<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1996
REGISTRATION NO. 333-4018
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
HERITAGE PROPANE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5984 73-1493906
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
---------------------
<TABLE>
<S> <C>
8801 SOUTH YALE AVENUE, SUITE 310 H. MICHAEL KRIMBILL
TULSA, OKLAHOMA 74137 VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
TELEPHONE: (918) 492-7272 HERITAGE HOLDINGS, INC.
8801 SOUTH YALE AVENUE, SUITE 310
(Address, including zip code, and telephone TULSA, OKLAHOMA 74137
number, including area code, of registrant's TELEPHONE: (918) 492-7272
principal executive offices) (Name, address, including zip code,
and telephone number, including area code,
of agent for service)
</TABLE>
---------------------
Copies to:
<TABLE>
<S> <C> <C>
ANDREWS & KURTH L.L.P. DOERNER, SAUNDERS, DANIEL & ANDERSON BAKER & BOTTS, L.L.P.
425 LEXINGTON AVENUE 320 SOUTH BOSTON AVENUE ONE SHELL PLAZA
10TH FLOOR SUITE 500 910 LOUISIANA
NEW YORK, NEW YORK 10017 TULSA, OKLAHOMA 74103 HOUSTON, TEXAS 77002
(212) 850-2800 (918) 582-1211 (713) 229-1234
ATTENTION: MICHAEL Q. ROSENWASSER ATTENTION: LAWRENCE T. CHAMBERS, JR. ATTENTION: JOSHUA DAVIDSON
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
HERITAGE PROPANE PARTNERS, L.P.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND HEADING PROSPECTUS LOCATION
------------------------------------------------------------ ------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front and Outside Back
Cover Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Prospectus Summary; Risk
Factors
4. Use of Proceeds....................................... Prospectus Summary; Use of
Proceeds
5. Determination of Offering Price....................... Underwriting
6. Dilution.............................................. Dilution
7. Selling Security Holders.............................. *
8. Plan of Distribution.................................. Outside Front Cover Page;
Underwriting
9. Description of Securities to be Registered............ Prospectus Summary; Cash
Distribution Policy;
Description of the Common
Units; The Partnership
Agreement; Tax
Considerations
10. Interest of Named Experts and Counsel................. *
11. Information with Respect to the Registrant............ Outside Front Cover Page;
Prospectus Summary; Risk
Factors; The Transactions;
Capitalization; Selected
Historical and Pro Forma
Financial and Operating
Data; Management's
Discussion and Analysis of
Financial Condition and
Results of Operations;
Business and Properties;
Management; Security
Ownership of Certain
Beneficial Owners and
Management; Certain
Relationships and Related
Transactions; Conflicts of
Interest and Fiduciary
Responsibilities; Financial
Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... *
</TABLE>
- ---------------
* Not Applicable
<PAGE> 3
***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************
SUBJECT TO COMPLETION
Dated June 4, 1996
HERITAGE PROPANE PARTNERS, L.P.
4,025,000 COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
---------------------
The Common Units offered hereby represent limited partner interests in Heritage
Propane Partners, L.P., a Delaware limited partnership (the "Partnership").
The Partnership was recently formed to acquire, own and operate the
propane business and assets of Heritage Holdings, Inc.
("Heritage"), which the Partnership believes is the sixth
largest retail marketer of propane in the United States.
---------------------
The Partnership will distribute to its partners, on a quarterly basis, all of
its Available Cash, which is generally all cash on hand at the end of a
quarter, as adjusted for reserves. The General Partner has broad discretion in
making cash disbursements and establishing reserves. The Partnership
intends, to the extent there is sufficient Available Cash, to distribute
to each holder of Common Units at least $0.50 per Common Unit per
quarter (the "Minimum Quarterly Distribution") or $2.00 per Common
Unit on an annualized basis.
---------------------
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A
CORPORATION. PURCHASERS OF COMMON UNITS SHOULD CONSIDER EACH OF THE FACTORS
DESCRIBED UNDER "RISK FACTORS," STARTING ON PAGE 30, IN EVALUATING AN INVESTMENT
IN THE PARTNERSHIP, INCLUDING, BUT NOT LIMITED TO, THE FOLLOWING:
- - PURCHASERS OF THE COMMON UNITS OFFERED HEREBY WILL EXPERIENCE IMMEDIATE AND
SUBSTANTIAL DILUTION IN NET TANGIBLE BOOK VALUE OF $22.16 PER COMMON UNIT FROM
THE INITIAL PUBLIC OFFERING PRICE (ASSUMING AN INITIAL PUBLIC OFFERING PRICE
OF $20.50 PER COMMON UNIT).
- - FUTURE PARTNERSHIP PERFORMANCE WILL DEPEND UPON THE SUCCESS OF THE PARTNERSHIP
IN MAXIMIZING PROFITS FROM PROPANE SALES. PROPANE SALES ARE AFFECTED BY, AMONG
OTHER THINGS, WEATHER PATTERNS, PRODUCT PRICES AND COMPETITION, INCLUDING
COMPETITION FROM OTHER ENERGY SOURCES.
- - THE DISTRIBUTION OF THE MINIMUM QUARTERLY DISTRIBUTION OR ANY OTHER AMOUNT TO
UNITHOLDERS IS NOT GUARANTEED. THE ACTUAL AMOUNT OF CASH DISTRIBUTIONS WILL
DEPEND ON FUTURE PARTNERSHIP OPERATING PERFORMANCE AND WILL BE AFFECTED BY THE
FUNDING OF RESERVES, OPERATING AND CAPITAL EXPENDITURES AND OTHER MATTERS
WITHIN THE DISCRETION OF THE GENERAL PARTNER, AS WELL AS REQUIRED INTEREST AND
PRINCIPAL PAYMENTS ON THE PARTNERSHIP'S DEBT.
- - ON A PRO FORMA BASIS AT FEBRUARY 29, 1996, THE PARTNERSHIP'S LONG-TERM
INDEBTEDNESS AS A PERCENTAGE OF ITS TOTAL CAPITALIZATION WOULD HAVE BEEN
APPROXIMATELY 81.2%. AS A RESULT, THE PARTNERSHIP WILL HAVE INDEBTEDNESS THAT
IS SUBSTANTIAL IN RELATION TO ITS PARTNERS' CAPITAL.
- - HOLDERS OF COMMON UNITS WILL HAVE ONLY LIMITED VOTING RIGHTS AND THE GENERAL
PARTNER WILL MANAGE AND OPERATE THE PARTNERSHIP.
(continued on page 3)
---------------------
Prior to this offering there has been no public market for the Common Units. It
is currently estimated that the initial public offering price per Common Unit
will be between $20.00 and $21.00. The initial public offering price
will be determined by agreement between the Partnership and the
Underwriters. See "Underwriting."
---------------------
The Common Units have been approved for listing on the New York Stock Exchange
(the "NYSE"), subject to official notice of issuance, under the trading symbol
"HPG."
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
====================================================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) PARTNERSHIP(2)
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<S> <C> <C> <C>
PER COMMON UNIT $ $ $
TOTAL(3) $ $ $
====================================================================================================================
</TABLE>
(1) The Partnership, the Operating Partnership and the General Partner have
agreed to indemnify the several Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deduction of expenses of this offering payable by the Partnership
estimated at $ .
(3) The Partnership has granted the Underwriters a 30-day option to purchase up
to an additional 603,750 Common Units to cover over-allotments, if any. If
such option is exercised in full, the total price to public, underwriting
discounts and commissions and proceeds to Partnership will be $ ,
$ and $ , respectively. See "Underwriting."
---------------------
The Common Units are being offered by the Underwriters named herein when, as
and if received and accepted by them, subject to their right to reject orders in
whole or in part and subject to certain conditions. It is expected that delivery
of the Common Units will be made in New York, New York on or about ,
1996.
---------------------
DEAN WITTER REYNOLDS INC. OPPENHEIMER & CO., INC.
A.G. EDWARDS & SONS, INC.
PRUDENTIAL SECURITIES INCORPORATED
, 1996
<PAGE> 4
HERITAGE PROPANE PARTNERS, L.P.
---------------------
Until , 1996 (25 calendar days after the date of this
Prospectus), all dealers effecting transactions in Common Units, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON UNITS AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 5
(continued from page 1)
- -CONFLICTS OF INTEREST MAY ARISE BETWEEN THE GENERAL PARTNER AND ITS AFFILIATES,
ON THE ONE HAND, AND THE PARTNERSHIP AND THE UNITHOLDERS, ON THE OTHER. THE
PARTNERSHIP AGREEMENT CONTAINS CERTAIN PROVISIONS THAT LIMIT THE LIABILITY AND
REDUCE THE FIDUCIARY DUTIES OF THE GENERAL PARTNER TO THE UNITHOLDERS. HOLDERS
OF COMMON UNITS ARE DEEMED TO HAVE CONSENTED TO CERTAIN ACTIONS AND CONFLICTS
OF INTEREST THAT MIGHT OTHERWISE BE DEEMED A BREACH OF FIDUCIARY OR OTHER
DUTIES UNDER APPLICABLE STATE LAW. THE VALIDITY AND ENFORCEABILITY OF THESE
TYPES OF PROVISIONS UNDER DELAWARE LAW ARE UNCERTAIN.
- - PRIOR TO MAKING ANY DISTRIBUTION ON THE COMMON UNITS, THE PARTNERSHIP WILL
REIMBURSE THE GENERAL PARTNER AND ITS AFFILIATES AT COST FOR ALL EXPENSES
INCURRED ON BEHALF OF THE PARTNERSHIP. ON A PRO FORMA BASIS, APPROXIMATELY
$17.5 MILLION OF EXPENSES (PRIMARILY WAGES AND SALARIES) WOULD HAVE BEEN
REIMBURSED BY THE PARTNERSHIP TO THE GENERAL PARTNER IN FISCAL 1995.
- - THE TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP ARE COMPLEX. IT IS
ANTICIPATED THAT THROUGH DECEMBER 31, 2000, A UNITHOLDER MAY RECEIVE
SUBSTANTIAL DISTRIBUTIONS THAT WOULD REDUCE SUCH HOLDER'S TAX BASIS, WITH THE
RESULT THAT SUCH HOLDER MAY RECOGNIZE SUBSTANTIAL TAXABLE GAIN UPON A
SUBSEQUENT SALE OF SUCH HOLDER'S UNITS.
- - BECAUSE THE RETAIL PROPANE INDUSTRY IS MATURE AND OVERALL DEMAND FOR PROPANE
IS EXPECTED TO EXPERIENCE LIMITED GROWTH IN THE FORESEEABLE FUTURE, THE
PARTNERSHIP WILL DEPEND ON ACQUISITIONS AS ITS PRINCIPAL MEANS OF GROWTH.
THERE CAN BE NO ASSURANCE THAT THE PARTNERSHIP WILL BE ABLE TO COMPLETE FUTURE
ACQUISITIONS.
---------------------
To enhance the Partnership's ability to make the Minimum Quarterly
Distribution on the Common Units during the Subordination Period, which will
generally extend at least through May 31, 2001, each holder of Common Units will
be entitled to receive the Minimum Quarterly Distribution, plus any arrearages
thereon, before any distributions are made on the outstanding subordinated
limited partner interests of the Partnership (the "Subordinated Units"). Upon
expiration of the Subordination Period, all Subordinated Units will convert into
Common Units on a one-for-one basis and will thereafter participate pro rata
with the other Common Units in distributions of Available Cash. Under certain
circumstances, up to 50% of the Subordinated Units may convert into Common Units
prior to the expiration of the Subordination Period.
---------------------
The Common Units offered hereby will represent an aggregate 51.0% limited
partner interest in the Partnership and Heritage Operating, L.P., the
Partnership's subsidiary operating partnership (the "Operating Partnership")
(54.4% if the Underwriters' over-allotment option is exercised in full). The
General Partner will own an aggregate 2% general partner interest in the
Partnership and the Operating Partnership, and 3,702,943 Subordinated Units
representing an aggregate 47.0% limited partner interest in the Partnership and
the Operating Partnership (43.6% if the Underwriters' over-allotment option is
exercised in full). The Common Units and the Subordinated Units are collectively
referred to herein as the "Units." Holders of the Common Units and the
Subordinated Units are collectively referred to herein as "Unitholders."
---------------------
The sale of the Common Units offered hereby is subject to, among other
things, the concurrent completion of a private placement by Heritage of $120.0
million of Senior Secured Notes due 2011 (the "Notes"). The Operating
Partnership will assume Heritage's obligations under the Notes in connection
with the conveyance by Heritage of substantially all of its assets (other than
approximately $80.1 million in proceeds from the issuance of the Notes) to the
Operating Partnership. See "The Transactions."
---------------------
The Partnership will furnish or make available to record holders of Common
Units (i) within 120 days after the close of each fiscal year of the
Partnership, an annual report containing audited financial statements and a
report thereon by its independent public accountants and (ii) within 90 days
after the close of each quarter (other than the fourth quarter), a quarterly
report containing unaudited summary financial information. The Partnership will
also furnish each Unitholder with tax information within 90 days after the close
of each calendar year.
---------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE PARTNERSHIP OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON
UNITS IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS NOT BEEN A CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE
AFFAIRS OF THE PARTNERSHIP SINCE THE DATE HEREOF.
3
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY............................... 5
Heritage Propane Partners, L.P................. 5
Summary Historical and Pro Forma Financial and
Operating Data............................... 12
The Common Units............................... 21
The Offering................................... 21
Summary of Tax Considerations.................. 27
RISK FACTORS..................................... 30
Risks Inherent in the Partnership's Business... 30
Risks Inherent in an Investment in the
Partnership.................................. 32
Conflicts of Interest and Fiduciary
Responsibilities............................. 37
Tax Risks...................................... 38
THE TRANSACTIONS................................. 42
USE OF PROCEEDS.................................. 43
CAPITALIZATION................................... 44
DILUTION......................................... 45
CASH DISTRIBUTION POLICY......................... 46
General........................................ 46
Quarterly Distributions of Available Cash...... 47
Distributions from Operating Surplus during
Subordination Period......................... 47
Distributions from Operating Surplus after
Subordination Period......................... 49
Incentive Distributions -- Hypothetical
Annualized Yield............................. 49
Distributions from Capital Surplus............. 50
Adjustment of Minimum Quarterly Distribution
and Target Distribution Levels............... 51
Distributions of Cash Upon Liquidation......... 51
Cash Available for Distribution................ 53
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND
OPERATING DATA................................. 55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............ 56
General........................................ 56
Analysis of Historical Results of Operations... 57
Liquidity and Capital Resources................ 61
Litigation and Other Contingencies............. 62
Description of Indebtedness.................... 63
Effects of Inflation........................... 64
BUSINESS AND PROPERTIES.......................... 65
General........................................ 65
Business Strategy.............................. 65
Industry Background and Competition............ 66
Products, Services and Marketing............... 68
Propane Supply and Storage..................... 69
Pricing Policy................................. 70
Billing and Collection Procedures.............. 70
Properties..................................... 70
Trademarks and Tradenames...................... 71
Government Regulation.......................... 71
Employees...................................... 72
Litigation and Other Contingencies............. 72
Transfer of the Partnership Assets............. 72
MANAGEMENT....................................... 74
Partnership Management......................... 74
Directors and Executive Officers of the General
Partner...................................... 74
Reimbursement of Expenses of the General
Partner and its Affiliates................... 75
Executive Compensation......................... 76
Restricted Unit Plan........................... 79
Unit Purchase Plan............................. 80
Compensation of Directors...................... 80
Compensation Committee Interlocks and Insider
Participation................................ 80
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................. 81
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS... 83
CONFLICTS OF INTEREST AND FIDUCIARY
RESPONSIBILITIES............................... 85
Conflicts of Interest.......................... 85
Fiduciary and Other Duties..................... 87
DESCRIPTION OF THE COMMON UNITS.................. 89
The Units...................................... 89
Transfer Agent and Registrar................... 89
Transfer of Common Units....................... 90
THE PARTNERSHIP AGREEMENT........................ 91
Organization and Duration...................... 91
Purpose........................................ 91
Power of Attorney.............................. 91
Capital Contributions.......................... 92
Limited Liability.............................. 92
Issuance of Additional Securities.............. 92
Amendment of Partnership Agreement............. 94
Merger, Sale or Other Disposition of Assets.... 95
Termination and Dissolution.................... 95
Liquidation and Distribution of Proceeds....... 96
Withdrawal or Removal of the General Partner... 96
Transfer of General Partner Interests.......... 97
Change of Management Provisions................ 97
Limited Call Right............................. 97
Meetings; Voting............................... 98
Status as Limited Partner or Assignee.......... 99
Non-citizen Assignees; Redemption.............. 99
Indemnification................................ 99
Books and Reports.............................. 100
Right to Inspect Partnership Books and
Records...................................... 100
Registration Rights............................ 100
UNITS ELIGIBLE FOR FUTURE SALE................... 101
TAX CONSIDERATIONS............................... 102
Legal Opinions and Advice...................... 102
Tax Rates and Changes in Federal Income
Tax Laws..................................... 103
Partnership Status............................. 103
Limited Partner Status......................... 105
Tax Consequences of Unit Ownership............. 105
Allocation of Partnership Income, Gain, Loss
and Deduction................................ 107
Tax Treatment of Operations.................... 108
Disposition of Common Units.................... 111
Uniformity of Units............................ 113
Administrative Matters......................... 114
State, Local and Other Tax Considerations...... 117
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT
PLANS.......................................... 118
UNDERWRITING..................................... 119
VALIDITY OF THE COMMON UNITS..................... 120
EXPERTS.......................................... 121
AVAILABLE INFORMATION............................ 121
INDEX TO FINANCIAL STATEMENTS.................... F-1
Appendix A -- Form of Amended and Restated
Agreement of Limited Partnership of Heritage
Propane Partners, L.P. ........................ A-1
Appendix B -- Form of Application for Transfer of
Common Units................................... B-1
Appendix C -- Glossary of Certain Terms.......... C-1
Appendix D -- Pro Forma Operating Surplus........ D-1
</TABLE>
4
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and historical and pro forma financial data appearing elsewhere in
this Prospectus and should be read only in conjunction with the entire
Prospectus. Unless otherwise specified, the information in this Prospectus
assumes that the Underwriters' over-allotment option is not exercised. Except as
the context otherwise requires, references to, or descriptions of, operations of
the Partnership include the operations of the Operating Partnership and any
other subsidiary operating partnership or corporation, and the propane
operations of the Partnership's predecessor, Heritage Holdings, Inc. For ease of
reference, a glossary of certain terms used in this Prospectus is included as
Appendix C to this Prospectus. Capitalized terms not otherwise defined herein
have the meanings given in the Glossary.
HERITAGE PROPANE PARTNERS, L.P.
Heritage Propane Partners, L.P. (the "Partnership") is a Delaware limited
partnership recently formed to acquire, own and operate the propane business and
assets of Heritage Holdings, Inc. ("Heritage"). Heritage will serve as the
general partner (the "General Partner") of the Partnership. Heritage was formed
in 1989 and has grown to become what the Partnership believes is the sixth
largest retail marketer of propane in the United States, serving more than
170,000 active residential, commercial, industrial and agricultural customers
from 118 district locations in 15 states. The Partnership's operations are
concentrated in the western and southeastern regions of the United States.
Heritage has grown primarily through acquisitions of retail propane
operations and, to a lesser extent, through internal growth. Through August 31,
1995, Heritage completed 25 acquisitions for an aggregate purchase price of
approximately $146 million. Heritage more than doubled its volumes of propane
sold to retail customers from 48.2 million gallons for the fiscal year ended
August 31, 1991 to 98.3 million gallons for the fiscal year ended August 31,
1995. For the six months ended February 29, 1996, Heritage sold approximately
73.6 million gallons to retail customers, compared to 59.7 million gallons for
the same period in 1995. Since August 31, 1995, Heritage has acquired four
propane companies and has signed a letter of intent to acquire one additional
propane company. The Partnership believes that these five companies generate
combined annual retail sales of approximately 10 million gallons.
The Partnership's operating income plus depreciation and
amortization("EBITDA") more than doubled from $10.3 million for the fiscal year
ended August 31, 1991 to $21.7 million for the fiscal year ended August 31,
1995. EBITDA for the six months ended February 29, 1996 was $19.0 million, as
compared to $16.8 million for the six months ended February 28, 1995. Heritage
had net losses of $7.3 million, $1.1 million, $0.7 million and $0.2 million for
its fiscal years ended August 31, 1991, 1992, 1993 and 1995, respectively, and
had net income of $0.3 million for its fiscal year ended August 31, 1994. For a
discussion of the seasonality of Heritage's operations, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General."
The Partnership believes that its competitive strengths include: (i)
management's experience in identifying, evaluating and completing acquisitions,
(ii) operations that are focused in areas experiencing higher-than-average
population growth, (iii) a low cost overhead structure and (iv) a decentralized
operating structure and entrepreneurial workforce. These competitive strengths
have enabled the Partnership to achieve levels of EBITDA per retail propane
gallon that the Partnership believes are among the highest of any publicly
traded propane partnership. The Partnership believes that as a result of its
geographic diversity and district-level incentive compensation program, the
Partnership has been able to reduce the effect of adverse weather conditions on
EBITDA, including those experienced during the warmer-than-normal winter of
1994-1995. The Partnership believes that its concentration in
higher-than-average population growth areas provides it with a strong economic
foundation for expansion through acquisitions and internal growth.
5
<PAGE> 8
BUSINESS STRATEGY
The Partnership's strategy is to expand its operations and increase its
retail market share in order to increase Available Cash. The three critical
elements to this strategy are described below.
Acquisitions. Acquisitions will be the principal means of growth for the
Partnership, as the retail propane industry is mature and overall demand for
propane is expected to experience limited growth in the foreseeable future. The
Partnership believes that the fragmented nature of the propane industry provides
significant opportunities for growth through acquisition. Industry sources
indicate that there are over 8,000 retail propane operations, of which the 10
largest comprise approximately 35% of industry sales. The Partnership follows a
disciplined acquisition strategy that concentrates on companies (i) in
geographic areas experiencing higher-than-average population growth, (ii) with a
high percentage of sales to residential customers, (iii) with local reputations
for quality service and (iv) with a high percentage of tank ownership. In
addition, unlike many of its competitors, the Partnership attempts to capitalize
on the reputations of the companies it acquires by maintaining local brand
names, billing practices and employees, thereby creating a sense of continuity
and minimizing customer loss. The Partnership believes that this strategy has
helped to make it an attractive buyer for many acquisition candidates.
Through August 31, 1995, Heritage completed 25 acquisitions for an
aggregate purchase price of approximately $146 million. The Partnership has
completed four additional acquisitions since that time and has executed a letter
of intent with one additional company. Of these 30 companies acquired or to be
acquired, 10 represent "core acquisitions" with multiple plants in a specific
geographic area, with the balance representing "blend-in companies" which
operate in an existing region. The Partnership will focus on acquisition
candidates in its existing areas of operations, but will consider core
acquisitions in other higher-than-average population growth areas in order to
further reduce the impact on the Partnership's operations of adverse weather
patterns in any one region. While the Partnership is currently evaluating
numerous acquisition candidates, there can be no assurance that the Partnership
will identify attractive acquisition candidates in the future, that the
Partnership will be able to acquire such businesses on economically acceptable
terms, that any acquisitions will not be dilutive to earnings and distributions
or that any additional debt incurred to finance an acquisition will not affect
the ability of the Partnership to make distributions to Unitholders.
The Partnership believes that its ability to make acquisitions will be
enhanced following the completion of this offering. In order to facilitate the
Partnership's acquisition strategy, the Operating Partnership will enter into a
bank credit facility (the "Bank Credit Facility") in connection with the closing
of this offering. The Bank Credit Facility will consist of a $35.0 million
revolving credit facility to be used for acquisitions and improvements (the
"Acquisition Facility") and a $15.0 million revolving credit facility to be used
for working capital and other general partnership purposes (the "Working Capital
Facility"). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Description of Indebtedness." The Partnership will also
have the ability to fund acquisitions through the issuance of additional
partnership interests.
Internal Growth. In addition to pursuing expansion through acquisitions,
the Partnership has aggressively focused on internal growth at its existing
district locations. The Partnership believes that, by concentrating its
operations in areas experiencing higher-than-average population growth, it is
well positioned to achieve internal growth by adding new customers. The
Partnership also believes that its decentralized structure, in which operational
decisions are made at the district and regional level, together with a bonus
system that allocates a significant portion of a district's EBITDA in excess of
budget to district employees, has fostered an entrepreneurial environment that
has allowed the Partnership to achieve its high rates of internal growth. The
Partnership believes that its rates of internal growth significantly exceed the
average growth rate in the industry.
Low Cost, Decentralized Operations. The Partnership focuses on controlling
costs at the corporate and district levels. While the Partnership has realized
certain economies of scale as a result of its acquisitions, it attributes its
low overhead primarily to its decentralized structure. By delegating all
customer billing and collection activities to the district level, the
Partnership has been able to operate without a large corporate staff. Of the
Partnership's 778 full-time employees as of February 29, 1996, only 36, or
approximately 5%,
6
<PAGE> 9
were general and administrative. In addition, the Partnership's plant bonus
system encourages district employees at all levels to control costs and expand
revenues.
As a result of the implementation of the strategy described above, the
Partnership has achieved the retail sales volumes per fiscal year set forth
below:
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Retail Propane Gallons Sold................... 37.5 48.2 63.2 73.4 79.7 98.3
</TABLE>
GENERAL
The Partnership is engaged in (i) the retail distribution of propane for
residential, commercial, industrial, agricultural and other retail users, (ii)
the repair and maintenance of propane heating systems and appliances, (iii) the
wholesale distribution of propane in the United States and Canada, and (iv) the
sale of propane-related supplies, appliances and other equipment.
Propane, a by-product of natural gas processing and petroleum refining, is
a clean-burning energy source recognized for its transportability and ease of
use relative to alternative forms of stand-alone energy sources. Retail propane
use falls into three broad categories: (i) residential applications, (ii)
industrial, commercial and agricultural applications and (iii) other retail
applications, including motor fuel sales. Residential customers use propane
primarily for space and water heating. Industrial customers use propane
primarily as fuel for forklifts and stationary engines, to fire furnaces, as a
cutting gas, in mining operations and in other process applications. Commercial
customers, such as restaurants, motels, laundries and commercial buildings, use
propane in a variety of applications, including cooking, heating and drying. In
the agricultural market, propane is primarily used for tobacco curing, crop
drying, poultry brooding and weed control. Other retail uses include motor fuel
for cars and trucks, outdoor cooking and other recreational uses, propane
resales and sales to state and local governments. In its wholesale operations,
the Partnership sells propane principally to large industrial end-users and
other propane distributors.
Approximately 81% of the gallons sold by the Partnership in fiscal 1995
were to retail customers and approximately 19% were to wholesale customers. Of
the retail gallons sold by the Partnership in fiscal 1995, 52% were to
residential customers, 30% were to industrial, commercial and agricultural
customers, and 18% were to all other retail users. Sales to residential
customers in fiscal 1995 accounted for 42% of total gallons sold, but 59% of the
Partnership's gross profit from propane sales. Residential sales have a greater
profit margin and a more stable customer base than other markets served by the
Partnership. Industrial, commercial and agricultural sales accounted for 22% of
the Partnership's gross profit from propane sales for fiscal year 1995, with all
other retail users accounting for 17%. Additional volumes sold to wholesale
customers contributed the remaining 2% of gross profit from propane sales. No
single customer accounted for 5% or more of the Partnership's revenues during
fiscal year 1995. Historically, approximately 66% of the Partnership's retail
propane volume and in excess of 80% of the Partnership's EBITDA are attributable
to sales during the six-month peak heating season of October through March. The
Partnership believes that sales to the commercial and industrial markets, while
affected by economic patterns, are not as sensitive to variations in weather
conditions as sales to residential and agricultural markets.
The Partnership's operations consist of 118 district locations in 15
states. As of February 29, 1996, the Partnership owned a fleet of approximately
13 transport truck tractors, 23 transport trailers, 8 railroad tank cars, 333
bobtail trucks and 565 other delivery and service vehicles. In addition, the
Partnership owns an aggregate of approximately seven million gallons of
above-ground storage capacity at its plant sites and leases varying amounts of
propane storage capacity in accordance with its needs. In 1995, the Partnership
had approximately 13 million gallons of underground storage available to it in
the form of leased space. Of the approximately 170,000 tanks used by the
Partnership's customers, approximately 145,000, or 85%, are owned by the
Partnership, with the balance owned by the customers. In many states, certain
fire safety regulations restrict the refilling of a leased tank solely to the
propane supplier that owns the tank. The inconvenience of switching tanks
minimizes a customer's tendency to switch among suppliers of propane.
7
<PAGE> 10
Propane competes primarily with natural gas, electricity and fuel oil as an
energy source, principally on the basis of price, availability and portability.
Propane is more expensive than natural gas on an equivalent BTU basis in
locations served by natural gas, but serves as an alternative to natural gas in
rural and suburban areas where natural gas is unavailable or portability of
product is required. Propane is generally less expensive to use than electricity
for space heating, water heating, clothes drying and cooking. Although propane
is similar to fuel oil in certain applications and market demand, propane and
fuel oil compete to a lesser extent primarily because of the cost of converting
from one to the other.
TRANSACTIONS AT CLOSING
Concurrently with the closing of this offering, Heritage will issue $120
million principal amount of the Notes to certain institutional investors in a
private placement (the "Note Placement"). Heritage will then convey
substantially all of its assets (other than approximately $80.1 million in
proceeds from issuance of the Notes) to the Operating Partnership in exchange
for a general partner interest and all the limited partner interests in the
Operating Partnership and the assumption by the Operating Partnership of
substantially all of the liabilities of Heritage (including the Notes, but
excluding certain notes payable pursuant to non-compete agreements entered into
in connection with prior acquisitions). Immediately thereafter, Heritage will
convey all of its limited partner interests in the Operating Partnership to the
Partnership in exchange for 3,702,943 Subordinated Units and a general partner
interest in the Partnership (including the right to receive Incentive
Distributions). As a result, the General Partner will own an aggregate 47.0%
limited partner interest (approximately 43.6% if the Underwriters'
over-allotment option is exercised in full), and an aggregate 2% general partner
interest, in the Partnership and the Operating Partnership.
In contemplation of this offering, Heritage entered into a letter of intent
dated as of April 24, 1996 (the "Letter Agreement") and, prior to consummation
of this offering, expects to execute definitive agreements with The Prudential
Insurance Company of America ("Prudential") and an affiliate of Golder, Thoma,
Cressey, Rauner, Inc., a private investment firm (together with its affiliates,
"GTCR"), who, together with certain members of management, own the entire equity
interest in Heritage immediately prior to the consummation of this offering.
Pursuant to the terms of the Letter Agreement and assuming an initial public
offering price of $20.50 per Common Unit, Heritage and certain members of
management will repurchase equity interests (the "Equity Repurchase") in
Heritage held by Prudential, GTCR, and certain members of management, as
follows: (i) Heritage and certain members of management will repurchase from
Prudential, 441,419 shares of Heritage's Class B Common Stock and 3,182 shares
of Heritage's 5% Cumulative Redeemable Preferred Stock (the "Redeemable
Preferred Stock"), representing Prudential's entire equity interest in Heritage,
for an aggregate of $19.3 million in cash and $2.0 million of notes to be issued
by such members of management, (ii) Heritage and certain members of management
will purchase from GTCR, 1,014,060 shares of Heritage's Class A Common Stock and
5,927 shares of Heritage's Redeemable Preferred Stock, representing GTCR's
entire equity interest in Heritage, for an aggregate of $42.8 million in cash
and $3.0 million of notes to be issued by such members of management and (iii)
Heritage will purchase from certain members of management, an aggregate 377.55
shares of Heritage's Redeemable Preferred Stock, for an aggregate of $0.5
million. Heritage will use a portion of the net proceeds from the issuance of
the Notes to finance its repurchases pursuant to the Equity Repurchase. As a
result of the Equity Repurchase, all of the outstanding capital stock of
Heritage will be owned by certain members of management. See "Certain
Relationships and Related Transactions."
The Partnership will contribute the net proceeds from the sale of Common
Units offered hereby (estimated to be approximately $74.8 million after
deduction of the underwriting discounts and commissions and expenses associated
with this offering) to the Operating Partnership. The Operating Partnership will
apply such net proceeds, together with approximately $39.9 million in cash
contributed by Heritage from the proceeds of the Note Placement, $2.4 million
borrowed under the Acquisition Facility and $4.0 million borrowed under the
Working Capital Facility, to finance the repayment of all of the indebtedness of
Heritage assumed by the Operating Partnership. Such indebtedness consists of (i)
$66.4 million principal amount of borrowings outstanding under Heritage's
Revolving Senior Acquisition Facility with Prudential (the "Existing Acquisition
Facility"), (ii) $3.0 million principal amount of borrowings outstanding under
Heritage's
8
<PAGE> 11
Revolving Credit Facility with Prudential (the "Existing Revolving Credit
Facility"), (iii) $4.0 million principal amount of borrowings outstanding under
Heritage's Working Capital Facility with Bank of Oklahoma, N.A. (the "Existing
Working Capital Facility"), (iv) $10.0 million principal amount of Heritage's
Senior Term Reset Notes due 1997 and $20.0 million principal amount of
Heritage's Senior Term Reset Notes due 2000 with Prudential (collectively, the
"Senior Reset Notes") and (v) $12.6 million principal amount of Heritage's
Subordinated Term Reset Notes due 2000 with Prudential (collectively, the
"Subordinated Reset Notes"), in each case plus accrued interest on such
indebtedness. Pursuant to the terms of the Letter Agreement, Heritage will repay
the Prudential indebtedness described above and will pay a prepayment penalty in
the amount of $3.5 million in connection with the early retirement of the Senior
Reset Notes and the Subordinated Reset Notes.
In October and November of 1995, Heritage completed three acquisitions for
an aggregate purchase price of approximately $5.5 million. As a result of its
use of available funds to finance these acquisitions, Heritage was unable to pay
a $5.0 million scheduled principal repayment in November 1995 under its Existing
Revolving Credit Facility (of which Heritage has since repaid $2.0 million) as
well as a $4.2 million scheduled principal repayment in February 1996 under the
Existing Acquisition Facility, resulting in a default under the terms of each
such facility and its other indebtedness to Prudential. Heritage proceeded with
each of the acquisitions while negotiating an additional bank credit facility,
the proceeds of which were to be used to repay a substantial portion of the
indebtedness outstanding to Prudential and thereby cure any payment defaults
thereunder. In December 1995, as a result of its decision to pursue this
offering, Heritage decided to abandon such refinancing efforts. In connection
with these transactions and in accordance with the requirements of the Letter
Agreement, Prudential has entered into a standstill agreement with Heritage
pursuant to which Prudential has agreed to waive existing and certain
prospective defaults under and forebear from exercising any remedies provided
under the terms of the Prudential indebtedness for a period of six months from
the date of execution of the Letter Agreement.
In addition, concurrently with the closing of this offering, the Operating
Partnership will also enter into a Bank Credit Facility, which will include the
Working Capital Facility, a revolving credit facility providing for up to $15.0
million of borrowings to be used for working capital and other general
partnership purposes, and the Acquisition Facility, a revolving credit facility
providing for up to $35.0 million of borrowings to be used for acquisitions and
improvements. The Partnership anticipates borrowing approximately $6.4 million
under the Bank Credit Facility concurrently with the closing of this offering in
order to repay any amounts borrowed in connection with its recent and pending
acquisitions as well as any other bank debt outstanding at the time of the
closing of this offering.
The Partnership will retain the net proceeds from any exercise of the
Underwriters' over-allotment option for general partnership purposes.
9
<PAGE> 12
The following table sets forth an estimated breakdown of the sources and
uses of funds contemplated by the transactions and as of the closing of this
offering, assuming an initial public offering price of $20.50 per Common Unit.
<TABLE>
<CAPTION>
AMOUNTS
-------------
(IN MILLIONS)
<S> <C>
Heritage
Sources
Proceeds from Note Placement........................................ $ 120.0
------
$ 120.0
======
Uses
Equity Repurchase................................................... $ 62.6
Contribution to Partnership......................................... 39.9
Retained by Heritage(1)............................................. 17.5
------
$ 120.0
======
Partnership
Sources
Drawdown of Working Capital Facility................................ $ 4.0
Drawdown of Acquisition Facility.................................... 2.4
Contribution of cash from Heritage.................................. 39.9
Net proceeds from Common Unit offering(2)........................... 74.8
------
$ 121.1
======
Uses
Repayment of debt................................................... $ 117.1
Payment of transfer taxes........................................... 0.5
Prepayment penalty.................................................. 3.5
------
$ 121.1
======
</TABLE>
- ---------------
(1) Cash retained by Heritage will be used to pay offering expenses associated
with the Note Placement, to satisfy notes payable pursuant to non-compete
agreements that are not being assumed by the Operating Partnership and to
satisfy certain net worth requirements of federal tax laws. See "Tax
Considerations."
(2) After underwriting discounts and commissions and expenses of this offering.
The transactions referred to above and the other transactions to occur in
connection with this offering are referred to herein as the "Transactions." See
"The Transactions." For additional information regarding the terms of the Notes
and the Bank Credit Facility, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Description of Indebtedness."
DISTRIBUTIONS AND PAYMENTS TO THE GENERAL PARTNER AND ITS AFFILIATES
The following information summarizes the distributions and payments to be
made by the Partnership to the General Partner and its affiliates in connection
with the Transactions and the ongoing operations of the Partnership. Such
distributions and payments were determined by and among affiliated entities and,
consequently, were not the result of arm's length negotiations. See "Conflicts
of Interest and Fiduciary Responsibilities."
Formation Stage
In exchange for conveying substantially all of its assets (other than
approximately $80.1 million in proceeds of the issuance of the Notes) to the
Operating Partnership, Heritage will receive 3,702,943 Subordinated Units and an
aggregate 2% general partner interest in the Partnership and the Operating
Partnership and the Operating Partnership will assume substantially all of the
liabilities of Heritage, including the Notes. Assuming an initial public
offering price of $20.50 per Common Unit, approximately $62.6 million
10
<PAGE> 13
of the net proceeds from the Note Placement retained by Heritage will be used to
finance the Equity Repurchase. As a result, certain members of management will
receive $0.5 million in consideration for the repurchase of their preferred
stock of Heritage and certain members of management will own all of the capital
stock of Heritage. Approximately $39.9 million of the net proceeds from the Note
Placement and all of the net proceeds from this offering will be used to finance
the repayment of $117.1 million of Heritage's indebtedness and a payment penalty
in the amount of $3.5 million in connection with the prepayment of certain of
such indebtedness. See "The Transactions" and "Certain Relationships and Related
Transactions."
Operational Stage
Distributions of Available Cash to the General Partner. Available Cash will
generally be distributed 98% to the Unitholders (including to the General
Partner as holder of the Subordinated Units) and 2% to the General Partner,
except that if distributions of Available Cash from Operating Surplus exceed the
Target Distribution Levels (as defined below), the General Partner will receive
a percentage of such excess distributions that will increase to up to
approximately 50% of the excess distributions above the highest Target
Distribution Level. See "Cash Distribution Policy."
Other Payments. Following this offering, in general, the management and
employees of Heritage who currently manage and operate the propane business and
assets to be owned by the Partnership will continue to manage and operate the
Partnership's business as officers and employees of the General Partner and its
affiliates. The General Partner will not receive any management fee or other
compensation in connection with its management of the Partnership, but will be
reimbursed at cost for all direct and indirect expenses incurred on behalf of
the Partnership, including the costs of compensation and employee benefit plans
described herein properly allocable to the Partnership (including the Restricted
Unit Plan and Unit Purchase Plan described herein), and all other expenses
necessary or appropriate to the conduct of business of, and allocable to, the
Partnership. On a pro forma basis, an aggregate of approximately $17.5 million
of expenses (primarily wages and salaries) would have been reimbursed by the
Partnership to the General Partner in fiscal 1995.
Affiliates of the General Partner may provide certain administrative
services for the General Partner on behalf of the Partnership and will be
reimbursed for all direct and indirect expenses incurred in connection
therewith. In addition, the General Partner and its affiliates may provide
additional services to the Partnership, for which the Partnership will be
charged reasonable fees as determined by the General Partner.
Withdrawal or Removal of the General Partner. If the General Partner
withdraws in violation of the Partnership Agreement or is removed by the
Unitholders for Cause (as defined in the Glossary), the successor general
partner will have the option to purchase the general partner interests in the
Partnership and the Operating Partnership (and the right to receive Incentive
Distributions, as such term is defined in the Glossary) for a cash payment equal
to the fair market value thereof. If the General Partner withdraws in accordance
with the Partnership Agreement or is removed without Cause it will have the
option to require a successor general partner to purchase its general partner
interests in the Partnership and the Operating Partnership (and the right to
receive Incentive Distributions) for such price. If the general partner
interests in the Partnership and the Operating Partnership (and the right to
receive Incentive Distributions) are not so purchased by the successor general
partner, the General Partner has the right to convert such partner interests
into a number of Common Units equal in value to the fair market value thereof as
determined by an independent investment banking firm or other independent
experts or to receive cash in exchange for such interests. See "The Partnership
Agreement -- Withdrawal or Removal of the General Partner."
Liquidation Stage
In the event of any liquidation of the Partnership, the partners, including
the General Partner, will be entitled to receive liquidating distributions in
accordance with their respective capital account balances. See "Cash
Distribution Policy -- Distributions of Cash Upon Liquidation."
11
<PAGE> 14
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table sets forth, for the periods and as of the dates
indicated, summary historical financial and operating data for Heritage and
summary pro forma financial and operating data for the Partnership after giving
effect to certain acquisitions and the Transactions. The historical balance
sheet data for the two years ended August 31, 1995 and 1994, respectively, and
the statement of operations and operating data for the three years ended August
31, 1995, 1994 and 1993, respectively, have been derived from the financial
statements appearing elsewhere herein which have been audited by Arthur Andersen
LLP, independent auditors. The summary historical balance sheet data for the
year ended August 31, 1993 has been derived from Heritage's audited financial
statements not included herein. The summary historical balance sheet data for
the two years ended August 31, 1992 and 1991, respectively, and statement of
operations and operating data for the two years ended August 31, 1992 and 1991,
respectively, have been derived from Heritage's unaudited financial statements,
not included herein. The historical financial and operating data for the six-
month periods ended February 28, 1995 and February 29, 1996 are derived from the
unaudited financial statements included elsewhere herein, and, in the opinion of
management of Heritage, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of results of
operations and financial condition. However, the propane business is seasonal in
nature, with its peak activity during the winter. Therefore, the results for the
interim periods are not indicative of the results that can be expected for a
full year. The summary historical financial and operating data of Heritage
should be read in conjunction with the financial statements of Heritage included
elsewhere in this Prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" also included elsewhere in this
Prospectus. The Partnership's summary pro forma financial and operating data are
derived from the Unaudited Pro Forma Consolidated Financial Statements of the
Partnership included elsewhere in this Prospectus, and should be read in
conjunction therewith. The amounts in the table below, except per Unit data, are
in thousands.
<TABLE>
<CAPTION>
PARTNERSHIP PARTNERSHIP
HERITAGE HISTORICAL PRO FORMA(A) HERITAGE HISTORICAL PRO FORMA(A)
------------------------------------------------ ------------ -------------------------- ------------
SIX MONTHS ENDED SIX MONTHS
YEAR ENDED AUGUST 31, YEAR ENDED -------------------------- ENDED
------------------------------------------------ AUGUST 31, FEBRUARY 28, FEBRUARY 29, FEBRUARY 29,
1991 1992 1993 1994 1995 1995 1995 1996 1996
-------- -------- -------- -------- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Revenues.............. $ 75,761 $ 97,209 $102,291 $103,971 $131,508 $142,410 $ 76,880 $103,053 $106,266
Gross profit(b)....... 30,545 41,014 45,596 48,601 55,841 61,520 34,234 39,242 40,591
Depreciation and
amortization........ 6,376 7,411 8,288 8,711 8,896 9,771 4,505 4,596 4,795
Operating income
(loss).............. 3,910 7,383 8,669 9,905 12,675 14,008 12,136 13,878 14,160
Interest expense...... 7,936 8,759 8,786 8,761 12,201 11,339 5,658 6,779 5,921
Provision (benefit)
for income
taxes............... 2,164 (440) 117 668 666 50 2,869 3,541 25
Net income (loss)..... (7,392) (1,084) (721) 315 (211) 2,878 4,179 4,218 8,894
Net income (loss) per
Unit(c)............. 0.37 1.13
BALANCE SHEET DATA
(END OF PERIOD)
Current assets........ $ 17,366 $ 16,572 $ 16,924 $ 17,134 $ 21,293 $ 26,686 $ 34,161 $ 32,837
Total assets.......... 115,800 116,123 121,557 118,330 163,423 164,605 180,776 189,171
Current liabilities... 16,520 17,344 18,734 19,646 35,825 23,532 142,347(d) 31,117
Long-term debt........ 82,013 82,354 86,532 81,373 103,412 110,446 6,301(d) 128,494
Redeemable preferred
stock............... 10,020 10,555 11,167 11,737 12,337 12,032 12,645
Stockholders' equity
(deficiency)........ (4,133) (5,153) (6,232) (6,301) (6,975) (2,293) (2,826)
Partner's
capital -- General
Partner............. 591
Partners'
capital -- Limited
Partners............ 28,969
OPERATING DATA
EBITDA(e)............. $ 10,286 $ 14,794 $ 16,957 $ 18,616 $ 21,672 $ 24,334 $ 16,770 $ 18,972 $ 19,494
Capital
expenditures(f):
Maintenance and
growth............ 2,891 3,625 3,802 6,194 8,634 4,745 4,990
Acquisition......... 30,322 3,648 8,149 -- 27,879 24,486 4,150
Retail propane gallons
sold................ 48,249 63,177 73,442 79,669 98,318 59,729 73,602
</TABLE>
- ---------------
(a) For a description of the assumptions and adjustments used in preparing the
Partnership's pro forma financial and operating data, see Unaudited Pro
Forma Consolidated Financial Statements included elsewhere in this
Prospectus.
(b) Gross profit is computed by reducing total revenues by the direct cost of
the products sold.
(c) Net income per Unit is computed by dividing the limited partners' interest
in net income by the limited partners' weighted average number of Units
outstanding.
(d) Heritage is in default on all indebtedness to Prudential as a result of its
failure to pay certain scheduled principal payments. As a result, all
amounts due are classified as current liabilities. All such indebtedness
will be repaid at the closing of this offering. See "The
Transactions -- Debt Refinancing."
(e) EBITDA is defined as operating income plus depreciation and amortization
(including the EBITDA of investees). EBITDA should not be considered as an
alternative to net income (as an indicator of operating performance) or as
an alternative to cash flow (as a measure of liquidity or ability to service
debt obligations), but provides additional information for evaluating the
Partnership's ability to make the Minimum Quarterly Distribution.
(f) The Partnership's capital expenditures fall generally into three categories:
(i) maintenance capital expenditures, which include expenditures for repairs
that extend the life of the assets and replacement of property, plant and
equipment, (ii) growth capital expenditures, which include expenditures for
purchase of new propane tanks and other equipment to facilitate expansion of
the Partnership's retail customer base and (iii) acquisition capital
expenditures, which include expenditures related to the acquisition of
retail propane operations and the portion of the purchase price allocated to
intangibles associated with such acquired businesses.
12
<PAGE> 15
RISK FACTORS
Limited partner interests are inherently different from capital stock of a
corporation, although many of the business risks to which the Partnership will
be subject are similar to those that would be faced by a corporation engaged in
a similar business. Prospective purchasers of the Common Units should consider
the following risk factors in evaluating an investment in the Common Units:
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
- Weather conditions have a significant impact on the demand for propane
for both heating and agricultural purposes. Many customers of the
Partnership rely heavily on propane as a heating fuel. Accordingly, the
volume of propane sold is at its highest during the six-month peak
heating season of October through March and is directly affected by the
severity of the winter weather. Historically, approximately 66% of the
Partnership's retail propane volume and in excess of 80% of EBITDA are
attributable to sales during the peak heating season. Actual weather
conditions can vary substantially from year to year, significantly
affecting the Partnership's financial performance. For example, the
Partnership believes that during each of its six fiscal years of
existence, weather affecting its operations, measured on a
Partnership-wide basis, has been warmer than normal. This warmer than
normal weather has contributed in part to the Partnership's operating
losses in four of the past five fiscal years. Furthermore, variations
in weather in one or more regions in which the Partnership operates can
significantly affect the total volumes sold by the Partnership and the
margins realized on such sales and, consequently, the Partnership's
results of operations.
- Propane is a commodity, the market price of which can be subject to
volatile changes in response to changes in supply or other market
conditions. As rapid increases in the wholesale cost of propane may not
be immediately passed on to customers, such increases could reduce the
Partnership's gross profits. The Partnership does not engage in any
hedging activities with respect to its propane supply requirements,
although it may do so in the future.
- The Partnership's profitability is affected by the competition for
customers among all participants in the retail propane business. Some
of the Partnership's competitors are larger or have greater financial
resources than the Partnership. Should a competitor attempt to increase
market share by decreasing prices, the Partnership's financial
condition and results of operations could be materially adversely
affected. In addition, propane competes with other sources of energy,
some of which are less costly for equivalent energy value.
- Acquisitions will be the principal means of growth for the
Partnership, as the retail propane industry is mature and overall
demand for propane is expected to experience limited growth in the
foreseeable future. There can be no assurance, however, that the
Partnership will identify attractive acquisition candidates in the
future, that the Partnership will be able to acquire such businesses on
economically acceptable terms, that any acquisitions will not be
dilutive to earnings and distributions to the Unitholders or that any
additional debt incurred to finance an acquisition will not affect the
ability of the Partnership to make distributions to the Unitholders.
- The Partnership's operations are subject to all operating hazards and
risks normally incidental to handling, storing and delivering
combustible liquids such as propane. As a result, the Partnership has
been, and is likely to continue to be, a defendant in various legal
proceedings and litigation arising in the ordinary course of business.
The Partnership will maintain insurance policies with insurers in such
amounts and with such coverages and deductibles as it believes are
reasonable and prudent. However, there can be no assurance that such
insurance will be adequate to protect the Partnership from all material
expenses related to potential future claims for personal and property
damage or that such levels of insurance will be available in the future
at economical prices.
- The failure of the Partnership to retain any of its senior management
team could adversely affect its operations.
13
<PAGE> 16
RISKS INHERENT IN AN INVESTMENT IN THE PARTNERSHIP
- Cash distributions to the Unitholders are not guaranteed and may
fluctuate based upon the Partnership's performance. In addition,
decisions of the General Partner with respect to the amount and timing
of cash expenditures, borrowings, issuances of additional Units and
reserves will affect the amount of Available Cash.
- Cash distributions are dependent primarily on cash flow, including
from reserves and working capital borrowings, and not on profitability,
which is affected by non-cash items. Therefore, cash distributions may
be made during periods when the Partnership records losses and may not
be made during periods when the Partnership records profits. The
General Partner will establish reserves that affect the amount of
Available Cash. Because the business of the Partnership is seasonal, it
is likely that the General Partner will make additions to reserves
during certain quarters in order to fund operating expenses, interest
payments and cash distributions to partners with respect to other
quarters. As a result of these and other factors, there is no guarantee
that the Minimum Quarterly Distribution, or any other amount of
distributions, will be made on the Common Units.
- The amount of pro forma Available Cash from Operating Surplus
generated during fiscal 1995 was approximately $10.0 million. Such
amount would have been sufficient to cover the Minimum Quarterly
Distribution for the four quarters in such year on all of the
outstanding Common Units and the related distribution on the aggregate
2% general partner interest, but would have been insufficient by
approximately $5.8 million to cover the Minimum Quarterly Distribution
on the Subordinated Units and the related distribution on the general
partner interest.
- In establishing the terms of this offering, including the number and
initial offering price of the Common Units, the number of Subordinated
Units and the Minimum Quarterly Distribution, the Partnership relied on
certain assumptions concerning its operations. Whether the assumptions
are realized is not, in many cases, within the control of the
Partnership and cannot be predicted with any degree of certainty. In
the event that the Partnership's assumptions are not realized, the
actual Available Cash from Operating Surplus generated by the
Partnership could deviate substantially from that currently expected.
- On a pro forma basis as of February 29, 1996, assuming consummation of
the Transactions, the Partnership's long-term indebtedness as a
percentage of its total capitalization would have been approximately
81.2%. As a result, the Partnership will be significantly leveraged and
will have indebtedness that is substantial in relation to its partners'
capital. The Partnership's leverage may also adversely affect the
ability of the Partnership to finance its future operations and capital
needs, may limit its ability to pursue acquisitions and other business
opportunities and may make its results of operations more susceptible
to adverse economic conditions. See "The Transactions -- Debt
Refinancing" for a discussion about certain payment defaults by
Heritage on its outstanding indebtedness to Prudential. In addition,
the Partnership expects to have approximately $43.6 million of unused
borrowing capacity under the Bank Credit Facility at the closing of
this offering. Future borrowings could result in a significant increase
in the Partnership's leverage. The Notes and the Bank Credit Facility
will contain restrictive covenants that will limit the ability of the
Partnership to incur additional indebtedness and to make distributions
to Unitholders. The payment of principal and interest on the
Partnership's indebtedness will reduce the cash available to make
distributions on the Units.
- The Partnership's indebtedness will contain provisions relating to
changes in ownership. If such provisions are triggered, such
outstanding indebtedness may become due. There is no restriction on the
ability of the General Partner or its stockholders from entering into a
transaction which would trigger such change in ownership provisions.
- Prior to making any distribution on the Common Units, the Partnership
will reimburse the General Partner and its affiliates at cost for all
expenses incurred on behalf of the Partnership. On
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<PAGE> 17
a pro forma basis, approximately $17.5 million of expenses (primarily
wages and salaries) would have been reimbursed by the Partnership to
the General Partner in fiscal 1995. In addition, the General Partner
and its affiliates may provide additional services to the Partnership,
for which the Partnership will be charged reasonable fees as determined
by the General Partner.
- The General Partner will manage and operate the Partnership. Holders
of Common Units will have no right to elect the General Partner on an
annual or other continuing basis, and will have only limited voting
rights on matters affecting the Partnership's business. The management
exercised by the General Partner may make it more difficult for others
to control or influence the activities of the Partnership.
- Subject to certain limitations, the Partnership may issue additional
Common Units and other interests in the Partnership, the effect of
which may be to dilute the interests of holders of Common Units in
distributions by the Partnership or to make it more difficult for a
person or group to remove the General Partner or otherwise change the
management of the Partnership.
- The Partnership Agreement contains certain provisions that may have
the effect of discouraging a person or group from attempting to remove
the general partner of the Partnership or otherwise change the
management of the Partnership. The effect of these provisions may be to
diminish the price at which the Common Units will trade under certain
circumstances. The General Partner's ownership of the Subordinated
Units effectively gives the General Partner the ability to prevent its
removal.
- Purchasers of Common Units in this offering will experience
substantial and immediate dilution in net tangible book value of $22.16
per Common Unit from the initial public offering price (assuming an
initial public offering price of $20.50 per Common Unit).
- Prior to this offering, there has been no public market for the Common
Units. The initial public offering price for the Common Units will be
determined through negotiations between the General Partner and the
representatives of the Underwriters. No assurance can be given as to
the market prices at which the Common Units will trade.
- If at any time less than 20% of the then issued and outstanding Common
Units are held by persons other than the General Partner and its
affiliates, the General Partner will have the right, which it may
assign to any of its affiliates or the Partnership, to acquire all, but
not less than all, of the remaining Common Units held by such
unaffiliated persons at a price generally equal to the then-current
market price of the Common Units. As a consequence, a holder of Common
Units may be required to sell his Common Units at a time when he may
not desire to sell them or at a price that is less than the price he
would desire to receive upon such sale.
- The General Partner and its affiliates will receive certain benefits
as a result of the Transactions. In exchange for conveying
substantially all of its assets to the Operating Partnership, the
General Partner will receive 3,702,943 Subordinated Units and an
aggregate 2% general partner interest in the Partnership and the
Operating Partnership (including the right to receive Incentive
Distributions), and the Operating Partnership will assume substantially
all of the liabilities of the General Partner, including the Notes. In
addition, substantially all of the net proceeds from this offering and
from the Note Placement will be used to finance the Equity Repurchase
and the repayment of the General Partner's indebtedness to Prudential.
- Under certain circumstances, holders of the Common Units could lose
their limited liability and could become liable for amounts improperly
distributed to them by the Partnership.
- The Partnership may be unable to obtain consents and title documents
with respect to the transfer of certain assets and property of Heritage
to the Operating Partnership. The failure to obtain such consents and
title documents could adversely affect the business of the Partnership.
15
<PAGE> 18
- The holders of the Common Units have not been represented by counsel
in connection with this offering, including the preparation of the
Partnership Agreement or the other agreements referred to herein or in
establishing the terms of this offering.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
- The General Partner and its affiliates may have conflicts of interest
with the Partnership and holders of Common Units. The Partnership
Agreement contains certain provisions that limit the liability and
reduce the fiduciary duties of the General Partner to the Unitholders,
as well as provisions that may restrict the remedies available to
Unitholders for actions that might, without such limitations,
constitute breaches of fiduciary duty. Holders of Common Units are
deemed to have consented to certain actions and conflicts of interest
that might otherwise be deemed a breach of fiduciary or other duties
under applicable state law. The validity and enforceability of these
types of provisions under Delaware law are uncertain.
- The Partnership Agreement does not restrict the ability of affiliates
of the General Partner to engage in any activities, except for the
retail sale of propane to end users in the continental United States.
The General Partner's affiliates may compete with the Partnership in
other propane-related activities, such as trading, transportation,
storage and wholesale distribution of propane. Furthermore, the
Partnership Agreement provides that the General Partner and its
affiliates have no obligation to present business opportunities to the
Partnership.
- Decisions of the General Partner with respect to the amount and timing
of cash expenditures, borrowings, issuances of additional Units and
reserves in any quarter will affect whether or the extent to which
there is sufficient Available Cash from Operating Surplus to meet the
Minimum Quarterly Distribution and target distributions on all Units in
a given quarter. In addition, actions by the General Partner may have
the effect of enabling the General Partner to receive distributions on
the Subordinated Units or Incentive Distributions or hastening the
expiration of the Subordination Period or the conversion of
Subordinated Units into Common Units.
TAX RISKS
- The availability to a Common Unitholder of the federal income tax
benefits of an investment in the Partnership depends, in large part, on
the classification of the Partnership as a partnership for federal
income tax purposes. Assuming the accuracy of certain factual matters
as to which the General Partner and the Partnership have made
representations, Andrews & Kurth L.L.P., special counsel to the General
Partner and the Partnership ("Counsel"), is of the opinion that, under
current law, the Partnership will be classified as a partnership for
federal income tax purposes.
- No ruling has been requested from the Internal Revenue Service ("IRS")
with respect to classification of the Partnership as a partnership for
federal income tax purposes, whether the Partnership's propane
operations generate "qualifying income" under Section 7704 of the
Internal Revenue Code of 1986, as amended (the "Code"), or any other
matter affecting the Partnership.
- A Unitholder will be required to pay income taxes on his allocable
share of the Partnership's income, whether or not he receives cash
distributions from the Partnership.
- It is anticipated that through December 31, 2000, a Unitholder may
receive substantial distributions that would reduce such holder's tax
basis, with the result that such holder may recognize substantial
taxable gain upon a subsequent sale of such holder's Units.
- Investment in Common Units by certain tax-exempt entities, regulated
investment companies and foreign persons, raises issues unique to such
persons. For example, virtually all of the taxable income derived by
most organizations exempt from federal income tax (including individual
retirement accounts (IRAs) and other retirement plans) from the
ownership of a Common Unit will be unrelated business taxable income
and thus will be taxable to such a Unitholder.
- Investment in Common Units is limited to calendar-year taxpayers. Any
holder of a Common Unit who is not a calendar year taxpayer will not be
admitted to the Partnership as a partner, will
16
<PAGE> 19
not be entitled to receive distributions or federal income tax
allocations from the Partnership and may only transfer such Common
Units to a purchaser or another transferee.
- In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), losses generated by the
Partnership, if any, will generally only be available to offset future
income generated by the Partnership and cannot be used to offset income
from other activities, including other passive activities or
investments. Passive losses which are not deductible because they
exceed the Unitholder's income generated by the Partnership may be
deducted in full when the Unitholder disposes of his entire investment
in the Partnership in a fully taxable transaction to an unrelated
party.
- The Partnership will adopt certain depreciation and amortization
conventions that do not conform with all aspects of certain proposed
and final Treasury regulations. A successful challenge of those
conventions by the IRS could adversely affect the amount of tax
benefits available to a purchaser of Common Units and could have a
negative impact on the value of the Common Units.
- A Unitholder may be required to file state and local income tax
returns and pay state and local income taxes in some or all of the
various jurisdictions in which the Partnership does business or owns
property. The Partnership will initially own property and conduct
business in the following states which currently impose a personal
income tax: Arizona, California, Colorado, Idaho, Michigan, Minnesota,
Montana, New Mexico, North Carolina, Oregon and South Carolina.
- The Partnership will be registered with the IRS as a "tax shelter." No
assurance can be given that the Partnership will not be audited by the
IRS or that tax adjustments will not be made. Any adjustments in the
Partnership's tax returns will lead to adjustments in the Unitholders'
tax returns and may lead to audits of the Unitholders' tax returns and
adjustments of items unrelated to the Partnership.
See "Risk Factors," "Cash Distribution Policy," "Conflicts of Interest and
Fiduciary Responsibilities," "The Partnership Agreement" and "Tax
Considerations" for a more detailed description of these and other risk factors
and conflicts of interest that should be considered in evaluating an investment
in the Common Units.
CASH AVAILABLE FOR DISTRIBUTION
Based on the amount of working capital that the Partnership is expected to
have at the time it commences operations and the availability of the Working
Capital Facility, the Partnership believes that, if its assumptions about
operating conditions prove correct, the Partnership should have sufficient
Available Cash from Operating Surplus to enable the Partnership to distribute
the Minimum Quarterly Distribution on the outstanding Common Units and
Subordinated Units, and the related distribution on the aggregate 2% general
partner interest, with respect to each of its quarters at least through the
quarter ending August 31, 1997, although no assurance can be given respecting
such distributions or any future distributions. The Partnership's belief is
based on a number of assumptions, including the assumptions that normal weather
conditions will prevail in the Partnership's operating areas (although during
each of its past six fiscal years, weather affecting its operations, measured on
a Partnership-wide basis, has been warmer than normal), that the Partnership's
operating margins and internal growth rates will remain constant (although the
retail propane industry is mature and overall demand for propane is expected to
experience limited growth for the foreseeable future), that the Partnership will
consummate certain acquisitions and that market and overall economic conditions
will not change substantially. Although the Partnership believes its assumptions
are within a range of reasonableness, whether the assumptions are realized is
not, in a number of cases, within the control of the Partnership and cannot be
predicted with any degree of certainty. For example, in any particular year or
even series of years, weather may deviate substantially from normal. Therefore,
certain of the Partnership's assumptions may prove to be inaccurate. As a
result, the actual Available Cash from Operating Surplus generated by the
Partnership could deviate substantially from that currently expected. See "Risk
Factors." In addition, the terms of the Partnership's indebtedness under certain
circumstances will restrict the ability of the Partnership to distribute cash to
Unitholders. Accordingly, no assurance can be given that distributions of the
17
<PAGE> 20
Minimum Quarterly Distribution or any other amounts will be made. The
Partnership does not intend to update the expression of belief set forth above.
See "Cash Distribution Policy" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The amount of Available Cash from Operating Surplus needed to distribute
the Minimum Quarterly Distribution for four quarters on the Common Units and
Subordinated Units to be outstanding immediately after this offering and on the
General Partner's aggregate 2% general partner interest is approximately $15.8
million ($8.1 million for the Common Units, $7.4 million for the Subordinated
Units and $0.3 million for the aggregate 2% general partner interest). The
amounts of pro forma Available Cash from Operating Surplus generated during
fiscal 1995 (which excludes any working capital borrowings) was $10.0 million.
As a result, the Partnership believes that it would have been able to distribute
the full Minimum Quarterly Distribution on all Common Units during fiscal 1995
but would not have been able to distribute the full Minimum Quarterly
Distribution on all Subordinated Units. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." For the calculation
of pro forma Available Cash from Operating Surplus, see Appendix D.
Based on the Partnership's pro forma results of operations for the six
months ended February 29, 1996, limited data about operations in March and April
1996 and the Partnership's estimated results of operations for the remainder of
fiscal 1996, the Partnership believes that if it had commenced operations on
September 1, 1995 (assuming the Transactions and the acquisitions reflected in
the Partnership's pro forma financial statements included herein had been
consummated on such date), it would generate during fiscal 1996 Available Cash
from Operating Surplus of approximately $11.0 million. As a result, the
Partnership believes that, based on such assumptions, it would be able to
distribute the full Minimum Quarterly Distribution on all Common Units for
fiscal 1996, but would not be able to distribute the full Minimum Quarterly
Distribution on all Subordinated Units. The Partnership's belief is based on the
assumptions about weather, margins, internal growth rates, a planned acquisition
and market and economic conditions described above as they apply to the final
two quarters of fiscal 1996. There can be no assurance that such assumptions
will be realized, and therefore, the Partnership's actual results of operations
for the final six months of 1996 may deviate substantially from those estimated.
The Partnership does not intend to update its expression of belief about fiscal
1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The amounts of pro forma Available Cash from Operating Surplus for fiscal
1995 set forth above were derived from the pro forma financial statements of the
Partnership in the manner set forth in Appendix D hereto. The pro forma
adjustments are based upon currently available information and certain estimates
and assumptions. The pro forma financial statements do not purport to present
the results of operations of the Partnership had the Transactions and the
acquisitions referred to therein actually been completed as of the dates
indicated. Furthermore, the pro forma financial statements are based on accrual
accounting concepts while Operating Surplus is defined in the Partnership
Agreement on a cash accounting basis. As a consequence, the amounts of pro forma
Available Cash from Operating Surplus shown above should only be viewed as a
general indication of the amounts of Available Cash from Operating Surplus that
may in fact have been generated by the Partnership had it been formed in earlier
periods. For a more complete definition of Operating Surplus, see the Glossary.
PARTNERSHIP STRUCTURE AND MANAGEMENT
The Partnership will conduct, in substantially every respect, the propane
business that was formerly conducted by Heritage. The operations of the
Partnership will be conducted through, and the operating assets will be owned
by, the Operating Partnership, a recently formed Delaware limited partnership,
and any other subsidiary operating partnerships and corporations (collectively,
the "Operating Partnership"). The Partnership will own a 98.9899% limited
partner interest in the Operating Partnership. The General Partner is also the
general partner of the Operating Partnership with a 1.0101% general partner
interest. The General Partner will own an aggregate 2% general partner interest
in the Partnership and the Operating Partnership. References herein to the
General Partner's aggregate 2% interest or to distributions to the General
Partner of 2% of Available Cash are references to the amount of the General
Partner's combined percentage interest in the Partnership and the Operating
Partnership.
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<PAGE> 21
Following this offering, the management and employees of Heritage who
currently manage and operate the propane business and assets to be owned by the
Partnership will continue to manage and operate the Partnership's business as
officers and employees of Heritage. The General Partner and its affiliates will
not receive any management fee or other compensation in connection with its
management of the Partnership, but will be reimbursed at cost for all direct and
indirect expenses incurred on behalf of the Partnership and all other necessary
or appropriate expenses allocable to the Partnership or otherwise reasonably
incurred by the General Partner or its affiliates in connection with the
operation of the Partnership's business.
Conflicts of interest may arise between the General Partner and its
affiliates, on the one hand, and the Partnership, the Operating Partnership and
the Unitholders, on the other, including conflicts relating to the compensation
of the officers and employees of the General Partner and the determination of
fees and expenses that are allocable to the Partnership. The General Partner
will have an audit committee (the "Audit Committee") consisting initially of two
independent members of its Board of Directors that will be available at the
General Partner's discretion to review matters involving conflicts of interest.
See "Conflicts of Interest and Fiduciary Responsibilities."
The principal executive offices of the Partnership and the Operating
Partnership are located at 8801 South Yale Avenue, Suite 310, Tulsa, Oklahoma
74137. The telephone number at such offices is (918) 492-7272.
19
<PAGE> 22
The following chart depicts the organization and ownership of the
Partnership and the Operating Partnership immediately after giving effect to the
sale of the Common Units offered hereby and assumes that the Underwriters'
over-allotment option is not exercised. The percentages reflected in the
following chart represent the approximate ownership interest in each of the
Partnership and the Operating Partnership individually and not on an aggregate
basis. Except in the following chart, the ownership percentages referred to in
this Prospectus reflect the approximate effective ownership interest of the
Unitholders in the Partnership and the Operating Partnership on a combined
basis.
<TABLE>
<S> <C>
- ----------------------------------------------------
EFFECTIVE AGGREGATE OWNERSHIP
OF THE PARTNERSHIP AND THE
OPERATING PARTNERSHIP
Public Unitholders' Common Units....... 51.0%
General Partner's Subordinated Units... 47.0%
General Partner's Combined General
Partner Interest.................... 2.0%
- ----------------------------------------------------
</TABLE>
[CHART]
20
<PAGE> 23
THE COMMON UNITS
All purchasers of Common Units in this offering and subsequent purchasers
of Common Units in the open market who wish to become Unitholders of record must
deliver an executed transfer application (the "Transfer Application," the form
of which is included in this Prospectus as Appendix B), in which the purchaser
must certify that the purchaser is a calendar-year taxpayer (a "Calendar-Year
Taxpayer"), before the purchase or transfer of such Common Units will be
registered on the records of the Transfer Agent and before cash distributions or
federal income tax allocations can be made to the transferee. Purchasers who
wish to hold Common Units in "street name" accounts will also be eligible to
receive distributions and federal income tax allocations, provided that the
broker (or other nominee) certifies to the Transfer Agent that to the best of
its knowledge the purchaser is a Calendar-Year Taxpayer. Any persons purchasing
Common Units who do not certify that they are Calendar-Year Taxpayers acquire no
rights in the Common Units other than the right to transfer such Common Units to
a purchaser or other transferee. See "Description of the Common
Units -- Transfer of Common Units."
THE OFFERING
Securities Offered............... 4,025,000 Common Units (4,628,750 Common
Units if the Underwriters' over-allotment
option is exercised in full).
Units to be Outstanding
After This Offering............ 4,025,000 Common Units and 3,702,943
Subordinated Units, representing a 51.0%
and 47.0% limited partner interest in the
Partnership, respectively. If the
Underwriters' over-allotment option is
exercised in full, 603,750 additional
Common Units will be issued by the
Partnership, which will result in there
being 4,628,750 Common Units and
3,702,943 Subordinated Units outstanding,
representing a 54.4% and 43.6% limited
partner interest in the Partnership,
respectively.
Distributions of Available
Cash............................. The Partnership will distribute all of its
Available Cash within 45 days after the
end of each quarter to the Unitholders of
record on the applicable record date and
to the General Partner. "Available Cash"
for any quarter will consist generally of
all cash on hand at the end of such
quarter, as adjusted for reserves. The
complete definition of Available Cash is
set forth in the Glossary. The General
Partner has broad discretion in making
cash disbursements and establishing
reserves, thereby affecting the amount of
Available Cash that will be distributed
with respect to any quarter. In addition,
the terms of the Partnership's
indebtedness require that certain
reserves for the payment of principal and
interest be maintained. Available Cash
will generally be distributed 98% to
Unitholders and 2% to the General Partner
except that if distributions of Available
Cash from Operating Surplus exceed
specified target levels ("Target
Distribution Levels") in excess of the
Minimum Quarterly Distribution, the
General Partner will receive a percentage
of such excess distributions that will
increase to up to 50% of the excess
distributions above the highest Target
Distribution Level. See "Cash
Distribution Policy -- Incentive
Distributions -- Hypothetical Annualized
Yield."
21
<PAGE> 24
Distributions to Common and
Subordinated Unitholders......... The Partnership intends, to the extent
there is sufficient Available Cash from
Operating Surplus, to distribute to each
holder of Common Units at least the
Minimum Quarterly Distribution of $0.50
per Common Unit per quarter. The Minimum
Quarterly Distribution is not guaranteed
and is subject to adjustment as described
under "Cash Distribution
Policy -- Adjustment of Minimum Quarterly
Distribution and Target Distribution
Levels." The Minimum Quarterly
Distribution for the period from the
closing of this offering through August
31, 1996 will be adjusted downward based
on the actual length of such period.
With respect to each quarter during the
Subordination Period, which will
generally not end prior to May 31, 2001,
the Common Unitholders will generally
have the right to receive the Minimum
Quarterly Distribution, plus any
arrearages thereon ("Common Unit
Arrearages"), before any distribution of
Available Cash from Operating Surplus is
made to the Subordinated Unitholders.
This subordination feature will enhance
the Partnership's ability to distribute
the Minimum Quarterly Distribution on the
Common Units during the Subordination
Period. Subordinated Units will not
accrue distribution arrearages. Upon
expiration of the Subordination Period,
Common Units will no longer accrue
distribution arrearages. See "Cash
Distribution Policy."
Subordination Period............. The Subordination Period will generally
extend from the closing of this offering
until the first day of any quarter
beginning after May 31, 2001 in respect
of which (i) distributions of Available
Cash from Operating Surplus on the Common
Units and the Subordinated Units with
respect to each of the three consecutive
four-quarter periods immediately
preceding such date equaled or exceeded
the sum of the Minimum Quarterly
Distribution on all of the outstanding
Common Units and Subordinated Units
during such periods, (ii) the Adjusted
Operating Surplus (as defined in the
Glossary) generated during each of the
three consecutive four-quarter periods
immediately preceding such date equaled
or exceeded the sum of the Minimum
Quarterly Distribution on all of the
outstanding Common Units and Subordinated
Units and the related distribution on the
general partner interest in the
Partnership during such periods, and
(iii) there are no outstanding Common
Unit Arrearages. Upon expiration of the
Subordination Period, all remaining
Subordinated Units will convert into
Common Units on a one-for-one basis and
will thereafter participate pro rata with
the other Common Units in distributions
of Available Cash.
Early Conversion of Subordinated
Units............................ A portion of the Subordinated Units will
convert into Common Units on the first
day after the record date established
22
<PAGE> 25
for the distribution in respect of any
quarter ending on or after (a) May 31,
1999 (with respect to one-quarter of the
Subordinated Units) and (b) May 31, 2000
(with respect to one-quarter of the
Subordinated Units), in respect of which
(i) distributions of Available Cash from
Operating Surplus on the Common Units and
the Subordinated Units with respect to
each of the three consecutive
four-quarter periods immediately
preceding such date equaled or exceeded
the sum of the Minimum Quarterly
Distribution on all of the outstanding
Common Units and Subordinated Units
during such periods, (ii) the Adjusted
Operating Surplus generated during each
of the two consecutive four-quarter
periods immediately preceding such date
equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of
the outstanding Common Units and
Subordinated Units and the related
distribution on the general partner
interest in the Partnership during such
periods, and (iii) there are no
outstanding Common Unit Arrearages;
provided, however, that the early
conversion of the second tranche of
Subordinated Units may not occur until at
least one year following the early
conversion of the first tranche of
Subordinated Units. See "Cash
Distribution Policy -- Distributions from
Operating Surplus during Subordination
Period."
Incentive Distributions.......... If quarterly distributions of Available
Cash exceed the Target Distribution
Levels, the General Partner will receive
distributions which are generally equal
to 15%, then 25% and then 50% of the
distributions of Available Cash that
exceed such Target Distribution Levels.
The Target Distribution Levels are based
on the amounts of Available Cash from
Operating Surplus distributed that exceed
distributions made with respect to the
Minimum Quarterly Distribution and Common
Unit Arrearages, if any. See "Cash
Distribution Policy -- Incentive
Distributions -- Hypothetical Annualized
Yield." The distributions to the General
Partner described above that are in
excess of its aggregate 2% general
partner interest are referred to herein
as the "Incentive Distributions."
Adjustment of Minimum Quarterly
Distribution and Target
Distribution Levels............ The Minimum Quarterly Distribution and the
Target Distribution Levels are subject to
downward adjustments in the event that
the Unitholders receive distributions of
Available Cash from Capital Surplus (as
defined in the Glossary) or legislation
is enacted or existing law is modified or
interpreted by the relevant governmental
authority in a manner that causes the
Partnership to be treated as an
association taxable as a corporation or
otherwise taxable as an entity for
federal, state or local income tax
purposes. If, as a result of
distributions of Available Cash from
Capital Surplus, the Unitholders receive
a full return of the initial public
offering price of the Common Units and
any unpaid Common Unit Arrearages, the
distributions of Available
23
<PAGE> 26
Cash payable to the General Partner will
increase to 50% of all amounts
distributed thereafter. See "Cash
Distribution Policy -- General,"
"-- Distributions from Capital Surplus"
and "-- Adjustment of Minimum Quarterly
Distribution and Target Distribution
Levels."
Partnership's Ability to Issue
Additional Units................. The Partnership Agreement generally
authorizes the Partnership to issue an
unlimited number of additional limited
partner interests and other equity
securities of the Partnership for such
consideration and on such terms and
conditions as shall be established by the
General Partner in its sole discretion
without the approval of the Unitholders.
During the Subordination Period, however,
the Partnership may not issue equity
securities ranking prior or senior to the
Common Units or an aggregate of more than
2,012,500 Common Units (excluding Common
Units issued upon the exercise of the
Underwriters' over-allotment option, upon
conversion of Subordinated Units or in
connection with certain acquisitions or
capital improvements or the repayment of
certain indebtedness) or an equivalent
number of securities ranking on a parity
with the Common Units, without the
approval of the holders of a Unit
Majority. See "The Partnership
Agreement -- Issuance of Additional
Securities."
Limited Call Right............... If at any time less than 20% of the issued
and outstanding Common Units are held by
persons other than the General Partner
and its affiliates, the General Partner
may purchase all of the remaining Common
Units at a price generally equal to the
then current market price of the Common
Units. See "The Partnership Agreement --
Limited Call Right."
Limited Voting Rights............ Holders of Common Units will have only
limited voting rights on matters
affecting the Partnership's business. See
"The Partnership Agreement."
Change of Management
Provisions....................... Any person or group (other than the General
Partner or its affiliates) that acquires
beneficial ownership of 20% or more of
the Common Units will lose its voting
rights with respect to all of its Common
Units. In addition, if the General
Partner is removed other than for Cause
(as defined in the Glossary) and Units
held by the General Partner and its
affiliates are not voted in favor of such
removal, (i) the Subordination Period
will end and all outstanding Subordinated
Units will immediately convert into
Common Units on a one-for-one basis, (ii)
any existing Common Units Arrearages will
be extinguished and (iii) the General
Partner will have the right to convert
its general partner interests (and its
right to receive Incentive Distributions)
into Common Units or to receive cash in
exchange for such interests. These
provisions are intended to discourage a
person or group from attempting to remove
the current General Partner or otherwise
change
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the management of the Partnership. The
effect of these provisions may diminish
the price at which the Common Units would
trade under certain circumstances. See
"The Partnership Agreement -- Change of
Management Provisions."
Removal and Withdrawal of the
General Partner.................. Subject to certain conditions, the General
Partner may be removed upon the approval
of the holders of at least 66 2/3% of the
outstanding Units (including Units held
by the General Partner and its
affiliates) and the election of a
successor general partner by the vote of
the holders of not less than a Unit
Majority. A meeting of holders of the
Common Units may be called only by the
General Partner or by the holders of 20%
or more of the outstanding Common Units.
The General Partner's ownership of the
Subordinated Units effectively gives the
General Partner the ability to prevent
its removal. The General Partner has
agreed not to voluntarily withdraw as
general partner of the Partnership and
the Operating Partnership prior to
December 31, 2006, subject to limited
exceptions, without obtaining the
approval of at least a Unit Majority and
furnishing an Opinion of Counsel (as
defined in the Glossary). See "The
Partnership Agreement -- Withdrawal or
Removal of the General Partner" and
"-- Meetings; Voting."
Distributions Upon Liquidation... In the event of any liquidation of the
Partnership during the Subordination
Period, the outstanding Common Units will
be entitled to receive a distribution out
of the net assets of the Partnership in
preference to liquidating distributions
on the Subordinated Units to the extent
of their Unrecovered Capital (as defined
in the Glossary) and any unpaid Common
Unit Arrearages. Under certain
circumstances there may be insufficient
gain for the holders of Common Units to
fully recover all such amounts, even
though there may be cash available for
distribution to holders of Subordinated
Units. Following conversion of the
Subordinated Units into Common Units, all
Units will be treated the same upon
liquidation of the Partnership. See "Cash
Distribution Policy -- Distributions of
Cash Upon Liquidation."
Use of Proceeds.................. The net proceeds to the Partnership from
the sale of Common Units offered hereby
are estimated to be approximately $74.8
million (assuming an initial public
offering price of $20.50 per Common
Unit), after deducting estimated
underwriting discounts and commissions
and expenses of this offering. The net
proceeds of this offering, along with a
portion of the net proceeds of the Note
Placement, will be applied to repay
existing indebtedness of Heritage. A
portion of the net proceeds of the Note
Placement will be used to repurchase
equity interests of the stockholders of
Heritage, as a result of which the entire
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equity interest in Heritage will be held
by certain members of management. The
remaining net proceeds of the Note
Placement will be retained by the General
Partner for various purposes. The
Partnership will retain the net proceeds
from any exercise of the Underwriters'
over-allotment option for general
partnership purposes, including repayment
of outstanding indebtedness. See "Use of
Proceeds."
Listing.......................... The Common Units have been approved for
listing on the NYSE, subject to official
notice of issuance.
NYSE Symbol...................... "HPG"
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<PAGE> 29
SUMMARY OF TAX CONSIDERATIONS
The tax consequences of an investment in the Partnership to a particular
investor will depend in part on the investor's own tax circumstances. Each
prospective investor should consult his own tax advisor about the United States
federal, state and local tax consequences of an investment in Common Units.
The following is a brief summary of certain expected tax consequences of
owning and disposing of Common Units. The following discussion, insofar as it
relates to United States federal income tax laws, is based in part upon the
opinion of Andrews & Kurth L.L.P., special counsel to the General Partner and
the Partnership, described in "Tax Considerations." This summary is qualified by
the discussion in "Tax Considerations," particularly the qualifications on the
opinions of Counsel described therein.
PARTNERSHIP STATUS
In the opinion of Counsel, the Partnership will be classified for federal
income tax purposes as a partnership, and the beneficial owners of Common Units
will generally be considered partners in the Partnership. Accordingly, the
Partnership will pay no federal income taxes, and a Common Unitholder will be
required to report in his federal income tax return his share of the
Partnership's income, gains, losses and deductions. In general, cash
distributions to a Common Unitholder will be taxable only if, and to the extent
that, they exceed the tax basis in his Common Units.
PARTNERSHIP ALLOCATIONS
In general, income and loss of the Partnership will be allocated to the
General Partner and the Unitholders for each taxable year in accordance with
their respective percentage interests in the Partnership, as determined annually
and prorated on a monthly basis and subsequently apportioned among the General
Partner and the Unitholders of record as of the opening of the first business
day of the month to which they relate, even though Unitholders may dispose of
their Units during the month in question. A Unitholder will be required to take
into account, in determining his federal income tax liability, his share of
income generated by the Partnership for each taxable year of the Partnership
ending within or with the Unitholder's taxable year even if cash distributions
are not made to him. As a consequence, a Unitholder's share of taxable income of
the Partnership (and possibly the income tax payable by him with respect to such
income) may exceed the cash actually distributed to him.
RATIO OF TAXABLE INCOME TO DISTRIBUTIONS
The Partnership estimates that a purchaser of Common Units in this offering
who owns them through December 31, 2000, will be allocated, on a cumulative
basis, an amount of federal taxable income for such period that will be
approximately 20% of cash distributed with respect to that period. The
Partnership further estimates that for taxable years after the taxable year
ending December 31, 2000, the taxable income allocable to them will represent a
significantly higher percentage (and could in certain circumstances exceed the
amount) of cash distributed to the Unitholders. These estimates are based upon
the assumption that the gross income from operations will approximate an amount
required to make the Minimum Quarterly Distribution with respect to all Units
and other assumptions with respect to capital expenditures, cash flow and
anticipated cash distributions. These estimates and assumptions are subject to,
among other things, numerous business, economic, regulatory, competitive and
political uncertainties which are beyond the control of the Partnership.
Further, the estimates are based on current tax law and certain tax reporting
positions that the Partnership intends to adopt and with which the IRS could
disagree. Accordingly, no assurance can be given that the estimates will prove
to be correct. The actual percentages could be higher or lower than as described
above and any differences could be material. See "Tax Considerations -- Tax
Consequences of Unit Ownership -- Ratio of Taxable Income to Distributions."
BASIS OF COMMON UNITS
A Unitholder's initial tax basis for a Common Unit purchased in this
offering will generally be the amount paid for the Common Unit. A Unitholder's
basis is generally increased by his share of Partnership
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<PAGE> 30
income and any increase in his share of Partnership nonrecourse liabilities and
decreased by his share of Partnership losses and distributions and any decrease
in his share of Partnership nonrecourse liabilities.
LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), any Partnership losses will only be
available to offset future income generated by the Partnership and cannot be
used to offset income from other activities, including passive activities or
investments. Any losses unused by virtue of the passive loss rules may be
deducted when the Unitholder disposes of all of his Common Units in a fully
taxable transaction with an unrelated party. In addition, a Unitholder may
deduct his share of Partnership losses only to the extent the losses do not
exceed his tax basis in his Common Units or, in the case of taxpayers subject to
the "at risk" rules (such as individuals), the amount the Unitholder is at risk
with respect to the Partnership's activities, if less than such tax basis.
SECTION 754 ELECTION
The Partnership intends to make the election provided for by Section 754 of
the Code, which will generally result in a Unitholder being allocated income and
deductions calculated by reference to the portion of his purchase price
attributable to each asset of the Partnership.
DISPOSITION OF COMMON UNITS
A Unitholder who sells Common Units will recognize gain or loss equal to
the difference between the amount realized and the adjusted tax basis of those
Common Units. Thus, distributions of cash from the Partnership to a Unitholder
in excess of the income allocated to him will, in effect, become taxable income
if he sells the Common Units at a price greater than his adjusted tax basis even
if the price is less than his original cost. A portion of the amount realized
(whether or not representing gain) may be ordinary income.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders may be subject to other
taxes, such as state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which a Unitholder resides or in which the Partnership does
business or owns property. Although an analysis of those various taxes is not
presented here, each prospective Unitholder should consider their potential
impact on his investment in the Partnership. The Partnership will initially own
property and conduct business in the following states which currently impose a
personal income tax: Arizona, California, Colorado, Idaho, Michigan, Minnesota,
Montana, New Mexico, North Carolina, Oregon and South Carolina. In certain
states, tax losses may not produce a tax benefit in the year incurred (if, for
example, the Partnership has no income from sources within that state) and also
may not be available to offset income in subsequent taxable years. Some of the
states may require the Partnership, or the Partnership may elect, to withhold a
percentage of income from amounts to be distributed to a Unitholder.
Withholding, the amount of which may be more or less than a particular
Unitholder's income tax liability to the state, may not relieve the nonresident
Unitholder from the obligation to file an income tax return. Amounts withheld
may be treated as if distributed to Unitholders for purposes of determining the
amounts distributed by the Partnership. Based on current law and its estimate of
future Partnership operations, the Partnership anticipates that any amounts
required to be withheld will not be material.
It is the responsibility of each prospective Unitholder to investigate the
legal and tax consequences, under the laws of pertinent states and localities,
of his investment in the Partnership. Accordingly, each prospective Unitholder
should consult, and must depend upon, his own tax counsel or other advisor with
regard to those matters. Further, it is the responsibility of each Unitholder to
file all U.S. federal, state and local tax returns that may be required of such
Unitholder. Counsel has not rendered an opinion on the state or local tax
consequences of an investment in the Partnership.
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<PAGE> 31
OWNERSHIP OF COMMON UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER
INVESTORS
An investment in Common Units by tax-exempt organizations (including
individual retirement accounts (IRAs) and other retirement plans), regulated
investment companies and foreign persons, raises issues unique to such persons.
Virtually all of the Partnership income allocated to a Unitholder which is a
tax-exempt organization will be unrelated business taxable income, and thus will
be taxable to such Unitholder; no significant amount of the Partnership's gross
income will be qualifying income for purposes of determining whether a
Unitholder will qualify as a regulated investment company; and a Unitholder who
is a nonresident alien, foreign corporation or other foreign person will be
regarded as being engaged in a trade or business in the United States as a
result of ownership of a Common Unit and thus will be required to file federal
income tax returns and to pay tax on such Unitholder's share of Partnership
taxable income. See "Tax Considerations -- Uniformity of Units -- Tax-Exempt
Organizations and Certain Other Investors."
TAX SHELTER REGISTRATION
The Code generally requires that "tax shelters" be registered with the
Secretary of the Treasury. It is arguable that the Partnership will not be
subject to this registration requirement. Nevertheless, the Partnership will be
registered as a tax shelter with the IRS. ISSUANCE OF THE REGISTRATION NUMBER
DOES NOT INDICATE THAT AN INVESTMENT IN THE PARTNERSHIP OR THE CLAIMED TAX
BENEFITS HAS BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS. See "Tax
Considerations -- Administrative Matters -- Registration as a Tax Shelter."
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<PAGE> 32
RISK FACTORS
A prospective investor should carefully consider the following risk factors
as well as the other information set forth in this Prospectus, before purchasing
the Common Units offered hereby.
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
Weather Conditions Affect the Demand for Propane
Weather conditions have a significant impact on the demand for propane for
both heating and agricultural purposes. Many customers of the Partnership rely
heavily on propane as a heating fuel. Accordingly, the volume of propane sold is
at its highest during the six-month peak heating season of October through March
and is directly affected by the severity of the winter weather. Historically,
approximately 66% of the Partnership's retail propane volume and in excess of
80% of the Partnership's EBITDA are attributable to sales during the peak
heating season. Actual weather conditions can vary substantially from year to
year, significantly affecting the Partnership's financial performance.
Furthermore, variations in weather in one or more regions in which the
Partnership operates can significantly affect the total volume of propane sold
by the Partnership and the margins realized on such sales and, consequently, the
Partnership's results of operations. Agricultural demand is also affected by
weather, as dry weather during the harvest season reduces demand for propane
used in crop drying. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Partnership Will Be Subject to Pricing and Inventory Risks
The retail propane business is a "margin-based" business in which gross
profits depend on the excess of sales prices over propane supply costs.
Consequently, the Partnership's profitability will be sensitive to changes in
wholesale propane prices. Propane is a commodity, and as such, its market price
is subject to volatile changes in response to changes in supply or other market
conditions. The Partnership will have no control over these market conditions.
Consequently, the unit price of propane purchased by the Partnership, as well as
other propane marketers, can change rapidly over a short period of time. In
general, product supply contracts permit suppliers to charge posted prices (plus
transportation costs) at the time of delivery or the current prices established
at major delivery points. Since rapid increases in the wholesale cost of propane
may not be immediately passed on to customers, such increases could reduce the
Partnership's gross profits. See "-- The Retail Propane Business Is Highly
Competitive."
Propane is available from numerous sources, including integrated
international oil companies, independent refiners and independent wholesalers.
The Partnership purchases propane from a variety of suppliers pursuant to supply
contracts or on the spot market. In 1995, approximately 73% of the propane
purchased by the Partnership was purchased from domestic suppliers and
approximately 27% was procured from M-P Oils Partnership, a Canadian partnership
in which the Partnership owns an indirect 60% interest. To the extent that the
Partnership purchases propane from foreign (including Canadian) sources, its
propane business will be subject to risks of disruption in foreign supply. The
Partnership generally attempts to minimize inventory risk by purchasing propane
on a short-term basis. However, the Partnership has on occasion purchased, and
may in the future purchase, large volumes of propane during periods of low
demand, which generally occur during the summer months, at the then current
market price, for storage both at its service centers and in the Partnership's
major storage facilities for future resale. In 1995, the Partnership's total
storage capacity was approximately 13 million gallons. See "Business and
Properties -- Properties." Because of the potential volatility of propane
prices, the market price for propane could fall below the price at which the
Partnership purchased propane held in inventory, thereby adversely affecting
gross margins or sales or rendering sales from such inventory unprofitable.
Except for the occasional opportunistic buying described above, the Partnership
has not engaged in any hedging activities with respect to its propane supply
requirements, although it may do so in the future. See "Business and
Properties -- Propane Supply and Storage."
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<PAGE> 33
The Retail Propane Business Is Highly Competitive
The Partnership's profitability is affected by the competition for
customers among all participants in the retail propane business. The Partnership
competes with other distributors of propane, including a number of large
national and regional firms and several thousand small independent firms. Some
of these competitors are larger or have greater financial resources than the
Partnership. Should a competitor attempt to increase market share by decreasing
prices, the Partnership's financial condition and results of operations could be
materially adversely affected. Generally, warmer-than-normal weather further
intensifies competition. The Partnership believes that its ability to compete
effectively depends on the reliability of its service, its responsiveness to
customers and its ability to maintain competitive retail prices.
The Retail Propane Business Faces Competition from Alternative Energy Sources
Propane competes with other sources of energy, some of which are less
costly for equivalent energy value. The Partnership competes for customers
against suppliers of electricity, natural gas and fuel oil. Electricity is a
major competitor of propane, but propane generally enjoys a competitive price
advantage over electricity. Except for certain industrial and commercial
applications, propane is generally not competitive with natural gas in areas
where natural gas pipelines already exist because natural gas is a significantly
less expensive source of energy than propane. The gradual expansion of the
nation's natural gas distribution systems has resulted in the availability of
natural gas in many areas that previously depended upon propane. Although
propane is similar to fuel oil in certain applications and market demand,
propane and fuel oil compete to a lesser extent primarily because of the cost of
converting from one to the other. In addition, the Partnership cannot predict
the effect that the development of alternative energy sources might have on its
operations.
The Partnership May Not Be Successful in Growing Through Acquisitions
The retail propane industry is mature, and the Partnership foresees only
limited growth in total retail demand for propane. Moreover, as a result of
long-standing customer relationships that are typical in the retail home propane
industry, the inconvenience of switching tanks and suppliers and propane's
higher cost than certain other energy sources, such as natural gas, the
Partnership may experience difficulty in acquiring new retail customers, other
than through acquisitions. Therefore, while the Partnership's business strategy
includes opening new locations, adding new retail customers and retaining
existing customers, the ability of the Partnership's propane business to grow
will depend primarily upon its ability to acquire other retail propane
distributors. There can be no assurance that the Partnership will identify
attractive acquisition candidates in the future, that the Partnership will be
able to acquire such businesses on economically acceptable terms, that any
acquisitions will not be dilutive to earnings and distributions to the
Unitholders or that any additional debt incurred to finance an acquisition will
not affect the ability of the Partnership to make distributions to the
Unitholders. The Partnership is subject to certain covenants in agreements
governing its indebtedness that might restrict the Partnership's ability to
incur indebtedness to finance acquisitions. In addition, to the extent that warm
weather adversely affects the Partnership's operating and financial results, the
Partnership's access to capital and its acquisition activities may be limited.
The Partnership Is Subject to Operating and Litigation Risks Which May Not Be
Covered by Insurance
The Partnership's operations are subject to all operating hazards and risks
normally incidental to handling, storing and delivering combustible liquids such
as propane. As a result, the Partnership has been, and is likely to continue to
be, a defendant in various legal proceedings and litigation arising in the
ordinary course of business. The Partnership will maintain insurance policies
with insurers in such amounts and with such coverages and deductibles as it
believes are reasonable and prudent. However, there can be no assurance that
such insurance will be adequate to protect the Partnership from all material
expenses related to potential future claims for personal and property damage or
that such levels of insurance will be available in the future at economical
prices.
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The Partnership Will Be Dependent Upon Key Personnel of Heritage
Heritage believes its success has been, and the Partnership's success will
be, dependent to a significant extent upon the efforts and abilities of its
senior management team. The failure of Heritage to retain any of such executive
officers could adversely affect the Partnership's operations. It is anticipated
that the Partnership will maintain the key man insurance for James E.
Bertelsmeyer currently held by Heritage in the amount of $5 million. Heritage
does not currently maintain key man insurance for any of the other members of
its senior management team.
Energy Efficiency and Technology Advances May Affect Demand
The national trend toward increased conservation and technological
advances, including installation of improved insulation and the development of
more efficient furnaces and other heating devices, has adversely affected the
demand for propane by retail customers. The Partnership cannot predict the
materiality of the effect of future conservation measures or the effect that any
technological advances in heating, conservation, energy generation or other
devices might have on its operations.
RISKS INHERENT IN AN INVESTMENT IN THE PARTNERSHIP
Cash Distributions Are Not Guaranteed and May Fluctuate with Partnership
Performance
Although the Partnership will distribute all of its Available Cash, there
can be no assurance regarding the amounts of Available Cash to be generated by
the Partnership. The actual amounts of Available Cash will depend upon numerous
factors, including cash flow generated by operations, required principal and
interest payments on the Partnership's debt, the costs of acquisitions
(including related debt service payments), restrictions contained in the
Partnership's debt instruments, issuances of debt and equity securities by the
Partnership, fluctuations in working capital, capital expenditures, adjustments
in reserves, prevailing economic conditions and financial, business and other
factors, a number of which will be beyond the control of the Partnership and the
General Partner. Cash distributions are dependent primarily on cash flow,
including from reserves, and not on profitability, which is affected by non-cash
items. Therefore, cash distributions may be made during periods when the
Partnership records losses and may not be made during periods when the
Partnership records profits.
The amount of Available Cash from Operating Surplus needed to distribute
the Minimum Quarterly Distribution for four quarters on the Common Units and
Subordinated Units to be outstanding immediately after this offering and on the
General Partner's aggregate 2% general partner interest is approximately $15.8
million ($8.1 million for the Common Units, $7.4 million for the Subordinated
Units and $0.3 million for the aggregate 2% general partner interest). The
amounts of pro forma Available Cash from Operating Surplus generated during
fiscal 1995 (which excludes any working capital borrowings) was approximately
$10.0 million. As a result, the Partnership believes that it would have been
able to distribute the full Minimum Quarterly Distribution on all Common Units
during fiscal 1995 but would not have been able to distribute the full Minimum
Quarterly Distribution on all Subordinated Units. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations." For the
calculation of pro forma Available Cash from Operating Surplus, see Appendix D.
Based on the Partnership's pro forma results of operations for the six
months ended February 29, 1996, limited data about operations in March and April
1996 and the Partnership's estimated results of operations for the remainder of
fiscal 1996, the Partnership believes that if it had commenced operations on
September 1, 1995 (assuming the Transactions and the acquisitions reflected in
the Partnership's pro forma financial statements included herein had been
consummated on such date) it would generate during fiscal 1996 Available Cash
from Operating Surplus of approximately $11.0 million. As a result, the
Partnership believes that, based on such assumptions, it would be able to
distribute the full Minimum Quarterly Distribution on all Common Units for
fiscal 1996, but would not be able to distribute the full Minimum Quarterly
Distribution on all Subordinated Units. The Partnership's belief is based on the
assumptions about weather, internal growth rates, a planned acquisition and
market and economic conditions described above as they apply to the final two
quarters of fiscal 1996. There can be no assurance that such assumptions will be
realized, and therefore, the
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Partnership's actual results of operations for the final six months of 1996 may
deviate substantially from those estimated. The Partnership does not intend to
update its expression of belief about fiscal 1996. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Partnership Agreement gives the General Partner broad discretion in
establishing reserves for the proper conduct of the Partnership's business that
will affect the amount of Available Cash. Because the business of the
Partnership is seasonal, the Partnership expects that it will make additions to
reserves during certain of the Partnership's quarters in order to fund operating
expenses, interest payments and cash distributions to partners with respect to
other quarters. In addition, the Partnership will be required to establish
reserves in respect of future payments of principal and interest on the Notes
and any indebtedness under the Bank Credit Facility. The Notes and the Bank
Credit Facility will limit the Operating Partnership's ability to distribute
cash to the Partnership. Distributions from the Operating Partnership will be
the Partnership's primary source of Available Cash. Any subsequent refinancing
of the Notes, the Bank Credit Facility or any other indebtedness incurred by the
Partnership may have similar restrictions, and the Partnership's ability to
distribute cash may also be limited during the existence of defaults under any
of the Partnership's debt instruments. As a result of these and other factors,
there can be no assurance regarding the actual levels of cash distributions to
Unitholders by the Partnership.
Partnership Assumptions Concerning Future Operations and Weather May Not Be
Realized
In establishing the terms of this offering, including the number and
initial offering price of the Common Units, the number of Subordinated Units and
the Minimum Quarterly Distribution, the Partnership relied on certain
assumptions concerning its operations, including the assumptions that normal
weather conditions will prevail in the Partnership's operating areas, that the
Partnership's operating margins and internal growth rates will remain constant,
that the Partnership will consummate certain acquisitions and that market and
overall economic conditions will not change substantially. Although the
Partnership believes its assumptions are within a range of reasonableness,
whether the assumptions are realized is not, in many cases, within the control
of the Partnership and cannot be predicted with any degree of certainty. In the
event that the Partnership's assumptions are not realized, the actual Available
Cash from Operating Surplus generated by the Partnership could deviate
substantially from that currently expected. See "Cash Distribution Policy --
Cash Available for Distribution."
Because a substantial portion of the Partnership's propane is used in the
heating-sensitive residential and commercial markets, the temperatures realized
in the Partnership's areas of operations, particularly during the six-month peak
heating season, have a significant effect on the financial performance of the
Partnership. In any given area, sustained above-normal temperatures will tend to
result in reduced propane use, while sustained below-normal temperatures will
tend to result in greater propane use.
The Partnership believes that its assumptions concerning the weather are
within a range of reasonableness as they are based on historical averages for
the years 1961-1990 as published by the National Weather Service Climate
Analysis Center for each measuring point in each of the Partnership's regions.
However, there is a substantial risk that the Partnership's assumptions
concerning the weather will not prove to be correct in any year or series of
years. Actual weather conditions can vary substantially from historical averages
and there can be no assurance that weather conditions in the future will not be
warmer than weather conditions in the past. For example, the Partnership
believes that during each of its six fiscal years of existence, weather
affecting its operations, measured on a Partnership-wide basis, has been warmer
than normal. Should weather conditions in the Partnership's operating areas be
warmer than the normal in the future, particularly during the October through
March peak heating season, the Partnership's results of operations would be
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Partnership's Indebtedness May Limit the Partnership's Ability to Make
Distributions and May Affect its Operations
On a pro forma basis at February 29, 1996, the Partnership's total
long-term indebtedness as a percentage of its total capitalization would have
been approximately 81.2%. As a result, the Partnership will be
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<PAGE> 36
significantly leveraged and will have indebtedness that is substantial in
relation to its partners' capital. Upon consummation of the Transactions, the
Partnership contemplates that it will have outstanding $120 million in Notes,
$4.0 million under the Working Capital Facility and $2.4 million under the
Acquisition Facility. The Partnership expects to have an additional $43.6
million of unused borrowing capacity under the Bank Credit Facility at the
closing of this offering. Future borrowings could result in a significant
increase in the Partnership's leverage. The ability of the Partnership to make
principal and interest payments depends on future performance, which performance
is subject to many factors, a number of which will be outside the Partnership's
control. The Notes and the Bank Credit Facility contain provisions relating to
change in ownership. If such change in ownership provisions are triggered, such
outstanding indebtedness may become due. In such event, there is no assurance
that the Partnership would be able to pay the indebtedness. There is no
restriction on the ability of the General Partner or its stockholders from
entering into a transaction which would trigger such change in ownership
provisions. The Notes and the Bank Credit Facility will contain restrictive
covenants that limit the ability of the Operating Partnership to distribute cash
and to incur additional indebtedness. The payment of principal and interest on
such indebtedness and the reserves required by the terms of the Partnership's
indebtedness for the future payment thereof will reduce the cash available to
make distributions on the Units. The Partnership's leverage also may adversely
affect the ability of the Partnership to finance its future operations and
capital needs, may limit its ability to pursue acquisitions and other business
opportunities and may make its results of operations more susceptible to adverse
economic conditions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Description of Indebtedness." See "The
Transactions -- Debt Refinancing" for a discussion about certain payment
defaults by Heritage on its outstanding indebtedness to Prudential.
Unitholders Will Have Certain Limits on their Voting Rights; The General
Partner Will Manage and Operate the Partnership
The General Partner will manage and operate the Partnership. Unlike the
holders of common stock in a corporation, holders of Common Units will have only
limited voting rights on matters affecting the Partnership's business. Holders
of Common Units will have no right to elect the General Partner on an annual or
other continuing basis, and the General Partner may not be removed except
pursuant to the vote of the holders of not less than 66 2/3% of the outstanding
Units (including Units owned by the General Partner and its affiliates) and upon
the election of a successor general partner by the vote of the holders of not
less than a Unit Majority. The General Partner's ownership of the Subordinated
Units effectively gives the General Partner the ability to prevent its removal.
As a result, holders of Common Units will have limited influence on matters
affecting the operation of the Partnership, and third parties may find it
difficult to attempt to gain control or influence the activities of the
Partnership. See "The Partnership Agreement."
The Partnership May Issue Additional Common Units thereby Diluting Existing
Unitholders' Interests
The Partnership has the authority to issue an unlimited number of
additional Common Units or other equity securities for such consideration and on
such terms and conditions as are established by the General Partner, in its sole
discretion without the approval of the Unitholders. During the Subordination
Period, however, the Partnership may not issue equity securities ranking prior
or senior to the Common Units or an aggregate of more than 2,012,500 additional
Common Units (excluding Common Units issued upon the exercise of the
Underwriters' over-allotment option, upon conversion of Subordinated Units or in
connection with certain acquisitions or capital improvements or the repayment of
certain indebtedness) or an equivalent number of securities ranking on a parity
with the Common Units without the approval of holders of a Unit Majority. After
the end of the Subordination Period, the Partnership may issue an unlimited
number of limited partner interests of any type without the approval of the
Unitholders. The Partnership Agreement does not give the holders of Common Units
the right to approve the issuance by the Partnership of equity securities
ranking junior to the Common Units at any time. Based on the circumstances of
each case, the issuance of additional Common Units or securities ranking on a
parity with the Common Units may dilute the value of the interests of the
then-existing holders of Common Units in the net assets of the Partnership.
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The conversion of some or all the Subordinated Units into Common Units will
increase the Partnership's Minimum Quarterly Distribution obligation with
respect to the Common Units while simultaneously reducing or eliminating the
Minimum Quarterly Distribution obligation with respect to the Subordinated
Units.
Change of Management Provisions
Following this offering, the General Partner's ownership of Subordinated
Units will preclude the removal of the General Partner without its consent. In
addition, the Partnership Agreement contains certain provisions that may have
the effect of discouraging a person or group from attempting to remove the
General Partner of the Partnership or otherwise change the management of the
Partnership. If the General Partner is removed as general partner of the
Partnership under circumstances where Cause does not exist and Units held by the
General Partner and its affiliates are not voted in favor of such removal (i)
the Subordination Period will end and all outstanding Subordinated Units will
immediately convert into Common Units on a one-for-one basis, (ii) any existing
Common Unit Arrearages will be extinguished and (iii) the General Partner will
have the right to convert its general partner interests (including the right to
receive Incentive Distributions) into Common Units or to receive cash in
exchange for such interests. Further, if any person or group (other than the
General Partner or its affiliates) acquires beneficial ownership of 20% or more
of any class of Units then outstanding, such person or group will lose voting
rights with respect to all of its Units. In addition, the Partnership has
substantial latitude in issuing equity securities without Unitholder approval.
The Partnership Agreement also contains provisions limiting the ability of
Unitholders to call meetings of Unitholders or to acquire information about the
Partnership's operations as well as other provisions limiting the Unitholders'
ability to influence the manner or direction of management. The effect of these
provisions may be to diminish the price at which the Common Units will trade
under certain circumstances. See "The Partnership Agreement -- Withdrawal or
Removal of the General Partner."
Purchasers of Common Units Will Experience Dilution
Purchasers of Common Units in this offering will experience substantial and
immediate dilution in net tangible book value of $22.16 per Common Unit
(assuming an initial public offering price of $20.50 per Common Unit). See
"Dilution."
No Prior Public Market for Common Units
Prior to this offering, there has been no public market for the Common
Units. The initial public offering price for the Common Units will be determined
through negotiations between the General Partner and the representatives of the
Underwriters. For a description of the factors to be considered in determining
the initial public offering price, see "Underwriting." No assurance can be given
as to the market prices at which the Common Units will trade. The Common Units
have been approved for listing on the NYSE, subject to official notice of
issuance, under the symbol "HPG."
The General Partner Will Have a Limited Call Right with Respect to the Limited
Partner Interests
If at any time less than 20% of the then issued and outstanding limited
partner interests of any class are held by persons other than the General
Partner and its affiliates, the General Partner will have the right, which it
may assign to any of its affiliates or the Partnership, to acquire all, but not
less than all, of the remaining limited partner interests of any class held by
such unaffiliated persons at a price generally equal to the then-current market
price of the limited partner interests of any class. As a consequence, a holder
of Common Units may be required to sell his Common Units at a time when he may
not desire to sell them or at a price that is less than the price he would
desire to receive upon such sale. See "The Partnership Agreement -- Limited Call
Right."
Benefits of the Transactions to Heritage and its Affiliates
In exchange for conveying substantially all of its assets (other than
approximately $80.1 million in proceeds of the issuance of the Notes) to the
Operating Partnership, Heritage will receive 3,702,943
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Subordinated Units and an aggregate 2% general partner interest in the
Partnership and the Operating Partnership (including the right to receive
Incentive Distributions) and the Operating Partnership will assume substantially
all of the liabilities of Heritage, including the Notes. Assuming an initial
public offering price of $20.50 per Common Unit, approximately $62.6 million of
the net proceeds from the Note Placement retained by Heritage will be used to
finance the Equity Repurchase from Prudential, GTCR and certain members of
management, as a result of which certain members of management will receive $0.5
million in consideration of the repurchase of their preferred stock of Heritage
and certain members of management will own all of the capital stock of Heritage.
Approximately $39.9 million of the net proceeds from the Note Placement and all
of the net proceeds from this offering will be used to finance the repayment of
$117.1 million of Heritage's indebtedness and a prepayment penalty in the amount
of $3.5 million in connection with certain Prudential indebtedness. See "The
Transactions" and "Certain Relationships and Related Transactions."
Cost Reimbursements and Fees Due to the General Partner May be Substantial
Prior to making any distribution on the Common Units, the Partnership will
reimburse the General Partner and its affiliates at cost for all expenses
incurred on behalf of the Partnership. On a pro forma basis, approximately $17.5
million of expenses (primarily wages and salaries) would have been reimbursed by
the Partnership to the General Partner in fiscal 1995. In addition, the General
Partner and its affiliates may provide additional services to the Partnership
for which the Partnership will be charged reasonable fees as determined by the
General Partner.
Unitholders May Not Have Limited Liability in Certain Circumstances; Liability
for Return of Certain Distributions
The limitations on the liability of holders of limited partner interests
for the obligations of a limited partnership have not been clearly established
in some states. If it were determined that the Partnership had been conducting
business in any state without compliance with the applicable limited partnership
statute, or that the right or the exercise of the right by the Unitholders as a
group to remove or replace the General Partner, to make certain amendments to
the Partnership Agreement or to take other action pursuant to the Partnership
Agreement constituted participation in the "control" of the Partnership's
business, then the Unitholders could be held liable in certain circumstances for
the Partnership's obligations to the same extent as a general partner. In
addition, under certain circumstances a Unitholder may be liable to the
Partnership for the amount of a distribution for a period of three years from
the date of the distribution. See "The Partnership Agreement -- Limited
Liability" for a discussion of the limitations on liability and the implications
thereof to a Unitholder.
Possible Inability to Obtain Consents and Title Documents to Asset Transfers
Concurrent with the closing of this offering, Heritage will convey
substantially all of its assets (other than approximately $80.1 million in
proceeds of the issuance of the Notes) and liabilities to the Partnership. Most
of Heritage's leasehold interests in real and personal property and many of
Heritage's permits, licenses and other rights are transferable to the
Partnership only with the consent of the lessor or other third party. In
addition, with respect to Heritage's owned real property, searches of local
records may be necessary to obtain documents evidencing chain of title in order
to prepare the documentation to transfer such real property interests and
certain of such documents may not be available on a timely basis. The failure by
the Partnership to obtain any such consents or title documents and its resulting
inability to obtain any such leasehold rights, permits, licenses, other rights
or property interests could have a material adverse effect on the Partnership.
However, Heritage believes that the Partnership will have the licenses, permits,
rights and property interests which will enable the Partnership to conduct its
propane business in a manner which is similar in all material respects to that
which was conducted by Heritage prior to the closing of this offering and that
any failure to obtain such licenses, permits, rights or property interests will
not have a material adverse impact on the business of the Partnership as
described in this Prospectus. See "Business and Properties -- Transfer of the
Partnership Assets."
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Holders of Common Units Have Not Been Represented by Counsel
The holders of Common Units have not been represented by counsel in
connection with this offering, including the preparation of the Partnership
Agreement or the other agreements referred to herein or in establishing the
terms of this offering.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Conflicts of interest could arise as a result of the relationships between
the Partnership, on the one hand, and the General Partner and its affiliates, on
the other. The directors and officers of the General Partner have fiduciary
duties to manage the General Partner in a manner beneficial to its stockholders.
At the same time, the General Partner has fiduciary duties to manage the
Partnership in a manner beneficial to the Partnership and the Unitholders. The
duties of the General Partner, as general partner, to the Partnership and the
Unitholders, therefore, may come into conflict with the duties of management of
the General Partner to its stockholders.
