<PAGE> 1
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, 1999
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)
<TABLE>
<S> <C>
DELAWARE 73-1493906
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
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:
<TABLE>
<S> <C>
Title of class Name of each exchange on
which registered
Common Units New York Stock Exchange
</TABLE>
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 3, 1999, 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 $121,825,000
At November 3, 1999, the registrant had units outstanding as follows:
Heritage Propane Partners, L.P. 7,065,174 Common Units
2,777,207 Subordinated Units
Documents Incorporated by Reference: None
<PAGE> 2
HERITAGE PROPANE PARTNERS, L.P.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
PAGE
------
<S> <C> <C>
ITEM 1. BUSINESS. ...........................................................................................1
ITEM 2. PROPERTIES...........................................................................................7
ITEM 3. LEGAL PROCEEDINGS................................................................................... 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................8
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..............................................................11
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........................................18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................................................19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..............................................................19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................................................20
ITEM 11. EXECUTIVE COMPENSATION..............................................................................22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...................................................................................24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................................26
</TABLE>
i
<PAGE> 3
HERITAGE PROPANE PARTNERS, L.P.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K...............................................................................26
</TABLE>
ii
<PAGE> 4
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"). As
of November 3, 1999, there were 7,065,174 common units outstanding, representing
an approximate 70% limited partner interest in the Partnership, and 2,777,207
subordinated units outstanding, representing an approximate 28% interest in the
Partnership. The General Partner owns all of the subordinated units and
1,116,243 of the common units. The General Partner 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. The common units and the subordinated units
represent limited partner interests in the Partnership, which entitle the
holders thereof to participate in distributions and exercise the rights and
privileges available to limited partners under the partnership agreement. 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 seventh
largest retail marketer of propane in the United States (as measured by retail
gallons sold). Heritage currently serves more than 265,000 active residential,
commercial, industrial and agricultural customers from 156 customer service
locations in 26 states. The Partnership's operations extend from coast to coast
with concentrations in the western, upper midwestern and southeastern regions of
the United States, with expansion into the northeastern United States in the
last three 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. Since its inception in 1989 through
August 31, 1999, the Partnership and its predecessor have completed 59
acquisitions for a total purchase price of approximately $242 million. Volumes
of propane sold to retail customers have increased steadily from 63.2 million
gallons for the fiscal year ended August 31, 1992 to 159.9 million gallons for
the fiscal year ended August 31, 1999. Since August 31, 1999, the Partnership
has acquired five additional propane companies.
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 the past four years with the winter of 1998 - 1999 recorded as one of
the warmest winters this century. 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
1
<PAGE> 5
vulnerable than its competitors to displacement by natural gas distribution
systems because the majority of the Partnership's areas of operations are rural
and their population growth tends to open business opportunities for the
Partnership in more remote locations on their peripheries.
BUSINESS STRATEGY
The Partnership's strategy is to expand its operations and increase its
retail market share in order to increase 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 retailers, including the Partnership, account for approximately 37% of
the total retail 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, 1999, the Partnership and its predecessor have completed
59 acquisitions for a total purchase price of approximately $242 million. The
Partnership has completed five additional acquisitions 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 or successfully integrate them into their existing operations and make
cost-saving changes, that any acquisition will not dilute earnings and
distributions to Unitholders or that any additional debt incurred to finance an
acquisition will not adversely affect the ability of the Partnership to make
distributions to Unitholders.
In order to facilitate the Partnership acquisition strategy, the Operating
Partnership maintains a Bank Credit Facility. The Partnership recently amended
their credit facility to increase the total amount available for borrowings from
$50 million to $85 million. The Bank Credit Facility currently consists of the
$50.0 million Acquisition Facility to be used for acquisitions and improvements
and the $35.0 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
2
<PAGE> 6
activities to the district level, the Partnership has been able to operate
without a large corporate staff. Of the Partnership's 1,040 full-time employees
as of August 31, 1999, only 42, or approximately 4%, were general and
administrative. In addition, the Partnership plant bonus system encourages
district employees at all levels to control costs and expand revenues.
As a result of the implementation of the strategy described above, the
Partnership has achieved the retail sales volumes per fiscal year set forth
below:
Retail Propane Gallons Sold (in millions) :
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
37.5 48.2 63.2 73.4 79.7 98.3 118.2 125.6 146.7 159.9
</TABLE>
INDUSTRY BACKGROUND AND COMPETITION
Propane, a by-product of natural gas processing and petroleum refining, is
a clean-burning energy source recognized for its transportability and ease of
use relative to alternative forms of stand-alone energy sources. Retail propane
use falls into three broad categories: (i) residential applications, (ii)
industrial, commercial, and agricultural applications and (iii) other retail
applications, including motor fuel sales. Residential customers use propane
primarily for space and water heating. Industrial customers use propane
primarily as fuel for forklifts and stationary engines, to fire furnaces, as a
cutting gas, in mining operations and in other process applications. Commercial
customers, such as restaurants, motels, laundries and commercial buildings, use
propane in a variety of applications, including cooking, heating and drying. In
the agricultural market, propane is primarily used for tobacco curing, crop
drying, poultry brooding and weed control. Other retail uses include motor fuel
for cars and trucks, outdoor cooking and other recreational uses, propane
resales and sales to state and local governments. In its wholesale operations,
the Partnership sells propane principally to large industrial end-users and
other propane distributors.
Propane is extracted from natural gas or oil wellhead gas at processing
plants or separated from crude oil during the refining process. Propane is
normally transported and stored in a liquid state under moderate pressure or
refrigeration for ease of handling in shipping and distribution. When the
pressure is released or the temperature is increased, it is usable as a
flammable gas. Propane is colorless and odorless: an odorant is added to allow
its detection. Like natural gas, propane is a clean burning fuel and is
considered an environmentally preferred energy source.
Propane competes with other sources of energy, some of which are less
costly for equivalent energy value. The Partnership competes for customers
against suppliers of electricity, natural gas and fuel oil. Competition from
alternative energy sources has been increasing as a result of reduced regulation
of many utilities including natural gas and electricity. Except for certain
industrial and commercial applications, propane is generally not competitive
with natural gas in areas where natural gas pipelines already exist because
natural gas is a significantly less expensive source of energy than propane. The
gradual expansion of the nation's natural gas distribution systems has resulted
in the availability of natural gas in many areas that previously depended upon
propane. Although 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. Although propane is similar to fuel oil in certain
applications and market demand, propane and fuel oil compete to a lesser extent
primarily because of the cost of converting from one to another. 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.
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 8.6 billion gallons
annually, that the 10 largest retailers, including the Partnership, account for
approximately 37% 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
3
<PAGE> 7
proximity to customers. The typical retail distribution outlet generally has an
effective marketing radius of approximately 50 miles although in certain rural
areas the marketing radius may be extended by a satellite location.
The ability to compete effectively further depends on the reliability of
service, responsiveness to customers and the ability to maintain competitive
prices. The Partnership believes that its safety programs, policies and
procedures are more comprehensive than many of its smaller, independent
competitors and give it a competitive advantage over such retailers. The
Partnership also believes that its service capabilities and customer
responsiveness differentiate it from many of these smaller competitors. The
Partnership's employees are on call 24-hours-a-day, 7-days-a-week for emergency
repairs and deliveries.
The wholesale propane business is highly competitive. For fiscal 1999, the
Partnership's domestic wholesale operations (excluding M-P Energy Partnership)
accounted for only 4.6% 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 156 customer service locations in 26 states.
The Partnership's operations are concentrated in large part in the western,
upper midwestern and southeastern regions of the United States, with expansion
over the last three years into the northeastern part of the United States. The
Partnership's serves more than 265,000 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 normally
concentrated in the Partnership's first and second fiscal quarters. Cash flows
from operations, however, are generally 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 95%
of the domestic gallons sold by the Partnership in fiscal 1999 were to retail
customers and approximately 5% were to wholesale customers. Of the retail
gallons sold by the Partnership in fiscal 1999, 57% were to residential
customers, 34% were to industrial, commercial and agricultural customers, and 9%
were to other retail users. Sales
4
<PAGE> 8
to residential customers in fiscal 1999 accounted for 54% of total domestic
gallons sold inclusive of domestic wholesale but 68% of the Partnership's gross
profit from propane sales. Residential sales have a greater profit margin and a
more stable customer base than other markets served by the Partnership.
Industrial, commercial and agricultural sales accounted for 23% of the
Partnership's gross profit from propane sales for fiscal year 1999, with all
other retail users accounting for 8%. 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 1999.
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 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. Most of the propane purchased by the Partnership is fiscal
1999 was purchased pursuant to one year agreements subject to annual renewal,
but the percentage of contract purchases may vary from year to year as
determined by the Partnership. Supply contracts generally provide for pricing in
accordance with posted prices at the time of delivery or the current prices
established at major delivery points. Most of these agreements provide maximum
and minimum seasonal purchase guidelines. The Partnership enters into such
contracts to meet normal purchase requirements. The Partnership is required to
take delivery of contracted volumes and no settlement provisions exist. The
Partnership receives its supply of propane predominately through railroad tank
cars and common carrier transport. In addition, the Partnership makes purchases
on the spot market and takes physical delivery from time to time to take
advantage of favorable pricing.
Supplies of propane from the Partnership's sources historically have been
readily available. In the fiscal year ended August 31, 1999, Dynegy Liquids
Marketing and Trade ("Dynegy") provided approximately 14% 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, 1999. 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 1999, the Partnership purchased approximately 63% 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
5
<PAGE> 9
immediately passed on to customers, such increases could reduce the
Partnership's gross profits. Since 1992, the Partnership and its predecessor
have generally been successful in maintaining retail gross margins on an annual
basis despite changes in the wholesale cost of propane. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--General." However, there may be times when the Partnership will be
unable to pass on fully such price increases to its customers. Consequently, the
Partnership's profitability will be sensitive to changes in wholesale propane
prices.
The Partnership 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.
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
in most instances, 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, certain automotive waste products generated by the Partnership's truck
fleet, as well as "hazardous substances" or "hazardous waste" 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 and impose
liability for remediation costs. In addition, 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 or waste.
In connection with all acquisitions of retail propane businesses that
involve the acquisitions 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.
6
<PAGE> 10
Petroleum-based contamination or environmental wastes are known to be
located on or adjacent to three sites which the Partnership presently or
formerly operates. 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 three 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 Department of Transportation ("DOT") stated in a
Temporary Regulation (49 CFR 171.5), that existing regulations required the
operators of cargo tank vehicles to maintain an unobstructed view of the vehicle
when making customer deliveries. Under the DOT's ruling, the regulations
required two people to attend customer deliveries or required the attendant to
remain at a point midway between the vehicle and the point of delivery. Two
separate lawsuits were filed against the DOT by parties affected by the
regulations and by industry organizations in an effort to prevent enforcement of
the temporary regulation. In response to this industry action and as part of its
negotiated rulemaking process, the DOT proposed revisions to its Hazardous
Material Regulations and the "unobstructed view" requirement. Under the Final
Rule adopted on May 24, 1999, Section 171.5 was removed and the Hazardous
Material Regulations as they relate to the unloading of liquefied compressed
gasses from cargo tank motor vehicles were revised to require delivery vehicles
to be fitted with off-truck remote shut-off capability. The DOT's revisions
require that installation of such remote shut-offs be completed by July 1, 2001.
Heritage has completed installation of remote shut-offs in all of its bobtail
delivery vehicles.
The Partnership has implemented environmental programs and policies
designed to avoid potential liability and cost under applicable environmental
laws. It is possible, however, that we will have increased costs due to stricter
pollution control requirements or liabilities resulting from non-compliance with
operating or other regulatory permits. 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, 1999, the Partnership had 1,040 full time employees, of
whom 42 were general and administrative and 998 were operational employees. None
of the Partnership's employees are represented by a labor union. The Partnership
believes that its relations with its employees are satisfactory. The Partnership
has hired as many as 100 seasonal workers to meet peak winter demands.
ITEM 2. PROPERTIES
The Partnership operates bulk storage facilities at 156 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 1999, the Partnership leased approximately 10.3
million gallons of underground storage facilities in two states (5.0 million
gallons of storage in Alto, Michigan and 5.3 million gallons in Bumstead,
Arizona). The
7
<PAGE> 11
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, Mammoth Lakes
and other locations in California and in Reno and other Nevada locations. The
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, 1999, 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 approximately 440 bobtails and 740 other delivery and
service vehicles, all of which are owned by the Partnership. As of August 31,
1999, the Partnership owned approximately 226,000 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, Blue Flame Gas of Charleston, Blue Flame Gas of Mt. Pleasant,
Blue Flame Gas of Vermont, 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.
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, 1999.
8
<PAGE> 12
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 Stock Exchange Composite Tape, and the amount of cash
distributions paid per Common Unit.
<TABLE>
<CAPTION>
Price Range Cash
High Low Distribution (1)
--------------- --------------- ---------------
<S> <C> <C> <C>
1998 FISCAL YEAR
First Quarter Ended November 30, 1997 $ 25.500 $ 22.625 $ 0.50
Second Quarter Ended February 28, 1998 $ 25.000 $ 23.125 $ 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
1999 FISCAL YEAR
First Quarter Ended November 30, 1998 $ 23.750 $ 20.813 $ 0.5000
Second Quarter Ended February 28, 1999 $ 24.000 $ 20.875 $ 0.5125
Third Quarter Ended May 31, 1999 $ 23.375 $ 21.500 $ 0.5625
Fourth Quarter Ended August 31, 1999 $ 23.375 $ 21.875 $ 0.5625
</TABLE>
(1) Distributions are shown in the quarter with respect to which they were
declared. For each of the indicated quarters for which distributions have
been made, an identical per unit cash distribution was paid on the
Subordinated Units.
