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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, 1998 OR
[ ] 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.
(Exact name of registrant as specified in its charter)
DELAWARE 73-1493906
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8801 SOUTH YALE AVENUE, SUITE 310, TULSA, OKLAHOMA 74137 (Address of
principal executive offices and zip code)
(918) 492-7272
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of class Name of each exchange on
which registered
Common Units New York Stock Exchange
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 the 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 2, 1998, 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 $107,442,000
At November 2, 1998, the registrant had units outstanding as follows:
Heritage Propane Partners, L.P. 4,876,725 Common Units
3,702,943 Subordinated Units
Documents Incorporated by Reference: None
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HERITAGE PROPANE PARTNERS, L.P.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
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PAGE
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ITEM 1. BUSINESS. ...........................................................1
ITEM 2. PROPERTIES...........................................................8
ITEM 3. LEGAL PROCEEDINGS....................................................8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND RELATED
UNITHOLDER MATTERS................................................9
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 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..............................18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................19
ITEM 11. EXECUTIVE COMPENSATION...............................................21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...................................................24
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 and $47 million of additional
Senior Secured Notes issued in 1997 and 1998 at yields ranging from 6.50% to
7.26%.
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. In addition the
Company owns approximately 3.4% of the Common Units in the Partnership (Common
Units represent limited partnership interests in the Partnership). 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
240,000 active residential, commercial, industrial and agricultural customers
from 144 district locations in 26 states. The Partnership's operations have been
concentrated in large part in the western, upper midwest and southeastern
regions of the United States, with expansion into the northeastern United States
in the last two years.
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,
1998, 47 acquisitions had been completed for an aggregate purchase price of
approximately $203 million. Volumes of propane sold to retail customers has more
than doubled from 63.2 million gallons for the fiscal year ended August 31, 1992
to 146.7 million gallons for the fiscal year ended August 31, 1998. Since August
31, 1998, the Partnership has acquired another 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
winters of 1994-1995, 1996-1997 and the El Nino winter of 1997-1998. 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 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, 1998, 47 acquisitions had been completed for an
aggregate purchase price of approximately $203 million. The Partnership has
completed an additional acquisition since that time. Of these companies
acquired, 13 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 acquisition 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 acquisition strategy, the
Operating Partnership entered into the Bank Credit Facility. The Bank Credit
Facility currently consists of the $30.0 million Acquisition Facility to be used
for acquisitions and improvements and the $20.0 million Working Capital Facility
to be used for working capital and other general partnership purposes. The
Partnership also has the ability to fund acquisitions through the issuance of
additional partnership interests and through the Medium Term Note Program. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Description of Indebtedness."
Internal Growth. In addition to pursuing expansion through
acquisitions, the Partnership has aggressively focused on internal growth at its
existing district locations. The Partnership believes that, by concentrating its
operations in areas experiencing higher-than-average population growth, it is
well positioned to achieve internal growth by adding new customers. The
Partnership also believes that its decentralized structure, in which operational
decisions are made at the district and regional level, together with a bonus
system that allocates a significant portion of a district's EBITDA in excess of
budget to district employees, has fostered an entrepreneurial environment that
has allowed the Partnership to achieve its high rates of internal growth. The
Partnership believes that its rate of internal growth exceeds the average
internal 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 957 full-time employees as of August 31, 1998, only 47, or
approximately 5%, were general and
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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 1997 1998
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Retail Propane Gallons Sold (in millions) 37.5 48.2 63.2 73.4 79.7 98.3 118.2 125.6 146.7
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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, 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 9.5 billion gallons
annually, that the 10 largest retailers, including the Partnership, account for
approximately 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.
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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 1998,
the Partnership's domestic wholesale operations (excluding M-P Energy
Partnership, formerly M-P Oils Partnership) accounted for only 7.2% of total
volumes and less than 1% of its gross profit. The Partnership does not emphasize
wholesale operations, but 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 144 district locations in 26 states. The
Partnership's operations are concentrated in large part in the western, upper
midwest and southeastern regions of the United States, with expansion over the
last two years into the northeastern part of the United States. The
Partnership's serves more than 240,000 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 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 93%
of the domestic gallons sold by the Partnership in fiscal 1998 were to retail
customers and approximately 7% were to wholesale customers. Of the retail
gallons sold by the Partnership in fiscal 1998, 55% were to residential
customers, 26% were to industrial, commercial and agricultural customers, and
19% were to all other retail users. Sales to residential customers in fiscal
1998 accounted for 51% of total domestic gallons sold inclusive of domestic
wholesale 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
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agricultural sales accounted for 20% of the Partnership's gross profit from
propane sales for fiscal year 1998, with all other retail users accounting for
12%. Additional volumes sold to wholesale customers contributed the remaining 1%
of gross profit from propane sales. No single customer accounted for 5% or more
of the Partnership's revenues during fiscal year 1998.
The propane business is very seasonal with weather conditions
significantly affecting demand for propane. The Partnership believes that the
geographic diversity of its 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 87% of the storage tanks utilized by its
customers, and (iv) the historic ability of the Partnership to more than offset
customer losses through internal growth of its customer base in existing
markets. Since home heating usage is the most sensitive to temperature,
residential customers account for the greatest usage variation due to weather.
Variations in the weather in one or more regions in which the Partnership
operates, however, can significantly affect the total volumes of propane sold by
the Partnership and the margins realized thereon and, consequently, the
Partnership's results of operations. The Partnership believes that sales to the
commercial and industrial markets, while affected by economic patterns, are not
as sensitive to variations in weather conditions as sales to residential and
agricultural markets.
PROPANE SUPPLY AND STORAGE
The Partnership's propane supply is purchased from over 50 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 is fiscal 1998 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, with few containing "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, 1998, Dynegy Liquids
Marketing and Trade ("Dynegy") provided approximately 33% of the Partnership's
total domestic propane supply. The Partnership believes that, if supplies from
Dynegy were interrupted, it would be able to secure adequate propane supplies
from other sources without a material disruption of its operations. Aside from
Dynegy, no single supplier provided more than 10% of the Partnership's total
domestic propane supply in the fiscal year ended August 31, 1998. 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 1998, the Partnership purchased approximately 77% 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 Energy 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
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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 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
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 without
limitation, 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 acquisition of retail propane businesses that
involve the acquisition of any interest in real estate, the Partnership conducts
an environmental review in an attempt to determine whether any substance other
than propane has been sold from, or stored on, any such real estate prior to its
purchase. Such review includes questioning the seller, obtaining representations
and warranties concerning the seller's compliance with environmental laws and
conducting inspections of the properties. Where warranted, independent
environmental consulting firms are hired to look for evidence of hazardous
substances or the existence of underground storage tanks.
Petroleum-based contamination or environmental wastes are known to be
located on or adjacent to three sites at which the Partnership presently or
formerly operates and is suspected to be located on or adjacent to one
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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 four cases the Partnership obtained indemnification 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.
On August 16, 1997, the United States Department of Transportation
("DOT") published its Final Rule HM-225 (49 CFR 171.5) which adopts temporary
requirements for cargo tank motor vehicles used to transport propane. The Final
Rule, which currently is not being generally enforced, basically requires that
such vehicles be equipped with remote control equipment capable of shutting off
the flow of propane in the event of a break in the vehicle's delivery hose or
piping. The Partnership is currently in the process of installing and testing
these remote shut off devices. The Final Rule also contains a statement that a
pre-existing regulation (Hazardous Materials Regulation 177.834(i)) requires
operators of cargo tank vehicles to maintain an "unobstructed view" of the
vehicle itself when making deliveries to customer tanks. This regulation could
require either two people attending customer deliveries or one attendant
remaining at a mid-point between bobtails and customer tanks. On October 15,
1997, a suit was filed against the DOT in United States District court seeking
to enjoin enforcement of the Final Rule. On February 13, 1998, the court
preliminarily enjoined the DOT from enforcing the Final Rule pending the final
outcome of the litigation. The Partnership cannot determine the outcome of the
litigation or the long-term impact it may have on the Partnership and its
results of operations.
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, 1998, the Partnership had 957 full time employees, of
whom 47 were general and administrative and 910 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.
7
<PAGE> 10
ITEM 2. PROPERTIES
The Partnership operates bulk storage facilities at 144 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 ten million gallons of aboveground storage capacity at its various
plant sites. In addition, in 1998, the Partnership leased approximately 10.9
million gallons of underground storage facilities in two states (5.0 million
gallons of storage in Alto, Michigan and 5.9 million gallons in Bumstead,
Arizona). The Partnership does not own or operate any underground storage
facilities (excluding customer and local distribution tanks) or pipe line
transportation assets (excluding local delivery systems).
The Partnership also owns 50% of Bi-State Propane, a California general
partnership that conducts business in South Lake Tahoe, Truckee and Mammoth
Lakes, California, Reno and other locations in Nevada. Nine Bi-State Propane
locations are included in the Partnership's site counts and all site, customer
and other property descriptions contained herein include all Bi-State Propane
information on a gross basis.
The transportation of propane requires specialized equipment. The
trucks and railroad tank cars utilized for this purpose carry specialized steel
tanks that maintain the propane in a liquefied state. As of August 31, 1998, the
Partnership had a fleet of 17 transport truck tractors and 25 transport
trailers, all of which are owned by the Partnership. In addition, the
Partnership utilizes 425 bobtails and 690 other delivery and service vehicles,
all of which are owned by the Partnership. As of August 31, 1998, the
Partnership owned approximately 209,000 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 government 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 that 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, Sawyer Gas, Keen Propane, Gibson Propane and
Rural Bottled Gas and Appliance. 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.
The Partnership is threatened with or is named as a defendant in
various personal injury, property damage and product liability suits. 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
arising from the alleged negligence of the Partnership or as a result of product
defects or similar matters. Of the pending or threatened matters, the suits
currently involve property damage and serious personal injuries. 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.
8
<PAGE> 11
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, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND RELATED UNITHOLDER
MATTERS.
MARKET PRICE OF AND DISTRIBUTIONS ON THE COMMON 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 periods indicated, the high and low sales prices per Common
Unit, as reported on the New York Sock Exchange Composite Tape, and the amount
of cash distributions paid per Common Unit.
<TABLE>
<CAPTION>
Price Range Cash
High Low Distribution
------- ------- -------------
<S> <C> <C> <C>
1997 FISCAL YEAR
First Quarter Ended November 30, 1996 $21.375 $20.000 $0.50
Second Quarter Ended February 28, 1997 $21.875 $19.875 $0.50
Third Quarter Ended May 31, 1997 $21.375 $20.000 $0.50
Fourth Quarter Ended August 31, 1997 $22.938 $20.875 $0.50
1998 FISCAL YEAR
First Quarter Ended November 30, 1997 $25.000 $22.675 $0.50
Second Quarter Ended February 28, 1998 $25.000 $23.250 $0.50
Third Quarter Ended May 31, 1998 $24.250 $22.500 $0.50
Fourth Quarter Ended August 31, 1998 $24.375 $22.000 $0.50
</TABLE>
As of September 30, 1998, there were approximately 307 record holders
of the Partnership's Common Units, representing approximately seven thousand
individual common unitholders. 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. previously filed as an
exhibit. The Partnership Agreement defines Minimum Quarterly Distributions as
$0.50 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 (Subordination Period). After review of the
Partnership's past financial performance, the Board of Directors of the General
Partner announced its intention to increase the annual distribution to $2.05 per
unit commencing with the first quarter of fiscal year 1999. This announcement
assumes that the Partnership experiences normal weather patterns and continued
success in internal growth and accreative acquisitions. 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
9
<PAGE> 12
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Description of Indebtedness.
CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 6, 1998, the Partnership issued 60,606 Common Units ("Units") in
exchange for substantially all of the assets of a propane company, for a total
value of $1.4 million. On August 31, 1998, the Partnership issued 45,195 Units
to Heritage Holdings, Inc., the Partnership's General Partner in connection with
the assumption of certain liabilities by the General Partner from the
Partnership's acquisition of certain assets of a propane company. The General
Partner's Units were not registered with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, by virtue of an exemption under
Section 4(2) thereof. These Units carry a restrictive legend with regard to
transfer of the Units. The Units issued in connection with the acquisition were
issued utilizing the Partnership's Registration Statement No. 333-40407 on Form
S-4.
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
selected historical balance sheet data as of August 31, 1998 and August 31,
1997, respectively, and the selected operating data for the years ended August
31, 1998 and 1997, for the two month period ended August 31, 1996, and for the
ten month period ended June 30, 1996, 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, 1996, August 31, 1995 and August 31, 1994
and the selected operating data for the years ended August 31, 1995 and 1994,
have been derived from Heritage's audited 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 Report and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" also included elsewhere in this Report. The
amounts in the table below, except per Unit data, are in thousands.
<TABLE>
<CAPTION>
For the Year Ended
August 31, 1996
------------------------
Years Ended 10 Months(e) Two Months Years Ended
August 31, Ended Ended August 31,
1994 (e) 1995(e) June 30, 1996 August 31,1996 1997 1998
----------- ----------- ------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Statements of Operating Data:
Revenues .................................... $ 103,971 $ 131,508 $ 144,623 $ 18,477 $ 199,785 $ 185,987
Gross Profit(a) ............................. 48,601 55,841 55,634 6,314 73,838 89,103
Depreciation and amortization ............... 8,711 8,896 7,581 1,733 11,124 13,680
Operating income (loss) .................... 9,905 12,675 15,755 (1,956) 16,919 22,929
Interest expense ............................ 8,761 12,201 10,833 1,962 12,063 14,599
Income (loss) before income taxes, minority
interest and extraordinary items .......... 1,296 759 6,084 (4,087) 5,625 9,266
Provision for income taxes .................. 668 666 2,735 -- -- --
Net income (loss) ........................... 315 (211) 2,921 (8,423) 5,177 8,790
Net income (loss) per Unit(b) ............... -- -- -- (1.06) 0.64 1.04
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
August 31,
---------------------------------------------------------------
1994(e) 1995(e) 1996 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (end of period):
Current assets ........................... $ 17,134 $ 21,293 $ 24,014 $ 27,951 $ 26,185
Total assets ............................. 118,330 163,423 187,850 203,799 239,964
Current liabilities ...................... 19,646 35,825 24,728 34,426 35,444
Long-term debt ........................... 81,373 103,412 132,521 148,453 177,431
Redeemable preferred stock ............... 11,737 12,337 -- -- --
Stockholders' deficit .................... (6,301) (6,975) -- -- --
Partner's capital - General Partner ...... -- -- 307 208 273
Partners' capital - Limited Partner (g)... -- -- 30,294 20,712 26,816
</TABLE>
<TABLE>
<CAPTION>
Years Ended August 31,
------------------------------------------------------------
1994(e) 1995(e) 1996(f) 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating Data:
EBITDA(c) .................... $ 18,616 $ 21,672 $ 24,365 $ 28,718 $ 37,561
Capital Expenditures(d)
Maintenance and growth ...... 6,194 8,634 7,244 7,170 9,359
Acquisition ................. -- 27,879 16,665 14,549 23,276
Retail propane gallons sold .. 79,669 98,318 118,200 125,605 146,747
</TABLE>
- - --------------------------
(a) Gross profit is computed by reducing total revenues by the direct cost
of the products sold.
(b) Net income (loss) per Unit is computed by dividing the limited
partners' interest in net income (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 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 of approximately $3.6
and $2.3 million in fiscal 1998 and 1997, respectively, 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 purchases 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.
(g) Partners' Capital is anticipated to decrease to the extent depreciation
and amortization exceeds maintenance capital expenditure requirements.
11
<PAGE> 14
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, 1998, Heritage and the Partnership completed
47 acquisitions for an aggregate purchase price of approximately $203 million.
The Partnership has completed 18 of these acquisitions since going public on
June 25, 1996. The Partnership engages in the sale, distribution and marketing
of propane and other related products. The Partnership derives its revenue
primarily from the retail propane marketing business. The General Partner
believes that the Partnership is the sixth largest retail marketer of propane in
the United States, based on retail gallons sold, serving more than 240,000
residential, industrial/commercial and agricultural customers in 26 states
through 144 retail outlets. Annual retail propane sales volumes in gallons were
146.7 million, 125.6 million and 118.2 million for the fiscal years ended August
31, 1998, 1997 and 1996, 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 that burns in internal combustion engines that
power vehicles and forklifts and as a heating 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 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 Flow from operations, however, is greatest during
the second and third fiscal quarters when customers pay for propane purchased
during the six-month peak-heating season.
