Interests will not be registered nor publicly tradable and
will be subordinated to both the Common Units and the Senior Subordinated Units.
The Senior Subordinated Units will be exchanged with holders of Petro's publicly
traded Class A common stock and the Junior Subordinated Units and General
Partnership Interest will be exchanged with individuals that currently own
Petro's Class C common stock. Certain holders of the Company's Class C
common stock will also exchange their shares for Senior Subordinated Units.
It is currently contemplated that 21,177,000 shares of Petro Common
Stock will be exchanged for 2,767,000 Star Gas Senior Subordinated Units.
5,386,000 shares of Petro common stock, held by certain individuals
who currently own Petro Class C common stock, including Irik P. Sevin, Chairman
of Petro and Star Gas and other members of a group that currently controls
Petro, will be exchanged for 579,000 Junior Subordinated Units and
General Partnership Interests which are economically equivalent to 279,000
Junior Subordinated Units.
Under the partnership subordination provision, distributions on Star Senior
Subordinated Units may be made only after distributions of Available Cash on
Common Units meet the Minimum Quarterly Distribution requirement.
Distributions on Star Junior Subordinated Units and to the General Partner
may be made only after distributions of Available Cash on Common Units and
Senior Subordinated Units meet the Minimum Quarterly Distribution
requirement. The Subordination Period will generally extend until the
Partnership earns and pays its MQD for three years. In any event, as a
condition of this transaction, the Partnership agreement will be amended so
that no distribution will be paid on the Senior Subordinated Units, Junior
Subordinated Units, or to the General Partner except to the extent Available
Cash is earned from operations.
Like many other publicly traded master limited partnerships, the Partnership
contains a provision which provides the General Partner incentive
distributions in excess of certain targeted amounts.
This provision will be modified so that should there be any such incentive
distributions, they will be made pro rata to the Senior Subordinated Units
and Junior Subordinated Units as well as to the General Partner.
In connection with the Transaction, the Senior Subordinated Units, Junior
Subordinated Units and General Partnership Interests can earn, pro rata, 303,000
additional Senior Subordinated Units each year that Petro provides $.50 per unit
accretion to Star to a maximum of 909,000 additional Senior Subordinated Units.
In connection with the transaction, Star Gas intends to raise approximately $140
million through a public offering of Common Units and $120 million through a
public or private offering of debt securities. The net proceeds from these
offerings will be used primarily to redeem approximately $240 million in Petro
public and private debt and preferred stock. Any such offering will be made only
by means of a prospectus or in transactions not requiring registration under
securities laws. This announcement does not constitute an offer to sell any
securities. As part of this recapitalization, Petro also intends to restructure
$66.2 million of privately held Notes.
- 15 -
<PAGE>
Petro has reached an agreement with institutional holders of an aggregate of
$149 million or 63.1% of such public debt and preferred stock to permit the
redemption of such securities at the closing of the Star Gas/Petro Transaction.
This agreement allows Petro to redeem its 9 3/8% Subordinated Debentures, 10
1/8% Subordinated Notes and 12 1/4% Subordinated Debentures at 100%, 100% and
103.5% of principal amount, respectively, and to redeem its 12 7/8% Preferred
Stock at $23 per share. In consideration for this early redemption right, Petro
has agreed to issue to such holders 3.37 shares of newly issued Petro Junior
Convertible Preferred Stock for each $1,000 in principal amount or liquidation
preference of such securities. Each share of Petro Junior Convertible Preferred
Stock will be exchangeable into .13 of a Star common Unit at the conclusion of
this transaction representing a maximum 104,000 MLP units. Should the
transaction not be consummated, the Junior Preferred Stock will be converted
into a like number of shares of Class A Common Stock.
Petro will offer to the remaining holders of Petro's publicly traded debt and
preferred stock the same right of early redemption under the same terms and
conditions as agreed to by the consenting holders. This proposal will be made
through an exchange offer that is expected to commence shortly. This transaction
and the associated Petro recapitalization is subject to receiving an agreement
to the early redemption from at least 90% of the outstanding publicly traded
debt and preferred stock.
Petro currently has a 40.7% equity interest in the Partnership and a subsidiary
of Petro is its general partner. After completion of the transaction, the Petro
shareholders will own approximately 26% of Star's equity through Subordinated
Units and General Partnership Interests. The holders of the Partnership's Common
Units (including an estimated 6.4 million Common Units that will be sold in the
Partnerships $140 million public offering) will own an aggregate approximately
74% equity interest in the Partnership following the completion of the
transaction. The General Partner of the Partnership will be a newly organized
Delaware limited liability company that will be owned by members of Petro's
current control group.
The Board of Directors of Star Gas has appointed an independent committee of
directors to represent Star Gas in this matter. This committee has retained
A.G. Edwards & Sons Inc. to act as its financial advisor and to determine the
fairness of this transaction to the Star Gas Common Unit holders. The Board
of Directors of Petro has retained PaineWebber Incorporated as its financial
advisor and Dain Rauscher Wessels to render an opinion as to the fairness to
Petro of this transaction.
The completion of the Petro Transaction is subject to the negotiation and
execution of definitive agreements, the receipt of regulatory approvals, the
approval of Star's nonaffiliated common unit holders and Petro's
nonaffiliated common shareholders, other necessary partnership and corporate
approvals, fairness opinions from A.G. Edwards & Sons Inc. and Dain Rauscher
Wessels, and the agreement to early redemption by the holders of 90% of Petro's
publicly traded debt and preferred stock.
Noncompliance with The NASDAQ Stock Market Minimum Bid Price Requirement
The Company received notification from The NASDAQ Stock Market ("NASDAQ") that
its Class A Common Stock was not in compliance pursuant to the newly enacted
NASD Market Place Rules regarding the minimum bid price requirement. The Company
responded to NASDAQ outlining its position as to why NASDAQ should not take any
action to delist Petro's Class A Common Stock from its National Market System
("NMS"). Among the reasons given for not delisting the stock was the possibility
of the previously described Star/Petro Transaction. Should the NASDAQ Hearing
Panel not grant the Company's written request for continued listing on the NMS,
the Company would then request a full oral hearing on this matter as provided
for under the NASD Market Place Rules.
With the exception of the minimum bid price of $5.00 per share, the Company
currently meets all of NASDAQ's other alternate maintenance standards. The
Company, through its Board of Directors, has the corporate power to increase the
minimum bid price per share to amounts in excess of $5.00 by effecting a reverse
stock-split. Such an action would decrease the number of shares outstanding and
proportionately increase the market value of each share, and as a result allow
the Company to then meet the minimum bid price maintenance criteria to remain on
the NASDAQ NMS.
Alternatively, the Company could also request inclusion of its Class A Common
Stock on the NASDAQ Small-Cap Market since it meets the maintenance requirements
associated with this listing.
- 16 -
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Included Within:
4.10 Certificate of Designation setting forth
resolution creating a series of Preferred
Stock designated as 1998 Junior Convertible
Preferred Stock.