As of October 22, 1999 there were approximately 372 holders of the
Partnership's Common Units, including common units held in street name,
representing approximately seven thousand individual common unitholders. The
Partnership also has 2,777,207 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). Restrictions on the Partnership's distributions required
by Item 5 is incorporated herein by reference to Note 6 of the Partnership's
Consolidated Financial Statements which begin on page F-1 of this Report, and to
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Description of Indebtedness.
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 and April 2, 1999, the Partnership
issued 45,195 and 23,213 Units, respectively, 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 two propane companies. The General Partner's Units were not registered
with the
9
<PAGE> 13
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. Subsequent to August
31, 1999, the Partnership issued 56,578 Units in exchange for certain assets in
connection with the acquisitions of certain propane businesses, for a total
value of $1.3 million. The Units issued in connection with the acquisitions were
issued utilizing the Partnership's Registration Statement No. 333-40407 on Form
S-4.
On October 25, 1999, the Partnership issued a prospectus supplement
offering 1,200,000 Common Units, representing limited partner interests in
Heritage Propane Partners, L.P. utilizing the Partnership's Registration
Statement No. 333-86057 on Form S-3 dated September 13, 1999. The underwriters
delivered the Common Units to purchasers on October 28, 1999, at a public
offering price of $22.00 per Common Unit. The net proceeds of approximately $24
million were used to repay a portion of the outstanding indebtedness under the
acquisition facility that was incurred to acquire propane businesses.
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 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.
The selected historical balance sheet data as of August 31, 1999 and August
31, 1998, respectively, and the selected operating data for the years ended
August 31, 1999, 1998 and 1997 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 and August 31, 1995 and the selected
operating data for the two month period ended August 31, 1996, for the ten month
period ended June 30, 1996, and for the year ended August 31, 1995 have been
derived from Heritage's audited financial statements not included herein.
<TABLE>
<CAPTION>
Ten Months Two Months Years Ended
Year Ended Ended Ended August 31,
August 31, June 30, August 31, -----------------------------------
1995(e) 1996(e) 1996 1997 1998 1999
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statements of Operating Data:
Revenues............................ $ 131,508 $ 144,623 $ 18,477 $ 199,785 $ 185,987 $ 184,020
Gross profit(a)..................... 55,841 55,634 6,314 73,838 89,103 96,753
Depreciation and amortization....... 8,896 7,581 1,733 11,124 13,680 14,749
Operating income (loss)............. 12,675 15,755 (1,956) 16,919 22,929 24,567
Interest expense.................... 12,201 10,833 1,962 12,063 14,599 15,915
Income (loss) before income taxes,..
minority interest and extraordinary
items............................. 455 6,084 (4,087) 5,625 9,266 10,116
Provision for income taxes.......... 666 2,735 -- -- -- --
Net income (loss)................... (211) 2,921 (8,423) 5,177 8,790 9,662
Net Income (loss) per Unit (b)...... -- -- (1.06) 0.64 1.04 1.11
</TABLE>
10
<PAGE> 14
<TABLE>
<CAPTION>
August 31,
1995(e) 1996(e) 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (end of period):
Current Assets........................... $ 21,293 $ 24,014 $ 27,951 $ 26,185 $ 29,219
Total Assets............................. 163,423 187,850 203,799 239,964 262,958
Current Liabilities...................... 35,825 24,728 34,426 35,444 47,680
Long-term debt........................... 103,412 132,521 148,453 177,431 196,216
Redeemable preferred stock............... 12,337 -- -- -- --
Stockholders' deficit.................... (6,975) -- -- -- --
Partner's capital - General Partner...... -- 307 208 273 176
Partners' capital - Limited Partner (g).. -- 30,294 20,712 26,816 18,886
</TABLE>
<TABLE>
<CAPTION>
Years Ended August 31,
1995(e) 1996(f) 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating Data:
EBITDA (c)................... $ 21,672 $ 24,365 $ 28,718 $ 37,792 $ 41,047
Capital expenditures (d):
Maintenance and growth .... 8,634 7,244 7,170 9,359 14,974
Acquisition................ 27,879 16,665 14,549 23,276 17,931
Retail propane gallons sold.. 98,318 118,200 125,605 146,747 159,938
</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 non-cash compensation,
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. EBITDA for the year ended August 31, 1998
was restated to account for non-cash compensation. The minority interest of
MP Energy Partnership, a majority owned partnership, is deducted from the
EBITDA calculation.
(d) The Partnership's capital expenditures fall generally into three
categories: (i) maintenance capital expenditures of approximately $4.6,
$3.6 and $2.3 million in fiscal 1999, 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.
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.
11
<PAGE> 15
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, 1999, Heritage and the Partnership completed
59 acquisitions for an aggregate purchase price of approximately $242 million.
The Partnership has completed 31 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 one of the largest retail marketers of propane
in the United States, based on retail gallons sold, serving more than 265,000
residential, industrial/commercial and agricultural customers in 26 states
through 156 retail outlets. Annual retail propane sales volumes in gallons were
159.9 million, 146.7 million and 125.6 million for the fiscal years ended August
31, 1999, 1998 and 1997, 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 percent 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
generally 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 assumes
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.
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
12
<PAGE> 16
Partnership during the periods discussed. In fiscal 1999, the Partnership
consummated six acquisitions for a total purchase price of $22.7 million. In
fiscal 1998 and 1997, the Partnership consummated seven acquisitions in each of
the years for total purchase prices of $37.1 million and $14.5 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 percent of the results of M-P
Energy Partnership, formerly named M-P Oils Partnership, a general partnership
in which the Partnership owns a 60 percent interest. Because M-P Energy
Partnership is primarily engaged in lower-margin wholesale distribution, its
contribution to the Partnership's net income is not significant and the minority
interest of this partnership is excluded from the EBITDA calculation.
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Volume. The Partnership sold 159.9 million retail gallons, an increase of
13.2 million gallons or 9.0% from the 146.7 million gallons sold in fiscal 1998
primarily as a result of acquisitions. The increases in the Partnership's
volumes were net of the effects of one of the warmest winters this century.
The Partnership also sold approximately 81.1 million wholesale gallons
during fiscal 1999, a decrease of 5.1 million gallons from fiscal 1998's 86.2
million gallons. The decrease in the wholesale volumes was attributable to a
decline of 1.5 million gallons in the foreign operations of M-P Energy
Partnership and the decline of 3.6 million gallons in the U.S. wholesale
operations. The warm weather experienced by the Partnership this past heating
season was the main factor in the decline in these volumes.
Revenues. Total revenues for the Partnership decreased $2.0 million to
$184.0 million from last year's total revenues of $186.0 million. Retail fuel
revenues increased $1.1 million to $137.4 million while domestic wholesale fuel
revenues decreased $1.9 million and foreign wholesale revenues decreased $4.4
million. The increase in retail fuel revenues due to increased volumes was
partially offset by the effects of lower cost of fuel this fiscal year. The
decreases in the U.S. and foreign wholesale revenues correspond primarily to the
decrease in volumes. Other revenues increased $3.2 million primarily as a result
of acquisitions and to a lesser extent internal growth.
Cost of Sales. Total cost of sales decreased $9.7 million, or 10.0% to
$87.2 million for the fiscal year ended August 31, 1999 as compared to $96.9
million for fiscal year ended August 31, 1998. Domestic cost of sales decreased
$5.0 million, or 6.8% to $68.1 million and foreign cost of sales decreased $4.7
million, or 19.7% to $19.1 million. Retail fuel cost of sales decreased $4.4
million to $57.6 in fiscal 1999 due to the lower cost of propane realized in
1999 which offset the increase in volumes. Domestic wholesale and foreign cost
of sales both decreased due to the lower cost of fuel realized in fiscal 1999
and the decrease in volumes.
Gross Profit. Total gross profit for fiscal 1999 was $96.8 million, a $7.7
million increase or 8.6% over fiscal 1998's gross profit of $89.1 million. The
reduction in the cost of fuel this fiscal year was the primary contributing
factor in the increase in gross profit along with the increase in other
revenues.
Operating Expenses. Operating expenses for fiscal 1999 increased $4.2
million or 8.9% to $51.2 million as compared to $47.0 million in fiscal 1998.
This increase is primarily the result of increased costs related to
acquisitions.
Selling, General and Administrative. Selling, general and administrative
expense increased $.7 million or 12.7% to $6.2 million for fiscal 1999 as
compared to $5.5 million for fiscal 1998. The increase is the result of
additional expenses to support business growth.
Depreciation and Amortization. Depreciation and amortization was $14.7
million for fiscal 1999, a $1.0 million increase over fiscal 1998's $13.7
million. This increase is the result of additional depreciation and amortization
costs on the fixed assets and intangibles recorded in relation to acquisitions.
Operating Income. Operating income increased 7.4% to $24.6 million in
fiscal 1999, a $1.7 million increase over fiscal 1998's $22.9 million. The
increased gross profit described above offset by the increases in operating and
other expenses, also described above, resulted in this increase.
13
<PAGE> 17
Net Income. Net income for the fiscal year ended August 31, 1999, increased
$.9 million, or 10.2% to $9.7 million as compared to fiscal 1998's net income of
$8.8 million. This increase is the result of increased operating income
partially offset by increased interest costs related to acquisition debt.
EBITDA. Earnings before interest, taxes, depreciation and amortization
increased $3.2 million or 8.5% to $41.0 million for fiscal 1999 as compared to
the restated 1998 EBITDA of $37.8 million. Fiscal 1998's EBITDA was restated to
account for the non-cash compensation expense that was previously included. The
Partnership's EBITDA includes the EBITDA of investees, but does not include the
EBITDA of the minority interest of M-P Energy Partnership. 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 obligation), but provides additional information for
evaluating the Partnership's ability to make the Minimum Quarterly Distribution.
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 fuel revenues
decreased $6.4 million or 54.7% from $11.7 million reported in fiscal 1997.
Foreign fuel 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 fuel revenues was attributable to both decreased volumes
and sales prices. The increase in domestic retail fuel revenues resulted from
increased volumes and offset somewhat by decreased sales prices. Other revenues
increased $2.3 million primarily as a result of acquisitions and to a lesser
extent internal growth.
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.
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.
14
<PAGE> 18
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 for
fiscal 1998 was $37.8 million, as restated to account for non-cash compensation
expense, an increase of $9.1 million or 31.7% over fiscal 1997'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 EBITDA. The
Partnership's EBITDA includes the EBITDA of investees, but does not include the
EBITDA of the minority interest of M-P Energy Partnership. 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 obligation), but provides additional information for
evaluating the Partnership's ability to make the Minimum Quarterly Distribution.
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 by 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
Operating Activities. Cash provided by operating activities for fiscal
1999, was $23.6 million compared to $24.5 million in fiscal 1998. The cash flows
from operations for fiscal 1999 consisted primarily of net income of $9.7
million and noncash charges of $14.1 million, principally depreciation and
amortization.
Investing Activities. Cash used in investing activities during fiscal 1999
included capital expenditures for acquisitions amounting to $17.9 million, net
of cash received plus $15.0 million spent for maintenance needed to sustain
operations at current levels, customer tanks to support growth of operations,
the purchase of land previously under lease arrangements and other miscellaneous
capitalized items. These investing activities were offset by proceeds from asset
sales of $2.1 million, which was principally from the non-recurring sale of
certain idle property. The proceeds from asset sales were used to purchase
property in certain areas of the Partnership's operations that were previously
leased and fund purchases of capital assets used in the business.
15
<PAGE> 19
Financing Activities. Cash provided by financing activities during fiscal
1999 of $7.0 million is primarily the result of an increase in the working
capital facility of $9.3 million and a net increase in long-term debt of $16.3
million to fund acquisitions. These increases were offset by cash distributions
to unitholders of $18.6 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 $35.0 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 $50.0 million of borrowings to be used for acquisitions and improvements.
See page F-10, "Notes to Consolidated Financial Statements--4. Working Capital
Facilities and Long-Term Debt." On October 28, 1999, the Partnership used the
net proceeds of $25.1 million from a public offering to repay a portion of the
outstanding indebtedness under the acquisition facility that was incurred to
acquire propane businesses. See page F-13, "Notes to Consolidated Financial
Statements--7. Registration Statements."
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 $17.9
million for fiscal year 1999, as compared to $23.3 million during fiscal 1998.
In addition to the $17.9 million of cash expended for acquisitions during fiscal
1999, $.5 million of Common Units and $3.3 million for notes payable on
non-compete agreements were issued in connection with certain acquisitions.
The Partnership increased its distribution to Unitholders two times during
the past fiscal year to a current annual level of $2.25 per unit. Under the
Partnership Agreement of Heritage, the Partnership will distribute to its
partners, 45 days after the end of each fiscal quarter, an amount equal to all
of its Available Cash for such quarter. 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 established by the General Partner in
its reasonable discretion that is necessary or appropriate to provide for future
cash requirements. The Partnership's commitment to its unitholders is to
distribute the increase in its cash flow while maintaining prudent reserves for
the Partnership's operations. The decision to increase the quarterly
distribution resulted from a review of Heritage's past financial performance and
current projections for available cash. The current distribution level includes
incentive distributions payable to the General Partner to the extent the
quarterly distribution exceeds $.55 per unit ($2.20 annually).
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-10, "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-10, "Notes to Consolidated Financial Statements--4. Working Capital
Facilities and Long-Term Debt."
16
<PAGE> 20
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 level 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 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 correctly 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 disrupting business operations. The Partnership along with outside
consultants has conducted a detailed assessment of its Year 2000 (Y2K)
compliance and readiness issues. The Partnership has put a comprehensive program
in place to prepare for its Y2K readiness and designates the following
information as our "Year 2000 Readiness Disclosure".
