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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________
Commission File Number 1-11727
HERITAGE PROPANE PARTNERS, L.P.
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(Exact name of registrants as specified in its charter)
Delaware 73-1493906
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8801 S. Yale Avenue, Suite 310, Tulsa, Oklahoma 74137
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (918) 492-7272
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of class which registered
Common Units New York Stock Exchange
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Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value as of November 19, 1996, of the registrant's Common
Units held by nonaffiliates of the registrant, based on the reported closing
price of such units on the New York Stock Exchange on such date, was
approximately $88,646,000.
At November 19, 1996, the registrant had units outstanding as follows:
Heritage Propane Partners, L.P. 4,285,000 Common Units
3,702,943 Subordinated Units
Documents Incorporated by Reference: None
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HERITAGE PROPANE PARTNERS, L.P.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PAGE
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PART I
<S> <C> <C>
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . 10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND RELATED
UNITHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM 6. SELECTED HISTORICAL FINANCIAL AND OPERATING DATA . . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
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PART I
ITEM 1. BUSINESS.
BUSINESS OF HERITAGE PROPANE PARTNERS, L.P.
Heritage Propane Partners, L.P. (the "Master Limited Partnership") or the
"MLP"), a publicly traded Delaware limited partnership, was formed in April of
1996. The MLP's activities are conducted through its subsidiary, Heritage
Operating, L.P. (the "Operating Partnership" or the "OLP"). The MLP, with a
99% limited partner interest, is the sole limited partner of the Operating
Partnership. The MLP and the OLP are together referred to herein as the
"Partnership". The Operating Partnership accounts for nearly all of the MLP's
consolidated assets, sales and operating earnings. The MLP's consolidated
earnings also reflect interest expense related to $120 million of 8.55% Senior
Secured Notes issued by the MLP in June, 1996.
BUSINESS OF HERITAGE OPERATING, L.P.
The Operating Partnership, a Delaware limited partnership, was formed in
April of 1996, to acquire, own and operate the propane business and assets of
Heritage Holdings, Inc. (the "Company", "Heritage", and "General Partner").
The Company has retained a 1% general partner interest in the MLP and also
holds a 1.0101% general partner interest in the Operating Partnership,
representing a 2% general partner interest in the Partnership on a combined
basis. As General Partner of the Partnership, the Company performs all
management functions required for the Partnership.
GENERAL
The Partnership is a Delaware limited partnership formed to acquire, own
and operate the propane business and assets of Heritage. Heritage serves as
the general partner of the Partnership. The Partnership believes it is the
sixth largest retail marketer of propane in the United States, serving more
than 180,000 active residential, commercial, industrial and agricultural
customers from 122 district locations in 17 states. The Partnership's
operations are concentrated in large part in the western and southeastern
regions of the United States.
The business of the Partnership, starting with the formation of Heritage
in 1989, has grown primarily through acquisitions of retail propane operations
and, to a lesser extent, through internal growth. Through August 31, 1996, 33
acquisitions had been completed for an aggregate purchase price of
approximately $164 million. Volumes of propane sold to retail customers almost
doubled from 63.2 million gallons for the fiscal year ended August 31, 1992 to
118.2 million gallons for the fiscal year ended August 31, 1996. Since August
31, 1996, the Partnership has acquired two more propane companies and has
signed a letter of intent to acquire one additional propane company.
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 by Heritage 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.
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BUSINESS STRATEGY
The Partnership's strategy is to expand its operations and increase its
retail market share in order to increase the funds available for distribution
to its Unitholders. 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 from the seller's viewpoint.
Through August 31, 1996, 33 acquisitions had been completed for an
aggregate purchase price of approximately $164 million. The Partnership has
completed two additional acquisitions since that time and has executed a letter
of intent with one additional company. Of these 36 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.
In order to facilitate the Partnership's acquisition strategy, the
Operating Partnership entered into the Bank Credit Facility. The Bank Credit
Facility consists of the $25.0 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 also has 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
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believes that its rates of internal growth 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 806 full-time employees as of August 31, 1996,
only 36, or approximately 4%, were general and administrative. In addition,
the Partnership 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:
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1990 1991 1992 1993 1994 1995 1996
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<S> <C> <C> <C> <C> <C> <C> <C>
Retail Propane Gallons 37.5 48.2 63.2 73.4 79.7 98.3 118.2
Sold (in millions)
</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. 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,
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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 diversity of 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-a-day, 7-days-a-week for emergency
repairs and deliveries.
The wholesale propane business is highly competitive. For fiscal year
1996, the Partnership's domestic wholesale operations (excluding M-P Oils
Partnership) accounted for 16% 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.
PRODUCTS, SERVICES AND MARKETING
The Partnership distributes propane through a nationwide retail
distribution network consisting of 122 district locations in 17 states. The
Partnership's operations are concentrated in large part in the western and
southeastern regions of the United States. The Partnership serves more than
180,000 active customers. Historically, approximately two-thirds 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
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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 typically
have an average capacity of approximately 10,500 gallons. End users receiving
transport deliveries include industrial customers, large-scale heating
accounts, mining 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 84%
of the domestic gallons sold by the Partnership in fiscal 1996 were to retail
customers and approximately 16% were to wholesale customers. Of the retail
gallons sold by the Partnership in fiscal 1996, 54% were to residential
customers, 27% were to industrial, commercial and agricultural customers, and
19% were to all other retail users. Sales to residential customers in fiscal
1996 accounted for 45% of total gallons sold but 67% 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 20% of the
Partnership's gross profit from propane sales for fiscal year 1996, with all
other retail users accounting for 11%. 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 1996.
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 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,
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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 1996 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, but none contain "take or pay" provisions. 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, 1996, Warren Petroleum
Company ("Warren"), a division of Chevron USA, provided approximately 29% 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, 1996. 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 1996 the Partnership purchased approximately 75% 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 1992, the Partnership and its predecessor
have 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 purchasing advantages as they may occur from time to
time. Access to storage facilities allows the Partnership to buy and store
large
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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 subject to periodic review by the internal audit staff as
well as sent to the accounting offices of the Partnership in Helena, Montana
each month.
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.
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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 all 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 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 August 31, 1996, the Partnership had 806 full time employees, of
whom 36 were general and administrative and 723 were operational employees.
None of the Partnership's employees 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.
ITEM 2. PROPERTIES.
The Partnership operates bulk storage facilities at 122 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 1996, 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).
-8-
<PAGE> 11
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 liquified state. As of August 31, 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 340 bobtail
and approximately 575 other delivery and service vehicles, all of which are
owned by the Partnership. As of August 31, 1996, the Partnership owned
approximately 150,000 customer storage tanks with typical capacities of 120 to
1,000 gallons. These customer storage tanks are collateral to secure the
obligations of the Partnership under its borrowings from its banks and
noteholders.
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 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.
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.
ITEM 3. LEGAL PROCEEDINGS.
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.
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.
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<PAGE> 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders of the
Partnership during the fiscal year ended August 31, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND RELATED
UNITHOLDER MATTERS.
The common units representing limited partners interests ("Common Units")
are listed on the New York Stock Exchange, which is the principal trading
market for such securities, under the symbol "HPG". The following table sets
forth, for the fourth quarter ended August 31, 1996, the high and low sales
prices per Common Unit, as reported on the New York Stock Exchange Composite
Tape.
<TABLE>
<CAPTION>
Price Range Cash
High Low Distribution
<S> <C> <C> <C>
1996 Fiscal Year
Fourth Quarter Ended
August 31, 1996 $20.625 $19.875 $-0-
</TABLE>
As of November 27, 1996, there were approximately 170 record holders of the
Partnership's Common Units. The Partnership also has Subordinated Units, all
of which are held by the General Partner for which there is no established
public trading market. The Partnership will distribute to its partners on a
quarterly basis, all of its Available Cash in the manner described herein.
Available Cash 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 are 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.
Available Cash is more fully defined in the Amended and Restated Agreement of
Limited Partnership of Heritage Propane Partners, L.P. filed as an exhibit to
this Report. The Partnership made a cash distribution on October 15, 1996 in
respect to its Common Units and its Subordinated Units for the partial quarter
ended August 31, 1996 in the amount of $2.82 million. This represented $.353
per Unit. The Partnership Agreement defines Minimum Quarterly Distributions as
50c. per Unit for each full fiscal quarter. Distributions of Available Cash to
the holder of the Subordinated Units are subject to the prior rights of the
holders of the Common Units to receive Minimum Quarterly Distributions for each
quarter during the subordination period, and to receive any arrearages in the
distribution of Minimum Quarterly Distributions on the Common Units for prior
quarters during the subordination period. The subordination period will not
end earlier than June 1, 2001. Restrictions on the Partnership's distributions
required by Item 5 is incorporated herein by reference to Note 8 of the
Partnership's Consolidated Financial Statements which begin on page F-1 of this
Report, and to Management's Discussion and Analysis of Financial Condition and
Results of Operations - Description of Indebtedness.
