<PAGE>
PROSPECTUS
8,540,000 COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
[LOGO]
-----------------
ALL OF THE COMMON UNITS OFFERED HEREBY ARE BEING SOLD BY CORNERSTONE PROPANE
PARTNERS, L.P., A DELAWARE LIMITED PARTNERSHIP ("CORNERSTONE" OR THE
"PARTNERSHIP"). PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR
THE COMMON UNITS. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS
CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
---------------------
THE COMMON UNITS OFFERED HEREBY REPRESENT LIMITED PARTNER INTERESTS IN
CORNERSTONE, WHICH THE PARTNERSHIP BELIEVES WILL BE THE FIFTH LARGEST RETAIL
MARKETER OF PROPANE IN THE UNITED STATES. THE PARTNERSHIP WAS RECENTLY
FORMED TO OWN AND OPERATE THE PROPANE BUSINESSES AND ASSETS (THE "COMBINED
OPERATIONS") OF SYN INC. ("SYNERGY") AND EMPIRE ENERGY CORPORATION (THE
PRINCIPAL PROPANE SUBSIDIARIES OF NORTHWESTERN GROWTH CORPORATION
("NORTHWESTERN GROWTH")), MYERS PROPANE GAS COMPANY AND CGI
HOLDINGS, INC. THE MANAGING GENERAL PARTNER WILL BE CORNERSTONE
PROPANE GP, INC. THE MANAGING GENERAL PARTNER AND NORTHWESTERN
GROWTH ARE SUBSIDIARIES OF NORTHWESTERN PUBLIC SERVICE COMPANY
("NPS"), A NEW YORK STOCK EXCHANGE-LISTED ENERGY
DISTRIBUTION COMPANY.
---------------------
THE PARTNERSHIP WILL DISTRIBUTE TO ITS PARTNERS, ON A QUARTERLY BASIS, ALL OF
ITS AVAILABLE CASH, WHICH IS GENERALLY ALL CASH ON HAND AT THE END OF A
QUARTER, AS ADJUSTED FOR RESERVES. THE MANAGING GENERAL PARTNER HAS
BROAD DISCRETION IN MAKING CASH DISBURSEMENTS AND ESTABLISHING
RESERVES. THE PARTNERSHIP INTENDS, TO THE EXTENT THERE IS
SUFFICIENT AVAILABLE CASH, TO DISTRIBUTE TO EACH HOLDER OF
COMMON UNITS AT LEAST $.54 PER COMMON UNIT PER QUARTER (THE
"MINIMUM QUARTERLY DISTRIBUTION") OR $2.16 PER COMMON
UNIT ON AN ANNUALIZED BASIS.
---------------------
THE COMMON UNITS HAVE BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE,
SUBJECT TO OFFICIAL NOTICE OF ISSUANCE, UNDER THE SYMBOL "CNO."
---------------------
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A
CORPORATION.
PURCHASERS OF COMMON UNITS SHOULD CONSIDER EACH OF THE FACTORS DESCRIBED UNDER
"RISK FACTORS," STARTING ON PAGE 30, IN EVALUATING AN INVESTMENT IN THE
PARTNERSHIP, INCLUDING, BUT NOT LIMITED TO, THE FOLLOWING:
- FUTURE PARTNERSHIP PERFORMANCE WILL DEPEND UPON THE SUCCESS OF THE
PARTNERSHIP IN MAXIMIZING PROFITS FROM PROPANE SALES. PROPANE SALES ARE
AFFECTED BY, AMONG OTHER THINGS, WEATHER PATTERNS, PRODUCT PRICES AND
COMPETITION, INCLUDING COMPETITION FROM OTHER ENERGY SOURCES. (CONTINUED
ON PAGE III)
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
PRICE $21 A COMMON UNIT
---------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND
PUBLIC COMMISSIONS(1)
-------------------------- --------------------------
<S> <C> <C>
PER COMMON UNIT.......................................... $21.00 $1.47
TOTAL(3)................................................. $179,340,000 $12,553,800
<CAPTION>
PROCEEDS TO
PARTNERSHIP(2)
--------------------------
<S> <C>
PER COMMON UNIT.......................................... $19.53
TOTAL(3)................................................. $166,786,200
</TABLE>
- ---------
(1) THE PARTNERSHIP, THE OPERATING PARTNERSHIP AND THE MANAGING GENERAL
PARTNER HAVE AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE PARTNERSHIP ESTIMATED AT
$3,800,000.
(3) THE PARTNERSHIP HAS GRANTED TO THE UNDERWRITERS AN OPTION, EXERCISABLE
WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF
1,281,000 ADDITIONAL COMMON UNITS AT THE PRICE TO PUBLIC LESS
UNDERWRITING DISCOUNTS AND COMMISSIONS, FOR THE PURPOSE OF COVERING
OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITERS EXERCISE SUCH OPTION IN
FULL, THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS
AND PROCEEDS TO PARTNERSHIP WILL BE $206,241,000, $14,436,870 AND
$191,804,130, RESPECTIVELY. SEE "UNDERWRITERS."
---------------------------
THE COMMON UNITS ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF
ACCEPTED BY THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN
LEGAL MATTERS BY BAKER & BOTTS, L.L.P., COUNSEL FOR THE UNDERWRITERS. IT IS
EXPECTED THAT DELIVERY OF THE COMMON UNITS WILL BE MADE ON OR ABOUT DECEMBER 17,
1996, AT THE OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK, NEW YORK,
AGAINST PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE FUNDS.
---------------------
MORGAN STANLEY & CO. DEAN WITTER REYNOLDS INC.
INCORPORATED
A.G. EDWARDS & SONS, INC.
OPPENHEIMER & CO., INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
DECEMBER 11, 1996
<PAGE>
[DESCRIPTION OF MAP]
Map of the United States showing the locations of the Partership's Customer
Service Centers
[Photographs (i) of bobtail trucks bearing the "Coast Gas" and "Synergy Gas"
logos; (ii) of an Empire Energy customer service center bearing the "Empiregas"
logo; (iii) depicting the use of propane in commercial, industrial, residential
and agricultural applications; (iv) of Coast's propane supply and logistics
business; and (v) of several employees of the Managing General Partner at work.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON UNITS
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
ii
<PAGE>
(CONTINUED FROM PAGE I)
- THE MINIMUM QUARTERLY DISTRIBUTION IS NOT GUARANTEED. THE ACTUAL AMOUNT OF
CASH DISTRIBUTIONS WILL DEPEND ON FUTURE PARTNERSHIP OPERATING PERFORMANCE
AND WILL BE AFFECTED BY THE FUNDING OF RESERVES, OPERATING AND CAPITAL
EXPENDITURES AND OTHER MATTERS WITHIN THE DISCRETION OF THE MANAGING
GENERAL PARTNER, AS WELL AS REQUIRED INTEREST AND PRINCIPAL PAYMENTS ON,
AND THE OTHER TERMS OF, THE PARTNERSHIP'S INDEBTEDNESS. PRO FORMA
AVAILABLE CASH FROM OPERATING SURPLUS (AS DEFINED IN THE GLOSSARY)
GENERATED DURING FISCAL 1996 WOULD HAVE BEEN SUFFICIENT TO COVER THE
MINIMUM QUARTERLY DISTRIBUTION FOR SUCH FISCAL YEAR ON ALL OF THE COMMON
UNITS OFFERED HEREBY AND THE RELATED DISTRIBUTION ON THE GENERAL PARTNER
INTERESTS, BUT WOULD HAVE BEEN INSUFFICIENT BY APPROXIMATELY $10.5 MILLION
TO COVER THE MINIMUM QUARTERLY DISTRIBUTION ON ALL THE SUBORDINATED UNITS
AND THE RELATED DISTRIBUTION ON THE GENERAL PARTNER INTERESTS.
- THERE CAN BE NO ASSURANCE THAT THE PARTNERSHIP WILL BE ABLE TO INTEGRATE
SUCCESSFULLY THE COMBINED OPERATIONS, ACHIEVE ANTICIPATED COST SAVINGS OR
INSTITUTE THE NECESSARY SYSTEMS AND PROCEDURES TO SUCCESSFULLY MANAGE THE
COMBINED OPERATIONS ON A PROFITABLE BASIS. THE PARTNERSHIP WAS RECENTLY
FORMED AND HAS CONDUCTED NO OPERATIONS AND GENERATED NO REVENUES TO DATE.
- ON A PRO FORMA BASIS AT SEPTEMBER 30, 1996, THE PARTNERSHIP'S TOTAL
INDEBTEDNESS AS A PERCENTAGE OF ITS TOTAL CAPITALIZATION WOULD HAVE BEEN
APPROXIMATELY 58.9%. AS A RESULT, THE PARTNERSHIP WILL HAVE INDEBTEDNESS
THAT IS SUBSTANTIAL IN RELATION TO ITS PARTNERS' CAPITAL.
- HOLDERS OF COMMON UNITS WILL HAVE ONLY LIMITED VOTING RIGHTS, AND THE
MANAGING GENERAL PARTNER WILL MANAGE AND OPERATE THE PARTNERSHIP. THE
MANAGING GENERAL PARTNER MAY NOT BE REMOVED EXCEPT PURSUANT TO THE VOTE OF
THE HOLDERS OF AT LEAST 66 2/3% OF THE OUTSTANDING UNITS (INCLUDING UNITS
OWNED BY THE MANAGING GENERAL PARTNER AND ITS AFFILIATES). THE OWNERSHIP
OF THE SUBORDINATED UNITS BY THE MANAGING GENERAL PARTNER AND ITS
AFFILIATES EFFECTIVELY GIVES THE MANAGING GENERAL PARTNER THE ABILITY TO
PREVENT ITS REMOVAL.
- CONFLICTS OF INTEREST MAY ARISE BETWEEN THE MANAGING GENERAL PARTNER AND
ITS AFFILIATES, ON THE ONE HAND, AND THE PARTNERSHIP AND THE UNITHOLDERS,
ON THE OTHER. THE PARTNERSHIP AGREEMENT CONTAINS CERTAIN PROVISIONS THAT
LIMIT THE LIABILITY AND REDUCE THE FIDUCIARY DUTIES OF THE MANAGING
GENERAL PARTNER TO THE UNITHOLDERS. HOLDERS OF COMMON UNITS ARE DEEMED TO
HAVE CONSENTED TO CERTAIN ACTIONS AND CONFLICTS OF INTEREST THAT MIGHT
OTHERWISE BE DEEMED A BREACH OF FIDUCIARY OR OTHER DUTIES UNDER APPLICABLE
STATE LAW. THE VALIDITY AND ENFORCEABILITY OF THESE TYPES OF PROVISIONS
UNDER DELAWARE LAW ARE UNCERTAIN. UNDER CERTAIN CIRCUMSTANCES, AFFILIATES
OF THE MANAGING GENERAL PARTNER MAY COMPETE WITH THE PARTNERSHIP.
- PURCHASERS OF THE COMMON UNITS OFFERED HEREBY WILL EXPERIENCE IMMEDIATE
AND SUBSTANTIAL DILUTION IN NET TANGIBLE BOOK VALUE OF $19.41 PER COMMON
UNIT FROM THE INITIAL PUBLIC OFFERING PRICE. EACH COMMON UNIT WILL HAVE A
PRO FORMA NET TANGIBLE BOOK VALUE OF $1.59, AND THE GENERAL PARTNERS WILL
EXPERIENCE AN INCREASE IN NET TANGIBLE BOOK VALUE OF $22.57 PER UNIT.
- PRIOR TO MAKING ANY DISTRIBUTION ON THE COMMON UNITS, THE PARTNERSHIP WILL
REIMBURSE THE MANAGING GENERAL PARTNER AND ITS AFFILIATES AT COST FOR ALL
EXPENSES INCURRED ON BEHALF OF THE PARTNERSHIP. ON A PRO FORMA BASIS,
APPROXIMATELY $48.0 MILLION OF EXPENSES (PRIMARILY WAGES AND SALARIES)
WOULD HAVE BEEN REIMBURSED BY THE PARTNERSHIP TO THE MANAGING GENERAL
PARTNER IN FISCAL 1996.
- THE AVAILABILITY TO A COMMON UNITHOLDER OF THE FEDERAL INCOME TAX BENEFITS
OF AN INVESTMENT IN THE PARTNERSHIP LARGELY DEPENDS ON THE CLASSIFICATION
OF THE PARTNERSHIP AS A PARTNERSHIP FOR THAT PURPOSE. THE PARTNERSHIP WILL
RELY UPON AN OPINION OF COUNSEL, AND NOT A RULING FROM THE INTERNAL
REVENUE SERVICE, ON THAT ISSUE AND OTHERS RELEVANT TO A COMMON UNITHOLDER.
- THE TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP ARE COMPLEX. IT
IS ANTICIPATED THAT THROUGH DECEMBER 31, 2000, A UNITHOLDER MAY RECEIVE
SUBSTANTIAL DISTRIBUTIONS THAT WOULD REDUCE SUCH HOLDER'S TAX BASIS, WITH
THE RESULT THAT SUCH HOLDER MAY RECOGNIZE SUBSTANTIAL TAXABLE GAIN UPON A
SALE OF SUCH HOLDER'S UNITS.
- BECAUSE THE RETAIL PROPANE INDUSTRY IS MATURE AND OVERALL DEMAND FOR
PROPANE IS EXPECTED TO EXPERIENCE LIMITED GROWTH IN THE FORESEEABLE
FUTURE, THE PARTNERSHIP WILL DEPEND ON ACQUISITIONS AS THE PRINCIPAL MEANS
OF GROWTH. THERE CAN BE NO ASSURANCE THAT THE PARTNERSHIP WILL BE ABLE TO
COMPLETE FUTURE ACQUISITIONS.
iii
<PAGE>
---------------------
To enhance the Partnership's ability to make the Minimum Quarterly
Distribution on the Common Units during the Subordination Period, which will
generally extend at least through December 31, 2001, each holder of Common Units
will be entitled to receive the Minimum Quarterly Distribution, plus any
arrearages thereon, before any distributions are made on the outstanding
subordinated limited partner interests of the Partnership (the "Subordinated
Units"). Upon expiration of the Subordination Period, all Subordinated Units
will convert into Common Units on a one-for-one basis and will thereafter
participate pro rata with the other Common Units in distributions of Available
Cash. Under certain circumstances, up to 50% of the Subordinated Units may
convert into Common Units prior to the expiration of the Subordination Period.
See "Cash Distribution Policy."
---------------------
The Common Units offered hereby will represent an aggregate 51.0% limited
partner interest in the Partnership and Cornerstone Propane, L.P., the
Partnership's subsidiary operating partnership (the "Operating Partnership")
(58.6% if the Underwriters' over-allotment option is exercised in full). The
Managing General Partner and Synergy (in its capacity as the special general
partner of the Partnership, the "Special General Partner" and, together with the
Managing General Partner, the "General Partners") will own an aggregate 2%
general partner interest in the Partnership and the Operating Partnership. In
addition, the General Partners will own an aggregate of 7,878,619 Subordinated
Units representing an aggregate 47.0% limited partner interest in the
Partnership and the Operating Partnership (6,597,619 Subordinated Units
representing an aggregate 39.4% limited partner interest in the Partnership and
the Operating Partnership if the Underwriters' over-allotment option is
exercised in full). The Common Units and the Subordinated Units are collectively
referred to herein as the "Units." Holders of the Common Units and the
Subordinated Units are collectively referred to herein as "Unitholders."
---------------------
The sale of the Common Units offered hereby is subject to, among other
things, the concurrent completion of a private placement (the "Note Placement")
by the Operating Partnership of $220.0 million of Senior Secured Notes due 2010
(the "Notes"). See "The Transactions."
---------------------
The Partnership will furnish or make available to record holders of Common
Units (i) within 120 days after the close of each fiscal year of the
Partnership, an annual report containing audited financial statements and a
report thereon by its independent public accountants and (ii) within 90 days
after the close of each quarter (other than the fourth quarter), a quarterly
report containing unaudited summary financial information. The Partnership will
also furnish each Unitholder with tax information within 90 days after the close
of each calendar year.
---------------------
UNTIL JANUARY 5, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON UNITS, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
---------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE PARTNERSHIP OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN A CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE PARTNERSHIP
SINCE THE DATE HEREOF.
iv
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY.................................... 1
Cornerstone Propane Partners, L.P................... 1
Summary Pro Forma Financial and Operating Data...... 10
Risk Factors........................................ 12
Cash Available for Distribution..................... 17
Partnership Structure and Management................ 19
The Offering........................................ 21
Summary of Tax Considerations....................... 27
RISK FACTORS.......................................... 30
Risks Inherent in the Partnership's Business........ 30
Risks Inherent in an Investment in the
Partnership........................................ 32
Conflicts of Interest and Fiduciary
Responsibilities................................... 37
Tax Risks........................................... 39
THE TRANSACTIONS...................................... 43
USE OF PROCEEDS....................................... 45
CAPITALIZATION........................................ 46
DILUTION.............................................. 47
CASH DISTRIBUTION POLICY.............................. 48
General............................................. 48
Quarterly Distributions of Available Cash........... 49
Distributions from Operating Surplus during
Subordination Period............................... 49
Distributions from Operating Surplus after
Subordination Period............................... 51
Incentive Distributions--Hypothetical Annualized
Yield.............................................. 51
Distributions from Capital Surplus.................. 52
Adjustment of Minimum Quarterly Distribution and
Target Distribution Levels......................... 53
Distributions of Cash Upon Liquidation.............. 53
CASH AVAILABLE FOR DISTRIBUTION....................... 56
SELECTED PRO FORMA FINANCIAL AND OPERATING DATA....... 58
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA...... 60
Synergy............................................. 60
Empire Energy....................................... 61
Coast............................................... 62
Myers............................................... 62
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................. 63
General............................................. 63
Synergy............................................. 64
Empire Energy....................................... 69
Coast............................................... 74
Description of Indebtedness......................... 80
Capital Expenditures and Commitments................ 82
Litigation and Other Contingencies.................. 82
Effects of Inflation................................ 83
Recently Issued Accounting Pronouncements........... 83
BUSINESS AND PROPERTIES............................... 84
General............................................. 84
Business Strategy................................... 84
Transaction Background.............................. 86
Industry Background and Competition................. 87
Products, Services and Marketing.................... 88
Propane Supply and Storage.......................... 90
Pricing Policy...................................... 91
Billing and Collection Procedures................... 91
Properties.......................................... 91
Trademarks and Tradenames........................... 91
Government Regulation............................... 92
Employees........................................... 92
Litigation and Other Contingencies.................. 93
Transfer of the Partnership Assets.................. 93
MANAGEMENT............................................ 95
Partnership Management.............................. 95
Directors and Executive Officers of the Managing
General Partner.................................... 95
Reimbursement of Expenses of the Managing General
Partner and its Affiliates......................... 96
Executive Compensation.............................. 97
Compensation of Directors........................... 99
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................... 100
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........ 100
Rights of the General Partners...................... 100
Contribution, Conveyance and Assumption Agreement... 100
CONFLICTS OF INTEREST AND FIDUCIARY
RESPONSIBILITIES..................................... 101
Conflicts of Interest............................... 101
Fiduciary and Other Duties.......................... 104
DESCRIPTION OF THE COMMON UNITS....................... 106
The Units........................................... 106
Transfer Agent and Registrar........................ 106
Transfer of Common Units............................ 107
THE PARTNERSHIP AGREEMENT............................. 108
Organization and Duration........................... 108
Purpose............................................. 108
Power of Attorney................................... 109
Capital Contributions............................... 109
Limited Liability................................... 109
Issuance of Additional Securities................... 110
Amendment of Partnership Agreement.................. 111
Merger, Sale or Other Disposition of Assets......... 112
Termination and Dissolution......................... 113
Liquidation and Distribution of Proceeds............ 113
Withdrawal or Removal of the General Partners....... 113
Transfer of General Partners' Interests and
Incentive Distribution Rights...................... 114
Change of Management Provisions..................... 115
Limited Call Right.................................. 115
Meetings; Voting.................................... 116
Status as Limited Partner or Assignee............... 116
Non-citizen Assignees; Redemption................... 117
Indemnification..................................... 117
Books and Reports................................... 117
Right to Inspect Partnership Books and Records...... 118
Registration Rights................................. 118
UNITS ELIGIBLE FOR FUTURE SALE........................ 119
TAX CONSIDERATIONS.................................... 121
Legal Opinions and Advice........................... 121
Tax Rates and Changes in Federal Income Tax Laws.... 122
Partnership Status.................................. 122
Limited Partner Status.............................. 124
Tax Consequences of Unit Ownership.................. 124
Allocation of Partnership Income, Gain, Loss and
Deduction.......................................... 127
Tax Treatment of Operations......................... 128
Disposition of Common Units......................... 130
Uniformity of Units................................. 133
Administrative Matters.............................. 134
State, Local and Other Tax Considerations........... 137
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT
PLANS................................................ 138
UNDERWRITERS.......................................... 139
VALIDITY OF THE COMMON UNITS.......................... 141
EXPERTS............................................... 141
AVAILABLE INFORMATION................................. 142
INDEX TO FINANCIAL STATEMENTS......................... F-1
APPENDIX A--FORM OF AMENDED AND RESTATED AGREEMENT OF
LIMITED PARTNERSHIP OF CORNERSTONE PROPANE PARTNERS,
L.P.................................................. A-1
APPENDIX B--FORM OF APPLICATION FOR TRANSFER OF COMMON
UNITS................................................ B-1
APPENDIX C--GLOSSARY OF CERTAIN TERMS................. C-1
</TABLE>
v
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND HISTORICAL AND PRO FORMA
FINANCIAL DATA APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
SPECIFIED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS'
OVER-ALLOTMENT OPTION IS NOT EXERCISED. THE TRANSACTIONS RELATED TO THE
FORMATION OF THE PARTNERSHIP, THE PARTNERSHIP'S ACQUISITION OF THE COMBINED
OPERATIONS, THE ISSUANCE OF THE NOTES, THE ENTERING INTO NEW BANK CREDIT
FACILITIES AND THE OTHER TRANSACTIONS TO OCCUR IN CONNECTION WITH THIS OFFERING
ARE REFERRED TO IN THIS PROSPECTUS AS THE "TRANSACTIONS." SEE "THE
TRANSACTIONS." EXCEPT AS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO, OR
DESCRIPTIONS OF, THE ASSETS, BUSINESS AND OPERATIONS OF THE PARTNERSHIP GIVE PRO
FORMA EFFECT TO THE TRANSACTIONS AND, ACCORDINGLY, INCLUDE THE PROPANE ASSETS,
BUSINESSES AND OPERATIONS OF SYNERGY, EMPIRE ENERGY CORPORATION ("EMPIRE
ENERGY"), MYERS PROPANE GAS COMPANY ("MYERS") AND CGI HOLDINGS, INC. ("COAST")
AS CONDUCTED PRIOR TO THE CLOSING OF THIS OFFERING AND TO BE CONDUCTED BY THE
PARTNERSHIP AND THE OPERATING PARTNERSHIP FOLLOWING THE CLOSING OF THIS
OFFERING. UNLESS OTHERWISE SPECIFIED, REFERENCES TO THE PARTNERSHIP IN THIS
PROSPECTUS INCLUDE THE OPERATING PARTNERSHIP AND REFERENCES TO PERCENTAGE
OWNERSHIP OF THE PARTNERSHIP REFLECT THE APPROXIMATE EFFECTIVE OWNERSHIP
INTEREST OF THE UNITHOLDERS AND THE GENERAL PARTNERS IN THE PARTNERSHIP AND THE
OPERATING PARTNERSHIP ON A COMBINED BASIS. FOR EASE OF REFERENCE, A GLOSSARY OF
CERTAIN TERMS USED IN THIS PROSPECTUS IS INCLUDED AS APPENDIX C TO THIS
PROSPECTUS. CAPITALIZED TERMS NOT OTHERWISE DEFINED HEREIN HAVE THE MEANINGS
GIVEN IN THE GLOSSARY.
CORNERSTONE PROPANE PARTNERS, L.P.
The Partnership believes that, upon consummation of the Transactions, it
will be the fifth largest retail marketer of propane in the United States in
terms of volume, serving more than 360,000 residential, commercial, industrial
and agricultural customers from 312 customer service centers in 26 states. The
Partnership's operations are concentrated in the east coast, south-central and
west coast regions of the United States. For the fiscal year ended June 30,
1996, the Partnership had combined retail propane sales of approximately 235
million gallons and pro forma operating income plus depreciation and
amortization ("EBITDA") of approximately $47.0 million. Pro forma EBITDA would
have been approximately $54.9 million if effect were given to an additional $7.9
million of expense reductions which the Partnership believes are achievable upon
consummation of the Transactions, but which have not been included in the pro
forma adjustments.
The Partnership was recently formed to own and operate the propane
businesses and assets of Synergy and Empire Energy (the principal propane
subsidiaries of Northwestern Growth), Myers and Coast. Northwestern Growth is a
wholly owned subsidiary of NPS, a New York Stock Exchange-listed energy
distribution company. Northwestern Growth was formed in 1994 to pursue and
manage nonutility investments and development activities for NPS, with a primary
focus on growth opportunities in the energy, energy equipment and energy
services industries. To capitalize on the growth and consolidation opportunities
in the propane distribution market, in August 1995, Northwestern Growth acquired
the predecessor of Synergy, then the sixth largest retail marketer of propane in
the United States, and in October 1996 it acquired Empire Energy, then the
eighth largest retail marketer of propane in the United States. In addition,
immediately prior to the consummation of this offering, Northwestern Growth will
complete the acquisition of Coast, currently the 18th largest retail marketer of
propane in the United States. NPS acquired Myers, a smaller retail marketer of
propane, in December 1995.
A key component of the Partnership's strategy has been to assemble an
experienced management team with a strong track record of growing and managing
diversified propane operations. Following the consummation of the Transactions,
the senior executives who currently manage Coast will manage the Partnership's
business in their capacities as the senior executives of the Managing General
Partner. Under this management team, Coast's annual retail sales have grown from
approximately seven million gallons in fiscal 1986 to approximately 35 million
gallons in fiscal 1996. Coast's management has accomplished this growth through
a balanced strategy of acquisitions, internal growth and start-ups. There can be
no
1
<PAGE>
assurance, however, that Coast's management team will be able to achieve similar
growth in the Partnership's business.
The Partnership believes that it is well positioned to compete successfully
in the propane business for the following reasons: (i) management's experience
in generating profitable growth at its customer service centers by fostering an
entrepreneurial approach by local managers; (ii) the Partnership's large
national and geographically diversified operations, which the Partnership
believes will reduce the effects of adverse weather conditions in any one region
on EBITDA and allow it to achieve economies of scale; (iii) the significant
proportion of the Partnership's retail sales that is made to residential
customers, which are generally more profitable than sales to other customers;
(iv) management's experience in identifying, evaluating and completing both
small and large acquisitions; (v) the Partnership's substantial national
wholesale supply and logistics business, which provides it with a national
presence and a relatively secure source of propane to support the service goals
of its customer service centers; (vi) the Partnership's centralized
administrative systems that will enable local managers to focus on customer
service and growth; and (vii) the Partnership's relationship with Northwestern
Growth, which has proven experience in the energy distribution business and in
the acquisition and growth of propane businesses. Although the Partnership
believes it has a number of competitive strengths, the propane industry is
highly competitive and includes a number of large national firms and regional
firms and several thousand small independent firms. Certain competitors may have
greater financial resources or lower operating costs than the Partnership.
Further, variations in the weather or the economy in one or more regions in
which the Partnership operates can significantly affect the total volume of
propane sold by the Partnership and, consequently, the Partnership's results of
operations.
BUSINESS STRATEGY
The principal elements of the Partnership's business strategy are to (i)
extend and refine the existing service orientation of the Combined Operations,
(ii) continue to pursue balanced growth through small and large acquisitions,
internal growth at its existing customer service centers and start-ups of new
customer service centers, (iii) enhance the profitability of its existing
operations by integrating the Combined Operations, implementing
entrepreneurially oriented local manager incentive programs, where appropriate,
and continuing to centralize administrative systems and (iv) capitalize on the
Partnership's national wholesale supply and logistics business.
FOCUS ON CUSTOMER SERVICE. The Partnership seeks to be recognized in the
marketplace as the most customer service-oriented propane supplier. Although
propane is a commodity product, the Partnership believes that it will be able to
distinguish itself from the competition by providing reliable and timely
delivery of propane at competitive prices. The Partnership believes that
establishing and clearly communicating standards of service and performance
expectations at all levels of the Combined Operations, and rewarding its
employees accordingly, will enable the Partnership to achieve its service goals.
Management has instituted incentive programs at existing Coast customer service
centers targeted to fostering an entrepreneurial environment at the customer
service center level. These programs provide substantial rewards to local
managers for managing service-oriented and profitable operations. The
Partnership intends to expand such incentive programs to additional customer
service locations included in the Combined Operations, where appropriate.
CONTINUED BALANCED GROWTH. The Partnership intends to continue to pursue
balanced growth through small and large acquisitions, internal growth at its
existing customer service centers and start-ups of new customer service centers.
Acquisitions are expected to 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 retail propane industry
provides significant opportunities for growth through strategic acquisitions.
Industry sources indicate that there are over 8,000 retail propane operations in
the United States, of which the ten largest account for approximately 33% of
industry volumes. The Partnership's acquisition strategy
2
<PAGE>
will concentrate on companies that have one or more of the following
characteristics: (i) locations in areas serviced by the Partnership that may be
combined with existing operations, providing greater economies of scale at the
customer service center level, (ii) a recent record of growth and a local
reputation for quality service, (iii) locations in areas that are relatively
colder and (iv) operations with a relatively high proportion of sales to the
more profitable residential customer segment. As part of its acquisition
program, the Partnership generally expects to retain the name and identity of
the acquired entity, which the Partnership believes will preserve the goodwill
of the acquired business and promote continued local customer loyalty. Upon
consummation of the Transactions, the Partnership's ability to make acquisitions
will be facilitated by the availability of a $75.0 million acquisition credit
facility and the ability to fund acquisitions through the issuance of additional
limited partner interests. There can be no assurance, however, that the
Partnership will identify attractive acquisition candidates in the future, that
the Partnership will be able to acquire such businesses on economically
acceptable terms, that any acquisitions will not be dilutive to earnings and
distributions to the Unitholders or that any additional debt incurrred to
finance an acquisition will not affect the ability of the Partnership to make
distributions to the Unitholders. The Partnership is not required under the
Partnership Agreement to seek Unitholder approval of any acquisition.
In the ordinary course of their businesses, Northwestern Growth, Synergy,
Empire Energy and Coast engage in discussions regarding the possible acquisition
of propane businesses. Since September 30, 1996, Northwestern Growth has
purchased, for an aggregate price of approximately $2.2 million, propane
businesses having aggregate annual retail propane sales of approximately 1.0
million gallons. All of these businesses, which are located in or near Coast's
current retail markets, will be contributed to the Partnership in connection
with the Transactions. Although the companies comprising the Combined Operations
continue to pursue acquisition opportunities, none of them currently has under
negotiation any additional acquisitions.
In addition to pursuing growth through acquisitions, the Partnership will
continue to focus on internal growth at its existing customer service centers.
The Partnership will seek to achieve internal growth by, among other things,
providing superior service and instituting programs that encourage employees,
existing customers and local real estate agents and contractors to refer new
accounts. This strategy will be implemented primarily through the Partnership's
incentive programs that will reward local managers for managing service-oriented
and profitable operations.
In some instances, the Partnership may identify a market that has one or
more of the characteristics that would make it attractive for an acquisition but
in which there are no attractive available acquisition candidates. In certain of
these cases, the Partnership may seek to penetrate the market by establishing a
new customer service center. The Partnership believes it can successfully
initiate these start-up operations in attractive markets by identifying and
hiring local managers with proven propane service experience and establishing
programs that reward service-oriented and profitable operations and that allow
the managers to share in the growth of the business.
ENHANCE PROFITABILITY OF ITS EXISTING OPERATIONS. The Partnership believes
that it can enhance the profitability of its customer service centers by
integrating the Combined Operations, reducing inefficiencies in areas where
there is a geographic overlap of services and implementing "best practices" and
management incentive programs throughout the Partnership's operations. As part
of its plans to integrate the Combined Operations, the Partnership intends to
consolidate and centralize ongoing administrative functions and systems, which
should enable local managers to devote their time to providing customer service
and achieving other performance goals. In addition, the Partnership believes it
can improve efficiencies in areas where there is a geographic overlap of
services provided by customer service centers. The Partnership's management has
identified effective operating programs and strategies currently used by one of
the constituent companies but not currently in use by one or more of the others.
The Partnership believes that the implementation of these "best practices"
throughout the Combined Operations will improve customer retention, foster
expansion of its customer base and create operating
3
<PAGE>
efficiencies and cost savings opportunities. Furthermore, the Partnership
believes that instituting management incentive programs, where appropriate, and
fostering an entrepreneurial approach at additional customer service centers
will give managers the incentive to increase such customer service centers'
profitability.
CAPITALIZE ON NATIONAL SUPPLY AND LOGISTICS BUSINESS. The Partnership has a
national wholesale propane supply and logistics business with sales of
approximately 226 million gallons in fiscal 1996. The Partnership believes that
this business provides it with a reasonably secure, competitively priced and
efficient supply base to support the service goals of its existing customer
service centers. In addition, the Partnership believes its wholesale and
logistics business positions it well for expansion through acquisitions or
start-up operations in new markets. As part of its wholesale business, the
Partnership also provides product supply and financial and technical assistance
to certain small independent retailers. While these arrangements provide some
economic return to the Partnership, the Partnership believes their greater value
lies in the resulting relationships, which position the Partnership to acquire
such businesses in the event they become available for purchase.
GENERAL
The Partnership is principally engaged in (i) the retail distribution of
propane for residential, commercial, industrial, agricultural and other retail
uses, (ii) the wholesale marketing and distribution of propane and natural gas
liquids to the retail propane industry, the chemical and petrochemical
industries and other commercial and agricultural markets, (iii) the repair and
maintenance of propane heating systems and appliances and (iv) the sale of
propane-related supplies, appliances and other equipment.
Propane, a by-product of natural gas processing and petroleum refining, is a
clean-burning energy source recognized for its transportability and ease of use
relative to alternative stand-alone energy sources. The retail propane business
of the Partnership consists principally of transporting propane to its retail
distribution outlets and then to tanks located on its customers' premises.
Retail propane use falls into four broad categories: (i) residential, (ii)
industrial and commercial, (iii) agricultural and (iv) other 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 purposes, propane resales and
sales to state and local governments. In its wholesale operations, the
Partnership sells propane principally to large industrial customers and other
propane distributors.
On a combined basis during fiscal 1996, the Partnership sold approximately
235 million gallons of propane to retail customers and 226 million gallons of
propane to wholesale customers. Approximately 57.8% of the retail gallons was
sold to residential customers, 25.9% was sold to industrial and commercial
customers, 13.1% was sold to agricultural customers and 3.2% was sold to all
other retail users. Sales to residential customers in fiscal 1996 accounted for
approximately 29.5% of total gallons (including wholesale gallons) sold, but
approximately 67.0% of the Partnership's pro forma gross profit from propane
sales. Residential sales have a greater profit margin and a more stable customer
base than other retail markets served by the Partnership. Industrial and
commercial sales accounted for 18.7% of the Partnership's pro forma gross profit
from propane sales for fiscal 1996, agricultural sales accounted for 6.1%, and
all other retail sales accounted for 2.8%. Sales to wholesale customers
contributed the remaining 5.4% of pro forma gross profit from propane sales. No
single retail customer accounted for more than 1% of the Partnership's pro forma
revenues during fiscal 1996. During fiscal 1996, approximately 72.7% of the
Partnership's combined retail propane volume and in excess of 85% of the
Partnership's pro forma EBITDA were attributable to sales during the six-month
peak heating season of
4
<PAGE>
October through March. The Partnership believes that sales to the commercial and
industrial markets, while affected by economic patterns, are not as sensitive to
variations in weather conditions as are sales to residential and agricultural
markets.
As of September 30, 1996, the Partnership's retail operations consisted of
312 customer service centers in 26 states. As of such date, the Partnership
owned a fleet of 34 transport truck tractors, 63 transport trailers, 917 bobtail
trucks and 1,004 other delivery and service vehicles. In addition, in its retail
operations, the Partnership owns an aggregate of approximately 21 million
gallons of above-ground propane storage capacity at its customer service
centers. Approximately 73% of the Partnership's customers lease tanks that are
owned by the Partnership. In many states, certain fire safety regulations
restrict the refilling of a leased tank solely to the propane supplier that owns
the tank. The inconvenience of switching tanks minimizes a customer's tendency
to switch among suppliers of propane.
The Partnership's wholesale operations engage in the marketing of propane to
independent dealers, major interstate marketers and the chemical and
petrochemical industries. The Partnership participates to a lesser extent in the
marketing of other natural gas liquids, the processing and marketing of natural
gas and the gathering of crude oil. The Partnership either owns or has
contractual rights to use transshipment terminals, rail cars, long-haul tanker
trucks, pipelines and storage capacity. The Partnership believes that its
wholesale marketing and processing activities position it to achieve product
cost advantages and to avoid shortages during periods of tight supply to an
extent not generally available to other retail propane distributors.
Propane competes primarily with natural gas, electricity and fuel oil as an
energy source, principally on the basis of price, availability and portability.
Propane is more expensive than natural gas on an equivalent BTU basis in
locations served by natural gas, but serves as a substitute for natural gas in
rural and suburban areas where natural gas is unavailable or portability of
product is required. Propane is generally less expensive to use than electricity
for space heating, water heating, clothes drying and cooking. Although propane
is similar to fuel oil in certain applications and market demand, propane and
fuel oil compete to a lesser extent primarily because of the cost of converting
from one to the other.
TRANSACTIONS AT CLOSING
Immediately prior to the closing of this offering, Synergy, Empire Energy,
Myers and Coast will enter into a series of transactions which will result in
the Combined Operations being owned by the General Partners.
Concurrently with the closing of this offering, the Managing General Partner
and the Special General Partner will contribute, or cause to be contributed, the
Combined Operations to the Operating Partnership in exchange for all of the
interests in the Operating Partnership, and the Operating Partnership will
assume substantially all of the liabilities associated with the Combined
Operations. Immediately after such contributions, all of the limited partner
interests in the Operating Partnership will be conveyed to the Partnership in
exchange for interests in the Partnership. As a result of such transactions, the
General Partners will own an aggregate of 7,878,619 Subordinated Units,
representing an aggregate 47.0% limited partner interest in the Partnership
(6,597,619 Subordinated Units, representing approximately 39.4% if the
Underwriters' over-allotment option is exercised in full), an aggregate 2%
general partner interest in the Partnership and the right to receive Incentive
Distributions (as defined below).
The Partnership will contribute the proceeds from the sale of the Common
Units offered hereby (approximately $179.3 million before deducting underwriting
discounts and commissions and expenses associated with this offering) to the
Operating Partnership. The Operating Partnership will use such funds to repay a
portion of the indebtedness that was assumed by the Operating Partnership and to
pay a portion of the fees and expenses of the Transactions. Immediately prior to
the closing of this offering, the Operating Partnership will issue $220.0
million aggregate principal amount of Notes to certain institutional investors
in the Note Placement. Proceeds from the sale of the Notes, together with
approximately $12.8
5
<PAGE>
million to be borrowed by the Operating Partnership under the Working Capital
Facility described below, will be used by the Operating Partnership to repay
approximately $156.1 million in liabilities assumed by the Operating Partnership
that were in large part incurred in connection with the transactions entered
into prior to the closing of this offering. Most of the remainder of the
proceeds from the sale of the Notes will be distributed to the Special General
Partner ($58.7 million) and the balance will be used to pay expenses. The
Special General Partner will use $43.7 million to redeem a portion of its
preferred stock issued in connection with the August 15, 1995 acquisition of
Synergy's predecessor (the "Synergy Acquisition") and the remaining $15.0
million will provide net worth for the Special General Partner. See "Use of
Proceeds."
The Operating Partnership will thereafter contribute the portion of the
Combined Operations that is to be utilized in the parts and appliance sales and
service business to its corporate subsidiary.
Concurrently with the closing of this offering, the Operating Partnership
will enter into a $125.0 million bank credit facility (the "Bank Credit
Facility"), which will include a $50.0 million revolving credit facility to be
used for working capital and other general partnership purposes (the "Working
Capital Facility"), and a $75.0 million revolving credit facility (the
"Acquisition Facility") to be used for acquisitions and capital improvements. It
is expected that approximately $12.8 million will be drawn under the Working
Capital Facility upon the consummation of the Transactions. For additional
information regarding the terms of the Notes and the Bank Credit Facility, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Description of Indebtedness."
The following table sets forth an estimated breakdown of the sources and
uses of funds contemplated by the Transactions.
<TABLE>
<CAPTION>
AMOUNTS
-------------
(IN MILLIONS)
<S> <C>
SOURCES OF FUNDS
Proceeds from issuance of Common Units............................................................. $ 179.3
Proceeds from Note Placement....................................................................... 220.0
Drawdown on Working Capital Facility............................................................... 12.8
------
Total............................................................................................ $ 412.1
------
------
USES OF FUNDS
Repayment of outstanding indebtedness to NPS (a)................................................... $ 59.4
Repayment of other outstanding indebtedness (b).................................................... 190.0
Distribution to the Special General Partner to enable it to redeem a portion of its preferred stock
issued in connection with the Synergy Acquisition................................................ 43.7
Distribution to the Special General Partner to provide net worth................................... 15.0
Repayment of acquisition bridge financing by Northwestern Growth (c)............................... 82.6
Payment of fees and expenses of the Transactions (d)............................................... 21.4
------
Total............................................................................................ $ 412.1
------
------
</TABLE>
- ------------------------
(a) Reflects a note owed to NPS by Synergy incurred in connection with the
Synergy Acquisition and a prepayment penalty estimated to be $6.5 million as
of the closing of the Transactions.
(b) Represents outstanding indebtedness owed by Synergy to third parties ($31.5
million); outstanding indebtedness owed by Coast to third parties ($50.7
million); and outstanding indebtedness owed by Empire Energy to third
parties ($107.8 million).
(c) Reflects bridge financing incurred by Northwestern Growth principally
relating to the acquisitions of Empire Energy and Coast, and the purchase of
the stock of (and certain rights related to) Synergy and Myers owned by
Empire Gas Corporation ("Empire Gas").
(d) Represents approximately $16.4 million in underwriting discounts and
commissions and expenses relating to this offering and approximately $5.0
million in expenses relating to the Note Placement.
6
<PAGE>
In connection with the contribution of substantially all of the assets
associated with the Combined Operations to the Operating Partnership, the
Operating Partnership will assume substantially all of the liabilities
associated with the Combined Operations. Excluded assets will include certain
claims related to the operations of Synergy prior to and including the Synergy
Acquisition (including claims made by Synergy against its minority stockholders)
and all income tax assets related to the Combined Operations relating to periods
prior to the consummation of the Transactions, and excluded liabilities will
include certain liabilities related to the operations of Synergy prior to the
Synergy Acquisition and all income tax liabilities related to the Combined
Operations relating to periods prior to the consummation of the Transactions.
In light of the existing disputes between Synergy and its minority
stockholders referred to above, it is anticipated that the minority stockholders
of Synergy will continue to challenge the claims of Synergy and that they may
challenge one or more of the past or contemplated transactions described in this
Prospectus, seeking damages, injunctive relief or both. Northwestern Growth has
agreed to indemnify and hold harmless the Managing General Partner and the
Partnership from and against any and all losses, liabilities, damages or
expenses (including, without limitation, expenses of defense and investigation)
that may arise in connection with, result from, or relate to any such challenge
by the minority stockholders of Synergy. As of the date of this Prospectus, no
lawsuit has been filed by the minority stockholders and no claim for damages has
been asserted. If any such claim were successfully asserted, there can be no
assurance that the amount of any such losses, liabilities, damages or expenses
would not exceed the ability of Northwestern Growth to satisfy its
indemnification obligations. At September 30, 1996, Northwestern Growth had
stockholder's equity, determined in accordance with generally accepted
accounting principles, of approximately $62.7 million.
DISTRIBUTIONS AND PAYMENTS TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information summarizes the distributions and payments to be
made by the Partnership to the General Partners and their affiliates in
connection with the Transactions and the ongoing operations of the Partnership.
Such distributions and payments were determined by and among affiliated entities
and, consequently, were not the result of arm's length negotiations. See
"Conflicts of Interest and Fiduciary Responsibilities."
<TABLE>
<S> <C>
FORMATION STAGE
The Consideration Paid to the
General Partners and their
Affiliates for the Transfer of
the Propane Business of the
Combined Operations to the
Partnership..................... In exchange for conveying substantially all of the
assets of the Combined Operations to the Operating
Partnership, the General Partners will receive
7,878,619 Subordinated Units, an aggregate 2% general
partner interest in the Partnership and the Operating
Partnership, and all of the Incentive Distribution
Rights, and the Operating Partnership will assume
substantially all of the liabilities associated with
the Combined Operations. Of the proceeds from this
offering and the Note Placement, approximately $59.4
million will be used to repay indebtedness owed by
Synergy to NPS (including a prepayment penalty
estimated to be $6.5 million as of the closing of the
Transactions), approximately $82.6 million will be
used to repay acquisition financing incurred by
Northwestern Growth principally in connection with the
acquisitions of Empire Energy and Coast and the
purchase of stock of (and certain rights related to)
Synergy and Myers,
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
and approximately $58.7 million will be distributed to
the Special General Partner and used to redeem a
portion of its preferred stock issued in connection
with the Synergy Acquisition and held by NPS and the
unaffiliated shareholders ($43.7 million) and provide
net worth to the Special General Partner ($15.0
million). The shareholders of Coast who will become
senior executives of the Managing General Partner will
receive approximately $9.0 million in connection with
Northwestern Growth's acquisition of Coast (the "Coast
Merger"). If the Underwriters exercise their
over-allotment option, the Partnership will use the
proceeds to pay certain expenses of this offering and
then to redeem a portion of the Subordinated Units
held by the General Partners. See "The Transactions"
and "Certain Relationships and Related Transactions."
OPERATIONAL STAGE
Distributions of Available Cash to
the General Partners............ Available Cash will generally be distributed 98% to the
Unitholders (including any distributions to the
General Partners as holders of the Subordinated Units)
and 2% to the General Partners, except that if
distributions of Available Cash from Operating Surplus
exceed the Target Distribution Levels (as defined
below), the General Partners will receive a percentage
of such excess distributions that will increase to up
to 50% of the excess distributions above the highest
Target Distribution Level (such distributions to the
General Partners in excess of their aggregate 2%
general partner interest being referred to as the
"Incentive Distributions"). See "Cash Distribution
Policy."
Other Payments to the Managing
General Partner and its
Affiliates...................... The Managing General Partner will not receive any
management fee or other compensation in connection
with its management of the Partnership, but will be
reimbursed at cost for all direct and indirect
expenses incurred on behalf of the Partnership,
including the costs of compensation and employee
benefit plans described herein properly allocable to
the Partnership (including the Annual Operating
Performance Incentive Plan, the New Acquisition
Incentive Plan and the Restricted Unit Plan described
herein), and all other expenses necessary or
appropriate to the conduct of the business of, and
allocable to, the Partnership. On a pro forma basis in
fiscal 1996, an aggregate of approximately $48.0
million of expenses (primarily wages and salaries)
would have been reimbursed by the Partnership to the
Managing General Partner.
Affiliates of the Managing General Partner may provide
certain administrative services for the Managing
General Partner on behalf of the Partnership and will
be reimbursed for all direct and indirect expenses
incurred in connection therewith. In addition, the
Managing General Partner and its affiliates may
provide additional services to the Partnership, for
which the Partnership will be charged reasonable fees
as determined by the Managing General Partner.
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
The Managing General Partner intends to adopt the
Restricted Unit Plan, which will be effective upon the
consummation of the Transactions, under which certain
officers and directors of the Managing General Partner
will have rights to receive authorized but unissued
Common Units with an aggregate value of $12.5 million.
In addition, the Managing General Partner intends to
adopt the Annual Operating Performance Incentive Plan
and the New Acquisition Incentive Plan, pursuant to
which certain members of management will be eligible
to receive cash bonuses.
Withdrawal or Removal of the
General Partners................ If the Managing General Partner withdraws in violation
of the Partnership Agreement or is removed by the
Unitholders for Cause, the successor general partner
will have the option to purchase the general partner
interests of the General Partners in the Partnership
and the Operating Partnership (and the right to
receive Incentive Distributions) for a cash payment
equal to the fair market value thereof. If the
Managing General Partner withdraws in accordance with
the Partnership Agreement or is removed without Cause,
it will have the option to require a successor general
partner to purchase the general partner interests of
the General Partners in the Partnership and the
Operating Partnership (and the right to receive
Incentive Distributions) for such price. If the
general partner interests of the General Partners in
the Partnership and the Operating Partnership (and the
right to receive Incentive Distributions) are not so
purchased by the successor general partner, such
general partner interests will be converted into a
number of Common Units equal in value to the fair
market value thereof as determined by an independent
investment banking firm or other independent experts.
The Special General Partner must withdraw or be
removed as a general partner upon the withdrawal or
removal of the Managing General Partner. See "The
Partnership Agreement -- Withdrawal or Removal of the
General Partners."
LIQUIDATION STAGE
Liquidation....................... In the event of any liquidation of the Partnership, the
partners, including the General Partners, will be
entitled to receive liquidating distributions in
accordance with their respective capital account
balances. See "Cash Distribution Policy --
Distributions of Cash Upon Liquidation."
</TABLE>
9
<PAGE>
SUMMARY PRO FORMA FINANCIAL AND OPERATING DATA
The following Summary Pro Forma Financial and Operating Data reflect the
consolidated historical operating results of the companies that comprise the
Combined Operations, as adjusted for the Transactions, and are derived from the
unaudited Pro Forma Consolidated Financial Statements of Cornerstone Propane
Partners, L.P. included elsewhere in this Prospectus. For a description of the
assumptions used in preparing the Summary Pro Forma Financial and Operating
Data, see "Pro Forma Consolidated Financial Statements of Cornerstone Propane
Partners, L.P." The pro forma information set forth below has been prepared by
combining the historical results of operations of Synergy for the 10 1/2 months
ended June 30, 1996 and for the three months ended September 30, 1996; Coast for
the fiscal year ended July 31, 1996 and for the three months ended October 31,
1996; Empire Energy for the fiscal year ended June 30, 1996 and for the one
month ended July 31, 1996 and the two months ended September 30, 1996; and Myers
for the six and one-half months ended June 30, 1996 and for the three months
ended September 30, 1996. The Partnership believes that it is reasonable to
combine the results of operations of companies having different fiscal years
because each of the fiscal years being combined includes the same winter heating
seasons in which the majority of the Partnership's revenue and cash flow was
generated. The following information should not be deemed indicative of future
operating results of the Partnership.
<TABLE>
<CAPTION>
PARTNERSHIP PRO FORMA
---------------------------------
YEAR ENDED THREE MONTHS ENDED
JUNE 30, 1996 SEPTEMBER 30, 1996
------------- ------------------
(IN THOUSANDS,
EXCEPT PER UNIT DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................................................... $ 595,790 $ 141,756
Gross profit(a)(b)........................................................... 139,806 24,237
Depreciation and amortization................................................ 14,500 3,738
Operating income (loss)(a)................................................... 32,535 (359)
Interest expense, net........................................................ 17,865 4,467
Net income (loss)(a)......................................................... 14,570 (4,851)
Net income (loss) per Unit(a)(c)............................................. .87 (.29)
OPERATING DATA:
EBITDA(a)(d)................................................................. $ 47,035 $ 3,379
Capital expenditures(e):
Growth and maintenance..................................................... 9,648 3,044
Acquisition................................................................ 44,303(f) 469
Retail propane gallons sold.................................................. 235,000 89,844
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
BALANCE SHEET DATA: 1996
-----------------
<S> <C>
Current assets.......................................................... $ 73,398
Total assets........................................................... 467,784
Current liabilities.................................................... 64,617
Long-term debt......................................................... 228,450
Partners' capital -- General Partners.................................. 3,370
Partners' capital -- Limited Partners.................................. 165,140
</TABLE>
(FOOTNOTES ON PAGE 11)
10
<PAGE>
(FOOTNOTES FROM PAGE 10)
- -------------------
(a) Pro forma gross profit for the year ended June 30, 1996 and for the three
months ended September 30, 1996 does not reflect propane acquisition and
logistics cost savings of approximately $1.5 million and $241,000,
respectively, that the Partnership believes are achievable upon consummation
of the Transactions. The pro forma amounts of operating income, net income
(loss), net income (loss) per Unit and EBITDA for the year ended June 30,
1996 and for the three months ended September 30, 1996 do not reflect
certain non-recurring expenses incurred by Empire Energy of approximately
$4.3 million and $185,000, respectively, propane acquisition and logistics
cost savings of approximately $1.5 million and $241,000, respectively, and
insurance savings of approximately $2.1 million and $47,000, respectively,
that the Partnership believes are achievable upon consummation of the
Transactions. If effect were given to such anticipated expense reductions,
the following amounts would have been reflected:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JUNE 30, 1996 SEPTEMBER 30, 1996
------------- -------------------
(IN THOUSANDS, EXCEPT PER UNIT
DATA)
<S> <C> <C>
Pro forma gross profit................................................. $ 141,306 $ 24,478
Pro forma operating income............................................. 40,397 114
Pro forma net income (loss)............................................ 22,432 (4,378)
Pro forma net income (loss) per Unit................................... 1.34 (.26)
Pro forma EBITDA....................................................... 54,897 3,852
</TABLE>
See Note 3 to the Pro Forma Consolidated Financial Statements of Cornerstone
Propane Partners, L.P. and "Risk Factors -- Risks Inherent in an Investment
in the Partnership -- Partnership Profitability Will Depend on Successful
Integration of the Combined Operations."
(b) Gross profit is computed by reducing total revenues by the direct cost of
the products sold.
(c) Net income per Unit is computed by dividing the limited partners' interest
in net income by the weighted average number of Units outstanding.
(d) EBITDA is defined as operating income plus depreciation and amortization.
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. Cash flows in accordance with generally
accepted accounting principles consist of cash flows from operating,
investing and financing activities. Cash flows from operating activities
reflect net income (loss) (including charges for interest and income taxes
not reflected in EBITDA), adjusted for (i) all non-cash charges or income
(which are reflected in EBITDA) and (ii) changes in operating assets and
liabilities (which are not reflected in EBITDA). Further, cash flows from
investing and financing activities are not included in EBITDA.
(e) The Partnership's capital expenditures fall generally into three categories:
(i) growth capital expenditures, which include expenditures for the purchase
of new propane tanks and other equipment to facilitate expansion of the
Partnership's retail customer base, (ii) maintenance capital expenditures,
which include expenditures for repairs that extend the life of the assets
and replacement of property, plant and equipment, and (iii) acquisition
capital expenditures.
(f) Approximately $36.0 million relates to the Empire Acquisition of Certain
Synergy Assets.
11
<PAGE>
RISK FACTORS
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A
CORPORATION, ALTHOUGH MANY OF THE BUSINESS RISKS TO WHICH THE PARTNERSHIP WILL
BE SUBJECT ARE SIMILAR TO THOSE THAT WOULD BE FACED BY A CORPORATION ENGAGED IN
A SIMILAR BUSINESS. PROSPECTIVE PURCHASERS OF THE COMMON UNITS SHOULD CONSIDER
THE FOLLOWING RISK FACTORS IN EVALUATING AN INVESTMENT IN THE COMMON UNITS. ALL
STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS
PROSPECTUS, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE
PARTNERSHIP'S BUSINESS STRATEGY, PLANS AND OBJECTIVES OF MANAGEMENT OF THE
PARTNERSHIP FOR FUTURE OPERATIONS AND THE STATEMENTS UNDER "-- CASH AVAILABLE
FOR DISTRIBUTION" AND "CASH AVAILABLE FOR DISTRIBUTION," ARE FORWARD-LOOKING
STATEMENTS. ALTHOUGH THE PARTNERSHIP BELIEVES THAT THE EXPECTATIONS REFLECTED IN
SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT
SUCH EXPECTATIONS WILL PROVE TO BE CORRECT. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE PARTNERSHIP'S EXPECTATIONS ARE
DISCLOSED BELOW, UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
- Weather conditions have a significant impact on the demand for propane for
both heating and agricultural purposes. Many customers of the Partnership
rely heavily on propane as a heating fuel. Accordingly, the volume of
retail propane sold is highest during the six-month peak heating season of
October through March and is directly affected by the severity of the
winter weather. During fiscal 1996, approximately 72.7% of the
Partnership's combined retail propane volume and in excess of 85% of the
Partnership's pro forma EBITDA were attributable to sales during the peak
heating season. Actual weather conditions can vary substantially from year
to year, significantly affecting the Partnership's financial performance.
Furthermore, variations in weather in one or more regions in which the
Partnership operates can significantly affect the total volumes sold by
the Partnership and the margins realized on such sales and, consequently,
the Partnership's results of operations.
- The retail propane business is a "margin-based" business in which gross
profits depend on the excess of sales prices over propane supply costs.
Consequently, the Partnership's profitability will be sensitive to changes
in wholesale propane prices. Propane is a commodity, the market price of
which can be subject to volatile changes in response to changes in supply
or other market conditions. As it may not be possible immediately to pass
on to customers rapid increases in the wholesale cost of propane, such
increases could reduce the Partnership's gross profits.
- The Partnership's profitability is affected by the competition for
customers among all participants in the retail propane business. Some of
the Partnership's competitors are larger or have greater financial
resources than the Partnership. Should a competitor attempt to increase
market share by reducing prices, the Partnership's financial condition and
results of operations could be materially adversely affected. In addition,
propane competes with other sources of energy, some of which are less
costly for equivalent energy value.
- Acquisitions will be the principal means of growth for the Partnership, as
the retail propane industry is mature and overall demand for propane is
expected to experience limited growth. There can be no assurance, however,
that the Partnership will identify attractive acquisition candidates in
the future, that the Partnership will be able to acquire such businesses
on economically acceptable terms, that any acquisitions will not be
dilutive to earnings and distributions to the Unitholders or that any
additional debt incurred to finance acquisitions will not affect the
ability of the Partnership to make distributions to the Unitholders.
- The Partnership's operations are subject to all operating hazards and
risks normally incidental to handling, storing and delivering combustible
liquids such as propane. As a result, each of the companies that comprise
the Combined Operations has been, and the Partnership is likely to be, a
defendant in various legal proceedings and litigation arising in the
ordinary course of business. The
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<PAGE>
Partnership will maintain insurance policies with insurers in such amounts
and with such coverages and deductibles as it believes are reasonable and
prudent. However, there can be no assurance that such insurance will be
adequate to protect the Partnership from all material expenses related to
potential future claims for personal injury and property damage or that
such levels of insurance will be available in the future at economical
prices.
- The Partnership believes that its success will depend to a significant
extent upon the efforts and abilities of its senior management team. The
failure by the Managing General Partner to retain members of its senior
management team could adversely affect the financial condition or results
of operations of the Partnership. Each of Keith G. Baxter, Charles J.
Kittrell, Ronald J. Goedde and Vincent J. DiCosimo will, upon the
consummation of the Transactions, be employed by the Managing General
Partner pursuant to a three-year employment contract.
RISKS INHERENT IN AN INVESTMENT IN THE PARTNERSHIP
- The Minimum Quarterly Distribution is not guaranteed. The actual amount of
cash distributions may fluctuate and will depend on future Partnership
operating performance. Cash distributions are dependent primarily on cash
flow, including from reserves and working capital borrowings, and not on
profitability, which is affected by non-cash items. Therefore, cash
distributions might be made during periods when the Partnership records
losses and might not be made during periods when the Partnership records
profits. Decisions of the Managing General Partner with respect to the
amount and timing of cash expenditures, borrowings, issuances of
additional Units and reserves will affect the amount of Available Cash.
Because the business of the Partnership is seasonal, it is likely that the
Managing General Partner will make additions to reserves during certain
quarters in order to fund operating expenses, interest payments and cash
distributions to partners with respect to other quarters.
- The amount of pro forma Available Cash from Operating Surplus generated
during fiscal 1996 was approximately $25.7 million. Such amount would have
been sufficient to cover the Minimum Quarterly Distribution for such
fiscal year on all of the Common Units offered hereby and the related
distribution on the aggregate 2% general partner interests, but would have
been insufficient by approximately $10.5 million to cover the Minimum
Quarterly Distribution on all the Subordinated Units and the related
distribution on the general partner interests.
- There can be no assurance that the Partnership will be able to integrate
successfully the Combined Operations, achieve anticipated cost savings or
institute the necessary systems and procedures to successfully manage the
combined enterprise on a profitable basis. The Partnership was recently
formed and has conducted no operations and generated no revenues to date.
The Partnership will be managed by the senior executives who currently
manage Coast. Such executives have not been involved with the operations
of either Synergy or Empire Energy. The historical financial results of
the companies that comprise the Combined Operations only cover periods
when the Combined Operations were not under common control and management
and, therefore, may not be indicative of the Partnership's future
financial and operating results. The inability of the Partnership to
integrate successfully the Combined Operations could have a material
adverse effect on the Partnership's business, financial condition and
results of operations.
- In establishing the terms of this offering, including the number and
initial offering price of the Common Units, the number of Subordinated
Units and the Minimum Quarterly Distribution, the Partnership has relied
on certain assumptions concerning its operations. Whether the assumptions
are realized is not, in many cases, within the control of the Partnership
and cannot be predicted with any degree of certainty. In the event that
the Partnership's assumptions are not realized, the actual Available Cash
from Operating Surplus generated by the Partnership could deviate
substantially from that currently expected.
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<PAGE>
- On a pro forma basis as of September 30, 1996, the Partnership's total
indebtedness as a percentage of its total capitalization would have been
approximately 58.9%. As a result, the Partnership will be significantly
leveraged and will have indebtedness that is substantial in relation to
its partners' capital. The Partnership's leverage may adversely affect the
ability of the Partnership to finance its future operations and capital
needs, limit its ability to pursue acquisitions and other business
opportunities and make its results of operations more susceptible to
adverse economic or operating conditions. In addition, the Partnership
expects to have approximately $112.2 million of unused borrowing capacity
under the Bank Credit Facility at the closing of this offering. Future
borrowings could result in a significant increase in the Partnership's
leverage. The Notes and the Bank Credit Facility will contain restrictive
covenants that will limit the ability of the Partnership to incur
additional indebtedness and to make distributions to Unitholders. The
payment of principal and interest on the Partnership's indebtedness will
reduce the cash available to make distributions on the Units.
- The Partnership's indebtedness will contain provisions relating to changes
of control. If such provisions are triggered, such outstanding
indebtedness may become due. There is no restriction on the ability of the
Managing General Partner or Northwestern Growth to enter into a
transaction which would trigger such change of control provisions.
- Prior to making any distribution on the Common Units, the Partnership will
reimburse the Managing General Partner and its affiliates at cost for all
expenses incurred on behalf of the Partnership. On a pro forma basis,
approximately $48.0 million of expenses (primarily wages and salaries)
would have been reimbursed by the Partnership to the Managing General
Partner in fiscal 1996. In addition, the Managing General Partner and its
affiliates may provide services to the Partnership for which the
Partnership will be charged reasonable fees as determined by the Managing
General Partner. The reimbursement of such expenses and the payment of any
such fees could adversely affect the ability of the Partnership to make
distributions.
- The Managing General Partner will manage and operate the Partnership.
Holders of Common Units will have no right to elect the Managing General
Partner on an annual or other continuing basis, and will have only limited
voting rights on matters affecting the Partnership's business. The
Managing General Partner may not be removed except pursuant to the vote of
the holders of at least 66 2/3% of the outstanding Units (including Units
owned by the Managing General Partner and its affiliates). The ownership
of the Subordinated Units by the Managing General Partner and its
affiliates effectively gives the Managing General Partner the ability to
prevent its removal. The management control exercised by the Managing
General Partner may make it more difficult for others to control, or
influence the activities of, the Partnership.
- Subject to certain limitations, the Partnership may issue additional
Common Units and other interests in the Partnership, the effect of which
may be to dilute the value of the interests of the then-existing holders
of Common Units in the net assets of the Partnership, dilute the interests
of holders of Common Units in distributions by the Partnership or to make
it more difficult for a person or group to remove the Managing General
Partner or otherwise change the management of the Partnership.
- The Partnership Agreement contains certain provisions that may have the
effect of discouraging a person or group from attempting to remove the
Managing General Partner or otherwise change the management of the
Partnership. The effect of these provisions may be to diminish the price
at which the Common Units will trade under certain circumstances. The
ownership of the Subordinated Units by the General Partners effectively
gives the Managing General Partner the ability to prevent its removal.
- Purchasers of Common Units in this offering will experience substantial
and immediate dilution in net tangible book value of $19.41 per Common
Unit from the initial public offering price. Each
14
<PAGE>
Common Unit will have a pro forma net tangible book value of $1.59, and
the General Partners will experience an increase in net tangible book
value of $22.57 per Unit.
- Prior to this offering, there has been no public market for the Common
Units. The initial public offering price for the Common Units has been
determined through negotiations between the Managing General Partner and
the representatives of the Underwriters. No assurance can be given as to
the market prices at which the Common Units will trade.
- If at any time less than 20% of the then-issued and outstanding limited
partner interests of any class (including Common Units) are held by
persons other than the Managing General Partner and its affiliates, the
Managing General Partner will have the right, which it may assign to any
of its affiliates or the Partnership, to acquire all, but not less than
all, of the remaining limited partner interests of such class held by such
unaffiliated persons at a price generally equal to the then-current market
price of limited partner interests of such class. As a consequence, a
holder of Common Units may be required to sell his Common Units at a time
when he may not desire to sell them or at a price that is less than the
price he would desire to receive upon such sale.
- Under certain circumstances, holders of the Common Units could lose their
limited liability and could become liable for amounts improperly
distributed to them by the Partnership.
- The Partnership may be unable to obtain consents and title documents with
respect to the transfer of the Combined Operations to the Operating
Partnership. The failure to obtain such consents and title documents could
adversely affect the business of the Partnership.
- The holders of the Common Units have not been represented by counsel in
connection with this offering, including the preparation of the
Partnership Agreement or the other agreements referred to herein or in
establishing the terms of this offering.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
- The Managing General Partner and its affiliates may have conflicts of
interest with the Partnership and its limited partners. The Partnership
Agreement contains certain provisions that limit the liability and reduce
the fiduciary duties of the Managing General Partner to the Unitholders,
as well as provisions that may restrict the remedies available to
Unitholders for actions that might, without such limitations, constitute
breaches of fiduciary duty. Holders of Common Units are deemed to have
consented to certain actions and conflicts of interest that might
otherwise be deemed a breach of fiduciary or other duties under applicable
state law. The validity and enforceability of these types of provisions
under Delaware law are uncertain.
- Decisions of the Managing General Partner with respect to the amount and
timing of cash expenditures, borrowings, issuances of additional Units and
reserves in any quarter will affect whether or the extent to which there
is sufficient Available Cash from Operating Surplus to meet the Minimum
Quarterly Distribution and Target Distribution Levels on all Units in a
given quarter. In addition, actions by the Managing General Partner may
have the effect of enabling the General Partners to receive distributions
on the Subordinated Units or Incentive Distributions or hastening the
expiration of the Subordination Period or the conversion of Subordinated
Units into Common Units.
- The terms of the New Acquisition Incentive Plan (described below under
"Management -- Executive Compensation -- Incentive Plans") could give the
senior executives of the Managing General Partner an incentive to cause
the Partnership to acquire additional propane operations without regard to
whether the operations would prove beneficial to the Partnership and may
present the senior executives of the Managing General Partner with a
conflict of interest in negotiating the acquisition price on behalf of the
Partnership.
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<PAGE>
- The Partnership Agreement provides that the Managing General Partner will
generally be restricted from engaging in any business activities other
than those incidental to its ownership of interests in the Partnership.
Notwithstanding the foregoing, the Partnership Agreement permits
affiliates of the Managing General Partner (including NPS, Northwestern
Growth and the Special General Partner) to compete with the Partnership
under certain circumstances. There can be no assurance that there will not
be competition between the Partnership and affiliates of the Managing
General Partner in the future.
- The Partnership Agreement does not prohibit the Partnership from engaging
in roll-up transactions. Were the Managing General Partner to cause the
Partnership to engage in a roll-up transaction, there could be no
assurance that such a transaction would not have a material adverse effect
on a Unitholder's investment in the Partnership.
TAX RISKS
- The availability to a Common Unitholder of the federal income tax benefits
of an investment in the Partnership depends, in large part, on the
classification of the Partnership as a partnership for federal income tax
purposes. Assuming the accuracy of certain factual matters as to which the
General Partners and the Partnership have made representations, Andrews &
Kurth L.L.P., special counsel to the General Partners and the Partnership,
is of the opinion that, under current law, the Partnership will be
classified as a partnership for federal income tax purposes.
- No ruling has been requested from the Internal Revenue Service (the "IRS")
with respect to classification of the Partnership as a partnership for
federal income tax purposes, whether the Partnership's propane operations
generate "qualifying income" under Section 7704 of the Internal Revenue
Code of 1986, as amended (the "Code"), or any other matter affecting the
Partnership.
- A Unitholder will be required to pay income taxes on his allocable share
of the Partnership's income, whether or not he receives cash distributions
from the Partnership.
- It is anticipated that through December 31, 2000, a Unitholder may receive
substantial distributions that would reduce such holder's tax basis, with
the result that such holder may recognize substantial taxable gain upon a
sale of such holder's Units, even if the sale price is less than the
original cost.
- Investment in Common Units by certain tax-exempt entities, regulated
investment companies and foreign persons raises issues unique to such
persons. For example, virtually all of the taxable income derived by most
organizations exempt from federal income tax (including individual
retirement accounts ("IRAs") and other retirement plans) from the
ownership of a Common Unit will be unrelated business taxable income and
thus will be taxable to such a Unitholder.
- In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), any losses generated by the
Partnership will generally only be available to offset future income
generated by the Partnership and cannot be used to offset income from
other activities, including other passive activities or investments.
Passive losses which are not deductible because they exceed the
Unitholder's income generated by the Partnership may be deducted in full
when the Unitholder disposes of his entire investment in the Partnership
in a fully taxable transaction to an unrelated party.
- The Partnership has registered with the Secretary of the Treasury as a
"tax shelter." No assurance can be given that the Partnership will not be
audited by the IRS or that tax adjustments will not be made. Any
adjustments in the Partnership's tax returns will lead to adjustments in
the Unitholders' tax returns and may lead to audits of the Unitholders'
tax returns and adjustments of items unrelated to the Partnership.
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- The Partnership will adopt certain depreciation and amortization
conventions that do not conform with all aspects of certain proposed and
final Treasury regulations. A successful challenge to those conventions by
the IRS could adversely affect the amount of tax benefits available to a
purchaser of Common Units or could affect the timing of such tax benefits
or the amount of gain from the sale of Units and could have a negative
impact on the value of the Common Units or result in audit adjustments to
the tax returns of Unitholders.
- A Unitholder will likely be required to file state and local income tax
returns and pay state and local income taxes in some or all of the various
jurisdictions in which the Partnership does business or owns property. The
Partnership will initially own property and conduct business in the
following states which currently impose a personal income tax: Alabama,
Arkansas, California, Georgia, Illinois, Indiana, Kentucky, Maryland,
Mississippi, Missouri, New Hampshire, New Jersey, New Mexico, New York,
North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Utah, Vermont
and Virginia.
See "Risk Factors," "Cash Distribution Policy," "Cash Available for
Distribution," "Conflicts of Interest and Fiduciary Responsibilities," "The
Partnership Agreement" and "Tax Considerations" for a more detailed description
of these and other risk factors and conflicts of interest that should be
considered in evaluating an investment in the Common Units.
CASH AVAILABLE FOR DISTRIBUTION
Based on the amount of working capital that the Partnership is expected to
have at the time it commences operations and the availability of the Working
Capital Facility, the Partnership believes that, if its assumptions about
operating conditions prove correct, the Partnership should have sufficient
Available Cash from Operating Surplus to enable the Partnership to distribute
the Minimum Quarterly Distribution on the Common Units and Subordinated Units to
be outstanding immediately after the consummation of this offering, and the
related distribution on the aggregate 2% general partner interest, with respect
to each of its quarters at least through the quarter ending December 31, 1997.
However, no assurance can be given respecting such distributions or any future
distributions. The Partnership's belief is based on a number of assumptions,
including the assumptions that (i) the Partnership will be able to realize
significant cost savings from integrating the Combined Operations, including
acquisition and logistics cost savings associated with propane purchasing,
insurance premium reductions and certain operating, general and administrative
cost savings; (ii) the Partnership will be able to continue internal growth at a
rate generally consistent with the historical levels of the companies that
comprise the Combined Operations; (iii) normal weather conditions will prevail
in the Partnership's operating areas; (iv) the Partnership's operating margins
will remain constant and (v) market and overall economic conditions will not
change substantially. Although the Partnership believes its assumptions are
within a range of reasonableness, whether the assumptions are realized is not,
in a number of cases, within the control of the Partnership and cannot be
predicted with any degree of certainty. For example, the Partnership may not be
able to integrate the Combined Operations successfully, and the anticipated cost
savings may not be achieved. Moreover, in any particular year or even series of
years, weather may deviate substantially from normal. Therefore, certain of the
Partnership's assumptions may prove to be inaccurate. As a result, the actual
Available Cash from Operating Surplus generated by the Partnership could deviate
substantially from that currently expected. See "Risk Factors." In addition, the
terms of the Partnership's indebtedness under certain circumstances will
restrict the ability of the Partnership to distribute cash to Unitholders.
Accordingly, no assurance can be given that distributions of the Minimum
Quarterly Distribution or any other amounts will be made. The Partnership does
not undertake to update the expression of belief set forth above. See "Cash
Distribution Policy," "Cash Available for Distribution" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The amount of Available Cash from Operating Surplus needed to distribute the
Minimum Quarterly Distribution for four quarters on the Common Units and
Subordinated Units to be outstanding
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immediately after this offering and on the aggregate 2% general partner
interests of the General Partners is approximately $36.2 million ($18.5 million
for the Common Units, $17.0 million for the Subordinated Units and $.7 million
for the aggregate 2% general partner interest of the General Partners). If the
Underwriters' over-allotment option is exercised in full, such amounts would be
$21.2 million for the Common Units, $14.3 million for the Subordinated Units and
$.7 million for the aggregate 2% general partner interest of the General
Partners, or an aggregate of approximately $36.2 million. The amount of pro
forma Available Cash from Operating Surplus generated during fiscal 1996 was
approximately $25.7 million. Such amount would have been sufficient to cover the
Minimum Quarterly Distribution for such fiscal year on all of the Common Units
offered hereby and the related distribution on the general partner interests,
but would have been insufficient by approximately $10.5 million to cover the
Minimum Quarterly Distribution for such fiscal year on all Subordinated Units
and the related distribution on the general partner interests. If effect were
given to an additional $7.9 million of expense reductions which the Partnership
believes are achievable upon consummation of the Transactions, pro forma
Available Cash from Operating Surplus would have been approximately $33.5
million, which amount would have been insufficient by approximately $2.7 million
to cover the Minimum Quarterly Distribution for fiscal 1996 on all Subordinated
Units and the related distribution on the general partner interests. See Note 3
to the Pro Forma Consolidated Financial Statements of Cornerstone Propane
Partners, L.P., "Risk Factors -- Risks Inherent in an Investment in the
Partnership -- Partnership Profitability Will Depend on Successful Integration
of the Combined Operations" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The amount of pro forma Available Cash from Operating Surplus for fiscal
1996 set forth above was derived from the pro forma financial statements of the
Partnership in the manner set forth in "Cash Available for Distribution." The
pro forma adjustments are based upon currently available information and certain
estimates and assumptions. The pro forma financial statements do not purport to
present the results of operations of the Partnership had the Transactions
referred to therein actually been completed as of the dates indicated.
Furthermore, the pro forma financial statements are based on accrual accounting
concepts while Operating Surplus is defined in the Partnership Agreement on a
cash accounting basis. As a consequence, the amount of pro forma Available Cash
from Operating Surplus shown above should only be viewed as a general indication
of the amount of Available Cash from Operating Surplus that might in fact have
been generated by the Partnership had it been formed in earlier periods.