The scope of the Partnership's program includes the review and evaluation
of (1) its information technology ("IT") such as hardware and software utilized
in the Partnership's operations; (2) non-IT systems or embedded technology such
as micro-controllers contained in various equipment, facilities and vehicles;
and (3) the readiness of third parties which includes key fuel suppliers,
vendors and banking facilities. A complete and detailed inventory list of the
Partnership's hardware and software systems has been completed enabling us 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 to the Y2K
software at these district locations is complete. The hardware necessary to
accommodate the software upgrades was replaced as needed. The Partnership's
central accounting software, which encompasses general ledger, financial
reporting, and accounts payable, has been upgraded and successfully tested as
Y2K compliant. The Partnership's payroll, fixed asset and wholesale fuel supply
and distribution systems are completed. Miscellaneous applications have also
been evaluated and upgrades are completed. The non-IT systems such as
telephones, fax machines, and photocopiers were investigated for the date
critical Year 2000 and were replaced or updated as needed for operation.
The Partnership has identified major vendors and suppliers on whom it
depends upon for services and products to assess their Year 2000 readiness to
assure there are no interruptions in operations. A Year 2000 compliance letter
and questionnaire was sent to these third parties and our evaluation of these
key third parties is complete. While none of the Partnership's products are
directly date sensitive, interruption of the supply and delivery of gas products
or other services could have a material adverse effect 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. The Partnership contacted their
bank facilities to ensure that the collection and transfer of funds will not be
interrupted and that extension of working capital will be available as needed.
The Partnership does not have any customers that accounted for 5% or more of the
Partnership's revenues during fiscal 1999 thus reducing the risk if some but not
all customers are not Y2K compliant.
Estimated costs to modify its computer-based systems to date have not been
specifically tracked but are estimated to be immaterial. A portion of these
costs was capitalized as they relate to adding new software and hardware to
enhance current operations. Other costs related directly to becoming Year 2000
compliant have been expensed as incurred.
17
<PAGE> 21
A contingency plan has been developed to deal with system failures and
disruptions of service arising from third party Y2K failures. The contingency
plan for the Partnership's district operations is primarily focused on one
system that already has been successfully tested and is Y2K compliant. This
system affects two-thirds of our district operations and if other systems fail
during the testing, they will be upgraded to this compliant system. The success
the Partnership 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 and vendors due to Year 2000 failures could have a material adverse
affect on its operations and cash flows. In addition to the business risks noted
above there are other Y2K risks, which include but are not limited to utility
and telecommunication systems failure to provide service, which are beyond the
Partnership's control and could have adverse effects on our operations.
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 conditions 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 accretive to the Partnership.
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.
o The Partnership's success in dealing with the Year 2000 issues and
those of its vendors, suppliers and other third parties, many of which
are beyond the Partnership's control.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Partnership has very little cash flow exposure due to rate changes for
long-term debt obligations. The Partnership primarily enters debt obligations to
support general corporate purposes including capital expenditures and working
capital needs. The Partnership's long-term debt instruments are typically issued
at fixed interest rates. When these debt obligations mature, the Partnership may
refinance all or a portion of such debt at then-existing market interest rates
which may be more or less than the interest rates on the maturing debt.
Commodity price risk arises from the risk of price changes in the propane
inventory that the Partnership buys and sells. The market price of propane is
often subject to volatile changes as a result of supply or other market
conditions over which the Partnership will have no control. In the past, price
changes have generally been passed along to the Partnership's customers to
maintain gross margins, mitigating the commodity price risk. The Partnership in
the past 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.
18
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial statements set forth on pages F-1 to F-16 of this Report are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
19
<PAGE> 23
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, 1999, the General Partner
employed 1,040 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
H. Michael Krimbill President and Chief Financial Officer,
Treasurer and Secretary
R. C. Mills Executive Vice President and Chief Operating
Officer
G. A. Darr Vice President - Corporate Development
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 57, has 24 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 24 years, and is a past president
of the Association.
R. C. Mills. Mr. Mills, age 62, has 41 years of experience in the propane
industry. Mr. Mills joined Heritage in 1991 as Executive Vice President and
Chief Operating Officer. Before coming to Heritage, Mr. Mills spent 25 years
with Texgas Corporation and its successor, Suburban Propane, Inc. At the time he
left Suburban in 1991, Mr. Mills was Vice President of Supply and Wholesale.
20
<PAGE> 24
G. A. Darr. Mr. Darr, age 66, has over 41 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 (the "Association").
H. Michael Krimbill. Before joining Heritage in 1990 as Vice President and
Chief Financial Officer, Mr. Krimbill, age 46, was Treasurer of Total Petroleum,
Inc. ("Total"). Total was a publicly traded, fully integrated oil company
located in Denver, Colorado. Mr. Krimbill was promoted to President of Heritage
April 1999. Mr. Krimbill is a Director of the Association.
Bradley K. Atkinson. Mr. Atkinson, age 44 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 42, 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 on October 1, 1996.
Bill W. Byrne. Mr. Byrne, age 69, 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 Association.
J. Charles Sawyer. Mr. Sawyer, age 62, 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 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, 1999, all filing requirements applicable to
its officers, directors, and greater than 10 percent beneficial owners were met
in a timely manner other than one late filing for Mr. Bertelsmeyer and Heritage
Holdings, Inc. each for one prior period.
21
<PAGE> 25
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, 1999, 1998
and 1997.
<TABLE>
<CAPTION>
All Other
Year Salary Compensation (1)
---------- ------------ ---------------
<S> <C> <C> <C>
James E. Bertelsmeyer 1999 $ 356,150 $ 1,078
Chairman of the Board and 1998 355,756 2,048
Chief Executive Officer 1997 341,756 2,619
H. Michael Krimbill 1999 211,255 267
President, Chief Financial 1998 185,000 357
Officer, Treasurer and Secretary 1997 175,000 616
R.C. Mills 1999 234,770 1,257
Executive Vice President and 1998 225,000 2,201
Chief Operating Officer 1997 215,000 2,316
G.A. Darr 1999 136,570 1,071
Vice President - 1998 150,756 1,933
Corporate Development 1997 134,756 1,193
Bradley K. Atkinson 1999 128,910 48
Vice President - 1998 (2) 125,000 --
Administration 1997 -- --
</TABLE>
(1) Consists of life insurance premiums.
(2) Mr. Atkinson joined Heritage in April 1998, but his salary is presented on
an annualized basis.
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.
22
<PAGE> 26
The Employment Agreements provide that in the event an Executive (i) is
involuntarily terminated (other than for "misconduct" or "disability") or (ii)
voluntarily terminates employment for "good reason" (as defined in the
agreements), such Executive will be entitled to continue receiving his base
salary and to participate in all group health insurance plans and programs that
may be offered to executives of the General Partner for the remainder of the
term of the Employment Agreement or, if earlier, the Executive's death. Each
Employment Agreement also provides that if any payment received by an Executive
is subject to the 20% federal excise tax under Section 4999(a) of the Code of
the Internal Revenue Service, the Payment will be grossed up to permit the
Executive to retain a net amount on an after-tax basis equal to what he would
have received had the excise tax and all other federal and state taxes on such
additional amount not been payable. In addition, each Employment Agreement
contains non-competition and confidentiality provisions.
RESTRICTED UNIT PLAN
The General Partner has adopted a restricted unit plan (the "Restricted
Unit Plan") for its non-employee directors and key employees of the General
Partner and its affiliates. The Plan covers rights to acquire 146,000 Common
Units. The right to acquire the Common Units under the Restricted Unit Plan,
including any forfeiture or lapse of rights are available for grant to key
employees on such terms and conditions (including vesting conditions) as the
Compensation Committee of the General Partner shall determine. Each non-employee
director shall automatically receive a grant with respect to 500 Common Units on
each September 1 that such person continues as a non-employee director. Newly
elected non-employee directors are also entitled to receive a grant with respect
to 2,000 Common Units upon election or appointment to the Board. Generally, the
rights to acquire the Common Units will vest upon the later to occur of (i) the
three-year anniversary of the grant date, or (ii) the conversion of the
Subordinated Units to Common Units. Grants made after the conversion of all of
the Partnership's Subordinated Units to Common 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,
1999, 59,500 Restricted Units had been granted to non-employee directors and key
employees. Compensation expense of $358,000, $215,000 and $93,000 was recorded
in the Partnership's financial statements for fiscal years 1999, 1998 and 1997,
respectively. See Note 6 of the of the Partnership's Consolidated Financial
Statements which begin on page F-1 of this Report.
The following table sets forth the number of grants awarded in the last
fiscal year that may result in the issuance of Common Units under the Restricted
Unit Plan to the executive officers of the Company:
23
<PAGE> 27
<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 2,000 (1) 2,000 2,000 2,000
H. Michael Krimbill 2,000 (1) 2,000 2,000 2,000
5,000 (2) 5,000 5,000 5,000
R.C. Mills 2,000 (1) 2,000 2,000 2,000
G.A. Darr 2,000 (1) 2,000 2,000 2,000
Bradley K. Atkinson 700 (1) 700 700 700
</TABLE>
(1) In accordance with the Restricted Unit Plan, each grant will specify the
terms and conditions for the Participant to become vested in the Phantom
Units. Unless earlier terminated, the rights to acquire the Phantom Units
granted October 27, 1998, will vest on the later of the third anniversary
of this grant or the attainment of $55 million of EBITDA for Heritage
Propane Partners, L.P. In addition, all of the Partnership's subordinated
units must convert to common units.
(2) Unless earlier terminated, the rights to acquire the Phantom Units granted
May 11, 1999, will vest on the later of the third anniversary of this grant
or the attainment of a $30 average per common unit trading price for 40
trading days for Heritage Propane Partners, L.P. In addition, all of the
Partnership's subordinated units must convert to common units.
COMPENSATION OF DIRECTORs
Heritage currently pays no additional remuneration to its employees for
serving as directors. Under the Restricted Unit Plan, non-employee directors
will be awarded 500 of these Restricted Units annually, and newly elected
directors receive an initial award of 2,000 Restricted Units. The General
Partner will pay each of its non-employee directors $10,000 annually, plus
$1,000 per Board meeting attended and $500 per committee meeting attended. All
expenses associated with compensation of directors will be reimbursed to
Heritage by the Partnership.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Compensation of the executive officers of Heritage is determined by its
board of directors. Mr. Bertelsmeyer, Heritage's Chairman of the Board and Chief
Executive Officer, participated in deliberations of Heritage's board of
directors concerning executive officer compensation, but did not participate in
deliberations concerning his own compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of August 31, 1999,
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> 28
<TABLE>
<CAPTION>
MLP UNITS
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) 44,551 *
H. Michael Krimbill (2) 11,000 *
R.C. Mills 9,500 *
G.A. Darr 790 *
Bradley K. Atkinson 4,700 *
Bill W. Byrne 10,000 *
J. Charles Sawyer 2,000 *
J.T. Atkins 2,000 *
All Directors and Executive
Officers as a group
(8 persons) 84,541 1.45%
Heritage Holdings, Inc. 1,116,243 19.16%
Subordinated Units (3) Heritage Holdings, Inc. (4) 2,777,207 100%
</TABLE>
<TABLE>
<CAPTION>
HERITAGE HOLDINGS, INC. COMMON STOCK
Name and Address Beneficially Percent of
Title of Class of 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 10.00
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> 29
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 on page E-1.
(B) REPORTS OF FORM 8-K.
None.
26
<PAGE> 30
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 19, 1999
- - ------------------------- Executive Officer and Director ---------------------
James E. Bertelsmeyer (Principal Executive Officer)
/s/ H. Michael Krimbill President and Chief Financial November 23, 1999
- - ------------------------- Officer (Principal Financial and ---------------------
H. Michael Krimbill Accounting Officer)
/s/ Bill W. Byrne Director November 23, 1999
- - -------------------------- ----------------------
Bill W. Byrne
/s/ J. Charles Sawyer Director November 23, 1999
- - -------------------------- ----------------------
J. Charles Sawyer
/s/ J. T. Atkins Director November 23, 1999
- - -------------------------- ----------------------
J.T. Atkins
</TABLE>
27
<PAGE> 31
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES PAGE
- - ------------------------------------------------ ----
<S> <C>
Report of Independent Public Accountants................................................................F-2
Consolidated Balance Sheets - August 31, 1999 and 1998..................................................F-3
Consolidated Statements of Operations -
Years Ended August 31, 1999, 1998 and 1997............................................................F-4
Consolidated Statements of Partners' Capital -
Years Ended August 31, 1999, 1998 and 1997............................................................F-5
Consolidated Statements of Cash Flows -
Years Ended August 31, 1999, 1998 and 1997............................................................F-6
Notes to Consolidated Financial Statements..............................................................F-7
</TABLE>
F-1
<PAGE> 32
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. (a Delaware limited partnership) and
subsidiaries as of August 31, 1999 and 1998, and the related
consolidated statements of operations, partners' capital and cash
flows for each of the three years in the period ended August 31, 1999.
