-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TjS0nnsS/3GhE/ZQIbhmiNFDWdoezCQ2EG4sufypdkj2iQlztvYOXot49qfDWb3p J7qopzY7gz4pUE7JEn89mg== 0000912057-96-005061.txt : 19960326 0000912057-96-005061.hdr.sgml : 19960326 ACCESSION NUMBER: 0000912057-96-005061 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960325 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRYSTAL OIL CO CENTRAL INDEX KEY: 0000745907 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 720163810 STATE OF INCORPORATION: LA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08715 FILM NUMBER: 96537938 BUSINESS ADDRESS: STREET 1: 229 MILAM ST CITY: SHREVEPORT STATE: LA ZIP: 71101 BUSINESS PHONE: 3182227791 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-8715
CRYSTAL OIL COMPANY (Exact name of registrant as specified in its charter) LOUISIANA 72-0163810 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 229 MILAM STREET, SHREVEPORT, 71101 LOUISIANA (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (318) 222-7791 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ----------------------------------------------------- ------------------------------------------- COMMON STOCK $.01 PAR VALUE AMERICAN STOCK EXCHANGE, INC. PACIFIC STOCK EXCHANGE, INCORPORATED $.06 SENIOR CONVERTIBLE PACIFIC STOCK EXCHANGE, INCORPORATED VOTING PREFERRED STOCK (NON-CUMULATIVE), $.01 PAR VALUE $.075 WARRANTS PACIFIC STOCK EXCHANGE, INCORPORATED $.10 WARRANTS PACIFIC STOCK EXCHANGE, INCORPORATED $.125 WARRANTS PACIFIC STOCK EXCHANGE, INCORPORATED $.15 WARRANTS PACIFIC STOCK EXCHANGE, INCORPORATED $.25 WARRANTS PACIFIC STOCK EXCHANGE, INCORPORATED
Securities registered pursuant to Section 12(g) of the Act: NONE ------------------------ 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 March 19, 1996, 2,654,042 shares of Common Stock of the registrant were outstanding. The aggregate market value of the voting stock of the registrant (based upon the latest closing price prior to March 19, 1996, of such shares on the American Stock Exchange, Inc. and the Pacific Stock Exchange, Incorporated) held by non-affiliates of the registrant was approximately $37.1 million. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENTS REFERENCE TO THIS REPORT - --------------------------------------------------------- --------------------------------------------------------- Proxy Statement for Annual Meeting Part III of Shareholders to be held in 1996
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / X - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ----- PART I Item 1. Business....................................................................................... 2 The Company.................................................................................... 2 Business....................................................................................... 3 Natural Gas Storage and Transportation......................................................... 3 Sales, Customers and Contracts................................................................. 4 Crude Oil and Natural Gas Exploration and Production........................................... 5 Drilling Activities............................................................................ 5 Other Business Information..................................................................... 6 Foreign Operations............................................................................. 6 Competition.................................................................................... 7 Employees...................................................................................... 7 Regulation..................................................................................... 7 Gas Storage and Transportation................................................................. 7 Environmental Matters.......................................................................... 7 Item 2. Properties..................................................................................... 9 Other Properties............................................................................... 9 Item 3. Legal Proceedings.............................................................................. 9 Item 4. Submission of Matters to a Vote of Security Holders............................................ 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 10 Price Range of Common Stock.................................................................... 10 Dividends...................................................................................... 10 Item 6. Selected Financial Data........................................................................ 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 12 General........................................................................................ 12 Results of Operations.......................................................................... 13 General........................................................................................ 13 Crude Oil and Natural Gas Exploration and Production........................................... 14 Investment Income.............................................................................. 15 Net Gain on Sale of Fixed Assets............................................................... 15 Depreciation, Depletion and Amortization....................................................... 16 General and Administrative Expense............................................................. 16 Taxes and Quasi-Reorganization Adjustment...................................................... 16 Liquidity and Capital Resources................................................................ 17 Other Matters.................................................................................. 18 Item 8. Consolidated Financial Statements and Supplementary Data....................................... 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 49 PART III Item 10. Directors and Executive Officers of the Registrant............................................. 49 Item 11. Executive Compensation......................................................................... 49 Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 49 Item 13. Certain Relationships and Related Transactions................................................. 49 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 50 Signatures................................................................................................. 54
1 PART I ITEM 1. BUSINESS THE COMPANY Crystal Oil Company, a Louisiana corporation (the "Company"), is an acquisition company that currently owns and operates through wholly owned subsidiaries a natural gas storage facility near Hattiesburg, Mississippi (the "Hattiesburg Facility") and holds various interests in crude oil and natural gas properties in Texas and Louisiana. The Company actively reviews acquisition opportunities, both within and outside the energy industry, with a focus on acquisitions that will maximize the return on the Company's existing capital resources and benefit from the Company's large net operating loss carryforwards and other tax benefits. The Company was historically a crude oil and natural gas exploration and development company. In the fourth quarter of 1994, the Company disposed of substantially all of its domestic crude oil and natural gas properties for approximately $98 million and applied a portion of the proceeds to prepay all of its outstanding indebtedness. In connection with this disposition, the Company embarked on an acquisition program aimed at identifying assets that would generate income for the Company on a current basis and would benefit from the Company's tax position as well as present the opportunity for capital appreciation. In June 1995, the Company completed its first acquisition under this program through the acquisition of First Reserve Gas Company ("FRGC") for approximately $78.5 million. FRGC's principal asset is the Hattiesburg Facility. The Hattiesburg Facility is a natural gas storage facility that was constructed in 1991 and consists of three salt-dome caverns with a total storage capacity of 5.5 billion cubic feet ("Bcf") of natural gas, of which 3.5 Bcf is working gas and 2.0 Bcf is base gas. The acquisition of FRGC was funded with the Company's available cash and a $60 million short-term bridge loan. In November 1995, the Company refinanced this loan through a sale to a newly formed business trust of approximately five years of future accounts receivable to be generated from the operations of the Hattiesburg Facility and $36.5 million in long-term debt, the recourse of which is primarily limited to FRGC and the Hattiesburg Facility. These transactions resulted in net proceeds to the Company of approximately $58 million, net of financing costs. The acquisition of FRGC and the subsequent refinancing thereof resulted in the Company reevaluating its tax assets for accounting purposes in light of the taxable income generated or to be generated from the operation of the Hattiesburg Facility during the life of the Company's net operating loss carryforwards and other tax benefits and from the 1995 accounts receivable sale. This evaluation resulted in an upward adjustment to the Company's stockholders' equity of $22.3 million. Of such increase $14.4 million related to tax benefits realized in 1995. This adjustment to the Company's tax assets did not affect net income for 1995 due to the accounting treatment required for the Company's 1986 quasi-reorganization and the fact that the Company's net operating loss carryforwards and certain of its other tax benefits relate to events prior to such reorganization. As of December 31, 1995, the Company had $65.3 million in cash, cash equivalents and marketable securities that could be utilized for future acquisitions. In addition, the Company had no material debt other than the debt directly associated with and primarily recourse to FRGC and the Hattiesburg Facility. The Company was incorporated in 1926 under the laws of the State of Maryland and reincorporated in the State of Louisiana in 1984. On October 1, 1986, the Company filed for reorganization under Chapter 11 of the United States Bankruptcy Code and on December 31, 1986, the United States Bankruptcy Court for the Western District of Louisiana, Shreveport Division, confirmed the Company's Second Amended and Restated Plan of Reorganization (the "Plan of Reorganization"). The Plan of Reorganization was consummated on January 30, 1987, and distributions to creditors and 2 shareholders were thereafter made. The Company accounted for its reorganization as a quasi-reorganization and restated its assets and liabilities to reflect their estimated fair market value as of December 31, 1986. The Company's executive offices are located at 229 Milam Street, Shreveport, Louisiana 71101, and its telephone number is (318) 222-7791. Except as otherwise indicated by the context, the terms "Company" and "Crystal", as used herein, mean Crystal Oil Company and its consolidated subsidiaries. BUSINESS The Company's operations currently consist of two business segments: (i) natural gas storage and transportation and (ii) exploration and development of crude oil and natural gas. The Company disposed of substantially all of its crude oil and natural gas properties in 1994 and acquired its natural gas storage and transportation business in 1995. Although the Company engaged in crude oil and natural gas exploration and development activities in 1995, these activities were limited to a prospect development program, which the Company retained from its 1994 sale. The Company's interest in such activities was that of an investor and not an operator. Accordingly, the Company's operations and sources of income in 1995 were significantly different and based on a fundamentally different asset base than in prior years and results between periods may not be comparable. Note R sets forth certain financial information for each of the Company's segments for the years ended December 31, 1995, 1994 and 1993. NATURAL GAS STORAGE AND TRANSPORTATION The Company's natural gas storage and transportation operations are currently conducted through FRGC and limited to the ownership and operation of the Hattiesburg Facility and related assets. The Hattiesburg Facility provides its customers with critical natural gas supply security through a combination of strategic geographic location, pipeline access and operating flexibility. The location of the facility in southeastern Mississippi is favorable due to its proximity to various natural gas pipeline systems, natural gas supplies and markets. The salt dome facility also allows rapid cycling of working natural gas volumes through high levels of sustained injection and withdrawal volumes. As a result, the working capacity of natural gas serves as a reserve for peak day delivery service, pipeline transportation balancing and certain spot-gas purchasing strategies. The entire working storage capacity is fully subscribed to twelve customers under firm storage capacity contracts expiring in 2005. The Hattiesburg Facility was constructed in 1991 through a conversion of a propane storage facility built in the early 1970s and the leaching of an additional cavern in 1991. The Hattiesburg Facility is located on a 73 acre tract outside of Hattiesburg, Mississippi, and consists of three salt caverns with storage capacity of 5.5 Bcf of natural gas. The Hattiesburg Facility is designed to handle 3.5 Bcf of working gas capacity and 2.0 Bcf of base gas. Working gas capacity refers to natural gas storage capacity available to the customers of the facility. Base gas refers to that gas which is generally owned by the facility and necessary to be in the facility to maintain the deliverability pressure of the facility. The Hattiesburg Facility is situated on top of a natural salt dome and utilizes three leached caverns for the storage of natural gas. The Hattiesburg Facility has a maximum injection capacity in excess of 175 million cubic feet ("Mmcf") of natural gas per day and a maximum withdrawal capacity in excess of 350 Mmcf of natural gas per day. The ability of the Hattiesburg Facility to handle these high levels of injections and withdrawals of natural gas makes the facility well suited for customers who desire the ability to meet short duration load swings and to cover major supply interruption events, such as hurricanes and temporary losses of production. The high injection and withdrawal rates also allow customers to take advantage of price savings in natural gas by allowing for quick 3 delivery. The characteristics of the salt dome at the Hattiesburg Facility permit sustained periods of high delivery, the ability to quickly switch from full injection to full withdrawal and provides an impermeable storage medium. The location of the Hattiesburg Facility is strategically located near various major pipelines serving the Northeastern and Southeastern natural gas markets. The Company owns 26.5 miles of intrastate pipelines connecting the Hattiesburg Facility to major pipelines in the surrounding area. Customers can cost-effectively transport significant volumes of natural gas through direct interconnects with Transcontinental Gas Pipe Line, Tennessee Gas Pipeline, Koch Gateway Pipeline and the Associated Natural Gas systems and indirect interconnects to the Texas Eastern Transmission, Southern Natural Gas and Florida Gas Transmission systems. Natural gas from the facility also enters the connected pipelines downstream of the capacity constrained segments of these systems thereby providing ready access to major natural gas markets. The Hattiesburg Facility and related assets are currently pledged to secure the indebtedness to refinance the Company's acquisition of FRGC as well as certain obligations of the Company in regard to the 1995 sale of Hattiesburg Facility receivables. The Company has also pledged its interest in the firm storage contracts relating to the facility and the stock of FRGC to secure the payment and performance of such obligations. SALES, CUSTOMERS AND CONTRACTS The Company provides both storage and related transportation services on an "unbundled" basis that permit customers to contract for storage space, injection and withdrawal capacities and transportation. These services are currently provided on a firm and interruptible basis to local distribution companies, pipelines, marketers and producers. In a firm basis contract, the user pays a charge for the availability of the storage space and of the injection and withdrawal rights regardless of whether the space or injection and withdrawal capacity is actually used. In an interruptible arrangement, the user customarily pays a per diem fee because the facility may be unable to make the storage, injection or withdrawal capacities available if the facility or a customer with a firm contract requires the space or the use of the facilities. The number of contracts and their terms for a given storage cavern will depend upon the physical limitations of available space and injection and withdrawal capacity. The rates charged by the Company at the Hattiesburg Facility for its services are negotiated rates subject to regulation by the Mississippi Public Service Commission (the "MPSC"). Such rates are based on various factors, including cost of capital and rates of return. The Hattiesburg Facility is not subject to regulation by the Federal Energy Regulatory Commission ("FERC"). See Regulations. The entire working gas capacity at the Hattiesburg Facility is currently fully subscribed on a firm basis under long-term contracts expiring in 2005. The rates under the contracts have all been approved by the MPSC. The Company and the customers have each agreed not to seek any rate adjustment prior to the year 2000. The customers under these contracts consist of eight local natural gas distribution companies, two major natural gas producers and two natural gas marketers. During 1995, the Company had one customer (Public Service Electric and Gas of New Jersey) which accounted for 10% of total revenues. In respect to the natural gas storage segment, the Company had four customers with sales in excess of 10% of revenues from gas storage services. These customers were Public Service Electric and Gas of New Jersey (18%), Consolidated Edison of New York (16%), Brooklyn Union Gas Company (11%) and Piedmont Natural Gas Company (11%). The Company realized $6.3 million in revenues from gas storage services during the period of June 19, 1995, through December 31, 1995. Revenues from gas storage services represented 54.8% of total revenues in 1995. In November 1995, the Company sold for $42.7 million the right to the receivables to be created under its natural gas storage contracts through June 2000 to a trust established by the Company and 4 of which the Company acquired a 47.3% non-voting subordinated interest for $20.2 million. This sale did not involve transfer or sale of any of the contracts or a disposition of any of the Company's rights in the Hattiesburg Facility. Since acquiring FRGC, the Company has actively marketed interruptible storage at the facility as well as additional "winter firm" storage that is available during the winter months due to expanded capacity from seasonable temperature variations. Interruptible service utilizes the unused storage capacity at the Hattiesburg Facility, which during 1995 ranged from no availability to 57% of total working gas capacity and averaged 30% over the year. The Company is also reviewing other potential pipeline connections at the Hattiesburg Facility that could be used to enhance the value of the facility and its desirability to current and future customers. CRUDE OIL AND NATURAL GAS EXPLORATION AND PRODUCTION With the disposition of substantially all of the Company's domestic crude oil and natural gas properties in the fourth quarter of 1994, the Company's current exploration and development activities are limited to its participation in a prospect development and exploration program with two industry partners. The Company's investment in this program is limited in amount and scope. Prior to the Company's disposition of substantially all of its domestic crude oil and natural gas properties in 1994, the Company's exploration and production activities were concentrated in Louisiana and its offshore waters, Texas and Arkansas. Within these areas, exploration and development activity was primarily focused on development of the Company's interest in the Southeast Pass field in Plaquemines Parish, Louisiana (which was acquired in late 1992) and the Company's Vernon field in North Louisiana. The Company also held significant fee properties and royalty interest in South Louisiana through its Vermilion Bay Land Company subsidiary. Production of crude oil and natural gas was not significant during 1995 as new wells under the prospect development and exploration program were completed in the third and fourth quarters of 1995. The Company's net volumes of crude oil (including condensate and liquefied petroleum gases) and natural gas produced and sold from working and royalty interests and the average prices received by the Company for the years ended December 31, 1995, 1994 1993 are shown below.
AVERAGE PRICE VOLUME PER UNIT ---------------------- ---------------------- BARRELS OF BARRELS OF OIL AND MCF OIL AND MCF YEAR ENDED DECEMBER 31 CONDENSATE OF GAS CONDENSATE OF GAS - ------------------------------------------------------------ ----------- --------- ----------- --------- (IN THOUSANDS) 1995........................................................ 2 8 $ 19.00 $ 2.38 1994........................................................ 969 7,349 15.84 1.83 1993........................................................ 1,106 7,550 17.12 1.98
The average production cost (including severance tax) per equivalent barrel (natural gas converted to barrels on a 6 Mcf to 1 barrel basis) from crude oil and natural gas producing activities during 1995, 1994 and 1993 was approximately $4.99, $5.36 and $5.09, respectively. Absent the addition of new reserves through discovery and acquisition, the production of crude oil and natural gas expected in 1996 will be limited to the Company's participation in the drilling activities under a prospect development program. DRILLING ACTIVITIES During 1995, the Company's capital expenditures for exploration and development activities were $1.0 million compared to $12.1 million and $7.8 million during 1994 and 1993, respectively. Included in expenditures for 1995, 1994 and 1993 were approximately $50 thousand, $2.4 million and $1.3 million in exploration costs, respectively. The exploration costs in 1995 were for the abandonment 5 of an exploration prospect. Capital expenditures for 1994 were primarily associated with the Company's Vernon field. Expenditures for exploration and development activities for 1996 are currently budgeted at approximately $1.1 million and relate solely to the Company's prospect development program. The following table sets forth the Company's interest in both development and exploratory wells and the working interest completions for each of the following years: EXPLORATORY WELLS
WORKING INTEREST COMPLETIONS NUMBER OF WELLS ---------------------------------------------------------------------- PARTICIPATED IN BY THE COMPANY OIL GAS DRY ---------------------------------- ---------------------- ---------------------- ---------------------- YEAR ENDED DECEMBER 31 GROSS NET GROSS NET GROSS NET GROSS NET - ----------------------- ----------------- --------------- ----------- --------- ----------- --------- ----------- --------- 1995................... 1 .05 -- -- 1 .05 -- -- 1994................... 4 .80 -- -- -- -- 4 .8 1993................... 2 .70 -- -- -- -- 2 .7 NET WELL SUCCESS YEAR ENDED DECEMBER 31 RATE - ----------------------- ------------ 1995................... 100% 1994................... -- % 1993................... -- %
DEVELOPMENT WELLS
WORKING INTEREST COMPLETIONS NUMBER OF WELLS ---------------------------------------------------------------------- PARTICIPATED IN BY THE COMPANY OIL GAS DRY ------------------------------ ---------------------- ---------------------- ---------------------- YEAR ENDED DECEMBER 31 GROSS NET GROSS NET GROSS NET GROSS NET - ----------------------- --------------- ------------- ----------- --------- ----------- --------- ----------- --------- 1995................... 1 .05 -- -- 1 .05 -- -- 1994................... 6 2.30 1 .1 5 2.20 -- -- 1993................... 11 4.80 7 3.9 3 .70 1 .2 NET WELL SUCCESS YEAR ENDED DECEMBER 31 RATE - ----------------------- ------------ 1995................... 100% 1994................... 100% 1993................... 96%
TOTAL EXPLORATORY AND DEVELOPMENT WELLS
WORKING INTEREST COMPLETIONS NUMBER OF WELLS ---------------------------------------------------------------------- PARTICIPATED IN BY THE COMPANY OIL GAS DRY -------------------------------- ---------------------- ---------------------- ---------------------- YEAR ENDED DECEMBER 31 GROSS NET GROSS NET GROSS NET GROSS NET - ----------------------- --------------- --------------- ----------- --------- ----------- --------- ----------- --------- 1995................... 2 .1 -- -- 2 .1 -- -- 1994................... 10 3.1 1 .1 5 2.2 4 .8 1993................... 13 5.5 7 3.9 3 .7 3 .9 NET WELL SUCCESS YEAR ENDED DECEMBER 31 RATE - ----------------------- ------------ 1995................... 100% 1994................... 74% 1993................... 84%
At December 31, 1995, the Company had proved developed reserves of 77 thousand barrels of crude oil and 633 Mmcf of natural gas with a present value of future net revenues of approximately $2.4 million. The Company also had .09 net (2 gross) exploratory wells in progress as of December 31, 1995. OTHER BUSINESS INFORMATION FOREIGN OPERATIONS In 1993, the Company entered into an agreement with the Orenburgneft Production Association ("Orenburgneft") in Orenburg, Russia, to form a closed stock corporation owned equally by Crystal and Orenburgneft. To date, this joint venture has been unable to obtain regulatory approval. As a result, the Company has curtailed its activities in Russia pending Orenburgneft's ability to obtain regulatory approval of the joint venture or the proposal of an alternative venture that would be economically viable under the laws of the Russian Federation. The Company does not currently expect that its operations in the Russian Federation will be significant in the future. 6 COMPETITION The Hattiesburg Facility competes with other forms of natural gas storage including other salt dome storage facilities, depleted reservoir facilities and pipelines. Competition is primarily based on location, the ability to deliver gas in a timely and reliable manner and cost. Many of the Company's competitors are significantly larger and have greater capital resources than the Company. Currently, all of the storage capacity at the Hattiesburg Facility is fully subscribed on a firm basis under long-term contracts extending through the year 2005. As a result, competition with respect to the Hattiesburg Facility is primarily limited to the Company's interruptible storage services. The interruptible storage services provided by the Company compete with other interruptible services provided by competitors as well as firm storage provided by other facilities. The Company believes that the location of the Hattiesburg Facility, combined with the existence of the long-term contracts for storage at the Hattiesburg Facility, allows the Company to compete effectively with other companies for natural gas storage. Once the Company's firm storage contracts have expired, the Company will have greater competition for storage at the Hattiesburg Facility. Such competition will be dependent upon the nature of the market existing at that time. EMPLOYEES At December 31, 1995, the Company employed 26 persons, including officers. In connection with the disposition of assets during the fourth quarter of 1994 and first quarter of 1995, the Company significantly reduced its number of employees. None of the Company's employees are represented by a labor union. REGULATION GAS STORAGE AND TRANSPORTATION Hattiesburg Industrial Gas Sales Company ("HIGS"), which serves as operator of the Hattiesburg Facility, is a regulated utility under the jurisdiction of the MPSC. Accordingly, the rates charged for natural gas storage services are subject to approval from the MPSC. The present rates of the firm long-term contracts were approved in 1990 and are subject to redetermination in the year 2000. Under the redetermination process, the Company has the right, upon its election, or shall be obligated, upon request of the customers, to submit cost of service information to the MPSC for a review of the rates charged and to request a determination by the MPSC of a rate for the remaining term of the firm contracts. A portion of the Company's natural gas storage business is also subject to a limited jurisdiction certificate issued by FERC under Section 7(c) of the Natural Gas Act. The FERC certificate authorizes the Company to provide storage services on behalf of interstate pipelines and local distribution companies for natural gas that may be ultimately consumed outside of the State of Mississippi. The Company has been authorized by FERC to charge for storage services provided under the certificate at the rates approved by the MPSC. ENVIRONMENTAL MATTERS The Company's activities in connection with the operation of the natural gas storage facility are also subject to environmental and safety regulation of federal and state authorities including the State of Mississippi Department of Environmental Quality. In most instances, the regulatory requirements relate to the discharge of substances into the environment and include measures to control water and air pollution. Management believes that the Company has obtained and is in current compliance with the applicable environmental regulations in respect of its natural gas storage operations. The Company, as an entity that has been involved in the exploration, development and production of crude oil and natural gas, has certain obligations based on federal, state and local regulations concerning the discharge of materials into the environment or otherwise relating to the protection of the environment. These environmental obligations include the remediation or mitigation of the 7 effects on the environment of the disposal or release of certain chemical and petroleum substances at certain properties previously owned or operated by the Company such as crude oil and natural gas fields and other facilities. As part of the Company's agreement with Apache Corporation ("Apache") with respect to the disposition of various of the Company's properties in 1994, Apache assumed various plugging and abandonment costs with respect to the properties acquired. The Company, however, agreed to indemnify Apache for certain environmental liabilities relating to the properties sold to it to the extent a claim is made by June 30, 1996. In 1995, the Company was advised by Atlantic Richfield Corporation ("ARCO") of the existence of a potential environmental cleanup of a mining site in Colorado that was sold by a subsidiary of the Company to ARCO. The mining assets were owned by the Company's subsidiary for approximately eight years during the 1970s and were sold by the subsidiary to ARCO in 1980. The Company has filed a declaratory action in the Federal District Court for the Northern District of Louisiana, Shreveport Division, seeking a determination that the Company has no liability to ARCO with respect to this site due to, among other things, a contractual agreement between the subsidiary of the Company that sold the property to ARCO's predecessor by merger in which such predecessor agreed that the Company's subsidiary would have no further liability with respect to the properties other than for certain express items. The Company is currently reviewing the scope of the potential cleanup and the cost thereof. Although no specific cost estimates have been made by the Company to date, the Company has been advised by ARCO that the total cost of cleanup could exceed $20 million. The Company intends to vigorously defend this matter. In 1991, the Company was named, among others, as a potentially responsible party ("PRP"), for environmental cleanup by the Indiana Department of Environmental Management and received an informational request concerning the Company's activities at a site located in Indiana. A now dissolved subsidiary of the Company owned a refinery on this site for a period of approximately four years during the 1970s. Other parties have owned and operated this site since the construction of the refinery in 1946. The Company was recently notified by the Department of Transportation of the State of Louisiana ("DOT") that it intends to seek contribution from the Company for the prior cleanup by the DOT of a site located in Shreveport, Louisiana, on which a refinery previously owned by the Company once operated in the 1920s. Other parties which have owned this site or conducted operations at this site have similarly been notified. The DOT is seeking $4.5 million from all PRPs. The Company is engaged in a preliminary review of this matter and, based on such review, believes that any contamination at the site was primarily related to operations or events at the site subsequent to the Company's ownership thereof. The Company currently intends to vigorously defend this matter and has not agreed to any contribution. The Company has also recently been advised by the Louisiana Department of Environmental Quality of the potential need for cleanup of 5.5 acres in a 30 acre tract of land outside of Shreveport which the Company owned from 1926 to 1965 and leased to another party that built and operated a crude oil refinery in the 1930s and 1940s. The Company has never owned or operated a refinery at this site and is currently investigating this matter to make a determination as to the potential costs to the Company, if any, of a cleanup of this site. Under federal and state environmental laws providing for joint and several liability for environmental cleanup, a governmental plaintiff could seek to recover all remediation costs at a waste disposal site from any one of the PRPs for such site, including the Company, despite the involvement of other PRPs. The Company's policy is to accrue environmental remediation costs if it is probable that a liability has been incurred and an amount is reasonably estimable. In light of the foregoing matters, the Company accrued as of December 31, 1995, $1.5 million for defense and related costs of such matters. Because the forgoing matters relate to matters existing prior to the Company's quasi- 8 reorganization in 1986, this accrual was recorded net of related tax impact as an offset to additional paid-in capital. Such accrual will be reviewed periodically and adjusted, if necessary, to reflect any additional charges that the Company believes will be probable. ITEM 2. PROPERTIES For information with respect to the natural gas storage facility and crude oil and natural gas properties see "Item 1. Business -- Natural Gas Storage and Crude Oil and Natural Gas Exploration and Production". OTHER PROPERTIES The general office of the Company in Shreveport, Louisiana, occupies approximately 55,000 square feet in the Crystal Building, which is owned by the Company through a wholly-owned subsidiary. The Company also owns various personal property, including computer equipment, transportation and furniture and fixtures. ITEM 3. LEGAL PROCEEDINGS In July 1979, a suit styled "AGB Oil Company et al vs. The Charter Company, Charter Oil Company, and Crystal Exploration and Production Company", was filed in the Circuit Court of the Eleventh Judicial Circuit in and for Dade County, Florida, Cause No. 79-12012-CA-07. Plaintiff, the limited partner of Caloosa 1974 Limited Partnership, a Colorado limited partnership, of which Crystal Exploration and Production Company, formerly Charter Exploration and Production Company, is the general partner, claims compensatory damages of $10 million, punitive damages in an undetermined amount, interest and costs of litigation. The suit alleges breach of contract, breach of fiduciary duty, mismanagement and fraud in connection with the operation of Caloosa 1974 Limited Partnership. In recent years, the suit has been generally inactive and the Company believes that the likelihood of a recovery, if any, by Plaintiff in a material amount is remote. For information with respect to environmental matters see "Item 1. Business - -- Environmental Matters". The Company is currently a party to various other lawsuits which, in management's opinion, will not have a significant adverse impact on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended December 31, 1995. 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The Common Stock is listed on the American Stock Exchange, Inc. (the "AMEX") and the Pacific Stock Exchange, Incorporated. The following table sets forth, for the periods indicated, the reported high and low sales prices per share of the Common Stock. Prices are based upon the closing sale prices reported by the AMEX.
1995 ----------------------------------------------------------------- QUARTER ENDED ----------------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ---------- ---------- --------------- --------------- High........................................ $ 31 1/2 $ 34 1/2 $ 32 1/4 $ 30 5/8 Low......................................... 29 1/4 29 3/4 29 1/2 29 1/8 1994 ----------------------------------------------------------------- QUARTER ENDED ----------------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ---------- ---------- --------------- --------------- High........................................ $ 23 $ 24 7/8 $ 27 5/8 $ 33 3/4 Low......................................... 21 1/2 20 1/8 24 1/2 25 5/8
On March 19, 1996, the last reported sales price of the Common Stock on the AMEX was $33 5/8 or $33.625 per share. The number of holders of record of the Company's Common Stock as of March 19, 1996, was 457. DIVIDENDS The Company has not paid any dividends on the Common Stock since the third quarter of 1984. Under the terms of the Company's Articles of Incorporation, the Company may not pay dividends on the Common Stock or its $.06 Senior Convertible Voting Senior Preferred Stock (non-cumulative), $.01 par value ("Senior Preferred Stock"), unless (i) there does not exist any superior indebtedness (which includes the Company's existing obligations under various letters of credit issued on behalf of the Company that do not expire until the year 2001 and certain indebtedness relating to the securing therefor), (ii) after giving effect to the payment of such dividends, the Company would have at least $1 in consolidated retained earnings, and (iii) the declaration or payment of such dividends would not violate any applicable law or provision of any material contract to which the Company is a party. As a result of this provision unless such terms are otherwise modified or amended, the above restrictions on the Company's ability to pay dividends on its Common Stock will apply until January 1, 2001. The Company does not anticipate the payment of any dividends with respect to its capital stock in the foreseeable future. In conjunction with the issuance in November 1995 of HGSC's 8.12% Senior Guaranteed Notes due 2005, FRGC and its subsidiaries have agreed to various restrictions on the distribution of assets from the FRGC parties to the Company. However, such restrictions do not restrict the ability of the Company to pay dividends to its shareholders from available cash and accumulated earnings, exclusive of the operating cash flows of the FRGC parties. 10 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31 ----------------------------------------------------------- 1995 1994 1993 1992 1991 ----------- --------- ----------- ----------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Selected Financial Data: Revenues(1)(2)(3)................................ $ 11,518 $ 43,523 $ 35,940 $ 27,531 $ 29,003 Income from operations before extraordinary item(2)(4)...................................... 1,404 4,426 1,040 229 1,588 Income per share from operations before extraordinary item(4)(5): Primary........................................ .52 1.68 .40 .09 .65 Cash dividends per common share(5)............... -- -- -- -- -- At year-end: Total assets(1)(2)(6)(7)....................... 173,445 91,940 117,334 129,050 96,974 Long-term obligations(1)(2)(4)(6)(7)........... 37,860 181 22,786 32,038 11,341 Deferred revenue from sale of future contract receivables(1)................................ 22,160 -- -- -- -- Working capital(1)(2)(4)(6)(7)(8).............. 63,444 75,723 14,935 17,836 23,501 Stockholders' equity(1)........................ 110,549 86,287 84,647 82,936 79,880
- ------------------------ (1) In 1995, the Company acquired FRGC. This acquisition was financed with existing cash, the sale of five years of future storage contract receivables and borrowings under a long-term obligation. In addition, the acquisition resulted in an increase of approximately $24 million to total assets, net of accruals, and stockholders' equity as a result of the recognition and accounting treatment for the actual and expected utilization of certain operating loss and tax credit carryforwards generated prior to the the Company's quasi-reorganization. (2) In 1994, the Company disposed of substantially all of its crude oil and natural gas properties and related assets for approximately $98 million, net of expenses. This disposition resulted in a $12.5 million net gain on sale of assets, which is included in revenues, and an increase in working capital. In addition, the Company reviewed the carrying value of its remaining assets and liabilities and recorded additional net expense of approximately $854 thousand. The Company also reduced the carrying value of its Russian projects by approximately $2.0 million in the fourth quarter of 1994 in light of the continuing difficulties existing in the Russian Federation. (3) In 1993, the increase in revenues resulted from the effect of the acquisitions of producing crude oil and natural gas properties during the third and fourth quarters of 1992. (4) In connection with the Company's 1994 disposition of crude oil and natural gas properties, the Company prepaid substantially all of its indebtedness and recorded an extraordinary charge for the early extinguishment of debt in the amount of approximately $3.8 million ($2.3 million net of taxes). (5) Per share amounts have been adjusted to reflect a 100-to-one reverse stock split and forward split in the form of a stock dividend of nine shares of Common Stock per share of Common Stock, which were effected on May 29, 1992, and June 1, 1992, respectively. (6) In 1992, the increase in total assets and long-term obligations resulted primarily from the acquisition of crude oil and natural gas properties and the financing of an acquisition of crude oil and natural gas properties mostly through borrowings under the credit agreement with its banks. (7) In 1993, the Company utilized existing cash for the prepayment of $5.0 million of long-term obligations, which contributed to a decrease in total assets and working capital. 11 (8) In 1992, the decrease in working capital was primarily attributable to the increase in the current portion of long-term obligations from the financing of crude oil and natural gas property acquisitions. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should assist in the understanding of the Company's financial condition as of December 31, 1995, as compared to the last fiscal year, as well as the Company's operating results for the three years ended December 31, 1995. Certain material events affecting the business of the Company are discussed in Items 1 and 3 of this report. The Notes to the Consolidated Financial Statements contain detailed information that should be read in conjunction with this discussion. GENERAL The Company was historically a crude oil and natural gas exploration and development company. In the fourth quarter of 1994, the Company disposed of substantially all of its domestic crude oil and natural gas properties for approximately $98 million and applied a portion of the net proceeds to prepay all of its outstanding indebtedness. In connection with this disposition, the Company embarked on an acquisition program aimed at identifying assets that would generate income for the Company on a current basis that would benefit from the Company's tax position as well as present the opportunity for capital appreciation. The Company's disposition of properties in 1994 resulted in the Company recognizing a gain on the sale of assets of approximately $12.5 million. This gain was offset by various charges, including reserves with respect to the Company's Russian ventures, the writedown of certain assets to net realizable value and severance and other costs relating to the disposition of the Company's crude oil and natural gas properties. In addition, the Company recognized an extraordinary charge of $2.3 million in 1994 relating to the early extinguishment of debt attributable to its prepayment of its outstanding indebtedness. In June 1995, the Company completed its first acquisition following its 1994 asset disposition through the acquisition of FRGC for approximately $78.5 million. FRGC's principal asset was the Hattiesburg Facility. The Hattiesburg Facility is a gas storage facility that was constructed in 1991 and consists of three salt-dome caverns with a total storage capacity of 5.5 Bcf of natural gas, of which 3.5 Bcf is working gas and 2.0 Bcf is base gas. The acquisition of FRGC was funded with the Company's available cash and a $60 million short-term bridge loan. In November 1995, the Company refinanced this loan through a sale to a newly formed business trust for $42.7 million of approximately five years of accounts receivable to be generated from the operations of the Hattiesburg Facility and $36.5 million in debt, the recourse of which is primarily limited to FRGC and the Hattiesburg Facility. These transactions resulted in net proceeds to the Company of approximately $58 million, net of financing costs. The acquisition of FRGC and the subsequent refinancing thereof resulted in the Company reevaluating its tax assets for accounting purposes in light of the taxable income generated or to be generated from the operation of the Hattiesburg Facility during the life of the Company's net operating loss carryforwards and other tax benefits and from the 1995 accounts receivable sale. This evaluation resulted in an upward adjustment to the Company's stockholders' equity of $22.3 million. Of such increase $14.4 million related to tax benefits realized in 1995. This adjustment to the Company's tax assets did not affect net income for 1995 due to the accounting treatment required for the Company's 1986 quasi-reorganization and the fact that the Company's net operating loss carryforwards and certain of its other tax benefits relate to events prior to such reorganization. As of December 31, 1995, the Company had $65.3 million in cash, cash equivalents and marketable securities that could be utilized for future acquisitions. In addition, the Company had no debt other than the debt directly associated with and recourse limited to FRGC and the Hattiesburg Facility. 12 Future acquisitions will focus on income generating businesses and assets without limitation on the type of business or industry. Future acquisitions will likely involve a combination of the use of a portion of the Company's available cash and debt or other financing. To the extent possible, the Company will seek to limit the recourse of any financing to the business and assets acquired. The Company may also seek to finance future acquisitions with additional equity if desirable. As a result of the significant changes the Company has undergone since the disposition of its crude oil and natural gas properties in the fourth quarter of 1994, the results of operations for the periods presented herein may not be comparable. RESULTS OF OPERATIONS GENERAL The following sets forth a discussion of the Company's results of operations for the years ended December 31, 1995, 1994 and 1993. Results for each of 1995, 1994 and 1993 included various items which make a comparison of such years difficult. In this regard, income during 1995 was primarily attributable to six months of operations of the Company's natural gas storage operations and interest income on the Company's available cash. Income in 1994 related principally to the Company's crude oil and natural gas operations and was significantly affected by the one-time gains and charges relating to the Company's disposition of properties in the fourth quarter of 1994. Results in 1993 were generally unaffected by unusual items and related to the Company's crude oil and natural gas activities. The Company recorded revenues of $11.5 million, $43.5 million and $35.9 million in 1995, 1994 and 1993, respectively. Revenues for 1995 were primarily attributable to gas storage activities ($6.3 million) and investment income ($4.7 million) from the investment by the Company of cash received on the disposition of its crude oil and natural gas properties in the fourth quarter of 1994. Future results are expected to benefit from additional natural gas storage revenues as the operations of FRGC are consolidated with those of the Company. Results for 1995 also included a net gain of approximately $.9 million from the sale of assets primarily in the first quarter and charges of $484 thousand incurred primarily during the second quarter for severance and other related expenses associated with the reduction in the Company's staff. The charge for severance and related expenses was recorded as an offset to the gains on sales of crude oil and natural gas properties recorded in the first quarter of 1995 and as an extension of the restructuring plan contemplated in connection with the sale of the Company's crude oil and natural gas properties in the fourth quarter of 1994. Revenues for 1994 and 1993 were primarily attributable to sales of crude oil and natural gas. Revenues from crude oil and natural gas were $57 thousand, $28.8 million and $33.9 million in 1995, 1994 and 1993, respectively. Revenues for 1994 also included a $12.5 million net gain from the disposition of crude oil and natural gas properties. In addition, the Company also recorded approximately $1.4 million in other income in 1994, of which $600 thousand related to net gains on the settlement of various interest rate and commodity swaps. The Company recorded total costs and expenses of $9.2 million, $36.3 million and $34.3 million in 1995, 1994 and 1993, respectively. In 1995, total costs and expenses included $587 thousand associated with the Company's newly acquired gas storage operations. Total costs and expenses in 1994 and 1993 primarily related to crude oil and natural gas exploration and production activities. Expenses for 1994 also included a writeoff of $2.5 million on various properties held by the Company relating to its crude oil and natural gas operations and $2.0 million relating to the Company's Russian projects. Interest expense was $2.3 million for 1995, compared to $2.8 million for 1994 and $3.6 million for 1993. The reduction in interest expense results in the overall reduction of average debt obligation from period to period and the restructuring of the Company's debt obligations due to the purchase of FRGC in June 1995. The recent financing of FRGC relating to the Hattiesburg Facility will result in increased interest expense and the addition of expense associated with the amortization of the discount on the sale of the future storage accounts receivable. 13 The Company recorded net income of $1.4 million, or $.52 per share, in 1995, net income before extraordinary item of $4.4 million, or $1.68 per share, in 1994 and net income of $1.0 million, or $.40 per share, in 1993. The Company recognized an extraordinary charge of $2.3 million in 1994 for the early extinguishment of debt, which reduced net income for 1994 to $2.1 million, or $.80 per share. The net effect of the Company's disposition of substantially all of its crude oil and natural gas assets in December 1994 before $2.5 million in income taxes is set forth in the chart below:
AMOUNT ITEM (IN MILLIONS) - --------------------------------------------------------------------------------- ------------- Net gain on sale of properties to Apache......................................... $ 10.4 Net gain on sale of other properties............................................. 2.1 Gain on cancellation of swaps.................................................... .6 Writedown of certain assets to net realizable value or fair value following the disposition..................................................................... (2.5) Reduction of contingent liabilities due to the disposition....................... 1.6 Writedown of Russian projects.................................................... (2.0) ----- Net Effect of unusual items or infrequently occurring items.................... 10.2 Extraordinary charge for early extinguishment of debt............................ (3.8) ----- Net Effect of unusual or infrequently occurring items and extraordinary item before provision in lieu of taxes............................................. $ 6.4 ----- -----
Excluding the unusual and extraordinary items noted above, the Company would have recorded a net loss of approximately $1.8 million for 1994, due primarily to decreases in crude oil and natural gas revenues and an increase in dry hole costs relating to the drilling of four exploratory wells. The Company's production of crude oil in 1995 was insignificant at two thousand barrels. The production in 1994 decreased by 137 thousand barrels to 969 thousand barrels, as compared to 1993. The production of natural gas by the Company was eight thousand Mcf in 1995, compared to 7.3 Bcf in 1994 and 7.6 Bcf in 1993. Production in 1995 was greatly reduced due to the sale of substantially all of the Company's crude oil and natural gas reserves in December 1994 and limited to production from the Company's interests in properties included in its prospect development program. Levels of production in 1994 as compared to 1993 reflected both normal declines from producing reserves and the effect of a three-week shut-in of production in the Southeast Pass field due to upgrade and maintenance of a pipeline in the area. Production from the Company's 1994 development wells in the Vernon field offset the declines in natural gas production beginning in the third quarter of 1994. During 1995, the Company's limited production of crude oil and natural gas was sold primarily during the fourth quarter at average prices of $19.00 for crude oil and $2.38 for natural gas. The average crude oil prices received by the Company during 1994 and 1993 were $15.84 and $17.12, respectively. The successive decreases in crude oil prices related to a number of factors, including excess supplies in crude oil throughout the world and various political factors. The average natural gas prices received by the Company during 1994 and 1993 were $1.83 and $1.98, respectively. Natural gas prices increased to an average of approximately $2.00 per Mcf in 1993, then gradually declined to a low of approximately $1.36 per Mcf in October 1994. The Company had historically entered into derivative products such as commodity and interest rate swaps to stabilize its average crude oil and natural gas prices. In connection with the sale of substantially all of its properties in December 1994, the Company canceled all of its swap contracts and had none outstanding as of December 31, 1995 and 1994. CRUDE OIL AND NATURAL GAS EXPLORATION AND PRODUCTION Results of operations before the unusual or extraordinary items noted previously and provision for income taxes attributable to crude oil and natural gas activities was a profit of $360 thousand in 1995, as compared to a $4.6 million profit in 1994 and a $9.7 million profit in 1993. (See Note L of Notes to Consolidated Financial Statements.) The decline in crude oil and natural gas sales in 1995 14 was attributable to the sale by the Company of substantially all of its crude oil and natural gas reserves in the fourth quarter of 1994. The decline in 1994 compared to 1993 reflected reduced revenues from the declines in the levels of production and prices received for crude oil and natural gas, and higher dry-hole costs. The production levels in 1994 reflected both normal declines from producing reserves and the effect of a three-week shut-in of production in the Southeast Pass field. The decline in production was partially offset by increased production from the Vernon field following the drilling of two additional development wells in the field in 1994. As compared to 1993, the average prices received by the Company in 1994 for its crude oil and natural gas were subject to adverse market conditions. As compared to 1993, crude oil and natural gas activities during 1994 included decreases in production taxes and depreciation, depletion and impairment as a result of declines in production volumes and a modest increase in lease operating expense due to an increase in environmental related charges. Due to the sale by the Company of substantially all of its crude oil and natural gas reserves in the fourth quarter of 1994, a comparison of crude oil and natural gas production operations for 1995 and 1994 is not meaningful. The following table sets forth certain additional data with respect to the Company's crude oil and natural gas production operations for the year ended December 31, 1994 and 1993.
YEAR ENDED DECEMBER 31 PERCENT -------------------- INCREASE INCREASE 1994 1993 (DECREASE) (DECREASE) --------- --------- ----------- ----------- (IN THOUSANDS, EXCEPT PRICES) Revenue Crude oil sales................................................. $ 15,349 $ 18,937 $ (3,588) (19%) Natural gas sales............................................... 13,470 14,925 (1,455) (10%) --------- --------- ----------- Total revenues................................................ $ 28,819 $ 33,862 $ (5,043) (15%) --------- --------- ----------- --------- --------- ----------- Volume Crude oil--Bbls................................................. 969 1,106 (137) (12%) Natural gas--Mcf................................................ 7,349 7,550 (201) (3%) Average net price Crude oil per Bbl............................................... $ 15.84 $ 17.12 $ (1.28) (7%) Natural gas per Mcf............................................. $ 1.83 $ 1.98 $ (.15) (8%) Lease operating expense, including production taxes............... $ 11,756 $ 12,030 $ (274) (2%) Depreciation, depletion and impairment............................ $ 10,612 $ 12,199 $ (1,587) (13%) Exploration cost.................................................. $ 2,351 $ 1,264 $ 1,087
Exploration costs reflect the level of exploratory drilling activity for unsuccessful exploratory wells. INVESTMENT INCOME The Company's investment income was approximately $4.7 million in 1995 compared to approximately $742 thousand and $658 thousand in 1994 and 1993, respectively. The level of investment income in 1995 reflects the average investment in debt securities of approximately $76 million. The average interest rate received by the Company on its investments was 6.18% during 1995. The Company's investment of its liquid assets are currently in short term government securities. NET GAIN ON SALE OF FIXED ASSETS Net gain on sale of fixed assets in 1995 included $860 thousand from the disposition of the Company's proportionate share of the net proceeds of asset sales from the Company's partnerships, the sale of an exploratory prospect and the final liquidation and disposition of various surplus equipment and inventory. Net gain on sale of fixed assets in 1995 also included charges of $484 thousand incurred primarily in the second quarter of 1995 relating to severance and other costs associated with the reduction of the Company's staff. The charges were made as an offset to the gains on sales of crude oil and natural gas properties recorded in the first quarter of 1995 and as an 15 extension of the restructuring plan contemplated in connection with the sale of crude oil and natural gas assets in the fourth quarter of 1994. The Company recognized a net gain of approximately $12.5 million in 1994 from the sale of substantially all of its domestic crude oil and natural gas properties. Net gain on sale of property, plant and equipment was $651 thousand in 1993. DEPRECIATION, DEPLETION AND AMORTIZATION Depreciation, depletion and amortization declined substantially in 1995 to $1.8 million from $14.2 million and $12.6 million in 1994 and 1993, respectively. Such declines were attributable to the Company's 1994 disposition of the Company's crude oil and natural gas properties. Current depreciation charges are primarily associated with the Company's natural gas storage facility and other assets acquired in June 1995, which have a substantially longer depreciable life than the Company's historical crude oil and natural gas properties. The carrying value of such assets reflects the cash purchase price for assets and the liabilities assumed in the purchase, including $18 million associated with deferred tax liabilities attributable to the difference between the book and tax bases of such assets purchased and liabilities assumed. Depreciation, depletion and amortization for the year ended 1994 included approximately $2.9 million in writedowns of the Russian projects and other assets to fair market value net of a reduction of contingent liabilities due to the disposition of crude oil and natural gas properties. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense for 1995 was approximately $3.8 million. Such expense represented a decrease of approximately $1.4 million (26.4%) and $1.0 million (21.2%) when compared to 1994 and 1993, respectively. The decrease in general and administrative expenses reflects the reduction in the Company's staff following the disposition of its crude oil and natural gas properties in late 1994. The staff reductions continued through the first two quarters of 1995 as the Company completed various post-closing matters associated with the sale. The staff reductions are now substantially complete. The decline in general and administrative expenses realized during 1995, was partially offset by certain transitional expenses and costs relating to the Company's Russian operations, which have been suspended pending improvements in the political and economic climate in Russia. The Company, however, has taken actions to reduce its expenses relating to its Russian operations. General and administrative expense also included approximately $126 thousand for the settlement of various lawsuits during 1995. TAXES AND QUASI-REORGANIZATION ADJUSTMENT Income before extraordinary item for 1995, 1994 and 1993 included provisions for income taxes of $962 thousand, $2.8 million and $626 thousand, respectively. In addition, net income for 1994 included an income tax benefit of approximately $1.5 million for losses related to early extinguishment of debt. The provision for income taxes includes a noncash accounting charge required by virtue of the Company's quasi-reorganization in 1986 in an amount equal to the deferred income taxes that the Company would have recognized had it not been able to utilize its net operating loss carryforwards against such income taxes. As a result of the Company's quasi-reorganization accounting treatment, the current and future benefit from utilization of the income tax credits and net operating loss carryforwards accumulated prior to the Company's reorganization are recorded as an adjustment to additional paid-in capital. Exclusive of the net operating loss carryforwards and other tax benefits recognized following the acquisition of FRGC during 1995, $246 thousand, $1.3 million and $605 thousand were credited to additional paid-in capital as a result of utilization of such tax carryforwards during 1995, 1994 and 1993, respectively. The completion of the Company's acquisition of FRGC and the subsequent financing therefor (including the sale of the future storage contract receivables) also resulted in the Company adjusting its tax assets in light of the taxable income generated or to be generated from the operation of the Hattiesburg Facility during the life of the Company's net operating loss carryforwards and other tax 16 benefits and from the 1995 accounts receivable sale. This evaluation resulted in an upward adjustment to the Company's stockholders' equity of $22.3 million. Of such increase $14.4 million related to tax benefits realized in 1995. This adjustment to the Company's tax assets did not affect net income for 1995 due to the accounting treatment required for the Company's 1986 quasi-reorganization and the fact that the Company's net operating loss carryforwards and certain of its other tax benefits relate to events prior to such reorganization. In addition, recognition of tax benefit carryforwards generated after the Company's quasi-reorganization resulted in a reduction of $2.2 million in the amount recorded as the carrying value of the gas storage facility. In assessing the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at December 31, 1995. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1995, the Company had marketable securities of approximately $54.4 million and cash and cash equivalents of approximately $10.8 million compared to $75.5 million in cash and cash equivalents at December 31, 1994. The reduction in cash and cash equivalents from December 31, 1994, reflects the investment of the Company's net proceeds from the sale of its crude oil and natural gas properties in 1994 to purchase marketable securities and to fund a portion of the Company's acquisition of FRGC. On November 22, 1995, Hattiesburg Gas Storage Company ("HGSC") and HIGS, indirect wholly-owned subsidiaries of the Company, sold to the FRGC Owner Trust, a newly formed Delaware business trust (the "Trust"), the right to receive payments on the firm storage contract receivables to be generated by HGSC and HIGS through June 30, 2000, from the operation of the FRGC Storage Facility (the "HGSC Sold Receivables") for a total cash consideration of approximately $42.7 million, representing a 7.52% annualized discount on the receivables. The HGSC Sold Receivables were sold without recourse to HGSC or the Company. However, HGSC, HIGS and FRGC agreed to be responsible for the payment of liquidated damages for certain breaches under the sales agreement that would materially and adversely impair the collection of the accounts receivable in the future and to self-insure against certain force majeure events to the extent they are not covered by insurance. The Company also agreed to be responsible for the payment of up to $10 million (subject to an annual $2 million reduction) of such liquidated damages and self-insurance under certain limited circumstances following a bankruptcy of HGSC, HIGS or FRGC (collectively, the "FRGC Parties"). The obligations of the FRGC Parties are secured by substantially all of their assets, including the FRGC Storage Facility and HGSC's storage contracts, but excluding certain receivables to be generated after June 30, 2000. Immediately prior to the sale of the HGSC Sold Receivables, HGSC purchased approximately 47.3% of the interests of the Trust for approximately $20.2 million, of which 26.8% were senior interests ranking on an equal basis with the interests sold to the other investors and 20.5% were junior to the interests sold to other investors. Such interests represent the right to receive funds from the Trust as the HGSC Sold Receivables are collected by the Trust. Simultaneously with the sale of the HGSC Sold Receivables to the Trust, HGSC issued approximately $36.5 million in 8.12% Secured Guaranteed Notes Due 2005 (the "Notes"). The terms of the Notes provide for the payment of interest only through June 30, 2000, at which time principal is to be amortized over the remaining life of the Notes. The Notes, which are without recourse to the Company, are secured by substantially all the assets of the FRGC Parties, including the FRGC Storage 17 Facility, HGSC's storage contracts, certain accounts receivable to be generated after June 30, 2000, and a pledge of the cash flow from HGSC's 26.8% senior interest in the Trust. The net proceeds from the Notes, funds of $22.5 million derived from the sale of the HGSC Sold Receivables and existing cash were used by the Company to repay $60 million in indebtedness incurred in connection with the Company's acquisition of FRGC in June 1995. Under the various agreements relating to the sale of the HGSC Sold Receivables and the Notes, the FRGC Parties agreed to various covenants and agreements relating to the Hattiesburg Facility. Among such covenants and agreements were covenants (i) not to take certain actions that would materially adversely affect the HGSC Sold Receivables, (ii) with respect to the manner of operation of the Hattiesburg Facility and the other assets of the FRGC Parties, (iii) restricting the business of the FRGC Parties to the operation of the Hattiesburg Facility, the provision of transportation and storage services relating to the Hattiesburg Facility, the expansion, prior to the year 2000, of or addition to the Hattiesburg Facility or to other storage and transportation services provided in connection with the Hattiesburg Facility and the provision of management and operational services for other facilities in the vicinity of the Hattiesburg Facility, (iv) requiring the continued ownership by the FRGC Parties of the Hattiesburg Facility and (v) restricting certain affiliated transactions. The FRGC Parties also agreed under the Indenture relating to the Notes to various restrictions on the distribution of assets from the FRGC Parties to the Company. However, such restrictions do not restrict the ability of the Company to pay dividends to its shareholders from available cash and accumulated earnings, exclusive of the operating cash flows of the FRGC Parties. Although HGSC and HIGS sold all of their rights and interests in the HGSC Sold Receivables through June 30, 2000, to the Trust and received payment therefor, the proceeds from the sale have been classified for accounting purposes as "Deferred Revenue from Sale of Future Contract Receivables" and will be recognized over the period during which the HGSC Sold Receivables are to be generated. The discount between the funds received on the sale of the HGSC Sold Receivables and the scheduled payments thereunder will be amortized over the life of the HGSC Sold Receivables based on the discount rate applied in fixing the sale price of the HGSC Sold Receivables and recorded as "Amortization of Discount on Sale of Future Contract Receivables." The amount of "Deferred Revenue" reflected on the Company's Balance Sheet reflects the amount of revenue generated from the sale of the HGSC Sold Receivables less the Company's carrying value of the senior and subordinated interests in the Trust that were purchased by HGSC. The Company's working capital position decreased by approximately $12.3 million to $63.4 million at December 31, 1995, compared to $75.7 million at December 31, 1994, primarily as a result of the utilization of existing cash for partially funding the Company's acquisition of FRGC. This decrease in working capital was partially offset by the transfer of approximately $5.1 million from restricted funds to cash equivalents. The Company reduced the level of restricted funds from $6.6 million at December 31, 1994, to $1.5 million at December 31, 1995, as a result of a reduction in the cash collateral requirements under the Company's amended credit agreement from 100% to 30% of the outstanding letters of credit previously issued by the Company's banks on behalf of the Company. OTHER MATTERS As previously described under "Item 1. Business -- Environmental Matters", the Company is currently subject to various claims regarding environmental matters, which will require the expenditure of funds for defense costs and could require additional expenditure of funds for remediation if it is determined that the Company is responsible for such remediation or otherwise agrees to contribute to the cost of such remediation. It is the Company's policy to accrue for environmental remediation costs if it is probable that a liability has been incurred and an amount is reasonably estimable. The resolution of the known environmental matters affecting the Company will be subject to various factors, including the discovery of additional information with respect to the nature of contamination at the known sites, the legal responsibility of various parties for any cleanup obligations, the financial capability of responsible parties and other actions by governmental agencies and private parties. 18 Although the cost of cleanup of sites in which the Company has been notified of potential liability is currently estimated to involve the expenditure of funds by all potentially responsible parties in excess of $25 million, based on information known to the Company, the Company does not believe that its ultimate payment obligations with respect to such matters will have a material adverse impact on the Company's financial position. The Company will adopt Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation, in 1996. The Company currently plans to continue to measure compensation cost for employee stock compensation plans using the method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The Company will adopt Statement of Financial Accounting Standards No. 121 ("SFAS 121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, in 1996. Under SFAS 121, an impairment is determined to have occurred and a loss is recognized when the net of future cash inflows expected to be generated by an identifiable long-lived asset and cash outflows expected to be required to obtain those inflows is less than the carrying value of the asset. The adoption of SFAS 121 is not expected to have a material impact on the Company's financial statements. While the Company continues to be affected by fluctuations in the purchasing power of the dollar, inflation has not had a significant affect on the Company's earnings or financial condition in recent years. 19 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors Crystal Oil Company: We have audited the consolidated balance sheets of Crystal Oil Company and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the Index at Item 14 (a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Crystal Oil Company and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note H to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES, in 1993. KPMG PEAT MARWICK LLP Shreveport, Louisiana February 26, 1996 20 CRYSTAL OIL COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31 --------------------- 1995 1994 ---------- --------- (IN THOUSANDS) CURRENT ASSETS Cash and cash equivalents................................................................. $ 10,812 $ 75,541 Marketable securities..................................................................... 54,447 -- Accounts receivable, net Gas storage............................................................................. 631 -- Crude oil and natural gas............................................................... 49 4,071 Other receivables....................................................................... 24 1,207 Prepaid expenses and other................................................................ 57 376 ---------- --------- TOTAL CURRENT ASSETS.................................................................. 66,320 81,195 PROPERTY, PLANT AND EQUIPMENT Gas storage facilities.................................................................... 93,989 -- Producing and non-producing crude oil and natural gas properties.......................... 1,944 3,979 Land and building......................................................................... 1,940 1,964 Furniture, office equipment and other..................................................... 1,135 1,723 ---------- --------- 99,008 7,666 Less allowances for depreciation and depletion............................................ (2,727) (3,684) ---------- --------- TOTAL PROPERTY, PLANT AND EQUIPMENT................................................... 96,281 3,982 OTHER ASSETS Deferred tax assets..................................................................... 7,398 -- Restricted cash equivalents and marketable securities................................... 1,476 6,563 Others.................................................................................. 1,970 200 ---------- --------- 10,844 6,763 ---------- --------- $ 173,445 $ 91,940 ---------- --------- ---------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term obligations.................................................. $ 294 $ 60 Accounts payable.......................................................................... 1,948 4,612 Other accrued expenses.................................................................... 634 800 ---------- --------- TOTAL CURRENT LIABILITIES............................................................. 2,876 5,472 LONG-TERM OBLIGATIONS, NET OF CURRENT PORTION............................................... 37,860 181 DEFERRED REVENUE FROM SALE OF FUTURE CONTRACT RECEIVABLES................................................................................ 22,160 -- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY $.06 Senior convertible voting preferred stock (non-cumulative), $.01 par value; $1.00 liquidation preference; authorized 51,200,773; issued and outstanding 14,788,328......... 148 148 Common stock, $.01 par value; authorized 4,000,000 shares; issued and outstanding 2,654,042 and 2,576,292 shares, respectively............................................. 27 26 Additional paid-in capital................................................................ 96,902 74,045 Retained earnings (Since January 1, 1987)................................................. 13,472 12,068 ---------- --------- TOTAL STOCKHOLDERS' EQUITY............................................................ 110,549 86,287 ---------- --------- $ 173,445 $ 91,940 ---------- --------- ---------- ---------
See notes to consolidated financial statements. 21 CRYSTAL OIL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 ------------------------------- 1995 1994 1993 --------- --------- --------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) REVENUES Gas storage fees............................................................. $ 6,317 $ -- $ -- Crude oil sales.............................................................. 38 15,349 18,937 Natural gas sales............................................................ 19 13,470 14,925 Net gain on sale of property, plant and equipment............................ 376 12,524 651 Investment income............................................................ 4,695 742 658 Other income................................................................. 73 1,438 769 --------- --------- --------- 11,518 43,523 35,940 COSTS AND EXPENSES Gas storage operating expenses............................................... 587 -- -- Crude oil and natural gas lease operating expense............................ 14 9,014 8,907 Taxes other than income tax.................................................. 543 2,742 3,123 General and administrative expense........................................... 3,796 5,157 4,819 Interest and debt expense.................................................... 2,252 2,773 3,575 Amortization of discount on sale of future contract receivables.............. 141 -- -- Exploration cost............................................................. 50 2,351 1,264 Depreciation, depletion and amortization..................................... 1,769 14,220 12,586 --------- --------- --------- 9,152 36,257 34,274 --------- --------- --------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM.............................. 2,366 7,266 1,666 INCOME TAXES................................................................... 962 2,840 626 --------- --------- --------- INCOME BEFORE EXTRAORDINARY ITEM............................................... 1,404 4,426 1,040 EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF DEBT (NET OF INCOME TAX BENEFIT OF $1,489 THOUSAND)................................................... -- 2,320 -- --------- --------- --------- NET INCOME..................................................................... $ 1,404 $ 2,106 $ 1,040 --------- --------- --------- --------- --------- --------- NET INCOME PER SHARE OF COMMON AND COMMON STOCK EQUIVALENT SHARE INCOME BEFORE EXTRAORDINARY ITEM............................................. $ .52 $ 1.68 $ .40 EXTRAORDINARY ITEM........................................................... -- (.88) -- --------- --------- --------- NET INCOME................................................................... $ .52 $ .80 $ .40 --------- --------- --------- --------- --------- --------- CASH DIVIDENDS PER SHARE OF COMMON STOCK....................................... $ -- $ -- $ -- --------- --------- --------- --------- --------- --------- AVERAGE OF COMMON AND COMMON STOCK EQUIVALENT SHARES OUTSTANDING............... 2,703 2,635 2,623 --------- --------- --------- --------- --------- ---------
See notes to consolidated financial statements. 22 CRYSTAL OIL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SENIOR SERIES A ADDITIONAL PREFERRED PREFERRED COMMON PAID-IN RETAINED STOCK STOCK STOCK CAPITAL EARNINGS ----------- ----------- ----------- ----------- --------- (IN THOUSANDS) Balance at January 1, 1993............................... $ 182 $ 270 $ 25 $ 73,537 $ 8,922 Net income............................................. -- -- -- -- 1,040 Conversion of preferred stock into common stock........ -- (15) -- 15 -- Issuance of common stock............................... -- -- -- 87 -- Payments in lieu of fractional shares.................. -- -- -- (21) -- Utilization of net operating loss carryforward......... -- -- -- 605 -- ----- ----------- --- ----------- --------- Balance at December 31, 1993............................. $ 182 $ 255 $ 25 $ 74,223 $ 9,962 Net income............................................. -- -- -- -- 2,106 Conversion of preferred stock into common stock........ -- (186) -- 186 -- Issuance of common stock............................... -- -- 1 364 -- Redemption of preferred stock.......................... -- (69) -- (502) -- Purchase of senior preferred stock..................... (34) -- -- (1,477) -- Utilization of net operating loss carryforward......... -- -- -- 1,251 -- ----- ----------- --- ----------- --------- Balance at December 31, 1994............................. $ 148 $ -- $ 26 $ 74,045 $ 12,068 Net income............................................. -- -- -- -- 1,404 Issuance of common stock............................... -- -- 1 1,344 -- Utilization of net operating loss carryforward and recognition of deferred tax assets.................... -- -- -- 22,513 -- Recognition of environmental remediation liability, net of tax................................................ -- -- -- (1,000) -- ----- ----------- --- ----------- --------- Balance at December 31, 1995............................. $ 148 $ -- $ 27 $ 96,902 $ 13,472 ----- ----------- --- ----------- --------- ----- ----------- --- ----------- ---------
See notes to consolidated financial statements. 23 CRYSTAL OIL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 --------------------------------- 1995 1994 1993 ----------- --------- --------- (IN THOUSANDS) Cash flows from operating activities: Net income.................................................................. $ 1,404 $ 2,106 $ 1,040 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary item...................................................... -- 2,320 -- Amortization of discount on convertible subordinated notes and deferred cost................................................................... 27 1,843 2,078 Net accretion on investments in debt securities......................... (355) -- -- Depreciation, depletion and amortization................................ 1,769 14,220 12,586 Exploration expenses.................................................... 50 2,351 1,264 Provision in lieu of income taxes....................................... 246 2,740 605 Deferred income taxes................................................... (357) -- -- Net gain on sale of property, plant and equipment....................... (376) (12,524) (651) Decrease in accounts receivable......................................... 4,264 1,498 1,281 Decrease (increase) in prepaid expenses and other current assets........ 149 95 (91) Decrease (increase) in other assets..................................... 44 165 (184) Increase (decrease) in accounts payable and accrued expenses............ (3,200) 53 (2,020) ----------- --------- --------- Net cash provided by operating activities................................... 3,665 14,867 15,908 ----------- --------- --------- Cash flows from investing activities: Acquisition of First Reserve Gas Company, net of cash received.............. (78,509) -- -- Proceeds from sale of property, plant and equipment......................... 2,310 96,555 1,202 Capital expenditures........................................................ (1,267) (13,762) (8,977) Investment in Russian joint venture......................................... (365) (805) (945) Purchase of marketable securities........................................... (156,461) -- (4,931) Maturity of marketable securities........................................... 102,369 -- 4,931 Investment of restricted funds.............................................. -- (6,563) -- Reduction of restricted funds............................................... 5,087 -- -- ----------- --------- --------- Net cash provided by (used in) investing activities....................... (126,836) 75,425 (8,720) ----------- --------- --------- Cash flows from financing activities: Proceeds from short-term note payable to bank............................... 60,000 -- -- Repayment of short-term note payable to bank................................ (60,000) -- -- Increase in long-term obligations........................................... 36,474 11,292 -- Reduction in long-term obligations.......................................... (61) (42,650) (12,815) Redemption of preferred stock............................................... -- (571) -- Purchase of senior preferred stock.......................................... -- (1,511) -- Proceeds from issuance of common stock...................................... 1,345 365 87 Proceeds from sale of future contracts receivables.......................... 22,504 -- -- Reduction of deferred revenue from sale of future contract receivables...... (344) -- -- Payments in lieu of fractional shares....................................... -- -- (21) Payment of costs for financing and sale of future contracts receivables..... (1,476) (65) (325) ----------- --------- --------- Net cash provided by (used in) financing activities....................... 58,442 (33,140) (13,074) ----------- --------- --------- Net increase (decrease) in cash and cash equivalents.......................... (64,729) 57,152 (5,886) Cash and cash equivalents at beginning of year................................ 75,541 18,389 24,275 ----------- --------- --------- Cash and cash equivalents at end of year...................................... $ 10,812 $ 75,541 $ 18,389 ----------- --------- --------- ----------- --------- --------- Supplemental disclosure of cash flow information: Cash paid during the year for: Interest, net of amounts capitalized........................................ $ 2,045 $ 933 $ 1,564 ----------- --------- --------- ----------- --------- --------- Income taxes................................................................ $ 1,368 $ -- $ 70 ----------- --------- --------- ----------- --------- ---------
See notes to consolidated financial statements. 24 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 NOTE A -- SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION -- The consolidated financial statements include the accounts of Crystal Oil Company and subsidiaries (the "Company"), all of which are wholly owned. All material intercompany accounts and transactions have been eliminated. BUSINESS -- The Company's principal business is the operation of a natural gas storage facility in Hattiesburg, Mississippi, which was acquired on June 19, 1995 (See Note C). The Company had been primarily engaged in crude oil and natural gas exploration and production in Louisiana, Southern Arkansas, Northeast Texas and offshore Louisiana prior to disposing of substantially all of its domestic crude oil and natural gas properties and related assets in the fourth quarter of 1994 and first quarter of 1995 (See Note D). The comparability of the Company's financial statements for the periods presented are affected by the change in operations. BASIS OF PRESENTATION -- On October 1, 1986, Crystal Oil Company filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Western District of Louisiana, Shreveport Division (the "Court"). On December 31, 1986, the Court entered an order confirming the Second Amended and Restated Plan of Reorganization (the "Plan") of the Company, which was consummated on January 30, 1987. The Company accounted for the reorganization as a quasi-reorganization. Accordingly, all assets and liabilities were restated to reflect their estimated fair value as of December 31, 1986. ACCOUNTING ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. The actual results could differ from those estimates. CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid debt instruments with an original maturity at date of purchase of three months or less to be cash equivalents. CRUDE OIL AND NATURAL GAS PROPERTIES -- The successful efforts accounting method is followed under which intangible development costs and certain non-recoverable tangible costs are capitalized with respect to producing wells and nonproducing development wells and are charged to operations with respect to nonproducing exploratory wells. Costs to acquire interests in undeveloped leases are capitalized and either transferred to producing properties when the properties become productive or charged against the impairment allowance when surrendered. An impairment allowance for undeveloped leases is determined on a property-by-property basis for significant properties and in the aggregate for other properties. Geological and geophysical costs and lease rentals are expensed as incurred. The carrying amounts of assets sold or otherwise disposed of, except for certain development wells, and the related allowances for depreciation and depletion are eliminated from the accounts, and any resulting gain or loss is included in operations. Individual development wells in a producing field, which are retired or otherwise disposed of, are deemed to be fully amortized, and the related cost is charged to accumulated depreciation and depletion for that field. The carrying amounts of producing crude oil and natural gas properties sold from a depletable field is apportioned to the interest sold and the interest retained on the basis of the fair values of those interests. A valuation adjustment for the impairment of crude oil and natural gas properties is provided to the extent that the carrying amount of producing crude oil and natural gas properties and undeveloped lease and mineral rights for financial reporting purposes exceeds undiscounted future net cash 25 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) flow from proved crude oil and natural gas reserves and the lower of cost or estimated fair market value of properties not being depleted. There were no valuation adjustments recorded during any of the three years in the period ended December 31, 1995. DEPRECIATION, DEPLETION AND AMORTIZATION -- Depreciation of gas storage facilities and equipment is provided using the straight-line method over the estimated useful lives of the assets which range from 20 to 40 years. Approximately $8.0 million associated with certain gas storage contracts providing for firm capacity to various customers is included under the classification gas storage facilities and is amortized using the straight-line method over the term of such contracts. Depletion of intangible drilling and leasehold costs relating to producing crude oil and natural gas properties is computed by the unit of production method on a field basis using only proved developed reserves. Depletion of leasehold acquisition costs relating to properties acquired is computed using total proved reserves. The provision for depreciation of other tangible assets has been computed on a straight-line basis over the estimated useful lives of the assets. INTEREST CAPITALIZATION -- Interest cost is capitalized based upon the average interest rate of outstanding borrowings during the period required to complete a construction project or drill a crude oil or natural gas well. In 1995, the Company did not incur any interest cost during the period required for the completion of fixed asset projects. Interest capitalized during the periods ended December 31, 1994 and 1993, was approximately $77 thousand and $56 thousand, respectively. INCOME TAXES -- Net operating loss carryforwards and other tax benefits are available to offset future federal and state income taxes. However, as a result of the Company's quasi-reorganization accounting treatment, the future benefits from recognition of these benefits accumulated prior to the reorganization are recorded as an adjustment to additional paid-in capital (See Note H). Debt Discounts and Deferred Costs of Financing and Sale of Future Contract Receivables -- The interest method is used to amortize debt discounts and deferred costs relating to long-term debt and sale of future contracts receivables. RECLASSIFICATIONS -- Certain reclassifications have been made in the 1994 and 1993 financial statements to conform to the classifications used in 1995. NATURAL GAS IMBALANCES -- The Company utilizes the "entitlement method" to account for over and under deliveries of natural gas (gas imbalances) resulting from the sale by one or more lease owners of volumes in excess of their gross revenue working interest in total natural gas production from a particular lease. Under the entitlement method, natural gas revenue is based on the Company's ownership of the production of natural gas reserves. The Company also maintains operating balancing agreements with pipeline companies transporting natural gas into the storage facility in order to account for over and under deliveries of natural gas resulting from the difference between the volumes injected into or withdrawn from the storage facility through the pipelines and the volumes nominated for the customers utilizing the storage facility. The Company records an account payable or receivable to or from the pipeline companies for the over or under delivery of natural gas and adjusts the level of the Company's base natural gas in the storage facility. The Company settles the natural gas imbalances with the pipelines through the exchange of volumes in-kind or cash. 26 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COMMODITY SWAP CONTRACTS -- Gains or losses on the Company's commodity swap contracts are recognized when the volumes of crude oil and natural gas being hedged are sold. The cash flows from futures contracts are accounted for as hedges for sales of crude oil and natural gas and are classified as operating activities in the consolidated statements of cash flows. The Company will adopt Statement of Financial Accounting Standards No. 121 ("SFAS 121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, in 1996. Under SFAS 121, an impairment is determined to have occurred and a loss is recognized when the net of future cash inflows expected to be generated by an identifiable long-lived asset and cash outflows expected to be required to obtain those inflows is less than the carrying value of the asset. The adoption of SFAS 121 is not expected to have a significant impact on the Company's financial statements. NOTE B -- INVESTMENTS IN DEBT SECURITIES Under the guidelines of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", management determines the appropriate classification of its investments in marketable debt securities at the time of the purchase and reevaluates such determination at each balance sheet date. At December 31, 1995, marketable debt securities have been categorized as available for sale and as a result are stated at fair value. Unrealized gains and losses are reported as an adjustment to shareholder's equity. At December 31, 1995, the Company's investments in debt securities were classified in the Company's balance sheet as cash equivalents, marketable securities and restricted funds. These investments are all highly liquid debt instruments with a maturity of less than three months at the time of purchase for investments classified as cash equivalents and a maturity of less than one year but greater than three months at the time of purchase for investments classified as marketable securities and restricted funds. The following is a summary of the estimated fair value of available for sale securities by balance sheet classification at December 31, 1995:
($IN THOUSANDS) --------------- Cash equivalents U. S. Government Agency Security............................................................... $ 10,025 --------------- --------------- Marketable securities U. S. Treasury bills........................................................................... $ 22,321 U. S. Treasury note............................................................................ 461 U. S. Government Agency Security............................................................... 31,665 --------------- $ 54,447 --------------- --------------- Restricted funds U. S. Treasury note............................................................................ $ 1,476 --------------- ---------------
The estimated fair value of each investment approximates the amortized cost, and therefore, there are no unrealized gains or losses as of December 31, 1995. NOTE C -- ACQUISITION On June 19, 1995, the Company acquired First Reserve Gas Company ("FRGC"), a natural gas storage company with facilities in Hattiesburg, Mississippi, for approximately $78.5 million, subject to 27 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE C -- ACQUISITION (CONTINUED) certain adjustments. The acquisition was initially funded with approximately $18 million of the Company's available cash and borrowings under a $60 million bridge loan. Such borrowings were repaid on November 22, 1995, with the net proceeds of $22.5 million from sale of future storage contract receivables (See Note E), $36.5 million from long-term financing (See Note F) and existing cash. FRGC's storage facility consists of three salt-dome caverns with a total capacity of 5.5 billion cubic feet ("Bcf") of natural gas, of which approximately 3.5 Bcf consists of working gas and approximately 2.0 Bcf consists of the Company's base gas. The working gas capacity is fully subscribed to twelve customers under firm storage capacity contracts expiring in 2005. FRGC's facility interconnects with Transcontinental Gas Pipe Line, Koch Gateway Pipeline, Tennessee Gas Pipeline and Associated Natural Gas systems. The cost of the gas storage facilities also includes costs associated with the deferred tax liability of $18 million resulting from the difference between the book and tax bases of the net assets acquired. In addition, recognition of tax benefit carryforwards generated after the Company's quasi-reorganization resulted in a reduction of $2.2 million in the carrying value of the gas storage facility (See Note H). The amortization of the additional cost is essentially offset by additional deferred tax benefits. The acquisition has been accounted for in accordance with the "purchase method" of accounting, and accordingly, the results of operations of FRGC are included in the Company's consolidated statement of operations from the acquisition date. In connection with the acquisition, the Company also acquired current assets (net of current liabilities assumed and excluding cash) totaling $294 thousand. The following supplemental unaudited proforma information reflects condensed results of operations of the Company as though FRGC had been acquired at January 1, 1994, and as though the disposition of substantially all of the Company's crude oil and natural gas properties (which occurred on December 30, 1994) had occurred as of January 1, 1994. The condensed results of operations on a proforma basis for the year ended December 31, 1994, do not include interest income that would have been earned from investing the funds derived from the sale of crude oil and natural gas properties. The proforma information does not purport to be indicative of the results of operations of the Company that would actually have occurred had FRGC been acquired as of the beginning of the respective periods, had substantially all of the Company's crude oil and natural gas properties been sold as of January 1, 1994, or of the future results of operations that will be obtained from the acquisition.