Available Cash from Operating Surplus generated during a specified period refers
generally to (i) all cash receipts of the Partnership from its operations
generated during such period, less (ii) all Partnership operating expenses, debt
service payments (including any increases in reserves therefor but not including
amounts paid from any reduction in reserves, or payments required in connection
with the sale of assets, or any refinancing with the proceeds of new
indebtedness or an equity offering) and maintenance capital expenditures, in
each case during such period. For a complete definition of Operating Surplus,
see the Glossary.
The Partnership will be required to establish reserves for the future
payment of principal and interest on the Notes and the indebtedness under the
Bank Credit Facility. There are other provisions in such agreements which will,
under certain circumstances, restrict the Partnership's ability to make
distributions to its partners. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Description of Indebtedness."
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PARTNERSHIP STRUCTURE AND MANAGEMENT
The Partnership will conduct, in substantially every respect, the propane
businesses that were formerly conducted by Synergy, Empire Energy, Myers and
Coast. The operations of the Partnership will be conducted through, and the
operating assets will be owned by, the Operating Partnership, a recently formed
Delaware limited partnership, and any other subsidiary operating partnerships
and corporations. The Partnership will own a 98.9899% limited partner interest
in the Operating Partnership. The General Partners are also the general partners
of the Operating Partnership, with an aggregate 1.0101% general partner interest
in the Operating Partnership. The General Partners will therefore own an
aggregate 2% general partner interest in the Partnership and the Operating
Partnership on a combined basis.
Following this offering, the senior executives who currently manage Coast
will manage and operate the Partnership's business as the senior executives of
the Managing General Partner. The Managing General Partner and its affiliates
will not receive any management fee or other compensation in connection with its
management of the Partnership, but will be reimbursed at cost for all direct and
indirect expenses incurred on behalf of the Partnership and all other necessary
or appropriate expenses allocable to the Partnership or otherwise reasonably
incurred by the Managing General Partner or its affiliates in connection with
the operation of the Partnership's business. The Special General Partner will
have no duty or right to participate in the management or operation of the
Partnership.
Conflicts of interest may arise between the Managing General Partner and its
affiliates, on the one hand, and the Partnership, the Operating Partnership and
the Unitholders, on the other, including conflicts relating to the compensation
of the officers and employees of the Managing General Partner and the
determination of fees and expenses that are allocable to the Partnership. The
Managing General Partner will have an audit committee (the "Audit Committee"),
consisting initially of two independent members of its Board of Directors, that
will be available at the Managing General Partner's discretion to review matters
involving conflicts of interest. See "Conflicts of Interest and Fiduciary
Responsibilities."
The principal executive offices of the Partnership and the Operating
Partnership are located at 432 Westridge Drive, Watsonville, California 95076.
The telephone number at such offices is (408) 724-1921.
The following chart depicts the organization and ownership of the
Partnership and the Operating Partnership immediately after giving effect to the
consummation of the Transactions, including the sale of the Common Units offered
hereby, and assumes that the Underwriters' over-allotment option is not
exercised. The percentages reflected in the following chart represent the
approximate ownership interest in each of the Partnership and the Operating
Partnership individually and not on an aggregate basis. Except in the following
chart, the ownership percentages referred to in this Prospectus reflect the
approximate effective ownership interest of the Unitholders in the Partnership
and the Operating Partnership on a combined basis. The 2% ownership percentage
of the General Partners referred to in this Prospectus reflects the approximate
effective ownership interest of the General Partners in the Partnership and the
Operating Partnership on a combined basis.
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[Description of Diagram]
Diagram depicting organizational structure and percentage interests owned in
the Partnership, the Operating Partnership and the General Partners setting
forth the following information.
<TABLE>
<CAPTION>
ENTITY PERCENTAGE OWNERSHIP INTEREST
----------------------------------- --------------------------------------------------
<S> <C>
Northwestern Public Service Company
Northwestern Growth Corporation 100% Interest owned by Northwestern Public Service
Company
Cornerstone Propane GP, Inc. 100% Interest owned by Northwestern Growth
Corporation
Cornerstone Propane Partners, L.P. 51.4939% Limited Partner Interest owned by Public
Unitholders
Cornerstone Propane Partners, L.P. 36.5153% Limited Partner Interest owned by
Cornerstone Propane GP, Inc.*
Cornerstone Propane Partners, L.P. 0.7686% Managing General Partner Interest owned by
Cornerstone Propane GP, Inc.*
Cornerstone Propane Partners, L.P. 10.9908% Limited Partner Interest owned by SYN
Inc.*
Cornerstone Propane Partners, L.P. 0.2314% Special General Partner Interest owned by
SYN Inc.*
Cornerstone Propane, L.P. 98.9899% Limited Partner Interest owned by
Cornerstone Propane Partners, L.P.
Cornerstone Propane, L.P. 0.7764% Managing General Partner Interest owned by
Cornerstone Propane GP, Inc.*
Cornerstone Propane, L.P. 0.2337% Special General Partner Interest owned by
SYN Inc.*
Corporate Subsidiary 100% owned by Cornerstone Propane, L.P.
SYN Inc. 17.5% Common Stock Ownership owned by Unaffiliated
Shareholders
SYN Inc. 82.5% Common Stock Ownership owned by Cornerstone
Propane GP, Inc.
</TABLE>
- ------------------------
* The allocation of the general partner interests in the Partnership and the
Operating Partnership and of the Subordinated Units between the Managing
General Partner and the Special General Partner is based on the relative
value of the assets to be contributed by each of them.
20
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ 8,540,000 Common Units (9,821,000 Common Units if the
Underwriters' over-allotment option is exercised in
full).
Units to be Outstanding After This
Offering........................ 8,540,000 Common Units and 7,878,619 Subordinated Units,
representing an aggregate 51.0% and 47.0% limited
partner interest in the Partnership, respectively. If
the Underwriters' over-allotment option is exercised
in full, 1,281,000 additional Common Units will be
issued by the Partnership and the proceeds therefrom
will be used to redeem, directly and indirectly, an
equal number of Subordinated Units from the General
Partners, resulting in there being 9,821,000 Common
Units and 6,597,619 Subordinated Units outstanding,
representing a 58.6% and 39.4% limited partner
interest in the Partnership, respectively.
Distributions of Available Cash... The Partnership will distribute all of its Available
Cash within 45 days after the end of each quarter to the
Unitholders of record on the applicable record date
and to the General Partners. "Available Cash" for any
quarter will consist generally of all cash on hand at
the end of such quarter, as adjusted for reserves. The
complete definition of Available Cash is set forth in
the Glossary. The Managing General Partner has broad
discretion in making cash disbursements and
establishing reserves, thereby affecting the amount of
Available Cash that will be distributed with respect
to any quarter. In addition, the terms of the
Partnership's indebtedness require that certain
reserves for the payment of principal and interest be
maintained. See "Risk Factors -- Risks Inherent in an
Investment in the Partnership -- Cash Distributions
Are Not Guaranteed and May Fluctuate with Partnership
Performance" for a description of the reserves for the
payment of principal and interest that the Partnership
will be required to maintain. Available Cash will
generally be distributed 98% to Unitholders and 2% to
the General Partners, except that if distributions of
Available Cash from Operating Surplus exceed specified
target levels ("Target Distribution Levels") in excess
of the Minimum Quarterly Distribution, the General
Partners will receive a percentage of such excess
distributions that will increase to up to 50% of the
excess distributions above the highest Target
Distribution Level. See "Cash Distribution Policy --
Incentive Distributions -- Hypothetical Annualized
Yield."
Distributions to Common and
Subordinated Unitholders........ The Partnership intends, to the extent there is
sufficient Available Cash from Operating Surplus, to
distribute to each holder of Common Units at least the
Minimum Quarterly Distribution of $.54 per Common Unit
per quarter. The Minimum Quarterly Distribution is not
guaranteed and is subject to adjustment as described
under "Cash Distribution
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Policy -- Adjustment of Minimum Quarterly Distribution
and Target Distribution Levels." The Minimum Quarterly
Distribution for the period from the closing of this
offering through March 31, 1997 will be adjusted based
on the actual length of such period.
With respect to each quarter during the Subordination
Period, which will generally not end prior to December
31, 2001, the Common Unitholders will generally have
the right to receive the Minimum Quarterly
Distribution, plus any arrearages thereon ("Common
Unit Arrearages"), and the General Partners will have
the right to receive the related distribution on the
general partner interests, before any distribution of
Available Cash from Operating Surplus is made to the
Subordinated Unitholders. This subordination feature
will enhance the Partnership's ability to distribute
the Minimum Quarterly Distribution on the Common Units
during the Subordination Period. Subordinated Units
will not accrue distribution arrearages. Upon
expiration of the Subordination Period, Common Units
will no longer accrue distribution arrearages. See
"Cash Distribution Policy."
Subordination Period.............. The Subordination Period will generally extend from the
closing of this offering until the first day of any
quarter beginning after December 31, 2001 in respect
of which (i) distributions of Available Cash from
Operating Surplus on the Common Units and the
Subordinated Units with respect to each of the three
consecutive four-quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum
Quarterly Distribution on all of the outstanding
Common Units and Subordinated Units during such
periods, (ii) the Adjusted Operating Surplus generated
during each of the three consecutive four-quarter
periods immediately preceding such date equaled or
exceeded the sum of the Minimum Quarterly Distribution
on all of the outstanding Common Units and
Subordinated Units and the related distribution on the
general partner interests in the Partnership during
such periods, and (iii) there are no outstanding
Common Unit Arrearages. Upon expiration of the
Subordination Period, all remaining Subordinated Units
will convert into Common Units on a one-for-one basis
and will thereafter participate pro rata with the
other Common Units in distributions of Available Cash.
Early Conversion of Subordinated
Units........................... A portion of the Subordinated Units will convert into
Common Units on the first day after the record date
established for the distribution in respect of any
quarter ending on or after (a) December 31, 1999 (with
respect to one-quarter of the Subordinated Units) and
(b) December 31, 2000 (with respect to one-quarter of
the Subordinated Units), in respect of which (i)
distributions of Available Cash from Operating Surplus
on the Common Units and the Subordinated Units with
respect
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to each of the three consecutive four-quarter periods
immediately preceding such date equaled or exceeded
the sum of the Minimum Quarterly Distribution on all
of the outstanding Common Units and Subordinated Units
during such periods, (ii) the Adjusted Operating
Surplus generated during each of the two consecutive
four-quarter periods immediately preceding such date
equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units
and Subordinated Units and the related distribution on
the general partner interests in the Partnership
during such periods, and (iii) there are no
outstanding Common Unit Arrearages; provided, however,
that the early conversion of the second one-quarter of
Subordinated Units may not occur until at least one
year following the early conversion of the first
one-quarter of Subordinated Units. See "Cash
Distribution Policy -- Distributions from Operating
Surplus during Subordination Period."
Incentive Distributions........... If quarterly distributions of Available Cash exceed the
Target Distribution Levels, the General Partners will
receive distributions which are generally equal to
15%, then 25% and then 50% of the distributions of
Available Cash that exceed such Target Distribution
Levels. The Target Distribution Levels are based on
the amounts of Available Cash from Operating Surplus
distributed with respect to a given quarter that
exceed distributions made with respect to the Minimum
Quarterly Distribution and Common Unit Arrearages, if
any. See "Cash Distribution Policy -- Incentive
Distributions -- Hypothetical Annualized Yield." The
distributions to the General Partners described above
that are in excess of their aggregate 2% general
partner interest are referred to herein as the
"Incentive Distributions."
Adjustment of Minimum Quarterly
Distribution and Target
Distribution Levels............. The Minimum Quarterly Distribution and the Target
Distribution Levels are subject to downward
adjustments in the event that the Unitholders receive
distributions of Available Cash from Capital Surplus
or legislation is enacted or existing law is modified
or interpreted by the relevant governmental authority
in a manner that causes the Partnership to be treated
as an association taxable as a corporation or
otherwise taxable as an entity for federal, state or
local income tax purposes. If, as a result of
distributions of Available Cash from Capital Surplus,
the Unitholders receive a full return of the initial
public offering price of the Common Units and any
unpaid Common Unit Arrearages, the distributions of
Available Cash payable to the General Partners and
their affiliates will increase to 50% of all amounts
distributed thereafter. See "Cash Distribution Policy
-- General," "-- Distributions from Capital Surplus"
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and "-- Adjustment of Minimum Quarterly Distribution
and Target Distribution Levels."
Partnership's Ability to Issue
Additional Units................ The Partnership Agreement generally authorizes the
Partnership to issue an unlimited number of additional
limited partner interests and other equity securities
of the Partnership for such consideration and on such
terms and conditions as shall be established by the
Managing General Partner in its sole discretion
without the approval of the Unitholders. During the
Subordination Period, however, the Partnership may not
issue equity securities ranking prior or senior to the
Common Units or an aggregate of more than 4,270,000
Common Units (excluding Common Units issued upon the
exercise of the Underwriters' over-allotment option,
upon conversion of Subordinated Units, pursuant to
employee benefit plans or in connection with certain
acquisitions or capital improvements or the repayment
of certain indebtedness) or an equivalent number of
securities ranking on a parity with the Common Units,
without the approval of the holders of a Unit
Majority. See "The Partnership Agreement -- Issuance
of Additional Securities."
Limited Call Right................ If at any time less than 20% of the issued and
outstanding Common Units are held by persons other than
the Managing General Partner and its affiliates, the
Managing General Partner may purchase all of the
remaining Common Units at a price generally equal to
the then current market price of the Common Units. See
"The Partnership Agreement -- Limited Call Right."
Limited Voting Rights............. Unitholders will not have voting rights except with
respect to the following matters, for which the
Partnership Agreement requires the approval of at
least a majority (and in certain cases a greater
percentage) of all of the holders of the Subordinated
Units and of all of the holders of the Common Units: a
sale or exchange of all or substantially all of the
Partnership's assets, the removal or the withdrawal of
the General Partners, the election of a successor
Managing General Partner, a dissolution or
reconstitution of the Partnership, a merger of the
Partnership, issuance of limited partner interests in
certain circumstances, approval of certain actions of
the General Partners (including the transfer by either
of the General Partners of its general partner
interest or Incentive Distribution Rights under
certain circumstances) and certain amendments to the
Partnership Agreement, including any amendment that
would cause the Partnership to be treated as an
association taxable as a corporation. Holders of
Subordinated Units will generally vote as a class
separate from the holders of Common Units. After
Subordinated Units convert into Common Units (either
upon termination of the Subordination Period or upon
early conversion), holders of such Common Units will
vote as a single class together with
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the holders of the other Common Units. Under the
Partnership Agreement, the Managing General Partner
generally will be permitted to effect amendments to
the Partnership Agreement that do not adversely affect
Unitholders. See "The Partnership Agreement."
Change of Management
Provisions...................... Any person or group (other than the Managing General
Partner and its affiliates) that acquires beneficial
ownership of 20% or more of the Common Units will lose
its voting rights with respect to all of its Common
Units. In addition, if the Managing General Partner is
removed other than for Cause and Units held by the
General Partners and their affiliates are not voted in
favor of such removal, (i) the Subordination Period
will end and all outstanding Subordinated Units will
immediately convert into Common Units on a one-for-one
basis, (ii) any existing Common Unit Arrearages will
be extinguished and (iii) the General Partners will
have the right to convert their general partner
interests (and their rights to receive Incentive
Distributions) into Common Units or to receive cash in
exchange for such interests. These provisions are
intended to discourage a person or group from
attempting to remove the current Managing General
Partner or otherwise change the management of the
Partnership. The effect of these provisions may be to
diminish the price at which the Common Units will
trade under certain circumstances. See "The
Partnership Agreement -- Change of Management
Provisions."
Removal and Withdrawal of the
General Partners................ Subject to certain conditions, the Managing General
Partner may be removed upon the approval of the holders
of at least 66 2/3% of the outstanding Units
(including Units held by the General Partners and
their affiliates) and the election of a successor
general partner by the vote of the holders of not less
than a majority of the outstanding Units. A meeting of
holders of the Common Units may be called only by the
Managing General Partner or by the holders of 20% or
more of the outstanding Common Units. The ownership of
the Subordinated Units by the Managing General Partner
and its affiliates effectively gives the Managing
General Partner the ability to prevent its removal.
The Managing General Partner has agreed not to
voluntarily withdraw as general partner of the
Partnership and the Operating Partnership prior to
December 31, 2006, subject to limited exceptions,
without obtaining the approval of at least a Unit
Majority and furnishing an Opinion of Counsel (as
defined in the Glossary). The Special General Partner
must withdraw or be removed as a general partner upon
the withdrawal or removal of the Managing General
Partner. See "The Partnership Agreement -- Withdrawal
or Removal of the General Partners" and "-- Meetings;
Voting."
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Distributions Upon Liquidation.... If the Partnership liquidates during the Subordination
Period, under certain circumstances holders of
outstanding Common Units will be entitled to receive
more per Unit in liquidating distributions than
holders of outstanding Subordinated Units. The per
Unit difference will be dependent upon the amount of
gain or loss recognized by the Partnership in
liquidating its assets and will be limited to the
Unrecovered Capital of a Common Unit and any Common
Unit Arrearages thereon. Under certain circumstances
there may be insufficient gain for the holders of
Common Units to fully recover all such amounts, even
though there may be cash available for distribution to
holders of Subordinated Units. Following conversion of
the Subordinated Units into Common Units, all Units
will be treated the same upon liquidation of the
Partnership. See "Cash Distribution Policy --
Distributions of Cash Upon Liquidation."
Use of Proceeds................... The proceeds to the Partnership from the sale of Common
Units offered hereby will be approximately $179.3
million, before deducting underwriting discounts and
commissions and estimated expenses of this offering.
The proceeds of this offering will be used to repay a
portion of the indebtedness assumed by the Operating
Partnership in connection with the Transactions and to
pay a portion of the fees and expenses of the
Transactions. Proceeds from the Note Placement,
together with borrowings under the Working Capital
Facility, will be applied to repay indebtedness
assumed by the Operating Partnership upon consummation
of the Transactions, to pay expenses and to make a
distribution to the Special General Partner. The
Partnership will use the proceeds from any exercise of
the Underwriters' over-allotment option to pay a
portion of the expenses of the offering and then to
redeem Subordinated Units from the General Partners.
If the over-allotment option is exercised in full, the
number of Subordinated Units outstanding will be
reduced by the number of Common Units issued upon the
exercise of such option. See "Use of Proceeds."
Listing........................... The Common Units have been approved for listing on the
New York Stock Exchange, subject to official notice of
issuance.
NYSE Symbol....................... "CNO"
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SUMMARY OF TAX CONSIDERATIONS
The tax consequences of an investment in the Partnership to a particular
investor will depend in part on the investor's own tax circumstances. Each
prospective investor should consult his own tax advisor about the United States
federal, state and local tax consequences of an investment in Common Units.
The following is a brief summary of certain expected tax consequences of
owning and disposing of Common Units. The following discussion, insofar as it
relates to United States federal income tax laws, is based in part upon the
opinion of Andrews & Kurth L.L.P., special counsel to the General Partners and
the Partnership ("Counsel"), described in "Tax Considerations." This summary is
qualified by the discussion in "Tax Considerations," particularly the
qualifications on the opinions of Counsel described therein.
PARTNERSHIP STATUS
In the opinion of Counsel, the Partnership will be classified for federal
income tax purposes as a partnership, and the beneficial owners of Common Units
will generally be considered partners in the Partnership. Accordingly, the
Partnership will pay no federal income taxes, and a Common Unitholder will be
required to report in his federal income tax return his share of the
Partnership's income, gains, losses and deductions. In general, cash
distributions to a Common Unitholder will be taxable only if, and to the extent
that, they exceed the tax basis in his Common Units.
PARTNERSHIP ALLOCATIONS
In general, income and loss of the Partnership will be allocated to the
General Partners and the Unitholders for each taxable year in accordance with
their respective percentage interests in the Partnership, as determined annually
and prorated on a monthly basis and subsequently apportioned among the General
Partners and the Unitholders of record as of the opening of the first business
day of the month to which they relate, even though Unitholders may dispose of
their Units during the month in question. At any time that distributions are
made on the Common Units and not on the Subordinated Units, or that Incentive
Distributions are made to the General Partners, gross income will be allocated
to the recipients to the extent of such distribution. A Unitholder will be
required to take into account, in determining his federal income tax liability,
his share of income generated by the Partnership for each taxable year of the
Partnership ending within or with the Unitholder's taxable year even if cash
distributions are not made to him. As a consequence, a Unitholder's share of
taxable income of the Partnership (and possibly the income tax payable by him
with respect to such income) may exceed the cash actually distributed to him.
RATIO OF TAXABLE INCOME TO DISTRIBUTIONS
The Partnership estimates that a purchaser of Common Units in this offering
who owns them through December 31, 2000, will be allocated, on a cumulative
basis, an amount of federal taxable income for such period that will be
approximately 20% of the cash distributed with respect to that period. The
Partnership further estimates that for taxable years after the taxable year
ending December 31, 2000, the taxable income allocable to them will represent a
significantly higher percentage (and could in certain circumstances exceed the
amount) of cash distributed to the Unitholders. These estimates are based upon
the assumption that the gross income from operations will approximate the amount
required to make the Minimum Quarterly Distribution with respect to all Units
and other assumptions with respect to capital expenditures, cash flow and
anticipated cash distributions. These estimates and assumptions are subject to,
among other things, numerous business, economic, regulatory, competitive and
political uncertainties which are beyond the control of the Partnership.
Further, the estimates are based on current tax law and certain tax reporting
positions that the Partnership intends to adopt and with which the IRS could
disagree. Accordingly, no assurance can be given that the estimates will prove
to be correct. The actual percentages could be higher or lower than as described
above and any differences could be material. See "Tax Considerations -- Tax
Consequences of Unit Ownership -- Ratio of Taxable Income to Distributions."
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BASIS OF COMMON UNITS
A Unitholder's initial tax basis for a Common Unit purchased in this
offering will generally be the amount paid for the Common Unit. A Unitholder's
basis will generally be increased by his share of Partnership income and
decreased by his share of Partnership losses and distributions.
LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), any Partnership losses will only be
available to offset future income generated by the Partnership and cannot be
used to offset income from other activities, including passive activities or
investments. Any losses unused by virtue of the passive loss rules may be fully
deducted when the Unitholder disposes of all of his Common Units in a taxable
transaction with an unrelated party.
SECTION 754 ELECTION
The Partnership intends to make the election provided for by Section 754 of
the Code, which will generally result in a Unitholder being allocated income and
deductions calculated by reference to the portion of his purchase price
attributable to each asset of the Partnership.
DISPOSITION OF COMMON UNITS
A Unitholder who sells Common Units will recognize gain or loss equal to the
difference between the amount realized and the adjusted tax basis of those
Common Units. Thus, distributions of cash from the Partnership to a Unitholder
in excess of the income allocated to him will, in effect, become taxable income
if he sells the Common Units at a price greater than his adjusted tax basis even
if the price is less than his original cost. A portion of the amount realized
(whether or not representing gain) may be ordinary income.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will likely be subject to
other taxes, such as state and local income taxes, unincorporated business
taxes, and estate, inheritance or intangible taxes that are imposed by the
various jurisdictions in which a Unitholder resides or in which the Partnership
does business or owns property. Although an analysis of those various taxes is
not presented here, each prospective Unitholder should consider their potential
impact on his investment in the Partnership. The Partnership will initially own
property and conduct business in the following states which currently impose a
personal income tax: Alabama, Arkansas, California, Georgia, Illinois, Indiana,
Kentucky, Maryland, Mississippi, Missouri, New Hampshire, New Jersey, New
Mexico, New York, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee,
Utah, Vermont and Virginia. In certain states, tax losses may not produce a tax
benefit in the year incurred (if, for example, the Partnership has no income
from sources within that state) and also may not be available to offset income
in subsequent taxable years. Some of the states may require the Partnership, or
the Partnership may elect, to withhold a percentage of income from amounts to be
distributed to a Unitholder. Withholding, the amount of which may be more or
less than a particular Unitholder's income tax liability owed to the state, may
not relieve the nonresident Unitholder from the obligation to file an income tax
return. Amounts withheld may be treated as if distributed to Unitholders for
purposes of determining the amounts distributed by the Partnership. Based on
current law and its estimate of future Partnership operations, the Partnership
anticipates that any amounts required to be withheld will not be material.
It is the responsibility of each prospective Unitholder to investigate the
legal and tax consequences, under the laws of pertinent states and localities,
of his investment in the Partnership. Accordingly, each prospective Unitholder
should consult, and must depend upon, his own tax counsel or other advisor with
regard to those matters. Further, it is the responsibility of each Unitholder to
file all U.S. federal, state and
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local tax returns that may be required of such Unitholder. Counsel has not
rendered an opinion on the state or local tax consequences of an investment in
the Partnership.
OWNERSHIP OF COMMON UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER
INVESTORS
An investment in Common Units by tax-exempt organizations (including IRAs)
and other retirement plans), regulated investment companies and foreign persons
raises issues unique to such persons. Virtually all of the Partnership income
allocated to a Unitholder which is a tax-exempt organization will be unrelated
business taxable income and, thus, will be taxable to such Unitholder; no
significant amount of the Partnership's gross income will be qualifying income
for purposes of determining whether a Unitholder will qualify as a regulated
investment company; and a Unitholder who is a nonresident alien, foreign
corporation or other foreign person will be regarded as being engaged in a trade
or business in the United States as a result of ownership of a Common Unit and
thus will be required to file federal income tax returns and to pay tax on such
Unitholder's share of Partnership taxable income. Furthermore, distributions to
foreign Unitholders will be subject to federal income tax withholding. See "Tax
Considerations -- Uniformity of Units -- Tax-Exempt Organizations and Certain
Other Investors."
TAX SHELTER REGISTRATION
The Code generally requires that "tax shelters" be registered with the
Secretary of the Treasury. It is arguable that the Partnership is not subject to
this registration requirement. Nevertheless, the Partnership has registered as a
tax shelter with the Secretary of the Treasury. ISSUANCE OF THE REGISTRATION
NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN THE PARTNERSHIP OR THE CLAIMED
TAX BENEFITS HAS BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS. See "Tax
Considerations -- Administrative Matters -- Registration as a Tax Shelter."
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RISK FACTORS
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A
CORPORATION, ALTHOUGH MANY OF THE BUSINESS RISKS TO WHICH THE PARTNERSHIP WILL
BE SUBJECT ARE SIMILAR TO THOSE THAT WOULD BE FACED BY A CORPORATION ENGAGED IN
A SIMILAR BUSINESS. PROSPECTIVE PURCHASERS OF THE COMMON UNITS SHOULD CONSIDER
THE FOLLOWING RISK FACTORS IN EVALUATING AN INVESTMENT IN THE COMMON UNITS. ALL
STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS
PROSPECTUS, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE
PARTNERSHIP'S BUSINESS STRATEGY, PLANS AND OBJECTIVES OF MANAGEMENT OF THE
PARTNERSHIP FOR FUTURE OPERATIONS AND STATEMENTS UNDER "PROSPECTUS SUMMARY --
CASH AVAILABLE FOR DISTRIBUTION" AND "CASH AVAILABLE FOR DISTRIBUTION," ARE
FORWARD-LOOKING STATEMENTS. ALTHOUGH THE PARTNERSHIP BELIEVES THAT THE
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN
GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO BE CORRECT. IMPORTANT
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
PARTNERSHIP'S EXPECTATIONS ARE DISCLOSED BELOW AND ELSEWHERE IN THIS PROSPECTUS.
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
WEATHER CONDITIONS AFFECT THE DEMAND FOR PROPANE
Weather conditions have a significant impact on the demand for propane for
both heating and agricultural purposes. Many customers of the Partnership rely
heavily on propane as a heating fuel. Accordingly, the volume of retail propane
sold is highest during the six-month peak heating season of October through
March and is directly affected by the severity of the winter weather. During
fiscal 1996, approximately 72.7% of the Partnership's combined retail propane
volume and in excess of 85% of the Partnership's pro forma EBITDA were
attributable to sales during the peak heating season. Actual weather conditions
can vary substantially from year to year, significantly affecting the
Partnership's financial performance. Furthermore, variations in weather in one
or more regions in which the Partnership operates can significantly affect the
total volume of propane sold by the Partnership and the margins realized on such
sales and, consequently, the Partnership's results of operations. Agricultural
demand is also affected by weather, as dry weather during the harvest season
reduces demand for propane used in crop drying. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
THE PARTNERSHIP WILL BE SUBJECT TO PRICING AND INVENTORY RISKS
The retail propane business is a "margin-based" business in which gross
profits depend on the excess of sales prices over propane supply costs.
Consequently, the Partnership's profitability will be sensitive to changes in
wholesale propane prices. Propane is a commodity, the market price of which can
be subject to volatile changes in response to changes in supply or other market
conditions. The Partnership will have no control over these market conditions.
Consequently, the unit price of propane purchased by the Partnership, as well as
other propane marketers, can change rapidly over a short period of time. In
general, product supply contracts permit suppliers to charge posted prices (plus
transportation costs) at the time of delivery or the current prices established
at major delivery points. As it may not be possible immediately to pass on to
customers rapid increases in the wholesale cost of propane, such increases could
reduce the Partnership's gross profits. See "-- The Retail Propane Business Is
Highly Competitive."
Propane is available from numerous sources, including integrated
international oil companies, independent refiners and independent wholesalers.
The Partnership purchases propane from a variety of suppliers pursuant to supply
contracts or on the spot market. To the extent that the Partnership purchases
propane from foreign (including Canadian) sources, its propane business will be
subject to risks of disruption in foreign supply. The Partnership generally
attempts to minimize inventory risk by purchasing propane on a short-term basis.
However, the Partnership may purchase large volumes of propane during periods of
low demand, which generally occur during the summer months, at the then current
market price. Because of the potential volatility of propane prices, if the
Partnership makes such purchases, the market price for propane could fall below
the price at which the Partnership made the purchases, thereby
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adversely affecting gross margins or sales or rendering sales from such
inventory unprofitable. The Partnership engages in hedging of product cost and
supply through common hedging practices. See "Business and Properties -- Propane
Supply and Storage."
THE RETAIL PROPANE BUSINESS IS HIGHLY COMPETITIVE
The Partnership's profitability is affected by the competition for customers
among all participants in the retail propane business. The Partnership competes
with other distributors of propane, including a number of large national and
regional firms and several thousand small independent firms. Some of these
competitors are larger or have greater financial resources than the Partnership.
Should a competitor attempt to increase market share by reducing prices, the
Partnership's financial condition and results of operations could be materially
adversely affected. Generally, warmer-than-normal weather further intensifies
competition. The Partnership believes that its ability to compete effectively
depends on the reliability of its service, its responsiveness to customers and
its ability to maintain competitive retail prices.
THE RETAIL PROPANE BUSINESS FACES COMPETITION FROM ALTERNATIVE ENERGY
SOURCES
Propane competes with other sources of energy, some of which are less costly
for equivalent energy value. The Partnership competes for customers against
suppliers of electricity, natural gas and fuel oil. Electricity is a major
competitor of propane, but propane generally enjoys a competitive price
advantage over electricity. Except for certain industrial and commercial
applications, propane is generally not competitive with natural gas in areas
where natural gas pipelines already exist because natural gas is a significantly
less expensive source of energy than propane. The gradual expansion of the
nation's natural gas distribution systems has resulted in the availability of
natural gas in many areas that previously depended upon propane. Although
propane is similar to fuel oil in certain applications and market demand,
propane and fuel oil compete to a lesser extent primarily because of the cost of
converting from one to the other. The Partnership cannot predict the effect that
the development of alternative energy sources might have on its operations.
THE PARTNERSHIP MAY NOT BE SUCCESSFUL IN GROWING THROUGH ACQUISITIONS
The retail propane industry is mature, and the Partnership foresees only
limited growth in total retail demand for propane. Moreover, as a result of
long-standing customer relationships that are typical in the retail home propane
industry, the inconvenience of switching tanks and suppliers and propane's
higher cost as compared to certain other energy sources, such as natural gas,
the Partnership may experience difficulty in acquiring new retail customers,
other than through acquisitions. Therefore, while the Partnership's business
strategy includes internal growth and start-ups of new customer service
locations, the ability of the Partnership's propane business to grow will depend
principally upon its ability to acquire other retail propane distributors. There
can be no assurance that the Partnership will identify attractive acquisition
candidates in the future, that the Partnership will be able to acquire such
businesses on economically acceptable terms, that any acquisitions will not be
dilutive to earnings and distributions to the Unitholders or that any additional
debt incurred to finance acquisitions will not affect the ability of the
Partnership to make distributions to the Unitholders. The Partnership is not
required under the Partnership Agreement to seek Unitholder approval of any
acquisition. The Partnership is subject to certain covenants in agreements
governing its indebtedness that restrict the Partnership's ability to incur
indebtedness to finance acquisitions. In addition, to the extent that warm
weather adversely affects the Partnership's operating and financial results, the
Partnership's access to capital and its acquisition activities may be limited.
THE PARTNERSHIP IS SUBJECT TO OPERATING AND LITIGATION RISKS WHICH MAY NOT
BE COVERED BY INSURANCE
The Partnership's operations are subject to all operating hazards and risks
normally incidental to handling, storing and delivering combustible liquids such
as propane. As a result, each of the companies
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that comprise the Combined Operations has been, and the Partnership is likely to
be, a defendant in various legal proceedings and litigation arising in the
ordinary course of business. The Partnership will maintain insurance policies
with insurers in such amounts and with such coverages and deductibles as it
believes are reasonable and prudent. However, there can be no assurance that
such insurance will be adequate to protect the Partnership from all material
expenses related to potential future claims for personal injury and property
damage or that such levels of insurance will be available in the future at
economical prices.
THE PARTNERSHIP WILL BE DEPENDENT UPON KEY PERSONNEL
The Partnership believes that its success will depend to a significant
extent upon the efforts and abilities of its senior management team. The failure
by the Managing General Partner to retain members of its senior management team
could adversely affect the financial condition or results of operations of the
Partnership. Each of Messrs. Baxter, Kittrell, Goedde and DiCosimo, upon the
consummation of the Transactions, will be employed by the Managing General
Partner pursuant to a three-year employment contract. However, each of the
executives will be entitled to terminate his agreement and receive a severance
amount equal to the total compensation due for the remainder of the employment
term upon a "change of control" of NPS, which is defined to include any person
or group becoming the beneficial owner of 10% of the voting securities of NPS,
and upon certain other circumstances. See "Management -- Executive Compensation
- -- Employment Agreements, Severance Arrangements."
ENERGY EFFICIENCY AND TECHNOLOGY ADVANCES MAY AFFECT DEMAND
The national trend toward increased conservation and technological advances,
including installation of improved insulation and the development of more
efficient furnaces and other heating devices, has adversely affected the demand
for propane by retail customers. The Partnership cannot predict the materiality
of the effect of future conservation measures or the effect that any
technological advances in heating, conservation, energy generation or other
devices might have on its operations.
RISKS INHERENT IN AN INVESTMENT IN THE PARTNERSHIP
CASH DISTRIBUTIONS ARE NOT GUARANTEED AND MAY FLUCTUATE WITH PARTNERSHIP
PERFORMANCE
Although the Partnership will distribute all of its Available Cash, there
can be no assurance regarding the amounts of Available Cash to be generated by
the Partnership. The actual amounts of Available Cash will depend upon numerous
factors, including cash flow generated by operations, required principal and
interest payments on the Partnership's debt, the costs of acquisitions
(including related debt service payments), restrictions contained in the
Partnership's debt instruments, issuances of debt and equity securities by the
Partnership, fluctuations in working capital, capital expenditures, adjustments
in reserves, prevailing economic conditions and financial, business and other
factors, a number of which will be beyond the control of the Partnership and the
Managing General Partner. Cash distributions are dependent primarily on cash
flow, including from reserves and working capital borrowings, and not on
profitability, which is affected by non-cash items. Therefore, cash
distributions might be made during periods when the Partnership records losses
and might not be made during periods when the Partnership records profits.
The amount of Available Cash from Operating Surplus needed to distribute the
Minimum Quarterly Distribution for four quarters on the Common Units and
Subordinated Units to be outstanding immediately after this offering and on the
General Partners' aggregate 2% general partner interest is approximately $36.2
million ($18.5 million for the Common Units, $17.0 million for the Subordinated
Units and $.7 million for the aggregate 2% general partner interest). If the
Underwriters' over-allotment option is exercised in full, such amounts would be
$21.2 million for the Common Units, $14.3 million for the Subordinated Units and
$.7 million for the aggregate 2% general partner interest of the General
Partners, or an aggregate of approximately $36.2 million. The amount of pro
forma Available Cash from Operating Surplus generated during fiscal 1996 was
approximately $25.7 million. Such amount would have
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been sufficient to cover the Minimum Quarterly Distribution for such fiscal year
on all of the Common Units offered hereby and the related distribution on the
general partner interests, but would have been insufficient by approximately
$10.5 million to cover the Minimum Quarterly Distribution on all Subordinated
Units and the related distribution on the general partner interests. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." For the calculation of pro forma Available Cash from Operating
Surplus, see "Cash Available for Distribution."
The Partnership Agreement gives the Managing General Partner broad
discretion in establishing reserves for the proper conduct of the Partnership's
business that will affect the amount of Available Cash. Because the business of
the Partnership is seasonal, the Managing General Partner will make additions to
reserves during certain quarters in order to fund operating expenses, interest
payments and cash distributions to partners with respect to other quarters. In
addition, the Partnership will be required to establish reserves in respect of
future payments of principal and interest on the Notes and, in certain
instances, in respect of future payments of principal and interest under the
Bank Credit Facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Description of Indebtedness." The
Partnership anticipates that reserves for interest on the Notes will be
established at approximately $4.1 million at each March and September,
commencing March 1997, and the reserves will be eliminated when interest
payments are made on the Notes in June and December. The $4.1 million reserved
for interest would be approximately 11.4% of the amount of Available Cash needed
to distribute the Minimum Quarterly Distribution for four quarters on the Common
Units and the Subordinated Units to be outstanding immediately after this
offering and on the General Partners' general partner interests. Reserves for
repayment of principal on the Notes are not required until March 2003 and then
will equal 25%, 50% and 75% at each March, June and September, respectively, of
the next installment of principal, and the reserves will be eliminated when
principal payments are made on the Notes in December. The $20.6 million reserved
for principal payments would be approximately 57.0% of the amount of Available
Cash needed to distribute the Minimum Quarterly Distribution for four quarters
on the Common Units and the Subordinated Units to be outstanding immediately
after this offering and on the General Partners' general partner interests.
Furthermore, the Notes and the Bank Credit Facility will limit the Operating
Partnership's ability to distribute cash to the Partnership. Distributions from
the Operating Partnership will be the Partnership's primary source of Available
Cash. Any subsequent refinancing of the Notes, the Bank Credit Facility or any
other indebtedness incurred by the Partnership may have similar restrictions,
and the Partnership's ability to distribute cash may also be limited during the
existence of defaults under any of the Partnership's debt instruments. As a
result of these and other factors, there can be no assurance regarding the
actual levels of cash distributions to Unitholders by the Partnership.
PARTNERSHIP PROFITABILITY WILL DEPEND ON SUCCESSFUL INTEGRATION OF THE
COMBINED OPERATIONS
There can be no assurance that the Partnership will be able to integrate
successfully the Combined Operations, achieve anticipated cost savings or
institute the necessary systems and procedures to successfully manage the
combined enterprise on a profitable basis. The Partnership was recently formed
and has conducted no operations and generated no revenues to date. The
Partnership will be managed by the senior executives who currently manage Coast.
Such executives have not been involved with the operations of either Synergy or
Empire Energy. The historical financial results of the companies that comprise
the Combined Operations only cover periods when such companies were not under
common control and management and, therefore, may not be indicative of the
Partnership's future financial and operating results. The inability of the
Partnership to integrate successfully the Combined Operations could have a
material adverse effect on the Partnership's business, financial condition and
results of operations.
PARTNERSHIP ASSUMPTIONS CONCERNING FUTURE OPERATIONS AND WEATHER MAY NOT BE
REALIZED
In establishing the terms of this offering, including the number and initial
offering price of the Common Units, the number of Subordinated Units and the
Minimum Quarterly Distribution, the Partnership has relied on certain
assumptions concerning its operations, including the assumptions that the
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Partnership will be able to realize significant cost savings from integrating
the Combined Operations, that the Partnership will be able to continue internal
growth at a rate consistent with historic levels of the companies that comprise
the Combined Operations, that normal weather conditions will prevail in the
Partnership's operating areas, that the Partnership's operating margins will
remain constant, and that market and overall economic conditions will not change
substantially. Whether the assumptions are realized is not, in many cases,
within the control of the Partnership and cannot be predicted with any degree of
certainty. In the event that the Partnership's assumptions are not realized, the
actual Available Cash from Operating Surplus generated by the Partnership could
deviate substantially from that currently expected. See "Cash Available for
Distribution."
Because a substantial portion of the Partnership's propane is used in
heating-sensitive markets, the temperatures realized in the Partnership's areas
of operations, particularly during the six-month peak heating season, have a
significant effect on the financial performance of the Partnership. In any given
area, sustained above-normal temperatures will tend to result in reduced propane
use, while sustained below-normal temperatures will tend to result in greater
propane use.
THE PARTNERSHIP'S INDEBTEDNESS MAY LIMIT THE PARTNERSHIP'S ABILITY TO MAKE
DISTRIBUTIONS AND MAY AFFECT ITS OPERATIONS
On a pro forma basis at September 30, 1996, the Partnership's total
indebtedness as a percentage of its total capitalization would have been
approximately 58.9%. As a result, the Partnership will be significantly
leveraged and will have indebtedness that is substantial in relation to its
partners' capital. Upon consummation of the Transactions, the Partnership
contemplates that it will have outstanding $220.0 million in Notes and
approximately $12.8 million under the Working Capital Facility. The Partnership
expects to have an additional $112.2 million of unused borrowing capacity under
the Bank Credit Facility at the closing of this offering. Future borrowings
could result in a significant increase in the Partnership's leverage. The
ability of the Partnership to make principal and interest payments depends on
future performance, which performance is subject to many factors, a number of
which will be outside the Partnership's control. The Notes and the Bank Credit
Facility contain provisions relating to change of control. If such change of
control provisions are triggered, such outstanding indebtedness may become due.
In such event, there is no assurance that the Partnership would be able to pay
the indebtedness. There is no restriction on the ability of the Managing General
Partner or Northwestern Growth to enter into a transaction which would trigger
such change of control provisions. The Notes and the Bank Credit Facility will
contain restrictive covenants that limit the ability of the Operating
Partnership to distribute cash and to incur additional indebtedness. The payment
of principal and interest on such indebtedness and the reserves required by the
terms of the Partnership's indebtedness for the future payment thereof will
reduce the cash available to make distributions on the Units. The Partnership's
leverage may adversely affect the ability of the Partnership to finance its
future operations and capital needs, limit its ability to pursue acquisitions
and other business opportunities and make its results of operations more
susceptible to adverse economic or operating conditions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Description of Indebtedness."
COST REIMBURSEMENTS AND FEES DUE TO THE MANAGING GENERAL PARTNER MAY BE
SUBSTANTIAL
Prior to making any distribution on the Common Units, the Partnership will
reimburse the Managing General Partner and its affiliates at cost for all
expenses incurred on behalf of the Partnership. On a pro forma basis,
approximately $48.0 million of expenses (primarily wages and salaries) would
have been reimbursed by the Partnership to the Managing General Partner in
fiscal 1996. In addition, the Managing General Partner and its affiliates may
provide services to the Partnership for which the Partnership will be charged
reasonable fees as determined by the Managing General Partner. The reimbursement
of such expenses and the payment of any such fees could adversely affect the
ability of the Partnership to make distributions.
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UNITHOLDERS WILL HAVE CERTAIN LIMITS ON THEIR VOTING RIGHTS; THE MANAGING
GENERAL PARTNER WILL MANAGE AND OPERATE THE PARTNERSHIP
The Managing General Partner will manage and operate the Partnership. Unlike
the holders of common stock in a corporation, holders of Common Units will have
only limited voting rights on matters affecting the Partnership's business.
Holders of Common Units will have no right to elect the Managing General Partner
on an annual or other continuing basis, and the Managing General Partner may not
be removed except pursuant to the vote of the holders of at least 66 2/3% of the
outstanding Units (including Units owned by the General Partners and their
affiliates) and upon the election of a successor general partner by the vote of
the holders of not less than a majority of the Outstanding Units. The ownership
of the Subordinated Units by the Managing General Partner and its affiliates
effectively gives the Managing General Partner the ability to prevent its
removal. As a result, holders of Common Units will have limited influence on
matters affecting the operation of the Partnership, and third parties may find
it difficult to attempt to gain control, or influence the activities, of the
Partnership. See "The Partnership Agreement."
THE PARTNERSHIP MAY ISSUE ADDITIONAL COMMON UNITS THEREBY DILUTING EXISTING
UNITHOLDERS' INTERESTS
The Partnership has the authority under the Partnership Agreement to issue
an unlimited number of additional Common Units or other equity securities for
such consideration and on such terms and conditions as are established by the
Managing General Partner, in its sole discretion without the approval of the
Unitholders. During the Subordination Period, however, the Partnership may not
issue equity securities ranking prior or senior to the Common Units or an
aggregate of more than 4,270,000 additional Common Units (excluding Common Units
issued upon the exercise of the Underwriters' over-allotment option, upon
conversion of Subordinated Units, pursuant to employee benefit plans or in
connection with certain acquisitions or capital improvements or the repayment of
certain indebtedness) or an equivalent number of securities ranking on a parity
with the Common Units without the approval of holders of a Unit Majority. After
the end of the Subordination Period, the Partnership may issue an unlimited
number of limited partner interests of any type without the approval of the
Unitholders. The Partnership Agreement does not give the holders of Common Units
the right to approve the issuance by the Partnership of equity securities
ranking junior to the Common Units at any time. Based on the circumstances of
each case, the issuance of additional Common Units or securities ranking on a
parity with the Common Units may dilute the value of the interests of the
then-existing holders of Common Units in the net assets of the Partnership,
dilute the interests of holders of Common Units in distributions by the
Partnership or make it more difficult for a person or group to remove the
Managing General Partner or otherwise change the management of the Partnership.
If some or all of the Subordinated Units are converted into Common Units,
the amount of Available Cash necessary to pay the Minimum Quarterly Distribution
with respect to all of the Common Units would be increased proportionately,
thereby resulting in a dilution of the interests of existing Common Unitholders
in distributions by the Partnership.
CHANGE OF MANAGEMENT PROVISIONS
Following this offering, the ownership of Subordinated Units by the Managing
General Partner and its affiliates will effectively preclude the removal of the
Managing General Partner without its consent. In addition, the Partnership
Agreement contains certain provisions that may have the effect of discouraging a
person or group from attempting to remove the Managing General Partner of the
Partnership or otherwise change the management of the Partnership. If the
Managing General Partner is removed as general partner of the Partnership under
circumstances where Cause does not exist and Units held by the Managing General
Partner and its affiliates are not voted in favor of such removal, (i) the
Subordination Period will end and all outstanding Subordinated Units will
immediately convert into Common Units on a one-for-one basis, (ii) any existing
Common Unit Arrearages will be extinguished and (iii) the General Partners will
have the right to convert their general partner interests (and their rights to
receive Incentive
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Distributions) into Common Units or to receive cash in exchange for such
interests. Further, if any person or group (other than the Managing General
Partner or its affiliates) acquires beneficial ownership of 20% or more of any
class of Units then outstanding, such person or group will lose voting rights
with respect to all of its Units. In addition, the Partnership has substantial
latitude in issuing equity securities without Unitholder approval. The
Partnership Agreement also contains provisions limiting the ability of
Unitholders to call meetings of Unitholders or to acquire information about the
Partnership's operations as well as other provisions limiting the Unitholders'
ability to influence the manner or direction of management. The effect of these
provisions may be to diminish the price at which the Common Units will trade
under certain circumstances. See "The Partnership Agreement -- Withdrawal or
Removal of the General Partners."
PURCHASERS OF COMMON UNITS WILL EXPERIENCE DILUTION
Purchasers of Common Units in this offering will experience substantial and
immediate dilution in net tangible book value of $19.41 per Common Unit from the
initial public offering price. Each Common Unit will have a pro forma net
tangible book value of $1.59, and the General Partners will experience an
increase in net tangible book value of $22.57 per Unit. See "Dilution."
NO PRIOR PUBLIC MARKET FOR COMMON UNITS
Prior to this offering, there has been no public market for the Common
Units. The initial public offering price for the Common Units has been
determined through negotiations between the Managing General Partner and the
representatives of the Underwriters. For a description of the factors considered
in determining the initial public offering price, see "Underwriters." No
assurance can be given as to the market prices at which the Common Units will
trade. The Common Units have been approved for listing on the New York Stock
Exchange, subject to official notice of issuance, under the symbol "CNO."
THE MANAGING GENERAL PARTNER WILL HAVE A LIMITED CALL RIGHT WITH RESPECT TO
THE LIMITED PARTNER INTERESTS
If at any time less than 20% of the then-issued and outstanding limited
partner interests of any class (including Common Units) are held by persons
other than the Managing General Partner and its affiliates, the Managing General
Partner will have the right, which it may assign to any of its affiliates or the
Partnership, to acquire all, but not less than all, of the remaining limited
partner interests of such class held by such unaffiliated persons at a price
generally equal to the then-current market price of limited partner interests of
such class. As a consequence, a holder of Common Units may be required to sell
his Common Units at a time when he may not desire to sell them or at a price
that is less than the price he would desire to receive upon such sale. See "The
Partnership Agreement -- Limited Call Right."
UNITHOLDERS MAY NOT HAVE LIMITED LIABILITY IN CERTAIN CIRCUMSTANCES;
LIABILITY FOR RETURN OF CERTAIN DISTRIBUTIONS
The limitations on the liability of holders of limited partner interests for
the obligations of a limited partnership have not been clearly established in
some states. If it were determined that the Partnership had been conducting
business in any state without compliance with the applicable limited partnership
statute, or that the right or the exercise of the right by the Unitholders as a
group to remove or replace the General Partners, to make certain amendments to
the Partnership Agreement or to take other action pursuant to the Partnership
Agreement constituted participation in the "control" of the Partnership's
business, then the Unitholders could be held liable in certain circumstances for
the Partnership's obligations to the same extent as a general partner. In
addition, under certain circumstances a Unitholder may be liable to the
Partnership for the amount of a distribution for a period of three years from
the date of the distribution. See "The Partnership Agreement -- Limited
Liability" for a discussion of the limitations on liability and the implications
thereof to a Unitholder.
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POSSIBLE INABILITY TO OBTAIN CONSENTS AND TITLE DOCUMENTS TO ASSET TRANSFERS
Concurrently with the closing of this offering, the General Partners will
cause the Combined Operations to be conveyed to the Partnership. Most of the
transferors' leasehold interests in real and personal property and many of the
transferors' permits, licenses and other rights are transferable to the
Partnership only with the consent of the lessor or other third party. In
addition, with respect to the transferors' owned real property, searches of
county records are necessary to obtain deeds and other documents evidencing
chain of title in order to prepare the documentation to transfer such real
property interests and certain of such documents may not be available on a
timely basis. The failure by the Partnership to obtain any such consents or
title documents and its resulting inability to obtain any such leasehold rights,
permits, licenses, other rights or property interests could have a material
adverse effect on the Partnership. See "Business and Properties -- Transfer of
the Partnership Assets."
HOLDERS OF COMMON UNITS HAVE NOT BEEN REPRESENTED BY COUNSEL
The holders of Common Units have not been represented by counsel in
connection with this offering, including the preparation of the Partnership
Agreement or the other agreements referred to herein or in establishing the
terms of this offering.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Conflicts of interest could arise as a result of the relationships between
the Partnership, on the one hand, and the General Partners and their affiliates,
on the other. The directors and officers of the Managing General Partner have
fiduciary duties to manage the Managing General Partner in a manner beneficial
to its stockholder. At the same time, the Managing General Partner has fiduciary
duties to manage the Partnership in a manner beneficial to the Partnership and
the Unitholders. The duties of the Managing General Partner, as managing general
partner, to the Partnership and the Unitholders, therefore, may come into
conflict with the duties of management of the Managing General Partner to its
stockholder.
Conflicts of interest might arise with respect to the following matters,
among others:
(i) Decisions of the Managing General Partner with respect to the amount
and timing of cash expenditures, borrowings, issuances of additional Units
and reserves in any quarter will affect whether, or the extent to which,
there is sufficient Available Cash from Operating Surplus to meet the
Minimum Quarterly Distribution and Target Distribution Levels on all Units
in a given quarter. In addition, actions by the Managing General Partner may
have the effect of enabling the General Partners to receive distributions on
the Subordinated Units or Incentive Distributions or hastening the
expiration of the Subordination Period or the conversion of Subordinated
Units into Common Units.
(ii) The Partnership will not, at least initially, have any employees
and will rely solely on employees of the Managing General Partner and its
affiliates.
(iii) Under the terms of the Partnership Agreement, the Partnership will
reimburse the Managing General Partner and its affiliates for costs incurred
in managing and operating the Partnership, including costs incurred in
rendering corporate staff and support services to the Partnership.
(iv) The terms of the New Acquisition Incentive Plan (described below
under "Management -- Executive Compensation -- Incentive Plans") could give
the senior executives of the Managing General Partner an incentive to cause
the Partnership to acquire additional propane operations without regard to
whether the operations would prove beneficial to the Partnership and may
present the senior executives of the Managing General Partner with a
conflict of interest in negotiating the acquisition price on behalf of the
Partnership.
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(v) Whenever possible, the Managing General Partner intends to limit the
Partnership's liability under contractual arrangements to all or particular
assets of the Partnership, with the other party thereto to have no recourse
against the General Partners or their assets.
(vi) Any agreements between the Partnership and the Managing General
Partner and its affiliates will not grant to the holders of Common Units,
separate and apart from the Partnership, the right to enforce the
obligations of the Managing General Partner and such affiliates in favor of
the Partnership. Therefore, the Managing General Partner, in its capacity as
the managing general partner of the Partnership, will be primarily
responsible for enforcing such obligations.
(vii) Under the terms of the Partnership Agreement, the Managing General
Partner is not restricted from causing the Partnership to pay the Managing
General Partner or its affiliates for any services rendered on terms that
are fair and reasonable to the Partnership or entering into additional
contractual arrangements with any of such entities on behalf of the
Partnership. Neither the Partnership Agreement nor any of the other
agreements, contracts and arrangements between the Partnership, on the one
hand, and the Managing General Partner and its affiliates, on the other, are
or will be the result of arm's-length negotiations.
(viii) The Managing General Partner may exercise its right to call for and
purchase Units as provided in the Partnership Agreement or assign such right
to one of its affiliates or to the Partnership.
(ix) The Partnership Agreement provides that the Managing General
Partner will generally be restricted from engaging in any business
activities other than those incidental to its ownership of interests in the
Partnership. Notwithstanding the foregoing, the Partnership Agreement
permits affiliates of the Managing General Partner (including NPS,
Northwestern Growth and the Special General Partner) to compete with the
Partnership in the retail sale of propane in the continental United States
only if (A) the Managing General Partner determines, in its reasonable
judgment prior to the commencement of such activity, that it is not in the
best interests of the Partnership to engage in such activity either (1)
because of the financial commitments or operating characteristics associated
with such activity, or (2) because such activity is not consistent with the
Partnership's business strategy or cannot otherwise be integrated with the
Partnership's operations on a basis beneficial to the Partnership; or (B)
such activity is being undertaken as provided in a joint venture agreement
or other agreement between the Partnership and an affiliate of the Managing
General Partner and such joint venture or other agreement was determined at
the time it was entered into to be fair to the Partnership in the reasonable
judgment of the Managing General Partner. See "Conflicts of Interest and
Fiduciary Responsibilities -- Conflicts of Interest -- The General Partners'
Affiliates May Compete with the Partnership." In addition, affiliates of the
Managing General Partner (including the Special General Partner) may compete
with the Partnership in businesses other than the retail sale of propane in
the continental United States. There can be no assurance that there will not
be competition between the Partnership and affiliates of the Managing
General Partner in the future.
(x) The Partnership Agreement does not prohibit the Partnership from
engaging in roll-up transactions. Were the Managing General Partner to cause
the Partnership to engage in a roll-up transaction, there could be no
assurance that such a transaction would not have a material adverse effect
on a Unitholder's investment in the Partnership.
Unless provided for otherwise in the partnership agreement, Delaware law
generally requires a general partner of a Delaware limited partnership to adhere
to fiduciary duty standards under which it owes its limited partners the highest
duties of good faith, fairness and loyalty and which generally prohibit such
general partner from taking any action or engaging in any transaction as to
which it has a conflict of interest. The Partnership Agreement expressly permits
the Managing General Partner to resolve conflicts of interest between itself or
its affiliates, on the one hand, and the Partnership or the Unitholders, on the
other, and to consider, in resolving such conflicts of interest, the interests
of other parties in addition to the
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interests of the Unitholders. In addition, the Partnership Agreement provides
that a purchaser of Common Units is deemed to have consented to certain
conflicts of interest and actions of the Managing General Partner and its
affiliates that might otherwise be prohibited, including those described in
clauses (i)-(x) above, and to have agreed that such conflicts of interest and
actions do not constitute a breach by the Managing General Partner of any duty
stated or implied by law or equity. The Managing General Partner will not be in
breach of its obligations under the Partnership Agreement or its duties to the
Partnership or the Unitholders if the resolution of such conflict is fair and
reasonable to the Partnership. The latitude given in the Partnership Agreement
to the Managing General Partner in resolving conflicts of interest may
significantly limit the ability of a Unitholder to challenge what might
otherwise be a breach of fiduciary duty.
The Partnership Agreement expressly limits the liability of the General
Partners by providing that the General Partners, their affiliates and their
officers and directors will not be liable for monetary damages to the
Partnership, the limited partners or assignees for errors of judgment or for any
acts or omissions if the General Partners and such other persons acted in good
faith. In addition, the Partnership is required to indemnify the General
Partners, their affiliates and their respective officers, directors, employees,
agents and trustees to the fullest extent permitted by law against liabilities,
costs and expenses incurred by the General Partners or such other persons, if
the General Partners or such persons acted in good faith and in a manner they
reasonably believed to be in, or (in the case of a person other than a General
Partner) not opposed to, the best interests of the Partnership and, with respect
to any criminal proceedings, had no reasonable cause to believe the conduct was
unlawful.
The provisions of Delaware law that allow the common law fiduciary duties of
a general partner to be modified by a partnership agreement have not been tested
in a court of law, and the Managing General Partner has not obtained an opinion
of counsel covering the provisions set forth in the Partnership Agreement that
purport to waive or restrict the fiduciary duties of the General Partners that
would be in effect under common law were it not for the Partnership Agreement.
See "Conflicts of Interest and Fiduciary Responsibilities -- Conflicts of
Interest."
TAX RISKS
For a general discussion of the expected federal income tax consequences of
owning and disposing of Common Units, see "Tax Considerations."
TAX TREATMENT IS DEPENDENT ON PARTNERSHIP STATUS
The availability to a Common Unitholder of the federal income tax benefits
of an investment in the Partnership depends, in large part, on the
classification of the Partnership as a partnership for federal income tax
purposes. Assuming the accuracy of certain factual matters as to which the
General Partners and the Partnership have made representations, Counsel is of
the opinion that, under current law, the Partnership will be classified as a
partnership for federal income tax purposes. No ruling from the IRS as to
classification has been or is expected to be requested. Instead, the Partnership
intends to rely on such opinion of Counsel (which is not binding on the IRS).
One of the representations of the Partnership on which the opinion of Counsel is
based is that at least 90% of the Partnership's gross income for each taxable
year in the future will be "qualifying income." Whether the Partnership will
continue to be classified as a partnership in part depends, therefore, on the
Partnership's ability to meet this qualifying income test in the future. See
"Tax Considerations -- Partnership Status."
If the Partnership were classified as an association taxable as a
corporation for federal income tax purposes, the Partnership would pay tax on
its income at corporate rates (currently a 35% federal rate), distributions
would generally be taxed again to the Unitholders as corporate distributions,
and no income, gains, losses or deductions would flow through to the
Unitholders. Because a tax would be imposed upon the Partnership as an entity,
the cash available for distribution to the holders of Common Units would be
substantially reduced. Treatment of the Partnership as an association taxable as
a corporation or otherwise
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as a taxable entity would result in a material reduction in the anticipated cash
flow and after-tax return to the holders of Common Units and thus would likely
result in a substantial reduction in the value of the Common Units. See "Tax
Considerations -- Partnership Status."
There can be no assurance that the law will not be changed so as to cause
the Partnership to be treated as an association taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level taxation.
The Partnership Agreement provides that, if a law is enacted or existing law is
modified or interpreted in a manner that subjects the Partnership to taxation as
a corporation or otherwise subjects the Partnership to entity-level taxation for
federal, state or local income tax purposes, certain provisions of the
Partnership Agreement will be subject to change, including a decrease in the
Minimum Quarterly Distribution and the Target Distribution Levels to reflect the
impact of such law on the Partnership. See "Cash Distribution Policy --
Adjustment of Minimum Quarterly Distribution and Target Distribution Levels."
NO IRS RULING WITH RESPECT TO TAX CONSEQUENCES
No ruling has been requested from the IRS with respect to classification of
the Partnership as a partnership for federal income tax purposes, whether the
Partnership's propane operations generate "qualifying income" under Section 7704
of the Code or any other matter affecting the Partnership. Accordingly, the IRS
may adopt positions that differ from Counsel's conclusions expressed herein. It
may be necessary to resort to administrative or court proceedings in an effort
to sustain some or all of Counsel's conclusions, and some or all of such
conclusions ultimately may not be sustained. Any such contest with the IRS may
materially and adversely impact the market for the Common Units and the prices
at which Common Units trade. In addition, the costs of any contest with the IRS
will be borne directly or indirectly by some or all of the Unitholders and the
General Partners.
TAX LIABILITY EXCEEDING CASH DISTRIBUTIONS
A Unitholder will be required to pay federal income taxes and, in certain
cases, state and local income taxes on his allocable share of the Partnership's
income, whether or not he receives cash distributions from the Partnership.
There is no assurance that a Unitholder will receive cash distributions equal to
his allocable share of taxable income from the Partnership or even the tax
liability to him resulting from that income. Further, a holder of Common Units
may incur a tax liability, in excess of the amount of cash received, upon the
sale of his Common Units. See "Tax Considerations -- Tax Consequences of Unit
Ownership" and "-- Disposition of Common Units."
OWNERSHIP OF COMMON UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER
INVESTORS
Investment in Common Units by certain tax-exempt entities, regulated
investment companies and foreign persons raises issues unique to such persons.
For example, virtually all of the taxable income derived by most organizations
exempt from federal income tax (including IRAs and other retirement plans) from
the ownership of a Common Unit will be unrelated business taxable income and
thus will be taxable to such a Unitholder. See "Tax Considerations -- Uniformity
of Units -- Tax-Exempt Organizations and Certain Other Investors."
DEDUCTIBILITY OF LOSSES
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), losses generated by the Partnership
will only be available to offset future income generated by the Partnership and
cannot be used to offset income from other activities, including passive
activities or investments. Passive losses which are not deductible because they
exceed the Unitholder's income generated by the Partnership may be deducted in
full when the Unitholder disposes of his entire investment in the Partnership in
a fully taxable transaction to an unrelated party. Net passive income from the
Partnership may be offset by unused Partnership losses carried over from prior
years, but not by losses
40
<PAGE>
from other passive activities, including losses from other publicly traded
partnerships. See "Tax Considerations -- Tax Consequences of Unit Ownership --
Limitations on Deductibility of Partnership Losses."
TAX SHELTER REGISTRATION; POTENTIAL IRS AUDIT
The Partnership has registered with the Secretary of the Treasury as a "tax
shelter." No assurance can be given that the Partnership will not be audited by
the IRS or that tax adjustments will not be made. The rights of a Unitholder
owning less than a 1% profits interest in the Partnership to participate in the
income tax audit process are very limited. Further, any adjustments in the
Partnership's tax returns will lead to adjustments in the Unitholders' tax
returns and may lead to audits of Unitholders' tax returns and adjustments of
items unrelated to the Partnership. Each Unitholder would bear the cost of any
expenses incurred in connection with an examination of such Unitholder's
personal tax return.
UNIFORMITY OF COMMON UNITS AND NONCONFORMING DEPRECIATION CONVENTIONS
Because the Partnership cannot match transferors and transferees of Common
Units, uniformity of the economic and tax characteristics of the Common Units to
a purchaser of Common Units must be maintained. To maintain uniformity and for
other reasons, the Partnership will adopt certain depreciation and amortization
conventions that do not conform with all aspects of certain proposed and final
Treasury Regulations. A successful challenge to those conventions by the IRS
could adversely affect the amount of tax benefits available to a purchaser of
Common Units and could have a negative impact on the value of the Common Units.
See "Tax Considerations -- Uniformity of Units."
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will likely be subject to
other taxes, such as state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which the Partnership does business or owns property. A
Unitholder will likely be required to file state and local income tax returns
and pay state and local income taxes in some or all of the various jurisdictions
in which the Partnership does business or owns property and may be subject to
penalties for failure to comply with those requirements. The Partnership will
initially own property and conduct business in the following states which
currently impose a personal income tax: Alabama, Arkansas, California, Georgia,
Illinois, Indiana, Kentucky, Maryland, Mississippi, Missouri, New Hampshire, New
Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, South Carolina,
Tennessee, Utah, Vermont and Virginia. It is the responsibility of each
Unitholder to file all United States federal, state and local tax returns that
may be required of such Unitholder. Counsel has not rendered an opinion on the
state or local tax consequences of an investment in the Partnership. See "Tax
Considerations -- State, Local and Other Tax Considerations."
PROPOSED CHANGES IN FEDERAL INCOME TAX LAWS
Legislation passed by Congress in 1995 (the "1995 Proposed Legislation") but
vetoed by President Clinton would have altered the tax reporting procedures and
the deficiency collection procedures applicable to large partnerships such as
the Partnership (generally defined as electing partnerships with more than 100
partners) and would have made certain additional changes to the treatment of
large partnerships. That legislation was generally intended to simplify the
administration of the tax reporting and deficiency collection rules governing
large partnerships.
On March 19, 1996, certain proposed tax legislation known as the Revenue
Reconciliation Act of 1996 was presented to Congress that would impact the
taxation of certain financial products, including partnership interests. One
proposal would treat a taxpayer as having sold an "appreciated" partnership
interest (one in which gain would be recognized if such interest were sold) if
the taxpayer or related persons entered into one or more positions with respect
to the same or substantially identical property
41
<PAGE>
which, for some period, substantially eliminated both the risk of loss and
opportunity for gain on the appreciated financial position (including selling
"short against the box" transactions). The Revenue Reconciliation Act of 1996
has not been enacted.
As of the date of this Prospectus, it is not possible to predict whether any
of the changes which were set forth in the 1995 Proposed Legislation, the
Revenue Reconciliation Act of 1996 or any other changes in the federal income
tax laws that would impact the Partnership and the holders of Common Units will
ultimately be enacted or, if enacted, what form they will take, what the
effective dates will be and what, if any, transition rules will be provided.
DISPOSITION OF COMMON UNITS
A Unitholder who sells Common Units will recognize gain or loss equal to the
difference between the amount realized (including his share of Partnership
nonrecourse liabilities) and his adjusted tax basis in such Common Units. Thus,
prior Partnership distributions in excess of cumulative net taxable income in
respect of a Common Unit which decreased a Unitholder's tax basis in such Common
Unit will, in effect, become taxable income if the Common Unit is sold at a
price greater than the Unitholder's tax basis in such Common Units, even if the
price is less than his original cost. A portion of the amount realized (whether
or not representing gain) may be ordinary income. Furthermore, should the IRS
successfully contest certain conventions to be used by the Partnership, a
Unitholder could realize more gain on the sale of Units than would be the case
under such conventions without the benefit of decreased income in prior years.
PARTNERSHIP TAX INFORMATION AND AUDITS
The Partnership will furnish each holder of Common Units with a Schedule K-1
that sets forth his allocable share of income, gains, losses and deductions. In
preparing these schedules, the Partnership will use various accounting and
reporting conventions and adopt various depreciation and amortization methods.
There is no assurance that these schedules will yield a result that conforms to
statutory or regulatory requirements or to administrative pronouncements of the
IRS. Further, the Partnership's tax return may be audited, and any such audit
could result in an audit of a partner's individual tax return as well as
increased liabilities for taxes because of adjustments resulting from the audit.
42
<PAGE>
THE TRANSACTIONS
Immediately prior to the closing of this offering, Synergy, Empire Energy,
Myers, and Coast will enter into a series of transactions which will result in
the Combined Operations being owned by the General Partners.
Concurrently with the closing of this offering, the Managing General Partner
and the Special General Partner will contribute, or cause to be contributed, the
Combined Operations to the Operating Partnership in exchange for all of the
interests in the Operating Partnership, and the Operating Partnership will
assume substantially all of the liabilities associated with the Combined
Operations. Immediately after such contributions, all of the limited partner
interests in the Operating Partnership will be conveyed to the Partnership in
exchange for interests in the Partnership. As a result of such transactions, the
General Partners will own an aggregate of 7,878,619 Subordinated Units,
representing an aggregate 47.0% limited partner interest in the Partnership
(6,597,619 Subordinated Units, representing approximately 39.4% if the
Underwriters' over-allotment option is exercised in full), an aggregate 2%
general partner interest in the Partnership and the right to receive Incentive
Distributions.
The Partnership will contribute the proceeds from the sale of the Common
Units offered hereby (approximately $179.3 million before deducting underwriting
discounts and commissions and expenses associated with this offering) to the
Operating Partnership. The Operating Partnership will use such funds to repay a
portion of the indebtedness that was assumed by the Operating Partnership and to
pay a portion of the fees and expenses of the Transactions. Immediately prior to
the closing of this offering, the Operating Partnership will issue $220.0
million aggregate principal amount of Notes to certain institutional investors
in the Note Placement. Proceeds from the sale of the Notes, together with
approximately $12.8 million to be borrowed by the Operating Partnership under
the Working Capital Facility, will be used by the Operating Partnership to repay
approximately $156.1 million in liabilities assumed by the Operating Partnership
that were in large part incurred in connection with the transactions entered
into immediately prior to the closing of this offering. Most of the remainder of
the proceeds from the sale of the Notes will be distributed to the Special
General Partner ($58.7 million) and the balance will be used to pay expenses.
The Special General Partner will use $43.7 million to redeem a portion of its
preferred stock issued in connection with the Synergy Acquisition and the
remaining $15.0 million will provide net worth for the Special General Partner.
See "Use of Proceeds."
The Operating Partnership will thereafter contribute the portion of the
Combined Operations that is to be utilized in the parts and appliance sales and
service businesses to its corporate subsidiary.
Concurrently with the closing of this offering, the Operating Partnership
will enter into the Bank Credit Facility, which will include the $50.0 million
Working Capital Facility to be used for working capital and other general
partnership purposes, and the $75.0 million Acquisition Facility to be used for
acquisitions and capital improvements. It is expected that approximately $12.8
million will be drawn under the Working Capital Facility upon the consummation
of the Transactions. For additional information regarding the terms of the Notes
and the Bank Credit Facility, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Description of Indebtedness."
In connection with the contribution of substantially all of the assets
associated with the Combined Operations to the Operating Partnership, the
Operating Partnership will assume substantially all of the liabilities
associated with the Combined Operations. Excluded assets will include certain
claims related to the operations of Synergy prior to and including the Synergy
Acquisition (including claims made by Synergy against its minority stockholders)
and all income tax assets related to the Combined Operations relating to periods
prior to the consummation of the Transactions, and excluded liabilities will
include certain liabilities related to the operations of Synergy prior to the
Synergy Acquisition and all income tax liabilities related to the Combined
Operations relating to periods prior to the consummation of the Transactions.
43
<PAGE>
In light of the existing disputes between Synergy and its minority
stockholders referred to above, it is anticipated that the minority stockholders
of Synergy will continue to challenge the claims of Synergy and that they may
challenge one or more of the past or contemplated transactions described in this
Prospectus, seeking damages, injunctive relief or both. Northwestern Growth has
agreed to indemnify and hold harmless the Managing General Partner and the
Partnership from and against any and all losses, liabilities, damages or
expenses (including, without limitation, expenses of defense and investigation)
that may arise in connection with, result from or relate to any such challenge
by the minority stockholders of Synergy. As of the date of this Prospectus, no
lawsuit has been filed by the minority stockholders and no claim for damages has
been asserted. If any such claim were successfully asserted, there can be no
assurance that the amount of any such losses, liabilities, damages or expenses
would not exceed the ability of Northwestern Growth to satisfy its
indemnification obligations. At September 30, 1996, Northwestern Growth had
stockholder's equity, determined in accordance with generally accepted
accounting principles, of approximately $62.7 million.
44
<PAGE>
USE OF PROCEEDS
The proceeds to the Partnership from the sale of Common Units offered hereby
will be approximately $179.3 million, before deducting estimated underwriting
discounts and commissions and expenses of this offering (estimated to be
approximately $16.4 million). The Partnership will contribute such proceeds to
the Operating Partnership and the Operating Partnership will apply these
proceeds to pay (i) a portion of the indebtedness that will be assumed by the
Operating Partnership from the propane subsidiaries of Northwestern Growth
(including Synergy and Empire Energy) and from Coast pursuant to the Coast
Merger and (ii) a portion of the fees and expenses of the Transactions. Such
indebtedness includes: (A) approximately $90.9 million of indebtedness of
Synergy, comprised of a $59.4 million note payable to NPS (including a
prepayment penalty estimated to be $6.5 million as of the closing of the
Transactions), $30.0 million of existing revolving credit indebtedness, and $1.5
million of other liabilities; (B) approximately $50.7 million of indebtedness of
Coast, comprised of $19.0 million of borrowings under a working capital
facility, $12.2 million in bank term notes, $15.0 million in subordinated notes
and $4.5 million in other obligations; and (C) approximately $34.3 million of
indebtedness of Empire Energy.
The Operating Partnership will use the approximately $220.0 million in gross
proceeds from the sale of the Notes, together with approximately $12.8 million
to be borrowed by the Operating Partnership under the Working Capital Facility,
to repay (i) $82.6 million in bridge financing incurred by Northwestern Growth,
(ii) $73.6 million of existing bank indebtedness of Empire Energy and (iii) fees
and expenses of the Transactions. The remaining $58.7 million of Note proceeds
will be distributed to the Special General Partner. The Special General Partner
will use $43.7 million to redeem a portion of its preferred stock issued in
connection with the Synergy Acquisition and the remaining $15.0 million will
provide net worth for the Special General Partner. The bridge loans were
incurred to finance the purchase by Northwestern Growth of (A) all the stock of
Empire Energy from its shareholders ($14.0 million in bridge financing), (B) an
$8.0 million note owed by Empire Energy, (C) the common stock of Coast ($38.7
million in bridge financing), (D) the stock of and certain rights relating to
Synergy and Myers owned by Empire Gas ($20.0 million) and (E) certain other
propane businesses ($1.9 million).
The Partnership will use the proceeds from any exercise of the Underwriters'
over-allotment option to pay a portion of the expenses of this offering and then
to redeem Subordinated Units from the General Partners as a partial
reimbursement for capital expenditures incurred within the two years preceding
the closing by the General Partners with respect to the assets conveyed to the
Operating Partnership. If the over-allotment option is exercised in full, the
number of Subordinated Units outstanding will be reduced by the number of Common
Units issued upon the exercise of such option.
For a more complete description of the indebtedness to be repaid with the
proceeds of this offering, including the interest rates, maturities and uses of
proceeds of such indebtedness, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Synergy -- Liquidity and
Capital Resources"; "-- Empire Energy -- Liquidity and Capital Resources"; and
"-- Coast -- Liquidity and Capital Resources."