ITEM 6. SELECTED HISTORICAL 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. The
historical balance sheet data for the two years ended August 31, 1996 and 1995,
respectively, and the statement of operations and operating data as of August
31, 1996, 1995 and 1994, respectively, have been derived from the financial
statements appearing elsewhere herein which have been audited by Arthur
Andersen LLP, independent public accountants. The selected historical balance
sheet data as of August 31, 1993 has been derived from Heritage's audited
financial
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<PAGE> 13
statements not included herein. The selected historical balance sheet data as
of August 31, 1992 and statement of operations and operating data for the year
ended August 31, 1992 has been derived from Heritage's unaudited financial
statements, not included herein. 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 amounts in the table below, except
per Unit data, are in thousands.
<TABLE>
<CAPTION>
Year Ended August 31,
Year Ended
August 31, 1996
1992(e) 1993(e) 1994(e) 1995(e) 10 mos.(e) 2 mos.
---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenues . . . . . . . . . . . . . . $ 97,209 $102,291 $103,971 $131,508 $144,623 $ 18,477
Gross profit(a) . . . . . . . . . . . . 41,014 45,596 48,601 55,841 55,634 6,314
Depreciation and amortization . . . . . . 7,411 8,288 8,711 8,896 7,581 1,733
Operating income . . . . . . . . . . . . 7,383 8,669 9,905 12,675 15,755 (1,956)
Interest expense . . . . . . . . . . . . 8,759 8,786 8,761 12,201 10,833 1,962
Provision (benefit) for income taxes . . (440) 117 668 666 2,735 --
Income (loss) before income taxes
and extraordinary items . . . . . . (1,063) (604) 1,296 759 6,084 (4,087)
Net income (loss) . . . . . . . . . . . (1,084) (721) 315 (211) 2,921 (8,423)
Net loss per Unit(b) . . . . . . . . . . . . . (1.06)
August 31,
1992(e) 1993(e) 1994(e) 1995(e) 1996
Balance Sheet Data (end of period)
Current assets . . . . . . . . . . . $ 16,572 $ 16,924 $ 17,134 $ 21,293 $ 24,014
Total assets . . . . . . . . . . . . . 116,123 121,557 118,330 163,423 187,850
Current liabilities . . . . . . . . . . 17,344 18,734 19,646 35,825 24,728
Long-term debt . . . . . . . . . . . . 82,354 86,532 81,373 103,412 132,521
Redeemable preferred stock . . . . . . 10,555 11,167 11,737 12,337 --
Stockholders' deficit . . . . . . . . . (5,153) (6,232) (6,301) (6,975) --
Partner's capital - General Partner . . . . . . 307
Partner's capital - Limited Partner . . . . . . 30,294
Year Ended August 31,
1992(e) 1993(e) 1994(e) 1995(e) 1996(f)
Operating Data
EBITDA(c) . . . . . . . . . . . . . . $ 14,794 $ 16,957 $ 18,616 $ 21,672 $ 24,365
Capital expenditures(d):
Maintenance and growth . . . . . . . . 3,625 3,802 6,194 8,634 7,244
Acquisition . . . . . . . . . . . . . . 3,648 8,149 -- 27,879 16,665
Retail propane gallons sold . . . . . . 63,177 73,422 79,669 98,318 118,200
</TABLE>
______________________
(a) Gross profit is computed by reducing total revenues by the direct cost
of the products sold.
(b) Net loss per Unit is computed by dividing the limited partners'
interest in net loss by the limited partners' weighted average number
of Units outstanding.
(c) EBITDA is defined as operating income plus depreciation and
amortization (including the EBITDA of investees). EBITDA should not
be considered as
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<PAGE> 14
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.
(d) 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.
(e) Information for the Partnership's predecessor, Heritage Holdings, Inc.
(f) Reflects unaudited pro forma information for the Partnership as if the
Partnership formation had occurred as of the beginning of the period
presented.
ITEM 7. 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 Financial and Operating Data and notes
thereto, and the historical financial statements and notes thereto included
elsewhere herein.
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, 1996, Heritage and the Partnership
completed 33 acquisitions for an aggregate purchase price of approximately $164
million. The Partnership is engaged in the sale, distribution and marketing of
propane and other related products. The Partnership's revenue is derived
primarily from the retail propane marketing business. The General Partner
believes the Partnership is the sixth largest retail marketer of propane in the
United States, based on retail gallons sold, serving more than 180,000
residential, industrial/commercial and agricultural customers in 17 states
through 122 retail outlets. Annual retail propane sales volumes were 118.2
million. 98.3 million and 79.7 million gallons for the fiscal years ended
August 31, 1996, 1995 and 1994, respectively.
The retail propane business of the Partnership consists principally of
transporting propane purchased in the contract and spot markets, primarily from
major oil companies, to its retail distribution outlets and then to tanks
located on the customers' premises, as well as to portable propane cylinders.
In the residential and commercial markets, propane is primarily used for space
heating, water heating and cooking. In the agricultural market, propane is
primarily used for crop drying, tobacco curing, poultry brooding and weed
control. In addition, propane is used for certain industrial applications,
including use as an engine fuel which is burned in internal combustion engines
that power vehicles and forklifts and as a heating or energy source in
manufacturing and mining processes.
The retail propane distribution business is largely seasonal due to
propane's use as a heating source in residential and commercial buildings.
Historically, approximately two-thirds of the Partnership's retail propane
volume and in excess of 80% of the Partnership's EBITDA is attributable to
sales during
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<PAGE> 15
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.
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 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, significant 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 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.
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 geological 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 1995 and 1996, the
Partnership consummated seven and eight acquisitions for total purchase prices
of $39.6 million and $22.0 million, respectively. 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.
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<PAGE> 16
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
The following table provides gallons and certain financial information
for Heritage Propane Partners, L.P.
HERITAGE PROPANE PARTNERS, L.P.
(IN THOUSANDS, EXCEPT AVERAGE SELLING PRICE)
<TABLE>
<CAPTION>
Pro Forma
September 1, 1995 September 1, 1994
to August 31, to August 31,
1996 (a) 1995
----------------- ------------------
<S> <C> <C>
Gallons sold:
Retail 118,200 98,300
Wholesale 120,500 93,400
------- -------
238,700 191,700
======== =======
Revenues:
Retail $102,588 $ 86,142
Wholesale 45,557 31,114
Other 14,955 14,252
-------- --------
$163,100 $131,508
======== ========
Average selling price
per gallon:
Retail $ .87 $ .88
Wholesale $ .38 $ .33
Gross profit(b) $ 61,948 $ 55,841
EBITDA(c) $ 24,365 $ 21,672
Operating income $ 14,042 $ 12,675
</TABLE>
___________________________
(a) Reflects unaudited pro forma information for the Partnership as if the
Partnership formation had occurred as of the beginning of the period
presented.
(b) Revenues less related cost of sales.
(c) EBITDA (earnings before interest, taxes, depreciation and
amortization) 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).
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Volume. During fiscal 1996, the Partnership sold 118.2 million retail
gallons, an increase of 19.9 million retail gallons or 20.2% from the 98.3
million gallons sold in fiscal 1995. Approximately half of this increase
resulted from eight acquisitions completed after August 31, 1995, plus a full
12 months of the acquisitions completed in fiscal 1995, with internal growth
and colder weather responsible for the remaining increase.
The Partnership also sold 120.5 million wholesale gallons in fiscal 1996, a
29.0% increase from the 93.4 million wholesale gallons sold in fiscal 1995.
The increase in wholesale volumes was attributable to increased sales by M-P
Oils Partnership in Canada.
Revenues. Total revenues increased $31.6 million or 24.0% to $163.1
million for fiscal 1996, as compared to $131.5 million for fiscal 1995.
Approximately
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<PAGE> 17
$14.5 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, colder weather and internal growth.
Domestic revenues increased $16.6 million or 15.0% to $127.4 million for fiscal
1996, as compared to $110.8 million for fiscal 1995. Foreign revenues
increased $15.0 million or 72.5% to $35.7 million for fiscal 1996, as compared
to $20.7 million for fiscal 1995.
Cost of Sales. Total cost of sales increased $25.5 million or 33.7% to
$101.2 million for fiscal 1996, as compared to $75.7 million for fiscal 1995.