PRO FORMA YEAR ENDED DECEMBER 31 -------------------- 1995 1994 --------- --------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Total Revenues................................................................... $ 16,488 $ 12,639 --------- --------- --------- --------- Net Income (loss)................................................................ $ 2,442 $ (140) --------- --------- --------- --------- Income per Common and Common Stock Equivalent Share Primary........................................................................ $ .90 $ (.05) --------- --------- --------- --------- Fully diluted.................................................................. $ .90 $ (.05) --------- --------- --------- ---------
28 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE D -- ASSET DISPOSITIONS During the first quarter of 1995, the Company recognized a net gain of approximately $477 thousand from its ownership interest in four crude oil and natural gas drilling partnerships as a result of the sale of all of the partnership's crude oil and natural gas properties and related assets to Apache Corporation. Pursuant to the partnership agreements, the disposition transactions resulted in the liquidation of the partnerships and the Company received proceeds in the aggregate amount of $832 thousand in April 1995. In addition, during the first half of 1995, the Company completed the sale of its interest in an exploratory project, a producing property in South Texas, various non-producing properties and surplus equipment and inventory for an aggregate consideration of approximately $1.1 million. The sale of the exploratory project and producing and non-producing properties resulted in a net gain of approximately $383 thousand. No gain or loss was realized on the surplus equipment and inventory sale. Charges of $484 thousand incurred primarily in the second quarter of 1995 relating to severance and other costs associated with further reductions of the Company's staff were made as an offset to the gains on sales of crude oil and natural gas properties recorded in 1995 and as an extension of the restructuring plan contemplated in connection with the sale of crude oil and natural gas assets in the fourth quarter of 1994. On December 30, 1994, the Company disposed of substantially all of its domestic crude oil and natural gas properties and related assets to Apache Corporation ("Apache") for approximately $94.5 million cash, net of approximately $3.3 million in net cash flow from the properties from October 1, 1994, the effective date of the transaction, through the closing. The net book value of the assets sold was approximately $82.5 million and the Company recognized a net gain of approximately $10.4 million after disposition costs of approximately $1.6 million. In addition, the Company received $1.3 million in April 1995 ($800 thousand of which related to crude oil and natural gas properties) relating to the final post-closing adjustment procedure for its disposition transaction effected with Apache Corporation on December 30, 1994. The Company accounted for the anticipated effect of the final settlement in the Company's financial statements as of December 31, 1994. During 1994, the Company also consummated the disposition of various crude oil and natural gas properties for cash consideration of approximately $3.5 million and recognized a net gain of approximately $2.1 million. After considering the sale of substantially all of its properties during 1994 and its ongoing operational needs, the Company reviewed the carrying value of its remaining assets and recorded a write-down of certain remaining crude oil and natural gas and other assets of approximately $2.5 million to reflect such assets at net realizable value or the estimated fair value thereof. The write-down was based on a review of the assets excluded from the dispositions of properties during 1994 and a determination of a permanent decline in the value of such assets in relation to current real estate or market values. In addition as a result of obligations assumed by Apache, the Company reversed an accrual of contingent liabilities of approximately $1.6 million. Under these disposition transactions, the Company sold its crude oil and natural gas properties located primarily in Louisiana, Southern Arkansas, Northeast Texas and offshore Louisiana and specifically its dispositions included crude oil and natural gas wells together with the corresponding reserve production from such wells, interest in four crude oil and natural gas drilling partnerships, equipment and fixtures, developed and undeveloped leasehold acreage and mineral interests, and approximately 51,000 acres of fee lands. The Company excluded from the disposition transaction its cash, accounts receivable, and property, plant and equipment primarily corresponding to various domestic exploratory projects and office building. 29 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE D -- ASSET DISPOSITIONS (CONTINUED) During 1993, the Company sold its interest in certain producing crude oil and natural gas properties for cash consideration of approximately $1.2 million, which resulted in a net gain of approximately $651 thousand. NOTE E -- DEFERRED REVENUE FROM SALE OF FUTURE CONTRACT RECEIVABLES On November 22, 1995, Hattiesburg Gas Storage Company ("HGSC") and Hattiesburg Industrial Gas Sales Company ("HIGS"), indirect wholly owned subsidiaries of the Company, sold to the FRGC Owner Trust, a newly formed Delaware business trust (the "Trust"), the right to receive payments on the firm storage contract receivables to be generated by them through June 30, 2000, from the operation of the FRGC Storage Facility (the "HGSC Sold Receivables") for a total cash consideration of approximately $42.7 million, representing $50.6 million at 7.52% annualized discount on the receivables. The HGSC Sold Receivables were sold without recourse to HGSC or the Company. However, HGSC, HIGS and First Reserve Gas Company, a subsidiary of the Company ("FRGC"), agreed to be responsible for the payment of liquidated damages for certain breaches under the sales agreement that would materially and adversely impair the collection of the accounts receivable in the future and to self-insure against certain force majeure events to the extent they are not covered by insurance. The Company also agreed to be responsible for the payment of up to $10 million (subject to an annual $2 million reduction) of such liquidated damages and self-insurance under certain limited circumstances following a bankruptcy of HGSC, HIGS or FRGC (collectively, the "FRGC Parties"). The obligations of the FRGC Parties are secured by substantially all of their assets, including the FRGC Storage Facility and HGSC's storage contracts, but excluding certain receivables to be generated after June 30, 2000. Prior to the sale of the HGSC Sold Receivables, HGSC purchased approximately 47.3% of the interests of the Trust for approximately $20.2 million, of which 26.8% were senior interests ranking and equal basis with the interests sold to the other investors and 20.5% were junior and subordinate to the interest sold to other investors. Such interests represent the right to receive funds from the Trust as the HGSC Sold Receivables are collected by it. The net proceeds of $22.5 million from the HGSC Sold Receivables in conjunction with funds of $36.5 million derived from long-term borrowings and existing cash were used by the Company to repay $60 million in indebtedness incurred in connection with the Company's acquisition of FRGC in June 1995. Although HGSC and HIGS sold all of their rights and interests in the HGSC Sold Receivables to the Trust and received payment therefor, the proceeds from such receivables have been classified for accounting purposes as "Deferred Revenue from Sale of Future Contract Receivables" and will be recognized over the period during which the HGSC Sold Receivables are to be generated. The discount between the funds received on the sale of the HGSC Sold Receivables and the scheduled payments thereunder will be amortized over the life of the HGSC Sold Receivables based on the discount rate applied in fixing the sale price of the HGSC Sold Receivables and recorded as "Amortization of Discount on Sale of Future Contract Receivables." The amount of the Deferred Revenue reflected on the Company's Balance Sheet reflects the amount of revenue generated from the sale less the Company's carrying value of the senior and subordinated interests in the Trust that were purchased by HGSC. The amount of Deferred Revenues that will be amortized over the next five years will be approximately $4.3 million in 1996, $4.6 million in 1997, $5.0 million in 1998, $5.4 million in 1999 and $2.9 million in 2000. 30 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE F -- LONG-TERM OBLIGATIONS
DECEMBER 31 -------------------- 1995 1994 --------- --------- (IN THOUSANDS) 8.12% Secured guaranteed notes, due in monthly amounts from July 2000 through July 2005............................................................................... $ 36,474 $ -- Mortgage note to a bank at prime plus 1/4 of 1%..................................... 10 10 Other............................................................................... 1,670 231 --------- --------- 38,154 241 Less current portion................................................................ (294) (60) --------- --------- Amount classified as long-term...................................................... $ 37,860 $ 181 --------- --------- --------- ---------
On November 22, 1995, HGSC issued approximately $36.5 million in 8.12% Secured Guaranteed Notes Due 2005 (the "Notes"). The terms of the Notes provide for the payment of interest only through June 30, 2000, at which time principal is to be amortized over the remaining life of the Notes. The Notes, which are without recourse to Crystal Oil Company, are secured by substantially all the assets of the FRGC Parties, including the FRGC Storage Facility, HGSC's storage contracts, certain accounts receivable to be generated after June 30, 2000, and a pledge of the cash flow from HGSC's 26.8% senior interest in the Trust. The net proceeds from the Notes, funds of $22.5 million derived from the sale of the HGSC Sold Receivables and existing cash were used by the Company to repay $60 million in indebtedness incurred in connection with the Company's acquisition of FRGC in June 1995. The FRGC Parties also agreed under the Indenture relating to the Notes to various restrictions on the distribution of assets from the FRGC Parties to the Company. However, such restrictions do not restrict the ability of the Company to pay dividents to its shareholders from available cash and accumulated earnings, exclusive of the operating cash flows of the FRGC Parties. The Company prepaid the borrowings of $5.0 million under a reducing revolving credit facility (the "Revolving Credit Commitment") in 1993 and the outstanding balance under a derivative-linked acquisition term loan (the "Term Loan") of approximately $11.6 million in December 1994 as a result of the disposition of assets during the fourth quarter of 1994. In addition, the Company agreed with its banks to terminate the Revolving Credit Commitment and to provide a collateral of approximately $6.6 million in cash and cash equivalents as assurance for the repayment of the Company's obligations with respect to the outstanding letters of credit previously issued by the banks on behalf of the Company and its subsidiaries (see Note K). On March 31, 1995, the Company amended its credit facility (the "Credit Agreement") with its banks relating to the standby letters of credit and reduced the cash collateral requirements for the facility to 30% of the outstanding letters of credit. Accordingly, the Company's Balance Sheets as of December 31, 1995 and 1994, included restricted marketable securities of $1.5 million and restricted cash equivalents of $6.6 million, respectively, which were classified as a non-current asset. The Credit Agreement continues to prohibit the declaration and payment of any dividends on the Company's stock as long as there are outstanding letters of credit under the Credit Agreement, the latest of which will terminate on January 1, 2001. In conjunction with the borrowing under the Term Loan, the Company entered into an interest rate swap agreement and hydrocarbon swap agreements with the objectives of hedging against the fluctuations of interest rates and the volatility of crude oil and natural gas prices for production derived from the property acquired in Plaquemines Parish (See Note O). The net payments or receipts under the interest rate swap agreement were recorded as adjustments to interest expense. On 31 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE F -- LONG-TERM OBLIGATIONS (CONTINUED) December 30, 1994, and as result of the prepayment of the Term Loan, the Company agreed to cancel the interest rate swap contract in consideration for approximately $200 thousand, which gain was accounted for as other income. In connection with the disposition of assets during 1994, the Company also acquired and redeemed all of its outstanding Non-Interest Bearing Convertible Subordinated Notes due 1997 (the "Convertible Notes") for approximately $15.5 million. On November 21, 1994, the Company purchased approximately $5.0 million principal amount of the Convertible Notes with a carrying value of approximately $3.7 million for approximately $4.2 million pursuant to an unsolicitated privately negotiated transaction. On December 30, 1994, the Company called for redemption all of its $11.3 million outstanding Convertible Notes with a carrying value of approximately $8.4 million at the principal amount thereof. The carrying value of the Convertible Notes was calculated using a discount rate of approximately 15%. As a result of prepayment of long-term obligations in 1994, the Company recognized a loss of approximately $3.8 million ($2.3 million net of income tax benefit) relating to approximately $3.4 million from the difference between the reacquisition price for the Convertible Notes and the carrying value and approximately $373 thousand from the write-off of unamortized deferred financing costs associated with the bank debt. The loss on early extinguishment of debt was classified as an extraordinary item in the Company's Consolidated Statement of Operations for the year ended December 31, 1994. Maturities of debt obligations for each of the next five years are $294 thousand in 1996; $268 thousand in 1997; $266 thousand in 1998; $266 thousand in 1999; and $3.3 million in 2000. NOTE G -- STOCKHOLDERS' EQUITY A summary of the Company's capital stock, as of December 31, 1995, is as follows:
SHARES ISSUED SHARES AND AUTHORIZED OUTSTANDING ------------- ------------- $.06 Senior Convertible Voting............................................ 51,200,773 Preferred Stock (Non-Cumulative), $.01 par value ("Senior Preferred Stock"); $1.00 liquidation preference.................................. 14,788,328 Common Stock, $.01 par value ("Common Stock")............................. 4,000,000 2,654,042
The Company's Senior Preferred Stock is entitled to a non-cumulative, $.06 per share annual dividend. However, no dividends may be paid until the following conditions are met: (a) certain liabilities to the bank, including the standby letters of credit, the last of which does not expire until January 1, 2001, are no longer outstanding, (b) after giving effect to such dividends, the Company has positive retained earnings and (c) the declaration and payment of such dividends will not violate any applicable law or provision of any material contract to which the Company is a party. The shares of the Senior Preferred Stock are convertible at the option of the holder into shares of Common Stock at any time at the conversion rate of 444.44 shares of Senior Preferred Stock per share of Common Stock (.00225 of a share of Common Stock per share). During the fourth quarter of 1994, the Company purchased approximately 3.4 million shares of its Senior Preferred Stock for approximately $1.5 million pursuant to an unsolicited privately negotiated transaction. 32 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE G -- STOCKHOLDERS' EQUITY (CONTINUED) The Senior Preferred Stock has a $1 liquidation preference for each share outstanding. As a result, if the Company were to have been liquidated and its assets sold and its liabilities settled at the carrying values thereof at December 31, 1995, $14.8 million of the equity of the Company would have been attributed entirely to the Senior Preferred Stock. Holders of the Senior Preferred Stock are entitled to vote with the holders of the Common Stock, as a single class, for the election of directors and on all matters submitted to a vote of stockholders of the Company. Each share of Senior Preferred Stock is entitled to .001 of a vote. During 1995 and 1994, the Company issued 67,750 shares and 20,350 shares of Common Stock, respectively, for an aggregate consideration of approximately $1.3 million and $365 thousand, respectively, pursuant to the Crystal Oil Company 1992 Employee Stock Option Plan (the "Option Plan") (See Note I). The table below shows the total number of shares of Common Stock which, at December 31, 1995, were reserved for future issuance upon conversion or exercise of the following securities:
SHARES RESERVED --------------- Senior Preferred Stock................................................................. 33,274 Warrants issued and outstanding........................................................ 449,308 Shares reserved for issuance pursuant to the Employee Stock Option Plan (See Note I)... 106,875 --------------- 589,457 --------------- ---------------
The Company's outstanding warrants allow its holders to purchase an aggregate of 449,308 shares of the Company's Common Stock at per share prices ranging from $97.78 to $325.93. The outstanding warrants expire on January 30, 1999. The Company has reserved for future issuance 106,875 shares of Common Stock that are issuable pursuant to an Employee Stock Option Plan. Of such shares reserved, options have been granted and are outstanding to purchase 85,250 shares of Common Stock (See Note I). In 1994, the shareholders of the Company approved an amendment to the Company's Articles of Incorporation that effected a change to the terms of the Series A Convertible Voting Preferred Stock, $.01 par value ("Series A Preferred Stock"). The amendment included an increase in the conversion rate applicable to the Series A Preferred Stock from .002 to .0031 of a share of the Company's Common Stock for each share of Series A Preferred Stock (equivalent to a change from 500 to approximately 323 shares of Series A Preferred Stock for one share of Common Stock) and required the Company to redeem for $.06 per share all of the shares of Series A Preferred Stock outstanding and not converted into shares of Common Stock as of the close of business on April 18, 1994. Pursuant to such amendment the Company received for conversion approximately 18.6 million shares of Series A Preferred Stock which were converted into approximately 58 thousand shares of Common Stock and the remaining approximately 6.8 million shares of Series A Preferred Stock were redeemed on April 19, 1994, at $.06 per share for approximately $410 thousand and related costs of approximately $161 thousand. 33 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE H -- PROVISION FOR INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carryforwards and other tax benefits. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In January 1993, the Company adopted the asset and liability method of accounting for income taxes under Statement of Financial Accounting Standards No. 109 ("SFAS 109"), Accounting for Income Taxes, without restating prior years' financial statements. The adoption of SFAS 109 did not have an effect on the Company's financial statements because of available net operating loss carryforwards for income tax purposes and the Company's quasi-reorganization accounting treatment of the realization of such carryforwards and accordingly, a cumulative effect of a change in accounting principle was not recorded. The components of the provision for income taxes are:
YEAR ENDED DECEMBER 31 ------------------------------- 1995 1994 1993 --------- --------- --------- (IN THOUSANDS) Federal: Current-Alternative Minimum Tax........................................... $ 867 $ 100 $ 21 Provision in lieu of income taxes......................................... 214 1,078 518 Deferred tax benefit...................................................... (357) -- -- State: Current................................................................... 206 -- -- Provision in lieu of income taxes......................................... 32 173 87 --------- --------- --------- $ 962 $ 1,351 $ 626 --------- --------- --------- --------- --------- ---------
The provision for income taxes vary from the amounts computed by applying the statutory rate as follows:
YEAR ENDED DECEMBER 31 ------------------------------- 1995 1994 1993 --------- --------- --------- (IN THOUSANDS) Amounts computed by applying statutory rate................................. $ 804 $ 1,175 $ 566 Benefit of state income taxes............................................... (80) (59) (30) Other....................................................................... -- 62 3 --------- --------- --------- 724 1,178 539 State income taxes.......................................................... 238 173 87 --------- --------- --------- $ 962 $ 1,351 $ 626 --------- --------- --------- --------- --------- ---------
As a result of the Company's quasi-reorganization accounting treatment, the benefits of utilizing the net operating loss carryforwards and income tax credits accumulated prior to the Company's reorganization are credited to additional paid-in-capital and are reported as a provision in lieu of income taxes in the statement of operations for financial reporting purposes. However, see elsewhere in this note for impact on deferred taxes of the FRGC purchase. The significant components of deferred income tax expense (benefit) for the years ended December 31, 1995, 1994 and 1993, included 34 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE H -- PROVISION FOR INCOME TAXES (CONTINUED) decreases of $756 thousand, $1.3 million and $605 thousand, respectively, in gross deferred tax assets (net of gross deferred tax liabilities) and the beginning of the year valuation allowance as a result of utilizing net operating loss, capital loss and tax credit carryforwards, net of an increase in 1995 for recognition of a deferred tax asset of $867 thousand for the payment of alternative minimum tax expected to be utilized to offset future taxable income. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 1995 and 1994, are as follows (in thousands):
1995 1994 ---------- ---------- Deferred tax assets: Sale of future contract receivables.......................................... $ 14,300 $ -- Net operating loss carryforwards............................................. 61,801 75,202 Investment tax credit carryforward........................................... 6,515 6,515 Percentage depletion carryforward............................................ 2,539 2,900 Alternative minimum tax credit carryforward.................................. 2,363 921 State net operating loss carryforward........................................ 2,157 2,642 Property, plant and equipment -- valuation and depreciation.................. -- 1,553 Other........................................................................ 1,455 431 ---------- ---------- Total gross deferred tax assets............................................ 91,130 90,164 Less valuation allowance................................................... (65,706) (90,051) ---------- ---------- Gross deferred tax assets net of valuation allowance..................... 25,424 113 ---------- ---------- Deferred tax liabilities Property, plant and equipment -- valuation and depreciation.................. (18,026) -- Partnership earnings......................................................... -- (113) ---------- ---------- Total gross deferred tax liabilities....................................... (18,026) (113) ---------- ---------- Net deferred tax assets.................................................. $ 7,398 $ -- ---------- ---------- ---------- ----------
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The valuation allowance for deferred tax assets as of January 1, 1995 and 1994, was $90.1 million and $109.9 million, respectively. The net change in the total valuation allowance for the years ended December 31, 1995 and 1994, were decreases of $24.3 million and $18.5 million, respectively. The change in 1995 relates primarily to the purchase of FRGC which resulted in an assessment that certain existing net operating loss carryforwards and other tax benefits are more likely than not to be utilized. As a result of the Company's quasi-reorganization accounting treatment, the recognition of net operating loss carryforwards and other tax benefits generated prior to the Company's quasi-reorganization resulted in an addition to paid-in capital of $22.8 million in connection with the acquisition. In addition, recognition of tax benefit carryforwards generated after the Company's quasi-reorganization resulted in a reduction of $2.2 million in the carrying value of the gas storage facility. The change in 1994 relates primarily to the effects of the sale of substantially all assets of the Company. In assessing the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this 35 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE H -- PROVISION FOR INCOME TAXES (CONTINUED) assessment. In order to fully realize the deferred tax asset at December 31, 1995, the Company will need to generate future taxable income of approximately $21.3 million prior to the expiration of the net operating loss carryforwards in 2002. Taxable income for the years ended December 31, 1995 and 1994 was $42.0 million and $19.0 million, respectively. Taxable income for 1995 differed from income before taxes as reported in the accompanying statement of operations for the same period due primarily to the taxable income generated in connection with the sale of future contract receivable. The difference for 1994 was a result of the sale of substantially all of the Company's crude oil and natural gas properties and the extinguishment of the Convertible Notes. Based upon projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at December 31, 1995. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. Investment tax credits and regular tax net operating loss carryforwards of $6.5 million and $181.7 million, respectively, are available for federal income tax purposes with expiration dates primarily from 1997 to 2002. In addition, statutory depletion carryforwards and Alternative Minimum Tax credit carryforwards of $7.5 million and $2.4 million, respectively, are available for federal income tax purposes and have no expiration date. As a result of the Company's quasi-reorganization accounting treatment, the future benefit from utilization of any additional net operating loss carryforwards accumulated prior to the Company's reorganization, and not previously recognized, will be recorded as an adjustment to additional paid-in capital. During 1995, 1994 and 1993, $246 thousand, $1.3 million and $605 thousand, respectively, were credited to additional paid-in capital as a result of utilization of such tax carryforwards, exclusive of that recognized in connection with the acquisition of FRGC during 1995. NOTE I -- EMPLOYEE INCENTIVE AND BENEFIT PLANS The Company has an Option Plan intended to provide a means whereby certain key employees of the Company may obtain a proprietary interest in the continued development and financial success of the Company. The Option Plan provides for the granting of stock options in the aggregate amount of 200,000 shares of Common Stock and for a four-year vesting period on the basis of one-fourth vesting on each anniversary date of the date of grant and subject to earlier vesting upon the occurrence of certain events such as the substantial disposition of assets. On December 30, 1994, the participants in the Option Plan became fully vested as a result of the disposition transaction with Apache. The determination of the individuals eligible to participate in the Option Plan and the allocation of stock options to the participants are administered by a committee of the Board of Directors. The price at which a share of Common Stock may be purchased pursuant to a stock option may not be less than the 36 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE I -- EMPLOYEE INCENTIVE AND BENEFIT PLANS (CONTINUED) fair market value of a share of Common Stock on the date the stock option is granted, and the maximum term of a stock option may not exceed ten years. Additional information relating to the Option Plan is as follows:
OPTION PRICE AVAILABLE STOCK OPTIONS PER SHARE OUTSTANDING EXERCISABLE FOR GRANT - ------------------------------------------- --------------------- ----------- ----------- --------- At December 31, 1992....................... $17.50 81,500 -- 28,500 Authorized................................. -- -- 90,000 Granted.................................... $21.50 37,500 -- (37,500) Became exercisable......................... $17.50 -- 20,375 -- Exercised.................................. $17.50 (5,025) (5,025) -- Terminated................................. $17.50 to $21.50 (4,625) -- 4,625 ----------- ----------- --------- At December 31, 1993....................... $17.50 to $21.50 109,350 15,350 85,625 Authorized -- -- -- Granted.................................... $22.125 46,500 -- (46,500) Became exercisable......................... $17.50 to $22.125 -- 140,500 -- Exercised.................................. $17.50 to $21.50 (20,350) (20,350) -- Terminated................................. -- -- -- ----------- ----------- --------- At December 31, 1994....................... $17.50 to $22.125 135,500 135,500 39,125 Authorized................................. -- -- -- Granted.................................... $31.125 17,500 -- (17,500) Became exercisable......................... -- -- -- Exercised.................................. $17.50 to $22.125 (67,750) (67,750) -- Terminated................................. -- -- -- ----------- ----------- --------- At December 31, 1995....................... $17.50 to $31.125 85,250 67,750 21,625 ----------- ----------- --------- ----------- ----------- --------- Average option price at December 31, 1995...................................... $22.50
The Company will adopt Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," in 1996. The Company currently plans to continue to measure compensation cost for employee stock compensation plans using the method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company provides a Retirement Savings Plan ("Savings Plan") for its eligible employees. The Savings Plan allows participants to defer a portion of their income through contributions to the Savings Plan pursuant to section 401(K) of the Internal Revenue Code and does not provide for any matching contributions by the Company. The Company bears the administrative costs of the Savings Plan. The Company adopted the Crystal Oil Company Employee Stock Ownership Plan (the "ESOP"), effective January 1, 1993, for its eligible employees. Under the ESOP, the Company may contribute annually an amount, if any, determined by the Board of Directors in a specified percentage of total employee compensation, not to exceed 10%. All contributions are made to a trust for the benefit of the employees and are invested in shares of Common Stock to be purchased by an independent trustee in the open market. The Company may elect to make its contribution in the form of shares of Common Stock. The Board of Directors approved a contribution to the ESOP of $50 thousand and $150 thousand or approximately 5% of total annual employee compensation in 1995 and 1994, respectively, which amounts were recorded as general and administrative expense. At December 31, 1995, 5,709 37 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE I -- EMPLOYEE INCENTIVE AND BENEFIT PLANS (CONTINUED) shares of the Company's Common Stock, purchased in the open market, are held in trust for the ESOP. The Company's contributions are subject to vesting based on the number of years that the employee is employed with the Company from and after January 1, 1993, with amounts being vested at a rate of 20% for each year of employment after January 1, 1993, subject to earlier vesting upon the occurrence of certain events such as the substantial disposition of assets. On December 30, 1994, the participants in the ESOP became fully vested with respect to the prior contributions of the Company as a result of the disposition transaction with Apache. Employees are entitled to receive a single distribution of the number of vested shares in the employee's account following retirement, disability, death or termination of employment but may, in accordance with rules under the ESOP, elect to receive the entire distribution in cash based on the existing value of the Common Stock. As a result of the disposition of assets, the Company adopted a special severance pay policy for eligible employees terminated due to a reduction in work force. The Company recorded charges of $484 thousand and $700 thousand in 1995 and 1994, respectively, primarily relating to severance compensation as an offset to the gains on sales of crude oil and natural gas properties. NOTE J -- NET INCOME PER SHARE Earnings per common share were computed by dividing adjusted net income by the weighted average number of shares of Common Stock and Common Stock equivalents outstanding during the year. The Convertible Notes, the Senior Preferred Stock, the stock options and all classes of warrants are considered to be the equivalent of Common Stock. For the years ended December 31, 1995, 1994 and 1993, the effective exercise price of all classes of warrants, when used in connection with the Senior Preferred Stock, was greater than the average market price of the Common Stock, and therefore not considered in calculating income per share. For 1993, the number of shares issuable on conversion of the Series A Preferred Stock (convertible into 50,959 shares of Common Stock) was added to the number of shares of Common Stock outstanding. The Senior Preferred Stock in 1995, 1994 and 1993 were assumed converted into Common Stock, thereby increasing the number of common shares outstanding by 33,274 in 1995, 33,274 in 1994 and 40,828 in 1993. The number of shares outstanding was increased in 1995, 1994 and 1993 by 21,583, 39,621, and 23,364 shares, respectively, for the increase in shares issuable from the outstanding stock options, net of the effect of applying the treasury stock method. The exercise of warrants utilizing the Convertible Notes and the conversion of the remaining Convertible Notes were anti-dilutive and therefore were not assumed to be exercised or converted for 1994 and 1993. All conversions into Common Stock and exercises of warrants were assumed to have been converted or exercised at the beginning of the year. Earnings per common share assuming full dilution is computed on the same basis except that in 1995 and 1994 the increase in the number of shares outstanding relating to the Company's stock options under full dilution was 22,168 and 41,015, respectively, because the closing market price of the Common Stock was higher than the average market price during the period for which such options became dilutive. NOTE K -- COMMITMENTS AND CONTINGENCIES The Company, as an entity that has been involved in the exploration, development and production of crude oil and natural gas, has certain obligations based on federal, state and local regulations concerning the discharge of materials into the environment or otherwise relating to the protection of the environment. These environmental obligations include the remediation or mitigation of the effects on the environment of the disposal or release of certain chemical and petroleum substances at 38 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE K -- COMMITMENTS AND CONTINGENCIES (CONTINUED) certain properties previously owned or operated by the Company such as crude oil and natural gas fields and other facilities. As part of the Company's agreement with Apache Corporation ("Apache") with respect to the disposition of various of the Company's properties in 1994, Apache assumed various plugging and abandonment costs with respect to the properties acquired. The Company, however, agreed to indemnify Apache for certain environmental liabilities relating to the properties sold to it to the extent a claim is made by June 30, 1996. In 1995, the Company was advised by Atlantic Richfield Corporation ("ARCO") of the existence of a potential environmental cleanup of a mining site in Colorado that was sold by a subsidiary of the Company to ARCO. The mining assets were owned by the Company's subsidiary for approximately eight years during the 1970s and were sold by the subsidiary to ARCO in 1980. The Company has filed a declaratory action in the Federal District Court for the Northern District of Louisiana, Shreveport Division, seeking a determination that the Company has no liability to ARCO with respect to this site due to, among other things, a contractual agreement between the subsidiary of the Company that sold the property to ARCO's predecessor by merger in which such predecessor agreed that the Company's subsidiary would have no further liability with respect to the properties other than for certain express items. The Company is currently reviewing the scope of the potential cleanup and the cost thereof. Although no specific cost estimates have been made by the Company to date, the Company has been advised by ARCO that the total cost of cleanup could exceed $20 million. The Company intends to vigorously defend this matter. In 1991, the Company was named, among others, as a potentially responsible party ("PRP"), for environmental cleanup by the Indiana Department of Environmental Management and received an informational request concerning the Company's activities at a site located in Indiana. A now dissolved subsidiary of the Company owned a refinery on this site for a period of approximately four years during the 1970s. Other parties have owned and operated this site since the construction of the refinery in 1946. Presently, no environmental-related cost have been assessed for remediation of this site. The Company was recently notified by the Department of Transportation of the State of Louisiana ("DOT") that it intends to seek contribution from the Company for the prior cleanup by the DOT of a site located in Shreveport, Louisiana, on which a refinery previously owned by the Company once operated in the 1920s. Other parties which have owned this site or conducted operations at this site have similarly been notified. The DOT is seeking $4.5 million from all PRPs. The Company is engaged in a preliminary review of this matter and, based on such review, believes that any contamination at the site was primarily related to operations or events at the site subsequent to the Company's ownership thereof. The Company currently intends to vigorously defend this matter and has not agreed to any contribution. The Company has also recently been advised by the Louisiana Department of Environmental Quality of the potential need for cleanup of 5.5 acres in a 30 acre tract of land outside of Shreveport which the Company owned from 1926 to 1965 and leased to another party that built and operated a crude oil refinery in the 1930s and 1940s. The Company has never owned or operated a refinery at this site and is currently investigating this matter to make a determination as to the potential costs to the Company, if any, of a cleanup of this site. Under federal and state environmental laws providing for joint and several liability for environmental cleanup, a governmental plaintiff could seek to recover all remediation costs at a waste disposal site from any one of the PRPs for such site, including the Company, despite the involvement of other PRPs. The Company's policy is to accrue environmental remediation costs if it is probable 39 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE K -- COMMITMENTS AND CONTINGENCIES (CONTINUED) that a liability has been incurred and an amount is reasonably estimable. In light of the foregoing matters, the Company accrued as of December 31, 1995, $1.5 million for defense and related costs of such matters. Because the forgoing matters relate to matters existing prior to the Company's quasi-reorganization in 1986, this accrual was recorded net of related tax impact as an offset to additional paid-in capital. Such accrual will be reviewed periodically and adjusted, if necessary, to reflect any additional charges that the Company believes will be probable. In July 1979, a suit styled "AGB Oil Company et al vs. The Charter Company, Charter Oil Company, and Crystal Exploration and Production Company", was filed in the Circuit Court of the Eleventh Judicial Circuit in and for Dade County, Florida, Cause No. 79-12012-CA-07. Plaintiff, the limited partner of Caloosa 1974 Limited Partnership, a Colorado limited partnership, of which Crystal Exploration and Production Company, formerly Charter Exploration and Production Company, is the general partner, claims compensatory damages of $10 million, punitive damages in an undetermined amount, interest and costs of litigation. The suit alleges breach of contract, breach of fiduciary duty, mismanagement and fraud in connection with the operation of Caloosa 1974 Limited Partnership. In recent years, the suit has been generally inactive and the Company believes that the likelihood of a recovery, if any, by Plaintiff in a material amount is remote. The Economic Recovery Tax Act of 1981, as supplemented by the Tax Equity and Fiscal Responsibility Act of 1982, provided for transactions that were structured in the form of a lease for tax purposes but, in substance, were solely the sale and purchase of tax benefits such as investment tax credits and deductions under the Accelerated Cost Recovery System. The sales agreements place restrictions on the disposal of assets and, in certain situations, require the Company to indemnify the tax lessor against loss of these tax benefits unless the purchaser of the assets assumes the obligations. In respect to the disposition of assets during 1994, the purchasers agreed to assume the Company's obligations with respect to substantially all of the tax lease agreements in effect. However, the Company is required to maintain its current letters of credit to support the tax lease agreements assumed by the purchasers, and is subject to reimbursement from the purchasers of the assets for draws against the letters of credit. As of December 31, 1995, approximately $4.6 million of standby letters of credit are remaining and primarily support the obligations with respect to the tax benefits sold. These letters of credit have quarterly fees of 3/4 of 1% per annum of the amount of the letters of credit from time to time outstanding. The Company's contingent obligations with respect to the letters of credit pursuant to the Company's Credit Agreement are secured by a collateral account maintained at the issuing bank with approximately $1.5 million in marketable securities. The balance of outstanding standby letters of credit decreases $4.1 million in 1996, $.2 million in 1997, $.1 million in 1998, $.1 million in 1999 and $.1 million thereafter through January 1, 2001. On November 10, 1994, the Company entered into various employment agreements with its key officers and employees. These agreements expire on December 31, 1999, and provide for a cash payment to the officer equal to a multiple of one to three times the most recent base salary and extension of certain employee benefits for a period of time in the event of termination of employment under certain circumstances and without cause. In addition, the employment agreements provide for certain cash bonus payment payable in equal semi-annual installments over a two year period and aggregating to 50% of the base salary if the officer is in the employ of the Company at that time. The future minimum rental payments for all non-cancelable operating leases as of December 31, 1995, are immaterial. Rental expense on operating leases was not significant in 1995 and approximated $.8 million, and $.6 million in 1994 and 1993, respectively. 40 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE L -- CRUDE OIL AND NATURAL GAS COST DATA AND RESULTS OF OPERATIONS The following tables set forth certain data with respect to crude oil and natural gas acquisition, exploration, development and production activities.
YEAR ENDED DECEMBER 31 ------------------------------- 1995 1994 1993 --------- --------- --------- (IN THOUSANDS) Acquisition of properties: Unproved................................................................ $ 158 $ 1,203 $ 260 Proved.................................................................. -- -- 50 Exploration costs......................................................... 866 900 2,270 Development costs......................................................... 110 11,203 5,550
DECEMBER 31 -------------------- 1995 1994 --------- --------- (IN THOUSANDS) Aggregate capitalized costs (including work in progress): Crude oil and natural gas properties............................................ $ 1,944 $ 3,652 Undeveloped leases and mineral interests........................................ -- 327 Less accumulated depreciation and depletion..................................... (6) (2,087) --------- --------- Costs relating to crude oil and natural gas activities, net..................... $ 1,938 $ 1,892 --------- --------- --------- ---------
Results of operations from exploration and production activities excluding the gain on the sale of the assets in the fourth quarter of 1994:
YEAR ENDED DECEMBER 31 ------------------------------- 1995 1994 1993 --------- --------- --------- (IN THOUSANDS) Revenues: Sales to unaffiliated customers....................................... $ 57 $ 28,819 $ 33,862 Other income.......................................................... 376 506 1,312 --------- --------- --------- Total revenues...................................................... 433 29,325 35,174 Production costs (lease operating expense and taxes).................... 17 11,756 12,030 Exploration costs....................................................... 50 2,351 1,264 Depreciation, depletion and impairment.................................. 6 10,612 12,199 --------- --------- --------- Total costs......................................................... 73 24,719 25,493 --------- --------- --------- Results of operations before income tax................................. 360 4,606 9,681 Income tax (1).......................................................... 122 1,566 3,291 --------- --------- --------- Results of operations................................................... $ 238 $ 3,040 $ 6,390 --------- --------- --------- --------- --------- ---------
- ------------------------ (1) Results of operations from exploration and production activities reflects a income taxes for comparative purposes. However, taxable income from operations is offset by the utilization of the Company's net operating loss carryforward. 41 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE M -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 1995 and 1994.
QUARTER ENDED ------------------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL --------- --------- ------------- ------------ --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1995 Revenues........................................... $ 2,191 $ 1,306 $ 3,909 $ 4,112 $ 11,518 --------- --------- ------------- ------------ --------- --------- --------- ------------- ------------ --------- Gross profit....................................... $ -- $ 302 $ 2,580 $ 2,776 $ 5,658 --------- --------- ------------- ------------ --------- --------- --------- ------------- ------------ --------- Net income (loss).................................. $ 528 $ (139) $ 590 $ 425 $ 1,404 --------- --------- ------------- ------------ --------- --------- --------- ------------- ------------ --------- Net income (loss) per common and common stock equivalent share.................................. $ .20 $ (.05) $ .22 $ .16 $ .52 --------- --------- ------------- ------------ --------- --------- --------- ------------- ------------ ---------
QUARTER ENDED -------------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL ----------- --------- ------------- ------------ --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1994 Revenues........................................... $ 7,676 $ 7,307 $ 8,130 $ 20,410 $ 43,523 ----------- --------- ------------- ------------ --------- ----------- --------- ------------- ------------ --------- Gross profit....................................... $ 4,676 $ 4,364 $ 4,619 $ 3,910 $ 17,569 ----------- --------- ------------- ------------ --------- ----------- --------- ------------- ------------ --------- Income (loss) before extraordinary item............ $ (1,102) $ (246) $ 110 $ 5,664 $ 4,426 ----------- --------- ------------- ------------ --------- ----------- --------- ------------- ------------ --------- Net income (loss).................................. $ (1,102) $ (246) $ 110 $ 3,344 $ 2,106 ----------- --------- ------------- ------------ --------- ----------- --------- ------------- ------------ --------- Income (loss) before extraordinary item per common and common stock equivalent share................. $ (.44) $ (.10) $ .04 $ 2.14 $ 1.68 ----------- --------- ------------- ------------ --------- ----------- --------- ------------- ------------ --------- Net income (loss) per common and common stock equivalent share.................................. $ (.44) $ (.10) $ .04 $ 1.26 $ .80 ----------- --------- ------------- ------------ --------- ----------- --------- ------------- ------------ ---------
The results of operations include a charge to exploration cost of $2.0 million for the quarter ended March 31, 1994, based on the assessment of wells in progress being drilled as uneconomical to complete. Revenues include a gain from the sale of crude oil and natural gas properties of approximately $12.5 million in the quarter ended December 31, 1994. NOTE N -- COMMODITY SWAP CONTRACTS The Company entered into commodity swap contracts with financial institutions for the purpose of hedging against the volatility in the prices that it receives for a portion of its crude oil and natural gas production. Under such commodity swap contracts, the Company was either entitled to receive or required to pay, on a quarterly basis, an amount of cash equal to the difference between the fixed price in such contracts and a reference price of a barrel of crude oil or a MMbtu of natural gas as quoted or referenced in an agreed established market multiplied by the volume hedged for each contract. These contracts were derivative financial instruments negotiated with the individual financial institution and did not require deliveries of the commodity hedged. During the fourth quarter of 1994 and as a result of the disposition of substantially all of the Company's crude oil and natural gas properties, the Company agreed to cancel all of its commodity swap contracts in consideration for a net amount of approximately $.7 million. The gain from the 42 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE N -- COMMODITY SWAP CONTRACTS (CONTINUED) termination of such contracts was allocated over the original periods of such contracts and recognized for the period ended December 31, 1994, as revenues from crude oil and natural gas of approximately $.3 million for the allocations to volumes hedged and sold from the termination date through the consummation of the disposition transaction on December 30, 1994, and as miscellaneous income of approximately $.4 million for the allocation to the remaining hedged volumes. Unless otherwise noted, all transactions identified in the financial statements as hedging transactions are identified and accounted for as hedging transactions for income tax purposes pursuant to Treasury Regulations Section 1.1221-2T(c). NOTE O -- CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents, marketable securities and trade accounts receivables. The Company consistently invests its idle funds in short term debt securities through major banks. At December 31, 1995, the outstanding balance of these securities included approximately $10.0 million classified as cash equivalents and $55.9 million classified as marketable securities, $1.5 million of which are restricted funds, in the accompanying financial statements. Such investments consist of short term government obligations that are for terms of less than one year. The Company's operating revenues are primarily generated from providing firm gas storage capacity to twelve customers under 15-year contracts expiring in 2005. These customers consist of eight local natural gas distribution companies, two major natural gas producers and two natural gas marketers. The concentration of credit risk in a relatively small number of customers in the natural gas industry affects the Company's overall exposure to credit risk because customers may be similarly affected by changes in economic and other conditions. The Company performs ongoing credit evaluations of its customer's financial condition. NOTE P -- INVESTMENT IN RUSSIAN JOINT VENTURE In 1993, the Company entered into an agreement with the Orenburgneft Production Association ("Orenburgneft") in Orenburg, Russia, to form a joint venture that would be structured as a closed stock corporation owned equally by Crystal and Orenburgneft. This joint venture is expected to engage in workover and enhanced recovery activities in two fields with existing producing crude oil and natural gas deposits located in the Orenburg Region of the Russian Federation. The Company's activities in Russia are subject to the risks associated with foreign operations, including political and economic uncertainties, risks of cancellation or unilateral modification of agreements, operating restrictions, repatriation restrictions, expropriation, export restrictions, the imposition of new taxes and the increase of existing taxes, inflation and other risks arising out of foreign governmental sovereignty over areas in which the operations are conducted. As a result of such operating environment and the extended period required for obtaining the necessary regulatory approvals and tax exemptions, the Company expensed during the fourth quarter of 1994 its aggregate investment of approximately $2.0 million in the joint venture and another potential venture in the developing stages with the Russian Federation. Presently, this joint venture has been unable to obtain regulatory approval. As a result, the Company has curtailed its activities in Russia pending Orenburgneft's ability to obtain regulatory approval of the joint venture or the proposal of an alternative venture that would be economically viable under the laws of the Russian Federation. 43 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE Q -- FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair values of certain of the Company's financial instruments at December 31, 1995 and 1994.