45
<PAGE>
CAPITALIZATION
The following table sets forth: (i) the consolidated capitalization of the
companies comprising the Combined Operations as of September 30, 1996, (ii) the
purchase accounting adjustments required to reflect the acquisition by
Northwestern Growth of Empire Energy and Coast, (iii) the pro forma adjustments
required to reflect the Transactions, including the sale of the Common Units
offered hereby and the application of the net proceeds therefrom as described in
"Use of Proceeds" and (iv) the pro forma capitalization of the Partnership as of
September 30, 1996 after giving effect thereto. The table should be read in
conjunction with the historical and pro forma financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------------------------
CONSOLIDATED
HISTORICAL PRO FORMA PARTNERSHIP
(A) ADJUSTMENTS (A) PRO FORMA
------------ --------------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Short-term indebtedness, including current portion of long-term
indebtedness..................................................... $ 12,079 $ 671 $ 12,750(b)
Long-term debt..................................................... 231,172 (2,722) 228,450
------------ --------------- -------------
Total indebtedness............................................... 243,251 (2,051) 241,200
------------ --------------- -------------
Preferred stock.................................................... 66,287 (66,287) --
Common stock equity................................................ 47,678 (47,678) --
Partners' capital:
Common Unitholders............................................... -- 85,940 85,940
Subordinated Unitholders......................................... -- 79,200 79,200
General Partners................................................. -- 3,370 3,370
------------ --------------- -------------
Total stockholders' equity/partners' capital..................... 113,965 54,545 168,510
------------ --------------- -------------
Total capitalization............................................. $ 357,216 $ 52,494 $ 409,710
------------ --------------- -------------
------------ --------------- -------------
</TABLE>
- ------------------------
(a) See Notes to Pro Forma Consolidated Financial Statements of Cornerstone
Propane Partners, L.P. for a discussion of the purchase accounting and pro
forma adjustments.
(b) On a pro forma basis as of September 30, 1996, there would have been $12.8
million of borrowings under the Working Capital Facility.
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<PAGE>
DILUTION
On a pro forma basis as of September 30, 1996, after giving effect to the
Transactions, the net tangible book value was $26.7 million or $1.59 per Common
Unit. Purchasers of Common Units in this offering will experience substantial
and immediate dilution in net tangible book value per Common Unit for financial
accounting purposes, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per Common Unit.............................. $ 21.00
Net tangible book value per Unit before the offering (a)(b)................ $ (20.98)
Increase in net tangible book value per Common Unit attributable to new
investors................................................................. 22.57
---------
Less: Pro forma net tangible book value per Common Unit after the
offering(b)(c)............................................................ 1.59
---------
Immediate dilution in net tangible book value per Common Unit to new
investors................................................................. $ 19.41
---------
---------
</TABLE>
- -------------------
(a) Determined by dividing the number of Units (7,878,619 Subordinated Units and
the 2% general partner interest of the General Partners having a dilutive
effect equivalent to 335,074 Units) to be issued to the General Partners for
the contribution of the Combined Operations to the Partnership into the net
tangible book value of the contributed assets and liabilities.
(b) The net tangible book value does not include intangible assets contributed
to the Partnership with a book value of $155.4 million ($9.27 per Unit).
(c) Determined by dividing the total number of Units (8,540,000 Common Units,
7,878,619 Subordinated Units and the 2% general partner interest of the
General Partners having a dilutive effect equivalent to 335,074 Units) to be
outstanding after the offering made hereby, into the pro forma net tangible
book value of the Partnership allocable to such Units, after giving effect
to the application of the net proceeds of this offering.
The following table sets forth the number of Units issued by the Partnership
and the total consideration contributed by the General Partners in respect of
their Units and by purchasers of Common Units in this offering upon the
consummation of the Transactions:
<TABLE>
<CAPTION>
UNITS ACQUIRED
--------------------------- TOTAL
NUMBER PERCENT CONSIDERATION
---------------- --------- -----------------
<S> <C> <C> <C>
General Partners................................................. 8,213,693(a) 49.0% $ 5,524,000(b)
New Investors.................................................... 8,540,000 51.0 179,340,000
---------------- --------- -----------------
Total........................................................ 16,753,693 100.0% $ 184,864,000
---------------- --------- -----------------
---------------- --------- -----------------
</TABLE>
- -------------------
(a) Upon the consummation of the Transactions, the General Partners will own
7,878,619 Subordinated Units and the 2% general partner interests in the
Partnership having a dilutive effect equivalent to 335,074 Units.
(b) Total consideration for the General Partners represents the book value at
September 30, 1996 of the net assets and liabilities contributed by the
General Partners. The assets and liabilities contributed by the General
Partners to the Partnership will be recorded at historical cost rather than
fair value by the Partnership in accordance with generally accepted
accounting principles. Such assets contributed by the General Partners
include $155.4 million of intangible assets.
47
<PAGE>
CASH DISTRIBUTION POLICY
GENERAL
The Partnership will distribute to its partners, on a quarterly basis, all
of its Available Cash in the manner described herein. Available Cash is defined
in the Glossary and generally means, with respect to any quarter of the
Partnership, all cash on hand at the end of such quarter less the amount of cash
reserves that is necessary or appropriate in the reasonable discretion of the
Managing 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 Partners in respect of any one or more of the next
four quarters.
Cash distributions will be characterized as distributions from either
Operating Surplus or Capital Surplus. This distinction affects the amounts
distributed to Unitholders relative to the General Partners, and under certain
circumstances it determines whether holders of Subordinated Units receive any
distributions. See "-- Quarterly Distributions of Available Cash."
Operating Surplus is defined in the Glossary and refers generally to (i) the
cash balance of the Partnership on the date the Partnership commences
operations, plus $25.0 million, plus all cash receipts of the Partnership from
its operations since the closing of the Transactions, less (ii) all Partnership
operating expenses, debt service payments (including reserves therefor but not
including payments required in connection with the sale of assets or any
refinancing with the proceeds of new indebtedness or an equity offering),
maintenance capital expenditures and reserves established for future Partnership
operations, in each case since the closing of the Transactions.
Capital Surplus is also defined in the Glossary and will generally be
generated only by borrowings (other than for working capital purposes), sales of
debt and equity securities and sales or other dispositions of assets for cash
(other than inventory, accounts receivable and other assets all as disposed of
in the ordinary course of business).
To avoid the difficulty of trying to determine whether Available Cash
distributed by the Partnership is from Operating Surplus or from Capital
Surplus, all Available Cash distributed by the Partnership from any source will
be treated as distributed from Operating Surplus until the sum of all Available
Cash distributed since the commencement of the Partnership equals the Operating
Surplus as of the end of the quarter prior to such distribution. Any Available
Cash in excess of such amount (irrespective of its source) will be deemed to be
from Capital Surplus and distributed accordingly.
If Available Cash from Capital Surplus is distributed in respect of each
Common Unit in an aggregate amount per Common Unit equal to the initial public
offering price of the Common Units (the "Initial Unit Price"), plus any Common
Unit Arrearages, the distinction between Operating Surplus and Capital Surplus
will cease, and all distributions of Available Cash will be treated as if they
were from Operating Surplus. The Partnership does not anticipate that there will
be significant distributions from Capital Surplus.
The Subordinated Units are a separate class of interests in the Partnership,
and the rights of holders of such interests to participate in distributions to
partners differ from the rights of the holders of Common Units. For any given
quarter, any Available Cash will be distributed to the General Partners and to
the holders of Common Units, and may also be distributed to the holders of
Subordinated Units depending upon the amount of Available Cash for the quarter,
the amount of Common Unit Arrearages, if any, and other factors discussed below.
The Incentive Distributions represent the right to receive an increasing
percentage of quarterly distributions of Available Cash from Operating Surplus
after the Target Distribution Levels have been achieved. The Target Distribution
Levels are based on the amounts of Available Cash from Operating Surplus
distributed in excess of the payments made with respect to the Minimum Quarterly
Distribution and Common Unit Arrearages, if any, and the related 2% distribution
to the General Partners.
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<PAGE>
Subject to the limitations described under "The Partnership Agreement --
Issuance of Additional Securities," the Partnership has the authority to issue
additional Common Units or other equity securities of the Partnership for such
consideration and on such terms and conditions as are established by the
Managing General Partner in its sole discretion and without the approval of the
Unitholders. It is possible that the Partnership will fund acquisitions of other
propane businesses through the issuance of additional Common Units or other
equity securities of the Partnership. Holders of any additional Common Units
issued by the Partnership will be entitled to share equally with the
then-existing holders of Common Units in distributions of Available Cash by the
Partnership. In addition, the issuance of additional Partnership Interests may
dilute the value of the interests of the then-existing holders of Common Units
in the net assets of the Partnership. The General Partners will be required to
make an additional capital contribution to the Partnership or the Operating
Partnership (other than in connection with the exercise of the over-allotment
option) in connection with the issuance of additional Partnership Interests.
The discussion in the sections below indicates the percentages of cash
distributions required to be made to the General Partners and the holders of
Common Units and the circumstances under which holders of Subordinated Units are
entitled to cash distributions and the amounts thereof. Distributions and
allocations to the General Partners will be made pro rata in accordance with
their respective general partner interests. For a discussion of Available Cash
from Operating Surplus available for distributions with respect to the Common
Units on a pro forma basis, see "Cash Available for Distribution."
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Partnership will make distributions to its partners with respect to each
quarter of the Partnership prior to its liquidation in an amount equal to 100%
of its Available Cash for such quarter. The Partnership expects to make
distributions of all Available Cash within approximately 45 days after the end
of each quarter, commencing with the quarter ending March 31, 1997, to holders
of record on the applicable record date. The Minimum Quarterly Distribution and
the Target Distribution Levels for the period from the closing of this offering
through March 31, 1997 will be adjusted based on the actual length of such
period. The Minimum Quarterly Distribution and the Target Distribution Levels
are also subject to certain other adjustments as described below under "--
Distributions from Capital Surplus" and "-- Adjustment of Minimum Quarterly
Distribution and Target Distribution Levels."
With respect to each quarter during the Subordination Period, to the extent
there is sufficient Available Cash, the holders of Common Units will have the
right to receive the Minimum Quarterly Distribution, plus any Common Unit
Arrearages, prior to any distribution of Available Cash to the holders of
Subordinated Units. This subordination feature will enhance the Partnership's
ability to distribute the Minimum Quarterly Distribution on the Common Units
during the Subordination Period. There is no guarantee, however, that the
Minimum Quarterly Distribution will be made on the Common Units. Upon expiration
of the Subordination Period, all Subordinated Units will be converted on a
one-for-one basis into Common Units and will participate pro rata with all other
Common Units in future distributions of Available Cash. Under certain
circumstances, up to 3,939,310 Subordinated Units may convert into Common Units
prior to the expiration of the Subordination Period. Common Units will not
accrue arrearages with respect to distributions for any quarter after the
Subordination Period and Subordinated Units will not accrue any arrearages with
respect to distributions for any quarter.
DISTRIBUTIONS FROM OPERATING SURPLUS DURING SUBORDINATION PERIOD
The Subordination Period will generally extend from the closing of this
offering until the first day of any quarter beginning after December 31, 2001 in
respect of which (i) distributions of Available Cash from Operating Surplus on
the Common Units and the Subordinated Units with respect to each of the three
consecutive four-quarter periods immediately preceding such date equaled or
exceeded the sum of the Minimum Quarterly Distribution on all of the outstanding
Common Units and Subordinated Units during such periods, (ii) the Adjusted
Operating Surplus generated during each of the three consecutive four-
49
<PAGE>
quarter periods immediately preceding such date equaled or exceeded the sum of
the Minimum Quarterly Distribution on all of the outstanding Common Units and
Subordinated Units and the related distribution on the general partner interests
in the Partnership during such periods, and (iii) there are no outstanding
Common Unit Arrearages.
Prior to the end of the Subordination Period, a portion of the Subordinated
Units will convert into Common Units on a one-for-one basis on the first day
after the record date established for the distribution in respect of any quarter
ending on or after (a) December 31, 1999 with respect to one-quarter of the
Subordinated Units (1,969,655 Subordinated Units, or 1,649,405 Subordinated
Units if the over-allotment option is exercised in full) and (b) December 31,
2000 with respect to one-quarter of the Subordinated Units (1,969,655
Subordinated Units, or 1,649,405 Subordinated Units if the over-allotment option
is exercised in full) in respect of which (i) distributions of Available Cash
from Operating Surplus on the Common Units and the Subordinated Units with
respect to each of the three consecutive four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units
during such periods, (ii) the Adjusted Operating Surplus generated during each
of the two consecutive four-quarter periods immediately preceding such date
equaled or exceeded the sum of the Minimum Quarterly Distribution on all of the
outstanding Common Units and Subordinated Units and the related distribution on
the general partner interests in the Partnership during such periods, and (iii)
there are no outstanding Common Unit Arrearages; provided, however, that the
early conversion of the second one-quarter of Subordinated Units may not occur
until at least one year following the early conversion of the first one-quarter
of Subordinated Units.
Upon expiration of the Subordination Period, all remaining Subordinated
Units will convert into Common Units on a one-for-one basis and will thereafter
participate, pro rata, with the other Common Units in distributions of Available
Cash. In addition, if the Managing General Partner is removed as managing
general partner of the Partnership under circumstances where Cause does not
exist and Units held by the Managing General Partner and its affiliates are not
voted in favor of such removal, (i) the Subordination Period will end and all
outstanding Subordinated Units will immediately convert into Common Units on a
one-for-one basis, (ii) any existing Common Unit Arrearages will be extinguished
and (iii) the General Partners will have the right to convert their general
partner interests (and the rights of each of them to receive Incentive
Distributions) into Common Units or to receive cash in exchange for such
interests.
"Adjusted Operating Surplus" for any period generally means Operating
Surplus generated during such period, less (a) any net increase in working
capital borrowings during such period and (b) any net reduction in cash reserves
for Operating Expenditures during such period not relating to an Operating
Expenditure made during such period; and plus (x) any net decrease in working
capital borrowings during such period and (y) any net increase in cash reserves
for Operating Expenditures during such period required by any debt instrument
for the repayment of principal, interest or premium. Operating Surplus generated
during a period is equal to the difference between (i) the Operating Surplus
determined at the end of such period and (ii) the Operating Surplus determined
at the beginning of such period.
Distributions by the Partnership of Available Cash from Operating Surplus
with respect to any quarter during the Subordination Period will be made in the
following manner:
FIRST, 98% to the Common Unitholders, pro rata, and 2% to the General
Partners, until there has been distributed in respect of each outstanding
Common Unit an amount equal to the Minimum Quarterly Distribution for such
quarter;
SECOND, 98% to the Common Unitholders, pro rata, and 2% to the General
Partners, until there has been distributed in respect of each outstanding
Common Unit an amount equal to any Common Unit Arrearages accrued and unpaid
with respect to any prior quarters during the Subordination Period;
50
<PAGE>
THIRD, 98% to the Subordinated Unitholders, pro rata, and 2% to the
General Partners, until there has been distributed in respect of each
outstanding Subordinated Unit an amount equal to the Minimum Quarterly
Distribution for such quarter; and
THEREAFTER, in the manner described in "-- Incentive Distributions --
Hypothetical Annualized Yield" below.
The above references to the 2% of Available Cash from Operating Surplus
distributed to the General Partners are references to the amount of the
percentage interest in distributions from the Partnership and the Operating
Partnership of the General Partners on a combined basis (exclusive of their
interest as holders of the Subordinated Units). The General Partners will own a
combined 1% general partner interest in the Partnership and a combined 1.0101%
general partner interest in the Operating Partnership. Other references in this
Prospectus to the General Partners' 2% interest or to distributions of 2% of
Available Cash are also references to the amount of the combined percentage
interest in the Partnership and the Operating Partnership of the General
Partners (exclusive of their interest as holders of the Subordinated Units).
With respect to any Common Unit, the term "Common Unit Arrearages" refers to the
amount by which the Minimum Quarterly Distribution in any quarter during the
Subordination Period exceeds the distribution of Available Cash from Operating
Surplus actually made for such quarter on a Common Unit issued in this offering,
cumulative for such quarter and all prior quarters during the Subordination
Period. Common Unit Arrearages will not accrue interest.
DISTRIBUTIONS FROM OPERATING SURPLUS AFTER SUBORDINATION PERIOD
Distributions by the Partnership of Available Cash from Operating Surplus
with respect to any quarter after the Subordination Period will be made in the
following manner:
FIRST, 98% to all Unitholders, pro rata, and 2% to the General Partners,
until there has been distributed in respect of each Unit an amount equal to
the Minimum Quarterly Distribution for such quarter; and
THEREAFTER, in the manner described in "-- Incentive Distributions --
Hypothetical Annualized Yield" below.
INCENTIVE DISTRIBUTIONS--HYPOTHETICAL ANNUALIZED YIELD
For any quarter for which Available Cash from Operating Surplus is
distributed to the Common and Subordinated Unitholders in an amount equal to the
Minimum Quarterly Distribution on all Units and to the Common Unitholders in an
amount equal to any unpaid Common Unit Arrearages, then any additional Available
Cash from Operating Surplus in respect of such quarter will be distributed among
the Unitholders and the General Partners in the following manner:
FIRST, 98% to all Unitholders, pro rata, and 2% to the General Partners,
until the Unitholders have received (in addition to any distributions to
Common Unitholders to eliminate Common Unit Arrearages) a total of $0.594
for such quarter in respect of each outstanding Unit (the "First Target
Distribution");
SECOND, 85% to all Unitholders, pro rata, and 15% to the General
Partners, until the Unitholders have received (in addition to any
distributions to Common Unitholders to eliminate Common Unit Arrearages) a
total of $0.700 for such quarter in respect of each outstanding Unit (the
"Second Target Distribution");
THIRD, 75% to all Unitholders, pro rata, and 25% to the General
Partners, until the Unitholders have received (in addition to any
distributions to Common Unitholders to eliminate Common Unit Arrearages) a
total of $0.900 for such quarter in respect of each outstanding Unit (the
"Third Target Distribution"); and
51
<PAGE>
THEREAFTER, 50% to all Unitholders, pro rata, and 50% to the General
Partners.
The distributions to the General Partners set forth above (other than in their
capacity as holders of the Subordinated Units) that are in excess of their
aggregate 2% general partner interest represent the Incentive Distributions. The
right to receive Incentive Distributions is not part of the general partner
interest and may be transferred separately from such interests. See "The
Partnership Agreement--Transfer of General Partners' Interests and Incentive
Distribution Rights."
The following table illustrates the percentage allocation of the additional
Available Cash from Operating Surplus between the Unitholders and the General
Partners up to the various Target Distribution Levels and a hypothetical
annualized percentage yield to be realized by a Unitholder at each Target
Distribution Level. For purposes of the following table, the annualized
percentage yield is calculated on a pretax basis assuming that (i) the Common
Unit was purchased at an amount equal to the initial public offering price of
$21.00 per Common Unit and (ii) the Partnership distributed each quarter during
the first year following the investment the amount set forth under the column
"Total Quarterly Distribution Target Amount." The calculations are also based on
the assumption that the quarterly distribution amounts shown do not include any
Common Unit Arrearages. The amounts set forth under "Marginal Percentage
Interest in Distributions" are the percentage interests of the General Partners
and the Unitholders in any Available Cash from Operating Surplus distributed up
to and including the corresponding amount in the column "Total Quarterly
Distribution Target Amount," until Available Cash distributed reaches the next
Target Distribution Level, if any. The percentage interests shown for the
Unitholders and the General Partners for the Minimum Quarterly Distribution are
also applicable to quarterly distribution amounts that are less than the Minimum
Quarterly Distribution.
<TABLE>
<CAPTION>
MARGINAL PERCENTAGE INTEREST
IN DISTRIBUTIONS
TOTAL QUARTERLY ----------------------------
DISTRIBUTION HYPOTHETICAL GENERAL
TARGET AMOUNT ANNUALIZED YIELD UNITHOLDERS PARTNERS
---------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
Minimum Quarterly Distribution.................... $0.540 10.286% 98% 2%
First Target Distribution......................... $0.594 11.314% 98% 2%
Second Target Distribution........................ $0.700 13.333% 85% 15%
Third Target Distribution......................... $0.900 17.143% 75% 25%
Thereafter........................................ above $0.900 above 17.143% 50% 50%
</TABLE>
DISTRIBUTIONS FROM CAPITAL SURPLUS
Distributions by the Partnership of Available Cash from Capital Surplus will
be made in the following manner:
FIRST, 98% to all Unitholders, pro rata, and 2% to the General Partners,
until the Partnership has distributed, in respect of each outstanding Common
Unit issued in this offering, Available Cash from Capital Surplus in an
aggregate amount per Common Unit equal to the Initial Unit Price;
SECOND, 98% to the holders of Common Units, pro rata, and 2% to the
General Partners, until the Partnership has distributed, in respect of each
outstanding Common Unit, Available Cash from Capital Surplus in an aggregate
amount equal to any unpaid Common Unit Arrearages with respect to such
Common Unit; and
THEREAFTER, all distributions of Available Cash from Capital Surplus
will be distributed as if they were from Operating Surplus.
As a distribution of Available Cash from Capital Surplus is made, it is
treated as if it were a repayment of the Initial Unit Price. To reflect such
repayment, the Minimum Quarterly Distribution and the Target Distribution Levels
will be adjusted downward by multiplying each such amount by a fraction, the
numerator of which is the Unrecovered Capital of the Common Units immediately
after giving effect to such repayment and the denominator of which is the
Unrecovered Capital of the Common Units
52
<PAGE>
immediately prior to such repayment. This adjustment to the Minimum Quarterly
Distribution may make it more likely that Subordinated Units will be converted
into Common Units (whether pursuant to the termination of the Subordination
Period or to the provisions permitting early conversion of some Subordinated
Units) and may accelerate the dates at which such conversions occur.
When "payback" of the Initial Unit Price has occurred, i.e., when the
Unrecovered Capital of the Common Units is zero (and any accrued Common Unit
Arrearages have been paid), then in effect the Minimum Quarterly Distribution
and each of the Target Distribution Levels will have been reduced to zero for
subsequent quarters. Thereafter, all distributions of Available Cash from all
sources will be treated as if they were from Operating Surplus. Because the
Minimum Quarterly Distribution and the Target Distribution Levels will have been
reduced to zero, the General Partners will be entitled thereafter to receive 50%
of all distributions of Available Cash in their capacities as General Partners
and as holders of the Incentive Distribution Rights (in addition to any
distributions to which they may be entitled as holders of Units).
Distributions of Available Cash from Capital Surplus will not reduce the
Minimum Quarterly Distribution or Target Distribution Levels for the quarter
with respect to which they are distributed.
ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
In addition to reductions of the Minimum Quarterly Distribution and Target
Distribution Levels made upon a distribution of Available Cash from Capital
Surplus, the Minimum Quarterly Distribution, the Target Distribution Levels, the
Unrecovered Capital, the number of additional Common Units issuable during the
Subordination Period without a Unitholder vote, the number of Common Units
issuable upon conversion of the Subordinated Units and other amounts calculated
on a per Unit basis will be proportionately adjusted upward or downward, as
appropriate, in the event of any combination or subdivision of Common Units
(whether effected by a distribution payable in Common Units or otherwise), but
not by reason of the issuance of additional Common Units for cash or property.
For example, in the event of a two-for-one split of the Common Units (assuming
no prior adjustments), the Minimum Quarterly Distribution, each of the Target
Distribution Levels and the Unrecovered Capital of the Common Units would each
be reduced to 50% of its initial level.
The Minimum Quarterly Distribution and the Target Distribution Levels may
also be adjusted if legislation is enacted or if existing law is modified or
interpreted by the relevant governmental authority in a manner that causes the
Partnership to become taxable as a corporation or otherwise subjects the
Partnership to taxation as an entity for federal, state or local income tax
purposes. In such event, the Minimum Quarterly Distribution and the Target
Distribution Levels would be reduced to an amount equal to the product of (i)
the Minimum Quarterly Distribution and each of the Target Distribution Levels,
respectively, multiplied by (ii) one minus the sum of (x) the maximum effective
federal income tax rate to which the Partnership is then subject as an entity
plus (y) any increase that results from such legislation in the effective
overall state and local income tax rate to which the Partnership is subject as
an entity for the taxable year in which such event occurs (after taking into
account the benefit of any deduction allowable for federal income tax purposes
with respect to the payment of state and local income taxes). For example,
assuming the Partnership was not previously subject to state and local income
tax, if the Partnership were to become taxable as an entity for federal income
tax purposes and the Partnership became subject to a maximum marginal federal,
and effective state and local, income tax rate of 38%, then the Minimum
Quarterly Distribution and the Target Distribution Levels would each be reduced
to 62% of the amount thereof immediately prior to such adjustment.
DISTRIBUTIONS OF CASH UPON LIQUIDATION
Following the commencement of the dissolution and liquidation of the
Partnership, assets will be sold or otherwise disposed of from time to time and
the partners' capital account balances will be adjusted to reflect any resulting
gain or loss. The proceeds of such liquidation will, first, be applied to the
payment of
53
<PAGE>
creditors of the Partnership in the order of priority provided in the
Partnership Agreement and by law and, thereafter, be distributed to the
Unitholders and the General Partners in accordance with their respective capital
account balances as so adjusted.
Partners are entitled to liquidating distributions in accordance with
capital account balances. The allocations of gains and losses upon liquidation
are intended, to the extent possible, to entitle the holders of outstanding
Common Units to a preference over the holders of outstanding Subordinated Units
upon the liquidation of the Partnership, to the extent required to permit Common
Unitholders to receive their Unrecovered Capital plus any unpaid Common Unit
Arrearages. Thus, net losses recognized upon liquidation of the Partnership will
be allocated to the holders of the Subordinated Units to the extent of their
capital account balances before any loss is allocated to the holders of the
Common Units, and net gains recognized upon liquidation will be allocated first
to restore negative balances in the capital account of the General Partners and
any Unitholders and then to the Common Unitholders until their capital account
balances equal their Unrecovered Capital plus unpaid Common Unit Arrearages.
However, no assurance can be given that there will be sufficient gain upon
liquidation of the Partnership to enable the holders of Common Units to fully
recover all of such amounts, even though there may be cash available for
distribution to the holders of Subordinated Units.
The manner of such adjustment is as provided in the Partnership Agreement,
the form of which is included as Appendix A to this Prospectus. If the
liquidation of the Partnership occurs before the end of the Subordination
Period, any net gain (or unrealized gain attributable to assets distributed in
kind) will be allocated to the partners as follows:
FIRST, to the General Partners and the holders of Units having negative
balances in their capital accounts to the extent of and in proportion to
such negative balances;
SECOND, 98% to the holders of Common Units, pro rata, and 2% to the
General Partners, until the capital account for each Common Unit is equal to
the sum of (i) the Unrecovered Capital in respect of such Common Unit, (ii)
the amount of the Minimum Quarterly Distribution for the quarter during
which liquidation of the Partnership occurs and (iii) any unpaid Common Unit
Arrearages in respect of such Common Unit;
THIRD, 98% to the holders of Subordinated Units, pro rata, and 2% to the
General Partners, until the capital account for each Subordinated Unit is
equal to the sum of (i) the Unrecovered Capital in respect of such
Subordinated Unit and (ii) the amount of the Minimum Quarterly Distribution
for the quarter during which the liquidation of the Partnership occurs;
FOURTH, 98% to all Unitholders, pro rata, and 2% to the General
Partners, until there has been allocated under this paragraph FOURTH an
amount per Unit equal to (a) the sum of the excess of the First Target
Distribution per Unit over the Minimum Quarterly Distribution per Unit for
each quarter of the Partnership's existence, less (b) the cumulative amount
per Unit of any distributions of Available Cash from Operating Surplus in
excess of the Minimum Quarterly Distribution per Unit that were distributed
98% to the Unitholders, pro rata, and 2% to the General Partners for each
quarter of the Partnership's existence;
FIFTH, 85% to the Unitholders, pro rata, and 15% to the General
Partners, until there has been allocated under this paragraph FIFTH an
amount per Unit equal to (a) the sum of the excess of the Second Target
Distribution per Unit over the First Target Distribution per Unit for each
quarter of the Partnership's existence, less (b) the cumulative amount per
Unit of any distributions of Available Cash from Operating Surplus in excess
of the First Target Distribution per Unit that were distributed 85% to the
Unitholders, pro rata, and 15% to the General Partners for each quarter of
the Partnership's existence;
SIXTH, 75% to all Unitholders, pro rata, and 25% to the General
Partners, until there has been allocated under this paragraph SIXTH an
amount per Unit equal to (a) the sum of the excess of the
54
<PAGE>
Third Target Distribution per Unit over the Second Target Distribution per
Unit for each quarter of the Partnership's existence, less (b) the
cumulative amount per Unit of any distributions of Available Cash from
Operating Surplus in excess of the Second Target Distribution per Unit that
were distributed 75% to the Unitholders, pro rata, and 25% to the General
Partners for each quarter of the Partnership's existence; and
THEREAFTER, 50% to all Unitholders, pro rata, and 50% to the General
Partners.
If the liquidation occurs after the Subordination Period, the distinction
between Common Units and Subordinated Units will disappear, so that clauses (ii)
and (iii) of paragraph SECOND above and all of paragraph THIRD above will no
longer be applicable.
Upon liquidation of the Partnership, any loss will generally be allocated to
the General Partners and the Unitholders as follows:
FIRST, 98% to holders of Subordinated Units in proportion to the
positive balances in their respective capital accounts and 2% to the General
Partners, until the capital accounts of the holders of the Subordinated
Units have been reduced to zero;
SECOND, 98% to the holders of Common Units in proportion to the positive
balances in their respective capital accounts and 2% to the General
Partners, until the capital accounts of the Common Unitholders have been
reduced to zero; and
THEREAFTER, 100% to the General Partners.
If the liquidation occurs after the Subordination Period, the distinction
between Common Units and Subordinated Units will disappear, so that all of
paragraph FIRST above will no longer be applicable.
Any allocation made to the General Partners herein shall be made to the
General Partners pro rata in accordance with their respective general partner
interests. In addition, interim adjustments to capital accounts will be made at
the time the Partnership issues additional interests in the Partnership or makes
distributions of property. Such adjustments will be based on the fair market
value of the interests or the property distributed and any gain or loss
resulting therefrom will be allocated to the Unitholders and the General
Partners in the same manner as gain or loss is allocated upon liquidation. In
the event that positive interim adjustments are made to the capital accounts,
any subsequent negative adjustments to the capital accounts resulting from the
issuance of additional interests in the Partnership, distributions of property
by the Partnership, or upon liquidation of the Partnership, will be allocated in
a manner which results, to the extent possible, in the capital account balances
of the General Partners equaling the amount which would have been the General
Partners' capital account balances if no prior positive adjustments to the
capital accounts had been made.
55
<PAGE>
CASH AVAILABLE FOR DISTRIBUTION
Based on the amount of working capital that the Partnership is expected to
have at the time it commences operations and the availability of the Working
Capital Facility, the Partnership believes that, if its assumptions about
operating conditions prove correct, the Partnership should have sufficient
Available Cash from Operating Surplus to enable the Partnership to distribute
the Minimum Quarterly Distribution on the Common Units and Subordinated Units to
be outstanding immediately after the consummation of this offering, and the
related distribution on the aggregate 2% general partner interest, with respect
to each of its quarters at least through the quarter ending December 31, 1997.
However, no assurance can be given respecting such distributions or any future
distributions. The Partnership's belief is based on a number of assumptions,
including the assumptions that (i) the Partnership will be able to realize
significant cost savings from integrating the Combined Operations, including
acquisition and logistics cost savings associated with propane purchasing,
insurance premium reductions and certain operating, general and administrative
cost savings; (ii) the Partnership will be able to continue internal growth at a
rate generally consistent with the historical levels of the companies that
comprise the Combined Operations; (iii) normal weather conditions will prevail
in the Partnership's operating areas; (iv) the Partnership's operating margins
will remain constant and (v) market and overall economic conditions will not
change substantially. Although the Partnership believes its assumptions are
within a range of reasonableness, whether the assumptions are realized is not,
in a number of cases, within the control of the Partnership and cannot be
predicted with any degree of certainty. For example, the Partnership may not be
able to integrate the Combined Operations successfully, and the anticipated cost
savings may not be achieved. Moreover, in any particular year or even series of
years, weather may deviate substantially from normal. Therefore, certain of the
Partnership's assumptions may prove to be inaccurate. As a result, the actual
Available Cash from Operating Surplus generated by the Partnership could deviate
substantially from that currently expected. See "Risk Factors." In addition, the
terms of the Partnership's indebtedness under certain circumstances will
restrict the ability of the Partnership to distribute cash to Unitholders.
Accordingly, no assurance can be given that distributions of the Minimum
Quarterly Distribution or any other amounts will be made. The Partnership does
not undertake to update the expression of belief set forth above. See "Cash
Distribution Policy" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Description of Indebtedness."
The amount of Available Cash from Operating Surplus needed to distribute the
Minimum Quarterly Distribution for four quarters on the Common Units and
Subordinated Units to be outstanding immediately after this offering and on the
aggregate 2% general partner interest of the General Partners is approximately
$36.2 million ($18.5 million for the Common Units, $17.0 million for the
Subordinated Units and $.7 million for the aggregate 2% general partner interest
of the General Partners). If the Underwriters' over-allotment option is
exercised in full, such amounts will be $21.2 million for the Common Units,
$14.3 million for the Subordinated Units and $.7 million for the aggregate 2%
general partner interest of the General Partners, or an aggregate of
approximately $36.2 million. The amount of pro forma Available Cash from
Operating Surplus generated during fiscal 1996 was approximately $25.7 million.
Such amount would have been sufficient to cover the full Minimum Quarterly
Distribution for such fiscal year on all of the Common Units offered hereby and
the related distribution on the general partner interests, but would have been
insufficient by approximately $10.5 million to cover the Minimum Quarterly
Distribution on all Subordinated Units and the related distribution on the
general partner interests. If effect were given to an additional $7.9 million of
expense reductions which the Partnership believes are achievable upon
consummation of the Transactions, pro forma Available Cash from Operating
Surplus would have been approximately $33.5 million, which amount would have
been insufficient by approximately $2.7 million to cover the Minimum Quarterly
Distribution for fiscal 1996 on all Subordinated Units and the related
distribution on the general partner interests. See Note 3 to the Pro Forma
Consolidated Financial Statements of Cornerstone Propane Partners, L.P.,
footnote (a) to the following table, "Risk Factors --Risks Inherent in an
Investment in the Partnership -- Partnership Profitability Will Depend on
Successful Integration of the Combined Operations" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
56
<PAGE>
Pro forma Available Cash from Operating Surplus was calculated as follows:
PRO FORMA AVAILABLE CASH FROM OPERATING SURPLUS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
JUNE 30, 1996
-------------
<S> <C>
Pro forma operating income(a)...................................................................... $ 32,535
Add: Pro forma depreciation and amortization....................................................... 14,500
-------------
Pro forma EBITDA(a)(b)............................................................................. 47,035
Less: Pro forma interest expense................................................................... 17,865
Pro forma capital expenditures -- maintenance(c).............................................. 3,500
-------------
Pro forma Available Cash from Operating Surplus(a)(d).............................................. $ 25,670
-------------
-------------
</TABLE>
- ------------------------
(a) The pro forma amounts of operating income, EBITDA and Available Cash from
Operating Surplus do not reflect certain non-recurring expenses incurred by
Empire Energy of approximately $4.3 million, propane acquisition and
logistics costs savings of approximately $1.5 million and insurance savings
of approximately $2.1 million that the Partnership believes are achievable
upon consummation of the Transactions. If effect were given to such
anticipated expense reductions, the following amounts would have been
reflected:
<TABLE>
<S> <C>
Pro forma operating income................................................................. $ 40,397
Pro forma EBITDA........................................................................... 54,897
Pro forma Available Cash from Operating Surplus............................................ 33,532
</TABLE>
See Note 3 to the Pro Forma Consolidated Financial Statements of Cornerstone
Propane Partners, L.P. and "Risk Factors -- Risks Inherent in an Investment
in the Partnership -- Partnership Profitability Will Depend on Successful
Integration of the Combined Operations."
(b) EBITDA is defined as operating income plus depreciation and amortization.
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), and is not a
measure of performance or financial condition under generally accepted
accounting principles, but provides additional information for evaluating
the Partnership's ability to distribute the Minimum Quarterly Distribution.
Cash flows in accordance with generally accepted accounting principles
consist of cash flows from operating, investing and financing activities.
Cash flows from operating activities reflect net income (loss)(including
charges for interest and income taxes not reflected in EBITDA), adjusted for
(i) all non-cash charges or income (which are reflected in EBITDA) and (ii)
changes in operating assets and liabilities (which are not reflected in
EBITDA). Further, cash flows from investing and financing activities are not
included in EBITDA. For a discussion of the operating performance and cash
flows provided by (used in) operating, investing and financing activities of
the companies that comprise the Combined Operations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(c) Based upon historical maintenance capital expenditures for the Combined
Operations for fiscal 1996.
(d) Available Cash from Operating Surplus generated during a specified period
refers generally to (i) all cash receipts of the Partnership from its
operations generated during such period, less (ii) all Partnership operating
expenses, debt service payments (including any increases in reserves
therefor but not including amounts paid from any reduction in reserves, or
payments required in connection with the sale of assets, or any refinancing
with the proceeds of new indebtedness or an equity offering) and maintenance
capital expenditures, in each case during such period. For a complete
definition of Operating Surplus, see the Glossary.
The amount of pro forma Available Cash from Operating Surplus for fiscal
1996 set forth above was derived from the pro forma financial statements of the
Partnership. The pro forma adjustments are based upon currently available
information and certain estimates and assumptions. The pro forma financial
statements do not purport to present the results of operations of the
Partnership had the Transactions actually been completed as of the dates
indicated. Furthermore, the pro forma financial statements are based on accrual
accounting concepts while Operating Surplus is defined in the Partnership
Agreement on a cash accounting basis. As a consequence, the amount of pro forma
Available Cash from Operating Surplus shown above should only be viewed as a
general indication of the amount of Available Cash from Operating Surplus that
might in fact have been generated by the Partnership had it been formed in
earlier periods.
The Partnership will be required to establish reserves for the future
payment of principal and interest on the Notes and the indebtedness under the
Bank Credit Facility. There are other provisions in such agreements which will,
under certain circumstances, restrict the Partnership's ability to make
distributions to its partners. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Description of Indebtedness."
57
<PAGE>
SELECTED PRO FORMA FINANCIAL AND OPERATING DATA
The following Summary Pro Forma Financial and Operating Data reflect the
consolidated historical operating results of the companies that comprise the
Combined Operations, as adjusted for the Transactions, and are derived from the
unaudited Pro Forma Consolidated Financial Statements of Cornerstone Propane
Partners, L.P. included elsewhere in this Prospectus. For a description of the
assumptions used in preparing the Summary Pro Forma Financial and Operating
Data, see "Pro Forma Consolidated Financial Statements of Cornerstone Propane
Partners, L.P." The pro forma information set forth below has been prepared by
combining the historical results of operations of Synergy for the 10 1/2 months
ended June 30, 1996 and for the three months ended September 30, 1996; Coast for
the fiscal year ended July 31, 1996 and for the three months ended October 31,
1996; Empire Energy for the fiscal year ended June 30, 1996 and for the one
month ended July 31, 1996 and the two months ended September 30, 1996; and Myers
for the six and one-half months ended June 30, 1996 and for the three months
ended September 30, 1996. The Partnership believes that it is reasonable to
combine the results of operations of companies having different fiscal years
because each of the fiscal years being combined includes the same winter heating
seasons in which the majority of the Partnership's revenue and cash flow was
generated. The following information should not be deemed indicative of future
operating results of the Partnership.
<TABLE>
<CAPTION>
PARTNERSHIP PRO FORMA
---------------------------------
YEAR ENDED THREE MONTHS ENDED
JUNE 30, 1996 SEPTEMBER 30, 1996
------------- ------------------
(IN THOUSANDS,
EXCEPT PER UNIT DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................................................... $ 595,790 $ 141,756
Gross profit(a)(b)........................................................... 139,806 24,237
Depreciation and amortization................................................ 14,500 3,738
Operating income (loss)(a)................................................... 32,535 (359)
Interest expense, net........................................................ 17,865 4,467
Net income (loss)(a)......................................................... 14,570 (4,851)
Net income (loss) per Unit(a)(c)............................................. .87 (.29)
OPERATING DATA:
EBITDA(a)(d)................................................................. $ 47,035 $ 3,379
Capital expenditures(e):
Growth and maintenance..................................................... 9,648 3,044
Acquisition................................................................ 44,303(f) 469
Retail propane gallons sold.................................................. 235,000 89,844
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
BALANCE SHEET DATA: 1996
-----------------
<S> <C>
Current assets.......................................................... $ 73,398
Total assets........................................................... 467,784
Current liabilities.................................................... 64,617
Long-term debt......................................................... 228,450
Partners' capital -- General Partners.................................. 3,370
Partners' capital -- Limited Partners.................................. 165,140
</TABLE>
(FOOTNOTES ON PAGE 59)
58
<PAGE>
(FOOTNOTES FROM PAGE 58)
- ------------------------
(a) Pro forma gross profit for the year ended June 30, 1996 and for the three
months ended September 30, 1996 does not reflect propane acquisition and
logistics cost savings of approximately $1.5 million and $241,000,
respectively, that the Partnership believes are achievable upon consummation
of the Transactions. The pro forma amounts of operating income, net income
(loss), net income (loss) per Unit and EBITDA for the year ended June 30,
1996 and for the three months ended September 30, 1996 do not reflect
certain non-recurring expenses incurred by Empire Energy of approximately
$4.3 million and $185,000, respectively, propane acquisition and logistics
cost savings of approximately $1.5 million and $241,000, respectively, and
insurance savings of approximately $2.1 million and $47,000, respectively,
that the Partnership believes are achievable upon consummation of the
Transactions. If effect were given to such anticipated expense reductions,
the following amounts would have been reflected:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JUNE 30, 1996 SEPTEMBER 30, 1996
------------- -------------------
(IN THOUSANDS, EXCEPT PER UNIT
DATA)
<S> <C> <C>
Pro forma gross profit................................................. $ 141,306 $ 24,478
Pro forma operating income............................................. 40,397 114
Pro forma net income (loss)............................................ 22,432 (4,378)
Pro forma net income (loss) per Unit................................... 1.34 (.26)
Pro forma EBITDA....................................................... 54,897 3,852
</TABLE>
See Note 3 to the Pro Forma Consolidated Financial Statements of Conerstone
Propane Partners, L.P. and "Risk Factors -- Risks Inherent in an Investment
in the Partnership -- Partnership Profitability Will Depend on Successful
Integration of the Combined Operations."
(b) Gross profit is computed by reducing total revenues by the direct cost of
the products sold.
(c) Net income per Unit is computed by dividing the limited partners' interest
in net income by the weighted average number of Units outstanding.
(d) EBITDA is defined as operating income plus depreciation and amortization.
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. Cash flows in accordance with generally
accepted accounting principles consist of cash flows from operating,
investing and financing activities. Cash flows from operating activities
reflect net income (loss) (including charges for interest and income taxes
not reflected in EBITDA), adjusted for (i) all non-cash charges or income
(which are reflected in EBITDA) and (ii) changes in operating assets and
liabilities (which are not reflected in EBITDA). Further, cash flows from
investing and financing activities are not included in EBITDA.
(e) The Partnership's capital expenditures fall generally into three categories:
(i) growth capital expenditures, which include expenditures for the purchase
of new propane tanks and other equipment to facilitate expansion of the
Partnership's retail customer base, (ii) maintenance capital expenditures,
which include expenditures for repairs that extend the life of the assets
and replacement of property, plant and equipment, and (iii) acquisition
capital expenditures.
(f) Approximately $36.0 million relates to the Empire Acquisition of Certain
Synergy Assets.
59
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
SYNERGY
The financial information below as of June 30, 1996 and for the 10 1/2-month
period ended June 30, 1996 is derived from the audited financial statements of
Synergy. The financial information as of September 30, 1995 and 1996 and for the
46-day period ended September 30, 1995 and the three months ended September 30,
1996 is derived from the unaudited consolidated Interim Financial Statements of
Synergy and, in the opinion of management of Synergy, contains all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of results of operations and financial condition. On August 15,
1995, Synergy Group Incorporated ("SGI"), the predecessor of Synergy, was
acquired by Synergy in the Synergy Acquisition. The 46-day period ended
September 30, 1995 covers the period from the date of the Synergy Acquisition to
September 30, 1995. The financial information below as of March 31, 1994 and
1995 is derived from the audited financial statements of SGI. As discussed
elsewhere in this Prospectus, the comparability of financial matters is affected
by the change in ownership of SGI and the concurrent sale of approximately 25%
of the operations acquired in the Synergy Acquisition to Empire Energy (the
"Empire Acquisition of Certain Synergy Assets"). The Statement of Operations
Data and the Operating Data for the 4 1/2 months ended August 14, 1995 represent
information for the period from the end of the last fiscal year of SGI until the
date of the Synergy Acquisition, and are presented only to reflect operations of
Synergy for a complete five-year period. The retail propane gallons sold for all
periods presented is derived from the accounting records of Synergy and SGI and
is unaudited. The results for the interim periods are not indicative of the
results that can be expected for a full year. The Selected Historical Financial
and Operating Data below should be read in conjunction with the financial
statements of Synergy and SGI and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Synergy" included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
SYNERGY GROUP INCORPORATED SYNERGY
------------------------------------------------------- ----------------------------------------
4 1/2 10 1/2
MONTHS MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED ENDED 46 DAYS
------------------------------------------ AUGUST 14, JUNE 30, ENDED
1992 1993 1994 1995 1995 1996 SEPTEMBER
--------- --------- --------- --------- ----------- ------------ 30,
1995
------------
(UNAUDITED)
3 MONTHS
ENDED
SEPTEMBER
30,
1996
------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................. $ 121,761 $ 132,855 $ 133,731 $ 123,562 $ 32,179 $ 96,062 $ 10,565 $ 17,883
Gross profit (a)......... 63,082 65,964 70,233 63,653 16,792 49,875 4,983 8,943
Depreciation and
amortization........... 5,919 5,381 5,170 5,100 1,845 3,329 511 1,000
Operating income (loss).. 1,346 (809) 3,609 (2,291) (6,660) 14,520 1,009 30
Interest expense......... 13,159 13,342 13,126 11,086 3,223 5,584 589 1,665
Provision (benefit) for
income taxes........... (314) 351 (400) (84) 31 3,675 88 (550)
Net income (loss)........ (11,553) (15,274) (11,615) (13,417) (9,813) 5,261 332 (1,085)
BALANCE SHEET DATA (END OF
PERIOD):
Working capital
(deficit).............. $ 12,433 $(118,238) $(130,211) $ (82,143) $ (98,045) $ 24,177 $ 16,091 $ 18,846
Total assets............. 112,089 112,153 111,914 103,830 96,500 166,762 166,617 170,042
Total debt............... 119,543 123,168 122,626 92,717 89,541 79,524 71,664 81,151
Redeemable preferred
stock.................. -- -- -- -- -- 55,312 55,312 55,312
Stockholders' equity
(deficit).............. (28,534) (43,808) (55,424) (15,762) (25,576) (1,899) (605) (5,057)
OPERATING DATA:
EBITDA (b)............... $ 7,265 $ 4,572 $ 8,779 $ 2,809 $ (4,815) $ 17,849 $ 1,520 $ 1,030
Capital expenditures
(c).................... 1,133 2,504 3,141 3,737 596 8,708 3,802 1,571
Retail propane gallons
sold................... 125,946 137,316 137,937 126,205 27,282 92,621 9,705 16,428
</TABLE>
- ---------------------
(a) Gross profit is computed by reducing total revenues by the direct cost of
the products sold.
(b) EBITDA is defined as operating income plus depreciation and amortization.
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.
(c) Capital expenditures fall generally into three categories: (i) growth
capital expenditures, which include expenditures for the purchase of new
propane tanks and other equipment to facilitate expansion of the retail
customer base, (ii) maintenance capital expenditures, which include
expenditures for repair and replacement of property, plant and equipment,
and (iii) acquisition capital expenditures.
60
<PAGE>
EMPIRE ENERGY
The financial information below as of June 30, 1994, 1995 and 1996 and for
the years ended June 30, 1994, 1995 and 1996 is derived from the audited
financial statements of Empire Energy. Empire Energy was formed in June 1994 as
a result of a tax-free split-off (the "Split-Off") from Empire Gas. These
financial statements give effect to the Split-Off as if it occurred on July 1,
1991. The historical financial and operating data for the three months ended
September 30, 1995, the one month ended July 31, 1996 and the two months ended
September 30, 1996 are derived from the unaudited financial statements included
elsewhere herein and, in the opinion of management of Empire Energy, contain all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of results of operations and financial condition. As discussed
elsewhere in this Prospectus, on August 15, 1995, Empire Energy acquired from
Synergy approximately 25% of the operations of SGI. On August 1, 1996, the
principal founding shareholder of Empire Energy and certain other shareholders
sold their interests in Empire Energy to certain members of management. The
financial and operating data are shown separately for the one month ended July
31, 1996 and the two months ended September 30, 1996 because of such change of
control. The data for the three months ended September 30, 1995 and the one
month ended July 31, 1996 are not comparable to the two months ended September
30, 1996 because the change of control resulted in a new basis for financial
accounting purposes. The retail propane gallons sold for all periods presented
is derived from the accounting records of Empire Energy and is unaudited. The
results for the interim periods are not indicative of the results that can be
expected for a full year. The Selected Historical Financial and Operating Data
below should be read in conjunction with the financial statements of Empire
Energy and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Empire Energy" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
EMPIRE ENERGY
-----------------------------------------------------------------------------------------------------
TWO MONTHS
FISCAL YEAR ENDED JUNE 30, THREE MONTHS ONE MONTH ENDED
------------------------------------------- ENDED ENDED SEPTEMBER 30,
1992 1993 1994 1995 1996 SEPTEMBER 30, 1995 JULY 31, 1996 1996
------- ------- ------- ------- ------- ------------------- ------------- ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA: (IN THOUSANDS)
Revenues................... $52,682 $61,057 $60,216 $56,689 $98,821 $ 12,223 $ 2,596 $ 12,439
Gross profit (a).......... 28,141 31,900 32,187 29,841 48,741 6,095 1,157 5,968
Depreciation and
amortization............ 4,143 4,257 4,652 4,322 5,875 1,288 499 1,087
Operating income (loss)... 5,560 8,097 6,015 1,084 9,846 (1,264) (1,822) 353
Interest expense.......... 310 366 118 39 2,598 376 217 1,487
Provision for income taxes
(credit)................ 2,050 2,900 2,400 600 3,550 (550) (765) (400)
Net income (loss)......... 2,988 4,726 3,497 445 3,698 (1,090) (1,274) (734)
BALANCE SHEET DATA (END OF
PERIOD):
Current assets............ $ 7,374 $ 8,751 $ 9,292 $ 9,615 $16,046 $ 24,994 15,107 $ 21,392
Total assets.............. 59,582 58,584 64,734 69,075 107,102 113,745 106,126 144,122
Current liabilities....... 8,742 3,620 2,697 4,277 12,126 10,776 12,557 13,396
Long-term debt............ 1,738 2,258 135 1,701 25,442 40,699 25,435 98,882
Stockholders' equity...... 37,888 42,614 46,111 46,535 50,233 45,445 48,959 1,588
OPERATING DATA:
EBITDA (b)................ $ 9,703 $12,354 $10,667 $ 5,406 $15,721 $ 24 (1,323) $ 1,440
Capital expenditures
(c)..................... 3,169 2,446 4,058 8,365 39,164 405 487 861
Retail propane gallons
sold.................... 57,627 66,456 67,286 62,630 104,036 14,234 2,522 13,251
</TABLE>
- -------------------
(a) Gross profit is computed by reducing total revenues by the direct cost of
the products sold.
(b) EBITDA is defined as operating income plus depreciation and amortization.
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.
(c) Capital expenditures fall generally into three categories: (i) growth
capital expenditures, which include expenditures for the purchase of new
propane tanks and other equipment to facilitate expansion of the retail
customer base, (ii) maintenance capital expenditures, which include
expenditures for repair and replacement of property, plant and equipment,
and (iii) acquisition capital expenditures.
61
<PAGE>
COAST
The financial information below as of July 31, 1992, 1994, 1995 and 1996 and
for the years ended July 31, 1992, 1994, 1995 and 1996 is derived from the
audited financial statements of Coast. The financial information as of July 31,
1993 and for the year ended July 31, 1993 is derived from the accounting records
of Coast and is unaudited. Historical and operating data for the year ended July
31, 1992 is not comparable to fiscal 1993, 1994, 1995 and 1996 periods due to
the application of purchase accounting adjustments in connection with the buyout
of Coast Gas Industries, Inc. by Aurora Capital Partners and Coast, which
occurred on March 31, 1993. The data for the three-month periods ended October
31, 1995 and 1996 have been derived from the unaudited financial statements
appearing herein and, in the opinion of the management of Coast, include all
adjustments, consisting only of normal recurring adjustments (except for the
sale of a partnership interest effective October 1, 1996), necessary for a fair
presentation of results of operations and financial condition. The results for
the interim periods are not indicative of the results that can be expected for a
full year. The Selected Historical Financial and Operating Data below should be
read in conjunction with the financial statements of Coast and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Coast" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
COAST GAS
INDUSTRIES, COAST
INC. ---------------------------------------------------------------------
-------------- THREE MONTHS ENDED
FISCAL YEAR FISCAL YEAR ENDED JULY 31, OCTOBER 31,
ENDED JULY 31, ---------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1995 1996
-------------- ---------- ---------- ---------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 216,772 $ 229,860 $ 242,986 $ 266,842 $ 384,354 $ 84,070 $ 108,175
Gross profit (a)................... 27,375 25,885 28,354 32,304 33,141 6,233 7,909
Depreciation and amortization...... 2,882 3,184 3,282 3,785 4,216 983 1,067
Operating income (loss)............ 3,620 3,399 3,843 4,535 4,044 (649) (110)
Interest expense................... 4,291 4,017 4,029 5,120 5,470 1,385 1,294
Provision (benefit) for income
taxes............................ 190 (123) (28) (202) (473) (671) (491)
Net loss (b)....................... (861) (495) (158) (889) (953) (1,363) (913)
BALANCE SHEET DATA (END OF PERIOD):
Current assets..................... $ 22,563 $ 21,962 $ 29,150 $ 33,676 $ 35,297 $ 39,944 $ 35,071
Total assets....................... 65,644 82,626 93,559 101,545 106,179 111,313 105,574
Current liabilities................ 22,643 23,182 31,178 27,605 37,849 34,539 35,361
Long-term debt..................... 28,811 29,241 31,080 46,021 41,801 50,509 45,069
Mandatorily redeemable
securities....................... 1,800 8,325 8,874 7,781 8,559 7,976 8,675
Stockholders' equity .............. 4,262 8,368 7,661 7,853 6,098 6,295 5,069
OPERATING DATA (UNAUDITED):
EBITDA (c)......................... $ 6,502 $ 6,583 $ 7,125 $ 8,320 $ 8,260 $ 334 $ 957
Capital expenditures (d)........... 4,590 6,114 4,451 5,581 6,060 3,495 594
Retail propane gallons sold........ 23,495 27,385 30,918 36,569 34,888 6,420 7,013
</TABLE>
- ------------------------
(a) Gross profit is computed by reducing total revenues by the direct cost of
the products sold, except for depreciation and amortization.
(b) Included in the net loss for the year ended July 31, 1995 is an
extraordinary charge to income of $506,000 for the early retirement of debt,
net of the income tax benefit.
(c) EBITDA is defined as operating income plus depreciation and amortization.
EBITDA should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations), but provides
additional information for evaluating the Partnership's ability to make the
Minimum Quarterly Distribution.
(d) Capital expenditures fall generally into three categories: (i) growth
capital expenditures, which include expenditures for the purchase of new
propane tanks and other equipment to facilitate expansion of the retail
customer base, (ii) maintenance capital expenditures, which include
expenditures for repair and replacement of property, plant and equipment,
and (iii) acquisition capital expenditures.
MYERS
Historical financial information for Myers has not been presented herein
based on the Partnership's belief that such information is not material to the
Partnership.
62
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE HISTORICAL FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE PARTNERSHIP AND ITS PRINCIPAL PREDECESSOR ENTITIES,
SYNERGY, EMPIRE ENERGY AND COAST, SHOULD BE READ IN CONJUNCTION WITH THE
SELECTED PRO FORMA FINANCIAL AND OPERATING DATA AND NOTES THERETO, THE SELECTED
HISTORICAL FINANCIAL AND OPERATING DATA AND NOTES THERETO AND THE HISTORICAL AND
PRO FORMA FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS. NO DISCUSSION OF THE HISTORICAL FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF MYERS HAS BEEN INCLUDED BASED ON THE PARTNERSHIP'S BELIEF THAT
SUCH INFORMATION IS NOT MATERIAL TO THE PARTNERSHIP.
GENERAL
The Partnership is a Delaware limited partnership recently formed to own and
operate the propane business and assets of Synergy, Empire Energy, Myers and
Coast. The Partnership believes that, upon the consummation of the Transactions,
it will be the fifth largest retail marketer of propane in the United States,
serving more than 360,000 residential, commercial, industrial and agricultural
customers from 312 customer service centers in 26 states. On a combined basis,
the Partnership's retail propane sales volume was approximately 242 million, 230
million and 235 million gallons during fiscal 1994, 1995 and 1996, respectively.
On a combined basis in fiscal 1996, the Partnership also sold approximately 226
million gallons of propane to wholesale customers.
On a combined basis during fiscal 1996, approximately 57.8% of the
Partnership's retail gallons was sold to residential customers, 25.9% was sold
to industrial and commercial customers, 13.1% was sold to agricultural customers
and 3.2% was sold to all other retail users. Sales to residential customers
during that period accounted for approximately 67.0% of the Partnership's pro
forma gross profit on propane sales, reflecting the higher profitability of this
segment of the business.
The retail distribution business is largely seasonal due to propane's use as
a heating source in residential buildings. During fiscal 1996, approximately
72.7% of the Partnership's combined retail propane volume and in excess of 85%
of the Partnership's pro forma EBITDA was attributable to sales during the
six-month peak heating season of October through March. As a result, cash flows
from operations are greatest from November through April when customers pay for
propane purchased during the six-month peak heating season.
Because a substantial portion of the Partnership's propane is used in the
weather-sensitive residential markets, the temperatures realized in the
Partnership's areas of operations, particularly during the six-month peak
heating season, have a significant effect on the financial performance of the
Partnership. In any given area, 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. Therefore, information on normal
temperatures is used by the Partnership in understanding how historical results
of operations are affected by temperatures that are colder or warmer than normal
and in preparing forecasts of future operations, which are based on the
assumption that normal weather will prevail in each of the Partnership's
regions.
In determining actual and normal weather for a given period of time, the
Partnership compares the actual number of Heating Degree Days for such period to
the average number of Heating Degree Days for a longer time period assumed to
more accurately reflect the average normal weather, in each case as such
information is published by the National Weather Service Climate Analysis
Center, for each measuring point in each of the Partnership's regions. Synergy
and Empire Energy have historically used the 30-year period from 1961-1990, and
Coast has historically used a 10-year rolling average. The Partnership then
calculates weighted averages, based on retail volumes attributable to each
measuring point, of actual and normal Heating Degree Days within each region.
Based on this information, the Partnership calculates a
63
<PAGE>
ratio of actual Heating Degree Days to normal Heating Degree Days, first on a
regional basis and then on a Partnership-wide basis.
Although the Partnership believes that comparing temperature information for
a given period of time to "normal" temperatures is helpful for an understanding
of the Partnership's results of operations, when comparing variations in weather
to changes in total revenues or operating profit, attention is drawn to the fact
that a portion of the Partnership's total revenues is not weather-sensitive and
other factors such as price, competition, product supply costs and customer mix
also affect the results of operations. Furthermore, actual weather conditions in
the Partnership's regions can vary substantially from historical experience.
Gross profit margins are not only affected by weather patterns but also by
changes in customer mix. For example, sales to residential customers ordinarily
generate higher margins than sales to other customer groups, such as commercial
or agricultural customers. In addition, gross profit margins vary by geographic
region. Accordingly, profit margins could vary significantly from year to year
in a period of identical sales volumes.
The Partnership intends to purchase a portion of its propane (approximately
50% to 60% of a given typical year's projected propane needs) pursuant to
agreements with terms of less than one year at market prices. The balance of its
propane needs for the year will be satisfied in the spot market. The Partnership
generally does not enter into supply contracts containing "take or pay"
provisions. In fiscal 1996, the Partnership purchased approximately 12.8% of its
propane supplies from one supplier, and no other single supplier provided more
than 10% of its total propane supply.
The Partnership will engage in hedging of product cost and supply through
common hedging practices. These practices will be monitored and maintained by
management for the Partnership on a daily basis. Hedging of product cost and
supply does not always result in increased margins.
SYNERGY
ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS
The following discussion compares the results of operations and other data
for Synergy for the three months ended September 30, 1996 to the 46-day period
ended September 30, 1995, the ten and one-half month period ended June 30, 1996
to the fiscal year ended March 31, 1995, and the fiscal year ended March 31,
1995 to the fiscal year ended March 31, 1994. As discussed below, the
comparability of financial matters for the periods is affected by the Synergy
Acquisition and the concurrent Empire Acquisition of Certain Synergy Assets.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE 46-DAY PERIOD ENDED
SEPTEMBER 30, 1995
VOLUME. During the three months ended September 30, 1996, Synergy sold 16.4
million retail propane gallons, an increase of 6.7 million gallons, or 69.3%,
from the 9.7 million retail propane gallons sold during the 46-day period ended
September 30, 1995. This increase in volume is due to the longer sales period in
1996.
REVENUES. Revenues increased by $7.3 million, or 69.3%, to $17.9 million
for the three months ended September 30, 1996, as compared to $10.6 million for
the 46-day period ended September 30, 1995. This increase was primarily due to
the longer sales period in 1996 and an increase in the net propane sales price
of approximately $.030 per gallon for the three months ended September 30, 1996,
as compared to the 46-day period ended September 30, 1995.
COST OF PRODUCT SOLD. Cost of product sold increased $3.4 million, or
60.2%, to $8.9 million for the three months ended September 30, 1996, as
compared to $5.6 million for the 46-day period ended
64
<PAGE>
September 30, 1995. The increase was primarily due to the longer sales period in
1996 as the net cost of propane per gallon for the two periods was relatively
unchanged.
GROSS PROFIT. Gross profit increased by $3.9 million, or 78.0%, to $8.9
million for the three months ended September 30, 1996, as compared to $5.0
million for the 46-day period ended September 30, 1995. The increase was
primarily due to the longer sales period in 1996 and the increase in gross
profit per gallon of approximately $0.031, or 6.0%, to $.544 per gallon for the
three months ended September 30, 1996, as compared to $.513 per gallon for the
46-day period ended September 30, 1995, resulting from an increase in the net
propane sales price for the three months ended September 30, 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(which include salaries and commissions and related-party corporate
administration and management fees) increased by $4.4 million, or 125.7%, to
$7.9 million for the three months ended September 30, 1996, as compared to $3.5
million for the 46-day period ended September 30, 1995, primarily due to the
longer sales period in 1996. As a percentage of revenues, general and
administrative expenses increased to 44.3% for the three months ended September
30, 1996, as compared to 32.8% for the 46-day period ended September 30, 1995.
This increase was primarily due to the fact that more retail volumes are sold in
the second half of the three-month period ended September 30, while expenses are
relatively constant for the entire three-month period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$.5 million, or 100%, to $1.0 million for the three months ended September 30,
1996, as compared to $.5 million for the 46-day period ended September 30, 1995,
primarily due to the longer sales period in 1996. As a percentage of revenues,
depreciation and amortization increased to 5.6% for the three months ended
September 30, 1996, as compared to 4.8% for the 46-day period ended September
30, 1995.
OPERATING INCOME. Operating income decreased by approximately $1.0 million,
or 97.0%, to $30,000 for the three months ended September 30, 1996, as compared
to $1.0 million for the 46-day period ended September 30, 1995, primarily due to
the longer sales period in 1996, because more retail volumes are sold in the
second half of the three-month period ended September 30, while expenses are
relatively constant for the entire three-month period. As a percentage of
revenues, operating income decreased to .2% for the three months ended September
30, 1996, as compared to 9.5% for the 46-day period ended September 30, 1995.
INTEREST EXPENSE. Interest expense increased $1.1 million, or 183.3%, to
$1.7 million for the three months ended September 30, 1996, as compared to $.6
million for the 46-day period ended September 30, 1995, primarily due to the
longer sales period in 1996.
NET INCOME (LOSS). Synergy had a net loss of $1.1 million for the three
months ended September 30, 1996, as compared to net income of $.3 million for
the 46-day period ended September 30, 1995, primarily due to the longer sales
period in 1996, because more retail volumes are sold in the second half of the
three-month period ended September 30, while expenses are relatively constant
for the entire three-month period.
EBITDA. EBITDA decreased by $.5 million, or 33.3%, to $1.0 million for the
three months ended September 30, 1996, as compared to $1.5 million for the
46-day period ended September 30, 1995, primarily due to the longer sales period
in 1996, because more retail volumes are sold in the second half of the
three-month period ended September 30, while expenses are relatively constant
for the entire three-month period. As a percentage of revenues, EBITDA decreased
to 5.8% for the three months ended September 30, 1996, as compared to 14.4% for
the 46-day period ended September 30, 1995. 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 to service debt
obligations), but provides additional information for evaluating the
Partnership's ability to distribute the Minimum Quarterly Distribution.
65
<PAGE>
TEN AND ONE-HALF MONTHS ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED
MARCH 31, 1995
VOLUME. During fiscal 1996, Synergy sold 92.6 million retail propane
gallons, a decrease of 33.6 million gallons, or 26.6%, from the 126.2 million
retail propane gallons sold during fiscal 1995. The decrease in volume was
primarily attributable to the Empire Acquisition of Certain Synergy Assets,
partially offset by the colder weather during fiscal 1996 in Synergy's marketing
areas. The weather in Synergy's marketing areas was approximately 3.5% colder
than normal for such areas during fiscal 1996, and was warmer than normal for
such areas during fiscal 1995.
REVENUES. Revenues declined by $27.5 million, or 22.2%, to $96.1 million
for fiscal 1996, as compared to $123.6 million for fiscal 1995. This decrease
was attributable almost entirely to the reduced sales volume in fiscal 1996 as a
result of the Empire Acquisition of Certain Synergy Assets, partially offset by
the colder than normal weather during fiscal 1996.
COST OF SALES. Cost of product sold decreased by $13.7 million, or 22.9%,
to $46.2 million for fiscal 1996, as compared to $59.9 million for fiscal 1995.
The decrease was attributable to the reduced sales volume in fiscal 1996
resulting from the Empire Acquisition of Certain Synergy Assets and was
partially offset by the colder than normal weather during fiscal 1996. As a
percentage of revenues, cost of product sold decreased slightly to 48.1% for
fiscal 1996, as compared to 48.5% for fiscal 1995.
GROSS PROFIT. Gross profit decreased by $13.8 million, or 21.7%, to $49.9
million for fiscal 1996, as compared to $63.7 million for fiscal 1995. This
decrease was due primarily to the Empire Acquisition of Certain Synergy Assets.
Gross profit per retail gallon (which includes non-propane related sales)
increased by $.033 per gallon, or 6.5%, to $.538 per gallon for fiscal 1996, as
compared to $.505 per gallon for fiscal 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(which include salaries and commissions and related-party corporate
administration and management fees) decreased by $28.8 million, or 47.4%, to
$32.0 million for fiscal 1996, as compared to $60.8 million for fiscal 1995, due
to the Empire Acquisition of Certain Synergy Assets and the reduction of
employee positions, corporate overhead and related party salaries and expenses.
As a percentage of revenues, general and administrative expenses decreased to
33.3% for fiscal 1996, as compared to 49.2% for fiscal 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
$1.8 million, or 35.3%, to $3.3 million for fiscal 1996, as compared to $5.1
million for fiscal 1995, due to the Empire Acquisition of Certain Synergy
Assets, partially offset by an increase in depreciation and amortization due to
the purchase accounting adjustment made in connection with the Synergy
Acquisition.
OPERATING INCOME. Operating income increased $16.8 million to $14.5 million
for fiscal 1996, as compared to a loss of $2.3 million for fiscal 1995. This
increase was primarily due to the significant reduction in general and
administrative expenses, partially offset by the effect of the Empire
Acquisition of Certain Synergy Assets. As a percentage of revenues, operating
income increased to 15.1% for fiscal 1996, as compared to a loss for fiscal
1995.
INTEREST EXPENSE. Interest expense decreased $5.5 million, or 49.6%, to
$5.6 million for fiscal 1996, as compared to $11.1 million for fiscal 1995,
primarily due to the recapitalization of Synergy in connection with the Synergy
Acquisition.
NET INCOME. Synergy had net income of $5.3 million for fiscal 1996, as
compared to a net loss of $13.4 million for fiscal 1995. The increase was
primarily the result of the reduction in general and administrative expenses and
interest expense, partially offset by the effect of the Empire Acquisition of
Certain Synergy Assets.
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EBITDA. EBITDA increased $15.0 million, or 537.7%, to $17.8 million in
fiscal 1996, as compared to $2.8 million for fiscal 1995. This increase was
primarily due to the reduction in general and administrative expenses and colder
than normal weather, and was partially offset by the effect of the Empire
Acquisition of Certain Synergy Assets. As a percentage of revenues, EBITDA
increased to 18.6% for fiscal 1996, as compared to 2.3% for fiscal 1995. EBITDA
should not be considered as an alternative to net income (as an indicator of
operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations), but provides additional
information for evaluating the Partnership's ability to distribute the Minimum
Quarterly Distribution.
FISCAL YEAR ENDED MARCH 31, 1995 COMPARED TO FISCAL YEAR ENDED MARCH 31,
1994
VOLUME. During fiscal 1995, Synergy sold 126.2 million retail propane
gallons, a decrease of 11.7 million gallons, or 8.5%, from the 137.9 million
retail propane gallons sold during fiscal 1994. The decrease in volume was
attributable to unusually warm weather during fiscal 1995 in Synergy's marketing
areas.
REVENUES. Revenues decreased by $10.1 million, or 7.6%, to $123.6 million
for fiscal 1995, as compared to $133.7 million for fiscal 1994. This decrease
was primarily attributable to the warmer than normal weather in Synergy's
marketing areas in fiscal 1995, which reduced sales volume.
COST OF PRODUCT SOLD. Cost of product sold decreased by $3.6 million, or
5.7%, to $59.9 million for fiscal 1995, as compared to $63.5 million for fiscal
1994. The decrease was attributable to the warmer than normal weather and
reduced sales volume in fiscal 1995. As a percentage of revenues, cost of
product sold increased to 48.5% for fiscal 1995, as compared to 47.5% for fiscal
1994.
GROSS PROFIT. Gross profit decreased by $6.5 million, or 9.3%, to $63.7
million for fiscal 1995, as compared to $70.2 million for fiscal 1994. This
decrease was primarily due to a decrease in sales volume resulting from the
warmer than normal weather in Synergy's marketing areas and to the lower average
gross margin per gallon of propane. Gross profit per retail gallon (which
includes non-propane related sales) decreased by $.004 per gallon, or .8%, to
$.505 per gallon for fiscal 1995, as compared to $.509 per gallon for fiscal
1994.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(which include salaries and commissions and related-party corporate
administration and management fees) decreased by $.7 million, or 1.1%, to $60.8
million for fiscal 1995, as compared to $61.5 million for fiscal 1994, primarily
due to a decrease in excise taxes, penalties and interest related to Synergy's
employee benefit plan of $2.9 million, which was offset by increases in employee
benefits of $.8 million and insurance expense of $1.4 million due to higher
health insurance and legal settlement claims incurred in 1995. As a percentage
of revenues, general and administrative expenses increased to 49.2% for fiscal
1995, as compared to 46.0% for fiscal 1994.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of $5.1
million and $5.2 million in fiscal 1995 and 1994, respectively, were comparable,
since an increase in depreciation expense in fiscal 1995 was offset by a
decrease in amortization expense in fiscal 1995. The increase in depreciation
was primarily attributable to an increase in vehicle-related depreciation. The
decrease in amortization was primarily due to decreases in the amortization of
deferred financing costs and acquisition-related costs.
OPERATING INCOME. Operating income decreased by $5.9 million to a loss of
$2.3 million in fiscal 1995, as compared to $3.6 million in income in fiscal
1994, since the decrease in general and administrative expenses was more than
offset by the sum of (i) the decrease in gross profit resulting from the lower
retail sales volume and lower average gross margin per gallon of propane and
(ii) the increase in the provision for doubtful accounts.
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INTEREST EXPENSE. Interest expense (which includes related-party interest
expense) decreased by $2.0 million, or 15.3%, in fiscal 1995 to $11.1 million,
as compared to $13.1 million in fiscal 1994, as a result of the restructuring of
Synergy's outstanding debt, which more than offset an increase in interest
expense related to borrowings under Synergy's revolving credit facility.
NET LOSS. Synergy had a net loss of $13.4 million for fiscal 1995, as
compared to a net loss of $11.6 million for fiscal 1994. The increase in net
loss was primarily due to the reduction in gross profit due to warmer weather,
partially offset by the decrease in general and administrative expenses and
interest expense.
EBITDA. EBITDA decreased by $6.0 million, or 68.2%, to $2.8 million for
fiscal 1995, as compared to $8.8 million for fiscal 1994. This decrease was due
to unfavorable weather conditions, partially offset by a decrease in general and
administrative expenses. As a percentage of revenues, EBITDA decreased to 2.3%
for fiscal 1995, as compared to 6.6% for fiscal 1994. EBITDA should not be
considered as an alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow (as a measure of liquidity or
ability to service debt obligations), but provides additional information for
evaluating the Partnership's ability to distribute the Minimum Quarterly
Distribution.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash provided by operating activities during the three-month period ended
September 30, 1996 was $3.9 million. Cash flow from operations consisted
primarily of a net loss of $1.1 million, which was offset by changes in
operating items of $4.6 million, primarily an increase in accounts payable. Cash
used in investing activities during the three-month period ended September 30,
1996 totalled $.6 million, which consisted entirely of purchases of property and
equipment. Cash used in financing activities during that three-month period was
$1.9 million, consisting primarily of preferred stock dividend payments.
Cash provided by operating activities during fiscal 1996 was $2.9 million,
as compared to $5.1 million used by operating activities during fiscal 1995.
Cash flow from operations consisted primarily of net income of $5.3 million and
non-cash charges of $7.0 million for fiscal 1996. The impact of working capital
changes (resulting primarily from payment timing differences) reduced cash flow
from operations by approximately $9.3 million in fiscal 1996.
Cash used in investing activities during fiscal 1996 totalled $123.6
million, including $150.9 million of capital expenditures associated with the
Synergy Acquisition, partially offset by $36.0 million received from Empire
Energy in connection with the Empire Acquisition of Certain Synergy Assets.
Synergy also used $8.7 million during fiscal 1996 for purchases of property and
equipment in the ordinary course of business and small acquisitions. Synergy has
budgeted base maintenance capital expenditures for fiscal 1997 of approximately
$1.4 million, subject to the availability of cash and other financing sources.
In addition, the 1997 budgeted capital expenditures include $1.0 million for new
trucks to complete a two-year modernization program, which was initiated
following the Synergy Acquisition in 1995.
Cash provided by financing activities was $120.7 million for fiscal 1996.
This amount primarily reflects the borrowing of $52.8 million under a term loan
from NPS described below and the issuance of $52.8 million of preferred stock to
finance the Synergy Acquisition, and an additional borrowing of $23.9 million
under the revolving credit facility described below to fund working capital and
small acquisitions.
FINANCING AND SOURCES OF LIQUIDITY
On December 28, 1995, Synergy entered into a revolving credit agreement with
Bank of Boston, which was amended in August 1996. Synergy's revolving credit
facility consists of a revolving credit line of up to $30.0 million, including
up to $7.5 million for letters of credit. The revolving credit facility bears
interest at
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either the Eurodollar rate plus 2.0% or the prime rate plus .75%. The
obligations of Synergy under the revolving credit agreement are secured by its
accounts receivable, inventory, instruments and documents and a pledge of the
capital stock of its subsidiaries. The revolving credit agreement contains
customary operating and maintenance covenants. Synergy's obligations under the
revolving credit agreement have been jointly and severally guaranteed by each of
its subsidiaries. The revolving credit facility matures on December 31, 1997. As
of September 30, 1996, the total outstanding indebtedness under the revolving
credit agreement was approximately $28.3 million.
On July 31, 1996, Synergy entered into a term loan agreement with NPS in the
principal amount of approximately $52.8 million, secured by substantially all of
Synergy's personal property. The term loan bears interest at a rate of 9.12% per
annum. The debt and security interests under the term loan agreement are
subordinate to the debt owed to and security interests of Bank of Boston under
the revolving credit agreement. The term loan agreement contains customary
financial and performance covenants. No principal payments are due under the
term loan until it matures on August 1, 2005.