A substantial portion of the Partnership's propane is used in the
heating-sensitive residential and commercial markets causing the temperatures
realized in the Partnership's areas of operations, particularly during the
six-month peak heating season, to 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. The
Partnership therefore uses information on normal temperatures in understanding
how temperatures that are colder or warmer than normal affect historical results
of operations and in preparing forecasts of future operations, which bases the
assumption that normal weather will prevail in each of the Partnership's
regions.
The retail propane business is a "margin-based" business in which gross
profits depend on the excess of sales price 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. Product supply contracts are one-year agreements subject to annual
renewal and generally 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. In the past, the Partnership generally
attempted to reduce price risk by purchasing propane on a short-term basis. The
Partnership has on occasion purchased 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.
12
<PAGE> 15
Gross profit margins vary according to customer mix. For example, sales
to residential customers generate higher margins than sales to certain other
customer groups, such as agricultural customers. Wholesale margins are
substantially lower than retail margins. In addition, gross profit margins vary
by geographical region. Accordingly, a change in customer or geographic mix can
affect gross profit without necessarily affecting total revenues.
ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS
The following discussion reflects for the periods indicated the results
of operations and operating data for the Partnership. Most of the increases in
the line items discussed below result from the acquisitions made by the
Partnership during the periods discussed. In fiscal 1998, the Partnership
consummated seven acquisitions for a total purchase price of $37.1 million. In
fiscal 1997 and 1996, the Partnership consummated seven and eight acquisitions
for total purchase prices of $14.5 million and $22.0 million, respectively.
These acquisitions affect the comparability of prior period financial matters,
as the volumes are not included in the prior period's results of operations.
Amounts discussed below reflect 100% of the results of M-P Energy Partnership,
formerly named M-P Oils Partnership, a general partnership in which the
Partnership owns a 60% interest. Because M-P Energy Partnership is primarily
engaged in lower-margin wholesale distribution, its contribution to the
Partnership's net income and EBITDA is not significant.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Volume. The Partnership sold 146.7 million retail gallons, an increase
of 21.1 million gallons or 16.8% from the 125.6 million gallons sold in fiscal
1997. This increase was primarily attributable to acquisition related volumes
offset, to a certain extent, by the effects of the warmer weather pattern of El
Nino.
The Partnership also sold approximately 86.2 million wholesale gallons
during fiscal 1998, a decrease of 26.4 million wholesale gallons or 23.4% from
the 112.6 million wholesale gallons sold in fiscal 1997. The decrease in
wholesale volumes was attributable to a decline of 16.4 million gallons in the
foreign operations of M-P Energy Partnership and 10.0 million gallons in U.S.
wholesale operations, both primarily due to warmer than normal weather in those
areas of operations.
Revenues. Total revenues decreased $13.8 million or 6.9% to $186.0
million for fiscal 1998 as compared to $199.8 million for fiscal 1997. Domestic
retail fuel revenues increased $6.6 million or 5.1% in fiscal 1998 to $136.3
million, as compared to $129.7 million for fiscal 1997. U.S. wholesale revenues
decreased $6.4 million or 54.7% from $11.7 million reported in fiscal 1997.
Foreign revenues decreased $16.3 million or 39.5% to $25.0 million for fiscal
1998, as compared to $41.3 million for fiscal 1997. The decrease in U.S. and
foreign wholesale revenues was attributable to both decreased volumes and sales
prices. The increase in domestic retail revenues resulted from increased volumes
and offset somewhat by decreased sales prices.
Cost of Sales. Total cost of sales decreased $29.1 million or 23.1% to
$96.9 million for fiscal 1998, as compared to fiscal 1997's $126.0 million.
Domestic cost of sales decreased $12.8 million or 14.9% to $73.1 million for
fiscal 1998, as compared to $85.9 million for fiscal 1997. Foreign cost of sales
decreased $16.3 million or 40.6% to $23.8 million for fiscal 1998, as compared
to $40.1 million for fiscal 1997. The decrease in foreign cost of sales was
attributable to decreased volumes sold and a decrease in the cost per gallon of
propane. The decrease in domestic cost of sales was also due to a decrease in
the cost per gallon of propane and the decrease in domestic wholesale volumes
for fiscal 1998, offset by the increased volumes of retail fuel.
Gross Profit. Total gross profit increased $15.3 million or 20.7% to
$89.1 million in fiscal 1998 as, compared to $73.8 million in fiscal 1997. This
increase was attributable to the acquisition related increase in retail volumes
sold, the impact of higher margins and an increase in other propane related
gross profit.
Operating Expenses. Operating expenses increased $6.6 million or 16.3%
to $47.0 million in fiscal 1998, as compared to $40.4 million in fiscal 1997.
The increase was primarily attributable to costs associated with acquisitions.
Selling, General and Administrative. Selling, general and
administrative expenses were $5.5 million for fiscal 1998 a slight increase as
compared to $5.3 million in fiscal 1997.
13
<PAGE> 16
Depreciation and Amortization. Depreciation and amortization increased
approximately $2.6 million or 23.4% to $13.7 million in fiscal 1998, as compared
to $11.1 million for fiscal 1997. This increase was primarily the result of
additional depreciation and amortization associated with acquisitions.
Operating Income. Operating income increased $5.9 million or 34.7% to
$22.9 million in fiscal 1998, as compared to $17.0 million for fiscal 1997. This
increase was the result of the increase in gross profit offset by the
acquisition related increase in operating expenses and depreciation and
amortization.
Net Income. Net income increased $3.6 million or 69.2% to $8.8 million
in fiscal 1998, as compared to $5.2 million for fiscal 1997. This increase is
due to higher operating income for fiscal 1998 as compared to 1997, offset
partially by increased interest costs in fiscal 1998.
EBITDA. Earnings before interest, taxes, depreciation and amortization
was $37.6 million for fiscal 1998, an increase of $8.9 million or 31.0% over
last year's EBITDA of $28.7 million. Increased gross profit for fiscal 1998,
offset by the acquisition related increase in operating expenses attributed to
the increase in this year's EBITDA.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Volume. During fiscal 1997, the Partnership sold 125.6 retail gallons,
an increase of 7.4 million retail gallons or 6.3% from the 118.2 million retail
gallons sold in fiscal 1996. This increase was primarily attributable both to
the volume increases from acquisitions and internal growth, offset by warmer
than normal weather during the heating season in the Partnership's southeast and
southwest areas of operations.
The partnership also sold 112.6 million wholesale gallons in fiscal
1997, a decrease of 7.9 million gallons or 7.9% from the 120.5 million wholesale
gallons in fiscal 1996. This decrease was mainly attributable to the decrease in
wholesale volumes in the foreign operations of M-P Oils Partnership.
Revenues. Total revenues for fiscal 1997 increased $36.7 million or
22.5% to $199.8 million, as compared to $163.1 million for fiscal 1996. Domestic
revenues increased $31.1 million or 24.4% to $158.5 million for fiscal 1997, as
compared to $127.4 million for fiscal 1996. Foreign revenues increased $5.6
million to $41.3 million for fiscal 1997, an increase of 15.7%, as compared to
$35.7 million for fiscal 1996. The increase in foreign revenues was attributable
to an increase in the selling price. The increase in domestic revenues was
attributable to higher selling prices and greater volumes associated with
acquisitions and internal growth.
Cost of Sales. Total cost of sales increased $24.8 million to $126.0
million for fiscal 1997, an increase of 24.5%, as compared to $101.2 million for
fiscal 1996. Domestic cost of sales increased $19.3 million or 29.0% for fiscal
1997 to $85.9 million as compared to $66.6 for fiscal 1996. Foreign cost of
sales increased $5.5 million or 15.9% from $34.6 million for fiscal 1996 to
$40.1 million for fiscal 1997. During fiscal 1997, the propane industry
witnessed the most volatile propane market since 1989, with the wholesale cost
of propane raising rapidly during the heating season. The increase in foreign
cost of sales is primarily attributable to higher propane costs. The increase in
domestic cost of sales is attributable to the increase in propane costs for
fiscal 1997 and the increase in retail volumes.
Gross Profit. Gross profit increased $11.9 million or 19.2% to $73.8
million for fiscal 1997, as compared to $61.9 million for fiscal 1996. In spite
of the rapid increases in propane costs during the heating season in fiscal
1997, the Partnership was able to retain strong margins. The strong margins
experienced in fiscal 1997 and the increased retail volumes were responsible for
the increase in gross profit over fiscal 1996.
Operating Expenses. Operating expenses increased $5.4 million or 15.4%
to $40.4 million for fiscal 1997 as compared to $35.0 million for fiscal 1996.
The majority of this increase was attributable to an increase in wages and plant
operations resulting from acquisitions. Vehicle expenses also contributed to
this increase, with the majority of the Partnership's vehicles operating on
propane, due to higher own use fuel costs associated with higher propane prices
and volumes.
14
<PAGE> 17
Selling, General and Administrative. Selling, general and
administrative expenses were $5.3 million for fiscal 1997, an increase of $1.4
million or 35.9% as compared to $3.9 million for fiscal 1996. This increase
resulted from costs associated with changing to and operating as a public master
limited partnership.
Depreciation and Amortization. Depreciation and amortization increased
$2.0 million or 22.0% to $11.1 million for fiscal 1997 as compared to $9.1
million for fiscal 1996. This increase was the result of additional depreciation
and amortization associated with the increase in property, plant, and equipment
along with intangible assets from the acquisitions the Partnership has made.
Operating Income. Operating income increased $3.2 million to $17.0
million, a 23.2% increase in fiscal 1997 as compared to $13.8 million in fiscal
1996. This increase was due to the Partnership having increased volumes related
to acquisitions and retaining strong margins on these volumes, offset by the
acquisition related increases in operating expenses and depreciation and
amortization costs.
Net Income. Net income increased $10.7 million to $5.2 million in
fiscal 1997, a 194.5% increase as compared to fiscal 1996's net loss of $5.5
million. This increase is the result of higher operating income in fiscal 1997
and as well as conversion to a partnership form during fiscal 1996. The
Partnership is not subject to federal income tax whereas the Company provided a
$2.7 million income tax provision in fiscal 1996. The Partnership also
experienced an extraordinary loss of $4.4 million on the early extinguishment of
debt in fiscal year 1996.
EBITDA. Earnings before interest, taxes, depreciation and amortization
increased $4.3 million, or 17.8% to $28.7 million for fiscal 1997, as compared
to $24.4 million for fiscal 1996. This increase was due to the increase in
domestic margins, plus volumes related to acquisitions and internal growth
partially offset by the related increase in operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
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 cost, and other debt services, will be provided
by the annual cash flow from operations
c) required maintenance capital, predominantly vehicle replacement,
will also be provided by the annual cash flow from operations
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,
other lines of credit, issues of additional Common Units or a
combination thereof.
Cash Flows
Cash provided by operating activities for fiscal 1998, was $24.5 million
compared to $15.4 million in fiscal 1997. The cash flows from operations for
fiscal 1998 consisted primarily of net income of $8.8 million and noncash
charges of $13.1 million, principally depreciation and amortization.
Cash used in investing activities during fiscal 1998 included capital
expenditures for acquisitions amounting to $23.3 million, net of cash received
plus $9.4 million spent for maintenance needed to sustain operations at current
15
<PAGE> 18
levels, new customer tanks to support growth of operations and other
miscellaneous capitalized items. These amounts were partially offset by the
proceeds from asset sales of $5.5 million.
Cash provided by financing activities during fiscal 1998 of $2.4 million
resulted primarily from a net increase in long-term debt of $20.7 million used
for acquisitions. This increase was offset by cash distributions to unitholders
of $16.7 million and a net reduction in the working capital facility of $1.6
million.
Financing and Sources of Liquidity
The Partnership has a Bank Credit Facility, which includes a Working
Capital Facility, a revolving credit facility providing for up to $20.0 million
of borrowings to be used for working capital and other general partnership
purposes, and an Acquisition Facility, a revolving credit facility providing for
up to $30.0 million of borrowings to be used for acquisitions and improvements.
See page F-12, "Notes to Consolidated Financial Statements--4. Working Capital
Facilities and Long-Term Debt."
The Partnership uses its cash provided by operating and financing
activities to provide distributions to unitholders and to fund acquisition,
maintenance and growth capital expenditures. Acquisition capital expenditures,
which include expenditures related to the acquisition of retail propane
operations and intangibles associated with such acquired businesses, were $23.3
million for fiscal year 1998, as compared to $14.5 million during fiscal 1997.
In addition to the $23.3 million of cash expended for acquisitions during fiscal
1998, $13.8 million of Common Units were issued in connection with certain
acquisitions.
The assets utilized in the propane business do not typically require
lengthy manufacturing process time nor complicated, high technology components.
Accordingly, the Partnership does not have any significant financial commitments
for capital expenditures. In addition, the Partnership has not experienced any
significant increases attributable to inflation in the cost of these assets or
in its operations.
DESCRIPTION OF INDEBTEDNESS
The Operating Partnership assumed $120 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 31 and June 30. The Notes have a final
maturity of 15 years, with ten equal mandatory repayments of principal beginning
on June 30, 2002. See page F-12, "Notes to Consolidated Financial Statements--4.
Working Capital Facilities and Long-Term Debt."
On November 19, 1997, the Partnership entered into a Note Purchase
Agreement ("Medium Term Note Program"), that provides for the issuance of up to
$100 million of senior secured promissory notes if certain conditions are met.
An initial placement of $32 million (Series A and B) at an average interest rate
of 7.23% with an average 10 year maturity was completed at the closing of the
Medium Term Note Program. Interest is payable semi-annually in arrears on each
November 19 and May 19. An additional placement of $15 million (Series C, D and
E) at an average interest rate of 6.59% with an average 12 year maturity was
completed in March 1998. Interest is payable on Series C, D and E semi-annually
in arrears on each September 13 and March 13. The proceeds of the placements
were used to refinance amounts outstanding under the Acquisition Facility. See
page F-12, "Notes to Consolidated Financial Statements--4. Working Capital
Facilities and Long-Term Debt."
The Note Purchase Agreement, Medium Term Note Program 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 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 default exists
before such Restricted Payment and after giving effect thereto. The Agreements
provide that 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
16
<PAGE> 19
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 dates.
The Operating Partnership is in compliance with all requirements,
tests, limitations and covenants related to the Notes and Bank Credit Facility.
YEAR 2000 MATTERS
The year 2000 issue arose because many computer programs use only the
last two digits to indicate the year; hence, they may not interpret dates beyond
the year 1999. The Partnership has recognized the potential impact of this
problem that could cause computer applications to fail or create erroneous
results and along with outside consultants, has conducted a detailed assessment
of its Year 2000 compliance and readiness. The Partnership has put a
comprehensive program in place to prepare for its year 2000 readiness.
The Partnership is reviewing and evaluating both their information
technology ("IT") and non-IT systems. A complete and detailed inventory list of
the Partnership's hardware and software systems has been established enabling
them to evaluate the state of readiness of these systems. The Partnership's
district operations use a variety of external software that has been evaluated
for Year 2000 compliance. The upgrade of the software at these district
locations is currently underway. The hardware necessary to accommodate the
software upgrades will be replaced as needed. Completion of this phase is
anticipated by March 1999. The Partnership's central accounting system, payroll
system and miscellaneous applications used are also in the process of being
upgraded with completion anticipated January 1999. The upgraded software in both
the district locations and at the administration level is scheduled for testing
and user training starting December 1998 and to be completed in early spring
1999. The non-IT systems such as telephones, fax machines, and photocopiers will
be investigated for the date critical Year 2000 and will be replaced or updated
as needed for operation.