Such conflicts of interest might arise in the following situations, among
others:
(i) Decisions of the General Partner with respect to the amount and
timing of cash expenditures, borrowings, issuances of additional Units and
reserves in any quarter will affect whether or the extent to which there is
sufficient Available Cash from Operating Surplus to meet the Minimum
Quarterly Distribution and Target Distribution Levels on all Units in a
given quarter. In addition, actions by the General Partner may have the
effect of enabling the General Partner to receive distributions on the
Subordinated Units or Incentive Distributions or hastening the expiration
of the Subordination Period or the conversion of Subordinated Units into
Common Units.
(ii) The Partnership will not, at least initially, have any employees
and will rely solely on employees of Heritage and its affiliates.
(iii) Under the terms of the Partnership Agreement, the Partnership
will reimburse the General Partner and its affiliates for costs incurred in
managing and operating the Partnership, including costs incurred in
rendering corporate staff and support services to the Partnership.
(iv) Whenever possible, the General Partner intends to limit the
Partnership's liability under contractual arrangements to all or particular
assets of the Partnership, with the other party thereto to have no recourse
against the General Partner or its assets.
(v) Any agreements between the Partnership and the General Partner and
its affiliates will not grant to the holders of Common Units, separate and
apart from the Partnership, the right to enforce the obligations of the
General Partner and such affiliates in favor of the Partnership. Therefore,
the General Partner, in its capacity as the general partner of the
Partnership, will be primarily responsible for enforcing such obligations.
(vi) Under the terms of the Partnership Agreement, the General Partner
is not restricted from causing the Partnership to pay the General Partner
or its affiliates for any services rendered on terms that are fair and
reasonable to the Partnership or entering into additional contractual
arrangements with any of such entities on behalf of the Partnership.
Neither the Partnership Agreement nor any of the other agreements,
contracts and arrangements between the Partnership, on the one hand, and
the General Partner and its affiliates, on the other, are or will be the
result of arm's-length negotiations.
(vii) The General Partner may exercise its right to call for and
purchase Units as provided in the Partnership Agreement or assign such
right to one of its affiliates or to the Partnership.
(viii) The Partnership Agreement does not restrict the ability of
affiliates of the General Partner to engage in any activities, except for
the retail sale of propane to end users in the continental United States.
The General Partner's affiliates may compete with the Partnership in other
propane-related activities, such as trading, transportation, storage and
wholesale distribution of propane. Furthermore, the Partner-
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ship Agreement provides that the General Partner and its affiliates have no
obligation to present business opportunities to the Partnership.
Unless provided for otherwise in the partnership agreement, Delaware law
generally requires a general partner of a Delaware limited partnership to adhere
to fiduciary duty standards under which it owes its limited partners the highest
duties of good faith, fairness and loyalty and which generally prohibit such
general partner from taking any action or engaging in any transaction as to
which it has a conflict of interest. The Partnership Agreement expressly permits
the General Partner to resolve conflicts of interest between itself or its
affiliates, on the one hand, and the Partnership or the Unitholders, on the
other, and to consider, in resolving such conflicts of interest, the interests
of other parties in addition to the interests of the Unitholders. In addition,
the Partnership Agreement provides that a purchaser of Common Units is deemed to
have consented to certain conflicts of interest and actions of the General
Partner and its affiliates that might otherwise be prohibited, including those
described in clauses (i)-(viii) above, and to have agreed that such conflicts of
interest and actions do not constitute a breach by the General Partner of any
duty stated or implied by law or equity. The General Partner will not be in
breach of its obligations under the Partnership Agreement or its duties to the
Partnership or the Unitholders if the resolution of such conflict is fair and
reasonable to the Partnership. The latitude given in the Partnership Agreement
to the General Partner in resolving conflicts of interest may significantly
limit the ability of a Unitholder to challenge what might otherwise be a breach
of fiduciary duty. The General Partner believes, however, that such latitude is
necessary and appropriate to enable it to serve as the general partner of the
Partnership without undue risk of liability.
The Partnership Agreement expressly limits the liability of the General
Partner by providing that the General Partner, its affiliates and its officers
and directors will not be liable for monetary damages to the Partnership, the
limited partners or assignees for errors of judgment or for any acts or
omissions if the General Partner and such other persons acted in good faith. In
addition, the Partnership is required to indemnify the General Partner, its
affiliates and their respective officers, directors, employees and agents to the
fullest extent permitted by law, against liabilities, costs and expenses
incurred by the General Partner or such other persons, if the General Partner or
such persons acted in good faith and in a manner they reasonably believed to be
in, or not opposed to, the best interests of the Partnership and, with respect
to any criminal proceedings, had no reasonable cause to believe the conduct was
unlawful.
The provisions of Delaware law that allow the common law fiduciary duties
of a general partner to be modified by a partnership agreement have not been
tested in a court of law, and the General Partner has not obtained an opinion of
counsel covering the provisions set forth in the Partnership Agreement that
purport to waive or restrict the fiduciary duties of the General Partner that
would be in effect under common law were it not for the Partnership Agreement.
See "Conflicts of Interest and Fiduciary Responsibilities -- Conflicts of
Interest."
TAX RISKS
For a general discussion of the expected federal income tax consequences of
owning and disposing of Common Units, see "Tax Considerations."
Tax Treatment is Dependent on Partnership Status
The availability to a Common Unitholder of the federal income tax benefits
of an investment in the Partnership depends, in large part, on the
classification of the Partnership as a partnership for federal income tax
purposes. Assuming the accuracy of certain factual matters as to which the
General Partner and the Partnership have made representations, Counsel is of the
opinion that, under current law, the Partnership will be classified as a
partnership for federal income tax purposes. No ruling from the IRS as to
classification has been or is expected to be requested. Instead, the Partnership
intends to rely on such opinion of Counsel (which is not binding on the IRS).
One of the representations of the Partnership on which the opinion of Counsel is
based is that at least 90% of the Partnership's gross income for each taxable
year in the future will be "qualifying income." Whether the Partnership will
continue to be classified as a partnership in part depends,
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therefore, on the Partnership's ability to meet this qualifying income test in
the future. See "Tax Considerations -- Partnership Status."
If the Partnership were classified as an association taxable as a
corporation for federal income tax purposes, the Partnership would pay tax on
its income at corporate rates (currently at a 35% federal rate), distributions
would generally be taxed again to the Unitholders as corporate distributions,
and no income, gains, losses or deductions would flow through to the
Unitholders. Because a tax would be imposed upon the Partnership as an entity,
the cash available for distribution to the holders of Common Units would be
substantially reduced. Treatment of the Partnership as an association taxable as
a corporation or otherwise as a taxable entity would result in a material
reduction in the anticipated cash flow and after-tax return to the holders of
Common Units and thus would likely result in a substantial reduction in the
value of the Common Units. See "Tax Considerations -- Partnership Status."
There can be no assurance that the law will not be changed so as to cause
the Partnership to be treated as an association taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level taxation.
The Partnership Agreement provides that, if a law is enacted or existing law is
modified or interpreted in a manner that subjects the Partnership to taxation as
a corporation or otherwise subjects the Partnership to entity-level taxation for
federal, state or local income tax purposes, certain provisions of the
Partnership Agreement will be subject to change, including a decrease in the
Minimum Quarterly Distribution and the Target Distribution Levels to reflect the
impact of such law on the Partnership. See "Cash Distribution
Policy -- Adjustment of Minimum Quarterly Distribution and Target Distribution
Levels."
No IRS Ruling With Respect to Tax Consequences
No ruling has been requested from the IRS with respect to classification of
the Partnership as a partnership for federal income tax purposes, whether the
Partnership's propane operations generate "qualifying income" under sec.7704 of
the Code or any other matter affecting the Partnership. Accordingly, the IRS may
adopt positions that differ from Counsel's conclusions expressed herein. It may
be necessary to resort to administrative or court proceedings in an effort to
sustain some or all of Counsel's conclusions, and some or all of such
conclusions ultimately may not be sustained. Any such contest with the IRS may
materially and adversely impact the market for the Common Units and the prices
at which Common Units trade. In addition, the costs of any contest with the IRS
will be borne directly or indirectly by some or all of the Unitholders and the
General Partner.
Tax Liability Exceeding Cash Distributions
A Unitholder will be required to pay federal income taxes and, in certain
cases, state and local income taxes on his allocable share of the Partnership's
income, whether or not he receives cash distributions from the Partnership.
There is no assurance that a Unitholder will receive cash distributions equal to
his allocable share of taxable income from the Partnership or even the tax
liability to him resulting from that income. Further, a holder of Common Units
may incur a tax liability, in excess of the amount of cash received, upon the
sale of his Common Units. See "Tax Considerations -- State, Local and Other Tax
Considerations" for a discussion of certain state and local tax considerations
that may be relevant to prospective Unitholders.
Ownership of Common Units by Tax-Exempt Organizations and Certain Other
Investors
Investment in Common Units by certain tax-exempt entities, regulated
investment companies, foreign persons and non-calendar year taxpayers, raises
issues unique to such persons. For example, virtually all of the taxable income
derived by most organizations exempt from federal income tax (including
individual retirement accounts (IRAs) and other retirement plans) from the
ownership of a Common Unit will be unrelated business taxable income and thus
will be taxable to such a Unitholder. See "Tax Considerations -- Uniformity of
Units -- Tax-Exempt Organizations and Certain Other Investors."
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Partners Limited to Calendar-Year Taxpayers
Investment in Common Units is limited to calendar-year taxpayers. Any
holder of a Common Unit who is not a calendar year taxpayer will not be admitted
to the Partnership as a partner, will not be entitled to receive distributions
or federal income tax allocations of the Partnership and may only transfer such
interests to a purchaser or other transferee.
Deductibility of Losses
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), losses generated by the Partnership,
if any, will only be available to offset future income generated by the
Partnership and cannot be used to offset income from other activities, including
passive activities or investments. Passive losses which are not deductible
because they exceed the Unitholder's income generated by the Partnership may be
deducted in full when the Unitholder disposes of his entire investment in the
Partnership in a fully taxable transaction to an unrelated party. Net passive
income from the Partnership may be offset by unused Partnership losses carried
over from prior years, but not by losses from other passive activities,
including losses from other publicly traded partnerships. See "Tax
Considerations -- Tax Consequences of Unit Ownership -- Limitations on
Deductibility of Partnership Losses."
Tax Shelter Registration; Potential IRS Audit
The Partnership will be registered with the IRS as a "tax shelter." No
assurance can be given that the Partnership will not be audited by the IRS or
that tax adjustments will not be made. The rights of a Unitholder owning less
than a 1% profits interest in the Partnership to participate in the income tax
audit process are very limited. Further, any adjustments in the Partnership's
tax returns will lead to adjustments in the Unitholders' tax returns and may
lead to audits of Unitholders' tax returns and adjustments of items unrelated to
the Partnership. Each Unitholder would bear the cost of any expenses incurred in
connection with an examination of such Unitholder's personal tax return.
Proposed Changes in Federal Income Tax Laws
Legislation passed by Congress in November 1995 (the "1995 Proposed
Legislation") would have altered the tax reporting procedures and the deficiency
collection procedures applicable to large partnerships such as the Partnership
(generally defined as electing partnerships with more than 100 partners) and
would make certain additional changes to the treatment of large partnerships.
That legislation was generally intended to simplify the administration of the
tax reporting and deficiency collection rules governing large partnerships.
On March 19, 1996, certain tax legislation known as the Revenue
Reconciliation Act of 1996, was presented to Congress that would impact the
taxation of certain financial products, including partnership interests. One
proposal would treat a taxpayer as having sold an "appreciated" partnership
interest (one in which gain would be recognized if such interest were sold) if
the taxpayer or related persons enters into one or more positions with respect
to the same or substantially identical property which, for some period,
substantially eliminates both the risk of loss and opportunity for gain on the
appreciated financial position (including selling "short against the box"
transactions).
The 1995 Proposed Legislation was vetoed by President Clinton on December
6, 1995. As of the date of this Prospectus, it is not possible to predict
whether any of the changes which were set forth in the 1995 Proposed
Legislation, the Revenue Reconciliation Act of 1996 or any other changes in the
federal income tax laws that would impact the Partnership and the holders of
Common Units will ultimately be enacted, or if enacted, what form they will
take, what the effective dates will be and what, if any, transition rules will
be provided.
Disposition of Common Units
A Unitholder who sells Common Units will recognize gain or loss equal to
the difference between the amount realized (including his share of Partnership
nonrecourse liabilities) and his adjusted tax basis in such
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Common Units. Thus, prior Partnership distributions in excess of cumulative net
taxable income in respect of a Common Unit which decreased a Unitholder's tax
basis in such Common Unit will, in effect, become taxable income if the Common
Unit is sold at a price greater than the Unitholder's tax basis in such Common
Units, even if the price is less than his original cost. A portion of the amount
realized (whether or not representing gain) may be ordinary income.
Uniformity of Common Units and Nonconforming Depreciation Conventions
Because the Partnership cannot match transferors and transferees of Common
Units, uniformity of the economic and tax characteristics of the Common Units to
a purchaser of Common Units must be maintained. To maintain uniformity and for
other reasons, the Partnership will adopt certain depreciation and amortization
conventions that do not conform with all aspects of certain proposed and final
Treasury Regulations. A successful challenge of those conventions by the IRS
could adversely affect the amount of tax benefits available to a purchaser of
Common Units and could have a negative impact on the value of the Common Units.
See "Tax Considerations -- Uniformity of Units."
State, Local and Other Tax Considerations
In addition to federal income taxes, Unitholders will be subject to other
taxes, such as state and local taxes, unincorporated business taxes, and estate,
inheritance or intangible taxes that may be imposed by the various jurisdictions
in which the Partnership does business or owns property. A Unitholder may be
required to file state and local income tax returns and pay state and local
income taxes in some or all of the various jurisdictions in which the
Partnership does business or owns property and may be subject to penalties for
failure to comply with those requirements. It is the responsibility of each
Unitholder to file all United States federal, state and local tax returns that
may be required of such Unitholder. Counsel has not rendered an opinion on the
state or local tax consequences of an investment in the Partnership. See "Tax
Considerations -- State, Local and Other Tax Considerations."
Partnership Tax Information and Audits
The Partnership will furnish each holder of Common Units with a Schedule
K-1 that sets forth his allocable share of income, gains, losses and deductions.
In preparing these schedules, the Partnership will use various accounting and
reporting conventions and adopt various depreciation and amortization methods.
There is no assurance that these schedules will yield a result that conforms to
statutory or regulatory requirements or to administrative pronouncements of the
IRS. Further, the Partnership's tax return may be audited, and any such audit
could result in an audit of a partner's individual tax return as well as
increased liabilities for taxes because of adjustments resulting from the audit.
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THE TRANSACTIONS
FORMATION OF PARTNERSHIP
Concurrently with the closing of this offering, Heritage will issue $120
million principal amount of the Notes to certain institutional investors
pursuant to the Note Placement. Heritage will then convey substantially all of
its assets (other than approximately $80.1 million in proceeds from issuance of
the Notes) to the Operating Partnership in exchange for a general partner
interest and all the limited partner interests in the Operating Partnership and
the assumption by the Operating Partnership of substantially all of the
liabilities of Heritage (including the Notes, but excluding certain notes
payable pursuant to non-compete agreements entered into in connection with prior
acquisitions). Immediately thereafter, Heritage will convey all of its limited
partner interests in the Operating Partnership to the Partnership in exchange
for 3,702,943 Subordinated Units and a general partner interest in the
Partnership (including the right to receive Incentive Distributions). As a
result, the General Partner will own an aggregate 47.0% limited partner interest
(approximately 43.6% if the Underwriters' over-allotment option is exercised in
full), and an aggregate 2% general partner interest, in the Partnership and the
Operating Partnership.
EQUITY REPURCHASE
In contemplation of this offering, Heritage entered into the Letter
Agreement dated as of April 24, 1996 and, prior to consummation of this
offering, expects to execute definitive agreements with Prudential and GTCR,
who, together with certain members of management, own the entire equity interest
in Heritage immediately prior to consummation of this offering. Pursuant to the
terms of the Letter Agreement and assuming an initial public offering price of
$20.50 per Common Unit, Heritage and certain members of management will effect
the Equity Repurchase as follows: (i) Heritage and certain members of management
will repurchase from Prudential, 441,419 shares of Heritage's Class B Common
Stock and 3,182 shares of Heritage's Redeemable Preferred Stock, representing
Prudential's entire equity interest in Heritage, for an aggregate of $19.3
million in cash and $2.0 million of notes to be issued by such members of
management, (ii) Heritage and certain members of management will purchase from
GTCR, 1,014,060 shares of Heritage's Class A Common Stock and 5,927 shares of
Heritage's Redeemable Preferred Stock, representing GTCR's entire equity
interest in Heritage, for an aggregate of $42.8 million in cash and $3.0 million
of notes to be issued by such members of management, and (iii) Heritage will
purchase from certain members of management an aggregate of 377.55 shares of
Heritage's Redeemable Preferred Stock, for an aggregate of $0.5 million.
Heritage will use a portion of the net proceeds from the issuance of the Notes
to finance its repurchases pursuant to the Equity Repurchase. As a result of the
Equity Repurchase, all of the outstanding capital stock of Heritage will be
owned by certain members of management. See "Certain Relationships and Related
Transactions."
DEBT REFINANCING
The Partnership will contribute the net proceeds from the sale of Common
Units offered hereby (estimated to be approximately $74.8 million after
deduction of underwriting discounts and commissions and expenses associated with
this offering) to the Operating Partnership. The Operating Partnership will
apply such net proceeds, together with approximately $39.9 million in cash
contributed by Heritage from the proceeds of the Note Placement, $2.4 million
borrowed under the Acquisition Facility and $4.0 million borrowed under the
Working Capital Facility, to finance the repayment of all of the indebtedness of
Heritage assumed by the Operating Partnership. Such indebtedness consists of (i)
$66.4 million principal amount of borrowings outstanding under the Existing
Acquisition Facility, (ii) $3.0 million principal amount of borrowings under the
Existing Revolving Credit Facility, (iii) $4.0 million principal amount of
borrowings outstanding under the Existing Working Capital Facility, (iv) an
aggregate of $30.0 million principal amount of the Senior Reset Notes and (v)
$12.6 million principal amount of the Subordinated Reset Notes, in each case
plus accrued interest on such indebtedness. Pursuant to the terms of the Letter
Agreement, Heritage will repay the Prudential indebtedness described above and
will also pay a prepayment penalty in the amount of $3.5 million in connection
with the early retirement of the Senior Reset Notes and the Subordinated Reset
Notes.
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In October and November of 1995, Heritage completed three acquisitions for
an aggregate purchase price of approximately $5.5 million. As a result of its
use of available funds to finance these acquisitions, Heritage was unable to pay
a $5.0 million scheduled principal repayment in November 1995 under its Existing
Revolving Credit Facility (of which Heritage has since repaid $2.0 million) as
well as a $4.2 million scheduled principal repayment in February 1996 under the
Existing Acquisition Facility, resulting in a default under the terms of each
such facility and its other indebtedness to Prudential. Heritage proceeded with
such acquisitions while negotiating a new bank credit facility, the proceeds of
which were to be used to repay a substantial portion of the indebtedness
outstanding to Prudential and thereby cure any payment defaults thereunder. In
December 1995, as a result of its decision to pursue this offering, Heritage
decided to abandon such refinancing efforts. In connection with these
transactions and in accordance with the requirements of the Letter Agreement,
Prudential has entered into a standstill agreement with Heritage pursuant to
which Prudential has agreed to waive existing and certain prospective defaults
and forebear from exercising any remedies under the Prudential indebtedness for
a period of six months from the date of execution of the Letter Agreement.
BANK CREDIT FACILITY
Concurrently with the closing of this offering, the Operating Partnership
will enter into the Bank Credit Facility, which will include both the Working
Capital Facility, a revolving credit facility providing for up to $15.0 million
of borrowings to be used for working capital and other general partnership
purposes, and the Acquisition Facility, a revolving credit facility providing
for up to $35.0 million of borrowings to be used for acquisitions and
improvements. The Partnership anticipates borrowing approximately $6.4 million
under the Bank Credit Facility concurrently with the closing of this offering in
order to repay any amounts borrowed in connection with its recent and pending
acquisitions as well as any other bank debt outstanding at the time of the
closing of this offering.
For additional information regarding the terms of the Bank Credit Facility
and the Notes, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Description of Indebtedness."
USE OF PROCEEDS
The net proceeds to the Partnership from the sale of Common Units offered
hereby are estimated to be approximately $74.8 million (assuming an initial
public offering price of $20.50 per Common Unit), after deducting estimated
underwriting discounts and commissions and expenses of this offering.
The Partnership will contribute such net proceeds to the Operating
Partnership. The Operating Partnership will apply these proceeds, together with
approximately $39.9 million in cash contributed by Heritage from the proceeds of
the Note Placement, to the repayment of all outstanding indebtedness to
Prudential. See "The Transactions -- Debt Refinancing."
The Existing Revolving Credit Facility matured on November 20, 1995.
Interest on the Existing Revolving Credit Facility is payable monthly at the one
month London InterBank Offered Rate (LIBOR) plus a spread (such interest rate
was 8.8% at February 29, 1996). The Existing Acquisition Facility matures on
November 20, 1997. Interest on the Existing Acquisition Facility is payable
quarterly at the three-month LIBOR rate then in effect plus a spread (such
interest rate was 8.8% at February 29, 1996). Of the $30.0 million of Senior
Reset Notes outstanding, $10.0 million mature on November 20, 1997 and $20.0
million mature on November 20, 2000. Interest thereon is payable quarterly and
was 11.6% at February 29, 1996. The Subordinated Reset Notes mature on November
20, 2000, with interest payable quarterly at 13.6% and 11.8%.
If the Underwriters' over-allotment option is exercised in full, the
estimated additional net proceeds to the Partnership will be approximately $11.5
million. The Partnership will retain the net proceeds from any exercise of the
Underwriters' over-allotment option for general partnership purposes, including
repayment of outstanding indebtedness.
43
<PAGE> 46
CAPITALIZATION
The following table sets forth (i) the capitalization of Heritage at
February 29, 1996, (ii) the pro forma adjustments required to give effect to
certain acquisitions and the Transactions, including the sale of Common Units
offered hereby (assuming an initial public offering price of $20.50 per Common
Unit), the placement of $120 million in Notes and the application of the net
proceeds therefrom as described in "Use of Proceeds," and (iii) the pro forma
capitalization of the Partnership at such date after giving effect thereto. The
table should be read in conjunction with the historical and pro forma
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FEBRUARY 29, 1996
----------------------------------------------
HERITAGE PRO FORMA PARTNERSHIP
HISTORICAL ADJUSTMENTS(A) PRO FORMA
---------- -------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Working capital borrowings:
Existing working capital facilities.................. $ 10,075(b) $ (10,075) $ --
Working Capital Facility............................. -- 8,756 8,756
-------- --------- --------
Total working capital borrowings............. $ 10,075(b) $ (1,319) $ 8,756
======== ========= ========
Current maturities of long-term debt:
Existing Acquisition Facility........................ $ 66,400(c) $ (66,400) $ --
Senior Reset Notes................................... 30,000(c) (30,000) --
Subordinated Reset Notes............................. 12,600(c) (12,600) --
Due under Non-Compete Agreements..................... 2,143 (2,143) --
Other................................................ 148 -- 148
-------- --------- --------
Total current portion........................ 111,291 (111,143) 148
-------- --------- --------
Long-term debt:
Due under Non-Compete Agreements..................... 5,582 (5,582) --
Acquisition Facility................................. -- 7,775 7,775
Other................................................ 719 -- 719
Notes................................................ -- 120,000 120,000
-------- --------- --------
Total long-term debt......................... 6,301 122,193 128,494
-------- --------- --------
Redeemable Preferred Stock............................. 12,645(d) (12,645) --
-------- --------- --------
Stockholders' equity (deficit):
Class A common stock................................. 13 (13) --
Class B common stock................................. 3 (3) --
Additional paid-in capital........................... 4,279 (4,279) --
Accumulated deficit.................................. (7,121) 7,121 --
-------- --------- --------
Total stockholders' deficit.................. (2,826) 2,826 --
-------- --------- --------
Partners' capital:
Common Unitholders................................... -- 15,076 15,076
Subordinated Unitholders............................. -- 13,893 13,893
General Partner................................... -- 591 591
-------- --------- --------
Total partners' capital...................... -- 29,560 29,560
-------- --------- --------
Total capitalization.............................. $ 127,411 $ 30,791 $158,202
======== ========= ========
</TABLE>
- ---------------
(a) See Notes to Pro Forma Consolidated Financial Statements of the Partnership
for a discussion of the pro forma adjustments.
(b) Heritage is in default on $5.0 million of such indebtedness to Prudential as
a result of its failure to pay certain scheduled principal repayments. See
"The Transactions -- Debt Refinancing."
(c) Heritage is in default on all such indebtedness to Prudential as a result of
its failure to pay certain scheduled principal payments. As a result, all
amounts due are classified as current liabilities. See "The
Transactions -- Debt Refinancing."
(d) Includes accrued dividends of $3.2 million.
44
<PAGE> 47
DILUTION
On a pro forma basis as of February 29, 1996, after giving effect to the
Transactions, the net negative tangible book value per Common Unit was $1.66
(assuming an initial public offering price of $20.50 per Unit). Purchasers of
Common Units in this offering will experience substantial and immediate dilution
in net tangible book value per Common Unit for financial accounting purposes, as
illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per Common Unit..................... $20.50
Net tangible book value per Unit before the offering(a)(b)................ $(23.02)
Increase in net tangible book value per Unit attributable to new
investors............................................................... 21.36
-------
Less: Pro forma net tangible book value per Common Unit after the
offering(b)(c).......................................................... (1.66)
------
Immediate dilution in net tangible book value per Common Unit to new
investors............................................................... $22.16
======
</TABLE>
- ---------------
(a) Determined by dividing the number of Units (3,702,943 Subordinated Units and
the 2% General Partner interest having a dilutive effect equivalent to
157,713 Units) to be issued to the General Partner for its contribution of
assets and liabilities to the Partnership into the net tangible book value
of the contributed assets and liabilities.
(b) The net negative tangible book value does not include intangible assets
contributed to the Partnership with a book value of $42,641,000 ($5.41 per
Unit).
(c) Determined by dividing the total number of Units (4,025,000 Common Units,
3,702,943 Subordinated Units and the 2% General Partner interest having a
dilutive effect equivalent to 157,713 Units) to be outstanding after the
offering made hereby, into the pro forma net tangible book value of the
Partnership, after giving effect to the application of the net proceeds of
this offering.
The following table sets forth the number of Units issued by the
Partnership and the total consideration contributed by the General Partner in
respect of its Units and by purchasers of Common Units in this offering upon the
consummation of the Transactions:
<TABLE>
<CAPTION>
UNITS ACQUIRED TOTAL BOOK
-------------------- VALUE OF
NUMBER PERCENT CONSIDERATION
--------- ------- -----------
<S> <C> <C> <C>
General Partner...................................... 3,860,656(a) 49.0% $ 5,938,000(b)
New Investors........................................ 4,025,000 51.0 82,512,500
--------- ----- -----------
Total...................................... 7,885,656 100.0% $88,450,500
========= ===== ===========
</TABLE>
- ---------------
(a) Upon the consummation of the Transactions, the General Partner will own
3,702,943 Subordinated Units and a 2% general partner interest in the
Partnership having a dilutive effect equivalent to 157,713 Units.
(b) Total consideration for the General Partner represents the book value of the
net assets and liabilities contributed by the General Partner at February
29, 1996. The assets and liabilities contributed by the General Partner to
the Partnership will be recorded at historical cost rather than fair value
by the Partnership in accordance with generally accepted accounting
principles. Such assets contributed by the General Partner include
$42,641,000 of intangible assets, which consist of goodwill ($21.4
million), non-compete agreements with the owners of certain acquired
businesses ($14 million), customer lists ($5 million) and deferred
financing costs and other miscellaneous intangible assets ($2.2 million).
45
<PAGE> 48
CASH DISTRIBUTION POLICY
GENERAL
The Partnership will distribute to its partners, on a quarterly basis, all
of its Available Cash in the manner described herein. Available Cash is defined
in the Glossary and generally means, with respect to any quarter of the
Partnership, all cash on hand at the end of such quarter less the amount of cash
reserves that is necessary or appropriate in the reasonable discretion of the
General Partner to (i) provide for the proper conduct of the Partnership's
business, (ii) comply with applicable law or any Partnership debt instrument or
other agreement, or (iii) provide funds for distributions to Unitholders and the
General Partner in respect of any one or more of the next four quarters.
Cash distributions will be characterized as distributions from either
Operating Surplus or Capital Surplus. This distinction affects the amounts
distributed to Unitholders relative to the General Partner, and under certain
circumstances it determines whether holders of Subordinated Units receive any
distributions. See "-- Quarterly Distributions of Available Cash."
Operating Surplus is defined in the Glossary and refers generally to (i)
the cash balance of the Partnership on the date the Partnership commences
operations, plus $10 million, plus all cash receipts of the Partnership from its
operations, less (ii) all Partnership operating expenses, debt service payments
(including reserves therefor but not including payments required in connection
with the sale of assets or any refinancing with the proceeds of new indebtedness
or an equity offering), maintenance capital expenditures and reserves
established for future Partnership operations.
Capital Surplus is also defined in the Glossary and will generally be
generated only by borrowings (other than for working capital purposes), sales of
debt and equity securities and sales or other dispositions of assets for cash
(other than inventory, accounts receivable and other assets all as disposed of
in the ordinary course of business).
To avoid the difficulty of trying to determine whether Available Cash
distributed by the Partnership is from Operating Surplus or from Capital
Surplus, all Available Cash distributed by the Partnership from any source will
be treated as distributed from Operating Surplus until the sum of all Available
Cash distributed since the commencement of the Partnership equals the Operating
Surplus with respect to the quarter prior to such distribution. Any Available
Cash in excess of such amount (irrespective of its source) will be deemed to be
from Capital Surplus and distributed accordingly.
If Available Cash from Capital Surplus is distributed in respect of each
Common Unit in an aggregate amount per Common Unit equal to the initial public
offering price of the Common Units (the "Initial Unit Price"), plus any Common
Unit Arrearages, the distinction between Operating Surplus and Capital Surplus
will cease, and all distributions of Available Cash will be treated as if they
were from Operating Surplus. The Partnership does not anticipate that there will
be significant distributions from Capital Surplus.
The Subordinated Units are a separate class of interests in the
Partnership, and the rights of holders of such interests to participate in
distributions to partners differ from the rights of the holders of Common Units.
For any given quarter, any Available Cash will be distributed to the General
Partner and to the holders of Common Units, and may also be distributed to the
holders of Subordinated Units depending upon the amount of Available Cash for
the quarter, the amount of Common Unit Arrearages, if any, whether the
Subordination Period has ended and other factors discussed below.
The Incentive Distributions represent the right to receive an increasing
percentage of quarterly distributions of Available Cash from Operating Surplus
after the Target Distribution Levels have been achieved. The Target Distribution
Levels are based on the amounts of Available Cash from Operating Surplus
distributed in excess of the payments made with respect to the Minimum Quarterly
Distribution and Common Unit Arrearages.
46
<PAGE> 49
Subject to the limitations described under "The Partnership
Agreement -- Issuance of Additional Securities," the Partnership has the
authority to issue additional Common Units or other equity securities of the
Partnership for such consideration and on such terms and conditions as are
established by the General Partner in its sole discretion and without the
approval of the Unitholders. It is possible that the Partnership will fund
acquisitions of other propane businesses through the issuance of additional
Common Units or other equity securities of the Partnership. Holders of any
additional Common Units issued by the Partnership will be entitled to share
equally with the then-existing holders of Common Units in distributions of
Available Cash by the Partnership. In addition, the issuance of additional
Partnership Interests may dilute the value of the interests of the then-existing
holders of Common Units in the net assets of the Partnership. The General
Partner will be required to make an additional capital contribution to the
Partnership or the Operating Partnership (other than in connection with the
exercise of the over-allotment option) in connection with the issuance of
additional Partnership Interests.
The discussion in the sections below indicate the percentages of cash
distributions required to be made to the General Partner and the holders of
Common Units and the circumstances under which holders of Subordinated Units are
entitled to cash distributions and the amounts thereof. For a discussion of
Available Cash from Operating Surplus available for distributions with respect
to the Common Units on a pro forma basis, see "-- Cash Available for
Distribution."
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Partnership will make distributions to its partners with respect to
each quarter of the Partnership prior to its liquidation in an amount equal to
100% of its Available Cash for such quarter. The Partnership expects to make
distributions of all Available Cash within approximately 45 days after the end
of each quarter, commencing with the quarter ending August 31, 1996, to holders
of record on the applicable record date. The Minimum Quarterly Distribution and
the Target Distribution Levels for the period from the closing of this offering
through August 31, 1996 will be adjusted downward based on the actual length of
such period. The Minimum Quarterly Distribution and the Target Distribution
Levels are also subject to certain other adjustments as described below under
"-- Distributions from Capital Surplus" and "-- Adjustment of Minimum Quarterly
Distribution and Target Distribution Levels."
With respect to each quarter during the Subordination Period, to the extent
there is sufficient Available Cash, the holders of Common Units will have the
right to receive the Minimum Quarterly Distribution, plus any Common Unit
Arrearages, prior to any distribution of Available Cash to the holders of
Subordinated Units. This subordination feature will enhance the Partnership's
ability to distribute the Minimum Quarterly Distribution on the Common Units
during the Subordination Period. There is no guarantee, however, that the
Minimum Quarterly Distribution will be made on the Common Units. Upon expiration
of the Subordination Period, all Subordinated Units will be converted on a
one-for-one basis into Common Units and will participate pro rata with all other
Common Units in future distributions of Available Cash. Under certain
circumstances, up to 1,851,472 Subordinated Units may convert into Common Units
prior to the expiration of the Subordination Period. Common Units will not
accrue arrearages with respect to distributions for any quarter after the
Subordination Period and Subordinated Units will not accrue any arrearages with
respect to distributions for any quarter.
DISTRIBUTIONS FROM OPERATING SURPLUS DURING SUBORDINATION PERIOD
The Subordination Period will generally extend from the closing of this
offering until the first day of any quarter beginning after May 31, 2001 in
respect of which (i) distributions of Available Cash from Operating Surplus on
the Common Units and the Subordinated Units with respect to each of the three
consecutive four-quarter periods immediately preceding such date equaled or
exceeded the sum of the Minimum Quarterly Distribution on all of the outstanding
Common Units and Subordinated Units during such periods, (ii) the Adjusted
Operating Surplus generated during each of the three consecutive four-quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the outstanding Common Units and
Subordinated Units and the related distribution on the general partner interest
in the Partnership during such periods, and (iii) there are no outstanding
Common Unit Arrearages.
47
<PAGE> 50
Prior to the end of the Subordination Period, a portion of the Subordinated
Units will convert into Common Units on a one-for-one basis on the first day
after the record date established for the distribution in respect of any quarter
ending on or after (a) May 31, 1999 (with respect to 925,736 Subordinated Units)
and (b) May 31, 2000 (with respect to 925,736 Subordinated Units) in respect of
which (i) distributions of Available Cash from Operating Surplus on the Common
Units and the Subordinated Units with respect to each of the three consecutive
four-quarter periods immediately preceding such date equaled or exceeded the sum
of the Minimum Quarterly Distribution on all of the outstanding Common Units and
Subordinated Units during such periods, (ii) the Adjusted Operating Surplus
generated during each of the two consecutive four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units and
the related distribution on the general partner interest in the Partnership
during such periods, and (iii) there are no outstanding Common Unit Arrearages;
provided, however, that the early conversion of the second tranche of
Subordinated Units may not occur until at least one year following the early
conversion of the first tranche of Subordinated Units.
Upon expiration of the Subordination Period, all remaining Subordinated
Units will convert into Common Units on a one-for-one basis and will thereafter
participate, pro rata, with the other Common Units in distributions of Available
Cash. In addition, if the General Partner is removed as general partner of the
Partnership under circumstances where Cause does not exist and Units held by the
General Partner and its affiliates are not voted in favor of such removal (i)
the Subordination Period will end and all outstanding Subordinated Units will
immediately convert into Common Units on a one-for-one basis, (ii) any existing
Common Unit Arrearages will be extinguished and (iii) the General Partner will
have the right to convert its general partner interest (and the right to receive
Incentive Distributions) into Common Units or to receive cash in exchange for
such interests.
"Adjusted Operating Surplus" for any period generally means Operating
Surplus generated during such period, less (a) any net increase in working
capital borrowings during such period and (b) any net reduction in cash reserves
for Operating Expenditures during such period not relating to an Operating
Expenditure made during such period; and plus (x) any net decrease in working
capital borrowings during such period and (y) any net increase in cash reserves
for Operating Expenditures during such period required by any debt instrument
for the repayment of principal, interest or premium. Operating Surplus generated
during a period is equal to the difference between (i) the Operating Surplus
determined at the end of such period and (ii) the Operating Surplus determined
at the beginning of such period.
Distributions by the Partnership of Available Cash from Operating Surplus
with respect to any quarter during the Subordination Period will be made in the
following manner:
first, 98% to the Common Unitholders, pro rata, and 2% to the General
Partner, until there has been distributed in respect of each outstanding
Common Unit an amount equal to the Minimum Quarterly Distribution for such
quarter;
second, 98% to the Common Unitholders, pro rata, and 2% to the General
Partner, until there has been distributed in respect of each outstanding
Common Unit an amount equal to any Common Unit Arrearages accrued and
unpaid with respect to any prior quarters during the Subordination Period;
third, 98% to the Subordinated Unitholders, pro rata, and 2% to the
General Partner, until there has been distributed in respect of each
outstanding Subordinated Unit an amount equal to the Minimum Quarterly
Distribution for such quarter; and
thereafter, in the manner described in "-- Incentive
Distributions -- Hypothetical Annualized Yield" below.
The above references to the 2% of Available Cash from Operating Surplus
distributed to the General Partner are references to the amount of the General
Partner's percentage interest in distributions from the Partnership and the
Operating Partnership on a combined basis (exclusive of its interest as holder
of the Subordinated Units). The General Partner will own a 1% general partner
interest in the Partnership and a 1.0101% general partner interest in the
Operating Partnership. Other references in this Prospectus to the
48
<PAGE> 51
General Partner's 2% interest or to distributions of 2% of Available Cash are
also references to the amount of the General Partner's combined percentage
interest in the Partnership and the Operating Partnership (exclusive of its
interest as holder of the Subordinated Units). With respect to any Common Unit,
the term "Common Unit Arrearages" refers to the amount by which the Minimum
Quarterly Distribution in any quarter during the Subordination Period exceeds
the distribution of Available Cash from Operating Surplus actually made for such
quarter on a Common Unit issued in this offering, cumulative for such quarter
and all prior quarters during the Subordination Period. Common Unit Arrearages
will not accrue interest.
DISTRIBUTIONS FROM OPERATING SURPLUS AFTER SUBORDINATION PERIOD
Distributions by the Partnership of Available Cash from Operating Surplus
with respect to any quarter after the Subordination Period will be made in the
following manner:
first, 98% to all Unitholders, pro rata, and 2% to the General
Partner, until there has been distributed in respect of each Unit an amount
equal to the Minimum Quarterly Distribution for such quarter; and
thereafter, in the manner described in "-- Incentive
Distributions--Hypothetical Annualized Yield" below.
INCENTIVE DISTRIBUTIONS -- HYPOTHETICAL ANNUALIZED YIELD
For any quarter for which Available Cash from Operating Surplus is
distributed to the Common and Subordinated Unitholders in an amount equal to the
Minimum Quarterly Distribution on all Units and to the Common Unitholders in an
amount equal to any unpaid Common Unit Arrearages, then any additional Available
Cash from Operating Surplus in respect of such quarter will be distributed among
the Unitholders and the General Partner in the following manner:
first, 98% to all Unitholders, pro rata, and 2% to the General
Partner, until the Unitholders have received (in addition to any
distributions to Common Unitholders to eliminate Common Unit Arrearages) a
total of $0.550 for such quarter in respect of each outstanding Unit (the
"First Target Distribution");
second, 85% to all Unitholders, pro rata, and 15% to the General
Partner, until the Unitholders have received (in addition to any
distributions to Common Unitholders to eliminate Common Unit Arrearages) a
total of $0.635 for such quarter in respect of each outstanding Unit (the
"Second Target Distribution");
third, 75% to all Unitholders, pro rata, and 25% to the General
Partner, until the Unitholders have received (in addition to any
distributions to Common Unitholders to eliminate Common Unit Arrearages) a
total of $0.825 for such quarter in respect of each outstanding Unit (the
"Third Target Distribution"); and
thereafter, 50% to all Unitholders, pro rata, and 50% to the General
Partner.
The distributions to the General Partner set forth above (other than in its
capacity as holder of the Subordinated Units) that are in excess of its
aggregate 2% general partner interest represent the Incentive Distributions.
The following table illustrates the percentage allocation of the additional
Available Cash from Operating Surplus between the Unitholders and the General
Partner up to the various Target Distribution Levels and a hypothetical
annualized percentage yield to be realized by a Unitholder at each different
level of allocation between the Unitholders and the General Partner. For
purposes of the following table, the annualized percentage yield is calculated
on a pretax basis assuming that (i) the Common Unit was purchased at an amount
equal to the assumed initial public offering price of $20.50 per Common Unit and
(ii) the Partnership distributed each quarter during the first year following
the investment the amount set forth under the column "Total Quarterly
Distribution Target Amount." The calculations are also based on the assumption
that the quarterly distribution amounts shown do not include any Common Unit
Arrearages. The amounts set forth
49
<PAGE> 52
under "Marginal Percentage Interest in Distributions" are the percentage
interests of the General Partner and the Unitholders in any Available Cash from
Operating Surplus distributed up to and including the corresponding amount in
the column "Total Quarterly Distribution Target Amount," until Available Cash
distributed reaches the next Target Distribution Level, if any. The percentage
interests shown for the Unitholders and the General Partner for the Minimum
Quarterly Distribution are also applicable to quarterly distribution amounts
that are less than the Minimum Quarterly Distribution.
<TABLE>
<CAPTION>
MARGINAL PERCENTAGE
TOTAL INTEREST IN
QUARTERLY DISTRIBUTIONS
DISTRIBUTION HYPOTHETICAL -----------------------
TARGET ANNUALIZED GENERAL
AMOUNT YIELD UNITHOLDERS PARTNER
------------ ------------ ----------- -------
<S> <C> <C> <C> <C>
Minimum Quarterly
Distribution................. $0.500 9.756% 98% 2%
First Target Distribution...... $0.550 10.732% 98% 2%
Second Target Distribution..... $0.635 12.390% 85% 15%
Third Target Distribution...... $0.825 16.098% 75% 25%
Thereafter..................... above $0.825 above 16.098% 50% 50%
</TABLE>
DISTRIBUTIONS FROM CAPITAL SURPLUS
Distributions by the Partnership of Available Cash from Capital Surplus
will be made in the following manner:
first, 98% to all Unitholders, pro rata, and 2% to the General
Partner, until the Partnership has distributed, in respect of each
outstanding Unit issued in this offering, Available Cash from Capital
Surplus in an aggregate amount per Unit equal to the Initial Unit Price;
second, 98% to the holders of Common Units, pro rata, and 2% to the
General Partner, until the Partnership has distributed, in respect of each
outstanding Common Unit, Available Cash from Capital Surplus in an
aggregate amount equal to any unpaid Common Unit Arrearages with respect to
such Common Unit; and
thereafter, all distributions of Available Cash from Capital Surplus
will be distributed as if they were from Operating Surplus.
As a distribution of Available Cash from Capital Surplus is made, it is
treated as if it were a repayment of the Initial Unit Price. To reflect such
repayment, the Minimum Quarterly Distribution and the Target Distribution Levels
will be adjusted downward by multiplying each such amount by a fraction, the
numerator of which is the Unrecovered Capital of the Common Units (as defined in
the Glossary) immediately after giving effect to such repayment and the
denominator of which is the Unrecovered Capital of the Common Units immediately
prior to such repayment. This adjustment to the Minimum Quarterly Distribution
may accelerate the termination of the Subordination Period, thereby increasing
the likelihood of the conversion of Subordinated Units into Common Units.
When "payback" of the Initial Unit Price has occurred, i.e., when the
Unrecovered Capital of the Common Units is zero (and any accrued Common Unit
Arrearages have been paid), then in effect the Minimum Quarterly Distribution
and each of the Target Distribution Levels will have been reduced to zero for
subsequent quarters. Thereafter, all distributions of Available Cash from all
sources will be treated as if they were from Operating Surplus. Because the
Minimum Quarterly Distribution and the Target Distribution Levels will have been
reduced to zero, the General Partner will be entitled thereafter to receive 50%
of all distributions of Available Cash.
Distributions of Available Cash from Capital Surplus will not reduce the
Minimum Quarterly Distribution or Target Distribution Levels for the quarter
with respect to which they are distributed.
50
<PAGE> 53
ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
In addition to reductions of the Minimum Quarterly Distribution and Target
Distribution Levels made upon a distribution of Available Cash from Capital
Surplus, the Minimum Quarterly Distribution, the Target Distribution Levels, the
Unrecovered Capital, the number of additional Common Units issuable during the
Subordination Period without a Unitholder vote, the number of Common Units
issuable upon conversion of the Subordinated Units and other amounts calculated
on a per Unit basis will be proportionately adjusted upward or downward, as
appropriate, in the event of any combination or subdivision of Common Units
(whether effected by a distribution payable in Common Units or otherwise), but
not by reason of the issuance of additional Common Units for cash or property.
For example, in the event of a two-for-one split of the Common Units (assuming
no prior adjustments), the Minimum Quarterly Distribution, each of the Target
Distribution Levels and the Unrecovered Capital of the Common Units would each
be reduced to 50% of its initial level.
The Minimum Quarterly Distribution and the Target Distribution Levels may
also be adjusted if legislation is enacted or if existing law is modified or
interpreted by the relevant governmental authority in a manner that causes the
Partnership to become taxable as a corporation or otherwise subjects the
Partnership to taxation as an entity for federal, state or local income tax
purposes. In such event, the Minimum Quarterly Distribution and the Target
Distribution Levels would be reduced to an amount equal to the product of (i)
the Minimum Quarterly Distribution and each of the Target Distribution Levels,
respectively, multiplied by (ii) one minus the sum of (x) the maximum effective
federal income tax rate to which the Partnership is then subject as an entity
plus (y) any increase that results from such legislation in the effective
overall state and local income tax rate to which the Partnership is subject as
an entity for the taxable year in which such event occurs (after taking into
account the benefit of any deduction allowable for federal income tax purposes
with respect to the payment of state and local income taxes). For example,
assuming the Partnership was not previously subject to state and local income
tax, if the Partnership were to become taxable as an entity for federal income
tax purposes and the Partnership became subject to a maximum marginal federal,
and effective state and local, income tax rate of 38%, then the Minimum
Quarterly Distribution and the Target Distribution Levels would each be reduced
to 62% of the amount thereof immediately prior to such adjustment.
DISTRIBUTIONS OF CASH UPON LIQUIDATION
Following the commencement of the dissolution and liquidation of the
Partnership, assets will be sold or otherwise disposed of from time to time and
the partners' capital account balances will be adjusted to reflect any resulting
gain or loss. The proceeds of such liquidation will, first, be applied to the
payment of creditors of the Partnership in the order of priority provided in the
Partnership Agreement and by law and, thereafter, be distributed to the
Unitholders and the General Partner in accordance with their respective capital
account balances as so adjusted.
Partners are entitled to liquidating distributions in accordance with
capital account balances. The allocations of gains and losses upon liquidation
are intended, to the extent possible, to entitle the holders of outstanding
Common Units to a preference over the holders of outstanding Subordinated Units
upon the liquidation of the Partnership, to the extent required to permit Common
Unitholders to receive their Unrecovered Capital plus any unpaid Common Unit
Arrearages. Thus, net losses recognized upon liquidation of the Partnership will
be allocated to the holders of the Subordinated Units to the extent of their
capital account balances before any loss is allocated to the holders of the
Common Units, and net gains recognized upon liquidation will be allocated first
to restore negative balances in the capital account of the General Partner and
any Unitholders and then to the Common Unitholders until their capital account
balances equal their Unrecovered Capital plus unpaid Common Unit Arrearages.
However, no assurance can be given that there will be sufficient gain upon
liquidation of the Partnership to enable the holders of Common Units to fully
recover all of such amounts, even though there may be cash available for
distribution to the holders of Subordinated Units.
The manner of such adjustment is as provided in the Partnership Agreement,
the form of which is included as Appendix A to this Prospectus. If the
liquidation of the Partnership occurs before the end of the
51
<PAGE> 54
Subordination Period, any net gain (or unrealized gain attributable to assets
distributed in kind) will be allocated to the partners as follows:
first, to the General Partner and the holders of Units having negative
balances in their capital accounts to the extent of and in proportion to
such negative balances;
second, 98% to the holders of Common Units, pro rata, and 2% to the
General Partner, until the capital account for each Common Unit is equal to
the sum of (i) the Unrecovered Capital in respect of such Common Unit, (ii)
the amount of the Minimum Quarterly Distribution for the quarter during
which liquidation of the Partnership occurs and (iii) any unpaid Common
Unit Arrearages in respect of such Common Unit;
third, 98% to the holders of Subordinated Units, pro rata, and 2% to
the General Partner, until the capital account for each Subordinated Unit
is equal to the sum of (i) the Unrecovered Capital in respect of such
Subordinated Unit and (ii) the amount of the Minimum Quarterly Distribution
for the quarter during which the liquidation of the Partnership occurs;
fourth, 98% to all Unitholders, pro rata, and 2% to the General
Partner, until there has been allocated under this clause fourth an amount
per Unit equal to (a) the sum of the excess of the First Target
Distribution per Unit over the Minimum Quarterly Distribution per Unit for
each quarter of the Partnership's existence, less (b) the cumulative amount
per Unit of any distributions of Available Cash from Operating Surplus in
excess of the Minimum Quarterly Distribution per Unit that were distributed
98% to the Unitholders, pro rata, and 2% to the General Partner for each
quarter of the Partnership's existence;
fifth, 85% to the Unitholders, pro rata, and 15% to the General
Partner, until there has been allocated under this clause fifth an amount
per Unit equal to (a) the sum of the excess of the Second Target
Distribution per Unit over the First Target Distribution per Unit for each
quarter of the Partnership's existence, less (b) the cumulative amount per
Unit of any distributions of Available Cash from Operating Surplus in
excess of the First Target Distribution per Unit that were distributed 85%
to the Unitholders, pro rata, and 15% to the General Partner for each
quarter of the Partnership's existence;
sixth, 75% to all Unitholders, pro rata, and 25% to the General
Partner, until there has been allocated under this clause sixth an amount
per Unit equal to (a) the sum of the excess of the Third Target
Distribution per Unit over the Second Target Distribution per Unit for each
quarter of the Partnership's existence, less (b) the cumulative amount per
Unit of any distributions of Available Cash from Operating Surplus in
excess of the Second Target Distribution per Unit that were distributed 75%
to the Unitholders, pro rata, and 25% to the General Partner for each
quarter of the Partnership's existence; and
thereafter, 50% to all Unitholders, pro rata, and 50% to the General
Partner.
If the liquidation occurs after the Subordination Period, the distinction
between Common Units and Subordinated Units will disappear, so that clauses (ii)
and (iii) of paragraph second above and all of paragraph third above will no
longer be applicable.
Upon liquidation of the Partnership, any loss will generally be allocated
to the General Partner and the Unitholders as follows:
first, 98% to holders of Subordinated Units in proportion to the
positive balances in their respective capital accounts and 2% to the
General Partner until the capital accounts of the holders of the
Subordinated Units have been reduced to zero;
second, 98% to the holders of Common Units, in proportion to the
positive balances in their respective capital accounts and 2% to the
General Partner until the capital accounts of the Common Unitholders have
been reduced to zero; and
thereafter, to the General Partner.
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<PAGE> 55
If the liquidation occurs after the Subordination Period, the distinction
between Common Units and Subordinated Units will disappear, so that all of
paragraph first above will no longer be applicable.
Interim adjustments to capital accounts will be made at the time the
Partnership issues additional interests in the Partnership or makes
distributions of property. Such adjustments will be based on the fair market
value of the interests or the property distributed and any gain or loss
resulting therefrom will be allocated to the Unitholders and the General Partner
in the same manner as gain or loss is allocated upon liquidation. In the event
that positive interim adjustments are made to the capital accounts, any
subsequent negative adjustments to the capital accounts resulting from the
issuance of additional interests in the Partnership, distributions of property
by the Partnership, or upon liquidation of the Partnership, will be allocated in
a manner which results, to the extent possible, in the capital account balance
of the General Partner equaling the amount which would have been the General
Partner's capital account if no prior positive adjustments to the capital
accounts had been made.
CASH AVAILABLE FOR DISTRIBUTION
Based on the amount of working capital that the Partnership is expected to
have at the time it commences operations and the availability of the Working
Capital Facility, the Partnership believes that, if its assumptions about
operating conditions prove correct, the Partnership should have sufficient
Available Cash from Operating Surplus to enable the Partnership to distribute
the Minimum Quarterly Distribution on the outstanding Common Units and
Subordinated Units, and the related distribution on the aggregate 2% general
partner interest, with respect to each of its quarters at least through the
quarter ending August 31, 1997, although no assurance can be given respecting
such distributions or any future distributions. The Partnership's belief is
based on a number of assumptions, including the assumptions that normal weather
conditions will prevail in the Partnership's operating areas (although during
each of its past six fiscal years, weather affecting its operations, measured on
a Partnership-wide basis, has been warmer than normal), that the Partnership's
operating margins and internal growth rates will remain constant (although the
retail propane industry is mature and overall demand for propane is expected to
experience limited growth for the foreseeable future), that the Partnership will
consummate certain acquisitions and that market and overall economic conditions
will not change substantially. Although the Partnership believes its assumptions
are within a range of reasonableness, whether the assumptions are realized is
not, in a number of cases, within the control of the Partnership and cannot be
predicted with any degree of certainty. For example, in any particular year or
even series of years, weather may deviate substantially from normal. Therefore,
certain of the Partnership's assumptions may prove to be inaccurate. As a
result, the actual Available Cash from Operating Surplus generated by the
Partnership could deviate substantially from that currently expected. See "Risk
Factors." In addition, the terms of the Partnership's indebtedness under certain
circumstances will restrict the ability of the Partnership to distribute cash to
Unitholders. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Description of Indebtedness." Accordingly, no
assurance can be given that distributions of the Minimum Quarterly Distribution
or any other amounts will be made. The Partnership does not intend to update the
expression of belief set forth above.
The amount of Available Cash from Operating Surplus needed to distribute
the Minimum Quarterly Distribution for four quarters on the Common Units and
Subordinated Units to be outstanding immediately after this offering and on the
General Partner's aggregate 2% general partner interest is approximately $15.8
million ($8.1 million for the Common Units, $7.4 million for the Subordinated
Units and $0.3 million for the aggregate 2% general partner interest). If the
Underwriters' over-allotment option is exercised in full, such amounts would be
$9.3 million for the Common Units, $7.4 million for the Subordinated Units and
$0.3 million for the aggregate 2% general partner interest, or an aggregate of
approximately $17.0 million.
The amounts of pro forma Available Cash from Operating Surplus generated
during fiscal 1995 (which excludes any working capital borrowings) was $10.0
million. As a result, the Partnership believes that it would have been able to
distribute the full Minimum Quarterly Distribution on all Common Units during
fiscal 1995 but would not have been able to distribute the full Minimum
Quarterly Distribution on all Subordinated Units. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations." For the
calculation of pro forma Available Cash from Operating Surplus, see Appendix D.
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<PAGE> 56
Based on the Partnership's pro forma results of operations for the six
months ended February 29, 1996, limited data about operations in March and April
1996 and the Partnership's estimated results of operations for the remainder of
fiscal 1996, the Partnership believes that if it had commenced operations on
September 1, 1995 (assuming the Transactions and the acquisitions reflected in
the Partnership's pro forma financial statements included herein had been
consummated on such date), it would generate during fiscal 1996 Available Cash
from Operating Surplus of approximately $11.0 million. As a result, the
Partnership believes that, based on such assumptions, it would be able to
distribute the full Minimum Quarterly Distribution on all Common Units for
fiscal 1996, but would not be able to distribute the full Minimum Quarterly
Distribution on all Subordinated Units. The Partnership's belief is based on the
assumptions about weather, margins, internal growth rates, a planned acquisition
and market and economic conditions described above as they apply to the final
two quarters of fiscal 1996. There can be no assurance that such assumptions
will be realized, and therefore, the Partnership's actual results of operations
for the final six months of 1996 may deviate substantially from those estimated.
The Partnership does not intend to update its expression of belief about fiscal
1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The amounts of pro forma Available Cash from Operating Surplus for fiscal
1995 set forth above were derived from the pro forma financial statements of the
Partnership in the manner set forth in Appendix D hereto. The pro forma
adjustments are based upon currently available information and certain estimates
and assumptions. The pro forma financial statements do not purport to present
the results of operations of the Partnership had the Transactions and the
acquisitions referred to therein actually been completed as of the dates
indicated. Furthermore, the pro forma financial statements are based on accrual
accounting concepts while Operating Surplus is defined in the Partnership
Agreement on a cash accounting basis. As a consequence, the amounts of pro forma
Available Cash from Operating Surplus shown above should only be viewed as a
general indication of the amounts of Available Cash from Operating Surplus that
may in fact have been generated by the Partnership had it been formed in earlier
periods. Operating Surplus is defined in the Glossary and generally refers to
(i) the cash balance of the Partnership on the date the Partnership commences
operations, plus $10 million, plus all cash receipts of the Partnership from its
operations, less (ii) all Partnership operating expenses, debt service payments
(including reserves therefor but not including payments required in connection
with the sale of assets or any refinancing with the proceeds of new indebtedness
or any equity offering), maintenance capital expenditures and reserves
established for future Partnership operations. For a more complete definition of
Operating Surplus, see the Glossary.
The Partnership will be required to establish reserves for the future
payment of principal and interest on the Notes and the indebtedness under the
Bank Credit Facility. There are other provisions in such agreements which will,
under certain circumstances, restrict the Partnership's ability to make
distributions to its partners. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Description of Indebtedness."
54
<PAGE> 57
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table sets forth, for the periods and as of the dates
indicated, selected historical financial and operating data for Heritage and
selected pro forma financial and operating data for the Partnership after giving
effect to certain acquisitions and the Transactions. The historical balance
sheet data for the two years ended August 31, 1995 and 1994, respectively, and
the statement of operations and operating data for the three years ended August
31, 1995, 1994 and 1993, respectively, have been derived from the financial
statements appearing elsewhere herein which have been audited by Arthur Andersen
LLP, independent auditors. The selected historical balance sheet data for the
year ended August 31, 1993 has been derived from Heritage's audited financial
statements not included herein. The selected historical balance sheet data for
the two years ended August 31, 1992 and 1991, respectively, and statement of
operations and operating data for the two years ended August 31, 1992 and 1991,
respectively, have been derived from Heritage's unaudited financial statements,
not included herein. The historical financial and operating data for the
six-month periods ended February 28, 1995 and February 29, 1996 are derived from
the unaudited financial statements included elsewhere herein, and, in the
opinion of management of Heritage, contain all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of results of
operations and financial condition. However, the propane business is seasonal in
nature, with its peak activity during the winter. Therefore, the results for the
interim periods are not indicative of the results that can be expected for a
full year. The selected historical financial and operating data of Heritage
should be read in conjunction with the financial statements of Heritage included
elsewhere in this Prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" also included elsewhere in this
Prospectus. The Partnership's summary pro forma financial and operating data are
derived from the Unaudited Pro Forma Consolidated Financial Statements of the
Partnership included elsewhere in this Prospectus, and should be read in
conjunction therewith. The amounts in the table below, except per Unit data, are
in thousands.
<TABLE>
<CAPTION>
PARTNERSHIP HERITAGE HISTORICAL PARTNERSHIP
PRO -------------------------- PRO FORMA(A)
HERITAGE HISTORICAL FORMA(A) SIX MONTHS ------------
------------------------------------------------ ---------- ENDED SIX MONTHS
YEAR ENDED AUGUST 31, YEAR ENDED -------------------------- ENDED
------------------------------------------------ AUGUST 31, FEBRUARY 28, FEBRUARY 29, FEBRUARY 29,
1991 1992 1993 1994 1995 1995 1995 1996 1996
-------- -------- -------- -------- -------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Revenues............... $ 75,761 $ 97,209 $102,291 $103,971 $131,508 $142,410 $ 76,880 $103,053 $106,266
Gross profit(b)........ 30,545 41,014 45,596 48,601 55,841 61,520 34,234 39,242 40,591
Depreciation and
amortization......... 6,376 7,411 8,288 8,711 8,896 9,771 4,505 4,596 4,795
Operating income
(loss)............... 3,910 7,383 8,669 9,905 12,675 14,008 12,136 13,878 14,160
Interest expense....... 7,936 8,759 8,786 8,761 12,201 11,339 5,658 6,779 5,921
Provision (benefit) for
income taxes......... 2,164 (440) 117 668 666 50 2,869 3,541 25
Net income (loss)...... (7,392) (1,084) (721) 315 (211) 2,878 4,179 4,218 8,894
Net income (loss) per
Unit(c).............. 0.37 1.13
BALANCE SHEET DATA (END
OF PERIOD)
Current assets......... $ 17,366 $ 16,572 $ 16,924 $ 17,134 $ 21,293 $ 26,686 $ 34,161 $ 32,837
Total assets........... 115,800 116,123 121,557 118,330 163,423 164,605 180,776 189,171
Current liabilities.... 16,520 17,344 18,734 19,646 35,825 23,532 142,347(d) 31,117
Long-term debt......... 82,013 82,354 86,532 81,373 103,412 110,446 6,301(d) 128,494
Redeemable preferred
stock................ 10,020 10,555 11,167 11,737 12,337 12,032 12,645
Stockholders' equity
(deficiency)......... (4,133) (5,153) (6,232) (6,301) (6,975) (2,293) (2,826)
Partner's
capital - General
Partner.............. 591
Partners'
capital - Limited
Partners............. 28,969
OPERATING DATA
EBITDA(e).............. $ 10,286 $ 14,794 $ 16,957 $ 18,616 $ 21,672 $ 24,334 $ 16,770 $ 18,972 $ 19,494
Capital
expenditures(f):
Maintenance and
growth............. 2,891 3,625 3,802 6,194 8,634 4,745 4,990
Acquisition.......... 30,322 3,648 8,149 -- 27,879 24,486 4,150
Retail propane gallons
sold................. 48,249 63,177 73,442 79,669 98,318 59,729 73,602
</TABLE>
- ---------------
(a) For a description of the assumptions and adjustments used in preparing the
Partnership's pro forma financial and operating data, see Unaudited Pro
Forma Consolidated Financial Statements included elsewhere in this
Prospectus.
(b) Gross profit is computed by reducing total revenues by the direct cost of
the products sold.
(c) Net income per Unit is computed by dividing the limited partners' interest
in net income by the limited partners' weighted average number of Units
outstanding.
(d) Heritage is in default on all indebtedness to Prudential as a result of its
failure to pay certain scheduled principal payments. As a result, all
amounts due are classified as current liabilities. All such indebtedness
will be repaid at the closing of this offering. See "The
Transactions -- Debt Refinancing."
(e) EBITDA is defined as operating income plus depreciation and amortization
(including the EBITDA of investees). EBITDA should not be considered as an
alternative to net income (as an indicator of operating performance) or as
an alternative to cash flow (as a measure of liquidity or ability to service
debt obligations), but provides additional information for evaluating the
Partnership's ability to make the Minimum Quarterly Distribution.
(f) The Partnership's capital expenditures fall generally into three categories:
(i) maintenance capital expenditures, which include expenditures for repairs
that extend the life of the assets and replacement of property, plant and
equipment, (ii) growth capital expenditures, which include expenditures for
purchase of new propane tanks and other equipment to facilitate expansion of
the Partnership's retail customer base and (iii) acquisition capital
expenditures, which include expenditures related to the acquisition of
retail propane operations and the portion of the purchase price allocated to
intangibles associated with such acquired businesses.
55
<PAGE> 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the historical financial condition and results
of operations of Heritage and the Partnership should be read in conjunction with
the Selected Historical and Pro Forma Financial and Operating Data and notes
thereto and the historical and pro forma financial statements and notes thereto
included elsewhere in this Prospectus.
GENERAL
Since its formation in 1989, Heritage has grown primarily through
acquisitions of retail propane operations and, to a lesser extent, through
internal growth. Through August 31, 1995, Heritage completed 25 acquisitions for
an aggregate purchase price of approximately $146 million. Heritage more than
doubled its volumes of propane sold to retail customers from 48.2 million
gallons for the fiscal year ended August 31, 1991 to 98.3 million gallons for
the fiscal year ended August 31, 1995. For the six months ended February 29,
1996, Heritage sold approximately 73.6 million gallons to retail customers,
compared to 59.7 million gallons for the same period in fiscal 1995. Since
August 31, 1995, Heritage has acquired four propane companies and has signed a
letter of intent to acquire one additional company. The Partnership believes
that these five companies generate combined annual retail sales of approximately
10 million gallons.
The retail propane distribution business is largely seasonal due to
propane's use as a heating source in residential and commercial buildings.
Historically, approximately 66% of the Partnership's retail propane volume and
in excess of 80% of the Partnership's EBITDA is attributable to sales during the
six-month peak heating season of October through March. Consequently, sales and
operating profits are concentrated in the Partnership's first and second fiscal
quarters. Cash flows from operations, however, are greatest during the second
and third fiscal quarters when customers pay for propane purchased during the
six-month peak heating season.
Because a substantial portion of the Partnership's propane is used in the
heating-sensitive residential and commercial markets, the temperatures realized
in the Partnership's areas of operations, particularly during the six-month peak
heating season, have a significant effect on the financial performance of the
Partnership. In any given area, sustained warmer-than-normal temperatures will
tend to result in reduced propane use, while sustained colder-than-normal
temperatures will tend to result in greater propane use. Information on normal
temperatures is therefore used by the Partnership in understanding how
historical results of operations are affected by temperatures that are colder or
warmer than normal and in preparing forecasts of future operations, which are
based on the assumption that normal weather will prevail in each of the
Partnership's regions.
In determining actual and normal weather for a given period of time, the
Partnership uses the actual number of Degree Days for such period and the
average number of Degree Days for such period over the 30 years from 1961-1990,
in each case as such information is published by the National Weather Service
Climate Analysis Center, for each measuring point in each of the Partnership's
regions. The Partnership then calculates weighted averages, based on retail
volumes attributable to each measuring point, of actual and normal Degree Days
within each region. Based on this information, the Partnership calculates a
ratio of actual Degree Days to normal Degree Days first on a regional basis and
then on a Partnership-wide basis.
Although the Partnership believes that comparing temperature information
for a given period of time to "normal" temperatures is helpful for an
understanding of the Partnership's results of operations, care should be
exercised when comparing variations in weather to changes in total revenues or
operating profit given the manner in which weather is measured, the fact that a
portion of the Partnership's total revenues are not heating-sensitive and other
factors affecting results of operations, such as price, competition, product
supply costs and customer mix. Furthermore, actual weather conditions in the
Partnership's districts can vary substantially from historical experience. For
example, the Partnership believes that during each of its six fiscal years of
existence, weather affecting its operations, measured on a partnership-wide
basis, has been warmer than normal. In addition, variations in weather in one or
more regions in which the Partnership operates can
56
<PAGE> 59
significantly affect the total volume of propane sold by the Partnership and the
margins realized on such sales and, consequently, the Partnership's results of
operations.
Most of the propane purchased by the Partnership is purchased pursuant to
one-year agreements subject to annual renewal, with the remainder purchased on
the spot market. The Partnership generally does not enter into any fixed price
take-or-pay contracts. The Partnership purchases propane from a wide variety of
sources, with no one provider supplying more than 15% of its needs in fiscal
year 1995.
The retail propane business is a "margin-based" business in which gross
profits depend on the excess of sales prices over propane supply costs. The
market price of propane is often subject to volatile changes as a result of
supply or other market conditions over which the Partnership will have no
control. In general, product supply contracts permit suppliers to charge posted
prices (plus transportation costs) at the time of delivery or the current prices
established at major delivery points. Since rapid increases in the wholesale
cost of propane may not be immediately passed on to retail customers, such
increases could reduce the Partnership's gross profits. The Partnership
generally attempts to minimize inventory risk by purchasing propane on a
short-term basis. However, the Partnership has on occasion purchased, and may in
the future purchase, large volumes of propane during periods of low demand,
which generally occur during the summer months, at the then current market
price, for storage both at its service centers and in the Partnership's major
storage facilities for future resale. Except for such occasional opportunistic
buying, the Partnership has not engaged in any significant hedging activities
with respect to its propane supply requirements, although it may do so in the
future. Since 1991, the Partnership has generally been successful in maintaining
retail gross margins on an annual basis, as evidenced by the fact that average
annual retail gross margins, measured on a cents-per-gallon basis, have varied
by less than 4% from the five-year average.
Gross profit margins vary according to customer mix. For example, sales to
residential customers generate higher margins than sales to certain other
customer groups, such as agricultural customers. Wholesale margins are
substantially lower than retail margins. In addition, gross profit margins vary
by geographical region. Accordingly, a change in customer or geographic mix can
affect gross profit without necessarily affecting total revenues.
ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS
The following discussion reflects for the periods indicated the results of
operations and operating data for the Partnership. Most of the increases in the
line items discussed below result from the acquisitions made by the Partnership
during the periods discussed. In fiscal 1993 and 1995, the Partnership
consummated five and seven acquisitions for total purchase prices of $10.6
million and $39.6 million, respectively. In the first six months of fiscal year
1996, the Partnership consummated three acquisitions for $5.5 million. These
acquisitions affect the comparability of prior period financial matters. Amounts
discussed below reflect 100% of the results of operations of M-P Oils
Partnership, a general partnership in which the Partnership owns a 60% interest.
Because M-P Oils Partnership is primarily engaged in lower-margin wholesale
propane distribution, its contribution to the Partnership's net income and
EBITDA is not significant.
Six Months Ended February 29, 1996 Compared to Six Months Ended February 28,
1995
Volume. During the six months ended February 29, 1996, the Partnership sold
73.6 million retail gallons, an increase of 13.9 million retail gallons or 23.2%
from the 59.7 million retail gallons sold in the six months ended February 28,
1995. This increase was primarily attributable both to the effect of
acquisitions made after September 1, 1994 and to weather that was significantly
colder than in the prior period and, to a lesser extent, internal growth. The
weather in the Partnership's areas of operations during the six-month period
ended February 29, 1996 was approximately 4% warmer than normal for such areas.
The weather in the Partnership's areas of operations during the six-month period
ended February 28, 1995 was approximately 13% warmer than normal for such areas.
This percentage was affected by significantly warmer-than-normal weather in the
Partnership's southern Florida region where variations in weather do not have as
significant an impact on the Partnership's operations as variations in other
regions.
57
<PAGE> 60
The Partnership also sold approximately 73.7 million wholesale gallons in
the six months ended February 29, 1996, a 57.5% increase from the 46.8 million
wholesale gallons sold in the prior six-month period. The increase in wholesale
volumes was largely attributable to M-P Oils Partnership's increased wholesale
volumes in Canada.
Revenues. Total revenues increased $26.2 million or 34.0% to $103.1 million
for the six months ended February 29, 1996, as compared to $76.9 million for the
prior six-month period. Domestic revenues increased $14.9 million or 22.4% to
$81.3 million for the six months ended February 29, 1996, as compared to $66.4
million for the six-month period ended February 28, 1995. Foreign revenues
increased $11.3 million or 107.6% to $21.8 million for the six months ended
February 29, 1996, as compared to $10.5 million for the six-month period ended
February 28, 1995. Approximately $12.9 million of the total increase was
attributable to low-margin wholesale revenues that may or may not recur in
future periods, with the balance attributable to volumes associated with
acquisitions, more favorable weather conditions and internal growth.
Cost of Sales. Total cost of sales increased $21.2 million or 49.6% to
$63.8 million for the six months ended February 29, 1996, as compared to $42.6
million for the six months ended February 28, 1995. Domestic cost of sales
increased $10.2 million or 31.4% to $42.7 million for the six months ended
February 29, 1996, as compared to $32.5 million for the six-month period ended
February 28, 1995. Foreign cost of sales increased $11.0 million or 108.9% to
$21.1 million for the six months ended February 29, 1996, as compared to $10.1
million for the six-month period ended February 28, 1995. Approximately $12.6
million of the total increase was attributable to higher wholesale volumes, with
the balance attributable to higher propane costs and increased volumes sold.
Gross Profit. Gross profit increased $5.0 million or 14.6% to $39.2 million
for the six months ended February 29, 1996, as compared to $34.2 million for the
prior six-month period. This increase is attributable to an increase in volumes
sold, partially offset by a margin decline of $1.9 million caused primarily by
pricing pressures exerted by one of the Partnership's larger competitors. While
the Partnership believes that such pricing pressures have since subsided, no
assurance can be given that, in the future, the Partnership's competitors will
not from time to time adopt aggressive pricing programs which create pressure on
the Partnership's margins.
Operating Expenses. Operating expenses increased $3.3 million or 20.2% to
$19.4 million in the six months ended February 29, 1996, as compared to $16.1
million in the six months ended February 28, 1995. The majority of this increase
was attributable to acquisition-related volumes.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses were $1.4 million for the six months ended February 29, 1996,
a small decrease from $1.5 million for the prior six-month period, as the
Partnership was able to integrate acquisitions without increasing SG&A expenses.
Depreciation and Amortization. Depreciation and amortization increased
approximately $0.1 million or 2.0% to $4.6 million in the six months ended
February 29, 1996, as compared to $4.5 million for the six months ended February
28, 1995. This increase was the result of additional depreciation associated
with acquisitions partially offset by a reduction in amortization associated
with the expiration of certain non-compete agreements that generated significant
expense in the six months ended February 28, 1995.
Operating Income. Operating income increased $1.8 million or 14.9% to $13.9
million for the six months ended February 29, 1996 compared to $12.1 million for
the prior six-month period. This increase was due primarily to increased
volumes, partially offset by a decline in margins. Domestic operating income
increased $1.6 million or 13.4% to $13.5 million for the six months ended
February 29, 1996, as compared to $11.9 million for the six-month period ended
February 28, 1995. Foreign operating income increased $0.2 million or 100.0% to
$0.4 million for the six months ended February 29, 1996, as compared to $0.2
million for the six-month period ended February 28, 1995.
Net Income. The Partnership's net income was approximately $4.2 million for
each of the six months ended February 29, 1996 and February 28, 1995 as higher
operating income was offset by an increase in interest expense associated with
additional borrowings for acquisitions and a higher provision for taxes.
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EBITDA. EBITDA increased $2.2 million or 13.1% to $19.0 million in the six
months ended February 29, 1996, as compared to $16.8 million for the prior
six-month period. This increase was due to an increase in volumes attributable
to acquisitions, favorable weather conditions and internal growth, partially
offset by a decrease in gross margins. EBITDA should not be considered as an
alternative to net income (as an indicator of operating performance) or as an
alternative to cash flow (as a measure of liquidity or ability to service debt
obligations) but provides additional information for evaluating the
Partnership's ability to distribute the Minimum Quarterly Distribution.
Fiscal Year 1995 Compared to Fiscal Year 1994
Volume. During fiscal 1995, the Partnership sold 98.3 million retail
gallons, an increase of 18.6 million retail gallons or 23.4% from the 79.7
million gallons sold in fiscal 1994. Substantially all of this increase resulted
from seven acquisitions completed after August 31, 1994, with internal growth
also contributing modestly to the increase. Partly offsetting the effects of
acquisitions and internal growth was weather that was warmer than in the prior
year. The weather in the Partnership's areas of operations during fiscal 1995
was approximately 13% warmer than normal for such areas. This percentage was
affected by significantly warmer-than-normal weather in the Partnership's
southern Florida region where variations in weather do not have as significant
an impact on the Partnership's operations as variations in other regions. The
weather in the Partnership's areas of operations during fiscal 1994 was
approximately 6% warmer than normal.
The Partnership also sold 93.4 million wholesale gallons in fiscal 1995, a
29.9% increase from the 71.9 million wholesale gallons sold in fiscal 1994. The
increase in wholesale volumes was attributable to increased sales in the United
States, increased sales by M-P Oils Partnership in Canada, and a short-term
agreement for sales in Mexico.
Revenues. Total revenues increased $27.5 million or 26.5% to $131.5 million
for fiscal 1995, as compared to $104.0 million for fiscal 1994. Approximately
$11.9 million of the increase was attributable to low-margin wholesale revenues
that may or may not recur in future periods with the balance attributable to
volumes associated with acquisitions and internal growth, partially offset by
reduced revenues in the Partnership's continuing operations due to warmer
weather. Domestic revenues increased $21.9 million or 24.6% to $110.8 million
for fiscal 1995, as compared to $88.9 million for fiscal 1994. Foreign revenues
increased $5.6 million or 37.1% to $20.7 million for fiscal 1995, as compared to
$15.1 million for fiscal 1994.
Cost of Sales. Total cost of sales increased $20.3 million or 36.7% to
$75.7 million for fiscal 1995, as compared to $55.4 million for fiscal 1994.
Approximately $11.4 million of the increase in cost of sales was attributable to
higher wholesale volumes. The actual cost of propane on a per gallon basis,
excluding acquisitions, increased approximately $0.03 per gallon in fiscal 1995,
accounting for $4.6 million of the total increase. The remaining increase in
cost of sales was attributable to higher retail volumes resulting from
acquisitions as well as higher wholesale volumes. Domestic cost of sales
increased $14.8 million or 36.1% to $55.8 million for fiscal 1995, as compared
to $41.0 million for fiscal 1994. Foreign cost of sales increased $5.5 million
or 38.2% to $19.9 million for fiscal 1995, as compared to $14.4 million for
fiscal 1994.
Gross Profit. Gross profit increased $7.2 million or 14.9% to $55.8 million
for fiscal 1995, as compared to $48.6 million for fiscal 1994. This increase was
attributable to acquisition-related volumes partially offset by a decrease in
gross profit per retail gallon resulting from lower propane sales prices caused
by competitive pressures and warmer weather conditions.
Operating Expenses. Operating expenses increased $3.9 million or 14.4% to
$31.4 million in fiscal 1995, as compared to $27.4 million in fiscal 1994. This
increase was attributable to higher volumes resulting from acquisitions,
partially offset by lower operating costs attributable to operations in place at
the beginning of the fiscal year.
Selling, General and Administrative. SG&A expenses increased $0.3 million
or 13.3% from $2.6 million in fiscal 1994 to $2.9 million in fiscal 1995. This
increase was largely attributable to expenses associated with acquisitions.
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Depreciation and Amortization. Depreciation and amortization increased
approximately $0.2 million or 2.1% to $8.9 million for fiscal 1995 as compared
to $8.7 million for fiscal 1994. This increase was attributable to additional
depreciation associated with acquisitions, largely offset by a reduction in
amortization associated with the expiration of certain non-compete agreements
that generated significant expense in fiscal 1994.
Operating Income. Operating income increased $2.8 million or 28.0% to $12.7
million in fiscal 1995 from $9.9 million in fiscal 1994. This increase was
primarily due to acquisition-related volumes, partially offset by lower margins.
Domestic operating income increased $2.8 million or 29.2% to $12.4 million for
fiscal 1995, as compared to $9.6 million for fiscal 1994. Foreign operating
income was unchanged at $0.3 million.
Net Income. The Partnership posted a net loss of $0.2 million for fiscal
1995, as compared to net income of $0.3 million in fiscal 1994. This decline in
net income was the result of a $3.4 million or 39.3% increase in interest
expense from $8.8 million in fiscal 1994 to $12.2 million in fiscal 1995,
partially offset by an increase in operating income of approximately $2.8
million. Approximately $2.5 million of the increase in interest expense was
attributable to additional borrowings for acquisitions with the balance
attributable to higher interest rates.
EBITDA. EBITDA increased $3.1 million or 16.4%, to $21.7 million in fiscal
1995, as compared to $18.6 million for fiscal 1994. This increase was primarily
due to an increase in volumes attributable to acquisitions and internal growth,
partially offset by a decline in gross margins.
Fiscal Year 1994 Compared to Fiscal Year 1993
Volume. During fiscal 1994, the Partnership sold 79.7 million retail
gallons, an increase of 6.2 million retail gallons or 8.5% from the 73.4 million
gallons sold in fiscal 1993. This increase was attributable to additional
volumes associated with acquisitions completed in fiscal 1993, the full effect
of which were not realized until fiscal 1994, plus internal growth. Wholesale
volumes in fiscal 1994 were approximately 71.9 million gallons, a 2.9% increase
from approximately 69.9 million gallons in fiscal 1993. Weather conditions in
the Partnership's area of operations were approximately 6% warmer than normal in
fiscal 1994 and in fiscal 1993.
Revenues. Total revenues increased $1.7 million or 1.6% to $104.0 million
for fiscal 1994, as compared to $102.3 million for fiscal 1993. The increase was
attributable to volumes associated with acquisitions, partially offset by a
decline in the value of Canadian dollars received from sales by M-P Oils
Partnership. Domestic revenues increased $2.1 million or 2.4% to $88.9 million
for fiscal 1994, as compared to $86.8 million for fiscal 1993. Foreign revenues
decreased $0.4 million or 2.6% to $15.1 million for fiscal 1994, as compared to
$15.5 million for fiscal 1993.
Cost of Sales. Total cost of sales decreased $1.3 million or 2.3% to $55.4
million for fiscal 1994, as compared to $56.7 million for fiscal 1993. This
decrease was attributable to lower propane costs partially offset by increased
costs attributable to volumes resulting from acquisitions. Domestic cost of
sales decreased $0.8 million or 1.9% to $41.0 million for fiscal 1994, as
compared to $41.8 million for fiscal 1993. Foreign cost of sales decreased $0.5
million or 3.4% to $14.4 million for fiscal 1994, as compared to $14.9 million
for fiscal 1993.
Gross Profit. Gross profit increased $3.0 million or 6.6% to $48.6 million
for fiscal 1994, as compared to $45.6 million for fiscal 1993. This increase was
primarily attributable to additional volumes and an increase in gross profit
margins per retail gallon and, to a lesser extent, internal growth.
Operating Expenses. Operating expenses increased $1.2 million or 4.5% to
$27.4 million in fiscal 1994, as compared to $26.2 million in fiscal 1993. This
increase was primarily attributable to acquisitions and internal growth.
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Selling, General and Administrative. SG&A expenses increased $0.2 million
or 6.9% to $2.6 million in fiscal 1994 from $2.4 million in fiscal 1993 as a
result of acquisitions.
Depreciation and Amortization. Depreciation and amortization increased $0.4
million or 5.1% to $8.7 million in fiscal 1994 from $8.3 million in fiscal 1993,
due primarily to acquisitions and other capital expenditures.
Operating Income. Operating income increased $1.2 million or 14.3% to $9.9
million in fiscal 1994 from $8.7 million in fiscal 1993. This increase was due
to an increase in gross profit partially offset by increased operating and
depreciation expense. Domestic operating income increased $1.2 million or 14.3%
to $9.6 million for fiscal 1994, as compared to $8.4 million for fiscal 1993.
Foreign operating income was unchanged at $0.3 million.
Net Income. The Partnership had net income of $0.3 million for fiscal 1994,
as compared to a net loss of $0.7 million in fiscal 1993. This increase in net
income was the result of higher operating income while interest expense was
essentially unchanged.
EBITDA. EBITDA increased $1.7 million or 9.8%, to $18.6 million in fiscal
1994, as compared to $17.0 million for fiscal 1993. This increase was primarily
due to acquisitions, an increase in margins and internal growth.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash provided by operating activities during fiscal 1995 was $7.6 million
compared with $9.2 million during fiscal 1994. The cash flows from operations in
fiscal 1995 consisted primarily of a $0.2 million net loss and noncash charges
of $9.7 million, principally depreciation and amortization.
Cash used in investing activities during fiscal 1995 included capital
expenditures for acquisitions amounting to $27.9 million. An additional $8.6
million was spent for remaining maintenance needed to sustain operations at
current levels, new customer tanks to support growth of operations, and other
miscellaneous capitalized items. The Partnership expects maintenance capital
expenditures for each of fiscal 1996 and 1997 to be approximately $3.0 million,
subject to the availability of cash and other financing sources. Subsequent to
August 31, 1995, Heritage has expended approximately $10.1 million on
acquisitions and has signed a letter of intent to acquire certain propane
operations which would require the expenditure of an additional $4.7 million.
Cash provided by financing activities during fiscal 1995 of $28.5 million
reflects net borrowings under the credit facilities available to the Company.
Financing and Sources of Liquidity
On November 20, 1990, Heritage entered into agreements with Prudential that
provided, among other things, for the $5.0 million Existing Revolving Credit
Facility and the $66.4 million Existing Acquisition Facility. In addition, and
as part of the same transaction, Heritage issued $30.0 million in Senior Reset
Notes and $12.6 million in Subordinated Reset Notes to Prudential. Since 1990,
all acquisitions have been financed with debt and internally generated cash
flow, while no significant amounts of equity have been raised. As Heritage grew
larger it required a higher working capital line to provide for seasonal propane
inventory purchases and financing of accounts receivable during the winter
season. In 1993, Heritage entered into a $2.0 million working capital line with
Bank of Oklahoma, N.A., which was increased to $6.0 million in 1995. In October
and November of 1995, Heritage completed three acquisitions for an aggregate
purchase price of approximately $5.5 million. As a result of its use of
available funds to finance these acquisitions, Heritage was unable to pay a $5.0
million scheduled principal repayment in November 1995 under its Existing
Revolving Credit Facility (of which Heritage has since repaid $2.0 million) as
well as a $4.2 million scheduled principal repayment in February 1996 under the
Existing Acquisition Facility, resulting in a default under the terms of each
such facility and its other indebtedness to Prudential. Heritage proceeded with
such acquisitions while negotiating a new bank credit facility, the proceeds of
which were to be used to repay a substantial portion of
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the indebtedness outstanding to Prudential and thereby cure any payment defaults
thereunder. In December 1995, as a result of its decision to pursue this
offering, Heritage decided to abandon such refinancing efforts. In connection
with these transactions and in accordance with the requirements of the Letter
Agreement, Prudential has entered into a standstill agreement with Heritage
pursuant to which Prudential has agreed to waive existing and certain
prospective defaults and forebear from exercising any remedies under the
Prudential indebtedness for a period of six months from the date of execution of
the Letter Agreement. All such indebtedness will be repaid concurrently with the
closing of this offering. See "The Transactions -- Debt Refinancing."
Concurrently with the closing of this offering, the Operating Partnership
will enter into a Bank Credit Facility, which will include the Working Capital
Facility, a revolving credit facility providing for up to $15.0 million of
borrowings to be used for working capital and other general partnership
purposes, and the Acquisition Facility, a revolving credit facility providing
for up to $35.0 million of borrowings to be used for acquisitions and
improvements. The Partnership anticipates borrowing approximately $6.4 million
under the Bank Credit Facility concurrently with the closing of this offering in
order to repay any amounts borrowed in connection with its recent and pending
acquisitions as well as any other bank debt outstanding at the time of the
closing of this offering. See "-- Description of Indebtedness -- Description of
Bank Credit Facility."
The Partnership uses almost all of its cash provided by operating and
financing activities to fund acquisition, maintenance and growth capital
expenditures. Acquisition capital expenditures, which include expenditures
related to the acquisition of retail propane operations and a portion of the
purchase price allocated to intangibles associated with such acquired
businesses, were $27.9 million in fiscal year 1995, as compared to zero in
fiscal year 1994. During the six months ended February 29, 1996, the Partnership
expended approximately $5.5 million on acquisitions. Subsequently, the
Partnership has made an additional acquisition for $4.6 million and has signed a
letter of intent to purchase certain propane operations for $4.7 million.
Maintenance capital expenditures include expenditures for repairs which extend
the life of the assets that are necessary to maintain the existing customer base
but that do not generate additional EBITDA. Growth capital expenditures include
expenditures for the purchase of new propane tanks and other equipment to
facilitate the expansion of the Partnership's customer base.
In excess of 80% of the Partnership's EBITDA is attributable to sales
during the six-month peak heating season of October through March. Net working
capital requirements are financed with internally generated cash flow, and
working capital borrowings are not necessary during this portion of its annual
cycle. During the spring it generally becomes necessary to draw upon the working
capital lines to fund operations. By late fall, the working capital borrowings
are at their peak as propane inventories are at their highest levels in
preparation for the coming winter. During fiscal 1995, working capital
borrowings averaged approximately $4.0 million.
The assets utilized in the propane business do not typically require
lengthy manufacturing process time nor complicated, high technology components.
Accordingly, Heritage does not have any significant financial commitments for
capital expenditures. In addition, Heritage has not experienced any significant
increases attributable to inflation in the cost of these assets.
The ability of the Partnership to satisfy its obligations will depend on
its future performance, which will be subject to prevailing economic, financial,
business and weather conditions and other factors, many of which are beyond its
control. Future capital needs of the Partnership are expected to be provided by
future operations, existing cash balance and the Working Capital Facility. The
Partnership may incur additional indebtedness or issue additional Units in order
to fund possible future acquisitions.
LITIGATION AND OTHER CONTINGENCIES
For a discussion of certain litigation and other contingencies of the
Partnership, see "Business and Properties -- Litigation and Other
Contingencies."
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DESCRIPTION OF INDEBTEDNESS
Description of Notes
Concurrently with this offering, Heritage will issue, and the Operating
Partnership will assume, $120.0 million aggregate principal amount of Notes in a
private placement with one or more institutional investors. The following is a
summary of the anticipated terms of the Notes, all of which will be issued
pursuant to a Note Agreement, the form of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. This summary is
qualified in its entirety by reference to the Note Agreement.
The Operating Partnership's obligations under the Note Agreement and the
Notes will be secured, on an equal and ratable basis with its obligations under
the Bank Credit Facility, by a first priority security interest in certain
personal property of the Operating Partnership, including inventory, accounts
receivable and storage tanks. The Notes will rank pari passu with the Bank
Credit Facility and will be non-recourse to the General Partner. The Notes will
bear interest at an annual rate of 8.55%, payable semi-annually in arrears. The
Notes will mature 15 years from the date of issuance. The Notes provide for ten
equal mandatory repayments of the principal beginning on the sixth anniversary
of their issuance. The Notes may be prepaid at any time, at the option of the
Operating Partnership, in whole or in part, upon not less than 30 nor more than
60 days' notice at a price equal to the greater of (i) 100% of the principal
amount thereof plus accrued and unpaid interest or (ii) the Economic Make-Whole
Amount (as defined in the Note Agreement). The Economic Make-Whole Amount
generally will be equal to the present value of the remaining interest and
principal payments on the Notes, as determined by using a discount rate equal to
the yield on the U.S. Treasury obligation having a maturity date corresponding
to the then remaining weighted average life of the Notes being prepaid plus a
spread of 50 basis points.
The Notes will contain customary covenants applicable to the Operating
Partnership and its subsidiaries, including limitations on the ability of the
Operating Partnership and its subsidiaries to, among other things, incur
additional indebtedness (other than certain permitted indebtedness), create
liens, enter into mergers, consolidations or sales of all or substantially all
assets (other than certain permitted transactions) and make asset sales. The
Notes also will require the Operating Partnership to maintain a ratio of
Consolidated Funded Debt to Consolidated Cash Flow (as such terms are defined in
the Note Agreement) of not greater than 5.25 to 1.00 and a ratio of Consolidated
Cash Flow to Consolidated Interest Expense (as such terms are defined in the
Note Agreement) of not less than 2.00 to 1.00 until one year after closing and
2.25 to 1.00 thereafter.
The Notes also will provide that the Operating Partnership will not,
directly or indirectly, declare, make or incur any liability to make any
Restricted Payment (as defined in the Note Agreement and including distributions
to the Partnership and repurchases of Units), except that the Operating
Partnership may declare, make or incur a liability to make a Restricted Payment
once during each calendar quarter, if: (a) the amount of such Restricted Payment
does not exceed Available Cash for the immediately preceding quarter; and (b) no
default or event of default exists before such Restricted Payment and after
giving effect thereto. The Note Agreement provides that in the quarter preceding
a quarter in which an interest payment is to be made on the Notes, Available
Cash is required to reflect a reserve equal to 50% of the interest to be paid on
the Notes. In addition, in the third, second and first quarters preceding a
quarter in which a scheduled principal payment is to be made on the Notes,
Available Cash is required to reflect a reserve equal to 25%, 50% and 75%,
respectively, of the principal amount to be repaid on such payment date.
In the event that one person or group of related persons (other than the
General Partner and its affiliates) acquires more than 50% of the Units of the
Partnership, a Change of Control will be deemed to have occurred. In the event
of a Change of Control, the holders of the Notes will have the right, but not
the obligation, to put the Notes back to the Operating Partnership at 101% of
the principal amount thereof plus accrued and unpaid interest. In the event that
the current management of the Partnership or a group of related persons which
includes the current management of the Partnership acquires more than 50% of the
Units of the Partnership, a Change of Control will not be deemed to have
occurred.
If an event of default exists on the Notes, the holders of Notes may
accelerate the maturity of the Notes and exercise other rights and remedies.
Events of default include (a) failure to pay any principal or premium
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when due, or interest within five days of when due, on the Notes, (b) failure to
perform or otherwise comply with covenants in the Note Agreement, (c) default by
the Operating Partnership or restricted subsidiaries of the Operating
Partnership under certain other indebtedness if the effect is to permit the
acceleration thereof, (d) certain unsatisfied final judgments and (e) various
bankruptcy or insolvency events involving the Operating Partnership or certain
restricted subsidiaries of the Operating Partnership.
Description of Bank Credit Facility
Concurrently with this offering, the Operating Partnership will enter into
the Bank Credit Facility with a group of commercial banks, for whom Bank of
Oklahoma, N.A. will act as agent. The following is a summary of the anticipated
terms of the agreement governing the Bank Credit Facility (the "Bank
Agreement"), the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. This summary is qualified in its
entirety by reference to the Bank Agreement.
The Bank Credit Facility consists of a $35.0 million Acquisition Facility
and a $15.0 million Working Capital Facility. The Operating Partnership's
obligations under the Bank Credit Facility will be secured, on an equal and
ratable basis with its obligations under the Notes, by a first priority security
interest in certain personal property of the Operating Partnership, including
inventory, accounts receivable and storage tanks. The Bank Credit Facility will
rank pari passu with the Notes. The Bank Credit Facility will bear interest at a
rate based upon either the Eurodollar Rate (as defined in the Bank Agreement)
plus a margin or a base rate plus a margin. The Partnership has no present
intention of entering into interest rate protection agreements with respect to
the Bank Credit Facility.
The Working Capital Facility will mature five years from the closing of
this offering. However, there must be no amount outstanding under the Working
Capital Facility for at least 30 consecutive days during each calendar year. The
Acquisition Facility will revolve for two and one-half years, after which time
any outstanding loans thereunder will amortize quarterly for a period of two and
one-half years thereafter.
The Bank Agreement is expected to contain negative covenants and default
provisions generally similar to those contained in the Note Agreement. In
addition, the Bank Agreement is expected to contain covenants requiring the
Partnership to maintain a ratio of Funded Debt to EBITDA (as such terms are
defined in the Bank Agreement) of not greater than 5.25 to 1.0 from closing
through the end of fiscal 1997, 5.0 to 1.0 from such date through the end of
fiscal 1998 and 4.75 to 1.0 from such date to maturity and to maintain a ratio
of EBITDA to Interest (as such terms are defined in the Bank Agreement) of at
least 2.20 to 1.00 from closing through one year after closing and 2.25 to 1.00
thereafter.
EFFECTS OF INFLATION
Although inflation affects the price the Partnership pays for operating and
administrative services and propane, the Partnership attempts to limit the
effects of inflation on its results of operations through cost control and
productivity improvements, as well as through adjustment of sales prices.
Changing prices as a result of inflationary pressures have not had a material
adverse effect on profitability, although sales may be affected. Inflation has
not materially impacted the results of operations and the Partnership does not
believe normal inflationary pressures will have a material adverse effect on the
profitability of the Partnership in the future.
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BUSINESS AND PROPERTIES
GENERAL
The Partnership is a Delaware limited partnership recently formed to
acquire, own and operate the propane business and assets of Heritage. Heritage
will serve as the general partner of the Partnership. Heritage was formed in
1989 and has grown to become what the Partnership believes is the sixth largest
retail marketer of propane in the United States, serving more than 170,000
active residential, commercial, industrial and agricultural customers from 118
district locations in 15 states. The Partnership's operations are concentrated
in the western and southeastern regions of the United States.
Heritage has grown primarily through acquisitions of retail propane
operations and, to a lesser extent, through internal growth. Through August 31,
1995, Heritage completed 25 acquisitions for an aggregate purchase price of
approximately $146 million. Heritage more than doubled its volumes of propane
sold to retail customers from 48.2 million gallons for the fiscal year ended
August 31, 1991 to 98.3 million gallons for the fiscal year ended August 31,
1995. For the six months ended February 29, 1996, Heritage sold approximately
73.6 million gallons to retail customers, compared to 59.7 million gallons for
the same period in 1995. Since August 31, 1995, Heritage has acquired four
propane companies and has signed a letter of intent to acquire one additional
propane company. The Partnership believes that these five companies generate
combined annual retail sales of approximately 10 million gallons.
The Partnership's EBITDA more than doubled from $10.3 million for the
fiscal year ended August 31, 1991 to $21.7 million for the fiscal year ended
August 31, 1995. EBITDA for the six months ended February 29, 1996 was $19.0
million, as compared to $16.8 million for the six months ended February 28,
1995. Heritage had net losses of $7.3 million, $1.1 million, $0.7 million and
$0.2 million for its fiscal years ended August 31, 1991, 1992, 1993 and 1995,
respectively, and had net income of $0.3 million for its fiscal year ended
August 31, 1994. For a discussion of the seasonality of Heritage's operations,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--General."
The Partnership believes that its competitive strengths include: (i)
management's experience in identifying, evaluating and completing acquisitions,
(ii) operations that are focused in areas experiencing higher-than-average
population growth, (iii) a low cost overhead structure and (iv) a decentralized
operating structure and entrepreneurial workforce. These competitive strengths
have enabled the Partnership to achieve levels of EBITDA per retail propane
gallon that the Partnership believes are among the highest of any publicly
traded propane partnership. The Partnership believes that as a result of its
geographic diversity and district-level incentive compensation program, the
Partnership has been able to reduce the effect of adverse weather conditions on
EBITDA, including those experienced during the warmer-than-normal winter of
1994-1995. The Partnership believes that its concentration in
higher-than-average population growth areas provides it with a strong economic
foundation for expansion through acquisitions and internal growth. The
Partnership does not believe that it is significantly more vulnerable than its
competitors to displacement by natural gas distribution systems because the
majority of the Partnership's areas of operations are rural and their population
growth tends to open business opportunities for the Partnership in more remote
locations on their peripheries.
BUSINESS STRATEGY
The Partnership's strategy is to expand its operations and increase its
retail market share in order to increase Available Cash. The three critical
elements to this strategy are described below.
Acquisitions. Acquisitions will be the principal means of growth for the
Partnership, as the retail propane industry is mature and overall demand for
propane is expected to experience limited growth in the foreseeable future. The
Partnership believes that the fragmented nature of the propane industry provides
significant opportunities for growth through acquisition. Industry sources
indicate that there are over 8,000 retail propane operations, of which the 10
largest comprise approximately 35% of industry sales. The Partnership follows a
disciplined acquisition strategy that concentrates on companies (i) in
geographic areas experiencing higher-than-average population growth, (ii) with a
high percentage of sales to residential customers, (iii) with local reputations
for quality service and (iv) with a high percentage of tank ownership. In
addition, unlike many of
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its competitors, the Partnership attempts to capitalize on the reputations of
the companies it acquires by maintaining local brand names, billing practices
and employees, thereby creating a sense of continuity and minimizing customer
loss. The Partnership believes that this strategy has helped to make it an
attractive buyer for many acquisition candidates.
Through August 31, 1995, Heritage completed 25 acquisitions for an
aggregate purchase price of approximately $146 million. The Partnership has
completed four additional acquisitions since that time and has executed a letter
of intent with one additional company. Of these 30 companies acquired or to be
acquired, 10 represent "core acquisitions" with multiple plants in a specific
geographic area, with the balance representing "blend-in companies" which
operate in an existing region. The Partnership will focus on acquisition
candidates in its existing areas of operations, but will consider core
acquisitions in other higher-than-average population growth areas in order to
further reduce the impact on the Partnership's operations of adverse weather
patterns in any one region. While the Partnership is currently evaluating
numerous acquisition candidates, there can be no assurance that the Partnership
will identify attractive acquisition candidates in the future, that the
Partnership will be able to acquire such businesses on economically acceptable
terms, that any acquisitions will not be dilutive to earnings and distributions
or that any additional debt incurred to finance an acquisition will not affect
the ability of the Partnership to make distributions to Unitholders.
The Partnership believes that its ability to make acquisitions will be
enhanced following the completion of this offering. In order to facilitate the
Partnership's acquisition strategy, the Operating Partnership will enter into
the Bank Credit Facility in connection with the closing of this offering. The
Bank Credit Facility will consist of the $35.0 million Acquisition Facility to
be used for acquisitions and improvements and the $15.0 million Working Capital
Facility to be used for working capital and other general partnership purposes.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Description of Indebtedness." The Partnership will also have the
ability to fund acquisitions through the issuance of additional partnership
interests.
Internal Growth. In addition to pursuing expansion through acquisitions,
the Partnership has aggressively focused on internal growth at its existing
district locations. The Partnership believes that, by concentrating its
operations in areas experiencing higher-than-average population growth, it is
well positioned to achieve internal growth by adding new customers. The
Partnership also believes that its decentralized structure, in which operational
decisions are made at the district and regional level, together with a bonus
system that allocates a significant portion of a district's EBITDA in excess of
budget to district employees, has fostered an entrepreneurial environment that
has allowed the Partnership to achieve its high rates of internal growth. The
Partnership believes that its rates of internal growth significantly exceed the
average growth rate in the industry.
Low Cost, Decentralized Operations. The Partnership focuses on controlling
costs at the corporate and district levels. While the Partnership has realized
certain economies of scale as a result of its acquisitions, it attributes its
low overhead primarily to its decentralized structure. By delegating all
customer billing and collection activities to the district level, the
Partnership has been able to operate without a large corporate staff. Of the
Partnership's 778 full-time employees as of February 29, 1996, only 36, or
approximately 5%, were general and administrative. In addition, the
Partnership's plant bonus system encourages district employees at all levels to
control costs and expand revenues.
As a result of the implementation of the strategy described above, the
Partnership has achieved the retail sales volumes per fiscal year set forth
below:
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Retail Propane Gallons Sold...... 37.5 48.2 63.2 73.4 79.7 98.3
</TABLE>
INDUSTRY BACKGROUND AND COMPETITION
Propane, a by-product of natural gas processing and petroleum refining, is
a clean-burning energy source recognized for its transportability and ease of
use relative to alternative forms of stand-alone energy sources.
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Retail propane use falls into three broad categories: (i) residential
applications, (ii) industrial, commercial, and agricultural applications and
(iii) other retail applications, including motor fuel sales. Residential
customers use propane primarily for space and water heating. Industrial
customers use propane primarily as fuel for forklifts and stationary engines, to
fire furnaces, as a cutting gas, in mining operations and in other process
applications. Commercial customers, such as restaurants, motels, laundries and
commercial buildings, use propane in a variety of applications, including
cooking, heating and drying. In the agricultural market, propane is primarily
used for tobacco curing, crop drying, poultry brooding and weed control. Other
retail uses include motor fuel for cars and trucks, outdoor cooking and other
recreational uses, propane resales and sales to state and local governments. In
its wholesale operations, the Partnership sells propane principally to large
industrial end-users and other propane distributors.
Propane is extracted from natural gas or oil wellhead gas at processing
plants or separated from crude oil during the refining process. Propane is
normally transported and stored in a liquid state under moderate pressure or
refrigeration for ease of handling in shipping and distribution. When the
pressure is released or the temperature is increased, it is usable as a
flammable gas. Propane is colorless and odorless; an odorant is added to allow
its detection. Like natural gas, propane is a clean burning fuel and is
considered an environmentally preferred energy source.
Based upon information provided by the Energy Information Agency, propane
accounts for approximately three to four percent of household energy consumption
in the United States. Propane competes primarily with natural gas, electricity
and fuel oil as an energy source, principally on the basis of price,
availability and portability. Propane is more expensive than natural gas on an
equivalent BTU basis in locations served by natural gas, but serves as an
alternative to natural gas in rural and suburban areas where natural gas is
unavailable or portability of product is required. Historically, the expansion
of natural gas into traditional propane markets has been inhibited by the
capital costs required to expand pipeline and retail distribution systems.
Although the extension of natural gas pipelines tends to displace propane
distribution in areas affected, the Partnership believes that new opportunities
for propane sales arise as more geographically remote neighborhoods are
developed. Propane is generally less expensive to use than electricity for space
heating, water heating, clothes drying and cooking. Due to the current location
of the Partnership's operations, fuel oil has not been a significant competitor.
In addition to competing with alternative energy sources, the Partnership
competes with other companies engaged in the retail propane distribution
business. Competition in the propane industry is highly fragmented and generally
occurs on a local basis with other large full-service multi-state propane
marketers, thousands of smaller local independent marketers and farm
cooperatives. Based on industry publications, the Partnership believes that the
domestic retail market for propane is approximately 9.2 billion gallons
annually, that the 10 largest retailers, including the Partnership, account for
less than 35% of the total retail sales of propane in the United States, and
that no single marketer has a greater than 10% share of the total retail market
in the United States. Most of the Partnership's retail distribution branches
compete with five or more marketers or distributors. Each retail distribution
outlet operates in its own competitive environment because retail marketers tend
to locate in close proximity to customers. The typical retail distribution
outlet generally has an effective marketing radius of approximately 50 miles
although in certain rural areas the marketing radius may be extended by a
satellite location.
The ability to compete effectively further depends on the reliability of
service, responsiveness to customers and the ability to maintain competitive
prices. The Partnership believes that its safety programs, policies and
procedures are more comprehensive than many of its smaller, independent
competitors and give it a competitive advantage over such retailers. The
Partnership also believes that its service capabilities and customer
responsiveness differentiate it from many of these smaller competitors. The
Partnership's employees are on call 24-hours and 7-days-a-week for emergency
repairs and deliveries.
The wholesale propane business is highly competitive. For fiscal year 1995,
the Partnership's wholesale operations accounted for 19% of total volumes but
less than 2% of its gross profit. While the Partnership does not emphasize
wholesale operations, it believes that limited wholesale activities enhance its
ability to supply its retail operations.
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PRODUCTS, SERVICES AND MARKETING
The Partnership distributes propane through a nationwide retail
distribution network consisting of 118 district locations in 15 states. The
Partnership's operations are concentrated primarily in the western and
southeastern regions of the United States. The Partnership serves more than
170,000 active customers. Historically, approximately 66% of the Partnership's
retail propane volume and in excess of 80% of its EBITDA are attributable to
sales during the six-month peak heating season from October through March, as
many customers use propane for heating purposes. Consequently, sales and
operating profits are concentrated in the Partnership's first and second fiscal
quarters. Cash flows from operations, however, are greatest during the second
and third fiscal quarters when customers pay for propane purchased during the
six-month peak season. To the extent necessary, the Partnership will reserve
cash from these periods for distribution to Unitholders during the warmer
seasons.
Typically, district locations are found in suburban and rural areas where
natural gas is not readily available. Generally, such locations consist of a one
to two acre parcel of land, an office, a small warehouse and service facility, a
dispenser and one or more 18,000 to 30,000 gallon storage tanks. Propane is
generally transported from refineries, pipeline terminals, leased storage
facilities and coastal terminals by rail or truck transports to the
Partnership's district locations where it is unloaded into the storage tanks. In
order to make a retail delivery of propane to a customer, a bobtail truck is
loaded with propane from the storage tank. Propane is then pumped from the
bobtail truck, which generally holds 2,500 to 3,000 gallons of propane, into a
stationary storage tank on the customer's premises. The capacity of these
customer tanks ranges from approximately 100 gallons to 1,200 gallons, with a
typical tank having a capacity of 100 to 300 gallons in milder climates and from
500 to 1,000 gallons in colder climates. The Partnership also delivers propane
to retail customers in portable cylinders, which typically have a capacity of 5
to 35 gallons. When these cylinders are delivered to customers, empty cylinders
are picked up for refilling at the Partnership's distribution locations or are
refilled in place. The Partnership also delivers propane to certain other bulk
end users of propane in tractor trailers known as transports, which have an
average capacity of approximately 10,500 gallons. End users receiving transport
deliveries include industrial customers, large-scale heating accounts, mine
operations, and large agricultural accounts which use propane for crop drying.
The Partnership encourages its customers to implement a regular delivery
schedule by, in some cases, charging extra for non-scheduled deliveries. Many of
the Partnership's residential customers receive their propane supply pursuant to
an automatic delivery system which eliminates the customer's need to make an
affirmative purchase decision and allows for more efficient route scheduling and
maximization of volumes delivered. From its district locations, the Partnership
also sells, installs and services equipment related to its propane distribution
business, including heating and cooking appliances.
Propane use falls into three broad categories: (i) residential
applications, (ii) industrial, commercial and agricultural applications and
(iii) other retail applications, including motor fuel sales. Approximately 81%
of the gallons sold by the Partnership in fiscal 1995 were to retail customers
and approximately 19% were to wholesale customers. Of the retail gallons sold by
the Partnership in fiscal 1995, 52% were to residential customers, 30% were to
industrial, commercial and agricultural customers, and 18% were to all other
retail users. Sales to residential customers in fiscal 1995 accounted for 42% of
total gallons sold but 59% of the Partnership's gross profit from propane sales.
Residential sales have a greater profit margin and a more stable customer base
than other markets served by the Partnership. Industrial, commercial and
agricultural sales accounted for 22% of the Partnership's gross profit from
propane sales for fiscal year 1995, with all other retail users accounting for
17%. Additional volumes sold to wholesale customers contributed the remaining 2%
of gross profit from propane sales. No single customer accounted for 5% or more
of the Partnership's revenues during fiscal year 1995.
The propane business is very seasonal with weather conditions significantly
affecting demand for propane. The Partnership believes that the geographic
diversity of its areas of operations helps to minimize its nationwide exposure
to regional weather. Although overall demand for propane is affected by climate,
changes in price and other factors, the Partnership believes its residential and
commercial business to be relatively stable due to the following
characteristics: (i) residential and commercial demand for propane has been
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relatively unaffected by general economic conditions due to the largely
non-discretionary nature of most propane purchases by the Partnership's
customers, (ii) loss of customers to competing energy sources has been low,
(iii) the tendency of the Partnership's customers to remain with the Partnership
due to the product being delivered pursuant to a regular delivery schedule and
to the Partnership's ownership of over 85% of the storage tanks utilized by its
customers and (iv) the historic ability of the Partnership to more than offset
customer losses through internal growth of its customer base in existing
markets. Since home heating usage is the most sensitive to temperature,
residential customers account for the greatest usage variation due to weather.
Variations in the weather in one or more regions in which the Partnership
operates, however, can significantly affect the total volumes of propane sold by
the Partnership and the margins realized thereon and, consequently, the
Partnership's results of operations. The Partnership believes that sales to the
commercial and industrial markets, while affected by economic patterns, are not
as sensitive to variations in weather conditions as sales to residential and
agricultural markets.
PROPANE SUPPLY AND STORAGE
The Partnership's propane supply is purchased from over 40 oil companies
and natural gas processors at numerous supply points located in the United
States and Canada. In addition, the Partnership makes purchases on the spot
market from time to time to take advantage of favorable pricing. Most of the
propane purchased by the Partnership in fiscal 1995 was purchased pursuant to
one year agreements subject to annual renewal, but the percentage of contract
purchases may vary from year to year as determined by the Partnership. Supply
contracts generally provide for pricing in accordance with posted prices at the
time of delivery or the current prices established at major delivery points.
Most of these agreements provide maximum and minimum seasonal purchase
guidelines. The Partnership receives its supply of propane predominately through
railroad tank cars and common carrier transport.
Supplies of propane from the Partnership's sources historically have been
readily available. In the fiscal year ended August 31, 1995, Warren Petroleum
Company ("Warren"), a division of Chevron USA, provided approximately 14% of the
Partnership's total domestic propane supply. The Partnership believes that, if
supplies from Warren were interrupted, it would be able to secure adequate
propane supplies from other sources without a material disruption of its
operations. Aside from Warren, no single supplier provided more than 10% of the
Partnership's total domestic propane supply in the fiscal year ended August 31,
1995. Although no assurance can be given that supplies of propane will be
readily available in the future, the Partnership expects a sufficient supply to
continue to be available. However, increased demand for propane in periods of
severe cold weather, or otherwise, could cause future propane supply
interruptions or significant volatility in the price of propane.
During fiscal 1995 the Partnership purchased approximately 73% of its
propane supplies from domestic suppliers with the remainder being procured
through M-P Oils, Ltd., a wholly-owned subsidiary of the Partnership. M-P Oils,
Ltd. holds a 60% interest in a Canadian partnership, M-P Oils Partnership, which
buys and sells propane for its own account as well as supplies the Partnership's
volume requirements in the northern states. Those volumes are included in the
sources of propane set forth in the immediately preceding paragraph.
The market price of propane is subject to volatile changes as a result of
supply or other market conditions over which the Partnership will have no
control. Since rapid increases in the wholesale cost of propane may not be
immediately passed on to customers, such increases could reduce the
Partnership's gross profits. Since 1991, the Partnership has generally been
successful in maintaining retail gross margins on an annual basis despite
changes in the wholesale cost of propane. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- General." However,
there may be times when the Partnership will be unable to pass on fully such
price increases to its customers. Consequently, the Partnership's profitability
will be sensitive to changes in wholesale propane prices. The Partnership has
not engaged in any hedging activities with respect to its propane supply
requirements, although it may do so in the future.