It is expected that, at the closing of this offering, both the Bank of
Boston revolving credit facility and the NPS term loan will be repaid in full
from the proceeds of this offering and will be terminated, and all security
interests relating thereto will be released.
EMPIRE ENERGY
ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS
The following discussion compares the results of operations and other data
for Empire Energy for the three months ended September 30, 1996 to the three
months ended September 30, 1995 and for the fiscal year ended June 30, 1996 to
the fiscal year ended June 30, 1995, and the fiscal year ended June 30, 1995 to
the fiscal year ended June 30, 1994. On August 1, 1996, the principal founding
shareholder of Empire Energy and certain other shareholders sold their interests
in Empire Energy to certain members of management of Empire Energy (the
"Management Buy-Out"). The results of operations and other data for the three
months ended September 30, 1996 are stated on a pro forma basis to combine the
one month ended prior to the Management Buy-Out and the two months beginning
with the Management Buy-Out. As discussed below, the comparability of financial
matters is also affected by the Empire Acquisition of Certain Synergy Assets,
the operations of which are included since the actual date of acquisition in
August 1995, and the Split-Off in June 1994.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER 30, SEPTEMBER 30,
1995 1996(A)
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Operating Revenue................................................................... $ 12,223 $ 15,035
Cost of Product Sold................................................................ 6,128 7,910
------------- -------------
Gross Profit........................................................................ 6,095 7,125
General and Administrative Expenses (including allowance for doubtful accounts)..... 6,071 7,008
Depreciation and Amortization....................................................... 1,288 1,586
------------- -------------
Operating Loss...................................................................... (1,264) (1,469)
Interest Expense.................................................................... 376 1,704
Credit for Income Taxes............................................................. (550) (1,165)
------------- -------------
Net Loss............................................................................ $ (1,090) $ (2,008)
</TABLE>
(a) The pro forma data reflect the combination of data for the one month ended
July 31, 1996 and data for the two months ended September 30, 1996. The
preceding table compares certain revenues and expenses for the three months
ended September 30, 1995 to pro forma amounts for the three months ended
September 30, 1996, which combine 1996 operations before and after the
adjustment of balance sheet accounts for purchase accounting.
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VOLUME. During the three months ended September 30, 1996, Empire Energy
sold 15.8 million retail propane gallons, an increase of 1.5 million gallons, or
10.8%, from the 14.3 million retail propane gallons sold during the three months
ended September 30, 1995. The increase in volume was primarily attributable to
the Empire Acquisition of Certain Synergy Assets. Although weather is a
significant factor in determining sales of propane in winter months, it
generally has an insignificant effect on sales volume in the three-month period
ended September 30.
REVENUES. Revenues increased by $2.8 million, or 23.0%, to $15.0 million
for the three months ended September 30, 1996, as compared to $12.2 million for
the three months ended September 30, 1995. This increase was attributable to the
Empire Acquisition of Certain Synergy Assets, as well as an increase in the
sales price of $.056 per gallon, or 7.7%, to $.790 per gallon for the three
months ended September 30, 1996, as compared to $.734 per gallon in the three
months ended September 30, 1995.
COST OF PRODUCT SOLD. Cost of product sold increased by $1.8 million, or
29.1%, to $7.9 million for the three months ended September 30, 1996, as
compared to $6.1 million for the three months ended September 30, 1995. The
increase was attributable to an increase in volumes sold as a result of the
Empire Acquisition of Certain Synergy Assets, as well as an increase in the cost
per gallon sold of $.056 per gallon, or 15.2%, to $.428 per gallon for the three
months ended September 30, 1996, as compared to $.372 per gallon for the three
months ended September 30, 1995. As a percentage of revenues, cost of products
sold increased to 52.6% for the three months ended September 30, 1996, as
compared to 50.1% for the three months ended September 30, 1995.
GROSS PROFIT. Gross profit increased by $1.0 million, or 16.9%, to $7.1
million for the three months ended September 30, 1996, as compared to $6.1
million for the three months ended September 30, 1995. This increase was
primarily due to the increase in sales volume resulting from the Empire
Acquisition of Certain Synergy Assets. Gross profit per retail gallon (which
includes non-propane related sales) increased by $.022, or 5.1%, to $.451 per
gallon for the three months ended September 30, 1996, as compared to $.429 per
gallon for the three months ended September 30, 1995. This increase was
primarily due to an increase in gross profit on non-propane related sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(which include provision for doubtful accounts) increased by $.9 million, or
14.8%, to $7.0 million for the three months ended September 30, 1996, as
compared to $6.1 million for the three months ended September 30, 1995. This
increase was primarily the result of the Empire Acquisition of Certain Synergy
Assets. As a percentage of revenues, general and administrative expenses
decreased to 46.6% for the three months ended September 30, 1996, as compared to
49.7% for the three months ended September 30, 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$.3 million, or 23.1%, to $1.6 million for the three months ended September 30,
1996, as compared to $1.3 million for the three months ended September 30, 1995.
This increase was primarily due to the acquisition of assets in the Empire
Acquisition of Certain Synergy Assets and the effect of the Management Buy-Out.
OPERATING LOSS. Operating loss increased by $.2 million, or 16.2%, to $1.5
million for the three months ended September 30, 1996, as compared to $1.3
million for the three months ended September 30, 1995. The increase was
primarily due to the increased depreciation expense resulting from the
Management Buy-Out and the Empire Acquisition of Certain Synergy Assets. As a
percentage of revenues, the operating loss decreased to 9.8% for the three
months ended September 30, 1996, as compared to 10.3% for the three months ended
September 30, 1995.
INTEREST EXPENSE. Interest expense increased by $1.3 million, or 325.0%, to
$1.7 million for the three months ended September 30, 1996, as compared to $.4
million for the three months ended September 30, 1995. This increase was due to
an increase in borrowings as a result of the Empire Acquisition of Certain
Synergy Assets and the effect of the Management Buy-Out.
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NET LOSS. Empire Energy had a net loss of $2.0 million for the three months
ended September 30, 1996, as compared to a net loss of $1.1 million for the
three months ended September 30, 1995. The increase was primarily due to an
increase in interest expense and depreciation resulting from the Management
Buy-Out and the Empire Acquisition of Certain Synergy Assets.
EBITDA. EBITDA increased $93,000, or 387.5%, to $117,000 for the three
months ended September 30, 1996, as compared to $24,000 for the three months
ended September 30, 1995. As a percentage of revenues, EBITDA increased to .8%
for the three months ended September 30, 1996, as compared to .2% for the three
months ended September 30, 1995. 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 to service debt
obligations), but provides additional information for evaluating the
Partnership's ability to distribute the Minimum Quarterly Distribution.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
VOLUME. During fiscal 1996, Empire Energy sold 104.0 million retail propane
gallons, an increase of 41.4 million gallons, or 66.1%, from the 62.6 million
retail propane gallons sold during fiscal 1995. The increase in volume was
primarily attributable to the Empire Acquisition of Certain Synergy Assets and
was also attributable to colder weather during fiscal 1996 in Empire Energy's
previously existing marketing areas.
REVENUES. Revenues increased by $42.1 million, or 74.3%, to $98.8 million
for fiscal 1996, as compared to $56.7 million for fiscal 1995. This increase was
attributable almost entirely to the Empire Acquisition of Certain Synergy Assets
and the colder weather in Empire Energy's marketing areas in fiscal 1996, both
of which had the effect of increasing sales.
COST OF PRODUCT SOLD. Cost of product sold increased by $23.3 million, or
86.9%, to $50.1 million for fiscal 1996, as compared to $26.8 million for fiscal
1995. The increase was attributable to increased volumes sold as a result of the
Empire Acquisition of Certain Synergy Assets and the colder weather. As a
percentage of revenues, cost of products sold increased to 50.7% for fiscal
1996, as compared to 47.3% for fiscal 1995.
GROSS PROFIT. Gross profit increased by $18.9 million, or 63.3%, to $48.7
million for fiscal 1996, as compared to $29.8 million for fiscal 1995. This
increase was primarily due to the increase in sales volume resulting from the
Empire Acquisition of Certain Synergy Assets and colder than normal weather.
Gross profit per retail gallon (which includes non-propane related sales)
decreased by $.007, or 1.5%, to $.469 per gallon for fiscal 1996, as compared to
$.476 per gallon for fiscal 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(which include provision for doubtful accounts) increased by $8.6 million, or
35.1%, to $33.0 million for fiscal 1996, as compared to $24.4 million in fiscal
1995, as a result of the Empire Acquisition of Certain Synergy Assets and the
increase in volumes sold due to the colder weather. As a percentage of revenues,
general and administrative expenses decreased to 33.4% for fiscal 1996, as
compared to 43.1% for fiscal 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$1.6 million, or 37.2%, to $5.9 million for fiscal 1996, as compared to $4.3
million for fiscal 1995, primarily due to the acquisition of assets in
connection with the Empire Acquisition of Certain Synergy Assets.
OPERATING INCOME. Operating income increased by $8.7 million, or 790.9%, to
$9.8 million for fiscal 1996, compared to $1.1 million for fiscal 1995. This
increase was primarily the result of the Empire Acquisition of Certain Synergy
Assets, which resulted in significant operating efficiencies in Empire Energy's
existing business, and an increase in propane sales volumes resulting from the
colder winter in
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fiscal 1996. As a percentage of revenues, operating income increased to 9.9% for
fiscal 1996, as compared to 1.9% for fiscal 1995.
INTEREST EXPENSE. Interest expense increased to $2.6 million for fiscal
1996, as compared to $39,000 for fiscal 1995, mainly due to an increase in
borrowings as a result of the Empire Acquisition of Certain Synergy Assets.
NET INCOME. Empire Energy had net income of $3.7 million for fiscal 1996,
as compared to net income of $.4 million for fiscal 1995. The increase was
primarily the result of an increase in propane sales volume resulting from the
Empire Acquisition of Certain Synergy Assets and colder weather in fiscal 1996.
EBITDA. EBITDA increased $10.3 million, or 190.8%, to $15.7 million in
fiscal 1996, as compared to $5.4 million for fiscal 1995. This increase was due
to the Empire Acquisition of Certain Synergy Assets, which resulted in increased
volumes and significant operating efficiencies, and the increase in volumes sold
due to the colder weather conditions. As a percentage of revenues, EBITDA
increased to 15.9% for fiscal 1996, as compared to 9.5% for fiscal 1995. EBITDA
should not be considered as an alternative to net income (as an indicator of
operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations), but provides additional
information for evaluating the Partnership's ability to distribute the Minimum
Quarterly Distribution.
FISCAL YEAR ENDED JUNE 30, 1995 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1994
VOLUME. During fiscal 1995, Empire Energy sold 62.6 million retail propane
gallons, a decrease of 4.7 million gallons, or 7.0%, from the 67.3 million
retail propane gallons sold during fiscal 1994. The decrease in volume was
attributable to unusually warmer weather during fiscal 1995 in Empire Energy's
marketing areas.
REVENUES. Revenues decreased by $3.5 million, or 5.8%, to $56.7 million for
fiscal 1995, as compared to $60.2 million for fiscal 1994. This decrease was
attributable almost entirely to the warmer than normal weather in Empire
Energy's marketing areas in fiscal 1995, which reduced sales volume.
COST OF PRODUCT SOLD. Cost of product sold decreased by $1.2 million, or
4.2%, to $26.8 million for fiscal 1995, as compared to $28.0 million for fiscal
1994. The decrease was attributable to the warmer weather and decreased sales
volumes in fiscal year 1995. As a percentage of revenues, cost of product sold
increased to 47.3% for fiscal 1995, as compared to 46.5% for fiscal 1994.
GROSS PROFIT. Gross profit decreased by $2.4 million, or 7.3%, to $29.8
million for fiscal 1995, as compared to $32.2 million for fiscal 1994. This
decrease was primarily due to the decrease in sales volume resulting from the
warmer than normal weather. The decrease in gross profit attributable to the
decrease in gallons sold was approximately $2.2 million. The remaining decrease
was due to the decrease in gross profit per retail gallon, as well as decreases
in gross profit from other sales. Gross profit per retail gallon (which includes
non-propane related sales) decreased by $.002 per gallon, or .4%, to $.476 per
gallon for fiscal 1995, as compared to $.478 per gallon for fiscal 1994.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(which include provision for doubtful accounts) increased by $2.9 million, or
13.5%, to $24.4 million for fiscal 1995, as compared to $21.5 million for fiscal
1994. The increase was primarily due to the partial allocation of officers'
salaries and other related expenses to Empire Gas operations in fiscal 1994,
whereas all such salaries and related expenses were allocated to Empire Energy
in fiscal 1995. As a percentage of revenues, general and administrative expenses
increased to 43.1% for fiscal 1995, as compared to 35.7% for fiscal 1994.
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DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
$.4 million, or 7.1%, to $4.3 million for fiscal 1995, as compared with $4.7
million for fiscal 1994, largely as a result of a reduction in depreciation
expense for residential customer tanks.
OPERATING INCOME. Operating income decreased $4.9 million, or 82.0%, to
$1.1 million for fiscal 1995, as compared to $6.0 million for fiscal 1994. This
decrease was primarily due to the warmer weather in fiscal 1995 and the increase
in salaries and commissions as a result of the restructuring due to the
Split-Off in June 1994. As a percentage of revenues, operating income decreased
to 1.9% for fiscal 1995, as compared to 10.0% for fiscal 1994.
INTEREST EXPENSE. Interest expense decreased $79,000, or 66.9%, to $39,000
for fiscal 1995, as compared to $118,000 for fiscal 1994, mainly due to a
decrease in borrowings under Empire Energy's operating line of credit in fiscal
1995 as a result of the reduction in propane sales volume.
NET INCOME. Empire Energy had net income of $.4 million for fiscal 1995, as
compared to net income of $3.5 million for fiscal 1994. The decrease was
primarily the result of the reduction of sales volumes due to the warmer weather
in fiscal 1995.
EBITDA. EBITDA decreased $5.3 million, or 49.3%, to $5.4 million for fiscal
1995, as compared to $10.7 million for fiscal 1994. This decrease was primarily
due to the warmer weather in fiscal 1995 and an increase in general and
administrative expenses due to the restructuring in connection with the
Split-Off. As a percentage of revenues, EBITDA decreased to 9.5% for fiscal
1995, as compared to 17.7% for fiscal 1994. EBITDA should not be considered as
an alternative to net income (as an indicator of operating performance) or as an
alternative to cash flow (as a measure of liquidity or ability to service debt
obligations), but provides additional information for evaluating the
Partnership's ability to distribute the Minimum Quarterly Distribution.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash used in operating activities during the one-month period ended July 31,
1996 was $1.4 million, consisting primarily of a net loss of $1.3 million. Cash
used in investing activities during that one-month period totalled $.5 million,
consisting primarily of purchases of property and equipment. Cash used in
financing activities during that one-month period was $15,000, consisting
entirely of principal payments on purchase obligations.
Cash used in operating activities during the two-month period ended
September 30, 1996 was $4.9 million, consisting primarily of a decrease in trade
receivables and inventories. Cash used in investing activities during that
two-month period totalled $.8 million, consisting primarily of purchases of
property and equipment. Cash provided by financing activities during that
two-month period was $5.6 million, consisting primarily of proceeds of
borrowings in connection with the Management Buy-Out, partially offset by
repayments under the acquisition credit facility and purchases of Empire Energy
stock in connection with the Management Buy-Out.
Cash provided by operating activities during fiscal 1996 was $11.9 million,
as compared to $5.4 million for fiscal 1995. Cash flow from operations consisted
primarily of net income of $3.7 million and non-cash charges of $6.9 million for
the period, principally depreciation and amortization. The impact of working
capital changes increased cash flow from operations by approximately $1.3
million.
Cash used in investing activities for fiscal 1996 totalled $39.0 million,
including approximately $36.0 million of capital expenditures associated with
the Empire Acquisition of Certain Synergy Assets. Empire Energy incurred
approximately $3.2 million of capital expenditures in connection with start-ups
and purchases of property and equipment in the ordinary course of business.
Empire Energy has budgeted
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maintenance capital expenditures for fiscal 1997 of approximately $1.5 million,
subject to the availability of cash and other financing sources.
Cash provided by financing activities was $29.2 million for fiscal 1996.
This amount reflects borrowing of $35.0 million under Empire Energy's credit
facility to finance the Empire Acquisition of Certain Synergy Assets, partially
offset by $5.5 million in principal repayments under the credit facility, and
$.3 million in principal payments on purchase obligations and checks in the
process of collection.
FINANCING AND SOURCES OF LIQUIDITY
In connection with the Management Buy-Out, on August 1, 1996, Empire Energy
obtained a new credit facility from Bank of Boston replacing its prior credit
facilities. The new credit facility provides for loans of $124.0 million,
including (i) a $42.0 million term loan, which matures on December 31, 2002,
(ii) a $52.0 million second term loan, which matures on December 31, 2006, (iii)
a $20.0 million working capital facility which matures on June 30, 2001, and
(iv) a $10.0 million acquisition credit facility, which matures on December 30,
2002. These loans bear interest at rates ranging from the Bank of Boston prime
rate up to 3.25% plus the Eurodollar rate, depending on the type of loan and the
amount of debt outstanding. The new credit facility includes working capital,
cash flow and net worth requirements as well as dividend and capital expenditure
restrictions and is secured by all goods, machinery, equipment and other
personal property of Empire Energy. In addition, Empire Energy's obligations
under the credit facility have been jointly and severally guaranteed by each of
its subsidiaries. As of September 30, 1996, total outstanding indebtedness under
this credit facility was $98.8 million.
It is expected that, at the closing of this offering, the Bank of Boston
credit facility will be repaid in full from the proceeds of this offering and
will be terminated, and all security interests relating thereto will be
released.
COAST
ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS
The following discussion compares the results of operations and other data
for Coast for the three-month period ended October 31, 1996 to the three-month
period ended October 31, 1995, the fiscal year ended July 31, 1996 to the fiscal
year ended July 31, 1995, and the fiscal year ended July 31, 1995 to the fiscal
year ended July 31, 1994.
THREE MONTHS ENDED OCTOBER 31, 1996 COMPARED TO THREE MONTHS ENDED OCTOBER
31, 1995
VOLUME. During the three months ended October 31, 1996, Coast sold 109.1
million wholesale propane gallons of natural gas liquids, a decrease of 5.8
million gallons, or 5.1%, from the 114.9 million gallons sold in the three
months ended October 31, 1995. The decrease in volume was primarily attributable
to the impact of warmer weather in some of the wholesale markets served by
Coast. During the three months ended October 31, 1996, Coast sold 7.0 million
retail propane gallons, an increase of .6 million gallons, or 9.2%, from the 6.4
million retail propane gallons sold during the three months ended October 31,
1995. The increase in retail volume was primarily attributable to increased
sales from acquisitions and start-up operations in the three months ended
October 31, 1996, as compared to the three months ended October 31, 1995.
REVENUES. Revenues increased by $24.1 million, or 28.7%, to $108.2 million
for the three months ended October 31, 1996, as compared to $84.1 million for
the three months ended October 31, 1995. This increase was primarily
attributable to increased natural gas and propane sales prices on a per unit
basis in the three months ended October 31, 1996. Retail operating revenues
increased by $1.5 million, or 21.3%, to $8.4 million for the three months ended
October 31, 1996, as compared to $6.9 million for the three
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months ended October 31, 1995. This increase was attributable to sales from
customer service centers acquired at the end of the three months ended October
31, 1995 and cooler weather in many of Coast's retail marketing areas in the
three months ended October 31, 1996, as compared to the three months ended
October 31, 1995, favorably impacting both volumes and revenues.
COST OF PRODUCT SOLD. Cost of product sold increased by $22.4 million, or
28.8%, to $100.3 million for the three months ended October 31, 1996, as
compared to $77.8 million for the three months ended October 31, 1995. The
increase in cost of product sold was primarily due to the increase in the
wholesale cost of natural gas and propane, which increased by approximately
49.0% and 25.0%, respectively, in the three months ended October 31, 1996, as
compared to the three months ended October 31, 1995. Cost of retail product
sold, primarily the cost of propane, increased by $.9 million, or 30.3%, to $4.1
million for the three months ended October 31, 1996, as compared to $3.1 million
for the three months ended October 31, 1995, as a result of increased sales and
costs from acquisitions and increased product costs due to heavier demand from
cooler weather conditions in many U.S. markets. The cost per gallon of propane
for the retail business increased from $.428 in the three months ended October
31, 1995 to $.520 in the three months ended October 31, 1996, reflecting higher
national demand. As a percentage of revenues, cost of product sold increased to
92.7% for the three months ended October 31, 1996, as compared to 92.6% for the
three months ended October 31, 1995.
GROSS PROFIT. Gross profit increased $1.7 million, or 26.9%, to $7.9
million for the three months ended October 31, 1996, as compared to $6.2 million
for the three months ended October 31, 1995. The increase was primarily
attributable to increased margins in Coast's wholesale and retail businesses due
to inventories purchased at advantageous prices. Retail gross profits increased
by $.5 million, or 13.9%, to $4.3 million for the three months ended October 31,
1996, as compared to $3.8 million for the three months ended October 31, 1995.
This increase was primarily due to higher sales volumes from acquisitions
consummated at the end of the three months ended October 31, 1995. The increase
in gross profits attributable to the increase in gallons sold was approximately
$.4 million. Gross profit per retail gallon increased by $.025, or 4.3%, to
$.616 per gallon for the three months ended October 31, 1996 from $.590 per
gallon for the three months ended October 31, 1995, primarily due to a higher
percentage of residential gallon sales in the three months ended October 31,
1996.
OPERATING EXPENSES. Operating expenses increased $.2 million, or 4.6%, to
$5.2 million for the three months ended October 31, 1996, as compared to $5.0
million for the three months ended October 31, 1995. Most of this increase was
due to expenses associated with the operation of retail customer service centers
acquired at the end of the three months ended October 31, 1995. Operating
expenses for the retail business segment increased by $.2 million, or 7.6%, to
$3.2 million in the three months ended October 31, 1996, as compared to $3.0
million in the three months ended October 31, 1995, due to acquisitions and
start-up operations which resulted in higher operating costs that were not
offset by added sales volumes in the summer months. As a percentage of revenues,
operating expenses decreased to 4.8% for the three months ended October 31,
1995, as compared to 5.9% for the three months ended October 31, 1995.
SALE OF PARTNERSHIP INTEREST. Effective October 1, 1996, Coast terminated
its participation and interest in Coast Energy Investments, Inc., a limited
partnership in which Coast Energy Group, Inc., a wholly owned subsidiary of
Coast, had been a 50% limited partner. The original partnership agreement
provided for a minimum investment term through December 1997. The termination
resulted in the sale of Coast's partnership interest to its 50% partner and an
employee of the partnership. Coast recorded a net loss on the disposition of the
partnership interest of $.7 million. This amount consisted of a $.2 million loss
on the partnership investment and $.5 million of termination costs consisting of
salary, consulting, non-compete agreements and other related expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(which include corporate administrative expenses) increased by $.2 million, or
17.8%, to $1.1 million for the three months ended October 31, 1996, as compared
to $.9 million for the three months ended October 31, 1995. The majority
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of this increase was attributable to outside services and travel expenses in
conjunction with acquisition matters. As a percentage of revenues, general and
administrative expenses decreased to 1.0% for the three months ended October 31,
1996, as compared to 1.1% for the three months ended October 31, 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $.1
million, or 8.5%, to $1.1 million for the three months ended October 31, 1996,
as compared to $1.0 million for the three months ended October 31, 1995. This
increase was primarily attributable to an increase in customers and tank sets
and acquisitions consummated at the end of the three months ended October 31,
1995.
OPERATING LOSS. Operating loss decreased $.5 million, or 83.1%, to $.1
million for the three months ended October 31, 1996, as compared to $.6 million
in the three months ended October 31, 1995. This decrease was primarily due to
the increase in wholesale and retail revenues during the three months ended
October 31, 1996 from Coast's natural gas marketing efforts and retail
acquisitions and start-up activities.
INTEREST EXPENSE. Interest expense decreased by $.1 million, or 6.6%, to
$1.3 million for the three months ended October 31, 1996, as compared to $1.4
million for the three months ended October 31, 1995. This decrease was primarily
due to decreases in bank borrowing rates in the three months ended October 31,
1996, as compared to the three months ended October 31, 1995.
NET LOSS. Coast had a net loss of $.9 million for the three months ended
October 31, 1996, as compared to a net loss of $1.4 million for the three months
ended October 31, 1995. This decrease was primarily attributable to an increase
in wholesale sales and profits for the three months ended October 31, 1996.
EBITDA. Total EBITDA increased by $.6 million, or 186.5%, to $1.0 million
for the three months ended October 31, 1996, as compared to $.3 million for the
three months ended October 31, 1995. Coast's retail EBITDA increased by $.3
million, or 35.6%, to $1.2 million for the three months ended October 31, 1996,
as compared to $.9 million for three months ended October 31, 1995. The increase
in total EBITDA reflects the impact of higher earnings from wholesale operations
and increased earnings from recent retail acquisitions and internal customer
growth. As a percentage of revenues, total EBITDA increased to .9% for the three
months ended October 31, 1996, as compared to .4% for the three months ended
October 31, 1995. EBITDA should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative to cash
flow (as a measure of liquidity or ability to service debt obligations), but
provides additional information for evaluating the Partnership's ability to
distribute the Minimum Quarterly Distribution.
FISCAL YEAR ENDED JULY 31, 1996 COMPARED TO FISCAL YEAR ENDED JULY 31, 1995
VOLUME. During fiscal 1996, Coast sold 328.4 million wholesale propane
gallons of natural gas liquids, an increase of 27.0 million gallons, or 9.0%,
from the 301.4 million gallons sold in fiscal 1995. The increase in volume was
primarily attributable to the impact of colder weather in the wholesale markets
served by Coast in the eastern United States. During fiscal 1996, Coast sold
34.9 million retail propane gallons, a decrease of 1.7 million gallons, or 4.6%,
from the 36.6 million retail propane gallons sold during fiscal 1995. The
decrease in retail volume was primarily attributable to warmer weather during
fiscal 1996 in Coast's retail marketing areas. The weather in Coast's areas of
retail operations during fiscal 1996 was approximately 16% warmer than normal
for such areas. The weather in Coast's areas of retail operations during fiscal
1995 was approximately 2% colder than normal for such areas.
REVENUES. Revenues increased by $117.5 million, or 44.0%, to $384.4 million
for fiscal 1996, as compared to $266.8 million for fiscal 1995. This increase
was primarily attributable to increased wholesale sales from Coast's natural gas
marketing efforts that resulted in an increase of $82.0 million in fiscal 1996.
Retail operating revenues decreased by $.1 million, or .3%, to $38.8 million for
fiscal 1996, as compared to $38.9 million for fiscal 1995. This decrease was
attributable almost entirely to the warmer than normal
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weather in Coast's marketing areas in fiscal 1996, which adversely impacted both
sales volumes and revenues.
COST OF PRODUCT SOLD. Cost of product sold increased by $116.7 million, or
49.7%, to $351.2 million for fiscal 1996, as compared to $234.5 million for
fiscal 1995. The increase in cost of product sold was primarily related to the
increase in wholesale sales of natural gas. Cost of retail product sold,
primarily the cost of propane, was constant in fiscal 1996 and 1995 at $17.4
million. The cost per gallon of propane for the retail business increased from
$.443 in fiscal 1995 to $.461 in fiscal 1996, reflecting higher national demand
resulting from colder than normal weather in many regions. As a percentage of
revenues, cost of product sold increased to 91.4% for fiscal 1996, as compared
to 87.9% for fiscal 1995.
GROSS PROFIT. Gross profit increased by $.8 million, or 2.6%, to $33.1
million in fiscal 1996, as compared to $32.3 million for fiscal 1995. This
increase was primarily attributable to increased margins in Coast's wholesale
businesses, due to a colder heating season in the eastern United States, where a
majority of Coast's wholesale sales are currently made. Retail gross profits
decreased by $.2 million, or .8%, to $21.3 million for fiscal 1996, as compared
to $21.5 million for fiscal 1995. This decrease was due primarily to lower sales
volumes as a result of warmer than normal weather in Coast's retail marketing
areas. The decrease in gross profits attributable to the decrease in gallons
sold was approximately $.9 million. Gross profit per retail gallon increased by
$.022, or 3.7%, to $.610 per gallon for fiscal 1996 from $.588 per gallon for
fiscal 1995, due to increased average propane selling prices.
OPERATING EXPENSES. Operating expenses increased $.8 million, or 4.0%, to
$21.0 million in fiscal 1996, as compared to $20.2 million in fiscal 1995. Most
of this increase was related to increases in Coast's retail operations.
Operating expense for the retail business segment increased by $.3 million, or
2.1%, to $12.1 million in fiscal 1996, as compared to $11.9 million in fiscal
1995. The majority of this increase was attributable to acquisitions and
start-up operations in fiscal 1996 that experienced higher operating costs that,
due to warmer weather, were not offset by added sales volumes. As a percentage
of revenues, operating expenses decreased to 5.5% for fiscal 1996, as compared
to 7.6% for fiscal 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(which include corporate administration expenses) increased by $.1 million, or
2.4%, to $3.8 million for fiscal 1996, as compared to $3.7 million for fiscal
1995. The majority of this increase was attributable to normal salary increases
and the addition of one staff position to assist with future acquisitions. As a
percentage of revenues, general and administrative expenses decreased to 1.0%
for fiscal 1996, as compared to 1.4% for fiscal 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$.4 million, or 11.4%, to $4.2 million for fiscal 1996, as compared to $3.8
million for fiscal 1995. This increase was primarily attributable to the
acquisition of North Star Fuel and Propane, Inc. in fiscal 1996 and the purchase
of retail customer tanks.
OPERATING INCOME. Operating income decreased by $.5 million, or 10.8%, to
$4.0 million for fiscal 1996, as compared to $4.5 million for fiscal 1995. This
decrease was primarily due to the decrease in retail gallons sold because of
warmer than normal weather in most of Coast's retail marketing areas. As a
percentage of revenues, operating income decreased to 1.1% for fiscal 1996, as
compared to 1.7% for fiscal 1995.
INTEREST EXPENSE. Interest expense increased by $.4 million, or 6.8%, to
$5.5 million in fiscal 1996, as compared to $5.1 million for fiscal 1995. This
increase was primarily due to an increase in borrowings under Coast's
acquisition revolving line of credit in fiscal 1996 related to the purchase of
North Star Fuel and Propane, Inc.
NET LOSS. Coast had a net loss of $1.0 million for fiscal 1996, as compared
to a net loss of $.4 million for fiscal 1995 before an extraordinary charge to
income for the early retirement of debt (net of income
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taxes). The $.6 million greater loss in fiscal 1996 reflects the impact of the
significantly warmer than normal weather and higher interest expenses.
EBITDA. Total EBITDA decreased by $.1 million, or .7%, to 8.2 million for
fiscal 1996, as compared to $8.3 million for fiscal 1995. Coast's retail EBITDA
decreased by $.4 million, or 4.4%, to $9.2 million for fiscal 1996, as compared
to $9.6 million for fiscal 1995. The warmer than normal weather in Coast's
retail marketing areas in fiscal 1996 more than offset the positive impact of
higher earnings from recent acquisitions and internal customer growth. As a
percentage of revenues, total EBITDA decreased to 2.2% for fiscal 1996, as
compared to 3.1% for fiscal 1995. EBITDA should not be considered as an
alternative to net income (as an indicator of operating performance) or as an
alternative to cash flow (as a measure of liquidity or ability to service debt
obligations), but provides additional information for evaluating the
Partnership's ability to distribute the Minimum Quarterly Distribution.
FISCAL YEAR ENDED JULY 31, 1995 COMPARED TO FISCAL YEAR ENDED JULY 31, 1994
VOLUME. During fiscal 1995, Coast sold 301.4 million wholesale propane
gallons, a decrease of 73.0 million gallons, or 19.5%, from the 374.4 million
wholesale propane gallons sold for fiscal 1994. The decrease in wholesale volume
was due to warmer than normal weather in Coast's wholesale marketing areas
during fiscal 1995. Retail propane sales volumes increased by 5.7 million
gallons, or 18.3%, to 36.6 million gallons for fiscal 1995, as compared to 30.9
million gallons for fiscal 1994. The increase in retail volume was primarily
attributable to the consummation of two acquisitions in fiscal 1995, with annual
sales of approximately .9 million gallons, the addition of new customers from
internal growth and colder than normal weather during fiscal 1995 in Coast's
retail marketing areas. The weather in Coast's areas of retail operations during
fiscal 1995 was approximately 2% colder than normal for such areas. The weather
in Coast's areas of retail operations during fiscal 1994 was approximately 5%
warmer than normal for such areas.
REVENUES. Revenues increased by $23.8 million, or 9.8%, to $266.8 million
for fiscal 1995, as compared to $243.0 million for fiscal 1994. The increase in
sales primarily reflects increased natural gas liquids sales in Coast's natural
gas procurement and marketing operations. Retail sales revenues increased by
$5.8 million, or 17.5%, to $38.9 million for fiscal 1995, as compared to $33.1
million for fiscal 1994. This increase was primarily attributable to the
addition of new customers from both acquisitions and internal growth, and
weather for fiscal 1995 that was colder than normal in Coast's retail marketing
areas.
COST OF PRODUCT SOLD. Cost of product sold increased by $19.9 million, or
9.3%, to $234.5 million for fiscal 1995, as compared to $214.6 million for
fiscal 1994. This increase primarily reflects the increase in the cost of
wholesale sales. Cost of retail propane sold increased by $2.1 million, or
13.8%, to $17.4 million for fiscal 1995, as compared to $15.3 million for fiscal
1994. The increase was primarily attributable to an increase in retail gallons
sold for fiscal 1995. The cost per gallon of propane for the retail business
decreased from $.458 in fiscal 1994 to $.443 in fiscal 1995, reflecting lower
national demand. As a percentage of revenues, cost of product sold decreased to
87.9% for fiscal 1995, as compared to 88.3% for fiscal 1994.
GROSS PROFIT. Gross profit increased by $4.0 million, or 13.9%, to $32.3
million for fiscal 1995, as compared to $28.3 million for fiscal 1994. Most of
the increase in gross profit was attributable to the retail business, in which
gross profit increased by $3.7 million, or 20.6%, to $21.5 million for fiscal
1995, as compared to $17.8 million for fiscal 1994. This increase was primarily
due to an increase in sales volume resulting from acquisitions, internal growth
and colder weather in Coast's retail marketing areas. The increase in gross
profit attributable to an increase in retail gallons sold was $3.4 million. The
remaining increase was due to the increase in the gross profit per retail
gallon, as well as increases in gross profit from other sales. Gross profit per
retail gallon increased by $.011, or 1.9%, to $.588 per gallon for fiscal 1995,
as compared to $.577 per gallon for fiscal 1994, due to lower product costs on a
per-gallon basis.
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OPERATING EXPENSES. Operating expenses increased by $2.5 million, or 13.9%,
to $20.2 million for fiscal 1995, as compared to $17.8 million for fiscal 1994.
This increase was primarily related to Coast's retail operations, where
operating expenses increased by $2.0 million, or 19.8%, to $11.9 million for
fiscal 1995, as compared to $9.9 million for fiscal 1994. The majority of this
increase was attributable to acquisitions and internal growth and related
customer service and delivery expenses. As a percentage of revenues, operating
expenses increased to 7.6% for fiscal 1995, as compared to 7.3% for fiscal 1994.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(which include corporate administrative expenses) increased by $.2 million, or
8.2%, to $3.7 million for fiscal 1995, as compared to $3.5 million for fiscal
1994. This increase was primarily attributable to increased salaries and
employee medical and disability insurance expenses. As a percentage of revenues,
general and administrative expenses remained relatively constant for fiscal 1995
and 1994.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$.5 million, or 15.3%, to $3.8 million for fiscal 1995, as compared with $3.3
million for fiscal 1994, largely as a result of increased ownership of tanks,
trucks and customer lists as a result of acquisitions and internal growth.
OPERATING INCOME. Operating income increased by $.7 million, or 18.0%, to
$4.5 million for fiscal 1995, as compared to $3.8 million for fiscal 1994. The
increase was primarily due to increased sales as a result of acquisitions and
internal growth. As a percentage of revenues, operating income increased to 1.7%
for fiscal 1995, as compared to 1.6% for fiscal 1994.
INTEREST EXPENSE. Interest expense increased by $1.1 million, or 27.1%, to
$5.1 million for fiscal 1995, as compared to $4.0 million for fiscal 1994,
primarily due to an increase in borrowings under Coast's operating line of
credit in fiscal 1995 related to acquisitions and increases in the interest rate
on borrowings.
NET LOSS. Coast had a net loss of $.4 million for fiscal 1995 before an
extraordinary charge to income for early retirement of debt (net of income
taxes), as compared to a net loss of $.2 million for fiscal 1994. The increased
loss was primarily due to higher interest expenses related to increases in the
interest rate on borrowings.
EBITDA. EBITDA increased $1.2 million, or 16.8%, to $8.3 million for fiscal
1995, as compared to $7.1 million for fiscal 1994. This increase primarily
reflects the benefit of colder weather in Coast's retail marketing areas,
partially offset by warmer weather in Coast's wholesale markets. Coast's retail
EBITDA increased by $1.7 million, or 21.7%, to $9.6 million in fiscal 1995, as
compared to $7.9 million in fiscal 1994. The increase in retail volumes is
attributable primarily to internal growth, acquisitions and favorable weather
conditions. As a percentage of revenues, EBITDA increased to 3.1% for fiscal
1995, as compared to 2.9% for fiscal 1994. EBITDA should not be considered as an
alternative to net income (as an indicator of operating performance) or as an
alternative to cash flow (as a measure of liquidity or ability to service debt
obligations), but provides additional information for evaluating the
Partnership's ability to distribute the Minimum Quarterly Distribution.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash provided by operating activities during the three months ended October
31, 1996 was $.2 million. Cash flow from operations included a net loss of $.9
million, largely offset by non-cash charges of $.8 million for the period,
comprised principally of depreciation and amortization expense. The impact of
working capital changes increased cash flow by approximately $.4 million.
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Cash provided by operating activities during fiscal 1996 was $7.2 million.
Cash flow from operations included a net loss of $1.0 million offset by non-cash
charges of $3.7 million for the period, consisting principally of depreciation
and amortization expense. The impact of working capital changes increased cash
flow from operations by approximately $4.4 million.
Cash used in investment activities for the three months ended October 31,
1996 totalled $.6 million, which was principally used for additions to plant and
equipment. Cash provided by financing activities was $3.6 million for the three
months ended October 31, 1996. This amount reflects borrowings under Coast's
revolving credit line of $4.6 million, partially offset by principal payments on
existing bank notes, capital lease obligations and other notes payable in the
amount of $1.0 million.
Cash used in investment activities for fiscal 1996 totalled $5.6 million,
including $3.0 million of capital expenditures associated with the acquisition
of North Star Fuel and Propane, Inc. Coast incurred approximately $2.5 million
of capital expenditures in connection with its internal growth programs and $.5
million for purchases of property and equipment in the ordinary course of
business. Coast has budgeted maintenance capital expenditures for fiscal 1997 of
approximately $.5 million, subject to the availability of cash and other
financing sources.
Cash required by financing activities was $4.4 million for fiscal 1996. This
amount reflects $1.2 million in capital lease obligations to finance purchases
of tanks, offset by $1.2 million in principal payments under Coast's existing
credit facility and $4.4 million in principal payments on acquisition notes,
capital lease obligations and other notes payable.
FINANCING AND SOURCES OF LIQUIDITY
In fiscal 1995, Coast Gas, Inc., the wholly owned operating subsidiary of
Coast, entered into a credit facility with Bank of America consisting of a
reducing revolving credit facility in the amount of up to $23.0 million and bank
term notes in the original amount of up to $15.0 million. The maximum amount of
the reducing revolving credit facility is fixed at $23.0 million until May 1,
1997, at which point it begins decreasing annually to $16.0 million on May 1,
2000 and matures on September 14, 2000. The revolving and term loans, at the
election of Coast Gas, Inc., bear interest at the Bank of America prime rate
plus 1.50% or LIBOR plus 2.75% per annum. The credit facility contains customary
financial and performance covenants. Coast's obligations under the credit
facility are collateralized by all of the personal property and fixtures of
Coast Gas, Inc. and its subsidiary and a pledge of the capital stock of Coast
Gas, Inc. and its subsidiary. Concurrently, Coast Gas, Inc. issued $15.0 million
in unsecured senior subordinated notes with a fixed interest rate of 12.50% per
annum. Coast also has a $20.0 million letter of credit line for its wholesale
operations.
As of October 31, 1996, the total outstanding indebtedness under Coast's
credit facility was approximately $17.7 million. The oustanding balance under
the credit facility represents an increase of $4.6 million since July 31, 1996,
primarily due to purchases of customer tanks, capital expenditures, payments on
term notes and working capital charges. It is expected that, at the closing of
this offering, Coast's credit facility and the subordinated notes will be repaid
in full from the proceeds of this offering and will be terminated, and all
security interests related thereto will be released.
Coast's principal operating cash requirements relate to maintenance capital
expenditures (currently budgeted at $.5 million for fiscal 1997) and funds for
acquisitions and start-up operations, if any.
DESCRIPTION OF INDEBTEDNESS
DESCRIPTION OF SENIOR SECURED NOTES
Concurrently with this offering, the Operating Partnership will issue $220.0
million aggregate principal amount of Notes in a private placement to
institutional investors. The following is a summary of the terms of the Notes,
each of which will be issued pursuant to a Note Agreement (collectively, the
"Note
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Agreement"), a form of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. This summary is qualified in its
entirety by reference to the Note Agreement.
The Operating Partnership's obligations under the Note Agreement and the
Notes will be secured, on an equal and ratable basis with its obligations under
the Bank Credit Facility, by a first priority security interest in the Operating
Partnership's inventory, accounts receivable, certain customer storage tanks and
the capital stock of each subsidiary of the Operating Partnership that is
designated as a Restricted Subsidiary under the terms of (and as defined in) the
Note Agreement (other than Qualifying Restricted Subsidiaries as defined
therein). The Notes will rank pari passu with the Bank Credit Facility. The
Notes will bear interest at an annual rate of 7.53%, payable semi-annually in
arrears. The Notes will mature 14 years from the date of issuance. The Notes
provide for eight equal mandatory repayments of the principal payable annually
beginning at the end of the seventh year after their issuance. The Notes may be
prepaid at any time, at the option of the Operating Partnership, and under
certain circumstances following the disposition of assets or the sale of equity
interests of Restricted Subsidiaries may be required to be prepaid, in whole or
in part, at a price equal to 100% of the principal amount thereof plus accrued
and unpaid interest and the Make Whole Amount (as defined in the Note
Agreement). The Make Whole Amount generally will be equal to the excess of (i)
the present value of the remaining interest and principal payments on the Notes,
as determined using a discount rate equal to the yield on the U.S. Treasury
obligation having a maturity date corresponding to the then remaining weighted
average life of the Notes being prepaid plus a spread of 50 basis points, (ii)
over the principal amount of the Notes plus accrued and unpaid interest.
The Note Agreement contains customary covenants applicable to the Operating
Partnership and its Restricted Subsidiaries, including limitations (with certain
exceptions) on the ability of the Operating Partnership and its Restricted
Subsidiaries to, among other things, incur additional indebtedness, create
liens, make investments and loans, enter into mergers, consolidations or sales
of all or substantially all assets and make asset sales.
The Note Agreement also provides that in general the Operating Partnership
will not, directly or indirectly, make any Restricted Payment (as defined in the
Note Agreement and including distributions to the Partnership), except that the
Operating Partnership may 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, does not exceed Available Cash (as
defined in the Note Agreement) with respect to the immediately preceding
quarter; (b) no matured default (or unmatured interest payment default) exists
before such Restricted Payment and no matured or unmatured default exists after
giving effect thereto; and (c) the ratio of Consolidated Cash Flow to
Consolidated Interest Expense (as such terms are defined in the Note Agreement)
is equal to or greater than 1.75 to 1.00 for the period of four fiscal quarters
immediately preceding the date of such Restricted Payment. The Note Agreement
provides that in the quarter preceding a quarter in which an interest payment is
to be made on the Notes, Available Cash is required to reflect a reserve equal
to 50% of the interest to be paid on the Notes and on certain other indebtedness
of the Operating Partnership. In addition, in the third, second and first
quarters preceding a quarter in which a scheduled principal payment is to be
made on the Notes, Available Cash is required to reflect a reserve equal to 25%,
50% and 75%, respectively, of the principal amount to be repaid on such payment
date and on certain other indebtedness of the Operating Partnership.
The Partnership believes that upon the closing of this offering, after
giving pro forma effect to the Transactions, the Operating Partnership would be
in compliance with all the restrictive and affirmative covenants under the
Notes.
In the event of a Change of Control (as defined in the Note Agreement), the
holders of the Notes will have the right, but not the obligation, to put the
Notes back to the Operating Partnership at 101% of the principal amount thereof
plus accrued and unpaid interest.
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If an event of default exists on the Notes, the holders of Notes may
accelerate the maturity of the Notes and exercise other rights and remedies.
Events of default include (a) failure to pay any principal or premium when due,
or interest within five days of when due, on the Notes, (b) failure to perform
or otherwise comply with covenants in the Note Agreement, (c) default by the
Operating Partnership or any Restricted Subsidiary under certain other
indebtedness if such default concerns the payment of principal, premium or
interest or the effect of such default is to cause the acceleration of such
indebtedness, (d) certain unsatisfied final judgments and (e) various bankruptcy
or insolvency events involving the Managing General Partner, the Operating
Partnership or any Restricted Subsidiary.
DESCRIPTION OF THE BANK CREDIT FACILITY
Concurrently with this offering, the Operating Partnership will enter into
the Bank Credit Facility with one or more commercial banks. The following is a
summary of the terms of the Bank Credit Facility, the form of which has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. This summary is qualified in its entirety by reference to the Bank Credit
Facility.
The Bank Credit Facility consists of a $75.0 million Acquisition Facility
and a $50.0 million Working Capital Facility. The Operating Partnership's
obligations under the Bank Credit Facility will be secured, on an equal and
ratable basis with its obligations under the Notes, by a first priority security
interest in the Operating Partnership's inventory, accounts receivable, certain
customer storage tanks and the capital stock of each future Restricted
Subsidiary. The Bank Credit Facility will rank pari passu with the Notes. The
Bank Credit Facility will bear interest at a rate based upon either an interbank
offered rate plus a margin or a base rate plus a margin.
The Working Capital Facility will mature three years from the closing of
this offering. The Bank Credit Facility provides that there must be no amount
outstanding under the Working Capital Facility (excluding letters of credit) in
excess of $10.0 million for at least 30 consecutive days during each fiscal
year. The Acquisition Facility will revolve for three years, after which time
any outstanding loans thereunder will amortize quarterly for a period of four
years thereafter.
The Bank Credit Facility contains negative covenants and default provisions
generally similar to those contained in the Note Agreement. In addition, the
Bank Agreement contains covenants requiring the Operating Partnership (i) to
maintain a ratio of Total Funded Indebtedness (less the amount of cash on hand
with the Operating Partnership and Restricted Subsidiaries in excess of $1.0
million but less than $10.0 million) to Consolidated Cash Flow (as such terms
are defined in the Bank Credit Facility) of not greater than 4.75 to 1.00 from
closing through the end of the first year after the closing, 4.50 to 1.00 from
the beginning of, and through the second year after, the closing, and 4.25 to
1.00 thereafter, (ii) to maintain a ratio of Consolidated Cash Flow to
Consolidated Interest Expense (as such terms are defined in the Bank Credit
Facility) of at least 2.00 to 1.00 from closing through the end of the first
year after the closing, 2.25 to 1.00 from the beginning of, and through the
second year after, the closing, and 2.50 to 1.00 thereafter, and (iii) limit
payments on operating lease payments to an amount not to exceed $15.0 million in
any fiscal year.
CAPITAL EXPENDITURES AND COMMITMENTS
The Partnership has budgeted maintenance capital expenditures for fiscal
1997 of approximately $3.5 million. In addition, the Partnership intends to
continue to pursue growth through acquisitions, internal growth and start-ups.
The Partnership expects to fund these expenditures from cash flow from
operations or from additional borrowings under the Bank Credit Facility.
LITIGATION AND OTHER CONTINGENCIES
For a description of certain litigation and other contingencies of the
Partnership, see "Business and Properties -- Litigation and Other
Contingencies."
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EFFECTS OF INFLATION
In general, inflation has not had any significant impact on the Partnership
in recent years and changes in propane prices, in particular, have been
dependent on factors generally more significant than inflation, such as weather
and availability of supply. However, to the extent inflation affects the amounts
the Partnership pays for propane as well as operating and administrative
expenses, the Partnership attempts to limit the effects of inflation by passing
on propane cost increases to customers in the form of higher selling prices to
the extent it can do so, as well as through cost controls and productivity
improvements. As such, inflation has not had a material adverse effect on the
Partnership's profitability, and the Partnership does not believe normal
inflationary pressures will have a material adverse effect on future results of
operations of the Partnership.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" ("SFAS No. 121"). This statement requires that long-lived assets
and certain identifiable intangible assets to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Partnership is
required to adopt SFAS No. 121 in fiscal year 1997. The initial adoption of this
statement is not expected to have a material impact on the Partnership's
operating results or financial condition.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). This statement
establishes a fair value-based method of accounting for stock-based compensation
plans (including compensation plans based on interests in partnerships). It also
encourages entities to adopt that method in place of the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," for all arrangements under which employees receive shares of stock
or other equity instruments of the employer or the employer incurs liabilities
to employees in amounts based upon the price of its stock or other equity
instruments. The Partnership is required to adopt this statement in fiscal year
1997. The adoption of this statement is not expected to have a material impact
on the Partnership's operating results or financial condition.
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BUSINESS AND PROPERTIES
GENERAL
The Partnership believes that, upon consummation of the Transactions, it
will be the fifth largest retail marketer of propane in the United States in
terms of volume, serving more than 360,000 residential, commercial, industrial
and agricultural customers from 312 customer service centers in 26 states. The
Partnership was recently formed to own and operate the propane business and
assets of Synergy, Empire Energy, Myers and Coast. The Partnership's operations
are concentrated in the east coast, south-central and west coast regions of the
United States. For the fiscal year ended June 30, 1996, the Partnership had
combined retail propane sales of approximately 235 million gallons and pro forma
EBITDA of approximately $47.0 million. Pro forma EBITDA would have been
approximately $54.9 million if effect were given to an additional $7.9 million
of expense reductions which the Partnership believes are achievable upon
consummation of the Transactions, but which have not been included in the pro
forma adjustments.
The Partnership believes that it is well positioned to compete successfully
in the propane business for the following reasons: (i) management's experience
in generating profitable growth at its customer service centers by fostering an
entrepreneurial approach by local managers; (ii) the Partnership's large
national and geographically diversified operations, which the Partnership
believes will reduce the effects of adverse weather conditions in any one region
on EBITDA and allow it to achieve economies of scale; (iii) the significant
proportion of the Partnership's retail sales that is made to residential
customers, which are generally more profitable than sales to other customers;
(iv) management's experience in identifying, evaluating and completing both
small and large acquisitions; (v) the Partnership's substantial national
wholesale supply and logistics business, which provides it with a national
presence and a relatively secure source of propane to support the service goals
of its customer service centers; (vi) the Partnership's centralized
administrative systems that will enable local managers to focus on customer
service and growth; and (vii) the Partnership's relationship with Northwestern
Growth, which has proven experience in the energy distribution business and in
the acquisition and growth of propane businesses. Although the Partnership
believes it has a number of competitive strengths, the propane industry is
highly competitive and includes a number of large national firms and regional
firms and several thousand small independent firms. Certain competitors may have
greater financial resources or lower operating costs than the Partnership.
Further, variations in the weather or the economy in one or more regions in
which the Partnership operates can significantly affect the total volume of
propane sold by the Partnership and, consequently, the Partnership's results of
operations.
BUSINESS STRATEGY
The principal elements of the Partnership's business strategy are to (i)
extend and refine the existing service orientation of the Combined Operations,
(ii) continue to pursue balanced growth through small and large acquisitions,
internal growth at its existing customer service centers and start-ups of new
customer service centers, (iii) enhance the profitability of its existing
operations by integrating the Combined Operations, implementing
entrepreneurially oriented local manager incentive programs, where appropriate,
and continuing to centralize administrative systems and (iv) capitalize on the
Partnership's national wholesale supply and logistics business.
FOCUS ON CUSTOMER SERVICE. The Partnership seeks to be recognized in the
marketplace as the most customer service-oriented propane supplier. Although
propane is a commodity product, the Partnership believes that it will be able to
distinguish itself from the competition by providing reliable and timely
delivery of propane at competitive prices. The Partnership believes that
establishing and clearly communicating standards of service and performance
expectations at all levels of the Combined Operations, and rewarding its
employees accordingly, will enable the Partnership to achieve its service goals.
Management has instituted incentive programs at existing Coast customer service
centers targeted to
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fostering an entrepreneurial environment at the customer service center level.
These programs provide substantial rewards to local managers for managing
service-oriented and profitable operations. The Partnership intends to expand
such incentive programs to additional customer service locations included in the
Combined Operations, where appropriate.
CONTINUED BALANCED GROWTH. The Partnership intends to continue to pursue
balanced growth through small and large acquisitions, internal growth at its
existing customer service centers and start-ups of new customer service centers.
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 forseeable future. The Partnership believes
that the fragmented nature of the retail propane industry provides significant
opportunities for growth through strategic acquisitions. Industry sources
indicate that there are over 8,000 retail propane operations in the United
States, of which the ten largest account for approximately 33% of industry
volumes. The Partnership's acquisition strategy will concentrate on companies
that have one or more of the following characteristics: (i) locations in areas
serviced by the Partnership that may be combined with existing operations,
providing greater economies of scale at the customer service center level, (ii)
a recent record of growth and a local reputation for quality service, (iii)
locations in areas that are relatively colder and (iv) operations with a
relatively high proportion of sales to the more profitable residential customer
segment. As part of its acquisition program, the Partnership generally expects
to retain the name and identity of the acquired entity, which the Partnership
believes will preserve the goodwill of the acquired business and promote
continued local customer loyalty. Upon consummation of the Transactions, the
Partnership's ability to make acquisitions will be facilitated by the
availability of the Acquisition Facility and the ability to fund acquisitions
through the issuance of additional limited partner interests. There can be no
assurance, however, that the Partnership will identify attractive acquisition
candidates in the future, that the Partnership will be able to acquire such
businessses on economically acceptable terms, that any acquisitions will not be
dilutive to earnings and distributions to the Unitholders or that any additional
debt incurred to finance an acquisition will not affect the ability of the
Partnership to make distributions to the Unitholders. The Partnership is not
required under the Partnership Agreement to seek Unitholder approval of any
acquisition.
In the ordinary course of their businesses, Northwestern Growth, Synergy,
Empire Energy and Coast engage in discussions regarding the possible acquisition
of propane businesses. Since September 30, 1996, Northwestern Growth has
purchased, for an aggregate price of approximately $2.2 million, propane
businesses having aggregate annual retail propane sales of approximately 1.0
million gallons. All of these businesses, which are located in or near Coast's
current retail markets, will be contributed to the Partnership in connection
with the Transactions. Although the companies comprising the Combined Operations
continue to pursue acquisition opportunities, none of them currently has under
negotiation any additional acquisitions.
In addition to pursuing growth through acquisitions, the Partnership will
continue to focus on internal growth at its existing customer service centers.
The Partnership will seek to achieve internal growth by, among other things,
providing superior service and instituting programs that encourage employees,
existing customers and local real estate agents and contractors to refer new
accounts. This strategy will be implemented primarily through the Partnership's
incentive programs that will reward local managers for managing service-oriented
and profitable operations.
In some instances, the Partnership may identify a market that has one or
more of the characteristics that would make it attractive for an acquisition but
in which there are no attractive available acquisition candidates. In certain of
these cases, the Partnership may seek to penetrate the market by establishing a
new customer service center. The Partnership believes that it can successfully
initiate these start-up operations in attractive markets by identifying and
hiring local managers with proven propane service experience and establishing
programs that reward service-oriented and profitable operations and that allow
the managers to share in the growth of the business.
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ENHANCE PROFITABILITY OF ITS EXISTING OPERATIONS. The Partnership believes
that it can enhance the profitability of its customer service centers by
integrating the Combined Operations, reducing inefficiencies in areas where
there is a geographic overlap of services and implementing "best practices" and
management incentive programs throughout the Partnership's operations. As part
of its plans to integrate the Combined Operations, the Partnership intends to
consolidate and centralize ongoing administrative functions and systems, which
should enable local managers to devote their time to providing customer service
and achieving other performance goals. In addition, the Partnership believes it
can improve efficiencies in areas where there is a geographic overlap of
services provided by customer service centers. The Partnership's management has
identified effective operating programs and strategies currently used by one of
the constituent companies but not currently in use by one or more of the others.
The Partnership believes that the implementation of these "best practices"
throughout the Combined Operations will improve customer retention, foster
expansion of its customer base and create operating efficiencies and cost
savings opportunities. Furthermore, the Partnership believes that instituting
management incentive programs, where appropriate, and fostering an
entrepreneurial approach at additional customer service centers will give
managers the incentive to increase such customer service centers' profitability.
CAPITALIZE ON NATIONAL SUPPLY AND LOGISTICS BUSINESS. The Partnership has a
national wholesale propane supply and logistics business with sales of
approximately 226 million gallons in fiscal 1996. The Partnership believes that
this business provides it with a reasonably secure, competitively priced and
efficient supply base to support the service goals of its existing customer
service centers. In addition, the Partnership believes its wholesale and
logistics business positions it well for expansion through acquisitions or
start-up operations in new markets. As part of its wholesale business, the
Partnership also provides product supply and financial and technical assistance
to certain small independent retailers. While these arrangements provide some
economic return to the Partnership, the Partnership believes their greater value
lies in the resulting relationships, which position the Partnership to acquire
such businesses in the event they become available for purchase.
TRANSACTION BACKGROUND
Northwestern Growth is a wholly owned subsidiary of NPS, a New York Stock
Exchange-listed energy distribution company. Northwestern Growth was formed in
1994 to pursue and manage nonutility investments and development activities for
NPS, with a primary focus on growth opportunities in the energy, energy
equipment and energy services industries.
To capitalize on the growth and consolidation opportunities in the propane
distribution market, in August 1995, Northwestern Growth, through its
subsidiary, Synergy, acquired SGI, then the sixth largest retail marketer of
propane in the United States. SGI has been in the retail propane distribution
business since 1969. At the time of the acquisition, SGI maintained 152 retail
branches serving approximately 200,000 customers in 23 states in the east and
south-central regions of the United States. In conjunction with the acquisition
of SGI, Synergy sold 38 retail propane locations to Empire Energy pursuant to
the Empire Acquisition of Certain Synergy Assets. The transaction represented a
net cash investment by Northwestern Growth of approximately $105 million, after
the sale of such retail outlets. Following the acquisition of SGI, Northwestern
Growth acquired four smaller propane companies, which have aggregate annual
retail propane sales of approximately four million gallons.
In December 1995, NPS acquired Myers, located in Sandusky, Ohio, for
consideration of approximately $4.8 million. As of the time of the acquisition,
Myers served approximately 5,000 customers within a radius of approximately 50
miles around Sandusky. Myers has annual retail propane sales of approximately
six million gallons.
In October 1996, Northwestern Growth acquired Empire Energy, then the eighth
largest retail marketer of propane in the United States. Such transaction
involved total consideration of approximately $120 million. Empire Energy was
formed in June 1994 as a result of the Split-Off from Empire Gas, which
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was founded in 1963. As a result of the Split-Off, Empire Energy acquired 133 of
the 284 Empire Gas retail locations. As of September 30, 1996, Empire Energy's
operations consisted of 157 retail locations in 10 states, primarily in the
midwest and southeast regions of the United States, including the 38 retail
propane locations acquired by Empire Energy from Synergy described above.
In September 1996, Northwestern Growth entered into a Stock Purchase and
Merger Agreement with Coast, CGI Acquisition Corporation and the holders of
Coast's preferred stock to acquire Coast, currently the 18th largest retail
marketer of propane in the United States with retail operations primarily
concentrated in the west coast region of the United States. Such acquisition
will be consummated immediately prior to the consummation of this offering. The
Coast Merger involves total consideration of approximately $97.0 million,
subject to working capital and capital expenditure adjustments. A key component
of Northwestern Growth's strategy has been to assemble an experienced management
team with a strong track record of growing and managing diversified propane
operations. Following the consummation of the Transactions, the senior
executives who currently manage Coast will manage the Partnership as the senior
executives of the Managing General Partner. Under this management team, Coast's
annual retail sales have grown from approximately seven million gallons in
fiscal 1986 to approximately 35 million gallons in fiscal 1996. In addition,
Coast's annual wholesale propane sales have grown during the same period from
approximately 45 million gallons to 226 million gallons. Coast's management has
accomplished this growth through a balanced strategy of acquisitions, internal
growth and start-ups. There can be no assurance, however, that Coast's
management team will be able to achieve similar growth in the Partnership's
business.
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 stand-alone energy sources. The retail propane business
of the Partnership consists principally of transporting propane to its retail
distribution outlets and then to tanks located on its customers' premises.
Retail propane use falls into four broad categories: (i) residential, (ii)
industrial and commercial, (iii) agricultural and (iv) other applications,
including motor fuel sales. Residential customers use propane primarily for
space and water heating. Industrial customers use propane primarily as fuel for
forklifts and stationary engines, to fire furnaces, as a cutting gas, in mining
operations and in other process applications. Commercial customers, such as
restaurants, motels, laundries and commercial buildings, use propane in a
variety of applications, including cooking, heating and drying. In the
agricultural market, propane is primarily used for tobacco curing, crop drying,
poultry brooding and weed control. Other retail uses include motor fuel for cars
and trucks, outdoor cooking and other recreational uses, propane resales and
sales to state and local governments. In its wholesale operations, the
Partnership sells propane principally to large industrial end-users and other
propane distributors.
Propane is extracted from natural gas or oil wellhead gas at processing
plants or separated from crude oil during the refining process. Propane is
normally transported and stored in a liquid state under moderate pressure or
refrigeration for ease of handling in shipping and distribution. When the
pressure is released or the temperature is increased, it is usable as a
flammable gas. Propane is colorless and odorless; an odorant is added to allow
its detection. Like natural gas, propane is a clean burning fuel and is
considered an environmentally preferred energy source.
Based upon information provided by the Energy Information Administration,
propane accounts for approximately three to four percent of household energy
consumption in the United States. Propane competes primarily with natural gas,
electricity and fuel oil as an energy source, principally on the basis of price,
availability and portability. Propane is more expensive than natural gas on an
equivalent BTU basis in locations served by natural gas, but serves as a
substitute for natural gas in rural and suburban areas where natural gas is
unavailable or portability of product is required. Historically, the expansion
of natural gas into traditional propane markets has been inhibited by the
capital costs required to expand pipeline and retail distribution systems.
Although the extension of natural gas pipelines tends to displace propane
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distribution in areas affected, the Partnership believes that new opportunities
for propane sales arise as more geographically remote neighborhoods are
developed. Propane is generally less expensive to use than electricity for space
heating, water heating, clothes drying and cooking. Although propane is similar
to fuel oil in certain applications and market demand, propane and fuel oil
compete to a lesser extent primarily because of the cost of converting from one
to the other.
In addition to competing with alternative energy sources, the Partnership
competes with other companies engaged in the retail propane distribution
business. Competition in the propane industry is highly fragmented and generally
occurs on a local basis with other large full-service multi-state propane
marketers, thousands of smaller local independent marketers and farm
cooperatives. Based on industry publications, the Partnership believes that the
domestic retail market for propane is approximately 9.2 billion gallons
annually, that the 10 largest retailers, including the Partnership, account for
approximately 33% 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 customer service centers compete
with five or more marketers or distributors. Each customer service center
operates in its own competitive environment, because retail marketers tend to
locate in close proximity to customers. The Partnership's customer service
centers generally have an effective marketing radius of approximately 25 to 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 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 and seven days a week for
emergency repairs and deliveries.
The wholesale propane business is highly competitive. For fiscal year 1996,
the Partnership's wholesale propane operations accounted for 49% of combined
total propane volumes but less than 6% of pro forma gross profit. The
Partnership believes that its wholesale business provides it with a national
presence and a reasonably secure, efficient supply base, and positions it well
for expansion through acquisitions or start-up operations in new markets.
PRODUCTS, SERVICES AND MARKETING
The Partnership is principally engaged in (i) the retail distribution of
propane for residential, commercial, industrial, agricultural and other retail
uses, (ii) the wholesale marketing and distribution of propane and natural gas
liquids to the retail propane industry, the chemical and petrochemical
industries and other commercial and agricultural markets, (iii) the repair and
maintenance of propane heating systems and appliances and (iv) the sale of
propane-related supplies, appliances and other equipment.
As of September 30, 1996, the Partnership's retail operations consisted of
312 customer service centers in 26 states. The Partnership's operations are
concentrated primarily in the east coast, south-central and west coast regions
of the United States. The Partnership serves more than 360,000 active customers.
Propane sales generally peak during the six-month heating season from October
through March, as many customers use propane for heating purposes. During fiscal
1996, approximately 72.7% of the Partnership's combined retail propane volume
and in excess of 85% of its pro forma EBITDA were attributable to sales during
the six-month heating season of October through March. As a result of this
seasonality, the Partnership's sales and operating profits are concentrated in
its second and third fiscal quarters. Cash flows from operations, however, are
greatest from November through April when customers pay for propane purchased
during the six-month peak season. To the extent the Managing General Partner
deems appropriate, the Partnership may reserve cash from these periods for
distribution to Unitholders during periods with lower cash flows from
operations.
Typically, customer service centers 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
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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 customer service centers, where it is unloaded
into the storage tanks. In order to make a retail delivery of propane to a
customer, a bobtail truck is loaded with propane from the storage tank. Propane
is then pumped from the bobtail truck, which generally holds 2,500 to 3,000
gallons of propane, into a stationary storage tank on the customer's premises.
The capacity of these customer tanks ranges from approximately 100 gallons to
1,200 gallons, with a typical tank having a capacity of 100 to 300 gallons in
milder climates and from 500 to 1,000 gallons in colder climates. The
Partnership also delivers propane to retail customers in portable cylinders,
which typically have a capacity of 5 to 35 gallons. When these cylinders are
delivered to customers, empty cylinders are picked up for refilling at the
Partnership's distribution locations or are refilled in place. The Partnership
also delivers propane to certain other bulk end users of propane in tractor
trailers known as transports, which have an average capacity of approximately
10,500 gallons. End users receiving transport deliveries include industrial
customers, large-scale heating accounts and large agricultural accounts.
The Partnership encourages its customers to implement a regular delivery
schedule by, in some cases, charging extra for non-scheduled deliveries. Most 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 customer service locations, the
Partnership also sells, installs and services equipment related to its propane
distribution business, including heating and cooking appliances.
Retail propane use falls into four broad categories: (i) residential, (ii)
industrial and commercial, (iii) agricultural and (iv) other applications,
including motor fuel sales. On a combined basis during fiscal 1996, the
Partnership sold approximately 235 million gallons of propane to retail
customers and 226 million gallons of propane to wholesale customers.
Approximately 57.8% of the retail gallons was sold to residential customers,
25.9% was sold to industrial and commercial customers, 13.1% was sold to
agricultural customers, and 3.2% was sold to all other retail users. Sales to
residential customers in fiscal 1996 accounted for 29.5% of total gallons
(including wholesale gallons) sold, but approximately 67.0% of the Partnership's
pro forma gross profit from propane sales. Residential sales have a greater
profit margin and a more stable customer base than other retail markets served
by the Partnership. Industrial and commercial sales accounted for 18.7% of the
Partnership's pro forma gross profit from propane sales for fiscal 1996,
agricultural sales accounted for 6.1% and all other retail sales accounted for
2.8%. Sales to wholesale customers contributed the remaining 5.4% of pro forma
gross profit from propane sales. No single retail customer accounted for more
than 1% of the Partnership's pro forma revenues during fiscal 1996.
The propane business is very seasonal, with weather conditions significantly
affecting demand for propane. The Partnership believes that the geographic
diversity of its areas of operations helps to minimize its exposure to regional
weather. Although overall demand for propane is affected by weather, changes in
price and other factors, the Partnership believes its residential business to be
relatively stable due to the following characteristics: (i) residential 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 residential customers, (ii) loss of customers to competing energy
sources has been low, (iii) the Partnership's customers tend to remain with the
Partnership due to a regular delivery schedule and the Partnership's ownership
of approximately 73% of the storage tanks used by its customers and (iv) the
Combined Operations have been able to more than offset customer losses through
internal growth of their customer bases in existing markets. Since home heating
usage is the most sensitive to temperature, residential customers account for
the greatest usage variation due to weather. Variations in the weather in one or
more regions in which the Partnership operates, however, can significantly
affect the total volumes of propane sold by the Partnership and the margins
realized thereon and, consequently, the Partnership's results of operations. The
Partnership believes that sales to the commercial and industrial markets, while
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affected by economic patterns, are not as sensitive to variations in weather
conditions as sales to residential and agricultural markets.
In addition to its core retail operations, the Partnership is also engaged
in the wholesale marketing of propane to independent dealers, major interstate
marketers and the chemical and petrochemical industries. The Partnership
participates to a lesser extent in the marketing of other natural gas liquids,
the processing and marketing of natural gas and the gathering of crude oil. The
Partnership either owns or has contractual rights to use transshipment
terminals, rail cars, long-haul tanker trucks, pipelines and storage capacity.
The Partnership believes that its wholesale marketing and processing activities
position it to achieve product cost advantages and to avoid shortages during
periods of tight supply to an extent not generally available to other retail
propane distributors.
PROPANE SUPPLY AND STORAGE
The Partnership's propane supply is purchased from 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 in fiscal 1996 was
purchased pursuant to agreements with terms of less than one year, 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. In addition, the Partnership makes purchases on the spot
market from time to time to take advantage of favorable pricing. The Partnership
receives its supply of propane predominantly through railroad tank cars and
common carrier transport.
Supplies of propane from the Partnership's sources historically have been
readily available. In fiscal 1996, Warren Gas Liquids was the Partnership's
largest supplier providing approximately 12.8% of the Partnership's total
propane supply for its retail and wholesale operations (excluding propane
obtained from the Partnership's natural gas processing operations). The
Partnership believes that if supplies from Warren Gas Liquids were interrupted,
it would be able to secure adequate propane supplies from other sources without
a material disruption of its operations. Aside from Warren Gas Liquids, no
single supplier provided more than 10% of the Partnership's domestic propane
supply in fiscal 1996. Although no assurance can be given that supplies of
propane will be readily available in the future, the Partnership expects a
sufficient supply to continue to be available. However, increased demand for
propane in periods of severe cold weather, or otherwise, could cause future
propane supply interruptions or significant volatility in the price of propane.
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 it may not be possible to pass rapid increases in the wholesale
cost of propane on to customers immediately, such increases could reduce the
Partnership's gross profits. Consequently, the Partnership's profitability will
be sensitive to changes in wholesale propane prices. The Partnership engages in
hedging of product cost and supply through common hedging practices. The
Partnership also engages in the trading of propane, natural gas, crude oil and
other commodities in amounts that have not had and are not expected to have a
material effect on the Partnership's financial condition or results of
operations.
The Partnership has from time to time leased space in storage facilities to
take advantage of supply purchasing opportunities as they have occurred, and the
Partnership believes that it will have adequate third party storage to take
advantage of such opportunities in the future. Access to storage facilities will
allow the Partnership, to the extent it may deem it desirable, 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.
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PRICING POLICY
The Partnership expects to rely on customer service center managers to set
prices based on prevailing local market conditions and product cost within a
pre-established gross margin framework developed jointly by senior management
and local service center managers. The Partnership will regularly assess how
each customer service center manager's pricing policy affects the service
center's margins and discuss alternative pricing strategies to improve margins
with the service center managers. 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.
BILLING AND COLLECTION PROCEDURES
Customer billing will be centralized, allowing the Partnership to achieve
efficiencies and reduce the time spent by local managers on billing, while
customer account collection responsibilities will be retained at the service
center level. The Partnership provides service center managers with weekly and
monthly aging reports of accounts receivable and discusses the reports with
customer service center managers on a regular basis. The Partnership believes
that its decentralized approach to account collection is beneficial for several
reasons: (i) the customer is more apt to pay a "local" business; (ii) cash
payments are forwarded to lock boxes that are swept daily; and (iii) district
personnel have a current account status available to them at all times to answer
customer inquiries.
PROPERTIES
As of September 30, 1996, the Partnership operated bulk storage facilities
with total propane storage capacity of approximately 21 million gallons,
substantially all of which was above-ground and all of which was owned by the
Partnership. The Partnership does not own, operate or lease any underground
propane storage facilities (excluding customer and local distribution tanks) or
pipeline transportation assets (excluding local delivery systems). In addition,
as of September 30, 1996, the Partnership operated 312 customer service centers.
The transportation of propane requires specialized equipment. The trucks and
railroad tank cars utilized for this purpose carry specialized steel tanks that
maintain the propane in a liquified state. As of September 30, 1996, the
Partnership owned a fleet of 34 transport truck tractors, 63 transport trailers,
917 bobtail trucks and 1,004 other delivery and service vehicles. As of such
date, the Partnership owned, and customers leased, approximately 268,000
customer storage tanks with typical capacities of 120 to 1,000 gallons.
The Partnership believes that it has satisfactory title to or valid rights
to use all of its material properties. Some of such properties are subject to
liabilities and leases, liens for taxes not yet due and payable, and immaterial
encumbrances, easements and restrictions, although the Partnership does not
believe that any such burdens will interfere with the continued use of such
properties by the Partnership to an extent material to 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 is in the process of
obtaining all required material registrations, qualifications and filings with,
the various state and local governmental and regulatory authorities which relate
to ownership of the Partnership's properties or the operations of its business.
TRADEMARKS AND TRADENAMES
The Partnership utilizes a variety of trademarks, including "Synergy Gas"
and its related design, which the Partnership owns, and "Empire Gas" and its
related design, which the Partnership has the right to use, and tradenames,
including "Coast Gas." The Partnership generally expects to retain the names and
identities of acquired entities, which the Partnership believes preserves the
goodwill of the acquired business and promotes continued local customer loyalty.
The Partnership regards its trademarks,
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tradenames and other proprietary rights as valuable assets and believes that
they have significant value in the marketing of its products.
GOVERNMENT REGULATION
The Partnership is subject to various federal, state and local
environmental, health and safety laws and regulations. Generally, these laws
impose limitations on the discharge of pollutants and establish standards for
the handling of solid and hazardous wastes. These laws include the Resource
Conservation and Recovery Act ("RCRA"), the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"), the Clean Air Act, the
Occupational Safety and Health Act, the Emergency Planning and Community
Right-to-Know Act, the Clean Water Act and comparable state statutes. CERCLA,
also known as the "Superfund" law, imposes joint and several liability without
regard to fault or the legality of the original conduct on certain classes of
persons that are considered to have contributed to the release or threatened
release of a "hazardous substance" into the environment. Propane is not a
hazardous substance within the meaning of CERCLA. However, automotive waste
products, such as waste oil, generated by the Partnership's truck fleet, as well
as "hazardous substances" disposed of during past operations by third parties on
the Partnership's properties, could subject the Partnership to liability under
CERCLA. Such laws and regulations could result in civil or criminal penalties in
cases of non-compliance or impose liability for remediation costs. In addition,
liquid petroleum products, such as gasoline and diesel fuel, are handled at some
of the Partnership's properties. Leaks of such materials from underground
storage tanks are regulated pursuant to RCRA and analogous state laws. Most
state laws also require the investigation and, where determined to be necessary,
the remediation of leaks or spills of liquid petroleum products, whether the
leaks or spills emanated from underground storage tanks or otherwise. Also,
third parties may make claims against owners or operators of properties for
personal injuries and property damage associated with releases of hazardous or
toxic substances.
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 and liquid petroleum products
are consistent with industry standards and are in compliance in all material
respects with applicable laws and regulations.