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, 1999 and 1998,
and the results of their operations and their cash flows for each of
the three years in the period ended August 31, 1999 in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
-----------------------
Tulsa, Oklahoma
October 8, 1999 (except with
respect to the matters discussed
in Notes 3 and 7, as to which the
date is October 28, 1999)
F-2
<PAGE> 33
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
<TABLE>
<CAPTION>
August 31, August 31,
ASSETS 1999 1998
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,679 $ 1,837
Accounts receivable 11,635 10,444
Inventories 14,784 12,545
Prepaid expenses 1,169 1,431
-------- --------
Total current assets 29,267 26,257
PROPERTY, PLANT AND EQUIPMENT, net 155,219 139,490
INVESTMENT IN AFFILIATE 5,202 4,667
INTANGIBLES AND OTHER ASSETS, net 73,270 69,550
-------- --------
Total assets $262,958 $239,964
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Working capital facility $ 19,900 $ 10,600
Accounts payable 17,268 13,952
Accrued and other current liabilities 8,490 9,689
Current maturities of long-term debt 2,022 1,203
-------- --------
Total current liabilities 47,680 35,444
LONG-TERM DEBT, less current maturities 196,216 177,431
-------- --------
COMMITMENTS AND CONTINGENCIES
Total liabilities 243,896 212,875
-------- --------
PARTNERS' CAPITAL:
Common unitholders (5,825,674 and 4,876,725 units issued and outstanding
at August 31, 1999 and 1998, respectively) 17,077 20,775
Subordinated unitholders (2,777,207 and 3,702,943 units issued and outstanding
at August 31, 1999 and 1998, respectively) 1,809 6,041
General partner 176 273
-------- --------
Total partners' capital 19,062 27,089
-------- --------
Total liabilities and partners' capital $262,958 $239,964
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE> 34
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit and unit data)
<TABLE>
<CAPTION>
For the Years Ended August 31,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Retail fuel $ 137,403 $ 136,301 $ 129,673
Wholesale fuel 24,018 30,254 53,019
Other 22,599 19,432 17,093
----------- ----------- -----------
Total revenues 184,020 185,987 199,785
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of products sold 87,267 96,884 125,947
Operating expenses 51,201 47,010 40,444
Depreciation and amortization 14,749 13,680 11,124
Selling, general and administrative 6,236 5,484 5,351
----------- ----------- -----------
Total costs and expenses 159,453 163,058 182,866
----------- ----------- -----------
OPERATING INCOME 24,567 22,929 16,919
OTHER INCOME (EXPENSE):
Interest expense (15,915) (14,599) (12,063)
Equity in earnings of affiliates 1,005 707 487
Gain on disposal of assets 722 534 372
Other (263) (305) (90)
----------- ----------- -----------
INCOME BEFORE MINORITY INTEREST 10,116 9,266 5,625
Minority interest (454) (476) (448)
----------- ----------- -----------
NET INCOME 9,662 8,790 5,177
GENERAL PARTNER'S INTEREST IN NET INCOME 97 88 52
----------- ----------- -----------
LIMITED PARTNERS' INTEREST IN NET INCOME $ 9,565 $ 8,702 $ 5,125
=========== =========== ===========
BASIC NET INCOME PER LIMITED PARTNER UNIT $ 1.11 $ 1.04 $ 0.64
=========== =========== ===========
BASIC WEIGHTED AVERAGE NUMBER OF UNITS
OUTSTANDING 8,589,335 8,332,351 7,987,943
=========== =========== ===========
DILUTED NET INCOME PER LIMITED
PARTNER UNIT $ 1.11 $ 1.04 $ 0.64
=========== =========== ===========
DILUTED WEIGHTED AVERAGE NUMBER OF UNITS
OUTSTANDING 8,645,958 8,365,334 8,005,943
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE> 35
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands, except unit data)
<TABLE>
<CAPTION>
Total
NUMBER OF UNITS Common Subordinated General Partners'
Common Subordinated Unitholders Unitholders Partner Capital
---------- ------------ ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
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 restricted Common
Units in connection with certain
acquisitions 591,725 -- 13,788 -- -- 13,788
Capital contribution from General
Partner in connection with issuance
of Common Units -- -- -- -- 141 141
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
Unit distribution -- -- (12,428) (5,924) (202) (18,554)
Issuance of restricted Common
Units in connection with certain
acquisitions 23,213 -- 502 -- -- 502
Capital contribution from General
Partner in connection with issuance
of Common Units -- -- -- -- 5 5
Conversion of Subordinated Units
to Common Units 925,736 (925,736) 1,510 (1,510) -- --
Other -- -- 240 115 3 358
Net income -- -- 6,478 3,087 97 9,662
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, AUGUST 31, 1999 5,825,674 2,777,207 $ 17,077 $ 1,809 $ 176 $ 19,062
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE> 36
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Years Ended August 31,
-------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,662 $ 8,790 $ 5,177
Reconciliation of net income to net cash provided by
operating activities-
Depreciation and amortization 14,749 13,680 11,124
Provision for losses on accounts receivable 338 435 699
Gain on disposal of assets (722) (534) (372)
Deferred compensation on restricted units 358 215 93
Undistributed earnings of affiliates (534) (642) (411)
Minority Interest (92) (15) 130
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable (848) 1,476 (622)
Inventories (1,718) 1,789 (1,694)
Prepaid expenses 310 149 (194)
Intangibles and other assets 883 (989) (581)
Accounts payable 2,947 (1,025) 740
Accrued and other current liabilities (1,720) 1,203 1,295
--------- --------- ---------
Net cash provided by operating activities 23,613 24,532 15,384
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired (17,931) (23,276) (14,549)
Capital expenditures (14,974) (9,359) (7,170)
Proceeds from asset sales 2,106 5,511 1,619
--------- --------- ---------
Net cash used in investing activities (30,799) (27,124) (20,100)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 85,250 129,147 69,782
Principal payments on debt (59,673) (110,119) (49,260)
Unit distribution (18,554) (16,765) (14,951)
Capital contribution from General Partner 5 141 --
--------- --------- ---------
Net cash provided by financing activities 7,028 2,404 5,571
--------- --------- ---------
INCREASE (DECREASE) IN CASH (158) (188) 855
CASH, beginning of period 1,837 2,025 1,170
--------- --------- ---------
CASH, end of period $ 1,679 $ 1,837 $ 2,025
========= ========= =========
NONCASH FINANCING ACTIVITIES:
Notes payable incurred on noncompete agreements $ 3,332 $ 6,393 $ 1,961
Issuance of restricted common units in connection with certain
acquisitions $ 502 $ 13,788 $ --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 15,655 $ 13,045 $ 11,873
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE> 37
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except unit and per unit data)
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.
The Operating Partnership sells propane and propane-related products to
approximately 265,000 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 M-P Energy
Partnership. M-P Energy Partnership is a Canadian partnership primarily engaged
in lower-margin wholesale distribution in which the Partnership owns a 60
percent interest. The Partnership grants credit to its customers for the
purchase of propane and propane-related products.
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 M-P Energy
Partnership. The Partnership accounts for its 50 percent partnership interest in
Bi-State Partnership, 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, 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 average cost, 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,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Fuel $ 9,341 $ 7,939
Appliances, parts and fittings 5,443 4,606
----------- -----------
$ 14,784 $ 12,545
=========== ===========
</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. Additionally, the Partnership capitalizes certain
costs directly related to the installation of Partnership owned tanks, including
internal labor costs. Components and useful lives of property, plant and
equipment are as follows:
F-7
<PAGE> 38
<TABLE>
<CAPTION>
August 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Land and improvements $ 8,778 $ 7,809
Buildings and improvements (10 to 30 years) 16,719 13,374
Bulk storage, equipment and facilities (3 to 30 years) 19,109 20,173
Tanks and other equipment (5 to 30 years) 115,608 104,764
Vehicles (5 to 7 years) 32,421 22,818
Furniture and fixtures (5 to 10 years) 5,021 4,578
Other 1,312 1,214
----------- -----------
198,968 174,730
Less-accumulated depreciation (43,749) (35,240)
----------- -----------
Property, plant, and equipment, net $ 155,219 $ 139,490
=========== ===========
</TABLE>
INTANGIBLES AND OTHER ASSETS
Intangibles and other assets are stated at cost net of amortization computed on
the straight-line method. The Partnership eliminates from its balance sheet any
fully amortized intangibles and the related accumulated amortization. Components
and useful lives of intangibles and other assets are as follows:
<TABLE>
<CAPTION>
August 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Goodwill (30 years) $ 48,672 $ 45,514
Noncompete agreements (10 to 15 years) 30,647 25,181
Customer lists (15 years) 15,597 12,110
Other 5,820 6,672
--------- ---------
100,736 89,477
Less-accumulated amortization (27,466) (19,927)
--------- ---------
Intangibles and other assets, net $ 73,270 $ 69,550
========= =========
</TABLE>
LONG-LIVED ASSETS
The Partnership reviews long-lived 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
long-lived assets is not recoverable, the Partnership reduces the carrying
amount of such assets to fair value.
ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consist of the following:
<TABLE>
<CAPTION>
August 31,
--------------------------
1999 1998
--------- --------
<S> <C> <C>
Interest payable $ 3,442 $ 3,629
Wages and payroll taxes 1,116 1,914
Deferred tank rent 1,450 1,204
Customer deposits 826 1,492
Other 1,656 1,450
--------- --------
Intangibles and other assets, net $ 8,490 $ 9,689
========= ========
</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
F-8
<PAGE> 39
the tax basis and financial reporting basis of assets and liabilities and the
taxable income allocation requirements under the Partnership agreement.
INCOME PER LIMITED PARTNER UNIT
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 (see
Note 6). A reconciliation of net income and weighted average units used in
computing basic and diluted earnings per unit is as follows:
<TABLE>
<CAPTION>
Years Ended August 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
BASIC NET INCOME PER LIMITED PARTNER UNIT:
Limited partners' interest in net income $ 9,565 $ 8,702 $ 5,125
========== ========== ==========
Weighted average limited partner units 8,589,335 8,332,351 7,987,943
========== ========== ==========
Basic net income per limited partner unit $ 1.11 $ 1.04 $ 0.64
========== ========== ==========
DILUTED NET INCOME PER LIMITED PARTNER UNIT:
Limited partners' interest in net income $ 9,565 $ 8,702 $ 5,125
========== ========== ==========
Weighted average limited partner units 8,589,335 8,332,351 7,987,943
Dilutive effect of Phantom Units 56,623 32,983 18,000
---------- ---------- ----------
Weighted average limited partner units, assuming
dilutive effect of Phantom Units 8,645,958 8,365,334 8,005,943
========== ========== ==========
Diluted net income per limited partner unit $ 1.11 $ 1.04 $ 0.64
========== ========== ==========
</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, 1999 of the Partnership's long-term debt
approximates the aggregate carrying amount.
3. ACQUISITIONS:
During fiscal 1999, the Partnership acquired certain assets of Claredon Gas
Company in Manning, SC, Blue Flame Gas Corporation of Richmond, VT and one other
small company. The Company also purchased all of the outstanding stock of S.R.
Young, Inc. of Springfield, VT, Pioneer LPG Corporation of Madera, CA and
Foster's Gas, Inc. of Leitchfield, KY, and conveyed the net assets to the
Partnership. The acquisitions totaled $22,743, which includes notes payable on
noncompete agreements of $3,332 for periods ranging from three to ten years.
These acquisitions were financed primarily with the acquisition facility and the
issuance of $502 of Common Units. Subsequent to August 31, 1999, the Company
purchased all of the outstanding stock of Eaves Oil Company, Inc. of New
Ellenton, SC, Blue Flame Gas Co. Inc. of Charleston, SC and Cumberland LP Gas,
Inc. of Cookeville, TN and
F-9
<PAGE> 40
conveyed the net assets to the Partnership. The Partnership purchased certain
assets of two smaller propane businesses subsequent to August 31, 1999. The
total purchase price of these acquisitions was approximately $20 million which
were financed primarily with the acquisition facility, notes payable on
noncompete agreements and the issuance of Common Units.
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.
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 were financed
primarily with the acquisition facility.
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 certain legal
and other costs directly 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.
4. WORKING CAPITAL FACILITY AND LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
August 31,
-----------------------
1999 1998
--------- ---------
<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 12,000
7.26% Series B Senior Secured Notes 20,000 20,000
6.50% Series C Senior Secured Notes 5,000 5,000
6.59% Series D Senior Secured Notes 5,000 5,000
6.67% Series E Senior Secured Notes 5,000 5,000
Senior Revolving Acquisition Facility 18,300 600
Notes Payable on noncompete agreements with
interest imputed at rates averaging 8%, due in
installments through 2009, collateralized by a first
security lien on certain assets of the Partnership 11,486 9,088
Other 1,452 1,946
--------- ---------
198,238 178,634
Current maturities of long-term debt (2,022) (1,203)
--------- ---------
$ 196,216 $ 177,431
========= =========
</TABLE>
Maturities of the Senior Secured Notes and the Medium Term Note Program are as
follows:
8.55% Senior Notes: Senior Notes: mature at the rate of $12,000 on
June 30 in each of the years 2002 to and
including 2011.
F-10
<PAGE> 41
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, 1999, 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. Effective July 2, 1999, the Partnership entered
into the First Amended and Restated Credit Agreement (the "Agreement"). The
Agreement replaced one of the financial institutions from the previous amended
credit agreement and extended the maturities, leaving all the terms essentially
unchanged. Subsequent to August 31, 1999, the Partnership entered into the First
Amendment to the First Amended and Restated Credit Agreement the terms of which
are as follows:
A $35,000 Senior Revolving Working Capital Facility, expiring June 30,
2002, with $19,900 outstanding at August 31, 1999. 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 6.6875 percent and 6.925 percent for amounts outstanding at
August 31, 1999 and 1998, respectively. The Partnership must be free of
all working capital borrowings for 30 consecutive days each fiscal
year. The maximum commitment fee payable on the unused portion of the
facility is .375 percent.
A $50,000 Senior Revolving Acquisition Facility is available through
December 31, 2001, at which time the outstanding amount must be paid in
ten equal quarterly installments, beginning March 31, 2002. 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 7.0 percent and 7.0273 percent for amounts
outstanding at August 31, 1999 and 1998, respectively. The maximum
commitment fee payable on the unused portion of the facility is .375
percent.
Future maturities of long-term debt for each of the next five fiscal years and
thereafter are $2,022 in 2000; $2,122 in 2001; $18,217 in 2002; $21,892 in 2003;
$24,086 in 2004 and $129, 899 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 $1,554 for fiscal 1999,
$1,593 for fiscal 1998 and $1,359 for fiscal 1997, respectively. Fiscal year
future minimum lease commitments for such leases are $1,138 in 2000; $710 in
2001; $601 in 2002; $515 in 2003; $420 in 2004 and $844 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 2000.