1995 1994 -------------------- -------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE --------- --------- --------- --------- Cash and cash equivalents.......................................... $ 10,812 $ 10,812 $ 75,864 $ 75,864 Marketable securities.............................................. 54,447 54,447 -- -- Restricted cash and cash equivalents............................... -- -- 6,563 6,563 Restricted marketable securities................................... 1,476 1,476 -- -- Long-term obligations, including current maturities................ 36,654 36,654 241 241 Deferred revenue from sale of future contract receivables....................................................... 22,160 22,160 -- --
The following methods and assumptions were used by the Company in determining its fair value disclosure for financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheet approximates fair value due to the short maturity of the cash equivalents. Marketable securities: Marketable securities consist of debt securities. Fair values are based on quoted market prices. Current and Long-Term Obligations: The carrying amount of the Company's secured guaranteed notes, note to bank and others approximates its fair value, which is estimated using discounted cash flow method based on the Company's borrowing rates for similar types of financing arrangements. Deferred Revenue from Sale of Future Contract Receivables: The carrying amount of the Company's deferred revenue from sale of future contract receivables reflects the net proceeds from the HGSC Sold Receivables and approximates its fair value. The fair value of the HGSC Sold Receivables is estimated using discounted cash flow method based on the discount rate for similar types of arrangements. Off-balance-sheet instruments: Fair values for the Company's letter of credit contracts are based on costs which would be incurred to terminate existing agreements and enter into new agreements for similar amounts, expiration dates and counterparties' credit standing. Such estimated fair value approximates the carrying amount of the obligation for fees related to the letters of credit. The carrying amounts of account receivable, accounts payable and accrued expenses approximate their fair value due to the short maturity of these instruments. NOTE R -- SEGMENT INFORMATION AND OTHER The Company's operations were primarily concentrated in the natural gas storage segment after the acquisition of FRGC in June 1995 and the crude oil and natural gas exploration and production segment prior to the substantial disposition of the related assets during the fourth quarter of 1994. Operating profit for each segment includes total revenues (inclusive of gain on sale of property, plant and equipment of $12.5 million in 1994) less operating expenses and excludes general and administrative expenses, interest and debt expense and income taxes. 44 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE R -- SEGMENT INFORMATION AND OTHER (CONTINUED) The following table presents information relating to the Company's business segments included in its Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993:
1995 1994 1993 --------- --------- --------- Segment Revenues: Crude oil and natural gas exploration and production......................... $ 433 $ 41,849 $ 35,174 Natural gas storage.......................................................... 6,317 -- -- Investment income and other.................................................. 4,768 1,674 766 --------- --------- --------- Total...................................................................... $ 11,518 $ 43,523 $ 35,940 --------- --------- --------- --------- --------- --------- Segment Operating Profit: Crude oil and natural gas exploration and production......................... $ 360 $ 17,130 $ 9,681 Natural gas storage.......................................................... 4,123 -- -- --------- --------- --------- Operating profit............................................................. 4,483 17,130 9,681 Corporate and general and administrative expense, net of investment income and other revenues.......................................................... 135 (7,091) (4,440) Interest and debt expense.................................................... (2,252) (2,773) (3,575) --------- --------- --------- $ 2,366 $ 7,266 $ 1,666 --------- --------- --------- --------- --------- ---------
The identifiable assets of the Company, by segment, at December 31, 1995 and 1994 are as follows:
1995 1994 ----------- --------- Crude oil and natural gas exploration and production........................... $ 2,522 $ 6,552 Natural gas storage............................................................ 93,417 -- Corporate and other............................................................ 77,506 85,388 ----------- --------- Total........................................................................ $ 173,445 $ 91,940 ----------- --------- ----------- ---------
Depreciation and amortization expense and capital expenditure information for each segment is as follows:
YEAR ENDED DECEMBER 31 ------------------------------- 1995 1994 1993 --------- --------- --------- Depreciation and Amortization Expense: Crude oil and natural gas exploration and production................ $ 6 $ 10,612 $ 12,199 Natural gas storage................................................. 1,495 -- -- Corporate and other................................................. 268 3,608 387 --------- --------- --------- Total............................................................. $ 1,769 $ 14,220 $ 12,586 --------- --------- --------- --------- --------- ---------
YEAR ENDED DECEMBER 31 ------------------------------- 1995 1994 1993 --------- --------- --------- Capital Expenditures: Crude oil and natural gas exploration and production................ $ 1,499 $ 14,111 $ 9,075 Natural gas storage................................................. 78,509 -- -- Corporate and other................................................. 133 456 847 --------- --------- --------- Total............................................................. $ 80,141 $ 14,567 $ 9,922 --------- --------- --------- --------- --------- ---------
45 CRYSTAL OIL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED DECEMBER 31, 1995 NOTE R -- SEGMENT INFORMATION AND OTHER (CONTINUED) During 1995, the Company's operating revenues were primarily generated from the operation of the gas storage facility and specifically from the 15-year contracts, which expire in 2005, providing for firm capacity to twelve customers. The Company had one customer which accounted for $1.2 million (10%) of total revenue in 1995. In respect to the crude oil and natural gas production activities, the Company had one purchaser of natural gas production which accounted for $10.6 million (24%) and $12.6 million (35%) of total revenue in 1994 and 1993, respectively, and one purchaser of crude oil production which accounted for approximately $10.5 million (24%) and $13.3 million (37%) of total revenues in 1994 and 1993, respectively. There are no other customers to whom sales represent more than 10% of total revenues. 46 SUPPLEMENTAL INFORMATION (UNAUDITED) Supplemental information includes crude oil and natural gas reserve information pertaining to the Company's crude oil and natural gas exploration and production operations required by Statement No. 69 of the Financial Accounting Standards Board entitled "Disclosures About Oil and Gas Producing Activities". RESERVE INFORMATION The following tables present certain information regarding the Company's proved reserves, all of which are located in the United States. The Company engaged the independent engineering firm of Harlan Consulting to report on the crude oil and natural gas reserves at December 31, 1993. An independent review of the reserves was not obtained at December 31, 1995 and 1994. At December 31, 1995, the reserves were derived from the Company's participation in the drilling activities under a prospect development program. At December 31, 1994, the reserves related to the Company's interest in one South Texas field and its interest, through a subsidiary, in its four partnerships. All of such reserves have been sold during the first quarter of 1995. The proved crude oil and natural gas reserves were estimated in all periods generally utilizing prices and costs then in effect. Actual future net cash flows will be affected by actual production, supply and demand for crude oil and natural gas, curtailments or increases in consumption by natural gas purchasers and changes in governmental regulations or taxation. As required, the prices used in preparing the following tables are those in effect at the respective year ends presented, which may vary from prices subsequently received due to seasonal fluctuations or changes in the industry except to extent prices are fixed and determinable from existing contracts or hedging arrangements. The timing of future cash flows from proved reserves, and thus their present value, is affected by the timing of the incurrence of expenses in connection with their development. In estimating future net cash flows and their present values, estimates were made about the Company's development drilling activities. NET PROVED CRUDE OIL AND NATURAL GAS RESERVES The proved developed and undeveloped crude oil and natural gas reserves, all of which are located in the United States, are summarized below:
DECEMBER 31, ----------------------------------------------------------------------- 1995 1994 1993 ---------------------- ----------------------- ---------------------- OIL GAS OIL GAS OIL GAS ----------- --------- ---------- ----------- ---------- ---------- (BARRELS) (MCF) (BARRELS) (MCF) (BARRELS) (MCF) Proved developed and undeveloped reserves: Beginning of period.................... 18,947 799,073 6,098,536 73,162,203 6,856,812 58,928,720 Revisions of previous estimates........ -- -- 44,346 247,655 95,244 20,325,563 Improved recovery (secondary).......... -- -- -- -- -- -- Purchases of minerals in place......... -- -- -- -- -- -- Extensions, discoveries, and other additions............................. 122,084 1,065,075 -- -- 311,060 1,834,187 Production............................. (2,141) (7,592) (968,524) (7,349,131) (1,106,192) (7,550,909) Sales of minerals in place............. (18,947) (799,073) (5,155,411) (65,261,654) (58,388) (375,358) ----------- --------- ---------- ----------- ---------- ---------- End of period.......................... 119,943 1,057,483 18,947 799,073 6,098,536 73,162,203 ----------- --------- ---------- ----------- ---------- ---------- ----------- --------- ---------- ----------- ---------- ---------- Proved developed reserves: Beginning of period.................... 18,947 799,073 4,857,749 51,904,640 5,639,268 55,295,935 ----------- --------- ---------- ----------- ---------- ---------- ----------- --------- ---------- ----------- ---------- ---------- End of period.......................... 77,292 632,570 18,947 799,073 4,847,749 51,904,640 ----------- --------- ---------- ----------- ---------- ---------- ----------- --------- ---------- ----------- ---------- ----------
47 ESTIMATED STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS The estimated standardized measure of discounted future net cash flows and changes therein relating to proved crude oil and natural gas reserves are summarized below:
DECEMBER 31 ---------------------------------- 1995 1994 1993 --------- --------- ------------ (IN THOUSANDS) Future cash inflows............................................................ $ 5,386 $ 1,298 $ 260,907 Future production costs........................................................ (552) (663) (79,588) Future development costs....................................................... (131) -- (20,464) --------- --------- ------------ Future net cash flow, before income tax expense (1)(2)......................... 4,703 635 160,855 Annual discount of estimated future net cash flow (3).......................... (908) (241) (64,590) --------- --------- ------------ Present value of future net cash flow before income taxes (4).................. 3,795 394 96,265 Future income tax expense discounted at 10% (5)................................ -- -- -- --------- --------- ------------ Standardized measure of discounted future net cash flow (3).................... $ 3,795 $ 394 $ 96,265 --------- --------- ------------ --------- --------- ------------ Costs relating to crude oil and natural gas activities, net (6)................ $ 1,938 $ 1,892 $ 78,483 --------- --------- ------------ --------- --------- ------------
- ------------------------ (1) In computing future net cash flow, crude oil and natural gas prices were based on year-end prices and consider increases or decreases to the extent they are fixed and determinable from existing contracts. No deductions have been made for general corporate overhead or any other indirect costs. (2) Includes future net cash flow attributable to proved developed non-producing properties of $1.3 million, $11 thousand and $23.2 million respectively, which is net of future development costs of $5.1 million in 1993. The future development costs are not significant in 1995 and 1994. (3) The annual discount of estimated future net cash flow is defined for use herein as future net cash flow, before income tax expense, discounted at 10% per year over the expected period of realization. Standardized measure of discounted future net cash flows, as used herein, should not be construed as fair market value, since no consideration has been given to many factors which influence the prices at which petroleum products are traded, such as allowance for return on the investment and normal risks incident to the crude oil and natural gas business. (4) Includes the present value of future net cash flow before income taxes attributable to proved developed non-producing properties of $1.1 million, $7 thousand and $13.7 million, respectively. (5) The future income tax expense varies primarily from the amount computed by applying statutory rates because of the benefits derived from the utilization of net operating loss carryforwards and other tax benefits available for tax purposes. Undiscounted future income taxes were none in 1995, 1994 and 1993. (6) At December 31, 1995, includes approximately $395 thousand relating to investment in a South Louisiana field and approximately $1.6 million relating to work in progress in an exploration venture with two partners, for which, at current, no future revenues are estimated until completion of each exploratory well. 48 The following are the principal sources of change in the standardized measure of discounted future net cash flows:
DECEMBER 31 --------------------------------- 1995 1994 1993 --------- ---------- ---------- (IN THOUSANDS) Balance at beginning of year.................................................. $ 394 $ 96,265 $ 99,602 Sales and transfers of crude oil and natural gas produced, net of production costs........................................................................ (40) (17,063) (21,831) Revisions for net change in price and production costs........................ -- (407) (12,538) Revisions of previous quantity estimates...................................... -- 450 20,799 Estimated future development costs and other.................................. -- (10,416) (3,376) Sales of minerals in place.................................................... (394) (78,061) (630) Extensions, discoveries and improved recovery, less related costs............. 3,835 -- 4,279 Purchases of minerals in place................................................ -- -- -- Net change in income taxes, net of discount................................... -- -- -- Accretion of discount......................................................... -- 9,626 9,960 --------- ---------- ---------- Balance at end of year........................................................ $ 3,795 $ 394 $ 96,265 --------- ---------- ---------- --------- ---------- ----------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required under Item 10 is incorporated by reference to information contained in the definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders to be held in 1996. ITEM 11. EXECUTIVE COMPENSATION The information required under Item 11 is incorporated by reference to information contained in the definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders to be held in 1996. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required under Item 12 is incorporated by reference to information contained in the definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders to be held in 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required under Item 13 is incorporated by reference to information contained in the definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders to be held in 1996. 49 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE ----- (a) 1. Financial Statements Crystal Oil Company and Subsidiaries: Report of Independent Certified Public Accountants for each year of the three years in the period ended December 31, 1995............................................................. 20 Consolidated Balance Sheets as of December 31, 1995 and 1994................................ 21 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1995.......................................................................... 22 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1995.................................................................... 23 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1995.......................................................................... 24 Notes to Consolidated Financial Statements for each of the three years in the period ended December 31, 1995.......................................................................... 25 Supplemental Information (Unaudited)........................................................ 47 Financial Statement Schedules for each of the three years in the period ended December 31, 1995 2. Schedule II -- Valuation and qualifying accounts and reserves............................... 53 (All other schedules are omitted as the required information is inappropriate or presented in the Consolidated Financial Statements or related footnotes.)
50 3. Exhibits 2.1 Purchase and Sale Agreement dated November 6, 1994, between Crystal Oil Company as Seller and Apache Corporation as Buyer (Reference is made to Report of Form 10-Q filed by the Company for the period ended September 30, 1994). 3.1 Amended and Restated Articles of Incorporation of the Company, as amended. (Reference is made to Report on Form 10-K filed by the Company for the period ended December 31, 1993). 3.2 By-laws of the Company, as amended through January 29, 1988 (Reference is made to Report on Form 10-K filed by the Company for the period ended December 31, 1987). 4.1 Credit Agreement dated March 31, 1995, (the "Credit Agreement"), between the Company and Bankers Trust Company, Morgan Guaranty Trust Company of New York and Texas Commerce Bank, National Association (Reference is made to Report on Form 10-Q filed by the Company for the period ended March 31, 1995). * 4.2 Trust Agreement dated November 21, 1995, between Hattiesburg Gas Storage Company as Seller, Hattiesburg Industrial Gas Sales Company as Seller and Servicer and Wilmington Trust Company as Owner Trustee. * 4.3 Indenture dated November 21, 1995, between Hattiesburg Gas Storage Company and Chemical Bank as Indenture Trustee. 4.4 Article IV of the Amended and Restated Articles of Incorporation of the Company (Reference is made to Exhibit 3.1 contained herein). 4.5 Amended and Restated Warrant Agreement dated as of January 1, 1987, between the Registrant and RepublicBank Dallas, National Association relating to the $.075 Warrants (Reference is made to Exhibit 2(c) to the Report on Form 8 filed by the Company on April 6, 1987). 4.6 Amended and Restated Warrant Agreement dated as of January 1, 1987, between the Registrant and RepublicBank Dallas, National Association relating to the $.10 Warrants (Reference is made to Exhibit 2(d) to the Report on Form 8 filed by the Company on April 6, 1987). 4.7 Amended and Restated Warrant Agreement dated as of January 1, 1987, between the Registrant and RepublicBank Dallas, National Association relating to the $.125 Warrants (Reference is made to Exhibit 2(e) to the Report on Form 8 filed by the Company on April 6, 1987). 4.8 Amended and Restated Warrant Agreement dated as of January 1, 1987, between the Registrant and RepublicBank Dallas, National Association relating to the $.15 Warrants (Reference is made to Exhibit 2(f) to the Report on Form 8 filed by the Company on April 6, 1987). 4.9 Amended and Restated Warrant Agreement dated as of January 1, 1987, between the Registrant and RepublicBank Dallas, National Association relating to the $.25 Warrants (Reference is made to Exhibit 2(g) to the Report on Form 8 filed by the Company on April 6, 1987). 10.1 Stock Purchase Agreement dated May 2, 1995, between the Company as Purchaser and First Reserve Energy Assets Fund, Limited Partnership and First Reserves Fund V, Limited Partnership as Sellers. (Reference is made to Report of Form 10-Q filed by the Company for the period ended March 31, 1995). * 10.2 Sale and Servicing Agreement dated November 21, 1995, between Hattiesburg Gas Storage Company as Seller, Hattiesburg Industrial Gas Sales Company as Seller and Servicer and Wilmington Trust Company as Owner Trustee.
51 * 10.3 First Amendment to the Sales and Servicing Agreement dated as of January 31, 1996, between Hattiesburg Gas Storage Company as Seller, Hattiesburg Industrial Gas Sales Company as Seller and Servicer and Wilmington Trust Company as Owner Trustee. 10.4 Form of Indemnity Agreement between the Company and each of its directors and executive officers (Reference is made to Report on Form 10-K filed by the Company for the period ended December 31, 1989). ( a)10.5 Employment Agreement dated August 22, 1989, as amended between the Company and J. N. Averett, Jr. (Reference is made to Report on Form 10-K filed by the Company for the period ended December 31, 1989). ( a)10.6 Crystal Oil Company Employee Stock Option Plan and Form of Option Agreement dated March 23, 1992, as amended through May 27, 1993, between the Company and its executives. (Reference is made to Report of Form 10-K filed by the Company for the period ended December 31, 1993). ( a)10.7 Crystal Oil Company Employee Stock Ownership Plan dated January 1, 1993, between the Company and its employees (Reference is made to Report on Form 10-K filed by the Company for the period ended December 31, 1992). ( a)10.8 First Amendment to the Crystal Oil Company Employee Stock Ownership Plan dated July 21, 1993. (Reference is made to Report on Form 10-K filed by the Company for the period ended December 31, 1993). ( a)10.9 Form of Executive Compensation and Severance Agreement dated November 10, 1994, between the Company and the Executives. (Reference is made to Report on Form 10-Q filed by the Company for the period ended September 30, 1994). * 11 Computation of Earnings Per Common Share. * 22 Subsidiaries of the Company. * 23 Consent of Independent Auditors dated March 20, 1996. 27 Financial Data Schedule.
(b) Reports on Form 8-K None - ------------------------ (a) Management Incentive Compensation Plans * Filed herein 52 SCHEDULE II CRYSTAL OIL COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT ALLOWANCE FOR DOUBTFUL BEGINNING COSTS AND OTHER END OF TRADE ACCOUNTS RECEIVABLE OF PERIOD EXPENSES ACCOUNTS(B) DEDUCTIONS(A) PERIOD - ------------------------------------------------ ----------- ------------- ------------- ------------- ----------- Year ended December 31, 1995.......................................... $ 231 $ 48 $ -- $ -- $ 279 ----------- ----- ------ ------------- ----- ----------- ----- ------ ------------- ----- 1994.......................................... $ 76 $ 109 $ 54 $ 8 $ 231 ----------- ----- ------ ------------- ----- ----------- ----- ------ ------------- ----- 1993.......................................... $ 41 $ 50 $ -- $ 15 $ 76 ----------- ----- ------ ------------- ----- ----------- ----- ------ ------------- ----- IMPAIRMENT ALLOWANCE ON UNDEVELOPED LEASES - ------------------------------------------------ Year ended December 31, 1995.......................................... $ 307 $ 20 $ -- $ 327 $ -- ----------- ----- ------ ------------- ----- ----------- ----- ------ ------------- ----- 1994.......................................... $ 406 $ 795 $ (227) $ 667 $ 307 ----------- ----- ------ ------------- ----- ----------- ----- ------ ------------- ----- 1993.......................................... $ 1,096 $ 984 $ -- $ 1,674 $ 406 ----------- ----- ------ ------------- ----- ----------- ----- ------ ------------- -----
- ------------------------ (A) Includes uncollectible trade accounts receivable and expired leases charged-off during the year against the allowance. (B) Includes reduction to impairment for leases sold during 1994. 53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 15th day of March 1996. CRYSTAL OIL COMPANY By: /s/ J. N. AVERETT, JR. ----------------------------------- J. N. Averett, Jr. PRESIDENT, CHIEF OPERATING OFFICER AND DIRECTOR (PRINCIPAL EXECUTIVE OFFICER) By: /s/ J. A. BALLEW ----------------------------------- J. A. Ballew SENIOR VICE PRESIDENT, TREASURER, AND CHIEF FINANCIAL OFFICER By: /s/ PAUL E. HOLMES ----------------------------------- Paul E. Holmes VICE PRESIDENT/CONTROLLER (PRINCIPAL ACCOUNTING OFFICER) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
SIGNATURE CAPACITY DATE - ------------------------------------------------------ ------------------------------------- ------------------ /s/ J. N. AVERETT, JR. ------------------------------------------- Director March 15, 1996 J. N. Averett, Jr. /s/ GEORGE P. GIARD, JR. ------------------------------------------- Director March 15, 1996 George P. Giard, Jr. /s/ GARY S. GLADSTEIN ------------------------------------------- Director March 15, 1996 Gary S. Gladstein /s/ ROBERT HODES ------------------------------------------- Director March 15, 1996 Robert Hodes /s/ DONALD G. HOUSLEY ------------------------------------------- Director March 15, 1996 Donald G. Housley /s/ LIEF ROSENBLATT ------------------------------------------- Director March 15, 1996 Lief Rosenblatt
54 EX-4.2 2 EXHIBIT 4.2 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TRUST AGREEMENT AMONG HATTIESBURG GAS STORAGE COMPANY SELLER HATTIESBURG INDUSTRIAL GAS SALES COMPANY SELLER AND SERVICER AND WILMINGTON TRUST COMPANY OWNER TRUSTEE DATED AS OF NOVEMBER 21, 1995 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE ARTICLE I DEFINITIONS . . . . . . . . . . . . . 1 SECTION 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II ORGANIZATION. . . . . . . . . . . . . 1 SECTION 2.1 Name . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2.2 Office . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2.3 Purposes and Powers. . . . . . . . . . . . . . . . . . 1 SECTION 2.4 Appointment of Owner Trustee . . . . . . . . . . . . . 2 SECTION 2.5 Initial Capital Contribution of Owner Trust Estate . . . . . . . . . . . . . . . . . . . . . 2 SECTION 2.6 Declaration of Trust . . . . . . . . . . . . . . . . . 2 SECTION 2.7 Liability of the Residual Certificateholder and the Investor Certificateholders. . . . . . . . . . 3 SECTION 2.8 Title to Trust Property. . . . . . . . . . . . . . . . 3 SECTION 2.9 Situs of Trust . . . . . . . . . . . . . . . . . . . . 3 SECTION 2.10 Representations and Warranties of Servicer and Seller. . . . . . . . . . . . . . . . . . 3 SECTION 2.11 Tax Treatment. . . . . . . . . . . . . . . . . . . . . 3 ARTICLE III THE INVESTOR CERTIFICATES. . . . . . . . . . 4 SECTION 3.1 Investor Certificates. . . . . . . . . . . . . . . . . 4 SECTION 3.2 Form of the Investor Certificates. . . . . . . . . . . 4 SECTION 3.3 Execution, Authentication and Delivery . . . . . . . . 4 SECTION 3.4 Registration; Registration of Transfer and Exchange of Investor Certificates. . . . . . . . . 5 SECTION 3.5 Investor Certificate Transfer Restrictions . . . . . . 6 SECTION 3.6 Mutilated, Destroyed, Lost or Stolen Investor Certificates. . . . . . . . . . . . . . . . . 7 SECTION 3.7 Persons Deemed Investor Certificateholders . . . . . . 8 SECTION 3.8 Access to List of Investor Certificateholders' Names and Addresses. . . . . . . . . . . . . . . . . . 8 SECTION 3.9 Maintenance of New York Office . . . . . . . . . . . . 8 SECTION 3.10 Distributions. . . . . . . . . . . . . . . . . . . . . 9 SECTION 3.11 Investor Certificates Held by HGSC . . . . . . . . . . 9 SECTION 3.12 Servicer or HGSC as Investor Certificateholder. . . . . . . . . . . . . . . . . . . 10 ARTICLE IV THE RESIDUAL CERTIFICATE. . . . . . . . . . 10 SECTION 4.1 Residual Certificate . . . . . . . . . . . . . . . . . 10 SECTION 4.2 Form of the Residual Certificate . . . . . . . . . . . 10 SECTION 4.3 Execution, Authentication and Delivery . . . . . . . . 11 SECTION 4.4 No Transfer. . . . . . . . . . . . . . . . . . . . . . 11 -i- PAGE ARTICLE V ACCOUNTS; DISTRIBUTIONS . . . . . . . . . . 11 SECTION 5.1 Establishment of Accounts. . . . . . . . . . . . . . . 11 SECTION 5.2 Distributions. . . . . . . . . . . . . . . . . . . . . 12 SECTION 5.3 Method of Payment. . . . . . . . . . . . . . . . . . . 17 SECTION 5.4 Accounting and Reports to Certificateholders, the Internal Revenue Service and Others. . . . . . . . 17 SECTION 5.5 Signature on Returns; Tax Matters Partner. . . . . . . 17 ARTICLE VI CAPITAL ACCOUNTS; ALLOCATIONS. . . . . . . . . 17 SECTION 6.1 Capital Accounts . . . . . . . . . . . . . . . . . . . 17 SECTION 6.2 Allocations of Income and Losses . . . . . . . . . . . 18 ARTICLE VII ACTIONS BY THE OWNER TRUSTEE. . . . . . . . . 18 SECTION 7.1 Action by Investor Certificateholders with Respect to Certain Matters. . . . . . . . . . . . 18 SECTION 7.2 Action by Investor Certificateholders with Respect to Bankruptcy . . . . . . . . . . . . . . 19 SECTION 7.3 Restrictions on Certificateholders' Power. . . . . . . 19 ARTICLE VIII COVENANTS OF THE SERVICER AND OTHERS. . . . . . . 19 SECTION 8.1 Covenants of the Servicer and Others . . . . . . . . . 19 SECTION 8.2 Purchase of Investor Certificates. . . . . . . . . . . 19 ARTICLE IX THE OWNER TRUSTEE. . . . . . . . . . . . 19 SECTION 9.1 Duties of the Owner Trustee. . . . . . . . . . . . . . 19 SECTION 9.2 Rights of the Owner Trustee. . . . . . . . . . . . . . 20 SECTION 9.3 Acceptance of Trusts and Duties. . . . . . . . . . . . 21 SECTION 9.4 Action upon Instruction by Investor Certificateholders . . . . . . . . . . . . . . . . . . 22 SECTION 9.5 Furnishing of Documents. . . . . . . . . . . . . . . . 23 SECTION 9.6 Representations and Warranties of the Owner Trustee. . . . . . . . . . . . . . . . . . . 23 SECTION 9.7 Reliance; Advice of Counsel. . . . . . . . . . . . . . 24 SECTION 9.8 Owner Trustee May Own Investor Certificates. . . . . . 24 SECTION 9.9 Compensation and Indemnity . . . . . . . . . . . . . . 24 SECTION 9.10 Replacement of the Owner Trustee . . . . . . . . . . . 25 SECTION 9.11 Merger or Consolidation of the Owner Trustee . . . . . 26 SECTION 9.12 Appointment of Co-Trustee or Separate Trustee. . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 9.13 Eligibility Requirements for the Owner Trustee. . . . . . . . . . . . . . . . . . . 27 -ii- PAGE ARTICLE X TERMINATION OF TRUST AGREEMENT . . . . . . . . 28 SECTION 10.1 Termination of Trust Agreement . . . . . . . . . . . . 28 SECTION 10.2 Dissolution upon Bankruptcy of the Residual Certificateholder. . . . . . . . . . . . . . . . . . . 29 ARTICLE XI AMENDMENTS AND WAIVERS . . . . . . . . . . 30 SECTION 11.1 Purpose of Amendments and Waivers. . . . . . . . . . . 30 SECTION 11.2 Form of Amendments or Waivers. . . . . . . . . . . . . 31 ARTICLE XII MISCELLANEOUS. . . . . . . . . . . . . 31 SECTION 12.1 No Legal Title to Owner Trust Estate . . . . . . . . . 31 SECTION 12.2 Limitations on Rights of Others. . . . . . . . . . . . 31 SECTION 12.3 Notices. . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 12.4 Severability . . . . . . . . . . . . . . . . . . . . . 32 SECTION 12.5 Counterparts . . . . . . . . . . . . . . . . . . . . . 32 SECTION 12.6 Successors and Assigns . . . . . . . . . . . . . . . . 32 SECTION 12.7 Confidentiality. . . . . . . . . . . . . . . . . . . . 32 SECTION 12.8 No Recourse. . . . . . . . . . . . . . . . . . . . . . 33 SECTION 12.9 Headings . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 12.10 Collateral Sharing and Security Agreement. . . . . . . 33 SECTION 12.11 Governing Law. . . . . . . . . . . . . . . . . . . . . 34 -iii- SCHEDULES Schedule 1 Schedule of Monthly Return Of Capital on the Certificates Schedule 2 Schedule of Payments and Distributions in Respect of the Residual Certificate Schedule 3 Closing Conditions EXHIBITS Exhibit A Form of Investor Certificate Exhibit B Form of Residual Certificate Exhibit C Form of Certificate of Trust Exhibit D Form of Undertaking Letter Exhibit E Form of Servicer's Certificate Exhibit F Operation of Trust -iv- TRUST AGREEMENT, dated as of November 21, 1995, by and among Hattiesburg Gas Storage Company, a Delaware general partnership ("HGSC"), Hattiesburg Industrial Gas Sales Company, a Delaware corporation (the "Servicer" and together with HGSC, the "Seller"), and Wilmington Trust Company, as owner trustee (the "Owner Trustee"). The Servicer, the Seller and the Owner Trustee hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.1 DEFINITIONS. Certain capitalized terms used in this Agreement shall have the respective meanings assigned to them in Part I of APPENDIX A to the Sale and Servicing Agreement. All references herein to "the Agreement" or "this Agreement" are to this Trust Agreement as it may be amended and supplemented from time to time, the Exhibits hereto and the capitalized terms used herein which are defined in such APPENDIX A, and all references herein to Articles, Sections and subsections are to Articles, Sections and subsections of this Agreement unless otherwise specified. The rules of construction set forth in Part II of such APPENDIX A shall be applicable to this Agreement. ARTICLE II ORGANIZATION SECTION 2.1 NAME. The Trust created hereby shall be known as the "FRGC Owner Trust" in which name the Owner Trustee may conduct the business of the Trust, make and execute contracts and other instruments on behalf of the Trust and sue and be sued on behalf of the Trust. SECTION 2.2 OFFICE. The office of the Trust shall be in care of the Owner Trustee at the Corporate Trust Office or at such other address in Delaware as the Owner Trustee may designate by written notice to the Certificateholders and the Servicer. SECTION 2.3 PURPOSES AND POWERS. The purpose of the Trust is to engage in the following activities: (i) to acquire, manage and hold the Purchased Contract Receivables, the other Purchased Property and the other parts of the Owner Trust Estate; (ii) to issue two classes of certificates, designated as the "Investor Certificates" and the "Residual Certificate" each such class to have the rights and restrictions provided for herein; (iii) to make payments or distributions on the Certificates to the Certificateholders, to make deposits into and withdrawals from the Investment Account, the Collection Account and other accounts established pursuant to the Basic Trust Documents and to pay the organizational, start-up and transactional expenses of the Trust; (iv) to enter into and perform its obligations and exercise its rights under the Basic Trust Documents to which it is to be a party; (v) to engage in those activities, including entering into agreements, that are necessary, suitable, desirable or convenient to accomplish the foregoing or are incidental thereto or connected therewith; and (vi) subject to compliance with the Basic Trust Documents, to engage in such other activities as may be required in connection with conservation of the Owner Trust Estate and the making of payments or distributions to the Certificateholders. The Trust shall not engage in any activity other than in connection with the foregoing or other than as required or authorized by the terms of this Agreement or the Basic Trust Documents. As of the date hereof, the Trust owns no real property in the State of Louisiana. SECTION 2.4 APPOINTMENT OF OWNER TRUSTEE. HGSC hereby appoints the Owner Trustee as the trustee of the Trust effective as of the date hereof, to have all the rights, powers and duties set forth herein. SECTION 2.5 INITIAL CAPITAL CONTRIBUTION OF OWNER TRUST ESTATE. HGSC hereby sells, assigns, transfers, conveys and sets over to the Owner Trustee, as of the date hereof, the sum of $1. The Owner Trustee hereby acknowledges receipt in trust from HGSC, as of the date hereof, of the foregoing contribution, which shall constitute the initial Owner Trust Estate and shall be deposited in the Collection Account. Prior to the issuance of the Certificates to the Investor Certificateholders, HGSC shall be the sole beneficiary of the Trust. HGSC shall pay organizational expenses of the Trust as they may arise or shall, upon the request of the Owner Trustee, promptly reimburse the Owner Trustee for any such expenses paid by it. SECTION 2.6 DECLARATION OF TRUST. The Owner Trustee hereby declares that it shall hold the Owner Trust Estate in trust upon and subject to the conditions and obligations set forth herein and in the Sale and Servicing Agreement for the use and benefit of the Certificateholders. It is the intention of the parties hereto that the Trust constitute a business trust under the Business Trust Statute, that this Agreement constitute the governing instrument of such business trust and that the Certificates represent the equity interests therein. The rights of the Certificateholders shall be determined as set forth herein and in the Business Trust Statute and the relationship between the parties hereto created by this Agreement shall not constitute indebtedness for any purpose. It is the intention of the parties hereto that, solely for purposes of federal income taxes, state and local income and franchise taxes, and any other taxes imposed upon, measured by or based upon gross or net income, the Trust shall be treated as a partnership. The parties agree that, unless otherwise required by appropriate tax authorities, the Trust shall file or cause to be filed annual or other -2- necessary returns, reports and other forms consistent with the characterization of the Trust as a partnership for such tax purposes. Effective as of the date hereof, the Owner Trustee shall have all rights, powers and duties set forth in this Agreement, the Sale and Servicing Agreement and the Business Trust Statute with respect to accomplishing the purposes of the Trust. SECTION 2.7 LIABILITY OF THE RESIDUAL CERTIFICATEHOLDER AND THE INVESTOR CERTIFICATEHOLDERS. (a) The Residual Certificateholder shall be liable directly to and shall indemnify the Trust and any Investor Certificateholder for all losses, claims, damages, liabilities and expenses (collectively, "Losses") incurred by the Trust or such Investor Certificateholder to the extent that the Residual Certificateholder would be liable if the Trust were a partnership under the Delaware Revised Uniform Limited Partnership Act in which the Residual Certificateholder were a general partner; PROVIDED, HOWEVER, that the Residual Certificateholder shall not be liable for any Losses incurred by an Investor Certificateholder as a result of any default by an Obligor under the Purchased Contract Receivables. (b) No Investor Certificateholder, other than the Residual Certificateholder to the extent set forth in subsection 2.7(a), shall have any personal liability for any liability or obligation of the Trust. SECTION 2.8 TITLE TO TRUST PROPERTY. Legal title to all the Owner Trust Estate shall be vested at all times in the Trust as a separate legal entity except where applicable law in any jurisdiction requires title to any part of the Owner Trust Estate to be vested in a trustee or trustees, in which case title shall be deemed to be vested in the Owner Trustee, a co-trustee or a separate trustee, as the case may be. SECTION 2.9 SITUS OF TRUST. The Trust shall be located and administered in the State of Delaware. The Trust shall not have any employees in any state other than Delaware; PROVIDED, HOWEVER, that nothing herein shall restrict or prohibit the Owner Trustee from having employees within or without the State of Delaware. The only office of the Trust shall be the Corporate Trust Office in Delaware. SECTION 2.10 REPRESENTATIONS AND WARRANTIES OF SERVICER AND SELLER. Each of the Seller and the Servicer (in its capacity as Servicer and Operator) hereby represents and warrants to the Owner Trustee, for the benefit of the Owner Trustee and the Investor Certificateholders, that (i) each of the representations and warranties of the Seller and the Servicer contained in Sections 3.1 and 3.2 of the Sale and Servicing Agreement are true and correct as of the date hereof and (ii) after giving effect to the closing of the transactions contemplated by the Basic Documents, the Consolidated Net Worth of HGSC will be at least equal to the Initial Required Net Worth. SECTION 2.11 TAX TREATMENT. HGSC and the Owner Trustee, by entering into this Agreement, and the Investor Certificateholders, by acquiring any Investor Certificate, (i) express their intention that the Certificates qualify under -3- applicable tax law as partnership interests in a partnership which holds the Owner Trust Estate for their benefit, and (ii) unless otherwise required by appropriate taxing authorities, agree to treat the Certificates as partnership interests in such a partnership for the purposes of federal income taxes, state and local income and franchise taxes, and any other taxes imposed upon, measured by or based upon gross or net income. ARTICLE III THE INVESTOR CERTIFICATES SECTION 3.1 INVESTOR CERTIFICATES. The Investor Certificates shall represent fractional undivided beneficial interests in the Trust, including the right to receive, subject to the terms and conditions set forth herein, distributions to be made to the Investor Certificateholders as set forth in Article V hereof. SECTION 3.2 FORM OF THE INVESTOR CERTIFICATES. (a) The Investor Certificates shall be substantially in the form set forth in EXHIBIT A and shall be issued in minimum denominations of $1,000,000, except for one Investor Certificate which may be issued to HGSC in any denomination. The Investor Certificates shall be executed on behalf of the Trust by manual or facsimile signature of a Responsible Officer of the Owner Trustee. Investor Certificates bearing the manual or facsimile signatures of individuals who were, at the time when such signatures shall have been affixed, authorized to sign on behalf of the Trust, shall be, when authenticated pursuant to Section 3.3, validly issued and entitled to the benefits of this Agreement, notwithstanding that such individuals or any of them shall have ceased to be so authorized prior to the authentication and delivery of such Investor Certificates or did not hold such offices at the date of authentication and delivery of such Investor Certificates. (b) The Investor Certificates shall be issued in definitive, fully- registered form only. The Investor Certificates shall be typewritten, printed, lithographed or engraved or produced by any combination of these methods (with or without steel engraved borders) all as determined by the officers executing such Investor Certificates, as evidenced by their execution of such Investor Certificates. (c) The terms of the Investor Certificates set forth in EXHIBIT A (including, without limitation, the legend set forth therein) shall form part of this Agreement. SECTION 3.3 EXECUTION, AUTHENTICATION AND DELIVERY. Concurrently with the sale of the Purchased Contract Receivables to the Trust pursuant to the Sale and Servicing Agreement, the Owner Trustee shall cause the Investor Certificates in an aggregate amount equal to the initial Investor Certificate Balance to be executed on behalf of the Trust, authenticated and delivered to the Initial Investors pursuant to the Certificate Purchase Agreement upon the written order of HGSC, signed by a duly authorized officer of the Servicer, as managing general partner of HGSC, without further action by HGSC, in authorized denominations. No Investor Certificate shall -4- entitle its holder to any benefit under this Agreement, or shall be valid for any purpose, unless there shall appear on such Investor Certificate a certificate of authentication substantially in the form set forth in EXHIBIT A executed by the Owner Trustee,by manual signature. Such authentication shall constitute conclusive evidence that such Investor Certificate shall have been duly authenticated and delivered hereunder. All Investor Certificates shall be dated the date of their authentication. SECTION 3.4 REGISTRATION; REGISTRATION OF TRANSFER AND EXCHANGE OF INVESTOR CERTIFICATES. (a) The Investor Certificate Registrar shall keep or cause to be kept, at the office or agency maintained pursuant to Section 3.9, an Investor Certificate Register in which, subject to such reasonable regulations as it may prescribe, the Owner Trustee shall provide for the registration of Investor Certificates and transfers and exchanges of Investor Certificates as provided herein; PROVIDED, HOWEVER, that no Investor Certificate may be subdivided upon registration of transfer or exchange such that the denomination of any resulting Investor Certificate would have been less than $1,000,000 if such Investor Certificate had been issued in the initial distribution of Investor Certificates. Wilmington Trust Company shall be the initial Investor Certificate Registrar. Upon any resignation of an Investor Certificate Registrar, the Owner Trustee shall promptly appoint a successor. (b) The Servicer shall have the right to inspect the Investor Certificate Register at all reasonable times and to obtain copies thereof for purposes of performing its obligations under the Sale and Servicing Agreement. (c) Upon surrender for registration of transfer of any Investor Certificate at the office or agency maintained pursuant to Section 3.9, the Owner Trustee shall, subject to compliance with any restrictions on transfer set forth in EXHIBIT A, execute on behalf of the Trust, authenticate and deliver, in the name of the designated transferee or transferees, one or more new Investor Certificates in authorized denominations of a like aggregate amount dated the date of authentication by the Owner Trustee. The Owner Trustee shall not be obligated to, and shall not, cause any transfer to be registered unless the restrictions on transfer set forth in EXHIBIT A have been complied with. In addition, if the Servicer shall have advised the Owner Trustee in writing that an Undertaking Letter shall be required with respect to any transfer, such registration of transfer shall not be effective unless the requirements of Section 3.5, with respect to the delivery of an Undertaking Letter, shall have been complied with. (d) At the option of an Investor Certificateholder, Investor Certificates may be exchanged for other Investor Certificates of authorized denominations of a like aggregate principal amount upon surrender of the Investor Certificates to be exchanged at the office or agency maintained pursuant to Section 3.9. Whenever any Investor Certificates are so surrendered for exchange, the Owner Trustee shall execute on behalf of the Trust, authenticate and deliver one or more Investor Certificates dated the date of authentication by the Owner Trustee. Such Investor Certificates shall be delivered to the Investor Certificateholder making the exchange. -5- (e) Every Investor Certificate presented or surrendered for registration of transfer or exchange shall be accompanied by a written instrument of transfer in form reasonably satisfactory to the Owner Trustee duly executed by the Investor Certificateholder or his attorney duly authorized in writing and such other documents and instruments as may be required by Section 3.5. Each Investor Certificate surrendered for registration of transfer or exchange shall be cancelled and subsequently destroyed or otherwise disposed of by the Owner Trustee in accordance with its customary practice. (f) No service charge shall be made for any registration of transfer or exchange of Investor Certificates, but the Owner Trustee may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer or exchange of Investor Certificates. SECTION 3.5 INVESTOR CERTIFICATE TRANSFER RESTRICTIONS. (a) The Investor Certificates may not be acquired by or for the account of (i) an employee benefit plan (as defined in Section 3(3) of ERISA) that is subject to the provisions of Title I of ERISA, (ii) a plan described in Section 4975(e)(1) of the Code or (iii) any entity whose underlying assets include plan assets by reason of a plan's investment in the entity (each, a "BENEFIT PLAN") unless the acquisition and holding of the Investor Certificates by such an entity does not constitute a non-exempt prohibited transaction within the meaning of ERISA and the Code. Any transferee of an Investor Certificateholder shall execute and deliver to the Owner Trustee an Undertaking Letter in the form set forth in EXHIBIT D. Transfers of Investor Certificates are also subject to the restrictions set forth in the legends contained in EXHIBIT A hereto. The Investor Certificates are also subject to the minimum denomination specified in Section 3.2(a). (b) None of the Investor Certificates shall be traded on an established securities market or issued in a transaction registered under the Securities Act of 1933, as amended. (c) No transfer of any Investor Certificate shall be effective and any such purported transfer shall not be recognized or approved by the Owner Trustee at a time when the Investor Certificates are readily tradeable on a secondary market, unless the Owner Trustee receives in connection with any such purported transfer an opinion of counsel reasonably acceptable to the Owner Trustee to the effect that such transfer will not cause the Trust to be treated as a publicly traded partnership. (d) No transfer of any Investor Certificate shall be effective and any such purported transfer shall not be recognized or approved by the Owner Trustee if the effect of such transfer would be to cause the Trust to be beneficially owned by more than 50 Persons. -6- SECTION 3.6 MUTILATED, DESTROYED, LOST OR STOLEN INVESTOR CERTIFICATES. (a) If (i) any mutilated Investor Certificate is surrendered to the Investor Certificate Registrar, or the Investor Certificate Registrar receives evidence to its satisfaction of the destruction, loss or theft of any Investor Certificate (PROVIDED, that an Institutional Investor that is an Investor Certificateholder, or the nominee of which is an Investor Certificateholder, may provide its own written evidence of such destruction, loss or theft and such written evidence shall be deemed satisfactory for such purpose), and (ii) there is delivered to the Investor Certificate Registrar, the Owner Trustee and the Trust such security or indemnity as may be required by them and is reasonably acceptable to the Servicer to hold each of them harmless (PROVIDED, that if the Investor Certificateholder is, or is a nominee for, an Institutional Investor with a claims-paying ability or long-term debt rating of at least investment grade or its equivalent, then an unsecured agreement of indemnity by such Institutional Investor shall be deemed satisfactory for such purpose), then, in the absence of notice to the Investor Certificate Registrar or the Owner Trustee that such Investor Certificate has been acquired by a bona fide purchaser, the Owner Trustee shall execute on behalf of the Trust and the Owner Trustee shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Investor Certificate, a replacement Investor Certificate in authorized denominations of a like amount; PROVIDED, HOWEVER, that if the final distribution with respect to any such destroyed, lost or stolen Investor Certificate, but not a mutilated Investor Certificate, shall have become or within seven days shall be required to be made, then instead of issuing a replacement Investor Certificate the Owner Trustee may make the final distribution with respect to such destroyed, lost or stolen Investor Certificate when so required to be made. (b) If, after the delivery of a replacement Investor Certificate or distribution in respect of a destroyed, lost or stolen Investor Certificate pursuant to subsection 3.6(a), a bona fide purchaser of the original Investor Certificate in lieu of which such replacement Investor Certificate was issued presents for payment such original Investor Certificate, the Owner Trustee shall be entitled to recover such replacement Investor Certificate (or such distribution) from the Person to whom it was delivered or any Person taking such replacement Investor Certificate from such Person to whom such replacement Investor Certificate was delivered or any assignee of such Person, except a bona fide purchaser, and shall be entitled to recover upon the security or indemnity provided therefor to the extent of any loss, damage, cost or expense incurred by the Owner Trustee in connection therewith. (c) In connection with the issuance of any replacement Investor Certificate under this Section 3.6, the Owner Trustee or HGSC may require the payment by such Investor Certificateholder of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto. (d) Any duplicate Investor Certificate issued pursuant to this Section 3.6 in replacement of any mutilated, destroyed, lost or stolen Investor Certificate shall constitute an original additional contractual obligation of the Trust, whether or not the mutilated, destroyed, lost or stolen Investor Certificate shall be found at any time or be enforced by anyone, and shall be entitled to all the benefits of this Agreement -7- equally and proportionately with any and all other Investor Certificates duly issued hereunder. (e) The provisions of this Section 3.6 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Investor Certificates. SECTION 3.7 PERSONS DEEMED INVESTOR CERTIFICATEHOLDERS. Prior to due presentation of an Investor Certificate for registration of transfer, the Owner Trustee or the Investor Certificate Registrar may treat the Person in whose name any Investor Certificate shall be registered in the Investor Certificate Register as the Investor Certificateholder of such Investor Certificate for the purpose of receiving distributions pursuant to Article V and for all other purposes whatsoever, and neither the Owner Trustee nor the Investor Certificate Registrar shall be bound by any notice to the contrary. SECTION 3.8 ACCESS TO LIST OF INVESTOR CERTIFICATEHOLDERS' NAMES AND ADDRESSES. (a) The Owner Trustee shall furnish or cause to be furnished to the Servicer, within 10 Business Days after registering any change in ownership of the Investor Certificates, a list, in such form as the Servicer may reasonably require, of the names and addresses of the Investor Certificateholders as of the most recent Record Date. (b) Within five Business Days after the receipt by the Investor Certificate Registrar of a written request by any Investor Certificateholder stating that such Investor Certificateholder desires to communicate with other Investor Certificateholders, the Owner Trustee shall provide such Investor Certificateholder with a copy of the most recent list of the names and addresses of the Investor Certificateholders as set forth in the Investor Certificate Registrar. (c) The Owner Trustee may provide information with respect to the name and addresses of the Investor Certificateholders and the Investor Certificate Balance held by them to the Collateral Trustee for purposes of the Collateral Sharing and Security Agreement. (d) Each Investor Certificateholder, by receiving and holding an Investor Certificate, shall be deemed to have agreed not to hold either the Servicer or the Owner Trustee accountable by reason of the disclosure of its name and address for purposes of this Agreement, regardless of the source from which such information was derived. SECTION 3.9 MAINTENANCE OF NEW YORK OFFICE. The Owner Trustee shall maintain in the Borough of Manhattan, the City of New York, an office or offices or agency or agencies where Investor Certificates may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Owner Trustee in respect of the Investor Certificates and the Basic Documents may be served. The Owner Trustee initially designates the offices of Harris Trust Company, 177 Water -8- Street, 4th Floor, New York, New York 10005, Attention: Reginald Aloissi, as its principal office for such purposes. The Owner Trustee shall give prompt written notice to the Servicer and to the Certificateholders of any change in the location of the Investor Certificate Register or any such office or agency. SECTION 3.10 DISTRIBUTIONS. The Paying Agent shall make distributions to Investor Certificateholders pursuant to Section 5.2 and shall report the amounts of such distributions to the Owner Trustee. Any Paying Agent shall have the revocable power to withdraw funds from the Collection Account for the purpose of making the distributions referred to above. The Owner Trustee may revoke such power and remove the Paying Agent if the Owner Trustee determines in its sole discretion that the Paying Agent shall have failed to perform its obligations under this Agreement in any material respect. The Paying Agent shall initially be Wilmington Trust Company. Any Paying Agent shall be permitted to resign as Paying Agent upon 30 days' written notice to the Owner Trustee. If Wilmington Trust Company shall no longer be the Paying Agent, the Owner Trustee shall appoint a successor to act as Paying Agent (which shall be a bank or trust company). The Owner Trustee shall cause such successor Paying Agent to execute and deliver to the Owner Trustee an instrument in which such successor Paying Agent shall agree with the Owner Trustee that as Paying Agent, such successor Paying Agent shall hold all sums, if any, held by it for distribution to the Investor Certificateholders in trust for the benefit of the Investor Certificateholders entitled thereto until such sums shall be paid to such Investor Certificateholders. The Paying Agent shall return all unclaimed funds to the Owner Trustee and upon removal of a Paying Agent such Paying Agent shall also return all funds in its possession to the Owner Trustee. The provisions of Sections 9.3, 9.6, 9.7, 9.8 and 9.9 shall apply to the Owner Trustee also in its role as Paying Agent, for so long as the Owner Trustee shall act as Paying Agent. SECTION 3.11 INVESTOR CERTIFICATES HELD BY HGSC. On and after the Closing Date, HGSC shall, except as provided below, maintain beneficial and record ownership of Investor Certificates representing not less than 20% of the Investor Certificate Balance; PROVIDED that such Investor Certificates may be transferred to another FRGC Party or any Person that succeeds to the business of HGSC if (x) the Owner Trustee receives an opinion of counsel (a copy of which shall be provided to the Rating Agency) reasonably acceptable to the Owner Trustee to the effect that the proposed transfer will not adversely affect the Trust's tax classification as a partnership or (y) HGSC (or any such successor) obtains the consent of the Majority Certificateholders, which consent may be withheld at the sole discretion of the Investor Certificateholders; PROVIDED that nothing in this Section 3.11 shall prohibit or otherwise restrict the sale, transfer or assignment by HGSC (or any such successor) of the right to distributions and any other payments in respect of the Investor Certificates held by HGSC (or any such successor). Except as provided in the immediately preceding sentence, any attempted transfer of any Investor Certificate by HGSC (or any such successor) that would reduce such interest of HGSC (or any such successor) below 20% of the Investor Certificate Balance shall be void. The Owner Trustee shall cause any Investor Certificate issued to HGSC (or any such successor) to contain a legend stating "THIS INVESTOR CERTIFICATE IS NOT TRANSFERABLE, EXCEPT AS PROVIDED IN SECTION 3.11 OF THE TRUST AGREEMENT." Except as otherwise -9- provided herein, any Investor Certificates held by HGSC, another FRGC Party or any Person that succeeds to the business of HGSC shall not have any rights to vote hereunder as long as they are held by any FRGC Party. SECTION 3.12 SERVICER OR HGSC AS INVESTOR CERTIFICATEHOLDER. The Servicer or HGSC in its individual or any other capacity may, subject to Section 3.11, become the owner or pledgee of Investor Certificates and may in its capacity as such owner or pledgee, subject to the provisions limiting voting rights pursuant to Section 3.11, otherwise deal with the Owner Trustee or its Affiliates as if it were not the Servicer or Seller. ARTICLE IV THE RESIDUAL CERTIFICATE SECTION 4.1 RESIDUAL CERTIFICATE. The Residual Certificate shall represent a fractional undivided beneficial interest in the Trust subordinated to the interests of the Investor Certificateholders, including the right to receive, subject to the terms and conditions set forth herein, (i) on each Distribution Date, the balance of the collections on the Purchased Contract Receivables after the Investor Certificateholders have received all distributions to which they are entitled hereunder and (ii) any other distribution to be made to the Residual Certificateholder as set forth in Article V hereof on such Distribution Date. The holder of the Residual Certificate shall have no right to vote with respect to the appointment of a successor Owner Trustee or the Servicer. SECTION 4.2 FORM OF THE RESIDUAL CERTIFICATE. (a) The Residual Certificate shall be substantially in the form set forth in EXHIBIT B. The Residual Certificate shall be executed on behalf of the Trust by manual or facsimile signature of a Responsible Officer of the Owner Trustee. The Residual Certificate bearing the manual or facsimile signatures of individuals who were, at the time when such signatures shall have been affixed, authorized to sign on behalf of the Trust, shall be, when authenticated pursuant to Section 4.3, validly issued and entitled to the benefits of the Agreement, notwithstanding that such individuals or any of them shall have ceased to be so authorized prior to the authentication and delivery of the Residual Certificate or did not hold such offices at the date of authentication and delivery of the Residual Certificate. (b) The Residual Certificate shall be issued in definitive, fully- registered form only. The Residual Certificate shall be typewritten, printed, lithographed or engraved or produced by any combination of these methods (with or without steel engraved borders) all as determined by the officers executing the Residual Certificate, as evidenced by their execution thereof. (c) The terms of the Residual Certificate set forth in EXHIBIT B (including, without limitation, the legend set forth therein) shall form part of this Agreement. -10- SECTION 4.3 EXECUTION, AUTHENTICATION AND DELIVERY. Concurrently with the sale of the Purchased Contract Receivables to the Trust pursuant to the Sale and Servicing Agreement, the Owner Trustee shall cause the Residual Certificate to be executed on behalf of the Trust, authenticated and delivered to HGSC in return for the Initial Residual Capital paid in immediately available funds, signed by its chairman of the board, its president or any vice president, without further corporate action by the Servicer. The Residual Certificate shall not entitle the holder thereof to any benefit under this Agreement, or be valid for any purpose, unless there shall appear on the Residual Certificate a certificate of authentication substantially in the form set forth in EXHIBIT B, executed by the Owner Trustee by manual signature. Such authentication shall constitute conclusive evidence that the Residual Certificate shall have been duly authenticated and delivered hereunder. The Residual Certificate shall be dated the date of its authentication. SECTION 4.4 NO TRANSFER. On and after the Closing Date, HGSC shall, except as provided below, maintain beneficial and record ownership of the Residual Certificate; PROVIDED that (i) the right to distributions and other payments in respect of the Residual Certificate may be pledged by HGSC to the Collateral Trustee under the Collateral Sharing and Security Agreement and (ii) the Residual Certificate may be transferred to another FRGC Party or any Person that succeeds to the business of HGSC if (x) the Owner Trustee receives an opinion of counsel reasonably acceptable to the Owner Trustee to the effect that the proposed transfer will not adversely affect the Trust's tax classification as a partnership or (y) HGSC (or any such successor) obtains the consent of the Majority Certificateholders, which consent may be withheld at the sole discretion of the Investor Certificateholders; PROVIDED that nothing in this Section 4.4 shall prohibit or otherwise restrict the sale, transfer or assignment by HGSC (or any such successor) of the right to distributions and other payments in respect of the Residual Certificate. Any attempted transfer of the Residual Certificate by HGSC (or any such successor) other than to any other FRGC Party or any Person that succeeds to the business of HGSC shall be void. Transfers of the Residual Certificates shall be subject to the provisions set forth in Sections 3.5(b), (c) and (d). The Residual Certificate shall bear a legend stating "THIS CERTIFICATE IS NOT TRANSFERABLE EXCEPT AS PROVIDED IN SECTION 4.4 OF THE TRUST AGREEMENT." ARTICLE V ACCOUNTS; DISTRIBUTIONS SECTION 5.1 ESTABLISHMENT OF ACCOUNTS. (a) The Owner Trustee, for the benefit of the Certificateholders, shall establish and maintain in the name of the Owner Trustee an Eligible Account known as the FRGC Owner Trust Collection Account (the "COLLECTION ACCOUNT"), bearing an additional designation clearly indicating that the funds deposited therein are held for the benefit of the Certificateholders. If a Lockbox Account is established, all funds received in the Lockbox Account shall be deposited by the Owner Trustee into the Collection Account and all Liquidated Damages or other funds received by the Owner -11- Trustee in respect of the Purchased Contract Receivables shall be deposited into the Collection Account, in each case within one Business Day of receipt thereof. Any funds received upon the sale of the Investor Certificates and the Residual Certificate that are not used to acquire the Purchased Contract Receivables shall also be deposited in the Collection Account. Funds on deposit in the Collection Account shall be invested by the Owner Trustee only in Eligible Investments. All earnings on such investment shall be deposited in the Collection Account. (b) The Owner Trustee, for the benefit of the Certificateholders, shall establish and maintain in the name of the Owner Trustee an Eligible Account known as the FRGC Owner Trust Investment Account (the "INVESTMENT ACCOUNT"), bearing an additional designation clearly indicating that the funds deposited therein are held for the benefit of the Certificateholders. On each Distribution Date until the aggregate amount deposited (without giving effect to any withdrawals made from the Investment Account hereunder) in the Investment Account, plus interest thereon, equals $1,800,000, the Owner Trustee shall withdraw from the Collection Account pursuant to clause (iii) of Section 5.2(d) the amount required thereby and deposit such amount into the Investment Account. Funds on deposit in the Investment Account shall be invested by the Owner Trustee only in Eligible Investments. From and after the date on which the amount deposited (without giving effect to any withdrawals) in the Investment Account pursuant to Section 5.2(d)(iii) and interest thereon first equals or exceeds $1,800,000, no additional funds shall be required to be deposited into the Investment Account and all further interest on the funds in the Investment Account earned after such date (net of any investment losses) shall be distributed to the Residual Certificateholder. Funds on deposit in the Investment Account shall be distributed to the Residual Certificateholder on the terms and conditions set forth in Section 5.2(f). (c) The Owner Trustee shall possess all right, title and interest in and to all funds on deposit from time to time in the Collection Account and the Investment Account and in all proceeds thereof. Except as otherwise provided herein, the Collection Account and the Investment Account shall each be under the sole dominion and control of the Owner Trustee for the benefit of the Certificateholders. If, at any time, the Collection Account or the Investment Account ceases to be an Eligible Account, the Owner Trustee shall within 10 Business Days establish a new Collection Account or Investment Account, as the case may be, as an Eligible Account and shall cause any cash or any investments in the old Collection Account or Investment Account to be transferred to such new Collection Account or Investment Account, as applicable. SECTION 5.2 DISTRIBUTIONS. (a) On or before the day that is two Business Days prior to each Distribution Date, the Servicer shall calculate the Collected Amount and all other amounts required to determine the amounts to be deposited in or paid from each of the Collection Account and the Investment Account on such Distribution Date. (b) On or before the day that is two Business Days prior to each Distribution Date, the Servicer shall deliver to the Owner Trustee a certificate in -12- substantially the form attached hereto as EXHIBIT E (the "SERVICER'S CERTIFICATE") executed by the President or any Vice President of the Servicer containing all information necessary to the Owner Trustee for making the calculations, withdrawals, deposits, transfers and distributions required by this Article V, the status of each Purchased Contract Receivable and all information required to be provided to Investor Certificateholders pursuant to Section 5.2(g). (c) On or before the day preceding each Distribution Date, the Owner Trustee shall cause to be made the following withdrawals, deposits, transfers and distributions in the amounts set forth in the Servicer's Certificate for such Distribution Date: (i) from the Collection Account to the Servicer, in immediately available funds, the Reinvestment Income in respect of such Distribution Date; and (ii) from the Investment Account to the Collection Account, the lesser of (A) the amount of cash or other immediately available funds in the Investment Account on the day preceding such Distribution Date and (B) the amount, if any, by which the sum of the Aggregate Fixed Return and Aggregate Return of Capital for such Distribution Date exceeds the Collected Amount in respect of such Distribution Date. (d) Before 12:00 noon, New York City time, on each Distribution Date, the Owner Trustee (based on the information contained in the Servicer's Certificate for such Distribution Date) shall, subject to Section 5.2(f), make the following distributions from the Collection Account (after the withdrawals, deposits and transfers specified in Section 5.2(c) have been made) in the following order of priority: (i) first, to the Investor Certificateholders, on a pro rata basis, the lesser of, for such Distribution Date, (A) the Total Available Amount and (B) the Aggregate Fixed Return; (ii) second, to the Investor Certificateholders, on a pro rata basis, the lesser of, for such Distribution Date, (A) the Total Available Amount (as such amount has been reduced by the distributions described in clause (i) above) and (B) the Aggregate Return Of Capital; (iii) third, subject to Section 5.1(b), to the Investment Account, the lesser of (A) the Total Available Amount (as such amount has been reduced by the distributions described in clauses (i) and (ii) above) and (B) the Monthly Deposit Amount; (iv) fourth, to the Investor Certificateholders, on a pro rata basis, the lesser of, for such Distribution Date, (A) the Total Available Amount (as such amount has been reduced by the distributions described in clauses (i), (ii) and (iii) above) and (B) the Additional Distributions, if any, payable on such -13- Distribution Date and any Additional Distributions that were required to be paid on a prior Distribution Date but were not paid; and (v) fifth, subject to paragraph (e) below, to the Residual Certificateholder, the balance of the Collected Amount. (e) In addition to, and without limiting, the distributions contained in Section 5.2(d), on each Distribution Date for each Monthly Period following the effective date of a Regulatory Increase (including the Monthly Period in which such Regulatory Increase occurs), the Owner Trustee (based on the information contained in the Servicer's Certificate for such Distribution Date) shall, subject to Section 5.2(f), distribute to the Investor Certificateholders, on a pro rata basis, 10% of collections on the Contract Regulatory Receivables received during the related Monthly Period. (f) At any time after the Investor Certificate Balance shall have been reduced to zero (including on the same date on which the Investor Certificate Balance has been reduced to zero), distributions from the Trust shall be made as follows: (i) If the Seller has paid Liquidated Damages in respect of all Purchased Contract Receivables, then the Investor Certificateholders shall be entitled to no further distributions from the Trust other than any Additional Distributions that are then payable, and all funds in the Collection Account and the Investment Account shall thereafter be distributed to the Residual Certificateholder. (ii) In all other circumstances, the Investor Certificateholders shall be entitled thereafter only to payments from the Trust pursuant to Section 5.2(e), and the Residual Certificateholder shall receive a distribution of (A) all funds in the Investment Account and (B) all funds in the Collection Account other than the amount necessary to pay amounts payable pursuant to Section 5.2(e). (iii) After all payments, if any, required to be made pursuant to Section 5.2(e) have been made, then the Investor Certificateholders shall be entitled to no further payments from