Future developments, such as stricter environmental, health or safety laws
and regulations promulgated thereunder, could affect Partnership operations. It
is not anticipated that the Partnership's compliance with or liabilities under
existing 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 September 30, 1996, the Managing General Partner would have had 1,685
full time employees, of whom 121 were general and administrative and 1,564 were
operational employees. Twenty-eight of the Managing General Partner's employees
at four customer service centers were represented by labor unions.
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The Partnership believes that its relations with its employees are satisfactory.
The Managing General Partner generally hires seasonal workers to meet peak
winter demand.
LITIGATION AND OTHER CONTINGENCIES
Upon the consummation of the Transactions, a number of personal injury,
property damage and products liability suits will be pending or threatened
against the Partnership. In general, these lawsuits have arisen in the ordinary
course of the Partnership's business and involve claims for actual damages, and
in some cases, punitive damages, arising from the alleged negligence of the
Partnership or as a result of product defects or similar matters. Of the pending
or threatened matters, a number involve property damage, and several involve
serious personal injuries or deaths and the claims made are for relatively large
amounts. Although any litigation is inherently uncertain, based on past
experience, the information currently available to it and the availability of
insurance coverage, the Partnership does not believe that these pending or
threatened litigation matters will have a material adverse effect on its results
of operations or its financial condition.
TRANSFER OF THE PARTNERSHIP ASSETS
Concurrent with the closing of this offering, the General Partners will
cause substantially all of the assets associated with the Combined Operations to
be conveyed to the Operating Partnership and the Operating Partnership will
assume substantially all of the liabilities associated with the Combined
Operations. Excluded assets will include certain claims related to the
operations of Synergy prior to and including the Synergy Acquisition (including
claims made by Synergy against its minority stockholders) and all income tax
assets related to the Combined Operations relating to periods prior to the
consummation of the Transactions, and excluded liabilities will include certain
liabilities related to the operations of Synergy prior to the Synergy
Acquisition and all income tax liabilities related to the Combined Operations
relating to periods prior to the consummation of the Transactions.
In light of the existing disputes between Synergy and its minority
stockholders referred to above, it is anticipated that the minority stockholders
of Synergy will continue to challenge the claims of Synergy and that they may
challenge one or more of the past or contemplated transactions described in this
Prospectus, seeking damages, injunctive relief or both. Northwestern Growth has
agreed to indemnify and hold harmless the Managing General Partner and the
Partnership from and against any and all losses, liabilities, damages or
expenses (including, without limitation, expenses of defense and investigation)
that may arise in connection with, result from or relate to any such challenge
by the minority stockholders of Synergy. As of the date of this Prospectus, no
lawsuit has been filed by the minority stockholders and no claim for damages has
been asserted. If any such claim were successfully asserted, there can be no
assurance that the amount of any such losses, liabilities, damages or expenses
would not exceed the ability of Northwestern Growth to satisfy its
indemnification obligations. At September 30, 1996, Northwestern Growth had
stockholder's equity, determined in accordance with generally accepted
accounting principles, of approximately $62.7 million.
The assets to be transferred include real estate and fixtures located in 26
states, motor vehicles, tanks, cylinders, machinery and office furniture,
intangible property such as contracts, and various licenses, permits and other
similar rights required in connection with the ownership and operation of the
Combined Operations, and leasehold interests in real and personal property,
including automobiles, light trucks and bobtails. See "-- Properties." Appliance
and parts sales, installation and service activities will be conducted through a
wholly owned corporate subsidiary of the Operating Partnership.
Most of the leases associated with the Combined Operations are transferable
to the Operating Partnership only with the consent of the lessor. In addition,
certain of the licenses, permits and other similar rights relating to the assets
to be assigned to the Operating Partnership are not transferable or are
transferable only with the consent of third parties. Such transferable rights
will not be transferred to the Operating Partnership at the closing of this
offering unless applicable consents have been obtained. The
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Managing General Partner expects to obtain, prior to the closing of this
offering, third party consents which are sufficient to allow the transfer to the
Operating Partnership of the assets necessary to enable the Operating
Partnership to conduct the propane business in all material respects as
described in this Prospectus. In the case of non-transferable rights or rights
where no consent has been obtained by the closing, the Managing General Partner
will seek to obtain such consents in the normal course of business after the
closing or seek to have comparable rights granted to the Operating Partnership.
Numerous licenses, permits and rights will be required for the operation of the
Operating Partnership's business, and no assurance can be given that the
Operating Partnership will obtain all licenses, permits and rights which are
required in connection with the ownership and operation of its business. In
order to transfer real property interests, documents evidencing chain of title
may be required to be obtained from searches of county records in order to
prepare and record the necessary transfer documents. The Partnership expects to
obtain, prior to the closing of this offering, documents evidencing title that
are sufficient to enable the Operating Partnership to record the transfer of
such real property interests to the Operating Partnership, although no assurance
can be given that such documents can be obtained in a timely manner.
If consent to the assignment or reissuance of any lease or other similar
right being transferred is not obtained, or if documents evidencing title to
real property interests being transferred are not obtained, the General Partners
and the Operating Partnership will enter into agreements pursuant to which the
General Partners will hold or operate such leases, rights and property so that,
to the maximum extent possible, the Operating Partnership will receive the
benefits of such lease, right or property interest and will discharge the duties
and bear the costs and risks thereunder. The Partnership will bear the risk that
such agreements will not provide the Partnership with the full benefits of such
lease, right or property interest.
Although failure by the Operating Partnership to obtain licenses, permits,
rights or title documents could have a material adverse effect on the Operating
Partnership, the Partnership believes that the Operating Partnership will have
the licenses, permits and rights and will obtain title documents or will be able
to enter into agreements which will enable the Partnership to conduct its
propane business in a manner which is similar in all material respects to that
which was conducted by the Combined Operations prior to the closing of this
offering, and that any failure to obtain such licenses, permits, rights or title
documents will not have a material adverse impact on the business of the
Partnership as described in this Prospectus.
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MANAGEMENT
PARTNERSHIP MANAGEMENT
The Managing General Partner will manage and operate the activities of the
Partnership. Neither the Special General Partner nor the Unitholders will
directly or indirectly participate in the management or operation of the
Partnership or have actual or apparent authority to enter into contracts on
behalf of, or to otherwise bind, the Partnership. Notwithstanding any limitation
on their obligations or duties, the Managing General Partner and the Special
General Partner will be liable, as general partners of the Partnership, for all
debts of the Partnership (to the extent not paid by the Partnership), except to
the extent that indebtedness or other obligations incurred by the Partnership
are made specifically non-recourse to the General Partners. Whenever possible,
the Managing General Partner intends to make any such indebtedness or other
obligations non-recourse to the General Partners.
At least two of the members of the Board of Directors of the Managing
General Partner who are neither officers or employees of the General Partners
nor directors, officers or employees of any affiliate of either of the General
Partners will serve on the Audit Committee, which will have 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 Managing General Partner is fair and reasonable to the
Partnership. Any matters approved by the Audit Committee will be conclusively
deemed to be fair and reasonable to the Partnership, approved by all partners of
the Partnership and not a breach by the Managing General Partner or its Board of
Directors of any duties they may owe the Partnership or the Unitholders. See
"Conflicts of Interest and Fiduciary Responsibilities -- Fiduciary and Other
Duties." In addition, the Audit Committee will review the external financial
reporting of the Partnership, will recommend engagement of the Partnership's
independent public accountants and will review the Partnership's procedures for
internal auditing and the adequacy of the Partnership's internal accounting
controls.
As is commonly the case with publicly traded limited partnerships, the
Partnership will not directly employ any of the persons responsible for managing
or operating the Partnership. In general, the current management of Coast will
manage and operate the Partnership's business as officers and employees of the
Managing General Partner and its affiliates. Neither the Special General Partner
nor the Unitholders will directly or indirectly participate in the management or
operation of the Partnership.
DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGING GENERAL PARTNER
The following table sets forth certain information with respect to the
executive officers and members of the Board of Directors of the Managing General
Partner. Executive officers and directors are elected for one-year terms.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH MANAGING GENERAL PARTNER
- --------------------------------------- ----------- ------------------------------------------------------------------
<S> <C> <C>
Merle D. Lewis 49 Chairman of the Board of Directors
Richard R. Hylland 36 Vice Chairman of the Board of Directors
Keith G. Baxter 47 President, Chief Executive Officer and Director
Charles J. Kittrell 57 Executive Vice President and Chief Operating Officer
Ronald J. Goedde 47 Executive Vice President and Chief Financial Officer
Vincent J. DiCosimo 39 Senior Vice President
Daniel K. Newell 40 Director
</TABLE>
Shortly after the consummation of the Transactions, the Managing General
Partner will appoint two additional directors who are expected to be neither
officers nor employees of either of the General Partners nor officers, directors
or employees of any affiliate of either of the General Partners.
MERLE D. LEWIS has been the President and Chief Executive Officer of NPS
since February 1994, and has served as Chairman and Chief Executive Officer of
Northwestern Growth since September 1994.
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Mr. Lewis also served as Executive Vice President of NPS from May 1993 to
February 1994 and Vice President -- Corporate Services of NPS from 1987 to 1993.
Mr. Lewis joined NPS in 1982 and has served as a member of the board of
directors of NPS since 1993. Mr. Lewis is also Chairman of Synergy and Empire
Energy and is a member of the board of directors of Lucht, Inc. (a manufacturer
of photographic equipment) and Northwestern Energy Corporation (a marketer of
non-regulated energy products) ("Northwestern Energy"), a subsidiary of NPS.
RICHARD R. HYLLAND has been the Executive Vice President -- Strategic
Development of NPS since November 1995 and has been President and Chief
Operating Officer of Northwestern Growth since September 1994. Mr. Hylland also
served as Vice President -- Strategic Development of NPS from August 1995 to
November 1995, Vice President -- Corporate Development of NPS from May 1993 to
August 1995 and Vice President -- Finance of NPS from April 1991 to August 1995.
Mr. Hylland has served as a member of the board of directors of NPS since 1995
and also serves as Vice Chairman of Synergy and as a member of the boards of
directors of Northwestern Growth, Empire Energy, Lucht, Inc., Franklin
Industries (a steel fabricator of highway sign and fence posts), Northwestern
Energy and LodgeNet Entertainment Corporation (a television-based entertainment
and information services company).
KEITH G. BAXTER has been the President, Chief Executive Officer and Chairman
of the Board of Directors of Coast since 1986. Prior to joining Coast, Mr.
Baxter was Sector Vice President of Peabody International Corporation (an
integrated manufacturing company).
CHARLES J. KITTRELL has been the Executive Vice President -- Chief Operating
Officer of Coast since 1986. Prior to joining Coast, Mr. Kittrell was Vice
President in charge of manufacturing, product engineering and general operations
at five manufacturing and distribution centers for Peabody Floway Inc. (a pump
manufacturing company), a subsidiary of Peabody International Corporation.
RONALD J. GOEDDE has been the Executive Vice President -- Chief Financial
Officer of Coast since 1988. Prior to joining Coast, Mr. Goedde was the Vice
President of Finance and Controller for Cal Gas Corporation (an integrated
propane company).
VINCENT J. DICOSIMO has been the Executive Vice President of Coast since
1993 and is the President and Chief Operating Officer and a member of the board
of directors of Coast Energy Group, Inc. From 1990 to 1993, Mr. DiCosimo was a
Vice President of Coast. Before joining Coast, Mr. DiCosimo was Manager of
Supply/Distribution for Cal Gas Corporation from 1981 to 1990 and prior thereto
was Senior Financial Analyst with Unocal Oil & Gas.
DANIEL K. NEWELL has been the Executive Vice President of Northwestern
Growth since July 1995 and has served as Vice President -- Finance of NPS since
July 1995 and Chief Financial Officer of NPS since May 1996. Prior to joining
NPS, Mr. Newell was Vice President -- Finance and Treasurer and a member of the
board of directors of Energy Fuels Corporation (a coal mining company) from 1991
to 1995. Mr. Newell serves as a member of the boards of directors of
Northwestern Growth, Synergy, Empire Energy, Myers and Franklin Industries.
REIMBURSEMENT OF EXPENSES OF THE MANAGING GENERAL PARTNER AND ITS AFFILIATES
The Managing General Partner will not receive any management fee or other
compensation in connection with its management of the Partnership. The Managing
General Partner and its affiliates performing services for the Partnership will
be reimbursed at cost for all expenses incurred on behalf of the Partnership,
including the costs of compensation described herein properly allocable to the
Partnership, and all other expenses necessary or appropriate to the conduct of
the business of, and allocable to, the Partnership. On a pro forma basis,
approximately $48.0 million of expenses (primarily wages and salaries) would
have been reimbursed by the Partnership to the Managing General Partner in
fiscal 1996. The Partnership Agreement provides that the Managing General
Partner will determine the expenses that are
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allocable to the Partnership in any reasonable manner determined by the Managing
General Partner in its sole discretion.
In addition, the General Partners will receive a combined 2% general partner
interest, the right to receive Incentive Distributions and 7,878,619
Subordinated Units as consideration for their contribution to the Partnership of
their limited partner interests in the Operating Partnership, which interests
will have been received as consideration for their contribution of the Combined
Operations to the Operating Partnership. See "The Transactions." The General
Partners will be entitled to distributions on their general partner interests,
Incentive Distributions and distributions on such Subordinated Units as
described under "Cash Distribution Policy."
EXECUTIVE COMPENSATION
The Partnership and the Managing General Partner were formed in October
1996. Accordingly, the Managing General Partner paid no compensation to its
directors and officers with respect to fiscal 1996, nor did any obligations
accrue in respect of management incentive or retirement benefits for the
directors and officers with respect to such year. Officers and employees of the
Managing General Partner may participate in employee benefit plans and
arrangements sponsored by Northwestern Growth, including plans which may be
established by Northwestern Growth in the future. Under the terms of the
Partnership Agreement, the Partnership is required to reimburse the Managing
General Partner for expenses relating to the operation of the Partnership,
including salaries and bonuses of employees employed on behalf of the
Partnership, as well as the costs of providing benefits to such persons under
employee benefit plans and for the costs of health and life insurance. See
"Certain Relationships and Related Transactions."
EMPLOYMENT AGREEMENTS, SEVERANCE ARRANGEMENTS
Effective immediately prior to the closing of this offering, employment
agreements (the "Employment Agreements") originally made between Northwestern
Growth and each of Keith C. Baxter, Charles J. Kittrell, Ronald J. Goedde and
Vincent J. DiCosimo (the "Executives"), as amended and assigned by Northwestern
Growth to and assumed by the Managing General Partner, will provide for the
employment of the Executives by the Managing General Partner. The summary of the
Employment Agreements which follows does not purport to be complete and is
qualified in its entirety by reference to the form of Employment Agreement,
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
Pursuant to the Employment Agreements, Messrs. Baxter, Kittrell, Goedde and
DiCosimo will serve as President and Chief Executive Officer, Executive Vice
President and Chief Operating Officer, Executive Vice President and Chief
Financial Officer, and Senior Vice President, respectively, of the Managing
General Partner. Each of the Employment Agreements will have a term of three
years from the closing of the Transactions, unless sooner terminated as provided
in the Employment Agreements. The Employment Agreements will provide for an
annual base salary of $200,000, $160,000, $150,000 and $150,000 for each of
Messrs. Baxter, Kittrell, Goedde and DiCosimo, respectively, subject to such
increases as the Board of Directors of the Managing General Partner may
authorize from time to time, plus a fee for each of the Executives of
approximately $135,000, $65,000, $40,000 and $25,000, respectively, per year for
three years related to the acquisition of Empire Energy and Coast by
Northwestern Growth (the "Management Fee"). In addition, the Managing General
Partner will pay for a $725,000 life insurance policy for Mr. Baxter and
$410,000 life insurance policies for each of Messrs. Kittrell, Goedde and
DiCosimo. Each of the Executives will participate in the Annual Operating
Performance Incentive Plan of the Managing General Partner and Messrs. Baxter,
Kittrell and Goedde will participate in the New Acquisition Incentive Plan of
the Managing General Partner (together with the Annual Operating Performance
Incentive Plan, the "Plans,") as described below. The Executives will also be
entitled to participate in such other benefit plans and programs as the Managing
General Partner may provide for its employees in general (the "Other Benefit
Plans").
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The Employment Agreements provide that in the event an Executive's
employment is terminated without "cause" (as defined in the Employment
Agreements) or if the Executive terminates his employment due to a "Fundamental
Change" (as defined below), such Executive will be entitled to receive a
severance payment in an amount equal to his total compensation for the remainder
of the employment term under the Employment Agreement and will receive benefits
under the Other Benefit Plans for a period of 12 months after termination. In
the event of termination due to disability, the Executive will be entitled to
his base salary, his Management Fee and benefits under the Plans and the Other
Benefit Plans for 12 months. In the event of termination due to death, benefits
under the Other Benefit Plans will be continued for the Executive's dependents
for 12 months. In the event the Executive's employment is terminated for
"cause," the Executive will receive accrued salary and benefits (including his
Management Fee and benefits under the Plans) up to the date of termination and,
if the Managing General Partner does not waive the Executive's covenant not to
compete, benefits under the Other Benefit Plans for 12 months.
A Fundamental Change is defined in the Employment Agreements to have
occurred (i) if the Executive's duties, authority, responsibilities and/or
compensation is reduced without performance or market-related justification;
(ii) if the Executive's primary office is moved more than 50 miles from
Watsonville, California (or, with respect to Mr. DiCosimo, Houston, Texas)
without his consent; (iii) if the Partnership disposes of business and assets
which reduce the annual EBITDA of the Partnership below 70% of the annual EBITDA
level existing at the time employment commenced; or (iv) if securities
representing 10% of the voting power in elections of directors of NPS become
beneficially owned by any party or group or other prescribed events occur
constituting a change of control of NPS.
In addition, each Employment Agreement contains non-competition and
confidentiality provisions.
INCENTIVE PLANS
The Managing General Partner intends to adopt the Annual Operating
Performance Incentive Plan, which will be effective upon consummation of the
Transactions. The Annual Operating Performance Incentive Plan provides that
annual incentive bonuses be paid to participants in the plan (who will be
determined by the Board of Directors of the Managing General Partner from time
to time and who will include the Executives) based on a percentage of annual
salary plus his Management Fee for performance up to budgeted levels of net
income and EBITDA. Such bonuses will range from zero for performance at 10%
below budget to 50% for performance at budget. In addition, in the event of
EBITDA performance over budgeted amounts, there will be established a bonus pool
equal to 10% of the excess of EBITDA over budget, which will be divided among
Messrs. Baxter, Kittrell and Goedde and any other participants that the Board of
Directors of the Managing General Partner may determine. The period covered by
the plan will begin upon the closing of the Transactions and end on the fifth
anniversary thereof.
The Managing General Partner intends to adopt the New Acquisition Incentive
Plan, which will be effective upon consummation of the Transactions. The New
Acquisition Incentive Plan provides for bonuses to participants in the plan (who
will be determined by the Board of Directors of the Managing General Partner
from time to time and who will include the Executives) for adding new businesses
to the Partnership's propane operations, in an aggregate amount equal to 4% of
the gross acquisition purchase price, spread among the participants in the plan
based on their relative salaries. The transactions covered by the Plan will
include those occurring after the closing of the Coast Merger (excluding that
transaction) and will end on the fifth anniversary thereof. Awards under this
program will be payable in cash 90 days after the close of the particular
acquisition transaction.
RESTRICTED UNIT PLAN
The Managing General Partner intends to adopt the Restricted Unit Plan for
executives, officers and directors of the Managing General Partner which will be
effective upon consummation of the Transactions. The summary of the Restricted
Unit Plan contained herein does not purport to be complete and is qualified in
its entirety by reference to the Restricted Unit Plan, which has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
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Initially, rights to receive authorized but unissued Common Units with an
aggregate value of $12.5 million will be available under the Restricted Unit
Plan. From these Units, rights to receive Common Units with an aggregate value
of $7.0 million (the "Initial Units") will be allocated to the Executives upon
the consummation of the Transactions, subject to the vesting conditions
described below and subject to other customary terms and conditions, as follows:
(i) rights to receive Common Units with an aggregate value of $2.8 million will
be allocated to Mr. Baxter, (ii) rights to receive Common Units with an
aggregate value of $1.6 million will be allocated to Mr. Kittrell, (iii) rights
to receive Common Units with an aggregate value of $1.6 million will be
allocated to Mr. Goedde and (iv) rights to receive Common Units with an
aggregate value of $1.0 million will be allocated to Mr. DiCosimo. Rights to
receive Common Units with an aggregate value of $.9 million will be allocated
among the three initial non-officer members of the Board of Directors of the
Managing General Partner as follows: (i) rights to receive Common Units with an
aggregate value of $.4 million will be allocated to Mr. Lewis as Chairman of the
Board; (ii) rights to receive Common Units with an aggregate value of $.3
million will be allocated to Mr. Hylland as Vice Chairman; and (iii) rights to
receive Common Units with an aggregate value of $.2 million will be allocated to
Mr. Newell. A total of seven individuals are currently eligible to receive
awards under the Restricted Unit Plan.
The right to receive the remaining $4.6 million of Common Units initially
available under the Restricted Unit Plan will be reserved and allocated to
future directors and may be allocated or issued in the future to officers on
such terms and conditions (including vesting conditions) as are described below
or as the Board of Directors of the Managing General Partner, or a compensation
committee thereof, shall determine. Each director appointed or elected
subsequent to the consummation of the Transactions will receive rights to
receive Common Units with a value of $.2 million on the same terms and
conditions as those granted to the three initial non-officer directors.
The Initial Units will be subject to a bifurcated vesting procedure such
that (i) 25% of the Initial Units will vest over time, with one-third of such
units vesting at the end of each of the third, fifth and seventh anniversaries
of the consummation of the Transactions, and (ii) the remaining 75% of the
Initial Units will vest automatically upon, and in the same proportions as, the
conversion of the Subordinated Units to Common Units. See "Cash Distribution
Policy -- Distributions from Operating Surplus during Subordination Period." If
a grantee's employment is terminated without "cause" (as defined in the
Restricted Unit Plan) or a grantee resigns with "good reason" (as defined in the
Restricted Unit Plan), the grantee's rights to receive Common Units which vest
over time will immediately vest. In the event of a "change of control" of the
Partnership (as defined in the Restricted Unit Plan), all rights to acquire
Common Units pursuant to the Restricted Unit Plan will immediately vest.
Upon "vesting" in accordance with the terms and conditions of the Restricted
Unit Plan, Common Units allocated to a plan participant will be issued to such
participant. Until such allocated, but unissued, Common Units have vested and
have been issued 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 issuance of the Common Units pursuant to the Restricted Unit Plan is
intended to serve as a means of incentive compensation for performance.
Therefore, no consideration will be payable by the plan participants upon
vesting and issuance of the Common Units.
COMPENSATION OF DIRECTORS
The Managing General Partner currently pays no additional remuneration to
its employees who also serve as directors. Following completion of this
offering, the Managing General Partner anticipates that, in addition to
permitting its non-officer directors to participate in the benefit plans
described above, Mr. Lewis will be compensated $50,000 annually as Chairman of
the Board and each of its other non-employee directors will be compensated
$15,000 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 the Managing General Partner by the Partnership.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth, as of September 30, 1996, the beneficial
ownership of the common stock, par value $3.50 per share, of NPS owned by each
director and each named executive officer of the Managing General Partner, as
well as the directors and all of the executive officers of the Managing General
Partner as a group. No director or executive officer beneficially owns more than
1% of NPS's outstanding shares. The total shares beneficially owned by the
directors and executive officers as a group represent less than 1% of NPS's
outstanding shares.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL
NAME OF BENEFICIAL OWNER OWNERSHIP (1)
- -------------------------------------------------------------------------------------------- --------------------
<S> <C>
Merle D. Lewis (2).......................................................................... 12,068
Richard R. Hylland (3)...................................................................... 848
Keith G. Baxter............................................................................. --
Charles J. Kittrell......................................................................... --
Ronald J. Goedde............................................................................ --
Vincent J. DiCosimo......................................................................... --
Daniel K. Newell............................................................................ 67
All directors and executive officers as a group (7 persons)................................. 12,983
</TABLE>
- ------------------------
(1) The nature of beneficial ownership is sole voting and dispositive power,
unless otherwise noted.
(2) Includes 1,935 shares held jointly with spouse.
(3) Includes 328 shares held in custodial accounts for Mr. Hylland's children.
The Managing General Partner is a wholly owned subsidiary of Northwestern
Growth, which in turn is a wholly owned subsidiary of NPS. No directors or
officers of the Managing General Partner or Northwestern Growth own any shares
of common stock of the Managing General Partner or Northwestern Growth.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RIGHTS OF THE GENERAL PARTNERS
After this offering, the General Partners will own all of the Subordinated
Units, representing an aggregate 47.0% limited partner interest in the
Partnership (39.4% if the Underwriters' over-allotment option is exercised in
full). Through the Managing General Partner's ability, as managing general
partner, to manage and operate the Partnership and the ownership of all of the
outstanding Subordinated Units by the General Partners (effectively giving the
General Partners the ability to veto certain actions of the Partnership), the
General Partners will have the ability to control the management of the
Partnership.
CONTRIBUTION, CONVEYANCE AND ASSUMPTION AGREEMENT
In connection with the Transactions, the Partnership, the Operating
Partnership, the Managing General Partner, Northwestern Growth and certain other
parties will enter into the Contribution, Conveyance and Assumption Agreement
(the "Contribution Agreement"), which will generally govern the Transactions,
including the asset transfer to and the assumption of liabilities by the
Operating Partnership, and the application of the proceeds of this offering. The
Contribution Agreement will not be the result of arm's-length negotiations, and
there can be no assurance that it, or that any of the transactions provided for
therein, will be effected on terms at least as favorable to the parties to such
agreement as could have been obtained from unaffiliated third parties. All of
the transaction expenses incurred in connection with the Transactions, including
the expenses associated with transferring assets into the Operating Partnership,
will be paid from the proceeds of this offering. See "Business and Properties --
Transfer of the Partnership Assets."
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CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
CONFLICTS OF INTEREST
Certain conflicts of interest exist and may arise in the future as a result
of the relationships between the General Partners and their stockholders, on the
one hand, and the Partnership and its limited partners, on the other hand. The
directors and officers of the Managing General Partner have fiduciary duties to
manage the Managing General Partner, including its investments in its
subsidiaries and affiliates, in a manner beneficial to its stockholder. At the
same time, the Managing General Partner has a fiduciary duty to manage the
Partnership in a manner beneficial to the Partnership and the Unitholders. The
Partnership Agreement contains provisions that allow the Managing General
Partner to take into account the interests of parties in addition to the
Partnership in resolving conflicts of interest, thereby limiting its fiduciary
duty to the Unitholders, as well as provisions that may restrict the remedies
available to Unitholders for actions taken that might, without such limitations,
constitute breaches of fiduciary duty. The duty of the directors and officers of
the Managing General Partner to its stockholder may, therefore, come into
conflict with the duties of the Managing General Partner to the Partnership and
the Unitholders. The Audit Committee of the Board of Directors of the Managing
General Partner will, at the request of the Managing General Partner, review
conflicts of interest that may arise between the Managing General Partner or its
affiliates, on the one hand, and the Partnership, on the other. See "Management
- -- Partnership Management" and "-- Fiduciary and Other Duties."
The fiduciary obligations of general partners is a developing area of law.
The provisions of the Delaware Act that allow the fiduciary duties of a general
partner to be waived or restricted by a partnership agreement have not been
resolved in a court of law, and the Managing General Partner has not obtained an
opinion of counsel covering the provisions set forth in the Partnership
Agreement that purport to waive or restrict fiduciary duties of the Managing
General Partner. Unitholders should consult their own legal counsel concerning
the fiduciary responsibilities of the Managing General Partner and its officers
and directors and the remedies available to the Unitholders.
Conflicts of interest could arise with respect to the situations described
below, among others:
COMMON UNITHOLDERS WILL HAVE NO RIGHT TO ENFORCE OBLIGATIONS OF THE MANAGING
GENERAL PARTNER AND ITS AFFILIATES UNDER AGREEMENTS WITH THE PARTNERSHIP
The agreements between the Partnership and the Managing General Partner do
not grant to the Unitholders, separate and apart from the Partnership, the right
to enforce the obligations of the Managing General Partner and its affiliates in
favor of the Partnership. Therefore, the Partnership will be primarily
responsible for enforcing such obligations.
CONTRACTS BETWEEN THE PARTNERSHIP, ON THE ONE HAND, AND THE MANAGING GENERAL
PARTNER AND ITS AFFILIATES, ON THE OTHER, WILL NOT BE THE RESULT OF
ARM'S-LENGTH NEGOTIATIONS
Under the terms of the Partnership Agreement, the Managing General Partner
is not restricted from paying the Managing General Partner or its affiliates for
any services rendered (provided such services are rendered on terms fair and
reasonable to the Partnership) or entering into additional contractual
arrangements with any of them on behalf of the Partnership. Neither the
Partnership Agreement nor any of the other agreements, contracts and
arrangements between the Partnership, on the one hand, and the Managing General
Partner and its affiliates, on the other, are or will be the result of
arm's-length negotiations. All of such transactions entered into after the sale
of the Common Units offered in this offering are to be on terms which are fair
and reasonable to the Partnership, provided that any transaction shall be deemed
fair and reasonable if (i) such transaction is approved by the Audit Committee,
(ii) its terms are no less favorable to the Partnership than those generally
being provided to or available from unrelated third parties or (iii) taking into
account the totality of the relationships between the parties involved
(including other transactions that may be particularly favorable or advantageous
to the
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Partnership), the transaction is fair to the Partnership. The Managing General
Partner and its affiliates will have no obligation to permit the Partnership to
use any facilities or assets of the Managing General Partner and such
affiliates, except as may be provided in contracts entered into from time to
time specifically dealing with such use, nor shall there be any obligation of
the Managing General Partner and its affiliates to enter into any such
contracts.
CERTAIN ACTIONS TAKEN BY THE MANAGING GENERAL PARTNER MAY AFFECT THE AMOUNT
OF CASH AVAILABLE FOR DISTRIBUTION TO UNITHOLDERS OR ACCELERATE THE
CONVERSION OF SUBORDINATED UNITS
Decisions of the Managing General Partner with respect to the amount and
timing of cash expenditures, participation in capital expansions and
acquisitions, borrowings, issuances of additional partnership interests and
reserves in any quarter will affect whether, or the extent to which, there is
sufficient Available Cash from Operating Surplus to meet the Minimum Quarterly
Distribution and Target Distributions Levels on all Units in such quarter or in
subsequent quarters. The Partnership Agreement provides that any borrowings by
the Partnership or the approval thereof by the Managing General Partner shall
not constitute a breach of any duty owed by the Managing General Partner to the
Partnership or the Unitholders, including borrowings that have the purpose or
effect, directly or indirectly, of enabling the General Partners to receive
distributions on the Subordinated Units or the Incentive Distributions or hasten
the expiration of the Subordination Period or the conversion of the Subordinated
Units into Common Units. The Partnership Agreement provides that the Partnership
and the Operating Partnership may borrow funds from the General Partners and
their affiliates. The General Partners and their affiliates may not borrow funds
from the Partnership or the Operating Partnership. Furthermore, any actions
taken by the Managing General Partner consistent with the standards of
reasonable discretion set forth in the definitions of Available Cash, Operating
Surplus and Capital Surplus will be deemed not to constitute a breach of any
duty of the Managing General Partner to the Partnership or the Unitholders.
THE PARTNERSHIP WILL REIMBURSE THE MANAGING GENERAL PARTNER AND ITS
AFFILIATES FOR CERTAIN EXPENSES
Under the terms of the Partnership Agreement, the Managing General Partner
and its affiliates will be reimbursed by the Partnership for certain expenses
incurred on behalf of the Partnership, including costs incurred in providing
corporate staff and support services to the Partnership. The Partnership
Agreement provides that the Managing General Partner will determine the expenses
that are allocable to the Partnership in any reasonable manner determined by the
Managing General Partner in its sole discretion. See "Management --
Reimbursement of Expenses of the Managing General Partner and its Affiliates."
THE MANAGING GENERAL PARTNER INTENDS TO LIMIT ITS LIABILITY WITH RESPECT TO
THE PARTNERSHIP'S OBLIGATIONS
Whenever possible, the Managing General Partner intends to limit the
Partnership's liability under contractual arrangements to all or particular
assets of the Partnership, with the other party thereto having no recourse
against the General Partners or their assets. The Partnership Agreement provides
that any action by the Managing General Partner in so limiting the liability of
the General Partners or that of the Partnership will not be deemed to be a
breach of the Managing General Partner's fiduciary duties, even if the
Partnership could have obtained more favorable terms without such limitation on
liability.
THE NEW ACQUISITION INCENTIVE PLAN MAY GIVE MANAGEMENT INCENTIVES TO MAKE
ACQUISITIONS THAT ARE NOT BENEFICIAL TO THE PARTNERSHIP
The terms of the New Acquisition Incentive Plan (described above under
"Management--Executive Compensation -- Incentive Plans") could give the senior
executives of the Managing General Partner an incentive to cause the Partnership
to acquire additional propane operations without regard to whether the
operations would prove beneficial to the Partnership and may present the senior
executives of the
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Managing General Partner with a conflict of interest in negotiating the
acquisition price on behalf of the Partnership. Mr. Baxter, the only participant
in the New Acquisition Incentive Plan who is a member of the Board of Directors
of the Managing General Partner, has agreed that he will not participate in any
board deliberations regarding potential acquisitions subject to the New
Acquisition Incentive Plan. The Partnership believes that the fact that the
ultimate decision regarding acquisitions and their terms will be made by
directors who have no interest in the New Acquisition Incentive Plan will
significantly reduce the potential conflicts resulting from the structure of the
plan.
COMMON UNITS ARE SUBJECT TO THE MANAGING GENERAL PARTNER'S LIMITED CALL
RIGHT
The Managing General Partner may exercise its right to call and purchase
Units as provided in the Partnership Agreement or assign such right to one of
its affiliates or to the Partnership. The Managing General Partner may use its
own discretion, free of fiduciary duty restrictions, in determining whether to
exercise such right. As a consequence, a Common Unitholder may have his Common
Units purchased from him even though he may not desire to sell them, and the
price paid may be less than the amount the holder would desire to receive upon
sale of his Common Units. For a description of such right, see "The Partnership
Agreement -- Limited Call Right."
THE PARTNERSHIP MAY RETAIN SEPARATE COUNSEL FOR ITSELF OR FOR THE HOLDERS OF
COMMON UNITS; ADVISORS RETAINED BY THE PARTNERSHIP FOR THIS OFFERING HAVE
NOT BEEN RETAINED TO ACT FOR HOLDERS OF COMMON UNITS
The Common Unitholders have not been represented by counsel in connection
with the preparation of the Partnership Agreement or other agreements referred
to herein or in establishing the terms of this offering. The attorneys,
independent public accountants and others who have performed services for the
Partnership in connection with this offering have been retained by the Managing
General Partner, its affiliates and the Partnership and may continue to be
retained by the Managing General Partner, its affiliates and the Partnership
after this offering. Attorneys, independent public accountants and others who
will perform services for the Partnership in the future will be selected by the
Managing General Partner or the Audit Committee and may also perform services
for the Managing General Partner and its affiliates. The Partnership may retain
separate counsel for itself or the holders of Common Units in the event of a
conflict of interest arising between the Managing General Partner and its
affiliates, on the one hand, and the Partnership or the holders of Common Units,
on the other, after the sale of the Common Units offered hereby, depending on
the nature of such conflict, but it does not intend to do so in most cases.
THE MANAGING GENERAL PARTNER IS NOT RESTRICTED FROM ENGAGING IN A
TRANSACTION WHICH WOULD TRIGGER CHANGE OF CONTROL PROVISIONS
The Partnership's indebtedness contains provisions relating to change of
control. If such change of control provisions are triggered, such outstanding
indebtedness may become due. There is no restriction on the ability of the
Managing General Partner or Northwestern Growth to enter into a transaction
which would trigger such change of control provisions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Description of Indebtedness."
THE GENERAL PARTNERS' AFFILIATES MAY COMPETE WITH THE PARTNERSHIP
The Managing General Partner may not engage in any business or activity or
incur any debts or liabilities except in connection with or incidental to (i)
its performance as a general partner of the Partnership or one or more
affiliates of the Partnership, (ii) the acquiring, owning or disposing of debt
or equity securities of the Partnership or such affiliates, and (iii) permitting
its employees to perform services for its affiliates. Except as limited by the
next paragraph, the Special General Partner and other affiliates of the Managing
General Partner (including NPS and Northwestern Growth) are not restricted from
engaging in any business activities, including those in competition with the
Partnership.
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Affiliates of the Managing General Partner may engage in a business activity
that involves the retail sale of propane to end users in the continental United
States only if (i) the Managing General Partner determines in its reasonable
judgment, prior to the commencement of such activity, that it is not in the best
interests of the Partnership to engage in such activity either (A) because of
the financial commitments or operating characteristics associated with such
activity or (B) because such activity is not consistent with the business
strategy or cannot otherwise be integrated with the Partnership's operations on
a basis beneficial to the Partnership; or (ii) such activity is being undertaken
as provided in a joint venture agreement or other agreement between the
Partnership and an affiliate of the Managing General Partner and such joint
venture or other agreement was determined at the time it was entered into to be
fair to the Partnership in the reasonable judgment of the Managing General
Partner.
There are no restrictions on the ability of affiliates of the Managing
General Partner to engage in the retail sale of propane outside the continental
United States or in the trading, transportation, storage and wholesale
distribution of propane. The Partnership Agreement expressly provides that if
the Managing General Partner or its affiliates act in accordance with the
foregoing, it shall not constitute a breach of the Managing General Partner's
fiduciary duties to the Partnership or the Unitholders if the Managing General
Partner or its affiliates engage in direct competition with the Partnership.
THE PARTNERSHIP AGREEMENT PERMITS THE PARTNERSHIP TO ENGAGE IN ROLL-UP
TRANSACTIONS
The Partnership Agreement does not prohibit the Partnership from engaging in
roll-up transactions. Were the Managing General Partner to cause the Partnership
to engage in a roll-up transaction, there could be no assurance that such a
transaction would not have a material adverse effect on a Unitholder's
investment in the Partnership.
FIDUCIARY AND OTHER DUTIES
The General Partners will be accountable to the Partnership and the
Unitholders as fiduciaries. Consequently, the Managing General Partner must
exercise good faith and integrity in handling the assets and affairs of the
Partnership. In contrast to the relatively well-developed law concerning
fiduciary duties owed by officers and directors to the shareholders of a
corporation, the law concerning the duties owed by general partners to other
partners and to partnerships is relatively undeveloped. Neither the Delaware
Revised Uniform Limited Partnership Act (the "Delaware Act") nor case law
defines with particularity the fiduciary duties owed by general partners to
limited partners or a limited partnership, but the Delaware Act provides that
Delaware limited partnerships may, in their partnership agreements, restrict or
expand the fiduciary duties that might otherwise be applied by a court in
analyzing the standard of duty owed by general partners to limited partners and
the partnership.
Fiduciary duties are generally considered to include an obligation to act
with the highest good faith, fairness and loyalty. Such duty of loyalty, in the
absence of a provision in a partnership agreement providing otherwise, would
generally prohibit a general partner of a Delaware limited partnership from
taking any action or engaging in any transaction as to which it has a conflict
of interest. In order to induce the Managing General Partner to manage the
business of the Partnership, the Partnership Agreement, as permitted by the
Delaware Act, contains various provisions intended to have the effect of
restricting the fiduciary duties that might otherwise be owed by the Managing
General Partner to the Partnership and its partners and waiving or consenting to
conduct by the Managing General Partner and its affiliates that might otherwise
raise issues as to compliance with fiduciary duties or applicable law.
The Partnership Agreement provides that in order to become a limited partner
of the Partnership, a holder of Common Units is required to agree to be bound by
the provisions thereof, including the provisions discussed above. This is in
accordance with the policy of the Delaware Act favoring the principle of freedom
of contract and the enforceability of partnership agreements. The Delaware Act
also provides that a partnership agreement is not unenforceable by reason of its
not having been signed by a person being admitted as a limited partner or
becoming an assignee in accordance with the terms thereof.
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The Partnership Agreement provides that whenever a conflict arises between
the General Partners or their affiliates, on the one hand, and the Partnership
or any other partner, on the other, the Managing General Partner shall resolve
such conflict. The Managing General Partner in general shall not be in breach of
its obligations under the Partnership Agreement or its duties to the Partnership
or the Unitholders if the resolution of such conflict is fair and reasonable to
the Partnership, and any resolution shall conclusively be deemed to be fair and
reasonable to the Partnership if such resolution is (i) approved by the Audit
Committee (although no party is obligated to seek such approval and the Managing
General Partner may adopt a resolution or course of action that has not received
such approval), (ii) on terms no less favorable to the Partnership than those
generally being provided to or available from unrelated third parties or (iii)
fair to the Partnership, taking into account the totality of the relationships
between the parties involved (including other transactions that may be
particularly favorable or advantageous to the Partnership). In resolving such
conflict, the Managing General Partner may (unless the resolution is
specifically provided for in the Partnership Agreement) consider the relative
interests of the parties involved in such conflict or affected by such action,
any customary or accepted industry practices or historical dealings with a
particular person or entity and, if applicable, generally accepted accounting
practices or principles and such other factors as its deems relevant. Thus,
unlike the strict duty of a fiduciary who must act solely in the best interests
of his beneficiary, the Partnership Agreement permits the Managing General
Partner to consider the interests of all parties to a conflict of interest,
including the interests of the General Partners. In connection with the
resolution of any conflict that arises, unless the Managing General Partner has
acted in bad faith, the action taken by the Managing General Partner shall not
constitute a breach of the Partnership Agreement, any other agreement or any
standard of care or duty imposed by the Delaware Act or other applicable law.
The Partnership also provides that in certain circumstances the Managing General
Partner may act in its sole discretion, in good faith or pursuant to other
appropriate standards.
The Delaware Act provides that a limited partner may institute legal action
on behalf of the partnership (a partnership derivative action) to recover
damages from a third party where the general partner has refused to institute
the action or where an effort to cause the general partner to do so is not
likely to succeed. In addition, the statutory or case law of certain
jurisdictions may permit a limited partner to institute legal action on behalf
of himself and all other similarly situated limited partners (a class action) to
recover damages from a general partner for violations of its fiduciary duties to
the limited partners.
The Partnership Agreement also provides that any standard of care and duty
imposed thereby or under the Delaware Act or any applicable law, rule or
regulation will be modified, waived or limited, to the extent permitted by law,
as required to permit the Managing General Partner and its officers and
directors to act under the Partnership Agreement or any other agreement
contemplated therein and to make any decisions pursuant to the authority
prescribed in the Partnership Agreement, so long as such action is reasonably
believed by the Managing General Partner to be in, or not inconsistent with, the
best interests of the Partnership. Further, the Partnership Agreement provides
that the General Partners and their officers and directors will not be liable
for monetary damages to the Partnership, the limited partners or assignees for
errors of judgment or for any acts or omissions if the Managing General Partner
and such other persons acted in good faith.
In addition, under the terms of the Partnership Agreement, the Partnership
is required to indemnify the General Partners and their officers, directors,
employees, affiliates, partners, members, agents and trustees, to the fullest
extent permitted by law, against liabilities, costs and expenses incurred by the
General Partners or such other persons, if the General Partners or such persons
acted in good faith and in a manner they reasonably believed to be in, or not
opposed to, the best interests of the Partnership and, with respect to any
criminal proceedings, had no reasonable cause to believe their conduct was
unlawful. See "The Partnership Agreement -- Indemnification." Thus, the General
Partners could be indemnified for their negligent acts if they meet such
requirements concerning good faith and the best interests of the Partnership.
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DESCRIPTION OF THE COMMON UNITS
Upon consummation of this offering, the Common Units will be registered
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations promulgated thereunder, and the Partnership will be
subject to the reporting and certain other requirements of the Exchange Act. The
Partnership will be required to file periodic reports containing financial and
other information with the Commission.
Purchasers of Common Units in this offering and subsequent transferees of
Common Units (or their brokers, agents or nominees on their behalf) who wish to
become Unitholders of record will be required to execute Transfer Applications,
the form of which is included as Appendix B to this Prospectus, before the
purchase or transfer of such Common Units will be registered on the records of
the Transfer Agent and before cash distributions or federal income tax
allocations can be made to the purchaser or transferee. The Partnership will be
entitled to treat the nominee holder of a Common Unit as the absolute owner
thereof, and the beneficial owner's rights will be limited solely to those that
it has against the nominee holder as a result of or by reason of any
understanding or agreement between such beneficial owner and nominee holder.
THE UNITS
The Common Units and the Subordinated Units represent limited partner
interests in the Partnership, which entitle the holders thereof to participate
in Partnership distributions and exercise the rights or privileges available to
limited partners under the Partnership Agreement. For a description of the
relative rights and preferences of holders of Common Units and Subordinated
Units in and to Partnership distributions, together with a description of the
circumstances under which Subordinated Units may convert into Common Units, see
"Cash Distribution Policy." For a description of the rights and privileges of
limited partners under the Partnership Agreement, see "The Partnership
Agreement."
TRANSFER AGENT AND REGISTRAR
DUTIES
Continental Stock Transfer & Trust Company will serve as registrar and
transfer agent (the "Transfer Agent") for the Common Units and will receive a
fee from the Partnership for serving in such capacities. All fees charged by the
Transfer Agent for transfers of Common Units will be borne by the Partnership
and not by the holders of Common Units, except that fees similar to those
customarily paid by stockholders for surety bond premiums to replace lost or
stolen certificates, taxes and other governmental charges, special charges for
services requested by a holder of a Common Unit and other similar fees or
charges will be borne by the affected holder. There will be no charge to holders
for disbursements of the Partnership's cash distributions. The Partnership will
indemnify the Transfer Agent, its agents and each of their respective
shareholders, directors, officers and employees against all claims and losses
that may arise out of acts performed or omitted in respect of its activities as
such, except for any liability due to any negligence, gross negligence, bad
faith or intentional misconduct of the indemnified person or entity.
RESIGNATION OR REMOVAL
The Transfer Agent may at any time resign, by notice to the Partnership, or
be removed by the Partnership, such resignation or removal to become effective
upon the appointment by the Partnership of a successor transfer agent and
registrar and its acceptance of such appointment. If no successor has been
appointed and accepted such appointment within 30 days after notice of such
resignation or removal, the Managing General Partner is authorized to act as the
transfer agent and registrar until a successor is appointed.
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TRANSFER OF COMMON UNITS
Until a Common Unit has been transferred on the books of the Partnership,
the Partnership and the Transfer Agent, notwithstanding any notice to the
contrary, may treat the record holder thereof as the absolute owner for all
purposes, except as otherwise required by law or stock exchange regulations. The
transfer of the Common Units to persons that purchase directly from the
Underwriters will be accomplished through the completion, execution and delivery
of a Transfer Application by such investor in connection with such Common Units.
Any subsequent transfers of a Common Unit will not be recorded by the Transfer
Agent or recognized by the Partnership unless the transferee executes and
delivers a Transfer Application. By executing and delivering a Transfer
Application (the form of which is set forth as Appendix B to this Prospectus and
which is also set forth on the reverse side of the certificates representing the
Common Units), the transferee of Common Units (i) becomes the record holder of
such Common Units and shall constitute an assignee until admitted into the
Partnership as a substitute limited partner, (ii) automatically requests
admission as a substituted limited partner in the Partnership, (iii) agrees to
be bound by the terms and conditions of, and executes, the Partnership
Agreement, (iv) represents that such transferee has the capacity, power and
authority to enter into the Partnership Agreement, (v) grants powers of attorney
to officers of the Managing General Partner and any liquidator of the
Partnership as specified in the Partnership Agreement, and (vi) makes the
consents and waivers contained in the Partnership Agreement. An assignee will
become a substituted limited partner of the Partnership in respect of the
transferred Common Units upon the consent of the Managing General Partner and
the recordation of the name of the assignee on the books and records of the
Partnership. Such consent may be withheld in the sole discretion of the Managing
General Partner.
Common Units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to request admission as
a substituted limited partner in the Partnership in respect of the transferred
Common Units. A purchaser or transferee of Common Units who does not execute and
deliver a Transfer Application obtains only (a) the right to assign the Common
Units to a purchaser or other transferee and (b) the right to transfer the right
to seek admission as a substituted limited partner in the Partnership with
respect to the transferred Common Units. Thus, a purchaser or transferee of
Common Units who does not execute and deliver a Transfer Application will not
receive cash distributions or federal income tax allocations unless the Common
Units are held in a nominee or "street name" account and the nominee or broker
has executed and delivered a Transfer Application with respect to such Common
Units, and may not receive certain federal income tax information or reports
furnished to record holders of Common Units. The transferor of Common Units will
have a duty to provide such transferee with all information that may be
necessary to obtain registration of the transfer of the Common Units, but a
transferee agrees, by acceptance of the certificate representing Common Units,
that the transferor will not have a duty to insure the execution of the Transfer
Application by the transferee and will have no liability or responsibility if
such transferee neglects to or chooses not to execute and forward the Transfer
Application to the Transfer Agent. See "The Partnership Agreement -- Status as
Limited Partner or Assignee."
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THE PARTNERSHIP AGREEMENT
The following paragraphs are a summary of the material provisions of the
Partnership Agreement. The form of the Partnership Agreement for the Partnership
is included in this Prospectus as Appendix A. The form of Partnership Agreement
for the Operating Partnership (the "Operating Partnership Agreement") is
included as an exhibit to the Registration Statement of which this Prospectus
constitutes a part. The Partnership will provide prospective investors with a
copy of the form of the Operating Partnership Agreement upon request at no
charge. The discussions presented herein and below of the material provisions of
the Partnership Agreement are qualified in their entirety by reference to the
Partnership Agreements for the Partnership and for the Operating Partnership.
The Partnership will be the sole limited partner of the Operating Partnership,
which will own, manage and operate the Partnership's business. The General
Partners will serve as the general partners of the Partnership and of the
Operating Partnership, owning an aggregate 2% general partner interest in the
Partnership and the Operating Partnership on a combined basis. The Managing
General Partner will manage and operate the Partnership, and the Special General
Partner will have no duty or right to participate in the management or operation
of the Partnership. Unless the context otherwise requires, references herein to
the "Partnership Agreement" constitute references to the Partnership Agreement
and the Operating Partnership Agreement, collectively.
Certain provisions of the Partnership Agreement are summarized elsewhere in
this Prospectus under various headings. With regard to the transfer of Common
Units, see "Description of the Common Units -- Transfer of Common Units." With
regard to distributions of Available Cash, see "Cash Distribution Policy." With
regard to allocations of taxable income and taxable loss, see "Tax
Considerations." Prospective investors are urged to review these sections of
this Prospectus and the Partnership Agreement carefully.
ORGANIZATION AND DURATION
The Partnership and the Operating Partnership were organized in October 1996
and November 1996, respectively, as Delaware limited partnerships. The General
Partners are the general partners of the Partnership and the Operating
Partnership. Following the issuance of the Common Units offered hereby, the
General Partners will own an aggregate 2% interest as general partners and the
right to receive Incentive Distributions, and the Unitholders (including the
General Partners as holders of Subordinated Units) will own a 98% interest as
limited partners, in the Partnership and the Operating Partnership on a combined
basis. The Partnership will dissolve on December 31, 2086, unless sooner
dissolved pursuant to the terms of the Partnership Agreement.
PURPOSE
The purpose of the Partnership under the Partnership Agreement is limited to
serving as the limited partner of the Operating Partnership and engaging in any
business activity that may be engaged in by the Operating Partnership. The
Operating Partnership Agreement provides that the Operating Partnership may,
directly or indirectly, engage in (i) the Combined Operations as conducted
immediately prior to this offering, (ii) any other activity approved by the
Managing General Partner but only to the extent that the Managing General
Partner reasonably determines that, as of the date of the acquisition or
commencement of such activity, such activity generates "qualifying income" (as
such term is defined in Section 7704 of the Code) or (iii) any activity that
enhances the operations of an activity that is described in (i) or (ii) above.
Although the Managing General Partner has the ability under the Partnership
Agreement to cause the Partnership and the Operating Partnership to engage in
activities other than propane marketing and related businesses, the Managing
General Partner has no current intention of doing so. The Managing General
Partner is authorized in general to perform all acts deemed necessary to carry
out such purposes and to conduct the business of the Partnership.
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POWER OF ATTORNEY
Each Limited Partner, and each person who acquires a Unit from a Unitholder
and executes and delivers a Transfer Application with respect thereto, grants to
the Managing General Partner and, if a liquidator of the Partnership has been
appointed, such liquidator, a power of attorney to, among other things, execute
and file certain documents required in connection with the qualification,
continuance or dissolution of the Partnership or the amendment of the
Partnership Agreement in accordance with the terms thereof and to make consents
and waivers contained in the Partnership Agreement.
CAPITAL CONTRIBUTIONS
For a description of the initial capital contributions to be made to the
Partnership, see "The Transactions." The Unitholders are not obligated to make
additional capital contributions to the Partnership, except as described below
under "-- Limited Liability."
LIMITED LIABILITY
Assuming that a Limited Partner does not participate in the control of the
business of the Partnership within the meaning of the Delaware Act and that he
otherwise acts in conformity with the provisions of the Partnership Agreement,
his liability under the Delaware Act will be limited, subject to certain
possible exceptions, to the amount of capital he is obligated to contribute to
the Partnership in respect of his Common Units plus his share of any
undistributed profits and assets of the Partnership. If it were determined,
however, that the right or exercise of the right by the Limited Partners as a
group to remove or replace the General Partners, to approve certain amendments
to the Partnership Agreement or to take other action pursuant to the Partnership
Agreement constituted "participation in the control" of the Partnership's
business for the purposes of the Delaware Act, then the Limited Partners could
be held personally liable for the Partnership's obligations under the laws of
the State of Delaware to the same extent as the General Partners with respect to
persons who transact business with the Partnership reasonably believing, based
on the Limited Partner's conduct, that the Limited Partner is a general partner.
Under the Delaware Act, a limited partnership may not make a distribution to
a partner to the extent that at the time of the distribution, after giving
effect to the distribution, all liabilities of the partnership, other than
liabilities to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to specific property
of the partnership, exceed the fair value of the assets of the limited
partnership. For the purpose of determining the fair value of the assets of a
limited partnership, the Delaware Act provides that the fair value of property
subject to liability for which recourse of creditors is limited shall be
included in the assets of the limited partnership only to the extent that the
fair value of that property exceeds that nonrecourse liability. The Delaware Act
provides that a limited partner who receives such a distribution and knew at the
time of the distribution that the distribution was in violation of the Delaware
Act shall be liable to the limited partnership for the amount of the
distribution for three years from the date of the distribution. Under the
Delaware Act, an assignee who becomes a substituted limited partner of a limited
partnership is liable for the obligations of his assignor to make contributions
to the partnership, except the assignee is not obligated for liabilities unknown
to him at the time he became a limited partner and which could not be
ascertained from the partnership agreement.
The Partnership expects that the Operating Partnership will initially
conduct business in at least 26 states. Maintenance of limited liability may
require compliance with legal requirements in such jurisdictions in which the
Operating Partnership conducts business, including qualifying the Operating
Partnership to do business there. Limitations on the liability of limited
partners for the obligations of a limited partnership have not been clearly
established in many jurisdictions. If it were determined that the Partnership
was, by virtue of its limited partner interest in the Operating Partnership or
otherwise, conducting business in any state without compliance with the
applicable limited partnership statute, or that the right or exercise of the
right by the Limited Partners as a group to remove or replace the General
Partners, to approve certain amendments to the Partnership Agreement, or to take
other action pursuant
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to the Partnership Agreement constituted "participation in the control" of the
Partnership's business for the purposes of the statutes of any relevant
jurisdiction, then the Limited Partners could be held personally liable for the
Partnership's obligations under the law of such jurisdiction to the same extent
as the General Partners under certain circumstances. The Partnership will
operate in such manner as the Managing General Partner deems reasonable and
necessary or appropriate to preserve the limited liability of the Limited
Partners.
ISSUANCE OF ADDITIONAL SECURITIES
The Partnership Agreement authorizes the Partnership to issue an unlimited
number of additional limited partner interests and other equity securities of
the Partnership for such consideration and on such terms and conditions as are
established by the Managing General Partner in its sole discretion without the
approval of any limited partners; provided that, during the Subordination
Period, except as provided in clauses (i) and (ii) below, the Partnership may
not issue equity securities of the Partnership ranking prior or senior to the
Common Units or an aggregate of more than 4,270,000 additional Common Units
(excluding Common Units issued upon the exercise of the Underwriters'
over-allotment option, upon conversion of Subordinated Units, upon conversion of
the general partner interests and Incentive Distribution Rights as a result of a
withdrawal of a General Partner, and pursuant to the employee benefit plans of
the Managing General Partner, the Partnership or other members of the
Partnership Group and subject to adjustment in the event of a combination or
subdivision of Common Units) or an equivalent number of securities ranking on a
parity with the Common Units without the approval of the holders of at least a
Unit Majority. During the Subordination Period, the Partnership may also issue
an unlimited number of additional Common Units or parity securities without the
approval of the Unitholders (i) if such issuance occurs (A) in connection with
an Acquisition or a Capital Improvement or (B) within 365 days of, and the net
proceeds from such issuance are used to repay debt incurred in connection with,
an Acquisition or a Capital Improvement, in each case where such Acquisition or
Capital Improvement involves assets that, if acquired by the Partnership as of
the date that is one year prior to the first day of the quarter in which such
transaction is to be effected, would have resulted in an increase in (1) the
amount of Adjusted Operating Surplus generated by the Partnership on a per-Unit
basis (for all outstanding Units) with respect to each of the four most recently
completed quarters (on a pro forma basis) as compared to (2) the actual amount
of Adjusted Operating Surplus generated by the Partnership on a per-Unit basis
(for all outstanding Units) (excluding Adjusted Operating Surplus attributable
to the Acquisition or Capital Improvement) with respect to each of such four
most recently completed quarters (provided that if the issuance of Units with
respect to an Acquisition or Capital Improvement occurs within the first four
full quarters after the closing of this offering, then Adjusted Operating
Surplus as used in clauses (1) (determined on a pro forma basis) and (2) above
will be calculated (A) for each quarter, if any, that commenced after the
closing of this offering for which actual results of operations are available,
based on the actual Adjusted Operating Surplus of the Partnership generated with
respect to such quarter and (B) for each other quarter, on a pro forma basis not
inconsistent with the procedures, as applicable, set forth in "Cash Available
for Distribution"; or (ii) if the proceeds from such issuance are used
exclusively to repay up to $75.0 million in indebtedness of a member of the
Partnership Group, in each case only where the aggregate amount of distributions
that would have been paid with respect to such newly issued Units and the
related additional distributions that would have been made to the General
Partners in respect of the (actual or pro forma) four-quarter period ending
prior to the first day of the quarter in which the issuance is to be consummated
(assuming such additional Units had been outstanding throughout such period and
that distributions equal to the distributions that were actually paid on the
outstanding Units during the period were paid on such additional Units) did not
exceed the interest costs actually incurred during such period on the
indebtedness that is to be repaid (or, if such indebtedness was not outstanding
throughout the entire period, would have been incurred had such indebtedness
been outstanding for the entire period). In accordance with Delaware law and the
provisions of the Partnership Agreement, the Partnership may also issue
additional partnership interests that, in the sole discretion of the Managing
General Partner, may have special voting rights to which the Common Units are
not entitled.
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Upon issuance of additional Partnership Securities (other than pursuant to
the over-allotment option), the General Partners will be required to make
additional capital contributions to the extent necessary to maintain their 2%
general partner interest in the Partnership and Operating Partnership. Moreover,
the Managing General Partner will have the right, which it may from time to time
assign in whole or in part to any of its affiliates, to purchase Common Units,
Subordinated Units or other equity securities of the Partnership from the
Partnership whenever, and on the same terms that, the Partnership issues such
securities or rights to persons other than the Managing General Partner and its
affiliates, to the extent necessary to maintain the percentage interest of the
General Partners and their affiliates in the Partnership (including their
interest represented by Subordinated Units) that existed immediately prior to
each such issuance. The holders of Common Units will not have preemptive rights
to acquire additional Common Units or other partnership interests that may be
issued by the Partnership.
AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed only by or with the
consent of the Managing General Partner, which consent may be given or withheld
in its sole discretion. In order to adopt a proposed amendment (other than
certain amendments discussed below), the Managing General Partner is required to
seek written approval of the holders of the number of Units required to approve
such amendment or call a meeting of the Limited Partners to consider and vote
upon the proposed amendment, except as described below. Proposed amendments
(unless otherwise specified) must be approved by holders of a Unit Majority,
except that no amendment may be made which would (i) enlarge the obligations of
any Limited Partner without its consent, unless approved by at least a majority
of the type or class of Units so affected, (ii) enlarge the obligations of,
restrict in any way any action by or rights of, or reduce in any way the amounts
distributable, reimbursable or otherwise payable by the Partnership to the
Managing General Partner or any of its affiliates without its consent, which may
be given or withheld in its sole discretion, (iii) change the term of the
Partnership, (iv) provide that the Partnership is not dissolved upon the
expiration of its term or upon an election to dissolve the Partnership by the
Managing General Partner that is approved by holders of a Unit Majority or (v)
give any person the right to dissolve the Partnership other than the Managing
General Partner's right to dissolve the Partnership with the approval of holders
of a Unit Majority.
The Managing General Partner may generally make amendments to the
Partnership Agreement without the approval of any Partner or assignee to reflect
(i) a change in the name of the Partnership, the location of the principal place
of business of the Partnership, the registered agent or the registered office of
the Partnership, (ii) admission, substitution, withdrawal or removal of partners
in accordance with the Partnership Agreement, (iii) a change that, in the
discretion of the Managing General Partner, is necessary or advisable to qualify
or continue the qualification of the Partnership as a limited partnership or a
partnership in which the Limited Partners have limited liability under the laws
of any state or to ensure that neither the Partnership nor the Operating
Partnership will be treated as an association taxable as a corporation or
otherwise taxed as an entity for federal income tax purposes, (iv) an amendment
that is necessary, in the opinion of counsel to the Partnership, to prevent the
Partnership, or the General Partners or their directors, officers, agents or
trustees, from in any manner being subjected to the provisions of the Investment
Company Act of 1940, as amended, the Investment Advisors Act of 1940, as
amended, or "plan asset" regulations adopted under the Employee Retirement
Income Security Act of 1974, as amended, whether or not substantially similar to
plan asset regulations currently applied or proposed, (v) subject to the
limitations on the issuance of additional Common Units or other limited or
general partner interests described above, an amendment that in the discretion
of the Managing General Partner is necessary or advisable in connection with the
authorization of additional limited or general partner interests, (vi) any
amendment expressly permitted in the Partnership Agreement to be made by the
Managing General Partner acting alone, (vii) an amendment effected, necessitated
or contemplated by a merger agreement that has been approved pursuant to the
terms of the Partnership Agreement, (viii) any amendment that, in the discretion
of the Managing General Partner, is necessary or advisable in connection with
the formation
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by the Partnership of, or its investment in, any corporation, partnership or
other entity (other than the Operating Partnership) as otherwise permitted by
the Partnership Agreement, (ix) a change in the fiscal year and/or taxable year
of the Partnership and changes related thereto, and (x) any other amendments
substantially similar to any of the foregoing.
In addition to the Managing General Partner's right to amend the Partnership
Agreement as described above, the Managing General Partner may make amendments
to the Partnership Agreement without the approval of any Partner or assignee if
such amendments, in the discretion of the Managing General Partner, (i) do not
adversely affect the Limited Partners in any material respect, (ii) are
necessary or advisable to satisfy any requirements, conditions or guidelines
contained in any opinion, directive, order, ruling or regulation of any federal
or state agency or judicial authority or contained in any federal or state
statute, (iii) are necessary or advisable to facilitate the trading of the
Common Units (including the division of any class or classes of outstanding
Partnership Securities into different classes to facilitate uniformity of tax
consequences within such classes of Partnership Securities) or to comply with
any rule, regulation, guideline or requirement of any securities exchange on
which the Common Units are or will be listed for trading, compliance with any of
which the Managing General Partner deems to be in the best interests of the
Partnership and the Limited Partners, (iv) are necessary or advisable in
connection with any action taken by the Managing General Partner relating to
splits or combinations of Units pursuant to the provisions of the Partnership
Agreement or (v) are required to effect the intent expressed in this Prospectus
or the intent of the Partnership Agreement or contemplated by the Partnership
Agreement.
The Managing General Partner will not be required to obtain an Opinion of
Counsel (as defined below) in the event of the amendments described in the two
immediately preceding paragraphs. No other amendments to the Partnership
Agreement will become effective without the approval of holders of at least 90%
of the Units unless the Partnership obtains an Opinion of Counsel to the effect
that such amendment will not affect the limited liability under applicable law
of any limited partner in the Partnership or the limited partner of the
Operating Partnership.
Any amendment that would have a material adverse effect on the rights or
preferences of any type or class of outstanding Units in relation to other
classes of Units will require the approval of at least a majority of the type or
class of Units so affected. Any amendment that reduces the voting percentage
required to take any action is required to be approved by the affirmative vote
of limited partners constituting not less than the voting requirement sought to
be reduced.
MERGER, SALE OR OTHER DISPOSITION OF ASSETS
The Managing General Partner is generally prohibited, without the prior
approval of holders of a Unit Majority, from causing the Partnership to, among
other things, sell, exchange or otherwise dispose of all or substantially all of
its assets in a single transaction or a series of related transactions
(including by way of merger, consolidation or other combination) or approving on
behalf of the Partnership the sale, exchange or other disposition of all or
substantially all of the assets of the Operating Partnership; provided that the
Managing General Partner may mortgage, pledge, hypothecate or grant a security
interest in all or substantially all of the Partnership's assets without such
approval. The Managing General Partner may also sell all or substantially all of
the Partnership's assets pursuant to a foreclosure or other realization upon the
foregoing encumbrances without such approval. Furthermore, provided that certain
conditions are satisfied, the Managing General Partner may merge the Partnership
or any member of the Partnership Group into, or convey some or all of the
Partnership Group's assets to, a newly formed entity if the sole purpose of such
merger or conveyance is to effect a mere change in the legal form of the
Partnership into another limited liability entity. The Unitholders are not
entitled to dissenters' rights of appraisal under the Partnership Agreement or
applicable Delaware law in the event of a merger or consolidation of the
Partnership, a sale of substantially all of the Partnership's assets or any
other transaction or event.
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TERMINATION AND DISSOLUTION
The Partnership will continue until December 31, 2086, unless sooner
terminated pursuant to the Partnership Agreement. The Partnership will be
dissolved upon (i) the election of the Managing General Partner to dissolve the
Partnership, if approved by the holders of a Unit Majority, (ii) the sale,
exchange or other disposition of all or substantially all of the assets and
properties of the Partnership and the Operating Partnership, (iii) the entry of
a decree of judicial dissolution of the Partnership or (iv) the withdrawal or
removal of the Managing General Partner or any other event that results in its
ceasing to be the Managing General Partner (other than by reason of a transfer
of its general partner interest in accordance with the Partnership Agreement or
withdrawal or removal following approval and admission of a successor). Upon a
dissolution pursuant to clause (iv), the holders of a Unit Majority may also
elect, within certain time limitations, to reconstitute the Partnership and
continue its business on the same terms and conditions set forth in the
Partnership Agreement by forming a new limited partnership on terms identical to
those set forth in the Partnership Agreement and having as general partner an
entity approved by the holders of a Unit Majority subject to receipt by the
Partnership of an opinion of counsel to the effect that (x) such action would
not result in the loss of limited liability of any Limited Partner and (y)
neither the Partnership, the reconstituted limited partnership nor the Operating
Partnership would be treated as an association taxable as a corporation or
otherwise be taxable as an entity for federal income tax purposes upon the
exercise of such right to continue (hereinafter, an "Opinion of Counsel").
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon dissolution of the Partnership, unless the Partnership is reconstituted
and continued as a new limited partnership, the person authorized to wind up the
affairs of the Partnership (the "Liquidator") will, acting with all of the
powers of the Managing General Partner that such Liquidator deems necessary or
desirable in its good faith judgment in connection therewith, liquidate the
Partnership's assets and apply the proceeds of the liquidation as provided in
"Cash Distribution Policy -- Distributions of Cash Upon Liquidation." Under
certain circumstances and subject to certain limitations, the Liquidator may
defer liquidation or distribution of the Partnership's assets for a reasonable
period of time or distribute assets to partners in kind if it determines that a
sale would be impractical or would cause undue loss to the partners.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNERS
The Managing General Partner has agreed not to withdraw voluntarily as a
general partner of the Partnership and the Operating Partnership prior to
December 31, 2006 (with limited exceptions described below), without obtaining
the approval of the holders of a Unit Majority and furnishing an Opinion of
Counsel. On or after December 31, 2006, the Managing General Partner may
withdraw as the Managing General Partner (without first obtaining approval from
any Unitholder) by giving 90 days' written notice, and such withdrawal will not
constitute a violation of the Partnership Agreement. Notwithstanding the
foregoing, the Managing General Partner may withdraw without Unitholder approval
upon 90 days' notice to the Limited Partners if at least 50% of the outstanding
Common Units are held or controlled by one person and its affiliates (other than
the Managing General Partner and its affiliates). In addition, the Partnership
Agreement permits the General Partners (in certain limited instances) to sell or
otherwise transfer all of their general partner interests in the Partnership
without the approval of the Unitholders. See "-- Transfer of General Partners'
Interests."
Upon the withdrawal of the Managing General Partner under any circumstances
(other than as a result of a transfer by the Managing General Partner of all or
a part of its general partner interests in the Partnership), the holders of a
Unit Majority may select a successor to such withdrawing Managing General
Partner. If such a successor is not elected, or is elected but an Opinion of
Counsel cannot be obtained, the Partnership will be dissolved, wound up and
liquidated, unless within 180 days after such withdrawal the holders of a Unit
Majority agree in writing to continue the business of the Partnership and to
appoint a successor Managing General Partner. See "-- Termination and
Dissolution."
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The Managing General Partner may not be removed unless such removal is
approved by the vote of the holders of not less than 66 2/3% of the outstanding
Units (including Units held by the General Partners and their affiliates) and
the Partnership receives an Opinion of Counsel. The ownership of the
Subordinated Units by the Managing General Partner and its affiliates
effectively gives the Managing General Partner the ability to prevent its
removal. Any such removal is also subject to the approval of a successor general
partner by the vote of the holders of not less than a Unit Majority. The
Partnership Agreement also provides that if the Managing General Partner is
removed as general partner of the Partnership under circumstances where Cause
does not exist and Units held by the General Partners and their affiliates are
not voted in favor of such removal (i) the Subordination Period will end and all
outstanding Subordinated Units will immediately convert into Common Units on a
one-for-one basis, (ii) any existing Common Unit Arrearages will be extinguished
and (iii) the General Partners will have the right to convert their partner
interests (and all the Incentive Distribution Rights) into Common Units or to
receive cash in exchange for such interests.
Withdrawal or removal of the Managing General Partner as a general partner
of the Partnership also constitutes withdrawal or removal, as the case may be,
of the Managing General Partner as a general partner of the Operating
Partnership. Any withdrawal or removal of the Managing General Partner will
result in the simultaneous withdrawal or removal of the Special General Partner
from the Partnership and the Operating Partnership.
In the event of removal of the General Partners under circumstances where
Cause exists or withdrawal of the General Partners where such withdrawal
violates the Partnership Agreement, a successor general partner will have the
option to purchase the general partner interests and Incentive Distribution
Rights of the departing General Partners (the "Departing Partners") in the
Partnership and the Operating Partnership for a cash payment equal to the fair
market value of such interests. Under all other circumstances where the General
Partners withdraw or are removed by the Limited Partners, the Departing Partners
will have the option to require the successor general partner to purchase such
general partner interest of the Departing Partners and their Incentive
Distribution Rights for such amount. In each case, such fair market value will
be determined by agreement between the Departing Partners and the successor
general partner, or if no agreement is reached, by an independent investment
banking firm or other independent expert selected by the Departing Partners and
the successor general partner (or if no expert can be agreed upon, by an expert
chosen by agreement of the experts selected by each of them). In addition, the
Partnership will be required to reimburse the Departing Partners for all amounts
due the Departing Partners, including, without limitation, all employee-related
liabilities, including severance liabilities, incurred in connection with the
termination of any employees employed by the Departing Partners for the benefit
of the Partnership.
If the above-described option is not exercised by either the Departing
Partners or the successor general partner, as applicable, the Departing
Partners' general partner interests in the Partnership and the Operating
Partnership and their Incentive Distribution Rights will be converted into
Common Units equal to the fair market value of such interests as determined by
an investment banking firm or other independent expert selected in the manner
described in the preceding paragraph.
TRANSFER OF GENERAL PARTNERS' INTERESTS AND INCENTIVE DISTRIBUTION RIGHTS
Except for a transfer by a General Partner of all, but not less than all, of
its general partner interest in the Partnership and the Operating Partnership to
(a) an affiliate of such General Partner or (b) another person in connection
with the merger or consolidation of such General Partner with or into another
person or the transfer by such General Partner of all or substantially all of
its assets to another person, such General Partner may not transfer all or any
part of its general partner interest in the Partnership and the Operating
Partnership to another person prior to December 31, 2006, without the approval
of the holders of at least a Unit Majority; provided that, in each case, such
transferee assumes the rights and duties of such General Partner to whose
interest such transferee has succeeded, agrees to be bound by the
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provisions of the Partnership Agreement, furnishes an Opinion of Counsel and
agrees to acquire all (or the appropriate portion thereof, as applicable) of
such General Partner's interest in the Operating Partnership and agrees to be
bound by the provisions of the Operating Partnership Agreement. The Special
General Partner cannot transfer its general partner interest in the Partnership
and the Operating Partnership without the approval of the Managing General
Partner. The General Partners shall have the right at any time, however, to
transfer their Subordinated Units to one or more persons without Unitholder
approval. At any time, the stockholders of the General Partners may sell or
transfer all or part of their interest in the General Partners to an affiliate
or a third party without the approval of the Unitholders. Each General Partner
or its affiliates or a subsequent holder may transfer its Incentive Distribution
Rights to another person in connection with its merger or consolidation with or
into, or sale of all or substantially all of its assets to, such person without
the prior approval of the Unitholders. Holders of Incentive Distribution Rights
may also transfer such rights to their affiliates without the prior approval of
the Unitholders. Prior to December 31, 2006, other transfers of the Incentive
Distribution Rights will require the affirmative vote of holders of at least a
Unit Majority. On or after December 31, 2006, the Incentive Distribution Rights
will be freely transferable.
CHANGE OF MANAGEMENT PROVISIONS
The Partnership Agreement contains certain provisions that are intended to
discourage a person or group from attempting to remove the Managing General
Partner as general partner of the Partnership or otherwise change the management
of the Partnership. If any person or group other than the Managing General
Partner and its affiliates acquires beneficial ownership of 20% or more of any
class of Units, such person or group loses voting rights with respect to all of
its Units. The Partnership Agreement also provides that if the Managing General
Partner is removed as a general partner of the Partnership under circumstances
where Cause does not exist and Units held by the General Partners and their
affiliates are not voted in favor of such removal, (i) the Subordination Period
will end and all outstanding Subordinated Units will immediately convert into
Common Units on a one-for-one basis, (ii) any existing Common Unit Arrearages
will be extinguished and (iii) the General Partners will have the right to
convert their partner interests (and all of their Incentive Distribution Rights)
into Common Units or to receive cash in exchange for such interests.
LIMITED CALL RIGHT
If at any time not more than 20% of the then-issued and outstanding limited
partner interests of any class (including Common Units) are held by persons
other than the Managing General Partner and its affiliates, the Managing General
Partner will have the right, which it may assign in whole or in part to any of
its affiliates or to the Partnership, to acquire all, but not less than all, of
the remaining limited partner interests of such class held by such unaffiliated
persons as of a record date to be selected by the Managing General Partner, on
at least 10 but not more than 60 days' notice. The purchase price in the event
of such a purchase shall be the greater of (i) the highest price paid by the
Managing General Partner or any of its affiliates for any limited partner
interests of such class purchased within the 90 days preceding the date on which
the Managing General Partner first mails notice of its election to purchase such
limited partner interests, and (ii) the Current Market Price as of the date
three days prior to the date such notice is mailed. As a consequence of the
Managing General Partner's right to purchase outstanding limited partner
interests, a holder of limited partner interests may have his limited partner
interests purchased even though he may not desire to sell them, or the price
paid may be less than the amount the holder would desire to receive upon the
sale of his limited partner interests. The tax consequences to a Unitholder of
the exercise of this call right are the same as a sale by such Unitholder of his
Common Units in the market. See "Tax Considerations -- Disposition of Common
Units."