The Partnership has identified major vendors and suppliers on whom it
depends upon for services and product to assess their Year 2000 readiness to
assure there are no interruptions in operations. A Year 2000 compliance letter
and questionnaire is being sent to these third parties with responses
anticipated by December 1998. Interruption of the supply and delivery of gas
products could have a material adverse affect on the operations of the
Partnership. By contacting these third parties to assess their state of
readiness and developing an appropriate contingency plan if necessary, the
Partnership is hoping to minimize these risks. In the fiscal year ended August
31, 1998, Dynegy Liquids Marketing and Trade provided approximately 33% of the
Partnership's total domestic propane supply. The Partnership believes that, if
supplies from Dynegy were interrupted, it would be able to secure adequate
propane supplies from other sources without a material disruption of its
operations. Aside from Dynegy, no single supplier provided more than 10% of the
Partnership's total domestic propane supply in the fiscal year ended August 31,
1998. Furthermore, no single customer accounted for 5% or more of the
Partnership's revenues during fiscal year 1998 alleviating the risk of adverse
affects if some but not all customers are not Year 2000 compliant. The
Partnership's banking facilities are also being contacted to insure that the
collection and transfer of funds will not be interrupted and that extension of
working capital will be available as needed. Acquisition candidates are supplied
with a compliance letter and questionnaire also to assess the potential needs of
their systems.
The Partnership does expect the costs to modify its computer-based
systems to have a material effect on the Partnership's results of operations.
The current estimates of the amount of time, personnel, and costs to modify the
current systems to be Year 2000 compliant is less than $.5 million. A portion of
these costs is expected to be capitalized as they relate to adding new software
and hardware to enhance current operations. Costs related directly to becoming
Year 2000 compliant will be expensed as incurred. Estimated costs to date have
not been specifically tracked but are estimated to be immaterial.
The Partnership expects that its IT and non-IT systems will be
compliant by the target dates listed. A contingency plan is being developed to
deal with system failures. The Partnership will primarily focus on one of the
systems currently being tested that would be compliant. If other systems fail
during the testing, they will be upgraded to the compliant system. The success
it has with dealing with the issues of the Year 2000 and its vendor and
supplier's success in the matter will affect the Partnership's future
operations. Interruptions in the Partnership's operations or those of its major
suppliers due to Year 2000 failures could have a material adverse affect on its
operations and cash flows.
17
<PAGE> 20
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report, excluding historical
information, include certain forward-looking statements. Although Heritage
believes such forward-looking statements are based on reasonable assumptions, no
assurance can be given that every objective will be reached. Such statements are
made in reliance on the "safe harbor" protections provided under the Private
Securities Litigation Reform Act of 1995.
As required by that law, the Partnership hereby identifies the
following important factors that could cause actual results to differ materially
from any results projected, forecasted, estimated or budgeted by the Partnership
in forward-looking statements.
o Risks and uncertainties impacting the Partnership as a whole
relate to changes in general economic conditions in the United
States; the availability and cost of capital; changes in laws and
regulations to which the Partnership is subject, including tax,
environmental and employment laws and regulations; the cost and
effects of legal and administrative claims and proceedings against
the Partnership or which may be brought against the Partnership
and changes in general and economic and currencies in foreign
countries.
o The uncertainty of the ability of the Partnership to sustain its
rate of internal sales growth and its ability to locate and
acquire other propane companies at prices that are accreative to
the Partnership's EBITDA.
o Risks and uncertainties related to energy prices and the ability
of the Partnership to develop expanded markets and products
offerings as well as their ability to maintain existing markets.
In addition, future sales will depend on the cost of propane
compared to other fuels, competition from other propane retailers
and alternate fuels, the general level of petroleum product
demand, and weather conditions, among other things.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Partnership has no material exposures of a quantitative and
qualitative nature related to market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial statements set forth on pages F-1 to F-15 of this Report
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
18
<PAGE> 21
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, 1998, the General
Partner employed 957 full time individuals.
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
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
Bradley K. Atkinson Vice President - Administration
J. T. Atkins Director of the General Partner
Bill W. Byrne Director of the General Partner
J. Charles Sawyer Director of the General Partner
</TABLE>
James E. Bertelsmeyer. Mr. Bertelsmeyer, age 56, has 23 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, (the "Association"), for the past 23 years, and is currently
President of the Association.
R. C. Mills. Mr. Mills, age 61, has 40 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
19
<PAGE> 22
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 65, 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 45, was Treasurer of Total
Petroleum, Inc. ("Total"). Total was a publicly traded, fully integrated oil
company located in Denver, Colorado.
Bradley K. Atkinson. Mr. Atkinson, age 43 joined Heritage on April 16,
1998 as Vice President Administration. Prior to joining Heritage, Mr. Atkinson
was with MAPCO/Thermogas for 12 years, eight of which were in the acquisitions
and business development of Thermogas. Mr. Atkinson is a CPA and received an
undergraduate business degree form Pittsburgh State University and an MBA from
Oklahoma State University.
J. T. Atkins. Mr. Atkins, age 41, is a managing director of CIBC
Oppenheimer Corp., 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 of
Heritage October 1, 1996.
Bill W. Byrne. Mr. Byrne, age 68, served as Vice President of Warren
Petroleum Company, the gas liquids division of Chevron Corporation, from
1982-1992. Since that time Mr. Byrne has served as the principal of Byrne &
Associates, L.L.C., a gas liquids consulting group based in Tulsa, Oklahoma. Mr.
Byrne has been a Director of Heritage since 1992. Mr. Byrne is a past president
and Director of the National Propane Gas Association.
J. Charles Sawyer. Mr. Sawyer, age 61, 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 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, 1998, all filing requirements applicable to
its officers, directors,
20
<PAGE> 23
and greater than 10 percent beneficial owners were met in a timely manner other
than one late filing for Mr. Bertelsmeyer for two prior periods and one late
filing for Heritage Holdings, Inc. for three prior periods.
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, 1998, 1997
and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ------
SECURITIES
UNDERLYING ALL OTHER
YEAR SALARY BONUS OPTIONS/SARS COMPENSATION(1)
---- ------ ----- ------------ ---------------
<S> <C> <C> <C> <C>
James E. Bertelsmeyer 1998 $355,756 $ -- -- $2,048
Chairman of the Board and 1997 341,756 -- -- 2,619
Chief Executive Officer 1996 241,756 100,000 -- 1,140
R. C. Mills 1998 225,000 -- -- 2,201
Executive Vice President and 1997 215,000 -- -- 2,316
Chief Operating Officer 1996 165,400 50,000 10,000 2,250
G. A. Darr 1998 150,756 -- -- 1,933
Vice President - Corporate 1997 134,756 -- -- 1,193
Development 1996 104,756 30,000 6,000 913
H. Michael Krimbill 1998 185,000 -- -- 357
Vice President, Chief Financial 1997 175,000 -- -- 616
Officer, Treasurer and Secretary 1996 135,000 40,000 10,000 510
Bradley K. Atkinson (2) 1998 125,000 -- -- --
Vice-President Administration 1997 -- -- -- --
1996 -- -- -- --
</TABLE>
(1) Consists of life insurance premiums.
(2) Mr. Atkinson joined Heritage April 1998, but his salary is presented on an
annualized basis.
21
<PAGE> 24
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. As of June 28, 1996,
all Stock Option Plans were terminated, therefore, no Option/SAR grant table is
presented.
EMPLOYMENT AGREEMENTS
The General Partner has entered into employment agreements (the
"Employment Agreements") with Messrs. Bertelsmeyer, Mills, Darr, Krimbill and
Atkinson, (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, and
two years for Mr. Atkinson, 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, $175,000 and $125,000 ("Base Salary")
for each of Messrs. Bertelsmeyer, Mills, Darr, Krimbill and Atkinson,
respectively. The Board shall review the Base salary at least annually and may
adjust the amount of the Base Salary at any time as the Board may deem
appropriate in its sole discretion; provided, however, that in no event may the
Base Salary be decreased below the above stated amount without the prior written
consent of the Employee. The Employment Agreements do not provide for an annual
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 Executive 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.
22
<PAGE> 25
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. Grants made after the conversion of all of
the Partnership's Subordinated Units to Units shall vest on such terms as the
Committee may establish, which may include the achievement of performance
objectives. 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
therefore 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 provide 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 which Restricted Units may be granted under the
Restricted Unit Plan; or (iv) materially increase the cost of the Restricted
Unit Plan to the Partnership.
The issuance of the Common Units pursuant to the Restricted Unit Plan is
intended to serve as a means of incentive compensation for performance and not
primarily as an opportunity to participate in the equity appreciation in respect
of the Common Units. Therefore, no consideration will be payable by the plan
participants upon vesting and issuance of the Common Units. As of August 31,
1998, 38,200 Restricted Units had been granted to non-employee directors and key
employees. Compensation expense of $215,000 and $93,000 was recorded in the
Partner's financial statements for fiscal years 1998 and 1997, respectively. See
Note 8 of the of the Partnership's Consolidated Financial Statements which begin
on page F-1 of this Report.
23
<PAGE> 26
The following table sets forth the number of grants that may result in
the issuance of Common Units under the Restricted Unit Plan to the executive
officers of the Company:
LONG-TERM INCENTIVE PLANS-AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Performance or
Shares, Units or Other Period Until Threshold Target Maximum
Name Other Rights(#) Maturation or Payout ( #) ( #) ( #)
--------------- -------------------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
James E. Bertelsmeyer 750 September 1, 2000 750 750 750
750 June 1, 2001 750 750 750
R. C. Mills 750 September 1, 2000 750 750 750
750 June 1, 2001 750 750 750
G. A. Darr 1,000 September 1, 2000 1,000 1,000 1,000
1,000 June 1, 2001 1,000 1,000 1,000
H. Michael Krimbill 750 September 1, 2000 750 750 750
750 June 1, 2001 750 750 750
Bradley K. Atkinson 2,500 April 27, 2001 2,500 2,500 2,500
2,500 June 1, 2001 2,500 2,500 2,500
</TABLE>
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 August 31,
1998, 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.
24
<PAGE> 27
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) 38,401 *
R. C. Mills 9,000 *
G. A. Darr 600 *
H. Michael Krimbill (2) 10,800 *
Bradley K. Atkinson 5,000 *
Bill W. Byrne 6,000 *
J. Charles Sawyer 2,000 *
J. T. Atkins 2,000 *
All directors and executive
officers as a group
(8 persons) 71,400 1.5%
Heritage Holdings, Inc. 167,294 3.4%
Subordinated Units (3) Heritage Holdings, Inc. (4) 3,702,943 100%
</TABLE>
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) 224,558 41.90%
R. C. Mills (4) 53,729 10.0
G. A. Darr (4) 35,386 6.60
H. Michael Krimbill (2) (4) 51,364 9.60
Bradley K. Atkinson (4) -- --
Bill W. Byrne 14,104 2.60
J. Charles Sawyer 14,104 2.60
J. T. Atkins -- --
All directors and executive
officers as a group
(8 persons) 393,245 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, 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., Mr. Krimbill and Mr. Atkinson
is 8801 S. Yale, Suite 310, Tulsa, Oklahoma 74137. The address for each
of Messrs. Bertelsmeyer and Mills is 7162 Phillips Highway,
Jacksonville, Florida 32256. The address for Mr. Darr is 2830 Halle
Parkway, Collierville, Tennessee 38017.
25
<PAGE> 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT OF 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.
(b) REPORTS OF 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 November 24,1998
- - ----------------------------- Executive Officer and Director -----------------
James E. Bertelsmeyer (Principal Executive Officer)
/s/ J. T. Atkins Director November 24, 1998
- - ----------------------------- -----------------
J. T. Atkins
/s/ Bill W. Byrne Director November 24, 1998
- - ----------------------------- -----------------
Bill W. Byrne
/s/ J. Charles Sawyer Director November 24, 1998
- - ----------------------------- -----------------
J. Charles Sawyer
/s/ H. Michael Krimbill Vice President and Chief Financial November 24, 1998
- - ----------------------------- Officer (Principal Financial and -----------------
H. Michael Krimbill Accounting Officer)
</TABLE>
27
<PAGE> 30
INDEX TO FINANCIAL STATEMENTS
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES PAGE
<TABLE>
<S> <C>
Report of Independent Public Accountants...................................F-2
Consolidated Balance Sheets - August 31, 1998 and 1997.....................F-3
Consolidated Statements of Operations Years Ended August 31, 1998 and
1997, Two Months Ended August 31, 1996, and the
Ten Months Ended June 30, 1996 (Predecessor).............................F-4
Consolidated Statements of Partners' Capital Years Ended August 31, 1998
and 1997, and the Period from Inception (April 24, 1996)
to August 31, 1996.......................................................F-5
Consolidated Statements of Cash Flows -
Years Ended August 31, 1998 and 1997,
Two Months Ended August 31, 1996, and the
Ten Months Ended June 30, 1996 (Predecessor).............................F-6
Notes to Consolidated Financial Statements.................................F-7
</TABLE>
F-1
<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. (the Partnership) and subsidiaries as of August 31, 1998 and
1997, the related consolidated statements of operations and cash flows for the
years ended August 31, 1998 and 1997 and for the two months ended August 31,
1996, and for the ten months ended June 30, 1996 (Predecessor), and for the
related consolidated statements of Partners' Capital for the years ended August
31, 1998 and 1997 and the period from inception (April 24, 1996) to August 31,
1996. 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, 1998 and 1997, and the results of their
operations and their cash flows for the years ended August 31, 1998 and 1997,
and for the two months ended August 31, 1996 and for the ten months ended June
30, 1996 (Predecessor), in conformity with generally accepted accounting
principles.