Approximately $10.8 million of the increase in cost of sales was attributable
to wholesale activity. The actual cost of propane on a per gallon basis
increased approximately $0.05 per gallon domestically in fiscal 1996,
accounting for $5.4 million of the total increase. The remaining increase in
cost of sales was attributable to higher retail volumes resulting from
acquisitions, internal growth and colder weather. Domestic cost of sales
increased $10.8 million or 19.4% to $66.6 million for fiscal 1996, as compared
to $55.8 million for fiscal 1995. Foreign cost of sales increased $14.7
million or 73.9% to $34.6 million for fiscal 1996, as compared to $19.9 million
for fiscal 1995.
Gross Profit. Gross profit increased $6.1 million or 10.9% to $61.9
million for fiscal 1996, as compared to $55.8 million for fiscal 1995. This
increase was attributable to acquisition-related volumes, internal growth and
colder weather partially offset by a decrease in gross profit per retail gallon
resulting from competitive pressures.
Operating Expenses. Operating expenses increased $3.6 million or 11.5% to
$35.0 million in fiscal 1996, as compared to $31.4 million in fiscal 1995.
About two-thirds of this increase was attributable to higher volumes resulting
from acquisitions, with the balance due to higher volumes generated by internal
growth and colder weather 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 $1.0 million
or $34.5% from $2.9 million in fiscal 1995 to $3.9 million in fiscal 1996.
This increase was largely attributable to expenses associated with
acquisitions.
Depreciation and Amortization. Depreciation and amortization increased
approximately $0.2 million or 2.0% to $9.1 million for fiscal 1996 as compared
to $8.9 million for fiscal 1995. This increase was attributable to additional
depreciation and amortization associated with acquisitions offset by a
reduction in amortization associated with the expiration of certain non-compete
agreements.
Operating Income. Operating income increased $1.1 million or 8.7% to $13.8
million in fiscal 1996 from $12.7 million in fiscal 1995. This increase was
primarily due to acquisition-related volumes, partially offset by lower
margins. Domestic operating income increased $1.1 million or 9.0% to $13.5
million for fiscal 1996, as compared to $12.4 million for fiscal 1995. Foreign
operating income increased $0.2 million.
Net Income. The Partnership posted a net loss of $5.5 million for fiscal
1996, as compared to net loss of $0.2 million in fiscal 1995. This increase in
net loss was primarily the result of certain transactions associated with the
initial public offering plus an increase in interest expense of $0.8 million in
fiscal 1996, partially offset by an increase in operating income of
approximately $1.4 million.
EBITDA. EBITDA increased $2.7 million or 12.4%, to $24.4 million for
fiscal 1996, as compared to $21.7 million for fiscal 1995. This increase was
primarily due to an increase in volumes attributable to acquisitions, colder
weather and internal growth, partially offset by a decline in gross margins.
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<PAGE> 18
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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<PAGE> 19
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 to 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.
LIQUIDITY AND CAPITAL RESOURCES
The statements contained herein are based on current expectations. These
statements are forward looking and actual results may differ materially.
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 various sources as follows:
a) increases in working capital will be financed on the working capital
line of credit and repaid from subsequent seasonal reductions in
inventory and accounts receivable
b) payment of interest costs, and other debt services, will be provided
by annual cash flow from operations
c) required maintenance capital, predominantly vehicle replacement, will
also be provided by the annual cash flow from operation
d) growth capital mainly for customer tanks, expended will be financed by
the revolving acquisition bank line of credit
e) acquisition capital expenditures will be financed with additional
indebtedness on the revolving acquisition bank line of credit, issues
of additional Common Units or a combination thereof.
For the fiscal year ending August 31, 1997 the General Partner believes
that the Partnership will have sufficient funds to meet its obligations and
enable it to distribute the Minimum Quarterly Distribution($0.50 per Unit) on
all Common Units and Subordinated Units.
-17-
<PAGE> 20
Operating Activities. Cash provided by operating activities increased
during fiscal 1996 to $12.3 million from $7.6 million in the prior year. The
cash flows from operations in fiscal 1996 consisted primarily of a net loss and
noncash charges of $9.3 million, principally depreciation and amortization,
plus an extraordinary loss on the early extinguishment of debt in the amount of
$4.4 million.
Investing Activities. Cash used in investing activities during fiscal 1996
included capital expenditures for eight acquisitions amounting to $16.7
million. An additional $7.2 million was spent for maintenance needed to
sustain operations at current levels, new customer tanks to support growth of
operations, and other miscellaneous items.
FINANCING ACTIVITIES
The Partnership raised approximately $79.8 million through the issuance of
Common Units in an initial public offering ("IPO") which included a partial
exercise of the underwriter's overallotment option. In addition, $120.0
million principal amount of 8.55% Senior Secured Notes (the "Notes") were
issued to certain institutional investors. These funds were used to repay
certain indebtedness incurred prior to the IPO, additional costs related to the
repayment, and to repurchase common and preferred equity from shareholders of
the predecessor entity.
DESCRIPTION OF INDEBTEDNESS
The Operating Partnership assumed $120.0 million principal amount of 8.55%
Senior Secured Notes (the "Notes") at the formation of the Partnership in a
private placement with institutional investors. Interest is payable
semi-annually in arrears on each December 28 and June 28. The Notes have a
final maturity of 15 years, with ten equal mandatory repayments of principal
beginning on June 28, 2002.
The Operating Partnership also established a Bank Credit Facility
consisting of a $25.0 million Acquisition Revolving Credit and a $15.0 million
Working Capital Revolver. The Operating Partnership has the right to increase
the Acquisition Revolving Credit to $35.0 million under the same terms and
conditions as currently exist. Interest accrues at a rate based upon either
LIBOR plus a margin or a base rate plus a margin, payable upon maturity of each
loan. The Working Capital Revolver matures in June of 1999 and the Acquisition
Revolving Credit revolves for two and one-half years, after which time any
outstanding loans will amortize quarterly over an additional period of two and
one-half years.
The Notes and Bank Credit Facility rank parri passu with each other an are
secured by a first priority security interest in certain personal property of
the Operating Partnership including inventory, accounts receivable, storage
tanks and pledge of the capital stock of a subsidiary.
The Note Purchase Agreement and Bank Credit Agreement contain customary
restrictive covenants applicable to the Operating Partnership including
limitations on the incurrence of additional indebtedness, creation of liens and
sale of assets. In addition, the Operating Partnership must maintain certain
ratios of Consolidated Funded Indebtedness to Consolidated EBITDA and
Consolidated EBITDA to Consolidated Interest Expense. These Agreements also
provide that the Operating Partnership will not, directly or indirectly,
declare, make or incur any liability to make any Restricted Payments (including
distributions to the Partnership), except that the Operating Partnership may
declare, make or incur a liability to make a Restricted Payment during each
fiscal quarter, if: (a) the amount of such Restricted Payment, together with
all other Restricted Payments during such quarter, do not exceed Available Cash
with respect to the immediately preceding quarter; and (b) no default or event
of
-18-
<PAGE> 21
default exists before such Restricted Payment and after giving effect thereto.
The Agreements provide 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.
The Operating Partnership is in compliance with all requirements, tests,
limitations and covenants related to the Notes and Bank Credit Facility.
The above description is qualified in its entirety by reference to the Note
Purchase Agreement and the Bank Credit Facility, both of which have been filed
as exhibits to this Report. Capitalized terms used but not defined herein have
the meanings ascribed to them in such Agreements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements set forth on pages F-1 to F-16 of this Report are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
PARTNERSHIP MANAGEMENT
The General Partner manages and operates the activities of the Partnership.
Unitholders do not directly or indirectly participate in the management or
operation of the Partnership.
In October of 1996, the Board of Directors of the General Partner appointed
J. T. Atkins to serve on the Independent 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 Independent 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 General Partner's Board of Directors serves as the Audit Committee to
review external financial reporting of the Partnership, to engage the
Partnership's independent accountants and review the Partnership's procedures
for internal auditing and the adequacy of the Partnership's internal accounting
controls.
The Partnership does not directly employ any of the persons responsible for
managing or operating the Partnership. At August 31, 1996, 806 full time
individuals were employed by the General Partner.
-19-
<PAGE> 22
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 Position with General Partner
---- -----------------------------
<S> <C>
James E. Bertelsmeyer Chairman of the Board and Chief Executive Officer
and a Director of the General Partner
R. C. Mills Executive Vice President and Chief Operating
Officer
G. A. Darr Vice President - Corporate Development
H. Michael Krimbill Vice President and Chief Financial Officer,
Treasurer and Secretary
J. T. Atkins Director of the General Partner
Bill W. Byrne Director of the General Partner
John D. Capps Director of the General Partner
J. Charles Sawyer Director of the General Partner
</TABLE>
James E. Bertelsmeyer. Mr. Bertelsmeyer, age 54, 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 has been a Director of the National
Propane Gas Association for the past 21 years.
R. C Mills. Mr. Mills, age 59, 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, age 63, 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 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, age 43, was Treasurer of Total
Petroleum, Inc. ("Total"). Total is a publicly traded, fully-integrated oil
company located in Denver, Colorado.