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MEETINGS; VOTING
Except as described below with respect to a Person or group owning 20% or
more of all Units, Unitholders or assignees who are record holders of Units on
the record date set pursuant to the Partnership Agreement will be entitled to
notice of, and to vote at, meetings of limited partners of the Partnership and
to act with respect to matters as to which approvals may be solicited. With
respect to voting rights attributable to Common Units that are owned by an
assignee who is a record holder but who has not yet been admitted as a limited
partner, the Managing General Partner shall be deemed to be the limited partner
with respect thereto and shall, in exercising the voting rights in respect of
such Common Units on any matter, vote such Common Units at the written direction
of such record holder. Absent such direction, such Common Units will not be
voted (except that, in the case of Common Units held by the Managing General
Partner on behalf of Non-citizen Assignees (as defined below), the Managing
General Partner shall distribute the votes in respect of such Common Units in
the same ratios as the votes of partners in respect of other Units are cast).
The Managing General Partner does not anticipate that any meeting of
Unitholders will be called in the foreseeable future. Any action that is
required or permitted to be taken by the Unitholders may be taken either at a
meeting of the Unitholders or without a meeting if consents in writing setting
forth the action so taken are signed by holders of such number of Units as would
be necessary to authorize or take such action at a meeting of all of the
Unitholders. Meetings of the Unitholders of the Partnership may be called by the
Managing General Partner or by Unitholders owning at least 20% of the
outstanding Units of the class for which a meeting is proposed. Unitholders may
vote either in person or by proxy at meetings. The holders of a majority of the
outstanding Units of the class or classes for which a meeting has been called
represented in person or by proxy shall constitute a quorum at a meeting of
Unitholders of such class or classes, unless any such action by the Unitholders
requires approval by holders of a greater percentage of such Units, in which
case the quorum shall be such greater percentage.
Each record holder of a Unit has a vote according to his percentage interest
in the Partnership, although additional limited partner interests having special
voting rights could be issued by the Partnership. See "-- Issuance of Additional
Securities." However, if at any time any person or group (other than the
Managing General Partner and its affiliates) acquires, in the aggregate,
beneficial ownership of 20% or more of any class of Units then outstanding, such
person or group will lose voting rights with respect to all of its Units and
such Units may not be voted on any matter and will not be considered to be
outstanding when sending notices of a meeting of Unitholders, calculating
required votes, determining the presence of a quorum or for other similar
Partnership purposes. The Partnership Agreement provides that Common Units held
in nominee or street name account will be voted by the broker (or other nominee)
pursuant to the instruction of the beneficial owner unless the arrangement
between the beneficial owner and his nominee provides otherwise. Except as
otherwise provided in the Partnership Agreement, Subordinated Units will vote
together with Common Units as a single class.
Any notice, demand, request, report or proxy material required or permitted
to be given or made to record holders of Common Units (whether or not such
record holder has been admitted as a limited partner) under the terms of the
Partnership Agreement will be delivered to the record holder by the Partnership
or by the Transfer Agent at the request of the Partnership.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described above under "-- Limited Liability," the Common Units
will be fully paid, and Unitholders will not be required to make additional
contributions to the Partnership.
An assignee of a Common Unit, subsequent to executing and delivering a
Transfer Application, but pending its admission as a substituted Limited Partner
in the Partnership, is entitled to an interest in the Partnership equivalent to
that of a Limited Partner with respect to the right to share in allocations and
distributions from the Partnership, including liquidating distributions. The
Managing General Partner will
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vote and exercise other powers attributable to Common Units owned by an assignee
who has not become a substitute Limited Partner at the written direction of such
assignee. See "-- Meetings; Voting." Transferees who do not execute and deliver
a Transfer Application will be treated neither as assignees nor as record
holders of Common Units, and will not receive cash distributions, federal income
tax allocations or reports furnished to record holders of Common Units. See
"Description of the Common Units -- Transfer of Common Units."
NON-CITIZEN ASSIGNEES; REDEMPTION
If the Partnership is or becomes subject to federal, state or local laws or
regulations that, in the reasonable determination of the Managing General
Partner, create a substantial risk of cancellation or forfeiture of any property
in which the Partnership has an interest because of the nationality, citizenship
or other related status of any Limited Partner or assignee, the Partnership may
redeem the Units held by such Limited Partner or assignee at their Current
Market Price (as defined in the Glossary). In order to avoid any such
cancellation or forfeiture, the Managing General Partner may require each
Limited Partner or assignee to furnish information about his nationality,
citizenship or related status. If a Limited Partner or assignee fails to furnish
information about such nationality, citizenship or other related status within
30 days after a request for such information or the Managing General Partner
determines after receipt of such information that the Limited Partner or
assignee is not an eligible citizen, such Limited Partner or assignee may be
treated as a non-citizen assignee ("Non-citizen Assignee"). In addition to other
limitations on the rights of an assignee who is not a substituted Limited
Partner, a Non-citizen Assignee does not have the right to direct the voting of
his Units and may not receive distributions in kind upon liquidation of the
Partnership.
INDEMNIFICATION
The Partnership Agreement provides that the Partnership will indemnify the
General Partners, any Departing Partner, any Person who is or was an affiliate
of a General Partner or any Departing Partner, any Person who is or was a
member, partner, officer, director, employee, agent or trustee of a General
Partner or any Departing Partner or any affiliate of a General Partner or any
Departing Partner, or any Person who is or was serving at the request of a
General Partner or any Departing Partner or any affiliate of any such person,
any affiliate of a General Partner or any Departing Partner as an officer,
director, employee, member, partner, agent, fiduciary or trustee of another
Person ("Indemnitees"), to the fullest extent permitted by law, from and against
any and all losses, claims, damages, liabilities (joint or several), expenses
(including, without limitation, legal fees and expenses), judgments, fines,
penalties, interest, settlements and other amounts arising from any and all
claims, demands, actions, suits or proceedings, whether civil, criminal,
administrative or investigative, in which any Indemnitee may be involved, or is
threatened to be involved, as a party or otherwise, by reason of its status as
an Indemnitee; provided that in each case the Indemnitee acted in good faith and
in a manner that such Indemnitee reasonably believed to be in or not opposed to
the best interests of the Partnership and, with respect to any criminal
proceeding, had no reasonable cause to believe its conduct was unlawful. Any
indemnification under these provisions will be only out of the assets of the
Partnership, and the General Partners shall not be personally liable for, or
have any obligation to contribute or loan funds or assets to the Partnership to
enable it to effectuate, such indemnification. The Partnership is authorized to
purchase (or to reimburse the General Partners or their affiliates for the cost
of) insurance against liabilities asserted against and expenses incurred by such
persons in connection with the Partnership's activities, regardless of whether
the Partnership would have the power to indemnify such person against such
liabilities under the provisions described above.
BOOKS AND REPORTS
The Managing General Partner is required to keep appropriate books of the
business of the Partnership at the principal offices of the Partnership. The
books will be maintained for both tax and financial reporting purposes on an
accrual basis. For tax purposes, the fiscal year of the Partnership is the
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calendar year. For financial reporting purposes, however, the fiscal year of the
Partnership is a fiscal year ending on June 30.
As soon as practicable, but in no event later than 120 days after the close
of each fiscal year, the Managing General Partner will furnish or make available
to each record holder of Units (as of a record date selected by the Managing
General Partner) an annual report containing audited financial statements of the
Partnership for the past fiscal year, prepared in accordance with generally
accepted accounting principles. As soon as practicable, but in no event later
than 90 days after the close of each quarter (except the last quarter of each
fiscal year), the Managing General Partner will furnish or make available to
each record holder of Units (as of a record date selected by the Managing
General Partner) a report containing unaudited financial statements of the
Partnership with respect to such quarter and such other information as may be
required by law.
The Partnership will furnish each record holder of a Unit information
reasonably required for tax reporting purposes within 90 days after the close of
each calendar year. Such information is expected to be furnished in summary form
so that certain complex calculations normally required of partners can be
avoided. The Partnership's ability to furnish such summary information to
Unitholders will depend on the cooperation of such Unitholders in supplying
certain information to the Partnership. Every Unitholder (without regard to
whether he supplies such information to the Partnership) will receive
information to assist him in determining his federal and state tax liability and
filing his federal and state income tax returns.
RIGHT TO INSPECT PARTNERSHIP BOOKS AND RECORDS
The Partnership Agreement provides that a Limited Partner can for a purpose
reasonably related to such Limited Partner's interest as a limited partner, upon
reasonable demand and at his own expense, have furnished to him (i) a current
list of the name and last known address of each partner, (ii) a copy of the
Partnership's tax returns, (iii) information as to the amount of cash, and a
description and statement of the agreed value of any other property or services,
contributed or to be contributed by each partner and the date on which each
became a partner, (iv) copies of the Partnership Agreement, the certificate of
limited partnership of the Partnership, amendments thereto and powers of
attorney pursuant to which the same have been executed, (v) information
regarding the status of the Partnership's business and financial condition, and
(vi) such other information regarding the affairs of the Partnership as is just
and reasonable. The Partnership may, and intends to, keep confidential from the
Limited Partners trade secrets or other information the disclosure of which the
Partnership believes in good faith is not in the best interests of the
Partnership or which the Partnership is required by law or by agreements with
third parties to keep confidential.
REGISTRATION RIGHTS
Pursuant to the terms of the Partnership Agreement and subject to certain
limitations described therein, the Partnership has agreed to register for resale
under the Securities Act and applicable state securities laws any Common Units
or other securities of the Partnership (including Subordinated Units) proposed
to be sold by the General Partners or any of their affiliates if an exemption
from such registration requirements is not otherwise available for such proposed
transaction. The Partnership is obligated to pay all expenses incidental to such
registration, excluding underwriting discounts and commissions. See "Units
Eligible for Future Sale."
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UNITS ELIGIBLE FOR FUTURE SALE
After the sale of the Common Units offered hereby, the General Partners will
hold an aggregate of 7,878,619 Subordinated Units (all of which will convert
into Common Units at the end of the Subordination Period and some of which may
convert earlier). See "Cash Distribution Policy -- Distributions from Operating
Surplus during Subordination Period." The sale of these Units could have an
adverse impact on the price of the Common Units or on any trading market that
may develop. For a discussion of the transactions whereby the General Partners
acquired the Subordinated Units in connection with the organization of the
Partnership, see "The Transactions."
The Common Units sold in this offering will generally be freely transferable
without restriction or further registration under the Securities Act, except
that any Common Units owned by an "affiliate" of the Partnership (as that term
is defined in the rules and regulations under the Securities Act) may not be
resold publicly except in compliance with the registration requirements of the
Securities Act or pursuant to an exemption therefrom under Rule 144 thereunder
("Rule 144") or otherwise. Rule 144 permits securities acquired by an affiliate
of the issuer in a public offering to be sold into the market in an amount that
does not exceed, during any three-month period, the greater of (i) 1% of the
total number of such securities outstanding or (ii) the average weekly reported
trading volume of the Common Units for the four calendar weeks prior to such
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Partnership. A person who is not deemed to have been an
affiliate of the Partnership at any time during the three months preceding a
sale, and who has beneficially owned his Common Units for at least three years,
would be entitled to sell such Common Units under Rule 144 without regard to the
public information requirements, volume limitations, manner of sale provisions
or notice requirements of Rule 144.
Prior to the end of the Subordination Period, the Partnership may not issue
equity securities of the Partnership ranking prior or senior to the Common Units
or an aggregate of more than 4,270,000 additional Common Units (excluding Common
Units issued upon exercise of the Underwriters' over-allotment option, upon
conversion of Subordinated Units, pursuant to the employee benefit plans of the
Managing General Partner, the Partnership or other members of the Partnership
Group, or in connection with certain acquisitions or capital improvements or the
repayment of certain indebtedness and subject to adjustment in the event of a
combination or subdivision of the Common Units), or an equivalent amount of
securities ranking on a parity with the Common Units, without the approval of
the holders of at least a Unit Majority. The Partnership Agreement provides
that, after the Subordination Period, the Partnership may issue an unlimited
number of limited partner interests of any type without a vote of the
Unitholders. The Partnership Agreement does not impose any restriction on the
Partnership's ability to issue equity securities ranking junior to the Common
Units at any time. Any issuance of additional Common Units or certain other
equity securities would result in a corresponding decrease in the proportionate
ownership interest in the Partnership represented by, and could adversely affect
the cash distributions to and market price of, Common Units then outstanding.
See "The Partnership Agreement -- Issuance of Additional Securities."
Pursuant to the Partnership Agreement, the General Partners and their
affiliates will have the right, upon the terms and subject to the conditions
therein, to cause the Partnership to register under the Securities Act and state
laws the offer and sale of any Units or other Partnership Securities that they
hold. Subject to the terms and conditions of the Partnership Agreement, such
registration rights allow the General Partners and their affiliates or their
assignees holding any Units to require registration of any such Units and to
include any such Units in a registration by the Partnership of other Units,
including Units offered by the Partnership or by any Unitholder. Such
registration rights will continue in effect for two years following any
withdrawal or removal of the Managing General Partner as a general partner of
the Partnership. In connection with any such registration, the Partnership will
indemnify each Unitholder participating in such registration and its officers,
directors and controlling persons from and against any liabilities under the
Securities Act or any state securities laws arising from the registration
statement or
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prospectus. The Partnership will bear all costs and expenses of any such
registration. In addition, the General Partners and their affiliates may sell
their Units in private transactions at any time, subject to compliance with
applicable laws.
Each of the Partnership and the General Partners have agreed in the
Underwriting Agreement that, without the prior written consent of Morgan Stanley
& Co. Incorporated, it will not (i) offer, issue, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, any Common Units, Subordinated Units or any
securities convertible into or exercisable or exchangeable for Common Units or
Subordinated Units or (ii) enter into any swap or other arrangement that
transfers, in whole or in part, any of the economic consequences of ownership of
the Common Unit or such other securities, in cash or otherwise, for a period of
180 days after the date hereof, except for (i) the Common Units offered hereby,
(ii) the Subordinated Units to be issued as described in this Prospectus, (iii)
the redemption of Subordinated Units by the Partnership in connection with the
exercise by the Underwriters of their over-allotment option as described in this
Prospectus, (iv) issuances of Common Units pursuant to employee plans described
in this Prospectus or (v) the issuance of Common Units in connection with
Acquisitions or Capital Improvements; provided that the Subordinated Units may
be transferred without such consent to an affiliate of the Managing General
Partner who agrees to be bound by the transfer restrictions contained in this
paragraph.
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TAX CONSIDERATIONS
This section is a summary of material tax considerations that may be
relevant to prospective Unitholders and, to the extent set forth below under "--
Legal Opinions and Advice," expresses the opinion of Andrews & Kurth L.L.P.,
special counsel to the General Partners and the Partnership ("Counsel"), insofar
as it relates to matters of law and legal conclusions. This section is based
upon current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing and proposed regulations thereunder and current administrative
rulings and court decisions, all of which are subject to change. Subsequent
changes in such authorities may cause the tax consequences to vary substantially
from the consequences described below. Unless the context otherwise requires,
references in this section to the Partnership are references to both the
Partnership and the Operating Partnership.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting the Partnership or the Unitholders.
Moreover, the discussion focuses on Unitholders who are individual citizens or
residents of the United States and has only limited application to corporations,
estates, trusts, non-resident aliens or other Unitholders subject to specialized
tax treatment (such as tax-exempt institutions, foreign persons, individual
retirement accounts, REITs or mutual funds). Accordingly, each prospective
Unitholder should consult, and should depend on, his own tax advisor in
analyzing the federal, state, local and foreign tax consequences peculiar to him
of the ownership or disposition of Common Units.
LEGAL OPINIONS AND ADVICE
Counsel is of the opinion that, based on the representations and subject to
the qualifications set forth in the detailed discussion that follows, for
federal income tax purposes (i) the Partnership and the Operating Partnership
will each be treated as a partnership, and (ii) owners of Common Units (with
certain exceptions, as described in "-- Limited Partner Status" below) will be
treated as partners of the Partnership (but not the Operating Partnership). In
addition, all statements as to matters of law and legal conclusions contained in
this section, unless otherwise noted, reflect the opinion of Counsel.
Although no attempt has been made in the following discussion to comment on
all federal income tax matters affecting the Partnership or prospective
Unitholders, Counsel has advised the Partnership that, based on current law, the
following is a general description of the principal federal income tax
consequences that should arise from the ownership and disposition of Common
Units and, insofar as it relates to matters of law and legal conclusions,
addresses the material tax consequences to Unitholders who are individual
citizens or residents of the United States.
No ruling has been or will be requested from the Internal Revenue Service
(the "IRS") with respect to classification of the Partnership as a partnership
for federal income tax purposes, whether the Partnership's propane operations
generate "qualifying income" under Section 7704 of the Code or any other matter
affecting the Partnership or prospective Unitholders. An opinion of counsel
represents only that counsel's best legal judgment and does not bind the IRS or
the courts. Thus, no assurance can be provided that the opinions and statements
set forth herein would be sustained by a court if contested by the IRS. Any such
contest with the IRS may materially and adversely impact the market for the
Common Units and the prices at which Common Units trade. In addition, the costs
of any contest with the IRS will be borne directly or indirectly by the
Unitholders and the General Partners. Furthermore, no assurance can be given
that the treatment of the Partnership or an investment therein will not be
significantly modified by future legislative or administrative changes or court
decisions. Any such modification may or may not be retroactively applied.
For the reasons hereinafter described, Counsel has not rendered an opinion
with respect to the following specific federal income tax issues: (i) the
treatment of a Unitholder whose Common Units are loaned to a short seller to
cover a short sale of Common Units (see "-- Tax Treatment of Operations --
Treatment of Short Sales"), (ii) whether a Unitholder acquiring Common Units in
separate transactions
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must maintain a single aggregate adjusted tax basis in his Common Units (see "--
Disposition of Common Units -- Recognition of Gain or Loss"), (iii) whether the
Partnership's monthly convention for allocating taxable income and losses is
permitted by existing Treasury Regulations (see "-- Disposition of Common Units
- -- Allocations Between Transferors and Transferees"), (iv) whether the
Partnership's convention for allocating recapture income and allocating all
items of income, gain, loss, deduction and credit for the period ending December
31, 1996 to the General Partners is sustainable (see "-- Allocation of
Partnership Income, Gain, Loss and Deduction"), and (v) whether the
Partnership's method for depreciating Section 743 adjustments is sustainable
(see "-- Tax Treatment of Operations -- Section 754 Election").
TAX RATES AND CHANGES IN FEDERAL INCOME TAX LAWS
The top marginal income tax rate for individuals is 36% subject to a 10%
surtax on individuals with taxable income in excess of $263,750 per year. The
surtax is computed by applying a 39.6% rate to taxable income in excess of the
threshold. The net capital gain of an individual remains subject to a maximum
28% tax rate.
The 1995 Proposed Legislation that was passed by Congress in 1995, as part
of the Revenue Reconciliation Act of 1995, and vetoed by President Clinton would
have altered the tax reporting system and the deficiency collection system
applicable to large partnerships (generally defined as electing partnerships
with more than 100 partners) and would have made certain additional changes to
the treatment of large partnerships, such as the Partnership. Certain of the
proposed changes are discussed later in this section. The 1995 Proposed
Legislation was generally intended to simplify the administration of the tax
rules governing large partnerships such as the Partnership. In addition, the
1995 Proposed Legislation contained provisions which would have reduced the
maximum tax rate applicable to the net capital gains of an individual to 19.8%.
On March 19, 1996, certain tax legislation, known as the Revenue
Reconciliation Act of 1996, was presented to Congress that would impact the
taxation of certain financial products, including partnership interests. One
proposal would treat a taxpayer as having sold an "appreciated" partnership
interest (one in which gain would be recognized if such interest were sold) if
the taxpayer or related persons entered into one or more positions with respect
to the same or substantially identical property which, for some period,
substantially eliminated both the risk of loss and opportunity for gain on the
appreciated financial position (including selling "short against the box"
transactions). Certain of these proposed changes are also discussed under "--
Disposition of Common Units."
As of the date of this Prospectus, it is not possible to predict whether any
of the changes set forth in the 1995 Proposed Legislation, the Revenue
Reconciliation Act of 1996 or any other changes in the federal income tax laws
that would impact the Partnership and the Unitholders will ultimately be enacted
or, if enacted, what form they will take, what the effective dates will be, and
what, if any, transition rules will be provided.
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner is required to take into account his allocable
share of items of income, gain, loss and deduction of the partnership in
computing his federal income tax liability, regardless of whether cash
distributions are made. Distributions by a partnership to a partner are
generally not taxable unless the amount of any cash distributed is in excess of
the partner's adjusted basis in his partnership interest.
No ruling has been or will be sought from the IRS as to the status of the
Partnership or the Operating Partnership as a partnership for federal income tax
purposes. Instead the Partnership has relied on the opinion of Counsel that,
based upon the Code, the regulations thereunder, published revenue rulings and
court decisions, the Partnership and the Operating Partnership will each be
classified as a partnership for federal income tax purposes.
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In rendering its opinion, Counsel has relied on certain factual
representations made by the Partnership and the General Partners. Such factual
matters are as follows:
(a) With respect to the Partnership and the Operating Partnership, the
General Partners, at all times while acting as general partners of the
Partnership and the Operating Partnership, will have combined net worth,
computed on a fair market value basis, excluding their interests in the
Partnership and in the Operating Partnership and any notes or receivables
due from the Partnership or the Operating Partnership, of not less than $15
million;
(b) The Partnership will be operated in accordance with (i) all
applicable partnership statutes, (ii) the Partnership Agreement, and (iii)
the description thereof in this Prospectus;
(c) The Operating Partnership will be operated in accordance with (i)
all applicable partnership statutes, (ii) the limited partnership agreement
for the Operating Partnership, and (iii) the description thereof in this
Prospectus;
(d) The General Partners will, at all times, act independently of the
limited partners (other than the limited partner interest held by the
General Partners); and
(e) For each taxable year, less than 10% of the gross income of the
Partnership will be derived from sources other than (i) the exploration,
development, production, processing, refining, transportation or marketing
of any mineral or natural resource, including oil, gas or products thereof,
or (ii) other items of "qualifying income" within the meaning of Section
7704(d) of the Code.
Counsel's opinion as to the partnership classification of the Partnership in
the event of a change in one of the general partners is based upon the
assumption that the new general partner will satisfy the foregoing
representations.
Section 7704 of the Code provides that publicly-traded partnerships will, as
a general rule, be taxed as corporations. However, an exception (the "Qualifying
Income Exception") exists with respect to publicly-traded partnerships of which
90% or more of the gross income for every taxable year consists of "qualifying
income." Qualifying income includes interest (from other than a financial
business), dividends and income and gains from the transportation and marketing
of crude oil, natural gas, and products thereof, including the retail and
wholesale marketing of propane and the transportation of propane and natural gas
liquids. Based upon the representations of the Partnership and the General
Partners and a review of the applicable legal authorities, Counsel is of the
opinion that at least 90% of the Partnership's gross income will constitute
qualifying income. The Partnership estimates that less than 7% of its gross
income for each taxable year will not constitute qualifying income.
If the Partnership fails to meet the Qualifying Income Exception (other than
a failure which is determined by the IRS to be inadvertent and which is cured
within a reasonable time after discovery), the Partnership will be treated as if
it had transferred all of its assets (subject to liabilities) to a newly formed
corporation (on the first day of the year in which it fails to meet the
Qualifying Income Exception) in return for stock in that corporation, and then
distributed that stock to the partners in liquidation of their interests in the
Partnership. This contribution and liquidation should be tax-free to Unitholders
and the Partnership, so long as the Partnership, at that time, does not have
liabilities in excess of the tax basis of its assets. Thereafter, the
Partnership would be treated as a corporation for federal income tax purposes.
If the Partnership or the Operating Partnership were treated as an
association taxable as a corporation in any taxable year, either as a result of
a failure to meet the Qualifying Income Exception or otherwise, its items of
income, gain, loss and deduction would be reflected only on its tax return
rather than being passed through to the Unitholders, and its net income would be
taxed to the Partnership or the Operating Partnership at corporate rates. In
addition, any distribution made to a Unitholder would be treated as either
taxable dividend income (to the extent of the Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
nontaxable return of capital (to the extent of the Unitholder's tax basis in his
Common Units) or taxable capital gain (after the Unitholder's tax basis in the
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Common Units is reduced to zero). Accordingly, treatment of either the
Partnership or the Operating Partnership as an association taxable as a
corporation would result in a material reduction in a Unitholder's cash flow and
after-tax return and thus would likely result in a substantial reduction of the
value of the Units.
The discussion below is based on the assumption that the Partnership will be
classified as a partnership for federal income tax purposes.
LIMITED PARTNER STATUS
Unitholders who have become limited partners of the Partnership will be
treated as partners of the Partnership for federal income tax purposes.
Moreover, the IRS has ruled that assignees of partnership interests who have not
been admitted to a partnership as partners, but who have the capacity to
exercise substantial dominion and control over the assigned partnership
interests, will be treated as partners for federal income tax purposes. On the
basis of this ruling, except as otherwise described herein, Counsel is of the
opinion that (a) assignees who have executed and delivered Transfer
Applications, and are awaiting admission as limited partners and (b) Unitholders
whose Common Units are held in street name or by a nominee and who have the
right to direct the nominee in the exercise of all substantive rights attendant
to the ownership of their Common Units will be treated as partners of the
Partnership for federal income tax purposes. As this ruling does not extend, on
its facts, to assignees of Common Units who are entitled to execute and deliver
Transfer Applications and thereby become entitled to direct the exercise of
attendant rights, but who fail to execute and deliver Transfer Applications,
Counsel's opinion does not extend to these persons. Income, gain, deductions or
losses would not appear to be reportable by a Unitholder who is not a partner
for federal income tax purposes, and any cash distributions received by such a
Unitholder would therefore be fully taxable as ordinary income. These holders
should consult their own tax advisors with respect to their status as partners
in the Partnership for federal income tax purposes. A purchaser or other
transferee of Common Units who does not execute and deliver a Transfer
Application may not receive certain federal income tax information or reports
furnished to record holders of Common Units unless the Common Units are held in
a nominee or street name account and the nominee or broker has executed and
delivered a Transfer Application with respect to such Common Units.
A beneficial owner of Common Units whose Common Units have been transferred
to a short seller to complete a short sale would appear to lose his status as a
partner with respect to such Common Units for federal income tax purposes. See
"-- Tax Treatment of Operations -- Treatment of Short Sales."
TAX CONSEQUENCES OF UNIT OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME
No federal income tax will be paid by the Partnership. Instead, each
Unitholder will be required to report on his income tax return his allocable
share of the income, gains, losses and deductions of the Partnership without
regard to whether corresponding cash distributions are received by such
Unitholder. Consequently, a Unitholder may be allocated income from the
Partnership even if he has not received a cash distribution. Each Unitholder
will be required to include in income his allocable share of Partnership income,
gain, loss and deduction for the taxable year of the Partnership ending with or
within the taxable year of the Unitholder.
TREATMENT OF PARTNERSHIP DISTRIBUTIONS
Distributions by the Partnership to a Unitholder generally will not be
taxable to the Unitholder for federal income tax purposes to the extent of his
tax basis in his Common Units immediately before the distribution. Cash
distributions in excess of a Unitholder's tax basis generally will be considered
to be gain from the sale or exchange of the Common Units, taxable in accordance
with the rules described under "-- Disposition of Common Units" below. Any
reduction in a Unitholder's share of the Partnership's liabilities
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for which no partner, including the General Partners, bears the economic risk of
loss ("nonrecourse liabilities") will be treated as a distribution of cash to
that Unitholder. To the extent that Partnership distributions cause a
Unitholder's "at risk" amount to be less than zero at the end of any taxable
year, he must recapture any losses deducted in previous years. See "--
Limitations on Deductibility of Partnership Losses."
A decrease in a Unitholder's percentage interest in the Partnership because
of the issuance by the Partnership of additional Common Units will decrease such
Unitholder's share of nonrecourse liabilities of the Partnership, and thus will
result in a corresponding deemed distribution of cash. A non-pro rata
distribution of money or property may result in ordinary income to a Unitholder,
regardless of his tax basis in his Common Units, if such distribution reduces
the Unitholder's share of the Partnership's "unrealized receivables" (including
depreciation recapture) and/or substantially appreciated "inventory items" (both
as defined in Section 751 of the Code) (collectively, "Section 751 Assets"). To
that extent, the Unitholder will be treated as having been distributed his
proportionate share of the Section 751 Assets and having exchanged such assets
with the Partnership in return for the non-pro rata portion of the actual
distribution made to him. This latter deemed exchange will generally result in
the Unitholder's realization of ordinary income under Section 751(b) of the
Code. Such income will equal the excess of (1) the non-pro rata portion of such
distribution over (2) the Unitholder's tax basis for the share of such Section
751 Assets deemed relinquished in the exchange.
RATIO OF TAXABLE INCOME TO DISTRIBUTIONS
The Partnership estimates that a purchaser of Common Units in this offering
who holds such Common Units from the date of the closing of this offering
through December 31, 2000, will be allocated, on a cumulative basis, an amount
of federal taxable income for such period that will be approximately 20% of the
cash distributed with respect to that period. The Partnership further estimates
that for taxable years after the taxable year ending December 31, 2000, the
taxable income allocable to the Unitholders will constitute a significantly
higher percentage of cash distributed to Unitholders. The Partnership Agreement
provides that no taxable income, gain, loss, deduction or credit will be
allocated to Unitholders for the taxable period ending December 31, 1996.
Counsel is unable to opine that such allocation will be given effect for federal
income tax purposes. If such allocation were not respected, the Partnership
expects that the Unitholders would be allocated only a minimal amount of taxable
income for the period ending December 31, 1996. The foregoing estimates are
based upon the assumption that gross income from operations will approximate the
amount required to make the Minimum Quarterly Distribution with respect to all
Units and other assumptions with respect to capital expenditures, cash flow and
anticipated cash distributions. These estimates and assumptions are subject to,
among other things, numerous business, economic, regulatory, competitive and
political uncertainties beyond the control of the Partnership. Further, the
estimates are based on current tax law and certain tax reporting positions that
the Partnership intends to adopt and with which the IRS could disagree.
Accordingly, no assurance can be given that the estimates will prove to be
correct. The actual percentage could be higher or lower, and any such
differences could be material and could materially affect the value of the
Common Units.
BASIS OF COMMON UNITS
A Unitholder's initial tax basis for his Common Units will be the amount he
paid for the Common Units plus his share of the Partnership's nonrecourse
liabilities. That basis will be increased by his share of Partnership income and
by any increases in his share of Partnership nonrecourse liabilities. That basis
will be decreased (but not below zero) by distributions from the Partnership, by
the Unitholder's share of Partnership losses, by any decrease in his share of
Partnership nonrecourse liabilities and by his share of expenditures of the
Partnership that are not deductible in computing its taxable income and are not
required to be capitalized. A limited partner will have no share of Partnership
debt which is recourse to the General Partners, but will have a share, generally
based on his share of profits, of Partnership debt which is not recourse to any
partner. See "-- Disposition of Common Units -- Recognition of Gain or Loss."
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LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES
The deduction by a Unitholder of his share of Partnership losses will be
limited to the tax basis in his Units and, in the case of an individual
Unitholder or a corporate Unitholder (if more than 50% of the value of its stock
is owned directly or indirectly by five or fewer individuals or certain
tax-exempt organizations), to the amount for which the Unitholder is considered
to be "at risk" with respect to the Partnership's activities, if that is less
than the Unitholder's tax basis. A Unitholder must recapture losses deducted in
previous years to the extent that Partnership distributions cause the
Unitholder's at risk amount to be less than zero at the end of any taxable year.
Losses disallowed to a Unitholder or recaptured as a result of these limitations
will carry forward and will be allowable to the extent that the Unitholder's tax
basis or at risk amount (whichever is the limiting factor) is subsequently
increased. Upon the taxable disposition of a Unit, any gain recognized by a
Unitholder can be offset by losses that were previously suspended by the at risk
limitation but may not be offset by losses suspended by the basis limitation.
Any excess loss (above such gain) previously suspended by the at risk or basis
limitations is no longer utilizable.
In general, a Unitholder will be at risk to the extent of the tax basis of
his Units, excluding any portion of that basis attributable to his share of
Partnership nonrecourse liabilities, reduced by any amount of money the
Unitholder borrows to acquire or hold his Units if the lender of such borrowed
funds owns an interest in the Partnership, is related to such a person or can
look only to Units for repayment. A Unitholder's at risk amount will increase or
decrease as the tax basis of the Unitholder's Units increases or decreases
(other than tax basis increases or decreases attributable to increases or
decreases in his share of Partnership nonrecourse liabilities).
The passive loss limitations generally provide that individuals, estates,
trusts and certain closely-held corporations and personal service corporations
can deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) only to the extent of the taxpayer's
income from those passive activities. The passive loss limitations are applied
separately with respect to each publicly-traded partnership. Consequently, any
passive losses generated by the Partnership will only be available to offset
future income generated by the Partnership and will not be available to offset
income from other passive activities or investments (including other
publicly-traded partnerships) or salary or active business income. Passive
losses which are not deductible because they exceed a Unitholder's income
generated by the Partnership may be deducted in full when he disposes of his
entire investment in the Partnership in a fully taxable transaction to an
unrelated party. The passive activity loss rules are applied after other
applicable limitations on deductions such as the at risk rules and the basis
limitation.
A Unitholder's share of net income from the Partnership may be offset by any
suspended passive losses from the Partnership, but it may not be offset by any
other current or carryover losses from other passive activities, including those
attributable to other publicly-traded partnerships. The IRS has announced that
Treasury Regulations will be issued which characterize net passive income from a
publicly-traded Partnership as investment income for purposes of the limitations
on the deductibility of investment interest.
LIMITATIONS ON INTEREST DEDUCTIONS
The deductibility of a non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of such taxpayer's "net investment
income." As noted, a Unitholder's net passive income from the Partnership will
be treated as investment income for this purpose. In addition, the Unitholder's
share of the Partnership's portfolio income will be treated as investment
income. Investment interest expense includes (i) interest on indebtedness
properly allocable to property held for investment, (ii) the Partnership's
interest expense attributed to portfolio income, and (iii) the portion of
interest expense incurred to purchase or carry an interest in a passive activity
to the extent attributable to portfolio income. The computation of a
Unitholder's investment interest expense will take into account interest on any
margin account borrowing or other loan incurred to purchase or carry a Unit. Net
investment income includes gross income from property held for investment and
amounts treated as portfolio income
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pursuant to the passive loss rules less deductible expenses (other than
interest) directly connected with the production of investment income, but
generally does not include gains attributable to the disposition of property
held for investment.
ALLOCATION OF PARTNERSHIP INCOME, GAIN, LOSS AND DEDUCTION
In general, if the Partnership has a net profit, items of income, gain, loss
and deduction will be allocated among the General Partners and the Unitholders
in accordance with their respective percentage interests in the Partnership. At
any time that distributions are made to the Common Units and not to the
Subordinated Units, or that Incentive Distributions are made to the General
Partners, gross income will be allocated to the recipients to the extent of such
distribution. If the Partnership has a net loss, items of income, gain, loss and
deduction will generally be allocated first, to the General Partners and the
Unitholders in accordance with their respective Percentage Interests to the
extent of their positive capital accounts (as maintained under the Partnership
Agreement) and, second, to the General Partners.
As required by Section 704(c) of the Code and as permitted by Regulations
thereunder, certain items of Partnership income, deduction, gain and loss will
be allocated to account for the difference between the tax basis and fair market
value of property contributed to the Partnership by each of the General Partners
("Contributed Property"). The effect of these allocations to a Unitholder will
be essentially the same as if the tax basis of the Contributed Property were
equal to their fair market value at the time of contribution. In addition,
certain items of recapture income will be allocated to the extent possible to
the partner allocated the deduction giving rise to the treatment of such gain as
recapture income in order to minimize the recognition of ordinary income by some
Unitholders, but these allocations may not be respected. If these allocations of
recapture income are not respected, the amount of the income or gain allocated
to a Unitholder will not change but instead a change in the character of the
income allocated to a Unitholder would result. Finally, although the Partnership
does not expect that its operations will result in the creation of negative
capital accounts, if negative capital accounts nevertheless result, items of
Partnership income and gain will be allocated in an amount and manner sufficient
to eliminate the negative balance as quickly as possible.
Regulations provide that an allocation of items of partnership income, gain,
loss or deduction, other than an allocation required by Section 704(c) of the
Code to eliminate the disparity between a partner's "book" capital account
(credited with the fair market value of Contributed Property) and "tax" capital
account (credited with the tax basis of Contributed Property) (the "Book-Tax
Disparity"), will generally be given effect for federal income tax purposes in
determining a partner's distributive share of an item of income, gain, loss or
deduction only if the allocation has substantial economic effect. In any other
case, a partner's distributive share of an item will be determined on the basis
of the partner's interest in the partnership, which will be determined by taking
into account all the facts and circumstances, including the partner's relative
contributions to the partnership, the interests of the partners in economic
profits and losses, the interest of the partners in cash flow and other
nonliquidating distributions and rights of the partners to distributions of
capital upon liquidation.
Counsel is of the opinion that, with the exception of the allocations of
recapture income and allocations of all items of income, gain, loss, deduction
or credit to the General Partners for the taxable period ending on December 31,
1996 discussed above, allocations under the Partnership Agreement will be given
effect for federal income tax purposes in determining a partner's distributive
share of an item of income, gain, loss or deduction. There are, however,
uncertainties in the Treasury Regulations relating to allocations of Partnership
income, and investors should be aware that the allocations of recapture income
and allocations of all items of income, gain, loss, deduction or credit to the
General Partners for the taxable period ending on December 31, 1996 in the
Partnership Agreement may be successfully challenged by the IRS.
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TAX TREATMENT OF OPERATIONS
ACCOUNTING METHOD AND TAXABLE YEAR
The Partnership will use the year ending December 31 as its taxable year and
will adopt the accrual method of accounting for federal income tax purposes.
Each Unitholder will be required to include in income his allocable share of
Partnership income, gain, loss and deduction for the taxable year of the
Partnership ending within or with the taxable year of the Unitholder. In
addition, a Unitholder who has a taxable year ending on a date other than
December 31 and who disposes of all of his Units following the close of the
Partnership's taxable year but before the close of his taxable year must include
his allocable share of Partnership income, gain, loss and deduction in income
for his taxable year with the result that he will be required to report in
income for his taxable year his distributive share of more than one year of
Partnership income, gain, loss and deduction. See "-- Disposition of Common
Units -- Allocations Between Transferors and Transferees."
INITIAL TAX BASIS, DEPRECIATION AND AMORTIZATION
The tax basis of the assets of the Partnership will be used for purposes of
computing depreciation and cost recovery deductions and, ultimately, gain or
loss on the disposition of such assets. The Partnership assets will initially
have an aggregate tax basis equal to the tax basis of the assets in the
possession of the General Partners immediately prior to the formation of the
Partnership plus the amount of gain, if any, recognized by the General Partners
as a result of the formation of the Partnership. The federal income tax burden
associated with the difference between the fair market value of property
contributed by the General Partners and the tax basis established for such
property will be borne by the General Partners. See "-- Allocation of
Partnership Income, Gain, Loss and Deduction."
To the extent allowable, the Partnership may elect to use the depreciation
and cost recovery methods that will result in the largest depreciation
deductions in the early years of the Partnership. The Partnership will not be
entitled to any amortization deductions with respect to goodwill conveyed to the
Partnership on formation. Property subsequently acquired or constructed by the
Partnership may be depreciated using accelerated methods permitted by the Code.
If the Partnership disposes of depreciable property by sale, foreclosure, or
otherwise, all or a portion of any gain (determined by reference to the amount
of depreciation previously deducted and the nature of the property) may be
subject to the recapture rules and taxed as ordinary income rather than capital
gain. Similarly, a partner who has taken cost recovery or depreciation
deductions with respect to property owned by the Partnership may be required to
recapture such deductions as ordinary income upon a sale of his interest in the
Partnership. See "-- Allocation of Partnership Income, Gain, Loss and Deduction"
and "-- Disposition of Common Units -- Recognition of Gain or Loss."
Costs incurred in organizing the Partnership may be amortized over any
period selected by the Partnership not shorter than 60 months. The costs
incurred in promoting the issuance of Units (i.e. syndication expenses) must be
capitalized and cannot be deducted currently, ratably or upon termination of the
Partnership. There are uncertainties regarding the classification of costs as
organization expenses, which may be amortized, and as syndication expenses,
which may not be amortized. Under recently adopted regulations, the underwriting
discounts and commissions would be treated as a syndication cost.
SECTION 754 ELECTION
The Partnership intends to make the election permitted by Section 754 of the
Code. That election is irrevocable without the consent of the IRS. The election
will generally permit the Partnership to adjust a Common Unit purchaser's tax
basis in the Partnership's assets ("inside basis") pursuant to Section 743(b) of
the Code to reflect his purchase price. The Section 743(b) adjustment belongs to
the purchaser and not to other partners. (For purposes of this discussion, a
partner's inside basis in the Partnership's
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assets will be considered to have two components: (1) his share of the
Partnership's tax basis in such assets ("Common Basis") and (2) his Section
743(b) adjustment to that basis.)
Proposed Treasury Regulation Section 1.168-2(n) generally requires the
Section 743(b) adjustment attributable to recovery property to be depreciated as
if the total amount of such adjustment were attributable to newly-acquired
recovery property placed in service when the purchaser acquires the Unit.
Similarly, the legislative history of Section 197 indicates that the Section
743(b) adjustment attributable to an amortizable Section 197 intangible should
be treated as a newly-acquired asset placed in service in the month when the
purchaser acquires the Unit. Under Treasury Regulation Section 1.167(c)-1(a)(6),
a Section 743(b) adjustment attributable to property subject to depreciation
under Section 167 of the Code rather than cost recovery deductions under Section
168 is generally required to be depreciated using either the straight-line
method or the 150% declining balance method. The depreciation and amortization
methods and useful lives associated with the Section 743(b) adjustment,
therefore, may differ from the methods and useful lives generally used to
depreciate the Common Basis in such properties. Pursuant to the Partnership
Agreement, the Partnership is authorized to adopt a convention to preserve the
uniformity of Units even if such convention is not consistent with Treasury
Regulation Sections 1.167(c)-1(a)(6), Proposed Treasury Regulation Section
1.168-2(n) or the legislative history of Section 197 of the Code. See "--
Uniformity of Units."
Although Counsel is unable to opine as to the validity of such an approach,
the Partnership intends to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property (to
the extent of any unamortized Book-Tax Disparity) using a rate of depreciation
or amortization derived from the depreciation or amortization method and useful
life applied to the Common Basis of such property, or treat that portion as
non-amortizable to the extent attributable to property the Common Basis of which
is not amortizable, despite its inconsistency with Proposed Treasury Regulation
Section 1.168-2(n), Treasury Regulation Section 1.167(c)-1(a)(6) (neither of
which is expected to directly apply to a material portion of the Partnership's
assets) or the legislative history of Section 197 of the Code. To the extent
such Section 743(b) adjustment is attributable to appreciation in value in
excess of the unamortized Book-Tax Disparity, the Partnership will apply the
rules described in the Regulations and legislative history. If the Partnership
determines that such position cannot reasonably be taken, the Partnership may
adopt a depreciation or amortization convention under which all purchasers
acquiring Units in the same month would receive depreciation or amortization,
whether attributable to Common Basis or Section 743(b) adjustment, based upon
the same applicable rate as if they had purchased a direct interest in the
Partnership's assets. Such an aggregate approach may result in lower annual
depreciation or amortization deductions than would otherwise be allowable to
certain Unitholders. See "-- Uniformity of Units."
The allocation of the Section 743(b) adjustment must be made in accordance
with the Code. The IRS may seek to reallocate some or all of any Section 743(b)
adjustment not so allocated by the Partnership to goodwill which, as an
intangible asset, would be amortizable over a longer period of time than the
Partnership's tangible assets.
A Section 754 election is advantageous if the transferee's tax basis in his
Units is higher than such Units' share of the aggregate tax basis to the
Partnership of the Partnership's assets immediately prior to the transfer. In
such a case, as a result of the election, the transferee would have a higher tax
basis in his share of the Partnership's assets for purposes of calculating,
among other items, his depreciation and depletion deductions and his share of
any gain or loss on a sale of the Partnership's assets. Conversely, a Section
754 election is disadvantageous if the transferee's tax basis in such Units is
lower than such Unit's share of the aggregate tax basis of the Partnership's
assets immediately prior to the transfer. Thus, the fair market value of the
Units may be affected either favorably or adversely by the election.
The calculations involved in the Section 754 election are complex and will
be made by the Partnership on the basis of certain assumptions as to the value
of Partnership assets and other matters. There is no assurance that the
determinations made by the Partnership will not be successfully challenged by
the IRS
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and that the deductions resulting from them will not be reduced or disallowed
altogether. Should the IRS require a different basis adjustment to be made, and
should, in the Partnership's opinion, the expense of compliance exceed the
benefit of the election, the Partnership may seek permission from the IRS to
revoke the Section 754 election for the Partnership. If such permission is
granted, a subsequent purchaser of Units may be allocated more income than he
would have been allocated had the election not been revoked.
ALTERNATIVE MINIMUM TAX
Each Unitholder will be required to take into account his distributive share
of any items of Partnership income, gain, deduction or loss for purposes of the
alternative minimum tax.
A Unitholder's alternative minimum taxable income derived from the
Partnership may be higher than his share of Partnership net income because the
Partnership may use accelerated methods of depreciation for purposes of
computing federal taxable income or loss. The minimum tax rate for noncorporate
taxpayers is 26% on the first $175,000 of alternative minimum taxable income in
excess of the exemption amount and 28% on any additional alternative minimum
taxable income. Prospective Unitholders should consult with their tax advisors
as to the impact of an investment in Units on their liability for the
alternative minimum tax.
VALUATION OF PARTNERSHIP PROPERTY AND BASIS OF PROPERTIES
The federal income tax consequences of the ownership and disposition of
Units will depend in part on estimates by the Partnership of the relative fair
market values, and determinations of the initial tax bases, of the assets of the
Partnership. Although the Partnership may from time to time consult with
professional appraisers with respect to valuation matters, many of the relative
fair market value estimates will be made by the Partnership. These estimates and
determinations of basis are subject to challenge and will not be binding on the
IRS or the courts. If the estimates of fair market value or determinations of
basis are subsequently found to be incorrect, the character and amount of items
of income, gain, loss or deductions previously reported by Unitholders might
change, and Unitholders might be required to adjust their tax liability for
prior years.
TREATMENT OF SHORT SALES
A Unitholder whose Units are loaned to a "short seller" to cover a short
sale of Units may be considered as having disposed of ownership of those Units.
If so, he would no longer be a partner with respect to those Units during the
period of the loan and may recognize gain or loss from the disposition. As a
result, during this period, any Partnership income, gain, deduction or loss with
respect to those Units would not be reportable by the Unitholder, any cash
distributions received by the Unitholder with respect to those Units would be
fully taxable and all of such distributions would appear to be treated as
ordinary income. Unitholders desiring to assure their status as partners and
avoid the risk of gain recognition should modify any applicable brokerage
account agreements to prohibit their brokers from borrowing their Units. The IRS
has announced that it is actively studying issues relating to the tax treatment
of short sales of Partnership interests.
DISPOSITION OF COMMON UNITS
RECOGNITION OF GAIN OR LOSS
Gain or loss will be recognized on a sale of Units equal to the difference
between the amount realized and the Unitholder's tax basis for the Units sold. A
Unitholder's amount realized will be measured by the sum of the cash or the fair
market value of other property received plus his share of Partnership
nonrecourse liabilities. Because the amount realized includes a Unitholder's
share of Partnership nonrecourse liabilities, the gain recognized on the sale of
Units could result in a tax liability in excess of any cash received from such
sale.
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Prior Partnership distributions in excess of cumulative net taxable income
in respect of a Common Unit which decreased a Unitholder's tax basis in such
Common Unit will, in effect, become taxable income if the Common Unit is sold at
a price greater than the Unitholder's tax basis in such Common Unit, even if the
price is less than his original cost.
Should the IRS successfully contest the convention used by the Partnership
to amortize only a portion of the Section 743(b) adjustment (described under "--
Tax Treatment of Operations -- Section 754 Election") attributable to an
amortizable Section 197 intangible after a sale by the General Partners of
Units, a Unitholder could realize additional gain from the sale of Units than
had such convention been respected. In that case, the Unitholder may have been
entitled to additional deductions against income in prior years but may be
unable to claim them, with the result to him of greater overall taxable income
than appropriate. Counsel is unable to opine as to the validity of the
convention but believes such a contest by the IRS to be unlikely because a
successful contest could result in substantial additional deductions to other
Unitholders.
Gain or loss recognized by a Unitholder (other than a "dealer" in Units) on
the sale or exchange of a Unit held for more than one year will generally be
taxable as long-term capital gain or loss. A portion of this gain or loss (which
could be substantial), however, will be separately computed and taxed as
ordinary income or loss under Section 751 of the Code to the extent attributable
to assets giving rise to depreciation recapture or other "unrealized
receivables" or to "substantially appreciated inventory" owned by the
Partnership. The term "unrealized receivables" includes potential recapture
items, including depreciation recapture. Inventory is considered to be
"substantially appreciated" if its value exceeds 120% of its adjusted basis to
the Partnership. Ordinary income attributable to unrealized receivables,
substantially appreciated inventory and depreciation recapture may exceed net
taxable gain realized upon the sale of the Unit and may be recognized even if
there is a net taxable loss realized on the sale of the Unit. Thus, a Unitholder
may recognize both ordinary income and a capital loss upon a disposition of
Units. Net capital loss may offset no more than $3,000 of ordinary income in the
case of individuals and may only be used to offset capital gain in the case of
corporations.
The IRS has ruled that a partner who acquires interests in a Partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of such
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. The ruling is unclear as to how the
holding period of these interests is determined once they are combined. If this
ruling is applicable to the holders of Common Units, a Common Unitholder will be
unable to select high or low basis Common Units to sell as would be the case
with corporate stock. It is not clear whether the ruling applies to the
Partnership, because, similar to corporate stock, interests in the Partnership
are evidenced by separate certificates. Accordingly, Counsel is unable to opine
as to the effect such ruling will have on the Unitholders. In addition, under
the financial product provisions of the Revenue Reconciliation Act of 1996, in
the case of partnership interests in publicly traded partnerships which are
substantially identical, the basis of such interests and any adjustments to
basis, would be determined on an average basis and, for holding period purposes,
a taxpayer would be treated as selling such interests on a first-in, first-out
basis. A Unitholder considering the purchase of additional Common Units or a
sale of Common Units purchased in separate transactions should consult his tax
advisor as to the possible consequences of such ruling and subsequent
legislation.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES
In general, the Partnership's taxable income and losses will be determined
annually, will be prorated on a monthly basis and will be subsequently
apportioned among the Unitholders in proportion to the number of Units owned by
each of them as of the opening of the NYSE on the first business day of the
month (the "Allocation Date"). However, gain or loss realized on a sale or other
disposition of Partnership assets other than in the ordinary course of business
will be allocated among the Unitholders on the Allocation Date in the month in
which that gain or loss is recognized. As a result, a Unitholder transferring
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Common Units in the open market may be allocated income, gain, loss and
deduction accrued after the date of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, Counsel is unable to opine on the validity of this
method of allocating income and deductions between the transferors and the
transferees of Units. If this method is not allowed under the Treasury
Regulations (or only applies to transfers of less than all of the Unitholder's
interest), taxable income or losses of the Partnership might be reallocated
among the Unitholders. The Partnership is authorized to revise its method of
allocation between transferors and transferees (as well as among partners whose
interests otherwise vary during a taxable period) to conform to a method
permitted under future Treasury Regulations.
A Unitholder who owns Units at any time during a quarter and who disposes of
such Units prior to the record date set for a cash distribution with respect to
such quarter will be allocated items of Partnership income, gain, loss and
deductions attributable to such quarter but will not be entitled to receive that
cash distribution.
NOTIFICATION REQUIREMENTS
A Unitholder who sells or exchanges Units is required to notify the
Partnership in writing of that sale or exchange within 30 days after the sale or
exchange and in any event by no later than January 15 of the year following the
calendar year in which the sale or exchange occurred. The Partnership is
required to notify the IRS of that transaction and to furnish certain
information to the transferor and transferee. However, these reporting
requirements do not apply with respect to a sale by an individual who is a
citizen of the United States and who effects the sale or exchange through a
broker. Additionally, a transferor and a transferee of a Unit will be required
to furnish statements to the IRS, filed with their income tax returns for the
taxable year in which the sale or exchange occurred, that set forth the amount
of the consideration received for the Unit that is allocated to goodwill or
going concern value of the Partnership. Failure to satisfy these reporting
obligations may lead to the imposition of substantial penalties.
CONSTRUCTIVE TERMINATION
The Partnership and the Operating Partnership will be considered to have
been terminated if there is a sale or exchange of 50% or more of the total
interests in Partnership capital and profits within a 12-month period. A
termination results in the closing of a Partnership's taxable year for all
partners and the Partnership's assets are regarded as having been distributed to
the partners and reconveyed to the Partnership, which is then treated as a new
partnership. However, under new proposed regulations which are not yet
effective, the Partnership will be deemed to have conveyed all its assets and
liabilities to a newly formed partnership in exchange for all the interests in
such partnership and then the Partnership will be deemed to have liquidated and
to have distributed to its partners the interests in this newly formed
partnership. A termination of the Partnership will cause a termination of the
Operating Partnership and any Subsidiary Partnership. Such a termination could
also result in penalties or loss of tax basis adjustments under Section 754 of
the Code if the Partnership were unable to determine that the termination had
occurred. (Under the 1995 Proposed Legislation, termination of a large
partnership, such as the Partnership, would not occur by reason of the sale or
exchange of interests in the partnership.)
In the case of a Unitholder reporting on a taxable year other than a fiscal
year ending December 31, the closing of the tax year of the Partnership may
result in more than 12 months' taxable income or loss of the Partnership being
includable in his taxable income for the year of termination. In addition, each
Unitholder will realize taxable gain to the extent that any money deemed as a
result of the termination to have been distributed to him exceeds the adjusted
tax basis of his Units. New tax elections required to be made by the
Partnership, including a new election under Section 754 of the Code, must be
made subsequent to a constructive termination. A termination could also result
in a deferral of Partnership
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deductions for depreciation. Finally, a termination might either accelerate the
application of, or subject the Partnership to, any tax legislation enacted prior
to the termination.
ENTITY-LEVEL COLLECTIONS
If the Partnership is required or elects under applicable law to pay any
federal, state or local income tax on behalf of any Unitholder or any General
Partner or any former Unitholder, the Partnership is authorized to pay those
taxes from Partnership funds. Such payment, if made, will be treated as a
distribution of cash to the partner on whose behalf the payment was made. If the
payment is made on behalf of a person whose identity cannot be determined, the
Partnership is authorized to treat the payment as a distribution to current
Unitholders. The Partnership is authorized to amend the Partnership Agreement in
the manner necessary to maintain uniformity of intrinsic tax characteristics of
Units and to adjust subsequent distributions, so that after giving effect to
such distributions, the priority and characterization of distributions otherwise
applicable under the Partnership Agreement is maintained as nearly as is
practicable. Payments by the Partnership as described above could give rise to
an overpayment of tax on behalf of an individual partner in which event the
partner could file a claim for credit or refund.
UNIFORMITY OF UNITS
Because the Partnership cannot match transferors and transferees of Units,
uniformity of the economic and tax characteristics of the Units to a purchaser
of such Units must be maintained. In the absence of uniformity, compliance with
a number of federal income tax requirements, both statutory and regulatory,
could be substantially diminished. A lack of uniformity can result from a
literal application of Proposed Treasury Regulation Section 1.168-2(n) and
Treasury Regulation Section 1.167(c)-1(a)(6) or the legislative history of
Section 197. Any non-uniformity could have a negative impact on the value of the
Units. See "-- Tax Treatment of Operations -- Section 754 Election."
The Partnership intends to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value of contributed
property or adjusted property (to the extent of any unamortized Book-Tax
Disparity) using a rate of depreciation or amortization derived from the
depreciation or amortization method and useful life applied to the Common Basis
of such property, or treat that portion as nonamortizable, to the extent
attributable to property the Common Basis of which is not amortizable, despite
its inconsistency with Proposed Treasury Regulation Section 1.168-2(n) and
Treasury Regulation Section 1.167(c)-1(a)(6) (neither of which is expected to
directly apply to a material portion of the Partnership's assets) or the
legislative history of Section 197. See "-- Tax Treatment of Operations --
Section 754 Election." To the extent such Section 743(b) adjustment is
attributable to appreciation in value in excess of the unamortized Book-Tax
Disparity, the Partnership will apply the rules described in the Regulations and
legislative history. If the Partnership determines that such a position cannot
reasonably be taken, the Partnership may adopt a depreciation and amortization
convention under which all purchasers acquiring Units in the same month would
receive depreciation and amortization deductions, whether attributable to Common
Basis or Section 743(b) basis, based upon the same applicable rate as if they
had purchased a direct interest in the Partnership's property. If such an
aggregate approach is adopted, it may result in lower annual depreciation and
amortization deductions than would otherwise be allowable to certain Unitholders
and risk the loss of depreciation and amortization deductions not taken in the
year that such deductions are otherwise allowable. This convention will not be
adopted if the Partnership determines that the loss of depreciation and
amortization deductions will have a material adverse effect on the Unitholders.
If the Partnership chooses not to utilize this aggregate method, the Partnership
may use any other reasonable depreciation and amortization convention to
preserve the uniformity of the intrinsic tax characteristics of any Units that
would not have a material adverse effect on the Unitholders. The IRS may
challenge any method of depreciating the Section 743(b) adjustment described in
this paragraph. If such a challenge were sustained, the uniformity of Units
might be affected, and the gain from the sale of Units might be increased
without the benefit of additional deductions. See "-- Disposition of Common
Units -- Recognition of Gain or Loss."
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TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Ownership of Units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to such persons and, as
described below, may have substantially adverse tax consequences. Employee
benefit plans and most other organizations exempt from federal income tax
(including individual retirement accounts ("IRAs") and other retirement plans)
are subject to federal income tax on unrelated business taxable income.
Virtually all of the taxable income derived by such an organization from the
ownership of a Unit will be unrelated business taxable income and thus will be
taxable to such a Unitholder.
A regulated investment company or "mutual fund" is required to derive 90% or
more of its gross income from interest, dividends, gains from the sale of stocks
or securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of the Partnership's gross income will
include that type of income.
Non-resident aliens and foreign corporations, trusts or estates which hold
Units will be considered to be engaged in business in the United States on
account of ownership of Units. As a consequence they will be required to file
federal tax returns in respect of their share of Partnership income, gain, loss
or deduction and pay federal income tax at regular rates on any net income or
gain. Generally, a Partnership is required to pay a withholding tax on the
portion of the Partnership's income which is effectively connected with the
conduct of a United States trade or business and which is allocable to the
foreign partners, regardless of whether any actual distributions have been made
to such partners. However, under rules applicable to publicly-traded
partnerships, the Partnership will withhold (currently at the rate of 39.6%) on
actual cash distributions made quarterly to foreign Unitholders. Each foreign
Unitholder must obtain a taxpayer identification number from the IRS and submit
that number to the Transfer Agent of the Partnership on a Form W-8 in order to
obtain credit for the taxes withheld. A change in applicable law may require the
Partnership to change these procedures.
Because a foreign corporation which owns Units will be treated as engaged in
a United States trade or business, such a corporation may be subject to United
States branch profits tax at a rate of 30%, in addition to regular federal
income tax, on its allocable share of the Partnership's income and gain (as
adjusted for changes in the foreign corporation's "U.S. net equity") which are
effectively connected with the conduct of a United States trade or business.
That tax may be reduced or eliminated by an income tax treaty between the United
States and the country with respect to which the foreign corporate Unitholder is
a "qualified resident." In addition, such a Unitholder is subject to special
information reporting requirements under Section 6038C of the Code.
Under a ruling of the IRS a foreign Unitholder who sells or otherwise
disposes of a Unit will be subject to federal income tax on gain realized on the
disposition of such Unit to the extent that such gain is effectively connected
with a United States trade or business of the foreign Unitholder. Apart from the
ruling, a foreign Unitholder will not be taxed upon the disposition of a Unit if
that foreign Unitholder has held less than 5% in value of the Units during the
five-year period ending on the date of the disposition and if the Units are
regularly traded on an established securities market at the time of the
disposition.
ADMINISTRATIVE MATTERS
PARTNERSHIP INFORMATION RETURNS AND AUDIT PROCEDURES
The Partnership intends to furnish to each Unitholder, within 90 days after
the close of each calendar year, certain tax information, including a Schedule
K-1, which sets forth each Unitholder's allocable share of the Partnership's
income, gain, loss and deduction for the preceding Partnership taxable year. In
preparing this information, which will generally not be reviewed by counsel, the
Partnership will use various accounting and reporting conventions, some of which
have been mentioned in the previous discussion, to determine the Unitholder's
allocable share of income, gain, loss and deduction. There is no
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assurance that any of those conventions will yield a result which conforms to
the requirements of the Code, regulations or administrative interpretations of
the IRS. The Partnership cannot assure prospective Unitholders that the IRS will
not successfully contend in court that such accounting and reporting conventions
are impermissible. Any such challenge by the IRS could negatively affect the
value of the Units.
The federal income tax information returns filed by the Partnership may be
audited by the IRS. Adjustments resulting from any such audit may require each
Unitholder to adjust a prior year's tax liability, and possibly may result in an
audit of the Unitholder's own return. Any audit of a Unitholder's return could
result in adjustments of non-Partnership as well as Partnership items.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership proceeding rather than
in separate proceedings with the partners. The Code provides for one partner to
be designated as the "Tax Matters Partner" for these purposes. The Partnership
Agreement appoints the Managing General Partner as the Tax Matters Partner of
the Partnership.
The Tax Matters Partner will make certain elections on behalf of the
Partnership and Unitholders and can extend the statute of limitations for
assessment of tax deficiencies against Unitholders with respect to Partnership
items. The Tax Matters Partner may bind a Unitholder with less than a 1% profits
interest in the Partnership to a settlement with the IRS unless that Unitholder
elects, by filing a statement with the IRS, not to give such authority to the
Tax Matters Partner. The Tax Matters Partner may seek judicial review (by which
all the Unitholders are bound) of a final partnership administrative adjustment
and, if the Tax Matters Partner fails to seek judicial review, such review may
be sought by any Unitholder having at least a 1% interest in the profits of the
Partnership and by the Unitholders having in the aggregate at least a 5% profits
interest. However, only one action for judicial review will go forward, and each
Unitholder with an interest in the outcome may participate.
A Unitholder must file a statement with the IRS identifying the treatment of
any item on his federal income tax return that is not consistent with the
treatment of the item on the Partnership's return. Intentional or negligent
disregard of the consistency requirement may subject a Unitholder to substantial
penalties. Under the 1995 Proposed Legislation, partners in electing large
partnerships would be required to treat all Partnership items in a manner
consistent with the Partnership return.
Under the reporting provisions of the 1995 Proposed Legislation, each
partner of an electing large partnership would take into account separately his
share of the following items, determined at the partnership level: (1) taxable
income or loss from passive loss limitation activities; (2) taxable income or
loss from other activities (such as portfolio income or loss); (3) net capital
gains to the extent allocable to passive loss limitation activities and other
activities; (4) tax exempt interest; (5) a net alternative minimum tax
adjustment separately computed for passive loss limitation activities and other
activities; (6) general credits; (7) low-income housing credit; (8)
rehabilitation credit; (9) foreign income taxes; (10) credit for producing fuel
from a nonconventional source; and (11) any other items the Secretary of
Treasury deems appropriate.
The House version of the 1995 Proposed Legislation would also make a number
of changes to the tax compliance and administrative rules relating to
partnerships. One provision would require that each partner in a large
partnership, such as the Partnership, take into account his share of any
adjustments to partnership items in the year such adjustments are made. Under
current law, adjustments relating to partnership items for a previous taxable
year are taken into account by those persons who were partners in the previous
taxable year. Alternatively, under the 1995 Proposed Legislation, a partnership
could elect to or, in some circumstances, could be required to directly pay the
tax resulting from any such adjustments. In either case, therefore, Unitholders
could bear significant economic burdens associated with tax adjustments relating
to periods predating their acquisition of Units.
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It cannot be predicted whether or in what form the 1995 Proposed
Legislation, or other tax legislation that might affect Unitholders, will be
enacted. However, if tax legislation is enacted which includes provisions
similar to those discussed above, a Unitholder might experience a reduction in
cash distributions.
NOMINEE REPORTING
Persons who hold an interest in the Partnership as a nominee for another
person are required to furnish to the Partnership (a) the name, address and
taxpayer identification number of the beneficial owner and the nominee; (b)
whether the beneficial owner is (i) a person that is not a United States person,
(ii) a foreign government, an international organization or any wholly-owned
agency or instrumentality of either of the foregoing, or (iii) a tax-exempt
entity; (c) the amount and description of Units held, acquired or transferred
for the beneficial owner; and (d) certain information including the dates of
acquisitions and transfers, means of acquisitions and transfers, and acquisition
cost for purchases, as well as the amount of net proceeds from sales. Brokers
and financial institutions are required to furnish additional information,
including whether they are United States persons and certain information on
Units they acquire, hold or transfer for their own account. A penalty of $50 per
failure (up to a maximum of $100,000 per calendar year) is imposed by the Code
for failure to report such information to the Partnership. The nominee is
required to supply the beneficial owner of the Units with the information
furnished to the Partnership.
REGISTRATION AS A TAX SHELTER
The Code requires that "tax shelters" be registered with the Secretary of
the Treasury. The temporary Treasury Regulations interpreting the tax shelter
registration provisions of the Code are extremely broad. It is arguable that the
Partnership is not subject to the registration requirement on the basis that it
will not constitute a tax shelter. However, the Managing General Partner, as a
principal organizer of the Partnership, has registered the Partnership as a tax
shelter with the Secretary of the Treasury in the absence of assurance that the
Partnership will not be subject to tax shelter registration and in light of the
substantial penalties which might be imposed if registration is required and not
undertaken. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN
INVESTMENT IN THE PARTNERSHIP OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED,
EXAMINED OR APPROVED BY THE IRS. The Partnership must furnish the registration
number to the Unitholders, and a Unitholder who sells or otherwise transfers a
Unit in a subsequent transaction must furnish the registration number to the
transferee. The penalty for failure of the transferor of a Unit to furnish the
registration number to the transferee is $100 for each such failure. The
Unitholders must disclose the tax shelter registration number of the Partnership
on Form 8271 to be attached to the tax return on which any deduction, loss or
other benefit generated by the Partnership is claimed or income of the
Partnership is included. A Unitholder who fails to disclose the tax shelter
registration number on his return, without reasonable cause for that failure,
will be subject to a $250 penalty for each failure. Any penalties discussed
herein are not deductible for federal income tax purposes.
ACCURACY-RELATED PENALTIES
An additional tax equal to 20% of the amount of any portion of an
underpayment of tax which is attributable to one or more of certain listed
causes, including negligence or disregard of rules or regulations, substantial
understatements of income tax and substantial valuation misstatements, is
imposed by the Code. No penalty will be imposed, however, with respect to any
portion of an underpayment if it is shown that there was a reasonable cause for
that portion and that the taxpayer acted in good faith with respect to that
portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty
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generally is reduced if any portion is attributable to a position adopted on the
return (i) with respect to which there is, or was, "substantial authority" or
(ii) as to which there is a reasonable basis and the pertinent facts of such
position are disclosed on the return. Certain more stringent rules apply to "tax
shelters," a term that in this context does not appear to include the
Partnership. If any Partnership item of income, gain, loss or deduction included
in the distributive shares of Unitholders might result in such an
"understatement" of income for which no "substantial authority" exists, the
Partnership must disclose the pertinent facts on its return. In addition, the
Partnership will make a reasonable effort to furnish sufficient information for
Unitholders to make adequate disclosure on their returns to avoid liability for
this penalty.
A substantial valuation misstatement exists if the value of any property (or
the adjusted basis of any property) claimed on a tax return is 200% or more of
the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement exceeds $5,000 ($10,000 for most
corporations). If the valuation claimed on a return is 400% or more than the
correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will be subject to other
taxes, such as state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which the Partnership does business or owns property. Although
an analysis of those various taxes is not presented here, each prospective
Unitholder should consider their potential impact on his investment in the
Partnership. The Partnership will initially own property and conduct business in
the following states which currently impose a personal income tax: Alabama,
Arkansas, California, Georgia, Illinois, Indiana, Kentucky, Maryland,
Mississippi, Missouri, New Hampshire, New Jersey, New Mexico, New York, North
Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Utah, Vermont and Virginia.
A Unitholder will be required to file state income tax returns and to pay state
income taxes in some or all of these states and may be subject to penalties for
failure to comply with those requirements. In certain states, tax losses may not
produce a tax benefit in the year incurred (if, for example, the Partnership has
no income from sources within that state) and also may not be available to
offset income in subsequent taxable years. Some of the states may require the
Partnership, or the Partnership may elect, to withhold a percentage of income
from amounts to be distributed to a Unitholder who is not a resident of the
state. Withholding, the amount of which may be greater or less than a particular
Unitholder's income tax liability to the state, generally does not relieve the
non-resident Unitholder from the obligation to file an income tax return.
Amounts withheld may be treated as if distributed to Unitholders for purposes of
determining the amounts distributed by the Partnership. See "-- Disposition of
Common Units -- Entity-Level Collections." Based on current law and its estimate
of future Partnership operations, the Managing General Partner anticipates that
any amounts required to be withheld will not be material.
It is the responsibility of each Unitholder to investigate the legal and tax
consequences, under the laws of pertinent states and localities of his
investment in the Partnership. Accordingly, each prospective Unitholder should
consult, and must depend upon, his own tax counsel or other advisor with regard
to those matters. Further, it is the responsibility of each Unitholder to file
all state and local, as well as U.S. federal, tax returns that may be required
of such Unitholder. Counsel has not rendered an opinion on the state or local
tax consequences of an investment in the Partnership.
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INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS
An investment in the Partnership by an employee benefit plan is subject to
certain additional considerations because the investments of such plans are
subject to the fiduciary responsibility and prohibited transaction provisions of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
restrictions imposed by Section 4975 of the Code. As used herein, the term
"employee benefit plan" includes, but is not limited to, qualified pension,
profit-sharing and stock bonus plans, Keogh plans, simplified employee pension
plans and tax deferred annuities or IRAs established or maintained by an
employer or employee organization. Among other things, consideration should be
given to (a) whether such investment is prudent under Section 404(a)(1)(B) of
ERISA; (b) whether in making such investment, such plan will satisfy the
diversification requirement of Section 404(a)(1)(C) of ERISA; and (c) whether
such investment will result in recognition of unrelated business taxable income
by such plan and, if so, the potential after-tax investment return. See "Tax
Considerations -- Uniformity of Units -- Tax-Exempt Organizations and Certain
Other Investors." The person with investment discretion with respect to the
assets of an employee benefit plan (a "fiduciary") should determine whether an
investment in the Partnership is authorized by the appropriate governing
instrument and is a proper investment for such plan.
Section 406 of ERISA and Section 4975 of the Code (which also applies to
IRAs that are not considered part of an employee benefit plan) prohibit an
employee benefit plan from engaging in certain transactions involving "plan
assets" with parties that are "parties in interest" under ERISA or "disqualified
persons" under the Code with respect to the plan.
In addition to considering whether the purchase of Common Units is a
prohibited transaction, a fiduciary of an employee benefit plan should consider
whether such plan will, by investing in the Partnership, be deemed to own an
undivided interest in the assets of the Partnership, with the result that the
Managing General Partner also would be a fiduciary of such plan and the
operations of the Partnership would be subject to the regulatory restrictions of
ERISA, including its prohibited transaction rules, as well as the prohibited
transaction rules of the Code.
The Department of Labor regulations provide guidance with respect to whether
the assets of an entity in which employee benefit plans acquire equity interests
would be deemed "plan assets" under certain circumstances. Pursuant to these
regulations, an entity's assets would not be considered to be "plan assets" if,
among other things, (a) the equity interest acquired by employee benefit plans
are publicly offered securities -- i.e., the equity interests are widely held by
100 or more investors independent of the issuer and each other, freely
transferable and registered pursuant to certain provisions of the federal
securities laws, (b) the entity is an "operating company" -- i.e., it is
primarily engaged in the production or sale of a product or service other than
the investment of capital either directly or through a majority owned subsidiary
or subsidiaries, or (c) there is no significant investment by benefit plan
investors, which is defined to mean that less than 25% of the value of each
class of equity interest (disregarding certain interests held by the Managing
General Partner, its affiliates, and certain other persons) is held by the
employee benefit plans referred to above, IRAs and other employee benefit plans
not subject to ERISA (such as governmental plans). The Partnership's assets
should not be considered "plan assets" under these regulations because it is
expected that the investment will satisfy the requirements in (a) and (b) above
and may also satisfy the requirements in (c).
Plan fiduciaries contemplating a purchase of Common Units should consult
with their own counsel regarding the consequences under ERISA and the Code in
light of the serious penalties imposed on persons who engage in prohibited
transactions or other violations.
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UNDERWRITERS
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof (the "Underwriting Agreement"), the Underwriters named
below, for whom Morgan Stanley & Co. Incorporated, Dean Witter Reynolds Inc.,
A.G. Edwards & Sons, Inc., Oppenheimer & Co., Inc., PaineWebber Incorporated and
Prudential Securities Incorporated are serving as Representatives, have
severally agreed to purchase, and the Partnership has agreed to sell to them,
the respective number of Common Units set forth opposite the names of such
Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME COMMON UNITS
- ------------------------------------------------------------------------------ --------------
<S> <C>
Morgan Stanley & Co. Incorporated............................................. 1,123,334
Dean Witter Reynolds Inc...................................................... 1,123,334
A.G. Edwards & Sons, Inc...................................................... 1,123,333
Oppenheimer & Co., Inc........................................................ 1,123,333
PaineWebber Incorporated...................................................... 1,123,333
Prudential Securities Incorporated............................................ 1,123,333
Bear, Stearns & Co. Inc....................................................... 180,000
Alex. Brown & Sons Incorporated............................................... 180,000
Dain Bosworth Incorporated.................................................... 90,000
Donaldson, Lufkin & Jenrette Securities Corporation........................... 180,000
EVEREN Securities, Inc........................................................ 90,000
Fahnestock & Co. Inc.......................................................... 90,000
Goldman, Sachs & Co........................................................... 180,000
Janney Montgomery Scott Inc................................................... 90,000
Edward D. Jones & Co., L.P.................................................... 90,000
Legg Mason Wood Walker, Incorporated.......................................... 90,000
McDonald & Company Securities, Inc............................................ 90,000
Piper Jaffray Inc............................................................. 90,000
Ragen MacKenzie Incorporated.................................................. 90,000
Rauscher Pierce Refsnes, Inc.................................................. 90,000
The Robinson-Humphrey Company, Inc............................................ 90,000
Scott & Stringfellow, Inc..................................................... 90,000
--------------
Total..................................................................... 8,540,000
--------------
--------------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Common Units offered hereby
are subject to approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all Common
Units offered hereby (other than those covered by the Underwriters'
over-allotment option described below) if any such Common Units are taken.
The Underwriters initially propose to offer part of the Common Units
directly to the public at the Price to Public set forth on the cover page hereof
and part of such Common Units to certain dealers at a price which represents a
concession not in excess of $.85 per Common Unit under the public offering
price. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $.10 per Common Unit to other Underwriters or to certain other
dealers. After the initial offering of the Common Units to the public, the
offering price and other selling terms may from time to time be varied by the
Representatives.
Pursuant to the Underwriting Agreement, the Partnership has granted to the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to 1,281,000 additional Common Units at the public
offering price set forth on the cover page hereof less underwriting discounts
and
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commissions. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, made in connection with the offering of the
Common Units offered hereby. To the extent such option is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional Common Units as the number
of Common Units set forth opposite such Underwriter's name in the preceding
table bears to the total number of Common Units offered by the Underwriters
hereby.