the Trust, and all funds in the Collection Account and the Investment Account shall be distributed to the Residual Certificateholder. (iv) On the first Business Day after the Investor Certificateholders shall have received all distributions required pursuant to Sections 5.2(d) and (e), the Residual Certificateholder may request the Owner Trustee to distribute all remaining assets (whether in the form of cash or other property) of the Owner Trust Estate, after payment of all expenses, to the Residual Certificateholder. The provisions of this Section 5.2(f) shall in no event limit the rights of the Investor Certificateholders to distributions required to be made prior to the dates or events set forth in this Section 5.2(f). -14- (g) On each Distribution Date, the Owner Trustee shall send to each Investor Certificateholder and the Rating Agency the Servicer's Certificate furnished pursuant to Section 5.2(b). In addition to the items set forth in Section 5.2(b), the Servicer's Certificate shall set forth the following information as to the Investor Certificates with respect to such Distribution Date or the preceding Monthly Period, as applicable: (i) the Collected Amount for such Monthly Period; (ii) the amount of Liquidated Damages paid and required to be paid by the Seller since the immediately preceding Distribution Date; (iii) the Total Available Amount in respect of such Distribution Date; (iv) the distributable amount determined pursuant to Section 5.2(d)(i) in respect of such Distribution Date; (v) the distributable amount determined pursuant to Section 5.2(d)(ii) in respect of such Distribution Date; (vi) the distributable amount determined pursuant to Section 5.2(d)(iii) in respect of such Distribution Date; (vii) the distributable amount determined pursuant to Section 5.2(d)(iv) in respect of such Distribution Date; (viii) the distributable amount determined pursuant to Section 5.2(d)(v) in respect of the Distribution Date; (ix) the transfer from the Collection Account to the Servicer pursuant to Section 5.2(c)(i) in respect of such Distribution Date; (x) the amount transferred from the Investment Account to the Collection Account pursuant to Section 5.2(c)(ii); (xi) the distributable amount determined pursuant to Section 5.2(e) in respect of such Distribution Date; (xii) the balance of the Investment Account on such Distribution Date, after giving effect to distributions, withdrawals, transfers and deposits made on such date, and the change in such balance from that of the immediately preceding Distribution Date; (xiii) the Investor Certificate Balance after giving effect to the distributions to be made on such Distribution Date; (xiv) the amount by which the sum of the funds transferred pursuant to Section 5.2(d)(iii) and the distributions made pursuant to Section 5.2(d)(v) are -15- less than the amount scheduled to be paid pursuant to such Sections as of such Distribution Date in Schedule 2; and (xv) the status of each Purchased Contract Receivable, including identifying any Purchased Contract Receivable that is not current and the age of such Purchased Contract Receivable and the actions being taken to collect on such past due Purchased Contract Receivable. Each amount set forth pursuant to clauses (iv), (v), (vi), (vii), (xi) and (xiii) above shall also be expressed as a dollar amount per $1,000 of the initial Investor Certificate Balance. (h) If any withholding tax is imposed on the Trust's distributions (or allocations of income) to any Certificateholder, such tax shall reduce the amount otherwise distributable to such Certificateholder in accordance with this Section 5.2. The Owner Trustee is hereby authorized and directed to retain from amounts otherwise distributable to any Certificateholders sufficient funds for the payment of any tax that is legally owed by the Trust (but such authorization shall not prevent the Owner Trustee from contesting any such tax in appropriate proceedings and withholding payment of such tax, if permitted by law, pending the outcome of such proceedings). The amount of any withholding tax imposed with respect to any Certificateholder shall be treated as cash distributed to such Certificateholder at the time it is withheld by the Trust and remitted to the appropriate taxing authority. If any Certificateholder wishes to apply for a refund of any such withholding tax, the Owner Trustee shall reasonably cooperate with such Certificateholder in making such claim so long as such Certificateholder agrees to reimburse the Owner Trustee for any out-of-pocket expenses incurred. (i) Within the prescribed period of time for tax reporting purposes after the end of each calendar year during the term of this Agreement, the Servicer shall prepare and execute and the Owner Trustee shall mail to each Person who at any time during such calendar year shall have been an Investor Certificateholder and received any payments thereon, a statement prepared and supplied by the Servicer containing the sum of the amounts set forth in each of clauses (iv), (v), (vi), (vii), (xi) and (xiii) of Section 5.2(g) for such calendar year or, if such Person shall have been an Investor Certificateholder during a portion of such calendar year and received any payments thereon, for the applicable portion of such year, for the purposes of such Investor Certificateholders' preparation of federal income tax returns. (j) The Servicer shall be provided full access to information with respect to the Collection Account and Investment Account in order to perform its obligations hereunder, including the right (x) to receive directly from the Eligible Institution or Eligible Institutions in which such accounts are established copies of all statements, confirmations and notices provided to the Owner Trustee, (y) to make inquiries directly to such Eligible Institution or Eligible Institutions regarding deposits, withdrawals and other payments to or from such accounts and balances in such accounts and (z) any other information relating to such matters as the Servicer may from time to time reasonably request. -16- SECTION 5.3 METHOD OF PAYMENT. (a) Distributions required to be made to Investor Certificateholders on any Distribution Date shall be made to each Investor Certificateholder of record on the related Record Date (i) by wire transfer, in immediately available funds, to the account of such Investor Certificateholder at a bank or other entity having appropriate facilities therefor if such Investor Certificateholder shall have provided to the Seller appropriate written instructions at least five Business Days prior to such Record Date or (ii) if clause (i) is not applicable, by check mailed to such Investor Certificateholder at the address of such Investor Certificateholder appearing in the Investor Certificate Register. (b) Distributions required to be made to the Servicer pursuant to Section 5.2(c)(i) and to the Residual Certificateholder shall be made (i) by wire transfer, in immediately available funds, to the account of the Servicer or the Residual Certificateholder, as the case may be, at a bank or other entity having appropriate facilities therefor if such Person shall have furnished to the Owner Trustee appropriate written instructions at least five Business Days prior to such Distribution Date or (ii) if clause (i) is not applicable by check mailed to the Servicer or the Residual Certificateholder, as the case may be, at the address provided pursuant to APPENDIX B to the Sale and Servicing Agreement. SECTION 5.4 ACCOUNTING AND REPORTS TO CERTIFICATEHOLDERS, THE INTERNAL REVENUE SERVICE AND OTHERS. The Owner Trustee shall (a) maintain (or cause to be maintained) the books of the Trust on the basis of a fiscal year ending December 31 on the accrual method of accounting, (b) deliver to each Certificateholder, as may be required by the Code and applicable Treasury Regulations or otherwise, such information as may be required to enable each Certificateholder to prepare its federal income tax returns, (c) file or cause to be filed such tax returns relating to the Trust and make such elections as may from time to time be required or appropriate under any applicable state or federal statute or rule or regulation thereunder so as to maintain the Trust's characterization as a partnership for federal income tax purposes, (d) cause such tax returns to be signed in the manner required by law and (e) collect or cause to be collected any withholding tax as described in and in accordance with subsection 5.2(h) with respect to income or distributions to Certificateholders. SECTION 5.5 SIGNATURE ON RETURNS; TAX MATTERS PARTNER. The Residual Certificateholder shall sign on behalf of the Trust any and all tax returns of the Trust. The Residual Certificateholder shall be the "tax matters partner" of the Trust pursuant to the Code. ARTICLE VI CAPITAL ACCOUNTS; ALLOCATIONS SECTION 6.1 CAPITAL ACCOUNTS. A separate capital account ("CAPITAL ACCOUNT") shall be established and maintained for each Certificateholder. The Capital Account of each Certificateholder shall be credited with the initial purchase price paid -17- by such Certificateholder for its Certificates and allincome and gain allocated to such Certificateholder pursuant to Section 6.2, andshall be debited by the amount of any loss or deduction allocated to suchCertificateholder pursuant to Section 6.2 and all distributions made to suchCertificateholder pursuant to Article V. To the extent not provided for in thepreceding sentence, the Capital Accounts of the Certificateholders shall beadjusted and maintained in accordance with the rules of Treasury RegulationsSection 1.704-1(b)(2)(iv), as the same may be amended or revised. Anyreferences in any section of this Agreement to the Capital Account of aCertificateholder shall be deemed to refer to such Capital Account as the samemay be credited or debited from time to time as set forth above. In the eventof any transfer of any Certificate in accordance with the terms of thisAgreement, the transferee shall succeed to the Capital Account of the transferorto the extent it relates to the transferred Certificate. SECTION 6.2 ALLOCATIONS OF INCOME AND LOSSES. All items of income, gain, loss and deductions shall be allocated to the Certificateholders' Capital Accounts in a manner consistent with the distribution procedures set forth in Article V; PROVIDED, HOWEVER, that any loss resulting from a default on a Purchased Contract Receivable shall be allocated to the Residual Certificateholder; and PROVIDED, FURTHER, that if the losses resulting from a default on one or more Purchased Contract Receivables would exceed the current balance of the Residual Certificateholder's Capital Account, then an amount of such losses equal to the current balance of the Residual Certificateholder's Capital Account shall be allocated to the Residual Certificateholder and any excess losses shall be allocated to the Investor Certificateholders on a pro rata basis in accordance with the balances in their Capital Accounts. ARTICLE VII ACTIONS BY THE OWNER TRUSTEE SECTION 7.1 ACTION BY INVESTOR CERTIFICATEHOLDERS WITH RESPECT TO CERTAIN MATTERS. The Owner Trustee shall not have the power, except upon the written direction of the Majority Certificateholders, to (a) remove the Servicer under the Sale and Servicing Agreement pursuant to Section 7.1 thereof or (b) require the Operator to engage a substitute operator under the Sale and Servicing Agreement pursuant to Section 5.2(b) thereof. The Owner Trustee shall not have the power, except upon the written direction of the Majority Certificateholders and the Residual Certificateholder, to sell the Purchased Contract Receivables or any interest therein or release any Obligor of any obligation with respect thereto; PROVIDED, HOWEVER, that the Majority Certificateholders may so direct the Owner Trustee without the consent of the Residual Certificateholder if there shall occur and be continuing a breach by an FRGC Party under any covenant, representation or warranty under any of the Basic Documents in a manner which materially adversely affects (after giving effect to the distribution of any Additional Net Distribution Amount payable in connection with such event) the Investor Certificateholders, and the Seller or the Servicer, as the case may be, fails to remedy such breach within 30 days after receiving written notice from the Owner Trustee or any Investor Certificateholder. -18- SECTION 7.2 ACTION BY INVESTOR CERTIFICATEHOLDERS WITH RESPECT TO BANKRUPTCY. The Owner Trustee shall not have the power to commence a voluntary proceeding in bankruptcy relating to the Trust without the unanimous prior approval of all Investor Certificateholders unless the Owner Trustee reasonably believes that the Trust is insolvent. SECTION 7.3 RESTRICTIONS ON CERTIFICATEHOLDERS' POWER. The Certificateholders shall not direct the Owner Trustee to take or refrain from taking any action if such action or inaction would be contrary to any obligation of the Trust or the Owner Trustee under this Agreement or any of the Basic Documents, nor shall the Owner Trustee be obligated to follow any such direction, if given. ARTICLE VIII COVENANTS OF THE SERVICER AND OTHERS SECTION 8.1 COVENANTS OF THE SERVICER AND OTHERS. Until such time as all required distributions have been made on the Investor Certificates pursuant to the terms hereof, each of HIG (in its capacity as Servicer and Operator) and the Seller, for the benefit of the Trust and the Investor Certificateholders, agrees to perform and comply with each of the covenants set forth in the Sale and Servicing Agreement to be performed by it. SECTION 8.2 PURCHASE OF INVESTOR CERTIFICATES. The Seller will not, and will not permit any Affiliate, to purchase or otherwise acquire, directly or indirectly, any of the Investor Certificates except pursuant to an offer to purchase made by the Seller or an Affiliate pro rata to all Investor Certificateholders upon the same terms and conditions. Any such offer shall remain open for at least 20 Business Days. ARTICLE IX THE OWNER TRUSTEE SECTION 9.1 DUTIES OF THE OWNER TRUSTEE. (a) The Owner Trustee undertakes to perform such duties, and only such duties, as are specifically set forth in this Agreement and the other Basic Trust Documents, including the administration of the Trust in the interest of the Certificateholders, in accordance with the provisions of this Agreement and the other Basic Trust Documents. No implied covenants or obligations shall be read into this Agreement or any other Basic Trust Document against the Owner Trustee. (b) Notwithstanding the foregoing, the Owner Trustee shall be deemed to have discharged its duties and responsibilities hereunder and under the Basic Trust Documents to the extent the Servicer has agreed in the Basic Trust Document to perform any act or to discharge any duty of the Owner Trustee hereunder or under any Basic Trust Document, and the Owner Trustee shall not be liable for the default or -19- failure of the Servicer to carry out its obligations under any of the Basic Trust Documents. (c) In the absence of bad faith on its part, the Owner Trustee may conclusively rely upon certificates or opinions furnished to it and conforming to the requirements of this Agreement in determining the truth of the statements and the correctness of the opinions contained therein; PROVIDED, HOWEVER, that the Owner Trustee shall have examined such certificates or opinions so as to determine compliance of the same with the requirements of this Agreement. (d) The Owner Trustee shall not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i) this subsection 9.1(d) shall not limit the effect of subsection 9.1(a) or (b); (ii) the Owner Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer unless it is proved that the Owner Trustee was negligent in ascertaining the pertinent facts; and (iii) the Owner Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 7.1 or 9.4. (e) Subject to Section 5.1, monies received by the Owner Trustee hereunder need not be segregated in any manner except to the extent required by law, this Agreement or the Sale and Servicing Agreement and may be deposited under such general conditions as may be prescribed by law, and the Owner Trustee shall not be liable for any interest thereon. (f) The Owner Trustee shall not take any action that (i) is inconsistent with the purposes of the Trust set forth in Section 2.3 or (ii) would, to the actual knowledge of a Responsible Officer of the Owner Trustee, result in the Trust's becoming taxable as a corporation for federal income tax purposes. (g) Neither the Servicer nor the Certificateholders shall direct the Owner Trustee to take any action that would violate the provisions of this Section 9.1. SECTION 9.2 RIGHTS OF THE OWNER TRUSTEE. The Owner Trustee is authorized and directed to execute and deliver the Basic Trust Documents and each certificate or other document attached as an exhibit to or contemplated by the Basic Trust Documents to which the Trust is to be a party, in such form as the Owner Trustee shall approve as evidenced conclusively by the Owner Trustee's execution thereof. In addition to the foregoing, the Owner Trustee is authorized, but shall not be obligated, to take all actions required of the Trust pursuant to the Basic Trust Documents. -20- SECTION 9.3 ACCEPTANCE OF TRUSTS AND DUTIES. Except as otherwise provided in this Article IX, in accepting the trusts hereby created, the Owner Trustee acts solely as trustee hereunder and not in its individual capacity and all Persons having any claim against the Owner Trustee by reason of the transactions contemplated by this Agreement or any Basic Trust Document shall look only to the Owner Trust Estate for payment or satisfaction thereof. The Owner Trustee accepts the trusts hereby created and agrees to perform its duties hereunder with respect to such trusts but only upon the terms of this Agreement. The Owner Trustee also agrees to disburse all monies actually received by it constituting part of the Owner Trust Estate upon the terms of this Agreement. The Owner Trustee shall not be liable or accountable hereunder or under any Basic Trust Document under any circumstances, except (i) for its own negligent action, its own negligent failure to act or its own willful misconduct or (ii) in the case of the inaccuracy of any representation or warranty contained in Section 9.6 and expressly made by the Owner Trustee. In particular, but not by way of limitation (and subject to the exceptions set forth in the preceding sentence): (a) the Owner Trustee shall not at any time have any responsibility or liability for or with respect to the legality, validity and enforceability of any Contract, any Purchased Contract Receivable or for or with respect to the sufficiency of the Owner Trust Estate or its ability to generate the distributions and payments to be made to Certificateholders under this Agreement; (b) the Owner Trustee shall not be liable with respect to any action taken or omitted to be taken by it in accordance with the instructions of the Servicer or any Certificateholder in accordance with this Agreement; (c) no provision of this Agreement or any Basic Trust Document shall require the Owner Trustee to expend or risk funds or otherwise incur any financial liability in the performance of any of its rights or powers hereunder or under any Basic Trust Document, if the Owner Trustee shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured or provided to it; (d) under no circumstances shall the Owner Trustee be liable for indebtedness evidenced by or arising under any of the Basic Trust Documents, including the Investor Certificate Balance and any return on the Investor Certificates; (e) the Owner Trustee shall not be responsible for or in respect of, and the Owner Trustee does not make any representation as to the validity or sufficiency of, any provision of this Agreement or for the due execution hereof by the Servicer or for the form, character, genuineness, sufficiency, value or validity of any of the Owner Trust Estate or for or in respect of the validity or sufficiency of the Basic Documents, the Certificates (other than the certificate of authentication on the Certificates) or of any Contract, any Purchased Contract Receivables or any related documents, and the Owner Trustee shall not in any event assume or incur any liability, duty or obligation to any Investor -21- Certificateholder or to the Servicer, other than as expressly provided for herein and in the Basic Trust Documents; (f) the Owner Trustee shall not be liable for the default or misconduct of the Servicer or the Seller under any of the Basic Trust Documents or otherwise, and the Owner Trustee shall not have any obligation or liability to perform the obligations of the Trust under this Agreement or the Basic Trust Documents that are required to be performed by the Servicer under the Sale and Servicing Agreement; and (g) the Owner Trustee shall not be under any obligation to exercise any of the rights or powers vested in it by this Agreement, or to institute, conduct or defend any litigation under this Agreement or otherwise or in relation to this Agreement or any Basic Trust Document, at the request, order or direction of any of the Certificateholders, unless such Certificateholders have offered to the Owner Trustee security or indemnity satisfactory to it against the costs, expenses and liabilities that may be incurred by the Owner Trustee therein or thereby. The right of the Owner Trustee to perform any discretionary act enumerated in this Agreement or in any Basic Trust Document shall not be construed as a duty, and the Owner Trustee shall not be answerable for other than its negligence or willful misconduct in the performance of any such act. SECTION 9.4 ACTION UPON INSTRUCTION BY INVESTOR CERTIFICATEHOLDERS. (a) Subject to Section 7.3, the Majority Certificateholders may by written instruction direct the Owner Trustee in the management of the Trust. (b) Notwithstanding the foregoing, the Owner Trustee shall not be required to take any action hereunder or under any Basic Trust Document if the Owner Trustee shall have reasonably determined, or shall have been advised by counsel, that such action is likely to result in liability on the part of the Owner Trustee or is contrary to the terms hereof or of any Basic Trust Document or is otherwise contrary to law. (c) Whenever the Owner Trustee is unable to decide between alternative courses of action permitted or required by the terms of this Agreement or any Basic Trust Document, or is unsure as to the application, intent, interpretation or meaning of any provision of this Agreement or the Basic Trust Documents, the Owner Trustee shall promptly give notice (in such form as shall be appropriate under the circumstances) to all of the Investor Certificateholders requesting instruction as to the course of action to be adopted, and, to the extent the Owner Trustee acts in good faith in accordance with any such instruction received, the Owner Trustee shall not be liable on account of such action to any Person. If the Owner Trustee shall not have received appropriate instructions from the Majority Certificateholders within ten days of such notice (or within such shorter period of time as reasonably may be specified in such notice or may be necessary under the circumstances) it may, but shall be under no duty to, take or refrain from taking such action which is consistent, in its view, with this Agreement and the Basic Trust Documents, and as it shall deem to be in the best -22- interests of the Investor Certificateholders, and the Owner Trustee shall have no liability to any Person for any such action or inaction. SECTION 9.5 FURNISHING OF DOCUMENTS. The Owner Trustee shall furnish to the Investor Certificateholders, promptly upon receipt of a written request therefor, duplicates or copies of all reports, notices, requests, demands, certificates, financial statements and any other instruments furnished to the Owner Trustee under the Basic Trust Documents and such other information as the Investor Certificateholders may reasonably request. SECTION 9.6 REPRESENTATIONS AND WARRANTIES OF THE OWNER TRUSTEE. The Owner Trustee hereby represents and warrants to the Servicer, for the benefit of the Investor Certificateholders and the Servicer, that: (a) It is a banking corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation. The eligibility requirements set forth in Section 9.13(a)-(c) are satisfied with respect to it. (b) It has full power, authority and legal right to execute, deliver and perform the Basic Trust Documents to which it is a party, and has taken all necessary action to authorize the execution, delivery and performance by it of the Basic Trust Documents to which it is a party. (c) The execution, delivery and performance by it of the Basic Trust Documents to which it is a party (i) shall not violate any provision of any law or regulation governing the banking and trust powers of the Owner Trustee or any order, writ, judgment or decree of any court, arbitrator or Governmental Authority applicable to the Owner Trustee or any of its assets, (ii) shall not violate any provision of the corporate charter or by-laws of the Owner Trustee, or (iii) shall not violate any provision of, or constitute, with or without notice or lapse of time, a default under, or result in the creation or imposition of any Lien on any properties included in the Trust pursuant to the provisions of any mortgage, indenture, contract, agreement or other undertaking to which it is a party, which violation, default or Lien could reasonably be expected to have a material adverse effect on the Owner Trustee's performance or ability to perform its duties under the Basic Trust Documents to which it is a party or on the transactions contemplated in the Basic Trust Documents to which it is a party. (d) The execution, delivery and performance by it of the Basic Trust Documents to which it is a party shall not require the authorization, consent or approval of, the giving of notice to, the filing or registration with, or the taking of any other action in respect of, any Governmental Authority or agency regulating the corporate trust activities of the Owner Trustee. (e) The Basic Trust Documents to which it is a party have been duly executed and delivered by the Owner Trustee and constitutes the legal, valid and binding agreement of the Owner Trustee, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, or other similar laws affecting the enforcement of creditors' rights in general and by -23- general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. SECTION 9.7 RELIANCE; ADVICE OF COUNSEL. (a) The Owner Trustee shall not incur any liability to anyone in acting upon any signature, instrument, notice, resolution, request, consent, order, certificate, report, opinion, bond or other document or paper believed by it to be genuine and believed by it to be signed by the proper party or parties and need not investigate any fact or matter in any such document. The Owner Trustee may accept a certified copy of a resolution of the board of directors or other governing body of any corporate party as conclusive evidence that such resolution has been duly adopted by such body and that the same is in full force and effect. As to any fact or matter the method of the determination of which is not specifically prescribed herein, the Owner Trustee may for all purposes hereof rely on a certificate, signed by the president or any vice president or by the treasurer or other authorized officers of the relevant party as to such fact or matter, and such certificate shall constitute full protection to it for any action taken or omitted to be taken by it in good faith in reliance thereon. (b) In the exercise or administration of the trusts hereunder and in the performance of its duties and obligations under this Agreement or the Basic Trust Documents, the Owner Trustee: (i) may act directly or through its agents, attorneys, custodians or nominees pursuant to agreements entered into with any of them, and shall not be liable for the conduct or misconduct of such agents, attorneys, custodians or nominees if such agents, attorneys, custodians or nominees shall have been selected by it with reasonable care; and (ii) may consult with counsel, accountants and other skilled professionals to be selected with reasonable care and employed by it. The Owner Trustee shall not be liable for anything done, suffered or omitted in good faith by it in accordance with the opinion or advice of any such counsel, accountants or other such Persons and not contrary to this Agreement or any Basic Document. SECTION 9.8 OWNER TRUSTEE MAY OWN INVESTOR CERTIFICATES. The Owner Trustee in its individual or any other capacity may become the owner or pledgee of Investor Certificates and may in its capacity as such owner or pledgee deal with the Servicer in transactions in the same manner as it would have if it were not a trustee hereunder. SECTION 9.9 COMPENSATION AND INDEMNITY. The Owner Trustee shall receive as compensation for its services hereunder such fees as have been separately agreed upon before the date hereof between the Servicer and the Owner Trustee, and the Owner Trustee shall be entitled to be reimbursed by the Servicer for its other reasonable expenses hereunder, including the reasonable compensation, expenses and disbursements of such agents, custodians, nominees, representatives, experts and counsel as the Owner Trustee may employ in connection with the exercise and performance of its rights and its duties hereunder. The Servicer shall indemnify the Owner Trustee and its successors, assigns, directors, officers, employees and agents in accordance with the provisions of Section 6.1 of the Sale and Servicing Agreement. The compensation and indemnities described in this Section 9.9 shall survive the resignation -24- or termination of the Owner Trustee or the termination of this Agreement. Any amounts paid to the Owner Trustee pursuant to this Article IX shall be deemed not to be a part of the Owner Trust Estate immediately after such payment. SECTION 9.10 REPLACEMENT OF THE OWNER TRUSTEE. (a) The Owner Trustee may give notice of its intent to resign and be discharged from the trusts hereby created by written notice thereof to the Servicer and the Investor Certificateholders; PROVIDED that no such resignation shall become effective, and the Owner Trustee shall not resign, prior to the time set forth in Section 9.10(c). The Servicer shall appoint, subject to the written consent of the Majority Certificateholders, a successor Owner Trustee by delivering a written instrument, in duplicate, to the resigning Owner Trustee and the successor Owner Trustee. If no successor Owner Trustee shall have been appointed and have accepted appointment within 30 days after the giving of such notice, the resigning Owner Trustee giving such notice may petition any court of competent jurisdiction for the appointment of a successor Owner Trustee. The Servicer shall, subject to the written consent of the Majority Certificateholders, remove the Owner Trustee if: (i) the Owner Trustee shall cease to be eligible in accordance with the provisions of Section 9.13 and shall fail to resign after written notice thereof is provided by the Servicer; (ii) the Owner Trustee shall be adjudged bankrupt or insolvent; (iii) a receiver or other public officer shall be appointed or take charge or control of the Owner Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation; or (iv) the Owner Trustee shall otherwise be incapable of acting. (b) If the Owner Trustee gives notice of its intent to resign or is removed or if a vacancy exists in the office of the Owner Trustee for any reason, the Servicer, subject to the written consent of the Majority Certificateholders, shall promptly appoint a successor Owner Trustee by written instrument in duplicate (one copy of which instrument shall be delivered to the outgoing Owner Trustee so removed and one copy to the successor Owner Trustee) and shall pay all fees owed to the outgoing Owner Trustee. (c) Any resignation or removal of the Owner Trustee and appointment of a successor Owner Trustee pursuant to any of the provisions of this Section 9.10 shall not become effective and no such resignation shall be deemed to have occurred until a written acceptance of appointment is delivered by the successor Owner Trustee to the outgoing Owner Trustee and the Servicer and all fees and expenses due to the outgoing Owner Trustee are paid. Any successor Owner Trustee appointed pursuant to this Section 9.10 shall be eligible to act in such capacity in accordance with Section 9.13 and, following compliance with the preceding sentence, shall become fully vested with all the rights, powers, duties and obligations of its predecessor under this -25- Agreement, with like effect as if originally named as the Owner Trustee. The Servicer shall provide notice of any resignation or proposed removal and replacement of the Owner Trustee to all Investor Certificateholders and the Rating Agency. (d) The predecessor Owner Trustee shall upon payment of its fees and expenses deliver to the successor Owner Trustee all documents and statements and monies held by it under this Agreement. The Servicer and the predecessor Owner Trustee shall execute and deliver such instruments and do such other things as may reasonably be required for fully and certainly vesting and confirming in the successor Owner Trustee all such rights, powers, duties and obligations. (e) Upon acceptance of appointment by a successor Owner Trustee pursuant to this Section 9.10, the Servicer shall mail notice of the successor of the Owner Trustee to all Certificateholders and the Rating Agency. (f) The Residual Certificateholder shall not be entitled to remove or replace the Owner Trustee. SECTION 9.11 MERGER OR CONSOLIDATION OF THE OWNER TRUSTEE. Any Person into which the Owner Trustee may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Owner Trustee shall be a party, or any Person succeeding to all or substantially all of the corporate trust business of the Owner Trustee, shall be the successor of the Owner Trustee hereunder, provided such Person shall be eligible pursuant to Section 9.13, and without the execution or filing of any instrument or any further act on the part of any of the parties hereto; PROVIDED, HOWEVER, that the Owner Trustee shall as promptly as reasonably practical prior to the merger or consolidation mail notice of such merger or consolidation to all Investor Certificateholders and the Rating Agency. SECTION 9.12 APPOINTMENT OF CO-TRUSTEE OR SEPARATE TRUSTEE. (a) Notwithstanding any other provisions of this Agreement, at any time, for the purpose of meeting any legal requirement of any jurisdiction in which any part of the Owner Trust Estate may at the time be located, the Owner Trustee shall have the power and shall execute and deliver all instruments to appoint one or more Persons approved by the Owner Trustee to act as co-trustee, jointly with the Owner Trustee, or as separate trustee or trustees, of all or any part of the Owner Trust Estate, and to vest in such Person, in such capacity, such title to the Trust, or any part thereof, and, subject to the other provisions of this Section 9.12, such powers, duties, obligations, rights and trusts as the Owner Trustee may consider necessary or desirable. No co-trustee or separate trustee under this Agreement shall be required to meet the terms of eligibility as a successor trustee pursuant to Section 9.13 and no notice of the appointment of any co-trustee or separate trustee shall be required pursuant to Section 9.10. (b) Each separate trustee and co-trustee shall, to the extent permitted by law, be appointed and act subject to the following provisions and conditions: -26- (i) all rights, powers, duties and obligations conferred or imposed upon the Owner Trustee shall be conferred upon and exercised or performed by the Owner Trustee and such separate trustee or co-trustee jointly (it being understood that such separate trustee or co-trustee is not authorize to act separately without the Owner Trustee joining in such act), except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed, the Owner Trustee shall be incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties and obligations (including the holding of title to the Trust or any portion thereof in any such jurisdiction) shall be exercised and performed singly by such separate trustee or co-trustee, but solely at the direction of the Owner Trustee; (ii) no trustee under this Agreement shall be personally liable by reason of any act or omission of any other trustee under this Agreemen (unless such other trustee acts or fails to act at the direction of such first trustee); and (iii) the Owner Trustee may at any time accept the resignation of or remove any separate trustee or co-trustee. (c) Any notice, request or other writing given to the Owner Trustee shall be deemed to have been given to each of the then separate trustees and co-trustees, as effectively as if given to each of them. Every instrument appointing any separate trustee or co-trustee shall refer to this Agreement and the conditions of this Article. Each separate trustee and co-trustee, upon its acceptance of the trusts conferred, shall be vested with the estates or property specified in its instrument of appointment, either jointly with the Owner Trustee or separately, as may be provided therein, subject to all the provisions of this Agreement, specifically including every provision of this Agreement relating to the conduct of, affecting the liability of, or affording protection to, the Owner Trustee. Each such instrument shall be filed with the Owner Trustee and a copy thereof given to the Servicer. (d) Any separate trustee or co-trustee may at any time appoint the Owner Trustee as its agent or attorney-in-fact with full power and authority, to the extent not prohibited by law, to do any lawful act under or in respect of this Agreement on its behalf and in its name. If any separate trustee or co-trustee shall die, become incapable of acting, resign or be removed, all of its estates, properties, rights, remedies and trusts shall vest in and be exercised by the Owner Trustee, to the extent permitted by law, without the appointment of a new or successor trustee. SECTION 9.13 ELIGIBILITY REQUIREMENTS FOR THE OWNER TRUSTEE. The Owner Trustee shall at all times be a corporation satisfying the provisions of Section 3807(a) of the Business Trust Statute. The Owner Trustee shall at all times: (a) be authorized to exercise corporate trust powers; (b) have a combined capital and surplus of at least $250,000,000 and be subject to supervision or examination by federal or state authorities; and (c) have a certificate of deposit rating of at least D-1 by the Rating Agency or be otherwise satisfactory to the Rating Agency. If such corporation shall publish reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purpose -27- of this Section 9.13, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Owner Trustee shall cease to be eligible in accordance with the provisions of this Section 9.13, the Owner Trustee shall resign immediately in the manner and with the effect specified in Section 9.10. ARTICLE X TERMINATION OF TRUST AGREEMENT SECTION 10.1 TERMINATION OF TRUST AGREEMENT. (a) This Agreement (other than Section 9.9) and the Trust shall terminate and be of no further force or effect on the earlier of (i) the final distribution by the Owner Trustee of all monies or other property or proceeds of the Owner Trust Estate in accordance with the terms of Article V or (ii) at the time provided in Section 10.2. The bankruptcy, liquidation, dissolution, death or incapacity of any Certificateholder, other than HGSC in its capacity as the Residual Certificateholder as described in Section 10.2, shall not (x) operate to terminate this Agreement or the Trust, nor (y) entitle such Investor Certificateholder's legal representatives or heirs to claim an accounting or to take any action or proceeding in any court for a partition or winding up of all or any part of the Trust or the Owner Trust Estate nor (z) otherwise affect the rights, obligations and liabilities of the parties hereto. (b) Except as provided in Section 10.1(a), none of the Servicer, the Seller or any Certificateholder shall be entitled to revoke or terminate the Trust or this Agreement. (c) Notice of any termination of the Trust, except as otherwise provided in Section 10.2, specifying the Distribution Date upon which the Investor Certificateholders shall surrender their Investor Certificates, and the Residual Certificateholder shall surrender the Residual Certificate, to the Owner Trustee for payment of the final distribution and cancellation, shall be given by the Owner Trustee by letter to the Investor Certificateholders and the Residual Certificateholder mailed within five Business Days prior to such final Distribution Date, stating: (i) the Distribution Date upon or with respect to which the final distribution on the Certificates shall be made upon presentation and surrender of the Certificates at the office of the Owner Trustee therein designated; (ii) the amount of any such final distribution; and (iii) that the Record Date otherwise applicable to such Distribution Date is not applicable, distributions being made only upon presentation and surrender of the Certificates at the office of the Owner Trustee therein specified. Upon presentation and surrender of the Certificates to the Owner Trustee, the Servicer shall cause to be distributed to Investor Certificateholders and to the Residual Certificateholder amounts distributable on such Distribution Date in accordance with Section 5.2. Notwithstanding the foregoing, all references to presentation and surrender in this Section 10.1(c) are subject to Section 10.1(h) and any such notice shall so provide. -28- (d) If all of the Investor Certificateholders shall not surrender their Investor Certificates for cancellation within six months after the date specified in the written notice specified in Section 10.1(c), the Owner Trustee shall give a second written notice to the remaining Investor Certificateholders to surrender their Investor Certificates for cancellation and receive the final distribution with respect thereto. If within one year after the second notice all the Investor Certificates shall not have been surrendered for cancellation, the Owner Trustee may take appropriate steps, or may appoint an agent to take appropriate steps, to contact the remaining Investor Certificateholders concerning surrender of their Investor Certificates, and the cost thereof shall be paid out of the funds and other assets that shall remain subject to this Agreement. Subject to applicable laws with respect to escheat of funds, any funds remaining in the Trust after exhaustion of such remedies in the preceding sentence shall be deemed property of the Residual Certificateholder and distributed by the Owner Trustee to the Residual Certificateholder. (e) On the Business Day immediately following the final Distribution Date and after the final distribution has been made to Investor Certificateholders pursuant to Section 5.2, any remaining funds on deposit in the Investment Account shall be distributed to the Residual Certificateholder by the Owner Trustee. (f) Upon the winding up of the Trust and its termination, the Owner Trustee shall cause the Certificate of Trust to be cancelled by filing a certificate of cancellation with the Secretary of State in accordance with the provisions of Section 3810 of the Business Trust Statute. (g) Within sixty days of the later of (i) the cancellation of all of the Investor Certificates pursuant to Section 10.1(c) or Section 10.1(d), or (ii) payment to the Residual Certificateholder of funds remaining in the Trust pursuant to Sections 10.1(d) and (e), the Owner Trustee shall provide the Rating Agency with written notice stating that all Investor Certificates have been so cancelled or such funds have been so paid to the Residual Certificateholder. (h) Notwithstanding the foregoing provisions of this Section 10.1, if an Investor Certificateholder is an Institutional Investor (or a nominee of an Institutional Investor), such Institutional Investor shall use its reasonable efforts to surrender its Investor Certificates upon written request of the Trust following final payment in respect thereof, but shall not be required to surrender its Investor Certificates as a condition to receipt of any payment in respect of any Investor Certificate. If an Institutional Investor shall not have surrendered its Investor Certificates within ten Business Days of being so requested to do so pursuant to this Section 10.1(h), such Institutional Investor will be deemed to indemnify, defend and hold harmless the Trust, the Owner Trustee and the Seller from and against any and all costs, expenses, losses, claims, damages and liabilities (including, without limitation, expenses of counsel and expenses of litigation) arising out of or incurred in connection with such failure to surrender its Investor Certificates. SECTION 10.2 DISSOLUTION UPON BANKRUPTCY OF THE RESIDUAL CERTIFICATEHOLDER. Subject to the liquidation, winding-up and dissolution procedures and -29- time periods described below, upon the occurrence of an Insolvency Event with respect to the Residual Certificateholder, the Trust shall terminate, subject to the liquidation, winding-up and dissolution procedures described below, and provided that the rights and obligations of the parties to this Agreement shall not terminate during such liquidation, winding-up and dissolution. Promptly after the occurrence of any Insolvency Event with respect to the Residual Certificateholder: (i) the Residual Certificateholder shall give the Owner Trustee written notice of such Insolvency Event and (ii) the Owner Trustee shall, upon the receipt of such written notice from the Residual Certificateholder, give prompt written notice to the Investor Certificateholders of the occurrence of such event; PROVIDED, HOWEVER, that any failure to give a notice required by this sentence shall not prevent or delay in any manner a termination of the Trust pursuant to the first sentence of this Section 10.2. Ninety days after the date the Residual Certificateholder gives the notice described in the preceding sentence, unless the Owner Trustee shall have received written instructions from the Majority Certificateholders as of the close of the preceding Distribution Date, to the effect that such Persons disapprove of the prospective liquidation of the assets held by the Trust and the prospective termination of the Trust and wish to reconstitute the Trust pursuant to terms corresponding to the terms of this Agreement, the Owner Trustee shall promptly sell, dispose of or otherwise liquidate or realize upon the assets of the Trust in a commercially reasonable manner and on commercially reasonable terms (which may include continuing to hold the Purchased Contract Receivables and receiving collections thereon). The proceeds of any such sale, disposition or liquidation of the assets of the Trust shall be treated as collections on the Purchased Contract Receivables and deposited in the Collection Account and promptly distributed by the Owner Trustee in accordance with Section 5.2. ARTICLE XI AMENDMENTS AND WAIVERS SECTION 11.1 PURPOSE OF AMENDMENTS AND WAIVERS. This Agreement may be amended, or any provision hereof may be waived, from time to time by the Residual Certificateholder, the Servicer and the Owner Trustee with the consent of the Majority Certificateholders (which consent, whether given pursuant to this Section 11.1 or pursuant to any other provision of this Agreement, shall be conclusive and binding on all Investor Certificateholders and on all future holders of Investor Certificates and of any Investor Certificates issued upon the transfer thereof or in exchange thereof or in lieu thereof whether or not notation of such consent is made upon the Investor Certificates) for the purpose of adding any provisions to or changing in any manner or eliminating or waiving compliance with any of the provisions of this Agreement, or of modifying in any manner the rights of the Investor Certificateholders; PROVIDED, HOWEVER, that no such amendment or waiver shall, without the consent of the Investor Certificateholder of each Investor Certificate at the time outstanding (a) change in any manner the amount of, or accelerate or delay the timing of, distributions that shall be required to be made on any Investor Certificate, (b) adjust the Fixed Return Rate, (c) change the aforesaid percentage required to consent to any such amendment or waiver or (d) amend Section 7.2 or Section 10.2. No amendment or waiver affecting the interest of the Residual Certificateholder shall be made without its consent. -30- SECTION 11.2 FORM OF AMENDMENTS OR WAIVERS. (a) Prior to the execution of any amendment or waiver pursuant to Section 11.1, the Owner Trustee shall furnish written notification of the substance of such amendment or waiver to the Investor Certificateholders and the Rating Agency. (b) Promptly after the execution of any amendment or waiver pursuant to Section 11.1, the Owner Trustee shall furnish a copy of such amendment or waiver to each Investor Certificateholder and the Rating Agency. (c) The particular form of any proposed amendment or waiver shall be required to be provided to the Investor Certificateholders and the Rating Agency in connection with any request for an amendment or waiver. The manner of obtaining such consents (and any other amendments or waivers of Investor Certificateholders provided for in this Agreement or in any other Basic Document) and of evidencing the authorization of the execution thereof by Investor Certificateholders shall be subject to such reasonable requirements as the Owner Trustee may prescribe. (d) Promptly after the execution of any amendment to the Certificate of Trust, the Owner Trustee shall cause the filing of such amendment with the Secretary of State of the State of Delaware. (e) Prior to the execution of any amendment to this Agreement or the Certificate of Trust or waiver of any provision of this Agreement, the Owner Trustee shall be entitled to receive and rely upon an Opinion of Counsel stating that the execution of such amendment or waiver is authorized or permitted by this Agreement and that all conditions precedent to such execution have been satisfied. The Owner Trustee may, but shall not be obligated to, enter into any such amendment or waiver which affects its own rights, duties or immunities under this Agreement or otherwise. ARTICLE XII MISCELLANEOUS SECTION 12.1 NO LEGAL TITLE TO OWNER TRUST ESTATE. The Certificateholders shall not have legal title to any part of the Owner Trust Estate. The Certificateholders shall be entitled to receive distributions with respect to their undivided ownership interest therein only in accordance with the Basic Trust Documents. No transfer, by operation of law or otherwise, of any right, title, and interest of the Certificateholders to and in their ownership interest in the Owner Trust Estate shall operate to terminate this Agreement or the trusts hereunder or entitle any transferee to an accounting or to the transfer to it of legal title to any part of the Owner Trust Estate. SECTION 12.2 LIMITATIONS ON RIGHTS OF OTHERS. The provisions of this Agreement are solely for the benefit of the Owner Trustee, the Servicer and the Certificateholders, and nothing in this Agreement, whether express or implied, shall be construed to give to any other Person any legal or equitable right, remedy or claim in -31- the Owner Trust Estate or under or in respect of this Agreement or any covenants, conditions or provisions contained herein. SECTION 12.3 NOTICES. All demands, notices and communications upon or to the Servicer, the Owner Trustee, the Rating Agency or any Certificateholder under this Agreement shall be delivered as specified in APPENDIX B to the Sale and Servicing Agreement. SECTION 12.4 SEVERABILITY. If any one or more of the covenants, agreements, provisions or terms of this Agreement shall be for any reason whatsoever held invalid, then such covenants, agreements, provisions or terms shall be deemed enforceable to the fullest extent permitted, and if not so permitted, shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement or of the Certificates or the rights of the holders thereof. SECTION 12.5 COUNTERPARTS. This Agreement may be executed by the parties hereto in separate counterparts (and by different parties on separate counterparts), each of which when so executed and delivered shall be an original, but all of which together shall constitute one and the same instrument. SECTION 12.6 SUCCESSORS AND ASSIGNS. All covenants and agreements contained herein shall be binding upon, and inure to the benefit of, the Servicer, HGSC, the Owner Trustee, the Residual Certificateholder and each Investor Certificateholder and their respective successors and permitted assigns, all as herein provided. Any request, notice, direction, consent, waiver or other instrument or action by an Investor Certificateholder shall bind the successors and assigns of such Investor Certificateholder. SECTION 12.7 CONFIDENTIALITY. For the purposes of this Section 12.7, "Confidential Information" means information delivered to an Investor Certificateholder by or on behalf of the Trust or the Servicer in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by the Investor Certificateholder as being confidential information of the Servicer or the Trust, provided that such term does not include information that (a) was publicly known or otherwise known to the Investor Certificateholder prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by the Investor Certificateholder or any Person acting on its behalf, (c) otherwise becomes known to the Investor Certificateholder other than through disclosure by any FRGC Party or (d) constitutes financial statements delivered to it under this Agreement that are otherwise publicly available. Each Investor Certificateholder will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by it in good faith to protect confidential information of third parties delivered to it, provided that each Investor Certificateholder may deliver or disclose Confidential Information to (i) its directors, officers, employees, agents, attorneys and affiliates (to the extent such disclosure reasonably relates to the administration of its investment in the Trust), (ii) its financial -32- advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 12.7, (iii) any other Certificateholder, (iv) any Institutional Investor to which the Investor Certificateholder sells or offers to sell its Investor Certificates (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 12.7), (v) any Person from which it offers to purchase any security of the Trust or any FRGC Party (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 12.7), (vi) any federal or state regulatory authority having jurisdiction over it, (vii) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about its investment portfolio, or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to it, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which it is a party or (z) if a default by the Servicer under any of the Basic Trust Documents has occurred and is continuing, to the extent it may reasonably determine such delivery and disclosure to be necessary or appropriate. Each Investor Certificateholder, by its acceptance of an Investor Certificate, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 12.7 as though it were a party to this Agreement. SECTION 12.8 NO RECOURSE. Each Investor Certificateholder by accepting an Investor Certificate acknowledges that such Person's Investor Certificate represents a beneficial interest in the Trust only and does not represent interest in or obligation of the Servicer, the Seller, the Owner Trustee or any Affiliate thereof. Except as expressly provided in the Basic Trust Documents, neither the Servicer nor the Owner Trustee in their respective individual capacities, nor any of their respective partners, beneficiaries, agents, officers, directors, employees or successors or assigns, shall be personally liable for, nor shall recourse be had to any of them for, the distribution of the Investor Certificate Balance with respect to (or earnings on) the Investor Certificates, or the Owner Trustee's performance of, or omission to perform, any of the covenants, obligations or indemnifications contained in the Investor Certificates or this Agreement, it being understood that such covenants and obligations have been made by the Owner Trustee solely in its capacity as the Owner Trustee. Each Investor Certificateholder by the acceptance of an Investor Certificate shall agree that, except as expressly provided in the Basic Trust Documents, in the case of nonpayment of any amounts with respect to the Investor Certificates, it shall have no claim against any of the foregoing for any deficiency, loss or claim therefrom. SECTION 12.9 HEADINGS. The headings of the various Articles and Sections herein are for purposes of reference only and shall not affect the meaning or interpretation of any provision hereof. SECTION 12.10 COLLATERAL SHARING AND SECURITY AGREEMENT. The Investor Certificateholders agree to be bound by the terms and conditions of the Collateral Sharing and Security Agreement. -33- SECTION 12.11 GOVERNING LAW. This agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, excluding choice-of-law principles of the laws of such State that would require the application of the laws of a jurisdiction other than such State. -34- IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to be duly executed by their respective officers hereunto duly authorized, in the presence of the undersigned witnesses, as of the day and year first above written. HATTIESBURG GAS STORAGE COMPANY By: HATTIESBURG INDUSTRIAL GAS SALES COMPANY, its General Partner By:/s/ J.A. Ballew --------------------------- J. A. Ballew, Vice President Witnesses: /s/ Jennifer L. Janss ----------------- /s/ Darrick Gring ----------------- HATTIESBURG INDUSTRIAL GAS SALES COMPANY By:/s/ J.A Ballew --------------------------- J. A. Ballew, Vice President Witnesses: /s/ Jennifer L. Janss ----------------- /s/ Darrick Gring ----------------- WILMINGTON TRUST COMPANY, as Owner Trustee By: /s/ W. Chris Sponenberg ----------------------- Name: W. Chris Sponenberg Title: Financial Services Officer Witnesses:/s/ Jennifer L. Janss ----------------- /s/ Darrick Gring ----------------- -35- STATE OF NEW YORK ) ) COUNTY OF NEW YORK ) On this the 21st day of November, 1995, before me, Holly C. Waugh, the undersigned officer, personally appeared J. A. Ballew, who acknowledged himself to be the Vice President of HATTIESBURG INDUSTRIAL GAS SALES COMPANY, the general partner of HATTIESBURG GAS STORAGE COMPANY, and that he, being authorized to do so, executed the foregoing instrument for the purposes therein contained. In witness whereof, I hereunto set my hand and official seal. /s/ Holly C. Waugh ------------------ Notary Public in and for the State of New York My Commission expires: July 31, 1996 ------------------ STATE OF NEW YORK ) ) COUNTY OF NEW YORK ) On this the 21st day of November, 1995, before me, Holly C. Waugh, the undersigned officer, personally appeared J. A. Ballew, who acknowledged himself to be the Vice President of HATTIESBURG INDUSTRIAL GAS SALES COMPANY, and that he, being authorized to do so, executed the foregoing instrument for the purposes therein contained. In witness whereof, I hereunto set my hand and official seal. /s/ Holly C Waugh -------------------- Notary Public in and for the State of New York My Commission expires: July 31, 1996 ---------------------- -36- STATE OF NEW YORK ) ) COUNTY OF NEW YORK ) On this the 21st day of November, 1995, before me, Holly C. Waugh, the undersigned officer, personally appeared W. Chris Sponenberg, who acknowledged himself to be the Financial Services Officer of WILMINGTON TRUST COMPANY, and that he, being authorized to do so, executed the foregoing instrument for the purposes therein contained. In witness whereof, I hereunto set my hand and official seal. /s/ Holly C. Waugh ---------------------- Notary Public in and for the State of New York My Commission expires: July 31, 1996 ---------------------- -37- EX-4.3 3 EXHIBIT 4.3 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- HATTIESBURG GAS STORAGE COMPANY 8.12% Secured Guaranteed Notes Due 2005 -------------------- INDENTURE Dated as of November 21, 1995 -------------------- CHEMICAL BANK Indenture Trustee - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page ---- ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE . . . . . 2 SECTION 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE II THE NOTES. . . . . . . . . . . . . . 2 SECTION 2.1 Form . . . . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 2.2 Execution, Authentication and Delivery . . . . . . . . 2 SECTION 2.3 Registration; Registration of Transfer and Exchange of Notes. . . . . . . . . . . . . . . . . . 3 SECTION 2.4 Mutilated, Destroyed, Lost or Stolen Notes . . . . . . 4 SECTION 2.5 Persons Deemed Noteholders . . . . . . . . . . . . . . 5 SECTION 2.6 Payment of Principal and Interest. . . . . . . . . . . 6 SECTION 2.7 Cancellation of Notes. . . . . . . . . . . . . . . . . 6 SECTION 2.8 Tax Treatment. . . . . . . . . . . . . . . . . . . . . 7 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE ISSUER AND THE SERVICER. . . . . . . . . . . . 7 SECTION 3.1 Representations and Warranties as to the Receivables and Contracts. . . . . . . . . . . . . . 7 SECTION 3.2 Other Representations and Warranties . . . . . . . . . 7 ARTICLE IV COVENANTS. . . . . . . . . . . . . . 11 SECTION 4.1 Payment of Principal and Interest. . . . . . . . . . . 11 SECTION 4.2 Maintenance of Agency Office . . . . . . . . . . . . . 12 SECTION 4.3 Money for Payments To Be Held in Trust . . . . . . . . 12 SECTION 4.4 Protection of Trust Estate; Acknowledgment of Pledge. . . . . . . . . . . . . . . . . . . . . . 13 SECTION 4.5 Covenants of the Issuer and the Servicer . . . . . . . 13 SECTION 4.6 Annual Statement as to Compliance; Annual Opinion . . . . . . . . . . . . . . . . . . . 17 SECTION 4.7 Information Provided to Rating Agency. . . . . . . . . 18 SECTION 4.8 Delivery of Financial Statements . . . . . . . . . . . 18 SECTION 4.9 Other Information. . . . . . . . . . . . . . . . . . . 19 SECTION 4.10 Notice of Events of Default. . . . . . . . . . . . . . 19 SECTION 4.11 Further Instruments and Acts . . . . . . . . . . . . . 20 ARTICLE V SATISFACTION AND DISCHARGE . . . . . . . . . 20 SECTION 5.1 Satisfaction and Discharge of Indenture. . . . . . . . 20 SECTION 5.2 Application of Trust Money . . . . . . . . . . . . . . 20 i Page ---- ARTICLE VI DEFAULT AND REMEDIES. . . . . . . . . . . 20 SECTION 6.1 Events of Default. . . . . . . . . . . . . . . . . . . 20 SECTION 6.2 Acceleration of Maturity; Rescission and Annulment; Remedies. . . . . . . . . . . . . . . . . 22 SECTION 6.3 Other Remedies; Priorities . . . . . . . . . . . . . . 25 SECTION 6.4 Limitation of Suits. . . . . . . . . . . . . . . . . . 26 SECTION 6.5 Unconditional Rights of Noteholders To Receive Principal and Interest . . . . . . . . . . . 27 SECTION 6.6 Restoration of Rights and Remedies . . . . . . . . . . 27 SECTION 6.7 Rights and Remedies Cumulative . . . . . . . . . . . . 28 SECTION 6.8 Delay or Omission Not a Waiver . . . . . . . . . . . . 28 SECTION 6.9 Control by Noteholders . . . . . . . . . . . . . . . . 28 SECTION 6.10 Waiver of Past Defaults. . . . . . . . . . . . . . . . 28 SECTION 6.11 Undertaking for Costs. . . . . . . . . . . . . . . . . 29 SECTION 6.12 Action on Notes. . . . . . . . . . . . . . . . . . . . 29 ARTICLE VII THE INDENTURE TRUSTEE. . . . . . . . . . . 30 SECTION 7.1 Duties of Indenture Trustee. . . . . . . . . . . . . . 30 SECTION 7.2 Rights of Indenture Trustee. . . . . . . . . . . . . . 32 SECTION 7.3 Indenture Trustee May Own Notes. . . . . . . . . . . . 33 SECTION 7.4 Indenture Trustee's Disclaimer . . . . . . . . . . . . 33 SECTION 7.5 Notice of Defaults . . . . . . . . . . . . . . . . . . 33 SECTION 7.6 Reports by Indenture Trustee to Noteholders. . . . . . 33 SECTION 7.7 Compensation; Indemnity. . . . . . . . . . . . . . . . 34 SECTION 7.8 Replacement of Indenture Trustee . . . . . . . . . . . 34 SECTION 7.9 Merger or Consolidation of Indenture Trustee . . . . . 35 SECTION 7.10 Appointment of Co-Indenture Trustee or Separate Indenture Trustee . . . . . . . . . . . . . 36 SECTION 7.11 Eligibility; Disqualification. . . . . . . . . . . . . 37 SECTION 7.12 Representations and Warranties of Indenture Trustee. . . . . . . . . . . . . . . . . . 37 SECTION 7.13 Indenture Trustee May Enforce Claims Without Possession of Notes. . . . . . . . . . . . . 37 SECTION 7.14 Suit for Enforcement . . . . . . . . . . . . . . . . . 37 SECTION 7.15 Rights of Noteholders to Direct Indenture Trustee. . . . . . . . . . . . . . . . . . . . . . . . 38 ARTICLE VIII NOTEHOLDERS' LISTS AND REPORTS . . . . . . . . 38 SECTION 8.1 Indenture Trustee To Furnish Issuer Names and Addresses of Noteholders . . . . . . . . . . . . 38 SECTION 8.2 Preservation of Information; Communications to Noteholders . . . . . . . . . . . . . . . . . . . 38 ii Page ---- ARTICLE IX COLLATERAL ACCOUNT, DISBURSEMENTS AND RELEASES . . . . 39 SECTION 9.1 Collateral Account . . . . . . . . . . . . . . . . . . 39 SECTION 9.2 Servicing Procedures . . . . . . . . . . . . . . . . . 40 SECTION 9.3 Release of Trust Estate. . . . . . . . . . . . . . . . 42 SECTION 9.4 Opinion of Counsel . . . . . . . . . . . . . . . . . . 42 ARTICLE X SUPPLEMENTAL INDENTURES . . . . . . . . . . 42 SECTION 10.1 Purpose of Supplemental Indentures . . . . . . . . . . 42 SECTION 10.2 Execution of Supplemental Indentures . . . . . . . . . 44 SECTION 10.3 Effect of Supplemental Indenture . . . . . . . . . . . 44 SECTION 10.4 Reference in Notes to Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . 44 ARTICLE XI REDEMPTION AND REPURCHASE OF NOTES . . . . . . . 45 SECTION 11.1 Optional Redemption. . . . . . . . . . . . . . . . . . 45 SECTION 11.2 Repurchase at the Option of Noteholders. . . . . . . . 46 SECTION 11.3 Mandatory Partial Redemption . . . . . . . . . . . . . 47 SECTION 11.4 Purchase of Notes. . . . . . . . . . . . . . . . . . . 48 SECTION 11.5 Application of Funds on Prepayment or Purchase . . . . 49 ARTICLE XII MISCELLANEOUS. . . . . . . . . . . . . 49 SECTION 12.1 Compliance Certificates and Opinions . . . . . . . . . 49 SECTION 12.2 Form of Documents Delivered to Indenture Trustee . . . 50 SECTION 12.3 Acts of Noteholders. . . . . . . . . . . . . . . . . . 50 SECTION 12.4 Notices, etc., to Indenture Trustee, Issuer and Rating Agency. . . . . . . . . . . . . . . . . . 51 SECTION 12.5 Notices to Noteholders; Waiver . . . . . . . . . . . . 51 SECTION 12.6 Alternate Payment and Notice Provisions. . . . . . . . 51 SECTION 12.7 Effect of Headings and Table of Contents . . . . . . . 52 SECTION 12.8 Successors and Assigns . . . . . . . . . . . . . . . . 52 SECTION 12.9 Separability . . . . . . . . . . . . . . . . . . . . . 52 SECTION 12.10 Benefits of Indenture. . . . . . . . . . . . . . . . . 52 SECTION 12.11 Legal Holidays . . . . . . . . . . . . . . . . . . . . 52 SECTION 12.12 Governing Law. . . . . . . . . . . . . . . . . . . . . 52 SECTION 12.13 Counterparts . . . . . . . . . . . . . . . . . . . . . 53 SECTION 12.14 Recording of Indenture . . . . . . . . . . . . . . . . 53 SECTION 12.15 No Recourse. . . . . . . . . . . . . . . . . . . . . . 53 SECTION 12.16 Access to Certain Documentation and Information Regarding Pledged Contract Receivables . . . . . . . 53 SECTION 12.17 Confidentiality. . . . . . . . . . . . . . . . . . . . 54 SECTION 12.18 Surrender of Notes by Institutional Investors. . . . . 55 SECTION 12.19 Collateral Sharing and Security Agreement. . . . . . . 55 iii Page ---- Schedule 1 - Schedule of Payments of Principal of the Notes Schedule 2 - Closing Conditions Schedule 3 - [Intentionally Omitted] Schedule 4 - Schedule of Contracts and Monthly Payments Schedule 5 - Business Interruption Insurance Schedule 6 - Storage Facilities Schedule 7 - Eligible Obligors Schedule 8 - Schedule of Pledged Contract Receivables Exhibit A - Form of Note Exhibit B - [Intentionally Omitted] Exhibit C - Form of Collateral Sharing and Security Agreement Exhibit D - Undertaking Letter Exhibit E - Form of Deed of Trust, Security Agreement and Fixture Filing Exhibit F - Form of Guarantee of FRGC Exhibit G - Form of Guarantee of HIG Appendix A - Defined Terms and Rules of Construction Appendix B - Notice Addresses and Procedures iv INDENTURE, dated as of November 21, 1995, by and among HATTIESBURG GAS STORAGE COMPANY, a Delaware general partnership (the "Issuer"), HATTIESBURG INDUSTRIAL GAS SALES COMPANY, a Delaware corporation (the "Servicer") and CHEMICAL BANK, as trustee and not in its individual capacity (the "Indenture Trustee"). Each party agrees as follows for the benefit of the other parties and for the equal and ratable benefit of the Noteholders: GRANTING CLAUSE The Issuer (and the Servicer with respect to clauses (a), (b) and (e) of this paragraph to the extent of its interest therein, if any) hereby Grants to the Indenture Trustee at the Closing Date, as trustee for the benefit of the Noteholders, all of the Issuer's and the Servicer's, as the case may be, right, title and interest in, to and under (a) the Pledged Contract Receivables and all monies paid or to be paid thereon and due or to be due thereunder; (b) all guarantees, insurance and other agreements or arrangements of Obligors of whatever character to the extent supporting or securing payment of any Pledged Contract Receivable whether pursuant to the Contracts or otherwise; (c) all rights to distributions and other payments in respect of the Investor Certificates in an aggregate initial amount of $11,452,177.84 acquired by the Issuer on the Closing Date (the "Pledged Investor Certificate Rights"); (d) the Collateral Account and all funds on deposit therein from time to time; and (e) all rights relating to or arising therefrom and all proceeds of any and all of the foregoing (collectively, the "COLLATERAL"), to secure the payment of principal and premium, if any, of and interest on, and any other amounts owing in respect of, the Notes, equally and ratably without prejudice, priority or distinction, and to secure all obligations under, and compliance with the provisions of, this Indenture, all as provided in this Indenture. This Indenture constitutes a security agreement under the UCC. The foregoing Grant includes all rights, powers and options (but none of the obligations, if any) of the Issuer and the Servicer under any agreement or instrument included in the Collateral, including the immediate and continuing right to claim for, collect, receive and give receipt for payments in respect of the Pledged Contract Receivables included in the Collateral and all other monies payable under the Collateral, to give and receive notices and other communications, to make waivers or other agreements, to exercise all rights and options, to bring Proceedings in the name of the Issuer, the Servicer or otherwise and generally to do and receive anything that the Issuer is or may be entitled to do or receive under or with respect to the Collateral. The Indenture Trustee, as trustee on behalf of the Noteholders, acknowledges such Grant and accepts the trusts under this Indenture in accordance with the provisions of this Indenture. In addition to the foregoing, the Issuer, the Servicer and FRGC have contemporaneously herewith granted to the Collateral Trustee, for the benefit of the Indenture Trustee and as security for the obligations of the Issuer and Servicer hereunder, a security interest in the Shared Collateral and Mortgage Collateral pursuant to the Collateral Sharing and Security Agreement and the Mortgage. ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.1 DEFINITIONS. Certain capitalized terms used in this Indenture shall have the respective meanings assigned them in Part I of APPENDIX A to this Indenture. All references herein to "the Indenture" or "this Indenture" are to this Indenture as it may be amended, supplemented or modified from time to time, the exhibits hereto and the capitalized terms used herein which are defined in such APPENDIX A. All references herein to Articles, Sections, subsections and exhibits are to Articles, Sections, subsections and Exhibits contained in or attached to this Indenture unless otherwise specified. All terms defined in this Indenture shall have the defined meanings when used in any certificate, notice, Note or other document made or delivered pursuant hereto unless otherwise defined therein. The rules of construction set forth in Part II of such APPENDIX A shall be applicable to this Indenture. ARTICLE II THE NOTES SECTION 2.1 FORM. (a) The Notes, with the Indenture Trustee's certificate of authentication, shall be substantially in the form set forth in EXHIBIT A, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and with such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may, consistently herewith, be determined by the officers executing such Notes, as evidenced by their execution of the Notes. Any portion of the text of any Note may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Note. (b) The Notes shall be issued in definitive, fully-registered form only. The Notes shall be typewritten, printed, lithographed or engraved or produced by any combination of these methods (with or without steel engraved borders), all as determined by the officers executing such Notes, as evidenced by their execution of such Notes. (c) Each Note shall be dated the date of its authentication. The terms of the Notes as provided for in EXHIBIT A hereto are part of the terms of this Indenture. SECTION 2.2 EXECUTION, AUTHENTICATION AND DELIVERY. (a) Each Note shall be dated the date of its authentication, and shall be issuable as a registered Note in the minimum denomination of $1,000,000. -2- (b) The Notes shall be executed on behalf of the Issuer by any of its Authorized Officers. The signature of any such Authorized Officer on the Notes may be manual or facsimile. (c) Notes bearing the manual or facsimile signature of individuals who were at any time Authorized Officers of the Issuer shall bind the Issuer, notwithstanding that such individuals or any of them have ceased to hold such office prior to the authentication and delivery of such Notes or did not hold such office at the date of such Notes. (d) The Indenture Trustee shall upon Issuer Order authenticate and deliver to or upon the order of the Issuer, the Notes for original issue in aggregate principal amount of $36,474,020.00. (e) No Notes shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose, unless there appears on such Note a certificate of authentication substantially in the form set forth in EXHIBIT A, executed by the Indenture Trustee by the manual signature of one of its authorized signatories, and such certificate upon any Note shall be conclusive evidence, and the only evidence, that such Note has been duly authenticated and delivered hereunder. SECTION 2.3 REGISTRATION; REGISTRATION OF TRANSFER AND EXCHANGE OF NOTES. (a) The Note Registrar shall cause to be kept the Note Register in which, subject to such reasonable regulations as the Note Registrar may prescribe, the Issuer shall provide for the registration of the Notes and the registration of transfers and exchanges of the Notes. The Indenture Trustee shall initially be the Note Registrar for the purpose of registering the Notes and transfers of the Notes as herein provided. Upon any resignation of any Note Registrar, the Issuer shall promptly appoint a successor Note Registrar or, if it elects not to make such an appointment, assume the duties of the Note Registrar. (b) If a Person other than the Indenture Trustee is appointed by the Issuer as Note Registrar, the Issuer will give the Indenture Trustee prompt written notice of the appointment of such Note Registrar and of the location, and any change in the location, of the Note Register. The Indenture Trustee shall have the right to inspect the Note Register at all reasonable times and to obtain copies thereof. The Indenture Trustee shall have the right to rely upon a certificate executed on behalf of the Note Registrar by an Executive Officer thereof as to the names and addresses of the Noteholders and the principal amounts and number of such Notes. (c) Upon surrender for registration of transfer of any Note at the Corporate Trust Office of the Indenture Trustee or the Agency Office of the Issuer (and following the delivery, in the former case, of such Notes to the Issuer by the Indenture Trustee), the Issuer shall execute, the Indenture Trustee shall authenticate and the Noteholder shall obtain from the Indenture Trustee, in the name of the designated transferee or transferees, one or more new Notes in any authorized denominations, of a like aggregate principal amount. If the Issuer requests, any transferee of a Note shall -3- execute and deliver to the Indenture Trustee an Undertaking Letter in the form set forth in Exhibit D. (d) At the option of the Noteholder, Notes may be exchanged for other Notes in any authorized denominations, of a like aggregate principal amount, upon surrender of the Notes to be exchanged at the Corporate Trust Office of the Indenture Trustee or the Agency Office of the Issuer (and following the delivery, in the former case, of such Notes to the Issuer by the Indenture Trustee), the Issuer shall execute, and the Indenture Trustee shall authenticate and the Noteholder shall obtain from the Indenture Trustee, the Notes which the Noteholder making the exchange is entitled to receive. (e) All Notes issued upon any registration of transfer or exchange of Notes shall be the valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Notes transferred or exchanged. (f) Every Note presented or surrendered for registration of transfer or exchange shall be duly endorsed by, or be accompanied by a written instrument of transfer in form reasonably satisfactory to the Indenture Trustee and the Note Registrar, duly executed by the Noteholder thereof or such Noteholder's attorney duly authorized in writing. (g) No service charge shall be made to a Noteholder for any registration of transfer or exchange of Notes, but the Issuer or Indenture Trustee may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Notes, other than exchanges pursuant to Section 10.4 not involving any transfer. (h) The preceding provisions of this Section 2.3 notwithstanding, the Issuer shall not be required to transfer or make exchanges, and the Note Registrar need not register transfers or exchanges, of Notes that (i) are being redeemed, or are required to be redeemed, pursuant to Article XI, if applicable; or (ii) are due for repayment in full, in each case, within 15 days of submission to the Corporate Trust Office or the Agency Office. SECTION 2.4 MUTILATED, DESTROYED, LOST OR STOLEN NOTES. (a) If (i) any mutilated Note is surrendered to the Indenture Trustee, or the Indenture Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Note (PROVIDED, that an Institutional Investor that is a Noteholder, or the nominee of which is a Noteholder, may provide its own written evidence of such destruction, loss or theft and such written evidence shall be deemed satisfactory evidence for such purpose), and (ii) there is delivered to the Indenture Trustee such security or indemnity as may be required by it to hold the Issuer and the Indenture Trustee harmless (PROVIDED, that if the Noteholder is, or is a nominee for, an Institutional Investor with a claims-paying ability or long-term debt rating of at least investment grade or its equivalent, then an unsecured agreement of indemnity by such Institutional Investor shall be deemed satisfactory indemnity for such purpose), then, -4- in the absence of notice to the Issuer or the Indenture Trustee that such Note has been acquired by a bona fide purchaser, the Issuer shall execute and upon the Issuer's request the Indenture Trustee shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Note, a replacement Note of a like aggregate principal amount; PROVIDED, HOWEVER, that if any such destroyed, lost or stolen Note, but not a mutilated Note, shall have become or within seven days shall be due and payable in full, or shall have been called for redemption, instead of issuing a replacement Note, the Issuer may make payment to the Noteholder of such destroyed, lost or stolen Note when so due or payable or upon the redemption date, if applicable, without surrender thereof. (b) If, after the delivery of a replacement Note or payment in respect of a destroyed, lost or stolen Note pursuant to subsection (a), any bona fide purchaser of the original Note in lieu of which such replacement Note was issued presents for payment such original Note, the Issuer and the Indenture Trustee shall be entitled to recover such replacement Note (or such payment) from (i) any Person to whom it was delivered, (ii) the Person taking such replacement Note from the Person to whom such replacement Note was delivered or (iii) any assignee of such Person, except any bona fide purchaser, and the Issuer and the Indenture Trustee shall be entitled to recover upon the security or indemnity provided therefor to the extent of any loss, damage, cost or expense incurred by the Issuer or the Indenture Trustee in connection therewith. (c) In connection with the issuance of any replacement Note under this Section 2.4, the Issuer may require the payment by the Noteholder of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto. (d) Any duplicate Note issued pursuant to this Section 2.4 in replacement for any mutilated, destroyed, lost or stolen Note shall constitute an original additional contractual obligation of the Issuer, whether or not the mutilated, destroyed, lost or stolen Note shall be found at any time or be enforced by any Person, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Notes duly issued hereunder. (e) The provisions of this Section 2.4 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes. SECTION 2.5 PERSONS DEEMED NOTEHOLDERS. Prior to due presentment for registration of transfer of any Note, the Issuer, the Indenture Trustee and any agent of the Issuer or the Indenture Trustee may treat the Person in whose name any Note is registered (as of the day of determination) as the Noteholder for the purpose of receiving payments of principal and premium, if any, of and interest on such Note and for all other purposes whatsoever, whether or not such Note be overdue, and neither the Issuer, the Indenture Trustee nor any agent of the Issuer or the Indenture Trustee shall be affected by notice to the contrary. -5- SECTION 2.6 PAYMENT OF PRINCIPAL AND INTEREST. (a) Interest on Notes shall accrue in the manner set forth in EXHIBIT A at the Interest Rate, and such interest shall be payable on each Payment Date as specified in the form of Note set forth in EXHIBIT A. Any installment of interest payable on any Note shall be paid to the Person in whose name such Note is registered on the applicable Record Date. (b) Prior to the occurrence of an Event of Default and an acceleration in accordance with Section 6.2(a) or (b) the principal of the Notes shall be payable on each Payment Date as specified in the form of Note set forth in EXHIBIT A and SCHEDULE 1. Any instalment of principal payable on any Note shall be paid to the Person in whose name such Note is registered on the applicable Record Date. (c) With respect to any Payment Date on which the final instalment of principal and premium, if any, of and interest on the Notes is to be paid, the Indenture Trustee shall notify each Noteholder as of the Record Date for such Payment Date of the fact that the final instalment of principal and premium, if any, of and interest on the Notes is to be paid on such Payment Date. Such notice shall be sent on the Record Date in accordance with Section 12.5(a) and shall specify, subject to Section 12.18 hereof, that such final instalment shall be payable only upon presentation and surrender of Notes and shall specify the place where Notes may be presented and surrendered for payment of such instalment and the manner in which such payment shall be made. Notices in connection with redemptions of Notes shall be mailed to Noteholders as provided in Section 11.3. Within sixty days of the surrender pursuant to this Section 2.6(c) or cancellation pursuant to Section 2.7 of all Notes, the Indenture Trustee shall provide the Rating Agency with written notice stating that all Notes have been surrendered or cancelled. (d) Any instalment of principal and premium, if any, or of interest on the Notes shall be paid (i) by wire transfer, in immediately available funds, to the account of the Person entitled thereto at a bank or other entity having appropriate facilities therefor, if such Person shall have provided to the Issuer appropriate written instructions at least five Business Days prior to the Record Date for such payment or (ii) if clause (i) is not applicable, by check mailed first-class, postage prepaid to such Person's address as it appears in the Note Register on such Record Date. SECTION 2.7 CANCELLATION OF NOTES. All Notes surrendered for payment, redemption, exchange or registration of transfer shall, if surrendered to any Person other than the Indenture Trustee, be delivered to the Indenture Trustee and shall be promptly canceled by the Indenture Trustee. The Issuer may at any time deliver to the Indenture Trustee for cancellation any Notes previously authenticated and delivered hereunder which the Issuer may have acquired in any manner whatsoever, and all Notes so delivered shall be promptly canceled by the Indenture Trustee. No Notes shall be authenticated in lieu of or in exchange for any Notes canceled as provided in this Section 2.7, except as expressly permitted by this Indenture. All canceled Notes may be held or disposed of by the Indenture Trustee in accordance with its standard retention or disposal policy as in effect at the time unless the Issuer shall direct by -6- an Issuer Order that they be returned to it; PROVIDED, HOWEVER, that such Issuer Order is timely and the Notes have not been previously disposed of by the Indenture Trustee. The Indenture Trustee shall certify to the Issuer that surrendered Notes have been duly cancelled and retained or destroyed, as the case may be. SECTION 2.8 TAX TREATMENT. The Issuer in entering into this Indenture, and the Noteholders, by acquiring any Note, (i) express their intention that the Notes qualify under applicable tax law as indebtedness secured by the Collateral, the Shared Collateral and Mortgage Collateral, and (ii) unless otherwise required by appropriate taxing authorities, agree to treat the Notes as indebtedness secured by the Collateral, the Shared Collateral and Mortgage Collateral for the purpose of federal income taxes, state and local income and franchise taxes, and any other taxes imposed upon, measured by or based upon gross or net income. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE ISSUER AND THE SERVICER SECTION 3.1 REPRESENTATIONS AND WARRANTIES AS TO THE RECEIVABLES AND CONTRACTS. Each of the Issuer and HIG (in its capacity as Servicer) hereby represents and warrants to the Indenture Trustee, for the benefit of the Noteholders, that as of the Closing Date (i) each Obligor is an Eligible Obligor, (ii) each Pledged Contract Receivable is an Eligible Receivable and (iii) with respect to each Contract, each statement set forth in the definition of Eligible Receivable relating to the Contract is true and correct. SECTION 3.2 OTHER REPRESENTATIONS AND WARRANTIES. Each of the Issuer and HIG (in its capacity as Servicer and Operator) represents and warrants to the Indenture Trustee for the benefit of the Noteholders as of the Closing Date as follows: (a) HIG (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, (ii) has the corporate power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (iii) has all licenses necessary to service the Pledged Contract Receivables pursuant to this Indenture, (iv) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification, except to the extent that the failure to be so qualified and in good standing would not have a Material Adverse Effect and (v) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith would not, individually or in the aggregate, have a Material Adverse Effect; HGSC (i) is a general partnership organized and existing under the laws of the State of Delaware, (ii) has the full partnership power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged and (iii) is in compliance with all Requirements of Law except to the extent that the failure -7- to comply therewith would not, individually or in the aggregate, have a Material Adverse Effect. (b) It (i) has the corporate or partnership power and authority to make, deliver and perform each Basic Note Document to which it is a party, (ii) has taken all necessary action to authorize the execution, delivery and performance of each Basic Note Document to which it is a party and (iii) has duly executed and delivered each Basic Note Document to which it is a party. (c) The execution, delivery and performance of each Basic Note Document to which it is a party will not violate any Requirement of Law or Contractual Obligation of it except for violations that would not have a Material Adverse Effect, and will not result in, or require, the creation or imposition of any Lien (other than Permitted Liens and Liens created by the Basic Documents) on any of its properties or revenues pursuant to any such Requirement of Law or Contractual Obligation. (d) Each Basic Note Document to which it is a party and each Contract constitutes the legal, valid and binding obligation of it enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights in general and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. (e) It has good and marketable title to the Pledged Contract Receivables, free of any Lien other than the Lien pursuant to this Indenture; and, upon execution and delivery of this Indenture by the parties hereto, the Indenture Trustee shall have all of the right, title and interest of the Issuer and the Servicer, as the case may be, in, to and under, and a first priority perfected security interest in, the Trust Estate free of any Lien other than Permitted Liens and Liens created pursuant to the Basic Documents. (f) Each of the audited consolidated balance sheet, statement of operations, statement of stockholders' equity and statement of cash flows of FRGC for each of the two fiscal years ended December 31, 1993 and 1994, and the two fiscal years ended December 31, 1993 and 1992, the audited consolidated balance sheet of FRGC as of June 19, 1995, the unaudited consolidated balance sheet, statement of operations and statement of cash flows of FRGC for the three-month period ended March 31, 1995, and the unaudited consolidated balance sheet and statement of operations of FRGC for the nine-month period ended September 30, 1995, respectively, have been prepared in accordance with GAAP applied on a consistent basis throughout the periods involved (except for the unaudited financial statements which are subject to normal year-end adjustments and purchase price adjustments as a result of Crystal's acquisition of FRGC and which do not contain footnote disclosures) and each fairly presents the consolidated financial position of FRGC and its Subsidiaries at the respective dates thereof and the consolidated results of their operations and changes in cash flows for the periods indicated. -8- (g) Since June 19, 1995, there has been no development or event which has had or could reasonably be expected to have a Material Adverse Effect. (h) No proceeds of the issuance of any Notes will be used by it to purchase or carry any margin stock (as defined in Regulations U and G of the Board of Governors of the Federal Reserve System, as in effect from time to time). It is in compliance with all applicable regulations of the Board of Governors of the Federal Reserve System (including, without limitation, Regulations U and G with respect to "margin stock"). (i) None of the FRGC Parties is an "investment company" within the meaning of, or subject to regulation under, the Investment Company Act of 1940 and the rules and regulations thereunder. (j) Each of Crystal and the FRGC Parties has filed or caused to be filed all tax returns which, to its knowledge, are required to be filed and have paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on its books), except where the failure to file or to pay such taxes, fees or other charges would not, individually or in the aggregate, have a Material Adverse Effect; no tax Lien has been filed, and, to its knowledge, no claim is being asserted, with respect to any such tax, fee or other charge, except for such claims which would not, individually or in the aggregate, have a Material Adverse Effect. Except for the Federal income tax liabilities of FRGC, which have been determined through 1991, the Federal income tax liabilities of the FRGC Parties have not been finally determined by the Internal Revenue Service for any period. (k) It has good record and indefeasible title in fee simple to, or a valid leasehold interest in, or other valid right to use, all its real property, and good title to, or a valid leasehold interest in, or other valid right to use, all its other property, and none of such property is subject to any Lien other than (i) Permitted Liens and (ii) the Liens created pursuant to the Basic Documents. (l) It is not in default under or with respect to any of its Contractual Obligations except for such defaults which, individually or in the aggregate, would not have a Material Adverse Effect. (m) It has previously delivered to the Indenture Trustee true and correct copies of each Contract (including any amendments thereto); and the terms other than price, volumes and payment dates of the Contracts as they relate to the Purchased Contract Receivables are the same in all material respects as the terms set forth in the Contracts attached to the Private Placement Memorandum with respect to the offer and sale of the Investor Certificates. -9- (n) It has not within the last twelve months made any transfer or incurred any obligation with actual intent to hinder, delay or defraud any entity to which it was or may become indebted and it has not transferred any material property without receiving reasonably equivalent value for any such transfer or obligation. Both immediately prior to and immediately after the transactions occurring on the Closing Date, (i) the fair value of its assets at a fair valuation exceeds its debts and liabilities, subordinated, contingent or otherwise; (ii) the present fair salable value of its property is greater than the amount that will be required to pay its probable liability on its debts and other liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; (iii) it is reasonably expected to be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (iv) it will not have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted. For all purposes of clauses (i) through (iv) above, the amount of contingent liabilities at any time shall be computed as the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. (o) Except for any other FRGC Party, it has no Subsidiaries. (p) The Servicer has in place procedures pursuant to the Basic Note Documents that are either necessary or advisable to ensure the timely collection of the Pledged Contract Receivables. (q) The Servicer has in force business interruption insurance with respect to the Storage Facilities as described in Schedule 5 hereto (the "Business Interruption Insurance"). (r) The office at which it keeps its records concerning the Pledged Contract Receivables is located at 229 Milam Street, Shreveport, Louisiana 71101. Since June 19, 1995, its chief executive office has been located at 229 Milam Street, Shreveport, Louisiana 71101 and is the place where it is "located" for the purposes of Section 9-103(3)(d) of the UCC of each jurisdiction the laws of which govern the transfer of the Pledged Contract Receivable hereunder. From January 1, 1995 until June 19, 1995, its chief executive office was "located" in Dallas, Texas for the purposes of Section 9-103(3)(d) of the UCC as in effect in the State of Texas. The taxpayer identification number of HGSC is 75-2316407 and of HIG is 75-2051721. (s) Its legal name is as set forth in this Indenture. It has no trade names, fictitious names, assumed names or "doing business as" names. (t) Schedule 8 accurately sets forth the amounts scheduled to come due after the Cut-off Date with respect to the Pledged Contract Receivables. -10- (u) No action, claim or proceeding is pending and, to its knowledge, no investigation is pending or threatened that would adversely affect the payment or enforceability of the Pledged Contract Receivables. (v) No consents or filings with any Governmental Authority or approvals by any Governmental Authority that have not been made or obtained are required for the execution, delivery and performance of the Basic Note Documents to which it is a party. (w) There are no pending or, to its knowledge, threatened actions, suits or proceedings against any FRGC Party that would adversely affect the transactions contemplated by the Basic Note Documents to which it is a party, and there is no injunction, writ, restraining order or other similar order in effect that adversely affects any of the FRGC Parties' performance of the agreements and transactions contemplated by the Basic Note Documents to which it is a party. (x) All of the FRGC Parties' pension and profit sharing plans have been fully funded in accordance with the applicable FRGC Parties' obligations. (y) Each Contract is a legal, valid and binding obligation and contract, as the case may be, of the FRGC Party thereto, enforceable against such party in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting the enforcement of creditors' rights in general and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law, and except as to any material provision of any Contract the lack of enforceability of which would not affect the enforceability of the payment obligations of the Obligors thereunder in respect of any Pledged Contract Receivable. (z) Since September 30, 1995, except on the Closing Date from the net proceeds from the sale of the Notes and the Investor Certificates, none of the FRGC Parties has made a Restricted Payment. (aa) The projected distributions with respect to the Pledged Investor Certificate Rights are sufficient to pay the interest obligations with respect to the Notes through July 2000. The representations and warranties set forth in this Article III shall survive the initial issuance of the Notes. ARTICLE IV COVENANTS SECTION 4.1 PAYMENT OF PRINCIPAL AND INTEREST. The Issuer shall duly and punctually pay the principal and premium, if any, of and interest on the Notes in accordance with the terms of the Notes and this Indenture. Any payment of principal -11- and premium, if any, of or interest on the Notes may be reduced by amounts, if any, required to be withheld under the Code. Any amounts so withheld shall be considered as having been paid by the Issuer to such Noteholder for all purposes of this Indenture. SECTION 4.2 MAINTENANCE OF AGENCY OFFICE. As long as any of the Notes remains Outstanding, the Issuer shall maintain in the Borough of Manhattan, The City of New York, an office (the "Agency Office"), being an office or agency where Notes may be surrendered to the Issuer for registration of transfer or exchange, and where notices and demands to or upon the Issuer in respect of the Notes and this Indenture may be served. The Issuer hereby initially appoints the Indenture Trustee to serve as its agent for the foregoing purposes. The Issuer shall give prompt written notice to the Indenture Trustee of the location, and of any change in the location, of the Agency Office. If at any time the Issuer shall fail to maintain any such office or agency or shall fail to furnish the Indenture Trustee with the address thereof, such surrenders, notices and demands may be made or served at the Corporate Trust Office of the Indenture Trustee, and the Issuer hereby appoints the Indenture Trustee as its agent to receive all such surrenders, notices and demands. SECTION 4.3 MONEY FOR PAYMENTS TO BE HELD IN TRUST. (a) All payments of amounts due and payable with respect to any Notes that are to be made from the Collateral Account pursuant to Section 9.1(d) shall be made on behalf of the Issuer by the Indenture Trustee, and no amounts so withdrawn from the Collateral Account for payments of Notes shall be paid over to the Issuer except as provided in this Section 4.3 or Section 9.1. (b) The Issuer and the Indenture Trustee shall comply with all requirements of the Code with respect to the withholding from any payments made by it on any Notes of any applicable withholding taxes imposed thereon and with respect to any applicable reporting requirements in connection therewith. (c) Subject to applicable laws with respect to escheat of funds, any money held by or on behalf of the Indenture Trustee for the payment of any amount due with respect to any Note and remaining unclaimed for one year after such amount has become due and payable shall be discharged from such trust and be returned to the Issuer on Issuer Request; and the Noteholder shall thereafter, as an unsecured general creditor, look only to the Issuer for payment thereof (but only to the extent of the amounts so paid to the Issuer), and all liability of the Indenture Trustee with respect to such trust money shall thereupon cease; PROVIDED, HOWEVER, that the Indenture Trustee, before being required to make any such payment, may at the expense of the Issuer cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in The City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining shall be paid to the Issuer. The Indenture Trustee may also adopt and employ, at the expense of the Issuer, any other reasonable means of notification of such payment (including, but not limited to, mailing notice of such payment to Noteholders whose Notes have been called but have not been -12- surrendered for redemption or whose right to or interest in monies due and payable but not claimed is determinable from the records of the Indenture Trustee, at the last address of record for each such Noteholder). SECTION 4.4 PROTECTION OF TRUST ESTATE; ACKNOWLEDGMENT OF PLEDGE. The Issuer shall from time to time execute and deliver all such supplements and amendments hereto and all such financing statements, amendments thereto, continuation statements, assignments, certificates, instruments of further assurance and other instruments as may be determined to be necessary or advisable in an Opinion of Counsel to the Indenture Trustee to: (i) maintain or preserve the lien and security interest (and the priority thereof) of this Indenture, the Mortgage and the Collateral Sharing and Security Agreement or carry out more effectively the purposes hereof including: (w) by making the necessary filings of financing statements or amendments thereto within sixty days after the occurrence of, and by promptly notifying the Indenture Trustee of, any of the following: (A) any change in the Issuer's name, (B) any change in the location of the Issuer's principal place of business and (C) any merger or consolidation or other change in the Issuer's identity or organizational structure; (x) by delivering the Pledged Investor Certificates to the Indenture Trustee, together with a duly executed blank assignment; and (y) by delivering immediately upon receipt thereof any instrument evidencing or constituting part of the Collateral, together with a duly executed blank assignment; (ii) perfect, publish notice of or protect the validity of any Grant made or to be made by this Indenture; (iii) enforce the rights of the Indenture Trustee and the Noteholders in any of the Collateral; (iv) preserve and defend title to the Trust Estate and the rights of the Indenture Trustee and the Noteholders in such Trust Estate against the claims of all Persons and parties; or (v) maintain or preserve the lien and security interest (and the priority thereof) of the Collateral Sharing and Security Agreement and the Mortgage and the benefits contemplated thereunder with respect to the Noteholders. SECTION 4.5 COVENANTS OF THE ISSUER AND THE SERVICER. Until such time as there are no Notes Outstanding, each of the Issuer and HIG (in its capacity as Servicer and Operator) covenants, for the benefit of the Indenture Trustee and the Noteholders, as follows: -13- (i) it will not voluntarily or involuntarily terminate or permit the termination of, or take any action which would permit the Obligors to terminate, any of the Contracts; (ii) it will not voluntarily or involuntarily take any action (including, without limitation, by agreeing to any amendment, modification or waiver of any provision of any Contract which would result in the reduction, or change the terms, of the Pledged Contract Receivables) which would permit the Obligors to reduce or adversely affect their obligations under the Pledged Contract Receivables, including, without limitation, by way of setoff or otherwise; (iii) it will not, without the consent of the Indenture Trustee at the direction of the Majority Noteholders, consent to an assignment by an Obligor which releases such Obligor from its obligations with respect to a Pledged Contract Receivable; (iv) it will operate the Storage Facilities in a good and prudent manner, consistent with its historical practices; (v) it will perform its obligations under the Contracts in all material respects; (vi) except for Indebtedness to Crystal or an Affiliate of Crystal to be repaid at Closing, other than the Notes and the obligations relating thereto, it will not incur, assume or become liable for any Indebtedness, or assume or guarantee any Indebtedness of any Person; (vii) it will not voluntarily or involuntarily create, grant or permit to exist any Liens on any of its property or assets other than (1) Permitted Liens, (2) Liens in the form of sales or leases of assets permitted pursuant to Section 4.5(xv) and (3) Liens created pursuant to any of the Basic Documents as executed and delivered at the closing of the transactions contemplated hereby; (viii) it will not expand or make any material additions or capital improvements to the Storage Facilities that would result in a reduction in the contractual rates for the Pledged Contract Receivables provided under the Contracts; (ix) it will not enter into contracts with respect to the Storage Facilities which (1) would prohibit or otherwise impose any material cost on the Indenture Trustee in selling or foreclosing on the Storage Facilities after an Event of Default or (2) would bind a subsequent purchaser of the Storage Facilities acquired in a foreclosure or sale unless the receivables under such contracts in the case of clause (2) are assigned as additional security to the Trust and the Indenture Trustee pursuant to the Collateral Sharing and Security Agreement; -14- (x) it will not engage in any business other than (w) the operation of the Storage Facilities, (x) the provision of transportation and storage services relating to or in connection with the Storage Facilities, (y) any expansion or additions to the Storage Facilities or its operations or to the transportation and storage services provided in connection with the Storage Facilities or (z) the provision of management or operational services for other Persons at facilities located in the Petal Dome area in Mississippi provided that such management and operational services would not have a Material Adverse Effect, it being understood that the Seller or the Servicer may, subject to the foregoing limitations and the other provisions of this Indenture, increase the storage capacity of the Storage Facilities, expand or leach new caverns on or under the property where the Storage Facilities are currently located (it being understood that no storage facilities outside such location will be acquired by it), construct, acquire or expand new or existing pipelines and related equipment which may connect directly or indirectly to the Storage Facilities or enhance the services provided at the Storage Facilities and enter into joint ventures and partnerships with respect to the storage, transportation or delivery of natural gas and other hydrocarbons to the extent that such joint ventures and partnerships do not create a Lien on the Storage Facilities and are reasonably related to the operations of the Storage Facilities; (xi) except as expressly contemplated by the Basic Note Documents, the Servicer will service the Pledged Contract Receivables in accordance with its historical practices and policies; (xii) it will maintain its corporate existence separate and apart from any other entity except that, subject to the terms of the Trust Agreement, any of FRGC, the Servicer and HGSC may merge with each other and HGSC may liquidate and dissolve as long as (1) either FRGC or HIG holds individually or together the assets of HGSC immediately following the liquidation, (2) no Default or Event of Default would exist following any such action and (3) any successor entity in any such action explicitly assumes the liabilities of its predecessor entity (and a copy of any such assumption agreement is delivered to the Noteholders and the Indenture Trustee); (xiii) it will (1) comply with all Requirements of Law, (2) perform its Contractual Obligations and (3) promptly pay its taxes and other liabilities as they become due and payable except, in each case, for such non-compliance, non-performance or non-payment which would not, individually or in the aggregate, have a Material Adverse Effect; (xiv) it will maintain Business Interruption Insurance (which shall name the Indenture Trustee as loss payee thereunder in respect of its interests in the Pledged Contract Receivables) of the type and in the amount set forth in Schedule 5 hereto and to the extent such insurance is not available on a reasonable basis or sufficient to cover all Force Majeure Events under a Contract for the entire time that such Force Majeure Event exists, it will self insure against such Force Majeure Event; -15- (xv) an FRGC Party will at all times own all the material assets constituting the Storage Facilities; PROVIDED, however, this provision will not restrict the sale of movable equipment that is not necessary for the operation of the Storage Facilities, sales and loans of base gas in the ordinary course of business and modifications and terminations of the leases and other agreements that would not have a Material Adverse Effect; (xvi) subject to the limitations of clause (xvii) of this Section 4.5 and except for the payment of dividends on shares of its capital stock, distributions with respect to its partnership interests, repurchases of shares of its capital stock, issuances of new classes or series of its capital stock, the lending of funds to Crystal or any of its Affiliates, the lending or borrowing of funds between or among the FRGC Parties or other transactions between or among the FRGC Parties, it will not engage in any material transaction with an Affiliate that is not on substantially the same terms as would reasonably be expected to be obtained on an arm's length basis with an unaffiliated third party; (xvii) except on the Closing Date from the net proceeds from the sale of the Notes and the Investor Certificates, it will not (x) make any payment in respect of any Indebtedness owed to Crystal to the extent any such Indebtedness may subsequently be permitted with the consent of the Majority Noteholders in accordance with the terms of this Indenture, or make any loan or advances of any amounts to Crystal, or make any payments in respect of any tax sharing arrangement or (y) permit FRGC (or any other Person that succeeds to FRGC's ownership of the Issuer or HIG) to take any such action or to pay any dividend on, or purchase or otherwise redeem or acquire any shares of FRGC's capital stock or options, warrants or rights to subscribe for capital stock or securities convertible or exchangeable for shares of capital stock (any of the foregoing in clauses (x) or (y), a "RESTRICTED PAYMENT"); provided that it or FRGC may make any such Restricted Payment at any time (the date of any such Restricted Payment, a "RESTRICTED PAYMENT DATE") if immediately after, and after giving effect to, the payment of such Restricted Payment on such Restricted Payment Date, the aggregate amount of all Restricted Payments made by all FRGC Parties to all Persons other than an FRGC Party since the Closing Date would not exceed the sum of (i) subject to the further proviso set forth below, all cash equity contributions made to an FRGC Party by Crystal or any other Affiliate (other than an FRGC Party) from and after June 30, 1995, (ii) all cash payments of principal and interest on Indebtedness owed to FRGC made by any Affiliates of FRGC (other than Subsidiaries of FRGC) and made within six months prior to the applicable Restricted Payment Date and (iii) the Specified Percentage (as defined below) of the Consolidated Net Income of FRGC since June 30, 1995 (after adding back all charges, accruals and provisions for income taxes or charges in lieu of income taxes and deducting all income taxes actually paid by an FRGC Party and all consolidated losses of the FRGC Parties since such date); PROVIDED, FURTHER, that at such times as the Fixed Charge Coverage Test (as defined below) is not satisfied, equity contributions set forth in clause (i) above may not be included in determining the aggregate amount of Restricted Payments which may be made on any Restricted Payment Date to the extent -16- that such contributions were received by FRGC more than six months prior to the applicable Restricted Payment Date. The term "SPECIFIED PERCENTAGE" shall mean (A) 85%, if none of the Pledged Contract Receivables are then delinquent by more than 30 days or in default (including with respect to which the related Obligor is subject to an Insolvency Event) and neither the Issuer nor the Servicer is in default under any of the covenants set forth in this Section 4.5 and no other Default or Event of Default exists or would exist after giving effect to any such Restricted Payment, and (B) 0%, in all other cases. The "FIXED CHARGE COVERAGE TEST" shall be deemed to be satisfied at any time if (and only if) the ratio of (A) Consolidated Cash Flow Available for Fixed Charges for the period of four consecutive fiscal quarters of FRGC most recently ended at such time to (B) Consolidated Fixed Charges for such period, is greater than 1 to 1; (xviii) neither it nor any other FRGC Party will enter into a tax sharing arrangement that would require the payment of taxes by the FRGC Parties greater than that which would be required to be paid by the FRGC Parties as a consolidated group absent the existence of the tax sharing agreement; and (xix) it will not enter into any speculative hedge contracts. SECTION 4.6 ANNUAL STATEMENT AS TO COMPLIANCE; ANNUAL OPINION. (a) The Servicer and Issuer shall deliver to the Indenture Trustee, each Noteholder and the Rating Agency, on or before March 31 of each year, beginning March 31, 1996, an officer's certificate signed by the President or any Vice President of the Servicer and by an Authorized Officer of the Issuer, dated as of such date, stating that (i) a review of the activities of the Servicer or the Issuer, as the case may be, during the prior calendar year (or, with respect to the first such certificate, such period as shall have elapsed from the Closing Date to the end of the prior calendar year) and of its performance under this Indenture and the other Basic Note Documents has been made under such officer's supervision and (ii) to such officer's knowledge, based on such review, the Servicer or the Issuer, as the case may be, has fulfilled in all material respects all its obligations under this Indenture and the other Basic Note Documents throughout such period, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to such officer and the nature and status thereof and remedies therefor being pursued. (b) The Servicer shall deliver to the Indenture Trustee and each Noteholder not later than 55 days after the end of each fiscal quarter beginning with the fiscal quarter ending December 31, 1995, a certificate setting forth the status of each Pledged Contract Receivable, including identifying any Pledged Contract Receivable that is not current and the age of such Pledged Contract Receivable and the actions being taken to collect on such past due Pledged Contract Receivable. (c) The Servicer shall send to each Noteholder the Servicer's Certificate furnished to the Owner Trustee pursuant to Section 5.2(b) of the Trust Agreement at the same time such certificate is sent to the Owner Trustee. -17- (d) The Servicer shall deliver to the Indenture Trustee, on or before April 30 of each year, beginning in 1997, an Opinion of Counsel either (i) stating that, in the opinion of such counsel, all financing statements and continuation statements have been executed and filed that are necessary fully to preserve and protect the interest of the Indenture Trustee in the Pledged Contract Receivables and to preserve and protect the interest of the Collateral Trustee in the Shared Collateral and the Mortgage Collateral, and reciting the details of such filings or referring to prior Opinions of Counsel in which such details are given, or (ii) stating that, in the opinion of such counsel, no further action is necessary to preserve and protect such interest. The Issuer shall also deliver to the Indenture Trustee, within 45 days after any change in location of the Issuer's chief executive office, stating that in the opinion of such counsel all financing statements and continuation statements have been executed and filed that are necessary fully to preserve and protect the interest of the Indenture Trustee in the Pledged Contract Receivables and to preserve and protect the interest of the Collateral Trustee in the Shared Collateral and Mortgage Collateral, and reciting the details of such filings or referring to prior opinions in which such details are given. SECTION 4.7 INFORMATION PROVIDED TO RATING AGENCY. In addition to receiving any information or documents required to be delivered to the Rating Agency pursuant to any Basic Document, the Rating Agency may request in writing to the Servicer, and the Servicer shall deliver, reasonable additional information necessary to the Rating Agency to monitor the Notes. Promptly, but in no event later than five Business Days, after obtaining knowledge of an Insolvency Event with respect to any FRGC Party, the Servicer shall deliver to the Rating Agency (with a copy to the Noteholders and the Indenture Trustee) notice of such Insolvency Event. The Servicer agrees to maintain and pay for the retention of the Rating Agency pursuant to the agreement between Crystal and the Rating Agency dated August 31, 1995. Failure by the Servicer to comply with the terms of this Section 4.7 shall constitute a default hereunder only of the Servicer and the sole remedy available to the Indenture Trustee shall be replacement of the Servicer as provided in Section 6.2. SECTION 4.8 DELIVERY OF FINANCIAL STATEMENTS. The Issuer shall furnish to the Indenture Trustee, each Noteholder and the Rating Agency: (i) as soon as available, but in any event not later than 105 days after the end of each fiscal year of FRGC ending on or after December 31, 1995, the consolidated balance sheet of FRGC and its consolidated Subsidiaries as at the end of such year and the related consolidated statements of earnings and retained earnings and cash flow statements, each of which shall be audited by a nationally recognized accounting firm; and (ii) as soon as available, but in any event not later than 55 days after the end of each of the first three quarterly periods of each fiscal year of FRGC beginning with the first fiscal quarter of 1996, the unaudited consolidated balance sheet of FRGC and its consolidated Subsidiaries as at the end of such quarter and the related unaudited consolidated statements of earnings and -18- retained earnings and cash flow statements of FRGC and its consolidated Subsidiaries for such quarter, and the portion of the fiscal year through the end of such quarter; setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal quarter or fiscal year, as the case may be, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly or annual financial statements generally; provided that footnote disclosure shall not be required for quarterly financial statements. The quarterly and annual financial statements shall be certified by a Responsible Officer of FRGC that such consolidated statements fairly present the financial condition of FRGC and its consolidated Subsidiaries as at the dates indicated and the results of their operations and cash flows for the periods indicated, subject, in the case of interim statements, to changes resulting from audit and normal year-end adjustment. The annual financial statements shall also be accompanied by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the financial position of FRGC and its Subsidiaries and their results of operations and cash flows and, except as set forth therein, have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for the opinion in the circumstances. SECTION 4.9 OTHER INFORMATION. (a) The Servicer and the Seller agree to provide to the Indenture Trustee and each Noteholder, with reasonable promptness, such additional data and information as may be reasonably requested relating to the business, operations, affairs, financial condition, assets and properties of the FRGC Parties, the Contracts and the ability of any of the FRGC Parties to perform their respective obligations under any of the Basic Note Documents. (b) The Servicer shall furnish to the Indenture Trustee and each Noteholder within five Business Days of the filing thereof a copy of each Annual Report on Form 10-K, Quarterly Report on Form 10-Q and Current Report on Form 8-K that may be filed by Crystal with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, for so long as Crystal shall be subject to such filing obligations or until such earlier date that FRGC shall cease to be a Subsidiary of Crystal. SECTION 4.10 NOTICE OF EVENTS OF DEFAULT. The Issuer shall furnish to the Indenture Trustee, each Noteholder and the Rating Agency, promptly, and in any event within five days, after obtaining knowledge of the occurrence of any Event of Default hereunder or any Insolvency Event with respect to any FRGC Party, a written notice specifying the nature and existence thereof and what action the applicable FRGC Party is taking or proposes to take with respect thereto. -19- SECTION 4.11 FURTHER INSTRUMENTS AND ACTS. Upon request of the Indenture Trustee, the Issuer shall execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture. ARTICLE V SATISFACTION AND DISCHARGE SECTION 5.1 SATISFACTION AND DISCHARGE OF INDENTURE. This Indenture shall cease to be of further effect with respect to the Notes except as to: (i) rights of registration of transfer and exchange; (ii) substitution of mutilated, destroyed, lost or stolen Notes; (iii) rights of Noteholders to receive payments of principal and premium, if any, thereof and interest thereon; (iv) Sections 4.1, 4.2 and 4.3(b) and (c); (v) the rights, obligations and immunities of the Indenture Trustee hereunder (including the rights of the Indenture Trustee under Section 7.7 and the obligations of the Indenture Trustee under Section 5.2); and (vi) the rights of Noteholders as beneficiaries hereof with respect to the property so deposited with the Indenture Trustee payable to all or any of them, and the Indenture Trustee, on demand of and at the expense of the Issuer, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture with respect to the Notes, and the release of all Collateral hereunder and all rights to any collateral under the Collateral Sharing and Security Agreement or the Mortgage, if all Notes theretofore authenticated and delivered (other than (1) Notes that have been destroyed, lost or stolen and that have been replaced or paid as provided in Section 2.4 and (2) Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Issuer and thereafter repaid to the Issuer or discharged from such trust, as provided in Section 4.3) have been delivered to the Indenture Trustee for cancellation. SECTION 5.2 APPLICATION OF TRUST MONEY. All monies deposited with the Indenture Trustee pursuant to Section 5.1 shall be held in trust for the Noteholders and applied by it, in accordance with the provisions of the Notes and this Indenture, to the payment of all sums due and to become due thereon for principal and premium, if any, and interest, but such monies need not be segregated from other funds except to the extent required herein or by applicable law. ARTICLE VI DEFAULT AND REMEDIES SECTION 6.1 EVENTS OF DEFAULT. For the purposes of this Indenture, "Event of Default" wherever used herein, means any one of the following events: (a) failure to pay any principal or premium, if any, of or interest on any Note as and when the same becomes due and payable (including, without limitation on any redemption date), and such default shall continue unremedied for a period of five (5) days; or -20- (b) any of the representations and warranties made by the Issuer or the Servicer in Sections 3.1 and 3.2 or by any FRGC Party in any Basic Note Document shall be false in any material respect when made, and such default shall continue or not be cured or remedied for a period of thirty (30) days after the earlier of (i) an Executive Officer of any FRGC Party obtaining actual knowledge of such default and (ii) the Issuer, the Servicer or the FRGC Party, as the case may be, receiving a written notice from the Indenture Trustee or any Noteholder, specifying such default, demanding that it be remedied and stating that such notice is a "Notice of Default" hereunder; or (c) default in the observance or performance in any respect of any covenant or agreement of the Issuer or the Servicer made in this Indenture or by any FRGC Party under any Basic Note Document (other than a covenant or agreement, a default in the observance or performance of which is specifically dealt with elsewhere in this Section 6.1), and such default shall continue or not be cured or remedied for a period of thirty (30) days after the earlier of (i) an Executive Officer of any FRGC Party obtaining actual knowledge of such default and (ii) the Issuer, the Servicer or the FRGC Party, as the case may be, receiving a written notice from the Indenture Trustee or any Noteholder, specifying such default, demanding that it be remedied and stating that such notice is a "Notice of Default" hereunder; or (d) the filing of a decree or order for relief by a court having jurisdiction in the premises in respect of any FRGC Party or any substantial part of the Trust Estate, the Shared Collateral or the Mortgage Collateral in an involuntary case under any applicable federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of any FRGC Party or for any substantial part of the Trust Estate or the collateral under the Collateral Sharing and Security Agreement or the Mortgage, or ordering the winding-up or liquidation of any FRGC Party's affairs, and such decree or order shall remain unstayed and in effect for a period of sixty (60) consecutive days; or (e) the commencement by any FRGC Party of a voluntary case under any applicable federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or the consent by any FRGC Party to the entry of an order for relief in an involuntary case under any such law, or the consent by any FRGC Party to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of any FRGC Party or for any substantial part of the Trust Estate, the Shared Collateral or the Mortgage Collateral, or the making by any FRGC Party of any general assignment for the benefit of its creditors, or the failure by any FRGC Party generally to pay its debts as such debts become due, or the taking of action by any FRGC Party in furtherance of any of the foregoing; or (f) a final judgment or judgments for the payment of money aggregating in excess of $1,000,000 are rendered against one or more of the -21- FRGC Parties and which judgments are not, within 60 days after the entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay. The Issuer shall deliver to the Indenture Trustee and each Noteholder, within three Business Days after learning of the occurrence thereof, written notice in the form of an Officer's Certificate of any Default under Section 6.1(b) or (c), its status and what action the Issuer is taking or proposes to take with respect thereto. SECTION 6.2 ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT; REMEDIES. (a) If an Event of Default described in clause (d) or (e) of Section 6.1 (other than the failure by the Issuer generally to pay its debts as such debts become due or the taking of action by the Issuer in furtherance of such event) has occurred, all the Notes then outstanding shall automatically become immediately due and payable. (b) If any other Event of Default should occur and be continuing, then and in every such case (except in the case of a Default under clause (b) or (c) of Section 6.1 which relates to one or more specific Contracts or Pledged Contract Receivables, in which case the provisions of Section 11.3 shall be applicable and, subject to the rights set forth in Sections 6.2(d) and (f), which shall be the sole remedy with respect to such Default) unless the principal amount of the Notes shall have already become due and payable, either the Indenture Trustee or the Noteholders representing the Majority Noteholders may, and at the direction of the Majority Noteholders, the Indenture Trustee shall, declare all the Notes to be immediately due and payable, by a notice in writing to the Issuer (and to the Indenture Trustee if given by the Noteholders) setting forth the Event of Default or Events of Default, and upon any such declaration the unpaid principal amount of such Notes, together with accrued and unpaid interest thereon through the date of payment, shall become immediately due and payable; PROVIDED, HOWEVER, that if any such Event of Default or Events of Default were the result of an action taken by the Issuer or the Servicer that was intended by such Person to cause an acceleration of the Notes (with the Issuer or the Servicer being presumed for the purposes of this Section 6.2(b) to have intended any action that was reasonably within the ability or control of any FRGC Party to avoid or prevent), then the amount due on the Notes shall include the Basic Make-Whole Premium. (c) At any time after such acceleration of maturity of the Notes has been made and before a judgment or decree for payment of the money due thereunder has been obtained by the Indenture Trustee as hereinafter provided in this Article VI, the Majority Noteholders, by written notice to the Issuer and the Indenture Trustee, may rescind and annul such acceleration and its consequences; PROVIDED that no such rescission and annulment shall extend to or affect any subsequent or other Default or impair any right consequent thereto; and PROVIDED, FURTHER, that if the Indenture Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission and annulment or for any other reason, or such proceedings shall have been determined adversely to the Indenture Trustee, then in every such case, the Indenture Trustee, the Issuer and the Noteholders, as the case may be, shall be restored to their respective -22- former positions and rights hereunder, and all rights, remedies and powers of the Indenture Trustee, the Issuer and the Noteholders, as the case may be, shall continue as though no such proceedings had been commenced. (d) The Issuer hereby confirms its appointment of HIG as Operator of the Storage Facilities on behalf of the Issuer. In addition to, and not in limitation of any other remedies the Indenture Trustee may have hereunder or under applicable law, in the event the Issuer or HIG breaches any of the covenants set forth in the Basic Note Documents (but only to the extent such covenant relates to the operation of the Storage Facilities), and such breach is not remedied or cured within 45 calendar days of receipt of written notice thereof from the Indenture Trustee, or in the event there shall have occurred and be continuing an Insolvency Event with respect to HIG, HIG agrees if requested pursuant to the provisions of the Collateral Sharing and Security Agreement to resign as Operator and HIG and HGSC agree that a substitute operator of the Storage Facilities may be engaged by the Collateral Trustee pursuant to Section 13 of the Collateral Sharing and Security Agreement. (e) In the event HIG shall breach any of the covenants in the Basic Note Documents (but only to the extent such covenant relates to the servicing of the Pledged Contract Receivables) and such breach shall be continuing and shall not be remedied or cured within 45 calendar days of receipt of written notice thereof from the Indenture Trustee or any Noteholder, or in the event there shall have occurred and be continuing an Insolvency Event with respect to HIG, the Indenture Trustee or the Majority Noteholders by notice given in writing to the Servicer may, in addition to the other rights and remedies available in a court of law or equity to damages, injunctive relief and specific performance (which other rights and remedies shall not be available in the case of a breach of Section 4.7), terminate all of the rights and obligations of the Servicer under this Indenture or appoint a successor servicer, and HIG agrees to pay the reasonable fees and expenses of such successor servicer. Unless otherwise provided in the notice, on or after receipt by HIG of such written notice, all authority and power of the Servicer under this Indenture shall pass to and be vested in the Indenture Trustee pursuant to and under this Section 6.2(e). The Indenture Trustee is hereby authorized and empowered to execute and deliver, on behalf of HIG, as prepared by and at the expense of HIG, as attorney-in-fact or otherwise, any and all documents and other instruments, and to do or accomplish all other acts or things necessary or appropriate to effect the purposes of such notice of termination. In such case, HIG agrees to cooperate with the Indenture Trustee in effecting the termination of the responsibilities and rights of HIG as Servicer under this Indenture. Unless otherwise provided in the notice, on and after the time the Servicer receives a notice of termination pursuant to this Section 6.2(e), the Indenture Trustee shall appoint a successor servicer, who shall succeed to the Servicer in its capacity as servicer under this Indenture and the transactions set forth or provided for in this Indenture, and shall be subject to all the responsibilities, restrictions, duties and liabilities relating thereto placed on the Servicer by the terms and provisions of this Indenture; PROVIDED, HOWEVER, that the predecessor servicer shall remain liable for, and the successor servicer shall have no liabilities for, any indemnification obligations of the Servicer arising as a result of acts, omissions or occurrences during the period in which the predecessor servicer was the Servicer; and PROVIDED, FURTHER, that HIG shall remain liable for all -23- such indemnification obligations of the Servicer without regard to whether it is still Servicer hereunder. (f) If the Issuer shall fail forthwith to pay any amounts due under this Section 6.2 upon demand, the Indenture Trustee, in its own name and as trustee of an express trust (and at the expense of the Issuer), may institute a Proceeding for the collection of the sums so due and unpaid, and may prosecute such Proceeding to judgment or final decree, and may enforce the same against the Issuer, any guarantor hereof or other obligor upon such Notes and collect in the manner provided by law out of the property of the Issuer, any guarantor hereof or other obligor upon such Notes, wherever situated, the monies adjudged or decreed to be payable. In addition, in any such case, the Indenture Trustee, in its own name and as trustee of an express trust, may cause the Collateral Trustee to exercise any right or remedy or other action permitted to be taken by the Collateral Trustee pursuant to the terms and conditions of the Collateral Sharing and Security Agreement and the Mortgage. (g) If an Event of Default occurs and is continuing, the Indenture Trustee may, and at the direction of the Majority Noteholders shall, as more particularly provided in Section 6.3, in its discretion, proceed to protect and enforce its rights and the rights of the Noteholders, by such appropriate Proceedings as the Indenture Trustee shall deem most effective to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy or legal or equitable right vested in the Indenture Trustee by this Indenture, the other Basic Note Documents or by applicable law. (h) If there shall be pending, relative to the Issuer, any guarantor hereof or any other obligor upon the Notes or any Person having or claiming an ownership interest in the Trust Estate, the Shared Collateral or the Mortgage Collateral, Proceedings under Title 11 of the United States Code or any other applicable federal or state bankruptcy, insolvency or other similar law, or if a receiver, assignee or trustee in bankruptcy or reorganization, liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Issuer or its property or such other obligor or Person, or in case of any other comparable judicial Proceedings relative to the Issuer, other obligor or such other Person upon the Notes, or to the creditors or property of the Issuer, other obligor or such other Person, the Indenture Trustee, irrespective of whether the principal of any Notes shall then be due and payable as therein expressed or by acceleration or otherwise and irrespective of whether the Indenture Trustee shall have made any demand pursuant to the provisions of this Section 6.2, shall be entitled and empowered, by intervention in such Proceedings or otherwise: (i) to file and prove a claim or claims for the entire amount of the unpaid principal and premium, if any, and interest owing in respect of the Notes and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Indenture Trustee (including any claim for reasonable compensation to the Indenture Trustee and each predecessor trustee, and their respective agents, attorneys and counsel, and for reimbursement of all -24- expenses and liabilities incurred, and all advances made, by the Indenture Trustee and each predecessor trustee, except as a result of negligence or bad faith) and of the Noteholders allowed in such Proceedings; (ii) unless prohibited by applicable law and regulations, to vote on behalf of the Noteholders in any election of a trustee, a standby trustee or Person performing similar functions in any such Proceedings; (iii) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute all amounts received with respect to the claims of the Noteholders and of the Indenture Trustee on their behalf; and (iv) to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Indenture Trustee or the Noteholders allowed in any judicial proceedings relative to the Issuer or such other obligor or Person, its creditors and its property; and any trustee, receiver, liquidator, custodian or other similar official in any such Proceeding is hereby authorized by each of such Noteholders to make payments to the Indenture Trustee, and, if the Indenture Trustee shall consent to the making of payments directly to such Noteholders, to pay to the Indenture Trustee such amounts as shall be sufficient to cover reasonable compensation to the Indenture Trustee, each predecessor trustee and their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Indenture Trustee and each predecessor trustee, except as a result of negligence or bad faith on the part of the Indenture Trustee. (i) Nothing herein contained shall be deemed to authorize the Indenture Trustee to authorize or consent to or vote for or accept or adopt on behalf of any Noteholder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Noteholder or to authorize the Indenture Trustee to vote in respect of the claim of any Noteholder in any such proceeding except, as aforesaid, to vote for the election of a trustee in bankruptcy or similar Person. (j) In any Proceedings brought by the Indenture Trustee (and also any Proceedings involving the interpretation of any provision of this Indenture to which the Indenture Trustee shall be a party), the Indenture Trustee shall be held to represent all the Noteholders, and it shall not be necessary to make any Noteholder a party to any such Proceedings. SECTION 6.3 OTHER REMEDIES; PRIORITIES. (a) If an Event of Default shall have occurred and be continuing, the Indenture Trustee may do one or more of the following: (i) institute Proceedings in its own name and as trustee of an express trust for the collection of all amounts then due and payable on the Notes or -25- under this Indenture with respect thereto, whether by acceleration or otherwise, enforce any judgment obtained, and collect from the Issuer and any other obligor upon such Notes monies adjudged due; (ii) institute Proceedings from time to time for the complete or partial foreclosure of this Indenture with respect to the Trust Estate; (iii) exercise any remedies of a secured party under the UCC and take any other appropriate action to protect and enforce the rights and remedies of the Indenture Trustee and the Noteholders; (iv) sell the Trust Estate or any portion thereof or rights or interest therein, at one or more public or private sales called and conducted in any manner permitted by law or elect to have the Issuer maintain possession of the Pledged Contract Receivables and continue to apply collections on such Pledged Contract Receivables as if there had been no acceleration; and (v) cause the Collateral Trustee to (x) institute Proceedings from time to time for the complete or partial foreclosure of the Shared Collateral and the Mortgage Collateral under the Collateral Sharing and Security Agreement and the Mortgage or (y) exercise any other right or remedy or take any other action permitted to be taken by the Collateral Trustee following such Event of Default; PROVIDED, HOWEVER, that the Indenture Trustee may not take an action or request the Collateral Trustee to take an action with respect to the Shared Collateral or the Mortgage Collateral unless it shall have complied with the terms and conditions of the Collateral Sharing and Security Agreement. (b) If the Indenture Trustee collects any money or property pursuant to this Article VI, it shall pay out or deposit such money or property in the following order: FIRST: to the Indenture Trustee for amounts due under Section 7.7; SECOND: to the Collateral Account, for distribution pursuant to Article IX; and THIRD: after all sums due under the Notes and the other Basic Note Documents have been paid in full, to the Issuer. SECTION 6.4 LIMITATION OF SUITS. No Noteholder shall have any right to institute any Proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (i) such Noteholder has previously given written notice to the Indenture Trustee of a continuing Event of Default; (ii) Noteholders representing not less than 25% of the Outstanding Amount of the Notes have made written request to the Indenture Trustee to -26- institute such Proceeding in respect of such Event of Default in its own name as Indenture Trustee hereunder; (iii) such Noteholder has offered to the Indenture Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in complying with such request; (iv) the Indenture Trustee for 30 days after its receipt of such notice, request and offer of indemnity has failed to institute such Proceedings; and (v) no direction inconsistent with such written request has been given to the Indenture Trustee during such 30-day period by the Majority Noteholders; it being understood and intended that no Noteholder shall have any right in any manner whatsoever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Noteholders or to obtain or to seek to obtain priority or preference over any other Noteholders or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable (on the basis of the respective aggregate amount of principal, premium, if any, and interest, respectively, due and unpaid on the Notes held by each Noteholder) and common benefit of all Noteholders. For the protection and enforcement of the provisions of this Section 6.4, each and every Noteholder shall be entitled to such relief as can be given either at law or in equity. If the Indenture Trustee shall receive conflicting or inconsistent requests and indemnity from two or more groups of Noteholders, each representing less than the Majority Noteholders, the Indenture Trustee in its sole discretion may determine what action, if any, shall be taken, notwithstanding any other provisions of this Indenture. SECTION 6.5 UNCONDITIONAL RIGHTS OF NOTEHOLDERS TO RECEIVE PRINCIPAL AND INTEREST. Notwithstanding any other provisions in this Indenture, any Noteholder shall have the right, which is absolute and unconditional, to receive payment of the principal and premium, if any, of and interest on such Note on or after the respective due dates thereof expressed in such Note or in this Indenture (or, in the case of redemption, if applicable, on or after the redemption date) and to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Noteholder. SECTION 6.6 RESTORATION OF RIGHTS AND REMEDIES. If the Indenture Trustee or any Noteholder has instituted any Proceeding to enforce any right or remedy under this Indenture and such Proceeding has been discontinued or abandoned for any reason or has been determined adversely to the Indenture Trustee or to such Noteholder, then and in every such case the Issuer, the Indenture Trustee and the Noteholders shall, subject to any determination in such Proceeding, be restored severally to their respective former positions hereunder, and thereafter all rights and remedies of the Indenture Trustee and the Noteholders shall continue as though no such Proceeding had been instituted. -27- SECTION 6.7 RIGHTS AND REMEDIES CUMULATIVE. Except as provided in Section 6.1 and Section 11.3, no right or remedy herein conferred upon or reserved to the Indenture Trustee or to the Noteholders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 6.8 DELAY OR OMISSION NOT A WAIVER. No delay or omission of the Indenture Trustee or any Noteholder to exercise any right or remedy accruing upon any Default shall impair any such right or remedy or constitute a waiver of any such Default or an acquiescence therein. Every right and remedy given by this Article VI or by law to the Indenture Trustee or to the Noteholders may be exercised from time to time, and as often as may be deemed expedient, by the Indenture Trustee or by the Noteholders, as the case may be. SECTION 6.9 CONTROL BY NOTEHOLDERS. The Majority Noteholders shall, subject to provision being made for indemnification against costs, expenses and liabilities in a form satisfactory to the Indenture Trustee, have the right to direct the time, method and place of conducting any Proceeding for any remedy available to the Indenture Trustee with respect to the Notes or exercising any trust or power conferred on the Indenture Trustee; PROVIDED, HOWEVER, that: (i) such direction shall not be in conflict with any rule of law or with this Indenture, the Collateral Sharing and Security Agreement or the Mortgage; and (ii) the Indenture Trustee may take any other action deemed proper by the Indenture Trustee that is not inconsistent with such direction; PROVIDED, HOWEVER, that, subject to Section 7.1, the Indenture Trustee need not take any action that it determines might cause it to incur any liability (a) with respect to which the Indenture Trustee shall have reasonable grounds to believe that adequate Indemnity against such liability in not assured to it and (b) which might materially adversely affect the rights of any Noteholders not consenting to such action. SECTION 6.10 WAIVER OF PAST DEFAULTS. (a) Prior to the acceleration of the maturity of the Notes as provided in Section 6.2(a) or the purchase of the Notes pursuant to Section 11.3, Noteholders representing the Majority Noteholders may waive any past Default and its consequences except a Default (i) in the payment of principal or premium, if any, of or interest on any of the Notes or (ii) in respect of a covenant or provision hereof which cannot be modified or amended