10.28 Fifth Amendment dated as of July 15, 1998 to
the Fourth Amended and Restated Credit
Agreement, dated as of September 27, 1996,
among Petroleum Heat and Power Co., Inc.,
the several banks and financial institutions
from time to time parties thereto and The
Chase Manhattan Bank, as agent for such
Banks.
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
- 17 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Irik P. Sevin Chairman of the Board, Chief August 14, 1998
- ------------- Executive Officer, and
Irik P. Sevin Chief Financial and Accounting
Officer and Director
</TABLE>
- 18 -
<PAGE>
Exhibit 10.28
FIFTH AMENDMENT
FIFTH AMENDMENT, dated as of July 15, 1998 (this "Amendment"),
to the Fourth Amended and Restated Credit Agreement, dated as of September 27,
1996 (as amended, supplemented or otherwise modified from time to time, (the
"Credit Agreement"), among Petroleum Heat and Power Co., Inc. (the "Company"),
the several banks and financial institutions from time to time parties thereto
(collectively, the "Banks") and The Chase Manhattan Bank (formerly known as
Chemical Bank), as agent for such Banks (in such capacity, the "Agent").
W I T N E S S E T H:
WHEREAS, the Company, the Banks and the Agent are parties to
the Credit Agreement;
WHEREAS, the Company has requested that the Credit Agreement
be amended, as more fully described herein;
WHEREAS, the Agent and the Banks are willing to consent to
such amendments, but only upon the terms and subject to the conditions set forth
herein;
NOW, THEREFORE, in consideration of the promises and mutual
covenants herein contained and for other good and valuable consideration the
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. Defined Terms. Unless otherwise defined herein, terms
defined in the Credit Agreement are used herein as therein defined.
2. Amendment of Subsection 1.1. Subsection 1.1 of the Credit
Agreement hereby is amended by:
(a) deleting therefrom in its entirety the matrix set forth in the
definition of the term "Applicable Margin" contained therein and by
substituting therefor the following:
<TABLE>
<CAPTION>
Working Capital Loans
-------------------------------
Interest Alternate Base Eurodollar Acquisition
Coverage Ratio Rate Loans Loans Letters of Credit
-------------- --- ----------- --- ------ -----------------
<S> <C> <C> <C>
Interest Coverage Ratio A .50% 1.75% 2.25%
Interest Coverage Ratio B .75% 2.00% 2.50%
Interest Coverage Ratio C 1.00% 2.25% 2.75%
Interest Coverage Ratio D 1.25% 2.50% 3.00%
</TABLE>
(b) inserting at the end of the definition of the term "Borrowing Base"
contained therein the following:
Notwithstanding the foregoing, the Borrowing Base from time to
time in effect may be reduced by the Agent from time to time
(in its sole discretion) in order to adjust for (w)
impairments to collectibility of any otherwise Eligible
Accounts (including, without limitation, the creditworthiness
of the account debtors with respect thereto), (x) changes (or
newly disclosed information) with respect to the collection,
accounting and reserve practices of the Company and its
Subsidiaries, (y) impairments to the perfection or first
priority status of the Agent's security interest in any
otherwise Eligible Accounts and (z) other similar matters.
(c) deleting the date "July 15, 1998" contained in the definition of the
term "Commitment Termination Date" set forth therein and by
substituting therefor the date "June 29, 1999";
(d) inserting at the end of the definition of the term "Consolidated
Interest
<PAGE>
Expense" the following:
Notwithstanding the foregoing, any amendment fees paid or
payable to the Agent and the Banks pursuant to the Fifth
Amendment, dated as of July 15, 1998, to this Agreement shall
be deemed not to constitute "Consolidated Interest Expense".
(e) deleting in its entirety the definition of the term "Eligible
Accounts" set forth therein and by substituting therefor the
following:
"Eligible Accounts" shall mean, as to any Person at a
particular date, the total outstanding balance of Accounts (as
defined in the Uniform Commercial Code in effect in the State
of New York) of such Person recorded on the books of such
Person in accordance with GAAP:
(a) which are bona fide, valid and legally
enforceable obligations of the account debtor in
respect thereof and arise from the actual sale and
delivery of goods or rendition and acceptance of
services in the ordinary course of business to such
account debtor;
(b) which are not owed by an obligor which
is an affiliate or Subsidiary of such Person;
(c) which are not owed by an obligor which
has taken any of the actions or suffered any of the
events of the kind described in paragraph (g) of
Section 11;
(d) which are evidenced by an invoice which
was issued within 15 days after the date of the
transaction giving rise to such Account and which
specifies a due date which is not more than 30 days
after the date of such transaction; provided that (i)
"budget accounts" (i.e., Accounts arising from
payment plans in which the account debtor's annual
billings are paid in regular installments over an
extended period) and (ii) "installation installment
accounts" (i.e., Accounts arising from installment
contracts for the installation of boiler, furnace and
similar equipment), (in each case) which do not arise
from any impairment of creditworthiness of the
relevant account debtor shall be deemed to be
"Eligible Accounts" even if the terms of this clause
(d) are not satisfied;
(e) which have not been outstanding for more
than 90 days past the initial due date set forth in
the related invoice(s);
(f) which are owned solely by such Person
free and clear of all liens or other rights or claims
(including, without limitation, rights of setoff) of
any other Person (except in favor of the Agent for
the ratable benefit of the Banks); and
(f) in which the Agent has a perfected,
first priority security interest;
provided that there shall be deducted from the amount of
Eligible Accounts at any date 100% of the credit balances then
existing on the books of the Company in favor of account
debtors.
3. Amendment of Subsection 5.7. Subsection 5.7 of the Credit
Agreement hereby is amended by deleting said subsection 5.7 in its entirety and
by substituting therefor the following:
5.7 Cash Collateralization of Acquisition Letters of Credit.
The Borrower shall pledge to the Agent pursuant to the Cash Collateral
Agreement sufficient cash collateral so that the percentage set forth
below of the Acquisition L/C Obligations from time to time outstanding
is cash collateralized from and after the date set forth opposite such
percentage:
<TABLE>
<CAPTION>
Date Percentage
<S> <C>
June 30, 1998 83.3%
June 28, 1999 100.0%
</TABLE>
4. Amendment of Subsection 6.1. Subsection 6.1 of the Credit
Agreement
<PAGE>
hereby is amended by deleting therefrom the phrase "at the rate of 3/8 of 1%"
contained therein and by substituting therefor the phrase:
"(a) prior to July 1, 1998, at the rate of 3/8 of 1% and (b) from and
after July 1, 1998, at the rate of 1/2 of 1%, in each case"
5. Amendment of Subsection 6.4. Subsection 6.4 of the Credit
Agreement hereby is amended by deleting clause (c) thereof in its entirety and
by substituting therefor the following:
(c) In the event that the Company or any of its
Subsidiaries sells, assigns, transfers, leases or otherwise disposes of
any of the Customer Lists, then on the first Business Day after any
such sale, assignment, transfer, lease or other disposition (any of the
foregoing, a "Customer List Disposition"), the Company shall or shall
cause any of its Subsidiaries to apply 100% of the Net Cash Proceeds
thereof to (a) cash collateralize the Acquisition Letters of Credit
pursuant to the Cash Collateral Agreement and (b) to the extent that
the Acquisition Letters of Credit then outstanding have been fully cash
collateralized or no Acquisition Letters of Credit are then in effect,
reduce the Working Capital Commitments. Notwithstanding anything to the
contrary contained herein, any sale, assignment, transfer, lease or
other disposition of any of the Customer Lists which occurs within 180
days after the Company or any of its Subsidiaries, as the case may be,
acquired such Customer Lists shall not be deemed to be a Customer List
Disposition for purposes hereof.