The Partnership, the Operating Partnership, the Managing General Partner and
the Underwriters have agreed to indemnify each other against certain civil
liabilities, including liabilities under the Securities Act.
Each of the Partnership and the General Partners have agreed that, without
the prior written consent of Morgan Stanley & Co. Incorporated, it will not (i)
offer, issue, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any Common Units, Subordinated Units or any securities convertible into or
exercisable or exchangeable for Common Units or Subordinated Units or (ii) enter
into any swap or other arrangement that transfers, in whole or in part, any of
the ecomonic consequences of ownership of the Common Units or such other
securities, in cash or otherwise, for a period of 180 days after the date
hereof, except for (i) the Common Units offered hereby, (ii) the Subordinated
Units to be issued as described in this Prospectus, (iii) the redemption of
Subordinated Units by the Partnership in connection with the exercise by the
Underwriters of their over-allotment option as described in this Prospectus,
(iv) issuances of Common Units pursuant to employee plans described in this
Prospectus or (v) the issuance of Common Units in connection with Acquisitions
or Capital Improvements; provided that the Subordinated Units may be transferred
without such consent to an affiliate of the Managing General Partner who agrees
to be bound by the transfer restrictions contained in this paragraph.
The Representatives have informed the Partnership that the Underwriters do
not intend sales to discretionary accounts to exceed 5% of the Common Units
offered by them.
The Common Units have been approved for listing on the New York Stock
Exchange ("NYSE"), subject to official notice of issuance, under the symbol
"CNO." In order to meet one of the requirements for listing the Common Units on
the NYSE, the Underwriters will undertake to sell lots of 100 or more Common
Units to a minimum of 2,000 beneficial holders.
Because the National Association of Securities Dealers, Inc. ("NASD") views
the Common Units offered hereby as interests in a direct participation program,
the offering is being made in compliance with Rule 2810 of the NASD's Conduct
Rules. Investor suitability of the Common Units should be judged similarly to
the suitability of other securities that are listed for trading on a national
securities exchange.
Morgan Stanley & Co. Incorporated and Dean Witter Reynolds Inc. are acting
as placement agents in connection with the private placement of the Notes, for
which they will receive customary compensation. From time to time, Morgan
Stanley & Co. Incorporated, Dean Witter Reynolds Inc. and PaineWebber
Incorporated render investment banking services to NPS and its affiliates, for
which they receive customary fees and commissions.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the Common Units
of the Partnership. The initial public offering price has been determined by
negotiations between the Managing General Partner and the Representatives. Among
the factors considered in determining the initial public offering price were the
history of and prospects for the Partnership's business and the industry in
which it competes, an assessment of the Partnership's management and the present
state of the Partnership's development, the past and present revenues and
earnings of the Partnership, the prospects for growth of the Partnership's
revenues and earnings, the current state of the economy in the United States and
the current level of economic activity in the industry in which the Partnership
competes and in related or comparable
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industries, and currently prevailing conditions in the securities markets,
including current market valuations of publicly traded companies which are
comparable to the Partnership.
VALIDITY OF THE COMMON UNITS
The validity of the Common Units will be passed upon for the Partnership by
Andrews & Kurth L.L.P., New York, New York. Certain legal matters in connection
with the Common Units offered hereby are being passed upon for the Underwriters
by Baker & Botts, L.L.P., Houston, Texas.
EXPERTS
The audited financial statements of Cornerstone Propane GP, Inc. and of
Cornerstone Propane Partners, L.P. have been audited and the pro forma
consolidated financial statements of Cornerstone Propane Partners, L.P. included
in this Prospectus, to the extent indicated in their reports, have been examined
by Arthur Andersen LLP, independent public accountants, and are included herein
in reliance upon the authority of said firm as experts in giving said reports.
The audited financial statements included in this Prospectus for Empire
Energy Corporation, to the extent and for the periods indicated in their report,
have been audited by Baird, Kurtz & Dobson, independent public accountants, and
are included herein in reliance upon the report of said firm given upon its
authority as experts in giving such report.
The audited financial statements included in this Prospectus for SYN Inc.,
to the extent and for the periods indicated in the report, have been audited by
Arthur Andersen LLP, independent public accountants, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
The CGI Holdings, Inc. financial statements as of July 31, 1996 and 1995 and
for each of the three years in the period ended July 31, 1996 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The audited financial statements included in this Prospectus for Synergy
Group Incorporated, to the extent and for the periods indicated in their report,
have been audited by Baird, Kurtz & Dobson, independent public accountants, and
are included herein in reliance upon the report of said firm given upon its
authority as experts in giving such report.
141
<PAGE>
AVAILABLE INFORMATION
The Partnership has not previously been subject to the informational
requirements of the Exchange Act. The Partnership has filed with the Securities
and Exchange Commission (the "Commission") a Registration Statement on Form S-1
(the "Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Common Units offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
items of which are contained in exhibits and schedules to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Partnership and the Common Units offered
hereby, reference is made to the Registration Statement, including the exhibits
and schedules thereto. Statements made in this Prospectus concerning the
contents of any contract, agreement or other document are not necessarily
complete; with respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
is qualified in its entirety by such reference. The Registration Statement and
the exhibits and schedules thereto filed with the Commission by the Partnership
may be inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the Commission located at 7 World Trade Center,
Suite 1300, New York, New York 10048 and 500 West Madison Street, Chicago,
Illinois 60661. Copies of such material can also be obtained upon written
request from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates or from the
Commission's Web site on the Internet at http://www.sec.gov.
142
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF CORNERSTONE PROPANE PARTNERS, L.P.
Introduction............................................................................................. F-3
Report of Independent Public Accountants................................................................. F-4
Pro Forma Consolidated Balance Sheet as of September 30, 1996............................................ F-5
Pro Forma Consolidated Statement of Operations for the Three Months Ended September 30, 1996............. F-7
Pro Forma Consolidated Statement of Operations for the Period Ended June 30, 1996........................ F-8
Notes to Pro Forma Consolidated Financial Statements..................................................... F-9
CORNERSTONE PROPANE PARTNERS, L.P.
Report of Independent Public Accountants................................................................. F-16
Balance Sheet as of October 7, 1996...................................................................... F-17
Note to Balance Sheet as of October 7, 1996.............................................................. F-18
CORNERSTONE PROPANE GP, INC.
Report of Independent Public Accountants................................................................. F-19
Balance Sheet as of October 7, 1996...................................................................... F-20
Note to Balance Sheet as of October 7, 1996.............................................................. F-21
EMPIRE ENERGY CORPORATION CONSOLIDATED FINANCIAL STATEMENTS
Independent Accountants' Report.......................................................................... F-22
PREDECESSOR COMPANY:
Consolidated Balance Sheets dated June 30, 1995 and 1996................................................. F-23
Consolidated Statements of Income for the Years Ended June 30, 1994, 1995, and 1996, for the Three Months
Ended September 30, 1995, and for the One Month Ended July 31, 1996.................................... F-24
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1994, 1995 and 1996 and for
the One Month Ended July 31, 1996...................................................................... F-25
Consolidated Statements of Cash Flows for the Years Ended June 30, 1994, 1995, and 1996, for the Three
Months Ended September 30, 1995, and for the One Month Ended July 31, 1996............................. F-26
Notes to Consolidated Financial Statements............................................................... F-27
NEW BASIS (UNAUDITED):
Consolidated Balance Sheet dated September 30, 1996...................................................... F-37
Consolidated Statement of Operations for the Two Months Ended September 30, 1996......................... F-38
Consolidated Statement of Cash Flows for the Two Months Ended September 30, 1996......................... F-39
Consolidated Statement of Stockholders' Equity for the Two Months Ended September 30, 1996............... F-40
Notes to Consolidated Financial Statements dated September 30, 1996...................................... F-41
CGI HOLDINGS, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................................................................ F-47
Consolidated Balance Sheets at July 31, 1996 and 1995 and October 31, 1996 (unaudited)................... F-48
Consolidated Statements of Operations for the Years Ended July 31, 1996, 1995, and 1994 and for the Three
Months Ended October 31, 1996 and 1995 (unaudited)..................................................... F-50
</TABLE>
F-1
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Consolidated Statements of Stockholders' Equity for the Three Years Ended July 31, 1996, 1995, and 1994
and for the Three Months Ended October 31, 1996 and 1995 (unaudited)................................... F-51
Consolidated Statements of Cash Flows for the Three Years Ended July 31, 1996, 1995, and 1994 and for the
Three Months Ended October 31, 1996 and 1995 (unaudited)............................................... F-52
Notes to Consolidated Financial Statements............................................................... F-53
SYN INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants................................................................. F-65
Consolidated Balance Sheets dated June 30, 1996 and September 30, 1996................................... F-66
Consolidated Statements of Income for the Period from Inception (August 15, 1995) through June 30, 1996,
for the 46 Days Ended September 30, 1995, and for the Three Months Ended September 30, 1996............ F-67
Consolidated Statements of Stockholders' Equity for the Period from Inception (August 15, 1995) through
September 30, 1996..................................................................................... F-68
Consolidated Statements of Cash Flows for the Period from Inception (August 15, 1995) through June 30,
1996, for the 46 Days Ended September 30, 1995, and for the Three Months Ended September 30, 1996...... F-69
Notes to Consolidated Financial Statements............................................................... F-70
SYNERGY GROUP INCORPORATED CONSOLIDATED FINANCIAL STATEMENTS
Independent Accountants' Report.......................................................................... F-77
Consolidated Balance Sheet dated August 14, 1995......................................................... F-78
Consolidated Statements of Operations for the Years Ended March 31, 1994 and 1995 and for the Four and
One-Half Months Ended August 14, 1995.................................................................. F-79
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended March 31, 1994 and 1995 and
for the Four and One-Half Months Ended August 14, 1995................................................. F-80
Consolidated Statements of Cash Flows for the Years Ended March 31, 1994 and 1995 and for the Four and
One-Half Months Ended August 14, 1995.................................................................. F-81
Notes to Consolidated Financial Statements............................................................... F-82
</TABLE>
F-2
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF
CORNERSTONE PROPANE PARTNERS, L.P.
The pro forma consolidated financial statements of Cornerstone Propane
Partners, L.P. (the "Partnership") are based upon the historical consolidated
financial statements of SYN Inc. ("Synergy"), Empire Energy Corporation ("Empire
Energy") and CGI Holdings, Inc. ("Coast") appearing elsewhere herein. The pro
forma consolidated financial statements were prepared to reflect the formation
of the Partnership to own and operate the propane business and operations of
Synergy, Empire Energy, Coast and Myers Propane Gas Company ("Myers").
Historical financial statements of Myers have not been included based on the
Partnership's belief that the inclusion of Myers does not have a material effect
on the pro forma consolidated financial statements of the Partnership.
Cornerstone Propane GP, Inc. will serve as the Managing General Partner of the
Partnership. The formation of the Partnership is described in the Notes to Pro
Forma Consolidated Financial Statements.
The pro forma consolidated financial statements do not purport to present
the financial position or results of operations of the Partnership had the
transactions to be effected at the closing of this offering actually been
completed as of the dates indicated. In addition, the pro forma consolidated
financial statements are not necessarily indicative of the results of future
operations of the Partnership and should be read in conjunction with the
historical financial statements of Synergy, Empire Energy and Coast and the
notes thereto appearing elsewhere in this Prospectus.
F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cornerstone Propane Partners, L.P.:
We have examined the pro forma adjustments reflecting the transactions
described in the notes to the pro forma consolidated financial statements and
the application of those adjustments to the historical amounts in the
accompanying pro forma consolidated statement of operations of Cornerstone
Propane Partners, L.P. (a Delaware limited partnership) for the year ended June
30, 1996. The historical amounts in the accompanying statements are derived from
the historical financial statements of SYN Inc., which were audited by us, and
the historical financial statements of Empire Energy Corporation and CGI
Holdings, Inc., which were audited by other accountants, appearing elsewhere
herein. The historical amounts related to Myers Propane Gas Company were derived
from the unaudited historical financial statements of Myers Propane Gas Company.
The pro forma adjustments are based upon management's assumptions described in
the notes to the pro forma consolidated financial statements. Our examination
was made in accordance with standards established by the American Institute of
Certified Public Accountants and, accordingly, included such procedures as we
considered necessary in the circumstances.
In addition, we have reviewed the pro forma adjustments and the application
of those adjustments to the historical amounts in the accompanying pro forma
consolidated balance sheet of Cornerstone Propane Partners, L.P., as of
September 30, 1996 and the related pro forma consolidated statement of
operations for the three months ended September 30, 1996. These historical
financial statements are derived from the historical unaudited interim financial
statements of SYN Inc., the historical unaudited interim financial statements of
Empire Energy Corporation, and the historical unaudited interim financial
statements of CGI Holdings, Inc., appearing elsewhere herein. The historical
unaudited interim financial statements of Myers Propane Gas Company, were
derived from the unaudited historical interim financial statements of Myers
Propane Gas Company. Such pro forma adjustments are based on management's
assumptions as described in the notes to the pro forma consolidated financial
statements. Our review was conducted in accordance with standards established by
the American Institute of Certified Public Accountants.
The objective of this pro forma consolidated financial information is to
show what the significant effects on the historical financial information might
have been had the transactions occurred at an earlier date. However, the pro
forma consolidated financial statements are not necessarily indicative of the
results of operations or related effects on financial position that would have
been attained had the above-mentioned transactions actually occurred earlier.
In our opinion, management's assumptions provide a reasonable basis for
presenting the significant effects directly attributable to the transactions
described in the notes to the pro forma consolidated financial statements, the
related pro forma adjustments give appropriate effect to those assumptions, and
the pro forma column reflects the proper application of those adjustments to the
historical financial statement amounts in the pro forma consolidated financial
statements as of and for the year ended June 30, 1996.
A review is substantially less in scope than an examination, the objective
of which is the expression of an opinion on management's assumptions, the pro
forma adjustments and the application of those adjustments to historical
financial information. Accordingly, we do not express such an opinion on the pro
forma adjustments or the application of such adjustments to the pro forma
consolidated balance sheet as of September 30, 1996, and the pro forma
consolidated statement of operations for the three months ended September 30,
1996. Based on our review, however, nothing came to our attention that caused us
to believe that management's assumptions do not provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
transactions described in the notes to the pro forma consolidated financial
statements, that the related pro forma adjustments do not give appropriate
effect to those assumptions, or that the pro forma column does not reflect the
proper application of those adjustments to the historical financial statement
amounts in the pro forma consolidated balance sheet as of September 30, 1996,
and the pro forma consolidated statement of operations for the three months
ended September 30, 1996.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
December 4, 1996
F-4
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SYNERGY PRO FORMA PARTNERSHIP
HISTORICAL ADJUSTMENTS PRO FORMA
-------- EMPIRE COAST MYERS ----------------- -----------
ENERGY -------- HISTORICAL
-------- (B) --------
(A) (C)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........... $ 1,444 $ -- $ 4,753 $ 110 $ 390,686(D) $ 6,307
(390,686) (E)
Trade receivables................... 7,791 7,987 21,443 159 -- 37,380
Related party receivables........... 37,966 7,978 -- 90 (7,978) (F) --
(16,577) (G)
(21,389) (H)
(90) (I)
Inventories......................... 8,165 10,938 6,751 110 -- 25,964
Current deferred income tax
assets............................ 3,727 1,101 802 -- (5,630) (J) --
Other............................... 1,019 1,366 1,322 40 -- 3,747
-------- -------- -------- -------- ----------------- -----------
Total current assets.............. 60,112 29,370 35,071 509 (51,664) 73,398
-------- -------- -------- -------- ----------------- -----------
Property, plant and equipment, net.... 69,893 108,960 51,435 2,174 -- 232,462
Deferred income tax asset............. 5,400 -- -- -- (5,400) (J) --
Excess of cost over fair value........ 31,381 31,306 52,841 1,994 16,577(G) 144,099
(10,000) (K)
20,000(L)
Other assets, net..................... 3,256 4,898 4,158 463 5,050(D) 17,825
-------- -------- -------- -------- ----------------- -----------
$170,042 $174,534 $143,505 $ 5,140 $ (25,437) $467,784
-------- -------- -------- -------- ----------------- -----------
-------- -------- -------- -------- ----------------- -----------
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-5
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SYNERGY PRO FORMA PARTNERSHIP
HISTORICAL ADJUSTMENTS PRO FORMA
-------- EMPIRE COAST MYERS ----------------- -----------
ENERGY -------- HISTORICAL
-------- (B) ------
(A) (C)
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current portion of long-term debt..... $ 2,630 $ 5,229 $ 4,220 $-- $ (12,079)(E) $ 12,750
12,750(D)
Trade accounts payable................ 6,270 4,023 28,364 25 -- 38,682
Accrued liabilities................... 2,999 6,322 3,777 87 -- 13,185
Acquisition liabilities............... 29,367 -- -- -- (7,978)(F) --
(21,389)(H)
Accrued income taxes.................. -- -- -- 181 (181)(J) --
-------- -------- -------- ------ ----------------- -----------
Total current liabilities........... 41,266 15,574 36,361 293 (28,877) 64,617
-------- -------- -------- ------ ----------------- -----------
Long-term debt.......................... 22,959 93,882 45,069 -- (168,368)(E) 220,000
220,000(D)
6,548(E)
(90)(I)
Notes payable--related party............ 55,562 8,000 3,300 2,400 (52,812)(E) 8,450
(8,000)(E)
Deferred income tax liability........... -- 28,078 10,305 -- (38,383)(J) --
Other................................... -- 15,000 1,095 112 (10,000)(K) 6,207
-------- -------- -------- ------ ----------------- -----------
Total liabilities................... 119,787 160,534 96,130 2,805 (79,982) 299,274
-------- -------- -------- ------ ----------------- -----------
MANDATORILY REDEEMABLE SECURITIES
Preferred stock....................... -- -- 8,675 -- (8,675)(E) --
STOCKHOLDERS' EQUITY
Preferred stock....................... 55,312 -- -- 2,300 (55,312)(E) --
(2,300)(E)
Common stock equity................... (5,057 ) 14,000 38,700 35 20,000(L) --
(78,818)(E)
27,534(J)
(4,322)(E)
(6,548)(E)
162,986(D)
(168,510)(M)
PARTNERS' CAPITAL
Common unitholders.................... -- -- -- -- 85,940(M) 85,940
Subordinated unitholders.............. -- -- -- -- 79,200(M) 79,200
General partners...................... -- -- -- -- 3,370(M) 3,370
-------- -------- -------- ------ ----------------- -----------
Total stockholders' equity partners'
capital............................ 50,255 14,000 38,700 2,335 63,220 168,510
-------- -------- -------- ------ ----------------- -----------
$170,042 $174,534 $143,505 $5,140 $ (25,437) $ 467,784
-------- -------- -------- ------ ----------------- -----------
-------- -------- -------- ------ ----------------- -----------
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-6
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
HISTORICAL AMOUNTS
----------------------------------
EMPIRE PRO FORMA PARTNERSHIP
SYNERGY ENERGY COAST ADJUSTMENTS PRO FORMA
-------- -------- -------- ACQUISITION/ --------------- --------------
DISPOSITION
MYERS ADJUSTMENTS
------- ---------------
(C) (N)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE.................. $17,883 $ 15,035 $108,175 $ 482 $ 181 -- $ 141,756
COST OF SALES............ 8,940 7,910 100,266 293 110 -- 117,519
-------- -------- -------- ------- ------ ------- --------------
GROSS PROFIT............. 8,943 7,125 7,909 189 71 -- 24,237
-------- -------- -------- ------- ------ ------- --------------
EXPENSES
Operating.............. 6,948 5,196 5,201 155 (77 ) -- 17,423
General and
administrative....... 965 1,812 1,091 -- -- (433)(O) 3,435
Depreciation and
amortization......... 1,000 1,586 1,067 46 19 20(P) 3,738
-------- -------- -------- ------- ------ ------- --------------
8,913 8,594 7,359 201 (58 ) (413) 24,596
-------- -------- -------- ------- ------ ------- --------------
OPERATING INCOME
(LOSS).................. 30 (1,469) 550 (12) 129 413 (359)
INTEREST EXPENSE, NET.... 1,665 1,704 1,294 44 33 (273)(Q) 4,467
LOSS ON SALE OF
PARTNERSHIP INTEREST.... -- -- 660 -- (660 ) -- --
-------- -------- -------- ------- ------ ------- --------------
INCOME (LOSS) BEFORE
INCOME TAXES............ (1,635 ) (3,173) (1,404) (56) 756 686 (4,826)
INCOME TAX PROVISION
(BENEFIT)............... (550 ) (1,165) (491) (21) 287 1,965(J) 25
-------- -------- -------- ------- ------ ------- --------------
NET INCOME (LOSS)........ $(1,085 ) $ (2,008) $ (913) $ (35) $ 469 $ (1,279) $ (4,851)
-------- -------- -------- ------- ------ -------
-------- -------- -------- ------- ------ -------
General partners'
interest in net loss.... (97)
--------------
Limited partner's
interest in net loss.... $ (4,754)
--------------
Net loss per unit........ $ (0.29)(R)
--------------
--------------
Weighted average number
of Units outstanding.... 16,419
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-7
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
EMPIRE
ENERGY PRO FORMA PARTNERSHIP
HISTORICAL ADJUSTMENTS PRO FORMA
SYNERGY -------- COAST MYERS ACQUISITION/--------------- --------------
-------- -------- ------- DISPOSITION
ADJUSTMENTS
(S) (T) (U) ----------
(V)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE.................. $106,121 $98,821 $384,961 $ 4,725 $1,162 $ -- $ 595,790
COST OF SALES............ 51,112 50,080 351,549 2,767 476 -- 455,984
-------- -------- -------- ------- ---------- ------- --------------
GROSS PROFIT............. 55,009 48,741 33,412 1,958 686 -- 139,806
-------- -------- -------- ------- ---------- ------- --------------
EXPENSES
Operating.............. 32,559 24,766 20,768 902 312 (700)(O) 78,607
General and
administrative....... 3,750 8,254 3,835 -- -- (1,675)(O) 14,164
Depreciation and
amortization......... 3,973 5,875 4,268 184 122 78(P) 14,500
-------- -------- -------- ------- ---------- ------- --------------
40,282 38,895 28,871 1,086 434 (2,297) 107,271
-------- -------- -------- ------- ---------- ------- --------------
OPERATING INCOME......... 14,727 9,846 4,541 872 252 2,297 32,535
INTEREST EXPENSE, NET.... 6,682 2,598 5,550 175 133 2,727(Q) 17,865
-------- -------- -------- ------- ---------- ------- --------------
INCOME (LOSS) BEFORE
INCOME TAXES............ 8,045 7,248 (1,009) 697 119 (430) 14,670
INCOME TAX PROVISION
(BENEFIT)............... 3,336 3,550 (314) 265 42 (6,779)(J) 100
-------- -------- -------- ------- ---------- ------- --------------
NET INCOME (LOSS)........ $ 4,709 $ 3,698 $ (695) $ 432 $ 77 $ 6,349 $ 14,570
-------- -------- -------- ------- ---------- -------
-------- -------- -------- ------- ---------- -------
General partners'
interest in net
income.................. 291
--------------
Limited partner's
interest in net
income.................. $ 14,279
--------------
Net income per unit...... $ .87(R)
--------------
--------------
Weighted average number
of Units outstanding.... 16,419
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-8
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
1. BASIS OF PRESENTATION:
The pro forma adjustments described in Note 4 below have been prepared as if
the Transactions to be effected at the closing of the offering had taken place
on September 30, 1996 with respect to balance sheet information and at the
beginning of the respective periods with respect to statement of operations. The
adjustments are based upon currently available information and certain estimates
and assumptions, and therefore the actual adjustments made to effect the
Transactions will differ from the pro forma adjustments. However, management
believes that the assumptions provide a reasonable basis for presenting the
significant effects of the Transactions as contemplated and that the pro forma
adjustments give appropriate effect to these assumptions and are properly
applied in the pro forma financial information. Capitalized terms used herein
and not otherwise defined have the meaning set forth in the Prospectus.
2. THE TRANSACTIONS:
Concurrently with the closing of the offering (the "Offering") of Common
Units by Cornerstone Propane Partners, L.P. (the "Partnership"), Cornerstone
Propane GP, Inc. (the "Managing General Partner") and SYN Inc. ("Synergy" or the
"Special General Partner") will contribute, or cause to be contributed, the
operations (the "Combined Operations") of Synergy, Empire Energy Corporation
("Empire Energy") (the principal propane subsidiaries of Northwestern Growth
Corporation ("Northwestern Growth")), Myers Propane Gas Company ("Myers") and
CGI Holdings, Inc. ("Coast") to Cornerstone Propane, L.P. (the "Operating
Partnership") in exchange for all the interests in the Operating Partnership,
and the Operating Partnership will assume substantially all of the liabilities
associated with the Combined Operations. Immediately thereafter, all of the
limited partner interests in the Operating Partnership will be conveyed to the
Partnership in exchange for interests in the Partnership. As a result of such
transactions, the Managing General Partner and the Special General Partner will
own an aggregate 47.0% limited partner interest in the Partnership and an
aggregate 2% general partner interest in the Partnership and the Operating
Partnership (including the right to receive incentive distributions).
3. OTHER EXPENSE REDUCTIONS:
The pro forma adjustments for the year ended June 30, 1996 and for the three
months ended September 30, 1996 exclude certain non-recurring expenses incurred
by Empire Energy of approximately $4.3 million and $185,000, respectively,
propane acquisition and logistics cost savings associated with the integration
of the Coast wholesale operations with the Combined Operations of approximately
$1.5 million and $241,000, respectively, and insurance savings of approximately
$2.1 million and $47,000, respectively, which the Partnership believes are
achievable upon consummation of the Transactions. These expense reductions are
not reflected in the accompanying pro forma statements of operations. If effect
were given to these anticipated expense reductions, the following amounts would
have resulted:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JUNE 30, 1996 SEPTEMBER 30, 1996
------------- -------------------
<S> <C> <C>
Pro forma operating income.................................................... $ 40,397 $ 114
Pro forma net income (loss)................................................... $ 22,432 $ (4,378)
Pro forma net income (loss) per Unit.......................................... $ 1.34 $ (.26)
</TABLE>
There can be no assurance that the Partnership will be able to integrate
successfully the Combined Operations, achieve anticipated cost savings or
institute the necessary systems and procedures to successfully manage the
Combined Operations on a profitable basis. The Partnership was recently formed
and has conducted no operations and generated no revenues to date.
F-9
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
4. PRO FORMA ADJUSTMENTS:
A. Reflects the purchase of Empire Energy by Northwestern Growth and the related
issuance of new debt. The adjustments are reflected at September 30, 1996 as
follows:
<TABLE>
<CAPTION>
EMPIRE ENERGY PURCHASE EMPIRE
HISTORICAL ADJUSTMENTS ENERGY
-------------- ----------- ----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................. $ -- $ -- $ --
Trade receivables..................................................... 7,987 -- 7,987
Related party receivables............................................. 2,000 5,978 7,978
Inventories........................................................... 10,938 -- 10,938
Current deferred income tax assets.................................... 1,101 -- 1,101
Other................................................................. 1,366 -- 1,366
-------------- ----------- ----------
Total current assets................................................ 23,392 5,978 29,370
-------------- ----------- ----------
-------------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT........................................... 108,960 -- 108,960
EXCESS OF COST OVER FAIR VALUE.......................................... 8,112 23,194 31,306
OTHER ASSETS, NET....................................................... 3,658 1,240 4,898
-------------- ----------- ----------
$ 144,122 $ 30,412 $ 174,534
-------------- ----------- ----------
-------------- ----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt..................................... $ 5,229 $ -- $ 5,229
Trade accounts payable................................................ 4,023 -- 4,023
Accrued liabilities................................................... 6,322 -- 6,322
-------------- ----------- ----------
Total current liabilities........................................... 15,574 -- 15,574
-------------- ----------- ----------
Long-term debt.......................................................... 93,882 -- 93,882
Note payable--related party............................................. 5,000 3,000 8,000
Deferred income tax liability........................................... 28,078 -- 28,078
Other................................................................... -- 15,000 15,000
-------------- ----------- ----------
Total liabilities................................................... 142,534 18,000 160,534
-------------- ----------- ----------
STOCKHOLDERS' EQUITY
Common stock equity................................................... 1,588 12,412 14,000
-------------- ----------- ----------
1,588 12,412 14,000
-------------- ----------- ----------
$ 144,122 $ 30,412 $ 174,534
-------------- ----------- ----------
-------------- ----------- ----------
</TABLE>
F-10
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
4. PRO FORMA ADJUSTMENTS: (CONTINUED)
B. Reflects the purchase of Coast by Northwestern Growth. The adjustments are
reflected at October 31, 1996 as follows:
<TABLE>
<CAPTION>
COAST PURCHASE
HISTORICAL ADJUSTMENTS COAST
---------- ----------- ----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 4,753 $ -- $ 4,753
Trade receivables......................................................... 21,443 -- 21,443
Inventories............................................................... 6,751 -- 6,751
Current deferred income tax assets........................................ 802 -- 802
Other..................................................................... 1,322 -- 1,322
---------- ----------- ----------
Total current assets.................................................... 35,071 -- 35,071
---------- ----------- ----------
---------- ----------- ----------
PROPERTY, PLANT AND EQUIPMENT............................................... 51,435 -- 51,435
EXCESS OF COST OVER FAIR VALUE.............................................. 11,761 41,080 52,841
OTHER ASSETS, NET........................................................... 7,307 (3,149) 4,158
---------- ----------- ----------
$ 105,574 $ 37,931 $ 143,505
---------- ----------- ----------
---------- ----------- ----------
LIABILITIES AND STOCKHOLDERS' CAPITAL
CURRENT LIABILITIES:
Current portion of long-term debt......................................... $ 4,220 $ -- $ 4,220
Trade accounts payable.................................................... 27,364 1,000 28,364
Accrued liabilities....................................................... 3,777 -- 3,777
---------- ----------- ----------
Total current liabilities............................................... 35,361 1,000 36,361
---------- ----------- ----------
Long-term debt.............................................................. 45,069 -- 45,069
Note payable--related party................................................. -- 3,300 3,300
Deferred income tax liability............................................... 10,305 -- 10,305
Other....................................................................... 1,095 -- 1,095
---------- ----------- ----------
Total liabilities....................................................... 91,830 4,300 96,130
---------- ----------- ----------
MANDATORILY REDEEMABLE SECURITIES
Preferred stock equity.................................................... 8,675 -- 8,675
STOCKHOLDERS' EQUITY
Common stock equity....................................................... 5,069 33,631 38,700
---------- ----------- ----------
5,069 33,631 38,700
---------- ----------- ----------
$ 105,574 $ 37,931 $ 143,505
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
C. Historical financial statements of Myers have not been included based on the
Partnership's belief that the inclusion of Myers does not have a material
effect on the pro forma consolidated financial statements of the
Partnership.
D. Reflects the receipt of proceeds from this offering of $179,340, the Note
Placement of $220,000 and borrowings under the working capital facility of
$12,750, net of offering costs of $21,404 ($5,050 of
F-11
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
4. PRO FORMA ADJUSTMENTS: (CONTINUED)
these offering costs relate to debt offering costs which are included as
other long-term assets on the balance sheet).
E. Reflects the payment of debt and preferred stock and the distribution to the
General Partners which was assumed by the Partnership in connection with the
transaction:
<TABLE>
<S> <C>
Payment of indebtedness........................................... $ 161,820
Payment of related party indebtedness............................. 67,360
Distribution to the General Partners.............................. 95,219
Redemption of preferred stock..................................... 66,287
---------
Total cash distributions........................................ $ 390,686
---------
---------
</TABLE>
F. Reflects the elimination of accounts receivable and claims by Empire Energy
arising in connection with the Empire Acquisition of Certain Synergy Assets.
G. Reflects a reallocation of the fair value of net assets acquired in
connection with the acquisition of Synergy Group Incorporated by Synergy
under the purchase method of accounting.
H. Reflects the retention of certain assets and liabilities that will not be
contributed to the Partnership and will be retained by Synergy.
I. Reflects the elimination of an intercompany receivable/payable between Myers
and Synergy.
J. Reflects the elimination of income tax related accounts because income taxes
will not be borne by the Partnership, except for income taxes applicable to
operations to be conducted by the Partnership's wholly owned corporate
subsidiary.
K. Reflects the retention of certain assets and liabilities that will not be
contributed to the Partnership and will be retained by Northwestern Growth.
L. Reflects the payment to terminate the Empire Gas management agreement and to
have Northwestern Growth acquire the 30% common stock interest in Synergy
and the 49% common stock interest in Myers owned by Empire Gas.
M. Reflects the allocation of the Partnership equity resulting from the
transactions associated with the closing of the Offering, using the
following relative interests: (1) effective general partner interests in the
Partnership equal to 2% of total Partners' Capital; (2) Common Units equal
to an approximate 51% limited partner interest; and (3) Subordinated Units
equal to an approximate 47% limited partner interest.
N. Reflects the pro forma three months results of propane operations which were
acquired by Northwestern Growth subsequent to October 1, 1996 and will be
contributed to the Operating Partnership pursuant to the Transactions. Also
reflects Coast's sale of its interest in a limited partnership subsequent to
October 1, 1996.
O. Reflects the full period effect of operating expense savings resulting from
the consolidation of certain operations that occurred subsequent to July 1,
1995, as well as the estimated elimination of certain
F-12
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
4. PRO FORMA ADJUSTMENTS: (CONTINUED)
operating and general and administrative expenses associated with the
operation of the Partnership, as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
JUNE 30, SEPTEMBER 30,
1996 1996
----------- ---------------
<S> <C> <C>
Operating:
- -----------------------------------------------------------------------------------------
Retail overlap consolidations............................................................ $ 700 $ --
----------- -----
----------- -----
General and Administrative:
- -----------------------------------------------------------------------------------------
Corporate overhead consolidation......................................................... $ 2,100 $ 525
Eliminated bank and consulting fees...................................................... 325 96
Estimated incremental general and administrative cost associated with the partnership.... (750) (188)
----------- -----
$ 1,675 $ 433
----------- -----
----------- -----
</TABLE>
The pro forma adjustment for general and administrative expenses does not
include any amount for the incentive compensation that might be paid to key
employees.
P. Reflects the additional depreciation and amortization expense due to the
increase in property and intangibles that result from applying the purchase
method of accounting to the Empire Energy and Coast acquisitions.
Q. Reflects the following adjustment to interest expense from the Transactions:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30,
JUNE 30, 1996 1996
------------- -------------
<S> <C> <C>
Historical interest expense......................................................... $ 13,753 $ 4,707
Pro forma interest expense from adjustment to full year. Note (M)................... 890 --
Pro forma interest expense from acquisitions. Note (N).............................. 495 33
------------- ------
$ 15,138 $ 4,740
------------- ------
Pro forma interest expense applicable to the Partnership:
$220,000 first mortgage notes at a rate of 7.53% per annum........................ $ 16,566 $ 4,142
Interest expense attributable to working capital facility based on an average
outstanding principal balance of $2,000 at 6.50% per annum...................... 130 33
Interest expense attributable to debt assumed based on an average outstanding
principal balance of $9,500 at 8.50% per annum.................................. 808 202
Debt expense amortization based on $5,050 estimated debt issuance costs........... 361 90
------------- ------
$ 17,865 $ 4,467
------------- ------
------------- ------
Pro forma interest expense adjustment............................................... $ 2,727 $ (273)
------------- ------
------------- ------
</TABLE>
F-13
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
4. PRO FORMA ADJUSTMENTS: (CONTINUED)
R. Net income (loss) per Unit is determined by dividing the net income (loss)
that would be allocated to the Unitholders, which is 98% of net income
(loss), by the number of units outstanding. The number of units outstanding,
16,419, were assumed to have been outstanding the entire period.
S. Reflects the results of operations for the pre-acquisition period July 1,
1995 to August 14, 1995 for Synergy and the pro forma full year results of
propane operations acquired by Synergy subsequent to July 1, 1995.
<TABLE>
<CAPTION>
ADJUST
HISTORICAL ACQUISITION/
SYNERGY TO FULL DISPOSITION
HISTORICAL YEAR ADJUSTMENTS SYNERGY
----------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
REVENUE.......................................................... $ 96,062 $ 7,568 $ 2,491 $ 106,121
COST OF SALES.................................................... 46,187 3,631 1,294 51,112
----------- ----------- ------ ----------
GROSS PROFIT..................................................... 49,875 3,937 1,197 55,009
----------- ----------- ------ ----------
EXPENSES
Operating...................................................... 28,745 3,163 651 32,559
General and administrative..................................... 3,281 469 -- 3,750
Depreciation and amortization.................................. 3,329 472 172 3,973
----------- ----------- ------ ----------
35,355 4,104 823 40,282
----------- ----------- ------ ----------
OPERATING INCOME (LOSS).......................................... 14,520 (167) 374 14,727
INTEREST EXPENSE, NET............................................ 5,584 816 282 6,682
----------- ----------- ------ ----------
INCOME (LOSS) BEFORE INCOME TAXES................................ 8,936 (983) 92 8,045
INCOME TAX PROVISON (BENEFIT).................................... 3,675 (373) 34 3,336
----------- ----------- ------ ----------
NET INCOME (LOSS)................................................ $ 5,261 $ (610) $ 58 $ 4,709
----------- ----------- ------ ----------
----------- ----------- ------ ----------
</TABLE>
F-14
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
4. PRO FORMA ADJUSTMENTS: (CONTINUED)
T. Reflects the pro forma full year results of propane operations acquired by
Coast subsequent to August 1, 1995. Also reflects the elimination of results
of discontinued operations subsequent to August 1, 1995.
<TABLE>
<CAPTION>
ACQUISITION/
COAST DISPOSITION
HISTORICAL ADJUSTMENT COAST
---------- ------------- ----------
<S> <C> <C> <C>
REVENUE..................................................................... $ 384,354 $ 607 $ 384,961
COST OF SALES............................................................... 351,213 336 351,549
---------- ----- ----------
GROSS PROFIT................................................................ 33,141 271 33,412
EXPENSES
Operating................................................................. 21,046 (278) 20,768
General and administrative................................................ 3,835 -- 3,835
Depreciation and amortization............................................. 4,216 52 4,268
---------- ----- ----------
29,097 (226) 28,871
---------- ----- ----------
OPERATING INCOME............................................................ 4,044 497 4,541
INTEREST EXPENSE, NET....................................................... 5,470 80 5,550
---------- ----- ----------
INCOME (LOSS) BEFORE INCOME TAXES........................................... (1,426) 417 (1,009)
INCOME TAX PROVISION (BENEFIT).............................................. (473) 159 (314)
---------- ----- ----------
NET INCOME (LOSS)........................................................... $ (953) $ 258 $ (695)
---------- ----- ----------
---------- ----- ----------
</TABLE>
U. Reflects the results of operations for the pre-acquisition period July 1,
1995 to December 6, 1995 for Myers.
<TABLE>
<CAPTION>
ADJUST
HISTORICAL
TO FULL
YEAR MYERS
MYERS ----------- ---------
HISTORICAL
-----------
(C)
<S> <C> <C> <C>
REVENUE.......................................................................... $ 3,178 $ 1,547 $ 4,725
COST OF SALES.................................................................... 1,842 925 2,767
----------- ----------- ---------
GROSS PROFIT..................................................................... 1,336 622 1,958
EXPENSES
Operating...................................................................... 554 348 902
General and Administrative..................................................... -- -- --
Depreciation and amortization.................................................. 103 81 184
----------- ----------- ---------
657 429 1,086
----------- ----------- ---------
OPERATING INCOME................................................................. 679 193 872
INTEREST EXPENSE, NET............................................................ 101 74 175
----------- ----------- ---------
INCOME (LOSS) BEFORE INCOME TAXES................................................ 578 119 697
INCOME TAX PROVISION............................................................. 220 45 265
----------- ----------- ---------
NET INCOME....................................................................... $ 358 $ 74 $ 432
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
V. Reflects the pro forma full year results of propane operations acquired by
Northwestern Growth subsequent to July 1, 1995.
F-15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cornerstone Propane Partners, L.P.
We have audited the accompanying balance sheet of Cornerstone Propane
Partners, L.P. (a Delaware limited partnership) as of October 7, 1996. This
balance sheet is the responsibility of the Partnership'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 balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Cornerstone Propane Partners, L.P.
as of October 7, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
October 7, 1996
F-16
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
BALANCE SHEET
OCTOBER 7, 1996
<TABLE>
<S> <C>
ASSETS:
Cash.............................................................................. $ 990
Receivable........................................................................ 10
---------
Total Assets.................................................................... $ 1,000
---------
---------
PARTNERS' EQUITY:
General Partner................................................................... $ 10
Organizational Limited Partner.................................................... 990
---------
Total Partners' Equity.......................................................... $ 1,000
---------
---------
</TABLE>
The accompanying note is an integral part of this balance sheet.
F-17
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTE TO BALANCE SHEET
OCTOBER 7, 1996
Cornerstone Propane Partners, L.P. (the "Partnership") is a Delaware limited
partnership recently formed to own and operate the propane operations of SYN
Inc., Empire Energy Corporation, CGI Holdings, Inc., and Myers Propane Gas
Company through a limited partnership. The Partnership has not commenced
operations. The Partnership intends to offer Common Units, representing limited
partner interests in the Partnership, to the public pursuant to a registered
public offering (the "Offering").
On October 7, 1996, Cornerstone Propane GP, Inc., a recently formed Delaware
corporation, contributed $10 for a general partner interest and an
organizational limited partner contributed $990 for a limited partner interest
in the Partnership.
The Partnership intends to adopt the provisions of a Restricted Unit Plan,
which will be effective upon the consummation of the Offering, under which
certain executives, officers and directors of the Partnership will have rights
to receive authorized but unissued Common Units with an aggregate value of $12.5
million. Common Units with an aggregate value of $7.0 million will be allocated
to selected executives and Common Units with an aggregate value of $.9 million
will be allocated to existing directors upon the consummation of the Offering,
subject to certain vesting conditions and other customary terms and conditions.
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cornerstone Propane GP, Inc.
We have audited the accompanying balance sheet of Cornerstone Propane GP,
Inc. (a Delaware corporation) as of October 7, 1996. 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 balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Cornerstone Propane GP, Inc., as of
October 7, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
October 7, 1996
F-19
<PAGE>
CORNERSTONE PROPANE GP, INC.
BALANCE SHEET
OCTOBER 7, 1996
<TABLE>
<S> <C>
ASSETS
Cash................................................................................ $ 1,000
Investment in Cornerstone Propane Partners, L.P..................................... 10
---------
Total Assets...................................................................... $ 1,010
---------
---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Payable to Cornerstone Propane Partners, L.P........................................ $ 10
Stockholder's equity................................................................ 1,000
---------
Total Liabilities and Stockholder's Equity........................................ $ 1,010
---------
---------
</TABLE>
The accompanying note is an integral part of this balance sheet.
F-20
<PAGE>
CORNERSTONE PROPANE GP, INC.
NOTE TO BALANCE SHEET
OCTOBER 7, 1996
Cornerstone Propane GP, Inc. (the "Company") is a recently formed Delaware
corporation, which is owned 100% by Northwestern Growth Corporation. The Company
was formed to acquire a general partner interest in Cornerstone Propane
Partners, L.P., and its subsidiary operating partnership.
On October 4, 1996, Northwestern Growth Corporation contributed $1,000 in
cash to the Company and the Company committed to contribute $10 to Cornerstone
Propane Partners, L.P., as a general partner capital contribution.
F-21
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
Empire Energy Corporation
Lebanon, Missouri
We have audited the accompanying consolidated balance sheets of EMPIRE
ENERGY CORPORATION as of June 30, 1995 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of EMPIRE
ENERGY CORPORATION as of June 30, 1995 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1996, in conformity with generally accepted accounting principles.
BAIRD, KURTZ & DOBSON
Springfield, Missouri
August 14, 1996 (except with respect
to the matter discussed in Note 14
as to which the date is October 7, 1996)
F-22
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1995 1996
----------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash....................................................................................... $ -- $ 2,064
Trade receivables, less allowance for doubtful accounts; 1995 -- $905 and 1996 -- $1,262... 3,302 5,724
Inventories................................................................................ 4,831 6,702
Prepaid expenses........................................................................... 103 103
Refundable income taxes.................................................................... 727 457
Deferred income taxes...................................................................... 652 996
----------- ---------
Total Current Assets..................................................................... 9,615 16,046
----------- ---------
DUE FROM SYN INC............................................................................. -- 7,978
----------- ---------
PROPERTY AND EQUIPMENT, At Cost:
Land and buildings......................................................................... 7,329 8,903
Storage and consumer service facilities.................................................... 56,827 80,615
Transportation, office and other equipment................................................. 16,804 18,702
----------- ---------
80,960 108,220
Less accumulated depreciation.............................................................. (25,037) (28,686)
----------- ---------
55,923 79,534
----------- ---------
OTHER ASSETS:
Excess of cost over fair value of net assets acquired, at amortized cost................... 3,285 3,033
Other...................................................................................... 252 511
----------- ---------
3,537 3,544
----------- ---------
$ 69,075 $ 107,102
----------- ---------
----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks in process of collection............................................................ $ 158 $ --
Current maturities of long-term debt....................................................... 163 6,019
Accounts payable........................................................................... 2,048 3,368
Accrued salaries........................................................................... 767 1,063
Accrued expenses........................................................................... 1,141 1,676
----------- ---------
Total Current Liabilities................................................................ 4,277 12,126
----------- ---------
LONG-TERM DEBT............................................................................... 1,701 25,442
----------- ---------
DEFERRED INCOME TAXES........................................................................ 15,458 16,877
----------- ---------
ACCRUED SELF-INSURANCE LIABILITY 1,104 2,424
----------- ---------
STOCKHOLDERS' EQUITY:
Common stock; $.001 par value; authorized 17,500,000 shares; issued at June 30, 1995 and
1996 -- 12,004,430 shares................................................................ 12 12
Additional paid-in capital................................................................. 46,099 46,099
Retained earnings.......................................................................... 445 4,143
----------- ---------
46,556 50,254
Treasury stock, at cost -- 3,000 shares.................................................... (21) (21)
----------- ---------
46,535 50,233
----------- ---------
$ 69,075 $ 107,102
----------- ---------
----------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
F-23
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
AND THREE MONTHS ENDED SEPTEMBER 30, 1995
AND THE ONE MONTH ENDED JULY 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ONE MONTH
ENDED ENDED JULY
SEPTEMBER 30, 31, 1996
1994 1995 1996 1995 -----------
--------- --------- --------- ------------- (UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE................................... $ 60,216 $ 56,689 $ 98,821 $ 12,223 $ 2,596
COST OF PRODUCT SOLD................................ 28,029 26,848 50,080 6,128 1,439
--------- --------- --------- ------------- -----------
GROSS PROFIT........................................ 32,187 29,841 48,741 6,095 1,157
--------- --------- --------- ------------- -----------
OPERATING COSTS AND EXPENSES:
Provision for doubtful accounts................... 537 983 1,450 222 40
General and administrative........................ 20,983 23,452 31,570 5,849 2,440
Depreciation and amortization..................... 4,652 4,322 5,875 1,288 499
--------- --------- --------- ------------- -----------
26,172 28,757 38,895 7,359 2,979
--------- --------- --------- ------------- -----------
OPERATING INCOME (LOSS)............................. 6,015 1,084 9,846 (1,264) (1,822)
INTEREST EXPENSE (Net).............................. 118 39 2,598 376 217
--------- --------- --------- ------------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................... 5,897 1,045 7,248 (1,640) (2,039)
PROVISION (CREDIT) FOR INCOME TAXES................. 2,400 600 3,550 (550) (765)
--------- --------- --------- ------------- -----------
NET INCOME (LOSS)................................... $ 3,497 $ 445 $ 3,698 $ (1,090) $ (1,274)
--------- --------- --------- ------------- -----------
--------- --------- --------- ------------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
F-24
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
AND ONE MONTH ENDED JULY 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK STOCK EARNINGS STOCK EQUITY
------------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1993................................ $ -- $ -- $ 42,614 $ -- $ 42,614
NET INCOME............................................ -- -- 3,497 -- 3,497
EFFECT OF CORPORATE RESTRUCTURING..................... 12 46,099 (46,111) -- --
--- ----------- ---------- --- ------------
BALANCE, JUNE 30, 1994................................ 12 46,099 -- -- 46,111
PURCHASE OF TREASURY STOCK............................ -- -- -- (21) (21)
NET INCOME............................................ -- -- 445 -- 445
--- ----------- ---------- --- ------------
BALANCE, JUNE 30, 1995................................ 12 46,099 445 (21) 46,535
NET INCOME............................................ -- -- 3,698 -- 3,698
--- ----------- ---------- --- ------------
BALANCE, JUNE 30, 1996................................ $ 12 $ 46,099 $ 4,143 $ (21) $ 50,233
NET INCOME (LOSS) (UNAUDITED)......................... -- -- (1,274) -- (1,274)
--- ----------- ---------- --- ------------
BALANCE, JULY 31, 1996 (UNAUDITED).................... $ 12 $ 46,099 $ 2,869 $ (21) $ 48,959
--- ----------- ---------- --- ------------
--- ----------- ---------- --- ------------
</TABLE>
See Notes to Consolidated Financial Statements
F-25
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
AND THREE MONTHS ENDED SEPTEMBER 30, 1995
AND ONE MONTH ENDED JULY 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ONE MONTH
ENDED ENDED JULY
SEPTEMBER 30, 31, 1996
1994 1995 1996 1995 -----------
--------- --------- ---------- ------------- (UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 3,497 $ 445 $ 3,698 $ (1,090) $ (1,274)
Items not requiring (providing) cash:
Depreciation.................................. 4,336 4,084 5,593 1,231 474
Amortization.................................. 316 238 282 57 24
Gain on sale of assets........................ (31) (145) (67) (6) 8
Deferred income taxes......................... (849) 194 1,075 (207) --
Changes in:
Trade receivables............................... (522) 388 (1,799) (2,949) 222
Inventories..................................... 952 (985) (348) (5,739) (340)
Accounts payable................................ (821) 1,444 1,301 1,789 335
Accrued expenses and self insurance............. 229 325 2,124 1,303 (5)
Prepaid expenses and other...................... (7) 72 (279) (965) (99)
Income taxes payable (refundable)............... (53) (702) 270 261 (768)
--------- --------- ---------- ------------- -----------
Net cash provided by (used in) operating
activities.................................. 7,047 5,358 11,850 (6,315) (1,423)
--------- --------- ---------- ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets...................... 125 295 162 14 14
Purchases of property and equipment............... (4,058) (8,365) (3,184) (405) (487)
Purchase of assets from SYN Inc................... -- -- (35,980) (35,980) --
--------- --------- ---------- ------------- -----------
Net cash used in investing activities......... (3,933) (8,070) (39,002) (36,371) (473)
--------- --------- ---------- ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in credit facilities.......... (2,051) 1,600 (5,500) 7,900 --
Principal payments on purchase obligations........ (109) (132) (126) (30) (15)
Checks in process of collection................... -- 158 (158) (158) --
Purchase of treasury stock........................ -- (21) -- -- --
Proceeds from acquisition credit facility......... -- -- 35,000 35,000 --
--------- --------- ---------- ------------- -----------
Net cash provided by (used in) financing
activities.................................. (2,160) 1,605 29,216 42,712 (15)
--------- --------- ---------- ------------- -----------
INCREASE (DECREASE) IN CASH......................... 954 (1,107) 2,064 26 (1,911)
CASH, BEGINNING OF PERIOD........................... 153 1,107 0 0 2,064
--------- --------- ---------- ------------- -----------
CASH, END OF PERIOD................................. $ 1,107 $ 0 $ 2,064 $ 26 153
--------- --------- ---------- ------------- -----------
--------- --------- ---------- ------------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
F-26
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Company for the periods ended
September 30, 1995 and July 31, 1996 are unaudited. In the opinion of
management, these unaudited statements include all adjustments, all of which are
of a normal recurring nature, which are necessary to a fair presentation of
results of operations and cash flows for the period.
Due to the seasonal nature of the Company's propane business, the results of
operations for the interim periods are not necessarily indicative of results to
be expected for a full year.
NATURE OF OPERATIONS
The Company's principal operations are the retail sale of LP gas. Most of
the Company's customers are owners of residential single or multi-family
dwellings who make periodic purchases on credit. Such customers are located in
the Southeast and Midwest regions of the United States. At June 30, 1994, the
Company was separated from Empire Gas Corporation (Empire Gas). The financial
statements for the year ended June 30, 1994 reflect the operations of the
subsidiaries of Empire Gas which the Company received in the restructuring
transaction. In addition to the direct operations of the subsidiaries, 47.7% of
Empire Gas corporate overhead for the year ended June 30, 1994 has been
allocated to Empire Energy. This percentage of overhead is considered reasonable
by management as it reflects the percentage of earnings before interest,
depreciation and income taxes of the subsidiaries received by the Company. See
Note 2 for a description of the restructuring transaction.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Empire Energy
Corporation and its subsidiaries. All significant intercompany balances have
been eliminated in consolidation.
REVENUE RECOGNITION POLICY
Sales and related cost of product sold are recognized upon delivery of the
product or service.
F-27
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the first-in, first-out method for retail operations and specific identification
method for wholesale operations. The inventories consist of the following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Gas and other petroleum products........................................... $ 1,679 $ 2,727
Gas distribution parts, appliances and equipment........................... 3,152 3,975
--------- ---------
$ 4,831 $ 6,702
--------- ---------
--------- ---------
</TABLE>
PROPERTY AND EQUIPMENT
Depreciation is provided on all property and equipment on the straight-line
method over estimated useful lives of 5 to 33 years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 1996, the Company's only financial instruments are cash,
long-term debt and related accrued interest for which their carrying amounts
approximate fair value.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
AMORTIZATION
The excess of cost over fair value of net assets acquired (originally
$4,850,000) is being amortized on the straight-line basis over 20 years.
NOTE 2: RESTRUCTURING TRANSACTION
On June 30, 1994, the Company was separated from Empire Gas in an exchange
of the majority ownership of Empire Gas for all of the shares of the Company (a
subsidiary of Empire Gas) (the "Split-off Transaction"). The Company received
locations principally in the Southeast plus certain home office assets and
liabilities.
In connection with this transaction, the principal shareholder of Empire Gas
terminated his employment with Empire Gas as well as terminated certain lease
and use agreements. This shareholder was the principal shareholder and chairman
of the board of the Company prior to the management buy out (See Note 3).
F-28
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: MANAGEMENT BUY OUT
Prior to year end, professional and other fees amounting to $1,926,000 were
incurred in connection with an effort to sell the Company and are included in
general and administrative expense during the year ended June 30, 1996. The
Company abandoned these efforts.
On August 1, 1996, subsequent to year end, the principal shareholder of the
Company since its inception and certain other shareholders sold their interests
in the Company to a new entity formed by certain members of management of the
Company.
In connection with this transaction, the principal shareholder of the
Company terminated employment with the Company as well as terminated certain
lease and use agreements. The new entity is principally owned by the son of the
former principal shareholder. All references in these financial statements to
the principal shareholder relate to the former principal shareholder.
The new entity paid approximately $59,000,000 cash, and distributed certain
home office assets and a portion of the SYN Inc. receivable in exchange for the
shares of Company stock purchased. In addition to the above consideration, the
new entity issued a $5,000,000 note payable to the principal shareholder. The
amount paid to the selling shareholders was financed with proceeds from a new
credit agreement with the Company's current lender.
The new credit facility provides for a $42,000,000 term loan, a $52,000,000
second term loan, a $20,000,000 working capital facility and a $10,000,000
acquisition credit facility. The new credit facility includes working capital,
capital expenditures, cash flow and net worth requirements as well as dividend
restrictions. The principal payment requirements on the two term loans will be
$3,400,000 in the year ended June 30, 1997.
NOTE 4: SYNERGY ACQUISITION
On August 15, 1995, the Company acquired the assets of 38 retail locations
previously operated by Synergy Group, Inc. These locations were purchased from
SYN Inc., a company formed for the purpose of acquiring Synergy Group
Incorporated. SYN Inc. is majority owned by Northwestern Growth Corporation, a
wholly-owned subsidiary of Northwestern Public Service Company, and minority
owned and managed by Empire Gas. The purchase price of the 38 retail locations
was approximately $38 million. The total consideration for the purchase was
approximately $36 million in cash financed by the new acquisition credit
facility (see Note 6) plus the assets of nine retail locations principally in
Mississippi valued at approximately $2 million. The results of operations for
the period after August 15, 1995, of the Synergy locations are included in the
financial statements for the period ended June 30, 1996. The purchase price of
the Synergy assets has been allocated as follows (In Thousands):
<TABLE>
<S> <C>
Current Assets..................................................... $ 2,499
Property and Equipment............................................. 27,435
Due from SYN Inc................................................... 7,978
---------
$ 37,912
---------
---------
</TABLE>
Unaudited pro forma operations assuming the acquisition was made at the
beginning of the year ended June 30, 1994 and 1995, are presented below. Pro
forma results for the year ended June 30, 1996,
F-29
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: SYNERGY ACQUISITION (CONTINUED)
are not presented since they would not differ materially from the audited
results of operations presented in the statement of income.
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Operating revenue........................................ $ 88,620 $ 82,222
Cost of product sold..................................... 42,589 40,724
--------- ---------
Gross profit............................................. $ 46,031 $ 41,498
--------- ---------
--------- ---------
</TABLE>
The purchase price of the assets acquired from SYN Inc. is subject to
adjustment based on the amount of working capital acquired by the Company. A
receivable has been recorded in the amount of $3,978,000, which reflects the
reduction in purchase price of the assets based on the amount of working capital
acquired. On August 1, 1996, this receivable was assigned to the former
principal shareholder in connection with the management buy out.
The purchase price of the assets acquired from SYN Inc. is also subject to
adjustment based on the value of consumer tanks which cannot be located within a
specified period of time. The Company has made a claim to SYN Inc. for
approximately $4,000,000 which represents the value of unlocated tanks at June
30, 1996. A receivable for these tanks has been recorded on the balance sheet at
June 30, 1996. On August 1, 1996, one-half of this receivable was assigned to
the former principal shareholder in connection with the management buy out.
These amounts receivable in connection with the purchase from SYN Inc. are
management's best estimate of amounts which will be ultimately collected.
However, the parties are still negotiating final settlement, and the final
amounts received could differ materially.
NOTE 5: RELATED-PARTY TRANSACTIONS
The Company provides data processing, office rent and other clerical
services to two corporations owned by officers and shareholders of the Company
and is reimbursed $5,000 per month for these services.
The Company leases a jet aircraft and an airport hangar from a corporation
owned by the principal shareholder of the Company. The lease requires annual
rent payments of $100,000 beginning July 1, 1994. In addition to direct lease
payments, the Company is also responsible for the operating costs of the
aircraft and the hangar. The lease agreement was terminated August 1, 1996, in
connection with the management buy out.
The Company has an agreement with a corporation owned by the principal
shareholder of the Company which provides the Company the right to use business
guest facilities. The agreement requires annual payments of $250,000 beginning
July 1, 1994. In addition to direct payments, the Company is also responsible
for providing vehicles and personnel to serve as security for the facilities.
This agreement was terminated August 1, 1996, in connection with the management
buy out.
The Company leases the corporate home office, land, buildings and certain
equipment from a corporation owned principally by the principal shareholder. The
lease requires annual payments of $200,000 beginning July 1, 1994. The lease was
terminated August 1, 1996, in connection with the management buy out.
F-30
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: RELATED-PARTY TRANSACTIONS (CONTINUED)
The Company leases a lodge from a corporation owned by the principal
shareholder of the Company. The lease requires annual rent payments of $120,000
beginning July 1, 1994. The lease was terminated August 1, 1996, in connection
with the management buy out.
On August 1, 1996, the Company entered into a new lease agreement with
entities controlled by the former principal shareholder. The new lease agreement
provides for the payment of $600,000 per year for the corporate home office,
land, buildings and certain equipment, the use of the airport hangar and the
right to use land underlying the Company's warehouse facility. The agreement
expires June 30, 2005.
A subsidiary of the Company has entered into a seven-year services agreement
with Empire Gas to provide data processing and management information services
beginning July 1, 1994. The services agreement provides for payments by Empire
Gas to be based on an allocation of the subsidiary's actual costs based on the
gallons of LP gas sold by Empire Gas as a percentage of the gallons of LP gas
sold by the Company and Empire Gas combined. For the years ended June 30, 1995,
and June 30, 1996, total amounts received related to this services agreement
were $1.1 million and $713,000, respectively. Such amounts have been netted
against related general and administrative expenses in the accompanying
statements of income.
NOTE 6: LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit facility (A)............................................ $ 1,600 $ --
Acquisition credit facility (B).......................................... -- 31,100
Purchase contract obligations (C)........................................ 264 361
--------- ---------
1,864 31,461
Less current maturities.................................................. 163 6,019
--------- ---------
$ 1,701 $ 25,442
--------- ---------
--------- ---------
</TABLE>
(A) On September 30, 1994, the Company entered into an agreement with a lender
to provide a revolving credit facility. The facility provides for borrowings
up to $20 million, bears interest at either 1/2% over the lender's prime
rate or 1 1/8% over the Eurodollar rate and matures June 30, 2000. The
facility includes working capital, capital expenditure, cash flow and net
worth requirements as well as dividend restrictions which limit the payment
of cash dividends to 50% of the preceding year's net income. The Company's
unused revolving credit line at June 30, 1996, amounted to $18,148,000 after
considering $1,852,000 of letters of credit. The credit facility was
terminated August 1, 1996, in connection with the management buy out.
(B) On August 15, 1995, the Company modified the above agreement to include a
$35 million acquisition credit facility which was used for the purchase of
assets from SYN Inc. The acquisition credit facility bears interest at
either 1/2% over the lender's prime rate or 1 1/8% over the Eurodollar rate
and matures June 30, 2000. The acquisition credit facility requires
quarterly principal payments of $1,944,000. This credit facility was
terminated August 1, 1996, in connection with the management buy out.
(C) Purchase contract obligations arise from the purchase of operating
businesses and are collateralized by the equipment and real estate acquired
in the respective acquisitions. The Company has also
F-31
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: LONG-TERM DEBT (CONTINUED)
entered into purchase contract obligations for equipment used in
administrative activities. At June 30, 1996, these obligations carried
interest rates ranging from 7% to 10% and are due periodically through 2001.
Based on the borrowing rates currently available to the Corporation from
bank loans with similar terms and average maturities, the estimated fair
value of long-term debt approximates its carrying value at June 30, 1995,
and June 30, 1996, respectively.
Aggregate annual maturities (in thousands) of the long-term debt outstanding
at June 30, 1996, are:
<TABLE>
<S> <C>
1997............................................... $ 6,019
1998............................................... 7,854
1999............................................... 7,807
2000............................................... 7,819
2001............................................... 1,962
---------
$ 31,461
---------
---------
</TABLE>
NOTE 7: INCOME TAXES
The provision for income taxes includes these components (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Taxes currently payable...................................................... $ 3,249 $ 406 $ 2,475
Deferred income taxes........................................................ (849) 194 1,075
--------- --------- ---------
$ 2,400 $ 600 $ 3,550
--------- --------- ---------
--------- --------- ---------
</TABLE>
The tax effects of temporary differences related to deferred taxes shown on
the balance sheets were (in thousands):
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Deferred Tax Assets
- --------------------------------------------------------------------------------
Allowance for doubtful accounts............................................. $ 335 $ 468
Accounts receivable advance collections..................................... 140 246
Self-insurance liabilities and contingencies................................ 480 1,229
Accrued expenses............................................................ 44 81
Alternative minimum tax credit carryover.................................... 39 --
---------- ----------
1,038 2,024
---------- ----------
Deferred Tax Liability
- --------------------------------------------------------------------------------
Accumulated depreciation.................................................... (15,844) (17,205)
Change in estimated taxes................................................... -- (700)
---------- ----------
(15,844) (17,905)
---------- ----------
Net deferred tax liability.............................................. $ (14,806) $ (15,881)
---------- ----------
---------- ----------
</TABLE>
F-32
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: INCOME TAXES (CONTINUED)
The above net deferred tax liability is presented on the balance sheets as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Deferred tax asset - current.................................................... $ 652 $ 996
Deferred tax liability - long-term.............................................. (15,458) (16,877)
---------- ----------
Net deferred tax liability.............................................. $ (14,806) $ (15,881)
---------- ----------
---------- ----------
</TABLE>
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Computed at the statutory rate (34%)......................................... $ 2,005 $ 355 $ 2,464
Increase resulting from:
Amortization of excess of cost over fair value of net assets acquired........ 107 77 79
State income taxes - net of federal tax benefit.............................. 258 116 248
Change in estimated taxes.................................................... -- -- 700
Other........................................................................ 30 52 59
--------- --------- ---------
Actual tax provision......................................................... $ 2,400 $ 600 $ 3,550
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 8: SELF-INSURANCE AND RELATED CONTINGENCIES
Under the Company's current insurance program, coverage for comprehensive
general liability and vehicle liability is obtained for catastrophic exposures
as well as those risks required to be insured by law or contract. The Company
retains a significant portion of certain expected losses related primarily to
comprehensive general liability and vehicle liability. Under these current
insurance programs, the Company self insures the first $1 million of coverage
(per incident) on general liability and on vehicle liability. In addition, the
Company has a $100,000 deductible for each and every liability claim. The
Company obtains excess coverage from carriers for these programs on claims-made
basis policies. The excess coverage for comprehensive general liability provides
a loss limitation that limits the Company's aggregate of self-insured losses to
$1.5 million per policy period.
The Company self insures the first $250,000 of workers' compensation
coverage (per incident). The Company purchased excess coverage from carriers for
workers' compensation claims in excess of the self-insured coverage. Provisions
for losses expected under this program are recorded based upon the Company's
estimates of the aggregate liability for claims incurred. The Company provided
letters of credit aggregating approximately $1,852,000 in connection with this
program.
Provisions for self-insured losses are recorded based upon the Company's
estimates of the aggregate self-insured liability for claims incurred. At June
30, 1995 and 1996, the self-insurance liability and general, vehicle and
workers' compensation liabilities accrued in the balance sheets totaled
$1,604,000 and $3,174,000, respectively.
The accrued liability includes $500,000 for incurred but not reported claims
for both June 30, 1995 and 1996. The current portion of the liability of
$500,000 and $750,000 at June 30, 1995 and 1996, respectively, is included in
accrued expenses in the consolidated balance sheets. The noncurrent portion is
included in accrued self-insurance liability.
F-33
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: SELF-INSURANCE AND RELATED CONTINGENCIES (CONTINUED)
The Company currently self insures health benefits provided to the employees
of the Company and its subsidiaries. Provisions for losses expected under this
program are recorded based upon the Company's estimate of the aggregate
liability for claims incurred. At June 30, 1995 and 1996, the self-insurance
health benefit liability accrued in the balance sheets totalled $122,000 and
$150,000, respectively. The accrued liability includes $6,000 and $35,000 for
incurred but not reported claims for June 30, 1995 and 1996, respectively.
In conjunction with the restructuring that occurred in June 1994 the Company
agreed to indemnify Empire Gas for 47.7% of the self-insured liabilities of
Empire Gas incurred prior to June 30, 1994. The Company has included in its
self-insurance liability its best estimate of the amount it will owe Empire Gas
under this indemnification agreement.
The Company and its subsidiaries are presently defendants in various
lawsuits related to the self-insurance program and other business-related
lawsuits which are not expected to have a material, adverse effect on the
Company's financial position or results of operations.
NOTE 9: INCOME TAX AUDITS
The State of Missouri has assessed Empire Gas approximately $1,400,000 for
additional state income tax for the years ended June 30, 1992 and 1993. An
amount approximating one-half of the above assessment could be at issue for the
year ended June 30, 1994. Empire Gas and Empire Energy have protested these
assessments and are currently waiting for a response from the Missouri
Department of Revenue. It is likely that this matter will have to be settled in
litigation. Empire Gas and Empire Energy believe that they have a strong
position on this matter and intend to vigorously contest the assessment. It is
not possible at this time to conclude on the outcome of this matter.
The Internal Revenue Service has begun a federal income tax audit of Empire
Gas for the year ended June 30, 1994. While the audit is still in process, the
audit has principally focused on the deductibility of certain professional fees
and travel and entertainment expenses as well as on the tax- free treatment of
the Split-off Transaction.
As a former member of the Empire Gas controlled group and in connection with
a tax indemnity agreement with Empire Gas, the Company agreed to indemnify 47.7%
of the total liabilities related to these tax audits of the years ended June 30,
1994, and prior thereto.
The Split-off Transaction was structured with the intent of qualifying for
tax-free treatment under Section 355 of the Internal Revenue Code and the
Company, and Empire Gas, obtained a private letter ruling (the "Letter Ruling")
from the Internal Revenue Service confirming such treatment, subject to certain
representations and conditions specified in the Letter Ruling. The Internal
Revenue Service is currently conducting an audit of Empire Gas for the year in
which the Split-off Transaction occurred. If the Internal Revenue Service were
to reverse the position it took in the Letter Ruling and prevail on a challenge
to the tax-free treatment of the Split-off Transaction, the Company would be
liable for a portion of any taxes, interest and penalties due, both as a former
member of the Empire Gas controlled group and under a tax indemnity agreement
with Empire Gas that was executed in connection with the Split-off Transaction.
The Company's liability in such circumstances could exceed the percentage under
the tax indemnity agreement if Empire Gas were unable to fund its percentage
share under that agreement. If the Company were held liable for any taxes,
interest or penalties in connection with the above Split-off
F-34
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: INCOME TAX AUDITS (CONTINUED)
Transaction, the amount of this liability could be substantial and could
adversely affect the Company's financial position and results of operations.
The Company and its subsidiaries are presently included in various state tax
audits which are not expected to have a material, adverse effect on the
Company's financial position or results of operation.
NOTE 10: STOCK OPTIONS
The Company's current stock options provide for a fixed option price of
$7.00 per share for options granted to officers and key employees. Options
granted are exercisable beginning one year after the date of grant at the rate
of 20% per year and expire six years after the date of grant. Option activity
for each period was:
<TABLE>
<CAPTION>
1995 1996
--------------------- ---------------------
SHARES PRICE SHARES PRICE
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Beginning options outstanding................................ 0 $ 0 1,145,000 $ 7.00
Options granted............................................ 1,170,000 7.00 25,000 7.00
Options canceled........................................... (25,000) 7.00 (50,000) 7.00
---------- --------- ---------- ---------
Ending options outstanding................................... 1,145,000 7.00 1,120,000 7.00
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
On August 1, 1996, in connection with the management buy out, 150,000
options of the selling shareholders were cancelled.
NOTE 11: ADDITIONAL CASH FLOW INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ONE MONTH
ENDED ENDED
SEPTEMBER 30, 1995 JULY 31, 1996
1994 1995 1996 ------------------- ---------------
--------- --------- --------- (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NONCASH INVESTING AND FINANCING
ACTIVITIES
Purchase contract obligations
incurred............................ $ -- $ 172 $ 222 $ -- $ --
ADDITIONAL CASH PAYMENT INFORMATION
Interest paid......................... $ 155 $ 64 $ 2,432 $ 8 $ 106
Income taxes paid (refunded).......... $ 3,302 $ 1,108 $ 2,995 $ (604) $ --
</TABLE>
NOTE 12: FUTURE ACCOUNTING PRONOUNCEMENTS
IMPACT OF SFAS NO. 121
In 1995 the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for the Impairment of Long-Lived Assets to be Disposed
of." The Company must adopt this standard effective July 1, 1996. The Company
does not expect that the adoption of this standard will have a material impact
on its financial position or results of operations.
F-35
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
DEPENDENCE ON PRINCIPAL SUPPLIERS
Three suppliers, Conoco, Phillips and Texaco, account for approximately 50%
of Empire Energy's volume of propane purchases.
Although the Company believes that alternative sources of propane are
readily available, in the event that the Company is unable to purchase propane
from one of these three suppliers, the failure to obtain alternate sources of
supply at competitive prices and on a timely basis would have a material,
adverse effect on the Company.
ESTIMATES
Significant estimates related to self-insurance, litigation, collectibility
of receivables and income tax assessments are discussed in Notes 4, 8, and 9.
Actual losses related to these items could vary materially from amounts
reflected in the financial statements.
NOTE 14: SUBSEQUENT EVENTS
On October 7, 1996, the new ownership of the Company pursuant to the
management buy out sold 100% of Company common stock to Northwestern Growth
Corporation.
F-36
<PAGE>
EMPIRE ENERGY CORPORATION
(NEW BASIS)
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................................ $ --
Trade receivables, less allowance for doubtful accounts of $1,536............... 7,987
Inventories..................................................................... 10,938
Prepaid expenses................................................................ 350
Refundable income taxes......................................................... 1,016
Deferred income taxes........................................................... 1,101
---------
Total Current Assets.......................................................... 21,392
---------
DUE FROM SYN INC.................................................................. 2,000
---------
PROPERTY AND EQUIPMENT, At Cost:
Land and buildings.............................................................. 5,738
Storage and consumer service facilities......................................... 93,271
Transportation, office and other equipment...................................... 10,838
---------
109,847
Less accumulated depreciation................................................... (887)
---------
108,960
---------
OTHER ASSETS:
Excess of cost over fair value of net assets acquired, at amortized cost........ 8,112
Other........................................................................... 224
Debt acquisition costs.......................................................... 3,434
---------
11,770
---------
$ 144,122
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks in process of collection................................................. $ 37
Current maturities of long-term debt............................................ 5,229
Accounts payable................................................................ 3,986
Accrued salaries................................................................ 594
Accrued expenses................................................................ 3,550
---------
Total Current Liabilities..................................................... 13,396
---------
LONG-TERM DEBT.................................................................... 93,882
---------
NOTE PAYABLE -- RELATED PARTY..................................................... 5,000
---------
DEFERRED INCOME TAXES............................................................. 28,078
---------
ACCRUED SELF-INSURANCE LIABILITY.................................................. 2,178
---------
STOCKHOLDERS' EQUITY:
Common stock; $.001 par value; authorized 17,500,000 shares; issued 879,346
shares........................................................................ 1
Additional paid-in capital...................................................... 2,321
Retained earnings (deficit)..................................................... (734)
---------
1,588
---------
$ 144,122
---------
---------
</TABLE>
See Notes to Consolidated Financial Statements
F-37
<PAGE>
EMPIRE ENERGY CORPORATION
(NEW BASIS)
CONSOLIDATED STATEMENT OF OPERATIONS
TWO MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING REVENUE.................................................................. $ 12,439
COST OF PRODUCT SOLD............................................................... 6,471
---------
GROSS PROFIT....................................................................... 5,968
---------
OPERATING COSTS AND EXPENSES:
Provision for doubtful accounts.................................................. 234
General and administrative....................................................... 4,294
Depreciation and amortization.................................................... 1,087
---------
5,615
---------
OPERATING INCOME................................................................... 353
INTEREST EXPENSE, Net.............................................................. 1,487
---------
LOSS BEFORE INCOME TAXES........................................................... (1,134)
CREDIT FOR INCOME TAXES............................................................ (400)
---------
NET LOSS........................................................................... $ (734)
---------
---------
</TABLE>
See Notes to Consolidated Financial Statements
F-38
<PAGE>
EMPIRE ENERGY CORPORATION
(NEW BASIS)
CONSOLIDATED STATEMENT OF CASH FLOWS
TWO MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................................... $ (734)
Items not requiring (providing) cash:
Depreciation................................................................... 1,002
Amortization................................................................... 85
Gain on sale of assets......................................................... (4)
Changes in:
Trade receivables.............................................................. (2,485)
Inventories.................................................................... (3,896)
Accounts payable............................................................... 283
Accrued expenses and self insurance............................................ 1,164
Prepaid expenses and other..................................................... (536)
Income taxes refundable........................................................ 209
---------
Net cash used in operating activities........................................ (4,912)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets..................................................... 18
Purchases of property and equipment.............................................. (861)
---------
Net cash used in investing activities........................................ (843)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in credit facilities.................................................... 4,800
Principal payments on purchase obligations....................................... (35)
Checks in process of collection.................................................. 37
Proceeds from management buy out loan............................................ 94,000
Repayment of acquisition credit facility......................................... (31,100)
Purchase of company stock in management buy out.................................. (59,000)
Payment of debt acquisition costs................................................ (3,100)
---------
Net cash provided by financing activities.................................... 5,602
---------
DECREASE IN CASH................................................................... (153)
CASH, BEGINNING OF PERIOD.......................................................... 153
---------
CASH, END OF PERIOD................................................................ $ -0-
---------
---------
</TABLE>
See Notes to Consolidated Financial Statements
F-39
<PAGE>
EMPIRE ENERGY CORPORATION
(NEW BASIS)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
TWO MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON PAID-IN EARNINGS TREASURY STOCKHOLDERS'
STOCK STOCK (DEFICIT) STOCK EQUITY
------------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, AUGUST 1, 1996............................... $ 12 $ 46,099 $ 2,869 $ (21) $ 48,959
PURCHASE OF COMPANY STOCK............................. (11) (70,744) -- -- (70,755)
EFFECT OF PURCHASE ACCOUNTING......................... -- 26,966 (2,869) 21 24,118
NET LOSS.............................................. -- -- (734) -- (734)
--- ----------- ---------- --- ------------
BALANCE, SEPTEMBER 30, 1996........................... $ 1 $ 2,321 $ (734) $ -- $ 1,588
--- ----------- ---------- --- ------------
--- ----------- ---------- --- ------------
</TABLE>
See Notes to Consolidated Financial Statements
F-40
<PAGE>
EMPIRE ENERGY CORPORATION
(NEW BASIS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Company for the period ended
September 30, 1996, are unaudited. In the opinion of management, these unaudited
statements include all adjustments, all of which are of normal recurring nature,
which are necessary to a fair presentation of results of operations and cash
flows for the period. Due to the seasonal nature of the Company's propane
business, the results of operations for the interim periods are not necessarily
indicative of results to be expected for a full year.