The Partnership leases space in storage facilities in Michigan and Arizona
and smaller storage facilities in other locations and has rights to use storage
facilities in additional locations when it "pre-buys" product from these
sources. The Partnership believes that it has adequate third party storage to
take advantage of supply
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purchasing advantages as they may occur from time to time. Access to storage
facilities allows the Partnership to buy and store large quantities of propane
during periods of low demand, which generally occur during the summer months,
thereby helping to ensure a more secure supply of propane during periods of
intense demand or price instability.
PRICING POLICY
Pricing policy is an essential element in the marketing of propane. The
Partnership relies on regional management to set prices based on prevailing
market conditions and product cost, as well as local management input. All
regional managers are advised regularly of any changes in the posted price of
the district's propane suppliers. In most situations, the Partnership believes
that its pricing methods will permit the Partnership to respond to changes in
supply costs in a manner that protects the Partnership's gross margins and
customer base, to the extent possible. In some cases, however, the Partnership's
ability to respond quickly to cost increases could occasionally cause its retail
prices to rise more rapidly than those of its competitors, possibly resulting in
a loss of customers.
BILLING AND COLLECTION PROCEDURES
Customer billing and account collection responsibilities are retained at
the district level. The Partnership believes that this decentralized approach is
beneficial for several reasons: (i) the customer is billed on a timely basis;
(ii) the customer is more apt to pay a "local" business; (iii) cash payments are
received faster; and (iv) district personnel have a current account status
available to them at all times to answer customer inquiries. These records are
periodically audited as well as sent to the accounting offices of the
Partnership in Helena, Montana each month.
PROPERTIES
As of the date of this Prospectus, the Partnership operates bulk storage
facilities at 118 district sites, of which approximately 80% are owned or under
long-term lease and the balance are subject to renewal in the ordinary course of
business during the next ten years. The Partnership believes that the increasing
difficulty associated with obtaining permits for new propane distribution
locations makes its high level of site ownership and control a competitive
advantage. The Partnership owns approximately seven million gallons of above-
ground storage capacity at its various plant sites. In addition, in 1995, the
Partnership leased approximately 13 million gallons of underground storage
facilities in two states (4.3 million gallons of storage in Alto, Michigan and
8.5 million gallons in Bumstead, Arizona). The Partnership does not own or
operate any underground storage facilities (excluding customer and local
distribution tanks) or pipe line transportation assets (excluding local delivery
systems).
The Partnership also owns 50% of Bi-State Propane, a California general
partnership, that conducts business in South Lake Tahoe and Truckee, California,
Reno and other locations in Nevada. Six Bi-State locations are included in the
Partnership's site counts and all site, customer and other property descriptions
contained herein include all Bi-State information on a gross basis.
The transportation of propane requires specialized equipment. The trucks
and railroad tank cars utilized for this purpose carry specialized steel tanks
that maintain the propane in a liquefied state. As of February 29, 1996, the
Partnership had a fleet of approximately 13 transport truck tractors, 23
transport trailers and 8 railroad tank cars, all of which are owned by the
Partnership. In addition, the Partnership utilizes approximately 333 bobtail and
approximately 565 other delivery and service vehicles, all of which are owned by
the Partnership. As of February 29, 1996, the Partnership owned approximately
145,000 customer storage tanks with typical capacities of 120 to 1,000 gallons.
The Partnership believes that it has satisfactory title to or valid rights
to use all of its material properties. Although some of such properties are
subject to liabilities and leases, liens for taxes not yet due and payable,
encumbrances securing payment obligations under non-competition agreements
entered in connection with acquisitions and immaterial encumbrances, easements
and restrictions, the Partnership does not believe that any such burdens will
materially interfere with the continued use of such properties by the
Partnership in its
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business, taken as a whole. In addition, the Partnership believes that it has,
or is in the process of obtaining, all required material approvals,
authorizations, orders, licenses, permits, franchises and consents of, and has
obtained or made all required material registrations, qualifications and filings
with, the various state and local governmental and regulatory authorities which
relate to ownership of the Partnership's properties or the operations of its
business.
TRADEMARKS AND TRADENAMES
The Partnership utilizes a variety of trademarks and tradenames which it
owns, including "Heritage Propane." The Partnership believes that its strategy
of retaining the names of the acquired companies has maintained the local
identification of such companies and has been important to the continued success
of these businesses. The Partnership's most significant trade names are Balgas,
Bi-State Propane, Carolane Propane Gas, Gas Service Company, Holton's L.P. Gas,
Ikard & Newsom, Northern Energy and Sawyer Gas. The Partnership regards its
trademarks, tradenames and other proprietary rights as valuable assets and
believes that they have significant value in the marketing of its products.
GOVERNMENT REGULATION
The Partnership is subject to various federal, state and local
environmental, health and safety laws and regulations. Generally, these laws
impose limitations on the discharge of pollutants and establish standards for
the handling of solid and hazardous wastes. These laws include the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), the Clean Air Act, the Occupational
Safety and Health Act, the Emergency Planning and Community Right-to-Know Act,
the Clean Water Act and comparable state statutes. CERCLA, also known as the
"Superfund" law, imposes joint and several liability without regard to fault or
the legality of the original conduct on certain classes of persons that are
considered to have contributed to the release or threatened release of a
"hazardous substance" into the environment. Propane is not a hazardous substance
within the meaning of CERCLA. However, automotive waste products, such as waste
oil, generated by the Partnership's truck fleet, as well as "hazardous
substances" disposed of during past operations by third parties on the
Partnership's properties, could subject the Partnership to liability under
CERCLA. Such laws and regulations could result in civil or criminal penalties in
cases of non-compliance or impose liability for remediation costs. Also, third
parties may make claims against owners or operators of properties for personal
injuries and property damage associated with releases of hazardous or toxic
substances.
In connection with all acquisitions of retail propane businesses that
involve the acquisition of any interest in real estate, the Partnership conducts
an environmental review in an attempt to determine whether any substance other
than propane has been sold from, or stored on, any such real estate prior to its
purchase. Such review includes questioning the seller, obtaining representations
and warranties concerning the seller's compliance with environmental laws and
conducting inspections of the properties. Where warranted, independent
environmental consulting firms are hired to look for evidence of hazardous
substances or the existence of underground storage tanks.
Petroleum-based contamination or environmental wastes are known to be
located on or adjacent to four sites at which the Partnership operates and are
suspected to be located on or adjacent to one additional site. These sites were
evaluated at the time of their acquisition. In four cases remediation operations
have been or will be undertaken by others, and in all five cases the Partnership
obtained indemnifications for expenses associated with any remediation from the
former owners or related entities. Based on information currently available to
the Partnership, such projects are not expected to have a material adverse
effect on the Partnership's financial condition or results of operation.
National Fire Protection Association Pamphlets No. 54 and No. 58, which
establish rules and procedures governing the safe handling of propane, or
comparable regulations, have been adopted as the industry standard in all of the
states in which the Partnership operates. In some states these laws are
administered by state agencies, and in others they are administered on a
municipal level. With respect to the transportation of propane by truck, the
Partnership is subject to regulations promulgated under the Federal Motor
Carrier
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Safety Act. These regulations cover the transportation of hazardous materials
and are administered by the United States Department of Transportation. The
Partnership conducts ongoing training programs to help ensure that its
operations are in compliance with applicable regulations. The Partnership
maintains various permits that are necessary to operate some of its facilities,
some of which may be material to its operations. The Partnership believes that
the procedures currently in effect at all of its facilities for the handling,
storage and distribution of propane are consistent with industry standards and
are in compliance in all material respects with applicable laws and regulations.
Future developments, such as stricter environmental, health or safety laws
and regulations promulgated thereunder, could affect Partnership operations. It
is not anticipated that the Partnership's compliance with or liabilities under
environmental, health and safety laws and regulations, including CERCLA, will
have a material adverse effect on the Partnership. To the extent that there are
any environmental liabilities unknown to the Partnership or environmental,
health or safety laws or regulations are made more stringent, there can be no
assurance that the Partnership's results of operations will not be materially
and adversely affected.
EMPLOYEES
As of February 29, 1996, the Partnership had 778 full time employees, of
whom 36 were general and administrative and 695 were operational employees.
Fewer than 10 of the Partnership's employees at one district location are
represented by a labor union. The Partnership believes that its relations with
its employees are satisfactory. The Partnership has hired as many as 100
seasonal workers to meet peak winter demands.
LITIGATION AND OTHER CONTINGENCIES
A number of personal injury, property damage and products liability suits
are pending or threatened against the Partnership. In general, these lawsuits
have arisen in the ordinary course of the Partnership's business since the
formation of Heritage and involve claims for actual damages, and in some cases,
punitive damages, arising from the alleged negligence of the Partnership or as a
result of product defects or similar matters. Of the pending or threatened
matters, a number involve property damage, and several involve serious personal
injuries or deaths and the claims made are for relatively large amounts. In
addition, the Partnership has been named as a defendant in a suit alleging that
it negligently hired an employee who was convicted of a felony. Although any
litigation is inherently uncertain, based on past experience, the information
currently available to it and the availability of insurance coverage, the
Partnership does not believe that these pending or threatened litigation matters
will have a material adverse effect on its results of operations or its
financial condition.
TRANSFER OF THE PARTNERSHIP ASSETS
Concurrent with the closing of this offering, Heritage will convey
substantially all of its assets (other than approximately $80.1 million in
proceeds from issuance of the Notes) to the Operating Partnership and the
Operating Partnership will assume substantially all of the liabilities of
Heritage (including the Notes, but excluding certain notes payable pursuant to
non-compete agreements entered into in connection with prior acquisitions).
The assets to be transferred include real estate and fixtures located in 15
states, motor vehicles, tanks, cylinders, machinery and office furniture,
intangible property such as contracts, and various licenses, permits and other
similar rights required in connection with the ownership and operation of
Heritage's propane businesses, and leasehold interests in real and personal
property, including automobiles, light trucks and bobtails. See "-- Properties."
Appliance sales, installation and service activities will be conducted through a
wholly-owned corporate subsidiary of the Operating Partnership.
Most of Heritage's leases are transferable to the Partnership only with the
consent of the lessor. In addition, certain of Heritage's licenses, permits and
other similar rights relating to the assets to be assigned to the Partnership
are not transferable or are transferable only with the consent of third parties.
Such transferable rights will not be transferred to the Partnership at the
closing of this offering unless applicable consents have been obtained. Heritage
expects to obtain, prior to the closing of this offering, third party consents
which are
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sufficient to enable Heritage to transfer to the Partnership the assets
necessary to enable the Partnership to conduct Heritage's propane business in
all material respects as described in this Prospectus. In the case of
non-transferable rights or rights where no consent has been obtained by the
closing, Heritage will seek to obtain such consents in the normal course of
business after the closing or seek to have comparable rights granted to the
Partnership. Numerous licenses, permits and rights will be required for the
operation of the Partnership's business, and no assurance can be given that the
Partnership will obtain all licenses, permits and rights which are required in
connection with the ownership and operation of its business. In order to
transfer real property interests, documents evidencing chain of title may be
required to be obtained from searches of local records in order to prepare and
record the necessary transfer documents. Heritage expects to obtain, prior to
the closing of this offering, documents evidencing title that are sufficient to
enable Heritage to record the transfer of such real property interests to the
Partnership, although no assurance can be given that such documents can be
obtained in a timely manner.
If consent to the assignment or reissuance of any lease, license, permit or
other similar right being transferred is not obtained, or if documents
evidencing title to real property interests being transferred are not obtained,
Heritage and the Partnership will develop alternative approaches so that, to the
maximum extent possible, the Partnership will receive the benefits of such
lease, license, permit, right or property interest and will discharge the duties
and bear the costs and risks thereunder. The Partnership will bear the risk that
such alternative arrangements will not provide the Partnership with the full
benefits of such lease, license, permit, right or property interest. Although
failure by the Partnership to obtain licenses, permits, rights or title
documents could have a material adverse effect on the Partnership, Heritage
believes that the Partnership will have the licenses, permits and rights and
will obtain title documents or will be able to enter into alternative
arrangements which will enable the Partnership to conduct its propane business
in a manner which is similar in all material respects to that which was
conducted by Heritage prior to the closing of this offering and that any failure
to obtain such licenses, permits, rights or title documents will not have a
material adverse impact on the business of the Partnership as described in this
Prospectus.
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MANAGEMENT
PARTNERSHIP MANAGEMENT
The General Partner will manage and operate the activities of the
Partnership. Unitholders will not directly or indirectly participate in the
management or operation of the Partnership and will not have actual or apparent
authority to enter into contracts on behalf of, or to otherwise bind, the
Partnership. Notwithstanding any limitation on its obligations or duties, the
General Partner will be liable, as the general partner of the Partnership, for
all debts of the Partnership (to the extent not paid by the Partnership), except
to the extent that indebtedness or other obligations incurred by the Partnership
are made specifically non-recourse to the General Partner.
At least two of the members of the Board of Directors of the General
Partner will serve on the Audit Committee with the authority to review specific
matters as to which the Board of Directors believes there may be a conflict of
interest in order to determine if the resolution of such conflict proposed by
the General Partner is fair and reasonable to the Partnership. Any matters
approved by the Audit Committee will be conclusively deemed to be fair and
reasonable to the Partnership, approved by all partners of the Partnership and
not a breach by the General Partner or its Board of Directors of any duties they
may owe the Partnership or the Unitholders. In addition, the Audit Committee
will review external financial reporting of the Partnership, will recommend
engagement of the Partnership's independent accountants and will review the
Partnership's procedures for internal auditing and the adequacy of the
Partnership's internal accounting controls.
As is commonly the case with publicly traded limited partnerships, the
Partnership will not directly employ any of the persons responsible for managing
or operating the Partnership. In general, the current management of Heritage
will continue to manage and operate the Partnership's business as officers and
employees of the General Partner and its affiliates.
DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER
The following table sets forth certain information with respect to the
executive officers and members of the Board of Directors of the General Partner.
Executive officers and directors are elected for one-year terms.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH GENERAL PARTNER
- ------------------------ --- ------------------------------------------------------------
<S> <C> <C>
James E. Bertelsmeyer 53 Chairman of the Board and Chief Executive Officer
R. C. Mills 58 Executive Vice President and Chief Operating Officer
G. A. Darr 63 Vice President, Corporate Development
H. Michael Krimbill 42 Vice President, Chief Financial Officer, Treasurer and
Secretary
Bill W. Byrne 66 Director
John D. Capps 72 Director
Bryan C. Cressey 46 Director
J. Charles Sawyer 60 Director
Carl D. Thoma 47 Director
</TABLE>
James E. Bertelsmeyer. Mr. Bertelsmeyer has 21 years of experience in the
propane industry, including six years as President of Buckeye Gas Products
Company, at the time the nation's largest retail propane marketer. Mr.
Bertelsmeyer has served as Chief Executive Officer of Heritage since its
formation. Mr. Bertelsmeyer began his career with Conoco Inc. where he spent ten
years in positions of increasing responsibility in the pipeline and gas products
departments. Mr. Bertelsmeyer is a director of Golf Enterprises Inc. and has
been a Director of the National Propane Gas Association for the past 21 years.
R. C. Mills. Mr. Mills has 38 years of experience in the propane industry.
Mr. Mills joined Heritage in 1991 as Executive Vice President and Chief
Operating Officer. Before coming to Heritage, Mr. Mills spent 25 years with
Texgas Corporation and its successor, Suburban Propane, Inc. At the time he left
Suburban in 1991, Mr. Mills was Vice President of Supply and Wholesale.
G. A. Darr. Mr. Darr has over 40 years of experience in the propane
industry. Mr. Darr came to Heritage in June 1989, as Director of Corporate
Development and was promoted to Vice President, Corporate
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Development in 1990. Prior to joining Heritage, Mr. Darr served for 10 years as
Director of Corporate Development with CalGas Corporation and its successor,
AmeriGas Propane, Inc. Mr. Darr began his career in the propane division of
Phillips Petroleum Company. Mr. Darr is a Director of the National Propane Gas
Association.
H. Michael Krimbill. Before joining Heritage in 1990 as Vice President and
Chief Financial Officer, Mr. Krimbill was Treasurer of Total Petroleum, Inc.
("Total"). Total is a publicly traded, fully-integrated oil company located in
Denver, Colorado.
Bill W. Byrne. Mr. Byrne served as Vice President of Warren Petroleum
Company, the gas liquids division of Chevron Corporation, from 1982-1992. Since
that time Mr. Byrne has served as the principal of Byrne & Associates, L.L.C., a
gas liquids consulting group based in Tulsa, Oklahoma. Mr. Byrne has been a
Director of Heritage since 1992 and also serves as a director of Empire Energy
Corporation, a propane distribution company. Mr. Byrne is a past president and
Director of the National Propane Gas Association.
John D. Capps. Mr. Capps served as Executive Vice President of the National
Propane Gas Association for 16 years before retiring in 1989. Mr. Capps then
served as Chief Executive Officer of J.D. Capps, Inc., a propane industry
executive search firm. Mr. Capps has served as a Director of Heritage since
1989.
Bryan C. Cressey. Mr. Cressey has served as a principal in GTCR since 1993.
Mr. Cressey was also general partner with the predecessor firm, Golder, Thoma &
Cressey, from 1980-1992. Mr. Cressey has served on the board of Heritage since
1989. Mr. Cressey also serves on the boards of directors of Cable Design
Technologies Corporation, Paging Network, Inc., Golf Enterprises Inc., American
Medserve Corporation and Ullo International, Inc.
J. Charles Sawyer. Mr. Sawyer has served as President and Chief Executive
Officer of Computer Energy, Inc., a provider of software to the propane
industry, since 1981. Mr. Sawyer was formerly the Chief Executive Officer of
Sawyer Gas Co., a regional propane distributor that was purchased by Heritage in
1991. Mr. Sawyer has served as a director of Heritage since 1991. Mr. Sawyer is
a past president and Director of the National Propane Gas Association.
Carl D. Thoma. Mr. Thoma has served as a principal in GTCR since 1993. Mr.
Thoma was also general partner with the predecessor firm, Golder, Thoma &
Cressey, from 1980-1992. Mr. Thoma has served on the board of Heritage since
1994 and he also serves on the boards of directors of MS Financial, Inc. and
Paging Network, Inc.
It is anticipated that Messrs. Cressey and Thoma will resign from the Board
of Directors before consummation of the Transactions.
REIMBURSEMENT OF EXPENSES OF THE GENERAL PARTNER AND ITS AFFILIATES
The General Partner will not receive any management fee or other
compensation in connection with its management of the Partnership. The General
Partner and its affiliates performing services for the Partnership will be
reimbursed at cost for all expenses incurred on behalf of the Partnership,
including the costs of compensation described herein properly allocable to the
Partnership, and all other expenses necessary or appropriate to the conduct of
the business of, and allocable to, the Partnership. On a pro forma basis,
approximately $17.5 million of expenses (primarily wages and salaries) would
have been reimbursed by the Partnership to the General Partner in fiscal 1995.
The Partnership Agreement provides that the General Partner shall determine the
expenses that are allocable to the Partnership in any reasonable manner
determined by the General Partner in its sole discretion.
In addition, the General Partner will receive a 2% general partner interest
and 3,702,943 Subordinated Units as consideration for its contribution to the
Partnership of its limited partner interest in the Operating Partnership, which
will be received as consideration for its contribution to the Operating
Partnership of the propane business of the General Partner. The General Partner
will be entitled to distributions on the general partner interest (including
rights to receive Incentive Distributions) and on such Subordinated Units as
described under "Cash Distribution Policy."
75
<PAGE> 78
EXECUTIVE COMPENSATION
The following table sets forth the annual salary, bonus and all other
compensation awards and payouts earned by the Chief Executive Officer and the
other executive officers of Heritage for services rendered to Heritage and its
subsidiaries during the fiscal years ended August 31, 1995, 1994 and 1993.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ---------------------
--------------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS COMPENSATION(1)
- ----------------------------------- ---- -------- --------- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
James E. Bertelsmeyer.............. 1995 $230,800 $ 100,000 -- $ 1,440
Chairman of the Board 1994 218,500 100,000 -- 994
and Chief Executive Officer 1993 210,800 90,000 -- 870
R. C. Mills........................ 1995 $158,000 $ 50,000 -- $ 2,250
Executive Vice President 1994 150,300 47,000 -- 925
and Chief Operating Officer 1993 145,000 37,500 -- 840
G. A. Darr......................... 1995 $ 99,800 $ 30,000 6,000 $ 688
Vice President, Corporate 1994 95,100 27,000 -- 656
Development 1993 91,800 10,000 -- 336
H. Michael Krimbill................ 1995 $129,000 $ 40,000 -- $ 510
Vice President, Chief Financial 1994 122,000 34,000 -- 152
Officer, Treasurer and Secretary 1993 118,000 30,000 -- 83
</TABLE>
- ---------------
(1) Consists of life insurance premiums paid by Heritage.
Plant Bonus Plan
District employees of Heritage are eligible to participate in a bonus plan
designed to encourage employees at the local level to increase sales volumes and
to control costs (the "Plant Bonus Plan"). The Plant Bonus Plan was adopted in
1989, and provides that a fixed portion of each district's EBITDA in excess of
budget is paid in bonuses to that district's employees. The purpose of the Plant
Bonus Plan is to share year-to-year growth in each district with the employees
generating that growth. The amounts earned by employees under the Plant Bonus
Plan are paid annually. Heritage paid an aggregate of approximately $390,000
pursuant to the Plant Bonus Plan in fiscal 1995.
Profit Sharing Plan
All employees of Heritage or its affiliates may participate in the Heritage
Propane Corporation Profit Sharing and 401(k) Savings Plan (the "Profit Sharing
Plan"), which became effective under a predecessor company on June 1, 1988. The
Board of Directors of Heritage may, in its discretion, cause Heritage to make
annual contributions to the Profit Sharing Plan. In fiscal years 1993, 1994 and
1995, respectively, such contributions have averaged approximately 2% of
employee compensation. Employees' profit sharing interests begin vesting after
the second year of service and vest ratably over a five-year period thereafter.
Employer contributions are invested among funds offered by the plan's trustee in
accordance with the participant's direction. Employees direct the investment of
all monies attributable to their account under the Profit Sharing Plan even if
such account is not entirely vested. The Profit Sharing Plan also has a 401(k)
feature whereby employees may contribute up to 17% of earnings into the plan on
a tax deferred basis. Amounts paid pursuant to the Profit Sharing Plan will be
reimbursed at cost to Heritage by the Partnership following the consummation of
this offering.
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<PAGE> 79
Stock Option Plans
Certain key employees of Heritage and its subsidiaries participate in the
1995 Stock Option Plan (the "1995 Plan") and the 1989 Stock Option Plan (the
"1989 Plan"). Options to purchase Heritage's Class A Common Stock may be granted
under either plan by action of Heritage's Board of Directors. The terms of
individual option grants, including whether such options constitute incentive
stock options under Section 422A of the Code, may be determined by the Board
subject to certain limitations. No option to purchase shares may be exercisable
more than 10 years following the date of the initial grant. Under the 1995 Plan,
the maximum aggregate number of options to purchase shares which may be granted
to any key employee during any calendar year is 20,000 options and no more than
75,000 options to purchase shares may be outstanding under such plan at any
given time. The 1995 Plan also allows for a disinterested committee of
Heritage's Board of Directors to grant outright up to 3,000 shares of Heritage's
Class A Common Stock to any non-employee director. The 1989 Plan provides that
no more than 180,000 options to purchase shares may be outstanding at any given
time. As of April 15, 1996, options to purchase 30,500 and 142,000 shares of
Heritage's Class A Common Stock had been granted under the 1995 Plan and the
1989 Plan, respectively. It is anticipated that no additional grants will be
made under either plan following consummation of this offering.
The following table sets forth certain information with respect to stock
option grants to the named executive officers during fiscal 1995.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
----------------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES % OF TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS/SARS EXERCISE PRICE APPRECIATION
OPTIONS/ GRANTED TO OR BASE FOR OPTION TERM
SARS GRANTED EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME (#)(1) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
---- ------------ -------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
James E.
Bertelsmeyer........ -- -- -- -- -- --
R. C. Mills........... -- -- -- -- -- --
G. A. Darr............ 6,000 100% $31.00 1/15/05 $116,974 $296,436
H. Michael Krimbill... -- -- -- -- -- --
</TABLE>
- ---------------
(1) Excludes grants of 10,000, 10,000 and 6,000 shares underlying options,
respectively, to Messrs. Mills, Krimbill and Darr granted on January 15,
1996 under the 1995 Plan.
77
<PAGE> 80
The following table sets forth certain information with respect to the
aggregate number and value of options exercisable and unexercisable by such
officers at fiscal year end 1995.
OPTION EXERCISES IN FISCAL YEAR 1995 AND FISCAL 1995 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
SHARES FISCAL 1995 YEAR-END FISCAL 1995 YEAR-END(1)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James E. Bertelsmeyer... -- -- -- -- -- --
R. C. Mills............. -- -- 20,000 -- $ 575,400 $ --
G. A. Darr.............. -- -- -- 6,000 $ -- $42,000
H. Michael Krimbill..... -- -- 16,000 -- $ 460,320 $ --
</TABLE>
- ---------------
(1) According to the terms of the Executive Stock Option Agreements, the market
value of each share of Class A Common Stock is determined by Heritage's
Board of Directors. In the absence of such a Board determination at fiscal
year-end 1995, the information presented above assumes the $38.00 per share
Class A Common Stock valuation established by the Board on January 15, 1996.
Employment Agreements and Severance Arrangements
The General Partner will enter into employment agreements (the "Employment
Agreements") with Messrs. Bertelsmeyer, Mills, Darr and Krimbill (each, an
"Executive") to become effective upon consummation of the Transactions. The
summary of such Employment Agreements contained herein does not purport to be
complete and is qualified in its entirety by reference to the Employment
Agreements, which have been filed as exhibits to the Registration Statement of
which this Prospectus is a part.
Pursuant to the Employment Agreements, Messrs. Bertelsmeyer, Mills, Darr
and Krimbill will serve as Chief Executive Officer, Executive Vice President and
Chief Operating Officer, Vice President, Corporate Development and Vice
President, Chief Financial Officer, Treasurer and Secretary, respectively. The
Employment Agreements will have an initial term of five years for Mr.
Bertelsmeyer and three years for each of Messrs. Mills, Darr and Krimbill but
will be automatically extended for successive one year periods, respectively,
unless earlier terminated by the affirmative vote of at least a majority of the
entire membership of the Board of Heritage upon a finding that a sufficient
reason exists for such termination or by the Executive for any reason or
otherwise terminated in accordance with the Employment Agreements. The
Employment Agreements will provide for an annual base salary of $341,000,
$215,000, $134,000, and $175,000 for each of Messrs. Bertelsmeyer, Mills, Darr
and Krimbill, respectively. The Employment Agreements do not provide for an
annual bonus for the Executives. The Employment Agreements will also provide for
the Executives and where applicable, the Executive's dependents, to have the
right to participate in benefit plans made available to other executives of
Heritage including the Unit Purchase Plan and Restricted Unit Plan described
below.
The Employment Agreements provide that in the event an Executive (i) is
involuntarily terminated (other than for "misconduct" or "disability") or (ii)
voluntarily terminates employment for "good reason" (as defined in the
agreements), such Executive will be entitled to continue receiving his base
salary and to participate in all group health insurance plans and programs that
may be offered to executives of the General Partner for the remainder of the
term of the Employment Agreement or, if earlier, the Executive's death, less any
severance payments received under the General Partner's severance plans. Each
Employment Agreement also provides that if any payment received by an Executive
is subject to the 20% federal excise tax under Section 4999(a) of the Code, the
payment will be grossed up to permit the Executive to retain a net amount on an
after-tax basis equal to what he would have received had the excise tax and all
other federal and state taxes on such additional amount not been payable. In
addition, each Employment Agreement will contain non-competition and
confidentiality provisions.
78
<PAGE> 81
The General Partner has also adopted a severance plan for its employees
which, in general, is triggered by the termination of an employee's employment
during the period (the "Transition Period") beginning two weeks prior to the
effective date of a "change of control" and ending, for senior management,
within 2 years thereafter or, for all other employees, within 1 year thereafter.
In general, the severance plan entitles (i) senior management to an amount equal
to two times base salary for the most recent twelve-month period and the average
annual bonus for the last three fiscal years in which a bonus was paid or is
payable, (ii) regional management to an amount equal to one year's base salary
and (iii) general employees to an amount equal to the product of the number of
years of such employee's service and his or her weekly salary. Severance
payments to general employees will be no less than two months and no greater
than one year's salary. The severance plan also provides that the General
Partner will be required to provide benefits commensurate with those received
while employed by the General Partner to senior management and regional
management for the duration of the Transition Period or such longer period as
any plan, program, practice or policy may provide. Furthermore, if any payment
received by an "eligible employee" is subject to the excise tax imposed by
Section 4999(a) of the Code, the General Partner will make an additional payment
to the "eligible employee" so that after such payment the employee retains a net
amount on an after-tax basis equal to what he would have received had the excise
tax and all other federal and state taxes on such additional amount not been
payable. In addition, each Employment Agreement will contain non-competition and
confidentiality provisions.
RESTRICTED UNIT PLAN
Prior to the closing of this offering, the General Partner will adopt a
restricted unit plan (the "Restricted Unit Plan") for non-employee directors and
key employees of the General Partner and its affiliates. The summary of the
Restricted Unit Plan contained herein does not purport to be complete and is
qualified in its entirety by reference to the Restricted Unit Plan, which has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part.
Initially, rights to acquire 146,000 Common Units will be available under
the Restricted Unit Plan. Upon consummation of the Transactions, rights to
acquire 24,400 Common Units (the "Initial Units") will be granted to the General
Partner's non-employee directors, executive officers and regional managers,
subject to the vesting conditions described below and subject to other customary
terms and conditions.
The right to acquire the remaining 121,600 Common Units initially available
under the Restricted Unit Plan, including any forfeiture or lapse of rights to
the Initial Units and excluding any grants to be granted to non-employee
directors as described below (the "Remaining Units"), will be available for
grant in the future to key employees on such terms and conditions (including
vesting conditions) as the Compensation Committee of the General Partner shall
determine. Each non-employee director shall automatically receive a grant with
respect to 500 Common Units on the closing of the offering made hereby and
thereafter a grant for 500 Common Units on each January 1 that such person
continues as a non-employee director. Newly elected non-employee directors will
also be entitled to receive Common Units upon election or appointment to the
Board.
The rights to acquire the Initial Units will be subject to a vesting
procedure such that the rights will vest automatically upon, and in the same
proportions as, the conversion of the Subordinated Units to Common Units. The
rights to acquire the Remaining Units will vest upon the latter to occur of (i)
the three-year anniversary of the issuance of such Units, or (ii) the conversion
of the Subordinated Units to Common Units. See "Cash Distribution
Policy -- Distributions from Operating Surplus during Subordination Period." In
the event of a "change of control" (as defined in the Restricted Unit Plan), all
rights to acquire Common Units pursuant to the Restricted Unit Plan will
immediately vest.
Common Units to be delivered upon the "vesting" of rights may be Common
Units acquired by the General Partner in the open market, Common Units already
owned by the General Partner, Common Units acquired by the General Partner
directly from the Partnership, or any other person, or any combination of the
foregoing. Although the Restricted Unit Plan permits the grant of distribution
equivalent rights to key employees, it is anticipated that until such Common
Units have been delivered to a participant, such
79
<PAGE> 82
participant shall not be entitled to any distributions or allocations of income
or loss and shall not have any voting or other rights in respect of such Common
Units.
The Board of Heritage in its discretion may terminate the Restricted Unit
Plan at any time with respect to any Units for which a grant has not theretofore
been made. The Board will also have the right to alter or amend the Restricted
Unit Plan or any part thereof from time to time; provided, however, that no
change in any Restricted Unit may be made that would impair the rights of the
optionee without the consent of such optionee; and provided further, that,
during the Subordination Period, without the approval of a majority of the
Unitholders no amendment or alteration will be made that would (i) increase the
total number of Units available for awards under the Restricted Unit Plan; (ii)
change the class of individuals eligible to receive Restricted Unit awards;
(iii) extend the maximum period during which Restricted Units may be granted
under the Restricted Unit Plan; or (iv) materially increase the cost of the
Restricted Unit Plan to the Partnership.
The issuance of the Common Units pursuant to the Restricted Unit Plan is
intended to serve as a means of incentive compensation for performance and not
primarily as an opportunity to participate in the equity appreciation in respect
of the Common Units. Therefore, no consideration will be payable by the plan
participants upon vesting and issuance of the Common Units.
UNIT PURCHASE PLAN
Prior to the closing of this offering, the Partnership will adopt a Unit
purchase plan (the "Unit Purchase Plan") for employees of the General Partner
and its affiliates. Pursuant to the Unit Purchase Plan, the General Partner has
agreed to pay the brokerage commissions, transfer taxes and other transaction
fees associated with a beneficiary's purchase of Common Units in market
transactions and an amount up to 10% of the cost of such Units. The maximum
amount of salary that a participant may withhold to purchase Units pursuant to
the Unit Purchase Plan in any calendar year may not exceed 10% of his base
salary or wages for the year. Further, if a participant sells or otherwise
disposes of his or her Units, the participant will thereafter be precluded from
participating in the Unit Purchase Plan. The number of Units initially available
for purchase under this plan is 20,000. The Unit Purchase Plan is intended to
serve as a means of encouraging participants to invest in the Partnership's
Common Units.
COMPENSATION OF DIRECTORS
Heritage currently pays no additional remuneration to its employees for
serving as directors. Historically, directors who are not employees of Heritage
or any of its affiliates have been given the opportunity to purchase or have
been awarded options to acquire shares of common stock in Heritage, although no
such purchases or awards are anticipated in the future. Following completion of
this offering, the General Partner anticipates that in addition to permitting
its non-employee directors to participate in the benefit plans described herein
that each of its non-employee directors will be compensated $10,000 annually,
$1,000 per Board meeting attended and $500 per committee meeting attended. All
expenses associated with compensation of directors will be reimbursed to
Heritage by the Partnership.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Compensation of the executive officers of Heritage is determined by its
Board of Directors. Mr. Bertelsmeyer, Heritage's Chairman of the Board and Chief
Executive Officer, participated in deliberations of Heritage's Board of
Directors concerning executive officer compensation, but did not participate in
deliberations concerning his own compensation.
80
<PAGE> 83
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information with respect to (i) the
historical beneficial ownership as of April 15, 1996, of Heritage's Class A
Common Stock, Class B Common Stock and Redeemable Preferred Stock by each
stockholder who owns of record, or is known by Heritage to own beneficially,
more than five percent of such class of stock as well as the ownership of each
executive officer and director of Heritage and all executive officers and
directors as a group and (ii) the pro forma beneficial ownership by such persons
of the capital stock of Heritage giving affect to the Transactions.
COMMON STOCK
<TABLE>
<CAPTION>
HERITAGE HISTORICAL HERITAGE PRO FORMA
---------------------------------- ----------------------------------
NUMBER OF NUMBER OF PERCENT OF NUMBER OF NUMBER OF PERCENT OF
CLASS A CLASS B COMMON CLASS A CLASS B COMMON
NAME SHARES(A) SHARES(B) STOCK SHARES SHARES STOCK
- -------------------------------------- --------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Golder, Thoma, Cressey Fund III,
Limited Partnership(c).............. 1,014,060 -- 61.60% -- -- --
c/o Golder, Thoma, Cressey, Rauner, Inc.
6100 Sears Tower
Chicago, Illinois 60606-6402
The Prudential Insurance Company of
America(d).......................... -- 441,419 25.52 -- -- --
Four Gateway Center
Newark, New Jersey 07102-4069
James E. Bertelsmeyer(e).............. 219,382 -- 13.23 219,382 -- 62.93%
R. C. Mills(f)........................ 32,000 -- 1.92 40,000 -- 10.28
G. A. Darr(g)......................... 17,544 -- 1.06 26,344 -- 6.77
H. Michael Krimbill(h)................ 30,239 -- 1.82 38,239 -- 9.83
Bill W. Byrne(i)...................... 7,500 -- * 7,500 -- 1.93
John D. Capps(j)...................... 9,672 -- * 9,672 -- 2.49
Bryan C. Cressey(k)................... 1,014,060 -- 61.60 -- -- --
J. Charles Sawyer(l).................. 7,500 -- * 7,500 -- 1.93
Carl D. Thoma(k)...................... 1,014,060 -- 61.60 -- -- --
All directors and executive officers
as a group (9 persons)(m)........... 1,337,897 -- 78.29% 348,637 -- 89.59%
</TABLE>
REDEEMABLE PREFERRED STOCK
<TABLE>
<CAPTION>
HERITAGE
HERITAGE HISTORICAL PRO FORMA
------------------------ ---------
NUMBER OF PERCENT OF NUMBER OF
NAME SHARES CLASS SHARES(N)
- ---------------------------------------------------------------------- --------- ---------- ---------
<S> <C> <C> <C>
Golder, Thoma, Cressey Fund III, Limited Partnership(c)............... 5,927.00 62.48% --
The Prudential Insurance Company of America........................... 3,182.00 33.54 --
James E. Bertelsmeyer................................................. 72.00 * --
R. C. Mills........................................................... 101.70 1.07 --
G. A. Darr............................................................ 36.00 * --
H. Michael Krimbill................................................... 27.00 * --
Bill W. Byrne......................................................... 72.00 * --
John D. Capps......................................................... 18.00 * --
Bryan C. Cressey(k)................................................... 5,927.00 62.48 --
J. Charles Sawyer..................................................... 50.85 * --
Carl D. Thoma(k)...................................................... 5,927.00 62.48 --
All directors and executive officers as a group (9 persons)........... 6,304.55 66.46% --
</TABLE>
81
<PAGE> 84
- ---------------
* Holds less than 1% of total outstanding shares of Common Stock or
Redeemable Preferred Stock.
(a) The Class A Common Stock is Heritage's only outstanding voting capital
stock.
(b) The Class B Common Stock is nonvoting stock convertible into shares of
Class A Common Stock on a one-for-one basis.
(c) Golder, Thoma, Cressey Fund III, Limited Partnership is a private
investment fund affiliated with GTCR. Messrs. Cressey and Thoma are each
principals of GTCR.
(d) Includes 83,919 shares issuable upon the exercise of warrants.
(e) All such shares of Class A Common Stock are held by a family limited
partnership established by Mr. Bertelsmeyer. Includes 12,302 shares
issuable upon the exercise of warrants.
(f) Includes 20,000 shares underlying options granted under the 1989 Plan and
2,000 shares underlying options granted under the 1995 Plan. Excludes for
historical purposes and includes for pro forma purposes 8,000 shares
underlying unvested options granted under the 1995 Plan, all of which will
vest upon consummation of this offering.
(g) Includes 804 shares issuable upon the exercise of warrants, 2,000 shares
underlying stock options under the 1989 Plan and 1,200 shares underlying
options granted under the 1995 Plan. Excludes for historical purposes and
includes for pro forma purposes 4,000 shares underlying unvested options
granted under the 1989 Plan and 4,800 shares underlying unvested options
granted under the 1995 Plan, all of which will vest upon consummation of
this offering.
(h) Includes 1,584 shares issuable upon the exercise of warrants, 16,000 shares
underlying options under the 1989 Plan and 2,000 shares underlying options
granted under the 1995 Plan. Excludes for historical purposes and includes
for pro forma purposes 8,000 shares underlying unvested options granted
under the 1995 Plan, all of which will vest upon consummation of this
offering.
(i) Includes 1,500 shares underlying options granted under the 1995 Plan. All
such shares are beneficially owned by Byrne & Associates L.L.C.
(j) Includes 402 shares issuable upon the exercise of warrants and 1,500
shares underlying options granted under the 1995 Plan.
(k) Represents shares held by Golder, Thoma, Cressey Fund III, Limited
Partnership, and over which, through GTCR, each of Messrs. Cressey and
Thoma have indirect voting power. Messrs. Cressey and Thoma disclaim
beneficial ownership of such shares.
(l) Includes 1,500 shares underlying options granted under the 1995 Plan.
(m) Includes 15,092 shares issuable upon the exercise of warrants and 47,700
shares underlying stock options granted under the 1989 Plan and the 1995
Plan.
(n) All shares of Redeemable Preferred Stock will be redeemed in connection
with the Equity Repurchase. See "The Transactions."
Upon consummation of the Transactions, all of the outstanding capital stock
of Heritage will be owned by management, employees and related persons and
entities. Concurrently with the consummation of the Equity Repurchase, such
stockholders will enter into a stockholders' agreement which, among other
things, grants Heritage and other stockholders first refusal rights to purchase
any outstanding shares proposed to be sold to an outside party.
82
<PAGE> 85
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH PRUDENTIAL
Prior to consummation of this offering, Prudential owned 441,419 shares of
Heritage's Class B Common Stock and 3,182 shares of Heritage's Redeemable
Preferred Stock, representing 25.52% and 33.54% of the outstanding Common Stock
and Redeemable Preferred Stock, respectively. In addition, immediately prior to
this offering Heritage had aggregate outstanding borrowings from Prudential of
approximately $112.0 million in principal amount. These borrowings consisted of
(i) $66.4 million principal amount of borrowings outstanding under the Existing
Acquisition Facility, (ii) $3.0 million principal amount of borrowings
outstanding under the Existing Revolving Credit Facility, (iii) $30 million
principal amount of the Senior Reset Notes and (iv) an aggregate of $12.6
million principal amount of the Subordinated Reset Notes. During each of the
three fiscal years ended August 31, 1993, 1994 and 1995 and during the six-month
period ended February 29, 1996, interest payments on such indebtedness were $8.0
million, $8.1 million, $11.1 million and $6.0 million, respectively.
In October and November of 1995, Heritage completed three acquisitions for
an aggregate purchase price of $5.5 million. As a result of its use of available
funds to finance these acquisitions, Heritage was unable to pay a $5.0 million
scheduled principal repayment in November 1995 under its Existing Revolving
Credit Facility (of which Heritage has since repaid $2.0 million) as well as a
$4.2 million scheduled principal repayment in February 1996 under the Existing
Acquisition Facility, resulting in a default under the terms of each such
facility and its other indebtedness to Prudential. Heritage proceeded with such
acquisitions while negotiating a new bank credit facility, the proceeds of which
were to be used to repay a substantial portion of the indebtedness outstanding
to Prudential and thereby cure any payment defaults thereunder. In December
1995, as a result of its decision to pursue this offering, Heritage decided to
abandon such refinancing efforts. Prudential and Heritage have entered into a
standstill agreement pursuant to which Prudential has agreed to waive existing
and certain prospective defaults and forbear from exercising any remedies under
the Prudential indebtedness for a period of six months from the execution of
such standstill agreement. See "The Transactions" and "Security Ownership of
Certain Beneficial Owners and Management."
Prudential, GTCR and Heritage have entered into the Letter Agreement,
pursuant to which, among other things, Heritage and certain members of
management will repurchase all of Prudential's shares of Class B Common Stock
and Heritage will repurchase all of Prudential's shares of Redeemable Preferred
Stock for an aggregate of approximately $19.3 million in cash (assuming an
offering price of $20.50 per Common Unit) and $2.0 million in notes (the
"Management Notes") to be issued by such members of management. The Management
Notes bear interest at a rate of 10% per annum, compounded annually. Prior to
maturity, principal of and interest on the Management Notes is payable only from
after-tax distributions to Heritage for distribution to its remaining
stockholders. The Management Notes provide for sinking fund payments of 33 1/3%
of the principal amount thereof on each of the seventh, eighth and ninth
anniversaries of the closing of this offering and have a 15 year maturity, at
which time any unpaid principal and accrued interest is payable in full. The
Management Notes are secured by the Common Stock of Heritage owned by the
respective remaining stockholders and are non-recourse to the makers thereof.
The consideration to be paid in connection with such repurchase was determined
by negotiation among Heritage, Prudential, GTCR and the stockholders of Heritage
to be remaining after consummation of the Transactions. Heritage will pay the
cash portion of such purchase price with a portion of the proceeds of the Note
Placement. The Letter Agreement also provides that, at the closing of this
offering, Heritage will repay or prepay all outstanding indebtedness due under
each of the Existing Acquisition Facility, the Existing Revolving Credit
Facility, the Senior Reset Notes and the Subordinated Reset Notes plus a
prepayment penalty in the amount of $3.5 million in connection with the early
retirement of the Senior Reset Notes and the Subordinated Reset Notes. See "The
Transactions."
TRANSACTIONS WITH GTCR
GTCR, of which Messrs. Cressey and Thoma are principals, participated in
the formation of Heritage in 1989, and immediately prior to this offering held
1,014,060 shares of Heritage's Class A Common Stock and
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5,927 shares of Heritage's Redeemable Preferred Stock, representing 61.60% and
62.48% of Heritage's outstanding Common Stock and Preferred Stock, respectively.
In accordance with the terms of the Letter Agreement, Heritage and certain
members of management will repurchase all of GTCR's shares of Class A Common
Stock and Heritage will repurchase all of GTCR's shares of Redeemable Preferred
Stock for an aggregate of approximately $42.8 million in cash (assuming an
offering price of $20.50 per Common Unit) and an aggregate of $3.0 million in
Management Notes identical in terms to those to be issued to Prudential. The
consideration to be paid in connection with such repurchase was determined by
negotiation among Heritage, Prudential, GTCR and the stockholders of Heritage to
be remaining after consummation of the Transactions. Heritage will pay the cash
portion of such purchase price with a portion of the proceeds of the Note
Placement.
TRANSACTIONS WITH MANAGEMENT
In connection with the Equity Repurchase, certain members of Heritage's
management will receive an aggregate of approximately $0.5 million in cash as
payment for the purchase by Heritage of 377.55 shares of its outstanding
Redeemable Preferred Stock. Of this amount, Messrs, Bertelsmeyer, Mills, Darr,
Krimbill, Byrne, Capps and Sawyer will receive approximately $95,000, $133,000,
$48,000, $36,000, $89,000, $24,000 and $66,000, respectively. In addition, and
pursuant to the Equity Repurchase, Messrs. Bertelsmeyer, Mills, Darr, Krimbill,
Byrne, Capps, Sawyer and certain other employee stockholders, respectively, will
issue an aggregate of $5.0 million principal amount of Management Notes, with
each of such officer's obligation under such Management Notes being
proportionate to his ownership interest in the General Partner following
consummation of the Transactions. As a result of the Equity Repurchase, Messrs.
Bertelsmeyer, Mills, Darr, Krimbill, Byrne, Capps, Sawyer and certain other
employee stockholders will own the entire equity interest in the General
Partner. Concurrently with the consummation of the Equity Repurchase, such
stockholders will enter into a stockholders' agreement which, among other
things, grants Heritage and such stockholders first refusal rights to purchase
any outstanding shares proposed to be sold to an outside party.
RIGHTS OF THE GENERAL PARTNER
After this offering, the General Partner will own all of the Subordinated
Units, representing an aggregate 47.0% limited partner interest in the
Partnership (43.6% if the Underwriters' over-allotment option is exercised in
full). Through the General Partner's ability, as general partner, to manage and
operate the Partnership and its ownership of all of the outstanding Subordinated
Units (effectively giving the General Partner the ability to veto certain
actions of the Partnership), the General Partner and its affiliates will have
the ability to control the management of the Partnership.
CONTRIBUTION, CONVEYANCE AND ASSUMPTION AGREEMENT
In connection with the Transactions, the Partnership, the Operating
Partnership and the General Partner will enter into the Contribution Agreement
which will generally govern the Transactions, including the asset transfer to
and the assumption of liabilities by the Operating Partnership, and the
distribution of the proceeds of this offering. The Contribution Agreement will
not be the result of arm's-length negotiations, and there can be no assurance
that it, or that each of the transactions provided for therein, will be effected
on terms at least as favorable to the parties to such agreement as could have
been obtained from unaffiliated third parties. All of the transaction expenses
incurred in connection with the Transactions, including the expense associated
with transferring assets into the Operating Partnership, will be paid from the
proceeds of this offering. See "Business and Properties -- Transfer of the
Partnership Assets."
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CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
CONFLICTS OF INTEREST
Certain conflicts of interest exist and may arise in the future as a result
of the relationships between the General Partner and its stockholders, on the
one hand, and the Partnership and its limited partners, on the other hand. The
directors and officers of the General Partner have fiduciary duties to manage
the General Partner, including its investments in its subsidiaries and
affiliates, in a manner beneficial to its stockholders. In general, the General
Partner has a fiduciary duty to manage the Partnership in a manner beneficial to
the Partnership and the Unitholders. The Partnership Agreement contains
provisions that allow the General Partner to take into account the interests of
parties in addition to the Partnership in resolving conflicts of interest,
thereby limiting its fiduciary duty to the Unitholders as well as provisions
that may restrict the remedies available to Unitholders for actions taken that
might, without such limitations, constitute breaches of fiduciary duty. The duty
of the directors and officers of the General Partner to the stockholders of the
General Partner may, therefore, come into conflict with the duties of the
General Partner to the Partnership and the Unitholders. The Audit Committee of
the Board of Directors of the General Partner will, at the request of the
General Partner, review conflicts of interest that may arise between the General
Partner or its affiliates, on the one hand, and the Partnership, on the other.
See "Management -- Partnership Management" and "-- Fiduciary and Other Duties."
The fiduciary obligations of general partners is a developing area of law.
The provisions of the Delaware Act that allow the fiduciary duties of a general
partner to be waived or restricted by a partnership agreement have not been
resolved in a court of law, and the General Partner has not obtained an opinion
of counsel covering the provisions set forth in the Partnership Agreement that
purport to waive or restrict fiduciary duties of the General Partner.
Unitholders should consult their own legal counsel concerning the fiduciary
responsibilities of the General Partner and its officers and directors and the
remedies available to the Unitholders.
Conflicts of interest could arise with respect to the situations described
below, among others:
COMMON UNITHOLDERS WILL HAVE NO RIGHT TO ENFORCE OBLIGATIONS OF THE GENERAL
PARTNER AND ITS AFFILIATES UNDER AGREEMENTS WITH THE PARTNERSHIP
The agreements between the Partnership and the General Partner do not grant
to the Unitholders, separate and apart from the Partnership, the right to
enforce the obligations of the General Partner and its affiliates in favor of
the Partnership. Therefore, the Partnership will be primarily responsible for
enforcing such obligations.
CONTRACTS BETWEEN THE PARTNERSHIP, ON THE ONE HAND, AND THE GENERAL PARTNER
AND ITS AFFILIATES, ON THE OTHER, WILL NOT BE THE RESULT OF ARM'S-LENGTH
NEGOTIATIONS
Under the terms of the Partnership Agreement, the General Partner is not
restricted from paying the General Partner or its affiliates for any services
rendered (provided such services are rendered on terms fair and reasonable to
the Partnership) or entering into additional contractual arrangement with any of
them on behalf of the Partnership. Neither the Partnership Agreement nor any of
the other agreements, contracts and arrangements between the Partnership, on the
one hand, and the General Partner and its affiliates, on the other, are or will
be the result of arm's length negotiations. All of such transactions entered
into after the sale of the Common Units offered in this offering are to be on
terms which are fair and reasonable to the Partnership, provided that any
transaction shall be deemed fair and reasonable if (i) such transaction is
approved by the Audit Committee, (ii) its terms are no less favorable to the
Partnership than those generally being provided to or available from unrelated
third parties or (iii) taking into account the totality of the relationships
between the parties involved (including other transactions that may be
particularly favorable or advantageous to the Partnership), the transaction is
fair to the Partnership. The General Partner and its affiliates will have no
obligation to permit the Partnership to use any facilities or assets of the
General Partner and such affiliates, except as may be provided in contracts
entered into from time to time specifically dealing
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with such use, nor shall there be any obligation of the General Partner and its
affiliates to enter into any such contracts.
CERTAIN ACTIONS TAKEN BY THE GENERAL PARTNER MAY AFFECT THE AMOUNT OF CASH
AVAILABLE FOR DISTRIBUTION TO UNITHOLDERS OR ACCELERATE THE CONVERSION OF
SUBORDINATED UNITS
Decisions of the General Partner with respect to the amount and timing of
cash expenditures, participation in capital expansions and acquisitions,
borrowings, issuances of additional partnership interests and reserves in any
quarter may affect whether, or the extent to which, there is sufficient
Available Cash from Operating Surplus to meet the Minimum Quarterly Distribution
and Target Distributions Levels on all Units in such quarter or in subsequent
quarters. The Partnership Agreement provides that any borrowings by the
Partnership or the approval thereof by the General Partner shall not constitute
a breach of any duty owned by the General Partner to the Partnership or the
Unitholders including borrowings that have the purpose or effect, directly or
indirectly, enabling the General Partner to receive distributions on the
Subordinated Units or the Incentive Distributions or hasten the expiration of
the Subordination Period or the conversion of the Subordinated Units into Common
Units. The Partnership Agreement provides that the Partnership and the Operating
Partnership may borrow funds from the General Partner and its affiliates. The
General Partner and its affiliates may not borrow funds from the Partnership or
the Operating Partnership. Furthermore, any actions taken by the General Partner
consistent with the standards of reasonable discretion set forth in the
definitions of Available Cash, Operating Surplus and Capital Surplus will be
deemed not to constitute a breach of any duty of the General Partner to the
Partnership or the Unitholders.
THE PARTNERSHIP WILL REIMBURSE THE GENERAL PARTNER AND ITS AFFILIATES FOR
CERTAIN EXPENSES
Under the terms of the Partnership Agreement, the General Partner and its
affiliates will be reimbursed by the Partnership for certain expenses incurred
on behalf of the Partnership, including costs incurred in providing corporate
staff and support services to the Partnership. The Partnership Agreement
provides that the General Partner will determine the expenses that are allocable
to the Partnership in any reasonable manner determined by the General Partner in
its sole discretion. See "Management -- Reimbursement of Expenses of the General
Partner and its Affiliates."
THE GENERAL PARTNER INTENDS TO LIMIT ITS LIABILITY WITH RESPECT TO THE
PARTNERSHIP'S OBLIGATIONS
Whenever possible, the General Partner intends to limit the Partnership's
liability under contractual arrangements to all or particular assets of the
Partnership, with the other party thereto having no recourse against the General
Partner or its assets. The Partnership Agreement provides that any action by the
General Partner in so limiting the liability of the General Partner or that of
the Partnership will not be deemed to be a breach of the General Partner's
fiduciary duties, even if the Partnership could have obtained more favorable
terms without such limitation on liability.
COMMON UNITS ARE SUBJECT TO THE GENERAL PARTNER'S LIMITED CALL RIGHT
The General Partner may exercise its right to call for and purchase Common
Units as provided in the Partnership Agreement or assign such right to one of
its affiliates or to the Partnership. The General Partner thus may use its own
discretion, free of fiduciary duty restrictions, in determining whether to
exercise such right. As a consequence, a Common Unitholder may have his Common
Units purchased from him even though he may not desire to sell them, and the
price paid may be less than the amount the holder would desire to receive upon
sale of his Common Units. For a description of such right, see "The Partnership
Agreement -- Limited Call Right."
THE PARTNERSHIP MAY RETAIN SEPARATE COUNSEL FOR ITSELF OR FOR THE HOLDERS
OF COMMON UNITS; ADVISORS RETAINED BY THE PARTNERSHIP FOR THIS OFFERING HAVE NOT
BEEN RETAINED TO ACT FOR HOLDERS OF COMMON UNITS
The Common Unitholders have not been represented by counsel in connection
with the preparation of the Partnership Agreement or other agreements referred
to herein or in establishing the terms of this offering. The
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attorneys, independent public accountants and others who have performed services
for the Partnership in connection with this offering have been retained by the
General Partner, its affiliates and the Partnership and may continue to be
retained by the General Partner, its affiliates and the Partnership after this
offering. Attorneys, independent public accountants and others who will perform
services for the Partnership in the future will be selected by the General
Partner or the Audit Committee and may also perform services for the General
Partner and its affiliates. The Partnership may retain separate counsel for
itself or the holders of Common Units in the event of a conflict of interest
arising between the General Partner and its affiliates, on the one hand, and the
Partnership or the holders of Common Units, on the other, after the sale of the
Common Units offered hereby, depending on the nature of such conflict, but it
does not intend to do so in most cases.
THE GENERAL PARTNER IS NOT RESTRICTED FROM ENGAGING IN A TRANSACTION WHICH
WOULD TRIGGER CHANGE IN OWNERSHIP PROVISIONS
The Partnership's indebtedness contains provisions relating to change in
ownership. If such change in ownership provisions are triggered, such
outstanding indebtedness may become due. There is no restriction on the ability
of the General Partner from entering into a transaction which would trigger such
change in ownership provisions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Description of Indebtedness."
THE GENERAL PARTNER'S AFFILIATES ARE NOT RESTRICTED FROM COMPETING WITH THE
PARTNERSHIP
The Partnership Agreement does not restrict the ability of affiliates of
the General Partner to engage in any activities, except for the retail sale of
propane to end users in the continental United States. The General Partner's
affiliates may compete with the Partnership in other propane-related activities,
such as trading, transportation, storage and wholesale distribution of propane.
Furthermore, the Partnership Agreement provides that the General Partner and its
affiliates have no obligation to present business opportunities to the
Partnership.
FIDUCIARY AND OTHER DUTIES
The General Partner will be accountable to the Partnership and the
Unitholders as a fiduciary. Consequently, the General Partner must exercise good
faith and integrity in handling the assets and affairs of the Partnership. In
contrast to the relatively well-developed law concerning fiduciary duties owed
by officers and directors to the shareholders of a corporation, the law
concerning the duties owed by general partners to other partners and to
partnerships is relatively undeveloped. Neither the Delaware Revised Uniform
Limited Partnership Act (the "Delaware Act") nor case law defines with
particularity the fiduciary duties owed by general partners to limited partners
or a limited partnership, but the Delaware Act provides that Delaware limited
partnerships may, in their partnership agreements, restrict or expand the
fiduciary duties that might otherwise be applied by a court in analyzing the
standard of duty owed by general partners to limited partners and the
partnership.
Fiduciary duties are generally considered to include an obligation to act
with the highest good faith, fairness and loyalty. Such duty of loyalty, in the
absence of a provision in a partnership agreement providing otherwise, would
generally prohibit a general partner of a Delaware limited partnership from
taking any action or engaging in any transaction as to which it has a conflict
of interest. In order to induce the General Partner to manage the business of
the Partnership, the Partnership Agreement, as permitted by the Delaware Act,
contains various provisions intended to have the effect of restricting the
fiduciary duties that might otherwise be owed by the General Partner to the
Partnership and its partners and waiving or consenting to conduct by the General
Partner and its affiliates that might otherwise raise issues as to compliance
with fiduciary duties or applicable law.
The Partnership Agreement provides that in order to become a limited
partner of the Partnership, a holder of Common Units is required to agree to be
bound by the provisions thereof, including the provisions discussed above. This
is in accordance with the policy of the Delaware Act favoring the principle of
freedom of
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contract and the enforceability of partnership agreements. The Delaware Act also
provides that a partnership agreement is not unenforceable by reason of its not
having been signed by a person being admitted as a limited partner or becoming
an assignee in accordance with the terms thereof.
The Partnership Agreement provides that whenever a conflict arises between
the General Partner or its affiliates, on the one hand, and the Partnership or
any other partner, on the other, the General Partner shall resolve such
conflict. The General Partner shall not be in breach of its obligations under
the Partnership Agreement or its duties to the Partnership or the Unitholders if
the resolution of such conflict is fair and reasonable to the Partnership, and
any resolution shall conclusively be deemed to be fair and reasonable to the
Partnership if such resolution is (i) approved by the Audit Committee (although
no party is obligated to seek such approval and the General Partner may adopt a
resolution or course of action that has not received such approval), (ii) on
terms no less favorable to the Partnership than those generally being provided
to or available from unrelated third parties or (iii) fair to the Partnership,
taking into account the totality of the relationships between the parties
involved (including other transactions that may be particularly favorable or
advantageous to the Partnership). In resolving such conflict, the General
Partner may (unless the resolution is specifically provided for in the
Partnership Agreement) consider the relative interests of the parties involved
in such conflict or affected by such action, any customary or accepted industry
practices or historical dealings with a particular person or entity and, if
applicable, generally accepted accounting or engineering practices or principles
and such other factors as its deems relevant. Thus, unlike the strict duty of a
fiduciary who must act solely in the best interests of his beneficiary, the
Partnership Agreement permits the General Partner to consider the interests of
all parties to a conflict of interest, including the interests of the General
Partner. In connection with the resolution of any conflict that arises, unless
the General Partner has acted in bad faith, the action taken by the General
Partner shall not constitute a breach of the Partnership Agreement, any other
agreement or any standard of care of duty imposed by the Delaware Act or other
applicable law. The Partnership also provides that in certain circumstances the
General Partner may act in its sole discretion, in good faith or pursuant to
other appropriate standards.
The Delaware Act provides that a limited partner may institute legal action
on behalf of the partnership (a partnership derivative action) to recover
damages from a third party where the general partner has refused to institute
the action or where an effort to cause the general partner to do so is not
likely to succeed. In addition, the statutory or case law of certain
jurisdictions may permit a limited partner to institute legal action on behalf
of himself or all other similarly situated limited partners (a class action) to
recover damages from a general partner for violations of its fiduciary duties to
the limited partners.
The Partnership Agreement also provides that any standard of care and duty
imposed thereby or under the Delaware Act or any applicable law, rule or
regulation will be modified, waived or limited, to the extent permitted by law,
as required to permit the General Partner and its officers and directors to act
under the Partnership Agreement or any other agreement contemplated therein and
to make any decisions pursuant to the authority prescribed in the Partnership
Agreement so long as such action is reasonably believed by the General Partner
to be in, or not inconsistent with, the best interests of the Partnership.
Further, the Partnership Agreement provides that the General Partner and its
officers and directors will not be liable for monetary damages to the
Partnership, the limited partners or assignees for errors of judgment or for any
acts or omissions if the General Partner and such other persons acted in good
faith.
In addition, under the terms of the Partnership Agreement, the Partnership
is required to indemnify the General Partner and its officers, directors,
employees, affiliates, partners, agents and trustees, to the fullest extent
permitted by law, against liabilities, costs and expenses incurred by the
General Partner or other such persons, if the General Partner or such persons
acted in good faith and in a manner they reasonably believed to be in, or not
opposed to, the best interests of the Partnership and, with respect to any
criminal proceedings, had no reasonable cause to believe the conduct was
unlawful. See "The Partnership Agreement -- Indemnification." Thus, the General
Partner could be indemnified for its negligent acts if it meets such
requirements concerning good faith and the best interests of the Partnership.
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DESCRIPTION OF THE COMMON UNITS
Upon consummation of this offering, the Common Units will be registered
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations promulgated thereunder, and the Partnership will be
subject to the reporting and certain other requirements of the Exchange Act. The
Partnership will be required to file periodic reports containing financial and
other information with the Commission.
Purchasers of Common Units in this offering and subsequent transferees of
Common Units (or their brokers, agents or nominees on their behalf) who wish to
become Unitholders of record will be required to execute Transfer Applications,
the form of which is included as Appendix B to this Prospectus, before the
purchase or transfer of such Common Units will be registered on the records of
the Transfer Agent and before cash distributions or federal income tax
allocations can be made to the purchaser or transferee. In executing such
Transfer Applications, all Purchasers, nominees and subsequent transferees must
certify that they are Calendar-Year Taxpayers. Any purchasers, nominees and
subsequent transferees of the Common Units who do not certify that they are
Calendar-Year Taxpayers acquire no rights in the Common Units other than the
right to transfer such Common Units to a purchaser or other transferee.
Purchasers in this offering may hold Common Units in nominee accounts and will
be eligible to receive distributions and federal income tax allocations,
provided that the broker (or other nominee) executes and delivers a Transfer
Application and becomes a limited partner and certifies to the Transfer Agent
that to the best of its knowledge the purchaser is a Calendar-Year Taxpayer. The
Partnership will be entitled to treat the nominee holder of a Common Unit as the
absolute owner thereof, and the beneficial owner's rights will be limited solely
to those that it has against the nominee holder as a result of or by reason of
any understanding or agreement between such beneficial owner and nominee holder.
THE UNITS
The Common Units and the Subordinated Units represent limited partner
interests in the Partnership, which entitle the holders thereof to participate
in Partnership distributions and exercise the rights or privileges available to
limited partners under the Partnership Agreement. For a description of the
relative rights and preferences of holders of Common Units and Subordinated
Units in and to Partnership distributions, together with a description of the
circumstances under which Subordinated Units may convert into Common Units, see
"Cash Distribution Policy." For a description of the rights and privileges of
limited partners under the Partnership Agreement, see "The Partnership
Agreement."
TRANSFER AGENT AND REGISTRAR
Duties
The General Partner will appoint a registrar and transfer agent (the
"Transfer Agent") for the Common Units which will receive a fee from the
Partnership for serving in such capacities. All fees charged by the Transfer
Agent for transfers of Common Units will be borne by the Partnership and not by
the holders of Common Units, except that fees similar to those customarily paid
by stockholders for surety bond premiums to replace lost or stolen certificates,
taxes and other governmental charges, special charges for services requested by
a holder of a Common Unit and other similar fees or charges will be borne by the
affected holder. There will be no charge to holders for disbursements of the
Partnership's cash distributions. The Partnership will indemnify the Transfer
Agent, its agents and each of their respective shareholders, directors, officers
and employees against all claims and losses that may arise out of acts performed
or omitted in respect of its activities as such, except for any liability due to
any negligence, gross negligence, bad faith or intentional misconduct of the
indemnified person or entity.
Resignation or Removal
The Transfer Agent may at any time resign, by notice to the Partnership, or
be removed by the Partnership, such resignation or removal to become effective
upon the appointment by the Partnership of a successor transfer agent and
registrar and its acceptance of such appointment. If no successor has been
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appointed and accepted such appointment within 30 days after notice of such
resignation or removal, the General Partner is authorized to act as the transfer
agent and registrar until a successor is appointed.
TRANSFER OF COMMON UNITS
Until a Common Unit has been transferred on the books of the Partnership,
the Partnership and the Transfer Agent, notwithstanding any notice to the
contrary, may treat the record holder thereof as the absolute owner for all
purposes, except as otherwise required by law or stock exchange regulations. The
transfer of the Common Units to persons that purchase directly from the
Underwriters will be accomplished through the completion, execution and delivery
of a Transfer Application by such investor in connection with such Common Units.
Any subsequent transfers of a Common Unit will not be recorded by the Transfer
Agent or recognized by the Partnership unless the transferee executes and
delivers a Transfer Application. By executing and delivering a Transfer
Application (the form of which is set forth as Appendix B to this Prospectus and
which is also set forth on the reverse side of the certificates representing the
Common Units), the transferee of Common Units (i) certifies that the transferee,
or if the transferee is or nominee holding fee the account of another person,
that to the best of its knowledge such other person, is a Calendar-Year Taxpayer
(ii) becomes the record holder of such Common Units and shall constitute an
assignee until admitted into the Partnership as a substitute limited partner,
(iii) automatically requests admission as a substituted limited partner in the
Partnership, (iv) agrees to be bound by the terms and conditions of, and
executes, the Partnership Agreement, (v) represents that such transferee has the
capacity, power and authority to enter into the Partnership Agreement, (vi)
grants powers of attorney to officers of the Partnership and any liquidator of
the Partnership as specified in the Partnership Agreement, and (vii) makes the
consents and waivers contained in the Partnership Agreement. An assignee will
become a substituted limited partner of the Partnership in respect of the
transferred Common Units upon the consent of the Partnership and the recordation
of the name of the assignee on the books and records of the Partnership. Such
consent may be withheld in the sole discretion of the General Partner.
Common Units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to request admission as
a substituted limited partner in the Partnership in respect of the transferred
Common Units. Any purchasers, nominees and subsequent transferees of the Common
Units who do not certify that they are Calendar-Year Taxpayers acquire no rights
in the Common Units other than the right to resell such Common Units to a
purchaser or other transferee. A purchaser or transferee of Common Units who
does not execute and deliver a Transfer Application obtains only (a) the right
to assign the Common Units to a purchaser or other transferee and (b) the right
to transfer the right to seek admission as a substituted limited partner in the
Partnership with respect to the transferred Common Units. Thus, a purchaser or
transferee of Common Units who does not execute and deliver a Transfer
Application will not receive cash distributions or federal income tax
allocations unless the Common Units are held in a nominee or "street name"
account and the nominee or broker has executed and delivered a Transfer
Application with respect to such Common Units, and may not receive certain
federal income tax information or reports furnished to record holders of Common
Units. The transferor of Common Units will have a duty to provide such
transferee with all information that may be necessary to obtain registration of
the transfer of the Common Units, but a transferee agrees, by acceptance of the
certificate representing Common Units, that the transferor will not have a duty
to insure the execution of the Transfer Application by the transferee and will
have no liability or responsibility if such transferee neglects or chooses not
to execute and forward the Transfer Application to the Transfer Agent. See "The
Partnership Agreement -- Status as Limited Partner or Assignee."
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THE PARTNERSHIP AGREEMENT
The following paragraphs are a summary of the material provisions of the
Partnership Agreement. The form of the Partnership Agreement for the Partnership
is included in this Prospectus as Appendix A. The form of Partnership Agreement
for the Operating Partnership (the "Operating Partnership Agreement") is
included as an exhibit to the Registration Statement of which this Prospectus
constitutes a part. The Partnership will provide prospective investors with a
copy of the form of the Operating Partnership Agreement upon request at no
charge. The discussions presented herein and below of the material provisions of
the Partnership Agreement are qualified in their entirety by reference to the
Partnership Agreements for the Partnership and for the Operating Partnership.
The Partnership will be the sole limited partner of the Operating Partnership,
which will own, manage and operate the Partnership's business. The General
Partner will serve as the general partner of the Partnership and of the
Operating Partnership, owning an aggregate 2% general partner interest in the
business and properties owned by the Partnership and the Operating Partnership
on a combined basis. Unless specifically described otherwise, references herein
to the "Partnership Agreement" constitute references to the Partnership
Agreement and the Operating Partnership Agreement, collectively.
Certain provisions of the Partnership Agreement are summarized elsewhere in
this Prospectus under various headings. With regard to the transfer of Common
Units, see "Description of the Common Units -- Transfer of Common Units." With
regard to distributions of Available Cash, see "Cash Distribution Policy." With
regard to allocations of taxable income and taxable loss, see "Tax
Considerations." Prospective investors are urged to review these sections of
this Prospectus and the Partnership Agreement carefully.
ORGANIZATION AND DURATION
The Partnership and the Operating Partnership were organized in April 1996
as Delaware limited partnerships. The General Partner is the general partner of
the Partnership and the Operating Partnership. Following the issuance of the
Common Units offered hereby, the General Partner will own an aggregate 2%
interest as general partner, and the Unitholders (including the General Partner
as holder of Subordinated Units) will own a 98% interest as limited partners, in
the Partnership and the Operating Partnership on a combined basis. The
Partnership will dissolve on September 30, 2085, unless sooner dissolved
pursuant to the terms of the Partnership Agreement.
PURPOSE
The purpose of the Partnership under the Partnership Agreement is limited
to serving as the limited partner of the Operating Partnership and engaging in
any business activity that may be engaged in by the Operating Partnership or
that is approved by the General Partner. The Operating Partnership Agreement
provides that the Operating Partnership may engage in any activity engaged in by
Heritage immediately prior to this offering, and any other activity approved by
the General Partner. Although the General Partner has the ability under the
Partnership Agreement to cause the Partnership and the Operating Partnership to
engage in activities other than propane marketing and related businesses, the
General Partner has no current intention of doing so. The General Partner is
authorized in general to perform all acts deemed necessary to carry out such
purposes and to conduct the business of the Partnership.
POWER OF ATTORNEY
Each Limited Partner, and each person who acquires a Unit from a Unitholder
and executes and delivers a Transfer Application with respect thereto, grants to
the General Partner and, if a liquidator of the Partnership has been appointed,
such liquidator, a power of attorney to, among other things, execute and file
certain documents required in connection with the qualification, continuance or
dissolution of the Partnership, or the amendment of the Partnership Agreement in
accordance with the terms thereof and to make consents and waivers contained in
the Partnership Agreement.
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CAPITAL CONTRIBUTIONS
For a description of the initial capital contributions to be made to the
Partnership, see "The Transactions." The Unitholders are not obligated to make
additional capital contributions to the Partnership, except as described below
under "-- Limited Liability."
LIMITED LIABILITY
Assuming that a Limited Partner does not participate in the control of the
business of the Partnership within the meaning of the Delaware Act and that he
otherwise acts in conformity with the provisions of the Partnership Agreement,
his liability under the Delaware Act will be limited, subject to certain
possible exceptions, to the amount of capital he is obligated to contribute to
the Partnership in respect of his Common Units plus his share of any
undistributed profits and assets of the Partnership. If it were determined,
however, that the right or exercise of the right by the Limited Partners as a
group to remove or replace the General Partner, to approve certain amendments to
the Partnership Agreement or to take other action pursuant to the Partnership
Agreement constituted "participation in the control" of the Partnership's
business for the purposes of the Delaware Act, then the Limited Partners could
be held personally liable for the Partnership's obligations under the laws of
the State of Delaware to the same extent as the General Partner with respect to
persons who transact business with the Partnership reasonably believing, based
on the Limited Partner's conduct, that the Limited Partner is a general partner.
Under the Delaware Act, a limited partnership may not make a distribution
to a partner to the extent that at the time of the distribution, after giving
effect to the distribution, all liabilities of the partnership, other than
liabilities to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to specific property
of the partnership, exceed the fair value of the assets of the limited
partnership. For the purpose of determining the fair value of the assets of a
limited partnership, the Delaware Act provides that the fair value of property
subject to liability for which recourse of creditors is limited shall be
included in the assets of the limited partnership only to the extent that the
fair value of that property exceeds that nonrecourse liability. The Delaware Act
provides that a limited partner who receives such a distribution and knew at the
time of the distribution that the distribution was in violation of the Delaware
Act shall be liable to the limited partnership for the amount of the
distribution for three years from the date of the distribution. Under the
Delaware Act, an assignee who becomes a substituted limited partner of a limited
partnership is liable for the obligations of his assignor to make contributions
to the partnership, except the assignee is not obligated for liabilities unknown
to him at the time he became a limited partner and which could not be
ascertained from the partnership agreement.
The Partnership expects that the Operating Partnership will initially
conduct business in at least 15 states. Maintenance of limited liability may
require compliance with legal requirements in such jurisdictions in which the
Operating Partnership conducts business, including qualifying the Operating
Partnership to do business there. Limitations on the liability of limited
partners for the obligations of a limited partnership have not been clearly
established in many jurisdictions. If it were determined that the Partnership
was, by virtue of its limited partner interest in the Operating Partnership or
otherwise, conducting business in any state without compliance with the
applicable limited partnership statute, or that the right or exercise of the
right by the Limited Partners as a group to remove or replace the General
Partner, to approve certain amendments to the Partnership Agreement, or to take
other action pursuant to the Partnership Agreement constituted "participation in
the control" of the Partnership's business for the purposes of the statutes of
any relevant jurisdiction, then the Limited Partners could be held personally
liable for the Partnership's obligations under the law of such jurisdiction to
the same extent as the General Partner under certain circumstances. The
Partnership will operate in such manner as the General Partner deems reasonable
and necessary or appropriate to preserve the limited liability of the Limited
Partners.
ISSUANCE OF ADDITIONAL SECURITIES
The Partnership Agreement authorizes the Partnership to issue an unlimited
number of additional limited partner interests and other equity securities of
the Partnership for such consideration and on such terms and
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conditions as are established by the General Partner in its sole discretion
without the approval of any limited partners; provided that, during the
Subordination Period, except as provided in clauses (i) and (ii) below, the
Partnership may not issue equity securities of the Partnership ranking prior or
senior to the Common Units or an aggregate of more than 2,012,500 additional
Common Units (excluding Common Units issued upon the exercise of the
Underwriters' over-allotment option, upon conversion of Subordinated Units and
pursuant to the employee benefit plans of the Partnership or other members of
the Partnership Group and subject to adjustment in the event of a combination or
subdivision of Common Units) or an equivalent number of securities ranking on a
parity with the Common Units without the approval of the holders of at least a
Unit Majority. During the Subordination Period, the Partnership may also issue
(i) an unlimited number of additional Common Units or parity securities without
the approval of the Unitholders if such issuance occurs (A) in connection with
an Acquisition or a Capital Improvement or (B) within 365 days of, and the net
proceeds from such issuance are used to repay debt incurred in connection with,
an Acquisition or a Capital Improvement, in each case where such Acquisition or
Capital Improvement involves assets that, if acquired by the Partnership as of
the date that is one year prior to the first day of the quarter in which such
transaction is to be effected, would have resulted in an increase in (1) the
amount of Adjusted Operating Surplus generated by the Partnership on a per-Unit
basis for all outstanding Units with respect to each of the four most recently
completed quarters (on a pro forma basis) as compared to (2) the actual amount
of Adjusted Operating Surplus generated by the Partnership on a per-Unit basis
for all outstanding Units (excluding Adjusted Operating Surplus attributable to
the Acquisition or Capital Improvement) with respect to each of such four most
recently completed quarters (provided that if the issuance of Units with respect
to an Acquisition or Capital Improvement occurs within the first four full
quarters after the closing of this offering, then Adjusted Operating Surplus as
used in clauses (1) (determined on a pro forma basis) and (2) above will be
calculated (A) for each quarter, if any, that commenced after the closing of
this offering for which actual results of operations are available, based on the
actual Adjusted Operating Surplus of the Partnership generated with respect to
such quarter and (B) for each other quarter, on a pro forma basis not
inconsistent with the procedures, as applicable, set forth in Appendix D to this
Prospectus); and (ii) an unlimited number of Common Units or parity securities
prior to the end of the Subordination Period and without the approval of the
Unitholders if the proceeds from such issuance are used exclusively to repay up
to $30 million in indebtedness of a member of the Partnership Group, in each
case only where the aggregate amount of distributions that would have been paid
with respect to such newly issued Units and the related additional distributions
that would have been made to the General Partner in respect of the (actual or
pro forma) four-quarter period ending prior to the first day of the quarter in
which the issuance is to be consummated (assuming such additional Units had been
outstanding throughout such period and that distributions equal to the
distributions that were actually paid on the outstanding Units during the period
were paid on such additional Units) did not exceed the interest costs actually
incurred during such period on the indebtedness that is to be repaid (or, if
such indebtedness was not outstanding throughout the entire period, would have
been incurred had such indebtedness been outstanding for the entire period). In
accordance with Delaware law and the provisions of the Partnership Agreement,
the Partnership may also issue additional partnership interests that, in the
sole discretion of the General Partner, may have special voting rights to which
the Common Units are not entitled.
Upon issuance of additional Partnership Securities (other than pursuant to
the over-allotment option), the General Partner will be required to make
additional capital contributions to maintain its 2% General Partner Interest in
the Partnership and Operating Partnership. Moreover, the General Partner will
have the right, which it may from time to time assign in whole or in part to any
of its affiliates, to purchase Common Units, Subordinated Units or other equity
securities of the Partnership from the Partnership whenever, and on the same
terms that, the Partnership issues such securities or rights to persons other
than the General Partner and its affiliates, to the extent necessary to maintain
the percentage interest of the General Partner and its affiliates in the
Partnership (including its interest represented by Subordinated Units) that
existed immediately prior to each such issuance. The holders of Common Units
will not have preemptive rights to acquire additional Common Units or other
partnership interests that may be issued by the Partnership.
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AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed only by or with the
consent of the General Partner, which consent may be given or withheld in its
sole discretion. In order to adopt a proposed amendment, the Partnership is
required to seek written approval of the holders of the number of Units required
to approve such amendment or call a meeting of the Limited Partners to consider
and vote upon the proposed amendment, except as described below. Proposed
amendments (unless otherwise specified) must be approved by holders of a Unit
Majority, except that no amendment may be made which would (i) enlarge the
obligations of any Limited Partner, without its consent, (ii) enlarge the
obligations of, restrict in any way any action by or rights of, or reduce in any
way the amounts distributable, reimbursable or otherwise payable by the
Partnership to, the General Partner or any of its affiliates without the General
Partner's consent, which may be given or withheld in its sole discretion, (iii)
change the term of the Partnership, (iv) provide that the Partnership is not
dissolved upon the expiration of its term or upon an election of the General
Partner that is approved by holders of a Unit Majority or (v) give any person
the right to dissolve the Partnership other than the General Partner's right to
dissolve the Partnership with the approval of holders of a Unit Majority.
The General Partner may generally make amendments to the Partnership
Agreement without the approval of any Limited Partner or assignee to reflect (i)
a change in the name of the Partnership, the location of the principal place of
business of the Partnership, the registered agent or the registered office of
the Partnership, (ii) admission, substitution, withdrawal or removal of partners
in accordance with the Partnership Agreement, (iii) a change that, in the
discretion of the General Partner, is necessary or advisable to qualify or
continue the qualification of the Partnership as a limited partnership or a
partnership in which the Limited Partners have limited liability under the laws
of any state or to ensure that neither the Partnership nor the Operating
Partnership will be treated as an association taxable as a corporation or
otherwise taxed as an entity for federal income tax purposes, (iv) an amendment
that is necessary, in the opinion of counsel to the Partnership, to prevent the
Partnership, or the General Partner or its directors, officers, agents or
trustees, from in any manner being subjected to the provisions of the Investment
Company Act of 1940, as amended, the Investment Advisors Act of 1940, as
amended, or "plan asset" regulations adopted under the Employee Retirement
Income Security Act of 1974, as amended, whether or not substantially similar to
plan asset regulations currently applied or proposed, (v) subject to the
limitations on the issuance of additional Common Units or other limited or
general partner interests described above, an amendment that in the discretion
of the General Partner is necessary or advisable in connection with the
authorization of additional limited or general partner interests, (vi) any
amendment expressly permitted in the Partnership Agreement to be made by the
General Partner acting alone, (vii) an amendment effected, necessitated or
contemplated by a merger agreement that has been approved pursuant to the terms
of the Partnership Agreement, (viii) any amendment that, in the discretion of
the General Partner, is necessary or advisable in connection with the formation
by the Partnership of, or its investment in, any corporation, partnership or
other entity (other than the Operating Partnership) as otherwise permitted by
the Partnership Agreement, (ix) a change in the fiscal year and/or taxable year
of the Partnership and changes related thereto, and (x) any other amendments
substantially similar to any of the foregoing.
In addition to the General Partner's right to amend the Partnership
Agreement as described above, the General Partner may make amendments to the
Partnership Agreement without the approval of any Limited Partner or assignee if
such amendments, in the discretion of the General Partner (i) do not adversely
affect the Limited Partners in any material respect, (ii) are necessary or
advisable to satisfy any requirements, conditions or guidelines contained in any
opinion, directive, ruling or regulation of any federal or state agency or
judicial authority or contained in any federal or state statute, (iii) are
necessary or advisable to facilitate the trading of the Common Units (including
the division of any class or classes of outstanding Partnership Securities into
different classes to facilitate uniformity of tax consequences within such
classes of Partnership Securities) or to comply with any rule, regulation,
guideline or requirement of any securities exchange on which the Common Units
are or will be listed for trading, compliance with any of which the General
Partner deems to be in the best interests of the Partnership and the
Unitholders, (iv) are necessary or advisable in connection with any action taken
by the General Partner relating to splits or combinations of Units pursuant to
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the provisions of the Partnership Agreement or (v) are required to effect the
intent expressed in this Prospectus or the intent of the Partnership Agreement
or contemplated by the Partnership Agreement.
The General Partner will not be required to obtain an Opinion of Counsel
(as defined in the Glossary) in the event of the amendments described in the two
immediately preceding paragraphs. No other amendments to the Partnership
Agreement will become effective without the approval of holders of at least 90%
of the Units unless the Partnership obtains an Opinion of Counsel to the effect
that such amendment will not affect the limited liability under applicable law
of any limited partner in the Partnership or the limited partner of the
Operating Partnership.
Any amendment that materially and adversely affects the rights or
preferences of any type or class of outstanding Units in relation to other
classes of Units will require the approval of at least a majority of the type or
class of Units so affected. Any amendment that reduces the voting percentage
required to take any action is required to be approved by the affirmative vote
of limited partners constituting not less than the voting requirement sought to
be reduced.
MERGER, SALE OR OTHER DISPOSITION OF ASSETS
The General Partner is generally prohibited, without the prior approval of
holders of a Unit Majority, from causing the Partnership to, among other things,
sell, exchange or otherwise dispose of all or substantially all of its assets in
a single transaction or a series of related transactions (including by way of
merger, consolidation or other combination) or approving on behalf of the
Partnership the sale, exchange or other disposition of all or substantially all
of the assets of the Operating Partnership; provided that the General Partner
may mortgage, pledge, hypothecate or grant a security interest in all or
substantially all of the Partnership's assets without such approval. The General
Partner may also sell all or substantially all of the Partnership's assets
pursuant to a foreclosure or other realization upon the foregoing encumbrances
without such approval. Furthermore, the General Partner may, assuming certain
conditions are satisfied, merge the Partnership or any member of the Partnership
Group into, or convey some or all of the Partnership Group's assets to, a newly
formed entity if the sole purpose of such merger or conveyance is to effect a
mere change in the legal form of the Partnership into another limited liability
entity. The Unitholders are not entitled to dissenters' rights of appraisal
under the Partnership Agreement or applicable Delaware law in the event of a
merger or consolidation of the Partnership, a sale of substantially all of the
Partnership's assets or any other transaction or event.
TERMINATION AND DISSOLUTION
The Partnership will continue until September 30, 2085, unless sooner
terminated pursuant to the Partnership Agreement. The Partnership will be
dissolved upon (i) the election of the General Partner to dissolve the
Partnership, if approved by the holders of a Unit Majority, (ii) the sale,
exchange or other disposition of all or substantially all of the assets and
properties of the Partnership and the Operating Partnership, (iii) the entry of
a decree of judicial dissolution of the Partnership or (iv) the withdrawal or
removal of the General Partner or any other event that results in its ceasing to
be the General Partner (other than by reason of a transfer of its general
partner interest in accordance with the Partnership Agreement or withdrawal or
removal following approval and admission of a successor). Upon a dissolution
pursuant to clause (iv), the holders of a Unit Majority may also elect, within
certain time limitations, to reconstitute the Partnership and continue its
business on the same terms and conditions set forth in the Partnership Agreement
by forming a new limited partnership on terms identical to those set forth in
the Partnership Agreement and having as general partner an entity approved by
the holders of a Unit Majority subject to receipt by the Partnership of an
opinion of counsel to the effect that (x) such action would not result in the
loss of limited liability of any Limited Partner and (y) neither the
Partnership, the reconstituted limited partnership nor any other member of the
Partnership Group would be treated as an association taxable as a corporation or
otherwise be taxable as an entity for federal income tax purposes upon the
exercise of such right to continue (hereinafter, an "Opinion of Counsel").
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LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon dissolution of the Partnership, unless the Partnership is
reconstituted and continued as a new limited partnership, the person authorized
to wind up the affairs of the Partnership (the "Liquidator") will, acting with
all of the powers of the General Partner that such Liquidator deems necessary or
desirable in its good faith judgment in connection therewith, liquidate the
Partnership's assets and apply the proceeds of the liquidation as provided in
"Cash Distribution Policy -- Distributions of Cash Upon Liquidation." Under
certain circumstances and subject to certain limitations, the Liquidator may
defer liquidation or distribution of the Partnership's assets for a reasonable
period of time or distribute assets to partners in kind if it determines that a
sale would be impractical or would cause undue loss to the partners.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER
The General Partner has agreed not to withdraw voluntarily as a general
partner of the Partnership and the Operating Partnership prior to December 31,
2006 (with limited exceptions described below), without obtaining the approval
of the holders of a Unit Majority and furnishing an Opinion of Counsel. On or
after December 31, 2006, the General Partner may withdraw as the General Partner
(without first obtaining approval from any Unitholder) by giving 90 days'
written notice, and such withdrawal will not constitute a violation of the
Partnership Agreement. Notwithstanding the foregoing, the General Partner may
withdraw without Unitholder approval upon 90 days' notice to the Limited
Partners if more than 50% of the outstanding Common Units are held or controlled
by one person and its affiliates (other than the General Partner and its
affiliates). In addition, the Partnership Agreement permits the General Partner
(in certain limited instances) to sell or otherwise transfer all of its general
partner interests in the Partnership without the approval of the Unitholders.
See "-- Transfer of General Partner Interests."
Upon the withdrawal of the General Partner under any circumstances (other
than as a result of a transfer by the General Partner of all or a part of its
general partner interest in the Partnership), the holders of a Unit Majority may
select a successor to such withdrawing General Partner. If such a successor is
not elected, or is elected but an Opinion of Counsel cannot be obtained, the
Partnership will be dissolved, wound up and liquidated, unless within 180 days
after such withdrawal the holders of a Unit Majority agree in writing to
continue the business of the Partnership and to the appointment of a successor
General Partner. See "-- Termination and Dissolution."
The General Partner may not be removed unless such removal is approved by
the vote of the holders of not less than a 66 2/3% of the outstanding Units
(including Units held by the General Partner and its affiliates) and the
Partnership receives an Opinion of Counsel. Any such removal is also subject to
the approval of a successor general partner by the vote of the holders of not
less than a Unit Majority. The Partnership Agreement also provides that if the
General Partner is removed as general partner of the Partnership under
circumstances where Cause does not exist and Units held by the General Partner
and its affiliates are not voted in favor of such removal (i) the Subordination
Period will end and all outstanding Subordinated Units will immediately convert
into Common Units on a one-for-one basis, (ii) any existing Common Unit
Arrearages will be extinguished and (iii) the General Partner will have the
right to convert its general partner interests (and its right to receive
Incentive Distributions) into Common Units or to receive cash in exchange for
such interests.
Withdrawal or removal of the General Partner as the general partner of the
Partnership also constitutes withdrawal or removal, as the case may be, of the
General Partner as a general partner of the Operating Partnership.
In the event of withdrawal of the General Partner where such withdrawal
violates the Partnership Agreement, a successor general partner will have the
option to purchase the general partner interest of the departing General Partner
(the "Departing Partner") in the Partnership and the Operating Partnership for a
cash payment equal to the fair market value of such interests. Under all other
circumstances where the General Partner withdraws or is removed by the Limited
Partners, the Departing Partner will have the option to require the successor
general partner to purchase such general partner interest of the Departing
Partner for such amount. In each case, such fair market value will be determined
by agreement between the Departing
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Partner and the successor general partner, or if no agreement is reached, by an
independent investment banking firm or other independent expert selected by the
Departing Partner and the successor general partner (or if no expert can be
agreed upon, by an expert chosen by agreement of the experts selected by each of
them). In addition, the Partnership will be required to reimburse the Departing
Partner for all amounts due the Departing Partner, including, without
limitation, all employee-related liabilities, including severance liabilities,
incurred in connection with the termination of any employees employed by the
Departing Partner for the benefit of the Partnership.
If the above-described option is not exercised by either the Departing
Partner or the successor general partner, as applicable, the Departing Partner
will have the right to convert its general partner interests in the Partnership
and the Operating Partnership into Common Units equal to the fair market value
of such interests as determined by an investment banking firm or other
independent expert selected in the manner described in the preceding paragraph
or to receive cash in exchange for such interests.
TRANSFER OF GENERAL PARTNER INTERESTS
Except for a transfer by the General Partner of all, but not less than all,
of its aggregate 2% general partner interest in the Partnership and the
Operating Partnership to (a) an affiliate or (b) another person in connection
with the merger or consolidation of the General Partner with or into another
person or the transfer by the General Partner of all or substantially all of its
assets to another person, the General Partner may not transfer all or any part
of its aggregate 2% general partner interest in the Partnership to another
person prior to June 30, 2006, without the approval of the holders of at least a
Unit Majority; provided that, in each case, such transferee assumes the rights
and duties of the General Partner to whose interest such transferee has
succeeded, agrees to be bound by the provisions of the Partnership Agreement,
furnishes an Opinion of Counsel and agrees to acquire all (or the appropriate
portion thereof, as applicable) of the General Partner's interests in the
Operating Partnership and agrees to be bound by the provisions of the Operating
Partnership Agreement. The General Partner shall have the right at any time,
however, to transfer its Subordinated Units to one or more persons without
Unitholder approval. At any time, the stockholders of the General Partner may
sell or transfer all or part of their interest in the General Partner to an
affiliate or a third party without the approval of the Unitholders. The General
Partner or a subsequent holder may transfer its right to receive Incentive
Distributions to another person in connection with its merger or consolidation
with or into, or sale of all or substantially all of its assets to, such person
without the prior approval of the Unitholders. Holders of rights to receive
Incentive Distributions may also transfer such rights to their affiliates
without the prior approval of the Unitholders, provided such affiliates are
family members, trusts created for the holder or his family members or the
estates and beneficiaries of such persons. Other transfers of the right to
receive Incentive Distributions will require the affirmative vote of holders of
at least a Unit Majority.
CHANGE OF MANAGEMENT PROVISIONS
The Partnership Agreement contains certain provisions that are intended to
discourage a person or group from attempting to remove the General Partner as
general partner of the Partnership or otherwise change the management of the
Partnership. If any person or group other than the General Partner and its
affiliates acquires beneficial ownership of 20% or more of the Common Units,
such person or group loses voting rights with respect to all of its Common
Units. The Partnership Agreement also provides that if the General Partner is
removed as general partner of the Partnership under circumstances where Cause
does not exist and Units held by the General Partner and its affiliates are not
voted in favor of such removal (i) the Subordination Period will end and all
outstanding Subordinated Units will immediately convert into Common Units on a
one-for-one basis, (ii) any existing Common Unit Arrearages will be extinguished
and (iii) the General Partner will have the right to convert its general partner
interests (and its right to receive Incentive Distributions) into Common Units
or to receive cash in exchange for such interests.
LIMITED CALL RIGHT
If at any time not more than 20% of the then-issued and outstanding limited
partner interests of any class are held by persons other than the General
Partner and its affiliates, the General Partner will have the right,
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which it may assign in whole or in part to any of its affiliates or to the
Partnership, to acquire all, but not less than all, of the remaining limited
partner interests of such class held by such unaffiliated persons as of a record
date to be selected by the General Partner, on at least 10 but not more than 60
days' notice. The purchase price in the event of such a purchase shall be the
greater of (i) the highest price paid by the General Partner or any of its
affiliates for any limited partner interests of such class purchased within the
90 days preceding the date on which the General Partner first mails notice of
its election to purchase such limited partner interests, and (ii) the Current
Market Price as of the date three days prior to the date such notice is mailed.
As a consequence of the General Partner's right to purchase outstanding limited
partner interests, a holder of limited partner interests may have his limited
partner interests purchased even though he may not desire to sell them, or the
price paid may be less than the amount the holder would desire to receive upon
the sale of his limited partner interests. The tax consequences to a Unitholder
of the exercise of this call right are the same as a sale by such Unitholder of
his Common Units in the market. See "Tax Considerations -- Disposition of Common
Units."
MEETINGS; VOTING
Except as described below with respect to a Person or group owning 20% or
more of all Units, Unitholders or assignees who are record holders of Units on
the record date set pursuant to the Partnership Agreement will be entitled to
notice of, and to vote at, meetings of limited partners of the Partnership and
to act with respect to matters as to which approvals may be solicited. With
respect to voting rights attributable to Common Units that are owned by an
assignee who is a record holder but who has not yet been admitted as a limited
partner, the General Partner shall be deemed to be the limited partner with
respect thereto and shall, in exercising the voting rights in respect of such
Common Units on any matter, vote such Common Units at the written direction of
such record holder. Absent such direction, such Common Units will not be voted
(except that, in the case of Common Units held by the General Partner on behalf
of Non-citizen Assignees, the General Partner shall distribute the votes in
respect of such Common Units in the same ratios as the votes of limited partners
in respect of other Common Units are cast).
The General Partner does not anticipate that any meeting of Unitholders
will be called in the foreseeable future. Any action that is required or
permitted to be taken by the Unitholders may be taken either at a meeting of the
Unitholders or without a meeting if consents in writing setting forth the action
so taken are signed by holders of such number of Units as would be necessary to
authorize or take such action at a meeting of all of the Unitholders. Meetings
of the Unitholders of the Partnership may be called by the General Partner or by
Unitholders owning at least 20% of the outstanding Units of the class for which
a meeting is proposed. Unitholders may vote either in person or by proxy at
meetings. The holders of a majority of the outstanding Units of the class or
classes for which a meeting has been called represented in person or by proxy
shall constitute a quorum at a meeting of Unitholders of such class or classes,
unless any such action by the Unitholders requires approval by holders of a
greater percentage of such Units, in which case the quorum shall be such greater
percentage.
Each record holder of a Unit has a vote according to his percentage
interest in the Partnership, although additional limited partner interests
having special voting rights could be issued by the General Partner. See
"-- Issuance of Additional Securities." However, if any Person or group (other
than the General Partner and its affiliates) acquires, in the aggregate,
beneficial ownership of 20% or more of the total Common Units and such Person or
group loses voting rights with respect to all of its Common Units and such
Common Units may not be voted on any matter and will not be considered to be
outstanding when sending notices of a meeting of Unitholders, calculating
required votes, determining the presence of a quorum or for other similar
Partnership purposes. The Partnership Agreement provides that Common Units held
in nominee or street name account will be voted by the broker (or other nominee)
pursuant to the instruction of the beneficial owner unless the arrangement
between the beneficial owner and his nominee provides otherwise. Except as
otherwise provided in the Partnership Agreement, Subordinated Units will vote
together with Common Units as a single class.
Any notice, demand, request, report or proxy material required or permitted
to be given or made to record holders of Common Units (whether or not such
record holder has been admitted as a limited partner) under
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the terms of the Partnership Agreement will be delivered to the record holder by
the Partnership or by the Transfer Agent at the request of the Partnership.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described above under "-- Limited Liability," the Common Units
will be fully paid, and Unitholders will not be required to make additional
contributions to the Partnership.
An assignee of a Common Unit, subsequent to executing and delivering a
Transfer Application, but pending its admission as a substituted Limited Partner
in the Partnership, is entitled to an interest in the Partnership equivalent to
that of a Limited Partner with respect to the right to share in allocations and
distributions from the Partnership, including liquidating distributions. The
General Partner will vote and exercise other powers attributable to Common Units
owned by an assignee who has not become a substitute Limited Partner at the
written direction of such assignee. See "-- Meetings; Voting." Transferees who
do not execute and deliver a Transfer Application will be treated neither as
assignees nor as record holders of Common Units, and will not receive cash
distributions, federal income tax allocations or reports furnished to record
holders of Common Units. See "Description of the Common Units -- Transfer of
Common Units."
NON-CITIZEN ASSIGNEES; REDEMPTION
If the Partnership is or becomes subject to federal, state or local laws or
regulations that, in the reasonable determination of the Partnership, create a
substantial risk of cancellation or forfeiture of any property in which the
Partnership has an interest because of the nationality, citizenship, residency
or other related status of any Limited Partner or assignee, the Partnership may
redeem the Common Units held by such Limited Partner or assignee at their
Current Market Price (as defined in the Glossary). In order to avoid any such
cancellation or forfeiture, the Partnership may require each Limited Partner or
assignee to furnish information about his nationality, citizenship, residency or
related status. If a Limited Partner or assignee fails to furnish information
about such nationality, citizenship, residency or other related status within 30
days after a request for such information, such Limited Partner or assignee may
be treated as a non-citizen assignee ("Non-citizen Assignee"). In addition to
other limitations on the rights of an assignee who is not a substituted Limited
Partner, a Non-citizen Assignee does not have the right to direct the voting of
his Common Units and may not receive distributions in kind upon liquidation of
the Partnership.
INDEMNIFICATION
The Partnership Agreement provides that the Partnership will indemnify the
General Partner, any Departing Partner, any Person who is or was an Affiliate of
the General Partner or any Departing Partner, any Person who is or was an
officer, director, partner or trustee of the General Partner or any Departing
Partner or any affiliate of the General Partner or any Departing Partner, or any
Person who is or was serving at the request of the General Partner or any
Departing Partner or any Affiliate of the General Partner or any Departing
Partner as an officer, director, employee, partner, agent or trustee of another
Person ("Indemnitees"), to the fullest extent permitted by law, from and against
any and all losses, claims, damages, liabilities (joint or several), expenses
(including, without limitation, legal fees and expenses), judgments, fines,
penalties, interest, settlements and other amounts arising from any and all
claims, demands, actions, suits or proceedings, whether civil, criminal,
administrative or investigative, in which any Indemnitee may be involved, or is
threatened to be involved, as a party or otherwise, by reason of its status as
any of the foregoing; provided that in each case the Indemnitee acted in good
faith and in a manner that such Indemnitee reasonably believed to be in or not
opposed to the best interests of the Partnership and, with respect to any
criminal proceeding, had no reasonable cause to believe its conduct was
unlawful. Any indemnification under these provisions will be only out of the
assets of the Partnership, and the General Partner shall not be personally
liable for, or have any obligation to contribute or loan funds or assets to the
Partnership to enable it to effectuate, such indemnification. The Partnership is
authorized to purchase (or to reimburse the General Partner or its affiliates
for the cost of) insurance against liabilities asserted against and expenses
incurred by such persons in connection with the Partnership's activities,
regardless of whether the Partnership would have the power to indemnify such
person against such liabilities under the provisions described above.
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BOOKS AND REPORTS
The Partnership is required to keep appropriate books of the business of
the Partnership at the principal offices of the Partnership. The books will be
maintained for both tax and financial reporting purposes on an accrual basis.
For tax purposes, the fiscal year of the Partnership is the calendar year. For
financial reporting purposes, however, the fiscal year of the Partnership is a
52 week fiscal year concluding on the last day of August.
As soon as practicable, but in no event later than 120 days after the close
of each fiscal year, the Partnership will furnish or make available to each
record holder of Units (as of a record date selected by the General Partner) an
annual report containing audited financial statements of the Partnership for the
past fiscal year, prepared in accordance with generally accepted accounting
principles. As soon as practicable, but in no event later than 90 days after the
close of each quarter (except the last quarter of each fiscal year), the
Partnership will furnish or make available to each record holder of Units (as of
a record date selected by the General Partner) a report containing unaudited
financial statements of the Partnership with respect to such quarter and such
other information as may be required by law.
The Partnership will use all reasonable efforts to furnish each record
holder of a Unit information reasonably required for tax reporting purposes
within 90 days after the close of each calendar year. Such information is
expected to be furnished in summary form so that certain complex calculations
normally required of partners can be avoided. The Partnership's ability to
furnish such summary information to Unitholders will depend on the cooperation
of such Unitholders in supplying certain information to the Partnership. Every
Unitholder (without regard to whether he supplies such information to the
Partnership) will receive information to assist him in determining his federal
and state tax liability and filing his federal and state income tax returns.
RIGHT TO INSPECT PARTNERSHIP BOOKS AND RECORDS
The Partnership Agreement provides that a Limited Partner can for a purpose
reasonably related to such Limited Partner's interest as a limited partner, upon
reasonable demand and at his own expense, have furnished to him (i) a current
list of the name and last known address of each partner, (ii) a copy of the
Partnership's tax returns, (iii) information as to the amount of cash, and a
description and statement of the agreed value of any other property or services,
contributed or to be contributed by each partner and the date on which each
became a partner, (iv) copies of the Partnership Agreement, the certificate of
limited partnership of the Partnership, amendments thereto and powers of
attorney pursuant to which the same have been executed, (v) information
regarding the status of the Partnership's business and financial condition, and
(vi) such other information regarding the affairs of the Partnership as is just
and reasonable. The Partnership may, and intends to, keep confidential from the
Limited Partners trade secrets or other information the disclosure of which the
Partnership believes in good faith is not in the best interests of the
Partnership or which the Partnership is required by law or by agreements with
third parties to keep confidential.
REGISTRATION RIGHTS
Pursuant to the terms of the Partnership Agreement and subject to certain
limitations described therein, the Partnership has agreed to register for resale
under the Securities Act and applicable state securities laws any Common Units
or other securities of the Partnership (including Subordinated Units) proposed
to be sold by the General Partner or any of its affiliates if an exemption from
such registration requirements is not otherwise available for such proposed
transaction. The Partnership is obligated to pay all expenses incidental to such
registration, excluding underwriting discounts and commissions. See "Units
Eligible for Future Sale."
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UNITS ELIGIBLE FOR FUTURE SALE
After the sale of the Common Units offered hereby, the General Partner will
hold 3,702,943 Subordinated Units (all of which will convert into Common Units
at the end of the Subordination Period and some of which may convert earlier).
See "Cash Distribution Policy -- Distributions from Operating Surplus during
Subordination Period." The sale of these Units could have an adverse impact on
the price of the Common Units or on any trading market that may develop. For a
discussion of the transactions whereby the General Partner acquired the
Subordinated Units in connection with the organization of the Partnership, see
"The Transactions."
The Common Units sold in this offering will generally be freely
transferable without restriction or further registration under the Securities
Act, except that any Common Units owned by "an affiliate" of the Partnership (as
that term is defined in the rules and regulations under the Securities Act) may
not be resold publicly except in compliance with the registration requirements
of the Securities Act or pursuant to an exemption therefrom under Rule 144
thereunder ("Rule 144") or otherwise. Rule 144 permits securities acquired by an
affiliate of the issuer in an offering to be sold into the market in an amount
that does not exceed, during any three-month period, the greater of (i) 1% of
the total number of such securities outstanding or (ii) the average weekly
reported trading volume of the Common Units for the four calendar weeks prior to
such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Partnership. A person who is not deemed to have been an
affiliate of the Partnership at any time during the three months preceding a
sale, and who has beneficially owned his Common Units for at least three years,
would be entitled to sell such Common Units under Rule 144 without regard to the
public information requirements, volume limitations, manner of sale provisions
or notice requirements of Rule 144.
Prior to the end of the Subordination Period, the Partnership may not issue
equity securities of the Partnership ranking prior or senior to the Common Units
or an aggregate of more than 2,012,500 additional Common Units (excluding Common
Units issued upon exercise of the Underwriters' over-allotment option and upon
conversion of Subordinated Units or in connection with certain acquisitions or
the repayment of certain indebtedness), or an equivalent amount of securities
ranking on a parity with the Common Units, without the approval of the holders
of at least a Unit Majority, except under certain circumstances. After the
Subordination Period, the Partnership, without a vote of the Unitholders, may
issue an unlimited number of limited partner interests of any type. The
Partnership Agreement does not impose any restriction on the Partnership's
ability to issue equity securities ranking junior to the Subordinated Units at
any time. Any issuance of additional Common Units or certain other equity
securities would result in a corresponding decrease in the proportionate
ownership interest in the Partnership represented by, and could adversely affect
the cash distributions to and market price of, Common Units then outstanding.
See "The Partnership Agreement -- Issuance of Additional Securities."
Pursuant to the Partnership Agreement, the General Partner and its
affiliates will have the right, upon the terms and subject to the conditions
therein, to cause the Partnership to register under the Securities Act and state
laws the offer and sale of any Units or other Partnership Securities that it
holds. Subject to the terms and conditions of the Partnership Agreement, such
registration rights allow the General Partner and its affiliates or their
assignees holding any Units to require registration of any such Units and to
include any such Units in a registration by the Partnership of other Units,
including Units offered by the Partnership or by any Unitholder. Such
registration rights will continue in effect for two years following any
withdrawal or removal of the General Partner as the general partner of the
Partnership. In connection with any such registration, the Partnership will
indemnify each Unitholder participating in such registration and its officers,
directors and controlling persons from and against any liabilities under the
Securities Act or any state securities laws arising from the registration
statement or prospectus. The Partnership will bear all costs and expenses of any
such registration. In addition, the General Partner and its affiliates may sell
their Units in private transactions at any time, subject to compliance with
applicable laws.
The Partnership, the Operating Partnership and the General Partner have
agreed not to sell, offer to sell, grant any option or warrant for the sale of,
or otherwise dispose of or enter into any agreement to sell any
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Common Units or Subordinated Units, any securities that are convertible into or
exercisable or exchangeable for or that represent the right to receive Common
Units or Subordinated Units or any securities that are senior to or pari passu
with Common Units (other than the issuance of Common Units pursuant to employee
benefit plans described in this Prospectus), for a period of 180 days after the
date of this Prospectus without the prior written consent of Dean Witter
Reynolds Inc.
TAX CONSIDERATIONS
This section is a summary of material tax considerations that may be
relevant to prospective Unitholders and, to the extent set forth below under
"-- Legal Opinions and Advice," represents the opinion of Andrews & Kurth
L.L.P., special counsel to the General Partner and the Partnership ("Counsel"),
insofar as it relates to matters of law and legal conclusions. This section is
based upon current provisions of the Internal Revenue Code of 1986, as amended
("Code"), existing and proposed regulations thereunder and current
administrative rulings and court decisions, all of which are subject to change.
Subsequent changes in such authorities may cause the tax consequences to vary
substantially from the consequences described below. Unless the context
otherwise requires, references in this section to Partnership are references to
both the Partnership and the Operating Partnership.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting the Partnership or the Unitholders.
Moreover, the discussion focuses on Unitholders who are individual citizens or
residents of the United States and has only limited application to corporations,
estates, trusts, non-resident aliens or other Unitholders subject to specialized
tax treatment (such as tax-exempt institutions, individual retirement accounts,
REITs or mutual funds). Accordingly, each prospective Unitholder should consult,
and should depend on, his own tax advisor in analyzing the federal, state, local
and foreign tax consequences peculiar to him of the ownership or disposition of
Common Units.
LEGAL OPINIONS AND ADVICE
Counsel has expressed its opinion that, based on the representations and
subject to the qualifications set forth in the detailed discussion that follows,
for federal income tax purposes (i) the Partnership and the Operating
Partnership will each be treated as a partnership, and (ii) owners of Common
Units (with certain exceptions, as described in "-- Limited Partner Status"
below) will be treated as partners of the Partnership (but not the Operating
Partnership). In addition, all statements as to matters of law and legal
conclusions contained in this section, unless otherwise noted, reflect the
opinion of Counsel.
Although no attempt has been made in the following discussion to comment on
all federal income tax matters affecting the Partnership or prospective
Unitholders, Counsel has advised the Partnership that, based on current law, the
following is a general description of the principal federal income tax
consequences that should arise from the ownership and disposition of Common
Units and, insofar as it relates to matters of law and legal conclusions,
addresses the material tax consequences to Unitholders who are individual
citizens or residents of the United States.
No ruling has been or will be requested from the Internal Revenue Service
(the "IRS") with respect to classification of the Partnership as a partnership
for federal income tax purposes, whether the Partnership's propane operations
generate "qualifying income" under sec.7704 of the Code or any other matter
affecting the Partnership or prospective Unitholders. An opinion of counsel
represents only that counsel's best legal judgment and does not bind the IRS or
the courts. Thus, no assurance can be provided that the opinions and statements
set forth herein would be sustained by a court if contested by the IRS. Any such
contest with the IRS may materially and adversely impact the market for the
Common Units and the prices at which Common Units trade. In addition, the costs
of any contest with the IRS will be borne directly or indirectly by the
Unitholders and the General Partner. Furthermore, no assurance can be given that
the treatment of the Partnership or an investment therein will not be
significantly modified by future legislative or administrative changes or court
decisions. Any such modification may or may not be retroactively applied.
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For the reasons hereinafter described, counsel has not rendered an opinion
with respect to the following specific federal income tax issues: (i) the
treatment of a Unitholder whose Common Units are loaned to a short seller to
cover a short sale of Common Units (see "-- Tax Treatment of
Operations -- Treatment of Short Sales"), (ii) whether a Unitholder acquiring
Common Units in separate transactions must maintain a single aggregate adjusted
tax basis in his Common Units (see "-- Disposition of Common Units --
Recognition of Gain or Loss"), (iii) whether the Partnership's monthly
convention for allocating taxable income and losses is permitted by existing
Treasury Regulations (see "-- Disposition of Common Units -- Allocations Between
Transferors and Transferees"), and (iv) whether the Partnership's method for
depreciating Section 743 adjustments, utilized to maintain the uniformity of the
economic and tax characteristics of the Common Units, is sustainable (see
"-- Uniformity of Units").
TAX RATES AND CHANGES IN FEDERAL INCOME TAX LAWS
The top marginal income tax rate for individuals is 36% subject to a 10%
surtax on individuals with taxable income in excess of $263,750 per year. The
surtax is computed by applying a 39.6% rate to taxable income in excess of the
threshold. The net capital gain of an individual remains subject to a maximum
28% tax rate.
The 1995 Proposed Legislation that was passed by Congress on November 17,
1995, as part of the Revenue Reconciliation Act of 1995, would have altered the
tax reporting system and the deficiency collection system applicable to large
partnerships (generally defined as electing partnerships with more than 100
partners) and would have made certain additional changes to the treatment of
large partnerships, such as the Partnership. Certain of the proposed changes are
discussed later in this section. The 1995 Proposed Legislation is generally
intended to simplify the administration of the tax rules governing large
partnerships such as the Partnership. In addition, the 1995 Proposed Legislation
contained provisions which would have reduced the maximum tax rate applicable to
the net capital gains of an individual to 19.8%.
On March 19, 1996, certain tax legislation, known as the Revenue
Reconciliation Act of 1996, was presented to Congress that would impact the
taxation of certain financial products, including partnership interests. One
proposal would treat a taxpayer as having sold an "appreciated" partnership
interest (one in which gain would be recognized if such interest were sold) if
the taxpayer or related persons enters into one or more positions with respect
to the same or substantially identical property which, for some period,
substantially eliminates both the risk of loss and opportunity for gain on the
appreciated financial position (including selling "short against the box"
transactions). Certain of these proposed changes are also discussed under
"-- Disposition of Common Units."
President Clinton vetoed the 1995 Proposed Legislation on December 6, 1995.
As of the date of this Prospectus, it is not possible to predict whether any of
the changes set forth in the 1995 Proposed Legislation, the Revenue
Reconciliation Act of 1996 or any other changes in the federal income tax laws
that would impact the Partnership and the Unitholders will ultimately be enacted
or, if enacted, what form they will take, what the effective dates will be, and
what, if any, transition rules will be provided.