F-11
<PAGE> 42
6. PARTNERS' CAPITAL:
As of August 31, 1999, Partners' capital consisted of 5,825,674 Common Units
representing a 66.4 percent limited partner interest, 2,777,207 Subordinated
Units owned by the General Partner representing a 31.6 percent limited partner
interest and a two percent general partner interest. Subsequent to August 31,
1999, the Partnership issued an additional 56,578 Common Units under Form S-4
registration statement in connection with the purchase of other propane
businesses, 4,500 Common Units in regards to the vesting rights under the
Restricted Unit Plan (see below "Restricted Unit Plan") and 1,200,000 Common
Units under Form S-3 registration statement (see note 7 "Registration
Statements"). After the issuance of these Common Units, there were 7,086,752
Common Units outstanding representing a 70.41 percent limited partner interest,
2,777,207 Subordinated Units representing a 27.59 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 1999, the Partnership issued
23,213 Common Units to Heritage Holdings, Inc., the Partnership's General
Partner. These Units were issued in connection with the assumption of certain
liabilities by the General Partner from the Partnership's prior acquisition of
certain assets of a propane company. 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. Pursuant to the terms of the Partnership Agreement,
925,736 Subordinated Units held by the General Partner converted to Common Units
on July 7, 1999.
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. Pursuant to the terms of
the Partnership Agreement, 925,736 Subordinated Units held by the General
Partner converted to Common Units on July 7, 1999. The conversion of these units
was dependent on meeting certain cash performance and distribution requirements
during the period that commenced with the Partnership's public offering in June
of 1996. The subordination period applicable to the remaining Subordinated Units
will end the first day of any quarter ending after May 31, 2001, in which
certain cash performance and distribution requirements have been met. An
additional 925,736 Subordinated Units will convert to Common Units after May 31,
2000 as long as these requirements are met. Upon expiration of the Subordination
Period, all remaining Subordinated Units will convert to Common Units.
F-12
<PAGE> 43
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 August 31, 1998.
For the quarters ended November 30, 1998, February 28, 1999 and May 31, 1999
quarterly distributions of $.5125, $.5625 and $.5625, respectively, were paid to
the Common and Subordinated Unitholders. The distribution of $.5625 per Common
and Subordinated Unit for the fourth quarter ended August 31, 1999, was declared
on September 17, 1999, payable on October 15, 1999, to Unitholders of record as
of October 1, 1999. The quarterly distributions for the quarters ended February
28, 1999, May 31, 1999 and August 31, 1999 included incentive distributions
payable to the General Partner to the extent the quarterly distribution exceeded
$.55 per unit.
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, and (3) terms and conditions specified by each grant. During fiscal 1999,
21,300 of these Phantom Units were granted to non-employee directors and key
employees. During fiscal 1998 and 1997, 20,200 and 18,000, respectively, of
these Phantom Units were granted to non-employee directors and key employees. As
of August 31, 1999, Phantom Units with a value of $1,346 have been awarded and
the compensation cost related to such units will be recognized over the vesting
period of the related awards. The Partnership applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees". Compensation cost and directors' fee
expense of $358, $215 and $93 was recorded for fiscal 1999, 1998 and 1997,
respectively, related to the issuance of the units. Subsequent to August 31,
1999, 4,500 of Phantom Unit grants vested pursuant to the vesting rights of the
Plan. The Partnership follows the disclosure only provision of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-based
Compensation". Pro-forma net income and net income per limited partner unit
under the fair value method of accounting for equity instruments under SFAS No.
123 would be the same as reported net income and net income per limited partner
unit.
7. REGISTRATION STATEMENTS:
Effective November 19, 1997, the Partnership registered 2,000,000 additional
Common Units on Form S-4 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. Subsequent to August 31, 1999, 56,578 Common
Units were issued from this registration statement in connection with the
acquisition of certain assets of subsequent acquisitions.
Effective September 13, 1999, the Partnership registered $150,000,000 of Common
Units and Debt Securities on Form S-3 that may be offered for sale in one or
more offerings. On October 25, 1999, the Partnership issued a prospectus
supplement offering 1,200,000 Common Units, representing limited partner
interests in the Partnership. The underwriters delivered the Common Units to
purchasers on October 28, 1999 at a public offering price of $22.00 per Common
Unit. The underwriters may also purchase up to an additional 180,000 Common
Units on the same terms within 30 days from the date of the prospectus
supplement to cover over-allotments, if any. The Partnership used the net
proceeds of approximately $24.0 million from this offering to repay a portion of
the outstanding indebtedness under its acquisition facility that was incurred to
acquire propane businesses.
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, 1999, 1998 and 1997, was $425, $375 and $325,
respectively. At August 31, 1999 and 1998, accounts payable included amounts
payable from the Partnership to the General Partner of $1,964 and $1,192,
respectively.
F-13
<PAGE> 44
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 $38,314, $33,870 and $28,659 for the years ended August 31, 1999,
1998 and 1997, respectively, include compensation and benefits paid to officers
and employees of the General Partner.
10. REPORTABLE SEGMENTS:
The Partnership has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information which requires the reporting of certain
financial information by business segment. The Partnership financial statements
reflect three reportable segments: the domestic retail operations of Heritage
Propane Partners, the domestic wholesale operations of Heritage Propane
Partners, and the foreign wholesale operations of M-P Energy Partnership, a
majority owned partnership. The Partnership's reportable segments are strategic
business units that sell products and services to different types of users;
retail and wholesale customers. M-P Energy Partnership is a 60 percent owned
Canadian wholesale supplier that the Partnership consolidates. Intersegment
sales by the foreign wholesale segment to the domestic segment are priced in
accordance with the partnership agreement. The Partnership manages these
segments separately as each segment involves different distribution, sale and
marketing strategies. The Partnership evaluates the performance of its operating
segments based on operating income. The operating income below does not reflect
domestic and foreign selling, general, and administrative expenses of $6,236,
$5,484 and $5,351 for the years ended 1999, 1998 and 1997, respectively.
The following table presents financial information by segment for the years
ended August 31,
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Gallons:
Domestic retail 159,938 146,747 125,606
Domestic wholesale 7,795 11,413 21,431
Foreign wholesale
Affiliated 56,869 44,133 45,886
Unaffiliated 73,337 74,807 91,165
Elimination (56,869) (44,133) (45,886)
--------- --------- ---------
Total 231,070 232,967 238,202
========= ========= =========
Revenues:
Domestic retail fuel $ 137,403 $ 136,301 $ 129,674
Domestic wholesale fuel 3,409 5,345 11,766
Foreign wholesale
Affiliated 16,903 14,696 20,764
Unaffiliated 20,628 24,929 41,277
Elimination (16,903) (14,696) (20,764)
Other domestic revenues 22,580 19,412 17,068
--------- --------- ---------
Total $ 184,020 $ 185,987 $ 199,785
========= ========= =========
</TABLE>
F-14
<PAGE> 45
<TABLE>
<S> <C> <C> <C>
Operating Income:
Domestic retail $ 29,659 $ 27,242 $ 20,969
Domestic wholesale fuel 162 227 264
Foreign wholesale
Affiliated 494 196 186
Unaffiliated 982 944 1,037
Elimination (494) (196) (186)
--------- --------- ---------
Total $ 30,803 $ 28,413 $ 22,270
========= ========= =========
Total Assets:
Domestic retail $ 236,215 $ 212,537 $ 174,636
Domestic wholesale 2,803 4,401 4,443
Foreign wholesale 4,566 3,110 4,864
Corporate 19,374 19,916 19,856
--------- --------- ---------
Total $ 262,958 $ 239,964 $ 203,799
========= ========= =========
Depreciation and amortization:
Domestic retail $ 14,691 $ 13,603 $ 11,033
Domestic wholesale 45 59 76
Foreign 13 18 15
--------- --------- ---------
Total $ 14,749 $ 13,680 $ 11,124
========= ========= =========
</TABLE>
11. SIGNIFICANT INVESTEE:
At August 31, 1999, the Partnership held a 50 percent interest in Bi-State
Partnership. The Partnership accounts for its 50 percent interest in Bi-State
Partnership under the equity method. The Partnership's investment in Bi-State
Partnership totaled $5,202 and $4,667 at August 31, 1999 and 1998 respectively.
The Partnership received distributions from Bi-State Partnership in the amount
of $470, $100 and $100 for the years ended August 31, 1999, 1998 and 1997,
respectively.
Bi-State Partnership's financial position at August 31, 1999 and 1998 is
summarized below:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current assets $ 1,533 $ 2,533
Noncurrent assets 14,281 13,752
----------- -----------
$ 15,814 $ 16,285
=========== ===========
Current liabilities $ 2,333 $ 2,306
Long-term debt 4,804 6,516
Partners' capital:
Heritage 5,202 4,667
Other partner 3,475 2,796
----------- -----------
$ 15,814 $ 16,285
=========== ===========
</TABLE>
Bi-State Partnership's results of operations for fiscal years ended August 31,
1999, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
Revenues $ 12,627 $ 10,708 $ 9,162
Gross profit 7,356 5,944 4,058
Net income:
Heritage 1,005 707 328
Other partner 1,149 878 462
</TABLE>
F-15
<PAGE> 46
12. QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
Fiscal 1999:
Nov. 30 Feb. 28 May 31 Aug. 31
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 41,558 $ 68,498 $ 43,150 $ 30,814
Operating income (loss) 4,563 18,070 5,009 (3,075)
Net income (loss) 1,215 14,404 1,344 (7,301)
Net income (loss) per unit-
basic and diluted 0.14 1.66 0.15 (0.84)
Fiscal 1998:
<CAPTION>
Nov. 30 Feb. 28 May 31 Aug. 31
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 45,906 $ 71,656 $ 42,285 $ 26,140
Operating income (loss) 3,999 17,932 3,989 (2,991)
Net income (loss) 494 14,627 419 (6,750)
Net income (loss) per unit-
basic and diluted 0.06 1.74 0.05 (0.79)
</TABLE>
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 more
than 80 percent 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.
F-16
<PAGE> 47
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.
Exhibit
Number Description
------ -----------
(1) 3.1 Agreement of Limited Partnership of Heritage Propane
Partners, L.P.
(7) 10.1 First Amended and Restated Credit Agreement with
Banks Dated May 31, 1999
(*) 10.1.1 First Amendment to the First Amended and Restated
Credit Agreement dated as of October 15, 1999
(1) 10.2 Form of Note Purchase Agreement (June 25, 1996)
(3) 10.2.1 Amendment of Note Purchase Agreement (June 25, 1996)
dated as of July 25, 1996
(4) 10.2.2 Amendment of Note Purchase Agreement (June 25, 2996)
dated as of March 11, 1997
(6) 10.2.3 Amendment of Note Purchase Agreement (June 25, 1996)
dated as of October 15, 1998
(*) 10.2.4 Second Amendment Agreement dated September 1, 1999 to
June 25, 1996 Note Purchase Agreement
(1) 10.3 Form of Contribution, Conveyance and Assumption
Agreement among Heritage Holdings, Inc., Heritage
Propane Partners, L.P. and Heritage Operating, L.P.
(1) 10.6 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
(6) 10.11 Employment Agreement for Bradley K. Atkinson
(7) 10.12 First Amended and Restated Revolving Credit
Agreement between Heritage Service Corp. and Banks
Dated May 31, 1999
(5) 10.16 Note Purchase Agreement dated as of November 19, 1997
(6) 10.16.1 Amendment dated October 15, 1998 to November 19, 1997
Note Purchase Agreement
(*) 10.16.2 Second Amendment Agreement dated September 1, 1999
to November 19, 1997 Note Purchase Agreement and
June 25, 1996 Note Purchase Agreement
<PAGE> 48
Exhibit
Number Description
------ -----------
(*) 21.1 List of Subsidiaries
(*) 23.3 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule - Filed with EDGAR version
only
(*) 99.1 Balance Sheet of Heritage Holdings, Inc. as of
August 31, 1999
--------------------------------------------
(1) Incorporated by reference to the same numbered Exhibit to Registrant's
Registration Statement of Form S-1, File No. 333-04018, 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. 333-04018, 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-Q for the quarter ended May 31, 1998.
(6) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1998.
(7) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 1999.
(*) Filed Herewith.
<PAGE> 1
EXHIBIT 10.1.1
FIRST AMENDMENT TO
FIRST AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIRST AMENDMENT TO FIRST AMENDED AND RESTATED CREDIT AGREEMENT,
dated effective as of October 15, 1999 (the "First Amendment"), is entered into
between and among HERITAGE OPERATING, L.P., a Delaware limited partnership (the
"Borrower") and BANK OF OKLAHOMA, NATIONAL ASSOCIATION ("BOk"), MERCANTILE BANK
NATIONAL ASSOCIATION ("Mercantile") and LOCAL OKLAHOMA BANK, N. A. ("Local")
(BOk, Mercantile and Local, together with each other Person that becomes a Bank
pursuant to Article XI of the Credit Agreement (hereinafter defined)
collectively referred to herein as the "Banks"), BOk, as administrative agent
for the Banks (in such capacity, the "Administrative Agent") and Mercantile, as
co-agent for the Banks (in such capacity, the "Co-Agent").
WHEREAS, the Borrower, the Banks, the Administrative Agent and the
Co-Agent entered into that certain First Amended and Restated Credit Agreement
dated as of May 31, 1999 (the "Credit Agreement"); and
WHEREAS, the Borrower has requested the Banks, the Administrative Agent
and the Co-Agent to increase (i) the maximum outstanding amount of the Working
Capital Loan pursuant to the Working Capital Facility from $20,000,000.00 to
$35,000,000.00 and (ii) the maximum outstanding amount of the Acquisition Loan
pursuant to the Acquisition Facility from $30,000,000.00 to $50,000,000.00 and
to amend and modify certain other provisions of the Credit Agreement concerning
interest rates and fees.