without the consent of each Noteholder. In the case of any such waiver, the Issuer, the Indenture Trustee and the Noteholders shall be restored to their respective former positions and rights hereunder; but no such waiver shall extend to or affect any subsequent or other Default or impair any right consequent thereto. -28- (b) Upon any such waiver, such Default shall cease to exist and be deemed to have been cured and not to have occurred, and any Event of Default arising therefrom shall be deemed to have been cured and not to have occurred, for every purpose of this Indenture; but no such waiver shall extend to or affect any subsequent or other Default or impair any right consequent thereto. SECTION 6.11 UNDERTAKING FOR COSTS. All parties to this Indenture agree, and each Noteholder by such Noteholder's acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any Proceeding for the enforcement of any right or remedy under this Indenture, or in any Proceeding against the Indenture Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such Proceeding of an undertaking to pay the costs of such Proceeding, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such Proceeding, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 6.11 shall not apply to: (a) any Proceeding instituted by the Indenture Trustee; (b) any Proceeding instituted by any Noteholder, or group of Noteholders, in each case holding in the aggregate more than 10% of the Outstanding Amount of the Notes; or (c) any Proceeding instituted by any Noteholder for the enforcement of the payment of principal or premium, if any, of or interest on any Note on or after the due date expressed in such Note or in this Indenture (or, in the case of redemption, on or after the redemption date). SECTION 6.12 ACTION ON NOTES. The Indenture Trustee's right to seek and recover judgment on the Notes or under this Indenture shall not be affected by the seeking, obtaining or application of any other relief under or with respect to this Indenture. Neither the lien of this Indenture nor any rights or remedies of the Indenture Trustee or the Noteholders shall be impaired by the recovery of any judgment by the Indenture Trustee against the Issuer or by the levy of any execution under such judgment upon any portion of the Trust Estate, the Shared Collateral or the Mortgage Collateral or upon any of the assets of the Issuer. Any money or property collected by the Indenture Trustee shall be applied in accordance with Section 6.3(b). -29- ARTICLE VII THE INDENTURE TRUSTEE SECTION 7.1 DUTIES OF INDENTURE TRUSTEE. (a) The Indenture Trustee, prior to the occurrence of an Event of Default of which a Responsible Officer of the Indenture Trustee shall have actual knowledge and after the curing of all such Events of Default that may have occurred, undertakes to perform such duties and obligations and only such duties and obligations as are specifically set forth in this Indenture. If an Event of Default has occurred and is continuing, the Indenture Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. The Indenture Trustee, upon receipt of all resolutions, certificates, statements, opinions, reports, documents, orders or other instruments furnished to the Indenture Trustee which are specifically required to be furnished pursuant to any provision of this Indenture, shall examine them to determine whether they conform to the requirements of this Indenture; PROVIDED, however, that the Indenture Trustee shall not be responsible for the accuracy or content of any resolution, certificate, statement, opinion, report, document, order or other instrument furnished by the Servicer or the Issuer hereunder. If any such instrument is found not to conform in any material respect to the requirements of this Indenture, the Indenture Trustee shall notify the Noteholders of such instrument in the event that the Indenture Trustee, after so requesting, does not receive a satisfactorily corrected instrument. (b) Except during the continuance of an Event of Default of which a Responsible Officer of the Indenture Trustee shall have actual knowledge: (i) the Indenture Trustee undertakes to perform such duties and obligations and only such duties and obligations as are specifically set forth in this Indenture and the Collateral Sharing and Security Agreement and no implied covenants or obligations shall be read into this Indenture, the Collateral Sharing and Security Agreement or any other Basic Note Document against the Indenture Trustee; and (ii) in the absence of bad faith on its part, the Indenture Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Indenture Trustee and conforming to the requirements of this Indenture. (c) The Indenture Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own wilful misconduct, except that: (i) this Section 7.1(c) does not limit the effect of Section 7.1(b); (ii) the Indenture Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or other officer of the Indenture -30- Trustee unless it is proved that the Indenture Trustee was negligent in ascertaining the pertinent facts; and (iii) the Indenture Trustee shall not be liable with respect to any action it takes, suffers or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.10. (d) The Indenture Trustee shall not be liable for interest on any money received by it except as the Indenture Trustee may agree in writing with the Issuer. (e) Money held in trust by the Indenture Trustee need not be segregated from other funds except to the extent required by law or the terms of this Indenture or the Collateral Sharing and Security Agreement. (f) No provision of this Indenture shall require the Indenture Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayments of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (g) If the Indenture Trustee commits any willful misfeasance, bad faith or gross negligence (except errors in judgment) in the performance of its duties under any of the Basic Note Documents, or is in reckless disregard of its obligations and duties under any of the Basic Note Documents, the Issuer may, in addition to any other remedies available to the Issuer, replace the Indenture Trustee in accordance with Section 7.8. (h) The Indenture Trustee shall not be required to take notice or be deemed to have notice or knowledge of any default or Event of Default unless a Responsible Officer of the Indenture Trustee shall have received written notice thereof or otherwise has actual knowledge thereof. In the absence of receipt of such notice, the Indenture Trustee may conclusively assume that there is no default or Event of Default. (i) Subject to the other provisions of this Indenture and without limiting the generality of this Section 7.1, the Indenture Trustee shall have no duty (i) to see to any recording, filing, or depositing of this Indenture or any agreement referred to herein or any financing statement or continuation statement evidencing a security interest, or to see to the maintenance of any such recording or filing or depositing or to any recording, refiling or redepositing of any thereof, (ii) to see to any insurance, (iii) to see to the payment or discharge of any tax, assessment, or other governmental charge or any lien or encumbrance of any kind owing with respect to, assessed or levied against, any part of the Trust Estate, the Shared Collateral or the Mortgage Collateral from funds available in the Collateral Account or (iv) to confirm or verify the contents of any reports or certificates of the Servicer delivered to the Indenture Trustee pursuant to this Indenture believed by the Indenture Trustee to be genuine and to have been signed or presented by the proper party or parties. -31- (j) Every provision of this Indenture relating to the Indenture Trustee shall be subject to the provisions of this Section 7.1. SECTION 7.2 RIGHTS OF INDENTURE TRUSTEE. (a) The Indenture Trustee may rely and shall be protected in acting or refraining from acting on any document believed by it in good faith to be genuine and to have been signed or presented by the proper Person. The Indenture Trustee need not investigate any fact or matter stated in the document. (b) Before the Indenture Trustee acts or refrains from acting, it may consult with counsel or require an Officer's Certificate from the Issuer or an Opinion of Counsel that such action or omission is required or permissible hereunder. The Indenture Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such advice of counsel, Officer's Certificate or Opinion of Counsel. (c) The Indenture Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys or a custodian or nominee, and the Indenture Trustee shall not be responsible for any misconduct or negligence on the part of, or for the supervision of, any such agent, attorney, custodian or nominee appointed with due care by it hereunder. (d) The Indenture Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers; PROVIDED, HOWEVER, that the Indenture Trustee's conduct does not constitute wilful misconduct, negligence or bad faith. (e) The Indenture Trustee may consult with counsel, and the advice or opinion of counsel with respect to legal matters relating to this Indenture and the Notes shall be full and complete authorization and protection from liability in respect to any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or opinion of such counsel. (f) The Indenture Trustee shall be under no obligation to exercise any of the trusts or powers vested in it by this Indenture or to institute, conduct or defend any litigation hereunder or in relation hereto at the request, order or direction of any of the Noteholders, pursuant to the provisions of this Indenture, unless such Noteholders shall have offered to the Indenture Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby (which will be deemed to be satisfied by a letter agreement with respect to such costs from the Majority Noteholders); nothing contained herein shall, however, relieve the Indenture Trustee of the obligation, upon the occurrence of an Event of Default of which a Responsible Officer of the Indenture Trustee shall have actual knowledge (which has not been cured), to exercise such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. -32- (g) The Indenture Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond or other paper or document, unless requested in writing to do so by the Majority Noteholders; PROVIDED, however, that if the payment within a reasonable time to the Indenture Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Indenture Trustee, not reasonably assured to the Indenture Trustee by the security afforded to it by the terms of this Indenture, the Indenture Trustee may require reasonable indemnity against such cost, expense or liability as a condition to taking any such action. The reasonable expense of every such examination shall be paid by the Servicer or, if paid by the Indenture Trustee, shall be repaid by the Servicer upon demand from the Servicer's own funds. (h) The right of the Indenture Trustee to perform any discretionary act enumerated in this Indenture shall not be construed as a duty, and the Indenture Trustee shall not be answerable for other than its negligence or willful misconduct in the performance of such act. (i) The Indenture Trustee shall not be required to give any bond or surety in respect of the execution of the Trust Estate created hereby or the powers granted hereunder. SECTION 7.3 INDENTURE TRUSTEE MAY OWN NOTES. The Indenture Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Issuer, the Servicer or any of their respective Affiliates with the same rights it would have if it were not Indenture Trustee; PROVIDED, HOWEVER, that the Indenture Trustee shall comply with Sections 7.10 and 7.11. SECTION 7.4 INDENTURE TRUSTEE'S DISCLAIMER. The Indenture Trustee shall not be responsible for and makes no representation as to the validity, legality or adequacy of this Indenture, the Notes or the Collateral Sharing and Security Agreement, it shall not be accountable for the Issuer's use of the proceeds from the Notes, and it shall not be responsible for any statement of the Issuer in the Indenture or in any document issued in connection with the sale of the Notes or in the Notes other than the Indenture Trustee's certificate of authentication. SECTION 7.5 NOTICE OF DEFAULTS. If a Default occurs and is continuing and if it is known to a Responsible Officer of the Indenture Trustee, the Indenture Trustee shall mail to each Noteholder notice of the Default within five Business Days after it occurs. SECTION 7.6 REPORTS BY INDENTURE TRUSTEE TO NOTEHOLDERS. The Indenture Trustee shall deliver to each Noteholder the information and documents set forth in Article VIII, and, in addition, all such information with respect to the Notes as may be required, as specified by the Servicer, to enable such Noteholder to prepare its federal and state income tax returns. -33- SECTION 7.7 COMPENSATION; INDEMNITY. (a) The Issuer shall pay to the Indenture Trustee from time to time such compensation for its services as shall be agreed upon in writing. The Indenture Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Issuer shall reimburse the Indenture Trustee and any director, officer, employee or agent of the Indenture Trustee for all losses, liabilities and reasonable out-of-pocket expenses incurred or made by it, including costs of collection, in addition to the compensation for its services. Such expenses shall include the reasonable compensation and expenses, disbursements and advances of the Indenture Trustee's agents, counsel, accountants and experts. (b) The Issuer's obligations to the Indenture Trustee pursuant to this Section 7.7 shall survive the discharge of this Indenture. When the Indenture Trustee incurs expenses after the occurrence of a Default specified in Section 6.1(d) or (e) with respect to the Issuer, the expenses are intended to constitute expenses of administration under Title 11 of the United States Code or any other applicable federal or state bankruptcy, insolvency or similar law. SECTION 7.8 REPLACEMENT OF INDENTURE TRUSTEE. (a) The Indenture Trustee may at any time give notice of its intent to resign by so notifying the Issuer; PROVIDED, HOWEVER, that no such resignation shall become effective and the Indenture Trustee shall not resign prior to the time set forth in Section 7.8(c). The Majority Noteholders may remove the Indenture Trustee by so notifying the Indenture Trustee and may appoint a successor Indenture Trustee. Such resignation or removal shall become effective in accordance with Section 7.8(c). The Issuer shall, at the direction of the Majority Noteholders, remove the Indenture Trustee if: (i) the Indenture Trustee commits any act described in Section 7.1(g) or fails to comply with Section 7.11; (ii) the Indenture Trustee is adjudged a bankrupt or insolvent; (iii) a receiver or other public officer takes charge of the Indenture Trustee or its property; or (iv) the Indenture Trustee otherwise becomes incapable of acting. (b) If the Indenture Trustee gives notice of its intent to resign or is removed or if a vacancy exists in the office of Indenture Trustee for any reason (the Indenture Trustee in such event being referred to herein as the retiring Indenture Trustee), the Issuer shall, at the direction of the Majority Noteholders, promptly appoint and designate a successor Indenture Trustee. (c) A successor Indenture Trustee shall deliver a written acceptance of its appointment and designation to the retiring Indenture Trustee and to the Issuer. -34- Thereupon the resignation or removal of the retiring Indenture Trustee shall become effective, and the successor Indenture Trustee shall have all the rights, powers and duties of the Indenture Trustee under this Indenture. The successor Indenture Trustee shall mail a notice of its succession to Noteholders and to the Rating Agency. The retiring Indenture Trustee shall promptly transfer all property held by it as Indenture Trustee to the successor Indenture Trustee. (d) If a successor Indenture Trustee does not take office within 60 days after the retiring Indenture Trustee gives notice of its intent to resign or is removed, the retiring Trustee, the Issuer or the Majority Noteholders may petition any court of competent jurisdiction for the appointment and designation of a successor Indenture Trustee. (e) If the Indenture Trustee fails to comply with Section 7.11, any Noteholder may petition any court of competent jurisdiction for the removal of the Indenture Trustee and the appointment of a successor Indenture Trustee. (f) Notwithstanding the replacement of the Indenture Trustee pursuant to this Section 7.8, the Issuer's obligations under Section 7.7 shall continue for the benefit of the retiring Indenture Trustee. SECTION 7.9 MERGER OR CONSOLIDATION OF INDENTURE TRUSTEE. (a) Any corporation or banking association into which the Indenture Trustee may be merged or with which it may be consolidated, or any corporation or banking association resulting from any merger or consolidation to which the Indenture Trustee shall be a party, or any corporation or banking association succeeding to the corporate trust business of the Indenture Trustee, shall be the successor of the Indenture Trustee under this Indenture; PROVIDED, HOWEVER, that such corporation or banking association shall be eligible under the provisions of Section 7.11, without the execution or filing of any instrument or any further act on the part of any of the parties to this Indenture, anything in this Indenture to the contrary notwithstanding. Following such merger or consolidation, the successor Indenture Trustee shall mail a notice of such merger or consolidation to the Rating Agency. (b) If at the time such successor or successors by merger or consolidation to the Indenture Trustee shall succeed to the trusts created by this Indenture, any of the Notes shall have been authenticated but not delivered, any such successor to the Indenture Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Notes so authenticated; and in case at that time any of the Notes shall not have been authenticated, any successor to the Indenture Trustee may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor to the Indenture Trustee. In all such cases such certificate of authentication shall have the same full force as is provided anywhere in the Notes or herein with respect to the certificate of authentication of the Indenture Trustee. -35- SECTION 7.10 APPOINTMENT OF CO-INDENTURE TRUSTEE OR SEPARATE INDENTURE TRUSTEE. (a) Notwithstanding any other provisions of this Indenture, at any time, for the purpose of meeting any legal requirement of any jurisdiction in which any part of the Trust Estate may at the time be located, the Indenture Trustee shall have the power and may execute and deliver all instruments to appoint one or more Persons to act as a co-trustee or co-trustees, or separate trustee or separate trustees, of all or any part of the Trust Estate, and to vest in such Person or Persons, in such capacity and for the benefit of the Noteholders, such title to the Trust Estate, or any part hereof, and, subject to the other provisions of this Section 7.10, such powers, duties, obligations, rights and trusts as the Indenture Trustee may consider necessary or desirable. No co- trustee or separate trustee hereunder shall be required to meet the terms of eligibility as a successor trustee under Section 7.11 and no notice to Noteholders of the appointment of any co-trustee or separate trustee shall be required under Section 7.8. (b) Every separate trustee and co-trustee shall, to the extent permitted by law, be appointed and act subject to the following provisions and conditions: (i) all rights, powers, duties and obligations conferred or imposed upon the Indenture Trustee shall be conferred or imposed upon and exercised or performed by the Indenture Trustee and such separate trustee or co-trustee jointly (it being understood that such separate trustee or co- trustee is not authorized to act separately without the Indenture Trustee joining in such act), except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed the Indenture Trustee shall be incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties and obligations (including the holding of title to the Trust Estate or any portion thereof in any such jurisdiction) shall be exercised and performed singly by such separate trustee or co-trustee, but solely at the direction of the Indenture Trustee; (ii) no trustee hereunder shall be personally liable by reason of any act or omission of any other trustee hereunder; and (iii) the Indenture Trustee may at any time accept the resignation of or remove any separate trustee or co-trustee. (c) Any notice, request or other writing given to the Indenture Trustee shall be deemed to have been given to each of the then separate trustees and co-trustees, as effectively as if given to each of them. Every instrument appointing any separate trustee or co-trustee shall refer to this Indenture and the conditions of this Article VII. Each separate trustee and co-trustee, upon its acceptance of the trusts conferred, shall be vested with the estates or property specified in its instrument of appointment, either jointly with the Indenture Trustee or separately, as may be provided therein, subject to all the provisions of this Indenture, specifically including every provision of this Indenture relating to the conduct of, affecting the liability of, or affording protection -36- to, the Indenture Trustee. Every such instrument shall be filed with the Indenture Trustee. (d) Any separate trustee or co-trustee may at any time constitute the Indenture Trustee as its agent or attorney-in-fact with full power and authority, to the extent not prohibited by law, to do any lawful act under or in respect of this Indenture on its behalf and in its name. The Indenture Trustee shall not be responsible for any action or inaction of any such separate trustee or co-trustee. If any separate trustee or co-trustee shall die, become incapable of acting, resign or be removed, all of its estates, properties, rights, remedies and trusts shall vest in and be exercised by the Indenture Trustee, to the extent permitted by law, without the appointment of a new or successor trustee. SECTION 7.11 ELIGIBILITY; DISQUALIFICATION. The Indenture Trustee shall be an Eligible Institution. SECTION 7.12 REPRESENTATIONS AND WARRANTIES OF INDENTURE TRUSTEE. The Indenture Trustee represents and warrants as of the Closing Date that: (a) the Indenture Trustee is a New York banking corporation duly organized, validly existing and in good standing under the laws of the State of New York and the eligibility requirements set forth in Section 7.11 are satisfied with respect to the Indenture Trustee; (b) the Indenture Trustee has full power, authority and legal right to execute, deliver and perform this Indenture, and has taken all necessary action to authorize the execution, delivery and performance by it of this Indenture; and (c) this Indenture has been duly executed and delivered by the Indenture Trustee and constitutes the legal, valid and binding agreement of the Indenture Trustee, enforceable in accordance with its terms. SECTION 7.13 INDENTURE TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF NOTES. Subject to the Collateral Sharing and Security Agreement, all rights of action and claims under this Indenture or the Notes may be prosecuted and enforced by the Indenture Trustee without the possession of any of the Notes or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Indenture Trustee shall be brought in its own name as Indenture Trustee. Any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Indenture Trustee, its agents and counsel, be for the ratable benefit of the Noteholders in respect of which such judgment has been obtained. SECTION 7.14 SUIT FOR ENFORCEMENT. Subject to the Collateral Sharing and Security Agreement, if an Event of Default shall occur and be continuing, the Indenture Trustee in its discretion may, subject to the provisions of Section 7.1 and the other terms of this Indenture, proceed to protect and enforce its rights and the rights of the Noteholders under this Indenture by a Proceeding whether for the specific performance -37- of any covenant or agreement contained in this Indenture or in aid of the execution of any power granted in this Indenture or for the enforcement of any other legal, equitable or other remedy as the Indenture Trustee, being advised by counsel, shall deem most effectual to protect and enforce any of the rights of the Indenture Trustee or the Noteholders. SECTION 7.15 RIGHTS OF NOTEHOLDERS TO DIRECT INDENTURE TRUSTEE. The Majority Noteholders shall have the right to direct in writing the time, method and place of conducting any Proceeding for any remedy available to the Indenture Trustee or exercising any trust or power conferred on the Indenture Trustee; PROVIDED, HOWEVER, that subject to Section 7.1, the Indenture Trustee shall have the right to decline to follow any such direction if the Indenture Trustee being advised by counsel determines that the action so directed may not lawfully be taken, or if the Indenture Trustee in good faith shall, by a Responsible Officer, determine that the Proceedings so directed would be illegal or subject it to personal liability or be unduly prejudicial to the rights of Noteholders not parties to such direction; and PROVIDED, FURTHER, that nothing in this Indenture shall impair the right of the Indenture Trustee to take any action deemed proper by the Indenture Trustee and which is not inconsistent with such direction by the Majority Noteholders. ARTICLE VIII NOTEHOLDERS' LISTS AND REPORTS SECTION 8.1 INDENTURE TRUSTEE TO FURNISH ISSUER NAMES AND ADDRESSES OF NOTEHOLDERS. The Indenture Trustee shall furnish (a) promptly, and in any event within five days, following any transfer of record of any Note the name and address of the transferee and (b) at such times as the Issuer may request in writing, within 10 days after receipt by the Indenture Trustee of any such request, a list of the names and addresses of the Noteholders. SECTION 8.2 PRESERVATION OF INFORMATION; COMMUNICATIONS TO NOTEHOLDERS. (a) The Indenture Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of the Noteholders contained in the most recent list furnished to the Indenture Trustee as provided in Section 8.1. The Indenture Trustee may destroy any list furnished to it as provided in such Section 8.1 upon receipt of a new list so furnished. (b) Within five Business Days after the receipt by the Indenture Trustee of a written request by any Noteholder stating that such Noteholder desires to communicate with other Noteholders, the Indenture Trustee shall provide such Noteholder with a copy of the most recent list of the names and addresses of the Noteholders as furnished to the Indenture Trustee pursuant to Section 8.1. (c) The Indenture Trustee may provide information with respect to the names and addresses of the Noteholders and the principal amounts of Notes held by them to the Collateral Trustee for purposes of the Collateral Sharing and Security Agreement. -38- ARTICLE IX COLLATERAL ACCOUNT, DISBURSEMENTS AND RELEASES SECTION 9.1 COLLATERAL ACCOUNT. (a) On or prior to the Closing Date, the Indenture Trustee shall establish and maintain, in the name of the Indenture Trustee, for the benefit of the Noteholders, an Eligible Account known as the FRGC Collateral Account (the "COLLATERAL ACCOUNT"), bearing an additional designation clearly indicating that the funds deposited therein are held for the benefit of the Noteholders. Funds on deposit in the Collateral Account shall be invested by the Indenture Trustee only in Eligible Investments. All earnings on such investment shall be deposited in the Collateral Account. The Indenture Trustee shall possess all right, title and interest in and to all funds on deposit from time to time in the Collateral Account and in all proceeds thereof. Except as otherwise provided therein, the Collateral Account shall be under the sole dominion and control of the Indenture Trustee for the benefit of the Noteholders. If, at any time, the Collateral Account ceases to be an Eligible Account, the Indenture Trustee shall within 10 Business Days establish a new Collateral Account as an Eligible Account and shall transfer any cash and/or an investments in the old Collateral Account to such new Collateral Account. (b) On the Closing Date, the Issuer shall deliver to the Indenture Trustee Investor Certificates in the aggregate initial amount of $11,452,177.84 to be held by it in order to enforce the security interest with respect to the Collateral granted hereby. From and after the Closing Date and until such time as the Collateral shall have been released, all distributions and proceeds in respect of the Pledged Investor Certificate Rights shall be made directly to the Collateral Account, and the Issuer agrees to so instruct the Owner Trustee. (c) Prior to July 1, 2000, the Issuer and the Servicer shall instruct all Obligors to make payments in respect of the Pledged Contract Receivables to a Lockbox, a Lockbox Account or the Collateral Account. All collections received in a Lockbox shall, within one Business Day of receipt thereof, be deposited in a Lockbox Account. Amounts on deposit in any Lockbox Account shall be promptly transferred to the Collateral Account and in all events not later than the first Business Day following such deposit. In the event that any payments in respect of the Pledged Contract Receivables are made directly to the Issuer or the Servicer, including, without limitation, any employees thereof or independent contractors employed thereby, the Issuer or the Servicer, as the case may be, shall, as soon as reasonably practicable but in no event more than two Business Days after receipt thereof, deposit such amounts in a Lockbox Account. (d) Without limiting in any respect the Issuer's absolute obligation to pay principal, premium, if any, of and interest on the Notes when due in accordance with the terms hereof, on each Payment Date and to make the other payments under the Basic Note Documents, the Indenture Trustee shall distribute all amounts on deposit in the Collateral Account to the Noteholders to the extent of amounts due and unpaid -39- on the Notes for principal and premium, if any, of and interest and other amounts due and owing in the following amounts, and in the following order of priority: (i) to accrued and unpaid interest on the Notes; PROVIDED, HOWEVER, that if there are not sufficient funds in the Collateral Account to pay the entire amount of accrued and unpaid interest then due on the Notes, the amount in the Collateral Account shall be applied to the payment of such interest on each of the Notes pro rata on the basis of the respective aggregate amount of interest due on each such Note; (ii) to due and unpaid principal and premium, if any, on the Notes; PROVIDED, HOWEVER, that if there are not sufficient funds in the Collateral Account to pay the entire amount of unpaid principal and premium, if any, then due on the Notes, the amount in the Collateral Account shall be applied to the repayment of principal and premium, if any, on each of the Notes pro rata on the basis of the respective unpaid principal amount of each such Note; and (iii) to the payment of any other obligations due and owing under the Basic Note Documents. In the event that the amount on deposit in the Collateral Account on the Business Day preceding any Payment Date is less than the full amount required to pay all interest and principal and premium, if any, due on the Notes on such Payment Date, the Issuer shall deposit into the Collateral Account on such Business Day the amount of such deficiency. On any Payment Date, if all amounts then due on the Notes and under the other Basic Note Documents have been paid exclusively from amounts deposited in the Collateral Account from collections on the Collateral, and provided that no Default or Event of Default under this Indenture shall have occurred and is continuing, any balance remaining in the Collateral Account from amounts deposited in respect of Pledged Contract Receivables due during the preceding month shall be distributed to the Issuer on the first Business Day following such Payment Date. (e) In the event that the Indenture Trustee shall request the Servicer to engage a substitute operator of the Storage Facilities pursuant to Section 6.2(d), then amounts retained in the Collateral Account pursuant to the last paragraph of Section 9.1(d) above shall be available to secure the Servicer's obligation to pay the fees and expenses of such substitute operator as additional Collateral for the Notes. SECTION 9.2 SERVICING PROCEDURES. (a) HIG is hereby appointed and authorized to act as agent for the Issuer and the Indenture Trustee and HIG hereby accepts such appointment. HIG agrees that in such capacity it will manage, service, administer and, subject to Section 9.2(c), make collections on the Pledged Contract Receivables prudently and in accordance with customary and usual servicing procedures and applicable law and, to the extent not inconsistent with the foregoing, to exercise that degree of skill and care it uses in -40- servicing assets held for its own account. The Servicer hereby accepts such appointment and authorization and agrees to perform the duties of Servicer with respect to the Pledged Contract Receivables set forth herein. The Servicer's duties shall include posting of all payments, responding to inquiries of Obligors on the Pledged Contract Receivables, investigating and collecting delinquencies, reporting tax information to Obligors, managing the collateral, accounting for collections and furnishing quarterly and annual statements to the Indenture Trustee pursuant to this Indenture, generating federal income tax information and performing the other duties specified herein. Subject to the provisions of Section 9.2(c), the Servicer shall follow its historical policies and procedures and shall have full power and authority, acting alone, to do any and all things, consistent with the terms of the Basic Note Documents, in connection with such managing, servicing, administration and collection that it may deem necessary or desirable. In fulfilling its obligations hereunder, the Servicer shall at any time and from time to time (i) be authorized to review and obtain copies of all information provided to the Indenture Trustee with respect to the Pledged Contract Receivables, (ii) be entitled to receive copies of all statements, notices and reports regarding the Collateral Account, (iii) be entitled to obtain any and all information regarding deposits, withdrawals and transfers to and from the Collateral Account and the current balances therein and (iv) be entitled to obtain such other reasonable information and documentation it deems necessary or desirable to perform the servicing and administrative duties required of it under this Indenture. (b) On or immediately following the Closing Date, the Servicer shall instruct all Obligors to make payments in respect of the Pledged Contract Receivables to the Collateral Account. If any future collections are received in a Lockbox, they shall, within one Business Day of receipt thereof, be deposited in a Lockbox Account. In the event that any payments in respect of the Pledged Contract Receivables are made directly to the Issuer or the Servicer, including, without limitation, any employees thereof or independent contractors employed thereby, the Issuer or the Servicer, as the case may be, shall, as soon as reasonably practicable but in no event more than two Business Days after receipt thereof, deposit such amounts in a Lockbox Account. (c) The Servicer shall use reasonable efforts to collect all payments called for under the terms and provisions of the Pledged Contract Receivables as and when the same shall become due, and shall follow such collection practices, policies and procedures as are consistent with past practices and as it follows with respect to comparable contract receivables that it services for itself or others. (d) The Servicer shall not take any action to cause any Pledged Contract Receivable to be evidenced by any instrument (as defined in the UCC as in effect in the State of New York) except in connection with its enforcement or collection of a Pledged Contract Receivable, in which event the Servicer shall deliver such instrument to the Indenture Trustee as soon as reasonably practicable but in no event more than five days after receipt thereof. -41- SECTION 9.3 RELEASE OF TRUST ESTATE. (a) Subject to the payment of its fees and expenses pursuant to Section 7.7, the Indenture Trustee may, and when required by the provisions of this Indenture shall, execute instruments to release property in the Trust Estate from the lien of this Indenture, or convey the Indenture Trustee's interest in the same, in a manner and under circumstances that are consistent with the provisions of this Indenture. No party relying upon an instrument executed by the Indenture Trustee as provided in this Article IX shall be bound to ascertain the Indenture Trustee's authority, inquire into the satisfaction of any conditions precedent or see to the application of any monies. The Indenture Trustee shall not, without the consent of Noteholders representing at least two- thirds of the Outstanding Amount of Notes, release from the lien of this Indenture or consent to the release of any collateral from the lien of the Collateral Sharing and Security Agreement or the Mortgage (i) the Pledged Contract Receivables, (ii) the Pledged Investor Certificate Rights or (iii) any other material collateral hereunder or thereunder. (b) The Indenture Trustee shall, at such time as there are no Notes Outstanding and all sums due to the Indenture Trustee pursuant to Section 7.7 have been paid, notify the Issuer thereof in writing and upon receipt of an Issuer Request, (i) release any remaining portion of the Trust Estate that secured the Notes from the lien of this Indenture, (ii) release to the Issuer or any other Person entitled thereto any funds then on deposit in the Collateral Account and (iii) cause there to be released from the Collateral Sharing and Security Agreement and the Mortgage lien and the security interest any property or assets securing the payment of the Notes and other obligations under this Indenture. SECTION 9.4 OPINION OF COUNSEL. The Indenture Trustee shall receive at least three Business days' notice when requested by the Issuer to take any action pursuant to Section 9.3(a), accompanied by copies of any instruments involved, and the Indenture Trustee shall also require as a condition to such action, an Opinion of Counsel, in form and substance satisfactory to the Indenture Trustee, stating that all conditions precedent to the taking of such action have been complied with. Counsel rendering any such Opinion of Counsel may rely, without independent investigation, on the accuracy and validity of any certificate or other instrument delivered to the Indenture Trustee in connection with any such action. ARTICLE X SUPPLEMENTAL INDENTURES SECTION 10.1 PURPOSE OF SUPPLEMENTAL INDENTURES. (a) The Issuer and the Indenture Trustee, when authorized by an Issuer Order, may, with prior notice to the Rating Agency and with the consent of the Majority Noteholders, by Act of such Noteholders delivered to the Issuer and the Indenture Trustee, enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to, changing in any manner, or eliminating any of the -42- provisions of, this Indenture or modifying in any manner the rights of the Noteholders under this Indenture; PROVIDED, HOWEVER, that no such supplemental indenture shall, without the consent of each Noteholder affected thereby: (i) change the due date of any instalment of principal or premium, if any, of or interest on any Note, or change the principal amount thereof, the interest rate applicable thereto, or the redemption price with respect thereto, change any place of payment where, or the coin or currency in which, any Note or any interest thereon is payable, or impair the right to institute suit for the enforcement of the provisions of this Indenture requiring the application of funds available therefor, as provided in Article VI, to the payment of any such amount due on the Notes on or after the respective due dates thereof (or, in the case of redemption, on or after the redemption date); (ii) change the percentage of the Outstanding Amount of the Notes, the consent of the Noteholders of which is required for (a) any such supplemental indenture, (b) any waiver of compliance with certain provisions of this Indenture, certain defaults hereunder and their consequences as provided for in this Indenture or (c) any action described in Sections 6.2, 6.4, 6.5, 6.9, 6.10, 7.8, 7.15 or 9.3 or other section fixing a specified percentage of Noteholders to take an action under this Indenture; (iii) modify or alter the provisions of the proviso to the definition of the term "Outstanding"; (iv) modify any provision of this Section 10.1 to change the required minimum percentage necessary to approve any amendments to any provisions of this Indenture; (v) modify any of the provisions of this Indenture in such manner as to affect the calculation of the amount of any payment of principal or premium, if any, of or interest on any Note on any Payment Date (including the calculation of any of the individual components of such calculation), or modify or alter the provisions of the Indenture regarding the voting of Notes held by the Issuer, the Servicer or any Affiliate of either of them; or (vi) except as expressly contemplated by the Basic Documents, permit the creation of any Lien ranking prior to or on a parity with the lien of this Indenture with respect to any part of the Trust Estate, the lien of the Collateral Sharing and Security Agreement with respect to any part of the Shared Collateral or the lien of the Mortgage with respect to any part of the Mortgage Collateral or, except as otherwise permitted or contemplated herein or the Basic Documents, terminate the lien of this Indenture on any property at any time subject to the lien of this Indenture or deprive any Noteholder of the security afforded by the lien of this Indenture; or (vii) except as expressly contemplated herein by the Basic Documents, authorize the termination of the liens of the Collateral Sharing and Security -43- Agreement or Mortgage on any property subject thereto or deprive any Noteholder of the security afforded by the Collateral Sharing and Security Agreement or Mortgage. (b) It shall be sufficient if an Act of Noteholders approves the substance, but not the form, of any proposed supplemental indenture. (c) Promptly after the execution by the Issuer and the Indenture Trustee of any supplemental indenture pursuant to this Section 10.1, the Indenture Trustee shall mail to the Noteholders a copy of such supplemental indenture. Any failure of the Indenture Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. SECTION 10.2 EXECUTION OF SUPPLEMENTAL INDENTURES. In executing, or permitting the additional trusts created by, any supplemental indenture permitted by this Article X or the modifications thereby of the trusts created by this Indenture, the Indenture Trustee shall be entitled to receive, and subject to Sections 7.1 and 7.2, shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture and that all conditions precedent to such execution have been satisfied. The Indenture Trustee may, but shall not be obligated to, enter into any such supplemental indenture that affects the Indenture Trustee's own rights, duties, liabilities or immunities under this Indenture or otherwise. SECTION 10.3 EFFECT OF SUPPLEMENTAL INDENTURE. Upon the execution of any supplemental indenture pursuant to the provisions hereof, this Indenture shall be and be deemed to be modified and amended in accordance therewith with respect to the Notes affected thereby, and the respective rights, limitations of rights, obligations, duties, liabilities and immunities under this Indenture of the Indenture Trustee, the Issuer and the Noteholders shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 10.4 REFERENCE IN NOTES TO SUPPLEMENTAL INDENTURES. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to this Article X may, and if required by the Indenture Trustee shall, bear a notation in form approved by the Indenture Trustee as to any matter provided for in such supplemental indenture. If the Issuer or the Indenture Trustee shall so determine, new Notes so modified as to conform, in the opinion of the Indenture Trustee and the Issuer, to any such supplemental indenture may be prepared and executed by the Issuer and authenticated and delivered by the Indenture Trustee in exchange for the Outstanding Notes. -44- ARTICLE XI REDEMPTION AND REPURCHASE OF NOTES SECTION 11.1 OPTIONAL REDEMPTION. (a) The Issuer may, at its option, redeem the Notes in whole at any time at a price in cash equal to the aggregate principal amount thereof to be redeemed, plus accrued and unpaid interest, if any, thereon to the date of redemption, plus the Redemption Make-Whole Premium. (b) If the Issuer elects to redeem the Notes, it shall notify the Indenture Trustee in writing of the redemption date and the principal amount of Notes to be redeemed. The Issuer shall give each notice provided for in this Section 11.1(b) at least 30 days but not more than 60 days before the redemption date (unless a shorter notice shall be agreed to by the Indenture Trustee in writing), together with an Officer's Certificate stating that such redemption shall comply with the conditions contained herein and in the Notes. (c) At least ten Business Days but not more than 60 days prior to a redemption date, the Issuer shall mail or cause the mailing of a notice of redemption by first-class mail to each Noteholder of Notes to be redeemed at the address of such Noteholder set forth in the Note Register. At the Issuer's request, the Indenture Trustee shall give the notice of redemption in the Issuer's name and at the Issuer's expense. The notice shall identify the Notes to be redeemed and shall state: (1) the redemption date; (2) the estimated total redemption price together with a reasonably detailed calculation thereof (with the actual total redemption price together with a reasonably detailed calculation thereof to be identified in a notice to the Noteholders delivered at least two Business Days prior to the proposed redemption date); (3) the name and address of the Indenture Trustee; (4) that, subject to Section 12.18 hereof, the Notes called for redemption must be surrendered to the Indenture Trustee to collect the redemption price; and (5) that, unless the Issuer defaults in making the redemption payment, interest on Notes called for redemption ceases to accrue on and after the redemption date and the only remaining right of the Noteholders is to receive payment of the redemption price upon surrender to the Indenture Trustee of the Notes redeemed. -45- (d) Once notice of redemption is mailed to the Noteholders, Notes called for redemption become due and payable on the redemption date and at the redemption price and shall cease to bear interest from and after the redemption date (unless the Issuer shall default in the payment of the redemption price or accrued interest). Upon surrender to the Indenture Trustee, such Notes shall be paid at the redemption price, plus accrued interest to the redemption date. (e) At least one Business Day prior to the redemption date, the Issuer shall deposit with the Indenture Trustee in immediately available funds money sufficient to pay the redemption price of all Notes to be redeemed on the redemption date. If any Note surrendered for redemption in the manner provided in the Notes shall not be so paid on the redemption date due to the failure of the Issuer to deposit sufficient funds with the Indenture Trustee, interest shall continue to accrue from the redemption date until such payment is made on the unpaid principal and, to the extent lawful, on any interest not paid on such unpaid principal, in each case at the Interest Rate. (f) In the event that, notwithstanding the requirement in Section 11.1(a) that any optional redemption be in whole, any optional redemption is made in part, any such partial redemption shall be to all Noteholders on a pro rata basis, based on the principal amount of Notes held by each Noteholder. SECTION 11.2 REPURCHASE AT THE OPTION OF NOTEHOLDERS. (a) Upon the occurrence of a Change of Control, the Issuer shall make an offer to all Noteholders to purchase all, but not less than all, of the Notes held by each such Noteholder pursuant to the offer described below (the "CHANGE OF CONTROL OFFER") at a price in cash (the "CHANGE OF CONTROL PAYMENT") equal to the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase, plus the Repurchase Make-Whole Premium. Within 15 days following any Change of Control, the Issuer shall mail a notice to each Noteholder, with a copy to the Indenture Trustee, with the following information: (1) a Change of Control Offer is being made pursuant to the Indenture, and that all, but not less than all, Notes held by such Noteholder properly tendered pursuant to such Change of Control Offer will be accepted for payment, (2) the purchase price and the purchase date, which will be no earlier than 30 days nor later than 60 days from the date such notice is mailed, except as may be otherwise required by applicable law (the "CHANGE OF CONTROL PAYMENT DATE"); (3) any Notes not properly tendered will remain Outstanding and continue to accrue interest; (4) unless the Issuer defaults in the payment of the Change of Control Payment, all Notes accepted for payment pursuant to the Change of Control Offer will cease to accrue interest on the Change of Control Payment Date; (5) Noteholders electing to have their Notes purchased pursuant to a Change of Control Offer will be required to surrender their Notes with the form entitled "Option of Noteholder to Elect Purchase" on the reverse of the Notes completed (or appropriate indemnifications must be provided to the Indenture Trustee and the Issuer regarding missing or lost Notes), to the Indenture Trustee specified in the notice at the address specified in the notice prior to the close of business on the third Business Day preceding the Change of Control Payment Date; and (6) Noteholders will be entitled to withdraw their tendered Notes and their election to require the Issuer to purchase such Notes, PROVIDED that the -46- Indenture Trustee receives, not later than the close of business on the last day of the offer period, a telegram, telefax, facsimile transmission or letter setting forth the name of the Noteholder, the principal amount of Notes tendered for purchase, and a statement that such Noteholder is withdrawing his tendered Notes and his election to have such Notes purchased. (b) Prior to any Change of Control, the Issuer shall obtain written confirmation from the Rating Agency that after such Change of Control, including after giving effect to all Change of Control Payments, the rating on the remaining Outstanding Notes and the Investor Certificates will not be lowered or withdrawn from its then current rating. (c) The Issuer shall notify in writing the Indenture Trustee and the Noteholders of the execution and delivery of any definitive agreement providing for a prospective Change of Control within ten Business Days of the effectiveness of such agreement. SECTION 11.3 MANDATORY PARTIAL REDEMPTION. (a) If an Event of Default described in Section 6.1(b) or (c) shall occur and be continuing that specifically relates to and materially and adversely affects the collection of the payments when due on one or more specific Pledged Contract Receivables or Contracts related thereto (an "AFFECTED PLEDGED CONTRACT RECEIVABLE"), and such breach continues or is not cured within the period described in Section 6.1(b) or (c), as the case may be, then, subject to the provisions of Sections 6.2(d) and 6.2(e), the remedy for such Event of Default shall be limited to that set forth in this Section 11.3, PROVIDED that the Issuer performs its obligations pursuant to this Section 11.3. Following such Event of Default, upon the request of the Indenture Trustee or the Majority Noteholders, the Issuer shall call for redemption, within 10 days of such request, Notes in an aggregate principal amount equal to the product of (1) the aggregate principal amount of the Notes Outstanding on such date, and (2) a fraction the numerator of which is the sum of the remaining scheduled payments to be made under the Affected Pledged Contract Receivable and the denominator of which is the sum of the remaining scheduled payments to be made under all outstanding Pledged Contract Receivables, including such Affected Pledged Contract Receivable (such amount, the "MANDATORY PARTIAL REDEMPTION AMOUNT"), at a redemption price equal to the Mandatory Partial Redemption Amount, plus accrued and unpaid interest, if any, on the Notes to be redeemed to the date of redemption; provided, however, that if any such Event of Default was the result of an action taken by the Issuer that was intended by the Issuer to cause an acceleration of the Notes (with the Issuer being presumed for the purposes of this Section 11.3(a) to have intended any action that was reasonably within the ability or control of any FRGC Party to avoid or prevent), then the redemption price shall include the Basic Make-Whole Premium. (b) The Issuer shall notify the Indenture Trustee in writing of the redemption date and the Mandatory Partial Redemption Amount as promptly as possible. Such notice shall be accompanied by an Officer's Certificate stating that such redemption shall comply with the conditions contained herein and the Notes. -47- (c) The Indenture Trustee shall redeem the Notes on a pro rata basis, based on the principal amount of Notes held by each Noteholder. The Indenture Trustee shall promptly notify the Issuer in writing of such Notes and Mandatory Partial Redemption Amount. (d) At least ten days but not more than 30 days prior to a redemption date, the Issuer shall mail or cause the mailing of a notice of redemption by first-class mail to each Noteholder to be redeemed at the address of such Noteholder set forth in the Note Register. At the Issuer's request, the Indenture Trustee shall give the notice of redemption in the Issuer's name and at the Issuer's expense. The notice shall identify the Notes to be redeemed and shall state: (1) the redemption date; (2) the estimated total redemption price together with a reasonably detailed calculation thereof and the Mandatory Partial Redemption Amount (with the actual total redemption price together with a reasonably detailed calculation thereof to be identified in a notice to the Noteholders delivered at least two Business Days prior to the proposed redemption date); and (3) the name and address of the Indenture Trustee. (e) Once notice of redemption is mailed to the Noteholders, Notes called for redemption become due and payable on the redemption date and at the redemption price and shall cease to bear interest from and after the redemption date (unless the Issuer shall default in the payment of the redemption price or accrued interest). Upon surrender to the Indenture Trustee, such Notes shall be paid at the redemption price, plus accrued interest to the redemption date. (f) At least one Business Day prior to the redemption date, the Issuer shall deposit with the Indenture Trustee in immediately available funds money sufficient to pay the redemption price of all Notes or portions thereof to be redeemed on the redemption date. If any Note surrendered for redemption in the manner provided in the Notes shall not be so paid on the redemption date, interest shall continue to accrue from the redemption date until such payment is made on the unpaid principal and, to the extent lawful, on any interest not paid on such unpaid principal, in each case at the Interest Rate. SECTION 11.4 PURCHASE OF NOTES. The Issuer will not and will not permit any Affiliate to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the Outstanding Notes except (i) upon the payment or prepayment of the Notes in accordance with the terms of this Indenture and the Notes or (ii) pursuant to an offer to purchase made by the Issuer or an Affiliate pro rata to the Noteholders upon the same terms and conditions. Any such offer shall remain open for at least 20 Business Days. The Issuer will not, and will not permit any Affiliate to, purchase or acquire any Investor Certificates pursuant to Section 8.2 of the Trust Agreement unless an offer to purchase Notes for an equivalent amount of funds is made pro rata to the Noteholders -48- on substantially the same terms and conditions. The Issuer will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment, prepayment or purchase of Notes pursuant to any provision of this Indenture and no Notes may be issued in substitution or exchange for any such Notes. SECTION 11.5 APPLICATION OF FUNDS ON PREPAYMENT OR PURCHASE. In the event any Notes are repurchased pursuant to Section 11.2, redeemed pursuant to Section 11.3 or purchased pursuant to Section 11.4, the principal amount of each required payment of the Notes becoming due on or after such repurchase, redemption or purchase shall be reduced in the same proportion as the aggregate unpaid principal amount of the Notes was reduced as a result of such repurchase, redemption or purchase. ARTICLE XII MISCELLANEOUS SECTION 12.1 COMPLIANCE CERTIFICATES AND OPINIONS. Upon any application or request by the Issuer to the Indenture Trustee to take any action under any provision of this Indenture, the Issuer shall furnish to the Indenture Trustee: (i) an Officer's Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and (ii) an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that, in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (i) a statement that each signatory of such certificate or opinion has read or has caused to be read such covenant or condition and the definitions herein relating thereto; (ii) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (iii) a statement that, in the judgment of each such signatory, such signatory has made such examination or investigation as is necessary to enable such signatory to express an informed opinion as to whether or not such covenant or condition has been complied with; and (iv) a statement as to whether, in the opinion of each such signatory, such condition or covenant has been complied with. -49- SECTION 12.2 FORM OF DOCUMENTS DELIVERED TO INDENTURE TRUSTEE. (a) In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. (b) Any certificate or opinion of an Authorized Officer of the Issuer may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate of an Authorized Officer or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Servicer or the Issuer, stating that the information with respect to such factual matters is in the possession of the Servicer or the Issuer, unless such counsel knows that the certificate or opinion or representations with respect to such matters are erroneous. (c) Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. (d) Whenever in this Indenture, in connection with any application or certificate or report to the Indenture Trustee, it is provided that the Issuer shall deliver any document as a condition of the granting of such application, or as evidence of the Issuer's compliance with any term hereof, it is intended that the truth and accuracy, at the time of the granting of such application or at the effective date of such certificate or report (as the case may be), of the facts and opinions stated in such document shall in such case be conditions precedent to the right of the Issuer to have such application granted or to the sufficiency of such certificate or report. The foregoing shall not, however, be construed to affect the Indenture Trustee's right to rely upon the truth and accuracy of any statement or opinion contained in any such document as provided in Article VI. SECTION 12.3 ACTS OF NOTEHOLDERS. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Noteholders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Noteholders in person or by agents duly appointed in writing; and except as herein otherwise expressly provided such action shall become effective when such instrument or instruments are delivered to the Indenture Trustee, and, where it is hereby expressly required, to the Issuer. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the -50- "Act" of the Noteholders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 7.1) conclusive in favor of the Indenture Trustee and the Issuer, if made in the manner provided in this Section 12.3. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved in any manner that the Indenture Trustee deems sufficient. (c) The ownership of Notes shall be proved by the Note Register. (d) Any request, demand, authorization, direction, notice, consent, waiver or other action by a Noteholder (or any one or more predecessor Noteholders with respect to the Notes held by the Noteholder) shall bind the Noteholder of every Note issued upon the registration thereof or in exchange therefor or in lieu thereof, in respect of anything done, omitted or suffered to be done by the Indenture Trustee or the Issuer in reliance thereon, whether or not notation of such action is made upon such Note. SECTION 12.4 NOTICES, ETC., TO INDENTURE TRUSTEE, ISSUER AND RATING AGENCY. Any request, demand, authorization, direction, notice, consent, waiver or Act of Noteholders or other documents provided or permitted by this Indenture to be made upon, given or furnished to or filed with the Indenture Trustee, the Issuer or the Rating Agency under this Indenture shall be made upon, given or furnished to or filed with such party as specified in Appendix B. SECTION 12.5 NOTICES TO NOTEHOLDERS; WAIVER. (a) Where this Indenture provides for notice to Noteholders of any condition or event, such notice shall be given as specified in Appendix B. (b) Where this Indenture provides for notice in any manner, such notice may be waived in writing by any Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Noteholders shall be filed with the Indenture Trustee but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such a waiver. (c) In case, by reason of the suspension of regular mail service as a result of a strike, work stoppage or similar activity, it shall be impractical to mail notice of any event of Noteholders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Indenture Trustee shall be deemed to be a sufficient giving of such notice. (d) Where this Indenture provides for notice to the Rating Agencies, failure to give such notice shall not affect any other rights or obligations created hereunder, and shall not under any circumstance constitute an Event of Default. SECTION 12.6 ALTERNATE PAYMENT AND NOTICE PROVISIONS. Notwithstanding any provision of this Indenture or any of the Notes to the contrary, the Issuer may -51- enter into any agreement with any Noteholder providing for a method of payment, or notice by the Indenture Trustee to such Noteholder, that is different from the methods provided for in this Indenture for such payments or notices. The Issuer shall furnish to the Indenture Trustee a copy of each such agreement and the Indenture Trustee shall cause payments to be made and notices to be given in accordance with such agreements. SECTION 12.7 EFFECT OF HEADINGS AND TABLE OF CONTENTS. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 12.8 SUCCESSORS AND ASSIGNS. (a) All covenants and agreements in this Indenture and the Notes by the Issuer shall bind its successors and assigns, whether so expressed or not. (b) All covenants and agreements of the Indenture Trustee in this Indenture shall bind its successors and assigns, whether so expressed or not. SECTION 12.9 SEPARABILITY. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 12.10 BENEFITS OF INDENTURE. Nothing in this Indenture or in the Notes, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, the Noteholders and (only to the extent expressly provided herein) the Certificateholders, any other party secured hereunder and any other Person with an ownership interest in any part of the Trust Estate, the Shared Collateral or the Mortgage Collateral, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 12.11 LEGAL HOLIDAYS. If the date on which any payment is due shall not be a Business Day, then (notwithstanding any other provision of the Notes or this Indenture) payment need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the date on which nominally due, and no interest shall accrue for the period from and after any such nominal date. SECTION 12.12 GOVERNING LAW. This Indenture shall be governed by, and construed and enforced in accordance with, the laws of the State of New York, excluding choice-of-law principles of the laws of such State that would require the application of the laws of a jurisdiction other than such State; PROVIDED, however, that insofar as the laws of another state govern the perfection of the Lien pursuant to this Indenture, it is agreed that, to the extent required by the laws of such other state, the laws of such other state shall apply to the enforcement of the power of sale or other rights and remedies created herein with respect to such Lien. -52- SECTION 12.13 COUNTERPARTS. This Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 12.14 RECORDING OF INDENTURE. If this Indenture is subject to recording in any appropriate public recording offices, such recording is to be effected by the Issuer and at its expense accompanied by an Opinion of Counsel (which may be counsel to the Indenture Trustee or any other counsel reasonably acceptable to the Indenture Trustee) to the effect that such recording is necessary either for the protection of the Noteholders or any other Person secured hereunder or for the enforcement of any right or remedy granted to the Indenture Trustee under this Indenture. SECTION 12.15 NO RECOURSE. No recourse may be taken, directly or indirectly, with respect to the obligations of the Issuer or the Indenture Trustee on the Notes or under this Indenture or any certificate or other writing delivered in connection herewith or therewith, against: (i) the Indenture Trustee in its individual capacity; (ii) any owner of a beneficial interest in the Issuer; or (iii) any partner, owner, beneficiary, agent, officer, director, employee or agent of the Indenture Trustee in their individual capacities, any holder of a beneficial interest in the Issuer or the Indenture Trustee or of any successor or assign of the Indenture Trustee in their individual capacities (or any of their successors or assigns), except as any such Person may have expressly agreed (it being understood that the Indenture Trustee has no such obligations in its individual capacity) and except that any such partner, owner or beneficiary shall be fully liable, to the extent provided by applicable law, for any unpaid consideration for stock, unpaid capital contribution or failure to pay any instalment or call owing to such entity. SECTION 12.16 ACCESS TO CERTAIN DOCUMENTATION AND INFORMATION REGARDING PLEDGED CONTRACT RECEIVABLES. Each of the FRGC Parties shall provide to the Indenture Trustee and the Noteholders reasonable access to the documentation regarding the Pledged Contract Receivables and to their respective officers, employees and accountants. Each of the FRGC Parties shall also permit the representatives of each Noteholder that is an Institutional Investor: (a) If no Default or Event of Default of an FRGC Party under any of the Basic Note Documents shall have occurred and be continuing, at the expense of such Noteholder and upon reasonable prior notice to the FRGC Parties, to visit the principal executive office of the FRGC Parties, to discuss the affairs, finances and accounts of the FRGC Parties as they relate to their respective obligations under the Basic Note Documents with their respective officers, and (with the consent of the FRGC Parties, which consent shall not be unreasonably withheld) their respective independent public accountants, and (with the consent of any FRGC Party, which consent shall not be unreasonably withheld) to visit the other offices and properties of the FRGC Parties, -53- all at such reasonable times and as often as may be reasonably requested in writing; and (b) If a Default or an Event of Default shall have occurred and be continuing for more than 30 days, at the expense of the FRGC Parties to visit and inspect any of the offices or properties of the FRGC Parties, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the FRGC Parties authorize said accountants to discuss the affairs, finances and accounts of the FRGC Parties), all at such times and as often as may be requested. SECTION 12.17 CONFIDENTIALITY. For the purposes of this Section 12.17, "Confidential Information" means information delivered to a Noteholder by or on behalf of the Issuer in connection with the transactions contemplated by or otherwise pursuant to this Indenture that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by the Noteholder as being confidential information of the Issuer, provided that such term does not include information that (a) was publicly known or otherwise known to the Noteholder prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by the Noteholder or any Person acting on its behalf, (c) otherwise becomes known to the Noteholder other than through disclosure by any FRGC Party or (d) constitutes financial statements delivered to the Noteholder under this Indenture that are otherwise publicly available. Each Noteholder will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by it in good faith to protect confidential information of third parties delivered to it, provided that each Noteholder may deliver or disclose Confidential Information to (i) its directors, officers, employees, agents, attorneys and affiliates (to the extent such disclosure reasonably relates to the Notes), (ii) its financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 12.17, (iii) any other Noteholder, (iv) any Institutional Investor to which the Noteholder sells or offers to sell its Notes (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 12.17), (v) any Person from which the Noteholder offers to purchase any security of any FRGC Party (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 12.7), (vi) any federal or state regulatory authority having jurisdiction over it, (vii) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about its investment portfolio, or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to it, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which it is a party or (z) if default by the Issuer under any of the Basic Note Documents has occurred and is continuing, to the extent it may reasonably determine such delivery and disclosure to be necessary or appropriate. Each Noteholder, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 12.17 as though it were a party to this Indenture. -54- SECTION 12.18 SURRENDER OF NOTES BY INSTITUTIONAL INVESTORS. Notwithstanding anything else in this Indenture or the Notes to the contrary, if a Noteholder is an Institutional Investor (or a nominee of an Institutional Investor), such Institutional Investor shall use its reasonable efforts to surrender its Notes upon written request of the Issuer or the Indenture Trustee following final payment in respect thereof, but shall not be required to surrender its Notes as a condition to receipt of any payment in respect of any Note. If an Institutional Investor shall not have surrendered its Notes within ten Business Days of being so requested to do so pursuant to this Indenture, such Institutional Investor will be deemed to indemnify, defend and hold harmless the Indenture Trustee and the Issuer from and against any and all costs, expenses, losses, claims, damages and liabilities (including, without limitation, expenses of counsel and expenses of litigation) arising out of or incurred in connection with failure to surrender its Notes. SECTION 12.19 COLLATERAL SHARING AND SECURITY AGREEMENT. The Noteholders agree to be bound by the terms and conditions of the Collateral Sharing and Security Agreement. -55- IN WITNESS WHEREOF, the Issuer, the Servicer and the Indenture Trustee have caused this Indenture to be duly executed by their respective officers, thereunto duly authorized, all as of the day and year first above written. HATTIESBURG GAS STORAGE COMPANY By: HATTIESBURG INDUSTRIAL GAS SALES COMPANY, its General Partner By: /s/ J. A. Ballew -------------------------------- J. A. Ballew, Vice President Witnesses: /s/ Jennifer L. Janss - ------------------------- /s/ Darrick Gring - ------------------------- HATTIESBURG INDUSTRIAL GAS SALES COMPANY By: /s/ J. A. Ballew ------------------------------- J. A. Ballew, Vice President Witnesses: /s/ Jennifer L. Janss - -------------------------- /s/ Darrick Gring - -------------------------- CHEMICAL BANK, as Indenture Trustee By: /s/ Dennis Kildea ------------------------------- Name: Dennis Kildea ------------------------------- Title: Trust Officer ------------------------------- Witnesses: /s/ Charles E. Dooley - --------------------------- /s/ Matthew Lefferts - --------------------------- -56- STATE OF NEW YORK ) ) COUNTY OF NEW YORK ) On this the 21st day of November, 1995, before me, Davalyn D. Curtis, the undersigned officer, personally appeared J. A. Ballew, who acknowledged himself to be the Vice President of HATTIESBURG INDUSTRIAL GAS SALES COMPANY, the general partner of HATTIESBURG GAS STORAGE COMPANY, and that he, being authorized to do so, executed the foregoing instrument for the purposes therein contained. In witness whereof, I hereunto set my hand and official seal. /s/ Davalyn D. Curtis ---------------------------------- Notary Public in and for the State of New York My Commission expires: 7/8/97 ---------------------------------- STATE OF NEW YORK ) ) COUNTY OF NEW YORK ) On this the 21st day of November, 1995, before me, Davalyn D. Curtis, the undersigned officer, personally appeared J. A. Ballew, who acknowledged himself to be the Vice President of HATTIESBURG INDUSTRIAL GAS SALES COMPANY, and that he, being authorized to do so, executed the foregoing instrument for the purposes therein contained. In witness whereof, I hereunto set my hand and official seal. /s/ Davalyn D. Curtis ---------------------------------- Notary Public in and for the State of New York My Commission expires: 7/8/97 ---------------------------------- -57- STATE OF NY ) ) COUNTY OF NY ) On this the 21st day of November, 1995, before me, Davalyn D. Curtis, the undersigned officer, personally appeared Dennis Kildea, who acknowledged himself to be the Trust Officer of CHEMICAL BANK, and that he, being authorized to do so, executed the foregoing instrument for the purposes therein contained. In witness whereof, I hereunto set my hand and official seal. /s/ Davalyn D. Curtis ---------------------------------- Notary Public in and for the State of New York My Commission expires: 7/8/97 ---------------------------------- -58- APPENDIX A PART I - INDENTURE DEFINITIONS All terms defined in this Appendix shall have the defined meanings when used in any of the Basic Note Documents, unless otherwise defined therein. ACT: An act specified in Section 12.3(a) of the Indenture. AFFECTED PLEDGED CONTRACT RECEIVABLE: As defined in Section 11.3 of the Indenture. AFFILIATE: With respect to any specified Person, any other Person controlling, controlled by or under common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. AGENCY OFFICE: The office of the Issuer maintained pursuant to Section 4.2 of the Indenture. AUTHORIZED OFFICER: With respect to the Issuer, any officer of the Issuer who is authorized to act for the Issuer in matters relating to the Issuer and who is identified on the list of Authorized Officers delivered by the Issuer to the Indenture Trustee on the Closing Date (as such list may be modified or supplemented from time to time hereafter). BASIC DOCUMENTS: The Basic Note Documents and the Basic Trust Documents (as defined in the Sale and Servicing Agreement). BASIC MAKE-WHOLE PREMIUM: With respect to any Note accelerated pursuant to Section 6.2 of the Indenture or redeemed pursuant to Section 11.3 of the Indenture, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note accelerated or redeemed over the amount of such Called Principal, provided that the Basic Make-Whole Premium may in no event be less than zero. BASIC NOTE DOCUMENTS: The Indenture, the Notes, the Note Purchase Agreements, the Mortgages, the Guarantees and the Collateral Sharing and Security Agreement. BUSINESS DAY: Any day other than a Saturday, a Sunday or any other day on which banking institutions in New York, New York are authorized or obligated by law, executive order or governmental decree to be closed. BUSINESS INTERRUPTION INSURANCE: As defined in Section 3.2(q) of the Indenture. A-1 CALLED PRINCIPAL: With respect to any Note, the principal of such Note that is declared to be immediately due and payable pursuant to Section 6.2 of the Indenture, is redeemed pursuant to Section 11.1 or 11.3 of the Indenture or is repurchased pursuant to Section 11.2 of the Indenture, as the context requires. CERTIFICATEHOLDER: A Person in whose name an Investor Certificate or a Residual Certificate is registered pursuant to the terms of the Trust Agreement. CHANGE OF CONTROL: With respect to FRGC, a Change of Control shall be deemed to occur in the event that Crystal fails to own, directly or indirectly, at least 80% of the outstanding capital stock of FRGC (or any permitted successor or assign) and have the power to elect at least a majority of the Board of Directors of FRGC (or any permitted successor or assign). CHANGE OF CONTROL OFFER: As defined in Section 11.2 of the Indenture. CHANGE OF CONTROL PAYMENT: As defined in Section 11.2 of the Indenture. CHANGE OF CONTROL PAYMENT DATE: As defined in Section 11.2 of the Indenture. CLOSING CONDITIONS: The conditions to the closing of the transactions contemplated by the Basic Documents which are set forth in Schedule 2 to the Indenture. CLOSING DATE: November 22, 1995. CODE: The Internal Revenue Code of 1986, as amended from time to time, and the Treasury Regulations promulgated thereunder. COLLATERAL: The collateral specified in the Granting Clause of the Indenture. COLLATERAL ACCOUNT: As defined in Section 9.1 of the Indenture. COLLATERAL SHARING AND SECURITY AGREEMENT: The Collateral Sharing and Security Agreement substantially in the form of Exhibit C to the Indenture, as amended and supplemented from time to time. COLLATERAL TRUSTEE: As defined in the Collateral Sharing and Security Agreement. CONSOLIDATED CASH FLOW AVAILABLE FOR FIXED CHARGES: For any period, the SUM of (i) Consolidated Net Income for such period PLUS (ii) to the extent (and only to the extent) that such aggregate amount was deducted in the computation of Consolidated Net Income for such period, the aggregate amount of (a) income tax expense, depreciation, amortization and other non-cash charges of the FRGC Parties for such period, determined on a consolidated basis for such Persons, and (b) Consolidated Fixed Charges for such period. A-2 CONSOLIDATED FIXED CHARGES: For any period, the aggregate amount, without duplication, of (i) interest expense of the FRGC Parties, (ii) the Monthly Fixed Return (as defined in the Trust Agreement) on the Investor Certificates (whether or not paid), (iii) scheduled amortization (whether or not paid) of Indebtedness of the FRGC Parties and scheduled payments (whether or not paid) of Monthly Return of Capital (as defined in the Trust Agreement), and (iv) lease expense of FRGC and its Subsidiaries, determined on a consolidated basis for the FRGC Parties. CONSOLIDATED NET INCOME: For any period, the net earnings (or loss) after income taxes of the FRGC Parties for such period, determined on a consolidated basis for such Persons in accordance with GAAP. CONTRACT: Each of the contracts described on Schedule 4 to the Indenture. CONTRACT RECEIVABLES: With respect to each Contract, the indebtedness and payment obligations arising from or relating to storage charges designated in such Contract as "D(1)" and deliverability charges designated as "D(2)". CONTRACT REGULATORY RECEIVABLES: With respect to any Contract, any increase in the Contract Receivables in respect of such Contract arising from or relating to a redetermination by the appropriate regulatory body of the storage or deliverability charges payable thereunder in accordance with the terms of such Contract. CONTRACTUAL OBLIGATION: As to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. CORPORATE TRUST OFFICE: With respect to the Indenture Trustee, the principal office at which at any particular time the corporate trust business of the Indenture Trustee shall be administered, which offices at the Closing Date are located at 450 West 33rd Street, 15th Floor, New York, New York 10001. CRYSTAL: Crystal Oil Company, a Louisiana corporation. CUT-OFF DATE: December 1, 1995. DEFAULT: Any occurrence that is, or with notice or the lapse of time or both would become, an Event of Default. DISCOUNTED VALUE: With respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to the Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal. ELIGIBLE ACCOUNT: A segregated trust account with an Eligible Institution. A-3 ELIGIBLE INSTITUTION: A depository institution organized under the laws of the United States of America or any State (or any domestic branch of a foreign bank), (A) which either (1) has a long-term unsecured debt rating of at least A+ from the Rating Agency at the time of any deposit therein (or, if such obligations are at the time of such deposit not rated by the Rating Agency but are rated at least A+ by Standard & Poor's ("S&P") and at least A1 by Moody's Investor Services Inc. ("Moody's"), provided that if such obligations are rated by only one of S&P or Moody's, such rating shall be sufficient) or (2) is a federal or state charter depository institution subject to regulations regarding fiduciary funds on deposit substantially similar to 12 C.F.R. Section 9.10(b), (B) whose deposits are insured by the FDIC and (C) having a combined capital and surplus of at least $250,000,000 as set forth in its most recent published annual report of condition. ELIGIBLE INVESTMENTS: Book-entry securities, negotiable instruments or securities represented by instruments in bearer or registered form which evidence: (i) direct obligations of, or obligations fully guaranteed as to timely payment of principal and interest by, the United States of America; (ii) demand deposits, time deposits or certificates of deposit of any depository institution or trust company incorporated under the laws of the United States of America or any state thereof (or any domestic branch of a foreign bank); and subject to supervision and examination by Federal or State banking or depository institution authorities; PROVIDED, HOWEVER, that at the time of the investment or contractual commitment to invest therein, the commercial paper or other short-term unsecured debt obligations (other than such obligations the rating of which is based on the credit of a Person other than such depository institution or trust company) thereof shall have a credit rating from the Rating Agency (or equivalent rating of S&P or Moody's) for short-term unsecured debt obligations or certificates of deposit granted thereby of at least D-1 (or equivalent rating of S&P or Moody's); (iii) commercial paper having, at the time of the investment or contractual commitment to invest therein, a rating from the Rating Agency (or equivalent rating of S&P or Moody's) for short-term unsecured debt obligations granted thereby of at least D-1 (or equivalent rating of S&P or Moody's); (iv) investments in money market or common trust funds having a rating from the Rating Agency (or equivalent rating of S&P or Moody's) for short-term unsecured debt obligations granted thereby of at least D-1 (or equivalent rating of S&P or Moody's) (including funds for which the Indenture Trustee or any of its Affiliates is investment manager or advisor, so long as such fund shall have such rating); (v) bankers' acceptances issued by any depository institution or trust company referred to in clause (ii) above; and A-4 (vi) repurchase obligations with respect to any security that is a direct obligation of, or fully guaranteed by the United States of America or any agency or instrumentality thereof the obligations of which are backed by the full faith and credit of the United States of America, in either case entered into with a depository institution or trust company (acting as principal) described in clause (ii); in each case maturing not later than the Business Day immediately preceding the next Payment Date. ELIGIBLE OBLIGOR: Any Obligor listed on Schedule 7 to the Indenture. ELIGIBLE RECEIVABLE: Each Contract Receivable: (i) that constitutes an account within the meaning of Section 9-106 of the UCC of the State the law of which governs the perfection of the interest granted in it; (ii) that is denominated and payable only in United States dollars in the United States; (iii) that was created in the ordinary course of business from the sale of services of the Issuer and in accordance with its historical credit and collection policies; (iv) with respect to which all installments due and payable prior to the Closing Date have been paid in full; (v) that, together with the Contracts underlying such Contract Receivable, was created in accordance with and does not contravene any applicable law, rule or regulation and in connection with which the Seller is not in violation of any law, rule or regulation; (vi) that is not a Contract Receivable purchased by the Issuer from any Person; (vii) that is not a Contract Receivable for which the Issuer has established an offsetting specific reserve; (viii) with respect to which all material consents, licenses, approvals or authorizations of, or registrations or declarations with, any Governmental Authority required to be obtained, effected or given by the Issuer in connection with the creation of such Contract Receivable and the related Contract have been duly obtained, effected or given and are in full force and effect; (ix) which has not been satisfied, subordinated or rescinded and with respect to which the Issuer is not in default in any material respect under the terms of the Contract from which such Contract Receivable arose; A-5 (x) which through the Basic Note Documents has been the subject of the grant of a first priority perfected security interest therein (and in the proceeds thereof) to the Indenture Trustee or the Collateral Trustee, free and clear of all Liens other than Permitted Liens; (xi) with respect to which the Issuer or its designee has duly given all notices of assignment in form and substance required to permit the legal, valid and enforceable assignment of such Contract Receivable by the Issuer to the Indenture Trustee, and is otherwise in compliance in all material respects with applicable law, all such notices are in full force and effect and such Contract Receivable is not subject to any right of rescission or set-off or, to the extent currently payable or asserted, any right of counterclaim or any other defense that is enforceable against the Indenture Trustee; (xii) that, together with the related Contract, will at all times be the legal, valid and binding payment obligation and contract, as the case may be, of the Obligor thereon, enforceable against such Obligor in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting the enforcement of creditors' rights in general and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law, and except as to any immaterial provision of any Contract the lack of enforceability of which would not affect the enforceability of the payment obligations of the Obligor in respect of any Pledged Contract Receivable; (xiii) with respect to which, on or before the Closing Date, the Issuer has not (i) taken any action that would impair the rights of the Indenture Trustee or the holders of the Notes with respect to the Pledged Contract Receivables or (ii) failed to take any action, that was necessary to avoid impairing the rights of the Indenture Trustee or the holders of the Notes; and (xiv) with respect to which no action, claim or proceeding is pending or, to the knowledge of Issuer, threatened which would adversely affect the payment or enforceability of the Pledged Contract Receivables. ERISA: The Employee Retirement Income Security Act of 1974, as amended. EVENT OF DEFAULT: An event specified in Section 6.1 of the Indenture. EXECUTIVE OFFICER: With respect to any corporation, the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, President, Executive Vice President, any Vice President, the Secretary or the Treasurer of such corporation; and with respect to any partnership, any general partner thereof acting through any such officer of such general partner. FDIC: Federal Deposit Insurance Corporation or any successor agency. FRGC: First Reserve Gas Company, a Delaware corporation. A-6 FRGC PARTIES: Collectively, FRGC, HIG, HGSC and any successors or permitted assigns to any of them. FINAL PAYMENT DATE: August 5, 2005. FIXED CHARGE COVERAGE TEST: As defined in Section 4.5(xvii) of the Indenture. GAAP: Generally accepted accounting principles in the United States of America in effect from time to time. GENERAL ACCOUNT ASSETS: The assets of a Noteholder that is an insurance company, other than assets allocated to a "separate account" (as defined in ERISA) maintained by such insurance company. GOVERNMENTAL AUTHORITY: Any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. GRANT: To mortgage, pledge, bargain, sell, warrant, alienate, remise, release, convey, assign, transfer, create, and grant a lien upon and a security interest in and right of set-off against, deposit, set over and confirm pursuant to the Indenture. A Grant of the Collateral or of any other agreement or instrument shall include all rights, powers and options (but none of the obligations) of the Granting party thereunder, including the immediate and continuing right to claim for, collect, receive and give receipt for principal and interest payments in respect of, the Collateral and all other moneys payable thereunder, to give and receive notices and other communications, to make waivers or other agreements, to exercise all rights and options, to bring Proceedings in the name of the Granting party or otherwise and generally to do and receive anything that the Granting party is or may be entitled to do or receive thereunder or with respect thereto. GUARANTEES: The Guarantees substantially in the form of Exhibits F and G to the Indenture, as amended and supplemented from time to time. HGSC: Hattiesburg Gas Storage Company, a Delaware general partnership. HIG: Hattiesburg Industrial Gas Sales Company, a Delaware corporation. INDEBTEDNESS: Of any Person at any date: (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices); (ii) any other indebtedness which is evidenced by a note, bond, debenture or similar instrument; (iii) all capital lease obligations of such Person; (iv) all obligations of such Person in respect of outstanding letters of credit, acceptances and similar obligations created for the account of such Person; and (v) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment A-7 thereof. The Indebtedness of any Person shall include any Indebtedness of any partnership in which such Person is the general partner. INDENTURE: The Indenture, dated as of November 21, 1995, among HGSC, HIG and the Indenture Trustee, as amended and supplemented from time to time. INDENTURE TRUSTEE: Chemical Bank, not in its individual capacity but solely as trustee under the Indenture, or any successor trustee under the Indenture. INSOLVENCY EVENT: With respect to a specified Person, (i) the entry of a decree or order by a court, agency or supervisory authority having jurisdiction in the premises for the appointment of a trustee, conservator, receiver, liquidator or other similar official for such Person, in any bankruptcy, insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings, or for the winding-up or liquidation of such Person's affairs, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days; (ii) the consent by such Person to the appointment of a trustee, conservator, receiver, liquidator or other similar official in any bankruptcy, insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings of or relating to such Person or of or relating to substantially all of such Person's property, or (iii) such Person shall admit in writing its inability to pay its debts generally as they become due, file a petition to take advantage of any applicable bankruptcy, insolvency or reorganization statute, make an assignment for the benefit of its creditors or voluntarily suspend payment of its obligations. INSTITUTIONAL INVESTOR: (a) any original purchaser of a Note, (b) any Noteholder holding more than 25% of the Outstanding Amount of Notes and (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form. INTEREST RATE: (a) 8.12% per annum with respect to the unpaid balance of any Note and (b) 10.12% per annum on any overdue payment of principal, any overdue payment of premium and any overdue payment of accrued and unpaid interest, from the date such payment was due until such amounts shall have been paid in full. INVESTOR CERTIFICATE: Any of the investor certificates executed by the Owner Trustee and authenticated by the Owner Trustee in substantially the form set forth in EXHIBIT A to the Trust Agreement. ISSUER: HGSC. ISSUER ORDER and ISSUER REQUEST: A written order or request signed in the name of the Issuer by any one of its Authorized Officers and delivered to the Indenture Trustee. LIEN: Any security interest, lien, charge, pledge, equity or encumbrance of any kind. A-8 LOCKBOX: The post office boxes to which the Obligors may be instructed to remit payments on the Pledged Contract Receivables. LOCKBOX ACCOUNT: Any intervening deposit account, established in the name of the Indenture Trustee, used for deposit of funds received in a Lockbox prior to their transfer to the Collateral Account. MAJORITY NOTEHOLDERS: Noteholders whose Notes represent greater than 50 percent of the Outstanding Amount of Notes. MANDATORY PARTIAL REDEMPTION AMOUNT: As defined in Section 11.3 of the Indenture. MATERIAL ADVERSE EFFECT: A material adverse effect on (a) the business, operations, property or condition (financial or otherwise) of the FRGC Parties, (b) the ability of any of the FRGC Parties to perform their respective obligations under the Basic Note Documents, (c) the validity or enforceability of any of the Basic Note Documents against any of the FRGC Parties or (d) the rights or remedies of the Indenture Trustee or the Noteholders under or with respect to the Basic Note Documents. MORTGAGE: The Deed of Trust, Security Agreement and Fixture Filing, substantially in the form of Exhibit E to the Indenture, pursuant to which the Issuer has mortgaged the Storage Facilities to the Collateral Trustee, as amended and supplemented from time to time. MORTGAGE COLLATERAL: As defined in the Collateral Sharing and Security Agreement. NOTEHOLDER: A Person in whose name a Note is registered pursuant to the terms of the Indenture. NOTE PURCHASE AGREEMENTS: The several note purchase agreements, dated as of November 21, 1995, among HGSC, HIG and the purchasers named therein, providing for the sale and purchase of the Notes. NOTE REGISTER: The register of Notes specified in Section 2.3 of the Indenture. NOTE REGISTRAR: The registrar at any time of the Note Register, appointed pursuant to Section 2.3 of the Indenture. NOTES: The 8.12% Secured Guaranteed Notes due 2005 issued by the Issuer and authenticated by the Indenture Trustee under the Indenture. OBLIGOR: Each party obligated to make payment with respect to any Contract Receivable, including any guarantor thereof. A-9 OFFICER'S CERTIFICATE: A certificate signed by any Authorized Officer of the Issuer, under the circumstances described in, and otherwise complying with, the applicable requirements of Section 12.1 of the Indenture, and delivered to the Indenture Trustee. Unless otherwise specified, any reference in the Indenture to an officer's certificate shall be to an Officer's Certificate of any Authorized Officer of the Issuer. OPERATOR: HIG in its capacity as the operator of the Storage Facilities under the Sale and Servicing Agreement or its successor in interest pursuant to Section 13 of the Collateral Sharing and Security Agreement. OPINION OF COUNSEL: A written opinion of counsel, who may, except as otherwise expressly provided, be an employee of the Issuer or the Servicer. In addition, for purposes of the Indenture, (i) such counsel shall be reasonably satisfactory to the Indenture Trustee; (ii) the opinion shall be addressed to the Indenture Trustee as Trustee; (iii) the opinion shall comply with any applicable requirements of Section 12.1 of the Indenture and shall be in form and substance satisfactory to the Indenture Trustee; and (iv) such opinion shall be at the expense of the Issuer. OUTSTANDING: With respect to the Notes, as of the date of determination, all Notes theretofore authenticated and delivered under the Indenture except: (i) Notes theretofore cancelled by the Indenture Trustee or delivered to the Indenture Trustee for cancellation; (ii) Notes or portions thereof the payment for which money in the necessary amount has been theretofore deposited with the Indenture Trustee in trust for the Noteholders; PROVIDED, HOWEVER, that if such Notes are to be redeemed, notice of such redemption has been duly given pursuant to the Indenture or provision therefor, satisfactory to the Indenture Trustee, has been made; and (iii) Notes in exchange for or in lieu of other Notes which have been authenticated and delivered pursuant to the Indenture unless proof satisfactory to the Indenture Trustee is presented that any such Notes are held by a bona fide purchaser; PROVIDED, HOWEVER, that in determining whether the Noteholders of the requisite portion of the Outstanding Amount of the Notes have given any request, demand, authorization, direction, notice, consent or waiver hereunder or under any Basic Document, Notes owned by the Issuer, any guarantor or other obligor upon the Notes, the Servicer or any Affiliate of any of the foregoing Persons shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Indenture Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Notes that the Indenture Trustee knows to be so owned shall be so disregarded. Notes so owned that have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Indenture Trustee the pledgor's right so to act with respect to such Notes and that the pledgee is not the Issuer, any other obligor upon the Notes, the Servicer or any Affiliate of any of the foregoing Persons. A-10 OUTSTANDING AMOUNT: As of any date, the aggregate principal amount of all Notes Outstanding at such date. OWNER TRUSTEE: Wilmington Trust Company, not in its individual capacity but solely as owner trustee under the Trust Agreement, or any successor owner trustee under the Trust Agreement. PAYMENT DATE: With respect to a date on which payment in respect of principal or premium, if any, of or interest on the Notes shall be made pursuant to the terms of the Indenture or the Notes, the fifth day of each calendar month. PERMITTED LIENS: Collectively, (i) statutory Liens for taxes, labor or materials where payment for such items is not yet delinquent; and (ii) any defects or imperfections of title, easements, surface leases or rights or plat restrictions that are not material in character, amount or extent and do not materially detract from the value, or materially interfere with the use, of the properties of the Servicer or the Seller, or materially prevent the Servicer or the Seller from receiving revenues from such properties or otherwise materially impair, or increase the cost of, the business operations being conducted thereon. PERSON: Any legal person, including any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. PLAN: Any employee benefit plan subject to Part 4 of subtitle B of Title I of ERISA and any plan within the meaning of Section 4975(c)(1) of the Code. PLEDGED CONTRACT RECEIVABLES: All Contract Receivables due pursuant to the terms of the Contracts on and after July 1, 2000 and in 2001, 2002, 2003 and 2004 and through July 31, 2005 (other than any Contract Regulatory Receivables due during the period on and after July 1, 2000 through June 30, 2001). PLEDGED INVESTOR CERTIFICATE RIGHTS: All rights to distributions and other payments in respect of the Investor Certificates pledged to the Indenture Trustee pursuant to the terms of the Indenture. PREDECESSOR NOTE: With respect to any particular Note, every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; and, for the purpose of this definition, any Note authenticated and delivered under Section 2.4 of the Indenture in lieu of a mutilated, lost, destroyed or stolen Note shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Note. PROCEEDING: Any suit in equity, action at law or other judicial or administrative proceeding. PURCHASED CONTRACT RECEIVABLES: (i) All Contract Receivables due pursuant to the terms of the Contracts in 1995 (but only after the Cut-off Date), 1996, 1997, 1998, A-11 1999 and through June 30, 2000, and (ii) all Contract Regulatory Receivables due during the period on and after July 1, 2000 through June 30, 2001. RATING AGENCY: Duff & Phelps Credit Rating Co. or, if Duff & Phelps Credit Rating Co. is unable to act as Rating Agency, another nationally recognized rating agency selected by the Issuer. RECORD DATE: With respect to any Payment Date, the first Business Day preceding such Payment Date; provided, however, with respect to the final instalment of principal and premium, if any, of and interest on the Notes, the Record Date shall be the 15th of the month immediately preceding the date on which such instalment is due. REDEMPTION MAKE-WHOLE PREMIUM: With respect to any Note to be redeemed pursuant to Section 11.1, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Redemption Make-Whole Premium may in no event be less than zero. REINVESTMENT YIELD: With respect to the Called Principal of any Note, 0.50% over the yield to maturity in the case of the Basic Make-Whole Premium and Redemption Make-Whole Premium and 0.75% over the yield to maturity in the case of the Repurchase Make-Whole Premium implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the third Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as "Page 678" on the Telerate Access Service (or such other display as may replaced Page 678 on Telerate Access Service) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are unascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the duration closest to and greater than the Remaining Average Life and (2) the actively traded U.S. Treasury security with the duration closest to and less than the Remaining Average Life. REMAINING AVERAGE LIFE: With respect to the Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse A-12 between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. REMAINING SCHEDULED PAYMENTS: With respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 6.2, 11.1, 11.2 or 11.3 of the Indenture, as the context requires. REPURCHASE MAKE-WHOLE PREMIUM: With respect to any Note to be repurchased pursuant to Section 11.2, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Repurchase Make-Whole Premium may in no event be less than zero. REQUIREMENT OF LAW: As to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. RESIDUAL CERTIFICATE: The residual certificate executed by the Owner Trustee and authenticated by the Owner Trustee in substantially the form set forth in Exhibit B to the Trust Agreement. RESPONSIBLE OFFICER: With respect to the Indenture Trustee, any officer within the Corporate Trust Office of the Indenture Trustee, and, with respect to any other Person, the President, any Vice President, Assistant Vice President, Secretary, Assistant Secretary or any other officer or assistant officer of such Person or general partner of such Person customarily performing functions similar to those performed by any of the above designated officers and also, with respect to a particular matter, any other officer to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. RESTRICTED PAYMENT: As defined in Section 4.5(xvii) of the Indenture. RESTRICTED PAYMENT DATE: As defined in Section 4.5(xvii) of the Indenture. SALE AND SERVICING AGREEMENT: The Sale and Servicing Agreement dated as of November 21, 1995, among the Seller, the Servicer and the Trust, as amended and supplemented from time to time. SERVICER: HIG in its capacity as the Servicer of the Pledged Contract Receivables under the Indenture, or its successor in interest. A-13 SETTLEMENT DATE: With respect to the Called Principal of any Note, the date on which such Called Principal is declared to be immediately due and payable pursuant to Section 6.2 of the Indenture, is redeemed pursuant to Section 11.1 or 11.3 of the Indenture or is repurchased pursuant to Section 11.2 of the Indenture, as the context requires. SHARED COLLATERAL: As defined in the Collateral Sharing and Security Agreement. SPECIFIED PERCENTAGE: As defined in Section 4.5(xvii) of the Indenture. STATE: Any one of the 50 States of the United States of America or the District of Columbia. STORAGE FACILITIES: As set forth on Schedule 6 to the Indenture. SUBSIDIARY: As to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. TREASURY REGULATIONS: The regulations, including proposed or temporary regulations, promulgated under the Code. References herein to specific provisions of proposed or temporary regulations shall include analogous provisions of final Treasury Regulations or other successor Treasury Regulations. TRUST: FRGC Owner Trust, a Delaware business trust created by the Trust Agreement. TRUST AGREEMENT: The Trust Agreement, dated as of November 21, 1995, among the Servicer, the Seller and the Owner Trustee, as amended and supplemented from time to time. TRUST ESTATE: All money, instruments, rights and other property that are subject or intended to be subject to the lien and security interest of the Indenture for the benefit of the Noteholders (including all property and interests Granted to the Indenture Trustee), including all proceeds thereof. UCC: The Uniform Commercial Code as in effect in the relevant jurisdiction (or if no such jurisdiction is relevant, as in effect in the State of New York). A-14 EX-10.2 4 EXHIBIT 10.2 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SALE AND SERVICING AGREEMENT AMONG HATTIESBURG GAS STORAGE COMPANY SELLER HATTIESBURG INDUSTRIAL GAS SALES COMPANY SERVICER AND SELLER AND FRGC OWNER TRUST DATED AS OF NOVEMBER 21, 1995 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE ARTICLE I CERTAIN DEFINITIONS . . . . . . . . . . . . 1 SECTION 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II CONVEYANCE OF PURCHASED CONTRACT RECEIVABLES; ORIGINAL ISSUANCE OF CERTIFICATES. . . . . . . . . 2 SECTION 2.1 Conveyance of Purchased Contract Receivables. . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 2.2 Payment of Purchase Price. . . . . . . . . . . . . . . . 3 SECTION 2.3 Acceptance by Trust. . . . . . . . . . . . . . . . . . . 3 SECTION 2.4 No Repurchase. . . . . . . . . . . . . . . . . . . . . . 4 SECTION 2.5 Certain Allocations. . . . . . . . . . . . . . . . . . . 4 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE SERVICER. . . . . . . . . . . . . 4 SECTION 3.1 Representations and Warranties as to the Receivables. . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 3.2 Other Representations and Warranties . . . . . . . . . . 4 ARTICLE IV ADMINISTRATION AND SERVICING OF RECEIVABLES . . . . . . 9 SECTION 4.1 Duties of the Servicer . . . . . . . . . . . . . . . . . 9 SECTION 4.2 Servicing Procedures . . . . . . . . . . . . . . . . . . 10 SECTION 4.3 Payment of Certain Expenses by Servicer. . . . . . . . . 10 SECTION 4.4 Annual Statement as to Compliance. . . . . . . . . . . . 10 SECTION 4.5 Access to Certain Documentation and Information Regarding Purchased Contract Receivables . . . . . . . . . . . . . . . . . . 11 SECTION 4.6 Information Provided to Rating Agency. . . . . . . . . . 11 SECTION 4.7 Compensation . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 4.8 Delivery of Financial Statements . . . . . . . . . . . . 12 SECTION 4.9 Other Information. . . . . . . . . . . . . . . . . . . . 13 SECTION 4.10 Notices. . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE V COVENANTS OF THE SERVICER AND OTHERS; REMEDIES . . . . . 13 SECTION 5.1 Covenants of the Servicer. . . . . . . . . . . . . . . . 13 SECTION 5.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . 16 -i- Page ---- ARTICLE VI LIABILITIES OF SERVICER AND OTHERS . . . . . . . . 17 SECTION 6.1 Liability of Servicer; Indemnities . . . . . . . . . . . 17 SECTION 6.2 Limitation on Liability of Servicer, Seller and Others. . . . . . . . . . . . . . . . . . . . 18 SECTION 6.3 Delegation of Duties . . . . . . . . . . . . . . . . . . 19 SECTION 6.4 Servicer Not to Resign . . . . . . . . . . . . . . . . . 19 ARTICLE VII DEFAULT . . . . . . . . . . . . . . . 19 SECTION 7.1 Servicer Default . . . . . . . . . . . . . . . . . . . . 19 SECTION 7.2 Trustee to Act; Appointment of Successor . . . . . . . . 19 SECTION 7.3 Notification to Investor Certificateholders . . . . . . . . . . . . . . . . . . . 20 ARTICLE VIII TERMINATION . . . . . . . . . . . . . . 20 SECTION 8.1 Termination. . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE IX MISCELLANEOUS PROVISIONS. . . . . . . . . . . 20 SECTION 9.1 Waiver and Amendment . . . . . . . . . . . . . . . . . . 20 SECTION 9.2 Protection of Title to Owner Trust Estate. . . . . . . . 21 SECTION 9.3 Notices. . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 9.4 Governing Law. . . . . . . . . . . . . . . . . . . . . . 23 SECTION 9.5 Severability of Provisions . . . . . . . . . . . . . . . 23 SECTION 9.6 Assignment . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 9.7 Third-Party Beneficiaries. . . . . . . . . . . . . . . . 23 SECTION 9.8 Separate Counterparts. . . . . . . . . . . . . . . . . . 23 SECTION 9.9 Headings and Cross-References. . . . . . . . . . . . . . 23 SECTION 9.10 No Petition Covenants. . . . . . . . . . . . . . . . . . 23 SECTION 9.11 Limitation of Liability of the Owner Trustee. . . . . . . . . . . . . . . . . . . . . . 24 SECTION 9.12 Treatment of Transaction by Seller . . . . . . . . . . . 24 -ii- Schedule 1 - List of Eligible Obligors Schedule 2 - Schedule of Contracts Schedule 3 - Schedule of Purchased Contract Receivables Schedule 4 - Schedule of Liquidated Damages and Fixed Percentage Schedule 5 - [Intentionally omitted] Schedule 6 - Description of Business Interruption Insurance Schedule 7 - Description of Storage Facilities Exhibit A - Form of FRGC Guarantee Exhibit B - [Intentionally omitted] Exhibit C - Form of Collateral Sharing and Security Agreement Exhibit D - [Intentionally omitted] Exhibit E - [Intentionally omitted] Exhibit F - Form of Deed of Trust, Security Agreement and Fixture Filing APPENDIX A - Defined Terms and Rules of Construction APPENDIX B - Notice Addresses and Procedures APPENDIX C - Closing Conditions -iii- SALE AND SERVICING AGREEMENT, dated as of November 21, 1995, by and among Hattiesburg Gas Storage Company, a Delaware general partnership ("HGSC"), Hattiesburg Industrial Gas Sales Company, a Delaware corporation ("HIG" or the "Servicer" and together with HGSC, the "Seller"), and FRGC Owner Trust, a Delaware business trust (the "Trust"). WHEREAS, the Seller desires to sell to the Trust, and the Trust desires to purchase from the Seller, the Purchased Contract Receivables in consideration of the payment of the Purchase Price, and the Servicer desires to perform the servicing obligations set forth herein for and in consideration of the fees and other benefits set forth in this Agreement; WHEREAS, HGSC is a beneficial owner of the Purchased Contract Receivables; WHEREAS, HIG is joining in this Agreement as Seller solely to evidence the transfer and assignment of its rights, if any, in the Purchased Property as a result of its being the signatory to the Contracts; WHEREAS, Crystal Oil Company, the ultimate parent of the Seller, has agreed, under certain circumstances and subject to certain limitations, to pay certain amounts payable by Seller in the event of a bankruptcy of the Seller; and WHEREAS, the Seller, the Servicer and the Trust wish to set forth the terms pursuant to which the Purchased Contract Receivables are to be sold by the Seller to the Trust and serviced by the Servicer; NOW, THEREFORE, in consideration of the premises and of the mutual terms and covenants contained herein, the parties hereto agree as follows: ARTICLE I CERTAIN DEFINITIONS SECTION 1.1 DEFINITIONS. Certain capitalized terms used in the above recitals and in this Agreement shall have the respective meanings assigned to them in Part I of APPENDIX A to this Agreement. All references herein to "the Agreement" or "this Agreement" are to this Sale and Servicing Agreement as it may be amended, supplemented or modified from time to time, the exhibits hereto and the capitalized terms used herein which are defined in such APPENDIX A, and all references herein to Articles, Sections and subsections are to Articles, Sections or subsections of this Agreement unless otherwise specified. The rules of construction set forth in Part II of such APPENDIX A shall be applicable to this Agreement. ARTICLE II CONVEYANCE OF PURCHASED CONTRACT RECEIVABLES; ORIGINAL ISSUANCE OF CERTIFICATES SECTION 2.1 CONVEYANCE OF PURCHASED CONTRACT RECEIVABLES. In consideration of the Trust's payment of the Purchase Price pursuant to Section 2.2, the Seller hereby sells, transfers, assigns and otherwise conveys to the Trust, WITHOUT RECOURSE other than as expressly provided herein, all right, title and interest of the Seller in, to and under: (a) the Purchased Contract Receivables and all monies paid or to be paid thereon and due or to be due thereunder; (b) all guarantees, insurance and other agreements or arrangements of the Obligors, or on behalf of the Obligors, of whatever character supporting or securing payment of any Purchased Contract Receivable whether pursuant to the Contracts or otherwise; and (c) all proceeds of any and all of the foregoing (the assets described in clauses (a) through (c) being collectively referred to herein as the "PURCHASED PROPERTY"). It is the intention of the Seller that the transfer and assignment contemplated by this Agreement shall constitute a sale of the Purchased Contract Receivables from the Seller to the Trust and the beneficial interest in and title to the Purchased Property shall not be part of the Seller's estate in the event of the filing of a bankruptcy petition, or the taking of any similar action, by or against the Seller under any bankruptcy, insolvency or similar law. The Seller and the Trust agree that the transfer and assignment contemplated by this Agreement is intended to be a sale and disposition of all of the Seller's rights, title and interest in the Purchased Property and will be treated as a sale for Federal income tax purposes. The Seller agrees to confirm such sale to any Person inquiring about the Purchased Contract Receivables. Notwithstanding the foregoing, in the event a court of competent jurisdiction determines that such transfer and assignment did not constitute such a sale or that such beneficial interest is part of the Seller's estate, then the Seller shall be deemed to have granted to the Trust a first priority perfected security interest in all of the Seller's right, title and interest in, to and under the Purchased Property, and the Seller hereby grants such security interest. For purposes of such grant, this Agreement shall constitute a security agreement under the UCC. Notwithstanding the assignment of the Purchased Property set forth in this Section 2.1, the Seller does not hereby assign any other rights under the Contracts or delegate any of its duties or obligations under the Contracts or the Purchased Property to the Trust or the Owner Trustee and neither the Trust nor the Owner Trustee accepts such duties or obligations. The foregoing assignment, set-over and conveyance does not constitute and is not intended to result in a creation or an assumption by the Trust, the Trustee or any Investor Certificateholder of any obligation of the Seller or any other Person in connection with the Purchased Property or under -2- any agreement or instrument relating thereto, including, without limitation, any obligation to any Obligor. In connection with such assignment, the Seller agrees to record and file, at its own expense, any financing statements (and continuation statements with respect to such financing statements when applicable) or, where applicable, registrations in the appropriate records with respect to the Purchased Property, in each case meeting the requirements of applicable law in such manner and in such jurisdictions as are necessary to perfect and maintain perfection of the assignment of the Purchased Property to the Trust, and to deliver a file-stamped copy or certified statement of such financing statement or registration or other evidence of such filing or registration to the Owner Trustee on or prior to the date of issuance of any Certificates. The Owner Trustee shall be under no obligation whatsoever to file such financing statement, or a continuation statement to such financing statement, or to make any other filing or other registration under the UCC, other relevant legislation or similar statute in connection with such transfer. In connection with such assignment, the Seller further agrees, at its own expense, on or prior to the Closing Date (a) to indicate, or to cause to be indicated, in its records that the Purchased Contract Receivables have been conveyed to the Trust pursuant to this Agreement and (b) to deliver or cause to be delivered to the Owner Trustee a true and complete list of all Purchased Contract Receivables transferred to the Trust specifying for each group of Purchased Contract Receivables, as of the Cut-Off Date, (i) the identification or reference number assigned to such Purchased Contract Receivables by the Seller and (ii) the amount of such Purchased Contract Receivables. Such list shall be marked as Schedule 3 to this Agreement and is hereby incorporated into and made a part of this Agreement. The Seller shall advise the Obligors of the transfer and assignment to the Trust of the Purchased Contract Receivables hereunder and instruct the Obligors that future payments thereon shall be made to the Lockbox and the Lockbox Account or the Collection Account. The Seller shall not revoke or otherwise change such instructions to the Obligors prior to the termination of this Agreement without notifying the Rating Agency and obtaining the prior written approval of the Trust acting through the Owner Trustee pursuant to Section 9.4 of the Trust Agreement. Any actions taken by the Servicer with respect to the Purchased Contract Receivables shall be deemed that as agent for the Trust and not that as the owner of the Purchased Contract Receivables or as principal. SECTION 2.2 PAYMENT OF PURCHASE PRICE. Upon fulfillment of the Closing Conditions, the Purchase Price for the Purchased Property shall be paid by the Trust to HGSC by wire transfer of immediately available funds to an account designated by the Seller in writing to the Trust. SECTION 2.3 ACCEPTANCE BY TRUST. The Trust hereby accepts the Purchased Property and agrees to hold such consideration upon the trust set forth in the Trust Agreement for the benefit of Certificateholders, subject to the terms and conditions of the Trust Agreement and this Agreement. The Trust hereby agrees and -3- accepts the appointment and authorization of the Servicer under Section 4.1. The Trust acknowledges that, except as expressly provided herein, the Purchased Property is being acquired without recourse and that all risks with respect to the payment and collection of the Purchased Property shall be that of the Trust and not of the Seller. SECTION 2.4 NO REPURCHASE. The Seller shall not have any right or obligation under this Agreement, by implication or otherwise, to repurchase from the Trust any Purchased Property or to rescind or otherwise retroactively effect any purchase of any Purchased Property. SECTION 2.5 CERTAIN ALLOCATIONS. The Seller agrees that, unless otherwise specified by the Owner Trustee, any payment received in respect of a Contract during any Monthly Period by the Obligors thereunder shall first be allocated to the Purchased Contract Receivables under that Contract due during such Monthly Period and then to any other amount due under such Contract during such Monthly Period. The Trust agrees that any payments received in respect of a Contract that are not in respect of or allocated to a Purchased Contract Receivable shall, subject to the terms and conditions of the Collateral Sharing and Security Agreement, promptly be remitted back to the Seller. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE SERVICER SECTION 3.1 REPRESENTATIONS AND WARRANTIES AS TO THE RECEIVABLES. Each of the Seller and HIG (in its capacity as Servicer) hereby represents and warrants to the Trust, for the benefit of the Investor Certificateholders, that as of the Closing Date (i) each Obligor is an Eligible Obligor, (ii) each Purchased Contract Receivable is an Eligible Receivable and (iii) with respect to each Contract, each statement set forth in the definition of Eligible Receivable relating to the Contract is true and correct. SECTION 3.2 OTHER REPRESENTATIONS AND WARRANTIES. Each of the Seller and HIG (in its capacity as Servicer and Operator) represents and warrants to the Trust for the benefit of the Investor Certificateholders as of the Closing Date as follows: (a) HIG (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, (ii) has the corporate power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (iii) has all licenses necessary to service the Purchased Contract Receivables pursuant to this Agreement, (iv) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification, except to the extent that the failure to be so qualified and in good standing would not have a Material Adverse Effect and (v) is in compliance with all Requirements of Law except to the extent that the failure -4- to comply therewith would not, individually or in the aggregate, have a Material Adverse Effect; HGSC (i) is a general partnership organized and existing under the laws of the State of Delaware, (ii) has the full partnership power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, and (iii) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith would not, individually or in the aggregate, have a Material Adverse Effect. (b) It (i) has the corporate or partnership power and authority to make, deliver and perform each Basic Trust Document to which it is a party, (ii) has taken all necessary action to authorize the execution, delivery and performance of each Basic Trust Document to which it is a party and (iii) has duly executed and delivered each Basic Trust Document to which it is a party. (c) The execution, delivery and performance of each Basic Trust Document to which it is a party will not violate any Requirement of Law or Contractual Obligation of it except for violations that would not have a Material Adverse Effect, and will not result in, or require, the creation or imposition of any Lien (other than Permitted Liens and Liens created by the Basic Documents) on any of its properties or revenues pursuant to any such Requirement of Law or Contractual Obligation. (d) Each Basic Trust Document to which it is a party and each Contract constitutes the legal, valid and binding obligation of it enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights in general and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. (e) No Purchased Contract Receivable has been sold, transferred, assigned or pledged to any Person other than the Trust; immediately prior to the conveyance of the Purchased Contract Receivables pursuant to this Agreement, the Seller had good and marketable title thereto, free of any Lien; and, upon execution and delivery of this Agreement by the parties hereto, the Trust shall have all of the right, title and interest of the Seller in, to and under the Purchased Contract Receivables free of any Lien other than Permitted Liens and Liens created pursuant to the Basic Documents. (f) Each of the audited consolidated balance sheet, statement of operations, statement of stockholders' equity and statement of cash flows of FRGC for each of the two fiscal years ended December 31, 1993 and 1994, and the two fiscal years ended December 31, 1993 and 1992, the audited consolidated balance sheet of FRGC as of June 19, 1995, the unaudited consolidated balance sheet, statement of operations and statement of cash flows of FRGC for the three-month period ended March 31, 1995, and the unaudited consolidated balance sheet and statement of operations of FRGC for the nine-month period -5- ended September 30, 1995, respectively, have been prepared in accordance with GAAP applied on a consistent basis throughout the periods involved (except for the unaudited financial statements which are subject to normal year-end adjustments and purchase price adjustments as a result of Crystal's acquisition of FRGC and which do not contain footnote disclosures) and each fairly presents the consolidated financial position of FRGC and its Subsidiaries at the respective dates thereof and the consolidated results of their operations and changes in cash flows for the periods indicated. (g) Since June 19, 1995, there has been no development or event which has had or could reasonably be expected to have a Material Adverse Effect. (h) No proceeds of the issuance of any Investor Certificates will be used by it to purchase or carry any margin stock (as defined in Regulations U and G of the Board of Governors of the Federal Reserve System, as in effect from time to time). It is in compliance with all applicable regulations of the Board of Governors of the Federal Reserve System (including, without limitation, Regulations U and G with respect to "margin stock"). (i) Upon formation of the Trust, and immediately following its acquisition of the Purchased Contract Receivables pursuant to this Agreement, none of the FRGC Parties nor the Trust will be an "investment company" within the meaning of, or subject to regulation under, the Investment Company Act of 1940 and the rules and regulations thereunder. (j) Each of Crystal and the FRGC Parties has filed or caused to be filed all tax returns which, to its knowledge, are required to be filed and have paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on its books), except where the failure to file or to pay such taxes, fees or other charges would not, individually or in the aggregate, have a Material Adverse Effect; no tax Lien has been filed, and, to its knowledge, no claim is being asserted, with respect to any such tax, fee or other charge, except for such claims which would not, individually or in the aggregate, have a Material Adverse Effect. Except for the Federal income tax liabilities of FRGC, which have been determined through 1991, the Federal income tax liabilities of the FRGC Parties have not been finally determined by the Internal Revenue Service for any period. (k) It has good record and indefeasible title in fee simple to, or a valid leasehold interest in, or other valid right to use, all its real property, and good title to, or a valid leasehold interest in, or other valid right to use, all its other property, and none of such property is subject to any Lien other than (i) Permitted Liens and (ii) the Liens created pursuant to the Basic Documents. -6- (l) It is not in default under or with respect to any of its Contractual Obligations except for such defaults which, individually or in the aggregate, would not have a Material Adverse Effect. (m) It has previously delivered to the Trust true and correct copies of each Contract (including any amendments thereto); and the terms other than price, volumes and payment dates of the Contracts as they relate to the Purchased Contract Receivables are the same in all material respects as the terms set forth in the Contracts attached to the Private Placement Memorandum with respect to the offer and sale of the Investor Certificates. (n) It has not within the last twelve months made any transfer or incurred any obligation with actual intent to hinder, delay or defraud any entity to which it was or may become indebted and it has not transferred any material property without receiving reasonably equivalent value for any such transfer or obligation. Both immediately prior to and immediately after the transactions occurring on the Closing Date, (i) the fair value of its assets at a fair valuation exceeds its debts and liabilities, subordinated, contingent or otherwise; (ii) the present fair salable value of its property is greater than the amount that will be required to pay its probable liability on its debts and other liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; (iii) it is reasonably expected to be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (iv) it will not have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted. For all purposes of clauses (i) through (iv) above, the amount of contingent liabilities at any time shall be computed as the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. (o) Except for any other FRGC Party, it has no Subsidiaries. (p) The Servicer has in place procedures pursuant to the Basic Trust Documents that are either necessary or advisable to ensure the timely collection of the Purchased Contract Receivables. (q) The Servicer has in force business interruption insurance with respect to the Storage Facilities as described in Schedule 6 hereto (the "Business Interruption Insurance"). (r) The office at which it keeps its records concerning the Purchased Contract Receivables is located at 229 Milam Street, Shreveport, Louisiana 71101. Since June 19, 1995, its chief executive office has been located at 229 Milam Street, Shreveport, Louisiana 71101 and is the place where it is "located" for the purposes of Section 9-103(3)(d) of the UCC of each jurisdiction the laws of which govern the transfer of the Purchased Contract Receivable hereunder. From January 1, 1995 until June 19, 1995, its chief executive office was "located" -7- in Dallas, Texas for the purposes of Section 9-103(3)(d) of the UCC as in effect in the State of Texas. The taxpayer identification number of HGSC is 75-2316407 and of HIG is 75-2051721. (s) Its legal name is as set forth in this Agreement. It has no trade names, fictitious names, assumed names or "doing business as" names. (t) Schedule 3 accurately sets forth the Collected Amounts scheduled to come due after the Cut-off Date with respect to the Purchased Contract Receivables. (u) No action, claim or proceeding is pending and, to its knowledge, no investigation is pending or threatened that would adversely affect the payment or enforceability of the Purchased Contract Receivables. (v) No consents or filings with any Governmental Authority or approvals by any Governmental Authority that have not been made or obtained are required for the execution, delivery and performance of the Basic Trust Documents to which it is a party. (w) There are no pending or, to its knowledge, threatened actions, suits or proceedings against any FRGC Party that would adversely affect the transactions contemplated by the Basic Trust Documents to which it is a party, and there is no injunction, writ, restraining order or other similar order in effect that adversely affects any of the FRGC Parties' performance of the agreements and transactions contemplated by the Basic Trust Documents to which it is a party. (x) All of the FRGC Parties' pension and profit sharing plans have been fully funded in accordance with the applicable FRGC Parties' obligations. (y) Each Contract is a legal, valid and binding obligation and contract, as the case may be, of the FRGC Party thereto, enforceable against such party in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting the enforcement of creditors' rights in general and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law, and except as to any material provision of any Contract the lack of enforceability of which would not affect the enforceability of the payment obligations of the Obligors thereunder in respect of any Purchased Contract Receivable. (z) Upon the completion of the sale of the Purchased Contract Receivables, the Trust's ownership therein will be reflected on the books and records of the Seller. The representations and warranties set forth in this Article III shall survive the transfer and assignment of the Purchased Property to the Trust. -8- ARTICLE IV ADMINISTRATION AND SERVICING OF RECEIVABLES SECTION 4.1 DUTIES OF THE SERVICER. The Servicer is hereby appointed and authorized to act as agent for the Trust and in such capacity shall manage, service, administer and, subject to Section 4.2, make collections on the Purchased Contract Receivables for the benefit of the Trust and the Certificateholders prudently and in accordance with customary and usual servicing procedures and applicable law and, to the extent not inconsistent with the foregoing, to exercise that degree of skill and care it uses in servicing assets held for its own account. The Servicer hereby accepts such appointment and authorization and agrees to perform the duties of Servicer with respect to the Purchased Contract Receivables set forth herein. The Servicer's duties shall include posting of all payments, responding to inquiries of Obligors on the Purchased Contract Receivables, investigating and collecting delinquencies, reporting tax information to Obligors, managing the collateral, accounting for collections and furnishing monthly and annual statements to the Trust pursuant to the Trust Agreement, generating federal income tax information and performing the other duties specified herein. Subject to the provisions of Section 4.2, the Servicer shall follow its historical policies and procedures and shall have full power and authority, acting alone, to do any and all things, consistent with the terms of the Basic Trust Documents, in connection with such managing, servicing, administration and collection that it may deem necessary or desirable. In fulfilling its obligations hereunder, the Servicer shall at any time and from time to time (i) be authorized to review and obtain copies of all information provided to the Trust with respect to the Purchased Contract Receivables, (ii) be entitled to receive copies of all statements, notices and reports regarding the Collection Account and Investment Account, (iii) be entitled to obtain any and all information regarding deposits, withdrawals and transfers to and from the Collection Account and Investment Account and the current balances therein and (iv) be entitled to obtain such other reasonable information and documentation it deems necessary or desirable to perform the servicing and administrative duties required of it under this Agreement. Without limiting the generality of the foregoing, the Servicer is hereby authorized to commence in the name of the Trust or the Owner Trustee or, to the extent necessary, in its own name, a legal proceeding to enforce any Purchased Contract Receivable, or to commence or participate in a legal proceeding (including a bankruptcy proceeding) relating to or involving any Purchased Contract Receivable. If the Servicer commences or participates in such a legal proceeding in its own name, the Trust shall thereupon be deemed to have automatically assigned such Purchased Contract Receivable to the Servicer solely for purposes of commencing or participating in any such proceeding as a party or claimant, and the Servicer is hereby authorized and empowered by the Trust to execute and deliver in the Servicer's name any notices, demands, claims, complaints, responses, affidavits or other documents or instruments in connection with any such proceeding. The Owner Trustee, upon the written request of the Servicer, shall furnish the Servicer with any powers of attorney and other documents and take any other steps which the Servicer may deem necessary or appropriate to enable the Servicer to carry out its servicing and administrative duties -9- under this Agreement. Except to the extent required by the preceding two sentences, the authority and rights granted to the Servicer in this Section 4.1 shall be nonexclusive and shall not be construed to be in derogation of the retention by the Trust of equivalent authority and rights. SECTION 4.2 SERVICING PROCEDURES. (a) On or immediately following the Closing Date, the Servicer shall instruct all Obligors to make payments in respect of the Purchased Contract Receivables to the Collection Account. If any future collections are received in a Lockbox, they shall within one Business Day of receipt thereof, be deposited in a Lockbox Account. In the event that any payments in respect of the Purchased Contract Receivables are made directly to the Seller or the Servicer, including, without limitation, any employees thereof or independent contractors employed thereby, the Seller or the Servicer, as the case may be, shall, as soon as reasonably practicable but in no event more than two Business Days after receipt thereof, deposit such amounts in the Lockbox Account or Collection Account. (b) The Servicer shall use reasonable efforts to collect all payments called for under the terms and provisions of the Purchased Contract Receivables as and when the same shall become due, and shall follow such collection practices, policies and procedures as are consistent with past practices and as it follows with respect to comparable contract receivables that it services for itself or others. (c) The Servicer shall not take any action to cause any Purchased Contract Receivable to be evidenced by any instrument (as defined in the UCC as in effect in the State of New York) except in connection with its enforcement or collection of a Purchased Contract Receivable, in which event the Servicer shall deliver such instrument to the Owner Trustee as soon as reasonably practicable but in no event more than five days after receipt thereof. SECTION 4.3 PAYMENT OF CERTAIN EXPENSES BY SERVICER. Subject to any limitations on the Servicer's liability hereunder, the Servicer shall be required to pay all expenses incurred by it in connection with its activities under this Agreement or any other Basic Document (including reasonable fees and disbursements of the Trust, the Owner Trustee and independent accountants, taxes imposed on the Servicer, expenses incurred in connection with distributions and reports to Investor Certificateholders and all other fees and expenses not expressly stated under this Agreement to be for the account of the Investor Certificateholders, but excluding federal, state and local income and franchise taxes, if any, of the Trust or any Investor Certificateholder). SECTION 4.4 ANNUAL STATEMENT AS TO COMPLIANCE. The Servicer shall deliver to the Owner Trustee, each Investor Certificateholder and the Rating Agency, on or before March 31 of each year, beginning March 31, 1996, an officer's certificate signed by the President or any Vice President of the Servicer, dated as of such date, stating that (i) a review of the activities of the Servicer during the prior calendar year (or, with respect to the first such certificate, such period as shall have elapsed from the Closing Date to the end of the prior calendar year) and of its performance under this -10- Agreement and the other Basic Trust Documents has been made under such officer's supervision and (ii) to such officer's knowledge, based on such review, the Servicer has fulfilled in all material respects all its obligations under this Agreement and the other Basic Trust Documents throughout such period, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to such officer and the nature and status thereof and remedies therefor being pursued. SECTION 4.5 ACCESS TO CERTAIN DOCUMENTATION AND INFORMATION REGARDING PURCHASED CONTRACT RECEIVABLES. Each of the FRGC Parties shall provide to the Owner Trustee and the Investor Certificateholders reasonable access to the documentation regarding the Purchased Contract Receivables and to their respective officers, employees and accountants. Each of the FRGC Parties shall also permit the representatives of each Certificateholder that is an Institutional Investor: (a) If no default of an FRGC Party under any of the Basic Trust Documents shall have occurred and be continuing, at the expense of such holder and upon reasonable prior notice to the FRGC Parties, to visit the principal executive office of the FRGC Parties, to discuss the affairs, finances and accounts of the FRGC Parties as they relate to their respective obligations under the Basic Trust Documents with their respective officers, and (with the consent of the FRGC Parties, which consent shall not be unreasonably withheld) their respective independent public accountants, and (with the consent of any FRGC Party, which consent shall not be unreasonably withheld) to visit the other offices and properties of the FRGC Parties, all at such reasonable times and as often as may be reasonably requested in writing; and (b) If a default of an FRGC Party under any of the Basic Trust Documents shall have occurred and be continuing for more than 30 days, at the expense of the FRGC Parties to visit and inspect any of the offices or properties of the FRGC Parties, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the FRGC Parties authorize said accountants to discuss the affairs, finances and accounts of the FRGC Parties), all at such times and as often as may be requested. SECTION 4.6 INFORMATION PROVIDED TO RATING AGENCY. In addition to receiving any information or documents required to be delivered to the Rating Agency pursuant to any Basic Trust Document, the Rating Agency may request in writing to the Servicer, and the Servicer shall deliver, reasonable additional information necessary to the Rating Agency to monitor the Investor Certificates. Promptly, but in no event later than five Business Days, after obtaining knowledge of an Insolvency Event with respect to any FRGC Party, the Servicer shall deliver to the Rating Agency (with a copy to the Investor Certificateholders and the Owner Trustee) notice of such Insolvency Event. The Servicer agrees to maintain and pay for the retention of the Rating Agency pursuant to the agreement between Crystal and the Rating Agency dated August 31, 1995. Failure by the Servicer to comply with the terms of this Section 4.6 shall constitute a default hereunder only of the Servicer and the sole remedy available to the Owner Trustee shall be replacement of the Servicer as provided in Article VII. -11- SECTION 4.7 COMPENSATION. As compensation for its services hereunder, the Servicer shall be specially allocated income equal to the reinvestment income earned on the temporary investment of the funds on deposit in the Collection Account prior to their distribution to the Certificateholders on each Distribution Date (such amount, the "REINVESTMENT INCOME"). The Reinvestment Income shall be distributed to the Servicer on each Distribution Date pursuant to the terms of the Trust Agreement. SECTION 4.8 DELIVERY OF FINANCIAL STATEMENTS. The Servicer shall furnish to the Trust, each Investor Certificateholder and the Rating Agency: (i) as soon as available, but in any event not later than 105 days after the end of each fiscal year of FRGC ending on or after December 31, 1995, the consolidated balance sheet of FRGC and its consolidated Subsidiaries as at the end of such year and the related consolidated statements of earnings and retained earnings and cash flow statements, which shall be audited by a nationally recognized accounting firm; and (ii) as soon as available, but in any event not later than 55 days after the end of each of the first three quarterly periods of each fiscal year of FRGC beginning with the first fiscal quarter of 1996, the unaudited consolidated balance sheet of FRGC and its consolidated Subsidiaries as at the end of such quarter and the related unaudited consolidated statements of earnings and retained earnings and cash flow statements of FRGC and its consolidated Subsidiaries for such quarter, and the portion of the fiscal year through the end of such quarter; setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal quarter or fiscal year, as the case may be, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly or annual financial statements generally; provided that footnote disclosure shall not be required for quarterly financial statements. The quarterly and annual financial statements shall be certified by a Responsible Officer of FRGC that such consolidated statements fairly present the financial condition of FRGC and its consolidated Subsidiaries as at the dates indicated and the results of their operations and cash flows for the periods indicated, subject, in the case of interim statements, to changes resulting from audit and normal year-end adjustment. The annual financial statements shall also be accompanied by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the financial position of FRGC and its consolidated subsidiaries and their results of operations and cash flows and, except as set forth therein, have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for the opinion in the circumstances. -12- SECTION 4.9 OTHER INFORMATION. (a) The Servicer and the Seller agree to provide to the Trust and each Investor Certificateholder, with reasonable promptness, such additional data and information as may reasonably be requested relating to the business, operations, affairs, financial condition, assets and properties of the FRGC Parties, the Contracts and the ability of any of the FRGC Parties to perform their respective obligations under any of the Basic Trust Documents. (b) The Servicer shall furnish to the Trust, the Rating Agency and each Investor Certificateholder within five Business Days of the filing thereof a copy of each Annual Report on Form 10-K, Quarterly Report on Form 10-Q and Current Report on Form 8-K that may be filed by Crystal with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, for so long as Crystal shall be subject to such filing obligations or until such earlier date that FRGC shall cease to be a Subsidiary of Crystal. SECTION 4.10 NOTICES. The Servicer or the Seller shall furnish to the Trust, each Investor Certificateholder and the Rating Agency, promptly, and in any event within five days, after obtaining knowledge of the occurrence of any default by any FRGC Party of any covenant, or breach of any representation and warranty of any FRGC Party, under any Basic Trust Document, a written notice specifying the nature and existence thereof and what action the applicable FRGC Party is taking or proposes to take with respect thereto. ARTICLE V COVENANTS OF THE SERVICER AND OTHERS; REMEDIES SECTION 5.1 COVENANTS OF THE SERVICER AND OTHERS. Until such time as all required distributions have been made on the Investor Certificates pursuant to the terms of Section 5.2(d) and (e) of the Trust Agreement, each of the Seller and HIG (in its capacity as Servicer and Operator) covenants, for the benefit of the Trust, the Owner Trustee and the Investor Certificateholders, as follows: (i) it will not voluntarily or involuntarily terminate or permit the termination of, or take any action which would permit the Obligors to terminate, any of the Contracts; (ii) it will not voluntarily or involuntarily take any action (including, without limitation, by agreeing to any amendment, modification or waiver of any provision of any Contract which would result in the reduction, or change the terms, of the Purchased Contract Receivables) which would permit the Obligors to reduce or affect in a manner adverse to the Trust their obligations under the Purchased Contract Receivables, including, without limitation, by way of setoff or otherwise; -13- (iii) it will not, without the consent of the Owner Trustee at the direction of the Majority Certificateholders, consent to an assignment by an Obligor which releases such Obligor from its obligations with respect to a Purchased Contract Receivable; (iv) it will operate the Storage Facilities in a good and prudent manner, consistent with its historical practices; (v) it will perform its obligations under the Contracts in all material respects; (vi) other than the Notes and the obligations