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner is required to take into account his allocable
share of items of income, gain, loss and deduction of the Partnership in
computing his federal income tax liability, regardless of whether cash
distributions are made. Distributions by a partnership to a partner are
generally not taxable unless the amount of any cash distributed is in excess of
the partner's adjusted basis in his partnership interest.
No ruling has been or will be sought from the IRS as to the status of the
Partnership or the Operating Partnership as a partnership for federal income tax
purposes. Instead the Partnership has relied on the opinion of Counsel that,
based upon the Code, the regulations thereunder, published revenue rulings and
court decisions, the Partnership and the Operating Partnership will each be
classified as a partnership for federal income tax purposes.
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In rendering its opinion, Counsel has relied on certain factual
representations and covenants made by the Partnership and the General Partner.
Such factual matters are as follows:
(a) With respect to the Partnership and the Operating Partnership, the
General Partner, at all times while acting as general partner of the
Partnership and the Operating Partnership, will have a net worth, computed
on a fair market value basis, excluding its interests in the Partnership
and in the Operating Partnership and any notes or receivables due from the
Partnership or the Operating Partnership, of not less than $8.2 million;
(b) The Partnership will be operated in accordance with (i) all
applicable partnership statutes, (ii) the Partnership Agreement, and (iii)
the description thereof in this Prospectus;
(c) The Operating Partnership will be operated in accordance with (i)
all applicable partnership statutes, (ii) the limited partnership agreement
for the Operating Partnership, and (iii) the description thereof in this
Prospectus;
(d) The General Partner will, at all times, act independently of the
limited partners (other than the limited partner interest held by the
General Partner); and
(e) For each taxable year, less than 10% of the gross income of the
Partnership will be derived from sources other than (i) the exploration,
development, production, processing, refining, transportation or marketing
of any mineral or natural resource, including oil, gas or products thereof,
or (ii) other items of "qualifying income" within the meaning of Section
7704(d) of the Code.
Counsel's opinion as to the partnership classification of the Partnership
in the event of a change in the general partner is based upon the assumption
that the new general partner will satisfy the foregoing representations and
covenants.
Section 7704 of the Code provides that publicly-traded partnerships will,
as a general rule, be taxed as corporations. However, an exception (the
"Qualifying Income Exception") exists with respect to publicly-traded
partnerships of which 90% or more of the gross income for every taxable year
consists of "qualifying income." Qualifying income includes interest (from other
than a financial business), dividends and income and gains from the
transportation and marketing of crude oil, natural gas, and products thereof,
including the retail and wholesale marketing of propane and the transportation
of propane and natural gas liquids. Based upon the representations of the
Partnership and the General Partner and a review of the applicable legal
authorities, Counsel is of the opinion that at least 90% of the Partnership's
gross income will constitute qualifying income. The Partnership estimates that
less than 6% of its gross income for each taxable year will not constitute
qualifying income.
If the Partnership fails to meet the Qualifying Income Exception (other
than a failure which is determined by the IRS to be inadvertent and which is
cured within a reasonable time after discovery), the Partnership will be treated
as if it had transferred all of its assets (subject to liabilities) to a newly
formed corporation (on the first day of the year in which it fails to meet the
Qualifying Income Exception) in return for stock in that corporation, and then
distributed that stock to the partners in liquidation of their interests in the
Partnership. This contribution and liquidation should be tax-free to Unitholders
and the Partnership, so long as the Partnership, at that time, does not have
liabilities in excess of the basis of its assets. Thereafter, the Partnership
would be treated as a corporation for federal income tax purposes.
If the Partnership or the Operating Partnership were treated as an
association taxable as a corporation in any taxable year, either as a result of
a failure to meet the Qualifying Income Exception or otherwise, its items of
income, gain, loss and deduction would be reflected only on its tax return
rather than being passed through to the Unitholders, and its net income would be
taxed to the Partnership or the Operating Partnership at corporate rates. In
addition, any distribution made to a Unitholder would be treated as either
taxable dividend income (to the extent of the Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
nontaxable return of capital (to the extent of the Unitholder's tax basis in his
Common Units) or taxable capital gain (after the Unitholder's tax basis in the
Common Units is reduced to zero). Accordingly, treatment of either the
Partnership or the Operating Partnership as an association taxable as a
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corporation would result in a material reduction in a Unitholder's cash flow and
after-tax return and thus would likely result in a substantial reduction of the
value of the Units.
The discussion below is based on the assumption that the Partnership will
be classified as a partnership for federal income tax purposes.
LIMITED PARTNER STATUS
Unitholders who have become limited partners of the Partnership will be
treated as partners of the Partnership for federal income tax purposes.
Moreover, the IRS has ruled that assignees of partnership interests who have not
been admitted to a partnership as partners, but who have the capacity to
exercise substantial dominion and control over the assigned partnership
interests, will be treated as partners for federal income tax purposes. On the
basis of this ruling, except as otherwise described herein, Counsel is of the
opinion that (a) assignees who have executed and delivered Transfer
Applications, and are awaiting admission as limited partners and (b) Unitholders
whose Common Units are held in street name or by a nominee and who have the
right to direct the nominee in the exercise of all substantive rights attendant
to the ownership of their Common Units will be treated as partners of the
Partnership for federal income tax purposes. As this ruling does not extend, on
its facts, to assignees of Common Units who are entitled to execute and deliver
Transfer Applications and thereby become entitled to direct the exercise of
attendant rights, but who fail to execute and deliver Transfer Applications,
Counsel's opinion does not extend to these persons. Income, gain, deductions or
losses would not appear to be reportable by a Unitholder who is not a partner
for federal income tax purposes, and any cash distributions received by such a
Unitholder would therefore be fully taxable as ordinary income. These holders
should consult their own tax advisors with respect to their status as partners
in the Partnership for federal income tax purposes. A purchaser or other
transferee of Common Units who does not execute and deliver a Transfer
Application may not receive certain federal income tax information or reports
furnished to record holders of Common Units unless the Common Units are held in
a nominee or street name account and the nominee or broker has executed and
delivered a Transfer Application with respect to such Common Units.
A beneficial owner of Common Units whose Common Units have been transferred
to a short seller to complete a short sale would appear to lose his status as a
partner with respect to such Common Units for federal income tax purposes. See
"-- Tax Treatment of Operations -- Treatment of Short Sales."
TAX CONSEQUENCES OF UNIT OWNERSHIP
Flow-through of Taxable Income
No federal income tax will be paid by the Partnership. Instead, each
Unitholder will be required to report on his income tax return his allocable
share of the income, gains, losses and deductions of the Partnership without
regard to whether corresponding cash distributions are received by such
Unitholder. Consequently, a Unitholder may be allocated income from the
Partnership even if he has not received a cash distribution. Each Unitholder
will be required to include in income his allocable share of Partnership income,
gain, loss and deduction for the taxable year of the Partnership ending with or
within the taxable year of the Unitholder.
Treatment of Partnership Distributions
Distributions by the Partnership to a Unitholder generally will not be
taxable to the Unitholder for federal income tax purposes to the extent of his
basis in his Common Units immediately before the distribution. Cash
distributions in excess of a Unitholder's basis generally will be considered to
be gain from the sale or exchange of the Common Units, taxable in accordance
with the rules described under "-- Disposition of Common Units" below. Any
reduction in a Unitholder's share of the Partnership's liabilities for which no
partner, including the General Partner, bears the economic risk of loss
("nonrecourse liabilities") will be treated as a distribution of cash to that
Unitholder. To the extent that Partnership distributions cause a Unitholder's
"at risk" amount to be less than zero at the end of any taxable year, he must
recapture any losses deducted in previous years. See "-- Limitations on
Deductibility of Partnership Losses."
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A decrease in a Unitholder's Percentage Interest in the Partnership because
of the issuance by the Partnership of additional Common Units will decrease such
Unitholder's share of nonrecourse liabilities of the Partnership, and thus will
result in a corresponding deemed distribution of cash. A non-pro rata
distribution of money or property may result in ordinary income to a Unitholder,
regardless of his basis in his Common Units, if such distribution reduces the
Unitholder's share of the Partnership's "unrealized receivables" (including
depreciation recapture) and/or substantially appreciated "inventory items" (both
as defined in Section 751 of the Code) (collectively, "Section 751 Assets"). To
that extent, the Unitholder will be treated as having been distributed his
proportionate share of the Section 751 Assets and having exchanged such assets
with the Partnership in return for the non-pro rata portion of the actual
distribution made to him. This latter deemed exchange will generally result in
the Unitholder's realization of ordinary income under Section 751(b) of the
Code. Such income will equal the excess of (1) the non-pro rata portion of such
distribution over (2) the Unitholder's basis for the share of such Section 751
Assets deemed relinquished in the exchange.
Ratio of Taxable Income to Distributions
The Partnership estimates that a purchaser of Common Units in this offering
who holds such Common Units from the date of the closing of this offering
through December 31, 2000, will be allocated, on a cumulative basis, an amount
of federal taxable income for such period that will be approximately 20% of the
cash distributed with respect to that period. The Partnership further estimates
that for taxable years after the taxable year ending December 31, 2000, the
taxable income allocable to the Unitholders will constitute a significantly
higher percentage of cash distributed to Unitholders. The foregoing estimates
are based upon the assumption that gross income from operations will approximate
the amount required to make the Minimum Quarterly Distribution with respect to
all Units and other assumptions with respect to capital expenditures, cash flow
and anticipated cash distributions. These estimates and assumptions are subject
to, among other things, numerous business, economic, regulatory, competitive and
political uncertainties beyond the control of the Partnership. Further, the
estimates are based on current tax law and certain tax reporting positions that
the Partnership intends to adopt and with which the IRS could disagree.
Accordingly, no assurance can be given that the estimates will prove to be
correct. The actual percentage could be higher or lower and any such differences
could be material and could materially affect the value of the Common Units.
Basis of Common Units
A Unitholder's initial tax basis for his Common Units will be the amount he
paid for the Common Units plus his share of the Partnership's nonrecourse
liabilities. That basis will be increased by his share of Partnership income and
by any increases in his share of Partnership nonrecourse liabilities. That basis
will be decreased (but not below zero) by distributions from the Partnership, by
the Unitholder's share of Partnership losses, by any decrease in his share of
Partnership nonrecourse liabilities and by his share of expenditures of the
Partnership that are not deductible in computing its taxable income and are not
required to be capitalized. A limited partner will have no share of Partnership
debt which is recourse to the General Partner, but will have a share, generally
based on his share of profits, of Partnership debt which is not recourse to any
partner. See "-- Disposition of Common Units -- Recognition of Gain or Loss."
Limitations on Deductibility of Partnership Losses
The deduction by a Unitholder of his share of Partnership losses will be
limited to the tax basis in his Units and, in the case of an individual
Unitholder or a corporate Unitholder (if more than 50% in the value of its stock
is owned directly or indirectly by five or fewer individuals or certain
tax-exempt organizations), to the amount which the Unitholder is considered to
be "at risk" with respect to the Partnership's activities, if that is less than
the Unitholder's basis. A Unitholder must recapture losses deducted in previous
years to the extent that Partnership distributions cause the Unitholder's at
risk amount to be less than zero at the end of any taxable year. Losses
disallowed to a Unitholder or recaptured as a result of these limitations will
carry forward and will be allowable to the extent that the Unitholder's basis or
at risk amount (whichever is the limiting factor) is subsequently increased.
Upon the taxable disposition of a Unit, any gain recognized by a Unitholder can
be offset by losses that were previously suspended by the at risk limitation but
may not be offset by losses
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suspended by the basis limitation. Any excess loss (above such gain) previously
suspended by the at risk or basis limitations is no longer utilizable.
In general, a Unitholder will be at risk to the extent of the tax basis of
his Units, excluding any portion of that basis attributable to his share of
Partnership nonrecourse liabilities, reduced by any amount of money the
Unitholder borrows to acquire or hold his Units if the lender of such borrowed
funds owns an interest in the Partnership, is related to such a person or can
look only to Units for repayment. A Unitholder's at risk amount will increase or
decrease as the basis of the Unitholder's Units increases or decreases (other
than basic increases or decreases attributable to increases or decreases in his
share of Partnership nonrecourse liabilities).
The passive loss limitations generally provide that individuals, estates,
trusts and certain closely-held corporations and personal service corporations
can deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) only to the extent of the taxpayer's
income from those passive activities. The passive loss limitations are applied
separately with respect to each publicly-traded partnership. Consequently, any
passive losses generated by the Partnership will only be available to offset
future income generated by the Partnership and will not be available to offset
income from other passive activities or investments (including other
publicly-traded partnerships) or salary or active business income. Passive
losses which are not deductible because they exceed a Unitholder's income
generated by the Partnership may be deducted in full when he disposes of his
entire investment in the Partnership in a fully taxable transaction to an
unrelated party. The passive activity loss rules are applied after other
applicable limitations on deductions such as the at risk rules and the basis
limitation.
A Unitholder's share of net income from the Partnership may be offset by
any suspended passive losses from the Partnership, but it may not be offset by
any other current or carryover losses from other passive activities, including
those attributable to other publicly-traded partnerships. The IRS has announced
that Treasury Regulations will be issued which characterize net passive income
from a publicly-traded Partnership as investment income for purposes of the
limitations on the deductibility of investment interest.
Limitations on Interest Deductions
The deductibility of a non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of such taxpayer's "net investment
income." As noted, a Unitholder's net passive income from the Partnership will
be treated as investment income for this purpose. In addition, the Unitholder's
share of the Partnership's portfolio income will be treated as investment
income. Investment interest expense includes (i) interest on indebtedness
properly allocable to property held for investment, (ii) the Partnership's
interest expense attributed to portfolio income, and (iii) the portion of
interest expense incurred to purchase or carry an interest in a passive activity
to the extent attributable to portfolio income. The computation of a
Unitholder's investment interest expense will take into account interest on any
margin account borrowing or other loan incurred to purchase or carry a Unit. Net
investment income includes gross income from property held for investment and
amounts treated as portfolio income pursuant to the passive loss rules less
deductible expenses (other than interest) directly connected with the production
of investment income, but generally does not include gains attributable to the
disposition of property held for investment.
ALLOCATION OF PARTNERSHIP INCOME, GAIN, LOSS AND DEDUCTION
In general, if the Partnership has a net profit, items of income, gain,
loss and deduction will be allocated among the General Partner and the
Unitholders in accordance with their respective percentage interests in the
Partnership. With respect to any taxable year, a class of Unitholders that
receives more cash than another class, on a per Unit basis, will be allocated
additional income equal to that excess. If the Partnership has a net loss, items
of income, gain, loss and deduction will generally be allocated first, to the
General Partner and the Unitholders in accordance with their respective
Percentage Interests to the extent of their positive capital accounts (as
maintained under the Partnership Agreement), and second, to the General Partner.
As required by Section 704(c) of the Code and as permitted by Regulations
thereunder, certain items of Partnership income, deduction, gain and loss will
be allocated to account for the difference between the tax basis and fair market
value of property contributed to the Partnership by the General Partner
("Contributed
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Property"). The effect of these allocations to a Unitholder will be essentially
the same as if the tax basis of the Contributed Property were equal to their
fair market value at the time of contribution. In addition, certain items of
recapture income will be allocated to the extent possible to the partner
allocated the deduction giving rise to the treatment of such gain as recapture
income in order to minimize the recognition of ordinary income by some
Unitholders, but these allocations may not be respected. If these allocations of
recapture income are not respected, the amount of the income or gain allocated
to a Unitholder will not change but instead a change in the character of the
income allocated to a Unitholder would result. Finally, although the Partnership
does not expect that its operations will result in the creation of negative
capital accounts, if negative capital accounts nevertheless result, items of
Partnership income and gain will be allocated in an amount and manner sufficient
to eliminate the negative balance as quickly as possible.
Regulations provide that an allocation of items of partnership income,
gain, loss or deduction, other than an allocation required by Section 704(c) of
the Code to eliminate the disparity between a partner's "book" capital account
(credited with the fair market value of Contributed Property) and "tax" capital
account (credited with the tax basis of Contributed Property) (the "Book-Tax
Disparity"), will generally be given effect for federal income tax purposes in
determining a partner's distributive share of an item of income, gain, loss or
deduction only if the allocation has substantial economic effect. In any other
case, a partner's distributive share of an item will be determined on the basis
of the partner's interest in the partnership, which will be determined by taking
into account all the facts and circumstances, including the partner's relative
contributions to the partnership, the interests of the partners in economic
profits and losses, the interest of the partners in cash flow and other
nonliquidating distributions and rights of the partners to distributions of
capital upon liquidation.
Counsel is of the opinion that, with the exception of the allocation of
recapture income discussed above, allocations under the Partnership Agreement
will be given effect for federal income tax purposes in determining a partner's
distributive share of an item of income, gain, loss or deduction. There are,
however, uncertainties in the Treasury Regulations relating to allocations of
Partnership income, and investors should be aware that the allocations of
recapture income in the Partnership Agreement may be successfully challenged by
the IRS.
TAX TREATMENT OF OPERATIONS
Accounting Method and Taxable Year
Common Units may be sold only to calendar year taxpayers. As a result, the
Partnership will use the fiscal year ending December 31 as its taxable year. The
Partnership will adopt the accrual method of accounting for federal income tax
purposes. Each Unitholder will be required to include in income his allocable
share of Partnership income, gain, loss and deduction for the fiscal year of the
Partnership ending within or with the taxable year of the Unitholder.
Initial Tax Basis, Depreciation and Amortization
The tax basis of the assets of the Partnership will be used for purposes of
computing depreciation and cost recovery deductions and, ultimately, gain or
loss on the disposition of such assets. The Partnership assets will initially
have an aggregate tax basis equal to the tax basis of the assets in the
possession of the General partner immediately prior to the formation of the
Partnership plus the amount of gain recognized by the General Partner as a
result of the formation of the Partnership. The federal income tax burden
associated with the difference between the fair market value of property
contributed by the General Partner and the tax basis established for such
property will be borne by the General Partner. See "-- Allocation of Partnership
Income, Gain, Loss and Deduction."
To the extent allowable, the Partnership may elect to use the depreciation
and cost recovery methods that will result in the largest depreciation
deductions in the early years of the Partnership. The Partnership will not be
entitled to any amortization deductions with respect to goodwill conveyed to the
Partnership on formation. Property subsequently acquired or constructed by the
Partnership may be depreciated using accelerated methods permitted by the Code.
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If the Partnership disposes of depreciable property by sale, foreclosure,
or otherwise, all or a portion of any gain (determined by reference to the
amount of depreciation previously deducted and the nature of the property) may
be subject to the recapture rules and taxed as ordinary income rather than
capital gain. Similarly, a partner who has taken cost recovery or depreciation
deductions with respect to property owned by the Partnership may be required to
recapture such deductions as ordinary income upon a sale of his interest in the
Partnership. See "-- Allocation of Partnership Income, Gain, Loss and Deduction"
and "-- Disposition of Common Units -- Recognition of Gain or Loss."
Costs incurred in organizing the Partnership may be amortized over any
period selected by the Partnership not shorter than 60 months. The costs
incurred in promoting the issuance of Units must be capitalized and cannot be
deducted currently, ratably or upon termination of the Partnership. There are
uncertainties regarding the classification of costs as organization expenses,
which may be amortized, and as syndication expenses, which may not be amortized.
For example, under recently adopted regulations, the Underwriter's spread would
be treated as a syndication cost.
Section 754 Election
The Partnership will make the election permitted by Section 754 of the
Code. That election is irrevocable without the consent of the IRS. The election
will generally permit the Partnership to adjust a Common Unit purchaser's basis
in the Partnership's assets ("inside basis") pursuant to Section 743(b) of the
Code to reflect his purchase price. The Section 743(b) adjustment belongs to the
purchaser and not to other partners. (For purposes of this discussion, a
partner's inside basis in the Partnership's assets will be considered to have
two components: (1) his share of the Partnership's basis in such assets ("Common
Basis") and (2) his Section 743(b) adjustment to that basis.)
Proposed Treasury Regulation Section 1.168-2(n) generally requires the
Section 743(b) adjustment attributable to recovery property to be depreciated as
if the total amount of such adjustment were attributable to newly-acquired
recovery property placed in service when the purchaser acquires the Unit.
Similarly, the legislative history of Section 197 indicates that the Section
743(b) adjustment attributable to an amortizable Section 197 intangible should
be treated as a newly-acquired asset placed in service in the month when the
purchaser acquires the Unit. Under Treasury Regulation Section 1.167(c)-1(a)(6),
a Section 743(b) adjustment attributable to property subject to depreciation
under Section 167 of the Code rather than cost recovery deductions under Section
168 is generally required to be depreciated using either the straight-line
method or the 150% declining balance method. The depreciation and amortization
methods and useful lives associated with the Section 743(b) adjustment,
therefore, may differ from the methods and useful lives generally used to
depreciate the Common Basis in such properties. Pursuant to the Partnership
Agreement, the Partnership is authorized to adopt a convention to preserve the
uniformity of Units even if such convention is not consistent with Treasury
Regulation Sections 1.167(c)-1(a)(6), Proposed Treasury Regulation Section
1.168-2(n) or the legislative history of Section 197 of the Code. See
"-- Uniformity of Units."
Although Counsel is unable to opine as to the validity of such an approach,
the Partnership intends to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property (to
the extent of any unamortized book-tax disparity) using a rate of depreciation
or amortization derived from the depreciation or amortization method and useful
life applied to the Common Basis of such property, despite its inconsistency
with Proposed Treasury Regulation Section 1.168-2(n), Treasury Regulation
Section 1.167(c)-1(a)(6) (neither of which is expected to directly apply to a
material portion of the Partnership's assets) or the legislative history of
Section 197 of the Code. To the extent such Section 743(b) adjustment is
attributable to appreciation in excess of the unamortized book-tax disparity,
the Partnership will apply the rules described in the Regulations and
legislative history. If the Partnership determines that such position cannot
reasonably be taken, the Partnership may adopt a depreciation or amortization
convention under which all purchasers acquiring Units in the same month would
receive depreciation or amortization, whether attributable to Common Basis or
Section 743(b) adjustment, based upon the same applicable rate as if they had
purchased a direct interest in the Partnership's assets. Such an
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aggregate approach may result in lower annual depreciation or amortization
deductions than would otherwise be allowable to certain Unitholders. See
"-- Uniformity of Units."
The allocation of the Section 743(b) adjustment must be made in accordance
with the Code. The IRS may seek to reallocate some or all of any Section 743(b)
adjustment not so allocated by the Partnership to goodwill which, as an
intangible asset, would be amortizable over a longer period of time than the
Partnership's tangible assets.
A Section 754 election is advantageous if the transferee's basis in his
Units is higher than such Units' share of the aggregate basis to the Partnership
of the Partnership's assets immediately prior to the transfer. In such a case,
as a result of the election, the transferee would have a higher basis in his
share of the Partnership's assets for purposes of calculating, among other
items, his depreciation and depletion deductions and his share of any gain or
loss on a sale of the Partnership's assets. Conversely, a Section 754 election
is disadvantageous if the transferee's basis in such Units is lower than such
Unit's share of the aggregate basis of the Partnership's assets immediately
prior to the transfer. Thus, the fair market value of the Units may be affected
either favorably or adversely by the election.
The calculations involved in the Section 754 election are complex and will
be made by the Partnership on the basis of certain assumptions as to the value
of Partnership assets and other matters. There is no assurance that the
determinations made by the Partnership will not be successfully challenged by
the IRS and that the deductions resulting from them will not be reduced or
disallowed altogether. Should the IRS require a different basis adjustment to be
made, and should, in the Partnership's opinion, the expense of compliance exceed
the benefit of the election, the Partnership may seek permission from the IRS to
revoke the Section 754 election for the Partnership. If such permission is
granted, a subsequent purchaser of Units may be allocated more income than he
would have been allocated had the election not been revoked.
Alternative Minimum Tax
Each Unitholder will be required to take into account his distributive
share of any items of Partnership income, gain, deduction, or loss for purposes
of the alternative minimum tax.
A Unitholder's alternative minimum taxable income derived from the
Partnership may be higher than his share of Partnership net income because the
Partnership may use accelerated methods of depreciation for purposes of
computing federal taxable income or loss. The minimum tax rate for noncorporate
taxpayers is 26% on the first $175,000 of alternative minimum taxable income in
excess of the exemption amount and to 28% on any additional alternative minimum
taxable income. Prospective Unitholders should consult with their tax advisors
as to the impact of an investment in Units on their liability for the
alternative minimum tax.
Valuation of Partnership Property and Basis of Properties
The federal income tax consequences of the ownership and disposition of
Units will depend in part on estimates by the Partnership of the relative fair
market values, and determinations of the initial tax basis, of the assets of the
Partnership. Although the Partnership may from time to time consult with
professional appraisers with respect to valuation matters, many of the relative
fair market value estimates will be made by the Partnership. These estimates and
determinations of basis are subject to challenge and will not be binding on the
IRS or the courts. If the estimates of fair market value or determinations of
basis are subsequently found to be incorrect, the character and amount of items
of income, gain, loss or deductions previously reported by Unitholders might
change, and Unitholders might be required to adjust their tax liability for
prior years.
Treatment of Short Sales
A Unitholder whose Units are loaned to a "short seller" to cover a short
sale of Units may be considered as having disposed of ownership of those Units.
If so, he would no longer be a partner with respect to those Units during the
period of the loan and may recognize gain or loss from the disposition. As a
result, during this period, any Partnership income, gain, deduction or loss with
respect to those Units would not be reportable by
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the Unitholder, any cash distributions received by the Unitholder with respect
to those Units would be fully taxable and all of such distributions would appear
to be treated as ordinary income. Unitholders desiring to assure their status as
partners and avoid the risk of gain recognition should modify any applicable
brokerage account agreements to prohibit their brokers from borrowing their
Units. The IRS has announced that it is actively studying issues relating to the
tax treatment of short sales of Partnership interests.
DISPOSITION OF COMMON UNITS
Recognition of Gain or Loss
Gain or loss will be recognized on a sale of Units equal to the difference
between the amount realized and the Unitholder's tax basis for the Units sold. A
Unitholder's amount realized will be measured by the sum of the cash or the fair
market value of other property received plus his share of Partnership
nonrecourse liabilities. Because the amount realized includes a Unitholder's
share of Partnership nonrecourse liabilities, the gain recognized on the sale of
Units could result in a tax liability in excess of any cash received from such
sale.
Prior Partnership distributions in excess of cumulative net taxable income
in respect of a Common Unit which decreased a Unitholder's tax basis in such
Common Unit will, in effect, become taxable income if the Common Unit is sold at
a price greater than the Unitholder's tax basis in such Common Unit, even if the
price is less than his original cost.
Gain or loss recognized by a Unitholder (other than a "dealer" in Units) on
the sale or exchange of a Unit held for more than one year will generally be
taxable as long-term capital gain or loss. A portion of this gain or loss (which
could be substantial), however, will be separately computed and taxed as
ordinary income or loss under Section 751 of the Code to the extent attributable
to assets giving rise to depreciation recapture or other "unrealized
receivables" or to "substantially appreciated inventory" owned by the
Partnership. The term "unrealized receivables" includes potential recapture
items, including depreciation recapture. Inventory is considered to be
"substantially appreciated" if its value exceeds 120% of its adjusted basis to
the Partnership. Ordinary income attributable to unrealized receivables,
substantially appreciated inventory and depreciation recapture may exceed net
taxable gain realized upon the sale of the Unit and may be recognized even if
there is a net taxable loss realized on the sale of the Unit. Thus, a Unitholder
may recognize both ordinary income and a capital loss upon a disposition of
Units. Net capital loss may offset no more than $3,000 of ordinary income in the
case of individuals and may only be used to offset capital gain in the case of
corporations.
The IRS has ruled that a partner who acquires interests in a Partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of such
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. The ruling is unclear as to how the
holding period of these interests is determined once they are combined. If this
ruling is applicable to the holders of Common Units, a Common Unitholder will be
unable to select high or low basis Common Units to sell as would be the case
with corporate stock. It is not clear whether the ruling applies to the
Partnership, because, similar to corporate stock, interests in the Partnership
are evidenced by separate certificates. Accordingly Counsel is unable to opine
as to the effect such ruling will have on the Unitholders. In addition, under
the financial product provisions of the Revenue Reconciliation Act of 1996, in
the case of partnership interests in publicly traded partnerships which are
substantially identical, the basis of such interests and any adjustments to
basis, would be determined on an average basis and a taxpayer would be treated
as selling such interests on a first-in, first-out basis. A Unitholder
considering the purchase of additional Common Units or a sale of Common Units
purchased in separate transactions should consult his tax advisor as to the
possible consequences of such ruling and subsequent legislation.
Allocations Between Transferors and Transferees
In general, the Partnership's taxable income and losses will be determined
annually, will be prorated on a monthly basis and subsequently apportioned among
the Unitholders in proportion to the number of Units
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owned by each of them as of the opening of the NYSE on the first business day of
the month (the "Allocation Date"). However, gain or loss realized on a sale or
other disposition of Partnership assets other than in the ordinary course of
business will be allocated among the Unitholders on the Allocation Date in the
month in which that gain or loss is recognized. As a result, a Unitholder
transferring Common Units in the open market may be allocated income, gain, loss
and deduction accrued after the date of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, Counsel is unable to opine on the validity of this
method of allocating income and deductions between the transferors and the
transferees of Units. If this method is not allowed under the Treasury
Regulations (or only applies to transfers of less than all of the Unitholder's
interest), taxable income or losses of the Partnership might be reallocated
among the Unitholders. The Partnership is authorized to revise its method of
allocation between transferors and transferees (as well as among partners whose
interests otherwise vary during a taxable period) to conform to a method
permitted under future Treasury Regulations.
A Unitholder who owns Units at any time during a quarter and who disposes
of such Units prior to the record date set for a cash distribution with respect
to such quarter will be allocated items of Partnership income, gain, loss and
deductions attributable to such quarter but will not be entitled to receive that
cash distribution.
Notification Requirements
A Unitholder who sells or exchanges Units is required to notify the
Partnership in writing of that sale or exchange within 30 days after the sale or
exchange and in any event by no later than January 15 of the year following the
calendar year in which the sale or exchange occurred. The Partnership is
required to notify the IRS of that transaction and to furnish certain
information to the transferor and transferee. However, these reporting
requirements do not apply with respect to a sale by an individual who is a
citizen of the United States and who effects the sale or exchange through a
broker. Additionally, a transferor and a transferee of a Unit will be required
to furnish statements to the IRS, filed with their income tax returns for the
taxable year in which the sale or exchange occurred, that set forth the amount
of the consideration received for the Unit that is allocated to goodwill or
going concern value of the Partnership. Failure to satisfy these reporting
obligations may lead to the imposition of substantial penalties.
Constructive Termination
The Partnership and the Operating Partnership will be considered to have
been terminated if there is a sale or exchange of 50% or more of the total
interests in Partnership capital and profits within a 12-month period. A
termination results in the closing of a Partnership's taxable year for all
partners and the Partnership's assets are regarded as having been distributed to
the partners and reconveyed to the Partnership, which is then treated as a new
partnership. However, under new proposed regulations which are not yet
effective, the Partnership will be deemed to have conveyed all its assets and
liabilities to a newly formed partnership in exchange for all the interests in
such partnership and then the Partnership will be deemed to have liquidated and
to have distributed to its partners the interests in this newly formed
partnership. A termination of the Partnership will cause a termination of the
Operating Partnership and any Subsidiary Partnership. Such a termination could
also result in penalties or loss of basis adjustments under Section 754 of the
Code if the Partnership were unable to determine that the termination had
occurred. (Under the 1995 Proposed Legislation, termination of a large
partnership, such as the Partnership would not occur by reason of the sale or
exchange of interests in the partnership.)
In the case of a Unitholder reporting on a taxable year other than a fiscal
year ending December 31, the closing of the tax year of the Partnership may
result in more than 12 months' taxable income or loss of the Partnership being
includable in his taxable income for the year of termination. In addition, each
Unitholder will realize taxable gain to the extent that any money deemed as a
result of the termination to have been distributed to him exceeds the adjusted
basis of his Units. New tax elections required to be made by the Partnership,
including a new election under Section 754 of the Code, must be made subsequent
to a constructive termination. A termination could also result in a deferral of
Partnership deductions for
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depreciation. Finally, a termination might either accelerate the application of
or subject the Partnership to any tax legislation enacted prior to the
termination.
Entity-Level Collections
If the Partnership is required or elects under applicable law to pay any
federal, state or local income tax on behalf of any Unitholder or any General
Partner or any former Unitholder, the Partnership is authorized to pay those
taxes from Partnership funds. Such payment, if made, will be treated as a
distribution of cash to the partner on whose behalf the payment was made. If the
payment is made on behalf of a person whose identity cannot be determined, the
Partnership is authorized to treat the payment as a distribution to current
Unitholders. Alternatively, the Partnership may elect to treat an amount paid on
behalf of the General Partner and Unitholders as an expenditure of the
Partnership if the amount paid on behalf of the General Partner is not
substantially greater than 2% of the total amount paid. The Partnership is
authorized to amend the Partnership Agreement in the manner necessary to
maintain uniformity of intrinsic tax characteristics of Units and to adjust
subsequent distributions, so that after giving effect to such distributions, the
priority and characterization of distributions otherwise applicable under the
Partnership Agreement is maintained as nearly as is practicable. Payments by the
Partnership as described above could give rise to an overpayment of tax on
behalf of an individual partner in which event the partner could file a claim
for credit or refund.
UNIFORMITY OF UNITS
Because the Partnership cannot match transferors and transferees of Units,
uniformity of the economic and tax characteristics of the Units to a purchaser
of such Units must be maintained. In the absence of uniformity, compliance with
a number of federal income tax requirements, both statutory and regulatory,
could be substantially diminished. A lack of uniformity can result from a
literal application of Proposed Treasury Regulation Section 1.168-2(n) and
Treasury Regulation Section 1.167(c)-1(a)(6) or the legislative history of
Section 197 and from the application of the "ceiling limitation" on the
Partnership's ability to make allocations to eliminate book-tax disparities
attributable to Contributed Properties and Partnership property that has been
revalued and reflected in the partners capital accounts ("Adjusted Properties").
Any non-uniformity could have a negative impact on the value of the Units. See
"-- Tax Treatment of Operations -- Section 754 Election."
The Partnership intends to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value of Contributed
Property or Adjusted Property (to the extent of any unamortized Book-Tax
Disparity) using a rate of depreciation or amortization derived from the
depreciation or amortization method and useful life applied to the Common Basis
of such property, despite its inconsistency with Proposed Treasury Regulation
Section 1.168-2(n) and Treasury Regulation Section 1.167(c)-1(a)(6) (neither of
which is expected to directly apply to a material portion of the Partnership's
assets) or the legislative history of Section 197. See "-- Tax Treatment of
Operations -- Section 754 Election." To the extent such Section 743(b)
adjustment is attributable to appreciation in excess of the unamortized Book-Tax
Disparity, the Partnership will apply the rules described in the Regulations and
legislative history. If the Partnership determines that such a position cannot
reasonably be taken, the Partnership may adopt a depreciation and amortization
convention under which all purchasers acquiring Units in the same month would
receive depreciation and amortization deductions, whether attributable to common
basis or Section 743(b) basis, based upon the same applicable rate as if they
had purchased a direct interest in the Partnership's property. If such an
aggregate approach is adopted, it may result in lower annual depreciation and
amortization deductions than would otherwise be allowable to certain Unitholders
and risk the loss of depreciation and amortization deductions not taken in the
year that such deductions are otherwise allowable. This convention will not be
adopted if the Partnership determines that the loss of depreciation and
amortization deductions will have a material adverse effect on the Unitholders.
If the Partnership chooses not to utilize this aggregate method, the Partnership
may use any other reasonable depreciation and amortization convention to
preserve the uniformity of the intrinsic tax characteristics of any Units that
would not have a material adverse effect on the Unitholders. The IRS may
challenge any method of depreciating the
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Section 743(b) adjustment described in this paragraph. If such a challenge were
sustained, the uniformity of Units might be affected.
Tax-Exempt Organizations and Certain Other Investors
Ownership of Units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to such persons and, as
described below, may have substantially adverse tax consequences. Employee
benefit plans and most other organizations exempt from federal income tax
(including individual retirement accounts ("IRAs") and other retirement plans)
are subject to federal income tax on unrelated business taxable income.
Virtually all of the taxable income derived by such an organization from the
ownership of a Unit will be unrelated business taxable income and thus will be
taxable to such a Unitholder.
A regulated investment company or "mutual fund" is required to derive 90%
or more of its gross income from interest, dividends, gains from the sale of
stocks or securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of the Partnership's gross income will
include that type of income.
Non-resident aliens and foreign corporations, trusts or estates which hold
Units will be considered to be engaged in business in the United States on
account of ownership of Units. As a consequence they will be required to file
federal tax returns in respect of their share of Partnership income, gain, loss
or deduction and pay federal income tax at regular rates on any net income or
gain. Generally, a Partnership is required to pay a withholding tax on the
portion of the Partnership's income which is effectively connected with the
conduct of a United States trade or business and which is allocable to the
foreign partners, regardless of whether any actual distributions have been made
to such partners. However, under rules applicable to publicly-traded
partnerships, the Partnership will withhold (currently at the rate of 39.6%) on
actual cash distributions made quarterly to foreign Unitholders. Each foreign
Unitholder must obtain a taxpayer identification number from the IRS and submit
that number to the Transfer Agent of the Partnership on a Form W-8 in order to
obtain credit for the taxes withheld. A change in applicable law may require the
Partnership to change these procedures.
Because a foreign corporation which owns Units will be treated as engaged
in a United States trade or business, such a corporation may be subject to
United States branch profits tax at a rate of 30%, in addition to regular
federal income tax, on its allocable share of the Partnership's income and gain
(as adjusted for changes in the foreign corporation's "U.S. net equity") which
are effectively connected with the conduct of a United States trade or business.
That tax may be reduced or eliminated by an income tax treaty between the United
States and the country with respect to which the foreign corporate Unitholder is
a "qualified resident." In addition, such a Unitholder is subject to special
information reporting requirements under Section 6038C of the Code.
Under a ruling of the IRS a foreign Unitholder who sells or otherwise
disposes of a Unit will be subject to federal income tax on gain realized on the
disposition of such Unit to the extent that such gain is effectively connected
with a United States trade or business of the foreign Unitholder. Apart from the
ruling, a foreign Unitholder will not be taxed upon the disposition of a Unit if
that foreign Unitholder has held less than 5% in value of the Units during the
five-year period ending on the date of the disposition and if the Units are
regularly traded on an established securities market at the time of the
disposition.
ADMINISTRATIVE MATTERS
Partnership Information Returns and Audit Procedures
The Partnership intends to furnish to each Unitholder, within 90 days after
the close of each calendar year, certain tax information, including a Schedule
K-1, which sets forth each Unitholder's allocable share of the Partnership's
income, gain, loss and deduction for the preceding Partnership taxable year. In
preparing this information, which will generally not be reviewed by counsel, the
Partnership will use various accounting and reporting conventions, some of which
have been mentioned in the previous discussion, to determine the
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Unitholder's allocable share of income, gain, loss and deduction. There is no
assurance that any of those conventions will yield a result which conforms to
the requirements of the Code, regulations or administrative interpretations of
the IRS. The Partnership cannot assure prospective Unitholders that the IRS will
not successfully contend in court that such accounting and reporting conventions
are impermissible. Any such challenge by the IRS could negatively affect the
value of the Units.
The federal income tax information returns filed by the Partnership may be
audited by the IRS. Adjustments resulting from any such audit may require each
Unitholder to adjust a prior year's tax liability, and possibly may result in an
audit of the Unitholder's own return. Any audit of a Unitholder's return could
result in adjustments of non-Partnership as well as Partnership items.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership proceeding rather than
in separate proceedings with the partners. The Code provides for one partner to
be designated as the "Tax Matters Partner" for these purposes. The Partnership
Agreement appoints the General Partner as the Tax Matters Partner of the
Partnership.
The Tax Matters Partner will make certain elections on behalf of the
Partnership and Unitholders and can extend the statute of limitations for
assessment of tax deficiencies against Unitholders with respect to Partnership
items. The Tax Matters Partner may bind a Unitholder with less than a 1% profits
interest in the Partnership to a settlement with the IRS unless that Unitholder
elects, by filing a statement with the IRS, not to give such authority to the
Tax Matters Partner. The Tax Matters Partner may seek judicial review (by which
all the Unitholders are bound) of a final partnership administrative adjustment
and, if the Tax Matters Partner fails to seek judicial review, such review may
be sought by any Unitholder having at least a 1% interest in the profits of the
Partnership and by the Unitholders having in the aggregate at least a 5% profits
interest. However, only one action for judicial review will go forward, and each
Unitholder with an interest in the outcome may participate.
A Unitholder must file a statement with the IRS identifying the treatment
of any item on his federal income tax return that is not consistent with the
treatment of the item on the Partnership's return. Intentional or negligent
disregard of the consistency requirement may subject a Unitholder to substantial
penalties. Under the 1995 Proposed Legislation, partners in electing large
partnerships would be required to treat all Partnership items in a manner
consistent with the Partnership return.
Under the reporting provisions of the 1995 Proposed Legislation, each
partner of an electing large partnership would take into account separately his
share of the following items, determined at the partnership level: (1) taxable
income or loss from passive loss limitation activities; (2) taxable income or
loss from other activities (such as portfolio income or loss); (3) net capital
gains to the extent allocable to passive loss limitation activities and other
activities; (4) tax exempt interest; (5) a net alternative minimum tax
adjustment separately computed for passive loss limitation activities and other
activities; (6) general credits; (7) low-income housing credit; (8)
rehabilitation credit; (9) foreign income taxes; (10) credit for producing fuel
from a nonconventional source; and (11) any other items the Secretary of
Treasury deems appropriate.
The House version of the 1995 Proposed Legislation would also make a number
of changes to the tax compliance and administrative rules relating to
partnerships. One provision would require that each partner in a large
partnership, such as the Partnership, take into account his share of any
adjustments to partnership items in the year such adjustments are made. Under
current law, adjustments relating to partnership items for a previous taxable
year are taken into account by those persons who were partners in the previous
taxable year. Alternatively, under the 1995 Proposed Legislation, a partnership
could elect to or, in some circumstances, could be required to, directly pay the
tax resulting from any such adjustments. In either case, therefore, Unitholders
could bear significant economic burdens associated with tax adjustments relating
to periods predating their acquisition of Units.
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<PAGE> 118
It cannot be predicted whether or in what form the 1995 Proposed
Legislation, or other tax legislation that might affect Unitholders, will be
enacted. However, if tax legislation is enacted which includes provisions
similar to those discussed above, a Unitholder might experience a reduction in
cash distributions.
Nominee Reporting
Persons who hold an interest in the Partnership as a nominee for another
person are required to furnish to the Partnership (a) the name, address and
taxpayer identification number of the beneficial owner and the nominee; (b)
whether the beneficial owner is (i) a person that is not a United States person,
(ii) a foreign government, an international organization or any wholly-owned
agency or instrumentality of either of the foregoing, or (iii) a tax-exempt
entity; (c) the amount and description of Units held, acquired or transferred
for the beneficial owner; and (d) certain information including the dates of
acquisitions and transfers, means of acquisitions and transfers, and acquisition
cost for purchases, as well as the amount of net proceeds from sales. Brokers
and financial institutions are required to furnish additional information,
including whether they are United States persons and certain information on
Units they acquire, hold or transfer for their own account. A penalty of $50 per
failure (up to a maximum of $100,000 per calendar year) is imposed by the Code
for failure to report such information to the Partnership. The nominee is
required to supply the beneficial owner of the Units with the information
furnished to the Partnership.
Registration as a Tax Shelter
The Code requires that "tax shelters" be registered with the Secretary of
the Treasury. The temporary Treasury Regulations interpreting the tax shelter
registration provisions of the Code are extremely broad. It is arguable that the
Partnership will not be subject to the registration requirement on the basis
that it will not constitute a tax shelter. However, the General Partner, as a
principal organizer of the Partnership, will register the Partnership as a tax
shelter with the IRS in the absence of assurance that the Partnership will not
be subject to tax shelter registration and in light of the substantial penalties
which might be imposed if registration is required and not undertaken. The
Partnership has applied for a tax shelter registration number with the IRS.
ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN THE
PARTNERSHIP OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED
BY THE IRS. The Partnership must furnish the registration number to the
Unitholders, and a Unitholder who sells or otherwise transfers a Unit in a
subsequent transaction must furnish the registration number to the transferee.
The penalty for failure of the transferor of a Unit to furnish the registration
number to the transferee is $100 for each such failure. The Unitholders must
disclose the tax shelter registration number of the Partnership on Form 8271 to
be attached to the tax return on which any deduction, loss or other benefit
generated by the Partnership is claimed or income of the Partnership is
included. A Unitholder who fails to disclose the tax shelter registration number
on his return, without reasonable cause for that failure, will be subject to a
$250 penalty for each failure. Any penalties discussed herein are not deductible
for federal income tax purposes.
Accuracy-Related Penalties
An additional tax equal to 20% of the amount of any portion of an
underpayment of tax which is attributable to one or more of certain listed
causes, including negligence or disregard of rules or regulations, substantial
understatements of income tax and substantial valuation misstatements, is
imposed by the Code. No penalty will be imposed, however, with respect to any
portion of an underpayment if it is shown that there was a reasonable cause for
that portion and that the taxpayer acted in good faith with respect to that
portion.
A substantial understatement of income tax in any taxable year exists if
the amount of the understatement exceeds the greater of 10% of the tax required
to be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on the return (i)
with respect to which there is, or was, "substantial authority" or (ii) as to
which there is a reasonable basis and the pertinent facts of such position are
disclosed on the return. Certain more stringent rules apply to "tax shelters," a
term that in this context does not appear to include the Partnership. If any
Partnership item of income, gain, loss or deduction included
116
<PAGE> 119
in the distributive shares of Unitholders might result in such an
"understatement" of income for which no "substantial authority" exists, the
Partnership must disclose the pertinent facts on its return. In addition, the
Partnership will make a reasonable effort to furnish sufficient information for
Unitholders to make adequate disclosure on their returns to avoid liability for
this penalty.
A substantial valuation misstatement exists if the value of any property
(or the adjusted basis of any property) claimed on a tax return is 200% or more
of the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement exceeds $5,000 ($10,000 for most
corporations). If the valuation claimed on a return is 400% or more than the
correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will be subject to other
taxes, such as state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which the Partnership does business or owns property. Although
an analysis of
those various taxes is not presented here, each prospective Unitholder should
consider their potential impact on his investment in the Partnership. The
Partnership will initially own property and conduct business in the following
states which currently impose a personal income tax: Arizona, California,
Colorado, Idaho, Michigan, Minnesota, Montana, New Mexico, North Carolina,
Oregon and South Carolina. A Unitholder will be required to file state income
tax returns and to pay state income taxes in some or all of these states and may
be subject to penalties for failure to comply with those requirements. In
certain states, tax losses may not produce a tax benefit in the year incurred
(if, for example, the Partnership has no income from sources within that state)
and also may not be available to offset income in subsequent taxable years. Some
of the states may require the Partnership, or the Partnership may elect, to
withhold a percentage of income from amounts to be distributed to a Unitholder
who is not a resident of the state. Withholding, the amount of which may be
greater or less than a particular Unitholder's income tax liability to the
state, generally does not relieve the non-resident Unitholder from the
obligation to file an income tax return. Amounts withheld may be treated as if
distributed to Unitholders for purposes of determining the amounts distributed
by the Partnership. See "-- Disposition of Common Units -- Entity-Level
Collections." Based on current law and its estimate of future Partnership
operations, the General Partner anticipates that any amounts required to be
withheld will not be material.
It is the responsibility of each Unitholder to investigate the legal and
tax consequences, under the laws of pertinent states and localities of his
investment in the Partnership. Accordingly, each prospective Unitholder should
consult, and must depend upon, his own tax counsel or other advisor with regard
to those matters. Further, it is the responsibility of each Unitholder to file
all state and local, as well as U.S. federal, tax returns that may be required
of such Unitholder. Counsel has not rendered an opinion on the state or local
tax consequences of an investment in the Partnership.
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<PAGE> 120
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS
An investment in the Partnership by an employee benefit plan is subject to
certain additional considerations because the investments of such plans are
subject to the fiduciary responsibility and prohibited transaction provisions of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
restrictions imposed by Section 4975 of the Code. As used herein, the term
"employee benefit plan" includes, but is not limited to, qualified pension,
profit-sharing and stock bonus plans, Keogh plans, simplified employee pension
plans and tax deferred annuities or Individual Retirement Accounts established
or maintained by an employer or employee organization. Among other things,
consideration should be given to (a) whether such investment is prudent under
Section 404(a)(1)(B) of ERISA; (b) whether in making such investment, such plan
will satisfy the diversification requirement of Section 404(a)(1)(C) of ERISA;
and (c) whether such investment will result in recognition of unrelated business
taxable income by such plan and, if so, the potential after-tax investment
return. See "Tax Considerations -- Uniformity of Units -- Tax-Exempt
Organizations and Certain Other Investors." The person with investment
discretion with respect to the assets of an employee benefit plan (a
"fiduciary") should determine whether an investment in the Partnership is
authorized by the appropriate governing instrument and is a proper investment
for such plan.
Section 406 of ERISA and Section 4975 of the Code (which also applies to
Individual Retirement Accounts that are not considered part of an employee
benefit plan) prohibit an employee benefit plan from engaging in certain
transactions involving "plan assets" with parties that are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to the plan.
In addition to considering whether the purchase of Common Units is a
prohibited transaction, a fiduciary of an employee benefit plan should consider
whether such plan will, by investing in the Partnership, be deemed to own an
undivided interest in the assets of the Partnership, with the result that the
General Partner also would be a fiduciary of such plan and the operations of the
Partnership would be subject to the regulatory restrictions of ERISA, including
its prohibited transaction rules, as well as the prohibited transaction rules of
the Code.
The Department of Labor regulations provide guidance with respect to
whether the assets of an entity in which employee benefit plans acquire equity
interests would be deemed "plan assets" under certain circumstances. Pursuant to
these regulations, an entity's assets would not be considered to be "plan
assets" if, among other things, (a) the equity interest acquired by employee
benefit plans are publicly offered securities -- i.e., the equity interests are
widely held by 100 or more investors independent of the issuer and each other,
freely transferable and registered pursuant to certain provisions of the federal
securities laws, (b) the entity is an "operating company" -- i.e., it is
primarily engaged in the production or sale of a product or service other than
the investment of capital either directly or through a majority owned subsidiary
or subsidiaries, or (c) there is no significant investment by benefit plan
investors, which is defined to mean that less than 25% of the value of each
class of equity interest (disregarding certain interests held by the General
Partner, its affiliates, and certain other persons) is held by the employee
benefit plans referred to above, Individual Retirement Accounts and other
employee benefit plans not subject to ERISA (such as governmental plans). The
Partnership's assets should not be considered "plan assets" under these
regulations because it is expected that the investment will satisfy the
requirements in (a) and (b) above and may also satisfy the requirements in (c).
Plan fiduciaries contemplating a purchase of Common Units should consult
with their own counsel regarding the consequences under ERISA and the Code in
light of the serious penalties imposed on persons who engage in prohibited
transactions or other violations.
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<PAGE> 121
UNDERWRITING
The Underwriters, for whom Dean Witter Reynolds Inc., Oppenheimer & Co.,
Inc., A.G. Edwards & Sons, Inc. and Prudential Securities Incorporated are
acting as representatives (the "Representatives"), have severally agreed,
subject to the terms and conditions of the Underwriting Agreement (a copy of
which has been filed as an exhibit to the Registration Statement), to purchase
from the Partnership the number of Common Units set forth opposite their
respective names in the table below:
<TABLE>
<CAPTION>
NUMBER OF
NAME COMMON UNITS
----------------------------------------------------------------------- ------------
<S> <C>
Dean Witter Reynolds Inc. .............................................
Oppenheimer & Co., Inc. ...............................................
A.G. Edwards & Sons, Inc. .............................................
Prudential Securities Incorporated ....................................
---------
Total........................................................ 4,025,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Common Units are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all Common Units offered
hereby (other than those covered by the over-allotment option described below)
if any such Common Units are taken.
The Underwriters propose to offer part of the Common Units directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and part of such Common Units to certain dealers at such price less a
concession not in excess of $ per Common Unit. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $
per Common Unit to certain other dealers. After the initial offering to the
public, the public offering price and such concessions may be changed by the
Underwriters. The Representatives have informed the Partnership that the
Underwriters do not expect to confirm sales to accounts over which they exercise
discretionary authority without the prior written approval of the transaction by
the customer.
The Partnership has granted to the Underwriters an option exercisable for
30 days from the date of this Prospectus to purchase up to 603,750 additional
Common Units at the price to public set forth on the cover page of this
Prospectus less the underwriting discounts and commissions. The Underwriters may
exercise such option solely for the purpose of covering over-allotments, if any,
in connection with this offering. To the extent such option is exercised, each
Underwriter will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional Common Units as the number
of Common Units set forth opposite each Underwriter's name in the preceding
table bears to the total number of Common Units listed in such table.
The Partnership, the Operating Partnership and the General Partner have
agreed not to sell, offer to sell, grant any option or warrant for the sale of,
or otherwise dispose of or enter into any agreement to sell any Common Units or
Subordinated Units, any securities that are convertible into or exercisable or
exchangeable for or that represent the right to receive Common Units or
Subordinated Units or any securities that are senior to or pari passu with
Common Units (other than the issuance of Common Units pursuant to employee
benefit plans described in this Prospectus), for a period of 180 days after the
date of this Prospectus without the prior written consent of Dean Witter
Reynolds Inc.
Prior to this offering, there has not been any public market for the Common
Units of the Partnership. Consequently, the initial public offering price of the
Common Units included in this offering has been determined by negotiations
between the General Partner and the Representatives. Among the factors
considered in determining such price were the history of and prospects for the
Partnership's business and the industry in which it competes, an assessment of
the Partnership's management and the present state of the Partnership's
development, the past and present revenues and earnings of the Partnership, the
prospects for
119
<PAGE> 122
growth of the Partnership's revenues and earnings, the current state of the
economy in the United States and the current level of economic activity in the
industry in which the Partnership competes and in related or comparable
industries, and currently prevailing conditions in the securities markets,
including current market valuations of publicly traded companies which are
comparable to the Partnership.
The Common Units have been approved for listing on the NYSE, subject to
official notice of issuance. In order to meet one of the requirements for
listing the Common Units on the NYSE, the Underwriters will undertake to sell
lots of 100 or more Common Units to a minimum of 2,000 beneficial holders.
Because the National Association of Securities Dealers, Inc. ("NASD") views
the Common Units offered hereby as interests in a direct participation program,
the offering is being made in compliance with Article III, Section 34 of the
NASD's Rules of Fair Practice. Investor suitability of the Common Units should
be judged similarly to the suitability of other securities that are listed for
trading on a national securities exchange.
Certain of the current Directors of Heritage have advised the
Representatives that they intend to purchase up to 100,000 Common Units at the
initial public offering price.
Prudential Securities Incorporated, Dean Witter Reynolds Inc. and
Oppenheimer & Co., Inc. are acting as placement agents in connection with the
private placement of the Notes for which they will receive customary
compensation. Dean Witter Reynolds Inc. and Oppenheimer & Co., Inc. have
rendered financial advisory services to Heritage for which they will receive
customary compensation.
Prudential, an affiliate of Prudential Securities Incorporated, owns
441,419 shares of Heritage's Class B Common Stock and 3,182 shares of Heritage's
Redeemable Preferred Stock, which shares will be repurchased pursuant to the
Equity Repurchase. In addition, Heritage has outstanding indebtedness of
approximately $112 million in principal amount to Prudential, all of which will
be repaid in connection with the Transactions. See "The Transactions."
The provisions of Article III, Sections 44(c)(7) and (8) of the NASD's
Rules of Fair Practice apply to this offering because, in connection with the
Equity Repurchase and the repayment of Heritage's indebtedness to Prudential,
more than 10% of the net proceeds of this offering will be paid to, and shares
of Heritage's Redeemable Preferred Stock will be repurchased from, Prudential,
which is an affiliate of Prudential Securities Incorporated. Such provisions
require, among other things, that the initial public offering price be no higher
than that recommended by a "qualified independent underwriter," who must
participate in the preparation of the registration statement and the prospectus
and who must exercise the usual standards of "due diligence" with respect
thereto. Dean Witter Reynolds Inc. is acting as a qualified independent
underwriter in this offering and the initial public offering price of the Common
Units will be no higher than the price recommended by Dean Witter Reynolds Inc.,
which price will be determined based on the factors discussed above.
The Partnership, the Operating Partnership and the General Partner have
agreed to indemnify the several Underwriters against certain civil liabilities,
including liabilities under the Securities Act, or to contribute to payments the
Underwriters may be required to make in respect thereof.
VALIDITY OF THE COMMON UNITS
The validity of the Common Units will be passed upon for the Partnership by
Andrews & Kurth L.L.P., New York, New York. Certain legal matters in connection
with the Common Units offered hereby are being passed upon for the Underwriters
by Baker & Botts, L.L.P., Houston, Texas.
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<PAGE> 123
EXPERTS
The audited financial statements of Heritage Holdings, Inc. and Heritage
Propane Partners, L.P. included in this Prospectus and elsewhere in the
Registration Statement, to the extent and for the periods indicated in their
reports, have been audited by Arthur Andersen LLP, independent public
accountants, and are included herein in reliance upon the authority of said firm
as experts in giving said reports.
The audited financial statements included in this Prospectus and elsewhere
in the Registration Statement for Carolane Propane Gas, Inc., to the extent and
for the periods indicated in their report, have been audited by Turlington and
Company, L.L.P., independent public accountants, and are included herein in
reliance upon the authority of said firm as experts in giving such report.
The audited financial statements included in this Prospectus and elsewhere
in the Registration Statement for Kingston Propane, Inc., to the extent and for
the periods indicated in the report, have been audited by David R. Gargano, CPA,
P.C., independent public accountant, and are included herein in reliance upon
the authority of said firm as experts in giving such report.
AVAILABLE INFORMATION
The Partnership has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Form S-1 Registration Statement under the Securities
Act, for the registration of the securities to be offered by this Prospectus.
Certain of the information contained in the Registration Statement is omitted
from this Prospectus, and reference is hereby made to the Registration Statement
and exhibits relating thereto for further information concerning the Partnership
and the General Partner and the securities to which this Prospectus relates.
Statements contained herein concerning the provisions of any document are not
necessarily complete and in each instance reference is made to the copy of the
document filed as an exhibit to the Registration Statement. Each such statement
is qualified in its entirety by this reference.
The Registration Statement and the exhibits thereto are available for
inspection in the principal office of the Commission in Washington, D.C. or on
the Internet at http:()(w)ww.sec.gov and photostatic copies of such material may
be obtained from the Commission upon payment of the fees prescribed by the
Commission.
ENGAGEMENT OF ARTHUR ANDERSEN LLP
In July 1994, the Board of Directors of Heritage decided to retain Arthur
Andersen LLP as its independent public accountants and discontinued the services
of Heritage's former auditors. The former auditors' reports, which have
subsequently been withdrawn, on Heritage's financial statements for each of the
three years in the period ended August 31, 1993 did not contain an adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles. There were no disagreements
with the former auditors on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure at the time of the
discontinuance or with respect to Heritage's financial statements for fiscal
years ended August 31, 1991, 1992 and 1993 which, if not resolved to the former
auditors' satisfaction, would have caused them to make reference to the subject
matter of the disagreement in connection with their report. Prior to retaining
Arthur Andersen LLP, Heritage had not consulted with Arthur Andersen LLP
regarding accounting principles.
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HERITAGE PROPANE PARTNERS, L.P.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Pro Forma Financial Statements
Heritage Propane Partners, L.P. Unaudited Pro Forma Consolidated
Financial Statements:
Introduction................................................................... F-2
Unaudited Pro Forma Consolidated Balance Sheet -- February 29, 1996............ F-3
Unaudited Pro Forma Consolidated Statement of Operations -- Six Months Ended
February 29, 1996............................................................. F-4
Unaudited Pro Forma Consolidated Statement of Operations -- Year Ended August
31,
1995........................................................................ F-5
Notes to Unaudited Pro Forma Consolidated Financial Statements................. F-6
Historical Financial Statements:
Heritage Propane Partners, L.P.:
Report of Independent Public Accountants......................................... F-8
Balance Sheet -- April 24, 1996.................................................. F-9
Note to Balance Sheet............................................................ F-9
Heritage Holdings, Inc. and Subsidiaries:
Report of Independent Public Accountants......................................... F-10
Consolidated Balance Sheets -- February 29, 1996 (unaudited) and August 31, 1995
and 1994....................................................................... F-11
Consolidated Statements of Operations -- Six Months Ended February 29, 1996
(unaudited) and February 28, 1995 (unaudited) and Years Ended August 31, 1995,
1994 and 1993................................................................... F-12
Consolidated Statements of Stockholders' Deficit -- Six Months Ended February 29,
1996 (unaudited) and Years Ended August 31, 1995, 1994 and 1993................. F-13
Consolidated Statements of Cash Flows -- Six Months Ended February 29, 1996
(unaudited) and February 28, 1995 (unaudited) and Years Ended August 31, 1995,
1994 and 1993................................................................... F-14
Notes to Consolidated Financial Statements....................................... F-15
Carolane Propane Gas, Inc.:
Independent Auditors' Report..................................................... F-25
Balance Sheets -- October 31, 1994 and May 31, 1994 and 1993..................... F-26
Stockholders' Equity -- Five Months Ended October 31, 1994 and Years Ended May
31, 1994 and 1993............................................................... F-27
Statements of Income -- Five Months Ended October 31, 1994 and Years Ended May
31, 1994 and 1993............................................................... F-28
Statements of Cash Flows-- Five Months Ended October 31, 1994 and Years Ended May
31, 1994 and 1993............................................................... F-29
Notes to Financial Statements.................................................... F-30
Kingston Propane, Inc.
Independent Auditors' Report..................................................... F-35
Balance Sheets -- September 30, 1995 and 1994.................................... F-36
Statements of Income -- Years Ended September 30, 1995 and 1994.................. F-37
Statements of Retained Earnings -- Years Ended September 30, 1995 and 1994....... F-38
Statements of Cash Flows -- Years Ended September 30, 1995 and 1994.............. F-39
Notes to Financial Statements.................................................... F-40
</TABLE>
F-1
<PAGE> 125
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial statements are based upon
the historical financial position and results of operations of Heritage
Holdings, Inc. and subsidiaries (the "Company"). The propane business of the
Company will be owned and operated by a newly formed limited partnership (the
"Partnership") and through a separate Operating Partnership (the "Operating
Partnership"). Unless the context otherwise requires, references herein to the
Partnership include the Partnership and the Operating Partnership.
Concurrently with the closing of this offering, the Company will issue
$120,000,000 principal amount of senior notes (the "Notes") to certain
institutional investors in a private placement. The Company will then convey
substantially all of its assets (other than approximately $80,149,000 in
proceeds from issuance of the Notes) to the Operating Partnership in exchange
for a general partner interest and all the limited partner interests in the
Operating Partnership and the assumption by the Operating Partnership of
substantially all of the liabilities of Heritage (including the Notes, but
excluding certain notes payable pursuant to noncompete agreements entered into
in connection with prior acquisitions). Immediately thereafter, the Company will
convey all of its limited partner interests in the Operating Partnership to the
Partnership in exchange for 3,702,943 Subordinated Units and a general partner
interest in the Partnership (including the right to receive incentive
distributions). As a result, the General Partner will own an aggregate 47.0%
limited partner interest (approximately 43.6% if the Underwriters'
over-allotment option is exercised in full), and an aggregate 2% general partner
interest, in the Partnership and the Operating Partnership.
In addition to the above, a number of other transactions are expected to
take place at the closing of the offering as described elsewhere in the
Prospectus and in the Notes to the Unaudited Pro Forma Financial Statements.
The following unaudited pro forma financial statements are presented as if
(i) the businesses acquired in fiscal 1995 and during the six months ended
February 29, 1996, and businesses to be acquired after February 29, 1996 and
(ii) the transactions to be effected at the closing of this offering (assuming
that the Underwriters' over-allotment option is not exercised) had taken place
on February 29, 1996, in the case of the unaudited pro forma consolidated
balance sheet, or as of September 1, 1994, in the case of the unaudited pro
forma consolidated statements of operations for the year ended August 31, 1995
and for the six months ended February 29, 1996.
The pro forma adjustments are based upon currently available information
and certain estimates and assumptions, and therefore, the actual adjustments may
differ from the unaudited pro forma adjustments. However, management believes
that the assumptions provide a reasonable basis for presenting the significant
effects of the transactions as contemplated and that the unaudited pro forma
adjustments give appropriate effect to those assumptions and are properly
applied in the unaudited pro forma financial statements. The unaudited pro forma
consolidated financial statements do not purport to present the financial
position or results of operations of the Partnership had the transactions
described above actually been completed as of the dates indicated. In addition,
the unaudited pro forma consolidated financial statements are not necessarily
indicative of the results of future operations of the Partnership and should be
read in conjunction with the audited historical financial statements of Heritage
Holdings, Inc. and the notes thereto appearing elsewhere in this Prospectus.
F-2
<PAGE> 126
HERITAGE PROPANE PARTNERS, L.P.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
FEBRUARY 29, 1996
(IN THOUSANDS, EXCEPT PER UNIT INFORMATION)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR THE PRO FORMA
HERITAGE TRANSACTIONS PRO FORMA ADJUSTMENTS FOR PRO FORMA
HOLDINGS, INC. AND BUSINESSES FOR THE BUSINESSES TO BUSINESSES TO FINANCIAL
HISTORICAL ACQUIRED OFFERING BE ACQUIRED BE ACQUIRED STATEMENTS
-------------- --------------- --------- ------------- --------------- ----------
(NOTE A)
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...... $ 2,010 $ 74,834(B) $ 1,000 $ 1,770 $(1,770)(C) $ 1,000
118,300(D)
(122,885)(E)
8,406(F)
(63,357)(G)
(8,083)(H)
(7,725)(C)
(500)(I)
Accounts receivable, net....... 23,362 -- 23,362 335 -- 23,697
Inventories.................... 6,409 -- 6,409 335 -- 6,744
Prepaid expenses............... 1,396 -- 1,396 -- -- 1,396
Deferred income taxes.......... 984 (984)(J) -- -- -- --
-------- --------- -------- ------- ------- --------
Total current assets..... 34,161 (1,994) 32,167 2,440 (1,770) 32,837
PROPERTY, PLANT AND EQUIPMENT,
net............................ 101,881 -- 101,881 6,697 -- 108,578
INVESTMENT IN AFFILIATE.......... 5,115 -- 5,115 -- -- 5,115
INTANGIBLES AND OTHER ASSETS,
net............................ 39,619 1,700(D) 40,691 1,950 -- 42,641
(978)(E)
350(F)
-------- --------- -------- ------- ------- --------
Total assets............. $180,776 $ (922) $179,854 $11,087 $(1,770) $189,171
======== ========= ======== ======= ======= ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Working capital facilities..... $ 10,075 $ (10,075)(E) $ 8,756 $ -- $ -- $ 8,756
8,756(F)
Accounts payable............... 15,190 -- 15,190 1,542 -- 16,732
Accrued and other current
liabilities.................. 5,791 (310)(E) 5,481 -- -- 5,481
Current maturities of long-term
debt......................... 111,291 (109,000)(E) 148 620 (620)(C) 148
(2,143)(C)
-------- --------- -------- ------- ------- --------
Total current
liabilities............ 142,347 (112,772) 29,575 2,162 (620) 31,117
LONG-TERM DEBT................... 6,301 120,000(D) 120,719 8,925(K) (1,150)(C) 128,494
(5,582)(C)
DEFERRED INCOME TAXES............ 22,309 (22,309)(J) -- -- -- --
-------- --------- -------- ------- ------- --------
Total liabilities........ 170,957 (20,663) 150,294 11,087 (1,770) 159,611
-------- --------- -------- ------- ------- --------
5% CUMULATIVE REDEEMABLE
PREFERRED STOCK................ 12,645 (12,645)(G) -- -- -- --
-------- --------- -------- ------- ------- --------
STOCKHOLDERS' DEFICIT............ (2,826) 74,834(B) -- -- -- --
(4,478)(E)
(50,712)(G)
(8,083)(H)
21,325(J)
(29,560)(L)
(500)(I)
PARTNERS' CAPITAL:
Common unitholders(1).......... -- 15,076(L) 15,076 -- -- 15,076
Subordinated unitholder(2)..... -- 13,893(L) 13,893 -- -- 13,893
General partner................ -- 591(L) 591 -- -- 591
-------- --------- -------- ------- ------- --------
Total partners'
capital................ (2,826) 32,386 29,560 -- -- 29,560
-------- --------- -------- ------- ------- --------
Total liabilities and
partners' capital...... $180,776 $ (922) $179,854 $11,087 $(1,770) $189,171
======== ========= ======== ======= ======= ========
</TABLE>
- ---------------
(1) $3.75 per Unit on a pro forma basis.
(2) $3.75 per Unit on a pro forma basis.
See notes to unaudited pro forma
consolidated financial statements.
F-3
<PAGE> 127
HERITAGE PROPANE PARTNERS, L.P.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED FEBRUARY 29, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS FOR ADJUSTMENTS
FOR THE BUSINESSES FOR
HERITAGE TRANSACTIONS ACQUIRED BUSINESSES BUSINESSES PRO FORMA
HOLDINGS, INC. BUSINESSES AND BUSINESSES AND THE TO BE TO BE FINANCIAL
HISTORICAL ACQUIRED ACQUIRED OFFERING ACQUIRED ACQUIRED STATEMENTS
-------------- ---------- -------------- --------- ---------- ----------- ---------
(NOTE A)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Retail.................. $ 65,929 $ 29 $ -- $ 65,958 $3,184 $ -- $ 69,142
Wholesale............... 28,031 -- -- 28,031 -- -- 28,031
Other................... 9,093 -- -- 9,093 -- -- 9,093
-------- ---- ------- -------- ------ ----- --------
Total revenues.... 103,053 29 -- 103,082 3,184 -- 106,266
-------- ---- ------- -------- ------ ----- --------
COSTS AND EXPENSES:
Cost of products sold... 63,811 14 -- 63,825 1,850 -- 65,675
Depreciation and
amortization.......... 4,596 8 -- 4,604 191 -- 4,795
Selling, general and
administrative........ 1,369 2 250(M) 1,621 70 -- 1,691
Operating expenses...... 19,399 3 (10)(N) 19,392 837 (284)(N) 19,945
-------- ---- ------- -------- ------ ----- --------
Total operating
expenses........ 89,175 27 240 89,442 2,948 (284) 92,106
-------- ---- ------- -------- ------ ----- --------
OPERATING INCOME (LOSS)... 13,878 2 (240) 13,640 236 284 14,160
GAIN ON DISPOSAL OF
ASSETS.................. 115 -- -- 115 -- -- 115
EQUITY IN EARNINGS OF
INVESTEES............... 368 20 -- 388 -- -- 388
OTHER INCOME.............. 177 -- -- 177 -- -- 177
INTEREST EXPENSE.......... 6,779 62 (1,068)(O) 5,773 259 (111)(O) 5,921
-------- ---- ------- -------- ------ ----- --------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME
TAXES................... 7,759 (40) 828 8,547 (23) 395 8,919
PROVISION FOR INCOME
TAXES................... 3,541 -- (3,516)(P) 25 -- -- 25
-------- ---- ------- -------- ------ ----- --------
NET INCOME (LOSS)......... $ 4,218 $(40) $ 4,344 $ 8,522 $ (23) $ 395 $ 8,894
======== ==== ======= ======== ====== ===== ========
NET INCOME PER UNIT(1).... $ 1.13
========
</TABLE>
- ---------------
(1) Determined by dividing net income by the total number of Units (4,025,000
Common Units, 3,702,943 Subordinated Units and the 2% General Partner
interest having a dilutive effect equivalent to 157,713 Units) to be
outstanding after the offering made hereby.
See notes to unaudited pro forma
consolidated financial statements.
F-4
<PAGE> 128
HERITAGE PROPANE PARTNERS, L.P.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR THE
TRANSACTIONS PRO FORMA FOR PRO FORMA
HERITAGE AND BUSINESSES ADJUSTMENTS FOR PRO FORMA
HOLDINGS, INC. BUSINESSES BUSINESSES ACQUIRED AND BUSINESSES TO BUSINESSES TO BE FINANCIAL
HISTORICAL ACQUIRED ACQUIRED THE OFFERING BE ACQUIRED ACQUIRED STATEMENTS
-------------- ---------- ----------- ------------- ------------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(NOTE A)
REVENUES:
Retail........... $ 86,142 $5,123 $ -- $ 91,265 $ 5,779 $ -- $ 97,044
Wholesale........ 31,114 -- -- 31,114 -- -- 31,114
Other............ 14,252 -- -- 14,252 -- -- 14,252
-------- ------ ------ -------- ------ ----- -----
Total
revenues... 131,508 5,123 -- 136,631 5,779 -- 142,410
-------- ------ ------ -------- ------ ----- -----
COST AND EXPENSES:
Cost of products
sold........... 75,667 2,408 -- 78,075 2,815 -- 80,890
Depreciation and
amortization... 8,896 479 -- 9,375 396 -- 9,771
Selling, general
and
administrative... 2,903 181 500(M) 3,584 190 -- 3,774
Operating
expenses....... 31,367 1,572 (440)(N) 32,499 2,051 (583)(N) 33,967
-------- ------ ------ -------- ------ ----- -----
Total costs
and
expenses... 118,833 4,640 60 123,533 5,452 (583) 128,402
-------- ------ ------ -------- ------ ----- -----
OPERATING INCOME
(LOSS)........... 12,675 483 (60) 13,098 327 583 14,008
GAIN ON DISPOSAL OF
ASSETS........... 215 -- -- 215 -- -- 215
EQUITY IN EARNINGS
OF INVESTEES..... 37 232 -- 269 -- -- 269
OTHER INCOME
(EXPENSE)........ (271) 13 -- (258) 33 -- (225 )
INTEREST EXPENSE... 12,201 1,238 (2,420)(O) 11,019 603 (283)(O) 11,339
-------- ------ ------ -------- ------ ----- -----
INCOME (LOSS)
BEFORE PROVISION
FOR INCOME
TAXES............ 455 (510) 2,360 2,305 (243) 866 2,928
PROVISION FOR
INCOME
TAXES............ 666 -- (616)(P) 50 -- -- 50
-------- ------ ------ -------- ------ ----- -----
NET INCOME
(LOSS)........... $ (211) $ (510) $ 2,976 $ 2,255 $ (243) $ 866 $ 2,878
======== ====== ====== ======== ====== ===== =====
NET INCOME PER
UNIT(1).......... $ .37
=====
</TABLE>
- ---------------
(1) Determined by dividing net income by the total number of Units (4,025,000
Common Units, 3,702,943 Subordinated Units and the 2% General Partner
interest having a dilutive effect equivalent to 157,713 Units) to be
outstanding after the offering made hereby.
See notes to unaudited pro forma
consolidated financial statements.
F-5
<PAGE> 129
HERITAGE PROPANE PARTNERS, L.P.
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED FEBRUARY 29, 1996 AND YEAR ENDED AUGUST 31, 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER UNIT INFORMATION)
(A) Reflects the acquisition of businesses to be acquired subsequent to
February 29, 1996 as if such acquisitions took place as of February 29,
1996 in the case of the unaudited pro forma balance sheet and as of
September 1, 1994 in the case of the unaudited pro forma statements of
operations for the year ended August 31, 1995 and the six months ended
February 29, 1996. All assets acquired and liabilities assumed in the
acquisitions have been reflected at fair market value.
(B) Reflects the net proceeds to the Partnership of approximately $74,834
from the issuance and sale of 4,025,000 Common Units at an assumed
offering price of $20.50 per Common Unit, net of the Underwriters'
discounts and commissions (estimated to be $5,776) and offering
expenses (estimated to be $1,900).
(C) Reflects assumed borrowings under the Acquisition Facility to fund
acquisitions of businesses to be acquired and retention by the General
Partner of notes payable issued pursuant to noncompete agreements and
retention of a corresponding amount of cash.
(D) Reflects the net proceeds to the Company of approximately $118,300 from
the issuance by the Company of the Notes, net of the placement agent
fees (estimated to be $1,350) and offering expenses (estimated to be
$350), which Notes will be assumed by the Partnership concurrently with
the offering made hereby.
(E) Reflects the retirement of $109,000 in aggregate principal amount of
indebtedness to Prudential under the Existing Acquisition Facility, the
Senior Reset Notes and the Subordinated Reset Notes, a $10,075 balance
under the existing working capital facilities and the related accrued
interest of $310 from the net proceeds from the sale by the Partnership
of the Common Units and the sale by the Company of the Notes. The early
extinguishment of the Senior Reset Notes and the Subordinated Reset
Notes results in an extraordinary loss of approximately $4,478,
resulting from prepayment premiums of $3,500 and the write-off of
unamortized financing costs of $978.
(F) Reflects assumed borrowings under the Working Capital Facility to fund
acquisitions and to pay financing costs of $350.
(G) Reflects application of proceeds from issuance of the Notes to effect
the Equity Repurchase.
(H) Reflects retention by the General Partner of cash to satisfy certain
net worth requirements of federal tax laws.
(I)Reflects the payment of taxes related to the transfer of assets from the
Company to the Partnership ($500).
(J) Reflects the elimination of the deferred tax assets and liabilities of
Heritage as income taxes will be borne by the partners and not the
Partnership except for income taxes applicable to operations to be
conducted by the Partnership's wholly owned corporate subsidiary.
(K) Includes $7,775 of acquisition indebtedness in addition to $1,150 of
long-term debt relating to notes payable pursuant to noncompete
agreements.
(L) Reflects the allocation of the Partnership equity resulting from the
completion of the transactions associated with the closing of this
offering, using the following relative partnership interests: (1)
effective general partner interest in the Partnership equal to 2% of
total partners' capital; (2) Common Units equal to an approximate 51%
limited partner interest; and (3) Subordinated Units equal to an
approximate 47% limited partner interest.
F-6
<PAGE> 130
HERITAGE PROPANE PARTNERS, L.P.
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(M) Reflects estimated incremental general and administrative costs (e.g.
costs of tax return preparation and annual and quarterly reports to
Unitholders, investor relations and registrar and transfer agent fees)
associated with the Partnership at an annual rate of $500.
(N) Reflects reduction in operating costs expected to result from the
acquisitions, consisting primarily of salary and benefit expenses
related to former owners and/or other family members not retained after
acquisition and reductions in certain insurance expense to reflect the
Company's insurance cost structure.
(O) Reflects the adjustment to interest expense resulting from the
transactions described in (C), (D), (E) and (F) above, reconciled as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
AUGUST 31, FEBRUARY 29,
1995 1996
---------- ------------
<S> <C> <C>
Historical interest expense attributable to debt
retired or to be assumed by the general partner:
Interest expense on Senior and Subordinated Reset
Notes........................................... $ 5,132 $2,589
Interest expense on Existing Acquisition
Facility........................................ 5,669 3,178
Interest expense on working capital facilities..... 335 449
Interest expense on other indebtedness (i)......... 857 459
Amortization of deferred financing costs........... 208 104
------- ------
12,201 6,779
------- ------
Pro forma interest expense on acquired businesses
(ii)............................................... 1,841 321
------- ------
Pro forma interest expense applicable to the
Partnership:
Interest expense at 8.55% per annum on the Notes... 10,260 5,130
Interest expense assuming 7.05% per annum on
Working Capital Facility including amounts
applicable to acquired businesses............... 718 573
Interest on other indebtedness..................... 81 78
Amortization of deferred financing costs........... 280 140
------- ------
11,339 5,921
------- ------
Pro forma adjustment to interest expense... $ 2,703 $1,179
======= ======
</TABLE>
--------------------
(i) Includes interest on agreements not to compete of $776 and $381
for the year ended August 31, 1995 and for the six months ended
February 29, 1996, respectively.
(ii) Includes interest on agreements not to compete of $118 and $28
for the year ended August 31, 1995 and for the six months ended
February 29, 1996, respectively.
(P) Reflects the elimination of the provision for current and deferred
income taxes of $666 and $3,541 for the year ended August 31, 1995 and
for the six months ended February 29, 1996, respectively, as income
taxes will be borne by the partners and not at the partnership level
except for income taxes applicable to operations to be conducted by the
Partnership's wholly owned corporate subsidiary. Additionally, reflects
the provision for income taxes of $50 and $25 for the year ended August
31, 1995 and for the six months ended February 29, 1996, respectively,
related to operations expected to be conducted through corporate
subsidiaries.
F-7
<PAGE> 131
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Heritage Propane Partners, L.P.:
We have audited the accompanying balance sheet of Heritage Propane
Partners, L.P., as of April 24, 1996. This financial statement is the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Heritage Propane Partners, L.P. as
of April 24, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
April 24, 1996
F-8
<PAGE> 132
HERITAGE PROPANE PARTNERS, L.P.
BALANCE SHEET
APRIL 24, 1996
ASSETS
<TABLE>
<S> <C>
Cash............................................................................. $1,000
------
Total Assets............................................................. $1,000
======
PARTNERS' CAPITAL:
General Partner.................................................................. $ 10
Limited Partner.................................................................. 990
------
Total Partners' Capital.................................................. $1,000
======
</TABLE>
NOTE TO BALANCE SHEET
APRIL 24, 1996
Heritage Propane Partners, L.P. (the Partnership) was formed April 17, 1996
as a Delaware limited partnership. The Partnership was formed to acquire, own
and operate substantially all of the assets of Heritage Holdings, Inc. through
Heritage Operating, L.P. (the Operating Partnership) in which the Partnership
will hold a 98.9899% limited partner interest and Heritage Holdings, Inc. holds
a 1.0101% general partner interest. Heritage Holdings, Inc. will convey
substantially all of its assets (other than approximately $81.8 million in
proceeds from issuance of senior notes) to the Operating Partnership and
substantially all of the liabilities associated with such assets. The
Partnership has not commenced operations. The Partnership intends to offer
Common Units, representing limited partner interests in the Partnership, to the
public and to concurrently issue Subordinated Units, representing additional
limited partner interests in the Partnership, to the general partner of the
Partnership, Heritage Holdings, Inc., as well as a 2 percent general partner
interest in the Partnership and the Operating Partnership, on a combined basis.
Heritage Holdings, Inc., as general partner, contributed $10 and the
organizational limited partner contributed $990 to the Partnership on April 23,
1996. There have been no other transactions involving the Partnership as of
April 24, 1996.
F-9
<PAGE> 133
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Heritage Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Heritage
Holdings, Inc. (a Delaware corporation) and subsidiaries as of August 31, 1995
and 1994, and the related consolidated statements of operations, stockholders'
deficit, and cash flows for each of the three years in the period ended August
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 financial statements referred to above present fairly,
in all material respects, the financial position of Heritage Holdings, Inc. and
subsidiaries as of August 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
March 28, 1996 (except with
respect to the matter discussed
in Note 9, as to which the date
is April 24, 1996).
F-10
<PAGE> 134
HERITAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1995 1994
FEBRUARY 29, -------- --------
1996
------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,010 $ 1,237 $ 1,066
Accounts receivable, net.................................. 23,362 8,085 6,282
Inventories............................................... 6,409 10,131 7,911
Prepaid expenses.......................................... 1,396 835 946
Deferred income taxes..................................... 984 1,005 929
-------- -------- --------
Total current assets.............................. 34,161 21,293 17,134
PROPERTY, PLANT AND EQUIPMENT, net.......................... 101,881 100,104 71,955
INVESTMENT IN AFFILIATES.................................... 5,115 991 --
INTANGIBLES AND OTHER ASSETS, net........................... 39,619 41,035 29,241
-------- -------- --------
Total assets...................................... $180,776 $163,423 $118,330
======== ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Working capital facilities................................ $ 10,075 $ 7,000 $ 6,975
Accounts payable.......................................... 15,190 8,550 6,741
Accrued and other current liabilities..................... 5,791 5,470 3,784
Current maturities of long-term debt...................... 111,291 14,805 2,146
-------- -------- --------
Total current liabilities......................... 142,347 35,825 19,646
LONG-TERM DEBT.............................................. 6,301 103,412 81,373
DEFERRED INCOME TAXES....................................... 22,309 18,824 11,875
-------- -------- --------
Total liabilities................................. 170,957 158,061 112,894
-------- -------- --------
COMMITMENTS AND CONTINGENCIES
5% CUMULATIVE REDEEMABLE PREFERRED STOCK,
$.01 par value, 19,262 shares authorized, 9,487 issued.... 12,645 12,337 11,737
-------- -------- --------
STOCKHOLDERS' DEFICIT, per accompanying statements:
Class A common stock, $.01 par value, 2,648,517 shares
authorized, 1,288,105, 1,284,105 and 1,282,105 shares
issued at February 29, 1996, August 31, 1995 and 1994,
respectively........................................... 13 13 13
Class B common stock, $.01 par value, 441,419 shares
authorized, 357,500 issued............................. 3 3 3
Additional paid-in capital................................ 4,279 4,040 3,903
Accumulated deficit....................................... (7,121) (11,031) (10,220)
-------- -------- --------
Total stockholders' deficit....................... (2,826) (6,975) (6,301)
-------- -------- --------
Total liabilities and stockholders' deficit....... $180,776 $163,423 $118,330
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
F-11
<PAGE> 135
HERITAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
---------------------------- FOR THE YEAR ENDED AUGUST 31,
FEBRUARY 29, FEBRUARY 28, --------------------------------
1996 1995 1995 1994 1993
------------ ------------ -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Retail.............................. $ 65,929 $ 53,880 $ 86,142 $ 72,202 $ 68,573
Wholesale........................... 28,031 14,981 31,114 19,183 20,715
Other............................... 9,093 8,019 14,252 12,586 13,003
-------- ------- -------- -------- --------
Total revenues.............. 103,053 76,880 131,508 103,971 102,291
-------- ------- -------- -------- --------
COSTS AND EXPENSES:
Cost of products sold............... 63,811 42,646 75,667 55,370 56,695
Depreciation and amortization....... 4,596 4,505 8,896 8,711 8,288
Selling, general and
administrative................... 1,369 1,453 2,903 2,562 2,396
Operating expenses.................. 19,399 16,140 31,367 27,423 26,243
-------- ------- -------- -------- --------
Total costs and expenses.... 89,175 64,744 118,833 94,066 93,622
-------- ------- -------- -------- --------
OPERATING INCOME...................... 13,878 12,136 12,675 9,905 8,669
GAIN ON DISPOSAL OF ASSETS............ 115 197 215 169 15
EQUITY IN EARNINGS OF INVESTEES....... 368 105 37 -- --
OTHER INCOME (EXPENSE)................ 177 268 (271) (330) (502)
INTEREST EXPENSE...................... 6,779 5,658 12,201 8,761 8,786
-------- ------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES........................ 7,759 7,048 455 983 (604)
PROVISION FOR INCOME TAXES............ 3,541 2,869 666 668 117
-------- ------- -------- -------- --------
NET INCOME (LOSS)..................... $ 4,218 $ 4,179 $ (211) $ 315 $ (721)
======== ======= ======== ======== ========
NET INCOME (LOSS)..................... $ 4,218 $ 4,179 $ (211) $ 315 $ (721)
PREFERRED STOCK DIVIDENDS............. 308 295 600 570 540
-------- ------- -------- -------- --------
INCOME (LOSS) APPLICABLE TO COMMON
STOCK............................... $ 3,910 $ 3,884 $ (811) $ (255) $ (1,261)
======== ======= ======== ======== ========
EARNINGS (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE.................... $ 2.15 $ 2.18 $ (.49) $ (.16) $ (.82)
======== ======= ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
AND COMMON SHARE EQUIVALENTS........ 1,815 1,782 1,642 1,633 1,534
======== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-12
<PAGE> 136
HERITAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CLASS A COMMON CLASS B COMMON
STOCK (VOTING) STOCK (NONVOTING)
------------------- ------------------- ADDITIONAL TOTAL
NUMBER OF NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIT
--------- ------ --------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST 31, 1992 (Note 6)...... 1,167,105 $ 12 357,500 $3 $3,536 $ (8,704) $(5,153)
Issuance of common stock............. 13,400 -- -- -- 142 -- 142
Stock issuance cost.................. -- -- -- -- (20) -- (20)
Compensatory appreciation in stock
warrants........................... -- -- -- -- 60 -- 60
5% preferred stock dividend.......... -- -- -- -- -- (540) (540)
Net loss............................. -- -- -- -- -- (721) (721)
--
--------- --- ------- ------ ------- -------
BALANCE, AUGUST 31, 1993............... 1,180,505 12 357,500 3 3,718 (9,965) (6,232)
Issuance of common stock............. 101,600 1 -- -- 125 -- 126
Compensatory appreciation in stock
warrants........................... -- -- -- -- 60 -- 60
5% preferred stock dividend.......... -- -- -- -- -- (570) (570)
Net income........................... -- -- -- -- -- 315 315
--
--------- --- ------- ------ ------- -------
BALANCE, AUGUST 31, 1994............... 1,282,105 13 357,500 3 3,903 (10,220) (6,301)
Issuance of common stock............. 3,000 -- -- -- 93 -- 93
Repurchase of common stock........... (1,000 ) -- -- -- (16) -- (16)
Compensatory appreciation in stock
warrants........................... -- -- -- -- 60 -- 60
5% preferred stock dividend.......... -- -- -- -- -- (600) (600)
Net loss............................. -- -- -- -- -- (211) (211)
--
--------- --- ------- ------ ------- -------
BALANCE, AUGUST 31, 1995............... 1,284,105 13 357,500 3 4,040 (11,031) (6,975)
Issuance of common stock
(unaudited)........................ 6,000 -- -- -- 207 -- 207
Repurchase of common stock
(unaudited)........................ (2,000 ) -- -- -- (48) -- (48)
Compensatory appreciation in stock
warrants (unaudited)............... -- -- -- -- 80 -- 80
5% preferred stock dividend
(unaudited)........................ -- -- -- -- -- (308) (308)
Net income (unaudited)............... -- -- -- -- -- 4,218 4,218
--
--------- --- ------- ------ ------- -------
BALANCE, FEBRUARY 29, 1996
(unaudited).......................... 1,288,105 $ 13 357,500 $3 $4,279 $ (7,121) $(2,826)
========= === ======= == ====== ======= =======
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-13
<PAGE> 137
HERITAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
---------------------------- FOR THE YEAR ENDED AUGUST 31,
FEBRUARY 29, FEBRUARY 28, --------------------------------
1996 1995 1995 1994 1993
------------ ------------ -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ 4,218 $ 4,179 $ (211) $ 315 $ (721)
Reconciliation of net income (loss) to net cash
provided by operating activities --
Depreciation and amortization.................. 4,596 4,505 8,896 8,711 8,288
Provision for losses on accounts receivable.... 99 88 325 431 348
Gain on disposal of assets..................... (115) (197) (215) (169) (15)
Issuance of stock for services rendered........ 93 -- -- -- --
Compensatory appreciation in stock warrants.... 80 30 60 60 60
Undistributed (earnings) losses of
affiliates................................... (374) (98) 48 -- --
Increase in deferred income taxes.............. 3,506 2,820 563 600 57
Changes in assets and liabilities, net of
effect of acquisitions:
Increase in accounts receivable.............. (15,338) (8,443) (877) (1,025) (1,469)
(Increase) decrease in inventories........... 3,722 2,819 (1,188) (1,136) 1,656
Increase (decrease) in prepaid expenses...... (561) (165) 526 43 (267)
(Increase) decrease in intangibles and other
assets.................................... (151) (2,022) (1,789) 384 221
Increase in accounts payable................. 7,147 1,575 728 1,720 455
Increase (decrease) in accrued and other
current liabilities....................... 321 431 751 (762) (63)
-------- -------- -------- -------- --------
Net cash provided by operating
activities.............................. 7,243 5,522 7,617 9,172 8,550
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash
acquired....................................... (4,150) (24,486) (27,879) -- (8,149)
Capital expenditures.............................. (4,990) (4,745) (8,634) (6,194) (3,802)
Proceeds from asset sales......................... 192 615 579 677 336
-------- -------- -------- -------- --------
Net cash used in investing activities..... (8,948) (28,616) (35,934) (5,517) (11,615)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.......................... 19,245 43,825 62,375 32,945 31,476
Principal payments on debt........................ (16,795) (19,362) (33,933) (37,042) (28,372)
Issuance of preferred stock....................... -- -- -- -- 72
Issuance of common stock.......................... 76 62 62 126 142
Repurchase of common stock........................ (48) -- (16) -- --
Stock issuance cost............................... -- -- -- -- (20)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities.............................. 2,478 24,525 28,488 (3,971) 3,298
-------- -------- -------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 773 1,431 171 (316) 233
CASH AND CASH EQUIVALENTS, beginning of year........ 1,237 1,066 1,066 1,382 1,149
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, end of year.............. $ 2,010 $ 2,497 $ 1,237 $ 1,066 $ 1,382
======== ======== ======== ======== ========
NONCASH FINANCING ACTIVITIES:
Notes payable incurred on noncompete agreements... $ -- $ 5,232 $ 6,281 $ -- $ 1,826
Issuance of Company stock for note receivables.... 38 31 31 -- --
5% preferred stock dividend....................... 308 295 600 570 540
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for --
Interest....................................... $ 6,902 $ 5,535 $ 11,581 $ 8,862 $ 8,708
Income taxes................................... -- -- 44 69 51
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-14
<PAGE> 138
HERITAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 29, 1996 AND
FEBRUARY 28, 1995 (UNAUDITED) AND
FOR THE YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND UNIT INFORMATION)
1. OPERATIONS AND ORGANIZATION:
Heritage Holdings, Inc. and subsidiaries (the Company) sells propane fuel
and propane fuel-related products to approximately 170,000 retail customers in
15 states throughout the United States. The Company is also a wholesale propane
supplier in the southwestern United States and in Canada, the latter through
participation in a Canadian partnership. The Company grants credit to its
customers for the purchase of fuel and fuel-related products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its subsidiaries and a majority-owned partnership. The Company accounts for its
interest in one-third of the outstanding stock of a propane fuel retailer and a
50 percent partnership interest in another propane fuel retailer under the
equity method. All significant intercompany transactions and accounts have been
eliminated in consolidation.
Revenue Recognition
Sales of propane and propane appliances are recognized at the time of
delivery of the product to the customer or at the time of sale or installation.
Revenue from repairs and maintenance service is recognized upon completion of
the service.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and on deposit with banks
including highly liquid investments with initial maturities of three months or
less. The Company participates in cash management programs, and, as a result,
disbursements in excess of bank balances of approximately $3,169, $1,033 and
$1,100 are included in accounts payable at February 29, 1996, August 31, 1995
and 1994, respectively.
Allowance for Doubtful Accounts
The allowance for doubtful accounts consists of the following:
<TABLE>
<CAPTION>
AUGUST 31,
FEBRUARY 29, --------------
1996 1995 1994
------------ ----- -----
(UNAUDITED)
<S> <C> <C> <C>
Beginning Reserve........................................ $315 $ 306 $ 345
Provision.............................................. 99 325 431
Write-offs............................................. (99) (325) (431)
Other.................................................. -- 9 (39)
---- ----- -----
Ending Reserve........................................... $315 $ 315 $ 306
==== ===== =====
</TABLE>
Inventories
Inventories are valued at the lower of cost or market. The cost of fuel
inventories is determined using average cost while the cost of appliances, parts
and fittings is determined by the first-in, first-out method.
F-15
<PAGE> 139
HERITAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories consist of the following:
<TABLE>
<CAPTION>
AUGUST 31,
FEBRUARY 29, -----------------
1996 1995 1994
------------ ------- ------
(UNAUDITED)
<S> <C> <C> <C>
Fuel................................................... $2,531 $ 6,727 $3,904
Appliances, parts and fittings......................... 3,878 3,404 4,007
------ ------- ------
$6,409 $10,131 $7,911
====== ======= ======
</TABLE>
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is computed principally by the straight-line method
over the estimated useful lives of the assets which range from three to thirty
years. Expenditures for maintenance and repairs are expensed as incurred.
Components and useful lives of property, plant and equipment are as
follows:
<TABLE>
<CAPTION>
AUGUST 31,
FEBRUARY 29, -------------------
1996 1995 1994
------------ -------- -------
(UNAUDITED)
<S> <C> <C> <C>
Land and improvements................................ $ 6,704 $ 6,136 $ 3,242
Buildings and improvements (10 to 30 years).......... 10,320 10,151 8,066
Bulk storage equipment and facilities (3 to 30
years)............................................. 15,920 15,625 13,422
Tanks and other equipment (5 to 30 years)............ 68,094 66,681 44,207
Vehicles (5 to 7 years).............................. 13,947 12,017 9,599
Furniture and fixtures (5 to 10 years)............... 3,645 3,482 2,772
Other................................................ 887 862 636
-------- -------- -------
119,517 114,954 81,944
Less- accumulated depreciation....................... 17,636 14,850 9,989
-------- -------- -------
$101,881 $100,104 $71,955
======== ======== =======
</TABLE>
Intangibles and Other Assets
Intangibles and other assets are stated at cost net of amortization
computed on the straight-line and effective interest methods over five to thirty
years. Components and useful lives of intangibles and other assets are as
follows:
<TABLE>
<CAPTION>
AUGUST 31,
FEBRUARY 29, -------------------
1996 1995 1994
------------ -------- -------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill (30 years).................................. $ 25,930 $ 25,910 $19,066
Noncompete agreements (5 to 15 years)................ 27,728 27,654 18,894
Customer lists (15 years)............................ 7,454 7,454 7,580
Other................................................ 2,391 2,209 2,232
-------- -------- -------
63,503 63,227 47,772
Less -- accumulated amortization..................... 23,884 22,192 18,531
-------- -------- -------
$ 39,619 $ 41,035 $29,241
======== ======== =======
</TABLE>
F-16
<PAGE> 140
HERITAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accrued and Other Current Liabilities
Accrued and other current liabilities consist of the following:
<TABLE>
<CAPTION>
AUGUST 31,
FEBRUARY 29, ----------------
1996 1995 1994
------------ ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Interest payable........................................ $ 616 $ 895 $ 483
Wages and payroll taxes................................. 1,769 1,614 1,468
Deferred tank rent...................................... 904 904 880
Taxes other than income................................. 690 408 341
Minority interest....................................... 298 13 102
Other................................................... 1,514 1,636 510
------ ------ ------
$5,791 $5,470 $3,784
====== ====== ======
</TABLE>
Earnings Per Common Share
Earnings (loss) per share has been computed by dividing net income by the
weighted average number of common shares and common share equivalents
outstanding. Common share equivalents included in the computation represent
shares issuable upon assumed exercise of stock options and stock warrants which
would have a dilutive effect. Common share equivalents were not dilutive for the
years ended August 31, 1995, 1994 or 1993.
Impact of SFAS No. 121
In 1995, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for the Impairment of Long-Lived Assets to be Disposed
of." The Company must adopt this standard effective September 1, 1996. The
Company does not expect that the adoption of this standard will have a material
impact on its financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount 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
reporting period. Actual results could differ from those estimates.
3. ACQUISITIONS:
During fiscal 1996, the Company purchased certain assets of Bi-State
Propane and Century Propane Company, Inc. The aggregate purchase price of the
acquisitions totaled approximately $4,537 which was financed primarily with the
revolving senior acquisition facility. The Company also entered into a
noncompete agreement for a period of ten years totaling $40. The Company
capitalized as part of the purchase allocation certain legal and other costs
related to the acquisitions.
During fiscal 1995, the Company purchased certain assets of Ballard, Inc.,
Balcom, Inc., San Luis Butane Distributors, Jerry's Propane Service, Inc., Greer
Gas, Inc., Paragon Energy Corporation and B&B Gas as well as the outstanding
common stock of Carolane Propane Gas, Inc. The aggregate purchase price of the
acquisitions totaled approximately $30,837 which was financed primarily with the
revolving senior acquisition facility. The Company also entered into noncompete
agreements for periods ranging from seven to fifteen
F-17
<PAGE> 141
HERITAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
years totaling $8,760. The Company capitalized as part of the purchase
allocation certain legal and other costs related to the acquisitions.
During fiscal 1993, the Company purchased certain assets of Gator Propane,
Inc., Southern States Utilities, Inc., Gas Service Co., Myers Propane Service
and San Diego ProFlame, Inc. The aggregate purchase price of the acquisitions
totaled approximately $8,251 which was financed primarily with the revolving
senior acquisition facility. The Company also entered into noncompete
agreements, each with fifteen year terms, totaling $2,365. The Company
capitalized as part of the purchase allocation certain legal and other costs
related to the acquisitions.
The acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the purchase prices have been allocated to assets
acquired and liabilities assumed based on the fair market values at the dates of
the acquisitions. The excess of the purchase price over the fair market values
of the net assets acquired has been recorded as goodwill.
The results of operations of the acquired entities have been included in
the Company's consolidated financial statements from the date of acquisition.
4. WORKING CAPITAL FACILITIES AND LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
AUGUST 31,
FEBRUARY 29, -------------------
1996 1995 1994
------------ -------- -------
(UNAUDITED)
<S> <C> <C> <C>
Revolving Senior Acquisition Facility................ $ 66,400 65,700 $35,000
Senior Reset Notes................................... 30,000 30,000 30,000
Subordinated Reset Notes............................. 12,600 12,600 12,600
Notes payable on noncompete agreements with interest
imputed at rates averaging 8%, due in installments
through 2005, collateralized by a first security
lien on certain assets of the Company.............. 7,725 8,930 4,593
Other................................................ 867 987 1,326
-------- -------- -------
117,592 118,217 83,519
Current maturities of long-term debt................. 111,291 14,805 2,146
-------- -------- -------
$ 6,301 $103,412 $81,373
======== ======== =======
</TABLE>
The Company has an agreement with Prudential Insurance Company of America
(Prudential) providing up to $114,000 of debt financing (the Debt Agreement). A
portion of this facility was used to repay the obligations owed a prior lender
whose entire commitment to the Company was eliminated. In connection with this
refinancing, Prudential also became a stockholder of the Company.
The Debt Agreement consists of the following:
A $5,000 Revolving Working Capital Facility, expiring November 20,
1995 (see Note 9) with $5,000 outstanding at February 29, 1996, August 31,
1995 and 1994. Interest is payable monthly at the London InterBank Offered
Rate (LIBOR) plus a spread (such interest rate was 8.8125% and 9.4375% at
February 29, 1996 and August 31, 1995, respectively). The Company must be
free of all working capital borrowings for 30 consecutive days each fiscal
year. A commitment fee of .5% is paid on the unused portion of the
facility.
F-18
<PAGE> 142
HERITAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A Revolving Senior Acquisition Facility of $66,400, with quarterly
payments due beginning February 20, 1996 (see Note 9) and ending November
20, 1997. Interest is payable quarterly at a spread plus the three-month
LIBOR rate then in effect (such interest rate was 8.75% and 9.4375% at
February 29, 1996 and August 31, 1995, respectively). A commitment fee of
.5% is paid on the unused portion of the facility.
Senior Reset Notes of $30,000 with $10,000 maturing November 20, 1997
and $20,000 maturing November 20, 2000. Interest thereon is payable
quarterly (such interest rate was 11.55% at February 29, 1996 and August
31, 1995, respectively). The interest rate will be reset for a three-year
period on November 20, 1997 based on a spread over the yield on U.S.
Treasury securities as of the reset date.
Subordinated Reset Notes of $9,000 and $3,600, maturing November 20,
2000, with interest payable quarterly at 13.59% and 11.77%, respectively.
The interest rate will be reset on November 20, 1996 based on a spread over
the yield on U.S. Treasury securities as of the reset date.
The Debt Agreement contains restrictive covenants including limitations on
substantial disposition of assets, payment of dividends, repurchase of stock,
capital expenditures and incurrence of additional debt and requires the
maintenance of certain financial ratios including indebtedness as a multiple of
cash flow and interest coverage. The Debt Agreement is collateralized by a
pledge of the stock of the Company's subsidiaries and includes a prepayment
penalty on the Senior Reset and Subordinated Reset Notes should prepayment occur
as a result of certain specified events.
The Company has a $6,000 bank line of credit which is available for working
capital purposes or for the issuance of standby letters of credit that matures
August 31, 1996, with interest payable quarterly at LIBOR plus a spread (8.0625%
and 8.626% at February 29, 1996 and August 31, 1995, respectively). The balance
outstanding at February 29, 1996, August 31, 1995 and 1994 was $5,000, $2,000
and $1,975, respectively. The bank has a right of offset against any deposits or
credit balances due from the bank in the event the obligation remains unpaid.
The Company also has a $500 facility with a bank available only to support
issuance of standby letters of credit. As of February 29, 1996 and August 31,
1995, $510 and $200 of standby letters of credit were outstanding, respectively.
The weighted average interest rates on borrowings under the Revolving
Working Capital Facility and the bank line of credit were 9.18%, 8.99% and 7.0%
for the six months ended February 29, 1996 and the years ended August 31, 1995
and 1994, respectively.
On November 20, 1995, the Company failed to pay the scheduled principal
payment then due on the Revolving Working Capital Facility. On February 20,
1996, the Company failed to pay the scheduled principal payment then due on the
Revolving Senior Acquisition Facility. Prudential has advised the Company that
this failure constitutes a default under the Debt Agreement (see Note 10). As a
result, all of the Prudential debt has been classified as current in the
February 29, 1996 consolidated balance sheet. In the event the Company is unable
to complete the transactions described in Note 10, management will be required
to seek new financing to refinance its indebtedness to Prudential. While
management believes that there are sufficient sources of capital available to it
to refinance the Prudential debt, the terms may place restrictions on, among
other things, the Company's ability to continue to make acquisitions consistent
with its business strategies.
F-19
<PAGE> 143
HERITAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future maturities of long-term debt at August 31, 1995 are as follows:
<TABLE>
<S> <C>
1996.............................................. $ 14,805
1997.............................................. 17,953
1998.............................................. 48,542
1999.............................................. 1,261
2000.............................................. 1,166
Thereafter........................................ 34,490
--------
$118,217
========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
Certain property and equipment is leased under noncancellable operating
leases which require fixed monthly rental payments and which expire at various
dates through 2008. Rental expense under these leases totaled approximately $600
and $522 for the six months ended February 29, 1996 and February 28, 1995,
respectively and $1,083, $1,018 and $966 for the years ended August 31, 1995,
1994 and 1993, respectively. Fiscal year future minimum lease commitments for
such leases are $1,085 in 1996; $676 in 1997; $556 in 1998; $398 in 1999; $228
in 2000 and $388, thereafter.
The Company is a party to various legal proceedings incidental to its
business. Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company. In addition, the
Partnership has been named as a defendant in a suit alleging that it negligently
hired an employee who was convicted of a felony. In the opinion of management,
all such matters are covered by insurance, are without merit, or involve amounts
which, if resolved unfavorably, would not have a significant effect on the
financial position or results of operations of the Company.
The Company has entered into several purchase and supply commitments for
the next fiscal year with varying terms as to quantities and prices.
6. INCOME TAXES:
The Company retroactively adopted the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, which uses the
liability method of accounting for income taxes. Under the liability method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities. The deferred tax
assets and liabilities are measured using the current tax rates and laws.
At February 29, 1996 and August 31, 1995, the Company had net operating
loss (NOL) carryforwards of approximately $10,000 and $17,000, respectively,
available to offset future taxable income. The NOL carryforwards begin to expire
in 2005.
The provision for income taxes includes the following components for the
years ended as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
AUGUST 31,
--------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current......................................................... $103 $ 69 $ 61
Deferred........................................................ 563 599 56
---- ---- ----
$666 $668 $117
==== ==== ====
</TABLE>
F-20
<PAGE> 144
HERITAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the statutory income tax rate to the effective income
tax rate for the years ended is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
AUGUST 31,
---------------------
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
Tax at statutory rates......................................... $155 $334 $(205)
Nondeductible amortization..................................... 390 220 238
State income taxes............................................. 18 40 39
Other.......................................................... 103 74 45
---- ---- ----
$666 $668 $ 117
==== ==== ====
</TABLE>
The significant components of the net deferred income tax liability are as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
AUGUST 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Deferred Tax Liabilities:
Depreciation................................................... $25,603 $17,915
Amortization................................................... -- 705
------- -------
$25,603 $18,620
======= =======
Deferred Tax Assets:
Net operating loss carryforwards............................... $ 6,549 $ 6,585
Valuation allowances........................................... 120 116
Accrued bonus.................................................. 372 350
Deferred tank rent............................................. 344 334
Market value of stock warrants................................. 183 160
Accrued vacation............................................... 133 94
Other.......................................................... 83 35
------- -------
$ 7,784 $ 7,674
======= =======
</TABLE>
7. CAPITAL STOCK:
5% Cumulative Redeemable Preferred Stock
The Preferred Stock is redeemable at the option of the holders for cash in
an amount equal to $1,000 per share plus all unpaid cumulative dividends. The
redemption date shall be November 20, 1997 providing certain conditions are met,
or November 20, 2000 if the specified conditions are not met.
No preferred dividends have been declared. Undeclared cumulative dividends
at February 29, 1996, August 31, 1995, 1994 and 1993, were approximately $3,158,
$2,850, $2,250 and $1,680, respectively, and have been recorded in the
accompanying financial statements as an increase in the Preferred Stock.
Class A Common Stock
Of the authorized shares of the Class A Common Stock, 441,419 shares are
reserved for issuance upon conversion of the Class B Common Stock; 94,000 shares
are reserved for issuance upon the exercise of employee stock options; 9,062 are
reserved for issuance to key employees or directors and 15,092 shares are
reserved for issuance upon the exercise of management warrants.
F-21
<PAGE> 145
HERITAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Class B Common Stock
Of the authorized shares of the Class B Common Stock, 83,919 shares are
reserved for issuance to Prudential in the event that specified financial
results are not achieved.
Stock Options
The Company maintains a stock option plan for key employees and directors.
The exercise price of the options was equal to the fair market value of the
stock at the date of grant. Options granted vest at periods ranging from three
to seven years and full vesting occurs at the date of certain sale events. The
options expire at various dates through 2006. Under the terms of the option
agreements, the Company may be required to repurchase stock issued under the
option agreements under certain circumstances at prices to be determined on the
repurchase date. The number and exercise price of options granted were as
follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE
SHARES PER SHARE
--------- ------------
<S> <C> <C>
Outstanding at September 1, 1992............................ 136,000 $ 1.00- 9.23
Granted................................................... 16,800 $ 16.00
------- -----------
Outstanding at August 31, 1993.............................. 152,800 $ 1.00-16.00
Granted................................................... 3,200 $ 16.00
Exercised................................................. 100,000 $ 1.00
------- -----------
Outstanding at August 31, 1994.............................. 56,000 $ 9.23-16.00
Granted................................................... 10,000 $ 31.00
------- -----------
Outstanding at August 31, 1995.............................. 66,000 $ 9.23-31.00
Granted (unaudited)....................................... 32,000 $ 38.00
Forfeited (unaudited)..................................... 4,000 $16.00-31.00
------- -----------
Outstanding at February 29, 1996 (unaudited)................ 94,000 $ 9.23-38.00
======= ===========
Exercisable at August 31, 1995.............................. 34,000 $ 9.23-31.00
======= ===========
</TABLE>
Stock Warrants
In conjunction with the debt agreements with Prudential (Note 4), the
Company granted Prudential warrants for a maximum of 83,919 shares of the
Company's Class B Common Stock. The total number of shares to be issued to
Prudential under the warrants is based upon specified financial results of the
Company. The exercise price of the warrants is $.10 per share, and the
expiration date is the earlier of November 20, 2000 or certain sale events.
Additionally, the Company granted management warrants for Class A Common Stock
for a maximum of 15,092 shares. Exercise of management's warrants is dependent
upon the exercise of Prudential's warrants. The exercise price of management's
warrants is $.01 per share and the expiration date is the earlier of November
20, 2000 or the employee's termination. Compensation expense has been recorded
based on the estimated market value of the management warrants which at February
29, 1996, August 31, 1995, 1994 and 1993, was approximately $560, $480, $420 and
$360, respectively.
8. PROFIT SHARING AND 401(K) SAVINGS PLAN:
The Company sponsors a defined contribution profit-sharing and 401(k)
savings plan which covers all employees with more than one year of service.
Contributions are made to the plan at the discretion of the board of directors.
Total expense under the profit sharing provision of the plan during the six
months ended February 29, 1996 and February 28, 1995, was $175 and $98,
respectively, and for the years ended August 31, 1995, 1994 and 1993, was $275,
$250 and $200, respectively.
F-22
<PAGE> 146
HERITAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. DOMESTIC AND FOREIGN OPERATIONS:
The following table presents revenues, operating income and identifiable
assets attributable to the Company's domestic and foreign operations.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
----------------------------- FOR THE YEAR ENDED AUGUST 31,
FEBRUARY 29, FEBRUARY 28, ----------------------------------
1996 1995 1995 1994 1993
------------ ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues:
Domestic........................ $ 81,308 $ 66,369 $110,773 $ 88,941 $ 86,774
Foreign
Affiliated................... 7,249 6,805 10,540 12,053 12,199
Unaffiliated................. 21,745 10,511 20,735 15,030 15,517
Eliminations.................... (7,249) (6,805) (10,540) (12,053) (12,199)
-------- -------- -------- -------- --------
$103,053 $ 76,880 $131,508 $103,971 $102,291
======== ======== ======== ======== ========
Operating Income:
Domestic........................ $ 13,478 $ 11,941 $ 12,398 $ 9,611 $ 8,344
Foreign
Affiliated................... 100 77 93 131 143
Unaffiliated................. 300 118 184 163 182
-------- -------- -------- -------- --------
$ 13,878 $ 12,136 $ 12,675 $ 9,905 $ 8,669
======== ======== ======== ======== ========
Identifiable Assets:
Domestic........................ $174,147 $161,612 $161,097 $115,769 $119,658
Foreign......................... 6,629 2,993 2,326 2,561 1,899
-------- -------- -------- -------- --------
$180,776 $164,605 $163,423 $118,330 $121,557
======== ======== ======== ======== ========
</TABLE>
10. SUBSEQUENT EVENTS:
Subsequent to February 29, 1996, the Company signed letters of intent to
purchase certain net assets of a
propane distributor and all of the outstanding common stock of another propane
distributor. The aggregate purchase price of the acquisitions totals
approximately $7,547. The Company also entered into noncompete agreements for
periods ranging from five to ten years totaling approximately $1,770.