J. T. Atkins. Mr. Atkins, age 39, is a managing director of Oppenheimer &
Co., Inc., investment bankers. Prior to his joining Oppenheimer in July of
1995, he held a similar position with the investment banking firm of Houlihan,
Lokey, Howard & Zukin, Inc. Mr. Atkins was elected a director October 1, 1996.
Bill W. Byrne. Mr. Byrne, age 66, served as Vice President of Warren
Petroleum Company, the gas liquids division of Chevron Corporation, from
-20-
<PAGE> 23
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. Mr. Byrne is a past
president and Director of the National Propane Gas Association.
John D. Capps. Mr. Capps, age 73, 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.
J. Charles Sawyer. Mr. Sawyer, age 60, has served as President and Chief
Executive Officer of Computer Energy, Inc., a provider of software of 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.
COMPENSATION OF THE GENERAL PARTNER
The General Partner does 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 are
reimbursed at cost for all expenses incurred on behalf of the Partnership,
including the costs of compensation allocable to the Partnership, and all other
expenses necessary or appropriate to the conduct of the business of, and
allocable to, the Partnership.
The General Partner has a 2% general partner interest in the combined
operations of the Partnership and the Operating Partnership.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES AND EXCHANGE ACT
Section 16(a) of the Securities and Exchange Act of 1934 requires the
General Partner's officers and directors, and persons who own more than 10% of
a registered class of the Partnership's equity securities, to file reports of
beneficial ownership and changes in beneficial ownership with the Securities
and Exchange Commission ("SEC"). Officers directors and greater than 10
percent unitholders are required by SEC regulation to furnish the General
Partner with copies of all Section 16(a) forms.
Based solely on its review of the copies of such forms received by the
General Partner, or written representations from certain reporting persons that
no Form 5's were required for those persons, the General Partner believes that
during fiscal year ending August 31, 1996, all filing requirements applicable
to its officers, directors, and greater than 10 percent beneficial owners were
met in a timely manner with the exception of the following late filing of Form
4's: Messrs. Bertelsmeyer and Krimbill - one each with NYSE; Messrs. Byrne and
Sawyer - one each.
-21-
<PAGE> 24
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the annual salary, bonus and all other
compensation awards and payouts earned by the General Partner's Chief Executive
Officer and the other executive officers for services rendered to the General
Partner and its subsidiaries during the fiscal years ended August 31, 1996 1995
and 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------ ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS COMPENSATION(1)
- --------------------------- ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
James E. Bertelsmeyer 1996 $241,756 $100,000 -- $1,440
Chairman of the Board and 1995 230,800 100,000 -- 1,440
Chief Executive Officer 1994 218,500 100,000 -- 994
R. C. Mills 1996 $165,400 $ 50,000 10,000 $2,250
Executive Vice President 1995 158,000 50,000 -- $2,250
& Chief Operating Officer 1994 150,300 47,000 -- 925
G. A. Darr 1996 $104,756 $ 30,000 6,000 $ 913
Vice President - Corporate 1995 99,800 30,000 6,000 688
Development 1994 95,100 27,000 -- 656
H. Michael Krimbill 1996 $135,000 $ 40,000 10,000 $ 510
Vice President, Chief 1995 129,000 40,000 -- 510
Financial Officer, 1994 122,000 34,000 -- 152
Treasurer and Secretary
</TABLE>
_____________________
(1) Consists of life insurance premiums.
STOCK OPTION PLANS
Certain key employees of the General Partner and its subsidiaries
participated in the 1995 Stock Option Plan (the "1995 Plan") and the 1989 Stock
Option Plan (the "1989 Plan"). Options to purchase the General Partner's
Common Stock were granted under the plans by action of the General Partner's
Board of Directors. The terms of individual option grants, including whether
such options constitute incentive stock options under Section 422A of the Code,
are 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 the General Partner's Board of Directors to
grant outright up to 3,000 shares of the General Partner's Common Stock to any
non-employee director. The 1989 Plan provided that no more than 180,000
options to purchase shares may be outstanding at any given time.
The following table sets forth certain information with respect to stock
option grants to the named executive officers during fiscal 1996.
-22-
<PAGE> 25
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
-------------------------------------------------------- -----------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SARS EXERCISE
OPTIONS/ GRANTED TO OR BASE
SARS GRANTED EMPLOYEES IN PRICE EXPIRATION
(#)(1) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
------------- --------------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
James E. Bertelsmeyer ... None -- -- -- -- --
R. C. Mills ............. 10,000 38% $38.00 1/15/06 0 $73,900
G. A. Darr .............. 6,000 24% $38.00 1/15/06 0 $44,340
H. Michael Krimbill ..... 10,000 38% $38.00 1/15/06 0 $73,900
</TABLE>
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 1996.
OPTION EXERCISES IN FISCAL YEAR 1996 AND FISCAL 1996 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
SHARES(A) FISCAL 1996 YEAR-END FISCAL 1996 YEAR-END
ACQUIRED VALUE ------------------------ ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James E. Bertelsmeyer ....... 12,302 $215,164 -- -- -- --
R. C. Mills.................. 0 0 30,000 __ 0 --
G. A. Darr .................. 804 $ 13,990 12,000 -- 0 --
H. Michael Krimbill.......... 1,584 $ 21,562 26,000 -- 0 --
</TABLE>
______________________
(a) Represents shares acquired by warrant exercise for Common Stock of the
General Partner upon the Partnership's sale of Common Units to the public.
EMPLOYMENT AGREEMENTS
The General Partner has entered into employment agreements (the "Employment
Agreements") with Messrs. Bertelsmeyer, Mills, Darr and Krimbill (each, an
"Executive"). 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 this Report.
The Employment Agreements 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 do 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
-23-
<PAGE> 26
bonus for the Executives, but certain of the agreements do provide for other
benefits, including a car allowance and the payment of life insurance premiums.
The Employment Agreements 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
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. 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 of
the Internal Revenue Service, 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
contains non-competition and confidentiality provisions.
RESTRICTED UNIT PLAN
The General Partner has adopted a restricted unit plan (the "Restricted
Unit Plan") for its non-employee directors and key employees of the General
Partner and its affiliates. The Plan covers rights to acquire 146,000 Common
Units. The right to acquire the Common Units under the Restricted Unit Plan,
including any forfeiture or lapse of rights are available for grant 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 each September 1 that such person continues as a non-employee
director. Newly elected non-employee directors are also entitled to receive a
grant with respect to 2,000 Common Units upon election or appointment to the
Board. Generally, the rights to acquire the Common Units will vest upon the
later to occur of (i) the three-year anniversary of the grant date, or (ii) the
conversion of the Subordinated Units to Common Units. 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 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 Common 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 participant without the consent of such participant; 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
-24-
<PAGE> 27
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.
COMPENSATION OF DIRECTORS
Heritage currently pays no additional remuneration to its employees for
serving as directors. Under the Restricted Unit Plan, non-employee directors
will be awarded 500 of these Restricted Units annually, and newly elected
directors receive an initial award of 2,000 Restricted Units. The General
Partner will pay each of its non-employee directors $10,000 annually, plus
$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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of November 19, 1996,
regarding the beneficial ownership by certain beneficial owners, all directors
and named executive officers of the General Partner and the Partnership, each
of the named executive officers and all directors and executive officers of the
General Partner as a group, of (i) the Common and Subordinated Units of the
MLP, and (ii) the Common Stock of the General Partner. The General Partner
knows of no other person beneficially owning more than 5% of the Common Units.
MLP UNITS
<TABLE>
<CAPTION>
Name and Address of Beneficially Percent of
Title of Class Beneficial Owner Owned(1) Class
- -------------- ---------------- ----- -----
<S> <C> <C> <C>
Common Units James E. Bertelsmeyer (2) 4,300 *
R. C. Mills 1,000 *
G. A. Darr -- *
H. Michael Krimbill (2) 2,600 *
Bill W. Byrne 2,000 *
John D. Capps -- *
J. Charles Sawyer 2,000 *
J. T. Atkins 1,000 *
All directors and executive
officers as a group
(8 persons) 12,900 *
Subordinated
Units(3) Heritage Holdings, Inc.(4) 3,702,943 100.0%
</TABLE>
-25-
<PAGE> 28
HERITAGE HOLDINGS, INC. COMMON STOCK
<TABLE>
<CAPTION>
Name and Address of Beneficially Percent of
Title of Class Beneficial Owner Owned(1) Class
- -------------- ---------------- ----- -----
<S> <C> <C> <C>
Common Stock James E. Bertelsmeyer(2)(4) 1,554,865 41.9
R. C. Mills (4) 370,294 10.0
G. A. Darr (4) 244,394 6.6
H. Michael Krimbill(2)(4) 355,482 9.6
Bill W. Byrne 96,276 2.6
John D. Capps 117,753 3.2
J. Charles Sawyer 96,276 2.6
J. T. Atkins -- --
All directors and executive
officers as a group
(8 persons) 2,835,340 76.5%
</TABLE>
__________________________
* Less than one percent (1%).