Tulsa, Oklahoma
October 15, 1998
/s/ Arthur Andersen LLP
-----------------------
F-2
<PAGE> 32
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS
August 31, August 31,
1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,837 $ 2,025
Accounts receivable, net of allowance for doubtful
accounts of $436 for 1998 and 1997 10,444 11,170
Inventories 12,545 13,361
Prepaid expenses 1,359 1,395
----------- -----------
Total current assets 26,185 27,951
PROPERTY, PLANT AND EQUIPMENT, net 139,490 117,962
INVESTMENT IN AFFILIATES 4,739 4,097
INTANGIBLES AND OTHER ASSETS, net 69,550 53,789
----------- -----------
Total assets $ 239,964 $ 203,799
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Working capital facility $ 10,600 $ 12,250
Accounts payable 13,952 14,000
Accrued and other current liabilities 9,689 7,376
Current maturities of long-term debt 1,203 800
----------- -----------
Total current liabilities 35,444 34,426
LONG-TERM DEBT, less current maturities 177,431 148,453
----------- -----------
Total liabilities 212,875 182,879
----------- -----------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL PER ACCOMPANYING STATEMENTS:
Common unitholders 20,775 11,295
Subordinated unitholders 6,041 9,417
General partner 273 208
----------- -----------
Total partners' capital 27,089 20,920
----------- -----------
Total liabilities and partners' capital $ 239,964 $ 203,799
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-3
<PAGE> 33
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit and unit data)
<TABLE>
<CAPTION>
For the Year Ended
August 31, 1996
-------------------------
For the For the Two Months Ten Months
Year Ended Year Ended Ended Ended
August 31, August 31, August 31, June 30,
1998 1997 1996 1996
----------- ----------- ----------- -----------
(Predecessor)
<S> <C> <C> <C> <C>
REVENUES:
Retail $ 136,301 $ 129,673 $ 9,920 $ 92,668
Wholesale 30,254 53,019 6,467 39,090
Other 19,432 17,093 2,090 12,865
----------- ----------- ----------- -----------
Total revenues 185,987 199,785 18,477 144,623
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of products sold 96,884 125,947 12,163 88,989
Operating expenses 47,010 40,444 5,839 29,134
Depreciation and amortization 13,680 11,124 1,733 7,581
Selling, general and administrative 5,484 5,351 698 3,164
----------- ----------- ----------- -----------
Total costs and expenses 163,058 182,866 20,433 128,868
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 22,929 16,919 (1,956) 15,755
OTHER INCOME (EXPENSE):
Interest expense (14,599) (12,063) (1,962) (10,833)
Equity in earnings (losses) of affiliates 707 487 (119) 662
Gain on disposal of assets 534 372 57 170
Other (305) (90) (107) 330
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES,
MINORITY INTEREST AND EXTRAORDINARY LOSS 9,266 5,625 (4,087) 6,084
Provision for income taxes -- -- -- (2,735)
Minority interest (476) (448) 25 (428)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 8,790 5,177 (4,062) 2,921
Extraordinary loss on early extinguishment of debt, net
of minority interest of $44 -- -- (4,361) --
----------- ----------- ----------- -----------
NET INCOME (LOSS) 8,790 5,177 (8,423) $ 2,921
===========
GENERAL PARTNER'S INTEREST IN NET INCOME (LOSS) 88 52 (84)
----------- ----------- -----------
LIMITED PARTNERS' INTEREST IN NET INCOME (LOSS) $ 8,702 $ 5,125 $ (8,339)
=========== =========== ===========
BASIC NET INCOME (LOSS) PER LIMITED PARTNER UNIT
Income (loss) before extraordinary loss $ 1.04 $ .64 $ (.51)
Extraordinary loss -- -- (.55)
----------- ----------- -----------
$ 1.04 $ .64 $ (1.06)
=========== =========== ===========
BASIC WEIGHTED AVERAGE NUMBER OF UNITS
OUTSTANDING 8,332,351 7,987,943 7,864,336
=========== =========== ===========
DILUTED NET INCOME (LOSS) PER LIMITED
PARTNER UNIT $ 1.04 $ .64 $ (1.06)
=========== =========== ===========
DILUTED WEIGHTED AVERAGE NUMBER OF UNITS
OUTSTANDING 8,365,334 8,005,943 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 unit data)
<TABLE>
<CAPTION>
Number of Units
-------------------------------------------------------------------------------
Total
Common Subordinated General Partners'
Common Subordinated Unitholders Unitholders Partner Capital
----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 24, 1996 -- -- $ -- $ -- $ -- $ --
Contribution of net assets of -- 3,702,943 19,334 16,397 361 36,092
predecessor
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
Unit distribution -- -- (7,939) (6,861) (151) (14,951)
Other -- -- 93 -- -- 93
Net Income -- -- 2,749 2,376 52 5,177
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, AUGUST 31, 1997 4,285,000 3,702,943 11,295 9,417 208 20,920
Unit distribution -- -- (9,192) (7,406) (167) (16,765)
Issuance of Common Units in connection
with acquisitions 591,725 -- 13,788 -- -- 13,788
Capital contribution from General
Partner in connection with issuance of -- -- -- -- 141 141
Common Units
Other -- -- 75 137 3 215
Net Income -- -- 4,809 3,893 88 8,790
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, AUGUST 31, 1998 4,876,725 3,702,943 $ 20,775 $ 6,041 $ 273 $ 27,089
=========== =========== =========== =========== =========== ===========
</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
-------------------------
For the Year For the Year Two Months Ten Months
Ended Ended Ended Ended
August 31, August 31, August 31, June 30,
1998 1997 1996 1996
------------ ------------ ----------- -----------
(Predecessor)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 8,790 $ 5,177 $ (8,423) $ 2,921
Reconciliation of net income (loss) to net cash provided
by (used in)
operating activities-
Depreciation and amortization 13,680 11,124 1,733 7,581
Provision for losses on accounts receivable 435 699 133 261
Gain on disposal of assets (534) (372) (55) (170)
Issuance of stock for services rendered and compensatory
appreciation in Warrants -- -- -- (164)
Deferred compensation on restricted units 215 93 -- --
Undistributed earnings of affiliates (642) (411) 330 (471)
Increase in deferred income taxes -- -- -- 2,680
Extraordinary loss on early extinguishment of debt -- -- 4,361 --
Minority interest (15) 130 (69) 428
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable 1,476 (622) (332) (2,444)
Inventories 1,789 (1,694) (2,859) 2,056
Prepaid expenses 149 (194) 1,058 (1,389)
Intangibles and other assets (989) (581) (235) (381)
Accounts payable (1,025) 740 (917) 3,720
Accrued and other current liabilities 1,203 1,295 2,328 644
------------ ------------ ----------- -----------
Net cash provided by (used in) operating
activities 24,532 15,384 (2,947) 15,272
------------ ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired (23,276) (14,549) (8,298) (8,367)
Capital expenditures (9,359) (7,170) (1,092) (6,152)
Proceeds from asset sales 5,511 1,619 50 282
------------ ------------ ----------- -----------
Net cash used in investing activities (27,124) (20,100) (9,340) (14,237)
------------ ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 129,147 69,782 21,603 159,645
Principal payments on debt (110,119) (49,260) (6,850) (37,884)
Unit distribution (16,765) (14,951) -- --
Payment of financing and organization costs -- -- (4,331) --
Issuance of common stock -- -- -- 76
Repurchase of common and preferred stock -- -- -- (61,156)
Net proceeds from issuance of common units -- -- 79,763 --
Cash contribution by General Partner 141 -- 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 financing activities 2,404 5,571 13,457 13,216
------------ ------------ ----------- -----------
INCREASE (DECREASE) IN CASH (188) 855 1,170 14,251
CASH, beginning of period 2,025 1,170 -- 1,237
------------ ------------ ----------- -----------
CASH, end of period $ 1,837 $ 2,025 $ 1,170 $ 15,488
============ ============ =========== ===========
NONCASH FINANCING ACTIVITIES:
Notes payable incurred on noncompete agreements $ 6,393 $ 1,961 $ 1,655 $ 500
5% Preferred stock dividend -- -- -- 523
Net senior notes transferred from predecessor -- -- 76,831 --
Issuance of Common Units in connection with acquisitions 13,788 -- -- --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 13,045 $ 11,873 $ 1,682 $ 10,151
</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, except unit and per unit amounts)
1. OPERATIONS AND ORGANIZATION:
Heritage Propane Partners, L.P. (the Partnership) was formed April 24, 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. (the Predecessor, Company or General Partner). 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 the 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 interest 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 received ownership of a 45.4
percent limited partner interest and an aggregate two percent general partner
interest in the Partnership and the Operating Partnership.
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 in the Company
including the preferred stock plus unpaid cumulative dividends.
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 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 $35,000 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 240,000 retail customers in 26 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.
F-7
<PAGE> 37
2. SIGNIFICANT ACCOUNTING POLICIES AND BALANCE SHEET DETAIL:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Partnership,
its subsidiaries, including Heritage Operating Partnership, and a majority owned
partnership. The Partnership accounts for its 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.
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,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Fuel $ 7,939 $ 9,468
Appliances, parts and fittings 4,606 3,893
--------- ---------
$ 12,545 $ 13,361
========= =========
</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,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
Land and improvements $ 7,809 $ 7,298
Buildings and improvements (10 to 30 years) 13,374 11,415
Bulk storage, equipment and facilities (3 to 30 years) 20,173 17,974
Tanks and other equipment (5 to 30 years) 104,764 84,664
Vehicles (5 to 7 years) 22,818 18,743
Furniture and fixtures (5 to 10 years) 4,578 4,049
Other 1,214 1,126
--------- ---------
174,730 145,269
Less-accumulated depreciation (35,240) (27,307)
--------- ---------
$ 139,490 $ 117,962
========= =========
</TABLE>
F-8
<PAGE> 38
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,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
Goodwill (30 years) $ 45,514 $ 31,666
Noncompete agreements (10 to 15 years) 25,181 24,233
Customer lists (15 years) 12,110 11,885
Other 6,672 5,373
--------- ---------
89,477 73,157
Less-accumulated amortization (19,927) (19,368)
--------- ---------
$ 69,550 $ 53,789
========= =========
</TABLE>
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. It is the
policy of the Partnership to eliminate from their balance sheet any fully
amortized intangibles and the related accumulated amortization.
ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consist of the following:
<TABLE>
<CAPTION>
August 31,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Interest payable $ 3,629 $ 2,075
Wages and payroll taxes 1,914 1,048
Deferred tank rent 1,204 925
Taxes other than income 501 519
Minority interest 280 295
Customer deposits 1,492 1,999
Other 669 515
-------- --------
$ 9,689 $ 7,376
======== ========
</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.
During the Predecessor period, the Company applied 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 provisions relate primarily to net
operating loss carryforwards and depreciation.
F-9
<PAGE> 39
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 amounts are reflected as an extraordinary loss in the
consolidated statement of operations for the two months ended August 31, 1996.
INCOME (LOSS) PER LIMITED PARTNER UNIT
The Partnership adopted Statement of Financial Accounting Standard (SFAS) No.
128, Earnings per Share, effective December 15, 1997, and all net income (loss)
per unit amounts disclosed herein have been calculated under the provisions of
SFAS No. 128. Basic net income per limited partner unit is computed by dividing
net income, after considering the General Partner's one percent interest, by the
weighted average number of Common and Subordinated Units outstanding. Diluted
net income per limited partner unit is computed by dividing net income, after
considering the General Partner's one percent interest, by the weighted average
number of Common and Subordinated Units outstanding and the weighted average
number of Restricted Units ("Phantom Units") granted under the Restricted Unit
Plan. A reconciliation of net income (loss) and weighted average units used in
computing basic and diluted earnings per unit is as follows:
<TABLE>
<CAPTION>
Two Months
Year Ended Ended
August 31, August 31,
------------------------ -----------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
BASIC NET INCOME (LOSS) PER LIMITED PARTNER UNIT:
Basic limited partner's interest in net income (loss) $ 8,702 $ 5,125 $ (8,339)
=========== =========== ===========
Weighted average limited partner units 8,332,351 7,987,943 7,864,336
=========== =========== ===========
Basic net income (loss) per limited partner unit $ 1.04 $ .64 $ (1.06)
=========== =========== ===========
DILUTED NET INCOME (LOSS) PER LIMITED PARTNER UNIT:
Limited partner's interest in net income (loss) $ 8,702 $ 5,125 $ (8,339)
=========== =========== ===========
Weighted average limited partner units 8,332,351 7,987,943 7,864,336
Dilutive effect of phantom units 32,983 18,000 --
----------- ----------- -----------
Weighted average limited partner units, assuming
dilutive effect of phantom units 8,365,334 8,005,943 7,864,336
=========== =========== ===========
Dilutive net income (loss) per limited partner unit $ 1.04 $ .64 $ (1.06)
=========== =========== ===========
</TABLE>
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 period. Actual results
could differ from those estimates.
FAIR VALUE
The carrying amount of accounts receivable and accounts payable approximates
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, 1998, of the Partnership's long-term debt
approximates the aggregate carrying amount.
F-10
<PAGE> 40
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement. Companies must formally document, designated, and
assess the effectiveness of transactions that receive hedge accounting. The
adoption of this statement did not have any material effect on the Partnership's
financial statements.
3. ACQUISITIONS:
During fiscal 1998, the Partnership acquired certain assets of Gibson Propane
Co. and Gibson Homegas of Memphis, TN, Fallsburg Gas Service, Inc. of Fallsburg,
NY and six smaller companies. The Company also purchased all of the outstanding
stock of Tennessee Independent Propane Co. (TIPCO), John E. Foster & Son, of
Leitchfield, KY, and Rural Bottle Gas and Appliance, Inc., of Greenville, MI,
and conveyed the net assets to the Partnership. The acquisitions totaled
$37,401, including noncompete agreements of $6,393 for periods ranging from five
to ten years. These acquisitions were financed primarily with the acquisition
facility, issuance of notes under the Medium Term Note Program and with the
issuance of $13,788 of Common Units. Subsequent to August 31, 1998, the Company
purchased all of the outstanding stock of S.R. Young, Inc., and conveyed the net
assets to the Partnership.
During fiscal 1997, the Partnership purchased certain assets of Horizon Gas,
Inc., Horizon Gas of Palm Bay, Inc., Horizon Gas of Hudson, Inc., Waynesville
Gas Service, Inc., Keen Compressed Gas Co., and three small companies. Guilford
Gas Service, Inc., a corporation in which the Partnership owned a one-third
interest, entered into a stock redemption agreement with its other shareholders
to purchase the remaining two-thirds of the stock. Guilford Gas Service, Inc.
then purchased certain assets of Lancaster Gas Service, Inc. The acquisitions
totaled approximately $17,353, including noncompete agreements for periods
ranging from seven to fifteen years totaling $1,961, which was financed
primarily with the acquisition facility.
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.
The acquisitions have been accounted for by the purchase method 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 and Partnership's consolidated financial statements from the date of
acquisition.
F-11
<PAGE> 41
4. WORKING CAPITAL FACILITIES AND LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
August 31,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
8.55% Senior Secured Notes $ 120,000 $ 120,000
Medium Term Note Program:
7.17% Series A Senior Secured Notes 12,000 --
7.26% Series B Senior Secured Notes 20,000 --
6.50% Series C Senior Secured Notes 5,000 --
6.59% Series D Senior Secured Notes 5,000 --
6.67% Series E Senior Secured Notes 5,000 --
Senior Revolving Acquisition Facility 600 25,000
Notes Payable on noncompete agreements with interest
imputed at rates averaging 8%, due in installments 9,088 3,278
through 2008, collateralized by a first security lien on
certain assets of the Partnership
Other
1,946 975
--------- ---------
178,634 149,253
Current maturities of long-term debt (1,203) (800)
--------- ---------
$ 177,431 $ 148,453
========= =========
</TABLE>
Maturities of the Senior Secured Notes and the Medium Term Note Program are as
follows:
8.55% Senior Notes: mature at the rate of $12,000 on June 30 in
each of the years 2002 to and including 2011.
Series A Notes: mature at the rate of $2,400 on November 19 in
each of the years 2005 to and including 2009.
Series B Notes: mature at the rate of $2,000 on November 19 in
each of the years 2003 to and including 2012.
Series C Notes: mature at the rate of $714 on March
13 in each of the years 2000 to and including
2003, $357 on March 13, 2004, $1,073 on March
13, 2005, and $357 in each of the years 2006
and 2007.
Series D Notes: mature at the rate of $556 on March 13 in each
of the years 2002 to and including 2010.
Series E Notes: mature at the rate of $714 on March 13 in each
of the years 2007 to and including 2013.
The Note Purchase Agreement and the Medium Term Note Program contain restrictive
covenants including limitations on substantial disposition of assets, changes in
ownership of the Partnership, additional indebtedness and require the
maintenance of certain financial ratios. At August 31, 1998, the Partnership was
in compliance with all covenants. All receivables, contracts, equipment,
inventory, general intangibles, cash concentration accounts, and the common
stock of the Partnership's subsidiaries secure the Notes.
As of June 25, 1996, the Partnership entered into a credit agreement with
various financial institutions. This agreement was amended September 30, 1997.
The amended credit agreement extended the terms of the Senior Revolving Working
Capital Facility and the Acquisition Facility by one year and increased the
Senior Revolving Acquisition Facility by $10,000. On October 15, 1998, this
agreement was amended to shift $5,000 from the Acquisition Facility to the
Working Capital Facility. The amended credit agreement consists of the
following:
F-12
<PAGE> 42
A $20,000 Senior Revolving Working Capital Facility, expiring June 30,
2000, with $10,600 outstanding at August 31, 1998. The interest rate
and interest payment dates vary depending on the terms the Partnership
agrees to when the money is borrowed. The weighted average interest
rates were 6.925 percent and 7.59 percent for amounts outstanding at
August 31, 1998 and 1997, respectively. The Partnership must be free of
all working capital borrowings for 30 consecutive days each fiscal
year. A commitment fee of .375 percent is paid on the unused portion of
the facility.
A $30,000 Senior Revolving Acquisition Facility is available through
December 31, 1999, at which time the outstanding amount must be paid in
ten equal quarterly installments, beginning March 31, 2000. The
interest rate and interest payment dates vary depending on the terms
the Partnership agrees to when the money is borrowed. The average
interest rates were 7.0273 percent and 7.38 percent for amounts
outstanding at August 31, 1998 and 1997, respectively. A commitment fee
of .375 percent is paid on the unused portion of the facility.
Future maturities of long-term debt for each of the next five fiscal years and
thereafter are $1,203 in 1999; $2,369 in 2000; $1,852 in 2001; $14,269 in 2002;
$14,278 in 2003 and $144,663 thereafter.