6. Amendment of Subsection 8.8. Subsection 8.8 of the Credit
Agreement hereby is amended by deleting therefrom each reference to the date
"December 31, 1995" or "June 30, 1996" and by substituting therefor "December
31, 1997" and "March 31, 1998", respectively.
7. Amendment of Section 8. Section 8 of the Credit Agreement
hereby is amended by inserting therein as a new subsection 8.15 the following:
8.15 Year 2000 Preparedness. Any reprogramming required to
permit the proper functioning from and after January 1, 2000 of (a) the
computer systems of the Company and its Subsidiaries and (b) equipment
containing embedded microchips (including, without limitation, systems
and equipment supplied by others or with which the systems of the
Borrower and its Subsidiaries interface) and the testing of all such
systems and equipment (as so reprogrammed) will be completed by June
29, 1999. The cost to the Borrower and its Subsidiaries of such
reprogramming and testing and of the reasonably foreseeable
consequences of year 2000 (including, without limitation, reprogramming
errors and the failure of others' systems and equipment) will not
result in a Default or Event of Default or a Material Adverse Effect.
8. Amendment of Subsection 9.1. Subsection 9.1 of the Credit
Agreement hereby is amended by:
(a) deleting clause (i) thereof in its entirety and by substituting
therefor the following:
(i) on the third Business Day of each calendar week
and promptly after any day on which the Agent requests, a
Borrowing Base Certificate showing the Borrowing Base as of
the last day of the most recently ended calendar week or such
other date as reasonably requested by the Agent, as the case
may be, in each case certified as complete and correct by the
chief financial officer, treasurer or president, as the case
may be, of the Company together with supporting documents
reasonably acceptable to the Agent; provided that, during such
time as there are no outstanding extensions of credit under
the Working Capital Commitments, such Borrowing Base
Certificate may (in lieu of being delivered weekly) be
delivered by not later than the 20th day of each calendar
month (or if such day shall not be a Business Day, the next
preceding Business Day) and shall reflect the Borrowing Base
as of the last day of the most recently ended calendar month.
(b) deleting from clauses (b) and (f) thereof each reference to the term "
chief financial officer" and by substituting therefor the phrase "chief
financial officer, treasurer or president".
9. Amendment of Subsection 9.6. Subsection 9.6 of the Credit
Agreement
<PAGE>
hereby is amended by deleting said subsection in its entirety and by
substituting therefor the following:
9.6 Inspection of Property, Books and Records. (a)
The Company shall, and shall cause its Subsidiaries to, permit any
representatives of the Agent or of any Bank to visit and inspect any of
their respective properties and examine and make abstracts from any of
the books and records of the Company and any Subsidiary at any
reasonable time and as often as may reasonably be determined.
(b) The Company shall, and shall cause its Subsidiaries to,
(i) permit representatives of the Agent and of the Banks (in
coordination with the Agent) to conduct audits and/or collateral
examinations of the accounts receivable of the Company and its
Subsidiaries and of the Borrowing Base at such times as the Agent or
the Required Banks reasonably shall require and (ii) provide such
assistance as the Agent reasonably may request in connection with such
audits and examinations; provided that, except during such time as an
Event of Default is continuing, the Agent and the Banks will not
conduct more than two such audits and/or collateral examinations during
the period from June 30, 1998 through the Commitment Termination Date.
The Company shall pay to the Agent and the Banks the reasonable fees
and expenses of the Agent and the Banks in conducting such audits and
collateral examinations.
10. Amendment of Subsection 10.5. Subsection 10.5 of the
Credit Agreement hereby is amended by deleting therefrom clauses (e) through (i)
thereof in their entireties and by substituting therefor the following:
(e) loans or advances to officers, directors and employees in the
ordinary course of business for travel, entertainment and similar
expenses; (g) loans in the ordinary course of business to oil delivery
vehicle operators for the purpose of purchasing oil or propane delivery
vehicles; (h) advances, loans and investments existing on the date
hereof which are specified in the financial statements referred to in
subsection 8.8 hereof; and (i) advances of oil to other companies in
the oil business by way of "through-puts" in accordance with industry
practice.
11. Amendment of Subsection 10.6. Subsection 10.6 of the
Credit Agreement hereby is amended by:
(a) deleting clause (a) thereof in its entirety and by substituting
therefor the following:
(a) Make any payment of principal of any Indebtedness
for borrowed money (other than amounts owing hereunder) or for
the deferred purchase price of property or services, except
(i) at the maturity of such Indebtedness (including, without
limitation, scheduled amortizations thereof), (ii) as required
by mandatory prepayment provisions relating thereto, as in
effect on the date hereof and (iii) Indebtedness secured by
Acquisition Letters of Credit.
(b) deleting in its entirety the proviso to clause (b) thereof and by
substituting therefor the following:
; provided that the provisions of this subsection 10.6(b)
shall not apply to (i) Restricted Payments made by any
Subsidiary of the Company to any wholly-owned Subsidiary of
the Company or to the Company, (ii) Restricted Payments on
account of the repurchase by the Company from Irik Sevin of
common stock of the Company, to the extent that (x) no Default
or Event of Default has occurred and is continuing and (y) the
only consideration paid on account of such repurchase is the
forgiveness of the indebtedness incurred by Irik Sevin to the
Company to finance the initial purchase of such common stock
and (iii) other Restricted Payments (other than Restricted
Payments on account of common stock of the Company and
Restricted Payments on account of the voluntary redemption or
repayment of Preferred Stock, which Restricted Payments shall
in no event be permitted hereunder) made when no Default or
Event of Default is continuing or would result therefrom.
12. Amendment of Subsection 10.7. Subsection 10.7 of the
Credit Agreement hereby is amended by deleting said subsection in its entirety
and by substituting therefor the following:
<PAGE>
10.7 Consolidated Cash Flow; EBITDA. (a) Permit
Consolidated Cash Flow for the first fiscal quarter of each fiscal year
of the Company to be less than (i) in the case of the fiscal quarter
ended March 31, 1998, $30,000,000 and (ii) otherwise, $40,000,000.