(1) Beneficial ownership for the purposes of the foregoing table is
defined by Rule 13d-3 under the Securities Exchange Act of 1934.
Under that rule, a person is generally considered to be the beneficial
owner of a security if he has or shares the power to vote or direct
the voting thereof ("Voting Power") or to dispose or direct the
disposition thereof ("Investment Power") or has the right to acquire
either of those powers within sixty (60) days.
(2) Each of Messrs. Bertelsmeyer and Krimbill shares Voting and Investment
Power with his wife.
(3) Messrs. Bertelsmeyer, Byrne, Capps, Sawyer and Atkins, as directors of
the General Partner, share Voting and Investment Power of the
Subordinated Units.
(4) The address for Heritage Holdings, Inc. and for each of Messrs.
Bertelsmeyer, Mills, Darr and Krimbill is 8801 S. Yale, Suite 310,
Tulsa, Oklahoma 74137.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS.
See "Index to Financial Statements" set forth on page F-1.
2. FINANCIAL STATEMENT SCHEDULES.
None
3. EXHIBITS.
See "Index to Exhibits" set forth on page E-1.
(B) REPORTS ON FORM 8-K.
None.
-26-
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HERITAGE PROPANE PARTNERS, L.P.
By Heritage Holdings, Inc.
(General Partner)
By: /s/James E. Bertelsmeyer
--------------------------------
James E. Bertelsmeyer
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/James E. Bertelsmeyer Chairman of the Board, Chief 11/25/96
- -------------------------------- Executive Officer and Director ------------
James E. Bertelsmeyer (Principal Executive Officer)
/s/J. T. Atkins Director 11/25/96
- -------------------------------- -------------
J. T. Atkins
/s/Bill W. Byrne Director 11/25/96
- -------------------------------- ------------
Bill W. Byrne
/s/J. Charles Sawyer Director 11/25/96
- -------------------------------- ------------
J. Charles Sawyer
/s/H. Michael Krimbill Vice President and Chief 11/25/96
- -------------------------------- Financial Officer (Principal ------------
H. Michael Krimbill Financial and Accounting Officer)
</TABLE>
-27-
<PAGE> 30
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets - August 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations -
Two Months Ended August 31, 1996 (Successor),
Ten Months Ended June 30, 1996
and Years Ended August 31, 1995 and 1994 (Predecessor) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Partners' Capital -
Two Months Ended August 31, 1996 (Successor),
Ten Months Ended June 30, 1996, and
Years Ended August 31, 1995 and 1994 (Predecessor) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows -
Two Months Ended August 31, 1996 (Successor),
Ten Months Ended June 30, 1996, and
Years Ended August 31, 1995 and 1994 (Predecessor) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
<PAGE> 31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Heritage Propane Partners, L.P.:
We have audited the accompanying consolidated balance sheets of Heritage
Propane Partners, L.P. (formerly Heritage Holdings, Inc.) and subsidiaries as
of August 31, 1996 (Successor) and 1995 (Predecessor), and the related
consolidated statements of operations, partners' capital, and cash flows for
the two months ended August 31, 1996 (Successor), for the ten months ended June
30, 1996, and for the years ended August 31, 1995 and 1994 (Predecessor).
These financial statements are the responsibility of the Partnership'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 Propane Partners,
L.P. and subsidiaries at August 31, 1996 (Successor) and 1995 (Predecessor),
and the results of their operations and their cash flows for the two months
ended August 31, 1996 (Successor), for the ten months ended June 30, 1996, and
for the years ended August 31, 1995 and 1994 (Predecessor), in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
October 21, 1996
F-2
<PAGE> 32
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and unit data)
<TABLE>
<CAPTION>
ASSETS August 31, August 31,
------ 1996 1995
--------- ---------
(Predecessor)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,170 $ 1,237
Accounts receivable, net of allowance for doubtful accounts of $315 in
1996 and 1995 10,859 8,085
Inventories 11,115 10,131
Prepaid expenses 870 835
Deferred income taxes -- 1,005
--------- ---------
Total current assets 24,014 21,293
PROPERTY, PLANT AND EQUIPMENT, net 110,342 100,104
INVESTMENT IN AFFILIATES 4,882 991
INTANGIBLES AND OTHER ASSETS, net 48,612 41,035
--------- ---------
Total assets $ 187,850 $ 163,423
========= =========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Working capital facilities $ 5,600 $ 7,000
Accounts payable 13,155 8,550
Accrued and other current liabilities 5,730 5,470
Current maturities of long-term debt 243 14,805
--------- ---------
Total current liabilities 24,728 35,825
LONG-TERM DEBT 132,521 103,412
DEFERRED INCOME TAXES -- 18,824
--------- ---------
Total liabilities 157,249 158,061
--------- ---------
COMMITMENTS AND CONTINGENCIES
5% CUMULATIVE REDEEMABLE PREFERRED STOCK, $.01 par value, 19,262 shares
authorized, 9,487 issued -- 12,337
--------- ---------
PARTNERS' CAPITAL:
Common unit holders (4,285,000 units outstanding) 16,392 --
Subordinated unit holders (3,702,943 units outstanding) 13,902 --
General partner 307 --
--------- ---------
Total partners' capital 30,601 --
--------- ---------
STOCKHOLDERS' DEFICIT:
Class A common stock, $.01 par value, 2,648,517 authorized, 1,284,105 -- 13
issued
Class B common stock, $.01 par value, 441,419 authorized, 357,500 issued -- 3
Additional paid-in capital -- 4,040
Accumulated deficit -- (11,031)
--------- ---------
Total stockholders' deficit -- (6,975)
--------- ---------
Total liabilities and partners' capital $ 187,850 $ 163,423
========= =========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-3
<PAGE> 33
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
<TABLE>
<CAPTION>
For the Year Ended
August 31, 1996
--------------------------
Two Months Ten Months For the For the
Ended Ended Year Ended Year Ended
August 31, June 30, August 31, August 31,
1996 1996 1995 1994
----------- ----------- ----------- -----------
REVENUES: (Predecessor) (Predecessor) (Predecessor)
<S> <C> <C> <C> <C>
Retail $ 9,920 $ 92,668 $ 86,142 $ 72,202
Wholesale 6,467 39,090 31,114 19,183
Other 2,090 12,865 14,252 12,586
----------- ----------- ----------- -----------
Total revenues 18,477 144,623 131,508 103,971
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of products sold 12,163 88,989 75,667 55,370
Depreciation and amortization 1,733 7,581 8,896 8,711
Selling, general and administrative 698 3,164 2,903 2,562
Operating expenses 5,839 29,134 31,367 27,423
----------- ----------- ----------- -----------
Total costs and expenses 20,433 128,868 118,833 94,066
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (1,956) 15,755 12,675 9,905
Gain on disposal of assets 57 170 215 169
Equity in earnings (losses) of affiliates (119) 662 37 --
Other income (expense) (107) 330 33 (17)
Interest expense (1,962) (10,833) (12,201) (8,761)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY LOSS (4,087) 6,084 759 1,296
Provision for income taxes -- 2,735 666 668
Minority interest 25 (428) (304) (313)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS (4,062) 2,921 (211) 315
Extraordinary loss on early extinguishment of debt, net of
minority interest of $44 (4,361) -- -- --
----------- ----------- ----------- -----------
NET INCOME (LOSS) (8,423) $ 2,921 $ (211) $ 315
=========== =========== ===========
GENERAL PARTNER'S INTEREST IN NET LOSS (84)
-----------
LIMITED PARTNERS' INTEREST IN NET LOSS $ (8,339)
===========
NET LOSS PER LIMITED PARTNER UNIT:
Loss before extraordinary loss $ .51
Extraordinary loss .55
-----------
$ 1.06
===========
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING 7,864,336
===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-4
<PAGE> 34
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock
(Voting) (Nonvoting)
------------------------ -----------------------
Number Number Additional Total
of of Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST 31, 1993
(Predecessor) 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
(Predecessor) 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
(Predecessor) 1,284,105 $ 13 357,500 $ 3 $ 4,040 $ (11,031) $ (6,975)
========== ========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Number of Units Total
----------------------- General Partners'
Common Subordinated Common Subordinated Partner Capital
------ ------------ ------ ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 24, 1996 -- -- $ -- $ -- $ -- $ --
Contributions of net assets
of predecessor -- 3,702,943 19,334 16,397 361 36,092
Issuance of units to public 4,285,000 -- 42,729 36,236 798 79,763
Net senior notes transferred from -- -- (41,159) (34,904) (768) (76,831)
predecessor
Net loss -- -- (4,512) (3,827) (84) (8,423)
--------- --------- --------- --------- --------- ---------