Heritage Propane Partners, L.P. (the Partnership) was formed April 17,
1996, as a Delaware limited partnership. The Partnership was formed to acquire,
own and operate the propane business and substantially all of the assets of the
Company. In order to simplify the Partnership's obligations under the laws of
several jurisdictions in which the partnership will conduct business, the
Partnership's activities will be conducted through a subsidiary operating
partnership, Heritage Operating, L.P. (the Operating Partnership).
The Partnership intends to offer 4,025,000 Common Units, representing
limited partner interests in the Partnership, to the public and to concurrently
issue Subordinated Units representing additional limited partner interests in
the Partnership, to the Company, as well as a 2% general partner interest in the
Partnership and the Operating Partnership, on a combined basis.
Concurrently with the closing of the above offering, the Company will issue
$120,000 principal amount of notes payable to certain institutional investors.
The Company will then convey substantially all of its assets (other than
approximately $80,100 in proceeds from issuance of the notes payable) to the
Operating Partnership in exchange for a general partner interest and all of the
limited partner interests in the Operating Partnership and the assumption by the
Operating Partnership of substantially all of the liabilities of the Company.
The Company will convey all of its limited partner interests in the Operating
Partnership to the
F-23
<PAGE> 147
HERITAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Partnership in exchange for 3,702,943 Subordinated Units and a general partner
interest in the Partnership. As a result, the General Partner will own an
aggregate 47.0% limited partner interest, and an aggregate 2% general partner
interest, in the Partnership and the Operating Partnership.
In contemplation of the offering, the Company entered into a letter
agreement dated as of April 24, 1996 with its nonmanagement shareholders.
Pursuant to the terms of the agreement, assuming an initial public offering
price of $20.50 per Common Unit, the Company will use approximately $62,500 of
the proceeds of the notes payable to finance the repurchase of equity interests
and the Preferred Stock in the Company.
The Partnership will contribute the net proceeds of $74,834 from the sale
of Common Units to the Operating Partnership. The Operating Partnership will
apply the net proceeds, together with approximately $38,200 in cash contributed
by the Company from the proceeds of the notes payable, to finance the repayment
of all of the indebtedness of the Company to Prudential. The Company will pay a
prepayment penalty in the amount of $3,500 in connection with the early
retirement of the Prudential debt. As described in Note 4, all indebtedness to
Prudential is in default, as a result of the Company's failure to pay on
November 20, 1995 the scheduled principal repayment of $5,000 under its
Revolving Working Capital Facility and its failure to pay on February 20, 1996
the scheduled principal payment of $4,150 under the Senior Acquisition Facility.
In connection with the transactions described above, Prudential has agreed to
waive existing and certain prospective defaults and forebear from exercising any
remedies under the Company's indebtedness to Prudential for six months from
April 24, 1996.
As a result of the transactions described above, all of the outstanding
capital stock of the Company will be owned by certain members of management.
In addition, the Operating Partnership will also enter into a Bank Credit
Facility, which will include the Working Capital Facility providing for up to
$15,000 of borrowings to be used for working capital and other general
partnership purposes, and the Acquisition Facility, providing for up to $35,000
of borrowings to be used for acquisitions and improvements. The Partnership
anticipates drawing on the Bank Credit Facility in order to repay any amounts
borrowed in connection with its recent and pending acquisitions as well as any
other bank debt outstanding at the time of the closing of this offering.
F-24
<PAGE> 148
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Carolane Propane Gas, Inc.
Lexington, North Carolina
We have audited the accompanying balance sheets of Carolane Propane Gas,
Inc. (a North Carolina corporation) as of October 31, 1994, May 31, 1994, and
May 31, 1993, and the related statements of income, stockholders' equity, and
cash flows for the periods then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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 financial statements referred to above present fairly,
in all material respects, the financial position of Carolane Propane Gas, Inc.
as of October 31, 1994, May 31, 1994, and May 31, 1993, and the results of its
operations and its cash flows for the periods then ended in conformity with
generally accepted accounting principles.
As described in Note 12 to the financial statements, effective June 1,
1993, the Company changed its method of accounting for income taxes.
TURLINGTON AND COMPANY, L.L.P.
Lexington, North Carolina
March 28, 1996
F-25
<PAGE> 149
CAROLANE PROPANE GAS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MAY 31
OCTOBER 31 --------------------------
1994 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Current assets:
Cash................................................ $ 2,029,734 $ 2,393,069 $ 1,441,681
Notes and accounts receivable:
Customers........................................ 1,175,643 576,064 719,134
Stockholders..................................... 5,500 80,000
Insurance company................................ 128,812
Income taxes..................................... 130,728 13,988
Allowance for doubtful accounts.................. (10,293) (49,382) (53,360)
Inventories......................................... 858,926 503,692 435,478
Deposits on future gas purchases.................... 370,575 88,000 175,460
Marketable securities............................... 131,054 66,124
Deferred income taxes............................... 1,687 19,493
Prepaid expenses.................................... 43,231 109,493
----------- ----------- -----------
4,605,731 3,865,471 2,913,329
----------- ----------- -----------
Property and equipment:
Cost................................................ 9,896,627 9,966,585 9,552,876
Accumulated depreciation............................ (7,076,062) (6,949,350) (6,404,156)
----------- ----------- -----------
2,820,565 3,017,235 3,148,720
----------- ----------- -----------
Other assets:
Investment in affiliate............................. 436,330 454,934 407,646
Investment in limited partnerships.................. 38 11,694
Cash value of life insurance (net) (Note 6)......... 43,796 87,332 58,191
Notes and accounts receivable -- stockholders....... 231,250
Unamortized customer lists.......................... 14,103 14,334
Unamortized goodwill................................ 371,729 379,063 396,665
Other............................................... 12,900 18,853
----------- ----------- -----------
851,855 948,370 1,138,633
----------- ----------- -----------
$ 8,278,151 $ 7,831,076 $ 7,200,682
========== ========== ==========
LIABILITIES
Current liabilities:
Accounts payable -- trade........................... $ 313,007 $ 277,042 $ 238,496
Customer credit balances............................ 533,132 172,048 64,437
Accrued income taxes................................ 146,041
Other accrued liabilities........................... 377,595 240,936 250,829
----------- ----------- -----------
1,223,734 690,026 699,803
Non-current liabilities:
Deferred income taxes............................... 554,195 554,472 573,858
----------- ----------- -----------
1,777,929 1,244,498 1,273,661
========== ========== ==========
STOCKHOLDERS' EQUITY
Capital stock:
Preferred........................................... 300 300
Common.............................................. 39,600 39,600 39,600
Retained earnings..................................... 6,460,622 6,546,678 5,887,121
----------- ----------- -----------
6,500,222 6,586,578 5,927,021
----------- ----------- -----------
$ 8,278,151 $ 7,831,076 $ 7,200,683
========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of the financial statements
F-26
<PAGE> 150
CAROLANE PROPANE GAS, INC.
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FIVE
MONTHS
ENDED YEARS ENDED MAY 31
OCTOBER 31 ------------------------
1994 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Capital stock:
Preferred stock; authorized 1,000 shares; par value
$100; 6% cumulative:
Balances at beginning of periods -- 3 shares........ $ 300 $ 300 $ 300
Shares cancelled during periods..................... (300)
---------- ---------- ----------
Balances at end of periods.......................... 300 300
---------- ---------- ----------
Common stock:
Class A; authorized 1,000 shares; par value $1; 396
shares issued and outstanding with no changes
during the
periods........................................... 396 396 396
Class B; authorized 99,000 shares; par value $1;
39,204 shares issued and outstanding with no
changes during the periods........................ 39,204 39,204 39,204
---------- ---------- ----------
39,600 39,600 39,600
---------- ---------- ----------
Retained earnings:
Balances at beginning of periods....................... 6,546,678 5,887,121 5,096,453
Net income (loss) for the periods...................... (86,056) 659,557 790,668
---------- ---------- ----------
Balances at end of periods............................. 6,460,622 6,546,678 5,887,121
---------- ---------- ----------
$6,500,222 $6,586,578 $5,927,021
========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of the financial statements
F-27
<PAGE> 151
CAROLANE PROPANE GAS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED YEARS ENDED MAY 31
OCTOBER 31 ---------------------------
1994 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Sales................................................ $4,376,403 $14,315,401 $13,950,957
Cost of sales........................................ 2,188,933 6,985,945 7,034,246
------------ ----------- -----------
Gross profit....................................... 2,187,470 7,329,456 6,916,711
------------ ----------- -----------
Operating expenses:
Salaries and wages................................. 1,254,910 3,050,362 2,792,064
Tools and supplies................................. 68,814 359,557 218,121
Vehicle expense.................................... 101,155 301,939 193,126
Rent............................................... 86,700 209,336 185,462
Repairs............................................ 28,092 50,912 48,381
Advertising........................................ 28,670 69,360 63,503
Telephone.......................................... 22,624 53,440 45,765
Utilities 17,205 34,258 30,555
Professional fees.................................. 14,043 22,940 40,439
Insurance.......................................... 95,791 477,599 581,001
Travel and entertainment........................... 14,206 38,297 43,514
Office............................................. 29,839 145,191 116,450
Dues and subscriptions............................. 6,080 31,122 14,705
Depreciation and amortization...................... 333,506 803,843 856,109
Taxes.............................................. 105,610 264,724 259,366
Profit-sharing contribution........................ 25,000 160,000 160,000
Other.............................................. 192,391 243,032 219,534
------------ ----------- -----------
2,424,636 6,315,912 5,868,095
------------ ----------- -----------
Operating income (loss).................... (237,166) 1,013,544 1,048,616
------------ ----------- -----------
Other income (deductions):
Interest and dividends received.................... 46,968 61,812 63,154
Unrealized loss on marketable securities........... 6,383 (6,383)
Gain (loss) on sale of equipment................... 6,835 (45,243) 25,600
Gain (loss) on sale of marketable securities....... (4,559) 11,842 497
Gain (loss) on sale of limited partnership
interests....................................... 129,175 (5,303) 224,170
Equity in earnings of affiliate.................... (18,604) 47,288 44,865
Interest paid...................................... (408) (6,309) (5,829)
Life insurance..................................... 1,954
Gains (losses) from limited partnership
interests....................................... 55,147 (96,721)
Amortization of goodwill........................... (7,334) (17,602) (17,602)
------------ ----------- -----------
160,410 95,249 238,134
------------ ----------- -----------
Income (loss) before income taxes and
cumulative effect of change in method of
accounting............................... (76,756) 1,108,793 1,286,750
Income taxes......................................... 9,300 504,958 496,082
------------ ----------- -----------
Income (loss) before cumulative effect of
change in method of accounting........... (86,056) 603,835 790,668
Cumulative effect of change in method of accounting
for income taxes................................... 55,722
------------ ----------- -----------
Net income (loss) for the periods.......... ($ 86,056) $ 659,557 $ 790,668
========= ========== ==========
</TABLE>
The accompanying notes are an integral part
of the financial statements
F-28
<PAGE> 152
CAROLANE PROPANE GAS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED YEARS ENDED MAY 31
OCTOBER 31 ------------------------
1994 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) for the periods...................... $ (86,056) $ 659,557 $ 790,668
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Unrealized (gain) loss on marketable securities..... (6,383) 6,383
Depreciation and amortization....................... 340,840 821,445 873,711
Equity in earnings of affiliate..................... 18,604 (47,288) (44,865)
Deferred income taxes............................... 17,529 (38,879) 23,001
Contribution of limited partnership interest........ 79,213
Gains (losses) from limited partnership interests... (55,147) 96,721
Cash value of life insurance........................ 43,536 (29,141) (26,883)
(Gain) loss on sale of equipment.................... (6,835) 45,243 (25,600)
(Gain) loss on sale of marketable securities........ 4,559 (11,842) (497)
(Gain) loss on sale of limited partnership
interests......................................... (129,175) 5,303 (224,170)
Changes in assets and liabilities:
Notes and accounts receivable....................... (668,008) 411,119 (88,821)
Inventories......................................... (355,234) (68,214) 30,046
Prepaid expenses and deposits....................... (216,313) (22,033) (175,460)
Accounts payable and customer credit balances....... 397,049 146,157 (50,248)
Accrued income taxes................................ (146,041) 11,644
Other accrued liabilities........................... 136,659 (9,893) (25,628)
---------- ---------- ----------
Net cash provided by (used for) operating
activities................................... (430,015) 1,666,729 1,163,619
---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment..................... (194,764) (760,747) (378,636)
Proceeds from sale of equipment........................ 78,866 43,937 25,600
Proceeds from sale of marketable securities............ 133,176 230,368 18,797
Proceeds from sale of limited partnerships............. 50,000 98,000
Distributions from limited partnerships................ 51,500 51,700
Purchase of marketable securities...................... (298) (290,399) (56,389)
Investment in limited partnership...................... (88,000)
---------- ---------- ----------
Net cash provided by (used for) investing
activities................................... 66,980 (715,341) (338,928)
---------- ---------- ----------
Cash flows from financing activities:
Retirement of capital stock............................ (300)
Reduction in short-term debt........................... (393,054)
---------- ---------- ----------
Net cash used for financing activities......... (300) (393,054)
---------- ---------- ----------
Net increase (decrease) in cash................ (363,335) 951,388 431,637
Cash, beginning of periods............................... 2,393,069 1,441,681 1,010,044
---------- ---------- ----------
Cash, end of periods..................................... $ 2,029,734 $2,393,069 $1,441,681
========== ========== ==========
Cash paid during the periods for:
Interest............................................... $ 408 $ 6,309 $ 5,829
========== ========== ==========
Income taxes........................................... $ 60,106 $ 722,216 $ 460,911
========== ========== ==========
Schedule of noncash investing and financing activities:
Notes receivable issued on sale of limited
partnership......................................... $ 150,000
==========
</TABLE>
The accompanying notes are an integral part
of the financial statements
F-29
<PAGE> 153
CAROLANE PROPANE GAS, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE PERIODS ENDED OCTOBER 31, 1994,
MAY 31, 1994, AND MAY 31, 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
These financial statements were prepared on the basis of generally accepted
accounting principles with the more significant of these principles used
described as follows:
Inventories of gas, appliances, pipes, and fittings are carried at the
lower of cost or market with cost determined by the first-in first-out
(FIFO) method.
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is computed by use of the declining-balance
method on substantially all of the Company's depreciable property.
The total amount of interest charged on customer finance contracts is
included in the face amount of the contract at the time it is made.
Contracts are made, generally, for 12 month terms. The total amount of a
contract, including interest, is paid in equal monthly installments.
Customer lists, purchased during prior years, are being amortized on
the direct write-off method.
The Company accounts for its investment in an affiliate by use of the
equity method.
Marketable securities are valued at the lower of cost or market.
The Company's cash as stated for cash flows purposes, consists
entirely of interest and noninterest bearing cash accounts and petty cash.
The Company has no other assets which are considered cash equivalents.
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 revenue and expenses
during the reporting periods. Actual results could differ from those
estimates.
2. MARKETABLE SECURITIES:
An analysis of these securities is shown as follows:
<TABLE>
<CAPTION>
MAY 31
OCTOBER 31 -------------------
1994 1994 1993
---------- -------- -------
<S> <C> <C> <C>
Values at cost........................................ $ 0 $137,437 $66,124
== ======== =======
Values at market...................................... $ 0 $131,054 $74,768
== ======== =======
Carrying values....................................... $ 0 $131,054 $66,124
== ======== =======
</TABLE>
3. INVENTORIES:
Summaries of inventories follow:
<TABLE>
<CAPTION>
MAY 31
OCTOBER 31 --------------------
1994 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Gas.................................................. $262,692 $111,161 $132,381
Appliances........................................... 449,650 360,201 274,782
Pipes and fittings................................... 146,584 32,330 28,315
-------- -------- --------
$858,926 $503,692 $435,478
======== ======== ========
</TABLE>
F-30
<PAGE> 154
CAROLANE PROPANE GAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Summaries of property and equipment follow:
<TABLE>
<CAPTION>
MAY 31
OCTOBER 31 ------------------------
1994 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Land............................................. $ 34,437 $ 58,737 $ 112,329
Buildings........................................ 102,586 153,807 96,025
Equipment........................................ 7,763,515 7,712,279 7,516,106
Vehicles......................................... 1,996,089 2,041,762 1,828,416
---------- ---------- ----------
$9,896,627 $9,966,585 $9,552,876
========== ========== ==========
</TABLE>
5. INVESTMENT IN AFFILIATE:
The Company owns 33 1/3% of the outstanding stock of Guilford Gas Service,
Inc. located in Greensboro, North Carolina. As mentioned in Note 1, this
investment is accounted for by use of the equity method of accounting. Under the
equity method, the Company reports its pro rata share of the equity increase or
decrease each year in its income statements and increases or decreases the
carrying value of its investment accordingly. Actual dividends received, if any,
reduce the investment's carrying value.
An analysis of the Company's investment, based on the financial statements
of Guilford Gas Service, Inc., as of October 31, 1994, May 31, 1994, and May 31,
1993 is as follows:
<TABLE>
<CAPTION>
MAY 31
OCTOBER 31 --------------------
1994 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Balance -- beginning of periods...................... $454,934 $407,646 $362,781
Pro rata share of equity increases (decreases)....... (18,604) 47,288 44,865
-------- -------- --------
Balance -- end of periods............................ $436,330 $454,934 $407,646
======== ======== ========
</TABLE>
6. CASH VALUE OF LIFE INSURANCE:
The cash values of life insurance policies on officers of the Company at
May 31, 1994 and 1993 were $23,525 and $22,650, respectively. The outstanding
policy loans for each year were $16,525. In addition to the cash values of life
insurance policies, the Company was the owner of various collateral assignments
on split-dollar life insurance contracts. The amount of the assignments at
October 31, 1994, May 31, 1994, and May 31, 1993 was $43,796, $80,332, and
$52,066, respectively.
7. GOODWILL:
On October 1, 1986, the Company purchased 2,000 shares (100%) of the
outstanding common stock of Carolina Propane Gas Service Co., Inc. for $711,169.
The purchase method was used to account for the acquisition. The purchase price
included goodwill of $73,939 which is being amortized by use of the straight-
line method over ten years.
On July 24, 1990, the Company purchased 2,396 shares (100%) of the
outstanding common stock of Southern Propane Gas Company, Inc. for $555,499. The
purchase method was used to account for the acquisition and the acquired company
was merged with the existing Carolane Propane Gas, Inc. The purchase price
included goodwill of $408,337 which is being amortized by use of the straight
line method over forty years.
F-31
<PAGE> 155
CAROLANE PROPANE GAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED PARTY TRANSACTIONS:
On December 23, 1992, the Company sold its investment in Glen Lennox
Apartments, Ltd. to Timken, Ltd. and Three Kids, Ltd. which are partnerships
owned by certain stockholders of the Company. The sale of the three units for
$150,000 was made at fair market value as determined by an appraisal. The
resulting gain to the Company as reflected in the statements of income was
$224,170. The note and interest receivable at May 31, 1993 was $151,250.
In addition to the above note receivable, the Company had accounts
receivable from eight stockholders totaling $80,000 at May 31, 1994 and 1993.
These accounts were unsecured and non-interest bearing. The amounts were repaid
during the five month period ended October 31, 1994.
On July 1, 1993, the Company sold computer equipment to the Heritage
Company, Inc. of Lexington, a corporation owned by certain stockholders of
Carolane Propane Gas, Inc. The sale of equipment for $5,000 was based on the
fair market value of the equipment. The resulting loss to the Company on the
sale of equipment was $5,603.
On January 1, 1994, the Company sold its investment in Calibre Place
Associates to Timken, Ltd. and Three Kids, Ltd. The sale of the investment for
$88,000 was made at fair market value as determined by an appraisal. The
resulting gain to the Company was $560.
On May 31, 1994, the Company sold its investment in Martinique Apartments
Limited Partnership to Timken, Ltd. and Three Kids, Ltd. The sale of the
investment for $10,000 was made at fair market value as determined by an
appraisal. The resulting loss to the Company was $5,863.
On October 1, 1994, the Company gifted its investment in Sherwood Ridges
Apartments Limited Partnership to the Timberlake Foundation, Inc. and to the Bob
and Kay Timberlake Foundation, Inc. The cost basis of the investment was $79,213
on the date of the gift. The Company deducted its basis as a charitable donation
during that period. These Foundations are controlled and founded by the
shareholders of the Company.
On October 31, 1994, the Company sold its Durham, NC land and plant to two
of its shareholders. The sales price of $68,950 was made at fair market value as
determined by an appraisal. The Company recognized a $3,080 loss from the sale.
The sale was required by Heritage Holdings, Inc. in connection with its
acquisition of the Company on November 1, 1994. The property has an
environmental problem associated with contaminated soil. Since the Company no
longer owns the property, management believes there is no additional Company
liability at October 31, 1994.
Substantially all (80%) of the leases referred to in Note 10 are leases in
which the lessors are either individual stockholders of the Company or are
related corporations controlled by these stockholders.
9. DESCRIPTION OF BUSINESS AND CONCENTRATION OF CREDIT RISK:
Carolane Propane Gas, Inc. is a retailer of propane gas and appliances with
seven retail stores which are located in Lexington, Roxboro, Winston-Salem,
Durham, Salisbury, Hillsborough, and Mount Airy, North Carolina. The Company
grants credit to customers, substantially all of whom are local residents.
The Company's policy is to maintain its cash balances in reputable
financial institutions insured by the Federal Deposit Insurance Corporation
which provides $100,000 of insurance coverage on each customer's cash balances.
At times during the years, the Company's cash balances exceeded $100,000.
Management believes that this policy will not cause any adverse effect to the
Company.
F-32
<PAGE> 156
CAROLANE PROPANE GAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. OPERATING LEASES:
The Company's lease commitments are on a month-to-month basis for its
offices and plants. The lease payments are considered operating in nature and
totaled $86,700, $209,336, and $185,462, respectively, for the periods ended
October 31, 1994, May 31, 1994, and May 31, 1993.
11. PROFIT-SHARING PLAN:
The Company has a profit-sharing plan covering substantially all employees
of the Company. Contributions to the plan are determined annually by the Board
of Directors. Company contributions to the plan for the periods ended October
31, 1994, May 31, 1994, and May 31, 1993 were $25,000, $160,000, and $160,000
respectively.
12. INCOME TAXES:
Effective June 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by FASB
Statement No. 109, "Accounting for Income Taxes". As permitted under the new
rules, prior years' financial statements have not been restated.
The cumulative effect of adopting Statement 109 as of June 1, 1993 was to
increase the Company's net income for the year ended May 31, 1994 by $55,722.
Deferred income taxes computed in accordance with Statement 109 reflect the
net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Company's deferred tax assets and
liabilities as of October 31, 1994 and May 31, 1994 are as follows:
<TABLE>
<CAPTION>
OCTOBER 31 MAY 31
1994 1994
---------- --------
<S> <C> <C>
Deferred tax assets:
Tax over book ending inventory............................... $ 1,687 $ 1,687
Book valuation allowance for unrealized losses............... 2,502
Compensated absences......................................... 58,121
Tax over book investment in limited partnerships............. 1,030
-------- --------
1,687 63,340
-------- --------
Deferred tax liabilities:
Tax over book bad debts...................................... 28,935
Tax over book depreciation................................... 396,874 390,924
Book prepaid expenses........................................ 13,882
Investment in affiliate...................................... 157,321 164,578
-------- --------
554,195 598,319
-------- --------
Net deferred tax liability........................... $552,508 $534,979
======== ========
</TABLE>
F-33
<PAGE> 157
CAROLANE PROPANE GAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Classification on the Company's October 31, 1994, May 31, 1994, and May 31,
1993 balance sheet is as follows:
<TABLE>
<CAPTION>
OCTOBER 31 MAY 31 MAY 31
1994 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Current............................................ $ (1,687) $(19,493)
Noncurrent......................................... 554,195 554,472 $573,858
-------- -------- --------
$552,508 $534,979 $573,858
======== ======== ========
</TABLE>
An analysis of income tax expense follows:
<TABLE>
<CAPTION>
MAY 31
OCTOBER 31 ---------------------
1994 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Income taxes (credits) currently payable per the
income tax returns............................... $(37,306) $476,403 $513,210
Low income housing credit.......................... (25,511) (40,199)
Recapture of low income housing credit............. 29,077 37,223 70
Amounts not currently payable (deferred)........... 17,529 16,843 23,001
-------- -------- --------
Income taxes per statements of income.............. $ 9,300 $504,958 $496,082
======== ======== ========
</TABLE>
The Company's income tax returns have been examined by the Internal Revenue
Service for the periods covered by these financial statements. The audit
resulted in no changes to the income tax return filed for these periods.
13. PURCHASE COMMITMENTS:
The Company makes commitments to purchase propane gas during periods of
off-peak demand. The Company had made deposits on future gas purchases as
reflected in the Balance Sheets. None of the purchase commitments were in excess
of propane gas prices at the time of commitment.
14. CONTINGENT LIABILITIES:
On December 23, 1992, the Company experienced a gas leak and fire at its
Mt. Airy, NC location. There were multiple third party claims arising from the
incident. Those claims included property damage to nearby dwellings and to
automobiles involved in collisions on a nearby highway. The claims also included
personal injury claims for those involved in the automobile collisions.
Management represents that subsequent to October 31, 1994 all of the claims from
this incident have been settled. There were no liabilities to the Company in
excess of the liability insurance coverage.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS:
FASB Statement No. 107 "Disclosures about Fair Value of Financial
Instruments" requires that the Company disclose estimated fair values for its
financial instruments. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments for which it is
practicable to estimate that value.
Cash
The carrying amount is a reasonable estimate of fair value.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
OCTOBER 31, 1994
-------------------------
CARRYING FAIR
AMOUNT VALUE
---------- ----------
<S> <C> <C>
Cash........................................................ $2,029,734 $2,029,734
</TABLE>
F-34
<PAGE> 158
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Kingston Propane, Inc.
Kingston, Massachusetts
We have audited the accompanying balance sheets of Kingston Propane, Inc.
(a Massachusetts Corporation) as of September 30, 1995 and 1994, and the related
statements of income, retained earnings, and cash flows for the years then
ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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
misstatements. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Kingston Propane, Inc. as of
September 30, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
DAVID R. GARGANO, CPA, P.C.
Hingham, Massachusetts
May 20, 1996
F-35
<PAGE> 159
KINGSTON PROPANE, INC.
BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Current assets
Cash........................................................ $ 5,043 $ 1,463
Accounts receivable
Customers................................................ 244,944 290,840
Stockholders............................................. 51,289 6,917
Allowance for doubtful accounts.......................... (16,600) (17,500)
Inventories................................................. 134,598 136,244
Prepaid expenses............................................ 12,133 28,549
Loans receivable
Stockholder.............................................. 65,510 39,742
Other.................................................... 6,181 7,815
---------- ----------
Total current assets................................ 503,098 494,070
---------- ----------
Property and equipment, net................................... 969,006 1,032,461
Other assets
Loans receivable
Stockholder.............................................. 110,129 165,683
Other.................................................... 6,970 14,969
Deferred financing costs.................................... 38,691 58,455
Customer list............................................... 91,076 104,569
Deposits.................................................... 6,473 6,323
Deferred income taxes....................................... 83,641 16,721
---------- ----------
336,980 366,720
---------- ----------
$1,809,084 $1,893,251
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade notes and accounts payable.............................. $ 362,555 $ 332,982
Accrued expenses............................................ 199,725 48,168
Customer deposits........................................... 104,294 84,669
Notes and current maturities of long-term debt.............. 635,073 467,672
---------- ----------
Total current liabilities........................... 1,301,647 933,491
---------- ----------
Long-term liabilities
Long-term debt, less current maturities..................... 276,596 503,555
Deferred income taxes....................................... 84,121 72,561
---------- ----------
360,717 576,116
---------- ----------
Stockholders' equity
Common stock, no par value; 100 shares authorized, issued
and outstanding.......................................... 124,666 124,666
Retained earnings........................................... 22,054 258,978
---------- ----------
146,720 383,644
---------- ----------
$1,809,084 $1,893,251
========= =========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-36
<PAGE> 160
KINGSTON PROPANE, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Sales
Retail............................................................ $3,106,569 $3,506,009
Wholesale......................................................... 1,029,509 853,852
Stockholders...................................................... 44,443 9,987
---------- ----------
4,180,521 4,369,848
Cost of goods sold.................................................. 2,488,452 2,343,756
---------- ----------
Gross profit........................................................ 1,692,069 2,026,092
Operating expenses
Selling, general and administrative............................... 1,693,110 1,675,224
Depreciation and amortization..................................... 188,266 179,019
---------- ----------
1,881,376 1,854,243
---------- ----------
Operating income (loss)............................................. (189,307) 171,849
Other income (expense)
Write-off loan to affiliate....................................... (163,546)
Interest expense.................................................. (134,895) (78,301)
Interest income................................................... 31,638 28,093
Miscellaneous..................................................... 6,604 18,503
---------- ----------
(Loss) before income tax benefit.................................... (285,960) (23,402)
Income tax benefit.................................................. 49,036 3,578
---------- ----------
Net (loss).......................................................... $ (236,924) $ (19,824)
========= =========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-37
<PAGE> 161
KINGSTON PROPANE, INC.
STATEMENTS OF RETAINED EARNINGS
FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Beginning balance.................................................... $ 258,978 $ 278,802
Net (loss)........................................................... (236,924) (19,824)
--------- ---------
Ending balance....................................................... $ 22,054 $ 258,978
========= =========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-38
<PAGE> 162
KINGSTON PROPANE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net (loss)......................................................... $(236,924) $ (19,824)
Adjustments to reconcile net (loss) to cash provided by operating
activities:
Depreciation and amortization................................... 188,266 179,019
Write-off of notes receivable................................... 167,548
Deferred income taxes........................................... (55,360) 8,160
Changes in assets and liabilities:
Accounts receivable........................................... 624 93,791
Inventories................................................... 1,646 32,255
Prepaid expenses.............................................. 16,416 3,612
Loans receivable.............................................. (24,134) 16,134
Trade notes and accounts payable.............................. 29,573 (21,580)
Accrued expenses.............................................. 151,557 (64,412)
Customer deposits............................................. 19,625 14,399
--------- ---------
Net cash provided by operating activities.................. 91,289 409,102
--------- ---------
Cash flows from investing activities:
Additions to property and equipment................................ (84,973) (179,715)
Addition to Deposit................................................ (150) (673)
(Increase) decrease loans receivable............................... 63,553 (254,946)
--------- ---------
Net cash (used) by investing activities............................ (21,570) (435,334)
--------- ---------
Cash flows from financing activities:
Payment of refinancing costs....................................... (59,410)
Proceeds from long-term debt....................................... 333,100 894,390
Payments of long-term debt......................................... (399,239) (818,360)
--------- ---------
Net cash provided (used) by financing activities................... (66,139) 16,620
--------- ---------
Increase (decrease) in cash.......................................... 3,580 (9,612)
--------- ---------
Cash -- beginning of year............................................ 1,463 11,075
--------- ---------
Cash -- end of year.................................................. $ 5,043 $ 1,463
========= =========
Supplemental disclosures of cash flow:
Noncash financing activities:
Liabilities assumed and reduction of loans receivable affiliate
on assets acquired............................................. $ 167,816
Notes payable and capitalized lease obligations incurred on
property and equipment and leases.............................. $ 6,581 135,855
Cash paid during the years for:
Interest........................................................ $ 112,123 $ 80,228
Income taxes.................................................... 10,982
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-39
<PAGE> 163
KINGSTON PROPANE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1994
1. SUMMARY OF ACCOUNTING POLICIES
Organization
The Company was organized under the laws of the Commonwealth of
Massachusetts on January 1, 1953. Its primary operation is the sale of propane
gas to retail and wholesale customers in southeastern Massachusetts. The Company
also installs and services propane systems for heating, cooking and other
commercial uses. Further, the Company has one wholesale fuel oil customer.
Accounting Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses at and during the reporting periods of the
financial statements. Actual results could differ from those estimates.
Revenue Recognition
Sales of propane and propane appliances are recognized at the time of
delivery of the product to the customer or at the time of sale or installation.
Revenue from repairs and maintenance service is recognized upon completion of
the service.
Inventory
Inventories are valued at the lower of cost or market under first-in,
first-out method.
Property and equipment
Property and equipment are recorded at cost. Expenditures for maintenance,
repairs and renewals are charged to expense as incurred, whereas major
betterments are capitalized as additions to property and equipment. Equipment
acquired by capitalized lease obligations is stated at the present value of the
future minimum lease payments at the inception of the lease. Depreciation,
including equipment under capitalized lease agreements, is computed over the
estimated useful lives of the assets, which range from five to fifteen years,
using the straight-line method.
Other assets
Intangibles and other assets are stated at cost net of related
amortization, computed on the straight-line method, over five to ten years.
Customer deposits
Customer deposits result from deferred payments made under payment plans
which spread seasonal propane costs over the entire year. In addition, deposits
include amounts held as security, required under certain customer credit
agreements.
Income taxes
The Company retroactively adopted the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, which uses the
liability method of accounting for income taxes. Under the liability method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities. The deferred tax
assets and liabilities are measured using the current tax rates and laws.
F-40
<PAGE> 164
KINGSTON PROPANE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Propane service parts............................... $ 68,359 $ 96,500
Propane............................................. 52,420 27,954
Fuel oil............................................ 13,819 11,790
-------- --------
$134,598 $136,244
======== ========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Equipment......................................... $ 1,985,115 $ 1,942,276
Motor vehicles.................................... 634,721 591,917
Leasehold improvements............................ 170,117 167,770
----------- -----------
2,789,953 2,701,963
Accumulated depreciation.......................... (1,820,947) (1,669,502)
----------- -----------
$ 969,006 $ 1,032,461
=========== ===========
</TABLE>
The Company leases operating equipment under lease agreements which are
classified in capital leases. The leases expire at various intervals through
April, 1997. Leased equipment amounted to approximately $112,000 and $106,000
for 1995 and 1994 respectively. These assets and the related accumulated
depreciation are included above in the property and equipment schedule.
INCOME TAX BENEFIT
For 1995 and 1994, the Company had net operating loss (NOL) carryforwards
of approximately $352,000 and $78,000, respectively, available to offset future
taxable income. The NOL carryforwards begin to expire in 2008.
The income tax benefit includes the following components.
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Current.............................................. $(6,324) $11,738
Deferred............................................. 55,360 (8,160)
------- -------
$49,036 $ 3,578
======= =======
</TABLE>
The significant components of the net deferred income tax liability are as
follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred Tax Liabilities:
Depreciation...................................... $364,555 $314,461
======== ========
Deferred Tax Assets:
Net operating loss carryforwards.................. $352,395 $ 78,464
======== ========
</TABLE>
F-41
<PAGE> 165
KINGSTON PROPANE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Demand note payable to bank, with interest at prime plus
2%......................................................... $ 249,967 $ 360,285
Term note payable to bank, with interest at prime plus 2%,
due in monthly installments of $12,500 until September,
1997....................................................... 350,000 450,000
Term note payable to bank, with interest at prime plus 2%,
due in monthly installments of $5,500 until November,
1997....................................................... 166,700
Term note payable to bank, with interest at prime plus 2%,
due in monthly installments of $1,389 until February,
1998....................................................... 40,972
Term note payable, non-interest bearing, due in monthly
installments of approximately $1,500 until September,
1996....................................................... 27,239 38,342
Installment notes payable, interest ranging from 5% to 11%,
due in monthly installments of approximately $1,700,
maturing in 1996 and 1997. The notes are secured by chattel
mortgages on Company motor vehicles........................ 29,837 47,467
Capitalized lease obligations, with weighted average interest
imputed at 10.3%, with a schedule of minimum lease payments
of approximately $44,000 and $4,000 for 1996 and 1997,
respectively............................................... 46,954 75,133
--------- ---------
911,669 971,227
Less notes and current maturities of long-term debt.......... (635,073) (467,672)
--------- ---------
Long-term debt............................................... $ 276,596 $ 503,555
========= =========
</TABLE>
The schedule maturities for the above notes is as follows:
<TABLE>
<S> <C> <C>
1996 -- $635,073
1997 -- $261,222
1998 -- $ 15,374
</TABLE>
The bank notes referred to above, are secured by substantially all the
assets of the Company, certain real estate owned by the stockholders, the
Company's common stock, and the personal guaranties of the Company's
stockholders. The notes are also subject to a cross-collateral agreement with
respect to certain stockholder real estate mortgages.
Further, the debt agreement contains restrictive covenants including
limitations on substantial disposition of assets, payment of dividends, capital
expenditures and incurrence of additional debt and requires the maintenance of
certain financial ratios.
During 1995, the Company failed to pay certain scheduled payments on its
bank notes. The Bank has advised the Company that this failure constitutes a
default under the Debt Agreement. Subsequent to the balance sheet date, the
Company entered into a forbearance agreement with the Bank. Under the terms of
the agreement, the Bank agrees to forbear in the exercise of its rights and
remedies under the notes and security documents until July 31, 1996. In the
event the Company is able to make payment on the notes on or before July 31,
1996, the Company shall have the right to pay said notes in full by repaying to
the Bank the principal amount of said notes less twenty percent. However, this
discount is contingent on the Company's stockholders paying certain real estate
notes owed to said Bank by the stockholders on or before the earlier of (a)
thirty days from the closing date of the sale (referred to below) or (b) July
31, 1996. The stockholders have received approval from another bank on their
real estate loan request.
F-42
<PAGE> 166
KINGSTON PROPANE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Management stated that the July 31, 1996 date was chosen as the
Stockholders of the Company have a letter-of-intent in place to sell all the
common stock of the Company to another propane distributor. It is the intent of
the Buyer to pay these notes and this should occur prior to July 31, 1996.
In the event that the above sale is not consummated, management will be
required to renegotiate with the Bank or seek a new financing alternative. The
Bank has agreed to give the Company a reasonable grace period to either
renegotiate the note to the Bank's satisfaction or refinance the note.
Management believes that there are sufficient sources of capital available to
refinance this debt.
6. RELATED PARTY TRANSACTIONS
Operating facilities lease
The Company rents its operating facilities from its majority stockholder.
The lease agreement is treated as an operating lease and provides for minimum
annual rental payments of $60,000 through September 30, 2000. Base rent for the
remaining term of the lease will increase approximately 3% per year. The lessee
is responsible for real estate taxes, insurance and other normal occupancy
costs. Rental expense charge to operations during the current year was $61,470
and $60,720 for 1995 and 1994, respectively.
Loan receivable stockholder
The loan receivable stockholder is an unsecured, demand note with interest
at 10%.
Write-off loan to affiliate
Over a number of years the Company loaned approximately $164,000 to an
entity that was related through common ownership. The affiliate was a real
estate management company and due to industry trends prevalent in the New
England area sustained substantial losses and has ceased operations. Management
has deemed the amount uncollectible.
Business combination
During 1994, the Company purchased certain assets of Norwood Propane, Inc.
(Norwood) an entity related through common ownership. The purchase price was
approximately $207,000, which was financed by assuming approximately $105,000 of
Norwood's debt and satisfying approximately $102,000 of a loan receivable from
Norwood which was on the Company's books.
The acquisition has been accounted for by the purchase method of accounting
and, accordingly, the purchase price has been allocated to assets acquired and
liabilities assumed based on the fair market values at the date of the
acquisition.
The results of operations of the acquired entity has been included in the
Company's financial statements from the date of acquisition.
7. COMMITMENTS AND CONTINGENCIES
Environmental Issues
Under Federal and State environmental laws, the Company is generally liable
for the cost of remediating environmental contamination of property contaminated
by hazardous substance used and stored by the Company. The Company leases a
number of real estate parcels, including parcels on which its operations or the
operations of others may have resulted in contamination by substances considered
hazardous under environmental laws.
F-43
<PAGE> 167
KINGSTON PROPANE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has identified two events where fuel oil has spilled. The
second of these events occurred subsequent to the balance sheet date. This spill
occurred during a refilling of oil by an unrelated Company. Although management
feels the clean up was quick and successful, the Company is presently performing
an evaluation to determine the existence and nature of any remaining
contamination and the necessary and possible methods of remediation, and
implementation of remediation.
Further, in 1985, the Company identified a fuel tank leak where hazardous
fuel oil was deposited and was, under Massachusetts General Laws Subchapter 21E
(21E), a reportable event. Methods of remediation were implemented and the
Company reports a steady decrease in the contamination since 1985. However, the
site still remains on the 21E List. The cost of monitoring and filtering this
site is approximately $3,000 per year. The Company considers this an
insignificant cost.
The Company cannot currently predict whether it will incur significant
liabilities for additional investigation and remediation costs at sites
identified by the Company, environmental agencies or others. As such, the
Company has not accrued for environmental remediation.
Litigation
The Company is a part to various legal proceedings incidental to its
business. Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company. In the opinion of
management, all such matters are covered by insurance, are without merit, or
involve amounts which, if resolved unfavorably, would not have a significant
effect on the financial position or results of operations of the Company.
Purchases
The Company has entered into several purchase and supply commitments for
the next fiscal year with varying terms as to quantities and prices.
8. COMMON STOCK
The common stock is restricted as to transfer. The Company has the right of
first refusal on any sale of its stock.
9. MITIGATION AGREEMENT
The Massachusetts Bay Transportation Authority, a political subdivision of
the Commonwealth of Massachusetts (the MBTA), has begun a railroad
rehabilitation project. The Company operates a propane distribution plant that
receives rail shipments using a rail siding located within the project zone.
For the duration of the construction period, the Company's use of the rail
siding has been suspended. This has forced the Company to receive propane
shipments via truck. The MBTA has entered into a mitigation agreement with the
Company and has agreed to reimburse the Company for additional costs. The
agreement restricts the gallonage to be reimbursed to no more than 1,200,000
gallons per year and for an amount not to exceed $240,000, through the earlier
of December, 1997 or the date the MBTA permits rail shipments within the project
zone or when the MBTA provides the Company with an alternative rail siding.
F-44
<PAGE> 168
APPENDIX A
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
HERITAGE PROPANE PARTNERS, L.P.
<PAGE> 169
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
<TABLE>
<S> <C> <C>
1.1 Definitions.................................................................... A-1
1.2 Construction................................................................... A-13
ARTICLE II
ORGANIZATION
2.1 Formation...................................................................... A-14
2.2 Name........................................................................... A-14
2.3 Registered Office; Registered Agent; Principal Office; Other Offices........... A-14
2.4 Purpose and Business........................................................... A-14
2.5 Powers......................................................................... A-15
2.6 Power of Attorney.............................................................. A-15
2.7 Term........................................................................... A-16
2.8 Title to Partnership Assets.................................................... A-16
ARTICLE III
RIGHTS OF LIMITED PARTNERS
3.1 Limitation of Liability........................................................ A-17
3.2 Management of Business......................................................... A-17
3.3 Outside Activities of the Limited Partners..................................... A-17
3.4 Rights of Limited Partners..................................................... A-17
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF
PARTNERSHIP INTERESTS; REDEMPTION OF
PARTNERSHIP INTERESTS
4.1 Certificates................................................................... A-18
4.2 Mutilated, Destroyed, Lost or Stolen Certificates.............................. A-18
4.3 Record Holders................................................................. A-19
4.4 Transfer Generally............................................................. A-19
4.5 Registration and Transfer of Units............................................. A-19
4.6 Transfer of a General Partner's General Partner Interest....................... A-20
4.7 Intentionally Deleted.......................................................... A-20
4.8 Transfer of Incentive Distribution Rights...................................... A-20
4.9 Restrictions on Transfers...................................................... A-21
4.10 Citizenship Certificates; Non-citizen Assignees................................ A-21
4.11 Redemption of Partnership Interests of Non-citizen Assignees................... A-22
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF
PARTNERSHIP INTERESTS
5.1 Organizational Contributions................................................... A-23
5.2 Contributions by General Partner............................................... A-23
5.3 Contributions by Initial Limited Partners...................................... A-23
5.4 Interest and Withdrawal........................................................ A-24
5.5 Capital Accounts............................................................... A-24
5.6 Issuances of Additional Partnership Securities................................. A-26
5.7 Limitations on Issuance of Additional Partnership Securities................... A-27
5.8 Conversion of Subordinated Units............................................... A-28
</TABLE>
A-i
<PAGE> 170
<TABLE>
<S> <C> <C>
5.9 Limited Preemptive Right....................................................... A-29
5.10 Splits and Combination......................................................... A-29
5.11 Fully Paid and Non-Assessable Nature of Limited Partner Partnership
Interests...................................................................... A-30
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
6.1 Allocations for Capital Account Purpose........................................ A-30
6.2 Allocations for Tax Purpose.................................................... A-35
6.3 Requirement and Characterization of Distributions; Distributions to Record
Holders........................................................................ A-37
6.4 Distributions of Available Cash from Operating Surplus......................... A-37
6.5 Distributions of Available Cash from Capital Surplus........................... A-39
6.6 Adjustment of Minimum Quarterly Distribution and Target Distribution Levels.... A-39
6.7 Special Provisions Relating to the Holders of Subordinated Units............... A-39
6.8 Special Provisions Relating to the Holders of Incentive Distribution Rights.... A-40
6.9 Entity-Level Taxation.......................................................... A-40
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
7.1 Management..................................................................... A-40
7.2 Certificate of Limited Partnership............................................. A-42
7.3 Restrictions on General Partner's Authority.................................... A-42
7.4 Reimbursement of the General Partner........................................... A-43
7.5 Outside Activities............................................................. A-44
7.6 Loans from the General Partner; Loans or Contributions from the Partnership;
Contracts with Affiliates; Certain Restrictions on the General Partner......... A-44
7.7 Indemnification................................................................ A-45
7.8 Liability of Indemnitees....................................................... A-47
7.9 Resolution of Conflicts of Interest............................................ A-47
7.10 Other Matters Concerning the General Partner................................... A-48
7.11 Intentionally Deleted.......................................................... A-49
7.12 Purchase or Sale of Units...................................................... A-49
7.13 Registration Rights of the General Partner and its Affiliates.................. A-49
7.14 Reliance by Third Parties...................................................... A-50
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
8.1 Records and Accounting......................................................... A-51
8.2 Fiscal Year.................................................................... A-51
8.3 Reports........................................................................ A-51
ARTICLE IX
TAX MATTERS
9.1 Tax Returns and Information.................................................... A-52
9.2 Tax Elections.................................................................. A-52
9.3 Tax Controversies.............................................................. A-52
9.4 Withholding.................................................................... A-52
ARTICLE X
ADMISSION OF PARTNERS
10.1 Admission of Initial Limited Partners.......................................... A-53
10.2 Admission of Substituted Limited Partner....................................... A-53
10.3 Admission of Successor General Partner......................................... A-53
</TABLE>
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10.4 Admission of Additional Limited Partners....................................... A-53
10.5 Amendment of Agreement and Certificate of Limited Partnership.................. A-54
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
11.1 Withdrawal of the General Partner.............................................. A-54
11.2 Removal of the General Partner................................................. A-55
11.3 Interest of Departing Partner and Successor General Partner.................... A-55
11.4 Termination of Subordination Period, Conversion of Subordinated Units and
Extinguishment of Cumulative Common Unit Arrearages............................ A-57
11.5 Withdrawal of Limited Partners................................................. A-57
ARTICLE XII
DISSOLUTION AND LIQUIDATION
12.1 Dissolution.................................................................... A-57
12.2 Continuation of the Business of the Partnership After Dissolution.............. A-57
12.3 Liquidator..................................................................... A-58
12.4 Liquidation.................................................................... A-58
12.5 Cancellation of Certificate of Limited Partnership............................. A-59
12.6 Return of Contributions........................................................ A-59
12.7 Waiver of Partition............................................................ A-59
12.8 Capital Account Restoration.................................................... A-59
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT;
MEETINGS; RECORD DATE
13.1 Amendment to be Adopted Solely by the General Partner.......................... A-59
13.2 Amendment Procedures........................................................... A-61
13.3 Amendment Requirements......................................................... A-61
13.4 Special Meetings............................................................... A-61
13.5 Notice of a Meeting............................................................ A-62
13.6 Record Date.................................................................... A-62
13.7 Adjournment.................................................................... A-62
13.8 Waiver of Notice; Approval of Meeting; Approval of Minutes..................... A-62
13.9 Quorum......................................................................... A-62
13.10 Conduct of a Meeting........................................................... A-63
13.11 Action Without a Meeting....................................................... A-63
13.12 Voting and Other Rights........................................................ A-63
ARTICLE XIV
MERGER
14.1 Authority...................................................................... A-64
14.2 Procedure for Merger or Consolidation.......................................... A-64
14.3 Approval by Unitholders of Merger or Consolidation............................. A-65
14.4 Certificate of Merger.......................................................... A-65
14.5 Effect of Merger............................................................... A-65
ARTICLE XV
RIGHT TO ACQUIRE UNITS
15.1 Right to Acquire Limited Partner Interests..................................... A-66
</TABLE>
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ARTICLE XVI
GENERAL PROVISIONS
16.1 Addresses and Notices.......................................................... A-67
16.2 Further Action................................................................. A-68
16.3 Binding Effect................................................................. A-68
16.4 Integration.................................................................... A-68
16.5 Creditors...................................................................... A-68
16.6 Waiver......................................................................... A-68
16.7 Counterparts................................................................... A-68
16.8 Applicable Law................................................................. A-68
16.9 Invalidity of Provisions....................................................... A-68
16.10 Consent of Partners............................................................ A-69
</TABLE>
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AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF
HERITAGE PROPANE PARTNERS, L.P.
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF HERITAGE
PROPANE PARTNERS, L.P. dated as of , 1996, is entered into by and
among Heritage Holdings, Inc., a Delaware corporation, as the General Partner,
and James E. Bertelsmeyer, as the Organizational Limited Partner, together with
any other Persons who become Partners in the Partnership or parties hereto as
provided herein. In consideration of the covenants, conditions and agreements
contained herein, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"Acquisition" means any transaction in which any Group Member acquires
(through an asset acquisition, merger, stock acquisition or other form of
investment) control over all or a portion of the assets, properties or business
of another Person for the purpose of increasing the operating capacity or
revenues of the Partnership Group from the operating capacity or revenues of the
Partnership Group existing immediately prior to such transaction.
"Additional Book Basis" means the portion of any remaining Carrying Value
of an Adjusted Property that is attributable to positive adjustments made to
such Carrying Value as a result of Book-Up Events. For purposes of determining
the extent to which Carrying Value constitutes Additional Book Basis:
(i) Any negative adjustment made to the Carrying Value of an Adjusted
Property as a result of either a Book-Down Event or a Book-Up Event shall
first be deemed to offset or decrease that portion of the Carrying Value of
such Adjusted Property that is attributable to any prior positive
adjustments made thereto pursuant to a Book-Up Event or Book-Down Event.
(ii) If Carrying Value that constitutes Additional Book Basis is
reduced as a result of a Book-Down Event and the Carrying Value of other
property is increased as a result of such Book-Down Event, an allocable
portion of any such increase in Carrying Value shall be treated as
Additional Book Basis; provided that the amount treated as Additional Book
Basis pursuant hereto as a result of such Book-Down Event shall not exceed
the amount by which the Aggregate Remaining Net Positive Adjustments after
such Book-Down Event exceeds the remaining Additional Book Basis
attributable to all of the Partnership's Adjusted Property after such
Book-Down Event (determined without regard to the application of this
clause (ii) to such Book-Down Event).
"Additional Book Basis Derivative Items" means any Book Basis Derivative
Items that are computed with reference to Additional Book Basis. To the extent
that the Additional Book Basis attributable to all of the Partnership's Adjusted
Property as of the beginning of any taxable period exceeds the Aggregate
Remaining Net Positive Adjustments as of the beginning of such period (the
"Excess Additional Book Basis"), the Additional Book Basis Derivative Items for
such period shall be reduced by the amount that bears the same ratio to the
amount of Additional Book Basis Derivative Items determined without regard to
this sentence as the Excess Additional Book Basis bears to the Additional Book
Basis as of the beginning of such period.
"Additional Limited Partner" means a Person admitted to the Partnership as
a Limited Partner pursuant to Section 10.4 and who is shown as such on the books
and records of the Partnership.
"Adjusted Capital Account" means the Capital Account maintained for each
Partner as of the end of each fiscal year of the Partnership, (a) increased by
any amounts that such Partner is obligated to restore
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under the standards set by Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or
is deemed obligated to restore under Treasury Regulation Sections 1.704-2(g) and
1.704-2(i)(5)) and (b) decreased by (i) the amount of all losses and deductions
that, as of the end of such fiscal year, are reasonably expected to be allocated
to such Partner in subsequent years under Sections 704(e)(2) and 706(d) of the
Code and Treasury Regulation Section 1.751-1(b)(2)(ii), and (ii) the amount of
all distributions that, as of the end of such fiscal year, are reasonably
expected to be made to such Partner in subsequent years in accordance with the
terms of this Agreement or otherwise to the extent they exceed offsetting
increases to such Partner's Capital Account that are reasonably expected to
occur during (or prior to) the year in which such distributions are reasonably
expected to be made (other than increases as a result of a minimum gain
chargeback pursuant to Section 6.1(d)(i) or 6.1(d)(ii)). The foregoing
definition of Adjusted Capital Account is intended to comply with the provisions
of Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted
consistently therewith. The "Adjusted Capital Account" of a Partner in respect
of a general partner interest, a Common Unit, a Subordinated Unit or an
Incentive Distribution Right or any other specified interest in the Partnership
shall be the amount which such Adjusted Capital Account would be if such general
partner interest, Common Unit, Subordinated Unit, Incentive Distribution Right
or other interest in the Partnership were the only interest in the Partnership
held by a Partner from and after the date on which such general partner
interest, Common Unit, Subordinated Unit, Incentive Distribution Right or other
interest was first issued.
"Adjusted Operating Surplus" means, with respect to any period, Operating
Surplus generated during such period (a) less (i) any net increase in working
capital borrowings during such period and (ii) any net reduction in cash
reserves for Operating Expenditures during such period not relating to an
Operating Expenditure made during such period, and (b) plus (i) any net decrease
in working capital borrowings during such period and (ii) any net increase in
cash reserves for Operating Expenditures during such period required by any debt
instrument for the repayment of principal, interest or premium. Adjusted
Operating Surplus does not include that portion of Operating Surplus included in
clause (a)(i) of the definition of Operating Surplus.
"Adjusted Property" means any property the Carrying Value of which has been
adjusted pursuant to Section 5.5(d)(i) or 5.5(d)(ii). Once an Adjusted Property
is deemed distributed by, and recontributed to, the Partnership for federal
income tax purposes upon a termination thereof pursuant to Section 708 of the
Code, such property shall thereafter constitute a Contributed Property until the
Carrying Value of such property is subsequently adjusted pursuant to Section
5.5(d)(i) or 5.5(d)(ii).
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly through one or more intermediaries controls, is
controlled by or is under common control with, the Person in question. As used
herein, the term "control" means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
Person, whether through ownership of voting securities, by contract or
otherwise.
"Aggregate Remaining Net Positive Adjustments" means, as of the end of any
taxable period, the sum of the Remaining Net Positive Adjustments of all the
Partners.
"Agreed Allocation" means any allocation, other than a Required Allocation,
of an item of income, gain, loss or deduction pursuant to the provisions of
Section 6.1, including, without limitation, a Curative Allocation (if
appropriate to the context in which the term "Agreed Allocation" is used).
"Agreed Value" of any Contributed Property means the fair market value of
such property or other consideration at the time of contribution as determined
by the General Partner using such reasonable method of valuation as it may
adopt; provided, however, that the Agreed Value of any property deemed
contributed to the Partnership for federal income tax purposes upon termination
and reconstitution thereof pursuant to Section 708 of the Code shall be
determined in accordance with Section 5.5(c)(i). Subject to Section 5.5(c)(i),
the General Partner shall, in its discretion, use such method as it deems
reasonable and appropriate to allocate the aggregate Agreed Value of Contributed
Properties contributed to the Partnership in a single or integrated transaction
among each separate property on a basis proportional to the fair market value of
each Contributed Property.
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"Agreement" means this Amended and Restated Agreement of Limited
Partnership of Heritage Propane Partners, L.P., as it may be amended,
supplemented or restated from time to time.
"Assignee" means a Non-citizen Assignee or a Person to whom one or more
Units have been transferred in a manner permitted under this Agreement and who
has executed and delivered a Transfer Application as required by this Agreement,
but who has not been admitted as a Substituted Limited Partner.
"Associate" means, when used to indicate a relationship with any Person,
(a) any corporation or organization of which such Person is a director, officer
or partner or is, directly or indirectly, the owner of 20% or more of any class
of voting stock or other voting interest; (b) any trust or other estate in which
such Person has at least a 20% beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity; and (c) any relative or
spouse of such Person, or any relative of such spouse, who has the same
principal residence as such Person.
"Audit Committee" means a committee of the Board of Directors of the
General Partner composed entirely of two or more directors who are neither
officers nor employees of the General Partner or officers, directors or
employees of any Affiliate of the General Partner.
"Available Cash," means, with respect to any Quarter ending prior to the
Liquidation Date,
(a) the sum of (i) all cash and cash equivalents of the Partnership
Group on hand at the end of such Quarter, and (ii) all additional cash and
cash equivalents of the Partnership Group on hand on the date of
determination of Available Cash with respect to such Quarter resulting from
borrowings for working capital purposes made subsequent to the end of such
Quarter, less
(b) the amount of any cash reserves that is necessary or appropriate
in the reasonable discretion of the General Partner to (i) provide for the
proper conduct of the business of the Partnership Group (including reserves
for future capital expenditures) subsequent to such Quarter, (ii) comply
with applicable law or any loan agreement, security agreement, mortgage,
debt instrument or other agreement or obligation to which any member of the
Partnership Group is a party or by which it is bound or its assets are
subject or (iii) provide funds for distributions under Section 6.4 or 6.5
in respect of any one or more of the next four Quarters; provided, however,
that the General Partner may not establish cash reserves pursuant to (iii)
above if the effect of such reserves would be that the Partnership is
unable to distribute the Minimum Quarterly Distribution on all Common Units
with respect to such Quarter; and, provided further, that disbursements
made by a Group Member or cash reserves established, increased or reduced
after the end of such Quarter but on or before the date of determination of
Available Cash with respect to such Quarter shall be deemed to have been
made, established, increased or reduced, for purposes of determining
Available Cash, within such Quarter if the General Partner so determines.
Notwithstanding the foregoing, "Available Cash" with respect to the Quarter
in which the Liquidation Date occurs and any subsequent Quarter shall equal
zero.
"Book Basis Derivative Items" means any item of income, deduction, gain, or
loss included in the determination of Net Income or Net Loss that is computed
with reference to the Carrying Value of an Adjusted Property (e.g.,
depreciation, depletion, or gain or loss with respect to an Adjusted Property).
"Book-Down Event" means an event which triggers a negative adjustment to
the Capital Accounts of the Partners pursuant to Section 5.5(d).
"Book-Up Event" means an event which triggers a positive adjustment to the
Capital Accounts of the Partners pursuant to Section 5.5(d).
"Book-Tax Disparity" means with respect to any item of Contributed Property
or Adjusted Property, as of the date of any determination, the difference
between the Carrying Value of such Contributed Property or Adjusted Property and
the adjusted basis thereof for federal income tax purposes as of such date. A
Partner's share of the Partnership's Book-Tax Disparities in all of its
Contributed Property and Adjusted Property will be reflected by the difference
between such Partner's Capital Account balance as maintained pursuant to
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Section 5.5 and the hypothetical balance of such Partner's Capital Account
computed as if it had been maintained strictly in accordance with federal income
tax accounting principles.
"Business Day" means Monday through Friday of each week, except that a
legal holiday recognized as such by the government of the United States of
America or the states of New York or Oklahoma shall not be regarded as a
Business Day.
"Calendar Year Taxpayer" means a taxpayer whose taxable year for federal
income purposes ends on December 31.
"Capital Account" means the capital account maintained for a Partner
pursuant to Section 5.5. The "Capital Account" of a Partner in respect of a
general partner interest, a Common Unit, a Subordinated Unit, an Incentive
Distribution Right or any other Partnership Interest shall be the amount which
such Capital Account would be if such general partner interest, Common Unit,
Subordinated Unit, Incentive Distribution Right, or other Partnership Interest
were the only interest in the Partnership held by a Partner from and after the
date on which such general partner interest, Common Unit, Subordinated Unit,
Incentive Distribution Right or other Partnership Interest was first issued.
"Capital Contribution" means any cash, cash equivalents or the Net Agreed
Value of Contributed Property that a Partner contributes to the Partnership
pursuant to this Agreement.
"Capital Improvements" means (a) additions or improvements to the capital
assets owned by any Group Member or (b) the acquisition of existing or the
construction of new capital assets (including retail distribution outlets,
propane tanks, pipeline systems, storage facilities, appliance showrooms,
training facilities and related assets), made to increase the operating capacity
of the Partnership Group from the operating capacity of the Partnership Group
existing immediately prior to such addition, improvement, acquisition or
construction.
"Capital Surplus" has the meaning assigned to such term in Section 6.3(a).
"Carrying Value" means (a) with respect to a Contributed Property, the
Agreed Value of such property reduced (but not below zero) by all depreciation,
amortization and cost recovery deductions charged to the Partners' and
Assignees' Capital Accounts in respect of such Contributed Property, and (b)
with respect to any other Partnership property, the adjusted basis of such
property for federal income tax purposes, all as of the time of determination.
The Carrying Value of any property shall be adjusted from time to time in
accordance with Sections 5.5(d)(i) and 5.5(d)(ii) and to reflect changes,
additions or other adjustments to the Carrying Value for dispositions and
acquisitions of Partnership properties, as deemed appropriate by the General
Partner.
"Cause" means a court of competent jurisdiction has entered a final,
non-appealable judgment finding the General Partner liable for actual fraud,
gross negligence or willful or wanton misconduct in its capacity as general
partner of the Partnership.
"Certificate" means a certificate, substantially in the form of Exhibit A
to this Agreement or in such other form as may be adopted by the General Partner
in its discretion, issued by the Partnership evidencing ownership of one or more
Common Units or a certificate, in such form as may be adopted by the General
Partner in its discretion, issued by the Partnership evidencing ownership of one
or more other Partnership Interests.
"Certificate of Limited Partnership" means the Certificate of Limited
Partnership of the Partnership filed with the Secretary of State of the State of
Delaware as referenced in Section 2.1, as such Certificate of Limited
Partnership may be amended, supplemented or restated from time to time.
"Citizenship Certification" means a properly completed certificate in such
form as may be specified by the General Partner by which an Assignee or a
Limited Partner certifies that he (and if he is a nominee holding for the
account of another Person, that to the best of his knowledge such other Person)
is an Eligible Citizen.
"claim" has the meaning assigned to such term in Section 7.19(c).
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"Closing Date" means the first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement.
"Closing Price" has the meaning assigned to such term in Section 15.1(a).
"Code" means the Internal Revenue Code of 1986, as amended and in effect
from time to time. Any reference herein to a specific section or sections of the
Code shall be deemed to include a reference to any corresponding provision of
future law.
"Combined Interest" has the meaning assigned to such term in Section
11.3(a).
"Commission" means the United States Securities and Exchange Commission.
"Common Unit" means a Unit representing a fractional part of the
Partnership Interests of all Limited Partners and Assignees and of the General
Partner (exclusive of its interest as holder of the general partner interest and
the Incentive Distribution Rights) and having the rights and obligations
specified with respect to Common Units in this Agreement. The term "Common Unit"
does not refer to a Subordinated Unit prior to its conversion into Common Unit
pursuant to the terms hereof.
"Common Unit Arrearage" means, with respect to any Common Unit, whenever
issued, as to any Quarter within the Subordination Period, the excess, if any,
of (a) the Minimum Quarterly Distribution with respect to such Common Unit in
respect of such Quarter over (b) the sum of all Available Cash distributed with
respect to such Common Unit in respect of such Quarter pursuant to Section
6.4(a)(i).
"Contributed Property" means each property or other asset, in such form as
may be permitted by the Delaware Act, but excluding cash, contributed to the
Partnership (or deemed contributed to the Partnership on termination and
reconstitution thereof pursuant to Section 708 of the Code). Once the Carrying
Value of a Contributed Property is adjusted pursuant to Section 5.5(d), such
property shall no longer constitute a Contributed Property, but shall be deemed
an Adjusted Property.
"Contribution and Conveyance Agreement" means that certain Contribution,
Conveyance and Assumption Agreement, dated as of the Closing Date, among the
General Partner, the Partnership, the Operating Partnership and certain other
parties, together with the additional conveyance documents and instruments
contemplated or referenced thereunder.
"Cumulative Common Unit Arrearage" means, with respect to any Common Unit,
whenever issued, and as of the end of any Quarter, the excess, if any, of (a)
the sum resulting from adding together the Common Unit Arrearage as to an
Initial Common Unit for each of the Quarters within the Subordination Period
ending on or before the last day of such Quarter over (b) the sum of any
distributions theretofore made pursuant to Section 6.4(a)(ii) and the second
sentence of Section 6.5 with respect to an Initial Common Unit (including any
distributions to be made in respect of the last of such Quarters).
"Curative Allocation" means any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 6.1(d)(xi).
"Current Market Price" has the meaning assigned to such term in Section
15.1(a).
"Delaware Act" means the Delaware Revised Uniform Limited Partnership Act,
6 Del C. sec.17-101, et seq., as amended, supplemented or restated from time to
time, and any successor to such statute.
"Departing Partner" means a former General Partner from and after the
effective date of any withdrawal or removal of such former General Partner
pursuant to Section 11.1 or 11.2.
"Economic Risk of Loss" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
"Eligible Citizen" means a Person qualified to own interests in real
property in jurisdictions in which any Group Member does business or proposes to
do business from time to time, and whose status as a Limited Partner or Assignee
does not or would not subject such Group Member to a significant risk of
cancellation or forfeiture of any of its properties or any interest therein.
"Event of Withdrawal" has the meaning assigned to such term in Section
11.1(a).
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"Final Subordinated Units" has the meaning assigned to such term in Section
6.1(d)(x).
"First Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(D).
"First Target Distribution" means $0.55 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on August 31,
1996, it means the product of $0.55 multiplied by a fraction of which the
numerator is the number of days in such period, and of which the denominator is
92), subject to adjustment in accordance with Sections 6.6 and 6.9.
"General Partner" means Heritage Holdings, Inc. and its successors and
permitted assigns as general partner of the Partnership.
"Group" means a Person that with or through any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent solicitation made
to 10 or more Persons) or disposing of any Partnership Securities with any other
Person that beneficially owns, or whose Affiliates or Associates beneficially
own, directly or indirectly, Partnership Securities.
"Group Member" means a member of the Partnership Group.
"Heritage" means Heritage Holdings, Inc., a Delaware corporation, which is
currently the General Partner of the Partnership.
"Holder" as used in Section 7.13, has the meaning assigned to such term in
Section 7.13(a).
"Incentive Distributions" means any amount of cash distributed to the
holders of the Incentive Distribution Rights pursuant to Sections 6.4(a)(v),
(vi) and (vii) and 6.4(b)(iii), (iv) and (v).
"Incentive Distribution Right" means a non-voting limited partner
Partnership Interest issued to the General Partner in connection with the
transfer of its assets to the Partnership pursuant to Section 5.2, which
Partnership Interest shall confer upon the holder thereof only the rights and
obligations specifically provided in this Agreement with respect to Incentive
Distribution Rights (and no other rights otherwise available to or other
obligations of holders of a Partnership Interest).
"Indemnified Persons" has the meaning assigned to such term in Section
7.13(c).
"Indemnitee" means (a) the General Partner, any Departing Partner and any
Person who is or was an Affiliate of the General Partner or any Departing
Partner, (b) any Person who is or was a director, officer, employee, agent or
trustee of the Partnership, the Operating Partnership or any other Subsidiary,
(c) any Person who is or was an officer, director, employee, agent or trustee of
the General Partner or any Departing Partner or any such Affiliate, (d) any
Person who is or was serving at the request of the General Partner or any
Departing Partner or any such Affiliate as a director, officer, employee,
partner, agent, fiduciary or trustee of another Person; provided, that a Person
shall not be an Indemnitee by reason of providing, on a fee-for-services basis,
trustee, fiduciary or custodial services.
"Initial Common Units" means the Common Units sold in the Initial Offering.
"Initial Limited Partners" means the General Partner (with respect to the
Subordinated Units and the Incentive Distribution Rights received by it pursuant
to Section 5.2) and the Underwriters, in each case upon being admitted to the
Partnership in accordance with Section 10.1.
"Initial Offering" means the initial offering and sale of Common Units to
the public, as described in the Registration Statement.
"Initial Unit Price" means (a) with respect to the Common Units and the
Subordinated Units, the initial public offering price per Common Unit at which
the Underwriters offered the Common Units to the public for sale as set forth on
the cover page of the prospectus included as part of the Registration Statement
and first issued at or after the time the Registration Statement first became
effective or (b) with respect to any other class or series of Units, the price
per Unit at which such class or series of Units is initially sold by the
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Partnership, as determined by the General Partner, in each case adjusted as the
General Partner determines to be appropriate to give effect to any distribution,
subdivision or combination of Units.
"Interim Capital Transactions" means the following transactions if they
occur prior to the Liquidation Date: (a) borrowings, refinancings or refundings
of indebtedness and sales of debt securities (other than for working capital
purposes and other than for items purchased on open account in the ordinary
course of business) by any Group Member; (b) sales of equity interests by any
Group Member (including Initial Common Units sold to the Underwriters pursuant
to the exercise of the Over-allotment Option); and (c) sales or other voluntary
or involuntary dispositions of any assets of any Group Member other than (x)
sales or other dispositions of inventory in the ordinary course of business, (y)
sales or other dispositions of other current assets, including receivables and
accounts in the ordinary course of business, and (z) sales or other dispositions
of assets as part of normal retirements or replacements.
"Issue Price" means the price at which a Unit is purchased from the
Partnership, after taking into account any sales commission or underwriting
discount charged to the Partnership.
"Limited Partner" means, unless the context otherwise requires, (a) the
Organizational Limited Partner, each Initial Limited Partner, each Substituted
Limited Partner, each Additional Limited Partner, any Partner upon the change of
its status from General Partner to Limited Partner pursuant to Section 11.3 or
(b) solely for purposes of Articles V, VI, VII and IX and Sections 12.3 and
12.4, each Assignee.
"Liquidation Date" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in clauses (a) and (b) of
the first sentence of Section 12.2, the date on which the applicable time period
during which the holders of Outstanding Units have the right to elect to
reconstitute the Partnership and continue its business has expired without such
an election being made, and (b) in the case of any other event giving rise to
the dissolution of the Partnership, the date on which such event occurs.
"Liquidator" means one or more Persons selected by the General Partner to
perform the functions described in Section 12.3.
"Merger Agreement" has the meaning assigned to such term in Section 14.1.
"Minimum Quarterly Distribution" means $0.50 per Unit per Quarter (or with
respect to the period commencing on the Closing Date and ending on August 31,
1996, it means the product of $0.50 multiplied by a fraction of which the
numerator is the number of days in such period and of which the denominator is
92), subject to adjustment in accordance with Sections 6.6 and 6.9.
"National Securities Exchange" means an exchange registered with the
Commission under Section 6(a) of the Securities Exchange Act of 1934, as
amended, supplemented or restated from time to time, and any successor to such
statute, or the Nasdaq Stock Market or any successor thereto.
"Net Agreed Value" means, (a) in the case of any Contributed Property, the
Agreed Value of such property reduced by any liabilities either assumed by the
Partnership upon such contribution or to which such property is subject when
contributed, and (b) in the case of any property distributed to a Partner or
Assignee by the Partnership, the Partnership's Carrying Value of such property
(as adjusted pursuant to Section 5.5(d)(ii)) at the time such property is
distributed, reduced by any indebtedness either assumed by such Partner or
Assignee upon such distribution or to which such property is subject at the time
of distribution, in either case, as determined under Section 752 of the Code.
"Net Income" means, for any taxable year, the excess, if any, of the
Partnership's items of income and gain (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of loss and deduction (other than
those items taken into account in the computation of Net Termination Gain or Net
Termination Loss) for such taxable year. The items included in the calculation
of Net Income shall be determined in accordance with Section 5.5(b) and shall
not include any items specially allocated under Section 6.1(d); provided that
the determination of the items that have been specially allocated under Section
6.1(d) shall be made as if Section 6.1(d)(xii) were not in this Agreement.
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"Net Loss" means, for any taxable year, the excess, if any, of the
Partnership's items of loss and deduction (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of income and gain (other than
those items taken into account in the computation of Net Termination Gain or Net
Termination Loss) for such taxable year. The items included in the calculation
of Net Loss shall be determined in accordance with Section 5.5(b) and shall not
include any items specially allocated under Section 6.1(d); provided that the
determination of the items that have been specially allocated under Section
6.1(d) shall be made as if Section 6.1(d)(xii) were not in this Agreement.
"Net Positive Adjustments" means, with respect to any Partner, the excess,
if any, of the total positive adjustments over the total negative adjustments
made to the Capital Account of such Partner pursuant to Book-Up Events and
Book-Down Events.
"Net Termination Gain" means, for any taxable year, the sum, if positive,
of all items of income, gain, loss or deduction recognized by the Partnership
after the Liquidation Date. The items included in the determination of Net
Termination Gain shall be determined in accordance with Section 5.5(b) and shall
not include any items of income, gain or loss specially allocated under Section
6.1(d).
"Net Termination Loss" means, for any taxable year, the sum, if negative,
of all items of income, gain, loss or deduction recognized by the Partnership
after the Liquidation Date. The items included in the determination of Net
Termination Loss shall be determined in accordance with Section 5.5(b) and shall
not include any items of income, gain or loss specially allocated under Section
6.1(d).
"Non-citizen Assignee" means a Person whom the General Partner has
determined in its discretion does not constitute an Eligible Citizen and as to
whose Partnership Interest the General Partner has become the Substituted
Limited Partner, pursuant to Section 4.10.
"Nonrecourse Built-in Gain" means with respect to any Contributed
Properties or Adjusted Properties that are subject to a mortgage or pledge
securing a Nonrecourse Liability, the amount of any taxable gain that would be
allocated to the Partners pursuant to Sections 6.2(b)(i)(A), 6.2(b)(ii)(A) and
6.2(b)(iii) if such properties were disposed of in a taxable transaction in full
satisfaction of such liabilities and for no other consideration.
"Nonrecourse Deductions" means any and all items of loss, deduction or
expenditures (described in Section 705(a)(2)(B) of the Code) that, in accordance
with the principles of Treasury Regulation Section 1.704-2(b), are attributable
to a Nonrecourse Liability.
"Nonrecourse Liability" has the meaning set forth in Treasury Regulation
Section 1.752-1(a)(2).
"Notes" means the $120 million of Senior Secured Notes issued by Heritage
and assumed by the Operating Partnership in conjunction with the Initial
Offering.
"Notice of Election to Purchase" has the meaning assigned to such term in
Section 15.1(b) hereof.
"Operating Expenditures" means all Partnership Group expenditures,
including, but not limited to, taxes, reimbursements of the General Partner,
debt service payments, and capital expenditures, subject to the following:
(a) Payments (including prepayments) of principal of and premium on
indebtedness shall not be an Operating Expenditure if the payment is (i)
required in connection with the sale or other disposition of assets or (ii)
made in connection with the refinancing or refunding of indebtedness with
the proceeds from new indebtedness or from the sale of equity interests.
For purposes of the foregoing, at the election and in the reasonable
discretion of the General Partner, any payment of principal or premium
shall be deemed to be refunded or refinanced by any indebtedness incurred
or to be incurred by the Partnership Group within 180 days before or after
such payment to the extent of the principal amount of such indebtedness.
(b) Operating Expenditures shall not include (i) capital expenditures
made for Acquisitions or for Capital Improvements, (ii) payment of
transaction expenses relating to Interim Capital Transactions or
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(iii) distributions to Partners. Where capital expenditures are made in
part for Acquisitions or for Capital Improvements and in part for other
purposes, the General Partner's good faith allocation between the amounts
paid for each shall be conclusive.
"Operating Partnership" means Heritage Operating L.P., a Delaware limited
partnership, and any successors thereto.
"Operating Partnership Agreement" means the Amended and Restated Agreement
of Limited Partnership of the Operating Partnership, as it may be amended,
supplemented or restated from time to time.
"Operating Surplus," means, with respect to any period ending prior to the
Liquidation Date, on a cumulative basis and without duplication,
(a) the sum of (i) $10 million plus all cash and cash equivalents of
the Partnership Group on hand as of the close of business on the Closing
Date, (ii) all cash receipts of the Partnership Group for the period
beginning on the Closing Date and ending with the last day of such period,
other than cash receipts from Interim Capital Transactions (except to the
extent specified in Section 6.5) and (iii) all cash receipts of the
Partnership Group after the end of such period but on or before the date of
determination of Operating Surplus with respect to such period resulting
from borrowings for working capital purposes, less
(b) the sum of (i) Operating Expenditures for the period beginning on
the Closing Date and ending with the last day of such period and (ii) the
amount of cash reserves that is necessary or advisable in the reasonable
discretion of the General Partner to provide funds for future Operating
Expenditures, provided, however, that disbursements made (including
contributions to a Group Member or disbursements on behalf of a Group
Member) or cash reserves established, increased or reduced after the end of
such period but on or before the date of determination of Available Cash
with respect to such period shall be deemed to have been made, established,
increased or reduced for purposes of determining Operating Surplus, within
such period if the General Partner so determines.
Notwithstanding the foregoing, "Operating Surplus" with respect to the
Quarter in which the Liquidation Date occurs and any subsequent Quarter shall
equal zero.
"Opinion of Counsel" means a written opinion of counsel (who may be regular
counsel to the Partnership or the General Partner or any of their Affiliates)
acceptable to the General Partner in its reasonable discretion.
"Option Closing Date" has the meaning assigned to such term in the
Underwriting Agreement.
"Organizational Limited Partner" means James E. Bertelsmeyer in his
capacity as the organizational limited partner of the Partnership pursuant to
this Agreement.
"Outstanding" means, with respect to Partnership Securities, all
Partnership Securities that are issued by the Partnership and reflected as
Outstanding on the Partnership's books and records as of the date of
determination; provided, however, that if at any time any Person or Group (other
than the General Partner or its Affiliates) beneficially owns 20% or more of any
Outstanding Partnership Securities of any class then Outstanding, all
Partnership Securities owned by such Person or Group shall not be voted on any
matter and shall not be considered to be Outstanding when sending notices of a
meeting of Limited Partners to vote on any matter (unless otherwise required by
law), calculating required votes, determining the presence of a quorum or for
other similar purposes under this Agreement, except that such Common Units shall
be considered to be Outstanding for purposes of Section 11.1(b)(iv) (such Common
Units shall not, however, be treated as a separate class of Partnership
Securities for purposes of this Agreement).
"Over-allotment Option" means the over-allotment option granted to the
Underwriters by the Partnership pursuant to the Underwriting Agreement.
"Parity Units" means Common Units and all other Units having rights to
distributions or in liquidation ranking on a parity with the Common Units.
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"Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(4).
"Partner Nonrecourse Debt Minimum Gain" has the meaning set forth in
Treasury Regulation Section 1.704-2(i)(2).
"Partner Nonrecourse Deductions" means any and all items of loss, deduction
or expenditure (including, without limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with the principles of
Treasury Regulation Section 1.704-2(i), are attributable to a Partner
Nonrecourse Debt.
"Partners" means the General Partner, the Limited Partners and the holders
of Common Units, Subordinated Units and Incentive Distribution Rights.
"Partnership" means Heritage Propane Partners, L.P., a Delaware limited
partnership, and any successors thereto.
"Partnership Group" means the Partnership, the Operating Partnership and
any Subsidiary of either such entity, treated as a single consolidated entity.
"Partnership Interest" means an interest in the Partnership, which shall
include general partner interests, Common Units, Subordinated Units, Incentive
Distribution Rights and other Partnership Securities, or a combination thereof
or interest therein, as the case may be.
"Partnership Minimum Gain" means that amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
"Partnership Security" means any class or series of Unit, any option,
right, warrant or appreciation rights relating thereto, or any other type of
equity interest that the Partnership may lawfully issue, or any unsecured or
secured debt obligation of the Partnership that is convertible into any class or
series of equity interests of the Partnership.
"Percentage Interest" means as of the date of such determination (a) as to
the General Partner (in its capacity as General Partner without reference to any
Units or limited partner interests held by it), 1.0%, (b) as to any Unitholder
or Assignee holding Units, the product of (i) 99% less the percentage applicable
to paragraph (c) multiplied by (ii) the quotient of the number of Units held by
such Unitholder or Assignee divided by the total number of all Outstanding
Units, and (c) as to the holders of additional Partnership Securities issued by
the Partnership in accordance with Section 5.6, the percentage established as a
part of such issuance. The Percentage Interest with respect to an Incentive
Distribution Right shall at all times be zero.
"Person" means an individual or a corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization, association,
government agency or political subdivision thereof or other entity.
"Per Unit Capital Amount" means, as of any date of determination, the
Capital Account, stated on a per Unit basis, underlying any Unit held by a
Person other than the General Partner or any Affiliate of the General Partner
who holds Units.
"Pro Rata" means (a) when modifying Units or any class thereof, apportioned
equally among all designated Units in accordance with their relative Percentage
Interests, (b) when modifying Partners, Unitholders and Assignees, in accordance
with their respective Percentage Interests and (c) when modifying holders of
Incentive Distribution Rights, apportioned equally among all holders of
Incentive Distribution Rights in accordance with the relative number of
Incentive Distribution Rights held by each such holder.
"Purchase Date" means the date determined by the General Partner as the
date for purchase of all Outstanding Units (other than Units owned by the
General Partner and its Affiliates) pursuant to Article XV.
"Quarter" means, unless the context requires otherwise, a fiscal quarter of
the Partnership.
"Recapture Income" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Sections 734 or 743 of the Code)
upon the disposition of any property or asset of the
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Partnership, which gain is characterized as ordinary income because it
represents the recapture of deductions previously taken with respect to such
property or asset.
"Record Date" means the date established by the General Partner for
determining (a) the identity of the Record Holders entitled to notice of, or to
vote at, any meeting of Limited Partners or entitled to vote by ballot or give
approval of Partnership action in writing without a meeting or entitled to
exercise rights in respect of any lawful action of Limited Partners or (b) the
identity of Record Holders entitled to receive any report or distribution or
participate in any offer.
"Record Holder" means the Person in whose name a Common Unit is registered
on the books of the Transfer Agent as of the opening of business on a particular
Business Day, or with respect to a holder of a general partner interest, a
Subordinated Unit, an Incentive Distribution Right or other Partnership
Interest, the Person in whose name such general partner interest, Subordinated
Unit, Incentive Distribution Right or other Partnership Interest is registered
on the books which the General Partner has caused to be kept as of the opening
of business on such Business Day.
"Redeemable Interests" means any Partnership Interests for which a
redemption notice has been given, and has not been withdrawn, pursuant to
Section 4.11.
"Registration Statement" means the Registration Statement on Form S-1
(Registration No. 333-4018) as it has been or as it may be amended or
supplemented from time to time, filed by the Partnership with the Commission
under the Securities Act to register the offering and sale of the Common Units
in the Initial Offering.
"Remaining Net Positive Adjustments" means as of the end of any taxable
period, (i) with respect to the Unitholders holding Common Units or Subordinated
Units, the excess of (a) the Net Positive Adjustments of the Unitholders holding
Common Units or Subordinated Units as of the end of such period over (b) the sum
of those Partners' Share of Additional Book Basis Derivative Items for each
prior taxable period, (ii) with respect to the General Partner, the excess of
(a) the Net Positive Adjustments of the General Partner as of the end of such
period over (b) the sum of the General Partner's Share of Additional Book Basis
Derivative Items for each prior taxable period, and (iii) with respect to the
holders of Incentive Distribution Rights, the excess of (a) the Net Positive
Adjustments of the holders of Incentive Distribution Rights as of the end of
such period over (b) the sum of the Share of Additional Book Basis Derivative
Items of the holders of the Incentive Distribution Rights for each prior taxable
period.
"Required Allocations" means (a) any limitation imposed on any allocation
of Net Losses or Net Termination Losses under Section 6.1(b) or 6.1(c)(ii) and
(b) any allocation of an item of income, gain, loss or deduction pursuant to
Section 6.1(d)(i), 6.1(d)(ii), 6.1(d)(iv), 6.1(d)(vii) or 6.1(d)(ix).
"Residual Gain" or "Residual Loss" means any item of gain or loss, as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of a Contributed Property
or Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Section 6.2(b)(i)(A) or 6.2(b)(ii)(A), respectively, to eliminate
Book-Tax Disparities.
"Second Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(E).
"Second Target Distribution" means $0.635 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on August 31,
1996, it means the product of $0.635 multiplied by a fraction of which the
numerator is equal to the number of days in such period and of which the
denominator is 92), subject to adjustment in accordance with Sections 6.6 and
6.9.
"Securities Act" means the Securities Act of 1933, as amended, supplemented
or restated from time to time and any successor to such statute.
"Share of Additional Book Basis Derivative Items" means in connection with
any allocation of Additional Book Basis Derivative Items for any taxable period,
(i) with respect to the Limited Partners holding Common Units or Subordinated
Units, the amount that bears the same ratio to such Additional Book Basis
Derivative Items as such Limited Partner's Remaining Net Positive Adjustments as
of the end of such
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period bears to the Aggregate Remaining Net Positive Adjustments as of that
time, (ii) with respect to the General Partner, the amount that bears the same
ratio to such additional Book Basis Derivative Items as the General Partner's
Remaining Net Positive Adjustments as of the end of such Period bears to the
Aggregate Remaining Net Positive Adjustment as of that time, and (iii) with
respect to the Partners holding Incentive Distribution Rights, the amount that
bears the same ratio to such Additional Book Basis Derivative Items as the
Remaining Net Positive Adjustments of the Partners holding the Incentive
Distribution Rights as of the end of such period bears to the Aggregate
Remaining Net Positive Adjustments as of that time.
"Special Approval" means approval by a majority of the members of the Audit
Committee.
"Subordinated Unit" means a Unit representing a fractional part of the
Partnership Interests of all Limited Partners and Assignees (other than of
holders of the Incentive Distribution Rights) and having the rights and
obligations specified with respect to Subordinated Units in this Agreement. The
term "Subordinated Unit" as used herein does not include a Common Unit.
"Subordination Period" means the period commencing on the Closing Date and
ending on the first to occur of the following dates:
(a) the first day of any Quarter beginning after May 31, 2001 in
respect of which (i) (A) distributions of Available Cash from Operating
Surplus on each of the Outstanding Common Units and Subordinated Units with
respect to each of the three consecutive, non-overlapping four-Quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all Outstanding Common Units and
Subordinated Units during such periods and (B) the Adjusted Operating
Surplus generated during each of the three consecutive, non-overlapping
four-Quarter periods immediately preceding such date equaled or exceeded
the sum of the Minimum Quarterly Distribution on all of the Outstanding
Common Units and Subordinated Units, plus the related distribution on the
general partner interest in the Partnership and in the Operating
Partnership, during such periods and (ii) there are no Cumulative Common
Unit Arrearages; and
(b) the date on which the General Partner is removed as general
partner of the Partnership upon the requisite vote by holders of
Outstanding Units under circumstances where Cause does not exist and Units
held by the General Partner and its Affiliates are not voted in favor of
such removal.
"Subsidiary" means, with respect to any Person, (a) a corporation of which
more than 50% of the voting power of shares entitled (without regard to the
occurrence of any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or indirectly, at the date
of determination, by such Person, by one or more Subsidiaries of such Person or
a combination thereof, (b) a partnership (whether general or limited) in which
such Person or a Subsidiary of such Person is, at the date of determination, a
general or limited partner of such partnership, but only if more than 50% of the
partnership interests of such partnership (considering all of the partnership
interests of the partnership as a single class) is owned, directly or
indirectly, at the date of determination, by such Person, by one or more
Subsidiaries of such Person, or a combination thereof, or (c) any other Person
(other than a corporation or a partnership) in which such Person, one or more
Subsidiaries of such Person, or a combination thereof, directly or indirectly,
at the date of determination, has (i) at least a majority ownership interest or
(ii) the power to elect or direct the election of a majority of the directors or
other governing body of such Person.
"Substituted Limited Partner" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 10.2 in place of and with all the
rights of a Limited Partner and who is shown as a Limited Partner on the books
and records of the Partnership.
"Surviving Business Entity" has the meaning assigned to such term in
Section 14.2(b).
"Third Target Distribution" means $0.825 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on August 31,
1996, it means the product of $0.825 multiplied by a fraction of which the
numerator is equal to the number of days in such period and of which the
denominator is 92), subject to adjustment in accordance with Sections 6.6 and
6.9.
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"Trading Day" has the meaning assigned to such term in Section 15.1(a).
"Transfer" has the meaning assigned to such term in Section 4.4(a).
"Transfer Agent" means such bank, trust company or other Person (including
the General Partner or one of its Affiliates) as shall be appointed from time to
time by the Partnership to act as registrar and transfer agent for the Units.
"Transfer Application" means an application and agreement for transfer of
Units in the form set forth on the back of a Certificate or in a form
substantially to the same effect in a separate instrument.
"Underwriter" means each Person named as an underwriter in Schedule I to
the Underwriting Agreement who purchases Common Units pursuant thereto.
"Underwriting Agreement" means the Underwriting Agreement dated
, 1996, among the Underwriters, the Partnership and certain other parties,
providing for the purchase of Common Units by such Underwriters.
"Unit" means a Partnership Interest of a Limited Partner or Assignee in the
Partnership and shall include Common Units and Subordinated Units but shall not
include (x) the general partner interest in the Partnership or (y) Incentive
Distribution Rights.
"Unitholders" means the holders of Common Units and Subordinated Units.
"Unit Majority" means, during the Subordination Period, at least a majority
of the Outstanding Common Units voting as a class and at least a majority of the
Outstanding Subordinated Units voting as a class, and thereafter, at least a
majority of the Outstanding Units.
"Unpaid MQD" has the meaning assigned to such term in Section 6.1(c)(i)(B).
"Unrealized Gain" attributable to any item of Partnership property means,
as of any date of determination, the excess, if any, of (a) the fair market
value of such property as of such date (as determined under Section 5.5(d)) over
(b) the Carrying Value of such property as of such date (prior to any adjustment
to be made pursuant to Section 5.5(d) as of such date).
"Unrealized Loss" attributable to any item of Partnership property means,
as of any date of determination, the excess, if any, of (a) the Carrying Value
of such property as of such date (prior to any adjustment to be made pursuant to
Section 5.5(d) as of such date) over (b) the fair market value of such property
as of such date (as determined under Section 5.5(d)).
"Unrecovered Capital" means at any time, with respect to a Unit, the
Initial Unit Price less the sum of all distributions constituting Capital
Surplus theretofore made in respect of an Initial Common Unit and any
distributions of cash (or the Net Agreed Value of any distributions in kind) in
connection with the dissolution and liquidation of the Partnership theretofore
made in respect of an Initial Common Unit, adjusted as the General Partner
determines to be appropriate to give effect to any distribution, subdivision or
combination of such Units.
"U.S. GAAP" means United States Generally Accepted Accounting Principles
consistently applied.
"Withdrawal Opinion of Counsel" has the meaning assigned to such term in
Section 11.1(b).
1.2 Construction
Unless the context requires otherwise: (a) any pronoun used in this
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular form of nouns, pronouns and verbs shall include the plural and
vice versa; (b) references to Articles and Sections refer to Articles and
Sections of this Agreement; and (c) "include" or "includes" means includes,
without limitation, and "including" means including, without limitation.
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ARTICLE II
ORGANIZATION
2.1 Formation
The General Partner and the Organizational Limited Partner have previously
formed the Partnership as a limited partnership pursuant to the provisions of
the Delaware Act and hereby amend and restate the original Agreement of Limited
Partnership of Heritage Propane Partners, L.P. in its entirety. This amendment
and restatement shall become effective on the date of this Agreement. Except as
expressly provided to the contrary in this Agreement, the rights and obligations
of the Partners and the administration, dissolution and termination of the
Partnership shall be governed by the Delaware Act. All Partnership Interests
shall constitute personal property of the owner thereof for all purposes.
The General Partner has caused the Certificate of Limited Partnership to be
filed with the Secretary of State of the State of Delaware as required by the
Delaware Act and shall use all reasonable efforts to cause to be filed such
other certificates or documents as may be determined by the General Partner to
be reasonable and necessary or appropriate for the formation, continuation,
qualification and operation of a limited partnership (or a partnership or other
entity in which the limited partners have limited liability) in the State of
Delaware or any other state in which the Partnership may elect to do business or
own property. To the extent that such action is determined by the General
Partner to be reasonable and necessary or appropriate, the General Partner shall
file amendments to and restatements of the Certificate of Limited Partnership
and do all things necessary or appropriate to maintain the Partnership as a
limited partnership (or a partnership or other entity in which the limited
partners have limited liability) under the laws of the State of Delaware or of
any other state in which the Partnership may elect to conduct business or own
property. Subject to the provisions of Section 3.4(a), the Partnership shall not
be required, before or after filing, to deliver or mail a copy of the
Certificate of Limited Partnership, any qualification document or any amendment
thereto to any Limited Partner or Assignee.
2.2 Name
The name of the Partnership shall be "Heritage Propane Partners, L.P." The
Partnership's business may be conducted under any other name or names deemed
necessary or appropriate by the General Partner in its sole discretion,
including the name of the General Partner. The words "Limited Partnership,"
"L.P.," "Ltd." or similar words or letters shall be included in the
Partnership's name where necessary for the purpose of complying with the laws of
any jurisdiction that so requires. The General Partner in its discretion may
change the name of the Partnership at any time and from time to time and shall
notify the Limited Partners of such change in the next regular communication to
the Limited Partners.
2.3 Registered Office; Registered Agent; Principal Office; Other Offices
Unless and until changed by the General Partner, the registered office of
the Partnership in the State of Delaware shall be located at 1209 Orange Street,
New Castle County, Wilmington, Delaware 19801, and the registered agent for
service of process on the Partnership in the State of Delaware at such
registered office shall be CT Corporation System. The principal office of the
Partnership shall be located at 8801 South Yale Avenue, Suite 310, Tulsa,
Oklahoma 74137 or such other place as the General Partner may from time to time
designate by notice to the Limited Partners. The Partnership may maintain
offices at such other place or places within or outside the State of Delaware as
the General Partner deems necessary or appropriate. The address of the General
Partner shall be 8801 South Yale Avenue, Suite 310, Tulsa, Oklahoma 74137 or
such other place as the General Partner may from time to time designate by
notice to the Limited Partners.
2.4 Purpose and Business
The purpose and nature of the business to be conducted by the Partnership
shall be to (a) serve as a limited partner in the Operating Partnership and, in
connection therewith, to exercise all the rights and powers conferred upon the
Partnership as a limited partner in the Operating Partnership pursuant to the
Operating
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Partnership Agreement or otherwise, (b) engage directly in, or to enter into or
form any corporation, partnership, joint venture, limited liability company or
other arrangement to engage indirectly in, any business activity that the
Operating Partnership is permitted to engage in by the Operating Partnership
Agreement and, in connection therewith, to exercise all of the rights and powers
conferred upon the Partnership pursuant to the agreements relating to such
business activity, (c) engage directly in, or to enter into or form any
corporation, partnership, joint venture, limited liability company or other
arrangement to engage indirectly in, any business activity that is approved by
the General Partner and which lawfully may be conducted by a limited partnership
organized pursuant to the Delaware Act and, in connection therewith, to exercise
all of the rights and powers conferred upon the Partnership pursuant to the
agreements relating to such business activity, and (d) do anything necessary or
appropriate to the foregoing, including the making of capital contributions or
loans to a Group Member. The General Partner has no obligation or duty to the
Partnership, the Limited Partners, or the Assignees to propose or approve, and
in its discretion may decline to propose or approve, the conduct by the
Partnership of any business.
2.5 Powers
The Partnership shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described in Section
2.4 and for the protection and benefit of the Partnership.
2.6 Power of Attorney
(a) Each Limited Partner and each Assignee hereby constitutes and appoints
the General Partner and, if a Liquidator shall have been selected pursuant to
Section 12.3, the Liquidator, severally (and any successor to the Liquidator by
merger, transfer, assignment, election or otherwise) and each of their
authorized officers and attorneys-in-fact, as the case may be, with full power
of substitution, as his true and lawful agent and attorney-in-fact, with full
power and authority in his name, place and stead, to:
(i) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (A) all certificates, documents and other
instruments (including this Agreement and the Certificate of Limited
Partnership and all amendments or restatements hereof or thereof) that the
General Partner or the Liquidator deems necessary or appropriate to form,
qualify or continue the existence or qualification of the Partnership as a
limited partnership (or a partnership in which the limited partners have
limited liability) in the State of Delaware and in all other jurisdictions
in which the Partnership may conduct business or own property; (B) all
certificates, documents and other instruments that the General Partner or
the Liquidator deems necessary or appropriate to reflect, in accordance
with its terms, any amendment, change, modification or restatement of this
Agreement; (C) all certificates, documents and other instruments (including
conveyances and a certificate of cancellation) that the General Partner or
the Liquidator deems necessary or appropriate to reflect the dissolution
and liquidation of the Partnership pursuant to the terms of this Agreement;
(D) all certificates, documents and other instruments relating to the
admission, withdrawal, removal or substitution of any Partner pursuant to,
or other events described in, Article IV, X, XI or XII; (E) all
certificates, documents and other instruments relating to the determination
of the rights, preferences and privileges of any class or series of
Partnership Securities issued pursuant to Section 5.6; and (F) all
certificates, documents and other instruments (including agreements and a
certificate of merger) relating to a merger or consolidation of the
Partnership pursuant to Article XIV; and
(ii) execute, swear to, acknowledge, deliver, file and record all
ballots, consents, approvals, waivers, certificates, documents and other
instruments necessary or appropriate, in the discretion of the General
Partner or the Liquidator, to make, evidence, give, confirm or ratify any
vote, consent, approval, agreement or other action that is made or given by
the Partners hereunder or is consistent with the terms of this Agreement or
is necessary or appropriate, in the discretion of the General Partner or
the Liquidator, to effectuate the terms or intent of this Agreement;
provided, that when required by Section 13.3 or any other provision of this
Agreement that establishes a percentage of the Limited Partners or of the
Limited Partners of any class or series required to take any action, the
General Partner
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and the Liquidator may exercise the power of attorney made in this Section
2.6(a)(ii) only after the necessary vote, consent or approval of the
Limited Partners or of the Limited Partners of such class or series, as
applicable.
Nothing contained in this Section 2.6(a) shall be construed as authorizing
the General Partner to amend this Agreement except in accordance with Article
XIII or as may be otherwise expressly provided for in this Agreement.
(b) The foregoing power of attorney is hereby declared to be irrevocable
and a power coupled with an interest, and it shall survive and, to the maximum
extent permitted by law, not be affected by the subsequent death, incompetency,
disability, incapacity, dissolution, bankruptcy or termination of any Limited
Partner or Assignee and the transfer of all or any portion of such Limited
Partner's or Assignee's Partnership Interest and shall extend to such Limited
Partner's or Assignee's heirs, successors, assigns and personal representatives.
Each such Limited Partner or Assignee hereby agrees to be bound by any
representation made by the General Partner or the Liquidator acting in good
faith pursuant to such power of attorney; and each such Limited Partner or
Assignee, to the maximum extent permitted by law, hereby waives any and all
defenses that may be available to contest, negate or disaffirm the action of the
General Partner or the Liquidator taken in good faith under such power of
attorney. Each Limited Partner or Assignee shall execute and deliver to the
General Partner or the Liquidator, within 15 days after receipt of the request
therefor, such further designation, powers of attorney and other instruments as
the General Partner or the Liquidator deems necessary to effectuate this
Agreement and the purposes of the Partnership.
2.7 Term
The Partnership commenced upon the filing of the Certificate of Limited
Partnership in accordance with the Delaware Act and shall continue in existence
until the close of Partnership business on September 30, 2085 or until the
earlier termination of the Partnership in accordance with the provisions of
Article XII.
2.8 Title to Partnership Assets
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partner or Assignee, individually or collectively, shall have any
ownership interest in such Partnership assets or any portion thereof. Title to
any or all of the Partnership assets may be held in the name of the Partnership,
the General Partner, one or more of its Affiliates or one or more nominees, as
the General Partner may determine. The General Partner hereby declares and
warrants that any Partnership assets for which record title is held in the name
of the General Partner or one or more of its Affiliates or one or more nominees
shall be held by the General Partner or such Affiliate or nominee for the use
and benefit of the Partnership in accordance with the provisions of this
Agreement; provided, however, that the General Partner shall use reasonable
efforts to cause record title to such assets (other than those assets in respect
of which the General Partner determines that the expense and difficulty of
conveyancing makes transfer of record title to the Partnership impracticable) to
be vested in the Partnership as soon as reasonably practicable; provided,
further, that, prior to the withdrawal or removal of the General Partner or as
soon thereafter as practicable, the General Partner shall use reasonable efforts
to effect the transfer of record title to the Partnership and, prior to any such
transfer, will provide for the use of such assets in a manner satisfactory to
the General Partner. All Partnership assets shall be recorded as the property of
the Partnership in its books and records, irrespective of the name in which
record title to such Partnership assets is held.
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ARTICLE III
RIGHTS OF LIMITED PARTNERS
3.1 Limitation of Liability
The Limited Partners and the Assignees shall have no liability under this
Agreement except as expressly provided in this Agreement or the Delaware Act.
3.2 Management of Business
No Limited Partner or Assignee (other than the General Partner or any of
its Affiliates or any officer, director, employee, partner, agent or trustee of
the General Partner or any of its Affiliates, or any director, employee or agent
of a Group Member, in its capacity as such, if such Person shall also be a
Limited Partner or Assignee) shall participate in the operation, management or
control (within the meaning of the Delaware Act) of the Partnership's business,
transact any business in the Partnership's name or have the power to sign
documents for or otherwise bind the Partnership. Any action taken by any
Affiliate of the General Partner or any officer, director, employee, partner,
agent or trustee of the General Partner or any of its Affiliates, or any
director, employee or agent of a Group Member, in its capacity as such, shall
not be deemed to be participation in the control of the business of the
Partnership by a limited partner of the Partnership (within the meaning of
Section 17-303(a) of the Delaware Act) and shall not affect, impair or eliminate
the limitations on the liability of the Limited Partners or Assignees under this
Agreement.
3.3 Outside Activities of the Limited Partners
Subject to the provisions of Section 7.5, which shall continue to be
applicable to the Persons referred to therein, regardless of whether such
Persons shall also be Limited Partners or Assignees, any Limited Partner or
Assignee shall be entitled to and may have business interests and engage in
business activities in addition to those relating to the Partnership, including
business interests and activities in direct competition with the Partnership
Group. Neither the Partnership nor any of the other Partners or Assignees shall
have any rights by virtue of this Agreement in any business ventures of any
Limited Partner or Assignee.
3.4 Rights of Limited Partners
(a) In addition to other rights provided by this Agreement or by applicable
law, and except as limited by Section 3.4(b), each Limited Partner shall have
the right, for a purpose reasonably related to such Limited Partner's interest
as a limited partner in the Partnership, upon reasonable written demand and at
such Limited Partner's own expense:
(i) to obtain true and full information regarding the status of the
business and financial condition of the Partnership;
(ii) promptly after becoming available, to obtain a copy of the
Partnership's federal, state and local tax returns for each year;
(iii) to have furnished to him a current list of the name and last
known business, residence or mailing address of each Partner;
(iv) to have furnished to him a copy of this Agreement and the
Certificate of Limited Partnership and all amendments thereto, together
with a copy of the executed copies of all powers of attorney pursuant to
which this Agreement, the Certificate of Limited Partnership and all
amendments thereto have been executed;
(v) to obtain true and full information regarding the amount of cash
and a description and statement of the Net Agreed Value of any other
Capital Contribution by each Partner and which each Partner has agreed to
contribute in the future, and the date on which each became a Partner; and
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(vi) to obtain such other information regarding the affairs of the
Partnership as is just and reasonable.
(b) The General Partner may keep confidential from the Limited Partners and
Assignees, for such period of time as the General Partner deems reasonable, (i)
any information that the General Partner reasonably believes to be in the nature
of trade secrets or (ii) other information the disclosure of which the General
Partner in good faith believes (A) is not in the best interests of the
Partnership Group, (B) could damage the Partnership Group or (C) that any Group
Member is required by law or by agreement with any third party to keep
confidential (other than agreements with Affiliates the primary purpose of which
is to circumvent the obligations set forth in this Section 3.4).
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF
PARTNERSHIP INTERESTS; REDEMPTION OF
PARTNERSHIP INTERESTS
4.1 Certificates
Upon the Partnership's issuance of Common Units or Subordinated Units to
any Person, the Partnership shall issue one or more Certificates in the name of
such Person evidencing the number of such Units being so issued. In addition,
(a) upon the General Partner's request, the Partnership shall issue to it one or
more Certificates in the General Partner's name evidencing its interests in the
Partnership and (b) upon the request of any Person owning Incentive Distribution
Rights, the Partnership shall issue to such Person one or more certificates
evidencing such Incentive Distribution Rights. Certificates shall be executed on
behalf of the Partnership by the General Partner. No Common Unit Certificate
shall be valid for any purpose until it has been countersigned by the Transfer
Agent. The Partners holding Certificates evidencing Subordinated Units may
exchange such Certificates for Certificates evidencing Common Units on or after
the date on which such Subordinated Units are converted into Common Units
pursuant to the terms of Section 5.8.
4.2 Mutilated, Destroyed, Lost or Stolen Certificates
(a) If any mutilated Certificate is surrendered to the Transfer Agent, the
appropriate Officers of the Partnership shall execute, and the Transfer Agent
shall countersign and deliver in exchange therefor, a new Certificate evidencing
the same number of Units as the Certificate so surrendered.
(b) The General Partner shall execute, and the Transfer Agent shall
countersign and deliver a new Certificate in place of any Certificate previously
issued if the Record Holder of the Certificate:
(i) makes proof by affidavit, in form and substance satisfactory to
the Partnership, that a previously issued Certificate has been lost,
destroyed or stolen;
(ii) requests the issuance of a new Certificate before the Partnership
has notice that the Certificate has been acquired by a purchaser for value
in good faith and without notice of an adverse claim;
(iii) if requested by the Partnership, delivers to the Partnership a
bond, in form and substance satisfactory to the Partnership, with surety or
sureties and with fixed or open penalty as the Partnership may reasonably
direct, in its sole discretion, to indemnify the Partnership, the Partners,
the General Partner and the Transfer Agent against any claim that may be
made on account of the alleged loss, destruction or theft of the
Certificate; and
(iv) satisfies any other reasonable requirements imposed by the
Partnership.
If a Limited Partner or Assignee fails to notify the Partnership within a
reasonable time after he has notice of the loss, destruction or theft of a
Certificate, and a transfer of the Units represented by the Certificate is
registered before the Partnership, the General Partner or the Transfer Agent
receives such notification, the
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Limited Partner or Assignee shall be precluded from making any claim against the
Partnership, the General Partner and the Transfer Agent for such transfer or for
a new Certificate.
(c) As a condition to the issuance of any new Certificate under this
Section 4.2, the Partnership may require the payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in relation
thereto and any other expenses (including the fees and expenses of the Transfer
Agent) reasonably connected therewith.
4.3 Record Holders
The Partnership shall be entitled to recognize the Record Holder as the
Partner or Assignee with respect to any Partnership Interest and, accordingly,
shall not be bound to recognize any equitable or other claim to or interest in
such Partnership Interest on the part of any other Person, regardless of whether
the Partnership shall have actual or other notice thereof, except as otherwise
provided by law or any applicable rule, regulation, guideline or requirement of
any National Securities Exchange on which the Units are listed for trading.
Without limiting the foregoing, when a Person (such as a broker, dealer, bank,
trust company or clearing corporation or an agent of any of the foregoing) is
acting as nominee, agent or in some other representative capacity for another
Person in acquiring and/or holding Units, as between the Partnership on the one
hand, and such other Persons on the other, such representative Person (a) shall
be the Partner or Assignee (as the case may be) of record and beneficially, (b)
must execute and deliver a Transfer Application and (c) shall be bound by this
Agreement and shall have the rights and obligations of a Partner or Assignee (as
the case may be) hereunder and as, and to the extent, provided for herein.
4.4 Transfer Generally
(a) The term "transfer," when used in this Agreement with respect to a
Partnership Interest, shall be deemed to refer to a transaction by which the
General Partner assigns its Partnership Interest as a general partner in the
Partnership to another Person, by which the holder of a Unit assigns such Unit
to another Person who is or becomes a Partner or an Assignee, by which the
holder of an Incentive Distribution Right assigns such Partnership Interest to
another Person, and includes a sale, assignment, gift, pledge, encumbrance,
hypothecation, mortgage, exchange or any other disposition by law or otherwise.
(b) No Partnership Interest shall be transferred, in whole or in part,
except in accordance with the terms and conditions set forth in this Article IV.
Any transfer or purported transfer of a Partnership Interest not made in
accordance with this Article IV shall be null and void.
(c) Nothing contained in this Agreement shall be construed to prevent a
disposition by any shareholder of the General Partner of any or all of the
issued and outstanding capital stock of the General Partner.
4.5 Registration and Transfer of Units
(a) The Partnership shall keep or cause to be kept on behalf of the
Partnership a register in which, subject to such reasonable regulations as it
may prescribe and subject to the provisions of Section 4.5(b), the Partnership
will provide for the registration and transfer of Units. The Transfer Agent is
hereby appointed registrar and transfer agent for the purpose of registering
Common Units and transfers of such Common Units as herein provided. The
Partnership shall not recognize transfers of Certificates representing Units
unless such transfers are effected in the manner described in this Section 4.5.
Upon surrender for registration of transfer of any Units evidenced by a
Certificate, and subject to the provisions of Section 4.5(b), the appropriate
officers on behalf of the Partnership shall execute, and in the case of Common
Units, the Transfer Agent shall countersign and deliver, in the name of the
holder or the designated transferee or transferees, as required pursuant to the
holder's instructions, one or more new Certificates evidencing the same
aggregate number of Units as was evidenced by the Certificate so surrendered.
(b) Except as otherwise provided in Section 4.10, the Partnership shall not
recognize any transfer of Units until the Certificates evidencing such Units are
surrendered for registration of transfer and such Certificates are accompanied
by a Transfer Application duly executed by the transferee (or the transferee's
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attorney-in-fact duly authorized in writing). No charge shall be imposed by the
Partnership for such transfer; provided, that as a condition to the issuance of
any new Certificate under this Section 4.5, the Partnership may require the
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed with respect thereto.
(c) Units may be transferred only in the manner described in this Section
4.5. The transfer of any Units and the admission of any new Partner shall not
constitute an amendment to this Agreement.
(d) Until admitted as a Substituted Limited Partner pursuant to Section
10.2, the Record Holder of a Unit shall be an Assignee in respect of such Unit.
Limited Partners may include custodians, nominees or any other individual or
entity in its own or any representative capacity.
(e) A transferee who has completed and delivered a Transfer Application
shall be deemed to have (i) requested admission as a Substituted Limited
Partner, (ii) agreed to comply with and be bound by and to have executed this
Agreement, (iii) represented and warranted that such transferee has the right,
power and authority and, if an individual, the capacity to enter into this
Agreement, (iv) granted the powers of attorney set forth in this Agreement and
(v) given the consents and approvals and made the waivers contained in this
Agreement.
(f) The General Partner shall have the right at any time to transfer its
Subordinated Units and Common Units whether issued upon conversion of the
Subordinated Units or otherwise) to one or more Persons.
4.6 Transfer of a General Partner's General Partner Interest
Except for a transfer by the General Partner of all, but not less than all,
of its Partnership Interest as general partner in the Partnership to (a) an
Affiliate of the General Partner or (b) another Person in connection with the
merger or consolidation of the General Partner with or into another Person or
the transfer by the General Partner of all or substantially all of its assets to
another Person, (which in any such case, shall only be limited by the other
provisions of this Section 4.6), prior to June 30, 2006, the General Partner
shall not transfer all or any part of its Partnership Interest as general
partner in the Partnership to a Person unless such transfer has been approved by
the prior written consent or vote of the holders of at least a Unit Majority.
Notwithstanding anything herein to the contrary, no transfer by the General
Partner of all or any part of its Partnership Interest as general partner in the
Partnership to another Person shall be permitted unless (i) the transferee
agrees to assume the rights and duties of the General Partner under this
Agreement and the Operating Partnership Agreement and to be bound by the
provisions of this Agreement and the Operating Partnership Agreement, (ii) the
Partnership receives an Opinion of Counsel that such transfer would not result
in the loss of limited liability of any Limited Partner or of any limited
partner of the Operating Partnership or cause the Partnership or the Operating
Partnership to be treated as an association taxable as a corporation or
otherwise to be taxed as an entity for federal income tax purposes (to the
extent not already so treated or taxed) and (iii) such transferee also agrees to
purchase all (or the appropriate portion thereof, if applicable) of the
partnership interest of the General Partner as the general partner of each other
Group Member. In the case of a transfer pursuant to and in compliance with this
Section 4.6, the transferee or successor (as the case may be) shall, subject to
compliance with the terms of Section 10.3, be admitted to the Partnership as a
General Partner immediately prior to the transfer of the Partnership Interest,
and the business of the Partnership shall continue without dissolution.