NOW THEREFORE, the Credit Agreement is hereby amended and modified as
follows:
1. The definition of "Applicable Margin" in the Credit Agreement is
deleted in its entirety and replaced with the following:
"Applicable Margin". With respect to any Eurodollar Loan or
with respect to any Base Rate Loan, the rate of interest per annum
determined for any Margin Period:
(i) if the Leverage Ratio on the Financial Statement
Delivery Date commencing such Margin Period was less than 3.25
to 1, the Applicable Margin will be .875% for Eurodollar Loans
and zero for Base Rate Loans;
(ii) if the Leverage Ratio on the Financial Statement
Delivery Date commencing such Margin Period was equal to or
greater than 3.25 to 1 but less than 3.75 to 1, the Applicable
Margin will be 1.125% for Eurodollar Loans and zero for Base
Rate Loans;
<PAGE> 2
(iii) if the Leverage Ratio on the Financial
Statement Delivery Date commencing such Margin Period was
equal to or greater than 3.75 to 1 but less than 4.25 to 1,
the Applicable Margin will be 1.375% for Eurodollar Loans and
zero for Base Rate Loans;
(iv) if the Leverage Ratio on the Financial Statement
Delivery Date commencing such Margin Period was equal to or
greater than 4.25 to 1 but less than 4.50 to 1, the Applicable
Margin will be 1.500% for Eurodollar Loans and zero for Base
Rate Loans;
(v) if the Leverage Ratio on the Financial Statement
Delivery Date commencing such Margin Period was equal to or
greater than 4.50 to 1 but less than 4.75 to 1, the Applicable
Margin will be 1.625% for Eurodollar Loans and 0.125% for Base
Rate Loans; and
(vi) if the Leverage Ratio on the Financial Statement
Delivery Date commencing such Margin Period was equal to or
greater than 4.75 to 1, the Applicable Margin will be 1.875%
for Eurodollar Loans and .250% for Base Rate Loans.
Notwithstanding the foregoing, if any of the financial
statements required pursuant to Section 7A.1(i) are not delivered
within the time periods specified in Section 7A.1(i), the Applicable
Margin shall be the Applicable Margin set forth in clause (vi) above
until the date such statements are delivered.
2. The definition of "Existing Credit Agreement" in the Credit
Agreement is deleted in its entirety and replaced with the following:
"Existing Credit Agreement" means the Credit Agreement dated
as of June 25, 1996, as amended by the First Amendment to Credit
Agreement dated as of July 25, 1996, the Second Amendment to Credit
Agreement dated as of February 28, 1997, the Third Amendment to Credit
Agreement dated as of September 30, 1997, the Fourth Amendment to
Credit Agreement dated as of November 18, 1997, and the Fifth Amendment
to Credit Agreement dated as of November 13, 1998, between and among
Borrower, BOk, Mercantile and BankBoston, N.A., and BankBoston, N.A.,
as Administrative Agent, and BOk, as Documentation Agent, as replaced
and restated by the First Amended and Restated Credit Agreement dated
as of May 31, 1999, between and among Borrower, BOk, Mercantile and
Local, and BOk, as Administrative Agent, and Mercantile, as Co-Agent.
2
<PAGE> 3
3. The definition of "Intercreditor Agreement" in the Credit Agreement
shall be amended by adding at the end thereof the phrase "or the Credit
Agreement, as amended."
4. The definition of "Note Purchase Agreement" in the Credit Agreement
is deleted in its entirety and replaced by the following:
"Note Purchase Agreements" means that certain (i) Note
Purchase Agreement between Heritage, Borrower and the Note Purchasers
named in the Purchaser Schedule annexed as Schedule I thereto dated as
of June 25, 1996, as amended, and (ii) Note Purchase Agreement between
Borrower and the Note Purchasers named in the Initial Purchaser
Schedule annexed thereto dated as of November 19, 1997, as amended.
5. The definition of "Private Placement Notes" in the Credit Agreement
is deleted in its entirety and replaced by the following:
"Private Placement Notes" means (i) the $120,000,000 senior
secured notes issued pursuant to the Memorandum, sold to the Purchasers
and described and defined in the Note Purchase Agreement dated as of
June 25, 1996, as amended, and (ii) the $47,000,000 senior secured
notes described and defined in the Note Purchase Agreement dated as of
November 19, 1997, as amended.
6. Section 2.1.2(a) of the Existing Credit Agreement is amended by
deleting "$30,000,000" and inserting in lieu thereof "$50,000,000." The form of
Exhibits 2.1.3 (Acquisition Loan Advance Request) and 2.1.4 (Acquisition Notes)
annexed to the Existing Credit Agreement are replaced with the form of Exhibits
2.1.3 and 2.1.4 annexed to this First Amendment.
7. Section 2.2.2 of the Existing Credit Agreement is amended by
deleting "$20,000,000" and inserting in lieu thereof "$35,000,000." The form of
Exhibits 2.2.3 (Loan Advance Request [Working Capital Credit Loans]) and 2.2.4
(Working Capital Notes) annexed to the Existing Credit Agreement are replaced
with the form of Exhibits 2.2.3 and 2.2.4 annexed to this First Amendment.
8. Section 3.1 of the Existing Credit Agreement is amended by deleting
"June 30, 1999" and inserting in lieu thereof "October 31, 1999."
9. A new Section 3.12 "Facility Fees" shall be added to the Existing
Credit Agreement as follows:
3.12 Facility Fees. The Borrower shall pay to (a) BOk a one
time facility fee in the amount of $250,000 and (b) Mercantile a one
time facility fee of $100,000, each due on the Closing Date of this
First Amendment.
3
<PAGE> 4
10. Section 6.1(vii) of the Existing Credit Agreement is deleted in its
entirety and replaced by the following:
(vii) Opinions of Borrower's Counsel. The Agents shall have
received from Borrower's counsel, Doerner, Saunders, Daniel & Anderson,
L.L.P., a favorable written closing opinion addressed to the Agents and
the Banks with respect to the Credit Agreement, as amended by this
First Amendment, satisfactory in form and substance to the
Administrative Agent's counsel including, without limitation, an
opinion that all notices to or consents of the Collateral Agent or the
Note Purchasers and all amendments to the Note Purchase Agreements as
required by the amendments, modifications and transactions contemplated
by this First Agreement have been duly obtained and are in full force
and effect.
11. Section 7B.2(ii)(x) of the Existing Credit Agreement is amended by
deleting "$20,000,000" and inserting in lieu thereof "$35,000,000."
12. Section 7B.2(iii) of the Existing Credit Agreement is amended by
deleting "$30,000,000" and inserting in lieu thereof "$50,000,000."
13. Section 10.1 of the Existing Credit Agreement is deleted in its
entirety and replaced by the following:
10.1 Interests in Loans/Commitments. The percentage interest
of each Bank in the Loans and Letters of Credit, and the Commitments,
shall be computed based on the maximum principal amount for each Bank
as follows:
<TABLE>
<CAPTION>
Maximum Maximum Working Maximum
Acquisition Capital Commitments Percentage
Bank Loan Commitments Loan Commitments Amount Interest
- - ---- ---------------- ---------------- -------------- ----------
<S> <C> <C> <C> <C>
BOk $ 26,470,588.24 $ 18,529,411.76 $45,000,000.00 52.9411%
Mercantile $ 14,705,882.35 $ 10,294.117.65 $25,000,000.00 29.4118%
Local $ 8,823,529.41 $ 6,176,470.59 $15,000,000.00 17.6471%
---------------- ---------------- -------------- ----------
Total $ 50,000,000.00 $ 35,000,000.00 $85,000,000.00 100.0000%
================ ================ ============== ==========
</TABLE>
The foregoing percentage interests, as from time to time in
effect and reflected in the Register, are referred to as the
"Percentage Interests" with respect to all or any portion of the Loans
and Letters of Credit, and the Commitments.
14. Section 11.4 of the Existing Credit Agreement is deleted in its
entirety and replaced by the following:
4
<PAGE> 5
11.4 Sale of Certain Participations. The Borrower, the Agents
and the Banks recognize and acknowledge that BOk is selling
participating interests in its Notes to Stillwater National Bank and
Trust Company ($8,000,000.00) and MidFirst Bank ($10,000,000.00),
respectively.
15. Existing Credit Agreement/Counterparts. All of the remaining terms,
provisions and conditions of the Existing Credit Agreement, except as otherwise
expressly amended and modified by this First Amendment, shall continue in full
force and effect in all respects. This First Amendment may be executed in
multiple counterparts, each of which shall be deemed an original and all of
which shall constitute a single First Amendment. Delivery of an executed
counterpart of a signature page to this Agreement by telecopier shall be as
effective as delivery of a manually executed counterpart of this Agreement.
16. Intercreditor Agreement/Security Agreement. The Borrower confirms
that it has reviewed and approved the terms of the Intercreditor Agreement,
including without limitation, the setoff sharing provisions set forth in Section
13(c) thereof. The Borrower agrees that any setoffs shared under the terms of
the Intercreditor Agreement with the Purchasers of the Private Placement Notes,
to the extent of the portions so shared, will not be deemed to pay down the
Loan. The Borrower further confirms and represents to the Banks, the
Administrative Agent and the Co-Agent that (i) the additional $35,000,000.00
available under the Commitments ($15,000,000.00 under the Working Capital Loan
Facility and $20,000,000.00 under the Acquisition Facility) are secured by the
Security Agreement and (ii) any amendments to or modifications of the Security
Agreement or the Intercreditor Agreement and any notice to or consent of the
Collateral Agent required by virtue of the increased Commitments or other
transactions contemplated by this First Amendment have been duly and validly
consummated, given or obtained, as the case may be, and that such amendments,
modifications or consents remain in full force and effect.
17. Further Assurances. The Borrower will, upon the request of the
Agent from time to time, promptly execute, acknowledge and deliver, and file and
record, all such instruments and notices, and take all such action, as the
Agents deem necessary or advisable to carry out the intent and purposes of this
First Amendment and the Existing Credit Agreement.
18. General. The Existing Credit Agreement and all of the other Loan
Documents are each confirmed as being in full force and effect. This First
Amendment, the Existing Credit Agreement and the other Loan Documents referred
to herein or therein constitute the entire understanding of the parties with
respect to the subject matter hereof and thereof and supersede all prior and
current understandings and agreements, whether written or oral, with respect to
such subject matter. The invalidity or unenforceability of any provision hereof
shall not affect the validity and enforceability of any other term or provision
hereof. The headings in this First Amendment are for convenience of reference
only and shall not alter, limit or otherwise affect the meaning
5
<PAGE> 6
hereof. Each of this First Amendment and the Existing Credit Agreement is a Loan
Document and may be executed in any number of counterparts, which together shall
constitute one instrument, and shall bind and inure to the benefit of the
parties and their respective successors and assigns including as such successors
and assigns all holders of any Note. This First Amendment shall be governed by
and construed in accordance with the laws (other than the conflict of law rules)
of the State of Oklahoma.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to Amended and Restated Credit Agreement to be duly executed and delivered in
Tulsa, Oklahoma, effective as of the 15th day of October, 1999, by the
undersigned duly authorized officers thereof.
"Borrower"
HERITAGE OPERATING, L.P., a
Delaware limited partnership
By: Heritage Holdings, Inc., a Delaware
corporation, general partner
By /s/ H. MICHAEL KRIMBILL
-----------------------------
H. Michael Krimbill
President
7
<PAGE> 8
"Banks"
BANK OF OKLAHOMA, NATIONAL
ASSOCIATION
By
Denise L. Maltby, Senior Vice President
8
<PAGE> 9
MERCANTILE BANK NATIONAL
ASSOCIATION
By
Jeffrey A. Nelson, Vice President
9
<PAGE> 10
LOCAL OKLAHOMA BANK, N.A.
By
Elisabeth F. Blue, Senior Vice President
10
<PAGE> 11
"Administrative Agent"
BANK OF OKLAHOMA, NATIONAL
ASSOCIATION
By
Denise L. Maltby, Senior Vice President
11
<PAGE> 12
"Co-Agent"
MERCANTILE BANK NATIONAL ASSOCIATION
By
Jeffrey A. Nelson, Vice President
12
<PAGE> 1
EXHIBIT 10.2.4
HERITAGE OPERATING, L.P.
SECOND AMENDMENT AGREEMENT
Re: Note Purchase Agreement dated as of June 25, 1996
Note Purchase Agreement dated as of November 19, 1997
Dated as of
September 1, 1999
To each of the Holders named
in Schedule 1 to this Second
Amendment Agreement
Ladies and Gentlemen:
Reference is made to
(i) the Note Purchase Agreement dated as of June 25, 1996 (the
"Original 1996 Agreement"), among Heritage Operating, L.P., a Delaware
limited partnership (the "Company") and the Purchasers named in the
Purchaser Schedule attached thereto, as amended by a First Amendment
Agreement (the "First Amendment Agreement") dated as of October 15,
1998 (said Original 1996 Agreement, as amended, being hereinafter
referred to as the "Outstanding 1996 Agreement") 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, as amended by
the First Amendment Agreement (said Basic 1997 Agreement, as so
amended, being hereinafter referred to as the "Amended Basic 1997
Agreement"), 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
<PAGE> 2
amount of its 6.67% Series E Senior Secured Notes due March 13, 2013
(the "Series E Notes").
The Amended 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 "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 "$20,000,000" set forth in Section 6B(ii) of the
Outstanding 1996 Agreement is hereby deleted and "$35,000,000" shall be
substituted therefor.
I-B. The reference to "$30,000,000" set forth in Section 6B(iii) of the
Outstanding 1996 Agreement is hereby deleted and the phrase "the Contracted
Dollar" shall be substituted therefor.
I-C. The reference to "$30,000,000" contained in the definition of the
term "Acquisition Facility" set forth in Section 10B of the Outstanding 1996
Agreement is hereby deleted and the phrase "the Contracted Dollar" shall be
substituted therefor.
I-D. The references to "$20,000,000" 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 "$35,000,000" shall be
substituted therefor.