BALANCE, AUGUST 31, 1996 4,285,000 3,702,943 $ 16,392 $ 13,902 $ 307 $ 30,601
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-5
<PAGE> 35
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Year Ended
August 31, 1996
----------------------
Two Months Ten Months For the Year For the Year
Ended Ended Ended Ended
August 31, June 30, August 31, August 31,
1996 1996 1995 1994
--------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES: (Predecessor) (Predecessor) (Predecessor)
<S> <C> <C> <C> <C>
Net income (loss) $ (8,423) $ 2,921 $ (211) $ 315
Reconciliation of net income (loss) to net cash provided by
operating activities-
Depreciation and amortization 1,733 7,581 8,896 8,711
Provision for losses on accounts receivable 133 261 325 431
Gain on disposal of assets (55) (170) (215) (169)
Issuance of stock for services rendered -- 53 -- --
Compensatory appreciation in stock warrants -- (217) 60 60
Undistributed earnings of affiliates 330 (471) 48 --
Increase in deferred income taxes -- 2,680 563 600
Extraordinary loss on early extinguishment of debt 4,361 -- -- --
Minority interest (69) 428 304 313
Changes in assets and liabilities, net of effect of
acquisitions:
Accounts receivable (332) (2,444) (877) (1,025)
Inventories (2,859) 2,056 (1,188) (1,136)
Prepaid expenses 1,058 (1,389) 526 43
Intangibles and other assets (235) (381) (1,789) 384
Accounts payable (917) 3,720 728 1,720
Accrued and other current liabilities 2,328 644 447 (1,075)
--------- --------- --------- ---------
Net cash provided by (used in) operating
activities (2,947) 15,272 7,617 9,172
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired (8,298) (8,367) (27,879) --
Capital expenditures (1,092) (6,152) (8,634) (6,194)
Proceeds from asset sales 50 282 579 677
--------- --------- --------- ---------
Net cash used in investing activities (9,340) (14,237) (35,934) (5,517)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 21,603 159,645 62,375 32,945
Principal payments on debt (6,850) (37,884) (33,933) (37,042)
Payment of financing and organization costs (4,331) -- -- --
Issuance of common stock -- 76 62 126
Repurchase of common and preferred stock -- (61,156) (16) --
Net proceeds from issuance of common units 79,763 -- -- --
Cash contribution by General Partner 4,296 (4,296) -- --
Net proceeds transferred from issuance of senior note debt 43,169 (43,169) -- --
Repayment of long-term debt, working capital facilities and
prepayment penalty (124,193) -- -- --
--------- --------- --------- ---------
Net cash provided by (used in) financing
activities 13,457 13,216 28,488 (3,971)
INCREASE (DECREASE) IN CASH 1,170 14,251 171 (316)
--------- --------- --------- ---------
CASH, beginning of period -- 1,237 1,066 1,382
--------- --------- --------- ---------
CASH, end of period $ 1,170 $ 15,488 $ 1,237 $ 1,066
========= ========= ========= =========
NONCASH FINANCING ACTIVITIES:
Notes payable incurred on noncompete agreements $ 1,655 $ 500 $ 6,281 $ --
Issuance of Company stock for note receivables -- 57 31 --
5% Preferred stock dividend -- 523 600 570
Net senior notes transferred from predecessor 76,831 -- -- --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 1,682 $ 10,151 $ 11,581 $ 8,862
Income taxes -- -- 44 69
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-6
<PAGE> 36
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
1. OPERATIONS AND ORGANIZATION:
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 Heritage
Holdings, Inc. In order to simplify the Partnership's obligation under the
laws of several jurisdictions in which the Partnership conducts business, the
Partnership's activities are conducted through a subsidiary operating
partnership, Heritage Operating, L.P. (the Operating Partnership). The
Partnership holds a 98.9899 percent limited partner interest and Heritage
Holdings, Inc. (the Company or General Partner) holds a 1.0101 percent general
partner interest in the Operating Partnership.
On June 28, 1996, the Partnership completed its initial public offering (the
IPO) of 4,025,000 Common Units, representing limited partner interests in the
Partnership, to the public at a price of $20.25 a unit. Concurrent with the
closing of the IPO, the Company issued $120,000 principal amount of Senior
Secured Notes (the Notes) to certain institutional investors in a private
placement. The Company conveyed substantially all of its assets (other than
approximately $76,831 in proceeds from the issuance of the Notes) 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 conveyed 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. On July 26, 1996, the
underwriters exercised their option to purchase an additional 260,000 Common
Units and the Partnership received proceeds of approximately $4,898 in exchange
thereof on July 29, 1996. As a result, the Company owns a 45.4 percent limited
partner interest, and an aggregate two percent general partner interest, in the
Partnership and the Operating Partnership. The net book value of the assets
contributed to the Partnership were as follows:
<TABLE>
<S> <C>
Total assets conveyed $217,823
Total liabilities assumed 258,562
--------
Net liabilities $ 40,739
========
</TABLE>
In contemplation of the offering, the Company entered into a letter agreement
with its nonmanagement/director shareholders. Pursuant to the terms of the
agreement, the Company together with certain members of management and
directors, repurchased equity interests of the nonmanagement/director
shareholders. The members of management issued notes aggregating $5,000 in
connection with the repurchase. Additionally, the Company used approximately
$61,156 of the proceeds of the Notes to finance the repurchase of equity
interests including the preferred stock plus unpaid cumulative dividends in the
Company.
The Partnership contributed the net proceeds of approximately $79,763 from the
IPO to the Operating Partnership. The Operating Partnership applied the net
proceeds, together with approximately $40,898 in cash contributed by the
Company to finance the repayment of all
F-7
<PAGE> 37
of the indebtedness of the Company to the Prudential Insurance Company of
America (Prudential). The Operating Partnership paid a prepayment penalty in
the amount of $3,500 in connection with the early retirement of the Prudential
debt.
The Operating Partnership entered into a Bank Credit Facility, which includes a
Working Capital Facility, providing for up to $15,000 of borrowings to be used
for working capital and other general partnership purposes, and an Acquisition
Facility, providing for up to $25,000 of borrowings to be used for acquisitions
and improvements (see Note 4). The Partnership utilized the Bank Credit
Facility in order to repay amounts previously borrowed in connection with
certain acquisitions (see Note 3) and other bank debt outstanding at the time
of the closing of the IPO.
The Operating Partnership sells propane and propane-related products to
approximately 180,000 retail customers in 17 states throughout the United
States. The Partnership is also a wholesale propane supplier in the
southwestern United States and in Canada, the latter through participation in a
Canadian partnership. The Partnership grants credit to its customers for the
purchase of propane and propane-related products.
The propane industry is seasonal in nature with peak activity during the winter
months. Therefore, the results of operations of the Partnership for the two
months ended August 31, 1996, are not indicative of the results to be expected
for a full fiscal year.
2. SIGNIFICANT ACCOUNTING POLICIES AND BALANCE SHEET DETAIL:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Partnership,
its subsidiaries and a majority owned partnership. The Partnership accounts
for its interest in one-third of the outstanding stock of a propane retailer
and a 50 percent partnership interest in another propane retailer under the
equity method. All significant intercompany transactions and accounts have
been eliminated in consolidation. The General Partner's 1.0101 percent
interest in the Operating Partnership is accounted for in the consolidated
financial statements as a minority interest.
REVENUE RECOGNITION
Sales of propane, propane appliances and parts and fittings are recognized at
the time of delivery of the product to the customer or at the time of sale or
installation. Revenue from service labor is recognized upon completion of the
service and tank rent is recognized ratably over the period it is earned.
CASH
The Partnership participates in cash management programs, and, as a result,
disbursements in excess of bank balances of approximately $3,307 and $1,033 are
included in accounts payable at August 31, 1996 and 1995, respectively.
F-8
<PAGE> 38
INVENTORIES
Inventories are valued at the lower of cost or market. The cost of fuel
inventories is determined using the average cost method while the cost of
appliances, parts and fittings is determined by the first-in, first-out method.