4.7 Intentionally Deleted
4.8 Transfer of Incentive Distribution Rights
A holder of Incentive Distribution Rights may transfer any or all of the
Incentive Distribution Rights held by such holder without any consent of the
Unitholders, (a) to its Affiliates (including, without limitation, if such
holder is an individual, (i) any family members or relatives of such holder,
(ii) any trusts created for the benefit of such holder or any of the persons
described in clauses (i) and (iii) in the event of the incompetence or death of
such holder or any of the persons described in clause (i), such person's estate
executor, administrator, committee, representative or beneficiaries) or (b) to
another Person in connection
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with (i) the merger or consolidation of such holder of Incentive Distribution
Rights with or into another Person or (ii) the transfer by such holder of all or
substantially all of its assets to another Person. Any other transfer of the
Incentive Distribution Rights shall require the prior approval of holders of at
least a Unit Majority. The General Partner shall have the authority (but shall
not be required) to adopt such reasonable restrictions on the transfer of
Incentive Distribution Rights and requirements for registering the transfer of
Incentive Distribution Rights as the General Partner, in its sole discretion,
shall determine are necessary or appropriate.
4.9 Restrictions on Transfers
(a) Notwithstanding the other provisions of this Article IV, no transfer of
any Partnership Interest shall be made if such transfer would (i) violate the
then applicable federal or state securities laws or rules and regulations of the
Commission, any state securities commission or any other governmental
authorities with jurisdiction over such transfer, (ii) terminate the existence
or qualification of the Partnership or the Operating Partnership under the laws
of the jurisdiction of its formation, or (iii) cause the Partnership or the
Operating Partnership to be treated as an association taxable as a corporation
or otherwise to be taxed as an entity for federal income tax purposes (to the
extent not already so treated or taxed).
(b) The General Partner may impose restrictions on the transfer of
Partnership Interests if a subsequent Opinion of Counsel determines that such
restrictions are necessary to avoid a significant risk of the Partnership or the
Operating Partnership becoming taxable as a corporation or otherwise to be taxed
as an entity for federal income tax purposes. The restrictions may be imposed by
making such amendments to this Agreement as the General Partner may determine to
be necessary or appropriate to impose such restrictions; provided, however, that
any amendment that the General Partner believes, in the exercise of its
reasonable discretion, could result in the delisting or suspension of trading of
any class of Units on the principal National Securities Exchange on which such
class of Units is then traded must be approved, prior to such amendment being
effected, by the holders of at least a majority of the Outstanding Units of such
class.
(c) The transfer of a Subordinated Unit that has converted into a Common
Unit shall be subject to the restrictions imposed by Section 6.7(b).
(d) No transfer of Units will be recorded or otherwise recognized by the
Partnership unless and until the transferee has delivered a properly executed
Transfer Application to the General Partner in which the transferee certifies
that he, and if the transferee is nominee holding for the account of another
Person, that to the best of his knowledge such other Person, is a Calendar Year
Taxpayer. A transferee of a Limited Partner Interest who is not a Calendar Year
Taxpayer will only have the right to resell his interest, will not be recorded
as a Limited Partner in the Partnership and will not share in any rights,
benefits or burdens as a Limited Partner in the Partnership.
(e) Nothing contained in this Article IV, or elsewhere in this Agreement,
shall preclude the settlement of any transactions involving Partnership
Interests entered into through the facilities of any National Securities
Exchange on which such Partnership Interests are listed for trading.
4.10 Citizenship Certificates; Non-citizen Assignees
(a) If any Group Member is or becomes subject to any federal, state or
local law or regulation that, in the reasonable determination of the General
Partner, creates a substantial risk of cancellation or forfeiture of any
property in which the Group Member has an interest based on the nationality,
citizenship or other related status of a Partner or Assignee, the General
Partner may request any Partner or Assignee to furnish to the General Partner,
within 30 days after receipt of such request, an executed Citizenship
Certification or such other information concerning his nationality, citizenship
or other related status (or, if the Partner or Assignee is a nominee holding for
the account of another Person, the nationality, citizenship or other related
status of such Person) as the General Partner may request. If a Partner or
Assignee fails to furnish to the General Partner within the aforementioned
30-day period such Citizenship Certification or other requested information or
if upon receipt of such Citizenship Certification or other requested information
the General Partner determines, with the advice of counsel, that a Partner or
Assignee is not an Eligible Citizen, the Partnership
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Interests owned by such Partner or Assignee shall be subject to redemption in
accordance with the provisions of Section 4.11. In addition, the General Partner
may require that the status of any such Partner or Assignee be changed to that
of a Non-citizen Assignee and, thereupon, the General Partner shall be
substituted for such Non-citizen Assignee as the Partner in respect of his
Units.
(b) The General Partner shall, in exercising voting rights in respect of
Units held by it on behalf of Non-citizen Assignees, distribute the votes in the
same ratios as the votes of Partners (including without limitation the General
Partner) in respect of Units other than those of Non-citizen Assignees are cast,
either for, against or abstaining as to the matter.
(c) Intentionally Deleted
(d) At any time after he can and does certify that he has become an
Eligible Citizen, a Non-citizen Assignee may, upon application to the General
Partner, request admission as a Substituted Limited Partner with respect to any
Units of such Non-citizen Assignee not redeemed pursuant to Section 4.11, and
upon his admission pursuant to Section 10.2, the General Partner shall cease to
be deemed to be the Limited Partner in respect of the Non-citizen Assignee's
Units.
4.11 Redemption of Partnership Interests of Non-citizen Assignees
(a) If at any time a Partner or Assignee fails to furnish a Citizenship
Certification or other information requested within the 30-day period specified
in Section 4.10(a), or if upon receipt of such Citizenship Certification or
other information the General Partner determines, with the advice of counsel,
that a Partner or Assignee is not an Eligible Citizen, the Partnership may,
unless the Partner or Assignee establishes to the satisfaction of the General
Partner that such Partner or Assignee is an Eligible Citizen or has transferred
his Partnership Interests to a Person who is an Eligible Citizen and who
furnishes a Citizenship Certification to the General Partner prior to the date
fixed for redemption as provided below, redeem the Partnership Interest of such
Partner or Assignee as follows:
(i) The General Partner shall, not later than the 30th day before the
date fixed for redemption, give notice of redemption to the Partner or
Assignee, at his last address designated on the records of the Partnership
or the Transfer Agent, by registered or certified mail, postage prepaid.
The notice shall be deemed to have been given when so mailed. The notice
shall specify the Redeemable Interests, the date fixed for redemption, the
place of payment, that payment of the redemption price will be made upon
surrender of the Certificate evidencing the Redeemable Interests and that
on and after the date fixed for redemption no further allocations or
distributions to which the Partner or Assignee would otherwise be entitled
in respect of the Redeemable Interests will accrue or be made.
(ii) The aggregate redemption price for Redeemable Interests shall be
an amount equal to the Current Market Price (the date of determination of
which shall be the date fixed for redemption) of Partnership Interests of
the class to be so redeemed multiplied by the number of Partnership
Interests of each such class included among the Redeemable Interests. The
redemption price shall be paid, in the discretion of the General Partner,
in cash or by delivery of a promissory note of the Partnership in the
principal amount of the redemption price, bearing interest at the rate of
10% annually and payable in three equal annual installments of principal
together with accrued interest, commencing one year after the redemption
date.
(iii) Upon surrender by or on behalf of the Partner or Assignee, at
the place specified in the notice of redemption, of the Certificate
evidencing the Redeemable Interests, duly endorsed in blank or accompanied
by an assignment duly executed in blank, the Partner or Assignee or his
duly authorized representative shall be entitled to receive the payment
therefor.
(iv) After the redemption date, Redeemable Interests shall no longer
constitute issued and Outstanding Partnership Interests.
(b) The provisions of this Section 4.11 shall also be applicable to
Partnership Interests held by a Partner or Assignee as nominee of a Person
determined to be other than an Eligible Citizen.
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(c) Nothing in this Section 4.11 shall prevent the recipient of a notice of
redemption from transferring his Partnership Interests before the redemption
date if such transfer is otherwise permitted under this Agreement. Upon receipt
of notice of such a transfer, the General Partner shall withdraw the notice of
redemption, provided the transferee of such Partnership Interests certifies to
the satisfaction of the General Partner in a Citizenship Certification delivered
in connection with the Transfer Application that he is an Eligible Citizen. If
the transferee fails to make such certification, such redemption shall be
effected from the transferee on the original redemption date.
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF
PARTNERSHIP INTERESTS
5.1 Organizational Contributions
In connection with the formation of the Partnership under the Delaware Act,
the General Partner made an initial Capital Contribution to the Partnership in
the amount of $10.00, for an interest in the Partnership and has been admitted
as the General Partner of the Partnership, and the Organizational Limited
Partner made an initial Capital Contribution to the Partnership in the amount of
$990.00 for an interest in the Partnership and has been admitted as a Limited
Partner of the Partnership. As of the Closing Date, the interest of the
Organizational Limited Partner shall be redeemed as provided in the Contribution
and Conveyance Agreement; the initial Capital Contributions of each Partner
shall thereupon be refunded; and the Organizational Limited Partner shall cease
to be a Limited Partner of the Partnership. Ninety-nine percent of any interest
or other profit that may have resulted from the investment or other use of such
initial Capital Contributions shall be allocated and distributed to the
Organizational Limited Partner, and the balance thereof shall be allocated and
distributed to the General Partner.
5.2 Contributions by General Partner
On the Closing Date and pursuant to the Contribution and Conveyance
Agreement, the General Partner shall contribute to the Partnership, as a Capital
Contribution, a limited partner interest in the Operating Partnership in
exchange for (i) the continuation of its Partnership Interest as general partner
of the Partnership, subject to all of the rights, privileges and duties of the
General Partner under this Agreement, (ii) 3,702,943 Subordinated Units and
(iii) all of the Incentive Distribution Rights. In addition, upon the issuance
of any additional Limited Partner Partnership Interests by the Partnership
(other than the issuance of the Common Units issued in the Initial Offering or
pursuant to the Over-Allotment Option), the General Partner shall be required to
make additional Capital Contributions equal to 1/99th of any amount contributed
to the Partnership in exchange for such Additional Units. Except as set forth in
the immediately preceding sentence and Article XII, the General Partner shall
not be obligated to make any additional Capital Contributions to the
Partnership.
5.3 Contributions by Initial Limited Partners
(a) On the Closing Date and pursuant to the Underwriting Agreement, each
Underwriter shall contribute to the Partnership cash in an amount equal to the
Issue Price per Initial Common Unit, multiplied by the number of Common Units
specified in the Underwriting Agreement to be purchased by such Underwriter at
the "Closing Date," as such term is defined in the Underwriting Agreement. In
exchange for such Capital Contributions by the Underwriters, the Partnership
shall issue Common Units to each Underwriter on whose behalf such Capital
Contribution is made in an amount equal to the quotient obtained by dividing (i)
the cash contribution to the Partnership by or on behalf of such Underwriter by
(ii) the Issue Price per Initial Common Unit.
(b) Upon the exercise of the Over-allotment Option, each Underwriter shall
contribute to the Partnership cash in an amount equal to the Issue Price per
Initial Common Unit, multiplied by the number of Common Units specified in the
Underwriting Agreement to be purchased by such Underwriter at the Option
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Closing Date. In exchange for such Capital Contributions by the Underwriters,
the Partnership shall issue Common Units to each Underwriter on whose behalf
such Capital Contribution is made in an amount equal to the quotient obtained by
dividing (i) the cash contributions to the Partnership by or on behalf of such
Underwriter by (ii) the Issue Price per Initial Common Unit.
(c) No Limited Partner Partnership Interests will be issued or issuable as
of or at the Closing Date other than (i) the Common Units issuable pursuant to
subparagraph (a) hereof in aggregate number equal to 4,025,000 and (ii) the
"Optional Units" as such term is defined in the Underwriting Agreement in
aggregate number up to 603,750 issuable upon exercise of the Over-allotment
Option pursuant to subparagraph (b) hereof, (iii) the 3,702,943 Subordinated
Units issuable to the General Partner pursuant to Section 5.2 hereof, and (iv)
the Incentive Distribution Rights issuable to the General Partner pursuant to
Section 5.2 hereof.
5.4 Interest and Withdrawal
No interest shall be paid by the Partnership on Capital Contributions. No
Partner or Assignee shall be entitled to the withdrawal or return of its Capital
Contribution, except to the extent, if any, that distributions made pursuant to
this Agreement or upon termination of the Partnership may be considered as such
by law and then only to the extent provided for in this Agreement. Except to the
extent expressly provided in this Agreement, no Partner or Assignee shall have
priority over any other Partner or Assignee either as to the return of Capital
Contributions or as to profits, losses or distributions. Any such return shall
be a compromise to which all Partners and Assignees agree within the meaning of
17-502(b) of the Delaware Act.
5.5 Capital Accounts
(a) The Partnership shall maintain for each Partner (or a beneficial owner
of Partnership Interests held by a nominee in any case in which the nominee has
furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the General
Partner in its sole discretion) owning a Partnership Interest a separate Capital
Account with respect to such Partnership Interest in accordance with the rules
of Treasury Regulation Section 1.704-1(b)(2)(iv). Such Capital Account shall be
increased by (i) the amount of all Capital Contributions made to the Partnership
with respect to such Partnership Interest pursuant to this Agreement and (ii)
all items of Partnership income and gain (including, without limitation, income
and gain exempt from tax) computed in accordance with Section 5.5(b) and
allocated with respect to such Partnership Interest pursuant to Section 6.1, and
decreased by (x) the amount of cash or Net Agreed Value of all actual and deemed
distributions of cash or property made with respect to such Partnership Interest
pursuant to this Agreement and (y) all items of Partnership deduction and loss
computed in accordance with Section 5.5(b) and allocated with respect to such
Partnership Interest pursuant to Section 6.1.
(b) For purposes of computing the amount of any item of income, gain, loss
or deduction which is to be allocated pursuant to Article VI and is to be
reflected in the Partners' Capital Accounts, the determination, recognition and
classification of any such item shall be the same as its determination,
recognition and classification for federal income tax purposes (including,
without limitation, any method of depreciation, cost recovery or amortization
used for that purpose), provided, that:
(i) Solely for purposes of this Section 5.5, the Partnership shall be
treated as owning directly its proportionate share (as determined by the
General Partner based upon the provisions of the Operating Partnership
Agreement) of all property owned by the Operating Partnership.
(ii) All fees and other expenses incurred by the Partnership to
promote the sale of (or to sell) a Partnership Interest that can neither be
deducted nor amortized under Section 709 of the Code, if any, shall, for
purposes of Capital Account maintenance, be treated as an item of deduction
at the time such fees and other expenses are incurred and shall be
allocated among the Partners pursuant to Section 6.1. To the extent an
adjustment to the adjusted tax basis of any Partnership asset pursuant to
Section 734(b) or 743(b) of the Code is required, pursuant to Treasury
Regulation Section 1.704-1(b)(2)(iv)(m) to be
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taken into account in determining Capital Accounts, the amount of such
adjustment in the Capital Accounts shall be treated as an item of gain or
loss.
(iii) Except as otherwise provided in Treasury Regulation Section
1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss
and deduction shall be made without regard to any election under Section
754 of the Code which may be made by the Partnership and, as to those items
described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without
regard to the fact that such items are not includable in gross income or
are neither currently deductible nor capitalized for federal income tax
purposes.
(iv) Any income, gain or loss attributable to the taxable disposition
of any Partnership property shall be determined as if the adjusted basis of
such property as of such date of disposition were equal in amount to the
Partnership's Carrying Value with respect to such property as of such date.
(v) In accordance with the requirements of Section 704(b) of the Code,
any deductions for depreciation, cost recovery or amortization attributable
to any Contributed Property shall be determined as if the adjusted basis of
such property on the date it was acquired by the Partnership were equal to
the Agreed Value of such property. Upon an adjustment pursuant to Section
5.5(d) to the Carrying Value of any Partnership property subject to
depreciation, cost recovery or amortization, any further deductions for
such depreciation, cost recovery or amortization attributable to such
property shall be determined (A) as if the adjusted basis of such property
were equal to the Carrying Value of such property immediately following
such adjustment and (B) using a rate of depreciation, cost recovery or
amortization derived from the same method and useful life (or, if
applicable, the remaining useful life) as is applied for federal income tax
purposes; provided, however, that, if the asset has a zero adjusted basis
for federal income tax purposes, depreciation, cost recovery or
amortization deductions shall be determined using any reasonable method
that the General Partner may adopt.
(vi) If the Partnership's adjusted basis in a depreciable or cost
recovery property is reduced for federal income tax purposes pursuant to
Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction
shall, solely for purposes hereof, be deemed to be an additional
depreciation or cost recovery deduction in the year such property is placed
in service and shall be allocated among the Partners pursuant to Section
6.1. Any restoration of such basis pursuant to Section 48(q)(2) of the Code
shall, to the extent possible, be allocated in the same manner to the
Partners to whom such deemed deduction was allocated.
(c) (i) Except as otherwise provided in Section 5.5(c)(ii), a transferee of
a Partnership Interest shall succeed to a pro rata portion of the Capital
Account of the transferor relating to the Partnership Interest so transferred;
provided, however, that, if the transfer causes a termination of the Partnership
under Section 708(b)(1)(B) of the Code, the Partnership's properties and
liabilities shall be deemed (i) to have been distributed in liquidation of the
Partnership to the Partners (including any transferee of a Partnership Interest
that is a party to the transfer causing such termination) pursuant to Section
12.4 (after adjusting the balance of the Capital Accounts of the Partners as
provided in Section 5.5(d)(ii)) and recontributed by such Partners in
reconstitution of the Partnership or (ii) to be treated as mandated by Treasury
Regulations issued pursuant to Sections 708 and 704 of the Code as amended. Any
such deemed contribution and distribution shall be treated as an actual
contribution and distribution for purposes of this Section 5.5. In such event,
the Carrying Values of the Partnership properties shall be adjusted immediately
prior to such deemed contribution and distribution pursuant to Section
5.5(d)(ii) and such Carrying Values shall then constitute the Agreed Values of
such properties upon such deemed contribution to the new Partnership. The
Capital Accounts of such new Partnership shall be maintained in accordance with
the principles of this Section 5.5.
(ii) Immediately prior to the transfer of a Subordinated Unit or of a
Subordinated Unit that has converted into a Common Unit pursuant to Section 5.8
by a holder thereof (other than a transfer to an Affiliate unless the General
Partner elects to have this subparagraph 5.5(c)(ii) apply), the Capital Account
maintained for such Person with respect to its Subordinated Units or converted
Subordinated Units will (A) first, be allocated to the Subordinated Units or
converted Subordinated Units to be transferred in an
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amount equal to the product of (x) the number of such Subordinated Units or
converted Subordinated Units to be transferred and (y) the Per Unit Capital
Amount for a Common Unit, and (B) second, any remaining balance in such Capital
Account will be retained by the transferor, regardless of whether it has
retained any Subordinated Units or converted Subordinated Units. Following any
such allocation, the transferor's Capital Account, if any, maintained with
respect to the retained Subordinated Units or converted Subordinated Units, if
any, will have a balance equal to the amount allocated under clause (B)
hereinabove, and the transferee's Capital Account established with respect to
the transferred Subordinated Units or converted Subordinated Units will have a
balance equal to the amount allocated under clause (A) hereinabove.
(d) (i) In accordance with Treasury Regulation Section
1.704-1(b)(2)(iv)(f), on an issuance of additional Units for cash or Contributed
Property or the conversion of the General Partner's Combined Interest to Common
Units pursuant to Section 11.3(b), the Capital Account of all Partners and the
Carrying Value of each Partnership property immediately prior to such issuance
shall be adjusted upward or downward to reflect any Unrealized Gain or
Unrealized Loss attributable to such Partnership property, as if such Unrealized
Gain or Unrealized Loss had been recognized on an actual sale of each such
property immediately prior to such issuance and had been allocated to the
Partners at such time pursuant to Section 6.1(c). In determining such Unrealized
Gain or Unrealized Loss, the aggregate cash amount and fair market value of all
Partnership assets (including, without limitation, cash or cash equivalents)
immediately prior to the issuance of additional Units shall be determined by the
General Partner using such reasonable method of valuation as it may adopt;
provided, however, that the General Partner, in arriving at such valuation, must
take fully into account the fair market value of the Partnership Interests of
all Partners at such time. The General Partner shall allocate such aggregate
value among the assets of the Partnership (in such manner as it determines in
its discretion to be reasonable) to arrive at a fair market value for individual
properties.
(ii) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f),
immediately prior to any actual or deemed distribution to a Partner of any
Partnership property (other than a distribution of cash that is not in
redemption or retirement of a Partnership Interest), the Capital Accounts of all
Partners and the Carrying Value of all Partnership property shall be adjusted
upward or downward to reflect any Unrealized Gain or Unrealized Loss
attributable to such Partnership property, as if such Unrealized Gain or
Unrealized Loss had been recognized in a sale of such property immediately prior
to such distribution for an amount equal to its fair market value, and had been
allocated to the Partners, at such time, pursuant to Section 6.1(c). In
determining such Unrealized Gain or Unrealized Loss the aggregate cash amount
and fair market value of all Partnership assets (including, without limitation,
cash or cash equivalents) immediately prior to a distribution shall (A) in the
case of an actual distribution which is not made pursuant to Section 12.4 or in
the case of a deemed contribution and/or distribution occurring as a result of a
termination of the Partnership pursuant to Section 708 of the Code, be
determined and allocated in the same manner as that provided in Section
5.5(d)(i) or (B) in the case of a liquidating distribution pursuant to Section
12.4, be determined and allocated by the Liquidator using such reasonable method
of valuation as it may adopt.
5.6 Issuances of Additional Partnership Securities
(a) Subject to Section 5.7, the Partnership may issue additional
Partnership Securities for any Partnership purpose at any time and from time to
time to such Persons for such consideration and on such terms and conditions as
shall be established by the General Partner in its sole discretion, all without
the approval of any Limited Partners.
(b) Each additional Partnership Security authorized to be issued by the
Partnership pursuant to Section 5.6(a) may be issued in one or more classes, or
one or more series of any such classes, with such designations, preferences,
rights, powers and duties (which may be senior to existing classes and series of
Partnership Securities), as shall be fixed by the General Partner in the
exercise of its sole discretion, including (i) the right to share Partnership
profits and losses or items thereof; (ii) the right to share in Partnership
distributions; (iii) the rights upon dissolution and liquidation of the
Partnership; (iv) whether, and the terms and conditions upon which, the
Partnership may redeem the Partnership Security; (v) whether such Partnership
Security is issued with the privilege of conversion or exchange and, if so, the
terms and conditions of such conversion or exchange; (vi) the terms and
conditions upon which each Partnership Security will be
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issued, evidenced by certificates and assigned or transferred; and (vii) the
right, if any, of each such Partnership Security to vote on Partnership matters,
including matters relating to the relative rights, preferences and privileges of
such Partnership Security.
(c) The General Partner is hereby authorized and directed to take all
actions that it deems necessary or appropriate in connection with (i) each
issuance of Partnership Securities pursuant to this Section 5.6, (ii) the
conversion of a general partner interest into Units pursuant to the terms of
this Agreement, (iii) the admission of Additional Limited Partners and (iv) all
additional issuances of Partnership Securities. The General Partner is further
authorized and directed to specify the relative rights, powers and duties of the
holders of the Units or other Partnership Securities being so issued. The
General Partner shall do all things necessary to comply with the Delaware Act
and is authorized and directed to do all things it deems to be necessary or
advisable in connection with any future issuance of Partnership Securities or in
connection with the conversion of a general partner interest into Units pursuant
to the terms of this Agreement, including compliance with any statute, rule,
regulation or guideline of any federal, state or other governmental agency or
any National Securities Exchange on which the Units or other Partnership
Securities are listed for trading.
5.7 Limitations on Issuance of Additional Partnership Securities
The issuance of Partnership Securities pursuant to Section 5.6 shall be
subject to the following restrictions and limitations:
(a) During the Subordination Period, the Partnership shall not issue an
aggregate of more than 2,012,500 additional Parity Units without the prior
approval of the holders of a Unit Majority. In applying this limitation, there
shall be excluded Common Units issued (A) in connection with the exercise of the
Over-allotment Option, (B) in accordance with Sections 5.7(b) and 5.7(c), (C)
upon conversion of Subordinated Units pursuant to Section 5.8, (D) pursuant to
the employee benefit plans of the Partnership or any other Group Member and (E)
in the event of a combination or subdivision of Common Units.
(b) The Partnership may also issue an unlimited number of Parity Units,
prior to the end of the Subordination Period and without the prior approval of
the Unitholders if such issuance occurs (i) in connection with an Acquisition or
a Capital Improvement or (ii) within 365 days of, and the net proceeds from such
issuance are used to repay debt incurred in connection with, an Acquisition or a
Capital Improvement, in each case where such Acquisition or Capital Improvement
involves assets that, if acquired by the Partnership as of the date that is one
year prior to the first day of the Quarter in which such Acquisition is to be
consummated or such Capital Improvement is to be completed, would have resulted
in an increase in:
(A) the amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) with respect to
each of the four most recently completed Quarters (on a pro forma basis as
described below) as compared to
(B) the actual amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) (excluding
Adjusted Operating Surplus attributable to the Acquisition or Capital
Improvement) with respect to each of such four most recently completed
Quarters.
If the issuance of Units with respect to an Acquisition or Capital
Improvement occurs within the first four full Quarters after the Closing Date,
then Adjusted Operating Surplus as used in clauses (A) (subject to the
succeeding sentence) and (B) above shall be calculated (i) for each Quarter, if
any, that commenced after the Closing Date for which actual results of
operations are available, based on the actual Adjusted Operating Surplus of the
Partnership generated with respect to such Quarter, and (ii) for each other
Quarter, on a pro forma basis not inconsistent with the procedure, as
applicable, set forth in Appendix D to the Registration Statement. Furthermore,
the amount in clause (A) shall be determined on a pro forma basis assuming that
(1) all of the Parity Units or Partnership Securities to be issued in connection
with or within 365 days of such Acquisition or Capital Improvement had been
issued and outstanding, (2) all indebtedness for borrowed money to be incurred
or assumed in connection with such Acquisition or Capital Improvement (other
than any such indebtedness that is to be repaid with the proceeds of such debt
issuance) had been incurred or assumed, in each case as of the commencement of
such four-Quarter period, (3) the personnel expenses that
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would have been incurred by the Partnership in the operation of the acquired
assets are the personnel expenses for employees to be retained by the
Partnership in the operation of the acquired assets, and (4) the non-personnel
costs and expenses are computed on the same basis as those incurred by the
Partnership in the operation of the Partnership's business at similarly situated
Partnership facilities.
(c) The Partnership may also issue an unlimited number of Parity Units,
prior to the end of the Subordination Period and without the approval of the
Unitholders if the proceeds from such issuance are used exclusively to repay up
to $30 million of indebtedness of a Group Member where the aggregate amount of
distributions that would have been paid with respect to such newly issued Units
or Partnership Securities, plus the related distributions on the general partner
interest in the Partnership in respect of the four-Quarter period ending prior
to the first day of the Quarter in which the issuance is to be consummated
(assuming such additional Units or Partnership Securities had been Outstanding
throughout such period and that distributions equal to the distributions that
were actually paid on the Outstanding Units during the period were paid on such
additional Units or Partnership Securities) did not exceed the interest costs
actually incurred during such period on the indebtedness that is to be repaid
(or, if such indebtedness was not outstanding throughout the entire period,
would have been incurred had such indebtedness been outstanding for the entire
period).
(d) During the Subordination Period, the Partnership shall not issue
additional Partnership Securities having rights to distributions or in
liquidation ranking prior or senior to the Common Units, without the prior
approval of the holders of a Unit Majority.
(e) No fractional Units shall be issued by the Partnership.
5.8 Conversion of Subordinated Units
(a) A total of 925,736 of the Outstanding Subordinated Units will convert
into Common Units on a one-for-one basis on the first day after the Record Date
for distribution in respect of any Quarter ending on or after May 31, 1999, in
respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding
Common Units and Subordinated Units with respect to each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equals or exceeds the sum of the Minimum Quarterly Distribution
on all of the Outstanding Common Units and Subordinated Units during such
periods;
(ii) the Adjusted Operating Surplus generated during each of the two
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equals or exceeds the sum of the Minimum Quarterly Distribution
on all of the Outstanding Common Units and Subordinated Units, plus the
related distribution on the general partner interest in the Partnership and
the general partner interest in the Operating Partnership, during such
periods; and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units
is zero.
(b) An additional 925,736 of the Outstanding Subordinated Units will
convert into Common Units on a one-for-one basis on the first day after the
Record Date for distribution in respect of any Quarter ending on or after May
31, 2000, in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding
Common Units and Subordinated Units with respect to each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equals or exceeds the sum of the Minimum Quarterly Distribution
on all of the Outstanding Common Units and Subordinated Units during such
periods;
(ii) the Adjusted Operating Surplus generated during each of the two
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equals or exceeds the sum of the Minimum Quarterly Distribution
on all of the Outstanding Common Units and Subordinated Units, plus the
related distribution on the general partner interest in the Partnership and
the general partner interest in the Operating Partnership, during such
periods; and
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(iii) the Cumulative Common Unit Arrearage on all of the Common Units
is zero;
provided, however, that the conversion of Subordinated Units pursuant to this
Section 5.8(b) may not occur until at least one year following the conversion of
Subordinated Units pursuant to Section 5.8(a).
(c) In the event that less than all of the Outstanding Subordinated Units
shall convert into Common Units pursuant to Section 5.8(a) or 5.8(b) at a time
when there shall be more than one holder of Subordinated Units, then, unless all
of the holders of Subordinated Units shall agree to a different allocation, the
Subordinated Units that are to be converted into Common Units shall be allocated
among the holders of Subordinated Units pro rata based on the number of
Subordinated Units held by each such holder.
(d) Any Subordinated Units that are not converted into Common Units
pursuant to Sections 5.8(a) and (b) shall convert into Common Units on a
one-for-one basis on the first day following the Record Date for distributions
in respect of the final Quarter of the Subordination Period.
(e) Notwithstanding any other provision of this Agreement, all the then
Outstanding Subordinated Units will automatically convert into Common Units on a
one-for-one basis as set forth in, and pursuant to the terms of, Section 11.4
hereof.
(f) A Subordinated Unit that has converted into a Common Unit shall be
subject to the provisions of Section 6.7(b).
5.9 Limited Preemptive Right
Except as provided in this Section 5.9 and Section 5.2, no Person shall
have any preemptive, preferential or other similar right with respect to the
issuance of any Partnership Security, whether unissued, held in the treasury or
hereafter created. The General Partner shall have the right, which it may from
time to time assign in whole or in part to any of its Affiliates, to purchase
Partnership Securities from the Partnership whenever, and on the same terms
that, the Partnership issues Partnership Securities to Persons other than the
General Partner and its Affiliates, to the extent necessary to maintain the
Percentage Interests of the General Partner and its Affiliates equal to that
which existed immediately prior to the issuance of such Partnership Securities.
5.10 Splits and Combination
(a) Subject to Sections 5.10(d), 6.6 and 6.9 (dealing with adjustments of
distribution levels), the Partnership may make a Pro Rata distribution of
Partnership Securities to all Record Holders or may effect a subdivision or
combination of Partnership Securities so long as, after any such event, each
Partner shall have the same Percentage Interest in the Partnership as before
such event, and any amounts calculated on a per Unit basis (including any Common
Unit Arrearage or Cumulative Common Unit Arrearage) or stated as a number of
Units (including the number of Subordinated Units that may convert prior to the
end of the Subordination Period and the number of additional Parity Units that
may be issued pursuant to Section 5.7 without a Unitholder vote) are
proportionately adjusted retroactive to the beginning of the Partnership.
(b) Whenever such a distribution, subdivision or combination of Partnership
Securities is declared, the General Partner shall select a Record Date as of
which the distribution, subdivision or combination shall be effective and shall
send notice thereof at least 20 days prior to such Record Date to each Record
Holder as of a date not less than 10 days prior to the date of such notice. The
General Partner also may cause a firm of independent public accountants selected
by it to calculate the number of Partnership Securities to be held by each
Record Holder after giving effect to such distribution, subdivision or
combination. The General Partner shall be entitled to rely on any certificate
provided by such firm as conclusive evidence of the accuracy of such
calculation.
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(c) Promptly following any such distribution, subdivision or combination,
the Partnership may issue Certificates to the Record Holders of Partnership
Securities as of the applicable Record Date representing the new number of
Partnership Securities held by such Record Holders, or the General Partner may
adopt such other procedures as it may deem appropriate to reflect such changes.
If any such combination results in a smaller total number of Partnership
Securities Outstanding, the Partnership shall require, as a condition to the
delivery to a Record Holder of such new Certificate, the surrender of any
Certificate held by such Record Holder immediately prior to such Record Date.
(d) The Partnership shall not issue fractional Units upon any distribution,
subdivision or combination of Units. If a distribution, subdivision or
combination of Units would result in the issuance of fractional Units but for
the provisions of Section 5.7(e) and this Section 5.10(d), each fractional Unit
shall be rounded to the nearest whole Unit (and a 0.5 Unit shall be rounded to
the next higher Unit).
5.11 Fully Paid and Non-Assessable Nature of Limited Partner Partnership
Interests
All Limited Partner Partnership Interests issued pursuant to, and in
accordance with the requirements of, this Article V shall be fully paid and
non-assessable Limited Partner Partnership Interests in the Partnership, except
as such non-assessability may be affected by Section 17-607 of the Delaware Act.
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
6.1 Allocations for Capital Account Purpose
For purposes of maintaining the Capital Accounts and in determining the
rights of the Partners among themselves, the Partnership's items of income,
gain, loss and deduction (computed in accordance with Section 5.5(b)) shall be
allocated among the Partners in each taxable year (or portion thereof) as
provided hereinbelow.
(a) Net Income. After giving effect to the special allocations set forth in
Section 6.1(d), Net Income for each taxable year and all items of income, gain,
loss and deduction taken into account in computing Net Income for such taxable
year shall be allocated as follows:
(i) First, 100% to the General Partner until the aggregate Net Income
allocated to the General Partner pursuant to this Section 6.1(a)(i) for the
current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(iii) for all previous taxable years;
(ii) Second, 100% to the General Partner and the Unitholders, in
accordance with their respective Percentage Interests, until the aggregate
Net Income allocated to such Partners pursuant to this Section 6.1(a)(ii)
for the current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to such Partners pursuant to Section
6.1(b)(ii) for all previous taxable years; and
(iii) Third, the balance, if any, 100% to the General Partner and the
Unitholders in accordance with their respective Percentage Interests.
(b) Net Losses. After giving effect to the special allocations set forth in
Section 6.1(d), Net Losses for each taxable period and all items of income,
gain, loss and deduction taken into account in computing Net Losses for such
taxable period shall be allocated as follows:
(i) First, 100% to the General Partner and the Unitholders, in
accordance with their respective Percentage Interests, until the aggregate
Net Losses allocated pursuant to this Section 6.1(b)(i) for the current
taxable year and all previous taxable years is equal to the aggregate Net
Income allocated to such Partners pursuant to Section 6.1(a)(iii) for all
previous taxable years, provided that the Net Losses shall not be allocated
pursuant to this Section 6.1(b)(i) to the extent that such allocation would
cause any
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Unitholder to have a deficit balance in its Adjusted Capital Account at the
end of such taxable year (or increase any existing deficit balance in its
Adjusted Capital Account);
(ii) Second, 100% to the General Partner and the Unitholders in
accordance with their respective Percentage Interests; provided, that Net
Losses shall not be allocated pursuant to this Section 6.1(b)(ii) to the
extent that such allocation would cause any Unitholder to have a deficit
balance in its Adjusted Capital Account at the end of such taxable year (or
increase any existing deficit balance in its Adjusted Capital Account);
(iii) Third, the balance, if any, 100% to the General Partner.
(c) Net Termination Gains and Losses. After giving effect to the special
allocations set forth in Section 6.1(d), all items of income, gain, loss and
deduction taken into account in computing Net Termination Gain or Net
Termination Loss for such taxable period shall be allocated in the same manner
as such Net Termination Gain or Net Termination Loss is allocated hereunder. All
allocations under this Section 6.1(c) shall be made after Capital Account
balances have been adjusted by all other allocations provided under this Section
6.1 and after all distributions of Available Cash provided under Sections 6.4
and 6.5 have been made; provided, however, that solely for purposes of this
Section 6.1(c), Capital Accounts shall not be adjusted for distributions made
pursuant to Section 12.4.
(i) If a Net Termination Gain is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Gain shall be allocated
among the Partners in the following manner (and the Capital Accounts of the
Partners shall be increased by the amount so allocated in each of the
following subclauses, in the order listed, before an allocation is made
pursuant to the next succeeding subclause):
(A) First, to each Partner having a deficit balance in its Capital
Account, in the proportion that such deficit balance bears to the total
deficit balances in the Capital Accounts of all Partners, until each
such Partner has been allocated Net Termination Gain equal to any such
deficit balance in its Capital Account;
(B) Second, 99% to all Unitholders holding Common Units, in
proportion to their relative Percentage Interests, and 1% to the General
Partner, until the Capital Account in respect of each Common Unit then
Outstanding is equal to the sum of (1) its Unrecovered Capital plus (2)
the Minimum Quarterly Distribution for the Quarter during which the
Liquidation Date occurs, reduced by any distribution pursuant to Section
6.4(a)(i) or (b)(i) with respect to such Common Unit for such Quarter
(the amount determined pursuant to this clause (2) is hereinafter
defined as the "Unpaid MQD") plus (3) any then existing Cumulative
Common Unit Arrearage;
(C) Third, if such Net Termination Gain is recognized (or is deemed
to be recognized) prior to the expiration of the Subordination Period,
99% to all Unitholders holding Subordinated Units, in proportion to
their relative Percentage Interests, and 1% to the General Partner until
the Capital Account in respect of each Subordinated Unit then
Outstanding equals the sum of (1) its Unrecovered Capital, determined
for the taxable year (or portion thereof) to which this allocation of
gain relates, plus (2) the Minimum Quarterly Distribution for the
Quarter during which the Liquidation Date occurs, reduced by any
distribution pursuant to Section 6.4(a)(iii) with respect to such
Subordinated Unit for such Quarter;
(D) Fourth, 99% to all Unitholders, in accordance with their
relative Percentage Interests, and 1% to the General Partner until the
Capital Account in respect of each Common Unit then Outstanding is equal
to the sum of (1) its Unrecovered Capital, plus (2) the Unpaid MQD, plus
(3) any then existing Cumulative Common Unit Arrearage, plus (4) the
excess of (aa) the First Target Distribution less the Minimum Quarterly
Distribution for each Quarter of the Partnership's existence over (bb)
the cumulative per Unit amount of any distributions of Operating Surplus
that was distributed pursuant to Sections 6.4(a)(iv) and 6.4(b)(ii) (the
sum of (1) plus (2) plus (3) plus (4) is hereinafter defined as the
"First Liquidation Target Amount");
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(E) Fifth, 85.8673% to all Unitholders, in accordance with their
relative Percentage Interests, 13.1327% to the holders of the Incentive
Distribution Rights, Pro Rata, and 1% to the General Partner until the
Capital Account in respect of each Common Unit then Outstanding is equal
to the sum of (1) the First Liquidation Target Amount, plus (2) the
excess of (aa) the Second Target Distribution less the First Target
Distribution for each Quarter of the Partnership's existence over (bb)
the cumulative per Unit amount of any distributions of Operating Surplus
that was distributed pursuant to Sections 6.4(a)(v) and 6.4(b)(iii) (the
sum of (1) plus (2) is hereinafter defined as the "Second Liquidation
Target Amount");
(F) Sixth, 75.7653% to all Unitholders, in accordance with their
relative Percentage Interests, 23.2347% to the holders of the Incentive
Distribution Rights, Pro Rata, and 1% to the General Partner until the
Capital Account in respect of each Common Unit then Outstanding is equal
to the sum of (1) the Second Liquidation Target Amount, plus (2) the
excess of (aa) the Third Target Distribution less the Second Target
Distribution for each Quarter of the Partnership's existence over (bb)
the cumulative per Unit amount of any distributions of Operating Surplus
that was distributed pursuant to Sections 6.4(a)(vi) and 6.4(b)(iv); and
(G) Finally, any remaining amount 50.5102% to all Unitholders, in
accordance with their relative Percentage Interests, 48.4898% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner.
(ii) If a Net Termination Loss is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Loss shall be allocated
among the Partners in the following manner:
(A) First, if such Net Termination Loss is recognized (or is deemed
to be recognized) prior to the conversion of the last Outstanding
Subordinated Unit, 99% to the Unitholders holding Subordinated Units, in
proportion to their relative Percentage Interests, and 1% to the General
Partner until the Capital Account in respect of each Subordinated Unit
then Outstanding has been reduced to zero;
(B) Second, 99% to all Unitholders holding Common Units, in
proportion to their relative Percentage Interests, and 1% to the General
Partner until the Capital Account in respect of each Common Unit then
Outstanding has been reduced to zero; and
(C) Third, the balance, if any, 100% to the General Partner.
(d) Special Allocations. Notwithstanding any other provision of this
Section 6.1, the following special allocations shall be made for such taxable
period:
(i) Partnership Minimum Gain Chargeback. Notwithstanding any other
provision of this Section 6.1, if there is a net decrease in Partnership
Minimum Gain during any Partnership taxable period, each Partner shall be
allocated items of Partnership income and gain for such period (and, if
necessary, subsequent periods) in the manner and amounts provided in
Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and
1.704-2(j)(2)(i), or any successor provision. For purposes of this Section
6.1(d), each Partner's Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required hereunder shall
be effected, prior to the application of any other allocations pursuant to
this Section 6.1(d) with respect to such taxable period (other than an
allocation pursuant to Sections 6.1(d)(vi) and 6.1(d)(vii)). This Section
6.1(d)(i) is intended to comply with the Partnership Minimum Gain
chargeback requirement in Treasury Regulation Section 1.704-2(f) and shall
be interpreted consistently therewith.
(ii) Chargeback of Partner Nonrecourse Debt Minimum Gain.
Notwithstanding the other provisions of this Section 6.1 (other than
Section 6.1(d)(i)), except as provided in Treasury Regulation Section
1.704-2(i)(4), if there is a net decrease in Partner Nonrecourse Debt
Minimum Gain during any Partnership taxable period, any Partner with a
share of Partner Nonrecourse Debt Minimum Gain at the beginning of such
taxable period shall be allocated items of Partnership income and gain for
such period (and, if necessary, subsequent periods) in the manner and
amounts provided in Treasury Regulation
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Sections 1.704-2(i)(4) and 1.704-2(j)(2)(ii), or any successor provisions.
For purposes of this Section 6.1(d), each Partner's Adjusted Capital
Account balance shall be determined, and the allocation of income or gain
required hereunder shall be effected, prior to the application of any other
allocations pursuant to this Section 6.1(d), other than Section 6.1(d)(i)
and other than an allocation pursuant to Sections 6.1(d)(vi) and
6.1(d)(vii), with respect to such taxable period. This Section 6.1(d)(ii)
is intended to comply with the chargeback of items of income and gain
requirement in Treasury Regulation Section 1.704-2(i)(4) and shall be
interpreted consistently therewith.
(iii) Priority Allocations.
(A) If the amount of cash or the Net Agreed Value of any property
distributed (except cash or property distributed pursuant to Section
12.4) to any Unitholder with respect to its Units for a taxable year is
greater (on a per Unit basis) than the amount of cash or the Net Agreed
Value of property distributed to the other Unitholders with respect to
their Units (on a per Unit basis), then (1) each Unitholder receiving
such greater cash or property distribution shall be allocated gross
income in an amount equal to the product of (aa) the amount by which the
distribution (on a per Unit basis) to such Unitholder exceeds the
distribution (on a per Unit basis) to the Unitholders receiving the
smallest distribution and (bb) the number of Units owned by the
Unitholder receiving the greater distribution; and (2) the General
Partner shall be allocated gross income in an aggregate amount equal to
1/99 of the sum of the amounts allocated in clause (1) above.
(B) After the application of Section 6.1(d)(iii)(A), all or any
portion of the remaining items of Partnership gross income or gain for
the taxable period, if any, shall be allocated 100% to the holders of
Incentive Distribution Rights, Pro Rata, until the aggregate amount of
such items allocated to the holders of Incentive Distribution Rights
pursuant to this paragraph 6.1(d)(iii)(B) for the current taxable year
and all previous taxable years is equal to the cumulative amount of all
Incentive Distributions made to the holders of Incentive Distribution
Rights from the Closing Date to a date 45 days after the end of the
current taxable year.
(iv) Qualified Income Offset. In the event any Partner unexpectedly
receives any adjustments, allocations or distributions described in
Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-
1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership income
and gain shall be specially allocated to such Partner in an amount and
manner sufficient to eliminate, to the extent required by the Treasury
Regulations promulgated under Section 704(b) of the Code, the deficit
balance, if any, in its Adjusted Capital Account created by such
adjustments, allocations or distributions as quickly as possible unless
such deficit balance is otherwise eliminated pursuant to Section 6.1(d)(i)
or (ii).
(v) Gross Income Allocations. In the event any Partner has a deficit
balance in its Capital Account at the end of any Partnership taxable period
in excess of the sum of (A) the amount such Partner is required to restore
pursuant to the provisions of this Agreement and (B) the amount such
Partner is deemed obligated to restore pursuant to Treasury Regulation
Sections 1.704-2(g) and 1.704-2(i)(5), such Partner shall be specially
allocated items of Partnership gross income and gain in the amount of such
excess as quickly as possible; provided, that an allocation pursuant to
this Section 6.1(d)(v) shall be made only if and to the extent that such
Partner would have a deficit balance in its Capital Account as adjusted
after all other allocations provided for in this Section 6.1 have been
tentatively made as if this Section 6.1(d)(v) were not in this Agreement.
(vi) Nonrecourse Deductions. Nonrecourse Deductions for any taxable
period shall be allocated to the Partners in accordance with their
respective Percentage Interests. If the General Partner determines in its
good faith discretion that the Partnership's Nonrecourse Deductions must be
allocated in a different ratio to satisfy the safe harbor requirements of
the Treasury Regulations promulgated under Section 704(b) of the Code, the
General Partner is authorized, upon notice to the other Partners, to revise
the prescribed ratio to the numerically closest ratio that does satisfy
such requirements.
(vii) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions
for any taxable period shall be allocated 100% to the Partner that bears
the Economic Risk of Loss with respect to the Partner
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Nonrecourse Debt to which such Partner Nonrecourse Deductions are
attributable in accordance with Treasury Regulation Section 1.704-2(i). If
more than one Partner bears the Economic Risk of Loss with respect to a
Partner Nonrecourse Debt, such Partner Nonrecourse Deductions attributable
thereto shall be allocated between or among such Partners in accordance
with the ratios in which they share such Economic Risk of Loss.
(viii) Nonrecourse Liabilities. For purposes of Treasury Regulation
Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of
the Partnership in excess of the sum of (A) the amount of Partnership
Minimum Gain and (B) the total amount of Nonrecourse Built-in Gain shall be
allocated among the Partners in accordance with their respective Percentage
Interests.
(ix) Code Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Section 734(b) or
743(c) of the Code is required, pursuant to Treasury Regulation Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the
asset) or loss (if the adjustment decreases such basis), and such item of
gain or loss shall be specially allocated to the Partners in a manner
consistent with the manner in which their Capital Accounts are required to
be adjusted pursuant to such Section of the Treasury regulations.
(x) Economic Uniformity. At the election of the General Partner with
respect to any taxable period ending upon, or after, the termination of the
Subordination Period, all or a portion of the remaining items of
Partnership gross income or gain for such taxable period, after taking into
account allocations pursuant to Sections 6.1(d)(iii), shall be allocated
100% to each Partner holding Subordinated Units that are Outstanding as of
the termination of the Subordination Period ("Final Subordinated Units") in
the proportion of the number of Final Subordinated Units held by such
Partner to the total number of Final Subordinated Units then Outstanding,
until each such Partner has been allocated an amount of gross income or
gain which increases the Capital Account maintained with respect to such
Final Subordinated Units to an amount equal to the product of (A) the
number of Final Subordinated Units held by such Partner and (B) the Per
Unit Capital Amount for a Common Unit. The purpose of this allocation is to
establish uniformity between the Capital Accounts underlying Final
Subordinated Units and the Capital Accounts underlying Common Units held by
Persons other than the General Partner and its Affiliates immediately prior
to the conversion of such Final Subordinated Units into Common Units. This
allocation method for establishing such economic uniformity will only be
available to the General Partner if the method for allocating the Capital
Account maintained with respect to the Subordinated Units between the
transferred and retained Subordinated Units pursuant to Section 5.5(c)(ii)
does not otherwise provide such economic uniformity to the Final
Subordinated Units.
(xi) Curative Allocation.
(A) Notwithstanding any other provision of this Section 6.1, other
than the Required Allocations, the Required Allocations shall be taken
into account in making the Agreed Allocations so that, to the extent
possible, the net amount of items of income, gain, loss and deduction
allocated to each Partner pursuant to the Required Allocations and the
Agreed Allocations, together, shall be equal to the net amount of such
items that would have been allocated to each such Partner under the
Agreed Allocations had the Required Allocations and the related Curative
Allocation not otherwise been provided in this Section 6.1.
Notwithstanding the preceding sentence, Required Allocations relating to
(1) Nonrecourse Deductions shall not be taken into account except to the
extent that there has been a decrease in Partnership Minimum Gain and
(2) Partner Nonrecourse Deductions shall not be taken into account
except to the extent that there has been a decrease in Partner
Nonrecourse Debt Minimum Gain. Allocations pursuant to this Section
6.1(d)(xi)(A) shall only be made with respect to Required Allocations to
the extent the General Partner reasonably determines that such
allocations will otherwise be inconsistent with the economic agreement
among the Partners. Further, allocations pursuant to this Section
6.1(d)(xi)(A) shall be deferred with respect to allocations pursuant to
clauses (1) and (2) hereof to the extent the General Partner
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reasonably determines that such allocations are likely to be offset by
subsequent Required Allocations.
(B) The General Partner shall have reasonable discretion, with
respect to each taxable period, to (1) apply the provisions of Section
6.1(d)(xi)(A) in whatever order is most likely to minimize the economic
distortions that might otherwise result from the Required Allocations,
and (2) divide all allocations pursuant to Section 6.1(d)(xi)(A) among
the Partners in a manner that is likely to minimize such economic
distortions.
(xii) Corrective Allocations. In the event of any allocation of
Additional Book Basis Derivative Items or any Book-Down Event or any
recognition of a Net Termination Loss, the following rules shall apply:
(A) In the case of any allocation of Additional Book Basis
Derivative Items (other than an allocation of Unrealized Gain or
Unrealized Loss under Section 5.5(d) hereof), the General Partner shall
allocate additional items of gross income and gain away from the holders
of Incentive Distribution Rights to the Unitholders and the General
Partner, or additional items of deduction and loss away from the
Unitholders and the General Partner to the holders of Incentive
Distribution Rights, Pro Rata, to the extent that the Additional Book
Basis Derivative Items allocated to the Unitholders or the General
Partner exceeds their Share of Additional Book Basis Derivative Items.
For this purpose, the Unitholders and the General Partner shall be
treated as being allocated Additional Book Basis Derivative Items to the
extent that such Additional Book Basis Derivative Items have reduced the
amount of income that would otherwise have been allocated to the
Unitholders or the General Partner under the Partnership Agreement
(e.g., Additional Book Basis Derivative Items taken into account in
computing cost of goods sold would reduce the amount of book income
otherwise available for allocation among the Partners). Any allocation
made pursuant to this Section 6.1(d)(xii)(A) shall be made after all of
the other Agreed Allocations have been made as if this Section
6.1(d)(xii) were not in this Agreement and, to the extent necessary,
shall require the reallocation of items that have been allocated
pursuant to such other Agreed Allocations.
(B) In the case of any negative adjustments to the Capital Accounts
of the Partners resulting from a Book-Down Event or from the recognition
of a Net Termination Loss, such negative adjustment (1) shall first be
allocated, to the extent of the Aggregate Remaining Net Positive
Adjustments, in such a manner, as reasonably determined by the General
Partner, that to the extent possible the aggregate Capital Accounts of
the holders of Incentive Distribution Rights will equal the amount which
would have been the holders of Incentive Distribution Rights Capital
Account balance if no prior Book-Up Events had occurred, and (2) any
negative adjustment in excess of the Aggregate Remaining Net Positive
Adjustments shall be allocated pursuant to Section 6.1(c) hereof.
(C) In making the allocations required under this Section
6.1(d)(xii), the General Partner, in its sole discretion, may apply
whatever conventions or other methodology it deems reasonable to satisfy
the purpose of this Section 6.1(d)(xii).
6.2 Allocations for Tax Purposes
(a) Except as otherwise provided herein, for federal income tax purposes,
each item of income, gain, loss and deduction shall be allocated among the
Partners in the same manner as its correlative item of "book" income, gain, loss
or deduction is allocated pursuant to Section 6.1.
(b) In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss,
depreciation, amortization and cost recovery deductions shall be allocated for
federal income tax purposes among the Partners as follows:
(i) (A) In the case of a Contributed Property, such items attributable
thereto shall be allocated among the Partners in the manner provided under
Section 704(c) of the Code that takes into account the variation between
the Agreed Value of such property and its adjusted basis at the time of
contribution;
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and (B) any item of Residual Gain or Residual Loss attributable to a
Contributed Property shall be allocated among the Partners in the same
manner as its correlative item of "book" gain or loss is allocated pursuant
to Section 6.1.
(ii) (A) In the case of an Adjusted Property, such items shall (1)
first, be allocated among the Partners in a manner consistent with the
principles of Section 704(c) of the Code to take into account the
Unrealized Gain or Unrealized Loss attributable to such property and the
allocations thereof pursuant to Section 5.5(d)(i) or (ii), and (2) second,
in the event such property was originally a Contributed Property, be
allocated among the Partners in a manner consistent with Section
6.2(b)(i)(A); and (B) any item of Residual Gain or Residual Loss
attributable to an Adjusted Property shall be allocated among the Partners
in the same manner as its correlative item of "book" gain or loss is
allocated pursuant to Section 6.1.
(iii) The General Partner shall apply the principles of Treasury
Regulation Section 1.704-3(d) to eliminate Book-Tax Disparities.
(c) For the proper administration of the Partnership and for the
preservation of uniformity of the Units (or any class or classes thereof), the
General Partner shall have sole discretion to (i) adopt such conventions as it
deems appropriate in determining the amount of depreciation, amortization and
cost recovery deductions; (ii) make special allocations for federal income tax
purposes of income (including, without limitation, gross income) or deductions;
and (iii) amend the provisions of this Agreement as appropriate (x) to reflect
the proposal or promulgation of Treasury regulations under Section 704(b) or
Section 704(c) of the Code or (y) otherwise to preserve or achieve uniformity of
the Units (or any class or classes thereof). The General Partner may adopt such
conventions, make such allocations and make such amendments to this Agreement as
provided in this Section 6.2(c) only if such conventions, allocations or
amendments would not have a material adverse effect on the Partners, the holders
of any class or classes of Units issued and Outstanding or the Partnership, and
if such allocations are consistent with the principles of Section 704 of the
Code.
(d) The General Partner in its discretion may determine to depreciate or
amortize the portion of an adjustment under Section 743(b) of the Code
attributable to unrealized appreciation in any Adjusted Property (to the extent
of the unamortized Book-Tax Disparity) using a predetermined rate derived from
the depreciation or amortization method and useful life applied to the
Partnership's common basis of such property, despite any inconsistency of such
approach with Proposed Treasury Regulation Section 1.168-2(n), Treasury
Regulation Section 1.167(c)-l(a)(6) or the legislative history of Section 197 of
the Code. If the General Partner determines that such reporting position cannot
reasonably be taken, the General Partner may adopt depreciation and amortization
conventions under which all purchasers acquiring Units in the same month would
receive depreciation and amortization deductions, based upon the same applicable
rate as if they had purchased a direct interest in the Partnership's property.
If the General Partner chooses not to utilize such aggregate method, the General
Partner may use any other reasonable depreciation and amortization conventions
to preserve the uniformity of the intrinsic tax characteristics of any Units
that would not have a material adverse effect on the Limited Partners or the
Record Holders of any class or classes of Units.
(e) Any gain allocated to the Partners upon the sale or other taxable
disposition of any Partnership asset shall, to the extent possible, after taking
into account other required allocations of gain pursuant to this Section 6.2, be
characterized as Recapture Income in the same proportions and to the same extent
as such Partners (or their predecessors in interest) have been allocated any
deductions directly or indirectly giving rise to the treatment of such gains as
Recapture Income.
(f) All items of income, gain, loss, deduction and credit recognized by the
Partnership for federal income tax purposes and allocated to the Partners in
accordance with the provisions hereof shall be determined without regard to any
election under Section 754 of the Code which may be made by the Partnership;
provided, however, that such allocations, once made, shall be adjusted as
necessary or appropriate to take into account those adjustments permitted or
required by Sections 734 and 743 of the Code.
(g) Each item of Partnership income, gain, loss and deduction attributable
to a transferred general partner interest or to transferred Units or Incentive
Distribution Rights, shall for federal income tax purposes,
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be determined on an annual basis and prorated on a monthly basis and shall be
allocated to the Partners as of the opening of the New York Stock Exchange on
the first Business Day of each month; provided, however, that (i) if the
Over-allotment Option is not exercised, such items for the period beginning on
the Closing Date and ending on the last day of the month in which the Closing
Date occurs shall be allocated to Partners as of the opening of the New York
Stock Exchange on the first Business Day of the next succeeding month or (ii) if
the Over-allotment Option is exercised, such items for the period beginning on
the Closing Date and ending on the last day of the month in which the Option
Closing Date (as defined in the Underwriting Agreement) occurs shall be
allocated to the Partners as of the opening of the New York Stock Exchange on
the first Business Day of the next succeeding month; and provided, further, that
gain or loss on a sale or other disposition of any assets of the Partnership
other than in the ordinary course of business shall be allocated to the Partners
as of the opening of the New York Stock Exchange on the first Business Day of
the month in which such gain or loss is recognized for federal income tax
purposes. The General Partner may revise, alter or otherwise modify such methods
of allocation as it determines necessary, to the extent permitted or required by
Section 706 of the Code and the regulations or rulings promulgated thereunder.
(h) Allocations that would otherwise be made to a Limited Partner under the
provisions of this Article VI shall instead be made to the beneficial owner of
Units held by a nominee in any case in which the nominee has furnished the
identity of such owner to the Partnership in accordance with Section 6031(c) of
the Code or any other method acceptable to the General Partner in its sole
discretion.
6.3 Requirement and Characterization of Distributions; Distributions to Record
Holders
(a) Within 45 days following the end of each Quarter commencing with the
Quarter ending on August 31, 1996, an amount equal to 100% of Available Cash
with respect to such Quarter shall, subject to Section 17-607 of the Delaware
Act, be distributed in accordance with this Article VI by the Partnership to the
Partners as of the Record Date selected by the General Partner in its reasonable
discretion. All amounts of Available Cash distributed by the Partnership on any
date from any source shall be deemed to be Operating Surplus until the sum of
all amounts of Available Cash theretofore distributed by the Partnership to the
Partners pursuant to Section 6.4 equals the Operating Surplus from the Closing
Date through the close of the immediately preceding Quarter. Any remaining
amounts of Available Cash distributed by the Partnership on such date shall,
except as otherwise provided in Section 6.5, be deemed to be "Capital Surplus."
All distributions required to be made under this Agreement shall be made subject
to Section 17-607 of the Delaware Act.
(b) In the event of the dissolution and liquidation of the Partnership, all
receipts received during or after the Quarter in which the Liquidation Date
occurs, other than from borrowings described in (a)(ii) of the definition of
Available Cash, shall be applied and distributed solely in accordance with, and
subject to the terms and conditions of, Section 12.4.
(c) The General Partner shall have the discretion to treat taxes paid by
the Partnership on behalf of, or amounts withheld with respect to, all or less
than all of the Partners, as a distribution of Available Cash to such Partners.
(d) Each distribution in respect of a Partnership Interest shall be paid by
the Partnership, directly or through the Transfer Agent or through any other
Person or agent, only to the Record Holder of such Partnership Interest as of
the Record Date set for such distribution. Such payment shall constitute full
payment and satisfaction of the Partnership's liability in respect of such
payment, regardless of any claim of any Person who may have an interest in such
payment by reason of an assignment or otherwise.
6.4 Distributions of Available Cash from Operating Surplus
(a) During Subordination Period. Available Cash with respect to any Quarter
within the Subordination Period that is deemed to be Operating Surplus pursuant
to the provisions of Section 6.3 or 6.5 shall, subject to
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Section 17-607 of the Delaware Act, be distributed as follows, except as
otherwise required by Section 5.6(b) in respect of additional Partnership
Securities issued pursuant thereto:
(i) First, 99% to the Unitholders holding Common Units, in proportion
to their relative Percentage Interests, and 1% to the General Partner until
there has been distributed in respect of each Common Unit then Outstanding
an amount equal to the Minimum Quarterly Distribution for such Quarter;
(ii) Second, 99% to the Unitholders holding Common Units, in
proportion to their relative Percentage Interests, and 1% to the General
Partner until there has been distributed in respect of each Common Unit
then Outstanding an amount equal to the Cumulative Common Unit Arrearage
existing with respect to such Quarter;
(iii) Third, 99% to the Unitholders holding Subordinated Units, in
proportion to their relative Percentage Interests, and 1% to the General
Partner until there has been distributed in respect of each Subordinated
Unit then Outstanding an amount equal to the Minimum Quarterly Distribution
for such Quarter;
(iv) Fourth, 99% to all Unitholders, in accordance with their relative
Percentage Interests, and 1% to the General Partner until there has been
distributed in respect of each Unit then Outstanding an amount equal to the
excess of the First Target Distribution over the Minimum Quarterly
Distribution for such Quarter;
(v) Fifth, 85.8673% to all Unitholders, in accordance with their
relative Percentage Interests, 13.1327% to the holders of the Incentive
Distribution Rights, Pro Rata, and 1% to the General Partner until there
has been distributed in respect of each Unit then Outstanding an amount
equal to the excess of the Second Target Distribution over the First Target
Distribution for such Quarter;
(vi) Sixth, 75.7653% to all Unitholders, in accordance with their
relative Percentage Interests, 23.2347% to the holders of the Incentive
Distribution Rights, Pro Rata, and 1% to the General Partner until there
has been distributed in respect of each Unit then Outstanding an amount
equal to the excess of the Third Target Distribution over the Second Target
Distribution for such Quarter; and
(vii) Thereafter, 50.5102% to all Unitholders, in accordance with
their relative Percentage Interests, 48.4898% to the holders of the
Incentive Distribution Rights, Pro Rata, and 1% to the General Partner;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 6.6(a), the
distribution of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made solely in accordance with Section
6.4(a)(vii).
(b) After Subordination Period. Available Cash with respect to any Quarter
after the Subordination Period that is deemed to be Operating Surplus pursuant
to the provisions of Section 6.3 or 6.5, subject to Section 17-607 of the
Delaware Act, shall be distributed as follows, except as otherwise required by
Section 5.6(b) in respect of additional Partnership Securities issued pursuant
thereto:
(i) First, 99% to all Unitholders, in accordance with their relative
Percentage Interests, and 1% to the General Partner until there has been
distributed in respect of each Unit then Outstanding an amount equal to the
Minimum Quarterly Distribution for such Quarter;
(ii) Second, 99% to all Unitholders, in accordance with their relative
Percentage Interests, and 1% to the General Partner until there has been
distributed in respect of each Unit then Outstanding an amount equal to the
excess of the First Target Distribution over the Minimum Quarterly
Distribution for such Quarter;
(iii) Third, 85.8673% to all Unitholders, in accordance with their
relative Percentage Interests, and 13.1327% to the holders of the Incentive
Distribution Rights, Pro Rata, and 1% to the General Partner until there
has been distributed in respect of each Unit then Outstanding an amount
equal to the excess of the Second Target Distribution over the First Target
Distribution for such Quarter;
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(iv) Fourth, 75.7653% to all Unitholders, in accordance with their
relative Percentage Interests, and 23.2347% to the holders of the Incentive
Distribution Rights, Pro Rata, and 1% to the General Partner until there
has been distributed in respect of each Unit then Outstanding an amount
equal to the excess of the Third Target Distribution over the Second Target
Distribution for such Quarter; and
(v) Thereafter, 50.5102% to all Unitholders, in accordance with their
relative Percentage Interests, and 48.4898% to the holders of the Incentive
Distribution Rights, Pro Rata, and 1% to the General Partner;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 6.6(a), the
distribution of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made solely in accordance with Section 6.4(b)(v).
6.5 Distributions of Available Cash from Capital Surplus
Available Cash that is deemed to be Capital Surplus pursuant to the
provisions of Section 6.3 shall, subject to Section 17-607 of the Delaware Act,
be distributed, unless the provisions of Section 6.3 require otherwise, 99% to
all Unitholders, in accordance with their relative Percentage Interests, and 1%
to the General Partner until a hypothetical holder of a Common Unit acquired on
the Closing Date has received with respect to such Common Unit, during the
period since the Closing Date through such date, distributions of Available Cash
that are deemed to be Capital Surplus in an aggregate amount equal to the
Initial Unit Price. Available Cash that is deemed to be Capital Surplus shall
then be distributed 99% to all Unitholders holding Common Units, in accordance
with their relative Percentage Interests, and 1% to the General Partner, until
there has been distributed in respect of each Common Unit then Outstanding an
amount equal to the Cumulative Common Unit Arrearage. Thereafter, all Available
Cash shall be distributed as if it were Operating Surplus and shall be
distributed in accordance with Section 6.4.
6.6 Adjustment of Minimum Quarterly Distribution and Target Distribution Levels
(a) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution, Third Target Distribution, Common Unit Arrearages and
Cumulative Common Unit Arrearages shall be proportionately adjusted in the event
of any distribution, combination or subdivision (whether effected by a
distribution payable in Units or otherwise) of Units or other Partnership
Securities in accordance with Section 5.10. In the event of a distribution of
Available Cash that is deemed to be from Capital Surplus, the then applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution shall be adjusted proportionately
downward to equal the product obtained by multiplying the otherwise applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution, as the case may be, by a fraction of
which the numerator is the Unrecovered Capital of the Common Units immediately
after giving effect to such distribution and of which the denominator is the
Unrecovered Capital of the Common Units immediately prior to giving effect to
such distribution.
(b) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution shall also be subject to
adjustment pursuant to Section 6.9.
6.7 Special Provisions Relating to the Holders of Subordinated Units
(a) Except with respect to the right to vote on or approve matters
requiring the vote or approval of a percentage of the holders of Outstanding
Common Units and the right to participate in allocations of income, gain, loss
and deduction and distributions made with respect to Common Units, the holder of
a Subordinated Unit shall have all of the rights and obligations of a Unitholder
holding Common Units hereunder; provided, however, that immediately upon the
conversion of Subordinated Units into Common Units pursuant to Section 5.8, the
Unitholder holding a Subordinated Unit shall possess all of the rights and
obligations of a Unitholder holding Common Units hereunder, including the right
to vote as a Common Unitholder and the right to participate in allocations of
income, gain, loss and deduction and distributions made with respect to
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Common Units; provided, however, that such converted Subordinated Units shall
remain subject to the provisions of Sections 5.5(c)(ii), 6.1(d)(x) and 6.7(b).
(b) The Unitholder holding a Subordinated Unit which has converted into a
Common Unit pursuant to Section 5.8 shall not be issued a Common Unit
Certificate, and shall not be permitted to transfer its converted Subordinated
Units to a Person which is not an Affiliate of the holder until such time as the
General Partner determines, based on advice of counsel, that a converted
Subordinated Unit should have, as a substantive matter, like intrinsic economic
and federal income tax characteristics, in all material respects, to the
intrinsic economic and federal income tax characteristics of an Initial Common
Unit. In connection with the condition imposed by this Section 6.7(b), the
General Partner may take whatever reasonable steps are required to provide
economic uniformity to the converted Subordinated Units in preparation for a
transfer of such converted Subordinated Units, including the application of
Sections 5.5(c)(ii) and 6.1(d)(x); provided, however, that no such steps may be
taken that would have a material adverse effect on the Unitholders holding
Common Units represented by Common Unit Certificates.
6.8 Special Provisions Relating to the Holders of Incentive Distribution Rights
Notwithstanding anything to the contrary set forth in this Agreement, the
holders of the Incentive Distribution Rights (a) shall (i) possess the rights
and obligations provided in this Agreement with respect to a Limited Partner
pursuant to Articles III and VII and (ii) have a Capital Account as a Partner
pursuant to Section 5.5 and all other provisions related thereto and (b) shall
not (i) be entitled to vote on any matters requiring the approval or vote of the
holders of Outstanding Units, (ii) be entitled to any distributions other than
as provided in Sections 6.4(a)(v), (vi) and (vii), 6.4(b)(iii), (iv) and (v),
and 12.4 or (iii) be allocated items of income, gain, loss or deduction other
than as specified in this Article VI.
6.9 Entity-Level Taxation
If legislation is enacted or the interpretation of existing language is
modified by the relevant governmental authority which causes the Partnership or
the Operating Partnership to be treated as an association taxable as a
corporation or otherwise subjects the Partnership or the Operating Partnership
to entity-level taxation for federal income tax purposes, the then applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution shall be adjusted to equal the
product obtained by multiplying (a) the amount thereof by (b) one minus the sum
of (i) the highest marginal federal corporate (or other entity, as applicable)
income tax rate of the Partnership for the taxable year of the Partnership in
which such Quarter occurs (expressed as a percentage) plus (ii) the effective
overall state and local income tax rate (expressed as a percentage) applicable
to the Partnership for the calendar year next preceding the calendar year in
which such Quarter occurs (after taking into account the benefit of any
deduction allowable for federal income tax purposes with respect to the payment
of state and local income taxes), but only to the extent of the increase in such
rates resulting from such legislation or interpretation. Such effective overall
state and local income tax rate shall be determined for the taxable year next
preceding the first taxable year during which the Partnership or the Operating
Partnership is taxable for federal income tax purposes as an association taxable
as a corporation or is otherwise subject to entity-level taxation by determining
such rate as if the Partnership or the Operating Partnership had been subject to
such state and local taxes during such preceding taxable year.
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
7.1 Management
(a) The General Partner shall conduct, direct and manage all activities of
the Partnership. Except as otherwise expressly provided in this Agreement, all
management powers over the business and affairs of the Partnership shall be
exclusively vested in the General Partner, and no Limited Partner or Assignee
shall have any management power over the business and affairs of the
Partnership. In addition to the powers now or
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hereafter granted a general partner of a limited partnership under applicable
law or which are granted to the General Partner under any other provision of
this Agreement, the General Partner, subject to Section 7.3, shall have full
power and authority to do all things and on such terms as it, in its sole
discretion, may deem necessary or appropriate to conduct the business of the
Partnership, to exercise all powers set forth in Section 2.5 and to effectuate
the purposes set forth in Section 2.4, including the following:
(i) the making of any expenditures, the lending or borrowing of money,
the assumption or guarantee of, or other contracting for, indebtedness and
other liabilities, the issuance of evidences of indebtedness and the
incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(iii) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the Partnership or
the merger or other combination of the Partnership with or into another
Person (the matters described in this clause (iii) being subject, however,
to any prior approval that may be required by Section 7.3);
(iv) the use of the assets of the Partnership (including cash on hand)
for any purpose consistent with the terms of this Agreement, including the
financing of the conduct of the operations of the Partnership Group, the
lending of funds to other Persons (including the Operating Partnership),
the repayment of obligations of the Partnership and the Operating
Partnership and the making of capital contributions to any member of the
Partnership Group;
(v) the negotiation, execution and performance of any contracts,
conveyances or other instruments (including instruments that limit the
liability of the Partnership under contractual arrangements to all or
particular assets of the Partnership, with the other party to the contract
to have no recourse against the General Partner or its assets other than
its interest in the Partnership, even if same results in the terms of the
transaction being less favorable to the Partnership than would otherwise be
the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees (including employees
having titles such as "president," "vice president," "secretary" and
"treasurer") and agents, outside attorneys, accountants, consultants and
contractors and the determination of their compensation and other terms of
employment or hiring;
(viii) the maintenance of such insurance for the benefit of the
Partnership Group and the Partners as it deems necessary or appropriate;
(ix) the formation of, or acquisition of an interest in, and the
contribution of property and the making of loans to, any further limited or
general partnerships, joint ventures, corporations or other relationships
(including the acquisition of interests in, and the contributions of
property to, the Operating Partnership from time to time);
(x) the control of any matters affecting the rights and obligations of
the Partnership, including the bringing and defending of actions at law or
in equity and otherwise engaging in the conduct of litigation and the
incurring of legal expense and the settlement of claims and litigation;
(xi) the indemnification of any Person against liabilities and
contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any National
Securities Exchange and the delisting of some or all of the Units from, or
requesting that trading be suspended on, any such exchange (subject to any
prior approval that may be required under Section 4.9);
(xiii) the purchase, sale or other acquisition or disposition of
Units, or, unless restricted or prohibited by Section 5.7, the issuance of
additional Units or other Partnership Securities; and
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(xiv) the undertaking of any action in connection with the
Partnership's participation in the Operating Partnership as the limited
partner.
(b) Notwithstanding any other provision of this Agreement, the Operating
Partnership Agreement, the Delaware Act or any applicable law, rule or
regulation, each of the Partners and Assignees and each other Person who may
acquire an interest in Units hereby (i) approves, ratifies and confirms the
execution, delivery and performance by the parties thereto of the Operating
Partnership Agreement, the Underwriting Agreement, the Conveyance and
Contribution Agreement, the agreements and other documents filed as exhibits to
the Registration Statement, and the other agreements described in or filed as a
part of the Registration Statement; (ii) agrees that the General Partner (on its
own or through any officer of the Partnership) is authorized to execute, deliver
and perform the agreements referred to in clause (i) of this sentence and the
other agreements, acts, transactions and matters described in or contemplated by
the Registration Statement on behalf of the Partnership without any further act,
approval or vote of the Partners or the Assignees or the other Persons who may
acquire an interest in Units; and (iii) agrees that the execution, delivery or
performance by the General Partner, any Group Member or any Affiliate of any of
them, of this Agreement or any agreement authorized or permitted under this
Agreement (including the exercise by the General Partner or any Affiliate of the
General Partner of the rights accorded pursuant to Article XV), shall not
constitute a breach by the General Partner of any duty that the General Partner
may owe the Partnership or the Limited Partners or the Assignees or any other
Persons under this Agreement (or any other agreements) or of any duty stated or
implied by law or equity.
7.2 Certificate of Limited Partnership
The General Partner has caused the Certificate of Limited Partnership to be
filed with the Secretary of State of the State of Delaware as required by the
Delaware Act and shall use all reasonable efforts to cause to be filed such
other certificates or documents as may be determined by the General Partner in
its sole discretion to be reasonable and necessary or appropriate for the
formation, continuation, qualification and operation of a limited partnership
(or a partnership in which the limited partners have limited liability) in the
State of Delaware or any other state in which the Partnership may elect to do
business or own property. To the extent that such action is determined by the
General Partner in its sole discretion to be reasonable and necessary or
appropriate, the General Partner shall file amendments to and restatements of
the Certificate of Limited Partnership and do all things to maintain the
Partnership as a limited partnership (or a partnership or other entity in which
the limited partners have limited liability) under the laws of the State of
Delaware or of any other state in which the Partnership may elect to do business
or own property. Subject to the terms of Section 3.4(a), the General Partner
shall not be required, before or after filing, to deliver or mail a copy of the
Certificate of Limited Partnership, any qualification document or any amendment
thereto to any Limited Partner or Assignee.
7.3 Restrictions on General Partner's Authority
(a) The General Partner may not, without written approval of the specific
act by holders of all of the outstanding Units or by other written instrument
executed and delivered by all of the Outstanding Units subsequent to the date of
this Agreement, take any action in contravention of this Agreement, including,
except as otherwise provided in this Agreement, (i) committing any act that
would make it impossible to carry on the ordinary business of the Partnership;
(ii) possessing Partnership property, or assigning any rights in specific
Partnership property, for other than a Partnership purpose; (iii) admitting a
Person as a Partner; (iv) amending this Agreement in any manner; or (v)
transferring its interest as general partner of the Partnership.
(b) Except as provided in Articles XII and XIV, the General Partner may not
sell, exchange or otherwise dispose of all or substantially all of the
Partnership's assets in a single transaction or a series of related transactions
or approve on behalf of the Partnership the sale, exchange or other disposition
of all or substantially all of the assets of the Operating Partnership, without
the approval of holders of at least a Unit Majority; provided however that this
provision shall not preclude or limit the General Partner's ability to
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mortgage, pledge, hypothecate or grant a security interest in all or
substantially all of the assets of the Partnership or Operating Partnership and
shall not apply to any forced sale of any or all of the assets of the
Partnership or Operating Partnership pursuant to the foreclosure of, or other
realization upon, any such encumbrance. Without the approval of holders of at
least a Unit Majority, the General Partner shall not, on behalf of the
Partnership, (i) consent to any amendment to the Operating Partnership Agreement
or, except as expressly permitted by Section 7.9(d), take any action permitted
to be taken by a partner of the Operating Partnership, in either case, that
would have a material adverse effect on the Partnership as a partner of the
Operating Partnership or (ii) except as permitted under Sections 4.6, 11.1 and
11.2, elect or cause the Partnership to elect a successor general partner of the
Operating Partnership.
(c) At all times while serving as the general partner of the Partnership,
the General Partner shall not make any dividend or distribution on, or
repurchase any shares of, its stock or take any other action within its control
if the effect of such action would cause its net worth, independent of its
interest in the Partnership Group, to be less than $8.2 million or such lower
amount, which based on an Opinion of Counsel that states, (i) based on a change
in the position of the Internal Revenue Service with respect to partnership
status pursuant to Code Section 7701, such lower amount would not cause the
Partnership or the Operating Partnership to be treated as an association taxable
as a corporation or otherwise to be taxed as an entity for federal income tax
purposes and (ii) would not result in the loss of the limited liability of any
Limited Partner or of the limited partner of the Operating Partnership.
7.4 Reimbursement of the General Partner
(a) Except as provided in this Section 7.4 and elsewhere in this Agreement
or in the Operating Partnership Agreement, the General Partner shall not be
compensated for its services as general partner of any Group Member.
(b) The General Partner shall be reimbursed on a monthly basis, or such
other reasonable basis as the General Partner may determine in its sole
discretion, for (i) all direct and indirect expenses it incurs or payments it
makes on behalf of the Partnership (including salary, bonus, incentive
compensation and other amounts paid to any Person including Affiliates of the
General Partner to perform services for the Partnership or for the General
Partner in the discharge of its duties to the Partnership), and (ii) all other
necessary or appropriate expenses allocable to the Partnership or otherwise
reasonably incurred by the General Partner in connection with operating the
Partnership's business (including expenses allocated to the General Partner by
its Affiliates). The General Partner shall determine the expenses that are
allocable to the Partnership in any reasonable manner determined by the General
Partner in its sole discretion. Reimbursements pursuant to this Section 7.4
shall be in addition to any reimbursement to the General Partner as a result of
indemnification pursuant to Section 7.7.
(c) Subject to Section 5.7, the General Partner, in its sole discretion and
without the approval of the Limited Partners (who shall have no right to vote in
respect thereof), may propose and adopt on behalf of the Partnership employee
benefit plans, employee programs and employee practices (including plans,
programs and practices involving the issuance of Units or options to purchase
Units), or cause the Partnership to issue Partnership Securities, in connection
with, pursuant to any employee benefit plan, employee program or employee
practice maintained or sponsored by the General Partner or any of its
Affiliates, in each case for the benefit of employees of the General Partner,
any Group Member or any Affiliate, or any of them, in respect of services
performed, directly or indirectly, for the benefit of the Partnership Group. The
Partnership agrees to issue and sell to the General Partner or any of its
Affiliates any Units or other Partnership Securities that the General Partner or
such Affiliate is obligated to provide to any employees pursuant to any such
employee benefit plans, employee programs or employee practices. Expenses
incurred by the General Partner in connection with any such plans, programs and
practices (including the net cost to the General Partner or such Affiliate of
Units or other Partnership Securities purchased by the General Partner or such
Affiliate from the Partnership to fulfill options or awards under such plans,
programs and practices) shall be reimbursed in accordance with Section 7.4(b).
Any and all obligations of the General Partner under any employee benefit plans,
employee programs or employee practices adopted by the General Partner as
permitted by this Section 7.4(c) shall constitute obligations of the General
Partner hereunder and shall be assumed by any
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successor General Partner approved pursuant to Section 11.1 or 11.2 or the
transferee of or successor to all of the General Partner's Partnership Interest
as a general partner in the Partnership pursuant to Section 4.6.
7.5 Outside Activities
(a) After the Closing Date, the General Partner, for so long as it is the
general partner of the Partnership (i) agrees that its sole business will be to
act as a general partner of the Partnership, the Operating Partnership, and any
other partnership of which the Partnership or the Operating Partnership is,
directly or indirectly, a partner and to undertake activities that are ancillary
or related thereto (including being a limited partner in the partnership), (ii)
shall not engage in any business or activity or incur any debts or liabilities
except in connection with or incidental to (A) its performance as general
partner of one or more Group Members or as described in or contemplated by the
Registration Statement or (B) the acquiring, owning or disposing of debt or
equity securities in any Group Member and (ii) shall not, and shall cause its
Affiliates (other than a Group member) not to, engage in the retail sale of
propane to end users in the continental United States.
(b) Except as restricted by Sections 7.5(a), each Indemnitee shall have the
right to engage in businesses of every type and description and other activities
for profit and to engage in and possess an interest in other business ventures
of any and every type or description, whether in businesses engaged in or
anticipated to be engaged in by any Group Member, independently or with others,
including business interests and activities in direct competition with the
business and activities of any Group Member, and none of the same shall
constitute a breach of this Agreement or any duty express or implied by law to
any Group Member or any Partner or Assignee. Neither any Group Member, any
Limited Partner nor any other Person shall have any rights by virtue of this
Agreement, the Operating Partnership Agreement or the partnership relationship
established hereby or thereby in any business ventures of any Indemnitee.
(c) Subject to the terms of Section 7.5(a) and (b), but otherwise
notwithstanding anything to the contrary in this Agreement, (i) the engaging in
competitive activities by any Indemnitees (other than the General Partner) in
accordance with the provisions of this Section 7.5 is hereby approved by the
Partnership and all Partners and (ii) it shall be deemed not to be a breach of
the General Partner's fiduciary duty or any other obligation of any type
whatsoever of the General Partner for the Indemnitees (other than the General
Partner) to engage in such business interests and activities in preference to or
to the exclusion of the Partnership (including, without limitation, the General
Partner and the Indemnities shall have no obligation to present business
opportunities to the Partnership).
(d) The General Partner and any of its Affiliates may acquire Units or
other Partnership Securities in addition to those acquired on the Closing Date
and, except as otherwise provided in this Agreement, shall be entitled to
exercise all rights of an Assignee or Limited Partner, as applicable, relating
to such Units or Partnership Securities.
(e) The term "Affiliates" when used in Section 7.5(b) with respect to the
General Partner shall not include any Group Member or any Subsidiary of the
Group Member.
7.6 Loans from the General Partner; Loans or Contributions from the
Partnership; Contracts with Affiliates; Certain Restrictions on the General
Partner
(a) The General Partner or any Affiliate thereof may lend to any Group
Member, and any Group Member may borrow from the General Partner or any of its
Affiliates, funds needed or desired by the Group Member for such periods of time
and in such amounts as the General Partner may determine; provided, however,
that in any such case the lending party may not charge the borrowing party
interest at a rate greater than the rate that would be charged the borrowing
party or impose terms less favorable to the borrowing party than would be
charged or imposed on the borrowing party by unrelated lenders on comparable
loans made on an arm's-length basis (without reference to the lending party's
financial abilities or guarantees). The borrowing party shall reimburse the
lending party for any costs (other than any additional interest costs) incurred
by the lending party in connection with the borrowing of such funds. For
purposes of this Section 7.6(a) and Section 7.6(b), the term "Group Member"
shall include any Affiliate of a Group Member
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that is controlled by the Group Member. No Group Member may lend funds to the
General Partner or any of its Affiliates (other than another Group Member).
(b) The Partnership may lend or contribute to any Group Member and any
Group Member, may borrow from the Partnership, funds on terms and conditions
established in the sole discretion of the General Partner; provided, however,
that the Partnership may not charge the Group Member interest at a rate less
than the rate that would be charged to the Group Member (without reference to
the General Partner's financial abilities or guarantees) by unrelated lenders on
comparable loans. The foregoing authority shall be exercised by the General
Partner in its sole discretion and shall not create any right or benefit in
favor of any Group Member or any other Person.
(c) The General Partner may itself, or may enter into an agreement with any
of its Affiliates to, render services to a Group Member or to the General
Partner in the discharge of its duties as general partner of the Partnership.
Any services rendered to a Group Member by the General Partner or any of its
Affiliates shall be on terms that are fair and reasonable to the Partnership;
provided, however, that the requirements of this Section 7.6(c) shall be deemed
satisfied as to (i) any transaction approved by Special Approval, (ii) any
transaction, the terms of which are no less favorable to the Partnership Group
than those generally being provided to or available from unrelated third parties
or (iii) any transaction that, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership Group), is
equitable to the Partnership Group. The provisions of Section 7.4 shall apply to
the rendering of services described in this Section 7.6(c).
(d) The Partnership Group may transfer assets to joint ventures, other
partnerships, corporations, limited liability companies or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions as are consistent with this Agreement and applicable
law.
(e) Neither the General Partner nor any of its Affiliates shall sell,
transfer or convey any property to, or purchase any property from the
Partnership, directly or indirectly, except pursuant to transactions that are
fair and reasonable to the Partnership; provided, however, that the requirements
of this Section 7.6(e) shall be deemed to be satisfied as to (i) the
transactions effected pursuant to Sections 4.1, 4.2 and 5.3, the Conveyance and
Contribution Agreement and any other transactions described in or contemplated
by the Registration Statement, (ii) any transaction approved by Special
Approval, (iii) any transaction, the terms of which are no less favorable to the
Partnership than those generally being provided to or available from unrelated
third parties, or (iv) any transaction that, taking into account the totality of
the relationships between the parties involved (including other transactions
that may be particularly favorable or advantageous to the Partnership), is
equitable to the Partnership. With respect to any contribution of assets to the
Partnership in exchange for Units, the Audit Committee, in determining whether
the appropriate number of Units are being issued, may take into account, among
other things, the fair market value of the assets, the liquidated and contingent
liabilities assumed, the tax basis in the assets, the extent to which tax-only
allocations to the transferor will protect the existing partners of the
Partnership against a low tax basis, and such other factors as the Audit
Committee deems relevant under the circumstances.
(f) The General Partner and its Affiliates will have no obligation to
permit any Group Member to use any facilities or assets of the General Partner
and its Affiliates, except as may be provided in contracts entered into from
time to time specifically dealing with such use, nor shall there be any
obligation on the part of the General Partner or its Affiliates to enter into
such contracts.
(g) Without limitation of Sections 7.6(a) through 7.6(f), and
notwithstanding anything to the contrary in this Agreement, the existence of the
conflicts of interest described in the Registration Statement are hereby
approved by all Partners.
7.7 Indemnification
(a) To the fullest extent permitted by law but subject to the limitations
expressly provided in this Agreement, all Indemnitees shall be indemnified and
held harmless by the Partnership from and against any and all losses, claims,
damages, liabilities, joint or several, expenses (including legal fees and
expenses),
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judgments, fines, penalties, interest, settlements or other amounts arising from
any and all claims, demands, actions, suits or proceedings, whether civil,
criminal, administrative or investigative, in which any Indemnitee may be
involved, or is threatened to be involved, as a party or otherwise, by reason of
its status as an Indemnitee, provided, that in each case the Indemnitee acted in
good faith and in a manner that such Indemnitee reasonably believed to be in, or
(in the case of a Person other than the General Partner) not opposed to, the
best interests of the Partnership and, with respect to any criminal proceeding,
had no reasonable cause to believe its conduct was unlawful; provided, further,
no indemnification pursuant to this Section 7.7 shall be available to the
General Partner with respect to its obligations incurred pursuant to the
Underwriting Agreement or the Conveyance and Contribution Agreement (other than
obligations incurred by the General Partner on behalf of the Partnership or the
Operating Partnership). The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that the Indemnitee acted in a
manner contrary to that specified above. Any indemnification pursuant to this
Section 7.7 shall be made only out of the assets of the Partnership, it being
agreed that the General Partner shall not be personally liable for such
indemnification and shall have no obligation to contribute or loan any monies or
property to the Partnership to enable it to effectuate such indemnification.
(b) To the fullest extent permitted by law, expenses (including legal fees
and expenses) incurred by an Indemnitee who is indemnified pursuant to Section
7.7(a) in defending any claim, demand, action, suit or proceeding shall, from
time to time, be advanced by the Partnership prior to the final disposition of
such claim, demand, action, suit or proceeding upon receipt by the Partnership
of any undertaking by or on behalf of the Indemnitee to repay such amount if it
shall be determined that the Indemnitee is not entitled to be indemnified as
authorized in this Section 7.7.
(c) The indemnification provided by this Section 7.7 shall be in addition
to any other rights to which an Indemnitee may be entitled under any agreement,
pursuant to any vote of the holders of Outstanding Units, as a matter of law or
otherwise, both as to actions in the Indemnitee's capacity as an Indemnitee and
as to actions in any other capacity (including any capacity under the
Underwriting Agreement), and shall continue as to an Indemnitee who has ceased
to serve in such capacity and shall inure to the benefit of the heirs,
successors, assigns and administrators of the Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse the General
Partner or its Affiliates for the cost of) insurance, on behalf of the General
Partner, its Affiliates and such other Persons as the General Partner shall
determine, against any liability that may be asserted against or expense that
may be incurred by such Person in connection with the Partnership's activities
or such Person's activities on behalf of the Partnership, regardless of whether
the Partnership would have the power to indemnify such Person against such
liability under the provisions of this Agreement.
(e) For purposes of this Section 7.7, the Partnership shall be deemed to
have requested an Indemnitee to serve as fiduciary of an employee benefit plan
whenever the performance by it of its duties to the Partnership also imposes
duties on, or otherwise involves services by, it to the plan or participants or
beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect
to an employee benefit plan pursuant to applicable law shall constitute "fines"
within the meaning of Section 7.7(a); and action taken or omitted by it with
respect to any employee benefit plan in the performance of its duties for a
purpose reasonably believed by it to be in the interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose which is in, or
not opposed to, the best interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited Partners to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in part
under this Section 7.7 because the Indemnitee had an interest in the transaction
with respect to which the indemnification applies if the transaction was
otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 7.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
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(i) No amendment, modification or repeal of this Section 7.7 or any
provision hereof shall in any manner terminate, reduce or impair the right of
any past, present or future Indemnitee to be indemnified by the Partnership, nor
the obligations of the Partnership to indemnify any such Indemnitee under and in
accordance with the provisions of this Section 7.7 as in effect immediately
prior to such amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or in part, prior to such
amendment, modification or repeal, regardless of when such claims may arise or
be asserted.
7.8 Liability of Indemnitees
(a) Notwithstanding anything to the contrary set forth in this Agreement,
no Indemnitee shall be liable for monetary damages to the Partnership, the
Limited Partners, the Assignees or any other Persons who have acquired interests
in the Units, for losses sustained or liabilities incurred as a result of any
act or omission if such Indemnitee acted in good faith.
(b) Subject to its obligations and duties as General Partner set forth in
Section 7.1(a), the General Partner may exercise any of the powers granted to it
by this Agreement and perform any of the duties imposed upon it hereunder either
directly or by or through its agents, and the General Partner shall not be
responsible for any misconduct or negligence on the part of any such agent
appointed by the General Partner in good faith.
(c) Any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the liability to the Partnership, the Limited Partners, the
General Partner, and the Partnership's and General Partner's directors, officers
and employees under this Section 7.8 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising from or
relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise or be asserted.
7.9 Resolution of Conflicts of Interest
(a) Unless otherwise expressly provided in this Agreement or the Operating
Partnership Agreement, whenever a potential conflict of interest exists or
arises between the General Partner or any of its Affiliates, on the one hand,
and the Partnership, the Operating Partnership, any Partner or any Assignee, on
the other, any resolution or course of action by the General Partner or its
Affiliates in respect of such conflict of interest shall be permitted and deemed
approved by all Partners, and shall not constitute a breach of this Agreement,
of the Operating Partnership Agreement, of any agreement contemplated herein or
therein, or of any duty stated or implied by law or equity, if the resolution or
course of action is, or by operation of this Agreement is deemed to be, fair and
reasonable to the Partnership. The General Partner shall be authorized but not
required in connection with its resolution of such conflict of interest to seek
Special Approval of such resolution. Any conflict of interest and any resolution
of such conflict of interest shall be conclusively deemed fair and reasonable to
the Partnership if such conflict of interest or resolution is (i) approved by
Special Approval (as long as the material facts known to the General Partner or
any of its Affiliates regarding any proposed transaction were disclosed to the
Audit Committee at the time it gave its approval), (ii) on terms no less
favorable to the Partnership than those generally being provided to or available
from unrelated third parties or (iii) fair to the Partnership, taking into
account the totality of the relationships between the parties involved
(including other transactions that may be particularly favorable or advantageous
to the Partnership). The General Partner may also adopt a resolution or course
of action that has not received Special Approval. The General Partner (including
the Audit Committee in connection with Special Approval) shall be authorized in
connection with its determination of what is "fair and reasonable" to the
Partnership and in connection with its resolution of any conflict of interest to
consider (A) the relative interests of any party to such conflict, agreement,
transaction or situation and the benefits and burdens relating to such interest;
(B) any customary or accepted industry practices and any customary or historical
dealings with a particular Person; (C) any applicable generally accepted
accounting practices or principles; and (D) such additional factors as the
General Partner (including the Audit Committee) determines in its sole
discretion to be relevant, reasonable or appropriate under the circumstances.
Nothing contained in this Agreement, however, is intended to nor shall it be
construed to require the General Partner (including the Audit Committee) to
consider the interests of any Person other than the Partnership. In the absence
of bad faith by the General Partner, the resolution,
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action or terms so made, taken or provided by the General Partner with respect
to such matter shall not constitute a breach of this Agreement or any other
agreement contemplated herein or a breach of any standard of care or duty
imposed herein or therein or, to the extent permitted by law, under the Delaware
Act or any other law, rule or regulation.
(b) Whenever this Agreement or any other agreement contemplated hereby
provides that the General Partner or any of its Affiliates is permitted or
required to make a decision (i) in its "sole discretion" or "discretion," that
it deems "necessary or appropriate" or "necessary or advisable" or under a grant
of similar authority or latitude, except as otherwise provided herein, the
General Partner or such Affiliate shall be entitled to consider only such
interests and factors as it desires and shall have no duty or obligation to give
any consideration to any interest of, or factors affecting, the Partnership, the
Operating Partnership, any Limited Partner or any Assignee, (ii) it may make
such decision in its sole discretion (regardless of whether there is a reference
to "sole discretion" or "discretion") unless another express standard is
provided for, or (iii) in "good faith" or under another express standard, the
General Partner or such Affiliate shall act under such express standard and
shall not be subject to any other or different standards imposed by this
Agreement, the Operating Partnership Agreement, any other agreement contemplated
hereby or under the Delaware Act or any other Law, rule or regulation. In
addition, any actions taken by the General Partner or such Affiliate consistent
with the standards of "reasonable discretion" set forth in the definitions of
Available Cash or Operating Surplus shall not constitute a breach of any duty of
the General Partner to the Partnership or the Limited Partners. The General
Partner shall have no duty, express or implied, to sell or otherwise dispose of
any asset of the Partnership Group other than in the ordinary course of
business. No borrowing by any Group Member or the approval thereof by the
General Partner shall be deemed to constitute a breach of any duty of the
General Partner to the Partnership or the Limited Partners by reason of the fact
that the purpose or effect of such borrowing is directly or indirectly to (A)
enable distributions to the General Partner or its Affiliates (including in
their capacities as Limited Partners) to exceed 1% of the total amount
distributed to all partners or (B) hasten the expiration of the Subordination
Period or the conversion of any Subordinated Units into Common Units.
(c) Whenever a particular transaction, arrangement or resolution of a
conflict of interest is required under this Agreement to be "fair and
reasonable" to any Person, the fair and reasonable nature of such transaction,
arrangement or resolution shall be considered in the context of all similar or
related transactions.
(d) The Unitholders hereby authorize the General Partner, on behalf of the
Partnership as a partner of a Group Member, to approve of actions by the general
partner of such Group Member similar to those actions permitted to be taken by
the General Partner pursuant to this Section 7.9.
7.10 Other Matters Concerning the General Partner
(a) The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, bond, debenture or other paper
or document believed by it to be genuine and to have been signed or presented by
the proper party or parties.
(b) The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants and
advisers selected by it, and any act taken or omitted to be taken in reliance
upon the opinion (including an Opinion of Counsel) of such Persons as to matters
that the General Partner reasonably believes to be within such Person's
professional or expert competence shall be conclusively presumed to have been
done or omitted in good faith and in accordance with such opinion.
(c) The General Partner shall have the right, in respect of any of its
powers or obligations hereunder, to act through any of its duly authorized
officers, a duly appointed attorney or attorneys-in-fact or the duly authorized
officers of the Partnership.
(d) Any standard of care and duty imposed by this Agreement or under the
Delaware Act or any applicable law, rule or regulation shall be modified, waived
or limited, to the extent permitted by law, as required to permit the General
Partner to act under this Agreement or any other agreement contemplated by
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this Agreement and to make any decision pursuant to the authority prescribed in
this Agreement, so long as such action is reasonably believed by the General
Partner to be in, or not inconsistent with, the best interests of the
Partnership.
7.11 Intentionally Deleted
7.12 Purchase or Sale of Units
The General Partner may cause the Partnership to purchase or otherwise
acquire Units; provided that, except as permitted pursuant to Section 4.10, the
General Partner may not cause the Partnership to purchase Subordinated Units
during the Subordination Period. As long as Units are held by any Group Member,
such Units shall not be considered outstanding for any purpose, except as
otherwise provided herein. The General Partner or any Affiliate of the General
Partner may also purchase or otherwise acquire and sell or otherwise dispose of
Units for its own account, subject to the provisions of Articles IV and X.
7.13 Registration Rights of the General Partner and its Affiliates
(a) If (i) the General Partner or any Affiliate of the General Partner
(including for purposes of this Section 7.13, any Person that is an Affiliate of
the General Partner at the date hereof notwithstanding that it may later cease
to be an Affiliate of the General Partner) holds Units or other Partnership
Securities that it desires to sell and (ii) Rule 144 of the Securities Act (or
any successor rule or regulation to Rule 144) or another exemption from
registration is not available to enable such holder of Units (the "Holder") to
dispose of the number of Units or other securities it desires to sell at the
time it desires to do so without registration under the Securities Act, then
upon the request of the General Partner or any of its Affiliates, the
Partnership shall file with the Commission as promptly as practicable after
receiving such request, and use all reasonable efforts to cause to become
effective and remain effective for a period of not less than six months
following its effective date or such shorter period as shall terminate when all
Units or other Partnership Securities covered by such registration statement
have been sold, a registration statement under the Securities Act registering
the offering and sale of the number of Units or other securities specified by
the Holder; provided, however, that the Partnership shall not be required to
effect more than three registrations pursuant to this Section 7.13(a); and
provided further, however, that if the Audit Committee determines in its good
faith judgment that a postponement of the requested registration for up to six
months would be in the best interests of the Partnership and its Partners due to
a pending transaction, investigation or other event, the filing of such
registration statement or the effectiveness thereof may be deferred for up to
six months, but not thereafter. In connection with any registration pursuant to
the immediately preceding sentence, the Partnership shall promptly prepare and
file (x) such documents as may be necessary to register or qualify the
securities subject to such registration under the securities laws of such states
as the Holder shall reasonably request; provided, however, that no such
qualification shall be required in any jurisdiction where, as a result thereof,
the Partnership would become subject to general service of process or to
taxation or qualification to do business as a foreign corporation or partnership
doing business in such jurisdiction solely as a result of such registration, and
(y) such documents as may be necessary to apply for listing or to list the
securities subject to such registration on such National Securities Exchange as
the Holder shall reasonably request, and do any and all other acts and things
that may reasonably be necessary or advisable to enable the Holder to consummate
a public sale of such Units in such states. Except as set forth in Section
7.12(c), all costs and expenses of any such registration and offering (other
than the underwriting discounts and commissions) shall be paid by the
Partnership, without reimbursement by the Holder.
(b) If the Partnership shall at any time propose to file a registration
statement under the Securities Act for an offering of equity securities of the
Partnership for cash (other than an offering relating solely to an employee
benefit plan), the Partnership shall use all reasonable efforts to include such
number or amount of securities held by the Holder in such registration statement
as the Holder shall request. If the proposed offering pursuant to this Section
7.13(b) shall be an underwritten offering, then, in the event that the managing
underwriter or managing underwriters of such offering advise the Partnership and
the Holder in writing that in their opinion the inclusion of all or some of the
Holder's securities would adversely and materially affect the success of the
offering, the Partnership shall include in such offering only that number or
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amount, if any, of securities held by the Holder which, in the opinion of the
managing underwriter or managing underwriters, will not so adversely and
materially affect the offering. Except as set forth in Section 7.13(c), all
costs and expenses of any such registration and offering (other than the
underwriting discounts and commissions) shall be paid by the Partnership,
without reimbursement by the Holder.
(c) If underwriters are engaged in connection with any registration
referred to in this Section 7.13, the Partnership shall provide indemnification,
representations, covenants, opinions and other assurance to the underwriters in
form and substance reasonably satisfactory to such underwriters. Further, in
addition to and not in limitation of the Partnership's obligation under Section
7.7, the Partnership shall, to the fullest extent permitted by law, indemnify
and hold harmless the Holder, its officers, directors and each Person who
controls the Holder (within the meaning of the Securities Act) and any agent
thereof (collectively, "Indemnified Persons") against any losses, claims,
demands, actions, causes of action, assessments, damages, liabilities (joint or
several), costs and expenses (including interest, penalties and reasonable
attorneys' fees and disbursements), resulting to, imposed upon, or incurred by
the Indemnified Persons, directly or indirectly, under the Securities Act or
otherwise (hereinafter referred to in this Section 7.13(c) as a "claim" and in
the plural as "claims") based upon, arising out of or resulting from any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which any Units were registered under the
Securities Act or any state securities or Blue Sky laws, in any preliminary
prospectus (if used prior to the effective date of such registration statement),
or in any summary or final prospectus or in any amendment or supplement thereto
(if used during the period the Partnership is required to keep the registration
statement current), or arising out of, based upon or resulting from the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements made therein not misleading;
provided, however, that the Partnership shall not be liable to any Indemnified
Person to the extent that any such claim arises out of, is based upon or results
from an untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement, such preliminary, summary or final
prospectus or such amendment or supplement, in reliance upon and in conformity
with written information furnished to the Partnership by or on behalf of such
Indemnified Person specifically for use in the preparation thereof.
(d) The provisions of Section 7.13(a) and 7.13(b) shall continue to be
applicable with respect to the General Partner (and any of the General Partner's
Affiliates) after it ceases to be a Partner of the Partnership, during a period
of two years subsequent to the effective date of such cessation and for so long
thereafter as is required for the Holder to sell all of the Units or other
Partnership Securities with respect to which it has requested during such
two-year period inclusion in a registration statement otherwise filed or that a
registration statement be filed; provided, however, that the Partnership shall
not be required to file successive registration statements covering the same
securities for which registration was demanded during such two-year period. The
provisions of Section 7.13(c) shall continue in effect thereafter.
(e) Any request to register Partnership Securities pursuant to this Section
7.13 shall (i) specify the Partnership Securities intended to be offered and
sold by the Person making the request, (ii) express such Person's present intent
to offer such shares for distribution, (iii) describe the nature or method of
the proposed offer and sale of Partnership Securities, and (iv) contain the
undertaking of such Person to provide all such information and materials and
take all action as may be required in order to permit the Partnership to comply
with all applicable requirements in connection with the registration of such
Partnership Securities.
7.14 Reliance by Third Parties
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner and any officer of the General Partner authorized by the General Partner
to act on behalf of and in the name of Partnership has full power and authority
to encumber, sell or otherwise use in any manner any and all assets of the
Partnership and to enter into any authorized contracts on behalf of the
Partnership, and such Person shall be entitled to deal with the General Partner
or any such officer as if it were the Partnership's sole party in interest, both
legally and beneficially. Each Limited Partner hereby waives any and all
defenses or other remedies that may be available against such Person to contest,
negate or disaffirm any action of the General Partner or any such officer in
connection with any such
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dealing. In no event shall any Person dealing with the General Partner or any
such officer or its representatives be obligated to ascertain that the terms of
the Agreement have been complied with or to inquire into the necessity or
expedience of any act or action of the General Partner or any such officer or
its representatives. Each and every certificate, document or other instrument
executed on behalf of the Partnership by the General Partner or its
representatives shall be conclusive evidence in favor of any and every Person
relying thereon or claiming thereunder that (a) at the time of the execution and
delivery of such certificate, document or instrument, this Agreement was in full
force and effect, (b) the Person executing and delivering such certificate,
document or instrument was duly authorized and empowered to do so for and on
behalf of the Partnership and (c) such certificate, document or instrument was
duly executed and delivered in accordance with the terms and provisions of this
Agreement and is binding upon the Partnership.
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
8.1 Records and Accounting
The Partnership shall keep or cause to be kept at the principal office of
the Partnership appropriate books and records with respect to the Partnership's
business, including all books and records necessary to provide to the
Unitholders any information required to be provided pursuant to Section 3.4(a).
Any books and records maintained by or on behalf of the Partnership in the
regular course of its business, including the record of the Record Holders and
Assignees of Units or other Partnership Securities, books of account and records
of Partnership proceedings, may be kept on, or be in the form of, computer
disks, hard drives, punch cards, magnetic tape, photographs, micrographics or
any other information storage device; provided, that the books and records so
maintained are convertible into clearly legible written form within a reasonable
period of time. The books of the Partnership shall be maintained, for financial
reporting purposes, on an accrual basis in accordance with U.S. GAAP.
8.2 Fiscal Year
The fiscal year of the Partnership shall be from September 1st to August
31st.
8.3 Reports
(a) As soon as practicable, but in no event later than 120 days after the
close of each fiscal year of the Partnership, the General Partner shall cause to
be mailed or furnished to each Record Holder of a Unit as of a date selected by
the General Partner in its discretion, an annual report containing financial
statements of the Partnership for such fiscal year of the Partnership, presented
in accordance with U.S. GAAP, including a balance sheet and statements of
operations, Partnership equity and cash flows, such statements to be audited by
a firm of independent public accountants selected by the General Partner.
(b) As soon as practicable, but in no event later than 90 days after the
close of each Quarter except the last Quarter of each year, the General Partner
shall cause to be mailed or furnished to each Record Holder of a Unit, as of a
date selected by the General Partner in its discretion, a report containing
unaudited financial statements of the Partnership and such other information as
may be required by applicable law, regulation or rule of any National Securities
Exchange on which the Units are listed for trading, or as the General Partner
determines to be necessary or appropriate.
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ARTICLE IX
TAX MATTERS
9.1 Tax Returns and Information
The Partnership shall timely file all returns of the Partnership that are
required for federal, state and local income tax purposes on the basis of the
accrual method and a taxable year ending on December 31. The tax information
reasonably required by Record Holders for federal and state income tax reporting
purposes with respect to a taxable year shall be furnished to them within 90
days of the close of the calendar year in which the Partnership's taxable year
ends. The classification, realization and recognition of income, gain, losses
and deductions and other items shall be on the accrual method of accounting for
federal income tax purposes.
9.2 Tax Elections
(a) The Partnership shall make the election under Section 754 of the Code
in accordance with applicable regulations thereunder, subject to the reservation
of the right to seek to revoke any such election upon the General Partner's
determination that such revocation is in the best interests of the Unitholders.
Notwithstanding any other provision herein contained, for the purposes of
computing the adjustments under Section 743(b) of the Code, the General Partner
shall be authorized (but not required) to adopt a convention whereby the price
paid by a transferee of Units will be deemed to be the lowest quoted closing
price of the Units on any National Securities Exchange on which such Units are
traded during the calendar month in which such transfer is deemed to occur
pursuant to Section 6.2(g) without regard to the actual price paid by such
transferee.
(b) The Partnership shall elect to deduct expenses incurred in organizing
the Partnership ratably over a sixty-month period as provided in Section 709 of
the Code.
(c) Except as otherwise provided herein, the General Partner shall
determine whether the Partnership should make any other elections permitted by
the Code.
9.3 Tax Controversies
Subject to the provisions hereof, the General Partner is designated as the
Tax Matters Partner (as defined in the Code) and is authorized and required to
represent the Partnership (at the Partnership's expense) in connection with all
examinations of the Partnership's affairs by tax authorities, including
resulting administrative and judicial proceedings, and to expend Partnership
funds for professional services and costs associated therewith. Each Partner
agrees to cooperate with the General Partner and to do or refrain from doing any
or all things reasonably required by the General Partner to conduct such
proceedings.
9.4 Withholding
Notwithstanding any other provision of this Agreement, the General Partner
is authorized to take any action that it determines in its discretion to be
necessary or appropriate to cause the Partnership and the Operating Partnership
to comply with any withholding requirements established under the Code or any
other federal, state or local law including, without limitation, pursuant to
Sections 1441, 1442, 1445 and 1446 of the Code. To the extent that the
Partnership is required or elects to withhold and pay over to any taxing
authority any amount resulting from the allocation or distribution of income to
any Partner or Assignee (including, without limitation, by reason of Section
1446 of the Code), the amount withheld may be treated as a distribution of cash
pursuant to Section 6.3 in the amount of such withholding from such Partner.
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ARTICLE X
ADMISSION OF PARTNERS
10.1 Admission of Initial Limited Partners
Upon the issuance by the Partnership of Subordinated Units to the General
Partner as described in Section 5.2, the General Partner shall be deemed to have
been admitted to the Partnership as a Limited Partner in respect of the
Subordinated Units issued to it. Upon the issuance by the Partnership of Common
Units to the Underwriters as described in Section 5.3 in connection with the
Initial Offering and the execution by each Underwriter of a Transfer
Application, the General Partner shall admit the Underwriters to the Partnership
as Initial Limited Partners in respect of the Common Units purchased by them.
10.2 Admission of Substituted Limited Partner
By transfer of a Unit in accordance with Article IV, the transferor shall
be deemed to have given the transferee the right to seek admission as a
Substituted Limited Partner subject to the conditions of, and in the manner
permitted under, this Agreement. A transferor of a Certificate shall, however,
only have the authority to convey to a purchaser or other transferee who does
not execute and deliver a Transfer Application (a) the right to negotiate such
Certificate to a purchaser or other transferee and (b) the right to transfer the
right to request admission as a Substituted Limited Partner to such purchaser or
other transferee in respect of the transferred Units. Each transferee of a Unit
(including any nominee holder or an agent acquiring such Unit for the account of
another Person) who executes and delivers a Transfer Application shall, by
virtue of such execution and delivery, be an Assignee and be deemed to have
applied to become a Substituted Limited Partner with respect to the Units so
transferred to such Person. Such Assignee shall become a Substituted Limited
Partner (x) at such time as the General Partner consents thereto, which consent
may be given or withheld in the General Partner's discretion, and (y) when any
such admission is shown on the books and records of the Partnership. If such
consent is withheld, such transferee shall be an Assignee. An Assignee shall
have an interest in the Partnership equivalent to that of a Limited Partner with
respect to allocations and distributions, including liquidating distributions,
of the Partnership. With respect to voting rights attributable to Units that are
held by Assignees, the General Partner shall be deemed to be the Limited Partner
with respect thereto and shall, in exercising the voting rights in respect of
such Units on any matter, vote such Units at the written direction of the
Assignee who is the Record Holder of such Units. If no such written direction is
received, such Units will not be voted. An Assignee shall have no other rights
of a Limited Partner.
10.3 Admission of Successor General Partner
A successor General Partner approved pursuant to Section 11.1 or 11.2 or
the transferee of or successor to all of the General Partner's Partnership
Interest as general partner in the Partnership pursuant to Section 4.6 who is
proposed to be admitted as a successor General Partner shall be admitted to the
Partnership as the General Partner, effective immediately prior to the
withdrawal or removal of the General Partner pursuant to Section 11.1 or 11.2 or
the transfer of the General Partner's Partnership Interest as a general partner
in the Partnership pursuant to Section 4.6, provided, however, that no such
successor shall be admitted to the Partnership until compliance with the terms
of Section 4.6 has occurred and such successor has executed and delivered such
other documents or instruments as may be required to effect such admission. Any
such successor shall, subject to the terms hereof, carry on the business of the
Partnership and the Operating Partnership without dissolution.
10.4 Admission of Additional Limited Partners
(a) A Person (other than the General Partner, an Initial Limited Partner or
a Substituted Limited Partner) who makes a Capital Contribution to the
Partnership in accordance with this Agreement shall be admitted to the
Partnership as an Additional Limited Partner only upon furnishing to the General
Partner (i) evidence of acceptance in form satisfactory to the General Partner
of all of the terms and conditions of this Agreement, including the power of
attorney granted in Section 2.6, and (ii) such other documents or
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instruments as may be required in the discretion of the General Partner to
effect such Person's admission as an Additional Limited Partner.
(b) Notwithstanding anything to the contrary in this Section 10.4, no
Person shall be admitted as an Additional Limited Partner without the consent of
the General Partner, which consent may be given or withheld in the General
Partner's discretion. The admission of any Person as an Additional Limited
Partner shall become effective on the date upon which the name of such Person is
recorded as such in the books and records of the Partnership, following the
consent of the General Partner to such admission.
10.5 Amendment of Agreement and Certificate of Limited Partnership
To effect the admission to the Partnership of any Partner, the General
Partner shall take all steps necessary and appropriate under the Delaware Act to
amend the records of the Partnership to reflect such admission and, if
necessary, to prepare as soon as practicable an amendment to this Agreement and,
if required by law, the General Partner shall prepare and file an amendment to
the Certificate of Limited Partnership, and the General Partner may for this
purpose, among others, exercise the power of attorney granted pursuant to
Section 2.6.