5. COMMITMENTS AND CONTINGENCIES:
Certain property and equipment is leased under noncancelable leases which
require fixed monthly rental payments, and expire at various dates through 2008.
Rental expense under these leases totaled approximately $1,593 for fiscal 1998,
$1,359 for fiscal 1997 and $1,010 and $226 for the ten months ended June 30,
1996 and the two months ended August 31, 1996, respectively. Fiscal year future
minimum lease commitments for such leases are $1,598 in 1999; $851 in 2000; $667
in 2001; $565 in 2002; $454 in 2003 and $879 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 with
varying terms as to quantities and prices, which expire at various dates through
March 1999.
6. PARTNERS' CAPITAL:
Partners' capital consists of 4,876,725 Common Units representing a 55.7 percent
limited partner interest, 3,702,943 Subordinated Units owned by the General
Partner representing a 42.3 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 (as defined below), 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. During fiscal 1998, the Partnership issued
591,725 Common Units in connection with certain acquisitions. 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.
F-13
<PAGE> 43
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 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 ($.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 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 (MQD) 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 MQD 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. A prorata MQD of
$.353 per Common and Subordinated Unit was made on October 15, 1996 for the two
month period between the Partnership's initial public offering and the fourth
quarter ended August 31, 1996. The MQD was made to the Common and Subordinated
Unitholders for the quarters ended November 30, 1996 through May 31, 1998. The
fourth quarter MQD for fiscal 1998 was declared on September 24, 1998, payable
on October 15, 1998, to the Common and Subordinated Unitholders of record as of
October 5, 1998. Subsequent to August 31, 1998, the Partnership announced its
intent to increase the quarterly distribution to $.5125 per unit, ($2.05
annually) effective with the distribution for the first quarter of fiscal 1999,
payable on January 14, 1999.
RESTRICTED UNIT PLAN
The General Partner adopted a restricted unit plan (the Plan) for its
non-employee directors and key employees of the General Partner and its
affiliates effective June 1996. Rights to acquire 146,000 Common Units (Phantom
Units) are available under the Plan and may be granted to employees from time to
time at the discretion of the Plan Committee. Commencing on September 1, 1996,
and on each September 1 thereafter that the Plan is in effect, each director who
is in office automatically receives 500 units. The Phantom Units vest upon, and
in the same proportions as (1) the conversion of the Partnership's Subordinated
Units into Common Units or (2) if later, the third anniversary of their grant
date. During fiscal 1998, 20,200 of these Phantom Units with a market value of
$23.50 per unit on the date of grant, were granted to non-employee directors and
key employees. During fiscal 1997, 18,000 of these Phantom Units with a market
value of $20.25 per unit on the date of grant, were granted to non-employee
directors and key employees. Compensation cost and directors' fee expense of
$215 and $93 was recorded for fiscal 1998 and 1997, respectively, related to the
issuance of the units.
7. REGISTRATION STATEMENT:
Effective November 19, 1997, the Partnership registered 2,000,000 additional
Common Units that may be issued from time to time by the Partnership by means of
a prospectus delivered in connection with its negotiations for acquisition of
other businesses, properties or securities in business combination transactions.
On August 6, 1998, 60,606 Common Units were issued from this registration
statement in connection with the acquisition of certain assets of another
propane company.
F-14
<PAGE> 44
8. PROFIT SHARING AND 401(K) SAVINGS PLAN:
The Company sponsors a defined contribution profit sharing and 401(k) savings
plan (the Plan), which covers all employees subject to service period
requirements. 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, 1998 and 1997, and the periods ended
August 31, 1996, was $375, $325 and $300, respectively.
9. RELATED PARTY TRANSACTIONS:
The Partnership has no employees and is managed 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
approximately $33,870 and $28,659 for the years ended August 31, 1998 and 1997,
respectively and $4,127 for the two months ended August 31, 1996, include
compensation and benefits paid to officers and employees of the General Partner.
10. DOMESTIC AND FOREIGN OPERATIONS:
The following table presents revenues, operating income (loss) and identifiable
assets attributable to the Partnership's domestic and foreign operations.
<TABLE>
<CAPTION>
For the Two For the Ten
For the Year Ended For the Year Ended Months Ended Months Ended
August 31, 1998 August 31, 1997 August 31, 1996 June 30, 1996
------------------ ------------------ ------------------ ------------------
(Predecessor)
<S> <C> <C> <C> <C>
Revenues:
Domestic $ 161,058 $ 158,508 $ 13,182 $ 114,257
Foreign
Affiliated 14,696 20,764 1,261 10,394
Unaffiliated 24,929 41,277 5,295 30,366
Elimination (14,696) (20,764) (1,261) (10,394)
------------------ ------------------ ------------------ ------------------
$ 185,987 $ 199,785 $ 18,477 $ 144,623
================== ================== ================== ==================
Operating Income (Loss):
Domestic $ 22,598 $ 16,541 $ (1,991) $ 15,440
Foreign
Affiliated 196 186 8 111
Unaffiliated 331 378 35 315
Elimination (196) (186) (8) (111)
------------------ ------------------ ------------------ ------------------
$ 22,929 $ 16,919 $ (1,956) $ 15,755
================== ================== ================== ==================
Identifiable Assets:
Domestic $ 236,854 $ 198,935 $ 184,469 $ n/a
Foreign 3,110 4,864 3,381 n/a
------------------ ------------------ ------------------ ------------------
$ 239,964 $ 203,799 $ 187,850 $ n/a
================== ================== ================== ==================
</TABLE>
F-15
<PAGE> 45
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
(3) 10.1.1 Amendment of Bank Credit Facility dated as of July 9, 1996
(4) 10.1.2 Amendment of Bank Credit Facility dated as of February 28, 1997
(5) 10.1.3 Third Amendment to Credit Agreement dated as of September 30, 1997
(1) 10.2 Form of Note Purchase Agreement
(3) 10.2.1 Amendment of Note Purchase Agreement dated as of July 25, 1996
(4) 10.2.2 Amendment of Note Purchase Agreement dated as of March 11, 1997
(*) 10.2.3 Amendment of Note Purchase Agreement dated as of October 15, 1998
(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
(4) 10.6.1 Amendment of Restricted Unit Plan dated as of October 17, 1996
(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
(*) 10.11 Employment Agreement for Bradley K. Atkinson
(6) 10.16 Note Purchase Agreement dated as of November 19, 1997
(*) 10.16.1 Amendment dated October 15, 1998 to November 19, 1997 Note Purchase Agreement
(*) 23.3 Consent of Arthur Andersen LLP
(*) 21.1 List of Subsidiaries
27.1 Financial Data Schedule - Filed with EDGAR version only
</TABLE>
<PAGE> 46
(1) Incorporated by reference to the same numbered Exhibit to Registrant's
Registration Statement of Form S-3, 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 S-1, File No. 333-4018, filed with the Commission on
June 21, 1996.
(3) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended November 30, 1996.
(4) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended February 28, 1997.
(5) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-K for the year ended August 31, 1997.
(6) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 1998.
(*) Filed Herewith.
<PAGE> 1
EXHIBIT 10.2.3
HERITAGE OPERATING, L.P.
FIRST AMENDMENT AGREEMENT
Re: Note Purchase Agreement dated as of June 25, 1996
Note Purchase Agreement dated as of November 19, 1997
Dated as of
October 15, 1998
To each of the Holders named
in Schedule 1 to this First
Amendment Agreement
Ladies and Gentlemen:
Reference is made to
(i) the Note Purchase Agreement dated as of June 25, 1996 (the
"Outstanding 1996 Agreement"), among Heritage Operating, L.P., a
Delaware limited partnership (the "Company") and the Purchasers named
in the Purchaser Schedule attached thereto, under and pursuant to which
the Company issued, and there are presently outstanding, $120,000,000
aggregate principal amount of its 8.55% Senior Secured Notes due 2011
(the "1996 Notes"); and
(ii) the Note Purchase Agreement dated as of November 19, 1997
(the "Basic 1997 Agreement"), among the Company and the Purchasers
named in the Initial Purchaser Schedule attached thereto, under and
pursuant to which the Company issued, and there are presently
outstanding, $12,000,000 aggregate principal amount of its 7.17% Series
A Senior Secured Notes due November 19, 2009 (the "Series A Notes") and
$20,000,000 aggregate principal amount of its 7.26% Series B Senior
Secured Notes due November 19, 2012 (the "Series B Notes"), as
supplemented by the First Supplemental Note Purchase Agreement dated as
of March 13, 1998 the "First Supplemental Agreement" among the Company
and the Purchasers named in the Supplemental Purchaser Schedule
attached thereto, under and pursuant to which the Company issued, and
there are presently outstanding, (x) $5,000,000 aggregate principal
amount of its 6.50% Series C Senior Secured Notes due March 13, 2007
(the "Series C Notes"), (y) $5,000,000 aggregate principal amount of
its 6.59% Series D Senior Secured Notes due March 13, 2010 (the "Series
D Notes") and (z) $5,000,000 aggregate principal amount of its 6.67%
Series E Senior Secured Notes due March 13, 2013 (the "Series E
Notes").
The Basic 1997 Agreement, as supplemented by the First Supplemental Agreement is
hereinafter sometimes referred to as the "Outstanding 1997 Agreement". The
Outstanding 1996 Agreement and the Outstanding 1997 Agreement are hereinafter
sometimes collectively referred to as the
<PAGE> 2
"Outstanding Agreements". The 1996 Notes, Series A Notes, Series B Notes, Series
C Notes, Series D Notes and Series E Notes are hereinafter sometimes
collectively referred to as the "Outstanding Notes."
The Company now desires to amend certain provisions of the Outstanding
Agreements. You are the owner and holder of the Outstanding Notes set forth
opposite your name on Schedule 1 hereto. The Company hereby requests that from
and after your acceptance hereof in the manner hereinafter provided and upon
receipt by the Company of similar acceptances from the holders of the requisite
percentage of each issue of the Outstanding Notes, said Outstanding Agreements
shall be amended in the respects, but only in the respects, hereinafter set
forth.
ARTICLE I
AMENDMENTS TO OUTSTANDING 1996 AGREEMENT
I-A. The reference to "$15,000,000" set forth in Section 6B(ii) of the
Outstanding 1996 Agreement is hereby deleted and "$20,000,000" shall be
substituted therefor.
I-B. The reference to "$35,000,000" set forth in Section 6B(iii) of the
Outstanding 1996 Agreement is hereby deleted and "$30,000,000" shall be
substituted therefor.
I-C. Section 7A(v) of the Outstanding 1996 Agreement is hereby amended
and restated in its entirety to read as follows:
"(v) the Company fails to perform, observe or comply with any
agreement contained in Section 6 or Section 5A(v); or"
I-D. The definition of the term "Reinvestment Yield" set forth in
Section 10A of the Outstanding 1996 Agreement is hereby amended and restated in
its entirety to read as follows:
"`Reinvestment Yield'" shall mean, with respect to the Called
Principal of any Note, 0.50% over the yield to maturity implied by (i)
the yields reported, as of 10:00 a.m. (New York City time) on the third
Business Day next preceding the Settlement Date with respect to such
Called Principal, on the display designated as "Page 678" on the
Telerate Service (or such other display as may replace Page 678 on the
Telerate Service) for actively traded U.S. Treasury securities having a
maturity equal to the Remaining Average Life of such Called Principal
as of such Settlement Date, or if such yields shall not be reported as
of such time or the yields reported as of such time shall not be
ascertainable, (ii) the Treasury Constant Maturity Series yields
reported, for the latest day for which such yields shall have been so
reported as of the third Business Day next preceding the Settlement
Date with respect to such Called Principal, in Federal Reserve
Statistical Release H.15 (519) (or any comparable successor
publication) for actively traded U.S. Treasury securities having a
constant maturity equal to the Remaining
-2-
<PAGE> 3
Average Life of such Called Principal as of such Settlement Date. Such
implied yield shall be determined, if necessary, by (a) converting U.S.
Treasury bill quotations to bond-equivalent yields in accordance with
accepted financial practice and (b) interpolating linearly between
yields reported for various maturities if no maturity corresponds to the
applicable Remaining Average Life."
I-E. The reference to "$35,000,000" contained in the definition of the
term "Acquisition Facility" set forth in Section 10B of the Outstanding 1996
Agreement is hereby deleted and "$30,000,000" shall be substituted therefor.
I-F. The references to "$15,000,000" contained in the definition of the
term "Revolving Working Capital Facility" set forth in Section 10B of the
Outstanding 1996 Agreement are hereby deleted and "$20,000,000" shall be
substituted therefor.
ARTICLE II
AMENDMENTS TO OUTSTANDING 1997 AGREEMENT
II-A. The reference to "$15,000,000" set forth in Section 6B(ii) of the
Outstanding 1997 Agreement is hereby deleted and "$20,000,000" shall be
substituted therefor.
II-B. The reference to "$35,000,000" set forth in Section 6B(iii) of the
Outstanding 1997 Agreement is hereby deleted and "$30,000,000" shall be
substituted therefor.
II-C. Section 7A(v) of the Outstanding 1997 Agreement is hereby amended
and restated in its entirety to read as follows:
"(v) the Company fails to perform, observe or comply with any
agreement contained in Section 6 or Section 5A(v); or"
II-D. The definition of the term "Reinvestment Yield" set forth in
Section 10A of the Outstanding 1997 Agreement is hereby amended and restated in
its entirety to read as follows:
"`Reinvestment Yield'" shall mean, with respect to the Called
Principal of any Note, 0.50% over the yield to maturity implied by (i)
the yields reported, as of 10:00 a.m. (New York City time) on the third
Business Day next preceding the Settlement Date with respect to such
Called Principal, on the display designated as "Page 678" on the
Telerate Service (or such other display as may replace Page 678 on the
Telerate Service) for actively traded U.S. Treasury securities having a
maturity equal to the Remaining Average Life of such Called Principal as
of such Settlement Date, or if such yields shall
-3-
<PAGE> 4
not be reported as of such time or the yields reported as of such time
shall not be ascertainable, (ii) the Treasury Constant Maturity Series
yields reported, for the latest day for which such yields shall have
been so reported as of the third Business Day next preceding the
Settlement Date with respect to such Called Principal, in Federal
Reserve Statistical Release H.15 (519) (or any comparable successor
publication) for actively traded U.S. Treasury securities having a
constant maturity equal to the Remaining Average Life of such Called
Principal as of such Settlement Date. Such implied yield shall be
determined, if necessary, by (a) converting U.S. Treasury bill
quotations to bond-equivalent yields in accordance with accepted
financial practice and (b) interpolating linearly between yields
reported for various maturities if no maturity corresponds to the
applicable Remaining Average Life."
II-E. The reference to "clause (xiv)" contained in the definition of the
term "Priority Debt" set forth in Section 10B of the Outstanding 1997 Agreement
is hereby deleted and "clause (xv)" shall be substituted therefor.
II-F. The reference to "$35,000,000" contained in the definition of the
term "Acquisition Facility" set forth in Section 10B of the Outstanding 1997
Agreement is hereby deleted and "$30,000,000" shall be substituted therefor.
II-G. The references to "$15,000,000" contained in the definition of the
term "Revolving Working Capital Facility" set forth in Section 10B of the
Outstanding 1997 Agreement are hereby deleted and "$20,000,000" shall be
substituted therefor.
ARTICLE III
MISCELLANEOUS
III-A. If the foregoing is acceptable to you, kindly note your acceptance
in the space provided below and upon receipt by the Company of similar
acceptances signed by the holders of the requisite percentage of each issue of
the Outstanding Notes, the Outstanding Agreements shall be amended and restated
as set forth above, but all other terms and provisions of the Outstanding
Agreements shall remain unchanged and are in all respects ratified, confirmed
and approved.
III-B. By your acceptance hereof you also agree that you shall, prior to
any sale, assignment, transfer, pledge or other disposition by you of any
Outstanding Notes, either (i) place on the Outstanding Notes so to be disposed
of an appropriate endorsement referring to this First Amendment Agreement as
binding upon the parties hereto and upon any and all future holders of such
Outstanding Notes, or (ii) (at your option) surrender such Outstanding Notes for
new notes modified to reflect the changes set forth herein. All expenses for the
preparation of such new notes and the exchange of such Outstanding Notes are to
be borne by the Company.