(b) Permit EBITDA for any year of the Company to be less than
(i) in the case of the fiscal year ending on December 31, 1998,
$34,000,000 and (ii) in the case of each other fiscal year,
$40,000,000.
13. Amendment of Subsection 10.11. Subsection 10.11 of the
Credit Agreement hereby is amended by deleting the ratio "1.35 to 1.00"
contained therein and by substituting therefor the ratio "1.05 to 1.00".
14. Amendment of Section 10. Section 10 of the Credit
Agreement hereby is amended by inserting therein as new subsections 10.12 and
10.13 the following:
10.12 Capital Expenditures. Make or commit to make
(by way of the acquisition of securities of a Person or otherwise) any
expenditure in respect of the purchase or other acquisition of fixed or
capital assets during the period of four consecutive fiscal quarters
ending on or about June 30, 1999 or any period of four consecutive
fiscal quarters ending thereafter, except to the extent that all such
expenditures and commitments during such period of four consecutive
fiscal quarters does not exceed $4,000,000 in the aggregate.
10.13 Bank Accounts. Maintain any material deposits
with any bank or other financial institution which is not the Agent or
a Lender, other than (a) amounts which are to be swept into an account
with the Agent or a Lender in the ordinary course of business in
accordance with past practice or (b) amounts (not to exceed $250,000 in
the aggregate at any one time) required to provide good funds to permit
the clearance of checks and drafts issued by the Company and its
Subsidiaries in payment of accounts payable.
15. Amendment of Section 11. Section 11 of the Credit
Agreement hereby is amended by (a) inserting at the end of clause (l) thereof
the word "or" and (b) inserting therein as a new clause (m) thereof the
following:
(m) either (i) any Person or associated group of Persons
(other than the Sevin Group and the Traber Group, as each such term is
defined in the Shareholders' Agreement described below) shall own
capital stock of the Company having more than 25% of the voting power
of all capital stock of the Company or (ii) the Shareholders'
Agreement, dated as of July 28, 1992, among Malvin P. Sevin, Audrey L.
Sevin, Irik P. Sevin, Phillip Ean Cohen, Thomas J. Edelman, Margot
Gordon, Wolfgang Traber and the other signatories from time to time
thereto shall be amended, supplemented or otherwise modified in any
respect which could reasonably be expected to have an adverse effect on
the rights or interests of the Agent or the Banks or which has the
effect of allowing a majority of the Board of Directors of the Company
to be elected or designated by Persons other than the Sevin Group (as
defined in such Shareholders' Agreement, as in effect on June 30,
1998);
16. Amendment of Section 13.6. Section 13.6 of the Credit
Agreement hereby is amended by:
(a) deleting from clause (c) thereof the phrase "with the consent of the
Company and the Agent (which in each case shall not be unreasonably
withheld)" and by substituting therefor the phrase "with the consent of
the Agent and (during such time as no Event of Default is continuing)
the Company (which, in each case, shall not be unreasonably withheld)";
and
(b) deleting from clause (e) thereof the phrase "(and, in the case of a
Purchasing Bank which is not then a Bank or an affiliate thereof, by
the Company and the Agent)" and by substituting therefor the phrase
"(and, in the case of a Purchasing Bank which is not then a Bank or an
affiliate thereof, by the Agent and, to the extent that no Event of
Default is then continuing, the Company)".
17. Amendment of Exhibit H. Exhibit H to the Credit Agreement)
hereby is amended by deleting said Exhibit H in its entirety and by substituting
therefor the new form of Exhibit H which is attached hereto as Annex I.
18. Amendment of Line Letter. Each Bank hereby agrees that the
Line
<PAGE>
Letter, dated as of September 27, 1996 (as amended, supplemented or otherwise
modified from time to time, the "Line Letter"), among the Banks and the Company
shall be amended by:
(a) deleting the date "June 30, 1998" set forth in the first paragraph
thereof and by substituting therefor the date "June 29, 1999";
(b) deleting from the second paragraph under the heading "Provisions
Relating to Letters of Credit" the phrase "in an amount equal to 1-3/4%
per annum of such undrawn face amount" and by substituting therefor the
phrase "in an amount equal to 2-1/4% per annum of such undrawn face
amount"; and
(c) inserting immediately before the heading for the section entitled
"Miscellaneous" contained therein, the following:
Unused Fee
The Company hereby agrees to pay to each Bank, an unused fee
for the period from and including June 26, 1998 to the date
upon which the Line of Credit is terminated by such Bank,
computed at the rate of 1/2 of 1% per annum on the amount
equal to such Bank's Ratable Share of the average daily unused
amount of this Line of Credit during the period for which
payment is made. Such unused fee shall be payable, in arrears,
on the last day of each month and on the date upon which the
Line of Credit is terminated by such Bank. THE COMPANY HEREBY
ACKNOWLEDGES AND AGREES THAT THE UNUSED FEE CONSTITUTES
COMPENSATION TO THE BANKS FOR THEIR PAST MAINTENANCE OF THE
LINE OF CREDIT AND IN NO EVENT CONSTITUTES PAYMENT FOR ANY
FUTURE MAINTENANCE OF THEREOF; IN FURTHERANCE OF THE
FOREGOING, IT IS EXPRESSLY ACKNOWLEDGED AND AGREED BY THE
COMPANY THAT EACH BANK MAY REDUCE OR TERMINATE ITS RATABLE
SHARE OF THE LINE OF CREDIT AT ANY TIME IN ACCORDANCE WITH THE
TERMS HEREOF.
19. Representations and Warranties. The Company hereby
confirms, reaffirms and restates the representations and warranties set forth in
Section 8 of the Credit Agreement; provided that each reference to the Credit
Agreement therein shall be deemed to be a reference to the Credit Agreement
after giving effect to this Amendment. The Company represents and warrants that,
after giving effect to this Amendment, no Default or Event of Default has
occurred and is continuing.
20. Effectiveness; Fees. This Amendment shall become effective
on the first date (such date, the "Effective Date") upon which the Agent has
received:
(a) counterparts hereof, duly executed and delivered by the Company and
each of the Banks;
(b) an amendment fee, for the ratable account of the Banks, in the amount
equal to $300,000; and
(c) an incumbency certificate executed by the Secretary of the Company,
certifying the names and true signatures of the officers of the Company
authorized to execute and deliver this Amendment.
The Company further agrees to:
(x) deliver to the Agent, within 30 days after the Effective Date, a
certified copy of the resolutions adopted by the Board of Directors of
the Company, authorizing the execution and delivery of this Amendment
and the performance by the Company of its obligations under the Credit
Agreement (as modified hereby) and the other Loan Documents; and
(y) pay to Agent, for the ratable account of the Banks, a supplemental
amendment fee on (a) the first Business Day to occur after January 1,
1999 in the amount equal to $85,000 and (b) the first Business Day to
occur after April 1, 1999 in the amount equal to $85,000; provided that
the fee to be paid on each such date shall be payable only to the
extent that the Working Capital Commitments are then in effect or any
extensions of credit under the Credit Agreement are then outstanding.