Inventories consist of the following:
<TABLE>
<CAPTION>
August 31,
-----------------------
1996 1995
------- -------
<S> <C> <C>
Fuel $ 7,735 $ 6,727
Appliances, parts and fittings 3,380 3,404
------- -------
$11,115 $10,131
======= =======
</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. 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,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Land and improvements $ 6,456 $ 6,136
Buildings and improvements (10 to 30 years) 11,402 10,151
Bulk storage, equipment and facilities (3 to 30 years) 16,713 15,625
Tanks and other equipment (5 to 30 years) 76,756 66,681
Vehicles (5 to 7 years) 15,178 12,017
Furniture and fixtures (5 to 10 years) 3,786 3,482
Other 989 862
-------- --------
131,280 114,954
Less- accumulated depreciation 20,938 14,850
-------- --------
$110,342 $100,104
======== ========
</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. Components and useful lives
of intangibles and other assets are as follows:
<TABLE>
<CAPTION>
August 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Goodwill (30 years) $27,885 $25,910
Noncompete agreements (10 to 15 years) 25,597 27,654
Customer lists (15 years) 9,351 7,454
Other 4,933 2,209
------- -------
67,766 63,227
Less- accumulated amortization 19,154 22,192
------- -------
$48,612 $41,035
======= =======
</TABLE>
F-9
<PAGE> 39
It is the Partnership's policy to review intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
of such assets may not be recoverable. If such a review should indicate that
the carrying amount of intangible assets is not recoverable, it is the
Partnership's policy to reduce the carrying amount of such assets to fair
value.
ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consist of the following:
<TABLE>
<CAPTION>
August 31,
-----------------------
1996 1995
------ ------
<S> <C> <C>
Interest payable $1,885 $ 895
Wages and payroll taxes 966 1,614
Deferred tank rent 916 904
Taxes other than income 730 408
Minority interest 165 13
Other 1,068 1,636
------ ------
$5,730 $5,470
====== ======
</TABLE>
INCOME TAXES
The Partnership is a limited partnership. As a result, the Partnership's
earnings or loss for federal income tax purposes is included in the tax returns
of the individual partners. Accordingly, no recognition has been given to
income taxes in the accompanying financial statements of the Partnership. Net
earnings for financial statement purposes may differ significantly from taxable
income reportable to unitholders as a result of differences between the tax
basis and financial reporting basis of assets and liabilities and the taxable
income allocation requirements under the Partnership agreement.
The Predecessor filed a consolidated federal income tax return. Deferred
income taxes were recognized for the tax consequences of temporary differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities.
EXTRAORDINARY ITEM
In connection with the repayment of the Prudential debt (see Note 1), the
Partnership incurred a prepayment penalty of $3,500 and wrote-off the
unamortized balance of $905 of deferred financing costs associated with the
Prudential debt. These are reflected as extraordinary loss in the consolidated
statement of operations for the two months ended August 31, 1996.
LOSS PER LIMITED PARTNER UNIT
Net loss per limited partner unit is computed by dividing net loss, after
considering the General Partner's one percent interest, by the weighted average
number of Common and Subordinated Units outstanding.
F-10
<PAGE> 40
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 adoption of this standard did not have a material impact on the
Partnership's 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 reported period.
Actual results could differ from those estimates.
FAIR VALUE
The carrying amounts of accounts receivable and accounts payable approximate
their fair value. Based on the estimated borrowing rates currently available
to the Partnership for long-term loans with similar terms and average
maturities, the aggregate fair value at August 31, 1996, of the Partnership's
long-term debt approximates the aggregate carrying amount.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform with the
current-year presentations. These reclassifications have no impact on net
income.
3. ACQUISITIONS:
During the two months ended August 31, 1996, the Partnership purchased certain
assets of Tri-Gas of Benzie, Inc. and Spring Lake Super Flame Gas & Oil, Inc.
The Company purchased all of the outstanding stock of Liberty Propane Gas, Inc.
and Kingston Propane, Inc., and conveyed the net assets to the Partnership.
The acquisitions totaled approximately $10,091, including noncompete agreements
for periods ranging from five to ten years totaling $1,655, which was financed
primarily with the acquisition facility.
During the ten months ended June 30, 1996, the Company purchased certain assets
of Bi-State Propane, Century Propane, and Turner Gas Company locations in
Nevada and California. The aggregate purchase price of the acquisitions
totaled approximately $9,693, including noncompete agreements for a period of
ten years totaling $2,290, which was financed primarily with lines of credit
available at the time.
During fiscal 1995, the Partnership purchased certain assets of Ballard, Inc.,
Balcom, Inc., San Luis Butane Distributors, Jerry's Propane Service, Inc.,
Greer Gas, Inc. and Paragon Energy Corporation, as well as the outstanding
common stock of Carolane Propane Gas, Inc. The aggregate purchase price of the
acquisitions totaled approximately $30,837, including noncompete agreements for
periods ranging from 7 to 15 years totaling $8,760, which was financed
primarily with the revolving senior acquisition facility.
F-11
<PAGE> 41
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 date of
acquisitions. The Company capitalized as part of the purchase price allocation
legal and other costs related to 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 and Partnership's consolidated financial statements from the date of
acquisition, as appropriate.
4. WORKING CAPITAL FACILITIES AND LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
August 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
8.55% Senior Secured Notes $120,000 $ --
Senior Revolving Acquisition Facility 10,750 --
Revolving Senior Acquisition Facility -- 65,700
Senior Reset Notes -- 30,000
Subordinated Reset Notes -- 12,600
Notes payable on noncompete agreements with interest imputed at rates
averaging 8%, due in installments through 2006, collateralized by a
first security lien on certain assets of the Partnership 1,655 8,930
Other 359 987
-------- --------
132,764 118,217
Current maturities of long-term debt 243 14,805
-------- --------
$132,521 $103,412
======== ========
</TABLE>
The Notes mature at the rate of $12,000 on June 30 in each of the years
2002 to and including 2011. The Note Purchase Agreement contains restrictive
covenants including limitations on substantial disposition of assets, changes
in ownership of the Partnership, additional indebtedness and requires the
maintenance of certain financial ratios. The Notes are secured by all
receivables, contracts, equipment, inventory, general intangibles, any cash
concentration account, and the common stock of the Partnership's subsidiaries.
As of June 25, 1996, the Partnership entered into a credit agreement with First
National Bank of Boston and Bank of Oklahoma. The credit agreement consists of
the following:
A $15,000 Senior Revolving Working Capital Facility, expiring June 30,
1999, with $5,600 outstanding at August 31, 1996. The interest rate
and interest payment dates vary depending on the terms the Partnership
agrees to when money is borrowed. The average interest rate was 8.08
percent for amounts outstanding at August 31, 1996. The Partnership
must be free of all working capital borrowings for 30 consecutive days
each fiscal year. A commitment fee of .5 percent is paid on the
unused portion of the facility.
A $25,000 Senior Revolving Acquisition Facility is available to
December 31, 1998, at which time the outstanding amount must be paid
in ten equal quarterly installments, beginning March 31, 1999. The
interest rate and interest payment dates vary depending
F-12
<PAGE> 42
on the terms the Partnership agrees to when money is borrowed. The
average interest rate was 7.73 percent for amounts outstanding at
August 31, 1996. A commitment fee of .5 percent is paid on the unused
portion of the facility.
The weighted average interest rates on borrowings under the working capital
facilities were 8.08 percent and 8.99 percent at August 31, 1996 and 1995,
respectively.
Future maturities of long-term debt for each of the next five fiscal years and
thereafter are $243 in 1997; $264 in 1998; $3,154 in 1999; $4,595 in 2000;
$3,901 in 2001 and $120,604 thereafter.
5. COMMITMENTS AND CONTINGENCIES:
Certain property and equipment is leased under noncancellable leases which
require fixed monthly rental payments, and which expire at various dates
through 2008. Rental expense under these leases totaled approximately $1,010
and $226 for the ten months ended June 30, 1996, and the two months ended
August 31, 1996, respectively and $1,083 and $1,018 for the years ended August
31, 1995 and 1994, respectively. Fiscal year future minimum lease commitments
for such leases are $1,258 in 1997; $687 in 1998; $560 in 1999; $898 in 2000;
$235 in 2001 and $481, thereafter.
The Partnership 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 Partnership. 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
Partnership.
The Partnership has entered into several purchase and supply commitments for
the next fiscal year with varying terms as to quantities and prices.
6. INCOME TAXES:
During the Predecessor period, the Company retroactively adopted the provisions
of SFAS 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. The significant
temporary differences and related deferred tax provision relate primarily to
net operating loss carryforwards and depreciation.
The provision for income taxes includes the following components for the
periods ended as follows:
<TABLE>
<CAPTION>
For the
10 Months For the Years Ended
Ended August 31,
June 30, -----------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Current $ 55 $ 103 $ 68
Deferred 2,680 563 600
------ ------ ------
$2,735 $ 666 $ 668
====== ====== ======
</TABLE>
F-13
<PAGE> 43
The reconciliation of the statutory income tax rate to the effective income tax
rate for the periods ended is as follows:
<TABLE>
<CAPTION>
For the
10 Months For the Years Ended
Ended August 31,
June 30, --------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Tax at statutory rates $1,923 $ 155 $ 334
Nondeductible amortization 360 390 220
State income taxes 226 18 40
Other 226 103 74
------ ------ ------
$2,735 $ 666 $ 668
====== ====== ======
</TABLE>
7. STOCKHOLDERS' EQUITY:
In conjunction with the debt agreements with Prudential, the Company granted
Prudential warrants for a maximum of 83,919 shares of the Company's Class B
Common Stock. During the Predecessor period, Prudential exercised all warrants
at the exercise price of $.10 per share. Additionally, the Company granted
management warrants for Class A Common Stock for a maximum of 15,092 shares.