Very truly yours,
HERITAGE OPERATING L.P.
By Heritage Holdings, Inc., General Partner
By /s/ H. Michael Krimbill
----------------------------------------
Its Vice President and CFO
------------------------------------
-4-
<PAGE> 5
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
JOHN HANCOCK MUTUAL LIFE INSURANCE
COMPANY
By
-------------------------------
Its
JOHN HANCOCK VARIABLE LIFE INSURANCE
COMPANY
By
-------------------------------
Its
MELLON BANK, N.A., solely in its capacity as Trustee for the Long-Term
Investment Trust (as directed by John Hancock Mutual Life Insurance Company),
and not in its individual capacity
By
-------------------------------
Its
-5-
<PAGE> 6
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
MASSACHUSETTS MUTUAL LIFE INSURANCE
COMPANY
By
-------------------------------
Its
-6-
<PAGE> 7
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
By
-------------------------------
Its
By
-------------------------------
Its
-7-
<PAGE> 8
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
NEW YORK LIFE INSURANCE COMPANY
By
-------------------------------
Its
NEW YORK LIFE INSURANCE AND ANNUITY
CORPORATION
By
-------------------------------
Its
-8-
<PAGE> 9
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA
By
-------------------------------
Its
-9-
<PAGE> 10
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
KEYPORT LIFE INSURANCE COMPANY
By
-------------------------------
Its
-10-
<PAGE> 11
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
J. ROMEO & CO.
By
-------------------------------
Its
-11-
<PAGE> 12
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
PACIFIC LIFE INSURANCE COMPANY
(formerly Pacific Mutual Life Insurance Company)
By
-------------------------------
Its
By
-------------------------------
Its
PACIFIC LIFE INSURANCE COMPANY
By
-------------------------------
Its
By
-------------------------------
Its
-12-
<PAGE> 13
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
PHOENIX HOME LIFE MUTUAL INSURANCE
COMPANY
By
-------------------------------
Its
-13-
<PAGE> 14
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
RELIASTAR LIFE INSURANCE COMPANY
By
-------------------------------
Its
-14-
<PAGE> 15
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
GENERAL AMERICAN LIFE INSURANCE COMPANY
By
-------------------------------
Its
-15-
<PAGE> 16
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
By
-------------------------------
Its
By
-------------------------------
Its
-16-
<PAGE> 17
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
ALLSTATE LIFE INSURANCE COMPANY
By
-------------------------------
Name:
By
-------------------------------
Name:
Authorized Signatories
-17-
<PAGE> 18
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
CHUBB LIFE INSURANCE COMPANY
OF AMERICA
By
-------------------------------
Its
-18-
<PAGE> 19
SCHEDULE 1
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT AND
SERIES OF OUTSTANDING
NAME OF HOLDER NOTES HELD AS OF
OF OUTSTANDING NOTES OCTOBER 15, 1998
<S> <C>
John Hancock Mutual Life Insurance Company $13,000,000
John Hancock Mutual Life Insurance Company $ 8,000,000
John Hancock Variable Life Insurance Company $ 1,000,000
Mellon Bank, N.A., Trustee Under Master Trust $ 3,000,000
Agreement of AT&T Corporation dated
January 1, 1984 for Employee Pension Plans
- AT&T - John Hancock - Private Placement
Massachusetts Mutual Life Insurance Company $15,000,000
Principal Mutual Life Insurance Company $15,000,000
New York Life Insurance Company $12,500,000
Teachers Insurance and Annuity Association of America $12,500,000
Keyport Life Insurance Company $10,000,000
MONY Life Insurance Company of America $ 3,500,000
The Mutual Life Insurance Company of New York $ 4,000,000
Pacific Mutual Life Insurance Company $ 5,500,000
Phoenix Home Life Mutual Insurance Company $ 5,000,000
ReliaStar Life Insurance Company $ 5,000,000
</TABLE>
-1-
<PAGE> 20
<TABLE>
<S> <C>
General American Life Insurance Company $ 4,000,000
Wisconsin National Life Insurance Company $ 3,000,000
Pacific Life Insurance Company $12,000,000 Series A Notes
Pacific Life Insurance Company $8,000,000 Series B Notes
New York Life Insurance Company $5,000,000 Series B Notes
New York Life Insurance and
Annuity Corporation $7,000,000 Series B Notes
Allstate Life Insurance Company $5,000,000 Series C Notes
Chubb Life Insurance Company
of America $5,000,000 Series D Notes
MONY Life Insurance Company
of America $5,000,000 Series E Notes
</TABLE>
-2-
<PAGE> 1
EXHIBIT 10.11
HERITAGE HOLDINGS, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of April 15,
1998 ("Effective Date") by and between Heritage Holdings, Inc. ("Company") and
Bradley K. Atkinson ("Employee").
WHEREAS, Employee is currently the Vice President Administration of the
Company; and
WHEREAS, the Company desires for Employee to continue in such capacity
with the Company and Employee is willing to continue serving in Employee's
current capacity, on the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties, and agreements contained herein, and for other
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
Definitions and Interpretations
1.1. Definitions
For purposes of this Agreement, except as otherwise expressly provided
or unless the context otherwise requires, the following terms shall have the
following respective meanings:
"Base Salary" shall have the meaning specified in Section 3.1.
"Board" shall mean the Board of Directors of the Company.
"Confidential Information" shall have the meaning specified in
Section 5.1(a).
"Continuation Period" shall have the meaning specified in
Section 4.5(a).
"Disability" shall mean a physical or mental condition of
Employee that, in the good faith judgment of not less than a majority
of the entire membership of the Board, based upon certification by a
licensed physician reasonably acceptable to Employee and the Board, (i)
prevents Employee from being able to perform the services required
under this Agreement, (ii) has continued for a period of at least 180
days during any 12-month period, and (iii) is expected to continue.
<PAGE> 2
"Dispute" shall have the meaning specified in Article VI.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Expiration Date" shall have the meaning specified in Section
2.2.
"Good Reason" shall mean any of the following:
(i) the assignment to Employee of any duties inconsistent
with Employee's position (including status, offices,
titles and reporting requirements), authority, duties
or responsibilities, excluding for this purpose an
isolated, unsubstantial and inadvertent action not
taken in bad faith and which is remedied by the
Company promptly after receipt of notice thereof
given by Employee. It is agreed and understood the
Employee's title shall change to Vice President,
Corporate Development upon the transfer of
responsibilities from G. A. Darr.
(ii) the Company's requiring Employee to be based at any
office other than the Company's Corporate
Headquarters;
(iii) any termination by the Company of Employee's
employment other than as expressly permitted by this
Agreement;
(iv) any failure by the Company to comply with and satisfy
Section 7.5 (requiring the Company to require any
successor to expressly assume and agree to perform
all obligations under this Agreement); or
"Misconduct" shall mean one or more of the following:
(i) the willful and continued failure by Employee to
perform substantially his duties hereunder (other than any
such failure resulting from Employee's incapacity due to
physical or mental illness) after written notice of such
failure has been given to Employee by the Company and Employee
has had a reasonable period (not to exceed 15 days) to correct
such failure;
(ii) conviction of Employee for any felony or any
other crime involving dishonesty or moral turpitude which is
materially detrimental to the Company;
(iii) any act or omission by Employee which
materially damages the integrity, reputation or financial
viability of the Company or its affiliates; or
(iv) a breach or violation by Employee of (a) any
material provision of this Agreement or (b) any material
Company employment policy, which, if capable of being
remedied, remains unremedied for more than 15 days after
written notice thereof is given to Employee by the Company.
<PAGE> 3
For purposes of this definition, no act or failure to act on Employee's part
shall be considered "Misconduct" if done or omitted to be done by Employee in
good faith and in the reasonable belief that such act or failure to act was in
the best interest the Company or in furtherance of Employee's duties and
responsibilities hereunder.
"Notice of Discontinuance" shall have the meaning specified in
Section 2.2.
"Notice of Termination" shall mean a notice purporting to
terminate Employee's employment in accordance with Section 4.1 or 4.2.
Such notice shall specify the effective date of such termination, which
date shall not be less than 30 (10 in the case of a termination by the
Company for Misconduct) nor more than 60 days after the date such
notice is given. If such termination is by Employee for Good Reason or
by the Company for Disability or Misconduct, such notice shall set
forth in reasonable detail the reason for such termination and the
facts and circumstances claimed to provide a basis therefor. Any notice
purporting to terminate Employee's employment which is not in
compliance with the requirements of this definition shall be
ineffective.
"Person" shall mean and include an individual, a partnership,
a joint venture, a corporation, a trust and an unincorporated
organization.
"Term" shall have the meaning specified in Section 2.2.
"Termination Date" shall mean the termination date specified
in a Notice of Termination delivered in accordance with this Agreement.
1.2. Interpretations
(a) In this Agreement, unless a clear contrary intention appears, (i)
the words "herein," "hereof" and "hereunder" and other words of similar import
refer to this Agreement as a whole and not to any particular Article, Section or
other subdivision, (ii) reference to any Article or Section, means such Article
or Section hereof, (iii) the words "including" (and with correlative meaning
"include") means including, without limiting the generality of any description
preceding such term, and (iv) where any provision of this Agreement refers to
action to be taken by either party, or which such party is prohibited from
taking, such provision shall be applicable whether such action is taken directly
or indirectly by such party.
(b) The Article and Section headings herein are for convenience only
and shall not affect the construction hereof.
-3-
<PAGE> 4
ARTICLE II
Employment; Term; Position and Duties; Etc.
2.1. Employment
The Company agrees to continue Employee's employment with the Company
and Employee agrees to remain in the employment of the Company, in each case on
the terms and conditions set forth in this Agreement.
2.2. Term of Employment
Unless sooner terminated pursuant to Article IV, the term of Employee's
employment under this Agreement (the "Term") shall commence on the Effective
Date and shall continue until April 30, 2000 (the "Expiration Date"); provided,
however, that beginning on January 1, 2000 and on each January 1 thereafter, the
Expiration Date shall be automatically extended one additional year unless,
prior to any such January 1 either party (i) shall give written notice to the
other (a "Notice of Discontinuance") that no such automatic extension shall
occur after the date of such notice or (ii) shall give a Notice of Termination
to the other party pursuant to Section 4.1 or 4.2, as the case may be. No Notice
of Discontinuance given by the Company shall be effective unless given pursuant
to instructions set forth in a resolution duly adopted by the affirmative vote
of a least a majority of the entire membership of the Board.
2.3. Position and Duties
(a) While employed hereunder, Employee shall serve as Vice President
Administration of the Company and shall have and may exercise all of the powers,
functions, duties and responsibilities normally attributable to such position.
Employee shall have such additional duties and responsibilities commensurate
with such position as from time to time may be reasonably assigned to Employee
by the Board or the Chief Executive Officer of the Company. While employed
hereunder, Employee shall (i) report directly and exclusively to the Chief
Executive Officer of the Company and (ii) observe and comply with all lawful
policies, directions and instructions of the Board and the Chief Executive
Officer of the Company which are consistent with the foregoing provisions of
this paragraph (a).
(b) While employed hereunder, Employee shall devote substantially all
of his business time, attention, skill and efforts to the faithful and efficient
performance of his duties hereunder. Notwithstanding the foregoing, Employee may
engage in the following activities so long as they do not interfere in any
material respect with the performance of Employee's duties and responsibilities
hereunder: (i) serve on corporate, civic, religious, educational and/or
charitable boards or committees and (ii) manage his personal investments.
-4-
<PAGE> 5
(c) While employed hereunder, Employee shall conduct himself in such a
manner as not to knowingly prejudice, in any material respect, the reputation of
the Company or any of its affiliates, including Heritage Propane Partners, L.P.,
or with the investment community or the public at large.
2.4. Place of Employment
Employee's place of employment hereunder shall be at the Company's
Corporate Headquarters presently located in Tulsa, Oklahoma.
ARTICLE III
Compensation and Benefits
3.1. Base Salary
(a) For services rendered by Employee under this Agreement, the Company
shall pay to Employee an annual base salary of $125,000 ("Base Salary"). The
Board shall review the Base Salary at least annually and may adjust the amount
of the Base Salary at any time as the Board may deem appropriate in its sole
discretion; provided, however, that in no event may the Base Salary be decreased
below the above stated amount without the prior written consent of Employee.
(b) The Base Salary shall be payable in accordance with the Company's
payroll practice for its executives as it is earned.
3.2. Vacation
While employed hereunder, Employee shall be entitled to vacation
benefits in accordance with the vacation policy approved by the Board from time
to time for the Company's executives in general. Employee shall not be entitled
to accumulate and carryover unused vacation time from year to year, except to
the extent permitted in accordance with the Company's vacation policy for
executives in general, nor shall Employee be entitled to compensation for unused
vacation time except as provided in Section 4.3(a).
3.3. Business Expenses
The Company shall, in accordance with the rules and policies that it
may establish from time to time for executives, reimburse Employee for business
expenses reasonably incurred in the performance of Employee's duties. Requests
for reimbursement for such expenses must be accompanied by appropriate
documentation.
-5-
<PAGE> 6
Other Benefits
Employee shall be entitled to receive all employee benefits, fringe
benefits and other perquisites that may be offered by the Company to its
executives as a group, including, without limitation, participation by Employee
and, where applicable, Employee's dependents, in the various employee benefit
plans or programs (including, without limitation, pension plans, profit sharing
and 401(k) plans, stock plans, health plans, life insurance and disability
insurance) provided to executives of the Company in general, subject to meeting
the eligibility requirements with respect to each of such benefit plans or
programs. However, nothing in this Section 3.4 shall be deemed to prohibit the
Company from making any changes in any of the plans, programs or benefits
described herein. In addition, Employee shall be entitled to reasonable moving
and relocation expenses if Employee is required to relocate by the Board.
ARTICLE IV
Termination of Employment
4.1. Termination by Employee
Employee may, at any time prior to the Expiration Date, terminate his
employment hereunder for any reason by delivering a Notice of Termination to the
Chief Executive Officer of the Company.
4.2. Termination by the Company
The Company may, at any time prior to the Expiration Date, terminate
Employee's employment hereunder for any reason by delivering a Notice of
Termination to Employee; provided, however, that in no event shall the Company
be entitled to terminate Employee's employment prior to the Expiration Date
unless the Board shall duly adopt, by the affirmative vote of at least a
majority of the entire membership of the Board, a resolution authorizing such
termination and stating that, in the opinion of the Board, sufficient reason
exists therefor.
4.3. Payment of Accrued Base Salary, Vacation Pay, etc.
(a) Promptly upon the termination of Employee's employment for any
reason (including death), the Company shall pay to Employee (or his estate) a
lump sum amount for (i) any unpaid Base Salary earned hereunder prior to the
termination date, (ii) all unused vacation time accrued by Employee as of the
termination date in accordance with Section 3.2, (iii) all unpaid benefits
earned or vested, as the case may be, by Employee as of the termination date
under any and all incentive or deferred compensation plans or programs of the
Company and (iv) any amounts in respect of which Employee has requested, and is
entitled to, reimbursement in accordance with Section 3.3.
(b) A termination of Employee's employment in accordance with this
Agreement shall not alter or impair any of Employee's rights or benefits under
any employee benefit plan or program
-6-
<PAGE> 7
maintained by the Company, in each case except as provided therein or in any
written agreement entered into between the Company and Employee pursuant
thereto.
4.4. Disability Payments
If Employee incurs a Disability, the Company may terminate Employee's
employment hereunder by delivering a Notice of Termination to Employee;
provided, however, in such event the Company shall continue to pay to Employee,
through the remainder of the Term (as determined without regard to its earlier
termination upon Employee's termination due to Disability under this Section 4.4
and without any extension of the Term after such termination date), at such
regularly scheduled times:
(A) the Base Salary in effect on the date of such
termination,
minus
(B) any amount payable to Employee under any disability
plan maintained by the Company for the benefit of
Employee.