I-E. Section 10B of the Outstanding 1996 Agreement is hereby amended by
adding thereto a new definition, in the proper alphabetical position, to be
entitled "Contracted Dollar" and to read as follows:
" `Contracted Dollar' shall mean the sum of:
2
<PAGE> 3
(a) $50,000,000; plus
(b) $45,000,000 from and after any date, occurring on
or prior to March 31, 2000, on which the Company or any
Subsidiary shall purchase the retail propane properties and
underground propane storage facilities of SCANA Corporation
which are being offered for sale by such corporation on
September 1, 1999; minus (to the extent that the amount of
`Contracted Dollar' is not reduced below $50,000,000)
(c) the net cash proceeds to the Company or any
Subsidiary resulting from any sale of Capital Stock of the
Company or any Subsidiary to any Person (other than the
Company or a Subsidiary), on or prior to August 1, 2001."
ARTICLE II
AMENDMENTS TO OUTSTANDING 1997 AGREEMENT
II-A. The reference to "$20,000,000" set forth in Section 6B(ii) of the
Outstanding 1997 Agreement is hereby deleted and "$35,000,000" shall be
substituted therefor.
II-B. The reference to "$30,000,000" set forth in Section 6B(iii) of the
Outstanding 1997 Agreement is hereby deleted and the phrase "the Contracted
Dollar" shall be substituted therefor.
II-C. The reference to "$30,000,000" contained in the definition of the
term "Acquisition Facility" set forth in Section 10B of the Outstanding 1997
Agreement is hereby deleted and the phrase "the Contracted Dollar" shall be
substituted therefor.
II-D. The references to "$20,000,000" 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 "$35,000,000" shall be
substituted therefor.
II-E. Section 10B of the Outstanding 1997 Agreement is hereby amended by
adding thereto a new definition, in the proper alphabetical position, to be
entitled "Contracted Dollar" and to read as follows:
" `Contracted Dollar' shall mean the sum of:
(a) $50,000,000; plus
3
<PAGE> 4
(b) $45,000,000 from and after any date, occurring on
or prior to March 31, 2000, on which the Company or any
Subsidiary shall purchase the retail propane properties and
underground propane storage facilities of SCANA Corporation
which are being offered for sale by such corporation on
September 1, 1999; minus (to the extent that the amount of
`Contracted Dollar' is not reduced below $50,000,000)
(c) the net cash proceeds to the Company or any
Subsidiary resulting from any sale of Capital Stock of the
Company or any Subsidiary to any Person (other than the
Company or a Subsidiary), on or prior to August 1, 2001."
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.
4
<PAGE> 5
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 Second 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
Its
------------------------------------
5
<PAGE> 6
The foregoing Second Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 Second Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 Second Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 LIFE INSURANCE COMPANY
(f/k/a Principal Mutual Life Insurance Company)
By
---------------------------------
Its
By
---------------------------------
Its
8
<PAGE> 9
The foregoing Second Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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: New York Life Insurance Company
By
---------------------------------
Its
9
<PAGE> 10
The foregoing Second Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 Second Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 Stein Roe & Farnham Incorporated, as agent
By
---------------------------------
Its
11
<PAGE> 12
The foregoing Second Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 Second Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 Second Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 Second Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 Second Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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: Conning Asset Management
By
---------------------------------
Its
16
<PAGE> 17
The foregoing Second Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 Second Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 Second Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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.
JEFFERSON PILOT FINANCIAL INSURANCE COMPANY
(FKA Chubb Life Insurance Company of America)
By
---------------------------------
Its
19
<PAGE> 20
SCHEDULE 1
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT AND
SERIES OF OUTSTANDING
NOTES HELD AS OF
NAME OF HOLDER SEPTEMBER 1, 1999
OF OUTSTANDING NOTES
<S> <C>
John Hancock Mutual Life Insurance Company $13,000,000 1996 Notes
John Hancock Mutual Life Insurance Company $ 8,000,000 1996 Notes
John Hancock Variable Life Insurance Company $ 1,000,000 1996 Notes
Mellon Bank, N.A., Trustee Under Master Trust $ 3,000,000 1996 Notes
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 1996 Notes
Principal Mutual Life Insurance Company $15,000,000 1996 Notes
New York Life Insurance Company $12,500,000 1996 Notes
Teachers Insurance and Annuity Association of America $12,500,000 1996 Notes
Keyport Life Insurance Company $10,000,000 1996 Notes
MONY Life Insurance Company of America $ 3,500,000 1996 Notes
The Mutual Life Insurance Company of New York $ 4,000,000 1996 Notes
Pacific Mutual Life Insurance Company $ 5,500,000 1996 Notes
Phoenix Home Life Mutual Insurance Company $ 5,000,000 1996 Notes
ReliaStar Life Insurance Company $ 5,000,000 1996 Notes
General American Life Insurance Company $ 4,000,000 1996 Notes
Wisconsin National Life Insurance Company $ 3,000,000 1996 Notes
</TABLE>
<PAGE> 21
<TABLE>
<S> <C>
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 10.16.2
HERITAGE OPERATING, L.P.
SECOND AMENDMENT AGREEMENT
Re: Note Purchase Agreement dated as of June 25, 1996
Note Purchase Agreement dated as of November 19, 1997
Dated as of
September 1, 1999
To each of the Holders named
in Schedule 1 to this Second
Amendment Agreement
Ladies and Gentlemen:
Reference is made to
(i) the Note Purchase Agreement dated as of June 25, 1996
(the "Original 1996 Agreement"), among Heritage Operating, L.P., a
Delaware limited partnership (the "Company") and the Purchasers named
in the Purchaser Schedule attached thereto, as amended by a First
Amendment Agreement (the "First Amendment Agreement") dated as of
October 15, 1998 (said Original 1996 Agreement, as amended, being
hereinafter referred to as the "Outstanding 1996 Agreement") 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,
as amended by the First Amendment Agreement (said Basic 1997
Agreement, as so amended, being hereinafter referred to as the
"Amended Basic 1997 Agreement"), 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
<PAGE> 2
amount of its 6.67% Series E Senior Secured Notes due March 13, 2013
(the "Series E Notes").
The Amended 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 "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 "$20,000,000" set forth in Section 6B(ii) of the
Outstanding 1996 Agreement is hereby deleted and "$35,000,000" shall be
substituted therefor.
I-B. The reference to "$30,000,000" set forth in Section 6B(iii) of the
Outstanding 1996 Agreement is hereby deleted and the phrase "the Contracted
Dollar" shall be substituted therefor.
I-C. The reference to "$30,000,000" contained in the definition of the
term "Acquisition Facility" set forth in Section 10B of the Outstanding 1996
Agreement is hereby deleted and the phrase "the Contracted Dollar" shall be
substituted therefor.
I-D. The references to "$20,000,000" 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 "$35,000,000" shall be
substituted therefor.
I-E. Section 10B of the Outstanding 1996 Agreement is hereby amended by
adding thereto a new definition, in the proper alphabetical position, to be
entitled "Contracted Dollar" and to read as follows:
"`Contracted Dollar' shall mean the sum of:
2
<PAGE> 3
(a) $50,000,000; plus
(b) $45,000,000 from and after any date, occurring
on or prior to March 31, 2000, on which the Company or any
Subsidiary shall purchase the retail propane properties and
underground propane storage facilities of SCANA Corporation
which are being offered for sale by such corporation on
September 1, 1999; minus (to the extent that the amount of
`Contracted Dollar' is not reduced below $50,000,000)
(c) the net cash proceeds to the Company or any
Subsidiary resulting from any sale of Capital Stock of the
Company or any Subsidiary to any Person (other than the
Company or a Subsidiary), on or prior to August 1, 2001."
ARTICLE II
AMENDMENTS TO OUTSTANDING 1997 AGREEMENT
II-A. The reference to "$20,000,000" set forth in Section 6B(ii) of the
Outstanding 1997 Agreement is hereby deleted and "$35,000,000" shall be
substituted therefor.
II-B. The reference to "$30,000,000" set forth in Section 6B(iii) of the
Outstanding 1997 Agreement is hereby deleted and the phrase "the Contracted
Dollar" shall be substituted therefor.
II-C. The reference to "$30,000,000" contained in the definition of the
term "Acquisition Facility" set forth in Section 10B of the Outstanding 1997
Agreement is hereby deleted and the phrase "the Contracted Dollar" shall be
substituted therefor.
II-D. The references to "$20,000,000" 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 "$35,000,000" shall be
substituted therefor.
II-E. Section 10B of the Outstanding 1997 Agreement is hereby amended by
adding thereto a new definition, in the proper alphabetical position, to be
entitled "Contracted Dollar" and to read as follows:
" `Contracted Dollar' shall mean the sum of:
(a) $50,000,000; plus
3
<PAGE> 4
(b) $45,000,000 from and after any date, occurring
on or prior to March 31, 2000, on which the Company or any
Subsidiary shall purchase the retail propane properties and
underground propane storage facilities of SCANA Corporation
which are being offered for sale by such corporation on
September 1, 1999; minus (to the extent that the amount of
`Contracted Dollar' is not reduced below $50,000,000)
(c) the net cash proceeds to the Company or any
Subsidiary resulting from any sale of Capital Stock of the
Company or any Subsidiary to any Person (other than the
Company or a Subsidiary), on or prior to August 1, 2001."
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.
4
<PAGE> 5
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 Second 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
Its
-----------------------------------
5
<PAGE> 6
The foregoing Second Amendment Agreement and the amendments referred
to therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 Second Amendment Agreement and the amendments referred
to therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 Second Amendment Agreement and the amendments referred
to therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 LIFE INSURANCE COMPANY
(f/k/a Principal Mutual Life Insurance Company)
By
--------------------------------
Its
By
--------------------------------
Its
8
<PAGE> 9
The foregoing Second Amendment Agreement and the amendments referred
to therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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: New York Life Insurance Company
By
--------------------------------
Its
9
<PAGE> 10
The foregoing Second Amendment Agreement and the amendments referred
to therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 Second Amendment Agreement and the amendments referred
to therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 Stein Roe & Farnham Incorporated, as agent
By
--------------------------------
Its
11
<PAGE> 12
The foregoing Second Amendment Agreement and the amendments referred
to therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 Second Amendment Agreement and the amendments referred
to therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 Second Amendment Agreement and the amendments referred
to therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 Second Amendment Agreement and the amendments referred
to therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 Second Amendment Agreement and the amendments referred
to therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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: Conning Asset Management
By
--------------------------------
Its
16
<PAGE> 17
The foregoing Second Amendment Agreement and the amendments referred
to therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 Second Amendment Agreement and the amendments referred
to therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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 Second Amendment Agreement and the amendments referred
to therein are hereby accepted and agreed to as of September 1, 1999, and the
undersigned hereby confirms that on September 1, 1999 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.
JEFFERSON PILOT FINANCIAL INSURANCE COMPANY
(FKA 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 SEPTEMBER 1, 1999
<S> <C>
John Hancock Mutual Life Insurance Company $13,000,000 1996 Notes
John Hancock Mutual Life Insurance Company $8,000,000 1996 Notes
John Hancock Variable Life Insurance Company $1,000,000 1996 Notes
Mellon Bank, N.A., Trustee Under Master Trust $3,000,000 1996 Notes
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 1996 Notes
Principal Mutual Life Insurance Company $15,000,000 1996 Notes
New York Life Insurance Company $12,500,000 1996 Notes
Teachers Insurance and Annuity Association of America $12,500,000 1996 Notes
Keyport Life Insurance Company $10,000,000 1996 Notes
MONY Life Insurance Company of America $3,500,000 1996 Notes
The Mutual Life Insurance Company of New York $4,000,000 1996 Notes
Pacific Mutual Life Insurance Company $5,500,000 1996 Notes
Phoenix Home Life Mutual Insurance Company $5,000,000 1996 Notes
ReliaStar Life Insurance Company $5,000,000 1996 Notes
General American Life Insurance Company $4,000,000 1996 Notes
Wisconsin National Life Insurance Company $3,000,000 1996 Notes
</TABLE>
<PAGE> 21
<TABLE>
<S> <C>
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 Blue Flame Gas of Charleston
o Blue Flame Gas of Mt. Pleasant
o Blue Flame Gas of Vermont
o C & D Propane
o Carolane Propane Gas
o Claredon Gas
o Covington Propane
o Cumberland LP Gas
o Eaves Oil
o Fallsburg Gas
o Foster 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 Pioneer Gas
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
1
<PAGE> 2
EXHIBIT 21.1
SUBSIDIARIES
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.
2
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-40407 and No. 333-86057.
/s/ Arthur Andersen LLP
-----------------------------------
Tulsa, Oklahoma
November 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> AUG-31-1999
<CASH> 1,679
<SECURITIES> 0
<RECEIVABLES> 11,934
<ALLOWANCES> 299
<INVENTORY> 14,784
<CURRENT-ASSETS> 29,267
<PP&E> 198,968
<DEPRECIATION> 43,749
<TOTAL-ASSETS> 262,958
<CURRENT-LIABILITIES> 47,680
<BONDS> 196,216
0
0
<COMMON> 0
<OTHER-SE> 19,062
<TOTAL-LIABILITY-AND-EQUITY> 262,958
<SALES> 184,020
<TOTAL-REVENUES> 184,020
<CGS> 87,267
<TOTAL-COSTS> 159,453
<OTHER-EXPENSES> (1,464)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,915
<INCOME-PRETAX> 10,116
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,662
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,662
<EPS-BASIC> 1.11
<EPS-DILUTED> 1.11
</TABLE>
<PAGE> 1
EXHIBIT 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Heritage Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Heritage
Holdings, Inc. and subsidiaries (the Company) as of August 31, 1999. This
balance sheet is the responsibility of the Company's management. Our
responsibility is to express an opinion on this balance sheet based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the consolidated financial position of Heritage Holdings,
Inc. and subsidiaries as of August 31, 1999, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
-----------------------
Tulsa, Oklahoma
October 8, 1999 (except with
respect to the matters discussed
in Note 7, as to which the date
is October 28, 1999)
<PAGE> 2
HERITAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
August 31,
1999
------------
ASSETS
<S> <C>
CURRENT ASSETS:
Cash $ 2,050
Marketable securities 4,233
Accounts receivable, net 11,635
Inventories 14,784
Prepaid expenses 1,169
Assets held in trust 1,341
------------
Total current assets 35,212
PROPERTY, PLANT AND EQUIPMENT, net 155,246
ASSETS HELD IN TRUST 2,341
INVESTMENT IN AFFILIATE 5,202
INTANGIBLES AND OTHER ASSETS, net 73,719
------------
Total assets $ 271,720
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Working capital facility $ 19,900
Accounts payable 15,311
Accrued and other current liabilities 10,799
Current maturities of long-term debt 3,136
------------
Total current liabilities 49,146
LONG-TERM DEBT, less current maturities 197,983
MINORITY INTEREST 71,404
DEFERRED TAXES 72,604
------------
391,137
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value, 600,000 shares authorized,
534,788 shares issued and outstanding 5
Additional paid-in capital 11,889
Accumulated deficit (125,613)
Other comprehensive income 1,444
Notes receivable from sale of common stock (7,142)
------------
Total stockholders' deficit (119,417)
------------
Total liabilities and stockholders' deficit $ 271,720
============
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
2
<PAGE> 3
HERITAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share/unit amounts)
1. OPERATIONS AND ORGANIZATION:
The accompanying consolidated balance sheet includes the accounts of Heritage
Holdings, Inc., its subsidiaries, including Heritage Propane Partners, L.P. and
Heritage Operating, L.P., and M-P Energy Partnership. The Company accounts for
its 50 percent partnership interest in Bi-State Partnership, another propane
retailer, under the equity method. All significant intercompany transactions and
accounts have been eliminated in consolidation.