The Company and (by their execution and delivery of the Consent attached hereto)
each of its Subsidiaries hereby acknowledges and agrees that (x) this Amendment
shall (for purposes of the definition of the term "Obligations" contained in the
Security Documents) constitute a Loan Document and (y) the supplemental
amendment fee described
<PAGE>
above shall constitute a portion of the Obligations secured by the Security
Documents.
21. Collateral Review. The Company hereby agrees to provide
all reasonable assistance to counsel to the Agent in conducting a collateral and
credit support review of the guarantees and security interests purportedly
granted by the Company and its Subsidiaries pursuant to the Security Documents
(including, without limitation, a review of the perfection of all security
interests). In furtherance of the foregoing, the Company agrees to provide to
the Agent such duly executed Uniform Commercial Code financing statements,
amendments and termination statements as the Agent reasonably may request in
order to cause the Agent to possess (for the benefit of the Banks) a first
priority, perfected security interest in the collateral security provided
pursuant to the Security Documents. The Company hereby further agrees that all
reasonable fees, costs and expenses of counsel to the Agent in conducting such
review and redressing any deficiencies that it may determine to be appropriate
shall be for the account of the Company (it being understood that (a) the Agent
may utilize the services of Intercounty Clearance Corporation in performing such
Uniform Commercial Code searches and filings as the Agent reasonably may require
in connection with such review and redress and (b) the Company promptly shall
pay directly to Intercounty Clearance Corporation all of its reasonable invoiced
fees and expenses in connection with such activities).
22. Continuing Effect of Credit Agreement. This Amendment
shall not constitute a waiver or amendment of any other provision of the Credit
Agreement not expressly referred to herein and shall not be construed as a
waiver or consent to any further or future action on the part of the Company
that would require a waiver or consent of the Banks or the Agent. Except as
expressly amended hereby, the provisions of the Credit Agreement are and shall
remain in full force and effect.
23. Counterparts. This Amendment may be executed by the
parties hereto in any number of counterparts, and all of such counterparts taken
together shall be deemed to constitute one and the same instrument.
24. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered in New York, New York by their
proper and duly authorized officers as of the date first above written.
PETROLEUM HEAT AND POWER CO., INC.
By: /s/ George Leibowitz
------------------------------------
Title: Treasurer
THE CHASE MANHATTAN BANK (formerly known as
Chemical Bank), as Agent and as a Bank
By: /s/ William DeMilt
------------------------------------
Title: Assistant Vice President
BANKBOSTON, N.A. (formerly known as The First
National Bank of Boston)
By: /s/ Timothy J. Norton
------------------------------------
Title: Vice President
NATIONSBANK, N.A.
By: /s/ Sean W. Cassidy
------------------------------------
Title: Vice President
<PAGE>
ACKNOWLEDGMENT AND CONSENT
Each of the undersigned hereby (a) acknowledges and consents
to the terms of the Third Amendment to which this Acknowledgment and Consent is
attached and (b) agrees that all Security Documents to which it is a party are,
and shall remain, in full force and effect, both before and after giving effect
to such Third Amendment.
MAXWHALE CORP.
ORTEP OF CONNECTICUT, INC.
PETRO, INC.
PETRO/CRYSTAL CORP.
ORTEP OF STATEN ISLAND, INC.
CBW REALTY CORP. OF
CONNECTICUT
OCENNET FUEL OIL CORP.
ORTEP OF NEW JERSEY, INC.
PUBLIC FUEL SERVICE CO., INC.
ORTEP OF PENNSYLVANIA, INC.
MAREX CORPORATION
A.P. WOODSON COMPANY, INC.
By: /s/ George Leibowitz
--------------------
Title: Treasurer
<PAGE>
ANNEX I
to
Fifth Amendment
EXHIBIT H
FORM OF
BORROWING BASE CERTIFICATE
This Certificate is delivered pursuant to subsection 9.1(i) of
the Fourth Amended and Restated Credit Agreement, dated as of September 27, 1996
(as the same may be amended, supplemented or otherwise modified from time to
time, the "Credit Agreement"), among Petroleum Heat and Power Co., Inc., a
Minnesota corporation (the "Company"), the several banks and other financial
institutions from time to time parties thereto and The Chase Manhattan Bank
(formerly known as Chemical Bank), as Agent. Unless otherwise defined herein or
as the context otherwise requires, terms used herein have the meanings provided
in the Credit Agreement.
On behalf of the Company, the undersigned certifies that he is
[the Chief Financial Officer][the Treasurer][the President] of the Company, and
that, as such, he is authorized to execute this Borrowing Base Certificate on
behalf of the Company and further certifies that:
For purposes of this Borrowing Base Certificate, the Borrowing
Base and Borrowing Base Adjustment calculation date is ___________ __, 199__
(the "Calculation Date").
1. The value of all Eligible Accounts of the Company and its
Subsidiaries as of the Calculation Date is: $ . [Schedule I hereto sets
forth certain calculations used to determine such value].
2. The amount of credit balances existing on the books of the
Company as of the Calculation Date in favor of account debtors is: $ .
3. The amount equal to Item 1 above minus Item 2 above is: $ .
4. 85% of the amount designated in Item 3 above is: $ .
3. The Borrowing Base (the amount designated in Item 4 above)
as of the Calculation Date is: $ .
4. The information contained in this Borrowing Base
Certificate (including the information upon which the foregoing
calculations are based) is true and complete in all material respects
as of the date hereof.
5. Except as disclosed in this Borrowing Base Certificate,
there has been no material adverse change in the collectibility or
enforceability of Accounts of the Company and its Subsidiaries or the
market value or salability of Inventory of the Company and its
Subsidiaries since , 19__.
6. To the best of my knowledge after due inquiry and in good
faith, the calculations contained herein are determined in accordance
with GAAP and the Borrowing Base calculations are based upon Accounts
of the Company and its Subsidiaries which meet the criteria set forth
in the Credit Agreement for Eligible Accounts.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this ___ day of_________, 19__ [insert the last day of the most recent calendar
month after the Agent has requested that the Company deliver a Borrowing Base
Certificate pursuant to subsection 9.1(i) of the Credit Agreement].
PETROLEUM HEAT AND POWER CO., INC.