4.5. Other Benefits
The following provisions shall apply if Employee terminates his
employment pursuant to Section 4.1 for Good Reason or if the Company terminates
Employee's employment pursuant to Section 4.2 for any reason other than
Misconduct or Disability:
(a) Base Salary Payments. For the remainder of the Term or
until Employee's death, if earlier (the "Continuation Period"), the
Company shall pay to Employee, at the regularly scheduled times, the
Base Salary (as in effect on the date on which the relevant Notice of
Termination is given in accordance with this Agreement). The amount
payable to Employee under this paragraph (a) is in lieu of, and not in
addition to, any severance payment due or to become due to Employee
under any separate agreement or contract between Employee and the
Company or pursuant to any severance payment plan, program or policy of
the Company.
(b) Insurance Benefits, etc. The Company shall at all times
during the Continuation Period cause Employee and Employee's eligible
dependents to be covered by and to participate in, to the fullest
extent allowable under the terms thereof, all group health insurance
plans and programs that may be offered to the executives of the Company
so that Employee will receive, at all times during the Continuation
Period, the same benefits under such plans and programs that Employee
would have been entitled to receive had he remained an executive of the
Company; provided, however, (i) Employee must timely pay the "active"
employee premium, if any, for such continued coverage and (ii) in the
event Employee becomes covered during the Continuation Period by
another employer's group health plan or programs which does not contain
any exclusion or limitation with respect to any
-7-
<PAGE> 8
pre-existing conditions, then the Company's group health plans shall no
longer be liable for any benefits under this paragraph (b).
(c) Release. Notwithstanding anything in this Section 4.5 to
the contrary, as a condition to the receipt of any benefit under this
Section 4.5, Employee must first execute and deliver to the Company a
release in a form prepared by the Company, releasing the Company, its
officers, the Board, employees and agents from any and all claims and
from any and all causes of action of any kind or character that
Employee may have arising out of Employee's employment with the Company
or the termination of such employment, but excluding any claims and
causes of action that Employee may have arising under or based upon
this Agreement.
(d) Parachute Tax. To the extent that any payment made to
Employee hereunder is subject to federal excise tax as a result of the
"parachute" provisions of Section 280G and 4999(a) of the Internal
Revenue Code of 1986, as amended, then the Company shall pay Employee
an additional amount of cash (the "Additional Amount") such that the
net amount received by Employee, after paying all applicable excise
taxes and all other federal and state taxes on such Additional Amount,
shall be equal to the net amount that Employee would have received if
payments made hereunder were not subject to such parachute excise tax.
4.6. Non-exclusivity of Rights
Nothing in this Agreement shall prevent or limit Employee's continuing
or future participation in any plan, program, policy or practice provided by the
Company for which Employee may qualify, nor shall anything herein limit or
otherwise affect such rights as Employee may have under any other contract or
agreement with the Company. Amounts which are vested benefits or which Employee
is otherwise entitled to receive under any plan, policy, practice or program of
or any contract or agreement with the Company at or subsequent to the
Termination Date shall be payable in accordance with such plan, policy, practice
or program or contract or agreement except as explicitly modified by this
Agreement.
-8-
<PAGE> 9
ARTICLE V
Confidential Information and Non-Competition
5.1. Confidential Information
(a) Employee recognizes that the services to be performed by Employee
hereunder are special, unique, and extraordinary and that, by reason of
Employee's employment with the Company, Employee may acquire Confidential
Information concerning the operation of the Company, the use or disclosure of
which would cause the Company substantial loss and damages which could not be
readily calculated and for which no remedy at law would be adequate.
Accordingly, Employee agrees that Employee will not (directly or indirectly) at
any time, whether during or after Employee's employment hereunder, (i) knowingly
use for an improper personal benefit any Confidential Information that Employee
may learn or has learned by reason of Employee's employment with the Company or
(ii) disclose any such Confidential Information to any Person except (A) in the
performance of Employee's obligations to the Company hereunder, (B) as required
by applicable law, (C) in connection with the enforcement of Employee's rights
under this Agreement, (D) in connection with any disagreement, dispute or
litigation (pending or threatened) between Employee and the Company or (E) with
the prior written consent of the Board. As used herein, "Confidential
Information" includes information with respect to the Company's products,
facilities and methods, research and development, trade secrets and other
intellectual property, systems, patents and patent applications, procedures,
manuals, confidential reports, product price lists, customer lists, financial
information, business plans, prospects or opportunities; provided, however, that
such term shall not include any information that (x) is or becomes generally
known or available other than as a result of a disclosure by Employee or (y) is
or becomes known or available to Employee on a nonconfidential basis from a
source (other than the Company) which, to Employee's knowledge, is not
prohibited from disclosing such information to Employee by a legal, contractual,
fiduciary or other obligation to the Company.
(b) Employee confirms that all Confidential Information is the
exclusive property of the Company. All business records, papers and documents
kept or made by Employee while employed by the Company relating to the business
of the Company shall be and remain the property of the Company at all times.
Upon the request of the Company at any time, Employee shall promptly deliver to
the Company, and shall retain no copies of, any written materials, records and
documents made by Employee or coming into his possession while employed by the
Company concerning the business or affairs of the Company other than personal
materials, records and documents (including notes and correspondence) of
Employee not containing proprietary information relating to such business or
affairs. Notwithstanding the foregoing, Employee shall be permitted to retain
copies of, or have access to, all such materials, records and documents relating
to any disagreement, dispute or litigation (pending or threatened) between
Employee and the Company.
-9-
<PAGE> 10
5.2. Non-Competition
(a) While employed hereunder and for one year thereafter or the
Continuation Period, if longer (the "Restricted Period"), Employee shall not,
unless Employee receives the prior written consent of the Board, own an interest
in, manage, operate, join, control, lend money or render financial or other
assistance to or participate in or be connected with, as an officer, employee,
partner, stockholder, consultant or otherwise, any Person which competes with
the Company in the retail marketing of propane gas in the United States;
provided, however, that the foregoing restriction shall apply only to (i) those
areas where the Company was actually doing business on the Termination Date and
(ii) those areas in respect of which the Company actively and diligently
conducted at any time during the 12-month period ended on the Termination Date
an analysis to determine whether or not it would commence doing business in such
areas but, in the case of each such area, the foregoing restriction shall cease
when the Company ceases to actively conduct business (disregarding any temporary
stoppages) in such area or, if applicable, abandons its intent to conduct
business in such area.
(b) Employee has carefully read and considered the provisions of this
Section 5.2 and, having done so, agrees that the restrictions set forth in this
Section 5.2 (including the Restricted Period, scope of activity to be restrained
and the geographical scope) are fair and reasonable and are reasonably required
for the protection of the interests of the Company, its officers, directors,
employees, creditors and shareholders. Employee understands that the
restrictions contained in this Section 5.2 may limit his ability to engage in a
business similar to the Company's business, but acknowledges that he will
receive sufficiently high remuneration and other benefits from the Company
hereunder to justify such restrictions.
(c) During the Restricted Period, Employee shall not, whether for his
own account or for the account of any other Person (excluding the Company),
intentionally (i) solicit, endeavor to entice or induce any employee of the
Company to terminate his employment with the Company or accept employment with
anyone else or (ii) interfere in a similar manner with the business of the
Company.
(d) In the event that any provision of this Section 5.2 relating to the
Restricted Period and/or the areas of restriction shall be declared by a court
of competent jurisdiction to exceed the maximum time period or areas such court
deems reasonable and enforceable, the Restricted Period and/or areas of
restriction deemed reasonable and enforceable by the court shall become and
thereafter be the maximum time period and/or areas.
5.3. Stock Ownership
Nothing in this Agreement shall prohibit Employee from acquiring or
holding any issue of stock or securities of any Person that has any securities
registered under Section 12 of the Exchange Act, listed on a national securities
exchange or quoted on the automated quotation system of the National Association
of Securities Dealers, Inc. so long as (i) Employee is not deemed to be an
"affiliate" of such Person as such term is used in paragraphs (c) and (d) of
Rule 145 under the Securities Act of 1933, as amended, and (ii) Employee and
members of his immediate family do not own or hold more than 3% of any voting
securities of any such Person.
-10-
<PAGE> 11
5.4. Injunctive Relief
Employee acknowledges that a breach of any of the covenants contained
in this Article V may result in material irreparable injury to the Company for
which there is no adequate remedy at law, that it will not be possible to
measure damages for such injuries precisely and that, in the event of such a
breach, any payments remaining under the terms of this Agreement shall cease and
the Company shall be entitled to obtain a temporary restraining order and/or a
preliminary or permanent injunction restraining Employee from engaging in
activities prohibited by this Article V or such other relief as may required to
specifically enforce any of the covenants contained in this Article V. Employee
agrees to and hereby does submit to in personam jurisdiction before each and
every such court for that purpose.
ARTICLE VI
Dispute Resolution
(a) In the event a dispute shall arise between the parties as to
whether the provisions of this Agreement have been complied with (a "Dispute"),
the parties agree to resolve such Dispute in accordance with the following
procedure:
(1) A meeting shall be held promptly between the Parties,
attended by (in the case of the Company) one or more individuals with
decision-making authority regarding the Dispute, to attempt in good
faith to negotiate a resolution of the Dispute.
(2) If, within 10 days after such meeting, the parties have
not succeeded in negotiating a resolution of the Dispute, the parties
agree to submit the Dispute to mediation in accordance with the
Commercial Mediation Rules of the American Arbitration Association.
(3) The parties will jointly appoint a mutually acceptable
mediator, seeking assistance in such regard from the American
Arbitration Association if they have been unable to agree upon such
appointment within 10 days following the 10-day period referred to in
clause (2) above.
(4) Upon appointment of the mediator, the parties agree to
participate in good faith in the mediation and negotiations relating
thereto for 15 days.
(5) If the parties are not successful in resolving the Dispute
through mediation within such 15-day period, the parties agree that the
Dispute shall be settled by arbitration in accordance with the
Expedited Procedures of the Commercial Arbitration Rules of the
American Arbitration Association.
-11-
<PAGE> 12
(6) The fees and expenses of the mediator/arbitrators shall be
borne solely by the non-prevailing party or, in the event there is no
clear prevailing party, as the mediator/arbitrators deem appropriate.
(7) Except as provided above, each party shall pay its own
costs and expenses (including, without limitation, attorneys' fees)
relating to any mediation/arbitration proceeding conducted under this
Article VI.
(8) All mediation/arbitration conferences and hearings will be
held in the Tulsa, Oklahoma area.
(b) In the event there is any disputed question of law involved in any
arbitration proceeding, such as the proper legal interpretation of any provision
of this Agreement, the arbitrators shall make separate and distinct findings of
all facts material to the disputed question of law to be decided and, on the
basis of the facts so found, express their conclusion of the question of law.
The facts so found shall be conclusive and binding on the parties, but any legal
conclusion reached by the arbitrators from such facts may be submitted by either
party to a court of law for final determination by initiation of a civil action
in the manner provided by law. Such action, to be valid, must be commenced
within 20 days after receipt of the arbitrators' decision. If no such civil
action is commenced within such 20-day period, the legal conclusion reached by
the arbitrators shall be conclusive and binding on the parties. Any such civil
action shall be submitted, heard and determined solely on the basis of the facts
found by the arbitrators. Neither of the parties shall, or shall be entitled to,
submit any additional or different facts for consideration by the court. In the
event any civil action is commenced under this paragraph (b), the party who
prevails or substantially prevails (as determined by the court) in such civil
action shall be entitled to recover from the other party all costs, expenses and
reasonable attorneys' fees incurred by the prevailing party in connection with
such action and on appeal.
(c) Except as limited by paragraph (b) above, the parties agree that
judgment upon the award rendered by the arbitrators may be entered in any court
of competent jurisdiction. In the event legal proceedings are commenced to
enforce the rights awarded in an arbitration proceeding, the party who prevails
or substantially prevails in such legal proceeding shall be entitled to recover
from the other party all costs, expenses and reasonable attorneys' fees incurred
by the prevailing party in connection with such legal proceeding and on appeal.
(d) Except as provided above, (i) no legal action may be brought by
either party with respect to any Dispute and (ii) all Disputes shall be
determined only in accordance with the procedures set forth above.
-12-
<PAGE> 13
ARTICLE VII
Miscellaneous
7.1. No Mitigation or Offset
The provisions of this Agreement are not intended to, nor shall they be
construed to, require that Employee mitigate the amount of any payment provided
for in this Agreement by seeking or accepting other employment, nor shall the
amount of any payment provided for in this Agreement be reduced by any
compensation earned by Employee as the result of employment by another employer
or otherwise. Without limitation of the foregoing, the Company's obligations to
make the payments to Employee required under this Agreement and otherwise to
perform its obligations hereunder shall not be affected by any set off (other
than as provided in Section 4.5(a)), counterclaim, recoupment, defense or other
claim, right or action that the Company may have against Employee.
7.2. Assignability
The obligations of Employee hereunder are personal and may not be
assigned or delegated by Employee or transferred in any manner whatsoever, nor
are such obligations subject to involuntary alienation, assignment or transfer.
The Company shall have the right to assign this Agreement and to delegate all
rights, duties and obligations hereunder as provided in Section 7.5.
7.3. Notices
All notices and all other communications provided for in the Agreement
shall be in writing and addressed (i) if to the Company, at its principal office
address or such other address as it may have designated by written notice to
Employee for purposes hereof, directed to the attention of the Chief Executive
Officer with a copy to the Secretary of the Company and (ii) if to Employee, at
his residence address on the records of the Company or to such other address as
he may have designated to the Company in writing for purposes hereof. Each such
notice or other communication shall be deemed to have been duly given when
delivered or mailed by United States registered mail, return receipt requested,
postage prepaid, except that any notice of change of address shall be effective
only upon receipt.
7.4. Severability
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
-13-
<PAGE> 14
7.5. Successors; Binding Agreement
(a) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company, by agreement in form and substance
reasonable acceptable to Employee, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place. Failure of the
Company to obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement. As used herein, the term
"Company" shall include any successor to its business and/or assets as aforesaid
which executes and delivers the Agreement provided for in this Section 7.5 or
which otherwise becomes bound by all terms and provisions of this Agreement by
operation of law.
(b) This Agreement and all rights of Employee hereunder shall inure to
the benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributes,
devisees and legatees. If Employee should die while any amounts are due him
hereunder, all such amounts shall be paid in accordance with the terms of this
Agreement to Employee's devisee, legatee, or other designee or, if there be no
such designee, to Employee's estate.
7.6. Tax Withholdings
The Company shall withhold from all payments hereunder all applicable
taxes (federal, state or other) which it is required to withhold therefrom
unless Employee has otherwise paid (or made other arrangements satisfactory) to
the Company the amount of such taxes.
7.7 Amendments and Waivers
No provision of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing and signed
by Employee and such member of the Board as may be specifically authorized by
the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of, or in compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
7.8. Entire Agreement; Termination of Any Other Agreements
This Agreement is an integration of the parties' agreement and no
agreement or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party which are
not set forth expressly in this Agreement. This Agreement hereby expressly
terminates, rescinds and replaces any prior agreement (written or oral) between
the parties relating to the subject matter hereof.
-14-
<PAGE> 15
7.9. Governing Law
THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF OKLAHOMA WITHOUT REGARD
TO ITS CONFLICT OF LAWS PROVISION.
7.10 Employment with Affiliates
For purposes of this Agreement, employment with any subsidiary of the
Company, Heritage Propane Partners, L.P., Heritage Operating L.P. or with any of
their respective subsidiaries shall be deemed to be employment with the Company.
7.11. Counterparts
This Agreement may be executed in or more counterparts, each of which
shall be deemed to be an original, but all of which together will constitute one
and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first above written.
HERITAGE HOLDINGS, INC.
By: /s/ J. E. Bertelsmeyer
----------------------------------------
Name: J. E. Bertelsmeyer
--------------------------------------
Title: Chief Executive Officer
-------------------------------------
EMPLOYEE
/s/ Bradley K. Atkinson
--------------------------------------------
Bradley K. Atkinson
-15-
<PAGE> 1
EXHIBIT 10.16.1
HERITAGE OPERATING, L.P.