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
11.1 Withdrawal of the General Partner
(a) The General Partner shall be deemed to have withdrawn from the
Partnership upon the occurrence of any one of the following events (each such
event herein referred to as an "Event of Withdrawal");
(i) the General Partner voluntarily withdraws from the Partnership by
giving written notice to the other Partners (and it shall be deemed that
the General Partner has withdrawn pursuant to this Section 11.1(a)(i) if
the General Partner voluntarily withdraws as general partner of the
Operating Partnership);
(ii) the General Partner transfers all of its rights as General
Partner pursuant to Section 4.6;
(iii) the General Partner is removed pursuant to Section 11.2;
(iv) the General Partner (A) makes a general assignment for the
benefit of creditors; (B) files a voluntary bankruptcy petition for relief
under Chapter 7 of the United States Bankruptcy Code; (C) files a petition
or answer seeking for itself a liquidation, dissolution or similar relief
(but not a reorganization) under any law; (D) files an answer or other
pleading admitting or failing to contest the material allegations of a
petition filed against the General Partner in a proceeding of the type
described in clauses (A)-(C) of this Section 11.1(a)(iv); or (E) seeks,
consents to or acquiesces in the appointment of a trustee (but not a debtor
in possession), receiver or liquidator of the General Partner or of all or
any substantial part of its properties;
(v) a final and non-appealable order of relief under Chapter 7 of the
United States Bankruptcy Code is entered by a court with appropriate
jurisdiction pursuant to a voluntary or involuntary petition by or against
the General Partner; or
(vi) (A) in the event the General Partner is a corporation, a
certificate of dissolution or its equivalent is filed for the General
Partner, or 90 days expire after the date of notice to the General Partner
of revocation of its charter without a reinstatement of its charter, under
the laws of its state of incorporation; or (B) in the event the General
Partner is a partnership, the dissolution and commencement of winding up of
the General Partner; (C) in the event the General Partner is acting in such
capacity by virtue of being a trustee of a trust, the termination of the
trust; (D) in the event the General Partner is a natural person, his death
or adjudication of incompetency; and (E) otherwise in the event of the
termination of the General Partner.
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If an Event of Withdrawal specified in Section 11.1(a)(iv), (v) or (vi)(A), (B),
(C) or (E) occurs, the withdrawing General Partner shall give notice to the
Limited Partners within 30 days after such occurrence. The Partners hereby agree
that only the Events of Withdrawal described in this Section 11.1 shall result
in the withdrawal of the General Partner from the Partnership.
(b) Withdrawal of the General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall not constitute a breach of this
Agreement under the following circumstances: (i) at any time during the period
beginning on the Closing Date and ending at 12:00 midnight, Eastern Standard
Time, on December 31, 2006, the General Partner voluntarily withdraws by giving
at least 90 days' advance notice of its intention to withdraw to the Limited
Partners; provided that prior to the effective date of such withdrawal, the
withdrawal is approved by Unitholders holding at least a Unit Majority and the
General Partner delivers to the Partnership an Opinion of Counsel ("Withdrawal
Opinion of Counsel") that such withdrawal (following the selection of the
successor General Partner) would not result in the loss of the limited liability
of any Limited Partner or of the limited partner of the Operating Partnership or
cause the Partnership or the Operating Partnership to be treated as an
association taxable as a corporation or otherwise to be taxed as an entity for
federal income tax purposes (to the extent not previously treated as such); (ii)
at any time after 12:00 midnight, Eastern Standard Time, on December 31, 2006,
the General Partner voluntarily withdraws by giving at least 90 days' advance
notice to the Unitholders, such withdrawal to take effect on the date specified
in such notice; (iii) at any time that the General Partner ceases to be the
General Partner pursuant to Section 11.1(a)(ii) or is removed pursuant to
Section 11.2; or (iv) notwithstanding clause (i) of this sentence, at any time
that the General Partner voluntarily withdraws by giving at least 90 days'
advance notice of its intention to withdraw to the Unitholders, such withdrawal
to take effect on the date specified in the notice, if at the time such notice
is given one Person and its Affiliates (other than the General Partner and its
Affiliates) own beneficially or of record or control at least 50% of the
Outstanding Units. The withdrawal of the General Partner from the Partnership
upon the occurrence of an Event of Withdrawal shall also constitute the
withdrawal of the General Partner as general partner of the other Group Members.
If the General Partner gives a notice of withdrawal pursuant to Section
11.1(a)(i), the holders of a Unit Majority, may, prior to the effective date of
such withdrawal, elect a successor General Partner. The Person so elected as
successor General Partner shall automatically become the successor general
partner of the other Group Members. If, prior to the effective date of the
General Partner's withdrawal, a successor is not selected by the Unitholders as
provided herein or the Partnership does not receive a Withdrawal Opinion of
Counsel, the Partnership shall be dissolved in accordance with Section 12.1. Any
successor General Partner elected in accordance with the terms of this Section
11.1 shall be subject to the provisions of Section 10.3.
11.2 Removal of the General Partner
The General Partner may be removed if such removal is approved by the
Unitholders holding at least 66 2/3% of the Outstanding Units (including Units
held by the General Partner and its Affiliates). Any such action by such holders
for removal of the General Partner must also provide for the election of a
successor General Partner by the Unitholders holding at least a Unit Majority
(including Units held by the General Partner and its Affiliates). Such removal
shall be effective immediately following the admission of a successor General
Partner pursuant to Section 10.3. The removal of the General Partner shall also
automatically constitute the removal of the General Partner as general partner
of the other Group Members. If a Person is elected as a successor General
Partner in accordance with the terms of this Section 11.2, such Person shall,
upon admission pursuant to Section 10.3, automatically become the successor
general partner of the other Group Members. The right of the holders of
Outstanding Units to remove the General Partner shall not exist or be exercised
unless the Partnership has received an opinion opining as to the matters covered
by a Withdrawal Opinion of Counsel. Any successor General Partner elected in
accordance with the terms of this Section 11.2 shall be subject to the
provisions of Section 10.3.
11.3 Interest of Departing Partner and Successor General Partner
(a) In the event of (i) withdrawal of the General Partner under
circumstances where such withdrawal does not violate this Agreement or (ii)
removal of the General Partner by the holders of Outstanding Units
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under circumstances where Cause does not exist, if a successor General Partner
is elected in accordance with the terms of Section 11.1 or 11.2, the Departing
Partner shall have the option exercisable prior to the effective date of the
departure of such Departing Partner to require its successor to purchase its
Partnership Interest as a general partner in the Partnership and its partnership
interest as the general partner in the other Group Members and its Incentive
Distribution Rights (collectively, the "Combined Interest") in exchange for an
amount in cash equal to the fair market value of such Combined Interest, such
amount to be determined and payable as of the effective date of its departure.
If the General Partner is removed by the Unitholders under circumstances where
Cause exists or if the General Partner withdraws under circumstances where such
withdrawal violates this Agreement or the Operating Partnership Agreement, and
if a successor General Partner is elected in accordance with the terms of
Section 11.1 or 11.2, such successor shall have the option, exercisable prior to
the effective date of the departure of such Departing Partner, to purchase the
Combined Interest of the Departing Partner for such fair market value of such
Combined Interest. In either event, the Departing Partner shall be entitled to
receive all reimbursements due such Departing Partner pursuant to Section 7.4,
including any employee-related liabilities (including severance liabilities),
incurred in connection with the termination of any employees employed by the
General Partner for the benefit of the Partnership or the other Group Members.
For purposes of this Section 11.3(a), the fair market value of the
Departing Partner's Combined Interest shall be determined by agreement between
the Departing Partner and its successor or, failing agreement within 30 days
after the effective date of such Departing Partner's departure, by an
independent investment banking firm or other independent expert selected by the
Departing Partner and its successor, which, in turn, may rely on other experts,
and the determination of which shall be conclusive as to such matter. If such
parties cannot agree upon one independent investment banking firm or other
independent expert within 45 days after the effective date of such departure,
then the Departing Partner shall designate an independent investment banking
firm or other independent expert, the Departing Partner's successor shall
designate an independent investment banking firm or other independent expert,
and such firms or experts shall mutually select a third independent investment
banking firm or independent expert, which third independent investment banking
firm or other independent expert shall determine the fair market value of the
Combined Interest. In making its determination, such third independent
investment banking firm or other independent expert may consider the then
current trading price of Units on any National Securities Exchange on which
Units are then listed, the value of the Partnership's assets, the rights and
obligations of the General Partner and other factors it may deem relevant.
(b) If the Combined Interest is not purchased in the manner set forth in
Section 11.3(a), the Departing Partner shall become a Limited Partner and the
Departing Partner's Combined Interest shall be converted into Common Units
pursuant to a valuation made by an investment banking firm or other independent
expert selected pursuant to Section 11.3(a), without reduction in such
Partnership Interest (but subject to proportionate dilution by reason of the
admission of its successor). Any successor General Partner shall indemnify the
Departing Partner as to all debts and liabilities of the Partnership arising on
or after the date on which the Departing Partner becomes a Limited Partner. For
purposes of this Agreement, conversion of the General Partner's Combined
Interest to Common Units will be characterized as if the General Partner
contributed its Combined Interest to the Partnership in exchange for the newly
issued Common Units.
(c) If a successor General Partner is elected in accordance with the terms
of Section 11.1 or 11.2 and the option described in Section 11.3(a) is not
exercised by the party entitled to do so, the successor General Partner shall,
at the effective date of its admission to the Partnership, contribute to the
Partnership cash in an amount equal to 1/99th of the Net Agreed Value of the
Partnership's assets on such date. In such event, such successor General Partner
shall, subject to the following sentence, be entitled to such Percentage
Interest of all Partnership allocations and distributions and any other
allocations and distributions to which the Departing Partner was entitled. In
addition, the successor General Partner shall cause this Agreement to be amended
to reflect that, from and after the date of such successor General Partner's
admission, the successor General Partner's interest in all Partnership
distributions and allocations shall be 1% (or if the Over-allotment Option is
exercised, the Percentage Interest of the Departing Partner), and that of the
holders of Outstanding Units
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shall be 99% (or if the Over-allotment Option is exercised, 100% less the
Percentage Interest of the Departing Partner).
11.4 Termination of Subordination Period, Conversion of Subordinated Units and
Extinguishment of Cumulative Common Unit Arrearages
Notwithstanding any provision of this Agreement, if the General Partner is
removed as general partner of the Partnership under circumstances where Cause
does not exist and Units held by the General Partner and its Affiliates are not
voted in favor of such removal, (i) the Subordination Period will end and all
Outstanding Subordinated Units will immediately and automatically convert into
Common Units on a one-for-one basis and (ii) all Cumulative Common Unit
Arrearages on the Common Units will be extinguished.
11.5 Withdrawal of Limited Partners
No Limited Partner shall have any right to withdraw from the Partnership;
provided, however, that when a transferee of a Limited Partner's Units or
Incentive Distribution Rights becomes a Record Holder of the Units or Incentive
Distribution Rights so transferred, such transferring Limited Partner shall
cease to be a Limited Partner with respect to the Units or Incentive
Distribution Rights so transferred.
ARTICLE XII
DISSOLUTION AND LIQUIDATION
12.1 Dissolution
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor General Partner in accordance with the terms of this Agreement. Upon
the removal or withdrawal of the General Partner, if a successor General Partner
is elected pursuant to Section 11.1 or 11.2, the Partnership shall not be
dissolved and such successor General Partner shall continue the business of the
Partnership. The Partnership shall dissolve, and (subject to Section 12.2) its
affairs shall be wound up, upon:
(a) the expiration of its term as provided in Section 2.7;
(b) an Event of Withdrawal of the General Partner as provided in Section
11.1(a) (other than Section 11.1(a)(ii)), unless a successor is elected and an
Opinion of Counsel is received as provided in Section 11.1(b) or 11.2 and such
successor is admitted to the Partnership pursuant to Section 10.3;
(c) an election to dissolve the Partnership by the General Partner that is
approved by the holders of a Unit Majority;
(d) entry of a decree of judicial dissolution of the Partnership pursuant
to the provisions of the Delaware Act; or
(e) the sale of all or substantially all of the assets and properties of
the Partnership Group.
12.2 Continuation of the Business of the Partnership After Dissolution
Upon (a) dissolution of the Partnership following an Event of Withdrawal
caused by the withdrawal or removal of the General Partner as provided in
Section 11.1(a)(i) or (iii) and the failure of the Partners to select a
successor to such Departing Partner pursuant to Section 11.1 or 11.2, then
within 90 days thereafter, or (b) dissolution of the Partnership upon an event
constituting an Event of Withdrawal as defined in Section 11.1(a)(iv), (v) or
(vi), then, to the maximum extent permitted by law, within 180 days thereafter,
the holders of a Unit Majority may elect to reconstitute the Partnership and
continue its business on the same terms and conditions set forth in this
Agreement by forming a new limited partnership on terms identical to those set
forth in this Agreement and having as the successor general partner a Person
approved by the holders
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of a Unit Majority. Unless such an election is made within the applicable time
period as set forth above, the Partnership shall conduct only activities
necessary to wind up its affairs. If such an election is so made, then:
(i) the reconstituted Partnership shall continue until the end of the
term set forth in Section 2.7 unless earlier dissolved in accordance with
this Article XII;
(ii) if the successor General Partner is not the former General
Partner, then the interest of the former General Partner shall be treated
in the manner provided in Section 11.3; and
(iii) all necessary steps shall be taken to cancel this Agreement and
the Certificate of Limited Partnership and to enter into and, as necessary,
to file a new partnership agreement and certificate of limited partnership,
and the successor general partner may for this purpose exercise the powers
of attorney granted the General Partner pursuant to Section 2.6; provided,
that the right of the holders of a Unit Majority to approve a successor
General Partner and to reconstitute and to continue the business of the
Partnership shall not exist and may not be exercised unless the Partnership
has received an Opinion of Counsel that (x) the exercise of the right would
not result in the loss of limited liability of any Limited Partner and (y)
neither the Partnership, the reconstituted limited partnership nor the
Operating Partnership would be treated as an association taxable as a
corporation or otherwise be taxable as an entity for federal income tax
purposes upon the exercise of such right to continue.
12.3 Liquidator
Upon dissolution of the Partnership, unless the Partnership is continued
under an election to reconstitute and continue the Partnership pursuant to
Section 12.2, the General Partner shall select one or more Persons to act as
Liquidator. The Liquidator (if other than the General Partner) shall be entitled
to receive such compensation for its services as may be approved by holders of
at least a majority of the Outstanding Common Units and Subordinated Units
voting as a single class. The Liquidator (if other than the General Partner)
shall agree not to resign at any time without 15 days' prior notice and may be
removed at any time, with or without cause, by notice of removal approved by
holders of at least a majority of the Outstanding Common Units and Subordinated
Units voting as a single class. Upon dissolution, removal or resignation of the
Liquidator, a successor and substitute Liquidator (who shall have and succeed to
all rights, powers and duties of the original Liquidator) shall within 30 days
thereafter be approved by holders of at least a majority of the Outstanding
Common Units and Subordinated Units voting as a single class. The right to
approve a successor or substitute Liquidator in the manner provided herein shall
be deemed to refer also to any such successor or substitute Liquidator approved
in the manner herein provided. Except as expressly provided in this Article XII,
the Liquidator approved in the manner provided herein shall have and may
exercise, without further authorization or consent of any of the parties hereto,
all of the powers conferred upon the General Partner under the terms of this
Agreement (but subject to all of the applicable limitations, contractual and
otherwise, upon the exercise of such powers, other than the limitation on sale
set forth in Section 7.3(b)) to the extent necessary or desirable in the good
faith judgment of the Liquidator to carry out the duties and functions of the
Liquidator hereunder for and during such period of time as shall be reasonably
required in the good faith judgment of the Liquidator to complete the winding up
and liquidation of the Partnership as provided for herein.
12.4 Liquidation
The Liquidator shall proceed to dispose of the assets of the Partnership,
discharge its liabilities, and otherwise wind up its affairs in such manner and
over such period as the Liquidator determines to be in the best interest of the
Partners, subject to Section 17-804 of the Delaware Act and the following:
(a) Disposition of Assets. The assets may be disposed of by public or
private sale or by distribution in kind to one or more Partners on such terms as
the Liquidator and such Partner or Partners may agree. If any property is
distributed in kind, the Partner receiving the property shall be deemed for
purposes of Section 12.4(c) to have received cash equal to its fair market
value; and contemporaneously therewith, appropriate cash distributions must be
made to the other Partners. The Liquidator may, in its absolute discretion,
defer liquidation or distribution of the Partnership's assets for a reasonable
time if it determines
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that an immediate sale of all or some of the Partnership's assets would be
impractical or would cause undue loss to the partners. The Liquidator may, in
its absolute discretion, distribute the Partnership's assets, in whole or in
part, in kind if it determines that a sale would be impractical or would cause
undue loss to the partners.
(b) Discharge of Liabilities. Liabilities of the Partnership include
amounts owed to Partners otherwise in respect of their distribution rights under
Article VI. With respect to any liability that is contingent or is otherwise not
yet due and payable, the Liquidator shall either settle such claim for such
amount as it thinks appropriate or establish a reserve of cash or other assets
to provide for its payment. When paid, any unused portion of the reserve shall
be distributed as additional liquidation proceeds.
(c) Liquidation Distributions. All property and all cash in excess of that
required to discharge liabilities as provided in Section 12.4(b) shall be
distributed to the Partners in accordance with, and to the extent of, the
positive balances in their respective Capital Accounts, as determined after
taking into account all Capital Account adjustments (other than those made by
reason of distributions pursuant to this Section 12.4(c)) for the taxable year
of the Partnership during which the liquidation of the Partnership occurs (with
such date of occurrence being determined pursuant to Treasury Regulation Section
1.704-1(b)(2)(ii)(g)), and such distribution shall be made by the end of such
taxable year (or, if later, within 90 days after said date of such occurrence).
12.5 Cancellation of Certificate of Limited Partnership
Upon the completion of the distribution of Partnership cash and property as
provided in Section 12.4 in connection with the liquidation of the Partnership,
the Partnership shall be terminated and the Certificate of Limited Partnership
and all qualifications of the Partnership as a foreign limited partnership in
jurisdictions other than the State of Delaware shall be canceled and such other
actions as may be necessary to terminate the Partnership shall be taken.
12.6 Return of Contributions
The General Partner shall not be personally liable for, and shall have no
obligation to contribute or loan any monies or property to the Partnership to
enable it to effectuate, the return of the Capital Contributions of the Limited
Partners or Unitholders, or any portion thereof, it being expressly understood
that any such return shall be made solely from Partnership assets.
12.7 Waiver of Partition
To the maximum extent permitted by law, each Partner hereby waives any
right to partition of the Partnership property.
12.8 Capital Account Restoration
No Limited Partner shall have any obligation to restore any negative
balance in its Capital Account upon liquidation of the Partnership. The General
Partner shall be obligated to restore any negative balance in its Capital
Account upon liquidation of its interest in the Partnership by the end of the
taxable year of the Partnership during which such liquidation occurs, or, if
later, within 90 days after the date of such liquidation.
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
13.1 Amendment to be Adopted Solely by the General Partner
Each Partner agrees that the General Partner, without the approval of any
Partner or Assignee, may amend any provision of this Agreement to execute, swear
to, acknowledge, deliver, file and record whatever documents may be required in
connection therewith, to reflect:
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(a) a change in the name of the Partnership, the location of the principal
place of business of the Partnership, the registered agent of the Partnership or
the registered office of the Partnership;
(b) admission, substitution, withdrawal or removal of Partners in
accordance with this Agreement;
(c) a change that, in the sole discretion of the General Partner, is
necessary or advisable to qualify or continue the qualification of the
Partnership as a limited partnership or a partnership in which the Limited
Partners have limited liability under the laws of any state or to ensure that
the Partnership and the Operating Partnership will not be treated as an
association taxable as a corporation or otherwise taxed as an entity for federal
income tax purposes;
(d) a change that, in the discretion of the General Partner, (i) does not
adversely affect the Unitholders in any material respect, (ii) is necessary or
advisable to (A) satisfy any requirements, conditions or guidelines contained in
any opinion, directive, order, ruling or regulation of any federal or state
agency or judicial authority or contained in any federal or state statute
(including the Delaware Act) or (B) facilitate the trading of the Units
(including the division of any class or classes of Outstanding Units into
different classes to facilitate uniformity of tax consequences within such
classes of Units) or comply with any rule, regulation, guideline or requirement
of any National Securities Exchange on which the Units are or will be listed for
trading, compliance with any of which the General Partner determines in its
discretion to be in the best interests of the Partnership and the Unitholders,
(iii) is necessary or advisable in connection with action taken by the General
Partner pursuant to Section 5.10, or (iv) is required to effect the intent
expressed in the Registration Statement or the intent of the provisions of this
Agreement or is otherwise contemplated by this Agreement;
(e) a change in the fiscal year or taxable year of the Partnership and any
changes that, in the discretion of the General Partner, are necessary or
advisable as a result of a change in the fiscal year or taxable year of the
Partnership including, if the General Partner shall so determine, a change in
the definition of "Quarter" and the dates on which distributions are to be made
by the Partnership;
(f) an amendment that is necessary, in the Opinion of Counsel, to prevent
the Partnership, or the General Partner or its directors, officers, trustees or
agents from in any manner being subjected to the provisions of the Investment
Company Act of 1940, as amended, the Investment Advisers Act of 1940, as
amended, or "plan asset" regulations adopted under the Employee Retirement
Income Security Act of 1974, as amended, regardless of whether such are
substantially similar to plan asset regulations currently applied or proposed by
the United States Department of Labor;
(g) subject to the terms of Section 5.7, an amendment that, in the
discretion of the General Partner, is necessary or advisable in connection with
the authorization of issuance of any class or series of Partnership Securities
pursuant to Section 5.6;
(h) any amendment expressly permitted in this Agreement to be made by the
General Partner acting alone;
(i) an amendment effected, necessitated or contemplated by a Merger
Agreement approved in accordance with Section 14.3;
(j) an amendment that, in the discretion of the General Partner, is
necessary or advisable to reflect, account for and deal with appropriately the
formation by the Partnership of, or investment by the Partnership in, any
corporation, partnership, joint venture, limited liability company or other
entity other than the Operating Partnership, in connection with the conduct by
the Partnership of activities permitted by the terms of Section 2.4;
(k) a merger or conveyance pursuant to Section 14.3(d); or
(l) any other amendments substantially similar to the foregoing.
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13.2 Amendment Procedures
Except as provided in Sections 13.1 and 13.3, all amendments to this
Agreement shall be made in accordance with the following requirements.
Amendments to this Agreement may be proposed only by or with the consent of the
General Partner which consent may be given or withheld in its sole discretion. A
proposed amendment shall be effective upon its approval by the holders of at
least a Unit Majority, unless a greater or different percentage is required
under this Agreement or by Delaware law. Each proposed amendment that requires
the approval of the holders of a specified percentage of Outstanding Units shall
be set forth in a writing that contains the text of the proposed amendment. If
such an amendment is proposed, the General Partner shall seek the written
approval of the requisite percentage of Outstanding Units or call a meeting of
the Unitholders to consider and vote on such proposed amendment. The General
Partner shall notify all Record Holders upon final adoption of any such proposed
amendments.
13.3 Amendment Requirements
(a) Notwithstanding the provisions of Sections 13.1 and 13.2, no provision
of this Agreement that establishes a percentage of Outstanding Units required to
take any action shall be amended, altered, changed, repealed or rescinded in any
respect that would have the effect of reducing such voting percentage unless
such amendment is approved by the written consent or the affirmative vote of
holders of Outstanding Units whose aggregate Outstanding Units constitute not
less than the voting requirement sought to be reduced.
(b) Notwithstanding the provisions of Sections 13.1 and 13.2, no amendment
to this Agreement may (i) enlarge the obligations of any Limited Partner without
its consent, unless such shall be deemed to have occurred as a result of an
amendment approved pursuant to Section 13.3(c), (ii) enlarge the obligations of,
restrict in any way any action by or rights of, or reduce in any way the amounts
distributable, reimbursable or otherwise payable to the General Partner or any
of its Affiliates without its consent, which may be given or withheld in its
sole discretion, (iii) change Section 12.1(a) or (c), or (iv) change the term of
the Partnership or, except as set forth in Section 12.1(c), give any Person the
right to dissolve the Partnership.
(c) Except as provided in Section 14.3, and except as otherwise provided,
and without limitation of the General Partner's authority to adopt amendments to
this Agreement as contemplated in Section 13.1, any amendment that would have a
material adverse effect on the rights or preferences of any class of Partnership
Interests in relation to other classes of Partnership Interests must be approved
by the holders of not less than a majority of the Partnership Interests of the
class affected.
(d) Notwithstanding any other provision of this Agreement, except for
amendments pursuant to Section 7.3 or 13.1 and except as otherwise provided by
Section 14.3(b), no amendments shall become effective without the approval of
the holders of at least 90% of the Outstanding Common Units and Subordinated
Units voting as a single class unless the Partnership obtains an Opinion of
Counsel to the effect that such amendment will not affect the limited liability
of any Limited Partner under applicable law.
(e) Except as provided in Section 13.1, this Section 13.3 shall only be
amended with the approval of the holders of at least 90% of the Outstanding
Units.
13.4 Special Meetings
All acts of Unitholders to be taken pursuant to this Agreement shall be
taken in the manner provided in this Article XIII. Special meetings of the
Unitholders may be called by the General Partner or by Unitholders owning 20% or
more of the Outstanding Units of the class or classes for which a meeting is
proposed. Unitholders shall call a special meeting by delivering to the General
Partner one or more requests in writing stating that the signing Unitholders
wish to call a special meeting and indicating the general or specific purposes
for which the special meeting is to be called. Within 60 days after receipt of
such a call from Unitholders or within such greater time as may be reasonably
necessary for the Partnership to comply with any statutes, rules, regulations,
listing agreements or similar requirements governing the holding of a meeting or
the solicitation of proxies for use at such a meeting, the General Partner shall
send a notice of the meeting to the Unitholders either directly or indirectly
through the Transfer Agent. A meeting shall be held at a time and
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place determined by the General Partner on a date not less than 10 days nor more
than 60 days after the mailing of notice of the meeting. Unitholders shall not
vote on matters that would cause the Limited Partners to be deemed to be taking
part in the management and control of the business and affairs of the
Partnership so as to jeopardize the Unitholders' limited liability under the
Delaware Act or the law of any other state in which the Partnership is qualified
to do business.
13.5 Notice of a Meeting
Notice of a meeting called pursuant to Section 13.4 shall be given to the
Record Holders in writing by mail or other means of written communication in
accordance with Section 16.1. The notice shall be deemed to have been given at
the time when deposited in the mail or sent by other means of written
communication.
13.6 Record Date
For purposes of determining the Unitholders entitled to notice of or to
vote at a meeting of the Unitholders or to give approvals without a meeting as
provided in Section 13.11, the General Partner may set a Record Date, which
shall not be less than 10 nor more than 60 days before (a) the date of the
meeting (unless such requirement conflicts with any rule, regulation, guideline
or requirement of any National Securities Exchange on which the Units are listed
for trading, in which case the rule, regulation, guideline or requirement of
such exchange shall govern) or (b) in the event that approvals are sought
without a meeting, the date by which Unitholders are requested in writing by the
General Partner to give such approvals.
13.7 Adjournment
When a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting and a new Record Date need not be fixed, if the
time and place thereof are announced at the meeting at which the adjournment is
taken, unless such adjournment shall be for more than 45 days. At the adjourned
meeting, the Partnership may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than 45 days
or if a new Record Date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given in accordance with this Article XIII.
13.8 Waiver of Notice; Approval of Meeting; Approval of Minutes
The transactions of any meeting of Unitholders, however called and noticed,
and whenever held, shall be as valid as if occurred at a meeting duly held after
regular call and notice, if a quorum is present either in person or by proxy,
and if, either before or after the meeting, Unitholders representing such quorum
who were present in person or by proxy and entitled to vote, sign a written
waiver of notice or an approval of the holding of the meeting or an approval of
the minutes thereof. All waivers and approvals shall be filed with the
Partnership records or made a part of the minutes of the meeting. Attendance of
a Unitholder at a meeting shall constitute a waiver of notice of the meeting,
except when the Unitholder does not approve, at the beginning of the meeting, of
the transaction of any business because the meeting is not lawfully called or
convened; and except that attendance at a meeting is not a waiver of any right
to disapprove the consideration of matters required to be included in the notice
of the meeting, but not so included, if the disapproval is expressly made at the
meeting.
13.9 Quorum
The holders of a majority of the Outstanding Units of the class or classes
for which a meeting has been called represented in person or by proxy shall
constitute a quorum at a meeting of Unitholders of such class or classes unless
any such action by the Unitholders requires approval by holders of a greater
percentage of such Units, in which case the quorum shall be such greater
percentage. At any meeting of the Unitholders duly called and held in accordance
with this Agreement at which a quorum is present, the act of Unitholders holding
Outstanding Units that in the aggregate represent a majority of the Outstanding
Units entitled to vote and be present in person or by proxy at such meeting
shall be deemed to constitute the act of all Unitholders, unless a greater or
different percentage is required with respect to such action under the
provisions of this
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Agreement, in which case the act of the Unitholders holding Outstanding Units
that in the aggregate represent at least such greater or different percentage
shall be required. The Unitholders present at a duly called or held meeting at
which a quorum is present may continue to transact business until adjournment,
notwithstanding the withdrawal of enough Unitholders to leave less than a
quorum, if any action taken (other than adjournment) is approved by the required
percentage of Outstanding Units specified in this Agreement. In the absence of a
quorum any meeting of Unitholders may be adjourned from time to time by the
affirmative vote of holders of at least a majority of the Outstanding Units
represented either in person or by proxy, but no other business may be
transacted, except as provided in Section 13.7.
13.10 Conduct of a Meeting
The General Partner shall have full power and authority concerning the
manner of conducting any meeting of the Unitholders or solicitation of approvals
in writing, including the determination of Persons entitled to vote, the
existence of a quorum, the satisfaction of the requirements of Section 13.4, the
conduct of voting, the validity and effect of any proxies and the determination
of any controversies, votes or challenges arising in connection with or during
the meeting or voting. The General Partner shall designate a Person to serve as
chairman of any meeting and shall further designate a Person to take the minutes
of any meeting. All minutes shall be kept with the records of the Partnership
maintained by the General Partner. The General Partner may make such other
regulations consistent with applicable law and this Agreement as it may deem
advisable concerning the conduct of any meeting of the Unitholders or
solicitation of approvals in writing, including regulations in regard to the
appointment of proxies, the appointment and duties of inspectors of votes and
approvals, the submission and examination of proxies and other evidence of the
right to vote, and the revocation of approvals in writing.
13.11 Action Without a Meeting
If authorized by the General Partner, any action that may be taken at a
meeting of the Unitholders may be taken without a meeting if an approval in
writing setting forth the action so taken is signed by Unitholders owning not
less than the minimum percentage of the Outstanding Units that would be
necessary to authorize or take such action at a meeting at which all the
Unitholders were present and voted (unless such provision conflicts with any
rule, regulation, guideline or requirement of any National Securities Exchange
on which the Units are listed for trading, in which case the rule, regulation,
guideline or requirement of such exchange shall govern). Prompt notice of the
taking of action without a meeting shall be given to the Unitholders who have
not approved in writing. The General Partner may specify that any written ballot
submitted to Unitholders for the purpose of taking any action without a meeting
shall be returned to the Partnership within the time period, which shall be not
less than 20 days, specified by the General Partner. If a ballot returned to the
Partnership does not vote all of the Units held by the Unitholders the
Partnership shall be deemed to have failed to receive a ballot for the Units
that were not voted. If approval of the taking of any action by the Unitholders
is solicited by any Person other than by or on behalf of the General Partner,
the written approvals shall have no force and effect unless and until (a) they
are deposited with the Partnership in care of the General Partner, (b) approvals
sufficient to take the action proposed are dated as of a date not more than 90
days prior to the date sufficient approvals are deposited with the Partnership
and (c) an Opinion of Counsel is delivered to the General Partner to the effect
that the exercise of such right and the action proposed to be taken with respect
to any particular matter (i) will not cause the Limited Partners to be deemed to
be taking part in the management and control of the business and affairs of the
Partnership so as to jeopardize the Limited Partners' limited liability, and
(ii) is otherwise permissible under the state statutes then governing the
rights, duties and liabilities of the Partnership and the Partners.
13.12 Voting and Other Rights
(a) Only those Record Holders of the Units on the Record Date set pursuant
to Section 13.6 (and also subject to the limitations contained in the definition
of "Outstanding") shall be entitled to notice of, and to vote at, a meeting of
Limited Partners or to act with respect to matters as to which the holders of
the Outstanding Units have the right to vote or to act. All references in this
Agreement to votes of, or other acts
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that may be taken by, the Outstanding Units shall be deemed to be references to
the votes or acts of the Record Holders of such Outstanding Units.
(b) With respect to Units that are held for a Person's account by another
Person (such as a broker, dealer, bank, trust company or clearing corporation,
or an agent of any of the foregoing), in whose name such Units are registered,
such other Person shall, in exercising the voting rights in respect of such
Units on any matter, and unless the arrangement between such Persons provides
otherwise, vote such Units in favor of, and at the direction of, the Person who
is the beneficial owner, and the Partnership shall be entitled to assume it is
so acting without further inquiry. The provisions of this Section 13.12(b) (as
well as all other provisions of this Agreement) are subject to the provisions of
Section 4.3.
ARTICLE XIV
MERGER
14.1 Authority
The Partnership may merge or consolidate with one or more corporations,
business trusts or associations, real estate investment trusts, common law
trusts or unincorporated businesses, including a general partnership or limited
partnership, formed under the laws of the State of Delaware or any other state
of the United States of America, pursuant to a written agreement of merger or
consolidation ("Merger Agreement") in accordance with this Article XIV.
14.2 Procedure for Merger or Consolidation
Merger or consolidation of the Partnership pursuant to this Article XIV
requires the prior approval of the General Partner. If the General Partner shall
determine, in the exercise of its discretion, to consent to the merger or
consolidation, the General Partner shall approve the Merger Agreement, which
shall set forth:
(a) The names and jurisdictions of formation or organization of each of the
business entities proposing to merge or consolidate;
(b) The name and jurisdictions of formation or organization of the business
entity that is to survive the proposed merger or consolidation (the "Surviving
Business Entity");
(c) The terms and conditions of the proposed merger or consolidation;
(d) The manner and basis of exchanging or converting the equity securities
of each constituent business entity for, or into, cash, property or general or
limited partner interests, rights, securities or obligations of the Surviving
Business Entity; and (i) if any general or limited partner interests, securities
or rights of any constituent business entity are not to be exchanged or
converted solely for, or into, cash, property or general or limited partner
interests, rights, securities or obligations of the Surviving Business Entity,
the cash, property or general or limited partner interests, rights, securities
or obligations of any limited partnership, corporation, trust or other entity
(other than the Surviving Business Entity) which the holders of such general or
limited partner interests, securities or rights are to receive in exchange for,
or upon conversion of their general or limited partner interests, securities or
rights, and (ii) in the case of securities represented by certificates, upon the
surrender of such certificates, which cash, property or general or limited
partner interests, rights, securities or obligations of the Surviving Business
Entity or any general or limited partnership, corporation, trust or other entity
(other than the Surviving Business Entity), or evidences thereof, are to be
delivered;
(e) A statement of any changes in the constituent documents or the adoption
of new constituent documents (the articles or certificate of incorporation,
articles of trust, declaration of trust, certificate or agreement of limited
partnership or other similar charter or governing document) of the Surviving
Business Entity to be effected by such merger or consolidation;
(f) The effective time of the merger, which may be the date of the filing
of the certificate of merger pursuant to Section 14.4 or a later date specified
in or determinable in accordance with the Merger Agreement
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(provided, that if the effective time of the merger is to be later than the date
of the filing of the certificate of merger, the effective time shall be fixed no
later than the time of the filing of the certificate of merger and stated
therein); and
(g) Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or appropriate by the General Partner.
14.3 Approval by Unitholders of Merger or Consolidation
(a) Except as provided in Section 14.3(d), the General Partner, upon its
approval of the Merger Agreement, shall direct that the Merger Agreement be
submitted to a vote of Limited Partners, whether at a special meeting or by
written consent, in either case in accordance with the requirements of Article
XIII. A copy or a summary of the Merger Agreement shall be included in or
enclosed with the notice of a special meeting or the written consent.
(b) Except as provided in Section 14.3(d), the Merger Agreement shall be
approved upon receiving the affirmative vote or consent of the holders of a Unit
Majority unless the Merger Agreement contains any provision that, if contained
in an amendment to this Agreement, the provisions of this Agreement or the
Delaware Act would require the vote or consent of a greater percentage of the
Outstanding Units or of any class of Unitholders, in which case such greater
percentage vote or consent shall be required for approval of the Merger
Agreement.
(c) Except as provided in Section 14.3(d), after such approval by vote or
consent of the Unitholders, and at any time prior to the filing of the
certificate of merger pursuant to Section 14.4, the merger or consolidation may
be abandoned pursuant to provisions therefor, if any, set forth in the Merger
Agreement.
(d) Mere Change in Form Merger. Notwithstanding anything else contained in
this Article XIV or in this Agreement, the General Partner is permitted, in its
discretion, without Unitholder approval, to merge the Partnership or any Group
Member into, or convey all or some of the Partnership's assets to, another
limited liability entity which shall be newly formed and shall have no assets,
liabilities or operations at the time of such Merger other than those it
receives from the Partnership or other Group Member if (i) the General Partner
has received an Opinion of Counsel that the merger or conveyance, as the case
may be, would not result in the loss of the limited liability of any Limited
Partner or any limited partner in the Operating Partnership or cause the
Partnership or Operating Partnership to be treated as an association taxable as
a corporation or otherwise to be taxed as an entity for federal income tax
purposes (to the extent not previously treated as such), (ii) the sole purpose
of such merger or conveyance is to effect a mere change in the legal form of the
Partnership into another limited liability entity and (iii) the governing
instruments of the new entity provide the Limited Partners and the General
Partner with the same rights and obligations as are herein contained.
14.4 Certificate of Merger
Upon the required approval by the General Partner and the Unitholders of a
Merger Agreement, a certificate of merger shall be executed and filed with the
Secretary of State of the State of Delaware in conformity with the requirements
of the Delaware Act.
14.5 Effect of Merger
(a) At the effective time of the certificate of merger:
(i) all of the rights, privileges and powers of each of the business
entities that has merged or consolidated, and all property, real, personal
and mixed, and all debts due to any of those business entities and all
other things and causes of action belonging to each of those business
entities shall be vested in the Surviving Business Entity and after the
merger or consolidation shall be the property of the Surviving Business
Entity to the extent they were of each constituent business entity;
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(ii) the title to any real property vested by deed or otherwise in any
of those constituent business entities shall not revert and is not in any
way impaired because of the merger or consolidation;
(iii) all rights of creditors and all liens on or security interests
in property of any of those constituent business entities shall be
preserved unimpaired; and
(iv) all debts, liabilities and duties of those constituent business
entities shall attach to the Surviving Business Entity, and may be enforced
against it to the same extent as if the debts, liabilities and duties had
been incurred or contracted by it.
(b) A merger or consolidation effected pursuant to this Article shall not
be deemed to result in a transfer or assignment of assets or liabilities from
one entity to another.
ARTICLE XV
RIGHT TO ACQUIRE UNITS
15.1 Right to Acquire Limited Partner Interests
(a) Notwithstanding any other provision of this Agreement, if at any time
not more than 20% of the total limited partner interests of any class then
Outstanding are held by Persons other than the General Partner and its
Affiliates, the General Partner shall then have the right, which right it may
assign and transfer in whole or in part to the Partnership or any Affiliate of
the General Partner, exercisable in its sole discretion, to purchase all, but
not less than all, of such limited partner interests of such class then
Outstanding held by Persons other than the General Partner and its Affiliates,
at the greater of (x) the Current Market Price as of the date three days prior
to the date that the notice described in Section 15.1(b) is mailed and (y) the
highest price paid by the General Partner or any of its Affiliates for any such
limited partner interest of such class purchased during the 90-day period
preceding the date that the notice described in Section 15.1(b) is mailed. As
used in this Agreement, (i) "Current Market Price" as of any date of any class
of limited partner interests listed or admitted to trading on any National
Securities Exchange means the average of the daily Closing Prices (as
hereinafter defined) per limited partner interest of such class for the 20
consecutive Trading Days (as hereinafter defined) immediately prior to such
date; (ii) "Closing Price" for any day means the last sale price on such day,
regular way, or in case no such sale takes place on such day, the average of the
closing bid and asked prices on such day, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted for trading on the principal National
Securities Exchange (other than the Nasdaq Stock Market) on which such limited
partner interests of such class are listed or admitted to trading or, if such
limited partner interests of such class are not listed or admitted to trading on
any National Securities Exchange (other than the Nasdaq Stock Market), the last
quoted price on such day or, if not so quoted, the average of the high bid and
low asked prices on such day in the over-the-counter market, as reported by the
Nasdaq Stock Market or such other system then in use, or, if on any such day
such limited partner interests of such class are not quoted by any such
organization, the average of the closing bid and asked prices on such day as
furnished by a professional market maker making a market in such limited partner
interests of such class selected by the General Partner, or if on any such day
no market maker is making a market in such limited partner interests of such
class, the fair value of such limited partner interests on such day as
determined reasonably and in good faith by the General Partner; and (iii)
"Trading Day" means a day on which the principal National Securities Exchange on
which such limited partner interests of any class are listed or admitted to
trading is open for the transaction of business or, if limited partner interests
of a class are not listed or admitted to trading on any National Securities
Exchange, a day on which banking institutions in New York City generally are
open.
(b) If the General Partner, any Affiliate of the General Partner or the
Partnership elects to exercise the right to purchase limited partner interests
granted pursuant to Section 15.1(a), the General Partner shall deliver to the
Transfer Agent notice of such election to purchase (the "Notice of Election to
Purchase") and shall cause the Transfer Agent to mail a copy of such Notice of
Election to Purchase to the Record Holders of limited partner interests of such
class (as of a Record Date selected by the General Partner) at least 10, but
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not more than 60, days prior to the Purchase Date. Such Notice of Election to
Purchase shall also be published for a period of at least three consecutive days
in at least two daily newspapers of general circulation printed in the English
language and published in the Borough of Manhattan, New York. The Notice of
Election to Purchase shall specify the Purchase Date and the price (determined
in accordance with Section 15.1(a)) at which limited partner interests will be
purchased and state that the General Partner, its Affiliate or the Partnership,
as the case may be, elects to purchase such limited partner interests, upon
surrender of Certificates representing such limited partner interests in
exchange for payment, at such office or offices of the Transfer Agent as the
Transfer Agent may specify, or as may be required by any National Securities
Exchange on which such limited partner interests are listed or admitted to
trading. Any such Notice of Election to Purchase mailed to a Record Holder of
limited partner interests at his address as reflected in the records of the
Transfer Agent shall be conclusively presumed to have been given regardless of
whether the owner receives such notice. On or prior to the Purchase Date, the
General Partner, its Affiliate or the Partnership, as the case may be, shall
deposit with the Transfer Agent cash in an amount sufficient to pay the
aggregate purchase price of all of such limited partner interests to be
purchased in accordance with this Section 15.1. If the Notice of Election to
Purchase shall have been duly given as aforesaid at least 10 days prior to the
Purchase Date, and if on or prior to the Purchase Date the deposit described in
the preceding sentence has been made for the benefit of the holders of limited
partner interests subject to purchase as provided herein, then from and after
the Purchase Date, notwithstanding that any Certificate shall not have been
surrendered for purchase, all rights of the holders of such limited partner
interests (including any rights pursuant to Articles IV, V, VI, and XII) shall
thereupon cease, except the right to receive the purchase price (determined in
accordance with Section 15.1(a)) for limited partner interests therefor, without
interest, upon surrender to the Transfer Agent of the Certificates representing
such limited partner interests, and such limited partner interests shall
thereupon be deemed to be transferred to the General Partner, its Affiliate or
the Partnership, as the case may be, on the record books of the Transfer Agent
and the Partnership, and the General Partner or any Affiliate of the General
Partner, or the Partnership, as the case may be, shall be deemed to be the owner
of all such limited partner interests from and after the Purchase Date and shall
have all rights as the owner of such limited partner interests (including all
rights as owner of such limited partner interests pursuant to Articles IV, V, VI
and XII).
(c) At any time from and after the Purchase Date, a holder of an
Outstanding limited partner interest subject to purchase as provided in this
Section 15.1 may surrender his Certificate evidencing such limited partner
interest to the Transfer Agent in exchange for payment of the amount described
in Section 15.1(a), therefor, without interest thereon.
ARTICLE XVI
GENERAL PROVISIONS
16.1 Addresses and Notices
Any notice, demand, request, report or proxy materials required or
permitted to be given or made to a Partner or Assignee under this Agreement
shall be in writing and shall be deemed given or made when delivered in person
or when sent by first class United States mail or by other means of written
communication to the Partner or Assignee at the address described below. Any
notice, payment or report to be given or made to a Partner or Assignee hereunder
shall be deemed conclusively to have been given or made, and the obligation to
give such notice or report or to make such payment shall be deemed conclusively
to have been fully satisfied, upon sending of such notice, payment or report to
the Record Holder of such Unit or Incentive Distribution Right at his address as
shown on the records of the Transfer Agent or as otherwise shown on the records
of the Partnership, regardless of any claim of any Person who may have an
interest in such Unit or Incentive Distribution Right or the Partnership
Interest of a General Partner by reason of any assignment or otherwise. An
affidavit or certificate of making of any notice, payment or report in
accordance with the provisions of this Section 16.1 executed by the General
Partner, the Transfer Agent or the mailing organization shall be prima facie
evidence of the giving or making of such notice, payment or report. If any
notice, payment or report addressed to a Record Holder at the address of such
Record Holder appearing on
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the books and records of the Transfer Agent or the Partnership is returned by
the United States Post Office marked to indicate that the United States Postal
Service is unable to deliver it, such notice, payment or report and any
subsequent notices, payments and reports shall be deemed to have been duly given
or made without further mailing (until such time as such Record Holder or
another Person notifies the Transfer Agent or the Partnership of a change in his
address) if they are available for the Partner or Assignee at the principal
office of the Partnership for a period of one year from the date of the giving
or making of such notice, payment or report to the other Partners and Assignees.
Any notice to the Partnership shall be deemed given if received by the General
Partner at the principal office of the Partnership designated pursuant to
Section 2.3. The General Partner may rely and shall be protected in relying on
any notice or other document from a Partner, Assignee or other Person if
believed by it to be genuine.
16.2 Further Action
The parties shall execute and deliver all documents, provide all
information and take or refrain from taking action as may be necessary or
appropriate to achieve the purposes of this Agreement.
16.3 Binding Effect
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
16.4 Integration
This Agreement constitutes the entire agreement among the parties hereto
pertaining to the subject matter hereof and supersedes all prior agreements and
understandings pertaining thereto.
16.5 Creditors
None of the provisions of this Agreement shall be for the benefit of, or
shall be enforceable by, any creditor of the Partnership.
16.6 Waiver
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach of any other covenant, duty, agreement or condition.
16.7 Counterparts
This Agreement may be executed in counterparts, all of which together shall
constitute an agreement binding on all the parties hereto, notwithstanding that
all such parties are not signatories to the original or the same counterpart.
Each party shall become bound by this Agreement immediately upon affixing its
signature hereto or, in the case of a Person acquiring a Unit, upon accepting
the certificate evidencing such Unit or executing and delivering a Transfer
Application as herein described, independently of the signature of any other
party.
16.8 Applicable Law
This Agreement shall be construed in accordance with and governed by the
laws of the State of Delaware, without regard to the principles of conflicts of
law.
16.9 Invalidity of Provisions
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
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16.10 Consent of Partners
Each Partner hereby expressly consents and agrees that, whenever in this
Agreement it is specified that an action may be taken upon the affirmative vote
or consent of less than all of the Partners, such action may be so taken upon
the concurrence of less than all of the Partners and each Partner shall be bound
by the results of such action.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
GENERAL PARTNER:
HERITAGE HOLDINGS, INC.
By:
--------------------------------
Name:
Title:
ORGANIZATIONAL LIMITED PARTNER:
----------------------------------
James E. Bertelsmeyer
LIMITED PARTNERS
All Limited Partners now and
hereafter admitted as Limited
Partners of the Partnership,
pursuant to powers of attorney now
and hereafter executed in favor of,
and granted and delivered to the
General Partner.
By:
--------------------------------
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EXHIBIT A TO THE AMENDED AND
RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
HERITAGE PROPANE PARTNERS, L.P.
CERTIFICATE EVIDENCING COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
HERITAGE PROPANE PARTNERS, L.P.
No. Common Units
In accordance with Section 4.1 of the Amended and Restated Agreement of
Limited Partnership of Heritage Propane Partners, L.P., as amended, supplemented
or restated from time to time (the "Partnership Agreement"), Heritage Propane
Partners, L.P., a Delaware limited partnership (the "Partnership"), hereby
certifies that (the "Holder") is the registered owner of Common Units
representing limited partner interests in the Partnership (the "Common Units")
transferable on the books of the Partnership, in person or by duly authorized
attorney, upon surrender of this Certificate properly endorsed and accompanied
by a properly executed application for transfer of the Common Units represented
by this Certificate. The rights, preferences and limitations of the Common Units
are set forth in, and this Certificate and the Common Units represented hereby
are issued and shall in all respects be subject to the terms and provisions of,
the Partnership Agreement. Copies of the Partnership Agreement are on file at,
and will be furnished without charge on delivery of written request to the
Partnership at, the principal office of the Partnership located at 8801 South
Yale Avenue, Suite 310, Tulsa, Oklahoma 74137. Capitalized terms used herein but
not defined shall have the meaning given them in the Partnership Agreement.
The Holder, by accepting this Certificate, is deemed to have (i) requested
admission as, and agreed to become, a Limited Partner and to have agreed to
comply with and be bound by and to have executed the Partnership Agreement, (ii)
represented and warranted that the Holder has all right, power and authority
and, if an individual, the capacity necessary to enter into the Partnership
Agreement, (iii) granted the powers of attorney provided for in the Partnership
Agreement and (iv) made the waivers and given the consents and approvals
contained in the Partnership Agreement.
This Certificate shall not be valid for any purpose unless it has been
countersigned and registered by the Transfer Agent and Registrar.
<TABLE>
<S> <C>
Dated: HERITAGE PROPANE PARTNERS, L.P.
-------------------------------
Countersigned and Registered by: By:
-------------------------------
President
- -------------------------------------
as Transfer Agent and Registrar
By: By:
---------------------------------- -------------------------------
Authorized Signature Secretary
</TABLE>
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[REVERSE OF CERTIFICATE]
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as follows according to applicable laws or
regulations:
<TABLE>
<S> <C> <C>
TEN COM- as tenants in common UNIF GIFT MIN ACT:
TEN ENT- as tenants by the entireties _______________ Custodian _______________
JT TEN- as joint tenants with right of (Cust) (Minor)
survivorship and not as under Uniform Gifts to Minors
tenants in common Act _____________________________________
State
</TABLE>
Additional abbreviations, though not in the above list, may also be used.
ASSIGNMENT OF COMMON UNITS
IN
HERITAGE PROPANE PARTNERS, L.P.
IMPORTANT NOTICE REGARDING INVESTOR RESPONSIBILITIES
DUE TO TAX SHELTER STATUS OF HERITAGE PROPANE PARTNERS, L.P.
You have acquired an interest in Heritage Propane Partners, L.P., 8801
South Yale Avenue, Suite 310, Tulsa, Oklahoma 74137 whose taxpayer
identification number is ________. The Internal Revenue Service has issued
Heritage Propane Partners, L.P. the following tax shelter registration number:
________.
YOU MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF
YOU CLAIM ANY DEDUCTION, LOSS, CREDIT, OR OTHER TAX BENEFIT OR REPORT ANY INCOME
BY REASON OF YOUR INVESTMENT IN HERITAGE PROPANE PARTNERS, L.P.
You must report the registration number as well as the name and taxpayer
identification number of HERITAGE PROPANE PARTNERS, L.P. on Form 8271. FORM 8271
MUST BE ATTACHED TO THE RETURN ON WHICH YOU CLAIM THE DEDUCTION, LOSS, CREDIT,
OR OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN
HERITAGE PROPANE PARTNERS, L.P.
If you transfer your interest in Heritage Propane Partners, L.P. to another
person, you are required by the Internal Revenue Service to keep a list
containing (a) that person's name, address and taxpayer identification number,
(b) the date on which you transferred the interest and (c) the name, address and
tax shelter registration number of Heritage Propane Partners, L.P. If you do not
want to keep such a list, you must (1) send the information specified above to
the Partnership, which will keep the list for this tax shelter, and (2) give a
copy of this notice to the person to whom you transfer your interest. Your
failure to comply with any of the above-described responsibilities could result
in the imposition of a penalty under Section 6707(b) or 6708(a) of the Internal
Revenue Code of 1986, as amended, unless such failure is shown to be due to
reasonable cause.
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED, OR APPROVED BY THE
INTERNAL REVENUE SERVICE.
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FOR VALUE RECEIVED, ________________________ hereby assigns, conveys, sells
and transfers unto ________________________
<TABLE>
<S> <C>
_______________________________ _______________________________________
(Please print or typewrite name (Please insert Social Security or other
and address of Assignee) identifying number of Assignee)
</TABLE>
____________________ Common Units representing limited partner interests
evidenced by this Certificate, subject to the Partnership Agreement, and does
hereby irrevocably constitute and appoint ________________ as its
attorney-in-fact with full power of substitution to transfer the same on the
books of Heritage Propane Partners, L.P.
<TABLE>
<S> <C>
Date:__________________________NOTE: The signature to any endorsement hereon must
correspond with the name as written upon the
face of this Certificate in every particular,
without alternation, enlargement or change.
SIGNATURE(S) MUST BE GUARANTEED BY A MEMBER ____________________________________________
FIRM OF THE NATIONAL ASSOCIATION OF (Signature)
SECURITIES DEALERS, INC. OR BY A COMMERCIAL
BANK OR TRUST COMPANY
____________________________________________
(Signature)
</TABLE>
SIGNATURE(S) GUARANTEED
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the Certificate evidencing the Common Units to
be transferred is surrendered for registration or transfer and an Application
for Transfer of Common Units has been executed by a transferee either (a) on the
form set forth below or (b) on a separate application that the Partnership will
furnish on request without charge. A transferor of the Common Units shall have
no duty to the transferee with respect to execution of the transfer application
in order for such transferee to obtain registration of the transfer of the
Common Units.
---------------------
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APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of Heritage Propane Partners, L.P.
(the "Partnership"), as amended, supplemented or restated to the date hereof
(the "Partnership Agreement"), (b) represents and warrants that the Assignee has
all right, power and authority and, if an individual, the capacity necessary to
enter into the Partnership Agreement, (c) appoints the General Partner of the
Partnership and, if a Liquidator shall be appointed, the Liquidator of the
Partnership as the Assignee's attorney-in-fact to execute, swear to, acknowledge
and file any document, including, without limitation, the Partnership Agreement
and any amendment thereto and the Certificate of Limited Partnership of the
Partnership and any amendment thereto, necessary or appropriate for the
Assignee's admission as a Substituted Limited Partner and as a party to the
Partnership Agreement, (d) gives the power of attorney provided for in the
Partnership Agreement, and (e) makes the waivers and gives the consents and
approvals contained in the Partnership Agreement. Capitalized terms not defined
herein have the meanings assigned to such terms in the Partnership Agreement.
<TABLE>
<S> <C>
Date:
---------------------------------------
- -------------------------------------------- --------------------------------------------
Social Security or other identifying Signature of Assignee
number of Assignee
- -------------------------------------------- --------------------------------------------
Purchase Price including commissions, if any Name and Address of Assignee
</TABLE>
Type of Entity (check one):
<TABLE>
<S> <C> <C>
/ / Individual / / Partnership / / Corporation
/ / Trust / / Other (specify)
</TABLE>
Nationality (check one)
<TABLE>
<S> <C>
/ / U.S. Citizen, Resident or Domestic Entity
/ / Foreign Corporation / / Non-resident Alien
</TABLE>
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
A-73
<PAGE> 246
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (Social Security Number) is
____________________
3. My home address is ____________________________________________ .
4. My taxable year ends on December 31st.
B. Partnership, Corporation or Other Interestholder
1. __________________________________ is not a foreign corporation, foreign
(Name of Interestholder)
partnership, foreign trust or foreign estate (as those terms are defined
in the Code and Treasury Regulations).
2. The interestholder's U.S. employer identification number is ____________.
3. The interestholder's office address and place of incorporation (if
applicable) is
______________________________________________ .
4. The interestholder's taxable year ends on December 31st.
The interestholder agrees to notify the Partnership within sixty (60) days
of the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to
the Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct and
complete and, if applicable, I further declare that I have authority to sign
this document on behalf of
------------------------------------------------------
NAME OF INTERESTHOLDER
------------------------------------------------------
SIGNATURE AND DATE
------------------------------------------------------
TITLE (IF APPLICABLE)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the signee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
A-74
<PAGE> 247
APPENDIX B
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the Certificate evidencing the Common Units to
be transferred is surrendered for registration or transfer and an Application
for Transfer of Common Units has been executed by a transferee either (a) on the
form set forth below or (b) on a separate application that the Partnership will
furnish on request without charge. A transferor of the Common Units shall have
no duty to the transferee with respect to execution of the transfer application
in order for such transferee to obtain registration of the transfer of the
Common Units.
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Agreement of
Limited Partnership of Heritage Propane Partners, L.P. (the "Partnership"), as
amended, supplemented or restated to the date hereof (the "Partnership
Agreement"), (b) represents and warrants that the Assignee has all right, power
and authority and, if an individual, the capacity necessary to enter into the
Partnership Agreement, (c) appoints the General Partner and, if a Liquidator
shall be appointed, the Liquidator of the Partnership as the Assignee's
attorney-in-fact to execute, swear to, acknowledge and file any document,
including, without limitation, the Partnership Agreement and any amendment
thereto and the Certificate of Limited Partnership of the Partnership and any
amendment thereto, necessary or appropriate for the Assignee's admission as a
Substituted Limited Partner and as a party to the Partnership Agreement, (d)
gives the powers of attorney provided for in the Partnership Agreement and (e)
makes the waivers and gives the consents and approvals contained in the
Partnership Agreement. Capitalized terms not defined herein have the meanings
assigned to such terms in the Partnership Agreement.
Date:
- --------------------------------------
Signature of Assignee
- --------------------------------------
Social Security or other identifying
number of Assignee
- --------------------------------------
Name and Address of Assignee
- --------------------------------------
Purchase Price including commissions,
if any
Type of Entity (check one):
/ / Individual / / Partnership / / Corporation
/ / Trust / / Other (specify) ______________
Nationality (check one):
/ / U.S. Citizen, Resident or Domestic Entity
/ / Foreign Corporation / / Non-resident Alien
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
B-1
<PAGE> 248
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (Social Security Number) is
3. My home address is
4. My taxable year ends on December 31st.
B. Partnership, Corporation or Other Interestholder
1. is not a foreign
(Name
of
Interestholder)
corporation, foreign partnership, foreign trust or foreign estate (as
those terms are defined in the Code and Treasury Regulations).
2. The interestholder's U.S. employer identification number is
3. The interestholder's office address and place of incorporation (if
applicable) is
- --------------------------------------------------------------------------------
4. The interestholder's taxable year ends on December 31st.
The interestholder agrees to notify the Partnership within sixty (60) days
of the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to
the Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct and
complete and, if applicable, I further declare that I have authority to sign
this document on behalf of
Name of Interestholder
Signature and Date
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered national securities exchange or a member of the National Association
of Securities Dealers, Inc., or, in the case of any other nominee holder, a
person performing a similar function. If the Assignee is a broker, dealer, bank,
trust company, clearing corporation, other nominee owner or an agent of any of
the foregoing, the above certification as to any person for whom the Assignee
will hold the Common Units shall be made to the best of the Assignee's
knowledge.
B-2
<PAGE> 249
APPENDIX C
GLOSSARY OF CERTAIN TERMS
Acquisition: Any transaction in which any member of the Partnership Group
acquires (through an asset acquisition, merger, stock acquisition or other form
of investment) control over all or a portion of the assets, properties or
business of another Person for the purpose of increasing the operating capacity
or revenues of the Partnership Group from the operating capacity or revenues of
the Partnership Group existing immediately prior to such transaction.
Adjusted Operating Surplus: With respect to any period, Operating Surplus
generated during such period (a) less (i) any net increase in working capital
borrowings during such period and (ii) any net reduction in cash reserves for
Operating Expenditures during such period not relating to an Operating
Expenditure made during such period, and (b) plus (i) any net decrease in
working capital borrowings during such period and (ii) any net increase in cash
reserves for Operating Expenditures during such period required by any debt
instrument for the repayment of principal, interest or premium. Adjusted
Operating Surplus does not include that portion of Operating Surplus included in
clause (a)(i) of the definition of Operating Surplus.
Audit Committee: A committee of the board of directors of the General
Partner composed entirely of two or more directors who are neither officers nor
employees of the General Partner nor officers, directors or employees of any
affiliate of the General Partner.
Available Cash: With respect to any quarter prior to liquidation:
(a) the sum of (i) all cash and cash equivalents of the Partnership
Group on hand at the end of such quarter and (ii) all additional cash and
cash equivalents of the Partnership Group on hand on the date of
determination of Available Cash with respect to such quarter resulting from
borrowings for working capital purposes made subsequent to the end of such
quarter, less
(b) the amount of any cash reserves that is necessary or appropriate
in the reasonable discretion of the General Partner to (i) provide for the
proper conduct of the business of the Partnership Group (including reserves
for future capital expenditures) subsequent to such quarter, (ii) comply
with applicable law or any loan agreement, security agreement, mortgage,
debt instrument or other agreement or obligation to which any member of the
Partnership Group is a party or by which it is bound or its assets are
subject, or (iii) provide funds for distributions to Unitholders and the
General Partner in respect of any one or more of the next four quarters;
provided, however, that the General Partner may not establish cash reserves
pursuant to (iii) above if the effect of such reserves would be that the
Partnership is unable to distribute the Minimum Quarterly Distribution on
all Common Units with respect to such quarter; and, provided further, that
disbursements made by a Group Member or cash reserves established,
increased or reduced after the end of such quarter but on or before the
date of determination of Available Cash with respect to such quarter shall
be deemed to have been made, established, increased or reduced for purposes
of determining Available Cash within such quarter if the General Partner so
determines. Notwithstanding the foregoing, "Available Cash" with respect to
the quarter in which the liquidation of the Partnership occurs and any
subsequent quarter shall equal zero.
Bank Credit Facility: The $35 million revolving acquisition facility (the
"Acquisition Facility") and the $15 million working capital facility (the
"Working Capital Facility") both entered into by the Operating Partnership.
Capital Account: The capital account maintained for a Partner pursuant to
the Partnership Agreement. The Capital Account of a partner in respect of a
general partner interest, a Common Unit, a Subordinated Unit, an Incentive
Distribution Right or any other Partnership Interest shall be the amount which
such Capital Account would be if such general partner interest, Common Unit,
Subordinated Unit, Incentive Distribution Right, or other Partnership Interest
were the only interest in the Partnership held by a Partner from and after the
date on which such general partner interest, Common Unit, Subordinated Unit,
Incentive Distribution Right or other Partnership Interest was first issued.
C-1
<PAGE> 250
Capital Improvements: Additions or improvements to the capital assets
owned by any member of the Partnership Group or the acquisition of existing or
the construction of new capital assets (including retail distribution outlets,
propane tanks, pipeline systems, storage facilities, appliance showrooms,
training facilities and related assets), made to increase the operating capacity
of the Partnership Group from the operating capacity of the Partnership Group
existing immediately prior to such addition, improvement, acquisition or
construction.
Capital Surplus: All Available Cash distributed by the Partnership from
any source will be treated as distributed from Operating Surplus until the sum
of all Available Cash distributed since the commencement of the Partnership
equals the Operating Surplus as of the end of the quarter prior to such
distribution. Any excess Available Cash will be deemed to be Capital Surplus.
Cause: Means a court of competent jurisdiction has entered a final,
non-appealable judgment finding the General Partner liable for actual fraud,
gross negligence or willful or wanton misconduct in its capacity as a general
partner of the Partnership.
Closing Date: The first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement.
Common Unit Arrearage: The amount by which the Minimum Quarterly
Distribution in respect of a quarter during the Subordination Period exceeds the
distribution of Available Cash from Operating Surplus actually made for such
quarter on a Common Unit, cumulative for such quarter and all prior quarters
during the Subordination Period.
Common Units: A Unit representing a fractional part of the Partnership
Interests of all limited partners and assignees and having the rights and
obligations specified with respect to Common Units in the Partnership Agreement.
Contribution Agreement: The Contribution, Conveyance and Assumption
Agreement to be dated the Closing Date among the Operating Partnership, the
General Partner and certain other parties governing the Transactions pursuant to
which, among other things, the assets of Heritage will be transferred and the
liabilities will be assumed.
Current Market Price: With respect to any class of Units listed or
admitted to trading on any national securities exchange as of any date, the
average of the daily Closing Prices (as hereinafter defined) for the 20
consecutive Trading Days (as hereinafter defined) immediately prior to such
date. "Closing Price" for any day means the last sale price on such day, regular
way, or in case no such sale takes place on such day, the average of the closing
bid and asked prices on such day, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the principal national securities exchange
(other than the Nasdaq Stock Market) on which the Units of such class are listed
or admitted to trading or, if the Units of such class are not listed or admitted
to trading on any national securities exchange (other than the Nasdaq Stock
Market), the last quoted price on such day, or, if not so quoted, the average of
the high bid and low asked prices on such day in the over-the-counter market, as
reported by the Nasdaq Stock Market or such other system then in use, or if on
any such day the Units of such class are not quoted by any such organization,
the average of the closing bid and asked prices on such day as furnished by a
professional market maker making a market in the Units of such class elected by
the General Partner, or if on any such day no market maker is making a market in
the Units of such class, the fair value of such Units on such day as determined
reasonably and in good faith by the General Partner. "Trading Days" means a day
on which the principal national securities exchange on which Units of any class
are listed or admitted to trading is open for the transaction of business or, if
the Units of a class are not listed or admitted to trading on any national
securities exchange, a day on which banking institutions in New York City
generally are open.
Degree Day: Degree days measure the amount by which the average of the
high and low temperature on a given day is below 65 degrees Fahrenheit. For
example, if the high temperature is 60 degrees and the low temperature is 40
degrees for a National Oceanic and Atmospheric Administration measurement
location, the average temperature is 50 degrees and the number of degree days
for that day is 15.
C-2
<PAGE> 251
EBITDA: Operating income plus depreciation and amortization. As used in
this Prospectus, EBITDA is not intended to be construed as an alternative to net
income as an indicator of operating performance or as an alternative to cash
flow as a measure of liquidity or ability to service debt obligations.
General Partner: Heritage Holdings, Inc., a Delaware corporation, and its
successors, as general partner of the Partnership.
Incentive Distributions: The distributions of Available Cash from
Operating Surplus initially made to the General Partner that are in excess of
the General Partner's aggregate 2% general partner interest.
Initial Common Units: The Common Units sold in this offering.
Initial Unit Price: An amount per Unit equal to the initial public
offering price of the Common Units as set forth on the outside front cover page
of this Prospectus.
Interim Capital Transactions: (a) Borrowings, refinancings and refundings
of indebtedness and sales of debt securities (other than for working capital
purposes and other than for items purchased on open account in the ordinary
course of business) by any member of the Partnership Group, (b) sales of equity
interests (including the Common Units sold to the Underwriters pursuant to the
exercise of their over-allotment option) by any member of the Partnership Group
and (c) sales or other voluntary or involuntary dispositions of any assets of
any member of the Partnership Group (other than (i) sales or other dispositions
of inventory in the ordinary course of business, (ii) sales or other
dispositions of other current assets, including, without limitation, receivables
and accounts, in the ordinary course of business and (iii) sales or other
dispositions of assets as a part of normal retirements or replacements), in each
case prior to the commencement of the dissolution and liquidation of the
Partnership.
Minimum Quarterly Distribution: $0.50 per Unit with respect to each
quarter or $2.00 per Unit on an annualized basis, subject to adjustment as
described in "Cash Distribution Policy -- Distributions from Capital Surplus"
and "Cash Distribution Policy -- Adjustment of Minimum Quarterly Distribution
and Target Distribution Levels."
Operating Expenditures: All Partnership Group expenditures, including
taxes, reimbursements of the General Partner, debt service payments and capital
expenditures, subject to the following:
(a) Payments (including prepayments) of principal and premium on a
debt shall not be an Operating Expenditure if the payment is (i) required
in connection with the sale or other disposition of assets or (ii) made in
connection with the refinancing or refunding of indebtedness with the
proceeds from new indebtedness or from the sale of equity interests. For
purposes of the foregoing, at the election and in the reasonable discretion
of the General Partner, any payment of principal or premium shall be deemed
to be refunded or refinanced by any indebtedness incurred or to be incurred
by the Partnership Group within 180 days before or after such payment to
the extent of the principal amount of and premiums on such indebtedness.
(b) Operating Expenditures shall not include (i) capital expenditures
made for Acquisitions or for Capital Improvements (as opposed to capital
expenditures made to maintain assets), (ii) payment of transaction expenses
relating to Interim Capital Transactions or (iii) distributions to
partners. Where capital expenditures are made in part for Acquisitions or
Capital Improvements and in part for other purposes, the General Partner's
good faith allocation between the amounts paid for each shall be
conclusive.
Operating Partnership: Heritage Operating, L.P., a Delaware limited
partnership, and any successors thereto.
Operating Partnership Agreement: The Agreement of Limited Partnership of
the Operating Partnership (the form of which has been filed as an exhibit to the
registration statement of which this Prospectus is a part).
C-3
<PAGE> 252
Operating Surplus: As to any period prior to liquidation, on a cumulative
basis and without duplication:
(a) the sum of (i) $10 million plus all cash and cash equivalents of
the Partnership Group on hand as of the close of business on the Closing
Date, (ii) all cash receipts of the Partnership Group for the period
beginning on the Closing Date and ending with the last day of such period,
other than cash receipts from Interim Capital Transactions and (iii) all
cash receipts of the Partnership Group after the end of such period but on
or before the date of determination of Operating Surplus with respect to
such period resulting from borrowings for working capital purposes, less
(b) the sum of (i) Operating Expenditures for the period beginning on
the Closing Date and ending with the last day of such period and (ii) the
amount of cash reserves that is necessary or advisable in the reasonable
discretion of the General Partner to provide funds for future Operating
Expenditures, provided however, that disbursements made (including
contributions to a member of the Partnership Group or disbursements on
behalf of a member of the Partnership Group) or cash reserves established,
increased or reduced after the end of such period but on or before the date
of determination of Available Cash with respect to such period shall be
deemed to have been made, established, increased or reduced for purposes of
determining Operating Surplus, within such period if the General Partner so
determines. Notwithstanding the foregoing, "Operating Surplus" with respect
to the quarter in which the liquidation occurs and any subsequent quarter
shall equal zero.
Opinion of Counsel: A written opinion of counsel, acceptable to the
General Partner in its reasonable discretion, to the effect that the taking of a
particular action will not result in the loss of the limited liability of the
limited partners of the Partnership or cause the Partnership to be treated as an
association taxable as a corporation or otherwise taxed as an entity for federal
income tax purposes.
Partnership: Heritage Propane Partners, L.P., a Delaware limited
partnership, and any successors thereto.
Partnership Agreement: The Amended and Restated Agreement of Limited
Partnership of the Partnership (the form of which is included in this Prospectus
at Appendix A), as it may be amended, restated or supplemented from time to
time. Unless the context requires otherwise, references to the Partnership
Agreement constitute references to the Partnership Agreement of the Partnership
and of the Operating Partnership Agreement, collectively.
Partnership Group: The Partnership, the Operating Partnership and any
subsidiary of either such entity, treated as a single consolidated entity.
Partnership Interest: An interest in the Partnership, which shall include
general partner interests, Common Units, Subordinated Units, Incentive
Distribution Rights or other equity securities of the Partnership, or a
combination thereof or interest therein as the case may be.
Subordinated Unit: A Unit representing a fractional part of the
Partnership Interests of all limited partners and assignees and having the
rights and obligations specified with respect to Subordinated Units in the
Partnership Agreement.
Subordination Period: The Subordination Period will generally extend from
the closing of this offering until the first to occur of: (a) the first day of
any quarter beginning after May 31, 2001 in respect of which (i) distributions
of Available Cash from Operating Surplus on each of the outstanding Common Units
and the Subordinated Units with respect to each of the three consecutive,
non-overlapping four-quarter periods immediately preceding such date equaled or
exceeded the sum of the Minimum Quarterly Distribution on all of the outstanding
Common Units and Subordinated Units during such periods, (ii) the Adjusted
Operating Surplus generated during each of the three consecutive,
non-overlapping four-quarter periods immediately preceding such date equaled or
exceeded the sum of the Minimum Quarterly Distribution on all of the outstanding
Common Units and Subordinated Units, plus the related distribution on the
general partner interest in the Partnership and in the Operating Partnership,
during such periods, and (iii) there are no outstanding Common Unit Arrearages;
and (b) the date on which the General Partner is removed as general partner of
the Partnership upon the requisite vote by holders of Outstanding Units under
circumstances where
C-4
<PAGE> 253
Cause does not exist and Units held by the General Partner and its Affiliates
are not voted in favor of such removal. Prior to the end of the Subordination
Period, a portion of the Subordinated Units will convert into Common Units on a
one-for-one basis on the first day after the record date established by the
General Partner for any quarter ending on or after (a) May 31, 1999 (with
respect to 925,736 Subordinated Units) and (b) May 31, 2000 (with respect to an
additional 925,736 Subordinated Units), on a cumulative basis, in respect of
which (i) distributions of Available Cash from Operating Surplus on the Common
Units and the Subordinated Units with respect to each of the three consecutive,
non-overlapping four-quarter periods immediately preceding such date equaled or
exceeded the sum of the Minimum Quarterly Distribution on all of the outstanding
Common Units and Subordinated Units during such periods, (ii) the Adjusted
Operating Surplus generated during each of the two consecutive, non-overlapping
four-quarter periods immediately preceding such date equaled or exceeded the sum
of the Minimum Quarterly Distribution on all of the outstanding Common Units and
Subordinated Units and the related distribution on the general partner interest
in the Partnership and the general partner interest in the Operating Partnership
during such periods, and (iii) there are no outstanding Common Unit Arrearages;
provided, however, that the early conversion of the second tranche of
Subordinated Units may not occur until at least one year following the early
conversion of the first tranche of Subordinated Units. In addition, if the
General Partner is removed as general partner of the Partnership under
circumstances where Cause does not exist and Units held by the General Partner
and its affiliates are not voted in favor of such removal (i) the Subordination
Period will end and all outstanding Subordinated Units will immediately and
automatically convert into Common Units on a one-for-one basis, (ii) any
existing Common Unit Arrearages will be extinguished and (iii) the General
Partner will have the right to convert its general partner interests (including
the incentive distribution rights) into Common Units or to receive cash in
exchange for such interests.
Target Distribution Levels: See "Cash Distribution Policy -- Incentive
Distributions -- Hypothetical Annualized Yield."
Transfer Application: An application for transfer of Units in the form set
forth on the back of a certificate, substantially in the form included in this
Prospectus as Appendix B, or in a form substantially to the same effect in a
separate instrument.
Unitholders: Holders of the Common Units and the Subordinated Units.
Unit Majority: During the Subordination Period, at least a majority of the
outstanding Common Units, voting as a class, and at least a majority of the
outstanding Subordinated Units, voting as a class and, thereafter, at least a
majority of the outstanding Units.
Units: The Common Units and the Subordinated Units, collectively, but
shall not include the right to receive Incentive Distributions.
Unrecovered Capital: At any time, the Initial Unit Price, less the sum of
all distributions theretofore made in respect of an Initial Common Unit
constituting Capital Surplus and any distributions of cash (or the net agreed
value of any distributions in kind) in connection with the dissolution and
liquidation of the Partnership theretofore made in respect of such Unit,
adjusted as the General Partner determines to be appropriate to give effect to
any distribution, subdivision or combination of such Units.
C-5
<PAGE> 254
APPENDIX D
PRO FORMA OPERATING SURPLUS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
AUGUST 31,
1995
-----------------
<S> <C>
Pro forma operating income................................................... $14,008
Add: Pro forma depreciation and amortization................................. 9,771
Equity in earnings of investees......................................... 269
Depreciation and amortization incurred by investees..................... 286
-------
Pro forma EBITDA(a)..................................................... 24,334
Less: Pro forma interest expense............................................. 11,339
Pro forma capital expenditures -- maintenance(b)........................ 2,957
-------
Pro forma Operating Surplus.................................................. $10,038
=======
</TABLE>
- ---------------
(a) EBITDA is defined as operating income plus depreciation and amortization and
equity in earnings of investees and depreciation and amortization incurred
by investees. EBITDA should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative to
cash flow (as a measure of liquidity or ability to service debt
obligations), but provides additional information for evaluating the
Partnership's ability to make the Minimum Quarterly Distribution.
(b) Reflects historical maintenance capital expenditures for fiscal 1995 and
therefore does not include maintenance capital expenditures associated with
the five acquisitions reflected in the pro forma financial statements.
D-1
<PAGE> 255
HERITAGE PROPANE
PARTNERS, L.P.
4,025,000 COMMON UNITS
REPRESENTING LIMITED
PARTNER INTERESTS
PROSPECTUS
DEAN WITTER REYNOLDS INC.
OPPENHEIMER & CO., INC.
A.G. EDWARDS & SONS, INC.
PRUDENTIAL SECURITIES INCORPORATED
, 1996
<PAGE> 256
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses to be paid by the registrant in connection with this offering
other than underwriting discounts and commissions, if any, are estimated as
follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee...................... $ 33,977
NASD filing fee.......................................................... 10,354
Printing and engraving expenses.......................................... 250,000
Legal fees and expenses.................................................. 800,000
Accounting fees and expenses............................................. 375,000
Transfer agent and registrar fees........................................ 15,000
Blue Sky fees and expenses............................................... 15,000
Miscellaneous fees and expenses.......................................... 400,669
--------
Total............................................................... $1,900,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The section of the Prospectus entitled "The Partnership
Agreement -- Indemnification" is incorporated herein by reference.
Reference is made to Section 6 of the Underwriting Agreement filed as
Exhibit 1.1 to this Registration Statement.
Subject to the terms, conditions or restrictions set forth in the
Partnership Agreement, the Delaware Act empowers Delaware limited partnerships
to indemnify and hold harmless any partner or other person from and against
claims and demands incurred in its capacity as a partner or other representative
of Partnership.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Prior to the closing of this offering, there has been no sale of securities
of the Partnership.
ITEM 16. LIST OF EXHIBITS.
The following instruments are included as exhibits to this Registration
Statement and are filed herewith unless otherwise indicated. Exhibits
incorporated by reference are so indicated by parenthetical information.
<TABLE>
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
3.1 -- Form of Agreement of Limited Partnership of Heritage Propane Partners, L.P.
(included as Appendix A to Prospectus)
*3.2 -- Form of Agreement of Limited Partnership of Heritage Operating, L.P.
3.3 -- Certificate of Limited Partnership of Heritage Propane Partners, L.P.
3.4 -- Certificate of Limited Partnership of Heritage Operating, L.P.
5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality of securities being
registered
8.1 -- Opinion of Andrews & Kurth L.L.P. relating to tax matters
*10.1 -- Form of Bank Credit Facility
*10.2 -- Form of Note Purchase Agreement
10.3 -- Form of Contribution, Conveyance and Assumption Agreement among Heritage
Holdings, Inc., Heritage Propane Partners, L.P. and Heritage Operating, L.P.
+10.4 -- 1989 Stock Option Plan
+10.5 -- 1995 Stock Option Plan
</TABLE>
II-1
<PAGE> 257
<TABLE>
<S> <C> <C>
*10.6 -- Restricted Unit Plan
*10.7 -- Unit Purchase Plan
*10.8 -- Employment Agreement for R. C. Mills
*10.9 -- Employment Agreement for G. A. Darr
*10.10 -- Employment Agreement for H. Michael Krimbill
*10.11 -- Employment Agreement for James E. Bertelsmeyer
*10.12 -- Severance Plan
+16.1 -- Letter dated April 22, 1996 from Deloitte & Touche
21.1 -- List of Subsidiaries
23.1 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1)
23.2 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit 8.1)
23.3 -- Consent of Arthur Andersen LLP
23.4 -- Consent of Turlington and Company, L.L.P.
23.5 -- Consent of David R. Gargano, CPA, P.C.
+24.1 -- Powers of attorney (included on the signature page contained in Part II of this
Registration Statement)
</TABLE>
- ---------------
* To be furnished by amendment
+ Previously filed
(b) Financial statement schedules
All financial statement schedules are omitted because the information is
not required, is not material or is otherwise included in the financial
statements or related notes hereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement filed as Exhibit 1.1 to
the registration statement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of the registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 258
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Tulsa, State of Oklahoma, on the 4th day of
June, 1996.
HERITAGE PROPANE PARTNERS, L.P.
BY: HERITAGE HOLDINGS, INC.
General Partner of Heritage Propane
Partners, L.P.
By: /s/ H. MICHAEL KRIMBILL
------------------------------------
H. Michael Krimbill
Vice President -- Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------------- -------------
<C> <S> <C>
* Chairman of the Board and Chief June 4, 1996
- --------------------------------------------- Executive Officer (Principal
James E. Bertelsmeyer executive officer)
* Executive Vice President and June 4, 1996
- --------------------------------------------- Chief Operating Officer
R. C. Mills
* Vice President -- Corporate June 4, 1996
- --------------------------------------------- Development
G. A. Darr
/s/ H. MICHAEL KRIMBILL Vice President -- Chief Financial June 4, 1996
- --------------------------------------------- Officer (Principal financial and
H. Michael Krimbill accounting officer)
* Director June 4, 1996
- ---------------------------------------------
Bill W. Byrne
- --------------------------------------------- Director June 4, 1996
Bryan C. Cressey
* Director June 4, 1996
- ---------------------------------------------
John D. Capps
* Director June 4, 1996
- ---------------------------------------------
J. Charles Sawyer
- --------------------------------------------- Director June 4, 1996
Carl D. Thoma
*By: /s/ H. MICHAEL KRIMBILL June 4, 1996
------------------------------------------
H. Michael Krimbill
Attorney-in-Fact
</TABLE>
II-3
<PAGE> 259
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ---------------------------------------------------------------------- ------------
<S> <C> <C> <C>
1.1 -- Form of Underwriting Agreement
3.1 -- Form of Agreement of Limited Partnership of Heritage Propane Partners,
L.P. (included as Appendix A to Prospectus)
*3.2 -- Form of Agreement of Limited Partnership of Heritage Operating, L.P.
3.3 -- Certificate of Limited Partnership of Heritage Propane Partners, L.P.
3.4 -- Certificate of Limited Partnership of Heritage Operating, L.P.
5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality of securities
being registered
8.1 -- Opinion of Andrews & Kurth L.L.P. relating to tax matters
*10.1 -- Form of Bank Credit Facility
*10.2 -- Form of Note Purchase Agreement
10.3 -- Form of Contribution, Conveyance and Assumption Agreement among
Heritage Holdings, Inc., Heritage Propane Partners, L.P. and Heritage
Operating, L.P.
+10.4 -- 1989 Stock Option Plan
+10.5 -- 1995 Stock Option Plan
*10.6 -- Restricted Unit Plan
*10.7 -- Unit Purchase Plan
*10.8 -- Employment Agreement for R. C. Mills
*10.9 -- Employment Agreement for G. A. Darr
*10.10 -- Employment Agreement for H. Michael Krimbill
*10.11 -- Employment Agreement for James E. Bertelsmeyer
*10.12 -- Severance Plan
+16.1 -- Letter dated April 22, 1996 from Deloitte & Touche
21.1 -- List of Subsidiaries
23.1 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1)
23.2 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit 8.1)
23.3 -- Consent of Arthur Andersen LLP
23.4 -- Consent of Turlington and Company, L.L.P.
23.5 -- Consent of David R. Gargano, CPA, P.C.
+24.1 -- Powers of attorney (included on the signature page contained in Part
II of this Registration Statement)
</TABLE>
- ---------------
* To be furnished by amendment
+ Previously filed
<PAGE> 1
EXHIBIT 1.1
4,025,000 COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
HERITAGE PROPANE PARTNERS, L.P.
UNDERWRITING AGREEMENT
Proof of June 2, 1996
DEAN WITTER REYNOLDS INC.
OPPENHEIMER & CO., INC.
A.G. EDWARDS & SONS, INC.
PRUDENTIAL SECURITIES INCORPORATED
As Representatives of the several Underwriters
c/o Dean Witter Reynolds Inc.
2 World Trade Center
65th Floor
New York, New York 10048
Dear Sirs:
1. Introductory. Heritage Propane Partners, L.P., a
Delaware limited partnership (the "Partnership"), proposes to issue and sell,
pursuant to the terms of this Agreement, to the several Underwriters named in
Schedule A hereto (the "Underwriters" which term also shall include any
underwriter substituted as hereinafter provided in Section 11) an aggregate of
4,025,000 common units representing limited partner interests in the
Partnership (the "Common Units"). The aggregate of 4,025,000 Common Units to
be sold by the Partnership is herein called the "Firm Units." The Partnership
also proposes to sell severally to the Underwriters, on a pro rata basis, at
the option of the Underwriters, an aggregate of not more than 603,750
additional Common Units as provided in Section 3 of this Agreement. The
aggregate of 603,750 Common Units so proposed to be sold is herein called the
"Optional Units." The Firm Units and the Optional Units are collectively
referred to herein as the "Units." Dean Witter Reynolds Inc. and the other
Representatives are acting as representatives of the several Underwriters and
in such capacity are hereinafter referred to as the "Representatives."
It is understood and agreed by all parties hereto that the
initial public offering price at which the Units are to be sold to the public
shall not be higher than the price recommended by Dean Witter Reynolds Inc.
acting as "qualified independent underwriter" ("QIU") for the offering
-1-
<PAGE> 2
of the Units within the meaning of Schedule E to the By-Laws of the National
Association of Securities Dealers, Inc. (the "NASD"). Dean Witter Reynolds
Inc. is sometimes referred to herein as the "Independent Underwriter."
It is further understood and agreed to by all parties that the
Partnership was formed to acquire and operate the business and assets of
Heritage Holdings, Inc., a Delaware corporation ("Heritage"), and its
subsidiaries. Heritage will serve as the general partner (the "General
Partner") of both the Partnership and Heritage Operating, L.P., a Delaware
limited partnership (the "Operating Partnership"). The Partnership, the
Operating Partnership and the General Partner are collectively referred to
herein as the "Heritage Parties."
It is further understood and agreed to by all parties that
concurrently with the closing of the offering of Units contemplated hereby and
as conditions to such closing, (a) Heritage will issue $120 million in senior
secured notes (the "Senior Notes") to certain institutional investors pursuant
to a Note Agreement (the "Note Agreement"), (b) pursuant to a Contribution,
Conveyance and Assumption Agreement (the "Contribution Agreement"), the General
Partner will convey (the "Conveyance") substantially all of its assets (other
than approximately $80.1 million in proceeds from the issuance of the Senior
Notes and certain non-operating assets) (the "Transferred Assets") to the
Operating Partnership and Heritage Service Corp., a Delaware corporation and a
wholly owned subsidiary of the Operating Partnership ("Corporate Sub"), in
exchange for a general partner interest and all the limited partner interests
in the Operating Partnership and the assumption by the Operating Partnership of
substantially all of the liabilities of the General Partner (including the
Senior Notes, but excluding certain notes payable pursuant to non-compete
agreements entered into in connection with prior acquisitions), (c) pursuant to
the Contribution Agreement, the General Partner will convey its limited partner
interests in the Operating Partnership to the Partnership in exchange for
3,702,943 subordinated units representing limited partner interests (the
"Subordinated Units") and a general partner interest in the Partnership, (d)
the Partnership will contribute the net proceeds from the sale of the Units to
the Underwriters to the Operating Partnership, which will use such proceeds and
approximately $39.9 million in cash contributed by Heritage from the proceeds
of the issuance of the Senior Notes to repay approximately $117.1 million of
indebtedness assumed by the Operating Partnership in the Conveyance pursuant to
a Debt Repayment Agreement (the "Debt Repayment Agreement"), (e) Heritage will
use approximately $62.6 million in proceeds from the issuance of the Senior
Notes to finance the repurchase of equity interests in Heritage pursuant to an
Equity Repurchase Agreement (the "Equity Repurchase Agreement"), as a result of
which all of the outstanding capital stock of Heritage will be owned by certain
members of management, and (f) the Operating Partnership will enter into a Bank
Credit Agreement (the "Bank Credit Agreement") providing for a $15 million
working capital facility and a $35 million acquisition facility (the
transactions described in clauses (a) through (f) are collectively referred to
as the "Transactions"). The Partnership, the Operating Partnership, Corporate
Sub, the other direct or indirect subsidiaries of either Heritage prior to the
Transactions or the Partnership following the Transactions (the
"Subsidiaries"), including without limitation M-P Oils, Ltd., an Alberta
corporation ("M-P Corporation"), and M-P Oils Partnership, an Alberta general
partnership ("M-P Partnership"), and the General Partner are collectively
referred to herein as the "Heritage Entities."
-2-
<PAGE> 3
In connection with the consummation of the Transactions, the Heritage Entities
will enter into various bills of sale, conveyances, deeds and other assignments
pursuant to the Contribution Agreement (collectively with the Contribution
Agreement, the "Conveyance Agreements").
2. (a) Representations and Warranties of the Heritage
Parties. Each of the Heritage Parties represents and warrants to, and agrees
with, the several Underwriters that:
(i) A registration statement on Form S-1 (File No.
333-4018) with respect to the Units, a copy of which has heretofore been
delivered to you, has been carefully prepared by the Partnership in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"),
and the published rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") under the Act, and has
been filed with the Commission under the Act; and the Partnership has so
prepared and filed or proposes so to file prior to the effective date of such
registration statement an amendment to such registration statement including
the final form of prospectus (which may omit such information as permitted by
Rule 430A of the Rules and Regulations). Such registration statement as
amended and the prospectus constituting a part thereof (including in each case
the information, if any, deemed to be a part thereof pursuant to Rule 430A(b)
or Rule 434 of the Rules and Regulations) are hereinafter referred to as the
"Registration Statement" and the "Prospectus," respectively, except that if any
prospectus shall have been, or shall be, provided to the Underwriters by the
Partnership for use in connection with the offering of the Units which differs
from the prospectus on file at the Commission at the time the Registration
Statement becomes effective (whether or not such prospectus is required to be
filed by the Partnership pursuant to Rule 424(b) of the Rules and Regulations),
the term "Prospectus" shall also refer to such prospectus from and after the
time it is first provided to the Underwriters for such use. If the Partnership
elects to rely on Rule 434 under the Rules and Regulations, all references to
the Prospectus shall be deemed to include, without limitation, the form of
prospectus and the term sheet, taken together, provided to the Underwriters by
the Partnership in reliance on Rule 434 under Rules and Regulations (the "Rule
434 Prospectus"). If the Partnership files a registration statement to
register a portion of the Units and relies on Rule 462(b) for such registration
statement to become effective upon filing with the Commission (the "Rule 462
Registration Statement"), then any reference to "Registration Statement" herein
shall be deemed to be to both the registration statement referred to above (No.
333-4018) and the Rule 462 Registration Statement, as each such registration
statement may be amended pursuant to the Act. The Commission has not issued
any order preventing or suspending the use of any Prospectus.
(ii) When the Registration Statement becomes effective,
the Registration Statement and the Prospectus will conform in all material
respects to the requirements of the Act and the Rules and Regulations. At the
time the Registration Statement becomes effective, the Registration Statement
will not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Prospectus, at the time the Registration Statement becomes
effective (unless the term "Prospectus" refers to a prospectus which has been
provided to the Underwriters by the Partnership for use in connection with the
offering of
-3-
<PAGE> 4
the Units which differs from the prospectus on file at the Commission at the
time the Registration Statement becomes effective, in which case at the time it
is first provided to the Underwriters for such use) and at the Closing Date (as
hereinafter defined) and the Option Closing Date (as hereinafter defined), will
not include an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that the foregoing representations, warranties and agreements shall not apply
to information contained in or omitted from the Registration Statement or the
Prospectus in reliance upon, and in conformity with, written information
furnished to the Partnership by or on behalf of any Underwriter, directly or
through the Representatives, specifically for use in the preparation thereof.
Each of the statements made by the Partnership in the Registration Statement
and the Prospectus within the coverage of Rule 175(b) of the Rules and
Regulations, including (but not limited to) any statements with respect to
future available cash or future cash distributions of the Partnership or the
anticipated ratio of taxable income to distributions, was made or will be made
with a reasonable basis and in good faith.
(iii) Except as disclosed in the Registration Statement and
the Prospectus, subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, (A) none of the Heritage
Entities has incurred any liabilities or obligations (indirect, direct or
contingent) or entered into any oral or written agreements or other
transactions not in the ordinary course of business that, singly or in the
aggregate, could reasonably be expected to be material to the Heritage Entities
considered as a whole or that could reasonably be expected to result in a
material reduction in the earnings of the Heritage Entities considered as a
whole, (B) none of the Heritage Entities has sustained any loss or interference
with its business or properties from strike, fire, flood, windstorm, accident
or other calamity (whether or not covered by insurance) that, singly or in the
aggregate, could reasonably be expected to be material to the Heritage Entities
considered as a whole, (C) there has been no material change in the
indebtedness of any of the Heritage Entities, no material change in the
capitalization of any Heritage Entity and no distribution of any kind declared,
paid or made by any of the Heritage Entities, and (D) there has not been any
material adverse change, nor any development that could, singly or in the
aggregate, result in a material adverse change in the condition (financial or
other), business, prospects or results of operations of the Heritage Entities
considered as a whole, whether or not arising in the ordinary course of
business.
(iv) Each of the Partnership and the Operating Partnership
is a limited partnership duly formed and validly existing under the Delaware
Revised Uniform Limited Partnership Act (the "Delaware Act") with full
partnership power and authority to own or lease its properties to be owned or
leased at the Closing Date, to assume the liabilities being assumed by it
pursuant to the Conveyance Agreements and to conduct its business to be
conducted at the Closing Date in all material respects as described in the
Registration Statement and the Prospectus, and each of the Partnership and the
Operating Partnership is, or at the Closing Date will be, duly registered or
qualified as a foreign limited partnership to conduct its business and is in
good standing in each jurisdiction or place where the nature or location of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify (A) would
-4-
<PAGE> 5
not reasonably be expected to have a material adverse effect on the condition
(financial or other), business, prospects, properties, net worth or results
of operations of the Heritage Entities considered as a whole, or (B) would not
subject the limited partners of the Partnership to any material liability or
disability.
(v) The General Partner is a corporation duly organized
and validly existing in good standing under the laws of the State of Delaware
with full corporate power and authority to own or lease its properties and to
conduct its business and to act as general partner of the Partnership and of
the Operating Partnership in each case in all material respects as described in
the Registration Statement and the Prospectus, and the General Partner is duly
registered or qualified as a foreign corporation to conduct its business and is
in good standing in each jurisdiction or place where the nature or location of
its properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify (A) would not
reasonably be expected to have a material adverse effect on the condition
(financial or other), business, prospects, properties, net worth or results of
operations of the Heritage Entities considered as a whole or (B) would not
subject the limited partners of the Partnership to any material liability or
disability.
(vi) Corporate Sub is a corporation duly organized and
validly existing in good standing under the laws of the State of Delaware with
full corporate power and authority to own or lease its properties and to
conduct its business in all material respects as described in the Registration
Statement and the Prospectus, and Corporate Sub is duly registered or qualified
as a foreign corporation to conduct its business and is in good standing in
each jurisdiction or place where the nature or location of its properties or
the conduct of its business requires such registration or qualification, except
where the failure so to register or qualify (A) would not reasonably be
expected to have a material adverse effect on the condition (financial or
other), business, prospects, properties, net worth or results of operations of
the Heritage Entities considered as a whole, or (B) would not subject the
limited partners of the Partnership to any material liability or disability.
(vii) M-P Corporation is a corporation duly organized and
validly existing in good standing under the laws of the Province of Alberta,
Canada with full corporate power and authority to own or lease its properties
and to conduct its business in all material respects as described in the
Registration Statement and the Prospectus, and M-P Corporation is duly
registered or qualified as a foreign corporation to conduct its business and is
in good standing in each jurisdiction or place where the nature or location of
its properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify (A) would not
reasonably be expected to have a material adverse effect on the condition
(financial or other), business, prospects, properties, net worth or results of
operations of Heritage Entities considered as a whole, or (B) would not subject
the limited partners of the Partnership to any material liability or
disability.
(viii) M-P Partnership is a general partnership duly formed
and validly existing under the laws of the Province of Alberta, Canada with
full partnership power and authority to own or lease its properties to be owned
or leased at the Closing Date and to conduct its business to be conducted at
the Closing Date in all material respects as described in the Registration
Statement and
-5-
<PAGE> 6
the Prospectus, and M-P Partnership is, or at the Closing Date will be, duly
registered or qualified as a foreign general partnership to conduct its
business and is in good standing in each jurisdiction or place where the nature
or location of its properties or the conduct of its business requires such
registration or qualification, except where the failure so to register or
qualify (A) would not reasonably be expected to have a material adverse effect
on the condition (financial or other), business, prospects, properties, net
worth or results of operations of the Heritage Entities considered as a whole,
or (B) would not subject the limited partners of the Partnership to any
material liability or disability.
(ix) Neither the General Partner, the Partnership nor the
Operating Partnership has any subsidiaries (other than the Partnership and
Operating Partnership themselves and the Corporate Sub, M-P Corporation and M-P
Partnership) which, individually or considered as a whole, would be deemed to
be a significant subsidiary (as such term is defined in Section 1-02 of
Regulation S-X under the Act).
(x) The General Partner is the sole general partner of
the Partnership with a 1% general partner interest in the Partnership; such
general partner interest is duly authorized by the Agreement of Limited
Partnership of the Partnership (as the same may be amended and restated at or
prior to the Closing Date, the "Partnership Agreement") between the General
Partner and James E. Bertelsmeyer, as organizational limited partner (the
"Organizational Limited Partner"), and was validly issued to the General
Partner; and the General Partner owns such general partner interest free and
clear of all liens, encumbrances, security interests, equities, charges or
claims.
(xi) The General Partner is the sole general partner of
the Operating Partnership with a 1.0101% general partner interest in the
Operating Partnership; such general partner interest is duly authorized by the
Agreement of Limited Partnership of the Operating Partnership (as the same may
be amended and restated at or prior to the Closing Date, the "Operating
Partnership Agreement," and together with the Partnership Agreement, the
"Partnership Agreements") between the General Partner and the Partnership, and
was validly issued to the General Partner; and the General Partner owns such
general partner interest free and clear of all liens, encumbrances, security
interests, equities, charges or claims.
(xii) At the Closing Date, the General Partner will own
limited partner interests in the Partnership represented by 3,702,943
Subordinated Units; at the Closing Date, there will be issued to the
Underwriters the Firm Units (assuming no purchase by the Underwriters of
Optional Units); at the Closing Date or the Option Closing Date, as the case
may be, the Firm Units or the Optional Units, as the case may be, and the
limited partner interests represented thereby will be duly authorized by the
Partnership Agreement and, when issued and delivered to the Underwriters
against payment therefor as provided herein, will be validly issued, fully paid
(to the extent required under the Partnership Agreement) and nonassessable
(except as such nonassessability may be affected by matters described in the
Prospectus under the caption "The Partnership Agreement--Limited Liability");
and other than the 3,702,943 Subordinated Units owned by the General Partner at
the
-6-
<PAGE> 7
Closing Date or the Option Closing Date, as the case may be, the Units will be
the only limited partner interests of the Partnership issued and outstanding.
(xiii) At the Closing Date and the Option Closing Date, (A)
the Partnership will be the sole limited partner of the Operating Partnership,
with a limited partner interest of 98.9899%; (B) such limited partner interest
will be duly authorized by the Operating Partnership Agreement, will be validly
issued in accordance with the Operating Partnership Agreement and will be fully
paid (to the extent required under the Operating Partnership Agreement) and
nonassessable (except as such nonassessability may be affected by matters
described in the Prospectus under the caption "The Partnership Agreement --
Limited Liability"); and (C) the Partnership will own such limited partner
interest in the Operating Partnership free and clear of all liens,
encumbrances, security interests, equities, charges or claims.
(xiv) All of the outstanding shares of capital stock of the
General Partner have been duly authorized and validly issued and are fully paid
and nonassessable; and, except as described in the Prospectus and except
pursuant to the Equity Repurchase Agreement, the related Pledge Agreement and
the stockholders' agreements referred to therein, all of the issued shares of
capital stock of the General Partner are owned by the registered holders
thereof free and clear of all liens, encumbrances, security interests,
equities, charges or claims.
(xv) At the Closing Date and the Option Closing Date, all
of the outstanding shares of capital stock of Corporate Sub will have been duly
authorized and validly issued and will be fully paid and nonassessable; and all
of the issued shares of capital stock of Corporate Sub will be registered on
its books in the name of the Operating Partnership, free and clear of all
liens, encumbrances, security interests, equities, charges or claims.
(xvi) All of the outstanding shares of capital stock of M-P
Corporation have been duly authorized and validly issued and are fully paid and
nonassessable; and at the Closing Date and the Option Closing Date, all of the
issued shares of capital stock of M-P Corporation will be registered on its
books in the name of the Operating Partnership, free and clear of all liens,
encumbrances, security interests, equities, charges or claims.
(xvii) M-P Corporation owns a general partner interest of
60% in M-P Partnership; such general partner interest is duly authorized by
the Partnership Agreement of M-P Partnership and will have been validly issued
in accordance with such partnership agreement; and M-P Corporation owns such
general partner interest in M-P Partnership free and clear of all liens,
encumbrances, security interests, equities, charges or claims.
(xviii) Except as described in the Prospectus, there are no
preemptive rights or other rights to subscribe for or to purchase, nor any
restriction upon the voting or transfer of, any limited partner interests in
the Partnership or the Operating Partnership pursuant to either of the
Partnership Agreements or any agreement or other instrument to which the
Partnership or the Operating Partnership is a party or by which either of them
may be bound. Except as described in the
-7-
<PAGE> 8
Prospectus, there are no outstanding options or warrants to purchase any Common
Units or Subordinated Units. The Units, when issued and delivered against
payment therefor as provided herein, and the Subordinated Units, when issued
and delivered in accordance with the terms of the Partnership Agreement and the
Contribution Agreement, will conform in all material respects to the
description thereof contained in the Prospectus. The Partnership has all
requisite power and authority to issue, sell and deliver (A) the Units, in
accordance with and upon the terms and conditions set forth in this Agreement
and in the Prospectus, and (B) the Subordinated Units, in accordance with the
terms and conditions set forth in the Partnership Agreement and the
Contribution Agreement. At the Closing Date and the Option Closing Date, all
corporate and partnership action, as the case may be, required to be taken by
any of the Heritage Entities or any of their shareholders, members or partners
for the authorization, issuance, sale and delivery of the Units and the
Subordinated Units and the consummation of the transactions (including the
Transactions) contemplated by this Agreement and the Operative Agreements (as
defined in Section 2(a)(xx) hereof) shall have been validly taken.
(xix) The execution and delivery of, and the performance by
each of the Heritage Parties of their respective obligations under, this
Agreement have been duly and validly authorized by each of the Heritage
Parties, and this Agreement has been duly executed and delivered by each of the
Heritage Parties, and constitutes the valid and legally binding agreement of
each of the Heritage Parties, enforceable against each of the Heritage Parties
in accordance with its terms, provided that the enforceability thereof may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws relating to or affecting creditors' rights
generally and by general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law) and except as
rights to indemnity and contribution thereunder may be limited by federal and
state securities laws.
(xx) At or before the Closing Date, the Partnership
Agreement will have been duly authorized, executed and delivered by the General
Partner and the Organizational Limited Partner and will be a valid and legally
binding agreement of the General Partner and the Organizational Limited
Partner, enforceable against the General Partner and the Organizational Limited
Partner in accordance with its terms; at or before the Closing Date, the
Operating Partnership Agreement will have been duly authorized, executed and
delivered by the General Partner and the Partnership and will be a valid and
legally binding agreement of the General Partner and the Partnership,
enforceable against the General Partner and the Partnership in accordance with
its terms; at or before the Closing Date, each of the Conveyance Agreements
will have been duly authorized, executed and delivered by the parties thereto
and will be a valid and legally binding agreement of the parties thereto
enforceable against such parties in accordance with its terms; at or before the
Closing Date, the Senior Notes and the Note Agreements will have been duly
authorized, executed and delivered by the General Partner and will be valid and
legally binding agreements of the General Partner enforceable against the
General Partner in accordance with their respective terms and, upon assumption
of the Senior Notes and the Note Agreements by the Operating Partnership
pursuant to the Contribution Agreement, will be valid and legally binding
agreements of the Operating Partnership enforceable against the Operating
Partnership in accordance with their respective terms;
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<PAGE> 9
at or before the Closing Date, the Debt Repayment Agreement will have been duly
authorized, executed and delivered by Heritage and the Operating Partnership
and will be a valid and legally binding agreement of Heritage and the Operating
Partnership enforceable against Heritage and the Operating Partnership in
accordance with its terms; at or before the Closing Date, the Equity Repurchase
Agreement will have been duly authorized, executed and delivered by Heritage
and will be a valid and legally binding agreement of Heritage enforceable
against Heritage in accordance with its terms; at or before the Closing Date,
the Bank Credit Agreement will have been duly authorized, executed and
delivered by the Operating Partnership and will be a valid and legally binding
agreement of the Operating Partnership enforceable against the Operating
Partnership in accordance with its terms; provided that, with respect to each
agreement described in this Section 2(a)(xx), the enforceability thereof may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws relating to or affecting creditors' rights
generally and by general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law). The
Partnership Agreements, the Conveyance Agreements, the Senior Notes, the Note
Agreements, the Debt Repayment Agreement, the Equity Repurchase Agreement and
the Bank Credit Agreement are herein collectively referred to as the "Operative
Agreements."
(xxi) None of the offering, issuance and sale by the
Partnership of the Units, the offering, issuance and sale by the General
Partner of the Senior Notes, the execution, delivery and performance of this
Agreement and the Operative Agreements by any of the Heritage Entities which
are parties thereto, nor the consummation of the transactions contemplated
hereby and thereby (including the Transactions) (A) conflicts or will conflict
with or constitutes or will constitute a violation of the agreement of limited
partnership, certificate or articles of incorporation or bylaws or other
organizational documents of any of the Heritage Entities, (B) conflicts or will
conflict with or constitutes or will constitute a breach or violation of, or a
default under (or an event which, with notice or lapse of time or both, would
constitute such an event), any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which any of the Heritage
Entities is a party or by which any of them or any of their respective
properties may be bound, (C) violates or will violate any order, judgment,
decree or injunction of any court or governmental agency or body directed to
any of them or any of their properties in a proceeding to which any of them or
their property is a party, (D) violates or will violate any statute, law,
regulation or judgment, injunction, order or decree applicable to any of the
Heritage Entities or any of their respective properties or (E) will result in
the creation or imposition of any lien, charge or encumbrance upon any property
or assets of any of the Heritage Entities, in the case of clauses (B), (C), (D)
or (E) which conflicts, breaches, violations or defaults would be reasonably
expected to have a material adverse effect upon the condition (financial or
other), business, prospects, properties, net worth or results of operations of
the Heritage Entities considered as a whole.
(xxii) No permit, consent, approval, authorization or order
of any court, governmental agency or body or financial institution is required
in connection with the execution and delivery of, or the consummation of the
transactions contemplated by, this Agreement or the Operative Agreements, or
the consummation by the Heritage Entities of the Transactions, except (A) for
such permits, consents, approvals and similar authorizations required under the
Securities
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<PAGE> 10
Act, the Exchange Act and the securities or "Blue Sky" laws of certain
jurisdictions, (B) for such permits, consents, approvals and similar
authorizations which have been, or prior to the Closing Date will be, obtained,
(C) for such permits, consents, approvals and similar authorizations which, if
not obtained, would not, individually or in the aggregate, reasonably be
expected to have a material adverse effect upon the condition (financial or
other), business, prospects, properties, net worth or results of operations of
the Heritage Entities considered as a whole and (D) as set forth or
contemplated in the Prospectus.
(xxiii) Except as described in the Prospectus, none of the
Heritage Entities is in (A) violation of its agreement of limited partnership,
certificate or articles of incorporation or bylaws or other organizational
documents, or of any law, statute, ordinance, administrative or governmental
rule or regulation applicable to it or of any decree of any court or
governmental agency or body having jurisdiction over it, or (B) breach, default
(or an event which, with notice or lapse of time or both, would constitute such
an event) or violation in the performance of any obligation, agreement or
condition contained in any bond, debenture, note or any other evidence of
indebtedness or in any agreement, indenture, lease or other instrument to which
it is a party or by which it or any of its properties may be bound, which
breach, default or violation would, if continued, reasonably be expected to
have a material adverse effect on the condition (financial or other), business,
prospects, properties, net worth or results of operations of the Heritage
Entities considered as a whole. To the knowledge of the Heritage Parties, no
third party to any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which any of the Heritage Entities is a party or by
which any of them is bound or to which any of their properties are subject, is
in default under any such agreement, which breach, default or violation would,
if continued, reasonably be expected to have a material adverse effect on the
condition (financial or other), business, prospects, properties, net worth or
results of operations of the Heritage Entities considered as a whole.
(xxiv) Arthur Andersen LLP, who have expressed their
opinions on the audited financial statements included in the Registration
Statement and the Prospectus, are independent public accountants with respect
to the Partnership and the General Partner as required by the Act and the Rules
and Regulations.
(xxv) Turlington and Company, L.L.P., who have expressed
their opinions on the audited financial statements of Carolane Propane Gas,
Inc. included in the Registration Statement and the Prospectus, are independent
public accountants with respect to the Partnership and the General Partner as
required by the Act and the Rules and Regulations.
(xxvi) David R. Gargano, CPA, P.C., who have expressed their
opinion on the audited financial statements of Kingston Propane, Inc. included
in the Registration Statement and the Prospectus, are independent public
accountants with respect to the Partnership and the General Partner as required
by the Act and the Rules and Regulations.
(xxvii) At ___________________, the Partnership would have
had, on the pro forma basis indicated in the Prospectus, a capitalization as
set forth therein. The financial statements
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<PAGE> 11
(including the related notes and supporting schedules) included in the
Registration Statement and the Prospectus present fairly in all material
respects the financial position, results of operations and cash flows of the
entities purported to be shown thereby on the basis stated therein at the
respective dates or for the respective periods to which they apply and have
been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except to the extent
disclosed therein. The selected historical and pro forma information set forth
in the Registration Statement and the Prospectus under the caption "Selected
Historical and Pro Forma Financial and Operating Data" is accurately presented
in all material respects and prepared on a basis consistent with the audited
and unaudited historical consolidated financial statements and pro forma
financial statements from which it has been derived. The pro forma financial
statements of the Partnership included in the Registration Statement and the
Prospectus have been prepared in all material respects in accordance with the
applicable accounting requirements of Article 11 of Regulation S-X of the
Commission; the assumptions used in the preparation of such pro forma financial
statements are, in the opinion of the management of the General Partner,
reasonable; and the pro forma adjustments reflected in such pro forma financial
statements have been properly applied to the historical amounts in compilation
of such pro forma financial statements.
(xxviii) There are no legal or governmental proceedings
pending or, to the knowledge of the Heritage Parties, threatened, against any
Heritage Entity, or to which any Heritage Entity is a party, or to which any of
their respective properties is subject, that are required to be described in
the Registration Statement or the Prospectus but are not described as required,
and there are no agreements, contracts, indentures, leases or other instruments
that are required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement that are
not described or filed as required by the Act.
(xxix) The General Partner and its Subsidiaries have, and
upon consummation of the Transactions on the Closing Date, the Operating
Partnership, Corporate Sub or another Subsidiary will have, good and
indefeasible title to all real property and good title to all personal property
described in the Prospectus to be owned by it, free and clear of all liens,
claims, security interests or other encumbrances except (A) as described in the
Prospectus and (B) such as do not materially interfere with the use of such
properties taken as a whole as they have been used in the past and are proposed
to be used in the future as described in the Prospectus; and all real property
and buildings held under lease by the General Partner and its Subsidiaries are
held by the General Partner and its Subsidiaries, and upon consummation of the
Transactions on the Closing Date, will be held by the Operating Partnership,
Corporate Sub or another Subsidiary, under valid and subsisting and enforceable
leases with such exceptions as do not materially interfere with the use of such
properties considered as a whole as they have been used in the past and are
proposed to be used in the future as described in the Prospectus. The
Conveyance Agreements will be, as of the Closing Date, legally sufficient to
transfer or convey to the Operating Partnership, Corporate Sub or another
Subsidiary all properties that are, individually or in the aggregate, required
to enable the Operating Partnership, Corporate Sub or such Subsidiary to
conduct their operations (in all material respects as contemplated by the
Prospectus), subject to the conditions, reservations and limitations contained
in the Conveyance Agreements and those set forth in the Prospectus. The
Operating Partnership,
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<PAGE> 12
Corporate Sub and the other Subsidiaries will, upon execution and delivery of
the Conveyance Agreements, succeed in all material respects to the business,
assets, properties, liabilities and operations reflected by the pro forma
financial statements of the Partnership, except as disclosed in the Prospectus.
(xxx) The Partnership has not distributed and, prior to the
later to occur of (A) the Closing Date and (B) completion of the distribution
of the Units, will not distribute, any prospectus (as defined under the Act) in
connection with the offering and sale of the Units other than the Registration
Statement, the Prospectus or other materials, if any, permitted by the Act,
including Rule 134 of the general rules and regulations thereunder.