relating thereto, it will not incur, assume or become liable for any Indebtedness, or assume or guarantee any Indebtedness of any Person; (vii) it will not voluntarily or involuntarily create, grant or permit to exist any Liens on any of its property or assets other than (1) Permitted Liens, (2) Liens in the form of sales or leases of assets permitted pursuant to Section 5.1(xv) and (3) Liens created pursuant to any of the Basic Documents as executed and delivered at the closing of the transactions contemplated hereby; (viii) it will not at any time prior to June 2000 expand or make any material additions or capital improvements to the Storage Facilities that would result in a reduction in the contractual rates for the Purchased Contract Receivables provided under the Contracts; (ix) it will not enter into contracts with respect to the Storage Facilities which (1) would prohibit or otherwise impose any material cost on the Trust in selling or foreclosing on the Storage Facilities in the event that the Servicer fails to pay Liquidated Damages pursuant to Section 5.2(a) or (2) would bind a subsequent purchaser of the Storage Facilities acquired in a foreclosure or sale unless the receivables under such contracts in the case of clause (2) are assigned as additional security to the Trust and the Indenture Trustee pursuant to the Collateral Sharing and Security Agreement; (x) it will not engage in any business other than (w) the operation of the Storage Facilities, (x) the provision of transportation and storage services relating to or in connection with the Storage Facilities, (y) any expansion or additions to the Storage Facilities or its operations or to the transportation and storage services provided in connection with the Storage Facilities or (z) the provision of management or operational services for other Persons at facilities located in the Petal Dome area in Mississippi provided that such management and operational services would not have a Material Adverse Effect, it being understood that the Seller or the Servicer may, subject to the foregoing limitations and the other provisions of this Agreement, increase the storage capacity of the Storage Facilities, expand or leach new caverns on or under the property where the Storage Facilities are currently located (it being understood that no storage facilities outside such location will be acquired by it), construct, -14- acquire or expand new or existing pipelines and related equipment which may connect directly or indirectly to the Storage Facilities or enhance the services provided at the Storage Facilities and enter into joint ventures and partnerships with respect to the storage, transportation or delivery of natural gas and other hydrocarbons to the extent that such joint ventures and partnerships do not create a Lien on the Storage Facilities and are reasonably related to the operations of the Storage Facilities; (xi) except as expressly contemplated by the Basic Trust Documents, the Servicer will service the Purchased Contract Receivables in accordance with its historical practices and policies; (xii) it will maintain its corporate existence separate and apart from any other entity except that, subject to the terms of the Trust Agreement, any of FRGC, the Servicer and HGSC may merge with each other and HGSC may liquidate and dissolve as long as (1) either FRGC or HIG holds individually or together the assets of HGSC immediately following the liquidation, (2) no default under this Agreement would exist following any such action and (3) any successor entity in any such action explicitly assumes the liabilities of its predecessor entity (and a copy of any such assumption agreement is delivered to the Investor Certificateholders, the Owner Trustee and the Rating Agency); (xiii) it will (1) comply with all Requirements of Law, (2) perform its Contractual Obligations and (3) promptly pay its taxes and other liabilities as they become due and payable except, in each case, for such non-compliance, non-performance or non-payment which would not, individually or in the aggregate, have a Material Adverse Effect; (xiv) it will maintain Business Interruption Insurance (which shall name the Trust as loss payee thereunder in respect of its interests in the Purchased Contract Receivables) of the type and in the amount set forth in Schedule 6 hereto and to the extent such insurance is not available on a reasonable basis or sufficient to cover all Force Majeure Events under a Contract for the entire time that such Force Majeure Event exists, it will self insure against such Force Majeure Event and make such payments to the Trust as a loss payee as may be necessary to compensate the Trust as the holder of the Purchased Contract Receivables for all losses arising from such Force Majeure Event that are not otherwise covered by Business Interruption Insurance; (xv) an FRGC Party will at all times own all the material assets constituting the Storage Facilities; PROVIDED, however, this provision will not restrict the sale of movable equipment that is not necessary for the operation of the Storage Facilities, sales and loans of base gas in the ordinary course of business and modifications and terminations of the leases and other agreements that would not have a Material Adverse Effect; (xvi) except for the payment of dividends on shares of its capital stock, distributions with respect to its partnership interests, repurchases of shares of -15- its capital stock, issuances of new classes or series of its capital stock, the lending of funds to Crystal or any of its Affiliates, the lending or borrowing of funds between or among the FRGC Parties or other transactions between or among the FRGC Parties, it will not engage in any material transaction with an Affiliate that is not on substantially the same terms as would reasonably be expected to be obtained on an arm's length basis with an unaffiliated third party; (xvii) HGSC will not pay any distributions to the extent such distributions would decrease its Consolidated Net Worth below the Initial Required Net Worth; and (xviii) it will not enter into any speculative hedge contracts. SECTION 5.2 REMEDIES. (a) In the event the Seller or HIG breaches any of the covenants set forth in Section 5.1 (whether voluntarily or involuntarily, including, without limitation, as a result of or in connection with a bankruptcy proceeding involving the Seller or HIG, but except as provided in Section 5.2(e)) or any of the representations and warranties of the Seller or HIG set forth in Article III is not true and correct as of the Closing Date, in each case in a manner which materially and adversely affects any Purchased Contract Receivable, if the Seller or HIG, as the case may be, fails to remedy such breach or correct any such representation or warranty within 30 days after receiving written notice from the Owner Trustee or any Investor Certificateholder, then, upon the request of the Owner Trustee or the Majority Certificateholders, HGSC and HIG shall be jointly and severally obligated to pay as liquidated damages ("LIQUIDATED DAMAGES") to the Trust immediately the Liquidated Damages Amount for such Purchased Contract Receivable. The remedies set forth in this Section 5.2(a) shall be in addition to, and not in limitation of, any other remedies the Owner Trustee may have under applicable law, provided that except as set forth in paragraph (b) below and Section 7.1, in the event that the Seller or HIG fully performs its obligations under this paragraph (a)in respect of any breach, then the remedies set forth herein shall be the sole remedy available to the Owner Trustee in respect of such breach. (b) HGSC hereby confirms the appointment of HIG as Operator of the Storage Facilities on behalf of HGSC. In the event HGSC or HIG breaches any of the covenants set forth in the Basic Trust Documents (but only to the extent such covenant relates to the operation of the Storage Facilities), and such breach is not remedied or cured within 45 calendar days of receipt of written notice thereof from the Trust, or in the event there shall have occurred and be continuing an Insolvency Event with respect to HIG, HIG agrees if requested pursuant to the provisions of the Collateral Sharing and Security Agreement, to resign as Operator and HIG and HGSC agree that a substitute operator of the Storage Facilities may be engaged by the Collateral Trustee pursuant to Section 13 of the Collateral Sharing and Security Agreement. (c) As collateral security for the prompt and complete payment of Liquidated Damages if and when due pursuant to Section 5.2(a) and the amounts required to be paid by Seller pursuant to Section 5.1(xiv), contemporaneously herewith -16- the Seller has granted to the Collateral Trustee a security interest in the Storage Facilities, the Contracts and certain other collateral. In the event the Seller shall fail to pay any Liquidated Damages when due or any amounts required to be paid pursuant to Section 5.1(xiv) and such failure shall be continuing, the Owner Trustee may, in addition to any other remedy available to it, cause the Collateral Trustee to (i) institute proceedings from time to time for the complete or partial foreclosure of the Shared Collateral and the Mortgage Collateral under the Collateral Sharing and Security Agreement and Mortgage or (ii) exercise any other right or remedy or take any other action permitted to be taken by the Collateral Trustee following such event. (d) As additional security for its obligation to pay Liquidated Damages and the amounts required to be paid by the Seller pursuant to Section 5.1(xiv) ("ADDITIONAL SECURITY"), contemporaneously herewith HGSC has granted to the Collateral Trustee a security interest in the distributions and other funds receivable in respect of the Residual Certificate. (e) In the event there occurs an Event of Force Majeure, the proceeds of the Business Interruption Insurance maintained by the Seller and the other amounts, if any, required to be paid by the Seller pursuant to Section 5.1(xiv) shall be paid to the Trust in respect of any installment (or portion thereof) of any Purchased Contract Receivables with respect to which the Obligor has not made such payment as a result of such Event of Force Majeure. Such proceeds shall be paid to the Collection Account and considered part of the Collected Amount. Subject to the Seller's compliance with Section 5.1(xiv), any such Event of Force Majeure shall not constitute a default under this Agreement or require the payment of any Liquidated Damages. ARTICLE VI LIABILITIES OF SERVICER AND OTHERS SECTION 6.1 LIABILITY OF SERVICER; INDEMNITIES. (a) The Servicer shall be liable in accordance with this Agreement only to the extent of the obligations in this Agreement specifically undertaken by the Servicer. Such obligations shall include the following: (i) The Servicer shall indemnify, defend and hold harmless the Owner Trustee and the Trust from and against any taxes that may at any time be asserted against the Owner Trust or the Trust with respect to the transactions contemplated in this Agreement, including any sales, gross receipts, general corporation, tangible personal property, privilege or license taxes (but not including any taxes asserted with respect to ownership of the Purchased Contract Receivables or Purchased Property, or federal or other income taxes arising out of distributions on the Certificates, or any fees or other compensation payable to the Owner Trust or the Trust) and costs and expenses in defending against the same; -17- (ii) The Servicer shall indemnify, defend and hold harmless the Owner Trustee, the Trust and any Investor Certificateholder from and against any and all costs, expenses, losses, claims, damages and liabilities to the extent that such cost, expense, loss, claim, damage or liability arose out of, or was imposed upon the Owner Trustee, the Trust or such Investor Certificateholder through the negligence, willful misfeasance or bad faith of the Servicer in the performance of its duties under this Agreement and the other Basic Documents or by reason of reckless disregard of its obligations and duties under any of the Basic Documents; and (iii) The Servicer shall indemnify, defend and hold harmless the Owner Trustee and Wilmington Trust Company, in its individual capacity, and its agents, officers, directors and employees, from and against all costs, expenses, losses, claims, damages and liabilities arising out of or incurred in connection with the acceptance, administration or performance by, or action or inaction of, the Owner Trustee of the trusts and duties contained in this Agreement, the Trust Agreement and the other Basic Trust Documents, including the administration of the Owner Trust Estate, except in each case to the extent that such cost, expense, loss, claim, damage or liability: (A) is due to the willful misfeasance, bad faith or negligence (except for errors in judgment) of the Person seeking to be indemnified, or (B) to the extent otherwise payable to the Owner Trustee, arises from the Owner Trustee's breach of any of its representations or warranties set forth in Section 9.6 of the Trust Agreement. (b) Indemnification under this Section 6.1 shall survive the resignation or removal of the Owner Trustee or the termination of this Agreement and shall include reasonable fees and expenses of counsel and expenses of litigation. If the Servicer has made any indemnity payments pursuant to this Section 6.1 and the recipient thereafter collects any of such amounts from others, the recipient shall promptly repay such amounts collected to the Servicer, without interest. SECTION 6.2 LIMITATION ON LIABILITY OF SERVICER, SELLER AND OTHERS. Neither the Seller, the Servicer nor any of the directors, officers, employees, agents or Affiliates of the Seller or the Servicer shall be under any liability to the Trust or the Investor Certificateholders, except as specifically provided in this Agreement, for any action taken or for refraining from the taking of any action pursuant to this Agreement or any of the Basic Trust Documents or for errors in judgment; PROVIDED, HOWEVER, that this provision shall not protect the Seller or the Servicer for any liability for breach of its obligations hereunder or the Seller, the Servicer or any such Person against any liability that would otherwise be imposed by reason of willful misfeasance, bad faith or negligence (except for errors in judgment) in the performance of duties or by reason of reckless disregard of obligations and duties under this Agreement or any of the Basic Documents. The Seller and the Servicer and any director, officer, employee or agent of the Seller or the Servicer may rely in good faith on the advice of counsel or on any document of any kind PRIMA FACIE properly executed and submitted by any Person respecting any matters arising under this Agreement. -18- SECTION 6.3 DELEGATION OF DUTIES. The Servicer may, at any time without notice or consent, delegate any duties under this Agreement to any of the other FRGC Parties. The Servicer may at any time perform specific duties as Servicer through sub-contractors who are in the business of servicing receivables comparable to the Purchased Contract Receivables; PROVIDED, HOWEVER, that no such delegation shall relieve the Servicer of its responsibility with respect to such duties. SECTION 6.4 SERVICER NOT TO RESIGN. Subject to the provisions of Section 7.2, the Servicer shall not resign from the obligations and duties imposed on it by this Agreement as Servicer except upon a determination that the performance of its duties under this Agreement is no longer permissible under applicable law. Any such determination permitting the resignation of the Servicer shall be evidenced by an Opinion of Counsel to such effect delivered to the Owner Trustee. ARTICLE VII DEFAULT SECTION 7.1 SERVICER DEFAULT. In the event HIG shall reach any of the covenants in this Agreement (but only to the extent such covenant relates to the servicing of the Purchased Contract Receivables) and such breach shall be continuing and shall not be remedied or cured within 45 calendar days of receipt of written notice thereof from the Owner Trustee or any Investor Certificateholder, or in the event there shall have occurred and be continuing an Insolvency Event with respect to HIG, the Owner Trustee or the Majority Certificateholders by notice given in writing to the Servicer may, in addition to the other rights and remedies available in a court of law or equity to damages, injunctive relief and specific performance (which other rights and remedies shall not be available in the case of a breach of Section 4.6), terminate all of the rights and obligations of the Servicer under this Agreement or appoint a successor servicer, and HIG agrees to pay the reasonable fees and expenses of such successor servicer. Unless otherwise provided in the notice, on or after receipt by HIG of such written notice, all authority and power of the Servicer under this Agreement shall pass to and be vested in the Owner Trustee pursuant to and under this Section 7.1. The Owner Trustee is hereby authorized and empowered to execute and deliver, on behalf of HIG, as attorney- in-fact or otherwise, any and all documents and other instruments, and to do or accomplish all other acts or things necessary or appropriate to effect the purposes of such notice of termination, whether to complete the transfer and endorsement of the Purchased Contract Receivables and related documents, or otherwise. In such case, HIG agrees to cooperate with the Owner Trustee in effecting the termination of the responsibilities and rights of HIG as the Servicer under this Agreement, including the transfer to the Owner Trustee for administration by it of all cash amounts that shall at the time be held by the Servicer for deposit, or that shall have been deposited by the Servicer in the Collection Account or thereafter received with respect to the Purchased Contract Receivables that shall at that time be held by the Servicer. SECTION 7.2 TRUSTEE TO ACT; APPOINTMENT OF SUCCESSOR. Unless otherwise provided in the notice, on and after the time the Servicer receives a notice -19- of termination pursuant to Section 7.1, the Owner Trustee shall appoint a successor servicer, who shall succeed to the Servicer in its capacity as servicer under this Agreement and the transactions set forth or provided for in this Agreement, and shall be subject to all the responsibilities, restrictions, duties and liabilities relating thereto placed on the Servicer by the terms and provisions of this Agreement; PROVIDED, HOWEVER, that the predecessor servicer shall remain liable for, and the successor servicer shall have no liabilities for, any indemnification obligations of the Servicer arising as a result of acts, omissions or occurrences during the period in which the predecessor servicer was the Servicer; and PROVIDED, FURTHER, that HIG shall remain liable for all such indemnification obligations of the Servicer without regard to whether it is still Servicer hereunder. As compensation therefor, such successor servicer shall be entitled to the Reinvestment Income which the Servicer would have been entitled under this Agreement if no such notice of termination had been given. Any such successor servicer (i) shall have a net worth of not less than $5 million and (ii) shall have a regular business that includes the servicing of similar receivables. In the event the Owner Trustee deems the Reinvestment Income to be insufficient compensation for the successor servicer's duties and obligations hereunder, such successor servicer shall be entitled to such additional fee as such successor servicer and the Owner Trustee shall mutually agree, which additional fee shall be payable from amounts otherwise distributable to the Residual Certificateholder pursuant to Article V of the Trust Agreement. The Owner Trustee and such successor servicer shall take such action, consistent with this Agreement, as shall be necessary to effectuate any such succession. SECTION 7.3 NOTIFICATION TO INVESTOR CERTIFICATEHOLDERS. Upon any termination of, or appointment of a successor to, the Servicer pursuant to this Article VII, the Owner Trustee shall give prompt written notice thereof to the Investor Certificateholders and the Rating Agency. ARTICLE VIII TERMINATION SECTION 8.1 TERMINATION. This Agreement (other than Section 6.1) shall terminate and be of no further force or effect upon the termination of the Trust Agreement pursuant to Section 10.1(a) thereof. ARTICLE IX MISCELLANEOUS PROVISIONS SECTION 9.1 WAIVER AND AMENDMENT. (a) This Agreement may be amended, or any provision hereof may be waived, from time to time by the Seller, the Servicer and the Owner Trustee with the consent of the Majority Certificateholders (which consent, whether given pursuant to this Section 9.1 or pursuant to any other provision of this Agreement, shall be conclusive and binding on all Investor Certificateholders and on all future holders of Investor Certificates and of any Investor Certificate issued upon the transfer thereof -20- or in exchange thereof or in lieu thereof whether or not notation of such consent is made upon the Investor Certificates) for the purpose of adding any provisions to or changing in any manner or eliminating or waiving compliance with any of the provisions of this Agreement, or of modifying in any manner the rights of the Investor Certificateholders; PROVIDED, HOWEVER, that no such amendment or waiver without the consent of each Investor Certificateholder at the time outstanding shall (i) change in any manner the amount of, or accelerate or delay the timing of, collections of payments on the Purchased Contract Receivables, (ii) change the aforesaid percentage required to consent to any such amendment or waiver, (iii) change the obligation of the Seller to pay Liquidated Damages pursuant to Section 5.2(a), (iv) change the obligation of the Seller to make payments pursuant to Section 5.1(xiv) or (v) amend any provision of this Agreement(including Section 9.6) which requires actions taken under such provision to have the consent of greater than the Majority Certificateholders, without the consent of the number of Investor Certificateholders described in such Section. (b) Prior to the execution of any such amendment or waiver, the Owner Trustee shall furnish written notification of the substance of such amendment or waiver to the Investor Certificateholders and the Rating Agency. (c) Promptly after the execution of any such amendment or waiver, the Owner Trustee shall furnish a copy of such amendment or waiver to each Investor Certificateholder and the Rating Agency. (d) The particular form of any proposed amendment or waiver shall be required to be provided to the Investor Certificateholders in connection with any request for an amendment or waiver. The manner of obtaining such amendments or waivers (and any other consents of Investor Certificateholders provided for in this Agreement) and of evidencing the authorization of the execution thereof by Investor Certificateholders shall be subject to such reasonable requirements as the Owner Trustee may prescribe. (e) Prior to the execution of any amendment or waiver to this Agreement, the Owner Trustee shall be entitled to receive and rely upon an Opinion of Counsel stating that the execution of such amendment or waiver is authorized or permitted by this Agreement and that all conditions precedent to the execution and delivery of such amendment or waiver have been satisfied. The Owner Trustee may, but shall not be obligated to, enter into any such amendment which affects the Owner Trustee's own rights, duties or immunities under this Agreement or otherwise. SECTION 9.2 PROTECTION OF TITLE TO OWNER TRUST ESTATE. (a) The Seller shall execute and file such financing statements and cause to be executed and filed such continuation and other statements, all in such manner and in such places as may be required by law fully to preserve, maintain and protect the interest of the Investor Certificateholders and the Owner Trustee under this Agreement in the Purchased Contract Receivables and the other Purchased Property. The Seller shall deliver (or cause to be delivered) to the Owner Trustee file-stamped -21- copies of, or filing receipts for, any document filed as provided above, as soon as available following such filing. (b) The Seller shall not change its name, identity or corporate structure in any manner that would make any financing statement or continuation statement filed in accordance with paragraph (a) above seriously misleading within the meaning of Section 9-402(7) of the UCC, unless it shall have given the Owner Trustee at least 30 days prior written notice thereof. (c) The Seller shall give the Owner Trustee at least 30 days prior written notice of any relocation of its chief executive office if, as a result of such relocation, the applicable provisions of the UCC would require the filing of any amendment of any previously filed financing or continuation statement or of any new financing statement. The Servicer shall at all times maintain each office from which it services any Purchased Contract Receivables and its principal executive office within the United States of America. (d) The Servicer shall maintain accounts and records as to each Purchased Contract Receivable accurately and in sufficient detail to permit the reader thereof to know as of a reasonably recent date the status of such Purchased Contract Receivable, including payments made and payments owing (and the nature of each). (e) The Servicer shall maintain its records so that, from and after the time of sale under this Agreement of the Purchased Contract Receivables to the Trust, the Servicer's records that refer to any Purchased Contract Receivable indicate clearly that such Purchased Contract Receivable is owned by the Trust. (f) The Servicer shall deliver to the Owner Trustee promptly after the execution and delivery of this Agreement and of each amendment thereto, an Opinion of Counsel either (i) stating that, in the opinion of such counsel, all financing statements and continuation statements have been executed and filed that are necessary fully to preserve and protect the interest of the Owner Trustee in the Purchased Contract Receivables, and reciting the details of such filings or referring to prior Opinions of Counsel in which such details are given, or (ii) stating that, in the opinion of such counsel, no such action is necessary to preserve and protect such interest. (g) The Servicer shall deliver to the Owner Trustee, on or before April 30 of each year, beginning in 1997, an Opinion of Counsel either (i) stating that, in the opinion of such counsel, all financing statements and continuation statements have been executed and filed that are necessary fully to preserve and protect the interest of the Owner Trustee in the Purchased Contract Receivables and the other property transferred to the Owner Trustee hereunder, and to preserve and protect the interest of the Collateral Trustee in the Shared Collateral and the Mortgage Collateral, and reciting the details of such filings or referring to prior Opinions of Counsel in which such details are given, or (ii) stating that, in the opinion of such counsel, no further action is necessary to preserve and protect such interest. -22- SECTION 9.3 NOTICES. All demands, notices and communications upon or to the Servicer, the Owner Trustee, the Investor Certificateholders or the Rating Agency under this Agreement shall be delivered as specified in APPENDIX B hereto. SECTION 9.4 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, EXCLUDING CHOICE-OF-LAW PRINCIPLES OF THE LAWS OF SUCH STATE THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF A JURISDICTION OTHER THAN SUCH STATE; PROVIDED, HOWEVER THAT THE DUTIES AND IMMUNITIES OF THE OWNER TRUSTEE HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE AND, INSOFAR AS THE LAWS OF ANOTHER STATE GOVERN THE PERFECTION OF THE TRUST'S INTERESTS IN THE PURCHASED CONTRACT RECEIVABLES, IT IS AGREED THAT TO THE EXTENT REQUIRED BY THE LAWS OF SUCH OTHER STATE, THE LAWS OF SUCH OTHER STATE SHALL APPLY TO ENFORCEMENT OF THE POWER OF SALE OR OTHER RIGHTS AND REMEDIES CREATED HEREIN WITH RESPECT TO SUCH PURCHASED CONTRACT RECEIVABLES. SECTION 9.5 SEVERABILITY OF PROVISIONS. If any one or more of the covenants, agreements, provisions or terms of this Agreement shall be for any reason whatsoever held invalid, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement or of the Certificates or the rights of the holders thereof. SECTION 9.6 ASSIGNMENT. Notwithstanding anything to the contrary contained in this Agreement, this Agreement may not be assigned by the Servicer without the prior written consent of the Supermajority Certificateholders. The Servicer shall provide notice of any such assignment to the Rating Agency. SECTION 9.7 THIRD-PARTY BENEFICIARIES. This Agreement shall be binding upon the parties hereto and their respective successors and permitted assigns and inure to the benefit of the parties hereto, the Investor Certificateholders and their respective successors and assigns. Except as otherwise provided in Section 6.1 or in this Article IX, no other Person shall have any right or obligation hereunder. SECTION 9.8 SEPARATE COUNTERPARTS. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 9.9 HEADINGS AND CROSS-REFERENCES. The various headings in this Agreement are included for convenience only and shall not affect the meaning or interpretation of any provision of this Agreement. SECTION 9.10 NO PETITION COVENANTS. Notwithstanding any prior termination of this Agreement, the Servicer shall not, prior to the date which is one year and one day after the final distribution with respect to the Investor Certificates acquiesce, petition or otherwise invoke or cause the Trust to invoke the process of any court or government authority for the purpose of commencing or sustaining a case -23- against the Trust under any federal or state bankruptcy, insolvency or similar law or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Trust or any substantial part of its property, or ordering the winding up or liquidation of the affairs of the Trust. SECTION 9.11 LIMITATION OF LIABILITY OF THE OWNER TRUSTEE. Notwithstanding anything contained herein to the contrary, this Agreement has been executed by Owner Trustee not in its individual capacity but solely in its capacity as Owner Trustee of the Trust and in no event shall the Owner Trustee in its individual capacity or, except as expressly provided in the Trust Agreement, as Owner Trustee of the Trust have any liability for the representations, warranties, covenants, agreements or other obligations of the Trust hereunder or in any of the certificates, notices or agreements delivered pursuant hereto, as to all of which recourse shall be had solely to the assets of the Trust. For all purposes of this Agreement, in the performance of its duties or obligations hereunder or in the performance of any duties or obligations of the Trust hereunder, the Owner Trustee shall be subject to, and entitled to the benefits of, the terms and provisions of Article IX of the Trust Agreement. SECTION 9.12 TREATMENT OF TRANSACTION BY SELLER. Notwithstanding the fact that the transfer and assignment contemplated by this Agreement constitutes a sale to the Trust of all of the Seller's right, title and interest in the Purchased Contract Receivables and will be treated as such for Federal income tax purposes, the parties hereto acknowledge and agree that such transfer and assignment may be treated in a different manner as deemed appropriate by the Seller for regulatory and state tax purposes. -24- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers as of the day and year first above written. HATTIESBURG GAS STORAGE COMPANY By: HATTIESBURG INDUSTRIAL GAS SALES COMPANY, its General Partner By: /s/ J. A. Ballew ---------------------------- J. A. Ballew, Vice President HATTIESBURG INDUSTRIAL GAS SALES COMPANY By: /s/ J. A. Ballew ---------------------------- J. A. Ballew, Vice President FRGC OWNER TRUSTEE By: WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee By: /s/ W. Chris Sponenberg ------------------------------ Name: W. Chris Sponenberg ---------------------------- Title: Financial Services Officer ---------------------------- -25- EX-10.3 5 EXHIBIT 10.3 FIRST AMENDMENT TO SALE AND SERVICING AGREEMENT AND FIRST AMENDMENT TO TRUST AGREEMENT FIRST AMENDMENT TO SALE AND SERVICING AGREEMENT and FIRST AMENDMENT TO TRUST AGREEMENT (this "Amendment"), dated as of January 31, 1996, by and among Hattiesburg Gas Storage Company, a Delaware general partnership ("HGSC"), Hattiesburg Industrial Gas Sales Company, a Delaware corporation ("HIG"), Wilmington Trust Company, as Owner Trustee (the "Owner Trustee"), and FRGC Owner Trust, a Delaware business trust (the "Trust"). WITNESSETH: WHEREAS, HGSC, HIG and the Owner Trustee entered into the Trust Agreement dated as of November 21, 1995 (the "Trust Agreement"), providing for the formation of the Trust; WHEREAS, HGSC, HIG and the Trust entered into the Sale and Servicing Agreement dated as of November 21, 1995 (the "S&S Agreement"), providing for the sale to the Trust of certain receivables of HGSC and HIG, and pursuant to which HIG agreed to act as servicer of such receivables; WHEREAS, pursuant to Article XI of the Trust Agreement and Article IX of the S&S Agreement, the parties hereto desire to amend certain definitions contained in Appendix A to the S&S Agreement, which definitions also apply to the Trust Agreement pursuant to Article I of the Trust Agreement, in order to resolve an ambiguity with respect to certain distribution calculations and payment provisions; and WHEREAS, the parties hereto desire to reaffirm the provisions of the Trust Agreement and the S&S Agreement subject to the amendments contained herein; NOW, THEREFORE, in consideration of the premises and of the mutual terms and covenants contained herein, the parties hereto agree as follows: 1. All capitalized terms used and not otherwise defined herein shall have the meanings given such terms in the Trust Agreement and the S&S Agreement. 2. APPENDIX A to the S&S Agreement is hereby amended and restated in its entirety as set forth in APPENDIX A attached hereto (the only changes to such APPENDIX A intended by the parties in this Amendment are changes to the definitions of the terms "Monthly Fixed Return" and "Total Available Amount"). Pursuant to Article I of the Trust Agreement, such amendment shall also apply to the Trust Agreement to the extent applicable. 3. This Amendment may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. 4. This Amendment shall be governed by, construed and enforced in accordance with the laws of the State of New York, excluding choice-of-law principles of the laws of such State that would require the application of the laws of a jurisdiction other than such State. 5. As amended by this Amendment, the Trust Agreement and the S&S Agreement remain in full force and effect and the parties hereto hereby reaffirm the Trust Agreement and the S&S Agreement. -2- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers as of the day and year first above written. HATTIESBURG GAS STORAGE COMPANY By: HATTIESBURG INDUSTRIAL GAS SALES COMPANY, its General Partner By: /s/ J. A. Ballew --------------------------------------------- J. A. Ballew, Vice President HATTIESBURG INDUSTRIAL GAS SALES COMPANY By: /s/ J. A. Ballew --------------------------------------------- J. A. Ballew, Vice President WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee By: /s/ W. Chris Sponenberg --------------------------------------------- Name: W. Chris Sponenberg ------------------------------------------- Title: Financial Services Officer ------------------------------------------ FRGC OWNER TRUST By: WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee By: /s/ W. Chris Sponenberg ---------------------------------------- Name: W. Chris Sponenberg -------------------------------------- Title: Financial Services Officer ------------------------------------- -3- This Amendment has been consented to by the Investor Certificateholders pursuant to Section 11.1 of the Trust Agreement and Section 9.1 of the S&S Agreement. PACIFIC MUTUAL LIFE INSURANCE COMPANY By: /s/ Audrey L. Milfs By: /s/ William R. Schmidt --------------------- --------------------------------------------- Name: Audrey L. Milfs Name: William R. Schmidt ------------------- ------------------------------------------- Title: Secretary Title: Assistant Vice President ------------------ ------------------------------------------ GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY By: /s/Julie Bock --------------------------------------------- Name: Julie Bock ------------------------------------------- Title: Manager Private Placement Investments ------------------------------------------ By: /s/ James G. Lowery --------------------------------------------- Name: James G. Lowery ------------------------------------------- Title: Assistant Vice President Private Placement Investments ------------------------------------------ -4- This Amendment is consented to by all the Noteholders and, at the direction of all the Noteholders hereby, by the Indenture Trustee pursuant to Section 5.5(d) of the Collateral Sharing and Security Agreement. PACIFIC MUTUAL LIFE INSURANCE COMPANY By: /s/ Audrey L. Milfs By: /s/ William R. Schmidt --------------------- --------------------------------------------- Name: Audrey L. Milfs Name: William R. Schmidt ------------------- ------------------------------------------- Title: Secretary Title: Assistant Vice President ------------------ ------------------------------------------ THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK By: /s/ Peter W. Oliver --------------------------------------------- Name: Peter W. Oliver ------------------------------------------- Title: Managing Director ------------------------------------------ MONY LIFE INSURANCE COMPANY OF AMERICA By: /s/ Peter W. Oliver --------------------------------------------- Name: Peter W. Oliver ------------------------------------------- Title: Authorized Agent ------------------------------------------ PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY By: /s/ David Fusell --------------------------------------------- Name: David Fusell ------------------------------------------- Title: Vice President Securities Department ------------------------------------------ GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY By: /s/Julie Bock By: /s/ James G. Lowery ------------------------ --------------------------------------------- Name: Julie Bock Name: James G. Lowery ---------------------- ------------------------------------------- Title: Manager Private Title: Assistant Vice President Placement Investments Private Placement Investments --------------------- ------------------------------------------ CHEMICAL BANK, as Indenture Trustee By: /s/ Dennis Kildea --------------------------------------------- Name: Dennis Kildea ------------------------------------------- Title: Trust Officer ------------------------------------------ -5- APPENDIX A PART I - TRUST DEFINITIONS All terms defined in this Appendix shall have the defined meanings when used in any of the Basic Trust Documents, unless otherwise defined therein. ADDITIONAL DISTRIBUTIONS: With respect to any Distribution Date, if Liquidated Damages have been paid since the Closing Date or the immediately preceding Distribution Date, as applicable, and such payment was required to be made as a result of a default by any FRGC Party intended to cause the payment of Liquidated Damages (with any FRGC Party being presumed for purposes of this definition to have intended any default that was reasonably within the ability or control of any FRGC Party to avoid or prevent), an amount equal to the applicable Fixed Percentage for such Distribution Date multiplied by the Additional Net Distribution Amount. ADDITIONAL NET DISTRIBUTION AMOUNT: With respect to any Distribution Date, the amount determined pursuant to clause (iii) of the definition of Aggregate Return of Capital. AFFILIATE: With respect to any specified Person, any other Person controlling, controlled by or under common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. AGGREGATE FIXED RETURN: With respect to any Distribution Date, the sum of (i) the Monthly Fixed Return for such Distribution Date, (ii) any outstanding Fixed Return Shortfall as of the close of the preceding Distribution Date and (iii) one-twelfth of the Fixed Return Rate multiplied by the Fixed Return Shortfall as of the close of the preceding Distribution Date. AGGREGATE RETURN OF CAPITAL: With respect to any Distribution Date, the sum of (i) the Monthly Return Of Capital for such Distribution Date, (ii) any outstanding Return Of Capital Shortfall as of the close of the preceding Distribution Date and (iii) 79.5% of the Liquidated Damages Amount required to be paid to the Trust and that has not previously been paid to the Trust; provided that to the extent the amount determined pursuant to this clause (iii) would cause the Investor Certificate Balance on such Distribution Date to be decreased below the aggregate Discounted Present Value of all Purchased Contract Receivables with respect to which Liquidated Damages have not been paid, then the amount to be used for purposes of this clause (iii) shall be reduced to the amount necessary to prevent such event. BASIC DOCUMENTS: The Basic Trust Documents and the Basic Note Documents (as defined in the Indenture). BASIC TRUST DOCUMENTS: The Certificates, the Certificate Purchase Agreements, the Certificate of Trust, the Trust Agreement, the Sale and Servicing Agreement, the Guarantees, the Mortgage and the Collateral Sharing and Security Agreement. BENEFIT PLAN: As defined in Section 3.5 of the Trust Agreement. BUSINESS DAY: Any day other than a Saturday, a Sunday or any other day on which banking institutions in New York, New York or Wilmington, Delaware are authorized or obligated by law, executive order or governmental decree to be closed. BUSINESS INTERRUPTION INSURANCE: As defined in Section 3.2(q) of the Sale and Servicing Agreement. BUSINESS TRUST STATUTE: Chapter 38 of Title 12 of the Delaware Code, 12 DEL. CODE Sections 3801 ET SEQ., as the same may be amended from time to time. CAPITAL ACCOUNT: As defined in Section 6.1 of the Trust Agreement. CERTIFICATEHOLDER: An Investor Certificateholder or a Residual Certificateholder. CERTIFICATE OF TRUST: The certificate of trust of the Trust substantially in the form of EXHIBIT C to the Trust Agreement to be filed for the Trust pursuant to Section 3810(a) of the Business Trust Statute. CERTIFICATE PURCHASE AGREEMENTS: The several certificate purchase agreements, dated as of November 21, 1995, among the Trust, HGSC, HIG and the respective purchasers named therein, providing for the sale and purchase of the Investor Certificates. CERTIFICATES: The Investor Certificates and the Residual Certificate. CLOSING CONDITIONS: The conditions to the closing of the transactions contemplated by the Basic Documents which are set forth on Appendix C to the Sale and Servicing Agreement and Schedule 3 to the Trust Agreement. CLOSING DATE: November 22, 1995. CODE: The Internal Revenue Code of 1986, as amended from time to time, and the Treasury Regulations promulgated thereunder. COLLATERAL SHARING AND SECURITY AGREEMENT: The Collateral Sharing and Security Agreement substantially in the form of EXHIBIT C to the Sale and Servicing Agreement, as amended and supplemented from time to time. COLLATERAL TRUSTEE: As defined in the Collateral Sharing and Security Agreement. A-2 COLLECTED AMOUNT: With respect to any Distribution Date, the total collections (other than payments of Liquidated Damages) received by the Trust in respect of the Purchased Contract Receivables during the Monthly Period relating to such Distribution Date. COLLECTION ACCOUNT: The account designated as such, established and maintained pursuant to Section 5.1(a) of the Trust Agreement. CONSOLIDATED NET WORTH: Of the Residual Certificateholder, as of any date, all amounts that would be included under partnership capital or stockholders' equity, as the case may be, of the Residual Certificateholder, determined on a fair market value basis, by the general partner or the Board of Directors of the Residual Certificateholder in good faith, minus the amount of the Investor Certificates and the Residual Certificate held by the Residual Certificateholder. CONTRACT: Each of the contracts described on Schedule 2 to the Sale and Servicing Agreement. CONTRACT RECEIVABLES: With respect to each Contract, the indebtedness and payment obligations arising from or relating to storage charges designated in such Contract as "D1" and deliverability charges designated as "D2" (including, without limitation, any Contract Regulatory Receivables). CONTRACT REGULATORY RECEIVABLES: With respect to any Contract, any increase in the Contract Receivables in respect of such Contract arising from or relating to a redetermination by the appropriate regulatory body of the storage or deliverability charges payable thereunder in accordance with the terms of such Contract, excluding any Contract Regulatory Receivables relating to a Contract for which Liquidated Damages have been paid pursuant to Section 5.2 of the Sale and Servicing Agreement. CONTRACTUAL OBLIGATION: As to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. CORPORATE TRUST OFFICE: With respect to the Owner Trustee, the principal office at which at any particular time the corporate trust business of the Owner Trustee shall be administered, which offices at the Closing Date are located at 1105 North Market Street, Wilmington, Delaware, Attention: Corporate Trust Administration. CRYSTAL: Crystal Oil Company, a Louisiana corporation. CUT-OFF DATE: December 1, 1995. DISCOUNTED PRESENT VALUE: As of any Distribution Date with respect to the Purchased Contract Receivables, the sum of the amounts set forth on Schedule 4 to the Sale and Servicing Agreement as the "Liquidated Damages Amount" for each Purchased A-3 Contract Receivable after giving effect to the distributions paid on such Distribution Date. DISTRIBUTION DATE: With respect to a Monthly Period, the fifth day of the next succeeding calendar month or, if such fifth day is not a Business Day, the next succeeding Business Day, commencing January 5, 1996. ELIGIBLE ACCOUNT: A segregated trust account with an Eligible Institution. ELIGIBLE INSTITUTION: A depository institution organized under the laws of the United States of America or any State (or any domestic branch of a foreign bank), (A) which either (1) has a long-term unsecured debt rating of at least A+ from the Rating Agency at the time of any deposit therein (or, if such obligations are at the time of such deposit not rated by the Rating Agency but are rated at least A+ by Standard & Poor's ("S&P") and at least A1 by Moody's Investor Services Inc. ("Moody's"), provided that if such obligations are rated by only one of S&P or Moody's, such rating shall be sufficient) or (2) is a federal or state charter depository institution subject to regulations regarding fiduciary funds on deposit substantially similar to 12 C.F.R. Section 9.10(b), (B) whose deposits are insured by the FDIC and (C) having a combined capital and surplus of at least $250,000,000 as set forth in its most recent published annual report of condition. ELIGIBLE INVESTMENTS: Book-entry securities, negotiable instruments or securities represented by instruments in bearer or registered form which evidence: (i) direct obligations of, or obligations fully guaranteed as to timely payment of principal and interest by, the United States of America; (ii) demand deposits, time deposits or certificates of deposit of any depository institution or trust company incorporated under the laws of the United States of America or any state thereof (or any domestic branch of a foreign bank); and subject to supervision and examination by Federal or State banking or depository institution authorities; PROVIDED, HOWEVER, that at the time of the investment or contractual commitment to invest therein, the commercial paper or other short-term unsecured debt obligations (other than such obligations the rating of which is based on the credit of a Person other than such depository institution or trust company) thereof shall have a credit rating from the Rating Agency (or an equivalent of S&P or Moody's) for short-term unsecured debt obligations or certificates of deposit granted thereby of at least D-1 (or an equivalent of S&P or Moody's); (iii) commercial paper having, at the time of the investment or contractual commitment to invest therein, a rating from the Rating Agency (or an equivalent of S&P or Moody's) for short-term unsecured debt obligations granted thereby of at least D-1 (or an equivalent of S&P or Moody's); (iv) investments in money market or common trust funds having a rating from the Rating Agency (or an equivalent of S&P or Moody's) for A-4 short-term unsecured debt obligations granted thereby of at least D-1 (or an equivalent of S&P or Moody's) (including funds for which the Owner Trustee or any of its Affiliates is investment manager or advisor, so long as such fund shall have such rating); (v) bankers' acceptances issued by any depository institution or trust company referred to in clause (ii) above; and (vi) repurchase obligations with respect to any security that is a direct obligation of, or fully guaranteed by, the United States of America or any agency or instrumentality thereof the obligations of which are backed by the full faith and credit of the United States of America, in either case entered into with a depository institution or trust company (acting as principal) described in clause (ii); in each case maturing not later than the Business Day immediately preceding the next Distribution Date. ELIGIBLE OBLIGOR: Any Obligor listed on Schedule 1 to the Sale and Servicing Agreement. ELIGIBLE RECEIVABLE: Each Contract Receivable: a. that constitutes an account within the meaning of Section 9-106 of the UCC of the State the law of which governs the perfection of the interest granted in it; b. that is denominated and payable only in United States dollars in the United States; c. that was created in the ordinary course of business from the sale of services of the Seller and in accordance with its historical credit and collection policies; d. with respect to which all installments due and payable prior to the Closing Date have been paid in full; e. that, together with the Contracts underlying such Contract Receivable, was created in accordance with and does not contravene any applicable law, rule or regulation and in connection with which the Seller is not in violation of any law, rule or regulation; f. that is not a Contract Receivable purchased by the Seller from any Person; g. that is not a Contract Receivable for which the Seller has established an offsetting specific reserve; A-5 h. with respect to which all material consents, licenses, approvals or authorizations of, or registrations or declarations with, any Governmental Authority required to be obtained, effected or given by the Seller in connection with the creation of such Contract Receivable and the related Contract have been duly obtained, effected or given and are in full force and effect; i. which has not been satisfied, subordinated or rescinded and with respect to which the Seller is not in default in any material respect under the terms of the Contract from which such Contract Receivable arose; j. which through the Basic Trust Documents has been the subject of either (A) a valid sale and assignment from the Seller to the Trust of all the Seller's right, title and interest therein (including any proceeds thereof) which results in the Trust having good title thereto, or (B) if not (A), the grant of a first priority perfected security interest therein (and in the proceeds thereof) to the Trust, in the case of each of clauses (A) and (B), free and clear of all Liens other than Permitted Liens; k. with respect to which the Seller or its designee has duly given all notices of assignment in form and substance required to permit the legal, valid and enforceable assignment of such Contract Receivable by the Seller to the Trust, and is otherwise in compliance in all material respects with applicable law, all such notices are in full force and effect and such Contract Receivable is not subject to any right of rescission or set-off or, to the extent currently payable or asserted, any right of counterclaim or any other defense that is enforceable against the Trust; l. that, together with the related Contract, will at all times (including after giving effect to the assignment of the Purchased Contract Receivables to the Trust) be the legal, valid and binding payment obligation and contract, as the case may be, of the Obligor thereon, enforceable against such Obligor in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting the enforcement of creditors' rights in general and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law, and except as to any immaterial provision of any Contract the lack of enforceability of which would not affect the enforceability of the payment obligations of the Obligor in respect of any Purchased Contract Receivable; m. with respect to which, on or before the Closing Date, the Seller has not (i) taken any action that would impair the rights of the Trust or the holders of the Investor Certificates with respect to the Purchased Contract Receivables or the other Purchased Property or (ii) failed to take any action, that was necessary to avoid impairing the rights of the Trust or the holders of the Investor Certificates; and A-6 n. with respect to which no action, claim or proceeding is pending or, to the knowledge of Seller, threatened which would adversely affect the payment or enforceability of the Purchased Contract Receivables. ERISA: The Employee Retirement Income Security Act of 1974, as amended. EVENT OF FORCE MAJEURE: An event of "force majeure" (as such term is defined in each Contract). EXCESS PAYMENTS: As defined in the definition of Liquidated Damages Amount. FDIC: Federal Deposit Insurance Corporation or any successor agency. FIXED PERCENTAGE: With respect to any Distribution Date, the percentage set forth on Schedule 4 to the Sale and Servicing Agreement for such Distribution Date. FIXED RETURN RATE: 7.52% FIXED RETURN SHORTFALL: With respect to the close of any Distribution Date, the Aggregate Fixed Return for such Distribution Date that was not paid on such Distribution Date. FRGC: First Reserve Gas Company, a Delaware corporation. FRGC PARTIES: Collectively, FRGC, HIG, HGSC and any successors or permitted assigns to any of them. GAAP: Generally accepted accounting principles in the United States of America in effect from time to time. GENERAL ACCOUNT ASSETS: The assets of an Investor Certificateholder that is an insurance company, other than assets allocated to a "separate account" (as defined in ERISA) maintained by such Investor Certificateholder. GOVERNMENTAL AUTHORITY: Any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. GUARANTEE: The Guarantee substantially in the form of EXHIBIT A to the Sale and Servicing Agreement, as amended and supplemented from time to time. HGSC: Hattiesburg Gas Storage Company, a Delaware general partnership. HIG: Hattiesburg Industrial Gas Sales Company, a Delaware corporation. A-7 INDEBTEDNESS: Of any Person at any date: (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices); (ii) any other indebtedness which is evidenced by a note, bond, debenture or similar instrument; (iii) all capital lease obligations of such Person; (iv) all obligations of such Person in respect of outstanding letters of credit, acceptances and similar obligations created for the account of such Person; and (v) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof. The Indebtedness of any Person shall include any Indebtedness of any partnership in which such Person is the general partner. INDENTURE: The Indenture, dated as of November 21, 1995, among HGSC, HIG and the Indenture Trustee, as amended and supplemented from time to time. INDENTURE TRUSTEE: Chemical Bank, not in its individual capacity but solely as trustee under the Indenture, or any successor trustee under the Indenture. INITIAL INVESTORS: The purchasers of the Investor Certificates pursuant to the Certificate Purchase Agreement. INITIAL REQUIRED NET WORTH: $1,000,000. INITIAL RESIDUAL CAPITAL: $8,836,332.40. INSOLVENCY EVENT: With respect to a specified Person, (i) the entry of a decree or order by a court, agency or supervisory authority having jurisdiction in the premises for the appointment of a trustee, conservator, receiver, liquidator or other similar official for such Person, in any bankruptcy, insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings, or for the winding-up or liquidation of such Person's affairs, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days; (ii) the consent by such Person to the appointment of a trustee, conservator, receiver, liquidator or other similar official in any bankruptcy, insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings of or relating to such Person or of or relating to substantially all of such Person's property, or (iii) such Person shall admit in writing its inability to pay its debts generally as they become due, file a petition to take advantage of any applicable bankruptcy, insolvency or reorganization statute, make an assignment for the benefit of its creditors or voluntarily suspend payment of its obligations. INSTITUTIONAL INVESTOR: (a) any original purchaser of an Investor Certificate, (b) any Investor Certificateholder holding more than 25% of the Investor Certificate Balance and (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form. A-8 INVESTMENT ACCOUNT: As defined in Section 5.1(b) of the Trust Agreement. INVESTOR CERTIFICATE: Any of the investor certificates executed by the Owner Trustee and authenticated by the Owner Trustee in substantially the form set forth in EXHIBIT A to the Trust Agreement. INVESTOR CERTIFICATE BALANCE: Initially, as of the Closing Date, $33,956,317.84 and, on any Distribution Date thereafter, the initial Investor Certificate Balance reduced by all distributions in respect of Aggregate Return Of Capital actually made to Investor Certificateholders on or prior to such date pursuant to clause (ii) of Section 5.2(d) of the Trust Agreement and, when the term is used with respect to any Investor Certificate, such Investor Certificate's pro rata portion of the Investor Certificate Balance of all Investor Certificates. INVESTOR CERTIFICATEHOLDER: A Person in whose name an Investor Certificate is registered pursuant to the terms of the Trust Agreement. INVESTOR CERTIFICATE REGISTER: The register of Investor Certificates specified in Section 3.4 of the Trust Agreement. INVESTOR CERTIFICATE REGISTRAR: The registrar at any time of the Investor Certificate Register, appointed pursuant to Section 3.4 of the Trust Agreement. LIEN: Any security interest, lien, charge, pledge, equity or encumbrance of any kind. LIQUIDATED DAMAGES: As defined in Section 5.2(a) of the Sale and Servicing Agreement. LIQUIDATED DAMAGES AMOUNT: With respect to any payment of Liquidated Damages, for a specific Purchased Contract Receivable (i) the amount set forth on Schedule 4 to the Sale and Servicing Agreement for such Purchased Contract Receivable as the "Liquidated Damages Amount" for the Distribution Date immediately preceding the date of the breach triggering the obligation to pay such Liquidated Damages minus (ii) all payments received by the Trust on such Purchased Contract Receivable since such Distribution Date and prior to the date on which the Liquidated Damages are paid. LOCKBOX: The post office boxes to which the Obligors may be instructed to remit payments on the Purchased Contract Receivables. LOCKBOX ACCOUNT: Any intervening deposit account, established in the name of the Owner Trustee, used for deposit of funds received in a Lockbox prior to their transfer to the Collection Account. MAJORITY CERTIFICATEHOLDERS: Investor Certificateholders whose Investor Certificates represent greater than 50 percent of the Voting Interests as of the close of the preceding Distribution Date. A-9 MATERIAL ADVERSE EFFECT: A material adverse effect on (a) the business, operations, property or condition (financial or otherwise) of the FRGC Parties, (b) the ability of any of the FRGC Parties to perform their respective obligations under the Basic Trust Documents, (c) the validity or enforceability of any of the Basic Trust Documents against any of the FRGC Parties or (d) the rights or remedies of the Owner Trustee or the Investor Certificateholders under or with respect to the Basic Trust Documents. MONTHLY DEPOSIT AMOUNT: $180,000. MONTHLY FIXED RETURN: With respect to any Distribution Date, a return equal to one-twelfth of the Fixed Return Rate multiplied by the Investor Certificate Balance as of the immediately preceding Distribution Date and after giving effect to any distributions on such immediately preceding Distribution Date (or, in the case of the first Distribution Date, based on the Investor Certificate Balance as of the Closing Date and pro-rata for the number of days from the Closing Date to but excluding such Distribution Date based on a 360 day year of twelve 30-day months). MONTHLY PERIOD: Each calendar month. MONTHLY RETURN OF CAPITAL: With respect to any Distribution Date, the amount set forth in the column labelled "Scheduled Monthly Return of Capital" for such Distribution Date on Schedule 1 to the Trust Agreement. MORTGAGE: The Deed of Trust, Security Agreement and Fixture Filing, substantially in the form of EXHIBIT F to the Sale and Servicing Agreement, pursuant to which the Seller has mortgaged the Storage Facilities to the Collateral Trustee, as amended and supplemented from time to time. NOTES: The 8.12% Secured Guaranteed Notes due 2005 issued by HGSC and authenticated by the Indenture Trustee under the Indenture. OBLIGOR: Each party obligated to make payment with respect to any Contract Receivable, including any guarantor thereof. OPERATOR: HIG in its capacity as the operator of the Storage Facilities under the Sale and Servicing Agreement, or its successor in interest pursuant to Section 13 of the Collateral Sharing and Security Agreement. OPINION OF COUNSEL: A written opinion of counsel, who may, except as otherwise expressly provided, be an employee of the Seller or the Servicer. OWNER TRUST ESTATE: All right, title and interest of the Trust in and to the property and rights assigned to the Trust pursuant to Article II of the Sale and Servicing Agreement or pursuant to the Trust Agreement, all funds on deposit from time to time in the Collection Account and the Investment Account and all other property of the Trust from time to time, including any rights of the Owner Trustee and A-10 the Trust pursuant to the Sale and Servicing Agreement and the other Basic Trust Documents to which the Trust is a party. OWNER TRUSTEE: Wilmington Trust Company, not in its individual capacity but solely as owner trustee under the Trust Agreement, or any successor owner trustee under the Trust Agreement. PAYING AGENT: The paying agent for distributions to the Investor Certificateholders appointed pursuant to Section 3.10 of the Trust Agreement. PERMITTED LIENS: Collectively, (i) statutory Liens for taxes, labor or materials where payment for such items is not yet delinquent; and (ii) any defects or imperfections of title, easements, surface leases or rights or plat restrictions that are not material in character, amount or extent and do not materially detract from the value, or materially interfere with the use, of the properties of the Servicer or the Seller, or materially prevent the Servicer or the Seller from receiving revenues from such properties or otherwise materially impair, or increase the cost of, the business operations being conducted thereon. PERSON: Any legal person, including any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. PLAN: An employee benefit plan subject to Part 4 of subtitle B of Title I of ERISA and any plan within the meaning of Section 4975(c)(1) of the Code. PURCHASED CONTRACT RECEIVABLES: (i) All Contract Receivables due pursuant to the terms of the Contracts in 1995 (but only after the Cut-off Date), 1996, 1997, 1998, 1999 and through June 30, 2000, and (ii) all Contract Regulatory Receivables due during the period on and after July 1, 2000 through June 30, 2001. PURCHASED PROPERTY: As defined in Section 2.1 of the Sale and Servicing Agreement. PURCHASE PRICE: $42,712,351.02. RATING AGENCY: Duff & Phelps Credit Rating Co. or, if Duff & Phelps Credit Rating Co. is unable to act as Rating Agency, another nationally recognized rating agency selected by the Seller. RATING AGENCY CONDITION: With respect to any action, the condition that the Rating Agency shall have been given at least 10 days (or such shorter period as is acceptable to the Rating Agency) prior notice thereof and that the Rating Agency shall have notified the Seller, the Servicer and the Trust in writing that such action shall not result in a downgrade or withdrawal of the then current rating of the Investor Certificates. A-11 RECORD DATE: With respect to any Distribution Date, the first Business Day preceding such Distribution Date. REGULATORY INCREASE: A redetermination by the appropriate regulatory body of the charges payable under any Contract in accordance with the terms thereof. REINVESTMENT INCOME: As defined in Section 4.7 of the Sale and Servicing Agreement. REQUIREMENT OF LAW: As to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. RESIDUAL CERTIFICATE: The residual certificate executed by the Owner Trustee and authenticated by the Owner Trustee in substantially the form set forth in EXHIBIT B to the Trust Agreement. RESIDUAL CERTIFICATEHOLDER: The Person in whose name the Residual Certificate is registered pursuant to the terms of the Trust Agreement. RESPONSIBLE OFFICER: With respect to the Owner Trustee, any officer within the Corporate Trust Office of the Owner Trustee customarily responsible for performing the functions contemplated by the Basic Documents, and, with respect to any other Person, the President, any Vice President, Assistant Vice President, Secretary, Assistant Secretary or any other officer or assistant officer of such Person customarily performing functions similar to those performed by any of the above designated officers and also, with respect to a particular matter, any other officer to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. RETURN OF CAPITAL SHORTFALL: With respect to any Distribution Date, the Aggregate Return of Capital for such Distribution Date that was not paid on such Distribution Date. S&S SELLER OBLIGATIONS: As defined in the Collateral Sharing and Security Agreement. SALE AND SERVICING AGREEMENT: The Sale and Servicing Agreement dated as of November 21, 1995, among the Seller, the Servicer and the Trust, as amended and supplemented from time to time. SERVICER: HIG in its capacity as the Servicer of the Purchased Contract Receivables under the Sale and Servicing Agreement, or its successor in interest. SERVICER'S CERTIFICATE: A certificate, completed by and executed on behalf of the Servicer, in accordance with Section 5.2(b) of the Trust Agreement. A-12 STATE: Any one of the 50 States of the United States of America or the District of Columbia. STORAGE FACILITIES: As set forth on Schedule 7 to the Sale and Servicing Agreement. SUBSIDIARY: As to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. SUPERMAJORITY CERTIFICATEHOLDERS: Investor Certificateholders whose Investor Certificates represent at least two-thirds of the Voting Interests as of the close of the preceding Distribution Date. TOTAL AVAILABLE AMOUNT: With respect to a Distribution Date, the sum of (i) the Collected Amount for such Distribution Date, (ii) the amount transferred from the Investment Account to the Collection Account with respect to such Distribution Date pursuant to Section 5.2(c)(ii) of the Trust Agreement and (iii) the amount transferred to the Collection Account pursuant to Section 5.1(a) of the Trust Agreement in regard to the funds received by the Trust from the sale of Certificates but not used to acquire the Purchased Contract Receivables. TREASURY REGULATIONS: The regulations, including proposed or temporary regulations, promulgated under the Code. References herein to specific provisions of proposed or temporary regulations shall include analogous provisions of final Treasury Regulations or other successor Treasury Regulations. TRUST: FRGC Owner Trust, a Delaware business trust created by the Trust Agreement. TRUST AGREEMENT: The Trust Agreement, dated as of November 21, 1995, among the Servicer, the Seller and the Owner Trustee, as amended and supplemented from time to time. UCC: The Uniform Commercial Code as in effect in the relevant jurisdiction (or if no such jurisdiction is relevant, as in effect in the State of New York). UNDERTAKING LETTER: The letter referred to in Section 3.5 of the Trust Agreement. VOTING INTERESTS: As of any date, the aggregate Investor Certificate Balance of all Investor Certificates outstanding; PROVIDED, HOWEVER, that Certificates owned by any FRGC Party, the Seller or any Affiliate of any of the foregoing Persons shall be disregarded and deemed not to be outstanding, except that, in determining A-13 whether the Owner Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Investor Certificates that the Owner Trustee knows to be so owned shall be so disregarded. A-14 EX-11 6 EXHIBIT 11 Exhibit 11 CRYSTAL OIL COMPANY COMPUTATION OF EARNINGS PER COMMON SHARE (In Thousands Except Share and Per Share Amounts)
YEAR ENDED DECEMBER 31 ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Primary (Including dilutive common stock equivalents): Income from operations before extraordinary item $ 1,404 $ 4,426 $ 1,040 Adjustments to income (net of income tax) Non-interest-bearing convertible secured notes amortization of discount - - - ---------- ---------- ---------- Adjusted net income before extraordinary items 1,404 4,426 1,040 Extraordinary item - (2,320) - ---------- ---------- ---------- Adjusted net income $ 1,404 $ 2,106 $ 1,040 ---------- ---------- ---------- ---------- ---------- ---------- Weighted average of common and common equivalent shares: Outstanding 2,648,626 2,562,012 2,508,255 Assuming conversion of: Stock options, net of treasury shares 21,583 39,621 23,364 Senior preferred stock through the exercise of warrants - - - Remaining senior preferred stock 33,274 33,274 40,828 Series A preferred stock - - 50,959 Convertible debt through the exercise of warrants - - - Remaining convertible debt - - - ---------- ---------- ---------- 2,703,483 2,634,907 2,623,406 ---------- ---------- ---------- ---------- ---------- ---------- Per share: Net income before extraordinary item $ .52 $ 1.68 $ .40 ---------- ---------- ---------- ---------- ---------- ---------- Net income $ .52 $ .80 $ .40 ---------- ---------- ---------- ---------- ---------- ----------
Exhibit 11 (continued) CRYSTAL OIL COMPANY COMPUTATION OF EARNINGS PER COMMON SHARE (In Thousands Except Share and Per Share Amounts)
YEAR ENDED DECEMBER 31 ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Fully-diluted: Income from operations before extraordinary item $ 1,404 $ 4,426 $ 1,040 Adjustments to income (net of income tax) Non-interest-bearing convertible secured notes amortization of discount - - - ---------- ---------- ---------- Adjusted net income before extraordinary item 1,404 4,426 1,040 Extraordinary item - (2,320) - ---------- ---------- ---------- Adjusted net income $ 1,404 $ 2,106 $ 1,040 ---------- ---------- ---------- ---------- ---------- ---------- Weighted average of common and common equivalent shares: Outstanding 2,648,626 2,562,012 2,508,255 Assuming conversion of: Stock options, net of treasury shares 22,168 41,015 23,364 Senior preferred stock through the exercise of warrants - - - Remaining senior preferred stock 33,274 33,274 40,828 Series A preferred stock - - 50,959 Convertible debt through the exercise of warrants - - - Remaining convertible debt - - - ---------- ---------- ---------- 2,704,068 2,636,301 2,623,406 ---------- ---------- ---------- ---------- ---------- ---------- Per share: Net income before extraordinary item $ .52 $ 1.68 $ .40 ---------- ---------- ---------- ---------- ---------- ---------- Net income $ .52 $ .80 $ .40 ---------- ---------- ---------- ---------- ---------- ----------
EX-22 7 EXHIBIT 22 EXHIBIT 22 CRYSTAL OIL COMPANY SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT DECEMBER 31, 1995
STATE OF SUBSIDIARY INCORPORATION - ----------------------------------------------------- ------------- Hattiesburg Holding Company Delaware First Reserve Gas Company Delaware Hattiesburg Industrial Gas Sales Company Delaware Hattiesburg Gas Storage Company (General Partnership) Delaware Crystal Program Limited Texas Crystal Exploration and Production Company (CEPCO) Florida Vermillion Bay Land Company Delaware Crystal Capital, Inc. Delaware Crystal Eurasia Oil Company Delaware
EX-23 8 EXHIBIT 23 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT ----------------------------- The Board of Directors Crystal Oil Company: We consent to incorporation by reference in the Registration Statements (No. 33-61114 and 33-66628) on Form S-8 of Crystal Oil Company of our report dated February 26, 1996, relating to the consolidated balance sheets of Crystal Oil Company and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows and related financial statement schedule for each of the years in the three year period ended December 31, 1995, which report appears in the December 31,1995, annual report on Form 10K of Crystal Oil Company. Our report refers to a change in the method of accounting for income taxes in 1993. KPMG PEAT MARWICK LLP Shreveport, Louisiana March 20, 1996 EX-27 9 EXHIBIT 27 (FDS)
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1995 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE THREE YEARS ENDED DEECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 10,812 54,447 983 279 0 66,320 99,008 2,727 173,445 2,876 60,020 0 148 27 110,374 173,445 6,374 6,823 0 2,963 0 48 2,443 2,366 962 1,404 0 0 0 1,404 .52 .52
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