By:
---------------------------------------
Name:
Title:
<PAGE>
SCHEDULE I
Accounts Excluded
<TABLE>
<S> <C> <C>
A. Accounts which are not bona fide, legally enforceable
obligations or do not arise from the actual sale and
delivery of goods or rendition and acceptance of
services the ordinary course of business $----------
B. Accounts which are owed by an obligor which is an
affiliate or Subsidiary of the Borrower $----------
C. Accounts, the balance of which is in excess of
$250,000, which are owed by an obligor who has taken
any of the actions or suffered any of the events of
the kind described in paragraph (g) of Section 11 of
the Credit Agreement $----------
D. Accounts which were not invoiced within 15 days after
the transaction date or which specify a due date more
than 30 days after the transaction date (other than
budget accounts and installation installment accounts) $----------
E. Accounts which are more than 90 days past the initial
invoice due date $----------
F. Accounts which are not free and clear of all liens
and other claims (except those in favor of the Agent
for the ratable benefit of the Banks) $----------
G. Accounts in which the Agent does not have a perfected
first priority security interest $----------
H. Accounts which are otherwise excluded $----------
</TABLE>
<PAGE>
Exhibit 4.10
CERTIFICATE OF DESIGNATION
-----------
SETTING FORTH RESOLUTION CREATING A SERIES
OF PREFERRED STOCK DESIGNATED AS 1998
JUNIOR CONVERTIBLE PREFERRED STOCK
ADOPTED BY THE BOARD OF DIRECTORS OF
PETROLEUM HEAT AND POWER CO., INC.
Pursuant to the Provisions of Section 302A.401 of the
Minnesota Business Corporation Act, as amended
We, the undersigned, JAMES BOTTIGLIERI and ALAN SHAPIRO, respectively
a Vice President and Assistant Secretary of Petroleum Heat and Power Co., Inc.,
a Minnesota corporation (hereinafter sometimes referred to as the Corporation ),
hereby certify as follows:
FIRST: That under the Restated and Amended Articles of Incorporation
of the Corporation ( Restated Articles ) the total number of authorized shares
of Preferred Stock which the Corporation may issue is 5,000,000 and under said
Restated Articles the Board of Directors of the Corporation ( Board ) is
authorized to issue such shares of the Preferred Stock from time to time in one
or more series and to determine in the resolution providing for the issuance of
any series of Preferred Stock the rights and preferences of shares of such
series not fixed and determined by the Restated Articles.
SECOND: That the Board, pursuant to the authority so vested in it by
the Restated Articles and in accordance with the provisions of Section 302 A.401
of the Minnesota Business Corporation Act, as amended, adopted the following
resolution creating a series of Preferred Stock designated as 1998 Junior
Convertible Preferred Stock ("Junior Preferred Stock"), which resolution has not
been amended, modified, rescinded or revoked and is in full force and effect.
WHEREAS, the Restated and Amended Articles of Incorporation (the
Restated Articles ) of Petroleum Heat and Power Co., Inc., a Minnesota
corporation (the Corporation ), authorize the issuance of 5,000,000 shares of
Preferred Stock of the Corporation; and
WHEREAS, pursuant to agreements entered into with the holders of its
10 1/8% Subordinated Notes due 2003, its 9 3/8% Subordinated Debentures due
2006, its 12 1/4% Subordinated Debentures due 2005 and its 12 7/8% Series B
Exchangeable Preferred Stock due 2009, this Corporation may issue up to
1,000,000 shares of its 1998 Junior Convertible Preferred Stock,
NOW, THEREFORE, be it, and it hereby is, resolved by the Board that a
series of Preferred Stock is hereby designated 1998 Junior Convertible Preferred
Stock consisting of 1,000,000 shares (the Junior Preferred Stock ), having the
relative rights and preferences as set forth below:
<PAGE>
1. Ranking. The shares of the Junior Preferred Stock shall rank junior to the
Corporation's Class B Common Stock, the Corporation's 1989 Preferred Stock and
the Corporation's Series B Exchangeable Preferred Stock, with respect to the
payment of dividends and upon liquidation, dissolution, winding up or otherwise.
The shares of Junior Preferred Stock shall rank pari passu with the
Corporation's Class A and Class C Common Stock with respect to the payment of
dividends and shall rank senior to such Class A and Class C Common Stock upon
liquidation, dissolution and winding up or otherwise to the extent set forth in
paragraph 4. Except as specified in the two preceding sentences and as provided
in paragraph 4(b), all other series of Preferred Stock, all other classes of
Preferred Stock and all other capital stock of the Corporation shall rank senior
to the Junior Preferred Stock with respect to the payment of dividends or upon
liquidation, dissolution, winding-up or otherwise.
2. Dividends. (a) The holders of the shares of the Junior Preferred Stock shall
be entitled to receive dividends thereon when and as declared by the Board of
Directors of this Corporation, out of funds legally available therefor.
Dividends shall not accrue or accumulate except if and to the extent they are
declared but unpaid. Accumulation of declared but unpaid dividends on any shares
of the Junior Preferred Stock shall not bear interest.
3. Priority as to Dividends. (a) No dividends or other distributions (other than
dividends or other distributions payable in Class A Common Stock or Class C
Common Stock) shall be declared or paid or set apart for payment on the Junior
Preferred Stock for any period, and no Junior Preferred Stock may be
repurchased, redeemed or otherwise retired, nor may funds be set apart for
payment with payment with respect thereto, unless at the time thereof (i) full
cumulative dividends have been or simultaneously are declared and paid (or
declared and a sum sufficient for the payment thereof set apart for such
payment) on all Senior Securities for all quarterly dividend periods terminating
on or prior to the date of payment of such dividends on the Junior Preferred
Stock, (ii) an amount equal to the dividends accrued on the Senior Securities as
of the date of each proposed distribution or payment on the Junior Preferred
Stock has been declared and set apart in cash for payment on the Senior
Securities and (iii) any redemption payment required to be made pursuant hereto
on or prior to the date of payment of such dividends on the Junior Preferred
Stock and all Parity Securities shall have been paid or a sum sufficient for the
payment thereof set apart for such payment.
(b) No dividends or other distributions other than dividends or other
distributions payable in Class A Common Stock or Class C Common Stock) shall be
declared or paid or set apart for payment on the Class A Common Stock or the
Class C Common Stock unless at the time there shall have been declared and paid
(or declared and a sum sufficient for the payment thereof set apart) dividends
on the Junior Preferred Stock.
(c) If the Corporation proposes to pay to the holders of the outstanding Junior
Preferred Stock and the holders of all outstanding Parity Securities an amount
less than full unpaid dividends declared thereon, then the amount actually paid
shall be distributed among such holders ratably per share in proportion to the
amount of such unpaid dividends. No Parity Securities may be repurchased,
redeemed or otherwise retired, nor may funds be set apart for payment with
respect thereto, if full unpaid dividends which have been declared have not been
paid in cash on the Junior Preferred Stock.
<PAGE>
(d) To calculate the dividends to be paid on the Junior Preferred Stock pursuant
to subparagraph (b) and (c), each share of Junior Preferred Stock shall be
deemed to be the equivalent of the whole number of shares of Class A Common
Stock which the holder of such share of Junior Preferred Stock would have been
entitled to receive had such share of Junior Preferred Stock been converted into
Class A Common Stock pursuant to paragraph 5 on the record date for payment of
such dividend.