FIRST AMENDMENT AGREEMENT
Re: Note Purchase Agreement dated as of June 25, 1996
Note Purchase Agreement dated as of November 19, 1997
Dated as of
October 15, 1998
To each of the Holders named
in Schedule 1 to this First
Amendment Agreement
Ladies and Gentlemen:
Reference is made to
(i) the Note Purchase Agreement dated as of June 25, 1996 (the
"Outstanding 1996 Agreement"), among Heritage Operating, L.P., a
Delaware limited partnership (the "Company") and the Purchasers named
in the Purchaser Schedule attached thereto, under and pursuant to which
the Company issued, and there are presently outstanding, $120,000,000
aggregate principal amount of its 8.55% Senior Secured Notes due 2011
(the "1996 Notes"); and
(ii) the Note Purchase Agreement dated as of November 19, 1997
(the "Basic 1997 Agreement"), among the Company and the Purchasers
named in the Initial Purchaser Schedule attached thereto, under and
pursuant to which the Company issued, and there are presently
outstanding, $12,000,000 aggregate principal amount of its 7.17% Series
A Senior Secured Notes due November 19, 2009 (the "Series A Notes") and
$20,000,000 aggregate principal amount of its 7.26% Series B Senior
Secured Notes due November 19, 2012 (the "Series B Notes"), as
supplemented by the First Supplemental Note Purchase Agreement dated as
of March 13, 1998 the "First Supplemental Agreement" among the Company
and the Purchasers named in the Supplemental Purchaser Schedule
attached thereto, under and pursuant to which the Company issued, and
there are presently outstanding, (x) $5,000,000 aggregate principal
amount of its 6.50% Series C Senior Secured Notes due March 13, 2007
(the "Series C Notes"), (y) $5,000,000 aggregate principal amount of
its 6.59% Series D Senior Secured Notes due March 13, 2010 (the "Series
D Notes") and (z) $5,000,000 aggregate principal amount of its 6.67%
Series E Senior Secured Notes due March 13, 2013 (the "Series E
Notes").
The Basic 1997 Agreement, as supplemented by the First Supplemental Agreement is
hereinafter sometimes referred to as the "Outstanding 1997 Agreement". The
Outstanding 1996 Agreement and the Outstanding 1997 Agreement are hereinafter
sometimes collectively referred to as the
<PAGE> 2
"Outstanding Agreements". The 1996 Notes, Series A Notes, Series B Notes, Series
C Notes, Series D Notes and Series E Notes are hereinafter sometimes
collectively referred to as the "Outstanding Notes."
The Company now desires to amend certain provisions of the Outstanding
Agreements. You are the owner and holder of the Outstanding Notes set forth
opposite your name on Schedule 1 hereto. The Company hereby requests that from
and after your acceptance hereof in the manner hereinafter provided and upon
receipt by the Company of similar acceptances from the holders of the requisite
percentage of each issue of the Outstanding Notes, said Outstanding Agreements
shall be amended in the respects, but only in the respects, hereinafter set
forth.
ARTICLE I
AMENDMENTS TO OUTSTANDING 1996 AGREEMENT
I-A. The reference to "$15,000,000" set forth in Section 6B(ii) of the
Outstanding 1996 Agreement is hereby deleted and "$20,000,000" shall be
substituted therefor.
I-B. The reference to "$35,000,000" set forth in Section 6B(iii) of the
Outstanding 1996 Agreement is hereby deleted and "$30,000,000" shall be
substituted therefor.
I-C. Section 7A(v) of the Outstanding 1996 Agreement is hereby amended
and restated in its entirety to read as follows:
"(v) the Company fails to perform, observe or comply with
any agreement contained in Section 6 or Section 5A(v); or"
I-D. The definition of the term "Reinvestment Yield" set forth in
Section 10A of the Outstanding 1996 Agreement is hereby amended and restated in
its entirety to read as follows:
"`Reinvestment Yield'" shall mean, with respect to the Called
Principal of any Note, 0.50% over the yield to maturity implied by (i)
the yields reported, as of 10:00 a.m. (New York City time) on the third
Business Day next preceding the Settlement Date with respect to such
Called Principal, on the display designated as "Page 678" on the
Telerate Service (or such other display as may replace Page 678 on the
Telerate Service) for actively traded U.S. Treasury securities having a
maturity equal to the Remaining Average Life of such Called Principal
as of such Settlement Date, or if such yields shall not be reported as
of such time or the yields reported as of such time shall not be
ascertainable, (ii) the Treasury Constant Maturity Series yields
reported, for the latest day for which such yields shall have been so
reported as of the third Business Day next preceding the Settlement
Date with respect to such Called Principal, in Federal Reserve
Statistical Release H.15 (519) (or any comparable successor
publication) for actively traded U.S. Treasury securities having a
constant maturity equal to the Remaining
-2-
<PAGE> 3
Average Life of such Called Principal as of such Settlement Date. Such
implied yield shall be determined, if necessary, by (a) converting U.S.
Treasury bill quotations to bond-equivalent yields in accordance with
accepted financial practice and (b) interpolating linearly between
yields reported for various maturities if no maturity corresponds to
the applicable Remaining Average Life."
I-E. The reference to "$35,000,000" contained in the definition of the
term "Acquisition Facility" set forth in Section 10B of the Outstanding 1996
Agreement is hereby deleted and "$30,000,000" shall be substituted therefor.
I-F. The references to "$15,000,000" contained in the definition of the
term "Revolving Working Capital Facility" set forth in Section 10B of the
Outstanding 1996 Agreement are hereby deleted and "$20,000,000" shall be
substituted therefor.
ARTICLE II
AMENDMENTS TO OUTSTANDING 1997 AGREEMENT
II-A. The reference to "$15,000,000" set forth in Section 6B(ii) of the
Outstanding 1997 Agreement is hereby deleted and "$20,000,000" shall be
substituted therefor.
II-B. The reference to "$35,000,000" set forth in Section 6B(iii) of the
Outstanding 1997 Agreement is hereby deleted and "$30,000,000" shall be
substituted therefor.
II-C. Section 7A(v) of the Outstanding 1997 Agreement is hereby amended
and restated in its entirety to read as follows:
"(v) the Company fails to perform, observe or comply with
any agreement contained in Section 6 or Section 5A(v); or"
II-D. The definition of the term "Reinvestment Yield" set forth in
Section 10A of the Outstanding 1997 Agreement is hereby amended and restated in
its entirety to read as follows:
"`Reinvestment Yield'" shall mean, with respect to the Called
Principal of any Note, 0.50% over the yield to maturity implied by (i)
the yields reported, as of 10:00 a.m. (New York City time) on the third
Business Day next preceding the Settlement Date with respect to such
Called Principal, on the display designated as "Page 678" on the
Telerate Service (or such other display as may replace Page 678 on the
Telerate Service) for actively traded U.S. Treasury securities having a
maturity equal to the Remaining Average Life of such Called Principal
as of such Settlement Date, or if such yields shall
-3-
<PAGE> 4
not be reported as of such time or the yields reported as of such time
shall not be ascertainable, (ii) the Treasury Constant Maturity Series
yields reported, for the latest day for which such yields shall have
been so reported as of the third Business Day next preceding the
Settlement Date with respect to such Called Principal, in Federal
Reserve Statistical Release H.15 (519) (or any comparable successor
publication) for actively traded U.S. Treasury securities having a
constant maturity equal to the Remaining Average Life of such Called
Principal as of such Settlement Date. Such implied yield shall be
determined, if necessary, by (a) converting U.S. Treasury bill
quotations to bond-equivalent yields in accordance with accepted
financial practice and (b) interpolating linearly between yields
reported for various maturities if no maturity corresponds to the
applicable Remaining Average Life."
II-E. The reference to "clause (xiv)" contained in the definition of the
term "Priority Debt" set forth in Section 10B of the Outstanding 1997 Agreement
is hereby deleted and "clause (xv)" shall be substituted therefor.
II-F. The reference to "$35,000,000" contained in the definition of the
term "Acquisition Facility" set forth in Section 10B of the Outstanding 1997
Agreement is hereby deleted and "$30,000,000" shall be substituted therefor.
II-G. The references to "$15,000,000" contained in the definition of the
term "Revolving Working Capital Facility" set forth in Section 10B of the
Outstanding 1997 Agreement are hereby deleted and "$20,000,000" shall be
substituted therefor.
ARTICLE III
MISCELLANEOUS
III-A. If the foregoing is acceptable to you, kindly note your acceptance
in the space provided below and upon receipt by the Company of similar
acceptances signed by the holders of the requisite percentage of each issue of
the Outstanding Notes, the Outstanding Agreements shall be amended and restated
as set forth above, but all other terms and provisions of the Outstanding
Agreements shall remain unchanged and are in all respects ratified, confirmed
and approved.
III-B. By your acceptance hereof you also agree that you shall, prior to
any sale, assignment, transfer, pledge or other disposition by you of any
Outstanding Notes, either (i) place on the Outstanding Notes so to be disposed
of an appropriate endorsement referring to this First Amendment Agreement as
binding upon the parties hereto and upon any and all future holders of such
Outstanding Notes, or (ii) (at your option) surrender such Outstanding Notes for
new notes modified to reflect the changes set forth herein. All expenses for the
preparation of such new notes and the exchange of such Outstanding Notes are to
be borne by the Company.
-4-
<PAGE> 5
Very truly yours,
HERITAGE OPERATING L.P.
By Heritage Holdings, Inc., General Partner
By /s/ H. Michael Krimbill
----------------------------------
Its Vice President and CFO
-----------------------------
-5-
<PAGE> 6
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
JOHN HANCOCK MUTUAL LIFE INSURANCE
COMPANY
By
--------------------------------
Its
JOHN HANCOCK VARIABLE LIFE INSURANCE
COMPANY
By
--------------------------------
Its
MELLON BANK, N.A., solely in its
capacity as Trustee for the Long-Term
Investment Trust (as directed by John
Hancock Mutual Life Insurance Company),
and not in its individual capacity
By
--------------------------------
Its
-6-
<PAGE> 7
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
MASSACHUSETTS MUTUAL LIFE INSURANCE
COMPANY
By
--------------------------------
Its
-7-
<PAGE> 8
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
By
--------------------------------
Its
By
--------------------------------
Its
-8-
<PAGE> 9
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
NEW YORK LIFE INSURANCE COMPANY
By
--------------------------------
Its
NEW YORK LIFE INSURANCE AND ANNUITY
CORPORATION
By
--------------------------------
Its
-9-
<PAGE> 10
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA
By
--------------------------------
Its
-10-
<PAGE> 11
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
KEYPORT LIFE INSURANCE COMPANY
By
--------------------------------
Its
-11-
<PAGE> 12
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
J. ROMEO & CO.
By
--------------------------------
Its
-12-
<PAGE> 13
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
PACIFIC LIFE INSURANCE COMPANY
(formerly Pacific Mutual Life Insurance Company)
By
--------------------------------
Its
By
--------------------------------
Its
PACIFIC LIFE INSURANCE COMPANY
By
--------------------------------
Its
By
--------------------------------
Its
-13-
<PAGE> 14
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
PHOENIX HOME LIFE MUTUAL INSURANCE
COMPANY
By
--------------------------------
Its
-14-
<PAGE> 15
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
RELIASTAR LIFE INSURANCE COMPANY
By
--------------------------------
Its
-15-
<PAGE> 16
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
GENERAL AMERICAN LIFE INSURANCE COMPANY
By
--------------------------------
Its
-16-
<PAGE> 17
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
By
--------------------------------
Its
By
--------------------------------
Its
-17-
<PAGE> 18
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
ALLSTATE LIFE INSURANCE COMPANY
By
--------------------------------
Name:
By
--------------------------------
Name:
Authorized Signatories
-18-
<PAGE> 19
The foregoing First Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of October 15, 1998, and the
undersigned hereby confirms that on October 15, 1998 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
CHUBB LIFE INSURANCE COMPANY
OF AMERICA
By
--------------------------------
Its
-19-
<PAGE> 20
SCHEDULE 1
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT AND
SERIES OF OUTSTANDING
NAME OF HOLDER NOTES HELD AS OF
OF OUTSTANDING NOTES OCTOBER 15, 1998
<S> <C>
John Hancock Mutual Life Insurance Company $ 13,000,000
John Hancock Mutual Life Insurance Company $ 8,000,000
John Hancock Variable Life Insurance Company $ 1,000,000
Mellon Bank, N.A., Trustee Under Master Trust $ 3,000,000
Agreement of AT&T Corporation dated
January 1, 1984 for Employee Pension Plans
- AT&T - John Hancock - Private Placement
Massachusetts Mutual Life Insurance Company $ 15,000,000
Principal Mutual Life Insurance Company $ 15,000,000
New York Life Insurance Company $ 12,500,000
Teachers Insurance and Annuity Association of America $ 12,500,000
Keyport Life Insurance Company $ 10,000,000
MONY Life Insurance Company of America $ 3,500,000
The Mutual Life Insurance Company of New York $ 4,000,000
Pacific Mutual Life Insurance Company $ 5,500,000
Phoenix Home Life Mutual Insurance Company $ 5,000,000
ReliaStar Life Insurance Company $ 5,000,000
</TABLE>
-1-
<PAGE> 21
<TABLE>
<S> <C>
General American Life Insurance Company $ 4,000,000
Wisconsin National Life Insurance Company $ 3,000,000
Pacific Life Insurance Company $ 12,000,000 Series A Notes
Pacific Life Insurance Company $ 8,000,000 Series B Notes
New York Life Insurance Company $ 5,000,000 Series B Notes
New York Life Insurance and
Annuity Corporation $ 7,000,000 Series B Notes
Allstate Life Insurance Company $ 5,000,000 Series C Notes
Chubb Life Insurance Company
of America $ 5,000,000 Series D Notes
MONY Life Insurance Company
of America $ 5,000,000 Series E Notes
</TABLE>
-2-
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES
1. Heritage Operating L.P., a Delaware limited partnership, which does business
under the following names:
o Balgas
o C & D Propane
o Carolane Propane Gas
o Covington Propane
o Fallsburg Gas
o Gas Service Co.
o Gibson Propane
o Greer Gas Co.
o Harris Propane Gas
o Heritage Propane
o Holton's L.P. Gas
o Horizon Gas
o Horizon Gas of Palm Bay
o Hydratane of Athens
o Ikard & Newson
o Jerry's Propane Service
o John E. Foster & Son
o Keen Propane
o Kingston Propane
o Liberty Propane Gas
o Lyons Propane
o Modern Propane
o Myers Propane Service
o New Mexico Propane
o Northern Energy
o Northwestern Propane
o Propane Gas Ind.
o Rasnick Gas
o Rural Bottled Gas and Appliance
o Sawyer Gas
o Spring Lake Super Flame
o Tri-Gas of Benzie
o Wakulla L.P.G.
o Wurtsboro Propane Gas
o Waynesville Gas Service
o Young's Propane
2. Heritage-Bi State, L.L.C., a Delaware limited liability company, holding a
partnership interest in the following:
o Bi-State Propane (Bi-State Propane also transacts business under the name
Turner Propane).
3. Heritage Service Corp., a Delaware corporation, holding a direct or indirect
interest in the following:
o M-P Oils Ltd.
o M-P Energy Partnership
4. Guilford Gas Service, Inc.
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Partnership's previously filed
Registration Statements file No. 333-40407.
Tulsa, Oklahoma /s/ Arthur Andersen LLP
November 24, 1998 ------------------------
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
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<SECURITIES> 0
<RECEIVABLES> 10,880
<ALLOWANCES> 436
<INVENTORY> 12,545
<CURRENT-ASSETS> 26,185
<PP&E> 174,730
<DEPRECIATION> 35,240
<TOTAL-ASSETS> 239,964
<CURRENT-LIABILITIES> 35,444
<BONDS> 177,431
0
0
<COMMON> 0
<OTHER-SE> 27,089
<TOTAL-LIABILITY-AND-EQUITY> 239,964
<SALES> 185,987
<TOTAL-REVENUES> 185,987
<CGS> 96,884
<TOTAL-COSTS> 163,058
<OTHER-EXPENSES> (936)
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<INTEREST-EXPENSE> 14,599
<INCOME-PRETAX> 9,266
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,266
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,790
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
</TABLE>