(xxxi) Each of the Heritage Entities, has, or at the Closing
Date will have, such permits, licenses, franchises and authorizations of
governmental or regulatory authorities ("permits") as are necessary to own its
properties and to conduct its business in the manner described in the
Prospectus, subject to such qualifications as may be set forth in the
Prospectus and except for such permits which, if not obtained, would not have,
individually or in the aggregate, a material adverse effect upon the ability of
the Heritage Entities considered as a whole to conduct its businesses in all
material respects as currently conducted and as contemplated by the Prospectus
to be conducted; each of the Heritage Entities has, or at the Closing Date will
have, fulfilled and performed all its material obligations with respect to such
permits and no event has occurred which allows, or after notice or lapse of
time would allow, revocation or termination thereof or results in any
impairment of the rights of the holder of any such permit, except for such
revocations, terminations and impairments that would not have a material
adverse effect upon the ability of the Heritage Entities considered as a whole
to conduct its businesses in all material respects as currently conducted and
as contemplated by the Prospectus to be conducted, subject in each case to such
qualification as may be set forth in the Prospectus; and, except as described
in the Prospectus, none of such permits contains any restriction that is
materially burdensome to the Heritage Entities considered as a whole.
(xxxii) Each of the Heritage Entities (A) makes and keeps
books, records and accounts, which, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of assets and (B) maintains systems
of internal accounting controls sufficient to provide reasonable assurances
that (1) transactions are executed in accordance with management's general or
specific authorization; (2) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (3) access to
assets is permitted only in accordance with management's general or specific
authorization; and (4) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(xxxiii) To the knowledge of the Heritage Parties, none of
the Heritage Entities nor any employee or agent of any of the Heritage Entities
has made any payment of funds of any of the Heritage Entities or received or
retained any funds in either case in violation of any law, rule or regulation,
which payment, receipt or retention of funds is of a character required to be
disclosed in the Prospectus.
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(xxxiv) No transaction has occurred between or among
Heritage, its Subsidiaries and any of their respective officers, directors,
stockholders or affiliates or, to the best knowledge of the Heritage Parties,
any affiliate of any such officer, director or stockholder, that is required to
be described in the Registration Statement that is not so described.
(xxxv) Each of the Heritage Entities has filed all material
tax returns required to be filed through the date hereof, which returns are
complete and correct in all material respects, and has timely paid all taxes
shown to be due pursuant to such returns, other than those (A) which, if not
paid, would not have a material adverse effect on the condition (financial or
other), business, prospects, properties, net worth or results of operations of
the Heritage Entities considered as a whole, or (B) which are being contested
in good faith.
(xxxvi) No holder of any security of the Partnership has any
right to require registration of Common Units or any other security of the
Partnership because of the filing of the Registration Statement or consummation
of the transactions contemplated by this Agreement.
(xxxvii) Each of the Heritage Entities owns or possesses, or
at the Closing Date will own or possess, all patents, trademarks, trademark
registrations, service marks, service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets and rights described in the
Prospectus as being owned by it or any of the Heritage Entities or necessary
for the conduct of its respective business, other than those which if not so
owned or possessed would not have a material adverse effect on the condition
(financial or other), business, prospects, properties, net worth or results of
operations of the Heritage Entities considered as a whole and none of the
Heritage Entities is aware of any claim to the contrary or any challenge by any
other person to the rights of the Heritage Entities with respect to the
foregoing.
(xxxviii) None of the Heritage Entities is now, and after
sale of the Units to be sold by the Partnership hereunder and application of
the net proceeds from such sale as described in the Prospectus under the
caption "Use of Proceeds" will be, (A) an "investment company" or a company
"controlled by" an "investment company" within the meaning of the Investment
Company Act of 1940, as amended, or (B) a "holding company" or a "subsidiary
company" of a "holding company" or an "affiliate" thereof, within the meaning
of the Public Utility Holding Company Act of 1935, as amended.
(xxxix) Each of the Heritage Entities has complied with all
provisions of Florida Statutes, Section 517.075, relating to issuers doing
business with Cuba.
(xl) None of the Heritage Entities has violated any
environmental, safety, health or similar law or regulation applicable to its
business relating to the protection of human health and safety, the environment
or hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), or lacks any permits, licenses or other approvals
required of them under applicable Environmental Laws to own, lease or operate
their properties and conduct their business as described in the Prospectus or
is violating any terms and conditions of any such permit, license
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<PAGE> 14
or approval, which in each case would reasonably be expected to have a material
adverse effect on the condition (financial or other), business, prospects,
properties, net worth or results of operations of the Heritage Entities
considered as a whole.
(xli) None of the Heritage Entities has violated any
federal, state or local law relating to discrimination in the hiring, promotion
or pay of employees nor any applicable wage or hour laws, nor any provisions of
the Employee Retirement Income Security Act of 1974 or the rules and
regulations promulgated thereunder, nor has any of the Heritage Entities
engaged in any unfair labor practice, which in each case would reasonably be
expected to have a material adverse effect on the condition (financial or
other), business, prospects, properties, net worth or results of operations of
the Heritage Entities considered as a whole; there is (A) no unfair labor
practice complaint pending against any of the Heritage Entities or, to the best
knowledge of the Heritage Parties, threatened against any of them, before the
National Labor Relations Board or any state or local labor relations board, and
no grievance or arbitration proceeding arising out of or under any collective
bargaining agreement pending against any of the Heritage Entities or, to the
best knowledge of the Heritage Parties, threatened against any of them, (B) no
significant strike, labor dispute, slowdown or stoppage pending against any of
the Heritage Entities or, to the best knowledge of the Heritage Parties,
threatened against any of the Heritage Entities and (C) to the best knowledge
of the Heritage Parties, no union representation question existing with respect
to the employees of the Heritage Entities and, to the best knowledge of the
Heritage Parties, no union organizing activities taking place, except in the
cases of clauses (A), (B) and (C), such complaints, grievances, arbitration
proceedings, strikes, labor disputes, slowdowns, stoppages or questions, which
if determined adversely to the Heritage Entities, would not individually or in
the aggregate reasonably be expected to result in a material adverse effect on
the condition (financial or other), business, prospects, properties, net worth
or results of operations of the Heritage Entities considered as a whole.
(xlii) The Heritage Parties maintain insurance covering the
properties, operations, personnel and businesses of the Heritage Entities. In
the reasonable judgment of the Heritage Parties, such insurance insures against
such losses and risks as are reasonably adequate to protect the Heritage
Entities and their businesses. None of the Heritage Entities has received
notice from any insurer or agent of such insurer that substantial capital
improvements or other expenditures will have to be made in order to continue
such insurance; all such insurance is outstanding and duly in force on the date
hereof and will be outstanding and duly in force on the Closing Date.
(xliii) At each of the Closing Date and the Option Closing
Date, as the case may be, the General Partner will have (excluding its
interests in the Partnership and the Operating Partnership and any notes
receivable from or payable to the Partnership or the Operating Partnership) a
net worth of at least $8.2 million. For purposes of this representation,
assets will be valued at fair market value, and the General Partner's interest
in the Partnership and the Operating Partnership (as general partner, limited
partner and creditor) shall not be taken into account except as an offset to
the Partnership's or the Operating Partnership's liabilities that are taken
into account in computing such net worth.
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(xliv) Except as described in the Prospectus, there is (A)
no action, suit or proceeding before or by any court, arbitrator or
governmental agency, body or official, domestic or foreign, now pending or, to
the knowledge of the Heritage Parties, threatened or contemplated to which any
of the Heritage Entities, or any of their respective subsidiaries, is or may be
a party or to which the business or property of any of the Heritage Entities,
is or may be subject, (B) no statute, rule, regulation or order that has been
enacted, adopted or issued by any governmental agency or that has been proposed
by any governmental body and (C) no injunction, restraining order or order of
any nature issued by a federal or state court or foreign court of competent
jurisdiction to which any of the Heritage Entities, is or may be subject, that,
in the case of clauses (A), (B) and (C) above, is reasonably expected to (1)
singly or in the aggregate have a material adverse effect on the condition
(financial or other), business, prospects, properties, net worth or results of
operations of the Heritage Entities considered as a whole, (2) prevent or
result in the suspension of the offering and issuance of the Units or the
Senior Notes or (3) in any manner draw into question the validity of this
Agreement or any other Operative Agreement.
(xlv) Except as contemplated by this Agreement and an
agreement between Heritage and Prudential Securities Inc., Dean Witter Reynolds
Inc. and Oppenheimer & Co., Inc. in connection with the private placement of
the Senior Notes, there is no broker, finder or other party that is entitled to
receive from any of the Heritage Entities any brokerage or finder's fee or any
other fee, commission or similar payment in connection with the Transactions.
(xlvi) Each of the offer, sale and issuance of the
Subordinated Units to the General Partner pursuant to the Contribution
Agreement and the Partnership Agreement and the offer, sale and issuance of the
Senior Notes pursuant to the Note Agreement is exempt from the registration
requirements of the Act and the securities laws of any state having
jurisdiction with respect thereto, and none of the Heritage Entities has taken
or will take any action that would cause the loss of such exemption.
(xlvii) The Units have been approved for listing on the New
York Stock Exchange, subject only to official notice of issuance.
(b) Any certificate signed by an officer of the General
Partner and delivered to the Representatives or counsel for the Underwriters
shall be deemed a representation and warranty of each of the Heritage Parties
to each Underwriter as to the matters covered thereby.
3. Purchase by, and Sale and Delivery to, Underwriters;
Closing Date. On the basis of the representations, warranties, covenants and
agreements herein contained, and subject to the terms and conditions herein set
forth, the Partnership agrees to sell to the Underwriters the Firm Units, and
subject to the terms and conditions herein set forth, the Underwriters agree,
severally and not jointly, to purchase from the Partnership, at the price of
$________ per Unit, the number of Firm Units set forth opposite their names in
Schedule A, subject to adjustment in accordance with Section 11 hereof.
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The Partnership will deliver the Firm Units to the
Representatives for the respective accounts of the several Underwriters (in the
form of definitive certificates, issued in such names and in such denominations
as the Representatives may direct by notice in writing to the Partnership given
at or prior to 12:00 Noon, New York Time, on the business day preceding the
Closing Date or, if no such direction is received, in the names of the
respective Underwriters in the amount set forth opposite each Underwriter's
name on Schedule A hereto), against payment of the purchase price therefor by
certified or official bank check or checks in New York Clearing House or
similar next day funds, payable to the order of the Partnership, all at the
offices of Andrews & Kurth L.L.P., 4200 Texas Commerce Tower, 600 Travis
Street, Houston, Texas 77002. The time and date of delivery and closing shall
be at 10:00 A.M., on the fourth full business day after the Registration
Statement becomes effective (or, if the Partnership has elected to rely upon
Rule 430A, the fourth full business day after execution of this Agreement);
provided, however, that such date and time may be accelerated or extended by
agreement between the Partnership and the Representatives or postponed pursuant
to the provisions of Section 11 hereof. The time and date of such payment and
delivery are herein referred to as the "Closing Date." The Partnership shall
make the certificates for the Firm Units available to the Representatives for
examination on behalf of the Underwriters not later than 3:00 P.M., New York
Time, on the second business day preceding the Closing Date.
In addition, for the purpose of covering any over-allotments
in connection with the distribution and sale of the Firm Units as contemplated
by the Prospectus, the Partnership hereby grants the Underwriters an option to
purchase, severally and not jointly, up to 603,750 Common Units, the aggregate
of the Optional Units. The purchase price per Unit to be paid for the Optional
Units shall be the same price per Unit as for the Firm Units. The option
granted hereby may be exercised as to all or any part of the Optional Units at
any time not more than 30 days subsequent to the effective date of this
Agreement. No Optional Units shall be sold and delivered unless the Firm Units
previously have been, or simultaneously are, sold and delivered. The right to
purchase the Optional Units or any portion thereof may be surrendered and
terminated at any time upon notice by the Representatives to the Partnership.
The option granted hereby may be exercised by the
Representatives on behalf of the Underwriters by giving written notice to the
Partnership setting forth the number of Optional Units to be purchased by them
and the date and time for delivery of and payment for the Optional Units. Such
date and time for delivery of and payment for the Optional Units (which may be
the Closing Date) is herein called the "Option Closing Date" and shall not be
later than five business days after written notice is given. Optional Units
shall be purchased for the account of each Underwriter in the same proportion
as the number of Firm Units set forth opposite such Underwriter's name in
Schedule A hereto bears to the total number of Firm Units (subject to
adjustment by the Representatives to eliminate odd lots). Upon exercise of the
option by the Representatives, the Partnership agrees to sell to the
Underwriters the number of Optional Units set forth in the written notice of
exercise and the Underwriters agree, severally and not jointly, subject to the
terms and conditions herein set forth, to purchase such Optional Units.
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The Partnership will deliver the Optional Units to the
Representatives for the respective accounts of the several Underwriters (in the
form of definitive certificates, issued in such names and in such denominations
as the Representatives may direct by notice in writing to the Partnership given
at or prior to 12:00 Noon, New York Time, on the business day preceding the
Option Closing Date or, if no such direction is received, in the names of the
respective Underwriters), against payment of the purchase price therefor by
certified or official bank check or checks in New York Clearing House or
similar next day funds, payable to the order of the Partnership, all at the
offices of Andrews & Kurth L.L.P., 4200 Texas Commerce Tower, 600 Travis
Street, Houston, Texas 77002. The Partnership shall make the certificates for
the Optional Units available to the Representatives for examination on behalf
of the Underwriters not later than 3:00 P.M., New York Time, on the second
business day preceding the Option Closing Date.
It is understood that Dean Witter Reynolds Inc. or other
Representatives, individually and not as Representatives of the several
Underwriters, may (but shall not be obligated to) make payment to the
Partnership on behalf of any Underwriter or Underwriters, for the Units to be
purchased by such Underwriter or Underwriters. Any such payment by Dean Witter
Reynolds Inc. or other Representatives shall not relieve such Underwriter or
Underwriters from any of its or their other obligations hereunder.
After the Registration Statement becomes effective, the
several Underwriters propose to make an initial public offering of the Units at
the initial public offering price. The Representatives shall promptly advise
the Partnership of the making of the initial public offering.
4. Covenants and Agreements of the Heritage Parties.
Each of the Heritage Parties covenants and agrees with the several Underwriters
that:
(a) The Partnership and the General Partner will use
their best efforts to cause the Registration Statement to become effective
under the Act, will advise the Representatives promptly as to the time at which
the Registration Statement becomes effective, will advise the Representatives
promptly of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the institution of any
proceedings for that purpose, and will use their best efforts to prevent the
issuance of any such stop order and to obtain as soon as possible the lifting
thereof, if issued. If the Partnership elects to rely on Rule 434 under the
Rules and Regulations, the Partnership will prepare a "term sheet" that
complies with the requirements of Rule 434 under the Rules and Regulations. If
the Partnership elects not to rely on Rule 434, the Partnership will provide
the Underwriters with copies of the form of Prospectus, in such number as the
Underwriters may reasonably request, and file or transmit for filing with the
Commission such Prospectus in accordance with Rule 424(b) of the Rules and
Regulations by the close of business in New York on the business day
immediately succeeding the date of this Agreement. If the Partnership elects
to rely on Rule 434, the Partnership will provide the Underwriters with copies
of the form of Rule 434 Prospectus, in such number as the Underwriters may
reasonably request, and file or transmit for filing with the Commission the
Rule 434 Prospectus in accordance with Rule
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424(b) of the Rules and Regulations by the close of business in New York on the
business day immediately succeeding the date of this Agreement.
(b) The Partnership will advise the Representatives
promptly of any request by the Commission for any amendment of or supplement to
the Registration Statement or the Prospectus or for additional information, and
will not at any time file any amendment to the Registration Statement or
supplement to the Prospectus which shall not previously have been submitted to
the Representatives a reasonable time prior to the proposed filings thereof or
to which the Representatives shall reasonably object in writing or which is not
in compliance with the Act and the Rules and Regulations.
(c) The Partnership will prepare and file with the
Commission, promptly upon the request of the Representatives, any amendments or
supplements to the Registration Statement or the Prospectus (including any
revised prospectus which the Partnership proposes for use by the Underwriters
in connection with the offering of the Units which differs from the prospectus
on file at the Commission at the time the Registration Statement becomes
effective, whether or not such revised prospectus is required to be filed
pursuant to Rule 424 of the Rules and Regulations or any term sheet prepared in
reliance on Rule 434 of the Rules and Regulations) which in the opinion of the
Representatives may be necessary to enable the several Underwriters to continue
the distribution of the Units and will use its best efforts to cause the same
to become effective as promptly as possible.
(d) If at any time prior to the expiration of nine
months after the effective date of the Registration Statement when, in the
opinion of counsel to the Underwriters, a prospectus relating to the Units is
required to be delivered under the Act any event relating to or affecting the
Heritage Entities occurs or has occurred as a result of which the Prospectus
would include an untrue statement of a material fact, or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary, at any time to amend the Prospectus to comply with the Act, the
Partnership will promptly notify the Representatives thereof and will prepare
an amended or supplemented prospectus (in form and substance satisfactory to
counsel to the Underwriters) which will correct such statement or omission;
and, in case any Underwriter is required to deliver a prospectus relating to
the Units nine months or more after the effective date of the Registration
Statement, the Partnership upon the request of the Representatives and at the
expense of such Underwriter will prepare promptly such prospectus or
prospectuses as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Act.
(e) The Partnership will deliver to the Representatives,
at or before the Closing Date, three signed copies of the Registration
Statement and all amendments thereto including all financial statements and
exhibits thereto, and will deliver to the Representatives such number of copies
of the Registration Statement, including such financial statements but without
exhibits, and of all amendments thereto, as the Representatives may reasonably
request. The Partnership will deliver or mail to or upon the order of the
Representatives on the date of the initial public offering,
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and thereafter from time to time during the period when delivery of a
prospectus relating to the Units is required under the Act, as many copies of
the Prospectus, in final form or as thereafter amended or supplemented as the
Representatives may reasonably request; provided, however, that the expense of
the preparation and delivery of any prospectus required for use nine months or
more after the effective date of the Registration Statement shall be borne by
the Underwriters required to deliver such prospectus.
(f) The Partnership will make generally available to its
security holders as soon as practicable, but in any event not later than 90
days after the close of the period covered thereby, an earnings statement (in
form complying with the provisions of Rule 158 under the Act) which will be in
reasonable detail (but which need not be audited) and which will comply with
Section 11(a) of the Act, covering a period of at least twelve months beginning
not later than the first day of the Partnership's fiscal quarter next following
the "effective date" (as defined in Rule 158) of the Registration Statement.
(g) The Partnership and the General Partner will
cooperate with the Representatives to enable the Units to be qualified for sale
under the securities laws of such jurisdictions as the Representatives may
designate and at the request of the Representatives will make such applications
and furnish such information as may be reasonably required of them for that
purpose; provided, however, that the Partnership and the General Partner shall
not be required to qualify to do business or to file a general consent to
service of process in any such jurisdiction. The Partnership and the General
Partner will, from time to time, prepare and file such statements and reports
as are or may be reasonably required of them to continue such qualifications in
effect for so long a period as the Representatives may reasonably request for
the distribution of the Units.
(h) The Partnership will furnish to its unitholders
annual reports containing financial statements certified by independent public
accountants and shall also furnish quarterly summary financial information in
reasonable detail which may be unaudited. During the period of five years from
the date hereof, the Partnership will deliver to the Representatives and, upon
request, to each of the other Underwriters, copies of each annual report of the
Partnership and each other report furnished by the Partnership to its
unitholders and will deliver to the Representatives, as soon as they are
available, copies of any other reports (financial or other) which the
Partnership shall publish or otherwise make available to any of its security
holders as such, and as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any national
securities exchange or the National Association of Securities Dealers, Inc.
(the "NASD").
(i) The Partnership and the General Partner will use
their best efforts to effect the listing of the Units on the New York Stock
Exchange.
(j) The Heritage Entities will use the net proceeds
received by them from the sale of the Units and the Senior Notes in the manner
specified in the Prospectus under "Use of Proceeds."
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(k) The Partnership will file with the Commission such
reports on Form SR as may be required pursuant to Rule 463 under the Act.
(l) Except as provided in this Agreement, during a
period of 180 days from the date of this Agreement, the Partnership, the
Operating Partnership and the General Partner will not, without prior written
consent of Dean Witter Reynolds Inc., directly or indirectly, sell, offer to
sell, grant any option or warrant for the sale of, or otherwise dispose of or
enter into any agreement to sell, any Common Units or Subordinated Units, any
securities that are convertible into or exercisable or exchangeable for or that
represent the right to receive Common Units or Subordinated Units or any
security that is senior to or pari passu with Common Units (other than the
issuance of Common Units pursuant to employee benefit plans disclosed in the
Registration Statement).
5. Payment of Expenses. The Heritage Parties will pay
(directly or by reimbursement) all expenses incident to the performance of the
obligations of the Heritage Entities under this Agreement, including but not
limited to all expenses and taxes incident to delivery of the Units to the
Representatives, all expenses incident to the registration of the Units under
the Act and the printing of copies of the Registration Statement, the
Prospectus, any amendments or supplements thereto including any term sheet
delivered by the Partnership pursuant to Rule 434 of the Rules and Regulations,
the "Blue Sky" memorandum, the Agreement Among Underwriters, Underwriters'
Questionnaire and this Agreement and furnishing the same to the Underwriters
and dealers except as otherwise provided in Sections 4(d) and 4(e), the fees
and disbursements of the Partnership's counsel and accountants, all filing and
printing fees and expenses (including legal fees and disbursements of counsel
for the Underwriters) incurred in connection with qualification of the Units
for sale and determination of their eligibility for investment under the laws
of such jurisdictions as the Representatives may designate, all fees and
expenses paid or incurred in connection with filings made with the NASD, the
fees and expenses incurred in connection with the listing of the Units on the
New York Stock Exchange, the costs of preparing unit certificates, the costs
and fees of any registrar or transfer agent, the transportation and other
expenses incurred by or on behalf of the officers and employees of the Heritage
Entities in connection with presentations to prospective purchasers of the
Units, and all other costs and expenses incident to the performance of their
obligations hereunder which are not otherwise specifically provided for in this
Section.
It is understood and agreed, however, that except as otherwise
expressly provided in this Section 5 and Section 10 hereunder, the Underwriters
shall pay their own direct costs and expenses, including the fees and expenses
of their counsel, any advertising expenses incurred in connection with any
offers they may make and the transportation and other expenses incurred by or
on behalf of the Underwriters in connection with presentations to prospective
purchasers of the Units.
If this Agreement is terminated by the Representatives in
accordance with the provisions of Section 3 or Section 8 hereof, the Heritage
Parties shall reimburse the Underwriters for all of their out-of-pocket
expenses, including the fees and disbursements of Baker & Botts, L.L.P.,
counsel for the Underwriters.
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6. Indemnification and Contribution. (a) Each of the
Heritage Parties agrees to indemnify and hold harmless each Underwriter, each
employee, officer, partner, director and agent of such Underwriter, and each
person, if any, who controls such Underwriter within the meaning of the Act,
against any losses, claims, damages, liabilities or expenses (including the
reasonable cost of investigating and defending against any claims therefor and
counsel fees incurred in connection therewith), joint or several, as incurred,
which may be based upon the Act, or any other federal or state statute or at
common law, arising out of any untrue statement or alleged untrue statement of
a material fact contained in the Registration Statement (or any amendment
thereto), including the information deemed to be part of the Registration
Statement pursuant to Rule 430A(b) or Rule 434 of the Rules and Regulations, if
applicable, or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading or
arising out of any untrue statement or alleged untrue statement of a material
fact contained in the Prospectus (or any amendment or supplement thereto) or
the omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, unless such statement or omission was
made in reliance upon, and in conformity with, written information furnished to
the Partnership by such Underwriter, directly or through the Representatives,
specifically for use in the preparation thereof; provided that the Partnership
shall not be liable with respect to any claims made against any Underwriter or
any such employee, officer, partner, director or agent or any such controlling
person under this subsection unless such Underwriter or employee, officer,
partner, director or agent or controlling person shall have notified the
Partnership in writing within a reasonable time after the summons or other
first legal process giving information of the nature of the claim shall have
been served upon such Underwriter or employee, officer, partner, director or
agent or controlling person (such notification by an Underwriter shall suffice
as notification on behalf of its officers, partners, directors, employees,
agents and controlling persons), but failure to notify the Partnership of any
such claim shall not relieve it from any liability which it may have to such
Underwriter or employee, officer, partner, director or agent or controlling
person otherwise than on account of the indemnity agreement contained in this
Section 6(a). In addition to and notwithstanding the foregoing, the Heritage
Parties shall indemnify and hold harmless the Independent Underwriter against
any loss, claim, damage or liability (or any action in respect thereof) arising
from the Independent Underwriter participating, acting or serving as a QIU for
the offering of the Units, except for any such losses, claims, damages or
liabilities that are finally judicially determined to have resulted from the
bad faith or gross negligence of the Independent Underwriter.
The Heritage Parties shall be entitled to participate at their
own expense in the defense, or, if they so elect, to assume the defense for
misstatements or omissions in a Prospectus of any suit brought to enforce any
such liability, but, if the Heritage Parties elect to assume the defense, such
defense shall be conducted by counsel chosen by them and reasonably
satisfactory to such Underwriter or indemnified person, as the case may be. In
the event the Heritage Parties elect to assume the defense of any such suit and
retain such counsel, the Underwriter or Underwriters or other indemnified
person or persons, defendant or defendants in the suit, may retain additional
counsel but shall bear the fees and expenses of such counsel unless (i) the
Partnership shall have
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<PAGE> 22
specifically authorized the retaining of such counsel or (ii) the parties to
such suit include such Underwriter or Underwriters or other indemnified person
or persons, and such Underwriter or Underwriters or other indemnified person or
persons have been advised by counsel that one or more legal defenses may be
available to it or them which may not be available to the Heritage Parties, in
which case the Heritage Parties shall not be entitled to assume the defense of
such suit notwithstanding their obligation to bear the fees and expenses of
such counsel. The Heritage Parties will not, without the prior written consent
of each Underwriter, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not such
Underwriter or other indemnified party is a party to such claim, action, suit
or proceeding), unless such settlement, compromise or consent (i) includes an
unconditional release of such Underwriter and each such other indemnified
person or persons from all liability arising out of such claim, action, suit or
proceeding and (ii) does not include a statement as to or as admission of
fault, culpability or a failure to act by or on behalf of any indemnified
party. The Heritage Parties agree that a breach of the preceding sentence
shall cause irreparable harm to the Underwriters and that the Underwriters
shall be entitled to injunctive relief from any appropriate court ordering
specific performance of said provision. This indemnity agreement will be in
addition to any liability which the Heritage Parties might otherwise have.
(b) Each Underwriter severally agrees to indemnify and
hold harmless each of the Heritage Parties, each of their directors, each of
their officers who have signed the Registration Statement, each of their
employees, officers, directors and agents and each person, if any, who controls
such Heritage Party within the meaning of the Act against any losses, claims,
damages, liabilities or expenses (including the reasonable cost of
investigating and defending against any claims therefor and counsel fees
incurred in connection therewith), joint or several, as incurred, which may be
based upon the Act, or any other statute or at common law, arising out of any
untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement (or any amendment thereto), including the
information deemed to be part of the Registration Statement pursuant to Rule
430A(b) of the Rules and Regulations, if applicable, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading or arising out of any untrue statement or
alleged untrue statement of a material fact contained in the Prospectus (or any
amendment or supplement thereto) or the omission or alleged omission therefrom
of a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading, but only
insofar as any such statement or omission was made in reliance upon, and in
conformity with, written information furnished to the Partnership by such
Underwriter, directly or through the Representatives, specifically for use in
the preparation thereof; provided, however, that in no case is such Underwriter
to be liable with respect to any claims made against the Heritage Parties or
any person against whom the action is brought unless the Heritage Parties or
such person shall have notified such Underwriter in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon the Heritage Parties or such
person, but failure to notify such Underwriter of such claim shall not relieve
it from any such liability which it may have to the
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<PAGE> 23
Heritage Parties or such person otherwise than on account of its indemnity
agreement contained in this Section 6(b). Such Underwriter shall be entitled
to participate at its own expense in the defense, or, if it so elects, to
assume the defense of any suit brought to enforce any such liability, but, if
such Underwriter elects to assume the defense, such defense shall be conducted
by counsel chosen by it and reasonably satisfactory to the Partnership or such
person, as the case may be. In the event that any Underwriter elects to assume
the defense of any such suit and retain such counsel, the Heritage Parties,
said employees, agents, officers and directors and any other Underwriter or
Underwriters or employee or employees or agent or agents or controlling person
or persons, defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them, respectively. The
Underwriter against whom indemnity may be sought shall not be liable to
indemnify any person for any settlement of any such claim effected without such
Underwriter's consent. This indemnity agreement will be in addition to any
liability which such Underwriter might otherwise have.
(c) If the indemnification provided for in this Section
6 is unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages,
liabilities or expenses (or actions in respect thereof) referred to herein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages, liabilities
or expenses (or actions in respect thereof), as incurred, in such proportion as
is appropriate to reflect the relative benefits received by the Heritage
Parties on the one hand and the Underwriters on the other from the offering of
the Units. If, however, the allocation provided by the immediately preceding
sentence is not permitted by applicable law, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party, as
incurred, in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Heritage Parties on the
one hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
expenses (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Heritage
Parties on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Partnership bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Heritage
Parties or the Underwriters and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or
omission. The Heritage Parties and the Underwriters agree that it would not be
just and equitable if contribution were determined by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to above. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, liabilities or expenses (or
actions in respect thereof) referred to above shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such claim. Notwithstanding the
provisions of this subsection (c), no Underwriter shall be required
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<PAGE> 24
to contribute any amount in excess of the amount by which the total price at
which the Units underwritten by it and distributed to the public were offered
to the public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute are several in
proportion to their respective underwriting obligations and not joint.
7. Survival of Indemnities, Representations,
Warranties, Etc. The respective indemnities, covenants, agreements,
representations, warranties and other statements of the Heritage Parties and
the several Underwriters, as set forth in this Agreement or made by them
respectively, pursuant to this Agreement, shall remain in full force and
effect, regardless of any investigation made by or on behalf of any
Underwriter, the Heritage Parties or any of their officers or directors or any
controlling person, and shall survive delivery of and payment for the Units.
8. Conditions of Underwriters' Obligations. The
respective obligations of the several Underwriters hereunder shall be subject
to the accuracy, at and (except as otherwise stated herein) as of the date
hereof and the Closing Date or the Option Closing Date, as the case may be, of
the representations and warranties made herein by the Heritage Parties, to the
accuracy of the statements of the General Partner's officers or directors in
any certificate furnished pursuant to the provisions hereof, to compliance at
and as of the Closing Date or the Option Closing Date, as the case may be, by
the Heritage Parties with their covenants and agreements herein contained and
other provisions hereof to be satisfied at or prior to such date, and to the
following additional conditions:
(a) The Registration Statement shall become effective
not later than 3:00 P.M., New York Time, on the date hereof or, with the
consent of the Representatives, at a later time and date, not later, however,
than 5:30 P.M., New York Time on the first business day following the date
hereof, or at such later date as may be approved by a majority in interest of
the Underwriters, and at such Closing Date (i) no stop order suspending the
effectiveness thereof shall have been issued and no proceedings for that
purpose shall have been initiated or, to the knowledge of the Heritage Parties
or the Representatives, threatened by the Commission, and any request for
additional information on the part of the Commission (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the reasonable satisfaction of the Representatives, and (ii) there
shall not have come to the attention of the Representatives any facts that
would cause them to believe that the Prospectus, at the time it was required to
be delivered to a purchaser of the Units, contained any untrue statement of a
material fact or omitted to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading. If the Partnership has elected to rely upon Rule 430A of
the Rules and Regulations, the price of the Units and any price related
information previously omitted from the effective Registration Statement
pursuant to Rule 430A shall have been transmitted to the Commission for filing
pursuant to Rule 424(b) of the Rules and Regulations within the prescribed time
period, and before the Closing Date the Partnership shall have provided
evidence
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<PAGE> 25
satisfactory to the Representatives of such timely filing, or a post-effective
amendment providing such information shall have been promptly filed and
declared effective in accordance with the requirements of Rule 430A of the
Rules and Regulations.
(b) At the time of execution of this Agreement, the
Representatives shall have received from Arthur Andersen LLP, a letter, dated
the date of such execution, in form and substance previously approved by the
Representatives, and to the effect that:
(i) They are independent certified public accountants
with respect to Heritage and its subsidiaries and the Partnership and its
subsidiaries within the meaning of the Act and the Rules and Regulations.
(ii) In their opinion, the financial statements and
supporting schedules examined by them and included in the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published Rules and
Regulations thereunder and they have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of the
unaudited consolidated interim financial statements and selected financial data
for the periods specified in such letter, as indicated in their reports
thereon, copies of which have been furnished to the Representatives.
(iii) The unaudited selected financial information with
respect to the consolidated results of operations and financial position of
Heritage for the three most recent fiscal years included in the Prospectus
agrees with the corresponding amounts (after restatement where applicable) in
the audited consolidated financial statements for such three fiscal years.
(iv) On the basis of limited procedures, not constituting
an examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available interim
financial statements of Heritage and its subsidiaries and the Partnership and
its subsidiaries, inspection of the minute books of Heritage and its
subsidiaries and the Partnership and its subsidiaries since the date of the
latest audited financial statements included in the Prospectus, inquiries of
officials of Heritage and its subsidiaries and the Partnership and its
subsidiaries responsible for financial and accounting matters and such other
inquiries and procedures as may be specified in such letter, nothing came to
their attention that caused them to believe that:
(A) The unaudited consolidated statements of operations,
consolidated balance sheets, consolidated statements of stockholders' deficit
and consolidated statements of cash flows included in the Prospectus do not
comply as to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations
thereunder, or are not in conformity with generally accepted accounting
principles applied on a basis substantially consistent with the basis for the
audited consolidated statements of operations, consolidated balance sheets,
consolidated statements of stockholders' deficit and consolidated statements of
cash flows included in the Prospectus.
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(B) Any other unaudited statement of operations data and
balance sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited consolidated financial statements from
which such data and items were derived, and any such unaudited data and items
were not determined on a basis substantially consistent with the basis for the
corresponding amounts in the audited consolidated financial statements included
in the Prospectus.
(C) The unaudited financial statements which were not
included in the Prospectus but from which were derived any unaudited statement
of operations data and balance sheet items included in the Prospectus and
referred to in clause (B) were not determined on a basis substantially
consistent with the basis for the audited financial statements included in the
Prospectus.
(D) As of a specified date not more than three days
prior to the date of such letter, there has been any change in the consolidated
capital stock of Heritage or in the partnership interests in the Partnership or
any increase in the consolidated long-term debt of Heritage and its
subsidiaries and the Partnership and its subsidiaries, any decrease in the
consolidated net current assets, net assets or other items specified by the
Representatives, or any change in any other items specified by the
Representatives, in each case as compared with amounts shown in the latest
balance sheet included in the Prospectus, except in each case for changes,
increases or decreases which the Prospectus discloses have occurred or may
occur or which are described in such letter.
(E) For the period from the date of the latest financial
statements included in the Prospectus to the specified date referred to in
clause (D), there was any decrease in consolidated gross profit or operating
income or the total or per share amounts of consolidated net income or other
items specified by the Representatives, or any increases in any items specified
by the Representatives, in each case as compared with the comparable period of
the preceding year and with any other period of corresponding length specified
by the Representatives, except in each case for increases or decreases which
the Prospectus discloses have occurred or may occur or which are described in
such letter.
(v) In addition to the examination referred to in their
reports included in the Prospectus and the limited procedures, inspection of
minute books, inquiries and other procedures referred to in paragraph (iv)
above, they have carried out certain specified procedures, not constituting an
examination in accordance with generally accepted auditing standards, with
respect to certain amounts, percentages and historical and pro forma financial
information specified by the Representatives which are derived from the general
accounting records of Heritage and its subsidiaries and the Partnership and its
subsidiaries, which appear in the Prospectus or in Part II of, or in exhibits
and schedules to, the Registration Statement specified by the Representatives,
and have compared certain of such amounts, percentages and financial
information with the accounting records of Heritage and its subsidiaries and
the Partnership and its subsidiaries and have found them to be in agreement.
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(c) At the time of execution of this Agreement, the
Representatives shall have received from Turlington and Company, L.L.P., a
letter, dated the date of such execution, in form and substance previously
approved by the Representatives, and to the effect that:
(i) They are independent certified public accountants
with respect to Heritage and its subsidiaries and the Partnership and its
subsidiaries within the meaning of the Act and the Rules and Regulations.
(ii) In their opinion, the financial statements and
supporting schedules examined by them and included in the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the Act and related published Rules and Regulations
thereunder.
(d) At the time of execution of this Agreement, the
Representatives shall have received from David R. Gargano, CPA, P.C., a letter,
dated the date of such execution, in form and substance previously approved by
the Representatives, and to the effect that:
(i) They are independent certified public accountants
with respect to Heritage and its subsidiaries and the Partnership and its
subsidiaries within the meaning of the Act and the Rules and Regulations.
(ii) In their opinion, the financial statements and
supporting schedules examined by them and included in the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the Act and related published Rules and Regulations
thereunder.
(e) The Representatives shall have received from Arthur
Andersen LLP, a letter, dated the Closing Date, to the effect that such
accountants reaffirm, as of such Closing Date, and as through made on such
Closing Date, the statements made in the letter furnished by such accountants
pursuant to paragraph (b) of this Section 8, except that the specified date
will be a date not more than three business days prior to the Closing Date.
(f) You shall have received on the Closing Date, an
opinion of Andrews & Kurth L.L.P., special counsel for the Heritage Parties,
dated the Closing Date and addressed to you, as Representatives of the several
Underwriters, to the effect that:
(i) Each of the Partnership and the Operating
Partnership has been duly formed and is validly existing as a limited
partnership under the Delaware Act with all necessary partnership power and
authority to own or lease its properties, assume the liabilities being assumed
by it pursuant to the Operative Agreements and to conduct its business, in each
case in all material respects as described in the Prospectus.
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(ii) Each of the Partnership and the Operating
Partnership is duly qualified or registered as a foreign limited partnership
for the transaction of business under the laws of the states listed on Schedule
I to such opinion; and, to such counsel's knowledge, such jurisdictions are the
only jurisdictions in which the character of the business conducted by the
Partnership or the Operating Partnership or the location of the properties
owned or leased by them make such qualification or registration necessary
(except where the failure to so qualify or so register would not reasonably be
expected to (A) have a material adverse effect on the financial condition,
business or results of operations of the Heritage Entities considered as a
whole or (B) subject the limited partners of the Partnership to any material
liability or disability).
(iii) The General Partner is duly qualified or registered
as a foreign corporation for the transaction of business under the laws of the
states listed on Schedule II to such opinion; and to the knowledge of such
counsel, such jurisdictions are the only jurisdictions in which the character
of the business conducted by the General Partner or the location of the
properties owned or leased by it make such qualification or registration
necessary (except where the failure to so qualify or so register would not
reasonably be expected to (A) have a material adverse effect on the financial
condition, business or results of operations of the Heritage Entities
considered as a whole or (B) subject the limited partners of the Partnership to
any material liability or disability).
(iv) Corporate Sub is a corporation duly organized and
validly existing in good standing under the laws of the State of Delaware, with
full corporate power and authority to own or lease its properties and to
conduct its business as contemplated by the Prospectus.
(v) Corporate Sub is duly qualified or registered as a
foreign corporation for the transaction of business under the laws of the
states listed on Schedule III to such opinion; and to the knowledge of such
counsel, such jurisdictions are the only jurisdictions in which the character
of the business conducted by Corporate Sub or the location of the properties
owned or leased by it make such qualification or registration necessary (except
where the failure to so qualify or so register would not reasonably be expected
to (A) have a material adverse effect on the financial condition, business or
results of operations of the Heritage Entities considered as a whole or (B)
subject the limited partners of the Partnership to any material liability or
disability).
(vi) The General Partner is the sole general partner of
the Partnership and the Operating Partnership with a general partner interest
in the Partnership of 1% and a general partner interest in the Operating
Partnership of 1.0101%; such general partner interests are duly authorized by
the Partnership Agreement and the Operating Partnership Agreement,
respectively, and were validly issued.
(vii) The 3,702,943 Subordinated Units to be issued to the
General Partner pursuant to the Contribution Agreement and the Partnership
Agreement and the limited partner interests represented thereby are duly
authorized by the Partnership Agreement and, when issued and delivered
pursuant to the terms of the Contribution Agreement and the Partnership
Agreement, will be validly issued, fully paid (to the extent required) and
nonassessable (except as such
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nonassessability may be affected by matters described in the Prospectus under
"The Partnership Agreement--Limited Liability").
(viii) The Partnership is the sole limited partner of the
Operating Partnership, with a limited partner interest of 98.9899%; such
limited partner interest is duly authorized by the Operating Partnership
Agreement and is validly issued, fully paid (to the extent required) and
nonassessable (except as such nonassessability may be affected by matters
described in the Prospectus under the caption "The Partnership
Agreement--Limited Liability").
(ix) The 4,025,000 Common Units to be issued and sold to
the Underwriters by the Partnership pursuant to the Underwriting Agreement and
the limited partner interests represented thereby are duly authorized by the
Partnership Agreement and, when issued and delivered against payment therefor
as provided in the Underwriting Agreement, will be validly issued, fully paid
(to the extent required) and nonassessable (except as such nonassessability may
be affected by matters described in the Prospectus under the caption "The
Partnership Agreement--Limited Liability"); other than the 3,702,943
Subordinated Units that will be owned by the General Partner, the Firm Units
will be the only limited partner interests of the Partnership issued at the
Closing Date, unless the Option Closing Date and the Closing Date are the same
date.
(x) The Partnership Agreement constitutes a valid and
legally binding agreement of the General Partner and the Organizational Limited
Partner, enforceable against the General Partner and the Organizational Limited
Partner in accordance with its terms, except as the enforceability thereof may
be limited by (A) bankruptcy, insolvency, fraudulent transfer, reorganization,
receivership, moratorium and similar laws of general application relating to or
affecting creditors' rights generally and to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law) and (B) public policy, applicable law relating to fiduciary
duties and an implied covenant of good faith and fair dealing.
(xi) The Operating Partnership Agreement constitutes a
valid and legally binding agreement of the General Partner and the Partnership,
enforceable against the General Partner and the Partnership in accordance with
its terms, except as the enforceability thereof may be limited by (A)
bankruptcy, insolvency, fraudulent transfer, reorganization, receivership,
moratorium and similar laws of general application relating to or affecting
creditors' rights generally and to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law)
and (B) public policy, applicable law relating to fiduciary duties and an
implied covenant of good faith and fair dealing.
(xii) The General Partner owns its general partner
interests in the Partnership and the Operating Partnership, and will own the
3,702,943 Subordinated Units to be issued to it pursuant to the Partnership
Agreement and the Contribution Agreement, in each case free and clear of all
liens, encumbrances, security interests, charges or claims (A) in respect of
which a financing statement under the Uniform Commercial Code of the State of
Oklahoma or Delaware naming the General Partner as debtor is on file in the
office of the Secretary of State of the State of Oklahoma
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or Delaware or (B) otherwise known to such counsel, without independent
investigation, other than those created by or arising under the Delaware Act.
(xiii) The Partnership owns its limited partner interest in
the Operating Partnership free and clear of all liens, encumbrances, security
interests, charges or claims (A) in respect of which a financing statement
under the Uniform Commercial Code of the State of Oklahoma or Delaware naming
the Partnership as debtor is on file in the office of the Secretary of State of
the State of Oklahoma or Delaware or (B) otherwise known to such counsel,
without independent investigation, other than those created by or arising under
the Delaware Act.
(xiv) All of the issued and outstanding shares of capital
stock of Corporate Sub have been duly authorized and validly issued and are
fully paid and nonassessable; and all of such shares are owned of record by the
Operating Partnership free and clear of all liens, encumbrances, security
interests, charges or claims (A) in respect of which a financing statement
under the Uniform Commercial Code of the State of Oklahoma or Delaware naming
the Operating Partnership as debtor is on file in the office of the Secretary
of State of the State of Oklahoma or Delaware or (B) otherwise known to such
counsel, without independent investigation, other than those created by or
arising under the Delaware General Corporation Law.
(xv) This Agreement has been duly authorized and validly
executed and delivered by each of the Heritage Parties.
(xvi) Each of the Conveyance Agreements has been duly
authorized and validity executed and delivered by each of the Heritage Parties
party thereto.
(xvii) The Senior Notes and the Note Agreements have been
duly authorized and validly executed and delivered by the General Partner; and
the Senior Notes and the Note Agreements constitute valid and legally binding
agreements of the Operating Partnership, enforceable against the Operating
Partnership in accordance with their terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws relating to or
affecting creditors' rights generally and to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
(xviii) The statements in the Registration Statement and
Prospectus under the captions "The Transactions," "Cash Distribution Policy,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Description of Indebtedness," "Business and Properties--Transfer of
the Partnership Assets," "Certain Relationships and Related
Transactions--Contribution, Conveyance and Assumption Agreement," "Description
of the Common Units" and "The Partnership Agreement," insofar as they
constitute descriptions of the Operative Agreements, or refer to statements of
law or legal conclusions, are accurate and complete in all material respects,
and the Units and the Subordinated Units conform in all material respects to
the descriptions thereof contained in the Registration Statement and
Prospectus.
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(xix) None of the offering, issuance and sale by the
Partnership of the Units, the offering, issuance and sale by the General
Partner of the Senior Notes, the execution, delivery and performance of this
Agreement and the Operative Agreements by any of the Heritage Entities which
are parties thereto, nor the consummation of the transactions contemplated
hereby and thereby (including the Transactions) (A) will constitute a
violation of the agreement of limited partnership, certificate or articles of
incorporation or bylaws or other organizational documents of any of the
Heritage Entities, (B) constitutes or will constitute a breach or violation of,
or a default under (or an event which, with notice or lapse of time or both,
would constitute such an event), any indenture, mortgage, deed of trust, loan
agreement or other material agreement or instrument known to such counsel to
which any of the Heritage Entities is a party or by which any of them or any of
their respective properties may be bound, (C) violates or will violate any
order, judgment, decree or injunction of any court or governmental agency or
body known to such counsel directed to any of them or any of their properties
in a proceeding to which any of them or their property is a party, (D) violates
or will violate any statute, law or regulation applicable to any of the
Heritage Entities or any of their respective properties or (E) will result in
the creation or imposition of any lien, charge or encumbrance upon any property
or assets of any of the Heritage Entities.
(xx) No permit, consent, approval, authorization or order
of any court, governmental agency or body or financial institution is required
in connection with the execution and delivery of, or the consummation of the
transactions contemplated by, this Agreement or the Operative Agreements, or
the consummation by the Heritage Entities of the Transactions, except (A) for
such permits, consents, approvals and similar authorizations required under the
Securities Act and the Exchange Act, (B) as may be required under state
securities or "Blue Sky" laws, as to which such counsel need not express any
opinion, (C) for such permits, consents, approvals and similar authorizations
which have been obtained, (D) for such permits, consents, approvals and similar
authorizations which (1) are of a routine or administrative nature, (2) are not
customarily obtained or made prior to the consummation of transactions such as
those contemplated hereby and by the Operative Agreements and (3) are expected
in the reasonable judgment of the General Partner to be obtained in the
ordinary course of business subsequent to the consummation of the Transactions,
(E) as may be required by the Public Utilities Holding Company Act of 1935, as
to which such counsel need not express any opinion and (F) as set forth or
contemplated in the Prospectus.
(xxi) The opinion of Andrews & Kurth L.L.P. that is filed
as Exhibit 8.1 to the Registration Statement is confirmed and the Underwriters
may rely upon such opinion as if it were addressed to them.
(xxii) The Registration Statement was declared effective
under the Act on _________________, 1996; no stop order suspending the
effectiveness of the Registration Statement has been issued and, to the
knowledge of such counsel, no proceedings for that purpose have been instituted
or threatened by the Commission; and any required filing of the Prospectus
pursuant to Rule 424(b) has been made in the manner and within the time period
required by such Rule.
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(xxiii) The Registration Statement and the Prospectus
(except for the financial statements and the notes and the schedules thereto
and the other financial, statistical and accounting data included in the
Registration Statement or the Prospectus, as to which such counsel need not
express any opinion) comply as to form in all material respects with the
requirements of the Act and the rules and regulations promulgated thereunder.
(xxiv) To the knowledge of such counsel, there are no
agreements, contracts or other documents to which any of the Heritage Entities
is a party that are required to be described in the Registration Statement or
the Prospectus or to be filed as exhibits to the Registration Statement that
are not described or filed as required.
(xxv) None of the Partnership, the Operating Partnership
or the General Partner is an "investment company" or a company "controlled by"
an "investment company" as such terms are defined in the Investment Company Act
of 1940, as amended.
(xxvi) Upon delivery to the Underwriters of certificates
evidencing the Units issued in the name of the Underwriters and payment by the
Underwriters of the purchase price for the Units, the Underwriters will acquire
the Units free of any adverse claim (as such term is defined in Section 8-302
of the New York Uniform Commercial Code), assuming that the Underwriters are
acting in good faith and without notice of any adverse claim.
(xxvii) Except as described in the Prospectus, there are no
preemptive rights or other rights to subscribe for or to purchase, nor any
restriction upon the voting or transfer of, any limited partner interests or
shares in any of the Heritage Entities pursuant to either of the Partnership
Agreements or the certificate of incorporation of the General Partner or, to
the knowledge of such counsel, pursuant to any agreement or instrument to which
any Heritage Party is a party or by which any of them may be bound. To such
counsel's knowledge, neither the filing of the Registration Statement nor the
offering or sale of the Units as contemplated hereby gives rise to any rights
for or relating to the registration of any Units or other securities of the
Partnership. To such counsel's knowledge, except as disclosed in the
Prospectus, there are no outstanding options or warrants to purchase any Units
or Subordinated Units or other partnership interests in the Partnership or the
Operating Partnership. The Partnership has all requisite power and authority
to issue, sell and deliver (A) the Units, in accordance with and upon the
terms and conditions set forth in this Agreement and in the Registration
Statement and Prospectus, and (B) the Subordinated Units, in accordance with
the terms and conditions set forth in the Contribution Agreement and the
Partnership Agreement. All corporate and partnership action required to be
taken by the Heritage Entities and their shareholders for the authorization,
issuance, sale and delivery of the Units and Subordinated Units and the
consummation of the transactions contemplated hereby and by the Operative
Agreements (including the Transactions) has been validly taken.
(xxviii) The Units have been approved for listing on the New
York Stock Exchange, subject only to official notice of issuance.
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(xxix) Each of the offer, sale and issuance of the
Subordinated Units to the General Partner pursuant to the Contribution
Agreement and the Partnership Agreement and the offer, sale and issuance of the
Senior Notes pursuant to the Note Agreement is exempt from the registration
requirements of the Act and the securities laws of any state having
jurisdiction with respect thereto.
In addition, such counsel shall state that they have
participated in conferences with officers and other representatives of Heritage
and the independent public accountants of the Partnership and Heritage and your
representatives, at which the contents of the Registration Statement and the
Prospectus and related matters were discussed, and although such counsel is not
passing on, and is not assuming any responsibility for the accuracy,
completeness or fairness of the statements contained in, the Registration
Statement and the Prospectus (except to the extent specified in the foregoing
opinion), no facts have come to such counsel's attention that lead such counsel
to believe that the Registration Statement (other than (i) the financial
statements included therein, including the notes and schedules thereto and the
auditors' reports thereon, (ii) the other historical, pro forma and projected
financial information and the statistical and accounting information included
therein and (iii) the exhibits thereto, as to which such counsel need not
comment), as of its effective date contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the Prospectus
(other than (i) the financial statements included therein, including the notes
and schedules thereto and the auditors' reports thereon, and (ii) the other
historical, pro forma and projected financial information and the statistical
and accounting information included therein, as to which such counsel need not
comment), as of its issue date and the Closing Date contained an untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
In rendering such opinion, such counsel may (A) rely in
respect of matters of fact upon certificates of officers and employees of the
Heritage Entities and upon information obtained from public officials, (B)
assume that all documents submitted to them as originals are authentic, that
all copies submitted to them conform to the originals thereof and that the
signatures on all documents examined by them are genuine, (C) state that their
opinion is limited to federal laws, the Delaware Act, the Delaware General
Corporation Law and the laws of the State of New York, (D) state that they
express no opinion with respect to the title of any of the Heritage Entities to
any of their respective real or personal property, and (E) state that they
express no opinion with respect to state or local taxes or tax statutes to
which any of the limited partners of the Partnership, the General Partner, the
Partnership or the Operating Partnership may be subject.
(g) You shall have received on the Closing Date, an
opinion of Doerner, Saunders, Daniel & Anderson, special counsel for the
Heritage Parties, dated the Closing Date and addressed to you, as
Representatives of the several Underwriters, to the effect that:
(i) The General Partner is a corporation duly organized
and validly existing in good standing under the laws of the State of Delaware,
with full corporate power and authority to
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own or lease its properties, to conduct its business and to act as general
partner of the Partnership and of the Operating Partnership, in each case in
all material respects as described in the Prospectus.
(ii) All of the issued and outstanding shares of capital
stock of the General Partner have been duly authorized and validly issued and
are fully paid and nonassessable and, except as provided for in the Equity
Repurchase Agreement and the related Pledge Agreement of even date herewith,
are owned by the registered holders thereof free and clear of all liens,
encumbrances, security interests, charges or claims, (A) in respect of which a
financing statement under the Uniform Commercial Code of the State of Oklahoma
or Delaware naming the registered holder thereof as debtor is on file in the
office of the Secretary of State of the State of Oklahoma or Delaware or (B)
otherwise known to such counsel, without independent investigation, other than
those created by or arising under the Delaware General Corporation Law.
(iii) M-P Corporation is a corporation duly organized and
validly existing in good standing under the laws of the Province of Alberta,
Canada, with full corporate power and authority to own or lease its properties,
to conduct its business and to act as a general partner of M-P Partnership, in
each case in all material respects as described in the Prospectus; all of the
issued and outstanding shares of capital stock of M-P Corporation have been
duly authorized and validly issued and are fully paid and nonassessable; and
all of such shares are owned of record by the Operating Partnership, free and
clear of all liens, encumbrances, security interests, charges or claims (A) in
respect of which a financing statement under the Uniform Commercial Code of the
State of Oklahoma or Delaware naming the Operating Partnership as debtor is on
file in the office of the Secretary of State of the State of Oklahoma or
Delaware or (B) otherwise known to such counsel, without independent
investigation, other than those created by or arising under the Business
Corporations Act of the Province of Alberta, Canada.
(iv) M-P Partnership has been duly formed and is validly
existing as a general partnership under the laws of the Province of Alberta,
Canada, with all necessary partnership power and authority to own or lease its
properties and to conduct its business, in each case in all material respects
as described in the Prospectus; M-P Corporation owns a general partner interest
in M-P Partnership of 60%; such general partner interest is duly authorized by
the M-P Partnership Agreement and was validly issued; and M-P Corporation owns
its general partner interest in M-P Partnership free and clear of all liens,
encumbrances, security interests, charges or claims (A) in respect of which a
financing statement under the Uniform Commercial Code of the State of Oklahoma
or Delaware naming M-P Corporation as debtor is on file in the office of the
Secretary of State of the State of Oklahoma or Delaware or (B) otherwise known
to such counsel, without independent investigation, other than those created by
or arising under the Partnership Act (Alberta).
(v) Each of the Conveyance Agreements constitutes valid
and legally binding agreements of the parties thereto, enforceable against such
parties in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws relating to or
affecting creditors' rights generally and to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
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<PAGE> 35
(vi) The Bank Credit Agreement has been duly authorized
and validly executed and delivered by the Operating Partnership; and the Bank
Credit Agreement constitutes a valid and legally binding agreement of the
Operating Partnership, enforceable against the Operating Partnership in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws relating to or affecting
creditors' rights generally and to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
(vii) The statements in the Registration Statement and the
Prospectus under the caption "Business and Properties--Government Regulation,"
insofar as they refer to statements of law or legal conclusions, are accurate
and complete in all material respects.
(viii) To the knowledge of such counsel, (A) there is no
legal or governmental proceeding pending or threatened to which any of the
Heritage Entities is a party or to which any of their respective properties is
subject that is required to be disclosed in the Prospectus and is not so
disclosed and (B) there are no agreements, contracts or other documents to
which any of the Heritage Entities is a party that are required to be described
in the Registration Statement or the Prospectus or to be filed as exhibits to
the Registration Statement that are not described or filed as required.
(ix) To the knowledge of such counsel, other than as
described or contemplated in the Prospectus (or any supplement thereto), there
is no litigation, proceeding or governmental investigation pending or overtly
threatened against any of the Heritage Entities that relates to any of the
transactions contemplated by the Prospectus or which, if adversely determined,
would reasonably be expected to have a material adverse effect on the financial
condition, business or results of operations of the Heritage Entities
considered as a whole, or would impair or call into question the validity of
this Agreement or the performance by any of the Heritage Entities of their
obligations under this Agreement, any of the Operative Agreements or the
Transactions.
(x) Except as described in the Prospectus, to the
knowledge of such counsel, none of the Heritage Entities is in (A) breach or
violation of the provisions of its certificate or articles of incorporation or
bylaws or other organizational documents or (B) default (and no event has
occurred which, with notice or lapse of time or both, would constitute such a
default) in the due performance of any term, covenant or condition contained in
any indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which it is a party or by which it is bound or to which any of
its properties are subject, which would reasonably be expected to have a
material adverse effect on the financial condition, business or results of
operations of the Heritage Entities considered as a whole or could impair the
ability of any of the Heritage Entities to perform their obligations under the
Operative Agreements.
(xi) The Operating Partnership is not a "gas utility
company," and none of the Partnership, the Operating Partnership or the General
Partner is a "holding company" or a "subsidiary company" of a "holding company"
or an affiliate thereof, within the meaning of the
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<PAGE> 36
Public Utility Holding Company Act of 1935, as amended, and none of the
Partnership, the Operating Partnership or the General Partner is subject to
regulation thereunder.
In addition, such counsel shall state that they have
participated in conferences with officers and other representatives of Heritage
and the independent public accountants of the Partnership and Heritage and your
representatives, at which the contents of the Registration Statement and the
Prospectus and related matters were discussed, and although such counsel is not
passing on, and is not assuming any responsibility for the accuracy,
completeness or fairness of the statements contained in, the Registration
Statement and the Prospectus (except to the extent specified in the foregoing
opinion), no facts have come to such counsel's attention that lead such counsel
to believe that the Registration Statement (other than (i) the financial
statements included therein, including the notes and schedules thereto and the
auditors' reports thereon, (ii) the other historical, pro forma and projected
financial information and the statistical and accounting information included
therein and (iii) the exhibits thereto, as to which such counsel need not
comment), as of its effective date contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the Prospectus
(other than (i) the financial statements included therein, including the notes
and schedules thereto and the auditors' reports thereon, and (ii) the other
historical, pro forma and projected financial information and the statistical
and accounting information included therein, as to which such counsel need not
comment), as of its issue date and the Closing Date contained an untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
In rendering such opinion, such counsel may (A) rely in
respect of matters of fact upon certificates of officers and employees of the
Heritage Entities and upon information obtained from public officials, (B)
assume that all documents submitted to them as originals are authentic, that
all copies submitted to them conform to the originals thereof, and that the
signatures on all documents examined by them are genuine, (C) state that their
opinion is limited to federal laws and the laws of the State of Oklahoma, (D)
state that they express no opinion with respect to the title of any of the
Heritage Entities to any of their respective real or personal property and (E)
state that they express no opinion with respect to state or local taxes or tax
statutes to which any of the limited partners of the Partnership, the General
Partner, the Partnership or the Operating Partnership may be subject.
(h) You shall have received on the Closing Date, an
opinion or opinions of special counsel to the Heritage Parties in each of the
States of Arizona, California, Florida, Michigan, Montana, New Mexico, North
Carolina and Washington, dated the Closing Date and addressed to you, as
Representatives of the several Underwriters, and authorizing you and your
counsel to rely on such opinion or opinions, to the effect that:
(i) Each of the Partnership, the Operating Partnership,
the General Partner and Corporate Sub has been duly qualified or registered, to
the extent required in such state, as a foreign
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corporation or a foreign limited partnership, as the case may be, for the
transaction of business under the laws of such state.
(ii) The Operating Partnership has all requisite
partnership power and authority under the laws of such state to own or lease
its properties and to conduct its business in such state; Corporate Sub has all
requisite corporate power and authority under the laws of such state to own or
lease its properties and to conduct its business in such state; and upon the
consummation of the Transactions, assuming that the Partnership will not be
liable under the laws of the State of Delaware for the liabilities of the
Operating Partnership and assuming that the Unitholders will not be liable
under the laws of the State of Delaware for liabilities of the Partnership or
the Operating Partnership, the Partnership will not be liable as a limited
partner under the laws of such state for the liabilities of the Operating
Partnership, and the Unitholders will not be liable as limited partners under
the laws of such state for the liabilities of the Partnership or the Operating
Partnership, except in each case to the same extent as under the laws of the
State of Delaware.
(iii) The execution, delivery and performance of the
Conveyance Agreements relating to the transfer of property in such state in
accordance with the terms thereof will not violate any statute of such state or
any rule, regulation or, to the knowledge of such counsel, any order of any
agency of such state having jurisdiction over any of the Partnership, the
Operating Partnership, the General Partner or Corporate Sub or any of their
respective properties, except for any such violations which, individually or in
the aggregate, would not have a material adverse effect upon the holders of
Common Units or upon the operations conducted in such state by the Heritage
Entities considered as a whole.
(iv) Each of the Conveyance Agreements relating to the
transfer of property in such state, assuming the due authorization, execution
and delivery thereof by the parties thereto and assuming such Conveyance
Agreements are governed by the laws of such state notwithstanding any choice of
law provisions thereof, is a valid and legally binding agreement of the parties
thereto under the laws of such state, enforceable in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general application relating to or affecting
creditors' rights generally and to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law);
each of such Conveyance Agreements is in a form legally sufficient as between
the parties thereto to convey to the transferee thereunder all of the right,
title and interest of the transferor stated therein in and to the properties
located in such state, as described in such Conveyance Agreements, subject to
the conditions, reservations and limitations contained in such Conveyance
Agreements, except motor vehicles or other property requiring conveyance of
certificated title as to which such Conveyance Agreements are legally
sufficient to compel delivery of such certificated title.
(v) Each of the deeds and assignments (including,
without limitation, the form of the exhibits and schedules thereto) is in a
form legally sufficient for recordation in the appropriate public offices of
such state, to the extent such recordation is required, and, upon proper
recordation of any of such deeds and assignments in such state, will constitute
notice to all third parties under
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the recordation statutes of such state concerning record title to the assets
transferred thereby; recordation in the office of the County Clerk for each
county in which the Operating Partnership, the General Partner or Corporate Sub
owns property is the appropriate public office in such state for the
recordation of deeds and assignments of interests in real property located in
such county.
(vi) No consent, approval, authorization, order,
registration or qualification of or with any governmental agency or body of
such state having jurisdiction over the Partnership, the Operating Partnership,
the General Partner or Corporate Sub, as the case may be, or any of their
respective properties is required for the issue and sale of the Units by the
Partnership or for the conveyance of the properties located in such state
purported to be conveyed to the Operating Partnership or Corporate Sub pursuant
to the Conveyance Agreements, except (A) such permits, consents, approvals and
similar authorizations required under the Act and the securities or "Blue Sky"
laws of such state, (B) such permits, consents, approvals and similar
authorizations which have been obtained, (C) such permits, consents, approvals
and similar authorizations which (1) are of a routine or administrative nature,
(2) are not customarily obtained or made prior to the consummation of
transactions such as those contemplated hereby and by the Conveyance Agreements
and (3) are expected in the reasonable judgment of such counsel to be obtained
in the ordinary course of business subsequent to the consummation of the
Transactions or (D) such permits, consents, approvals and similar
authorizations which, if not obtained, would not, individually or in the
aggregate, have a material adverse effect upon the operations conducted in such
state by the Heritage Entities considered as a whole.
(vii) The General Partner, the Partnership, the Operating
Partnership and Corporate Sub possess all certificates, authorizations or
permits issued by the appropriate state regulatory agencies or bodies necessary
to conduct the business currently (or, as described or contemplated in the
Prospectus, to be) operated by them, except (A) with respect to the
Partnership, the Operating Partnership and Corporate Sub for such certificates,
authorizations or permits which (1) are of a routine or administrative nature,
(2) are not customarily obtained or made prior to the consummation of
transactions such as those contemplated hereby and by the Conveyance Agreements
and (3) are expected in the reasonable judgment of such counsel to be obtained
in the ordinary course of business subsequent to the consummation of the
Transactions and (B) such certificates, authorizations or permits which would
not, individually or in the aggregate, have a material adverse effect upon the
operations conducted in such state by the Heritage Entities considered as a
whole.
In rendering such opinion, such counsel may (A) rely in
respect of matters of fact upon certificates of officers and employees of the
Heritage Entities and upon information obtained from public officials, (B)
assume that all documents submitted to them are authentic, that all copies
submitted to them conform to the originals thereof, that all documents
submitted to them as execution copies conform to the executed originals, and
that the signatures on all documents examined by such counsel are genuine, (C)
state that their opinion is limited to the laws of their state of practice,
excepting therefrom municipal and local ordinances and regulations, (D) state
that they express no opinion with respect to state or local taxes or tax
statutes and (E) state that they express
-38-
<PAGE> 39
no opinion with respect to the title of any of the real or personal property
purported to be transferred by the Conveyance Agreements.
(i) The Representatives shall have received from Baker &
Botts, L.L.P., counsel for the Underwriters, their opinion or opinions dated
the Closing Date with respect to the validity of the Units, the Registration
Statement, the Prospectus and such other related matters as the Representatives
may require. In giving such opinion, such counsel may rely, as to all matters
governed by the laws of jurisdictions other than the law of the States of
Delaware, New York and Texas and the federal law of the United States, upon
opinions of counsel satisfactory to the Representatives. The Heritage Entities
shall have furnished to such counsel such documents as they may request for the
purpose of enabling them to pass upon such matters.
(j) The Representatives shall have received a
certificate, dated such Closing Date, of the Chief Executive Officer and the
Chief Financial Officer of the General Partner to the effect that: (i) no stop
order suspending the effectiveness of the Registration Statement has been
issued, and no proceedings for that purpose have been instituted or are pending
or, to the best of their knowledge, contemplated under the Act; (ii) except as
described in the Prospectus, subsequent to the respective dates as of which
information is given in the Prospectus, none of the Heritage Entities has
incurred any liabilities or obligations, direct or contingent, nor entered into
any transactions, not in the ordinary course of business, which in either case
are material to the Heritage Entities considered as a whole, whether or not
arising in the ordinary course of business, and there has not been any material
adverse change in the condition (financial or otherwise), business, prospects
or results of operations of the Heritage Entities considered as a whole, or any
material change in the partnership interests or long-term debt of the Heritage
Entities considered as a whole; (iii) the Heritage Entities have complied with
all agreements set forth herein and satisfied all conditions on their part to
be performed or satisfied at or before the Closing Date; (iv) the
representations and warranties of the Heritage Parties in this Agreement are
true and correct at and as of the Closing Date; and (v) between the execution
of this Agreement and the Closing Date, the business and operations conducted
by the Heritage Entities have not sustained a loss by strike, fire, flood,
accident or other calamity (whether or not insured) of such a character as to
interfere materially with the conduct of the business and operations of the
Heritage Entities considered as a whole. As used in this Section 8(j), the
term "Prospectus" means the Prospectus in the form first used to confirm sales
of Units.
(k) The Heritage Entities shall have furnished to the
Representatives such additional certificates as the Representatives may have
reasonably requested.
(l) The Units shall have been approved for listing on
the New York Stock Exchange.
(m) Simultaneously with the sale of the Units on the
Closing Date, (i) the closing of the offering of the Senior Notes shall have
occurred on the basis set forth in the Prospectus, (ii) the Bank Credit
Agreement shall have been executed and delivered and become effective in
substantially the form filed as an exhibit to the Registration Statement and
(iii) the closings under
-39-
<PAGE> 40
the Equity Repurchase Agreement and the Debt Repayment Agreement shall have
occurred on the basis set forth in the Prospectus.
(n) In the event the Underwriters exercise the option
granted in Section 3 hereof to purchase all or any portion of the Optional
Units, the representations and warranties of the Heritage Parties contained
herein and the statements in any certificates furnished by the Heritage
Entities hereunder shall be true and correct as of the Option Closing Date, and
you shall have received:
(i) A letter from Arthur Andersen LLP, in form and
substance satisfactory to you and dated the Option Closing Date, substantially
the same in scope and substance as the letter furnished to you pursuant to
Section 8(e), except that the specified date in the letter furnished pursuant
to this Section 8(n) shall be a date not more than three days prior to the
Option Closing Date.
(ii) The opinion of Andrews & Kurth L.L.P., special
counsel for the Heritage Parties, in form and substance satisfactory to counsel
for the Underwriters, dated the Option Closing Date, relating to the Optional
Units and otherwise to the same effect as the opinion required by Section 8(f).
(iii) The opinion of Doerner, Saunders, Daniel & Anderson,
special counsel for the Heritage Parties, in form and substance satisfactory to
counsel for the Underwriters, dated the Option Closing Date, relating to the
Optional Units and otherwise to the same effect as the opinion required by
Section 8(g).
(iv) The opinion of Baker & Botts, L.L.P., counsel for
the Underwriters, dated the Option Closing Date, relating to the Optional Units
and otherwise to the same effect as the opinion required by Section 8(i). The
Heritage Entities shall have furnished to such counsel such documents as they
may request for the purpose of enabling them to pass upon such matters.
(v) A certificate, dated the Option Closing Date, of the
Chief Executive Officer and the Chief Financial Officer of the General Partner
confirming that the certificate delivered at the Closing Date pursuant to
Section 8(j) remains true as of the Option Closing Date.
(vi) The Heritage Entities shall have furnished to the
Representatives such additional certificates as the Representatives have
reasonably requested.
If any of the conditions hereinabove provided for in this
Section shall not have been satisfied when and as required by this Agreement,
this Agreement may be terminated by the Representatives by notifying the
Partnership of such termination in writing or by telegram at or prior to the
Closing Date or the Option Closing Date, as the case may be, but the
Representatives shall be entitled to waive any of such conditions.
-40-
<PAGE> 41
9. Termination. This Agreement may be terminated by
the Representatives by notice to the Partnership if at or prior to the Closing
Date or the Option Closing Date, as the case may be, (a) trading in securities
on the New York or American Stock Exchanges shall have been suspended or
minimum or maximum prices shall have been established on either such exchange,
or a banking moratorium shall have been declared by New York or United States
authorities; (b) there shall have been any adverse change in the financial
markets in the United States, Japan or Europe or any outbreak or escalation of
hostilities between the United States and any foreign power, or of any other
insurrection or armed conflict involving the United States that, in the
judgment of the Representatives, makes it impracticable or inadvisable to
offer, sell or deliver the Firm Units or the Optional Units, as applicable, on
the terms contemplated by the Prospectus or this Agreement; (c) there shall
have been since the execution of this Agreement or since the respective dates
as of which information is given in the Prospectus any material adverse change
in the condition (financial or other), or business, prospects or results of
operations of the Heritage Entities considered as a whole; (d) there shall have
been any development involving the business or properties or securities of the
Heritage Entities or the transactions contemplated by this Agreement, which, in
the judgment of the Representatives, makes it impracticable or inadvisable to
offer, sell or deliver the Firm Units or Optional Units, as applicable, on the
terms contemplated by the Prospectus or this Agreement; or (e) if there shall
be any litigation, pending or threatened, which, in the judgment of the
Representatives, makes it impracticable or inadvisable to offer or deliver the
Firm Units or the Optional Units, as applicable, on the terms contemplated by
the Prospectus or this Agreement. As used in this Section 9, the term
"Prospectus" means the Prospectus in the form first used to confirm sales of
Units.
10. Reimbursement of Underwriters. Notwithstanding any
other provisions hereof, if this Agreement shall be terminated by the
Representatives under Section 8, Section 9 or Section 12, the Heritage Parties
will bear and pay the expenses specified in Section 5 hereof and, in addition
to its obligations pursuant to Section 6 hereof, the Heritage Parties will
reimburse the reasonable out-of-pocket expenses of the several Underwriters
(including reasonable fees and disbursements of counsel for the Underwriters)
incurred in connection with this Agreement and the proposed purchase of the
Units, and promptly upon demand the Heritage Parties will pay such amounts to
you as Representatives. In addition, the provisions of Section 6 shall survive
any such termination.
11. Default by Underwriters. If any Underwriter or
Underwriters shall default in its or their obligations to purchase Firm Units
hereunder on the Closing Date and the aggregate number of Firm Units which such
defaulting Underwriter or Underwriters agreed but failed to purchase does not
exceed 10% of the total number of Firm Units which the Underwriters are
obligated to purchase at the Closing Date, the other Underwriters shall be
obligated severally, in proportion to their respective commitments hereunder,
to purchase the Firm Units which such defaulting Underwriter or Underwriters
agreed but failed to purchase. If any Underwriter or Underwriters shall so
default and the aggregate number of Firm Units with respect to which such
default or defaults occur is more than 10% of the total number of Firm Units
underwritten and arrangements satisfactory to the Representatives and the
Partnership for the purchase of such Firm
-41-
<PAGE> 42
Units by other persons are not made within 48 hours after such default, this
Agreement shall terminate. If any Underwriter or Underwriters shall default in
its or their obligations to purchase Optional Units hereunder on the Option
Closing Date, the other Underwriters shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the Optional
Units which such defaulting Underwriter or Underwriters agreed but failed to
purchase.
If the remaining Underwriters or substituted underwriters are
required hereby or agree to take up all or part of the Firm Units or Optional
Units, as applicable, of a defaulting Underwriter or Underwriters as provided
in this Section 11, (a) the Partnership shall have the right to postpone the
Closing Date or the Option Closing Date, as applicable, for a period of not
more than five full business days, in order that the Partnership may effect
whatever changes may thereby be made necessary in the Registration Statement or
the Prospectus, or in any other documents or arrangements, and the Partnership
agrees promptly to file any amendments to the Registration Statement or
supplements to the Prospectus which may thereby be made necessary, and (b) the
respective numbers of Firm Units or Optional Units, as applicable, to be
purchased by the remaining Underwriters or substituted underwriters shall be
taken as the basis of their underwriting obligation for all purposes of this
Agreement. Nothing herein contained shall relieve any defaulting Underwriter
of its liability to the Partnership, or the Underwriters for damages occasioned
by its default hereunder. Any termination of this Agreement pursuant to this
Section 11 shall be without liability on the part of any non- defaulting
Underwriter or the Partnership, except for expenses to be paid or reimbursed
pursuant to Section 5 and except for the provisions of Section 6.
12. Default by the Partnership. If the Partnership
shall fail at the Closing Date or the Option Closing Date, as applicable, to
sell and deliver the number of Firm Units or Optional Units, as applicable,
which it is obligated to sell hereunder, then this Agreement shall terminate
without any liability on the part of any non-defaulting party.
No action taken pursuant to this Section shall relieve the
Partnership so defaulting from liability, if any, in respect of such default.
13. Notices. All communications hereunder shall be in
writing and, if sent to the Underwriters shall be mailed, delivered or
telegraphed and confirmed to you, as their Representatives c/o Dean Witter
Reynolds Inc. at Two World Trade Center, 65th Floor, Corporate Finance, New
York, New York 10048, Attention: Samuel H. Wolcott, III, except that notices
given to an Underwriter pursuant to Section 6 hereof shall be sent to such
Underwriter at the address provided to the Representatives or, if sent to the
Partnership, shall be mailed, delivered or telegraphed and confirmed c/o the
General Partner, 8801 South Yale Avenue, Suite 310, Tulsa, Oklahoma 74137,
Attention: James E. Bertelsmeyer.
14. Successors. This Agreement shall inure to the
benefit of and be binding upon the several Underwriters, the Heritage Parties
and their respective successors and legal representatives. Nothing expressed
or mentioned in this Agreement is intended or shall be construed to give any
person other than the persons mentioned in the preceding sentence any legal or
equitable
-42-
<PAGE> 43
right, remedy or claim under or in respect of this Agreement, or any provisions
herein contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person; except that the representations,
warranties, covenants, agreements and indemnities of the Heritage Parties
contained in this Agreement shall also be for the benefit of the person or
persons, if any, who control any Underwriter or Underwriters within the meaning
of Section 15 of the Act, and the indemnities of the several Underwriters shall
also be for the benefit of each director of any Heritage Party, each of its
officers who has signed the Registration Statement and the person or persons,
if any, who control the Heritage Parties within the meaning of Section 15 of
the Act.
15. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. Each of the Heritage Parties
hereby consents to personal jurisdiction in the State of New York and
voluntarily submits to the jurisdiction of the courts of such state, including
the federal district courts located in such state, in any proceeding with
respect to this Agreement.
16. Counterparts. This Agreement may be executed by one
or more parties hereto in any number of counterparts each of which shall be
deemed to be an original, but all such counterparts shall together constitute
one and the same instrument.
17. Authority of the Representatives. In connection
with this Agreement, the Representatives will act for and on behalf of the
several Underwriters, and any action taken under this Agreement by the
Representatives jointly or by Dean Witter Reynolds Inc., as Representatives of
the several Underwriters, will be binding on all the Underwriters.
-43-
<PAGE> 44
If the foregoing correctly sets forth our understanding,
please indicate your acceptance thereof in the space provided below for that
purpose, whereupon this letter and your acceptance shall constitute a binding
agreement between us.
Very truly yours,
HERITAGE PROPANE PARTNERS, L.P.
By Heritage Holdings, Inc., its General Partner
By
----------------------------------------------
Name:
Title:
HERITAGE OPERATING, L.P.
By Heritage Holdings, Inc., its General Partner
By
----------------------------------------------
Name:
Title:
HERITAGE HOLDINGS, INC.
By
----------------------------------------------
Name:
Title:
-44-
<PAGE> 45
Accepted and delivered,
as of the date first above written:
DEAN WITTER REYNOLDS INC.
OPPENHEIMER & CO., INC.
A.G. EDWARDS & SONS, INC.
PRUDENTIAL SECURITIES INCORPORATED
Acting on their own behalf and as Representatives of the
several Underwriters referred to in the foregoing Agreement.
BY DEAN WITTER REYNOLDS INC.
By__________________________________________________________
Authorized Signature
-45-
<PAGE> 46
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
FIRM UNITS TO
NAME BE PURCHASED
- ---- ------------
<S> <C>
Dean Witter Reynolds Inc.
Oppenheimer & Co., Inc.
A.G. Edwards & Sons, Inc.
Prudential Securities Incorporated
__________
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,025,000
==========
</TABLE>
A-1
<PAGE> 1
EXHIBIT 3.3
CERTIFICATE OF LIMITED PARTNERSHIP
OF
HERITAGE PROPANE PARTNERS, L.P.
The undersigned represents that it has formed a limited partnership
pursuant to the Delaware Revised Uniform Limited Partnership Act (the "Act")
and that the undersigned has executed this Certificate in compliance with the
requirements of the Act. The undersigned further states:
1. The name of the limited partnership is Heritage Propane
Partners, L.P., (the "Partnership").
2. The address of the registered office of the Partnership in the
State of Delaware and the name and address of the registered
agent of the Partnership required to be maintained by Section
17-104 of the Act at such address are as follows:
<TABLE>
<CAPTION>
Name and Address
of Registered Agent Address of Registered Office
------------------- ----------------------------
<S> <C>
The Corporation Trust Company Corporation Trust Center
Corporation Trust Center 1209 Orange Street
1209 Orange Street Wilmington, Delaware 19801
Wilmington, Delaware 19801
</TABLE>
3. The name and business addresses of the General Partner is as
follows:
<TABLE>
<CAPTION>
General Partner Address
--------------- -------
<S> <C>
Heritage Holdings, Inc. 8801 South Yale Avenue
Suite 310
Tulsa, Oklahoma 74137
</TABLE>
WHEREFORE, the undersigned has executed this Certificate as of the 16th
of April, 1996.
GENERAL PARTNER:
HERITAGE HOLDINGS, INC.
By: /s/ JAMES E. BERTELSMEYER
------------------------------------
Name: James E. Bertelsmeyer
Title: Chairman and CEO
<PAGE> 1
EXHIBIT 3.4
CERTIFICATE OF LIMITED PARTNERSHIP
OF
HERITAGE OPERATING, L.P.
The undersigned represents that it has formed a limited partnership
pursuant to the Delaware Revised Uniform Limited Partnership Act (the "Act")
and that the undersigned has executed this Certificate in compliance with the
requirements of the Act. The undersigned further states:
1. The name of the limited partnership is Heritage Operating,
L.P., (the "Partnership").
2. The address of the registered office of the Partnership in the
State of Delaware and the name and address of the registered
agent of the Partnership required to be maintained by Section
17-104 of the Act at such address are as follows:
<TABLE>
<CAPTION>
Name and Address
of Registered Agent Address of Registered Office
------------------- ----------------------------
<S> <C>
The Corporation Trust Company Corporation Trust Center
Corporation Trust Center 1209 Orange Street
1209 Orange Street Wilmington, Delaware 19801
Wilmington, Delaware 19801
</TABLE>
3. The name and business addresses of the General Partner is as
follows:
<TABLE>
<CAPTION>
General Partner Address
--------------- -------
<S> <C>
Heritage Holdings, Inc. 8801 South Yale Avenue
Suite 310
Tulsa, Oklahoma 74137
</TABLE>
WHEREFORE, the undersigned has executed this Certificate as of the 18th
of April, 1996.
GENERAL PARTNER:
HERITAGE HOLDINGS, INC.
By: /s/ JAMES E. BERTELSMEYER
-----------------------------------
Name: James E. Bertelsmeyer
Title: Chairman and CEO
<PAGE> 1
[ANDREWS & KURTH LETTERHEAD]
EXHIBIT 5.1
June 4, 1996
Heritage Propane Partners, L.P.
8801 South Yale Avenue
Suite No. 310
Tulsa, Oklahoma 74137
Gentlemen:
We have acted as counsel to Heritage Propane Partners, L.P., a
Delaware limited partnership (the "Partnership"), and Heritage Holdings, Inc.,
a Delaware corporation and the general partner of the Partnership, in
connection with the registration under the Securities Act of 1933, as amended
(the "Act"), of the offering and sale of up to an aggregate of 4,628,750 common
units representing limited partner interests in the Partnership (the "Common
Units").
As the basis for the opinion hereinafter expressed, we have
examined such statutes, regulations, corporate records and documents,
certificates of corporate and public officials, and other instruments as we
have deemed necessary or advisable for the purposes of this opinion. In such
examination we have assumed the authenticity of all documents submitted to us
as originals and the conformity with the original documents of all documents
submitted to us as copies.
Based on the foregoing and on such legal considerations as we
deem relevant, we are of the opinion that:
1. The Partnership has been duly formed and is validly existing
as a limited partnership under the Delaware Revised Uniform Limited Partnership
Act.
2. The Common Units will, when issued and paid for as described
in the Partnership's Registration Statement on Form S-1 (File No. 333-4018)
relating to the Common Units, as amended (the "Registration Statement"), be
duly authorized, validly issued, fully paid and nonassessable, except as such
nonassessability may be affected by the matters described in the prospectus
included in the Registration Statement (the "Prospectus") under the caption
"The Partnership Agreement--Limited Liability."
<PAGE> 2
Heritage Propane Partners, L.P.
June 4, 1996
Page 2
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Validity
of the Common Units" in the Prospectus.
Very truly yours,
/s/ ANDREWS & KURTH L.L.P.
1198:1208:2647:sfe
<PAGE> 1
[ANDREWS & KURTH LETTERHEAD]
EXHIBIT 8.1
June 4, 1996
Heritage Propane Partners, L.P.
8801 South Yale Avenue
Suite No. 310
Tulsa, Oklahoma 74137
Re: Tax Opinion
Gentlemen:
We have acted as special counsel to Heritage Propane Partners,
L.P, a Delaware limited partnership (the "Partnership"), in connection with the
offering of up to 4,628,750 common units representing limited partner interests
("Common Units") in the Partnership pursuant to the Registration Statement on
Form S-1 of the Partnership (Registration No. 333-4018) relating to the Common
Units (the "Registration Statement").
All statements of legal conclusions contained in the
discussion under the caption "Tax Considerations" in the prospectus included in
the Registration Statement, unless otherwise noted, represent our opinion with
respect to the matters set forth therein.
In addition, based on the foregoing, we are of the opinion
that the federal income tax discussion in the prospectus included in the
Registration Statement with respect to those matters as to which no legal
conclusions are provided is an accurate discussion of such federal income tax
matters (except for the representations and statements of fact of the
Partnership and its general partner, included in such discussion, as to which
we express no opinion).
We hereby consent to the references to our firm and this
opinion contained in the prospectus included in the Registration Statement.
Very truly yours,
/s/ ANDREWS & KURTH L.L.P.
1117:2445
<PAGE> 1
EXHIBIT 10.3
CONTRIBUTION, CONVEYANCE AND ASSUMPTION AGREEMENT
This Contribution, Conveyance and Assumption Agreement, dated
as of June _______, 1996, is entered into by and among HERITAGE PROPANE
PARTNERS, L.P., a Delaware limited partnership (the "Partnership"), HERITAGE
OPERATING, L.P., a Delaware limited partnership (the "Operating Partnership"),
HERITAGE-BI STATE CORP., a Delaware corporation ("HBSC") and HERITAGE HOLDINGS,
INC., a Delaware corporation (the "Company").
RECITALS
WHEREAS, the Company, as general partner, and James
Bertelsmeyer ("Bertelsmeyer"), as the organizational limited partner, have
formed the Partnership pursuant to the Delaware Revised Uniform Limited
Partnership Act (the "Delaware Act") for the purpose of serving as the sole
limited partner of the Operating Partnership; and
WHEREAS, the Company contributed $10.00 to the capital of the
Partnership and received a 1% general partner interest therein; and
Bertelsmeyer contributed $990.00 to the capital of the Partnership and received
a 99% limited partner interest therein; and
WHEREAS, the Company and the Partnership have heretofore
formed the Operating Partnership pursuant to the Delaware Act for the purpose
of aquiring, owning and operating the propane business and assets of the
Company (the "Business"); and
WHEREAS, the Company contributed $10.10 to the capital of the
Operating Partnership and received a 1.01% general partner interest therein;
and the Partnership contributed
<PAGE> 2
$989.90 to the capital of the Operating Partnership and received a 98.98%
limited partner interest therein;
WHEREAS, immediately prior to the consummation of the
transactions contemplated hereby, New Mexico Propane of Taos, Inc., a New
Mexico corporation, was merged into its immediate parent Heritage Propane of
New Mexico, Inc;
WHEREAS, the Company has previously formed Bi State Merger
Corp., a Delaware corporation ("BSMC"), as a wholly owned subsidiary of the
Company, and caused its subsidiary Heritage Nevada Inc., an Oklahoma
corporation, to merge into BSMC;
WHEREAS, HBSC and the Company have previously formed
Heritage-Bi State, L.L.C., a Delaware limited liability company (the "LLC")
owned 99% by the Company and 1% by HBSC;
WHEREAS, immediately prior to the consummation of the
transactions contemplated hereby, the Company has caused BSMC to merge with and
into the LLC such that the LLC is the resulting owner of the 50% general
partnership interest in Bi State Propane, a California general partnership,
previously held by Heritage Nevada, Inc.;
WHEREAS, immediately prior to the consummation of the
transactions contemplated hereby, (i) Ikard of Texas, Inc., Sawyer Gas of
Jacksonville, Inc., Heritage Propane of New Mexico, Inc., Holton's LP Gas Co.,
Northern Energy, Inc. and Carolane Propane Gas, Inc., each wholly-owned
subsidiaries of Heritage Propane Corporation, a Delaware corporation
("Heritage"), will be merged with and into Heritage, and (ii) Heritage, a
wholly-owned subsidiary of the Company, will be merged with and into the
Company, with the Company being the surviving corporation in the merger;
-2-
<PAGE> 3
WHEREAS, concurrently with the consummation of the
transactions contemplated hereby, the Company will issue $120,000,000 in
principal amount of notes to certain institutional investors in a private
placement;
WHEREAS, as of the date hereof, the Company, as general
partner, and the Partnership, as organizational limited partner, have entered
into that certain Amended and Restated Agreement of Limited Partnership of the
Operating Partnership (the "Operating Partnership Agreement"); and
WHEREAS, as of the date hereof, Bertelsmeyer, as the
organizational limited partner, and the Company, as the general partner, have
entered into that certain Amended and Restated Agreement of Limited Partnership
of the Partnership (the "Partnership Agreement");
WHEREAS, pursuant to the Operating Partnership Agreement, the
Company has agreed to contribute to the Operating Partnership, as a capital
contribution thereto, substantially all of its assets related to the Business
(including its 99% interest in the LLC (the "LLC Interest")) in exchange for
(i) the continuation of its 1.01% general partner interest in the Operating
Partnership, (ii) a limited partner interest in the Operating Partnership and
(iii) the assumption by the Operating Partnership of substantially all of the
liabilities of the Company;
WHEREAS, pursuant to the Operating Partnership Agreement, HBSC
has agreed to contribute $1,000 to the Operating Partnership as a capital
contribution thereto in exchange for a 1.01% limited partner interest in the
Operating Partnership.
WHEREAS, pursuant to the Partnership Agreement, the Company
has agreed to contribute to the Partnership, as a capital contribution thereto,
all of its limited partner interests in
-3-
<PAGE> 4
the Operating Partnership and the LLC Interest in exchange for (i) its
continued 1% general partner interest in the Partnership and (ii) Subordinated
Units;
WHEREAS, in connection with the above described contributions,
the Company has agreed to indemnify the Partnership and the Operating
Partnership from and against certain liabilities and the Operating Partnership
has agreed to indemnify the Company from and against certain liabilities;
NOW, THEREFORE, in consideration of their mutual undertakings
and agreements hereunder, the parties to this Agreement undertake and agree as
follows:
ARTICLE I
DEFINITIONS
The following capitalized terms shall have the meanings given
below.
"Agreement" means this Contribution, Conveyance and Assumption
Agreement.
"Assets" means all of the assets owned, leased or held by the
Company, as of the Effective Time, of every kind character and description,
whether tangible or intangible, whether real, personal or mixed, whether
accrued or contingent, and wherever located, including, without limitation, all
of the assets necessary to operate the Business as presently being operated by
the Company and all right, title and interest of the Company in and to the
following assets:
(a) propane inventory;
(b) storage tanks and containers, propane cylinders,
office furniture, furnishings, computers and equipment of any kind;
(c) all real property wherever located, together with all
buildings, improvements, appurtenances and fixtures of every kind or
nature located thereon;
-4-
<PAGE> 5
(d) all rights in real property or personal property
arising under leases, easements or other contracts or arrangements;
(e) all motor vehicles, trailers, tanks, railcars, and
related equipment, whether owned or leased;
(f) every contract, agreement, arrangement, grant, gift,
trust or other arrangement or understanding of any kind;
(g) any and all right, claims and causes of action that
the Company may have under warranties, insurance policies or otherwise
against any person or property, whether known or unknown, accrued or
contingent, and whether or not reflected on the books and records of
the Company as of the Effective Time, insofar as any of the same
relate to the Business prior to the Effective Time and such rights,
claims or causes of action representing reimbursement or recovery of
amounts actually paid by the Partnership or the Operating Partnership
after the Effective Time;
(h) every right to sell or distribute any product or
service;
(i) all know-how, every trade secret, every customer list
and all other confidential information of every kind;
(j) every customer relationship, employee relationship,
supplier relationship and other relationship of any kind;
(k) every business conducted prior to the Effective Time;
(l) every other proprietary right of any kind;
(m) all governmental licenses, permits and authorizations
of every kind;
-5-
<PAGE> 6
(n) all rights, benefits, privileges and appurtenances
pertaining to any of the foregoing;
excluding, however, any of such assets that constitute Excluded Assets.
"Assumed Liabilities" means all of the Company's liabilities
arising from or relating to the Assets or the Business, as of the Effective
Time, of every kind, character and description, whether known or unknown,
accrued or contingent, and whether or not reflected on the books and records of
the Company as of the Effective Time, excluding, however, any of such
liabilities that constitute Excluded Liabilities.
"BSMC" has the meaning assigned to such term in the Recitals
to this Agreement.
"Business" has the meaning assigned to such term in the
Recitals to this Agreement.
"Company" has the meaning assigned to such term in the opening
paragraph of this Agreement.
"Conveyance, Assignment and Bill of Sale" means that certain
Conveyance, Assignment and Bill of Sale, dated of even date herewith, in
recordable form from the Company to the Operating Partnership, the form of
which is attached hereto as Exhibit A.
"Delaware Act" has the meaning assigned to such term in the
Recitals to this Agreement.
"Effective Time" means 9:00 a.m. Eastern Standard Time on June
______, 1996.
"Excluded Assets" means those assets of the Company described
on Schedule 1 hereto.
"Excluded Liabilities" means all of the liabilities described
on Schedule 2 hereto.
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"Existing Indebtedness" means the indebtedness of the Company
evidenced by [Notes] in the principal amount of $120,000,000.
"HBSC" has the meaning assigned to such term in the opening
paragraph of this Agreement.
"Laws" means any and all laws, statutes, ordinances, rules or
regulations promulgated by a governmental authority, orders of a governmental
authority, judicial decisions, decisions of arbitrators or determinations of
any governmental authority or court.
"Limited Partner Interest" has the meaning assigned to such
term in Section 2.2.
"LLC" has the meaning assigned to such term in the Recitals to
this Agreement.
"LLC Interest" has the meaning assigned to such term in the
Recitals to this Agreement.
"Operating Partnership" has the meaning assigned to such term
in the opening paragraph of this Agreement.
"Operating Partnership Agreement" has the meaning assigned to
such term in the Recitals to this Agreement.
"Partnership" has the meaning assigned to such term in the
opening paragraph of this Agreement.
"Partnership Agreement" has the meaning assigned to such term
in the Recitals to this Agreement.
"Restriction" has the meaning assigned to such term in Section
8.2.
"Restriction-Asset" has the meaning assigned to such term in
Section 8.2.
"Specific Conveyances" has the meaning assigned to such term
in Section 2.3.
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<PAGE> 8
"Subordinated Units" has the meaning assigned to such term in
the Partnership Agreement.
ARTICLE II
CONTRIBUTION TO THE OPERATING PARTNERSHIP
2.1. Contribution. (a) The Company hereby grants and conveys to the
Operating Partnership, its successors and assigns, for its and their own use
forever, all right, title and interest in and to the Assets in exchange for (i)
the consideration stated in Section 2.2, (ii) the assumption of certain
liabilities by the Operating Partnership as provided in Section 4.1 and (iii)
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged and the Operating Partnership hereby accepts the Assets, as
a contribution to the capital of the Operating Partnership.
TO HAVE AND TO HOLD the Assets unto the Operating Partnership,
its successors and assigns, together with all and singular the rights and
appurtenances thereto in any wise belonging, subject, however, to the terms and
conditions stated in this Agreement, forever.
(b) HBSC hereby grants and conveys to the Operating Partnership,
its successors and assigns, $1,000 in exchange for a 1.01% limited partnership
interest in the Operating Partnership and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged and
the Operating Partnership hereby accepts the $1,000 as a contribution to the
capital of the Operating Partnership.
2.2. Consideration for Contributions. (a) In consideration for the
contribution of the Assets to the Operating Partnership by the Company, the
Operating Partnership hereby (i) continues the Company's 1.01% general partner
interest in the Operating Partnership and (ii) grants and conveys
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<PAGE> 9
to the Company a 98.98% limited partner interest in the Operating Partnership
(the "Limited Partner Interest") and (b) in consideration for the contribution
of $1,000 to the Operating Partnership by HBSC, the Operating Partnership
grants and conveys to HBSC a 1.01% limited partner interest in the Operating
Partnership.
2.3. Specific Conveyances. To further evidence this conveyance and
more fully and effectively convey record title with respect to the real
property included in the Assets, the Company has executed and delivered to the
Operating Partnership multiple counterparts of the Conveyance, Assignment and
Bill of Sale substantially in the form attached hereto as Exhibit A (the
"Specific Conveyances"). The Specific Conveyances shall evidence and perfect
the sale and contribution made by this Agreement and shall not constitute a
second conveyance of the Assets or interests therein. The Specific Conveyances
are not intended to modify, and shall not modify, any of the terms, covenants
and conditions herein set forth and are not intended to create, and shall not
create, any additional covenants or warranties of or by the Company.
ARTICLE III
CONTRIBUTION TO THE PARTNERSHIP
3.1 Contribution. (a) The Company hereby grants and conveys to the
Partnership, its successors and assigns, for its and their own use forever, all
right, title and interest of the Company in and to the Limited Partner Interest
and the LLC Interest in exchange for (i) the consideration stated in Section
3.2, and (ii) other good and valuable consideration, the sufficiency of which
is hereby acknowledged and the Partnership hereby accepts the Limited Partner
Interest and the LLC Interest, as a contribution to the capital of the
Partnership.
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<PAGE> 10
TO HAVE AND TO HOLD the Limited Partner Interest and the LLC
Interest unto the Partnership, its successors and assigns, together with all
and singular the rights and appurtenances thereto in anywise belonging,
subject, however, to the terms and conditions stated in this Agreement,
forever.
3.2 Consideration for Contribution. In consideration for the
contribution made pursuant to Section 3.1, the Partnership hereby (i) continues
the Company's 1% general partner interest in the Partnership and (ii) issues,
grants and conveys to the Company 3,702,943 Subordinated Units.
ARTICLE IV
ASSUMPTION OF CERTAIN LIABILITIES
4.1. Assumption of Certain Liabilities by the Operating Partnership.
In connection with the contribution and transfer of the Assets to the Operating
Partnership by the Company, the Operating Partnership hereby assumes and agrees
to duly and timely pay, perform and discharge the Assumed Liabilities,
including the payment obligations of the Company with respect to the Existing
Indebtedness, to the full extent that the Company has been heretofore or would
have been in the future were it not for the execution and delivery of this
Agreement obligated to pay, perform and discharge the Assumed Liabilities;
provided, however, that said assumption and agreement to duly and timely pay,
perform and discharge the Assumed Obligations shall not increase the obligation
of the Operating Partnership with respect to the Assumed Liabilities beyond
that of the Company, waive any valid defense that was available to the Company
with respect to the Assumed Liabilities or enlarge any rights or remedies of
any third party under any of the Assumed Liabilities.
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<PAGE> 11
ARTICLE V
INDEMNIFICATION
5.1. Indemnification With Respect to Excluded Liabilities. The
Company shall indemnify, defend and hold harmless the Partnership, the
Operating Partnership and their respective successors and assigns from and
against any and all claims, demands, costs, liabilities and expenses (including
court costs and reasonable attorneys' fees) of every kind, character and
description, whether known or unknown, accrued or contingent, and whether or
not reflected on the books and records of the Company as of the Effective
Time, arising from or relating to the Excluded Liabilities.
5.2. Indemnification With Respect to Operations Prior to the
Effective Time. The Company shall indemnify, defend and hold harmless the
Partnership, the Operating Partnership and their respective successors and
assigns from and against any and all claims, demands, costs and expenses
(including court costs and reasonable attorneys fees) of every kind, character
and description, whether known or unknown, accrued or contingent, and whether
or not reflected on the books and records of the Company as of the Effective
Time, arising from or relating to the operation of the Assets or the Business
conducted with the Assets prior to the Effective Time, other than any such
claims, demands, costs, liabilities and expenses arising from or relating to a
change in Laws after the Effective Time; provided, however, that
notwithstanding the foregoing, the Company shall not be required to indemnify,
defend and hold harmless the Partnership, the Operating Partnership and their
respective successors and assigns to the extent that any of the foregoing
claims, demands, costs, liabilities and expenses are recovered through
insurance proceeds paid to the owner of the Assets.
5.3. Indemnification With Respect to Assumed Liabilities. Except as
set forth in Section 5.2, the Operating Partnership shall indemnify, defend and
hold harmless the Company, its
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<PAGE> 12
successors and assigns from and against any and all claims, demands, costs,
liabilities and expenses (including court costs and reasonable attorneys' fees)
of every kind, character and description, whether known or unknown, accrued or
contingent, and whether or not reflected on the books and records of the
Company as of the Effective Time, arising from or relating to the Assumed
Liabilities.
5.4. Indemnification With Respect to Existing Indebtedness. The
Operating Partnership shall indemnify, defend and hold harmless the Company,
its successors and assigns from and against any and all claims, demands, costs,
liabilities and expenses (including court costs and reasonable attorneys' fees)
of every kind, character and description, whether known or unknown, accrued or
contingent, and whether or not reflected on the books and records of the
Company as of the Effective Time, arising from or relating to the liabilities
and outstanding indebtedness of the Company under the Existing Indebtedness.
ARTICLE VI
TITLE MATTERS
6.1. Encumbrances. The contribution of the Assets made under
Section 2.1 is made expressly subject to all recorded and unrecorded liens,
encumbrances, agreements, defects, restrictions, adverse claims and all laws,
rules, regulations, ordinances, judgments and orders of governmental
authorities or tribunals having or asserting jurisdiction over the Assets or
the Business and operations conducted thereon or therewith, in each case to the
extent the same are valid, enforceable and affect the Assets, including,
without limitation, all matters that a current survey or visual inspection of
the Assets would reflect, and to the Assumed Liabilities.
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<PAGE> 13
6.2. Disclaimer of Warranties; Subrogation; Waiver of Bulk Sales
Laws.
(a) THE COMPANY IS CONVEYING THE ASSETS "AS IS" WITHOUT
REPRESENTATION OR WARRANTY, WHETHER EXPRESS, IMPLIED OR STATUTORY (ALL
OF WHICH THE COMPANY HEREBY DISCLAIMS), AS TO (i) TITLE, (ii) FITNESS
FOR ANY PARTICULAR PURPOSE OR MERCHANTABILITY OR DESIGN OR QUALITY, OR
(iii) ANY OTHER MATTER WHATSOEVER. THE PROVISIONS OF THIS SECTION 6.2
HAVE BEEN NEGOTIATED BY THE OPERATING PARTNERSHIP AND THE COMPANY
AFTER DUE CONSIDERATION AND ARE INTENDED TO BE A COMPLETE EXCLUSION
AND NEGATION OF ANY REPRESENTATIONS OR WARRANTIES OF THE COMPANY,
WHETHER EXPRESS, IMPLIED OR STATUTORY, WITH RESPECT TO THE ASSETS THAT
MAY ARISE PURSUANT TO ANY LAW NOW OR HEREAFTER IN EFFECT, OR
OTHERWISE, EXCEPT AS EXPRESSLY SET FORTH HEREIN.
(b) The contribution of the Assets made under Section 2.1
is made with full rights of substitution and subrogation of the
Operating Partnership, and all persons claiming by, through and under
the Operating Partnership, to the extent assignable, in and to all
covenants and warranties by the predecessors-in-title of the Company,
and with full subrogation of all rights accruing under applicable
statutes of limitation and all rights of action of warranty against
all former owners of the Assets.
(c) The Company and the Operating Partnership agree that
the disclaimers contained in this Section 6.2 are "conspicuous"
disclaimers. Any covenants implied by statute or law by the use of
the words "grant," "convey," "bargain," "sell," "assign,"
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<PAGE> 14
"transfer," "deliver," or "set over" or any of them or any other
words used in this Agreement are hereby expressly disclaimed, waived
and negated.
(d) Each of the parties hereto hereby waives compliance
with any applicable bulk sales law or any similar law in any
applicable jurisdiction in respect of the transactions contemplated by
this Agreement.
ARTICLE VII
FURTHER ASSURANCES
7.1. Company Assurances. From time to time after the date hereof,
and without any further consideration, the Company shall execute, acknowledge
and deliver all such additional deeds, assignments, conveyances, instruments,
notice releases, acquittances and other documents, and will do all such other
acts and things, all in accordance with applicable law, as may be necessary or
appropriate more fully to assure the Operating Partnership, its successors and
assigns, all of the properties, rights, titles, interests, estates, remedies,
powers and privileges by this Agreement granted to the Operating Partnership or
intended so to be and to more fully and effectively carry out the purposes and
intent of this Agreement.
7.2. Partnership and Operating Partnership Assurances. From time to
time after the date hereof, and without any further consideration, the
Partnership and the Operating Partnership shall execute, acknowledge and
deliver all such additional instruments, notices and other documents, and will
do all such other acts and things, all in accordance with applicable law, as
may be necessary or appropriate to more fully and effectively carry out the
purposes and intent of this Agreement.
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<PAGE> 15
ARTICLE VIII
POWER OF ATTORNEY
The Company hereby constitutes and appoints the Operating Partnership,
its successors and assigns, its true and lawful attorney-in-fact with full
power of substitution for it and in its name, place and stead or otherwise on
behalf of the Company, its successors and assigns, and for the benefit of the
Operating Partnership, its successors and assigns, to demand and receive from
time to time the Assets and to execute in the name of the Company and its
successors and assigns instruments of conveyance, instruments of further
assurance and to give receipts and releases in respect of the same, and from
time to time to institute and prosecute in the name of the Operating
Partnership or the Company for the benefit of the Operating Partnership, as may
be appropriate, any and all proceedings at law, in equity or otherwise which
the Operating Partnership, its successors and assigns may deem proper in order
to collect, assert or enforce any claims, rights or titles of any kind in and
to the Assets, and to defend and compromise any and all actions, suits or
proceedings in respect of any of the Assets and to do any and all such acts and
things in furtherance of this Agreement as the Operating Partnership, its
successors or assigns shall deem advisable. The Company hereby declares that
the appointment hereby made and the powers hereby granted are coupled with an
interest and are and shall be irrevocable and perpetual and shall not be
terminated by any act of the Company, its successors or assigns or by operation
of law.
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<PAGE> 16
ARTICLE IX
MISCELLANEOUS
9.1. Order of Completion of Transactions; Effective Time.
(a) The transactions provided for in Articles II and III
of this Agreement shall be completed on the date of this Agreement in
the following order:
First, the transactions provided for in Article II shall be
completed; and
Second, following the completion of the transactions as
provided in first above the transactions provided for in Article III
shall be completed.
(b) The contribution of the Assets to the Operating
Partnership shall be effective for all purposes as of the Effective
Time.
9.2. Consents; Restriction on Assignment. If there are prohibitions
against or conditions to the conveyance of one or more portions of the Assets
without the prior written consent of third parties, including, without
limitation, governmental agencies (other than consents of a ministerial nature
which are normally granted in the ordinary course of business), which if not
satisfied would result in a breach of such prohibitions or conditions or would
give an outside party the right to terminate the Operating Partnership's rights
with respect to such portion of the Assets (herein called a "Restriction"),
then any provision contained in this Agreement to the contrary notwithstanding,
the transfer of title to or interest in each such portion of the Assets (herein
called the "Restriction-Asset") pursuant to this Agreement shall not become
effective unless and until such Restriction is satisfied, waived or no longer
applies. When and if such a Restriction is so satisfied, waived or no longer
applies, to the extent permitted by applicable law and any applicable
contractual provisions, the assignment of the Restriction-Asset subject thereto
shall become effective automatically as of
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<PAGE> 17
the Effective Time, without further action on the part of the Operating
Partnership or the Company. The Company and the Operating Partnership agree to
use their best efforts to obtain satisfaction of any Restriction on a timely
basis. The description of any portion of the Assets as a "Restriction-Asset"
shall not be construed as an admission that any Restriction exists with respect
to the transfer of such portion of the Assets. In the event that any
Restriction-Asset exists, the Company agrees to hold such Restriction-Asset in
trust for the exclusive benefit of the Operating Partnership and to otherwise
use its best efforts to provide the Operating Partnership with the benefits
thereof, and the Company will enter into other agreements, or take such other
action as it deems necessary, in order to help ensure that the Operating
Partnership has the assets and concomitant rights necessary to enable it to
operate the Assets contributed to the Operating Partnership in all material
respects as they were operated prior to the Effective Time.
9.3. Costs. The Operating Partnership shall pay all sales, use and
similar taxes arising out of the contributions, conveyances and deliveries to
be made hereunder, and shall pay all documentary, filing, recording, transfer,
deed, and conveyance taxes and fees required in connection therewith. In
addition, the Operating Partnership shall be responsible for all costs,
liabilities and expenses (including court costs and reasonable attorneys' fees)
incurred in connection with the satisfaction or waiver of any Restriction
pursuant to Section 9.2.
9.4. Headings: References: Interpretation. All Article and Section
headings in this Agreement are for convenience only and shall not be deemed to
control or affect the meaning or construction of any of the provisions hereof.
The words "hereof," "herein" and "hereunder" and words of similar import, when
used in this Agreement, shall refer to this Agreement as a whole, including,
without limitation, all Schedules and Exhibits attached hereto, and not to any
particular
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<PAGE> 18
provision of this Agreement. All references herein to Articles, Sections,
Schedules and Exhibits shall, unless the context requires a different
construction, be deemed to be references to the Articles and Sections of this
Agreement and the Schedules and Exhibits attached hereto, and all such
Schedules and Exhibits attached hereto are hereby incorporated herein and made
a part hereof for all purposes. All personal pronouns used in this Agreement,
whether used in the masculine, feminine or neuter gender, shall include all
other genders, and the singular shall include the plural and vice versa. The
use herein of the word "including" following any general statement, term or
matter shall not be construed to limit such statement, term or matter to the
specific items or matters set forth immediately following such word or to
similar items or matters, whether or not non-limiting language (such as
"without limitation," "but not limited to," or words of similar import) is used
with reference thereto, but rather shall be deemed to refer to all other items
or matters that could reasonably fall within the broadest possible scope of
such general statement, term or matter.
9.5. Successors and Assigns. The Agreement shall be binding upon
and inure to the benefit of the parties signatory hereto and their respective
successors and assigns.
9.6. No Third Party Rights. The provisions of this Agreement are
intended to bind the parties signatory hereto as to each other and are not
intended to and do not create rights in any other person or confer upon any
other person any benefits, rights or remedies and no person is or is intended
to be a third party beneficiary of any of the provisions of this Agreement.
9.7. Counterparts. This Agreement may be executed in any number of
counterparts, all of which together shall constitute one agreement binding on
the parties hereto.
9.8. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Oklahoma applicable to
contracts made and to be performed wholly
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<PAGE> 19
within such state without giving effect to conflict of law principles thereof,
except to the extent that it is mandatory that the law of some other
jurisdiction, wherein the Assets are located, shall apply.
9.9. Severability. If any of the provisions of this Agreement are
held by any court of competent jurisdiction to contravene, or to be invalid
under, the laws of any political body having jurisdiction over the subject
matter hereof, such contravention or invalidity shall not invalidate the entire
Agreement. Instead, this Agreement shall be construed as if it did not contain
the particular provision or provisions held to be invalid, and an equitable
adjustment shall be made and necessary provision added so as to give effect to
the intention of the parties as expressed in this Agreement at the time of
execution of this Agreement.
9.10. Deed; Bill of Sale; Assignment. To the extent required by
applicable law, this Agreement shall also constitute a "deed," "bill of sale"
or "assignment" of the Assets.
9.11. Amendment or Modification. This Agreement may be amended or
modified from time to time only by the written agreement of all the parties
hereto. Each such instrument shall be reduced to writing and shall be
designated on its face an "Amendment" to this Agreement.
9.12 Integration. This Agreement supersedes all previous
understandings or agreements between the parties, whether oral or written, with
respect to its subject matter. This document is an integrated agreement which
contains the entire understanding of the parties. No understanding,
representation, promise or agreement, whether oral or written, is intended to
be or shall be included in or form part of this Agreement unless it is
contained in a written amendment hereto executed by the parties hereto after
the date of this Agreement.
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<PAGE> 20
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereto as of the date first above written.
HERITAGE HOLDINGS, INC.
By:_____________________________________
Name:__________________________________
_
Title:__________________________________
HERITAGE OPERATING, L.P.
By: Heritage Holdings, Inc.,
as general partner
By:_______________________________
HERITAGE PROPANE PARTNERS, L.P.
By: Heritage Holdings, Inc.,
as general partner
By:_______________________________
HERITAGE-BI STATE CORP.
By:_____________________________________
Name:__________________________________
_
Title:__________________________________
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EXHIBIT 21.1
SUBSIDIARIES
1. Heritage Operating, L.P., a Delaware limited partnership, which will
do business under the following names:
o Balgas
o Carolane Propane Gas
o Fairway Propane
o Gas Service Co.
o Greer Gas Co.
o Harris Propane Gas
o Heritage Propane Corporation
o Holton's L.P. Gas
o Ikard & Newsom
o Jerry's Propane Service, Inc.
o Meyers Propane Service
o New Mexico Propane of Taos
o Northern Energy
o Northwestern Propane
o Sawyer Gas
o Wakulla L.P.G.
<PAGE> 2
2. Heritage--Bi State, L.L.C., a Delaware limited liability
company, which will do business under the following name:
o Bi-State Propane
3. Heritage Service Corp., a Delaware corporation, which will do business
under the following names:
o M-P Oils Ltd.
o M-P Oils Partnership
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<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made part of this
registration statement. We also consent to the application of our report on the
Company's audited financial statements for the periods indicated therein to the
additional tables labeled "Summary Historical and Pro Forma Financial and
Operating Data" and "Selected Historical and Pro Forma Financial and Operating
Data" included herein.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
June 4, 1996
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made part of this
registration statement.
TURLINGTON AND COMPANY, L.L.P.
June 4, 1996
<PAGE> 1
EXHIBIT 23.5
As an independent Public Accountant, I hereby consent to the use of my reports
(and to all references to my firm) included in or made part of this
Registration Statement.
DAVID R. GARGANO CPA, P.C.
June 4, 1996