4. Payment on Liquidation. (a) In the event of any liquidation, dissolution or
winding-up of the affairs of the Corporation, whether voluntary or involuntary,
after payment or provision for payment of the debts and other liabilities of the
Corporation, the holders of shares of the Junior Preferred Stock shall not be
entitled to receive any distribution of assets of the Corporation unless there
has been set aside for distribution to the holders of the Senior Securities the
full amounts to which they are entitled under the Restated Articles.
(b) Subject to the payment in full to the holders of the Senior Securities of
all amounts to which they are entitled under the Restated Articles, the holders
of the Junior Preferred Stock shall be entitled to receive a distribution equal
to $.01 per share ("Liquidation Preference"); provided, however, that if there
are insufficient assets to pay the Liquidation Preference with respect to all
shares of Junior Preferred Stock, then the amount actually distributed shall be
paid ratably per share to the holders of the Junior Preferred Stock.
(c) Subject to the payment in full (i) to the holders of the Senior Securities
of all amounts to which they are entitled under the Restated Articles and (ii)
to the holders of the Junior Preferred Stock of the Liquidation Preference, the
remaining assets shall be distributed ratably to the holders of the Junior
Preferred Stock and the Parity Securities and each share of Junior Preferred
Stock shall be deemed to be the equivalent of the number of whole shares of
Class A Common Stock which the holder of such share of Junior Preferred Stock
would have been entitled to receive had such share of Junior Preferred Stock
been converted pursuant to paragraph 5 immediately prior to such time.
5. Conversion. (a) Shares of Junior Preferred Stock shall be convertible at the
office of the transfer agent for such shares, and at such other place or places,
if any, as the Board of Directors of the Corporation may designate, into fully
paid and non-assessable shares of a Class A Common Stock at any time at the
election of the holder subject the provisions of this paragraph. The Junior
Preferred Stock shall be convertible into shares of Class A Common Stock at the
rate of one share of Class A Common Stock for each share of Junior Preferred
Stock ("Conversion Ratio"). The Conversion Ratio shall be subject to adjustment
from time to time as hereinafter provided. No adjustment shall be made in
respect of dividends on the Class A Common Stock or the Junior Preferred Stock
upon conversion of shares of the Junior Preferred Stock. No fractional shares of
Class A Common Stock will be issued; and a cash payment will be paid in lieu of
any fractional share in an amount equal to the same fraction of the closing
price of the Class A Common Stock on the business day which next precedes the
day of conversion.
<PAGE>
(b) Before any holder of the Junior Preferred Stock shall be entitled to convert
the same into Class A Common Stock, such holder shall surrender the certificate
or certificates therefor, duly endorsed to the Corporation or in blank, at the
office of the transfer agent for such series or at such other place or places,
if any, as the Board of Directors of the Corporation shall have designated, and
shall give written notice to the Corporation at said office or place that he
elects to convert the same and shall state in writing therein the name or names
(with addresses) in which he wishes the certificate or certificates for Class A
Common Stock to be issued. The Corporation, as soon as practicable thereafter,
shall issue and deliver at said office or place to such holder of shares of
Junior Preferred Stock, or to his nominee or nominees, certificates for the
number of full shares of Class A Common Stock to which he shall be entitled as
aforesaid together with cash in lieu of any fraction of a share to which he
would otherwise be entitled. Shares of Junior Preferred Stock shall be deemed to
have been converted as of the close of business on the date of the surrender of
such shares for conversion as provided above, and the person or persons entitled
to receive the Class A Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such Class A Common
Stock as of the close of business on such date.
(c) The Conversion Ratio in effect at any time shall be subject to adjustment as
follows: In case the Corporation shall (A) declare a dividend on the Class A
Common Stock in shares of its capital stock, (B) subdivide the outstanding
shares of Class A Common Stock, (C) combine the outstanding shares of Class A
Common Stock into a smaller number of shares, or (D) issue by reclassification
of the Class A Common Stock (including any such reclassification in connection
with a consolidation or merger in which the Corporation is the continuing
corporation) any shares of its capital stock, the Conversion Ratio in effect on
the record date for such dividend or on the effective date of such subdivision,
combination or reclassification shall be proportionately adjusted so that the
holder of any shares of Junior Preferred Stock surrendered for conversion after
such time shall be entitled to receive the kind and amount of shares which such
holder would have owned or have been entitled to receive had such shares of
Junior Preferred Stock been converted immediately prior to such time. Such
adjustment shall be made successively whenever any event listed above shall
occur.
(d) In any case in which this Paragraph 5 shall require that an adjustment in
the Conversion Ratio be made effective as of a record date for a specified
event, the Corporation may elect to defer until the occurrence of such event the
issuing to the holder of any Junior Preferred Stock converted after such record
date the shares of Class A Common Stock and other shares, if any, issuable upon
such exercise over and above the shares of Class A Common Stock, if any,
issuable upon such exercise on the basis of the Conversion Ratio in effect prior
to such adjustment; provided, however, that the Corporation shall deliver to
such holder an appropriate instrument evidencing such holder's right to receive
such additional shares if any, upon the occurrence of the event requiring such
adjustment.
<PAGE>
(e) In case of any consolidation or merger to which the Corporation is a party
(other than a consolidation or merger in which the Corporation is the continuing
corporation and the Junior Preferred Stock is not changed or exchanged), or in
case of any sale or conveyance to another corporation of the property of the
Corporation as an entirety or substantially as an entirety, (any such merger,
consolidation, sale or conveyance a "Transfer") there shall be no adjustment of
the Conversion Ratio, but the holder of each share of Junior Preferred Stock
shall have the right to convert such share into the kind and amount of shares of
stock and other securities and property which such holder would have been
entitled to receive upon such consolidation, merger, sale or conveyance if such
holder had held the Class A Common Stock issuable upon the conversion of such
share immediately prior to such consolidation, merger, sale or conveyance
assuming such holder of Class A Common Stock failed to exercise his rights of
election, if any, as to the kind or amount of securities, cash or other property
receivable upon such Transfer. Thereafter, holders of the Junior Preferred Stock
shall be entitled to appropriate adjustments with respect to their conversion
rights so that the provisions set forth in this Paragraph 5 shall
correspondingly be made applicable, as nearly as may reasonably be, in relation
to any shares of stock or other securities or property thereafter deliverable on
conversion of the Junior Preferred Stock. Any such adjustment shall be approved
by the Board of Directors (whose determination shall be conclusive and shall be
set forth in a board resolution filed by the Corporation with the transfer agent
for the Junior Preferred Stock). Notwithstanding the foregoing, if the
Corporation shall participate in a transaction with Star Gas Partners LP or an
entity which is controlling, controlled by or under common control with Star Gas
Partners LP involving a Transfer, each share of the Junior Preferred Stock shall
be exchanged for no less than .13064 Common Units of Star Gas Partners LP as
equitably adjusted for dividends in the form of Units, unit splits, unit
recapitalizations and like transactions ("Common Units"); provided, however,
that no fractional Common Units shall be issued and in lieu of fractional Common
Units, holders shall be entitled to receive a cash payment.