The Company has an unrealized gain of approximately $57,414 representing the
difference between the net liabilities of $38,905 transferred to Heritage
Operating, L.P. and its underlying equity in the Partnership at the initial
public offering (IPO) date of $18,509.
The limited partner units received by the Company are subordinated to the Common
Units sold to the public as the Common Units have preferential distribution
rights during the Subordination Period. After the Subordination Period (see Note
6), the Company will recognize a gain in income of $57,414. The unrealized gain
is recorded as minority interest in the consolidated balance sheet.
The Operating Partnership sells propane and propane-related products to
approximately 265,000 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.
2. SIGNIFICANT ACCOUNTING POLICIES AND BALANCE SHEET DETAIL:
MARKETABLE SECURITIES
The Company determines the appropriate classification of marketable securities
at the time of purchase and reevaluates such designation at each balance sheet
date. Marketable securities that have been classified as available-for-sale are
carried at fair value, with unrealized gains and losses reported as other
comprehensive income. Securities available for sale consist of equity securities
with historical costs of $2,789, net unrealized gains of $1,444 and a market
value of $4,233 at August 31, 1999.
3
<PAGE> 4
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,
1999
---------------
<S> <C>
Fuel $ 9,341
Appliances, parts and fittings 5,443
---------------
$ 14,784
===============
</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. Additionally, the Company capitalizes certain costs
directly related to the installation of Company owned tanks, including internal
labor costs. Components and useful lives of property, plant and equipment are as
follows:
<TABLE>
<CAPTION>
August 31,
1999
---------------
<S> <C>
Land and improvements $ 8,778
Buildings and improvements (10 to 30 years) 16,732
Bulk storage, equipment and facilities (3 to 30 years) 19,109
Tanks and other equipment (5 to 30 years) 115,608
Vehicles (5 to 7 years) 32,481
Furniture and fixtures (5 to 10 years) 5,087
Other 1,312
---------------
199,107
Less-accumulated depreciation (43,861)
---------------
$ 155,246
===============
</TABLE>
INTANGIBLES AND OTHER ASSETS
Intangibles and other assets are stated at cost net of amortization computed on
the straight-line method. The Company eliminates from its balance sheet any
fully amortized intangibles and the related accumulated amortization. Components
and useful lives of intangibles and other assets are as follows:
<TABLE>
<CAPTION>
August 31,
1999
---------------
<S> <C>
Goodwill (30 years) $ 48,672
Noncompete agreements (10 to 15 years) 30,647
Customer lists (15 years) 15,597
Other 6,269
---------------
101,185
Less-accumulated amortization (27,466)
---------------
$ 73,719
===============
</TABLE>
4
<PAGE> 5
LONG-LIVED ASSETS
The Company reviews long-lived 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
long-lived assets is not recoverable, the Company reduces the carrying amount of
such assets to fair value.
ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consist of the following:
<TABLE>
<CAPTION>
August 31,
1999
---------------
<S> <C>
Interest payable $ 3,615
Wages and benefits 3,330
Deferred tank rent 1,450
Taxes other than income 641
Customer deposits 826
Other 937
---------------
$ 10,799
===============
</TABLE>
INCOME TAXES
Effective September 1, 1996, the Company elected to be treated as an S
Corporation for tax reporting purposes. This election results in the Company no
longer operating as a taxable entity for federal and state tax reporting
purposes. As an S Corporation, the taxable income of the Company is included in
the taxable income of its shareholders. Deferred taxes are recorded for the
estimated liability for income tax on built-in gains related to the difference
between the estimated fair value and book value of the investment in
Partnership. These deferred taxes will not be paid unless the Company disposes
of its partnership units held on September 1, 1996, before September 1, 2006. At
that time, the deferred income taxes would be eliminated from the balance sheet
and be recorded as retained earnings.
OTHER COMPREHENSIVE INCOME
The Company applies Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," which requires companies to report all
nonowner changes in equity during a period in the financial statements for the
period in which they are recognized. The Company includes unrealized gains and
losses on available-for-sale securities in other comprehensive income.
USE OF ESTIMATES
The preparation of consolidated 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.
5
<PAGE> 6
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 Company for long-term loans with similar terms and average maturities, the
aggregate fair value at August 31, 1999, of the Company's long-term debt
approximates the aggregate carrying amount.
3. ASSETS HELD IN TRUST:
In connection with the IPO, the Company retained $9,613 from the proceeds of the
Notes. These proceeds were placed in various trusts to be paid to the
noteholders of noncompete agreements entered into by the Company prior to the
IPO. The proceeds are disbursed monthly from the trust in accordance with the
noncompete agreements. The Company retains all earnings from the trust assets.
4. WORKING CAPITAL FACILITIES AND LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
August 31,
1999
------------
<S> <C>
8.55% Senior Secured Notes $ 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 18,300
Notes Payable on noncompete agreements with interest imputed at rates
averaging 8%, due in installments through 2009, collateralized by a first
security lien on certain assets of the Partnership 14,367
Other 1,452
------------
201,119
Current maturities of long-term debt (3,136)
------------
$ 197,983
============
</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.
6
<PAGE> 7
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 Notes 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, 1999, 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, and the noteholders have recourse
against the Company.
The Partnership maintains a credit agreement with various financial institutions
with a Senior Revolving Working Capital Facility and Acquisition Facility.
Subsequent to August 31, 1999, this agreement was amended and restated. The
amended and restated credit agreement consists of the following:
A $35,000 Senior Revolving Working Capital Facility, expiring June 30,
2002, with $19,900 outstanding at August 31, 1999. 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
rate was 6.7 percent at August 31, 1999. 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 $50,000 Senior Revolving Acquisition Facility is available through
December 31, 2001, at which time the outstanding amount must be paid in
ten equal quarterly installments, beginning March 31, 2002. The
interest rate and interest payment dates vary depending on the terms
the Partnership agrees to when the money is borrowed. The average
interest rate was 7.0 percent for amounts outstanding at August 31,
1999. A commitment fee of .375 percent is paid on the unused portion of
the facility.
Future maturities at August 31, 1999, of long-term debt for each of the next
five fiscal years and thereafter are $3,136 in 2000; $2,488 in 2001; $18,491 in
2002; $22,159 in 2003; $24,317 in 2004 and $130,528 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.
At August 31, 1999, fiscal year future minimum lease commitments for such leases
are $1,138 in 2000; $710 in 2001; $601 in 2002; $515 in 2003; $420 in 2004 and
$844 thereafter.
7
<PAGE> 8
The Company is a party to various legal proceedings incidental to its business.
Certain claims, suits and complaints arising in the ordinary course of business
have been filed or are pending against the Company. In the opinion of
management, all such matters are covered by insurance, are without merit or
involve amounts, which, if resolved unfavorably, would not have a significant
effect on the financial position or results of operations of the Company.
The Partnership has entered into several purchase and supply commitments with
varying terms as to quantities and prices, which expire at various dates through
March 2000.
6. PARTNERSHIP UNITS:
The Partnership's capital consists of 5,825,674 Common Units representing a 66.4
percent limited partner interest, 2,777,207 Subordinated Units owned by the
General Partner representing a 31.6 percent limited partner interest and a two
percent general partner interest.
The Partnership is expected to make quarterly cash distributions of all of its
Available Cash, generally defined as consolidated cash receipts less
consolidated operating expenses, debt service payments, maintenance capital
expenditures and net changes in reserves established by the General Partner for
future requirements. These reserves are retained to provide for the proper
conduct of the Partnership business, or to provide funds for distributions with
respect to any one or more of the next four fiscal quarters.
Distributions by the Partnership in an amount equal to 100 percent of its
Available Cash will generally be made 98 percent to the Common and Subordinated
Unitholders and two percent to the General Partner, subject to the payment of
incentive distributions to the holders of Incentive Distribution Rights to the
extent that certain target levels of cash distributions are achieved. To the
extent there is sufficient Available Cash, the holders of Common Units have the
right to receive the Minimum Quarterly Distribution ($.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. Pursuant to the terms of
the Partnership Agreement 925,736 Subordinated Units held by the General Partner
converted to Common Units on July 7, 1999. The conversion of these units was
dependent on meeting certain cash performance and distribution requirements
during the period that commenced with the IPO. The subordination period
applicable to the remaining Subordinated Units will end the first day of any
quarter ending after May 31, 2001, in which certain cash performance and
distribution requirements have been met. An additional 925,736 Subordinated
Units will convert to Common Units after May 31, 2000, as long as these
requirements are met. 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 IPO and the fourth quarter
8
<PAGE> 9
ended August 31, 1996. The MQD was made to the Common and Subordinated
Unitholders for the quarters ended November 30, 1996 through May 31, 1999. For
the quarters ended February 28, 1999 and May 31, 1999, the Partnership increased
its quarterly distribution to $.5625. The distribution of $.5625 per Common and
Subordinated Unit for the fourth quarter ended August 31, 1999, was declared on
September 17, 1999, payable on October 15, 1999, to Unitholders of record on
October 1, 1999. The quarterly distributions for the quarters ended February 28,
1999, May 31, 1999 and August 31, 1999, included incentive distributions payable
to the General Partner to the extent the quarterly distribution exceeded $.55
per unit.
RESTRICTED UNIT PLAN
The General Partner adopted a restricted unit plan (the Plan) for its
nonemployee 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, and (3) terms and conditions specified by each grant. As of August 31,
1999, 59,500 Phantom Units with a value of $1,346 have been granted. Subsequent
to August 31, 1999, 4,500 of Phantom Unit grants vested pursuant to the vesting
rights of the plan.
7. REGISTRATION STATEMENTS:
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. Subsequent to August 31, 1999, 56,578 Common Units were issued
from this registration statement in connection with acquisitions of other
propane companies.
Effective September 13, 1999, the Partnership registered $150,000 of Common
Units and Debt Securities on a Form S-3 registration statement that may be
offered for sale in one or more offerings. On October 25, 1999, the Partnership
issued a prospectus supplement offering 1,200,000 Common Units, representing
limited partner interests in the Partnership. The underwriters delivered the
Common Units to purchasers on October 28, 1999, at a public offering price of
$22.00 per Common Unit. The underwriters may also purchase up to an additional
180,000 Common Units on the same terms within 30 days from the date of the
prospectus supplement to cover over-allotments, if any. The Partnership used the
net proceeds of approximately $24 million from this offering to repay the
outstanding indebtedness under its acquisition facility.
8. NOTES RECEIVABLE:
At August 31, 1999, notes receivable from sale of common stock consist of notes
issued by various members of management to exercise stock options. In connection
with the IPO, members of management issued $5,000 of notes to third parties to
repurchase the equity interest of nonmanagement/director shareholders of the
Company. In December 1998, the third-party
9
<PAGE> 10
notes were refinanced through the Company and include the noteholders' shares of
common stock of the Company as collateral. The notes bear interest at 7-8%,
payable each December 30, and mature in June 2011. Sinking fund payments equal
to 33 1/3% of the original principal amount of the notes are due June 28, 2003,
2004 and 2005. Prior to maturity, interest and sinking fund payments shall be
payable only out of distributions from the Company.
10
<PAGE> 11
9. SUPPLEMENTAL INFORMATION:
The following balance sheet of the Company includes its investment in the
Partnership on an equity basis. Such presentation is included to provide
additional information with respect to the Company's financial position on a
stand alone basis:
<TABLE>
<CAPTION>
August 31,
1999
---------------
ASSETS
<S> <C>
CURRENT ASSETS:
Cash $ 371
Marketable securities 4,233
Receivable from Partnership 1,964
Assets held in trust 1,341
---------------
Total current assets 7,909
ASSETS HELD IN TRUST 2,341
OTHER ASSETS 476
---------------
Total assets $ 10,726
===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 2,492
Current maturities of long-term debt 1,114
---------------
Total current liabilities 3,606
LONG-TERM DEBT, less current portion 1,767
NEGATIVE INVESTMENT IN PARTNERSHIP 52,166
DEFERRED TAXES 72,604
---------------
Total liabilities 130,143
---------------
STOCKHOLDER'S DEFICIT:
Common stock $.01 par value, 600,000 shares authorized,
534,788 shares issued and outstanding 5
Additional paid-in capital 11,889
Accumulated deficit (125,613)
Other comprehensive income 1,444
Notes receivable from sale of common stock (7,142)
---------------
Total stockholders' deficit (119,417)
---------------
Total liabilities and stockholders' deficit $ 10,726
===============
</TABLE>
11