During the Predecessor period, management exercised all warrants at the
exercise price of $.01 per share. Compensation expense has been recorded based
on the estimated market value of the management warrants.
8. PARTNERS' CAPITAL:
Partners' capital consists of 4,285,000 Common Units representing a 52.6
percent limited partner interest, 3,702,943 Subordinated Units owned by the
General Partner representing a 45.4 percent limited partner interest, and a two
percent general partner interest.
The Agreement of Limited Partnership of Heritage Propane Partners, L.P.
(Partnership Agreement) contains specific provisions for the allocation of net
earnings and loss to each of the partners for purposes of maintaining the
partner capital accounts.
During the Subordination Period, the Partnership may issue up to 2,012,500
additional Common Units (excluding Common Units issued in connection with
conversion of Subordinated Units into Common Units) or an equivalent number of
securities ranking on a parity with the Common Units and an unlimited number of
partnership interests junior to the Common Units without a Unitholder vote.
The Partnership may also issue additional Common Units during the Subordination
Period in connection with certain acquisitions or the repayment of certain
indebtedness. After the Subordination Period, the Partnership Agreement
authorizes the General Partner to cause the Partnership to issue an unlimited
number of limited partner interests of any type without the approval of any
Unitholders.
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Partnership is expected to make quarterly cash distributions of all of its
Available Cash, generally defined as consolidated cash receipts less
consolidated operating expenses, debt service payments, maintenance capital
expenditures and net changes in reserves established by
F-14
<PAGE> 44
the General Partner for future requirements. These reserves are retained to
provide for the proper conduct of the Partnership business, or to provide funds
for distributions with respect to any one or more of the next four fiscal
quarters.
Distributions by the Partnership in an amount equal to 100 percent of its
Available Cash will generally be made 98 percent to the Common and Subordinated
Unitholders and two percent to the General Partner, subject to the payment of
incentive distributions to the holders of Incentive Distribution Rights to the
extent that certain target levels of cash distributions are achieved. To the
extent there is sufficient Available Cash, the holders of Common Units have the
right to receive the Minimum Quarterly Distribution ($0.50 per Unit), plus any
arrearages, prior to any distribution of Available Cash to the holders of
Subordinated Units. Common Units will not accrue arrearages for any quarter
after the Subordination Period (as defined below) and Subordinated Units will
not accrue any arrearages with respect to distributions for any quarter.
In general, the Subordination Period will continue indefinitely until the first
day of any quarter beginning after May 31, 2001, in which distributions of
Available Cash equal or exceed the Minimum Quarterly Distribution on the Common
Units and the Subordinated Units for each of the three consecutive four-quarter
periods immediately preceding such date. Prior to the end of the Subordination
Period, 925,736 Subordinated Units will convert to Common Units after May 31,
1999 and another 925,736 Subordinated Units will convert to Common Units after
May 31, 2000, if distributions of Available Cash on the Common Units and
Subordinated Units equal or exceed the Minimum Quarterly Distribution for each
of the three consecutive four-quarter periods preceding such date. Upon
expiration of the Subordination Period, all remaining Subordinated Units will
convert to Common Units.
The Partnership is expected to make distributions of its Available Cash within
45 days after the end of each fiscal quarter ending November, February, May and
August to holders of record on the applicable record date.
9. PROFIT SHARING AND 401(K) SAVINGS PLAN:
The Partnership sponsors a defined contribution profit sharing and 401(k)
savings plan (the Plan), which covers all employees with more than 1 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 years ended August 31, 1996, 1995 and 1994, was $350, $275 and $250,
respectively.
10. RELATED PARTY TRANSACTIONS:
The Partnership has no employees and is managed and controlled by the General
Partner. Pursuant to the Partnership Agreement, the General Partner is
entitled to reimbursement for all direct and indirect expenses incurred or
payments it makes on behalf of the Partnership, and 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. These costs, which totaled $4,127 for the two months ended August
31, 1996, include compensation and benefits paid to officers and employees of
the General Partner.
F-15
<PAGE> 45
11. DOMESTIC AND FOREIGN OPERATIONS:
The following table presents revenue, operating income and identifiable assets
attributable to the Partnership's domestic and foreign operations.
<TABLE>
<CAPTION>
For the Two For the Ten For the Years
Months Ended Months Ended Ended August 31,
August 31, June 30, ------------------------
1996 1996 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Domestic $ 13,182 $ 114,257 $ 110,773 $ 88,941
Foreign-
Affiliated 1,261 10,394 10,540 12,053
Unaffiliated 5,295 30,366 20,735 15,030
Eliminations (1,261) (10,394) (10,540) (12,053)
--------- --------- --------- ---------
$ 18,477 $ 144,623 $ 131,508 $ 103,971
========= ========= ========= =========
Operating Income (Loss):
Domestic $ (1,999) $ 15,329 $ 12,398 $ 9,611
Foreign-
Affiliated 8 111 93 131
Unaffiliated 35 315 184 163
--------- --------- --------- ---------
$ (1,956) $ 15,755 $ 12,675 $ 9,905
========= ========= ========= =========
Identifiable Assets:
Domestic $ 184,469 $ n/a $ 161,097 $ 115,769
Foreign 3,381 n/a 2,326 2,561
--------- --------- --------- ---------
$ 187,850 $ n/a $ 163,423 $ 118,330
========= ========= ========= =========
</TABLE>
12. SUBSEQUENT EVENTS:
Subsequent to August 31, 1996, the Partnership declared a cash distribution of
$.353 per Common and Subordinated unit. The distribution of $2,820 was paid on
October 15, 1996 to Unitholders of record at the close of business on October
1, 1996 and $58 was distributed to the General Partner. The distribution
represented a partial quarterly distribution from operations for the two months
ended August 31, 1996.
F-16
<PAGE> 46
INDEX TO EXHIBITS
The exhibits listed on the following Exhibit Index are filed as part
of this Report. Exhibits required by Item 601 of Regulation S-K, but which are
not listed below, are not applicable.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C> <C>
(1) 3.1 Agreement of Limited Partnership of Heritage Propane Partners, L.P.
(1) 10.1 Form of Bank Credit Facility
(1) 10.2 Form of Note Purchase Agreement
(1) 10.3 Form of Contribution, Conveyance and Assumption Agreement among Heritage Holdings, Inc.,
Heritage Propane Partners, L.P. and Heritage Operating, L.P.
(1) 10.4 1989 Stock Option Plan
(1) 10.5 1995 Stock Option Plan
(1) 10.6 Restricted Unit Plan
(2) 10.7 Employment Agreement for James E. Bertelsmeyer
(1) 10.8 Employment Agreement for R. C. Mills
(1) 10.9 Employment Agreement for G. A. Darr
(1) 10.10 Employment Agreement for H. Michael Krimbill
(1) 21.1 List of Subsidiaries
27.1 Financial Data Schedule--Filed with EDGAR version only
</TABLE>
_____________________________
(1) Incorporated by reference to the same numbered Exhibit to Registrant's
Registration Statement on Form S-1, File No. 333-4018, filed with the
Commission on June 21, 1996.
(2) Incorporated by reference to Exhibit 10.11 to Registrant's
Registration Statement on Form 2-1, File No. 333- 4018, filed with the
Commission on June 21, 1996.
E-1
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> AUG-31-1996
<CASH> 1,170
<SECURITIES> 0
<RECEIVABLES> 11,174
<ALLOWANCES> 315
<INVENTORY> 11,115
<CURRENT-ASSETS> 24,014
<PP&E> 131,280
<DEPRECIATION> 20,938
<TOTAL-ASSETS> 187,850
<CURRENT-LIABILITIES> 24,728
<BONDS> 132,521
<COMMON> 30,601
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 187,850
<SALES> 18,477
<TOTAL-REVENUES> 18,477
<CGS> 12,163
<TOTAL-COSTS> 20,433
<OTHER-EXPENSES> 169
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,962
<INCOME-PRETAX> (4,087)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,062)
<DISCONTINUED> 0
<EXTRAORDINARY> (4,361)
<CHANGES> 0
<NET-INCOME> (8,423)
<EPS-PRIMARY> (1.06)
<EPS-DILUTED> 0
</TABLE>