(f) The Corporation shall at all times reserve and keep available, free from
preemptive rights, out of the aggregate of the authorized but unissued shares of
Class A Common Stock and the issued shares of Class A Common Stock held in its
treasury, solely for the purpose of effecting the conversion of the Junior
Preferred Stock, the full number of shares of Class A Common Stock then issuable
upon the conversion of all the outstanding share of Preferred Stock. For the
purpose of this Paragraph 5(f), the full number of shares of Class A Common
Stock issuable upon the conversion of all the outstanding shares of Junior
Preferred Stock shall be computed as if at the time of computation of such
number of shares of Class A Common Stock all outstanding shares of Junior
Preferred Stock were held by a single holder. The Corporation shall from time to
time, in accordance with the laws of the State of Minnesota, increase the
authorized amount of Class A Common Stock if at any time the aggregate of the
authorized amount of Class A Common Stock remaining unissued and the issued
shares of Class A Common Stock held in its treasury (other than any such shares
reserved for issuance in any other connection) shall not be sufficient to permit
the conversion of all shares of Junior Preferred Stock at the time outstanding.
If any shares of Class A Common Stock required to be reserved for issuance upon
conversion of shares of Junior Preferred Stock hereunder require registration
with or approval of any governmental authority under any Federal or state law
before such may be issued upon such conversion, the Corporation will in good
faith and as expeditiously as possible endeavor to cause such shares to be so
registered or approved.
<PAGE>
(g) The Corporation shall pay any and all documentary, stamp or similar issue or
transfer taxes that may be payable in respect of the issue or delivery of shares
of Class A Common Stock on conversion of shares of Junior Preferred Stock
pursuant hereto. The Corporation shall not, however, be required to pay any such
tax which may be payable in respect of any transfer involved in the issue or
transfer and delivery of shares of Class A Common Stock in a name other than
that in which the shares of Junior Preferred Stock so converted were registered,
and no such issue or delivery shall be made unless and until the person
requesting such issue has paid to the Corporation the amount of any such tax or
has established to the satisfaction of the Corporation that such tax has been
paid.
(h) The registered holder of such shares of Junior Preferred Stock as the close
of business on a dividend payment record date shall be entitled to receive the
dividend payable on such shares on the corresponding dividend payment date
notwithstanding the conversion thereof. A holder of Junior Preferred Stock on a
dividend record date who (or whose transferee) converts shares of Junior
Preferred Stock on a dividend payment date will receive the dividend payable on
such Junior Preferred by the Corporation on such date, and the converting holder
need not include payment in the amount of such dividend upon surrender of shares
of Junior Preferred Stock for conversion.
6. Required Conversion. (a) On and after April 1, 1999, the Corporation may
elect to require the conversion of all, but not less than all, of the Junior
Preferred Stock into Class A Common Stock at the Conversion Ratio at the time in
effect plus a payment in cash equal to all declared and unpaid dividends to the
date fixed for conversion. Notice of such conversions specifying the date fixed
for conversion (the "Conversion Date"), the Conversion Ratio and the place where
shares of Junior Preferred Stock are to be surrendered plus the amount of any
cash to be paid with respect to declared and unpaid dividends shall be mailed,
postage prepaid at least thirty but not more than 45 days prior to the
Conversion Date to the holders of record of Junior Preferred Stock at their
addresses as the same shall appear on the books of the Corporation's transfer
agent for Junior Preferred Stock. If such Conversion Notice shall have been so
mailed and if on or before the Conversion Date all shares of Class A Common
Stock and all cash necessary to effect the conversion have been set aside by the
Corporation, so as to be and continue to be available therefore, then on and
after the Conversion Date, notwithstanding that any certificate for Junior
Preferred Stock shall not have been surrendered for cancellation, the shares of
Junior Preferred Stock represented hereby shall be deemed to be no longer
outstanding, the right to receive dividends thereon shall cease and terminate,
and the only right of the holders thereof shall be to receive shares of Class A
Common Stock and the cash payment, if any, to which such holder may be entitled
upon surrender of the certificate representing such Junior Preferred Stock.
(b) Junior Preferred Stock may be beneficially owned only by a holder who
acquired such Junior Preferred Stock from the Corporation (a "Direct Acquirer")
and when beneficial ownership of any share of Junior Preferred Stock is
transferred by a Direct Acquirer, such share of Junior Preferred Stock shall be
immediately converted into shares of Class A Common Stock at the Conversion
Ratio then in effect.
<PAGE>
(c) No fraction of shares of Class A Common Stock will be issued pursuant to a
conversion pursuant to this Paragraph 6; and a cash payment will be made in lieu
of any fractional share in an amount equal to the same fraction of the closing
price of the Class A Common Stock as reported on the principal exchange or
market in which the Class A Common Stock shall then trade (i) in the case of a
conversion pursuant to subparagraph 6(a), on the date the notice of conversion
is first mailed to holders and (ii) in all other cases, such date as the Board
of Directors may reasonably select.
7. Voting Holders of the Junior Preferred Stock shall not been titled to any
voting rights with respect to the Junior Preferred Stock, except as required by
the laws of the State of Minnesota. On all matters upon which holders of the
Junior Preferred Stock are entitled to vote or give their consent, each such
holder shall been titled to one vote per each share of the Junior Preferred
Stock held by such holder.
8. Certain Definitions. "Parity Securities" means the Class A and Class C Common
Stock of the Corporation and each other Class of Common Stock of the
Corporation, other than Class B Common Stock. "Senior Securities" means the 1989
Preferred Stock, the 12 7/8% Series B Exchangeable Preferred Stock, the Class B
Common Stock and each other series or class of Preferred Stock.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION (IN THOUSANDS EXCEPT PER
SHARE DATA) EXTRACTED FROM PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 33,223
<SECURITIES> 0
<RECEIVABLES> 48,688
<ALLOWANCES> 1,728
<INVENTORY> 11,063
<CURRENT-ASSETS> 99,340
<PP&E> 75,525
<DEPRECIATION> 45,561
<TOTAL-ASSETS> 229,120
<CURRENT-LIABILITIES> 76,201
<BONDS> 284,587
32,687
0
<COMMON> 2,648
<OTHER-SE> (177,714)
<TOTAL-LIABILITY-AND-EQUITY> 229,120
<SALES> 231,657
<TOTAL-REVENUES> 249,366
<CGS> 123,496
<TOTAL-COSTS> 157,320
<OTHER-EXPENSES> 72,113
<LOSS-PROVISION> 913
<INTEREST-EXPENSE> 16,485
<INCOME-PRETAX> 3,864
<INCOME-TAX> 325
<INCOME-CONTINUING> 3,539
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,004
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