NATURE OF OPERATIONS
The Company's principal operations are the retail sale of LP gas. Most of
the Company's customers are owners of residential single or multi-family
dwellings who make periodic purchases on credit. Such customers are located in
the southeast and midwest regions of the United States. On August 1, 1996,
members of management of Empire Energy purchased the ownership of Empire Energy
from the principal shareholder and certain other shareholders. (See Note 2)
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Empire Energy
and its subsidiaries. All significant intercompany balances have been eliminated
in consolidation.
REVENUE RECOGNITION POLICY
Sales and related cost of product sold are recognized upon delivery of the
product or service.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the first-in, first-out method for retail operations and specific identification
method for wholesale operations. The inventories consist of the following:
<TABLE>
<S> <C>
Gas and other petroleum products................................... $ 7,146
Gas distribution parts, appliances and equipment................... 3,792
---------
$ 10,938
---------
---------
</TABLE>
F-41
<PAGE>
EMPIRE ENERGY CORPORATION
(NEW BASIS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FUTURES CONTRACTS
The Company uses commodity futures contracts to reduce the risk of future
price fluctuations for LPG inventories and contracts. Gains and losses on
futures contracts purchased as hedges are deferred and recognized in cost of
sales as a component of the product cost for the related hedged transaction. In
the statement of cash flows, cash flows from qualifying hedges are classified in
the same category as the cash flows of the items being hedged. Net realized
gains and losses for the current period and unrealized gains and losses on open
positions as of September 30, 1996, are not material.
PROPERTY AND EQUIPMENT
Depreciation is provided on all property and equipment on the straight-line
method over estimated useful lives of five to 40 years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At September 30, 1996, the Company's only financial instruments are cash,
long-term debt and related accrued interest for which their carrying amounts
approximate fair value.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
AMORTIZATION
The excess of cost over fair value of net assets acquired (originally
$8,150,000) is being amortized on the straight-line basis over 40 years.
NOTE 2: MANAGEMENT BUY OUT
On August 1, 1996, members of management of Empire Energy purchased the
ownership (92.7% of the Common Stock) of Empire Energy from the principal
shareholder and certain other shareholders.
In connection with this transaction, the principal shareholder of Empire
Energy terminated employment with the Company as well as terminated certain
lease and use agreements. The new entity is principally owned (71.3% of the
Common Stock) by the son of the former principal shareholder.
The new entity paid approximately $59,000,000 cash, distributed certain home
office assets and a portion of the SYN Inc. receivable in exchange for the
shares of Company stock purchased. In addition to the above consideration, the
new entity issued a $5,000,000 note payable to the principal shareholder. The
amount paid to the selling shareholders was financed with proceeds from a new
credit agreement with the Company's current lender.
F-42
<PAGE>
EMPIRE ENERGY CORPORATION
(NEW BASIS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 2: MANAGEMENT BUY OUT (CONTINUED)
Because of the change in control of the Company, the balance sheet accounts
were adjusted at the acquisition date to reflect new bases determined using the
principles of purchase accounting. Stockholders' equity was adjusted to the cost
of the investors' interest in Empire Energy of $2,322,000. The principal effects
of the purchase accounting adjustments were to increase the book value of
equipment (principally storage tanks) by $30,367,000, accrue additional deferred
income tax liabilities of $11,096,000, record the excess of cost over fair value
of assets acquired of $5,129,000 and write off unamortized debt acquisition
costs of $282,000.
NOTE 3: LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
--------------
(IN THOUSANDS)
<S> <C>
Tranche A term note (A)....................................................... $ 42,000
Tranche B term note (A)....................................................... 52,000
Revolving credit facility (A)................................................. 4,800
Note payable to former owner (B).............................................. 5,000
Purchase contract obligations (C)............................................. 311
-------
104,111
Less current maturities....................................................... 5,229
-------
$ 98,882
-------
-------
</TABLE>
(A) On August 1, 1996, in conjunction with the management buy-out, the Company
entered into an agreement with a lender to provide a $42 million term note
maturing December 31, 2002, a $52 million term note maturing December 31,
2006, a $20 million revolving working capital credit facility maturing June
30, 2001 and a $10 million acquisition credit facility maturing June 30,
2001. The Company has the choice of keeping the borrowings at prime or
transferring the loans to Eurodollar. Amounts at prime on these notes bear
interest at the Bank of Boston daily rate or 1/2% over the Federal Funds
Rate. Amounts at Eurodollar on these notes bear interest at the Eurodollar
rate plus an applicable margin which is dependent on a ratio of debt
(excluding note payable to former principal shareholder and purchase
contract obligations) to earnings before depreciation, interest and income
taxes. The facility includes working capital, capital expenditure, cash flow
and net worth requirements as well as dividend restrictions.
(B) On August 1, 1996, in conjunction with the management buy-out, the Company
entered into a $5 million subordinated promissory note with the former
principal shareholder of the Company. The note bears interest at 8% and
matures August 1, 2007.
(C) Purchase contract obligations arise from the purchase of operating
businesses and are collateralized by the equipment and real estate acquired
in the respective acquisitions. The Company has also entered into purchase
contract obligations for equipment used in administrative activities. At
June 30,
F-43
<PAGE>
EMPIRE ENERGY CORPORATION
(NEW BASIS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 3: LONG-TERM DEBT (CONTINUED)
1996, these obligations carried interest rates ranging from 7% to 10% and
were due periodically through 2001.
Aggregate annual maturities (in thousands) of the long-term debt outstanding
at September 30, 1996, are:
<TABLE>
<S> <C>
1997...................................................................... $ 5,229
1998...................................................................... 6,837
1999...................................................................... 7,370
2000...................................................................... 8,123
2001...................................................................... 8,751
Thereafter................................................................ 67,801
---------
$ 104,111
---------
---------
</TABLE>
NOTE 4: INCOME TAXES
The tax effects of temporary differences related to deferred taxes shown on
the balance sheet were (in thousands):
<TABLE>
<S> <C>
Deferred Tax Assets
- --------------------------------------------------------------------------
Allowance for doubtful accounts....................................... $ 584
Accounts receivable advance collections............................... 281
Self-insurance liabilities and contingencies.......................... 1,046
Accrued expenses...................................................... 82
Net operating loss.................................................... 342
---------
2,335
Deferred Tax Liability
- --------------------------------------------------------------------------
Accumulated depreciation.............................................. (29,312)
---------
Net deferred tax liability.......................................... $ (26,977)
---------
---------
</TABLE>
The above net deferred tax liability is presented on the balance sheet as
follows (in thousands):
<TABLE>
<S> <C>
Deferred tax asset - current.............................................. $ 1,101
Deferred tax liability - long-term........................................ (28,078)
---------
Net deferred tax liability............................................ $ (26,977)
---------
---------
</TABLE>
F-44
<PAGE>
EMPIRE ENERGY CORPORATION
(NEW BASIS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 4: INCOME TAXES (CONTINUED)
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below (in thousands):
<TABLE>
<S> <C>
Computed at the statutory rate (34%)...................................... $ (352)
Increase resulting from:
Amortization of excess of cost over fair value of net assets acquired... 33
State income taxes - net of federal tax benefit......................... (44)
Other................................................................... (37)
---------
Actual tax credit......................................................... $ (400)
---------
---------
</TABLE>
NOTE 5: SELF-INSURANCE AND RELATED CONTINGENCIES
The Company self-insures its general and vehicle liability and worker's
compensation. For details of the self insurance program, see Note 8 of the June
30, 1996, financial statements.
NOTE 6: INCOME TAX AUDITS
The Company and its subsidiaries are presently included in various state tax
audits. For details of the state tax audits, see Note 9 of the June 30, 1996,
financial statements.
NOTE 7: STOCK OPTIONS
The Company's current stock options provide for a fixed option price of
$7.00 per share for options granted to officers and key employees. Options
granted are exercisable beginning one year after the date of grant at the rate
of 20% per year and expire six years after the date of grant. The Company has
945,000 shares of stock under option as of September 30, 1996. During the
two-month period ended September 30, 1996, 25,000 shares of stock under option
were canceled.
NOTE 8: ADDITIONAL CASH FLOW INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
TWO MONTHS ENDED
SEPTEMBER 30, 1996
-------------------
<S> <C>
ADDITIONAL CASH PAYMENT INFORMATION
Interest paid..................................................................... $ 804
Income taxes paid................................................................. $ (609)
NONCASH INVESTING AND FINANCING ACTIVITIES
Nonmonetary assets distributed to former principal shareholders................... $ 6,755
Note payable issued to former principal shareholder............................... $ 5,000
</TABLE>
F-45
<PAGE>
EMPIRE ENERGY CORPORATION
(NEW BASIS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 9: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
DEPENDENCE ON PRINCIPAL SUPPLIERS
Three suppliers, Conoco, Phillips and Texaco, account for approximately 50%
of Empire Energy's annual volume of propane purchases.
Although the Company believes that alternative sources of propane are
readily available, in the event that the Company is unable to purchase propane
from one of these three suppliers, the failure to obtain alternate sources of
supply at competitive prices and on a timely basis would have a material adverse
effect on the Company.
ESTIMATES
Significant estimates related to self-insurance and litigation (Note 5),
collectibility of receivables and income tax assessments (Note 6) are discussed
in the financial statements. Actual losses related to these items could vary
materially from amounts reflected in the financial statements.
NOTE 10: SUBSEQUENT EVENTS
On October 7, 1996, 100% of the Company stock was sold to Northwestern
Growth Corporation.
F-46
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
CGI Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity, and cash flows
present fairly, in all material respects, the financial position of CGI
Holdings, Inc. and its subsidiaries at July 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended July 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Francisco, California
September 13, 1996
F-47
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JULY 31,
----------------------
1996 1995
OCTOBER 31, ---------- ----------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 4,753 $ 1,519 $ 4,423
Accounts and notes receivable............................................. 21,443 23,664 20,817
Inventories............................................................... 6,751 7,316 5,870
Prepaid expenses and deposits............................................. 1,322 1,996 1,586
Deferred income tax benefit............................................... 802 802 980
----------- ---------- ----------
Total current assets.................................................... 35,071 35,297 33,676
----------- ---------- ----------
Property and equipment, at cost less accumulated depreciation............... 51,435 51,495 50,860
Cost in excess of net assets acquired, net of amortization.................. 11,761 11,844 9,447
Notes receivable............................................................ 1,380 1,357 1,108
Deferred charges and other assets........................................... 5,927 6,186 6,454
----------- ---------- ----------
$ 105,574 $ 106,179 $ 101,545
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
LIABILITIES, MANDATORILY REDEEMABLE SECURITIES
AND STOCKHOLDERS' EQUITY
JULY 31,
--------------------
1996 1995
--------- ---------
OCTOBER
31, 1996
---------
(UNAUDITED)
CURRENT LIABILITIES:
<S> <C> <C> <C>
Accounts payable............................................ $ 27,364 $ 30,824 $ 21,248
Accrued liabilities......................................... 3,777 3,101 3,210
Current maturities of long-term debt and capital lease
obligations............................................... 4,220 3,924 3,147
--------- --------- ---------
Total current liabilities................................. 35,361 37,849 27,605
--------- --------- ---------
Long-term debt and capital lease obligations.................. 45,069 41,801 46,021
Deferred income taxes......................................... 10,305 10,777 11,471
Other liabilities............................................. 1,095 1,095 814
Commitments and contingencies (Note 9)
MANDATORILY REDEEMABLE SECURITIES:
Redeemable exchangeable preferred stock:
10% cumulative, $0.01 par value, 62,500 shares authorized,
issued and outstanding; at redemption value............. 8,675 8,559 7,781
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value, 6,515,000 shares authorized;
4,312,247 issued and outstanding (1995 - 4,316,457
shares):
Class A voting common stock, $0.01 par value, 3,000,000
shares authorized; 2,789,784 issued and outstanding..... 28 28 28
Class B voting common stock, $0.01 par value, 200,000
shares authorized; 149,485 issued and outstanding....... 1 1 1
Class C voting common stock, $0.01 par value, 3,000,000
shares authorized; 1,343,831 issued and outstanding
(1995 -- 1,348,041 shares).............................. 13 13 13
Class D non-voting common stock, $0.01 par value, 250,000
shares authorized; 29,147 issued and outstanding........ -- -- --
Warrants outstanding...................................... 2,134 2,134 2,134
Additional paid-in capital.................................. 8,945 8,945 8,969
Accumulated deficit......................................... (6,052) (5,023) (3,292)
--------- --------- ---------
Total stockholders' equity................................ 5,069 6,098 7,853
--------- --------- ---------
$ 105,574 $ 106,179 $ 101,545
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
OCTOBER 31, FISCAL YEAR ENDED JULY 31,
---------------------- ----------------------------------
1996 1995 1996 1995 1994
----------- --------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales and other revenue.............................. $ 108,175 $ 84,070 $ 384,354 $ 266,842 $ 242,986
Costs and expenses:
Cost of sales, except for depreciation and
amortization..................................... 100,266 77,837 351,213 234,538 214,632
Operating expenses................................. 5,201 4,973 21,046 20,239 17,767
Sale of partnership interest....................... 660 -- -- -- --
General and administrative expenses................ 1,091 926 3,835 3,745 3,462
Depreciation and amortization...................... 1,067 983 4,216 3,785 3,282
Interest expense................................... 1,294 1,385 5,470 5,120 4,029
----------- --------- ---------- ---------- ----------
Loss before income taxes and extraordinary charge.... (1,404) (2,034) (1,426) (585) (186)
Income tax benefit................................... (491) (671) (473) (202) (28)
----------- --------- ---------- ---------- ----------
Loss before extraordinary charge..................... (913) (1,363) (953) (383) (158)
Extraordinary charge for early retirement of debt,
net of income tax benefit.......................... -- -- -- (506) --
----------- --------- ---------- ---------- ----------
Net loss............................................. $ (913) $ (1,363) $ (953) $ (889) $ (158)
----------- --------- ---------- ---------- ----------
----------- --------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK WARRANTS CAPITAL DEFICIT
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at July 31, 1993.......................................... $ 42 $ -- $ 9,969 $ (990)
Net loss.......................................................... -- -- -- (158)
Accrued dividends on redeemable and exchangeable preferred
stock........................................................... -- -- -- (548)
----------- ----------- ----------- ------------
Balance at July 31, 1994.......................................... 42 -- 9,969 (1,696)
Net loss.......................................................... -- -- -- (889)
Issuance of warrants.............................................. -- 2,134 -- --
Repurchase of common stock........................................ -- -- (1,000) --
Accrued dividends on redeemable and exchangeable preferred
stock........................................................... -- -- -- (707)
----------- ----------- ----------- ------------
Balance at July 31, 1995.......................................... 42 2,134 8,969 (3,292)
Net loss.......................................................... -- -- -- (953)
Repurchase of common stock........................................ -- -- (24) --
Accrued dividends on redeemable and exchangeable preferred
stock........................................................... -- -- -- (778)
----------- ----------- ----------- ------------
Balance at July 31, 1996.......................................... 42 2,134 8,945 (5,023)
Net loss (unaudited).............................................. -- -- -- (913)
Accrued dividends on redeemable and exchangeable preferred stock
(unaudited)..................................................... -- -- -- (116)
----------- ----------- ----------- ------------
Balance at October 31, 1996 (unaudited)........................... $ 42 $ 2,134 $ 8,945 $ (6,052)
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
OCTOBER 31, FISCAL YEAR ENDED JULY 31,
-------------------- -------------------------------
1996 1995 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES:
Net loss........................................................... $ (913) $ (1,363) $ (953) $ (889) $ (158)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization.................................... 1,067 983 4,216 3,785 3,282
Deferred income taxes............................................ (472) (672) (516) (488) (66)
Extraordinary charge to earnings................................. -- -- -- 506 --
Sale of partnership interest..................................... 202 -- -- -- --
Changes in assets and liabilities net of acquisitions:
Accounts and notes receivable.................................. 2,198 (3,958) (2,950) (2,700) (5,122)
Inventories.................................................... 565 (2,329) (1,511) (617) (1,121)
Prepaid expenses and deposits.................................. 472 (599) (410) 1,451 (1,307)
Other assets................................................... (91) 75 (193) (495) --
Accounts payable............................................... (3,460) 5,838 9,327 (3,897) 8,103
Accrued liabilities............................................ 676 (555) 172 (1,630) 434
--------- --------- --------- --------- ---------
244 (2,580) 7,182 (4,974) 4,045
--------- --------- --------- --------- ---------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES:
Payments for acquisitions of retail outlets........................ -- (3,000) (3,000) (1,091) (1,030)
Proceeds from sale of property and equipment....................... 20 140 415 878 239
Purchases of and investments in property and equipment............. (594) (495) (3,060) (4,490) (3,421)
Other, net......................................................... -- -- -- -- (890)
--------- --------- --------- --------- ---------
(574) (3,355) (5,645) (4,703) (5,102)
--------- --------- --------- --------- ---------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES:
Repurchase of common stock......................................... -- -- (24) (1,000) --
Prepayment of long-term debt....................................... -- -- -- (26,940) --
Net proceeds from issuance of long-term debt....................... -- -- -- 28,111 --
Proceeds from issuance of senior subordinated debt................. -- -- -- 13,073 --
Repayment of long-term debt........................................ (562) (312) (1,250) (1,000) (850)
Borrowings on capital leases and other term loans.................. -- 871 1,248 2,263 1,113
Repayment of other notes payable................................... (104) (78) (561) (739) (741)
Principal payments under capital lease obligations................. (345) (329) (1,579) (2,929) (1,607)
Borrowings (repayments) under acquisition line..................... 4,575 5,145 (2,275) 1,054 3,041
--------- --------- --------- --------- ---------
3,564 5,297 (4,441) 11,893 956
--------- --------- --------- --------- ---------
Net (decrease) increase in cash.................................... 3,234 (638) (2,904) 2,216 (101)
Cash balance, beginning of year.................................... 1,519 4,423 4,423 2,207 2,308
--------- --------- --------- --------- ---------
Cash balance, end of year.......................................... $ 4,753 $ 3,785 $ 1,519 $ 4,423 $ 2,207
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Pursuant to a Stock Purchase Agreement dated March 31, 1993, by and among
CGI Holdings, Inc., a Delaware corporation (the "Company") formed to effect this
transaction and a major shareholder of Coast Gas Industries ("Industries"), the
Company acquired all of the outstanding stock of Industries (the "Buyout"). The
financial statements of the Company for each of the three years ended July 31,
1996 are presented on the Company's basis of accounting giving effect to the
Stock Purchase Agreement.
The Company engages in the sale and distribution of natural gas, crude oil,
natural gas liquids, liquefied petroleum gas ("LPG"), LPG storage and
transportation equipment through its wholly-owned subsidiary, Coast Gas, Inc.
Its operations consist primarily of the sale, transportation and storage of LPG
to wholesale and retail customers; the sale of LPG storage equipment; and the
leasing of LPG storage and transportation equipment under monthly operating
leases. Sales are made to approximately 75,000 customers in seven states,
primarily in the western regions of the United States.
In connection with the Stock Purchase Agreement, the Company pays a monthly
fee to Aurora Capital Partners ("Aurora"), an investor in the Company, for
management services provided. Payments for each of the years ended July 31,
1996, 1995 and 1994 amounted to $250,000.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Coast Gas, Inc., and its wholly-owned
subsidiary Coast Energy Group, Inc. ("CEG"). In 1989 the Company formed CEG,
headquartered in Houston, Texas, to conduct its wholesale procurement and
distribution operations. All significant intercompany transactions have been
eliminated in consolidation.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1994 consolidated
financial statements to conform to the 1996 presentation. In addition, the
Company changed its method of accounting to gross-up in the consolidated
statement of operations sales and the cost of those sales related to certain
bulk purchases and resales of natural gas, crude oil and certain propane
transactions which resulted in reporting sales and cost of sales of $136.2
million and $124.8 million for the years ended July 31, 1995 and 1994,
respectively. This reclassification had no effect on net income for any period.
The Company believes that this presentation better reflects the activities of
its wholesale operations.
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements of the Company as of October 31, 1996
and 1995 are unaudited. In the opinion of the Company's management, the interim
data include all adjustments necessary for a fair statement of the results for
the interim periods. These adjustments were of a normal recurring nature, except
as disclosed in Note 11.
The results of operations for the interim periods are not necessarily
indicative of future financial results.
REVENUE RECOGNITION
Sales of natural gas, crude oil, natural gas liquids and LPG are recognized
when delivered to the customer.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-53
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
The Company offers credit terms on sales to its retail and wholesale customers.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The Company
maintains an allowance for uncollectible accounts receivable based upon the
expected collectibility of all accounts receivable.
CASH FLOWS
For purposes of the comparative statements of cash flows, the Company
considers all highly liquid investments having original maturities of three
months or less to be cash equivalents. The carrying amount of cash, cash
equivalents and short-term debt approximates fair market value due to the short
maturity of these instruments.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of LPG is
determined using the last-in, first-out (LIFO) method. The LIFO reserve was $0.9
million and $0.1 million at July 31, 1996 and 1995, respectively. The cost of
parts and fittings is determined using the first-in, first-out (FIFO) method.
The major components of inventory consist of the following (in thousands of
dollars):
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31
1996 --------------------
(UNAUDITED) 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
LPG........................................................... $ 5,890 $ 6,474 $ 5,085
Parts and fittings............................................ 861 842 785
----------- --------- ---------
$ 6,751 $ 7,316 $ 5,870
----------- --------- ---------
----------- --------- ---------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets as
follows: buildings and improvements, 25 years; LPG storage and rental tanks, 40
to 50 years; and office furniture, equipment and tank installation costs, 5 to
10 years. Leasehold improvements are amortized over the shorter of the estimated
useful life or the lease term. Depreciation of equipment acquired under capital
leases of $132,000, $160,000 and $120,000 for the years ended July 31, 1996,
1995 and 1994, respectively, is included in depreciation and amortization
expense.
When property or equipment is retired or otherwise disposed, the cost and
related accumulated depreciation is removed from the accounts, and the resulting
gain or loss is credited or charged to operations. Maintenance and repairs are
charged to earnings, while replacements and betterments that extend estimated
useful lives are capitalized.
A majority of the LPG rental and storage tanks are leased to customers on a
month-to-month basis under operating lease agreements. Tank rental income of
approximately $2.3 million, $2.2 million and $2.3 million, for the years ended
July 31, 1996, 1995 and 1994, respectively, is included in sales and other
revenue. Direct costs associated with the installation of LPG storage tanks
leased to customers are capitalized and amortized over the estimated average
customer retention term.
F-54
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST IN EXCESS OF NET ASSETS ACQUIRED
The excess of acquisition cost over the estimated fair market value of
identifiable net assets of acquired businesses is amortized on a straight-line
basis over forty years. The related costs and accumulated amortization were
$12.8 million and $0.9 million at July 31, 1996 and $10.0 million and $0.6
million at July 31, 1995, respectively.
It is the Company's policy to review intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. If such a review should indicate that the
carrying amount of intangible assets is not recoverable, it is the Company's
policy to reduce the carrying amount of such assets to fair value.
DEFERRED CHARGES AND OTHER ASSETS
Deferred charges consist primarily of deferred debt issuance costs and
capitalized non-compete covenant agreement costs. Deferred debt issuance costs
are amortized using the bonds outstanding method over the life of the related
loans, other deferred charges are amortized on a straight-line basis over
varying lives, ranging from five to seven years. Total deferred charges and the
related accumulated amortization were $6.2 million and $3.0 million as of July
31, 1996 and $5.5 million and $1.9 million as of July 31, 1995, respectively.
Included in these amounts are unamortized debt issuance costs associated with
the bank borrowings of $1.6 million and $1.9 million at July 31, 1996 and 1995,
respectively.
Other assets include customer lists purchased in business acquisitions that
are amortized on a straight-line basis over a ten year life. The total cost of
customer lists and the related accumulated amortization were $2.6 million and
$1.0 million at July 31, 1996 and $2.2 million and $0.6 million at July 31,
1995, respectively.
FUTURES CONTRACTS
The Company routinely uses commodity futures contracts to reduce the risk of
future price fluctuations for natural gas and LPG inventories and contracts.
Gains and losses on futures contracts purchased as hedges are deferred and
recognized in cost of sales as a component of the product cost for the related
hedged transaction. In the statement of cash flows, cash flows from qualifying
hedges are classified in the same category as the cash flows from the items
being hedged. Contracts which do not qualify as hedges are marked to market,
with the resulting gains and losses charged to current operations. Net realized
gains and losses for the current fiscal year and unrealized gains, losses on
outstanding positions and open positions as of July 31, 1996 are not material.
INTEREST RATE SWAP AGREEMENT
Interest rate differentials to be paid or received under interest rate swap
agreements are accrued and recognized over the life of the agreements. Interest
payable or receivable under these interest rate swap agreements is recognized in
the periods when market rates exceed contract limits as an increase or reduction
in interest expense. Interest rate swap agreements held by the Company expired
during fiscal 1996.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121").
This statement requires companies to investigate potential impairments of
long-lived assets, including identifiable intangibles and goodwill, if there is
evidence that events or changes in circumstances have made recovery of an
asset's carrying value unlikely. The statement is effective for the
F-55
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company in fiscal 1997. SFAS 121 also requires companies to measure potential
impairments to carrying value at the lowest level of identifiable cash flows,
and to record impairment losses to the extent that the undiscounted cash flows
exceed the carrying amount of the asset. The Company does not expect the
adoption of SFAS 121 to have a material effect on the Company's financial
position or operating results.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This statement establishes a fair value-based method
of accounting for stock-based compensation plans. It also encourages entities to
adopt that method in place of the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," for all arrangements
under which employees receive shares of stock or other equity instruments of the
employer or the employer incurs liabilities to employees in amounts based upon
the price of its stock. The Company is required to adopt this statement in
fiscal 1997. The adoption of this statement is not expected to have a material
impact on the Company's financial position or operating results. The Company
currently accounts for stock based compensation in accordance with Accounting
Principles Board Opinion No. 25.
2. ACCOUNTS AND NOTES RECEIVABLE AND OTHER ASSETS
Accounts and notes receivable as of July 31, 1996 and 1995 consist of the
following (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Accounts receivable from customers................................................ $ 23,814 $ 21,064
Allowance for doubtful accounts................................................... (367) (421)
Notes receivable from customers................................................... 753 397
Notes and accounts receivable from employees...................................... 821 885
--------- ---------
Total accounts and notes receivable............................................... 25,021 21,925
Less: non-current portion......................................................... 1,357 1,108
--------- ---------
Current notes and accounts receivable............................................. $ 23,664 $ 20,817
--------- ---------
--------- ---------
</TABLE>
Notes receivable arise in the ordinary course of business from the sale of
LPG storage and transportation equipment. Terms are generally from one to five
years, with interest rates ranging from 12.0% to 13.0%.
The Company has accounts and notes receivable due from employees totaling
$821,000 and $885,000 at July 31, 1996 and 1995, respectively. The notes
primarily relate to employee stock purchase loans and employee housing
assistance programs. The terms of the employee stock purchase loans require
interest payments of 6.0% per annum on the outstanding principal balance and
that all outstanding principal and interest be paid by October 31, 1997. Under
the employee housing assistance program, the Company is a guarantor on primary
residential notes issued in conjunction with the Company's relocation program
for a fixed term of seven years through October 1997, after which the employee
will refinance and the Company's guarantee will be eliminated.
The Company, through its wholly-owned subsidiary Coast Gas, Inc., holds a
50% limited interest in Coast Energy Investments, Inc., a limited partnership.
The partnership was established to facilitate the formation of a trading fund
and is accounted for under the equity method. Coast Gas, Inc. receives a
F-56
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. ACCOUNTS AND NOTES RECEIVABLE AND OTHER ASSETS (CONTINUED)
management fee. For the years ended July 31, 1996 and 1995, the investment in
the partnership amounted to $122,000 and $124,000, respectively. In addition, at
July 31, 1996, Coast Gas, Inc. recorded a management fee receivable of $93,000
(see Note 11).
3. PROPERTY AND EQUIPMENT
Property and equipment as of July 31, 1996 and 1995 consists of the
following (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Land.............................................................................. $ 2,312 $ 2,212
Buildings and improvements........................................................ 4,600 4,513
LPG rental and storage tanks...................................................... 44,690 42,550
Equipment and office furnishings.................................................. 6,447 5,989
--------- ---------
58,049 55,264
Less accumulated depreciation and amortization.................................... 6,554 4,404
--------- ---------
$ 51,495 $ 50,860
--------- ---------
--------- ---------
</TABLE>
At July 31, 1996 and 1995, LPG rental and storage tanks include $7.3 million
and $8.2 million, respectively, for tanks acquired under capital leases. Tanks
acquired under capital leases are pledged as collateral under the capital lease
agreements. All assets of the Company are pledged as collateral for the
Company's long-term debt under the provisions of the Credit Agreement (see Note
4).
Depreciation expense for the years ended July 31, 1996, 1995 and 1994
totaled $2.4 million, $2.2 million and $2.1 million, respectively.
4. LONG-TERM DEBT
Long-term debt as of July 31, 1996 and 1995 consists of the following (in
thousands of dollars):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Revolving loan, variable interest at prime plus 1.50%, due in monthly installments
of interest only until September 14, 2000, secured by all assets of the
Company......................................................................... $ 13,080 $ 15,355
Term loan, variable interest at prime plus 1.50%, due in quarterly installments
through July 31, 2000, secured by all assets of the Company..................... 12,750 14,000
Senior subordinated notes, fixed interest rate of 12.50%, due in equal annual
installments of $5.0 million, commencing September 15, 2002.The senior
subordinated notes are unsecured obligations of the Company with quarterly
interest payments over the life of the loan..................................... 13,310 13,073
Other notes payable with periodic payments through 2002, interest rates ranging
from 8.0% to 12.0%.............................................................. 2,232 2,212
--------- ---------
41,372 44,640
Less current maturities........................................................... 2,562 1,831
--------- ---------
$ 38,810 $ 42,809
--------- ---------
--------- ---------
</TABLE>
F-57
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
In fiscal 1995, Coast Gas, Inc. entered into a Credit Agreement (the "Credit
Agreement") with Bank of America, which provided financing of up to $35.0
million, consisting of $15.0 million in term debt and a $20.0 million revolving
credit facility. The revolving and term loans, at the election of Coast Gas,
Inc., bear interest at the Bank of America prime rate plus 1.50% or Libor plus
2.75% per annum. Concurrently, Coast Gas, Inc. issued $15.0 million in senior
subordinated notes with a fixed interest rate of 12.50% per annum. The proceeds
of the subordinated notes and a portion of the proceeds available under the
Credit Agreement were used to repay the notes to Heller Financial, Inc.
("Heller"). The balance of the funds available under the Credit Agreement
("Working Capital Line") will be used for general corporate purposes and to
finance future acquisitions.
The terms of the Credit Agreement were amended in fiscal 1996 to increase
the Working Capital line by an additional $3.0 million. An additional provision
of the amendment requires that the maximum amount of the facility is fixed at
$23.0 million until May 1, 1997, at which point it begins decreasing annually to
$16.0 million by May 1, 2000 and matures on September 14, 2000. Advances against
the line used to finance acquisitions were $3.0 million and $1.1 million for the
years ended July 31, 1996 and 1995, respectively.
The terms of the Credit Agreement contain restrictions on the issuance of
new debt or liens, the purchase or sale of assets not in the ordinary course of
business and the declaration and payment of dividends, and requires that Coast
Gas, Inc. maintain specified levels of fixed charge and interest payment
coverage ratios. The Credit Agreement also provides for prepayment of excess
funds in the event of sales of pledged assets if such funds are not reinvested
in like kind assets. The Credit Agreement provides for an unused commitment fee
of .5% on funds not drawn against the revolving line.
Total interest paid during the three month periods ended October 31, 1996
and 1995 was $1.3 million and $1.4 million, respectively. Total interest paid
during the years ended July 31, 1996, 1995 and 1994 was $5.4 million, $4.9
million, and $3.8 million, respectively, of which interest paid on bank
long-term and subordinated debt totaled $4.4 million, $4.0 million and $2.5
million, respectively.
Annual maturities of revolving, term and other long-term debt through July
31, 2001 are as follows: 1997 - $2.9 million; 1998 - $3.5 million; 1999 - $3.9
million; 2000 - $4.4 million; 2001 - $13.3 million; and thereafter - $15.1
million. The subordinated notes amortize $5.0 million per annum commencing in
fiscal 2003.
For the year ended July 31, 1995, the Company recorded an extraordinary
charge of $506,000 (net of $337,000 tax benefit) for the write-off of deferred
debt issuance costs upon the early extinguishment of the Heller debt. Debt
issuance costs associated with the new subordinated, revolving and term bank
debt totaling $2.2 million are being amortized using the bonds outstanding
method over the life of the related loans.
The carrying value of the Company's long-term debt approximates fair value,
in that most of the long-term debt is at floating market rates, or incurred at
rates that are not materially different from those current at July 31, 1996.
The Company has a Continuing Letter of Credit Agreement with Banque Paribas
to provide a $20.0 million credit guidance line for the operations of Coast
Energy Group, Inc., the Company's wholly owned subsidiary. The agreement
provides for a compensating balance of $1.3 million, and grants Banque Paribas a
security interest in certain pledged accounts receivable of CEG. At July 31,
1996, outstanding letters of credit drawn against this line amounted to $11.3
million.
F-58
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. MANDATORILY REDEEMABLE SECURITIES
The Company has outstanding 62,500 shares of cumulative redeemable,
exchangeable preferred stock, with par value of $0.01 and stated value of $100.
Cumulative dividends of 10% are payable annually. Payment of dividends is
restricted under the terms of the Credit Agreement with Coast Gas, Inc. (see
Note 4). Each share of preferred stock may be redeemed at a price equal to
stated value per share plus accrued and unpaid dividends. The redemption amounts
per share at October 31, 1996, July 31, 1996 and 1995 were $138.80, $136.94 and
$124.50, respectively. The stock is also exchangeable, at the option of the
Company, for Coast Gas, Inc.'s subordinated exchange debentures due September
15, 2002 (see Note 4). The stock shall, with respect to dividend rights and
rights on liquidation, winding up and dissolution, rank senior to all classes of
common stock. The Company shall redeem the stock in full at the earliest of
twelve consecutive years of unpaid dividends, sale or disposal of substantially
all the assets of the Company or merger of the Company, subject to certain
conditions. No dividends have been declared or paid since April 1, 1993.
Pursuant to the Stock Purchase and Merger Agreement (see Note 11), no dividends
can be accrued after September 9, 1996. Accrued dividends were $2.4 million and
$1.7 million at October 31, 1996 and 1995, respectively, and $2.3 million, $1.5
million and $0.8 million at July 31, 1996, 1995 and 1994, respectively, and have
been recorded as a charge to accumulated deficit.
6. INCOME TAXES
The income tax provision for the years ended July 31, 1996, 1995 and 1994
are summarized as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current provision:
Federal............................................................................ $ -- $ -- $ --
State.............................................................................. 25 7 38
--------- --------- ---------
25 7 38
--------- --------- ---------
Deferred provison (benefit):
Federal............................................................................ (428) (176) (48)
State.............................................................................. (70) (33) (18)
--------- --------- ---------
(498) (209) (66)
--------- --------- ---------
$ (473) $ (202) $ (28)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-59
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. INCOME TAXES (CONTINUED)
The significant components of temporary differences which give rise to
deferred tax assets (liabilities) as of July 31, 1996 and 1995 are as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Accruals, reserves and other..................................................... $ 1,178 $ 1,365
Federal NOLs..................................................................... 6,833 5,875
State NOLs....................................................................... 220 234
--------- ----------
Deferred tax assets............................................................ 8,231 7,474
--------- ----------
Accumulated depreciation......................................................... (13,385) (13,167)
PP&E book/tax basis difference................................................... (1,793) (1,793)
Capitalized tank installation costs.............................................. (1,607) (1,456)
LIFO inventory basis............................................................. (245) (245)
Other............................................................................ (1,176) (1,304)
--------- ----------
Deferred tax liabilities....................................................... (18,206) (17,965)
--------- ----------
Net deferred tax liabilities..................................................... $ (9,975) $ (10,491)
--------- ----------
--------- ----------
</TABLE>
A reconciliation of the Company's income tax provision computed at the
United States federal statutory rate to the effective rate for the recorded
provision for income taxes for the years ended July 31, 1996, 1995 and 1994 is
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate..................................................... (34%) (34%) (34%)
Amortization of cost in excess of assets acquired.......................... 7% 6% 8%
State franchise taxes, net of federal income tax benefit................... 2% 2% 11%
Prior year tax adjustments................................................. (5%) -- --
Extraordinary loss......................................................... -- (9%) --
Other, net................................................................. (3%) -- --
--------- --------- ---------
(33%) (35%) (15%)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Tax payments during the year ended July 31, 1996, 1995 and 1994 were minimal
due to the Company's tax loss position. Payments were solely for state income
taxes in various states.
The Company has a federal and state net operating loss carryforward of
approximately $20.0 million and $2.3 million, respectively, available to reduce
future payments of income tax liabilities. The tax benefits of these NOLs are
reflected in the accompanying table of deferred tax assets and liabilities. If
not used, carryforwards expire during the period from 2006 to 2011.
Under the provisions of Internal Revenue Code Section 382, the annual
utilization of the Company's net operating loss carryforwards may be limited
under certain circumstances. Events which may affect utilization include, but
are not limited to, cumulative stock ownership changes of more than 50% over a
three-year period. An ownership change occurred effective March 31, 1993, due to
cumulative changes in the Company's ownership. The annual and cumulative limits
on the utilization of net operating losses incurred prior to March 31, 1993 are
approximately $1.6 million and $5.5 million, respectively.
F-60
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. LEASES
Coast Gas, Inc. leases rental tanks and vehicles from a former owner of the
Company on a month-to-month operating lease. The lease provides for cancellation
within 90 days, and includes a lease purchase option at the greater of the
original cost or current list price. Coast Gas, Inc. also leases real estate,
LPG storage tanks, and office equipment from certain of its current directors,
officers and employees under operating and capital lease agreements.
Rental payments under such leases totaled $204,000, $135,000 and $161,000
for the years ended July 31, 1996, 1995 and 1994, respectively.
Coast Gas, Inc. generally leases vehicles, computer equipment, office
equipment and real property under operating lease agreements. The typical
equipment lease term is four to six years. Real property leases generally have
terms in excess of ten years with renewal options. Rent expense under all
operating lease agreements for the years ended July 31, 1996, 1995 and 1994
totaled $2.5 million, $2.4 million and $1.9 million, respectively.
Capital leases consist primarily of financing agreements for the acquisition
of LPG storage tanks with terms ranging from five to seven years. These leases
provide fixed price purchase options at the end of the non-cancelable lease
term. As of July 31, 1996, future minimum lease commitments under non-cancelable
leases, with terms in excess of one year were as follows:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31, OPERATING CAPITAL
- ----------------------------------------------------------------------------------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C>
1997.......................................................................... $ 2,020 $ 1,624
1998......................................................................... 1,495 1,336
1999......................................................................... 991 1,150
2000......................................................................... 753 885
2001......................................................................... 679 113
----------- ---------
Total minimum lease payments....................................................... $ 5,938 $ 5,108
-----------
-----------
Less amounts representing interest................................................. 755
---------
Present value of future minimum lease payments..................................... 4,353
Less amounts due within one year................................................... 1,362
---------
$ 2,991
---------
---------
</TABLE>
Total assets acquired under capital leases totaled $1.2 million, $2.2
million and $1.5 million for the years ended July 31, 1996, 1995 and 1994,
respectively.
In addition to these minimum lease rentals, Coast Gas, Inc. has an agreement
to lease the assets of a retail LPG distributor at a fixed percentage of the
gross profits generated by the business. Contingent lease rents paid under this
lease agreement for the years ended July 31, 1996, 1995 and 1994 totaled
$344,000, $406,000 and $394,000, respectively. The original lease term of five
years, which expired in 1995, was extended for five years and has various
renewal and purchase options available to Coast Gas, Inc. through January 31,
2014.
Coast Gas, Inc. subleases some of its LPG storage tanks and vehicles to
other propane distributors under non-cancelable operating lease agreements. The
lease terms are generally for one year with automatic renewal provisions.
Additionally, these distributors may purchase the LPG storage tanks under
F-61
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. LEASES (CONTINUED)
lease, at the greater of original cost or current list price. Sublease income
totaled $270,000, $390,000 and $494,000 for the years ended July 31, 1996, 1995
and 1994, respectively.
8. STOCKHOLDERS' EQUITY
EMPLOYEE BENEFIT PLANS
The Company has a 401(k) employee benefit plan. All full-time employees who
have completed one year of service and are twenty-one years of age or older are
eligible to participate. Under the plan provisions, participants are allowed to
make monthly contributions on a tax deferred basis subject to the limitations of
the plan. In addition, the Company will contribute a discretionary matching
contribution based upon participant contributions. Employees are 100% vested for
all contributions. The plan is managed by a trustee, and is fully funded.
In 1990 the Company established a discretionary profit-sharing plan for the
benefit of all eligible full time employees. Contributions are made annually at
the sole discretion of the Board of Directors. Participant benefits vest and are
paid annually over a five year period. Unvested contributions are forfeited upon
termination of employment, and are allocated to the remaining plan participants.
Contributions are unfunded until the time of payment. At July 31, 1995, the
Company had accrued $76,000 for the profit sharing plan. No additional amounts
were accrued for fiscal year 1996.
Additionally, the Company provides certain health and life insurance
benefits to all eligible full time employees. Expenses are recorded based upon
actual paid claims and expected liabilities for incurred but not reported claims
at year end.
WARRANTS
In conjunction with the refinancing in fiscal 1995, the Company repurchased
175,438 shares of common stock from officers of the Company for $1.0 million.
Warrants in the Company were issued to senior subordinated note holders which
have been assigned an estimated fair value of $2.1 million, to be amortized over
the life of the credit agreement using the bonds outstanding method. The
warrants include 175,438 Series A Warrants with an exercise price of $2.85 and
287,228 Series B Warrants with an exercise price of $0.01. The warrants are
exerciseable at the earliest of a sale, acquisition or initial public offering,
subject to certain conditions, or September 15, 1997 into shares of the
Company's Class D non-voting common stock. The warrants issued to Heller under
the previous debt agreement were returned unexercised.
OPTIONS
The Company has a 1987 stock plan available to grant incentive and
non-qualified stock options to officers and other employees. The plan provides
for the granting of a maximum of 175,000 options to purchase common shares of
the Company. The option price per share may not be less than the fair market
value of a share on the date the option is granted and the maximum term of the
option may not exceed 10 years. Options granted vest over a period of four years
from the date of grant. Granting of options under this plan will expire on the
10th anniversary of the plan. Pursuant to the Merger Agreement (see Note 11),
each outstanding option shall be converted into the right to receive cash
whether or not such option is
F-62
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
exerciseable in full. Compensation expense related to the granting of options
amounted to $21,000 for the year ended July 31, 1995. Information regarding the
Company's stock option plan is summarized below:
<TABLE>
<CAPTION>
PER SHARE
OPTIONS RANGE
--------- --------------
<S> <C> <C>
Outstanding at August 1, 1993................................................ 132,031 $ 0.01 - $9.11
Granted.................................................................... --
Exercised.................................................................. --
Canceled................................................................... --
---------
Outstanding at July 31, 1994................................................. 132,031 $ 0.01 - $9.11
Granted.................................................................... 42,942 $ 0.10 - $9.13
Exercised.................................................................. --
Canceled................................................................... --
---------
Outstanding at July 31, 1995................................................. 174,973 $ 0.01 - $9.13
Granted.................................................................... --
Exercised.................................................................. --
Canceled................................................................... --
---------
Outstanding at July 31, 1996................................................. 174,973 $ 0.01 - $9.13
Available for grant at July 31, 1996......................................... 27
</TABLE>
During 1996, the Company adopted a Stock Appreciation Rights (SARs) plan.
The Company granted 500,000 SARs, which are to vest over a five-year period, at
a per share value of $1.20. Compensation expense related to the grant of SARs of
$120,000 was recorded in 1996.
9. COMMITMENTS AND CONTINGENCIES
The Company has contracts with various suppliers to purchase a portion of
its supply needs of LPG for future deliveries with terms ranging from one to
twelve months. The contracted quantities are not significant with respect to the
Company's anticipated total sales requirements and will generally be acquired at
prevailing market prices at the time of shipment. Outstanding letters of credit
issued in conjunction with product supply contracts are a normal business
requirement. There were no outstanding letters of credit issued on behalf of the
Company as of October 31, 1996 or July 31, 1996 other than the $14.0 million and
$11.3 million, respectively, drawn against the credit guidance line (see Note
4).
The Company is engaged in certain legal actions related to the normal
conduct of business. In the opinion of management, any possible liability
arising from such actions will be adequately covered by insurance or will not
have a material adverse effect on the Company's financial position or results of
operations.
10. BUSINESS ACQUISITIONS
During the year ended July 31, 1996, Coast Gas, Inc. acquired one retail
outlet in a transaction accounted for using the purchase method of accounting.
The cost of the acquired company totaled $4.0 million, including $1.0 million of
seller notes and other liabilities and $3.0 from the increase in the Company's
Working Capital/Acquisition bank line. Goodwill resulting from the acquisition
totaled $2.8 million. Revenues of the acquired company for the year ended July
31, 1996, subsequent to the dates of acquisition and included in the Company's
consolidated sales totaled $1.9 million.
F-63
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. BUSINESS ACQUISITIONS (CONTINUED)
During the year ended July 31, 1995, Coast Gas, Inc. acquired three retail
outlets in transactions accounted for using the purchase method of accounting.
The cost of the acquired companies totaled $1.8 million (including $0.7 million
of seller notes). Goodwill resulting from these acquisitions totaled $0.3
million. Revenues of the acquired companies for the year ended July 31, 1995,
subsequent to the dates of acquisition and included in the Company's
consolidated sales totaled $0.7 million.
During the ended July 31, 1994, Coast Gas, Inc. acquired two retail outlets
in transactions accounted for using the purchase method of accounting. The cost
of the acquired companies totaled $2.0 million (including $1.0 million of seller
notes and other liabilities). Goodwill resulting from these acquisitions totaled
$0.2 million. Revenues of the acquired companies for the year ended July 31,
1994, subsequent to the dates of acquisition, included in the Company's
consolidated sales totaled $1.2 million.
11. SUBSEQUENT EVENTS
STOCK PURCHASE AND MERGER AGREEMENT
Effective September 9, 1996, subsequent to the fiscal year end, the Company
and the preferred shareholders of the Company entered into a Stock Purchase and
Merger Agreement (the "Merger Agreement") for the sale of the preferred stock of
the Company for $8.7 million. The terms of the Agreement also provided an option
to the buyer of the preferred stock to acquire all of the outstanding common
stock of the Company, for a period of one year from the date of the sale of the
preferred stock. Additionally, the shareholders of the Company have an option to
put the common stock of the Company to the buyer of the preferred stock on April
30, 1997, if the buyer has not previously exercised the option to acquire the
common stock.
SALE OF PARTNERSHIP INTEREST
Effective October 1, 1996, the Company terminated its participation and
interest in Coast Energy Investments, Inc., a limited partnership in which Coast
Energy Group, Inc. was a 50% limited partner. The original partnership agreement
provided for a minimum investment term through December 1997. The termination
resulted in the sale of the Company's partnership interest to its 50% partner
and an employee of the partnership. The Company recorded a net loss on the
disposition of the partnership interest of $660,000. This amount consisted of a
$202,000 loss on the partnership investment and $458,000 of termination costs
consisting of salary, consulting, non-compete agreements and other related
expenses.
F-64
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SYN Inc.:
We have audited the accompanying consolidated balance sheet of SYN Inc. (a
Delaware corporation and 52.5% owned subsidiary of Northwestern Public Service
Company) and Subsidiaries as of June 30, 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for the period from
inception (August 15, 1995) through June 30, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our 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 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 audit provides 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 SYN Inc. and Subsidiaries as
of June 30, 1996, and the results of their operations and their cash flows for
the period from inception (August 15, 1995) through June 30, 1996 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
August 9, 1996 (except with respect
to the matter discussed in Note 9 as to
which the date is September 28, 1996)
F-65
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
JUNE 30, -------------
1996
--------- (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash..................................................................................... $ 14 $ 1,444
Trade receivables, less allowance for doubtful accounts of $1,505 and $1,475,
respectively........................................................................... 9,195 7,791
Inventories.............................................................................. 7,447 8,165
Prepaid expenses and other............................................................... 678 1,019
Deferred income tax benefit.............................................................. 3,727 3,727
Due from Former Stockholders............................................................. 37,966 37,966
--------- -------------
Total current assets................................................................... 59,027 60,112
--------- -------------
PROPERTY AND EQUIPMENT:
Land and buildings....................................................................... 6,420 6,644
Storage and consumer service facilities.................................................. 52,953 54,036
Transportation, office and other equipment............................................... 11,910 12,510
Less--Accumulated depreciation........................................................... (2,592) (3,297)
--------- -------------
Total property and equipment........................................................... 68,691 69,893
--------- -------------
OTHER ASSETS:
Investments and restricted cash deposits................................................. 3,025 3,048
Deferred income tax benefit.............................................................. 4,849 5,400
Intangible assets, primarily the excess of cost over fair value of net assets acquired,
net of accumulated amortization........................................................ 30,943 31,381
Other.................................................................................... 227 208
--------- -------------
Total other assets..................................................................... 39,044 40,037
--------- -------------
$ 166,762 $ 170,042
--------- -------------
--------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt..................................................... $ 1,025 $ 2,630
Accounts payable......................................................................... 1,604 6,270
Accrued expenses......................................................................... 2,915 2,999
Acquisition related liabilities.......................................................... 29,306 29,367
--------- -------------
Total current liabilities.............................................................. 34,850 41,266
LONG-TERM DEBT............................................................................. 25,687 25,709
NOTE PAYABLE--RELATED PARTY................................................................ 52,812 52,812
--------- -------------
Total liabilities...................................................................... 113,349 119,787
--------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Cumulative preferred stock, $.01 par value; 70,500 shares authorized; 55,312 shares,
issued and outstanding, at stated value of $1,000 per share............................ 55,312 55,312
Common stock; $0.01 par value; 100,000 shares authorized, issued and outstanding......... 1 1
Additional paid-in capital............................................................... 99 99
Accumulated deficit...................................................................... (1,999) (5,157)
--------- -------------
Total stockholders' equity............................................................. 53,413 50,255
--------- -------------
$ 166,762 $ 170,042
--------- -------------
--------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-66
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION FOR THE 46 FOR THE 3
(AUGUST 15, DAYS ENDED MONTHS ENDED
1995) THROUGH SEPTEMBER 30, SEPTEMBER 30,
JUNE 30, 1996 1995 1996
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES:
Propane sales................................................... $ 81,706 $ 8,584 $ 15,026
Appliance and parts sales....................................... 5,546 773 776
Other........................................................... 8,810 1,208 2,081
------- ------- -------
Total revenues................................................ 96,062 10,565 17,883
COST OF PRODUCT SOLD.............................................. 46,187 5,582 8,940
------- ------- -------
Gross profit.................................................. 49,875 4,983 8,943
------- ------- -------
OPERATING EXPENSES:
Salaries and commissions........................................ 14,520 1,662 3,865
General and administrative...................................... 14,225 1,333 3,083
Depreciation and amortization................................... 3,329 511 1,000
Related-party corporate administration and management fees...... 3,281 468 965
------- ------- -------
Total operating expenses...................................... 35,355 3,974 8,913
------- ------- -------
Operating income.............................................. 14,520 1,009 30
INTEREST EXPENSE, including $4,388, $589 and $1,204, respectively
to related party................................................ 5,584 589 1,665
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES................................. 8,936 420 (1,635)
PROVISION (BENEFIT) FOR INCOME TAXES.............................. 3,675 88 (550)
------- ------- -------
Net income (loss)............................................. 5,261 332 (1,085)
DIVIDENDS ON CUMULATIVE PREFERRED STOCK........................... (7,260) -- (2,073)
------- ------- -------
Net income (loss) applicable to common stockholders........... $ (1,999) $ 332 $ (3,158)
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
F-67
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------
PREFERRED STOCK ADDITIONAL
------------------- PAID-IN ACCUMU- LATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- ------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT INCEPTION, August 15, 1995............. -- $ -- -- $ -- $ -- $ --
Common stock issued............................. -- -- 100,000 1 99 --
Preferred stock issued.......................... 55,312 55,312 -- -- -- --
Dividends on preferred stock, $131.25 per
share......................................... -- -- -- -- -- (7,260)
Net income...................................... -- -- -- -- -- 5,261
---------- ------- -------- --- --- ------------
BALANCE, June 30, 1996............................ 55,312 $55,312 100,000 $ 1 $ 99 $ (1,999)
Dividends on preferred stock, $37.48 per share
(unaudited)................................... -- -- -- -- -- (2,073)
Net loss (unaudited)............................ -- -- -- -- -- (1,085)
---------- ------- -------- --- --- ------------
BALANCE, September 30, 1996 (unaudited)........... 55,312 $55,312 100,000 $ 1 $ 99 $ (5,157)
---------- ------- -------- --- --- ------------
---------- ------- -------- --- --- ------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE AT INCEPTION, August 15, 1995............. $ --
Common stock issued............................. 100
Preferred stock issued.......................... 55,312
Dividends on preferred stock, $131.25 per
share......................................... (7,260)
Net income...................................... 5,261
-------------
BALANCE, June 30, 1996............................ $ 53,413
Dividends on preferred stock, $37.48 per share
(unaudited)................................... (2,073)
Net loss (unaudited)............................ (1,085)
-------------
BALANCE, September 30, 1996 (unaudited)........... $ 50,255
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-68
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION FOR THE 3
(AUGUST 15, FOR THE 46 DAYS MONTHS ENDED
1995) THROUGH ENDED SEPTEMBER SEPTEMBER 30,
JUNE 30, 1996 30, 1995 1996
-------------- --------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................................... $ 5,261 $ 332 $ (1,085)
Items not requiring (providing) cash--
Depreciation and amortization................................. 3,329 511 1,000
Deferred income taxes......................................... 3,624 518 (550)
Changes in operating items--
Trade receivables............................................. (1,247) (1,388) 1,270
Inventories................................................... 704 495 (1,253)
Prepaid expenses and other.................................... 189 (731) (311)
Accounts payable.............................................. (5,571) 658 4,665
Accrued expenses.............................................. (3,423) (3,418) 206
-------------- --------------- -------------
Net cash provided by (used in) operating activities......... 2,866 (3,023) 3,942
-------------- --------------- -------------
INVESTING ACTIVITIES:
Acquisition of assets of Synergy Group Incorporated............. (150,922) (143,436) --
Proceeds from the sale of certain Synergy Group Incorporated
assets to Empire Energy Corporation........................... 35,980 35,980 --
Purchases of property and equipment............................. (9,182) (3,802) (1,571)
Proceeds from sale of assets.................................... 474 -- 973
Change in investments and restricted cash deposits.............. 70 (330) --
-------------- --------------- -------------
Net cash used in investing activities....................... (123,580) (111,588) (598)
-------------- --------------- -------------
FINANCING ACTIVITIES:
Increase in credit facility..................................... -- 8,916 90
Borrowing under long-term debt agreements....................... 23,910 -- --
Proceeds from issuance of common stock.......................... 100 100 --
Proceeds from issuance of preferred stock....................... 52,812 52,812 --
Proceeds from issuance of note payable--related party........... 52,812 52,812 --
Borrowings from related party................................... 36,458 36,458 90
Repayments to related party..................................... (36,458) (36,458) --
Payment on long-term debt....................................... (1,834) (1) (21)
Preferred stock dividends paid.................................. (7,072) -- (2,073)
-------------- --------------- -------------
Net cash provided by financing activities................... 120,728 114,639 (1,914)
-------------- --------------- -------------
Increase in cash............................................ 14 28 1,430
CASH:
Beginning of period............................................. -- -- 14
-------------- --------------- -------------
End of period................................................... $ 14 $ 28 $ 1,444
-------------- --------------- -------------
-------------- --------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-69
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
SYN Inc. (Synergy) is engaged in the retail sale of liquid propane gas
primarily in the southern, midwest and eastern regions of the United States.
Most of Synergy's customers use propane for residential home heating and make
periodic purchases with cash or on credit. Synergy was formed to acquire Synergy
Group Incorporated (SGI).
SYNERGY ACQUISITION
On August 15, 1995, Synergy completed its acquisition of SGI, a retail
distributor of propane with 152 locations. In conjunction with the acquisition,
the Company sold certain retail locations to Empire Energy Corporation (Empire
Energy) for approximately $36 million in cash and the assets of nine retail
locations valued at $2 million. There was no gain or loss recognized on this
sale.
The total net purchase price paid by Synergy for the acquisition of SGI
consisted of $105.6 million in cash (which was provided by proceeds from the
issuance of $52.8 million of preferred stock and the issuance of $52.8 million
of debt), $1.25 million in long-term debt and the assumption of certain
liabilities. The acquisition was accounted for under the purchase method of
accounting with all tangible assets and liabilities acquired recorded at fair
value at date of acquisition and the cost in excess of such fair value of $32.5
million recorded as an intangible asset.
The purchase price is subject to adjustment based on the amount of working
capital acquired by Synergy. Synergy has made a claim against the former owners
of SGI (the Former Stockholders) for a working capital adjustment and has
recorded a receivable of $26.7 million, which reflects the reduction in purchase
price of the assets based on the amount of working capital acquired. The
purchase price is also subject to adjustment based on the value of customer
tanks which cannot be located within a specified period of time. Synergy has
made a claim against the Former Stockholders for the value of unlocated tanks
and has recorded a receivable for $11.3 million related to this claim.
These amounts receivable in connection with the acquisition of SGI are
management's best estimate of the amounts which will ultimately be due from the
Former Stockholders. However, the parties continue to negotiate final settlement
and the Former Stockholders have objected to a number of the claims made by
Synergy. An adjustment of the consideration paid for SGI could also result in an
adjustment in the amount of consideration received from Empire Energy.
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements of Synergy as of September 30, 1995
and 1996 have not been audited by independent public accountants. In the opinion
of Synergy's management, the interim data include all adjustments necessary for
a fair statement of the results for the interim periods. These adjustments were
of a normal recurring nature, except as disclosed in Note 9.
Due to the seasonal nature of Synergy's propane business, the results of
operations for the interim periods are not necessarily indicative of results to
be expected for a full year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Synergy and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
F-70
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
statements and the reported amounts of revenues and expenses during the period.
Significant estimates related to self-insurance, litigation, collectibility of
receivables and income tax assessments are discussed in Notes 6 and 7. Actual
results could differ from those estimates.
DEPENDENCE ON PRINCIPAL SUPPLIER
Synergy obtains management services and all of its propane supplies through
Empire Gas Corporation (Empire Gas) which sells such propane to Synergy at cost.
Although Synergy believes that alternative sources of propane are readily
available, in the event that Empire Gas ceases to supply propane to Synergy or
has to obtain propane from alternate suppliers, the failure to obtain such
alternate sources of supply at competitive prices and on a timely basis may have
a material adverse effect on Synergy.
REVENUE RECOGNITION POLICY
Revenue from propane sales and the related cost of product sold are
recognized upon delivery of the product.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the first-in, first-out method for retail operations inventory and by the
specific identification method for wholesale operations inventory. The
inventories were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
JUNE 30, -------------
1996
----------- (UNAUDITED)
<S> <C> <C>
Gas and other petroleum products..................................... $ 4,058 $ 5,041
Gas distribution parts, appliances and equipment..................... 4,034 3,449
Obsolescence reserve................................................. (645) (325)
----------- ------
$ 7,447 $ 8,165
----------- ------
----------- ------
</TABLE>
PROPERTY AND EQUIPMENT
For financial reporting purposes, property and equipment are stated at
acquisition cost. Repairs and maintenance costs which do not significantly
extend the useful lives of the respective assets are charged to operations as
incurred. Depreciation is computed using the straight-line method over the
following estimated useful lives of the assets:
<TABLE>
<S> <C>
Buildings......................................... 40 years
Storage and consumer service facilities........... 35-40 years
Transportation, office and other equipment........ 5-10 years
</TABLE>
INTANGIBLE ASSETS
The excess of cost over the fair value of the net acquired assets of SGI has
been recorded as an intangible asset and is being amortized on a straight-line
basis over 40 years. Costs related to arranging the debt financing for the
acquisition of SGI have been capitalized and are being amortized on a
straight-line basis over the two-year term of the debt. Intangible assets are
reflected net of accumulated amortization of $737,000 in the June 30, 1996
consolidated balance sheet.
F-71
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred asset will not be realized.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121), which
established new standards for accounting for the impairment of long-lived
assets. The statement will be effective for Synergy in fiscal 1997, and, while
Synergy has not performed a detailed analysis of the impact of SFAS 121,
management does not expect that its initial adoption will have a material effect
on Synergy's financial position or results of operations.
2. RELATED-PARTY TRANSACTIONS:
Synergy entered into a Management Service Agreement with Empire Gas, a 30%
common stockholder of Synergy, under which Empire Gas provides all management
services to Synergy for payment of an annual overhead reimbursement of $3.25
million, and a management fee of $500,000 plus a performance-based payment for
certain operating results.
During 1996, Synergy purchased $42 million of liquid propane gas from Empire
Gas and accounts payable at June 30, 1996 includes $116,000 due to Empire Gas
resulting from the purchase of inventory.
The related party note payable represents borrowings by Synergy from
Northwestern Public Service Company (the parent corporation of the controlling
stockholder of Synergy). This note is subordinate to Synergy's other long-term
debt under its working capital facility (see Note 3), matures August 15, 2005,
bears interest at 9.12% and is subject to a prepayment premium.
Synergy transferred real and personal property of three retail locations
valued at $1,615,000 to Empire Gas in exchange for four Empire Gas retail
locations valued at approximately $1,713,000, with the difference of $98,000
paid to Empire Gas in cash.
Synergy paid $6,343,000 in 1996 to the controlling stockholder of Synergy
and $1,103,000 to Empire Gas for reimbursement of costs incurred relating to the
acquisition of SGI.
During 1996, Synergy leased, under operating leases, transportation
equipment to Propane Resources Transportation, Inc. (PRT) in which Synergy owns
a 15% common stock interest. Synergy received $274,000 in lease income during
1996 from these leases.
F-72
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
JUNE 30, -------------
1996
--------- (UNAUDITED)
<S> <C> <C>
Working capital facility............................................ $ 23,910 $ 24,000
Note payable to Former Stockholders, 9 1/2% payable in three
equal annual installments through August 15, 1998................. 1,250 1,250
Other, interest at 7.5% to 11.6%, due through 2001,
collateralized by certain equipment and materials................. 1,552 3,089
--------- -------------
26,712 28,339
Less--Current maturities............................................ 1,025 2,630
--------- -------------
$ 25,687 $ 25,709
--------- -------------
--------- -------------
</TABLE>
On December 28, 1995, Synergy entered into a working capital facility
agreement with the First National Bank of Boston providing for borrowings of up
to $25 million, interest at either the Eurodollar rate plus 2% or the prime rate
plus 3/4% (an average of 7.5% at June 30, 1996), and maturing December 31, 1997.
Synergy is required to comply with certain financial covenants including
compliance with restrictions upon other indebtedness and dividend distributions.
Borrowings under the agreement are collateralized by all receivables, inventory,
and property and equipment of Synergy.
Based on the borrowing rates currently available to Synergy from bank loans
with similar terms and average maturities, the fair value of long-term debt
approximates carrying value.
Aggregate annual maturities of the long-term debt outstanding at June 30,
1996, are as follows (in thousands):
<TABLE>
<S> <C>
1997.............................................. $ 1,025
1998.............................................. 24,603
1999.............................................. 680
2000.............................................. 204
2001.............................................. 200
-------
$26,712
-------
-------
</TABLE>
4. OPERATING LEASES:
Synergy leases retail location sales offices under noncancelable operating
leases expiring at various times through 2006. These leases generally contain
renewal options and require Synergy to pay all executory costs (property taxes,
maintenance and insurance).
F-73
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. OPERATING LEASES: (CONTINUED)
Future minimum lease payments (in thousands) at June 30, 1996, were:
<TABLE>
<S> <C>
1997.............................................. $ 598
1998.............................................. 310
1999.............................................. 206
2000.............................................. 41
2001.............................................. 19
Thereafter........................................ 53
-------
$ 1,227
-------
-------
</TABLE>
Lease expense during 1996 was approximately $600,000.
5. INCOME TAXES:
The provision for income taxes includes the following components (in
thousands):
<TABLE>
<S> <C>
Taxes currently payable........................... $ 51
Deferred income taxes............................. 3,624
------
$3,675
------
------
</TABLE>
A reconciliation of income tax expense at the statutory rate to the actual
income tax expense is as follows (in thousands):
<TABLE>
<S> <C>
Taxes computed at statutory rate (34%)............ $3,038
Amortization of excess of cost over fair value of
net assets acquired............................. 157
State income taxes, net of federal tax benefit.... 378
Other............................................. 102
------
Actual tax provision.............................. $3,675
------
------
</TABLE>
The tax effects of temporary differences which relate to deferred taxes
reflected on the balance sheet were as follows (in thousands):
<TABLE>
<S> <C>
Current deferred tax assets:
Allowance for doubtful accounts................. $ 2,302
Self-insurance liabilities...................... 1,005
Inventory costs and reserves capitalized for tax
purposes...................................... 420
--------
Net current deferred income tax asset......... $ 3,727
--------
--------
Long-term deferred tax assets:
Net operating loss carryforward................. $ 7,596
Alternative minimum tax carryover............... 910
Deferred tax liability related to accelerated
depreciation.................................. (3,657)
--------
Net long-term deferred income tax asset....... $ 4,849
--------
--------
</TABLE>
At June 30, 1996, Synergy had approximately $20 million of net operating
loss carryforwards for tax reporting purposes expiring in varying amounts from
2007 through 2010. These net operating loss
F-74
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. INCOME TAXES: (CONTINUED)
carryforwards have been reflected in the financial statements as deferred income
tax assets at June 30, 1996 and are subject to certain limitations on
utilization under provisions of the Internal Revenue Code.
6. COMMITMENTS AND CONTINGENCIES:
SELF-INSURANCE
Synergy obtains insurance coverage for catastrophic exposures related to
comprehensive general liability, vehicle liability and workers' compensation, as
well as those risks required to be insured by law or contract. Synergy
self-insures the first $250,000 of coverage per incident and obtains excess
coverage from carriers for these programs.
Provisions for self-insured losses are recorded based upon Synergy's
estimates of the aggregate self-insured liability for claims incurred. Synergy
has provided letters of credit aggregating approximately $2.875 million in
connection with these programs.
Synergy self-insures for health benefits provided to its employees.
Provisions for losses expected under this program are recorded based upon
Synergy's estimate of the aggregate liability for claims incurred.
CONTINGENCIES
Synergy and the acquired operations of SGI are presently involved in various
federal and state tax audits and are also defendants in other business-related
lawsuits which are not expected to have a material adverse effect on Synergy's
financial position or results of operations.
In conjunction with the acquisition of SGI, the Former Stockholders of SGI
are contractually liable for all insurance claims and tax liabilities that
relate to periods prior to the acquisition date. Funds have been placed in
escrow accounts to provide for payment of these liabilities. In the event that
the escrow amount is insufficient to settle these liabilities, Synergy could be
obligated to fund any additional amounts due and would have to seek
reimbursement from the Former Stockholders for such amounts. Synergy has
recorded its best estimates of the ultimate liabilities expected to arise from
these matters and has made claims against the Former Stockholders for
reimbursement (see Note 1).
7. EMPLOYEE BENEFIT PLAN:
Synergy succeeded to the SGI-sponsored defined contribution retirement plan
covering substantially all salaried employees. Employees who elect to
participate may contribute a percentage of their salaries to the plan and
Synergy at its discretion may match a portion of the employee contribution.
Synergy may also make profit-sharing contributions to the plan at the discretion
of its Board of Directors. Synergy made no profit-sharing contributions to the
plan in 1996.
The plan is currently under audit by the U.S. Department of Labor (DOL),
which has alleged that the plan violated certain sections of the Employee
Retirement Income Security Act of 1974. However, the DOL has advised that it is
not contemplating current action regarding these violations. The DOL audit is
continuing and the outcome cannot be determined at this time. In the event the
Former Stockholders are unable to satisfy any liabilities resulting from the
above examination, Synergy could be obligated to fund these liabilities and seek
reimbursement from the Former Stockholders. Synergy has recorded its best
estimates of the ultimate liabilities expected to arise from these matters and
has made claims against the Former Stockholders for reimbursement (see Note 1).
F-75
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. ADDITIONAL CASH FLOW INFORMATION (IN THOUSANDS):
<TABLE>
<S> <C>
Assets acquired through issuance of:
Long-term debt.................................. $2,250
------
------
Preferred stock................................. $2,500
------
------
</TABLE>
ADDITIONAL CASH PAYMENT INFORMATION
<TABLE>
<S> <C>
Interest paid..................................... $5,535
------
------
Income taxes paid................................. $2,284
------
------
</TABLE>
9. SUBSEQUENT EVENT:
Synergy and its controlling stockholder have negotiated an agreement with
Empire Gas to, among other items, terminate the Empire Gas management agreement
and to have the controlling stockholder acquire the 30% common stock interest in
Synergy owned by Empire Gas. The range of total consideration to be paid for
these transactions is subject to certain future events, but will be funded
solely by Synergy's controlling stockholder which is also in the process of
arranging for alternative management services. Synergy does not expect that this
ownership and managerial change will have a significant effect on its operations
or financial position.
F-76
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
Northwestern Growth Corporation
Huron, South Dakota
We have audited the accompanying consolidated balance sheet of SYNERGY GROUP
INCORPORATED as of August 14, 1995 and the related consolidated statements of
operations, changes in stockholders' equity (deficit) and cash flows for each of
the years ended March 31, 1994 and 1995, and the period ended August 14, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SYNERGY
GROUP INCORPORATED as of August 14, 1995 and the results of its operations and
its cash flows for each of the years ended March 31, 1994 and 1995, and the
period ended August 14, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 13, in 1995 the Company restated prior years' financial
statements for changes in previously reported accrued liabilities.
BAIRD, KURTZ & DOBSON
Springfield, Missouri
October 9, 1996
F-77
<PAGE>
SYNERGY GROUP INCORPORATED
CONSOLIDATED BALANCE SHEET
AUGUST 14, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 1,747
Trade receivables, less allowance for doubtful accounts of $5,547................ 9,504
Inventories...................................................................... 9,356
Prepaid expenses................................................................. 894
---------
Total Current Assets........................................................... 21,501
---------
INVESTMENTS:
Restricted cash deposit.......................................................... 3,095
---------
PROPERTY AND EQUIPMENT, At Cost:
Land and buildings............................................................... 8,656
Storage and consumer service facilities.......................................... 84,319
Transportation, office and other equipment....................................... 24,196
---------
117,171
Less accumulated depreciation.................................................... (48,343)
---------
68,828
---------
OTHER ASSETS:
Excess of cost over fair value of net assets acquired, at amortized cost......... 2,929
Other............................................................................ 147
---------
3,076
---------
$ 96,500
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt............................................. $ 89,104
Accounts payable................................................................. 4,101
Accrued salaries................................................................. 3,605
Accrued expenses................................................................. 12,808
Accrued interest................................................................. 5,768
Accrued self-insurance liability................................................. 4,160
---------
Total Current Liabilities...................................................... 119,546
---------
LONG-TERM DEBT..................................................................... 437
---------
DEFERRED INCOME TAXES.............................................................. 2,093
---------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, Series A; no par value; authorized
10,000 shares; issued and outstanding 2,500 shares.............................. 25,000
Preferred stock, Series B; no par value; authorized
5,000 shares; issued and outstanding 1,670 shares............................... 16,700
Common stock, Class A; voting; $1 par value; authorized 2,000 shares; issued and
outstanding 405 shares.......................................................... 1
Common stock, Class B; non-voting; no par value; authorized 2,000 shares; issued
and outstanding 405 shares...................................................... 40
Additional paid-in capital....................................................... 11,378
Retained earnings (deficit)...................................................... (78,695)
---------
(25,576)
---------
$ 96,500
---------
---------
</TABLE>
See Notes to Consolidated Financial Statements
F-78
<PAGE>
SYNERGY GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
4 1/2
YEAR ENDED MARCH 31, MONTHS
---------------------- ENDED
1994 1995 AUGUST 14,
RESTATED RESTATED 1995
---------- ---------- -----------
<S> <C> <C> <C>
OPERATING REVENUE............................................................ $ 133,731 $ 123,562 $ 32,179
COST OF PRODUCT SOLD......................................................... 63,498 59,909 15,387
---------- ---------- -----------
GROSS PROFIT................................................................. 70,233 63,653 16,792
---------- ---------- -----------
OPERATING COSTS AND EXPENSES
Provision for doubtful accounts............................................ 3,052 3,786 926
General and administrative................................................. 58,402 57,058 20,681
Depreciation and amortization.............................................. 5,170 5,100 1,845
---------- ---------- -----------
66,624 65,944 23,452
---------- ---------- -----------
OPERATING INCOME (LOSS)...................................................... 3,609 (2,291) (6,660)
---------- ---------- -----------
OTHER INCOME (EXPENSE)
Interest expense........................................................... (10,079) (8,385) (2,436)
Related-party interest expense............................................. (3,047) (2,701) (787)
Debt restructuring costs................................................... (2,650) (350) --
Other income............................................................... 152 226 101
---------- ---------- -----------
(15,624) (11,210) (3,122)
---------- ---------- -----------
LOSS BEFORE INCOME TAXES..................................................... (12,015) (13,501) (9,782)
PROVISION (CREDIT) FOR INCOME TAXES.......................................... (400) (84) 31
---------- ---------- -----------
NET LOSS..................................................................... $ (11,615) $ (13,417) $ (9,813)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-79
<PAGE>
SYNERGY GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 1994 AND 1995,
AND THE PERIOD ENDED AUGUST 14, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
SERIES A SERIES B CLASS A CLASS B ADDITIONAL RETAINED STOCKHOLDERS'
PREFERRED PREFERRED COMMON COMMON PAID-IN EARNINGS EQUITY
STOCK STOCK STOCK STOCK CAPITAL (DEFICIT) (DEFICIT)
----------- ----------- ------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1993, AS
PREVIOUSLY REPORTED............. $ -- $ -- $ 1 $ 40 $ -- $ (33,916) $ (33,875)
Adjustments applicable to prior
years........................... (9,934) (9,934)
----------- ----------- --- --- ----------- ----------- -------------
BALANCE, MARCH 31, 1993, AS
RESTATED........................ -- -- 1 40 -- (43,850) (43,809)
NET LOSS......................... (11,615) (11,615)
----------- ----------- --- --- ----------- ----------- -------------
BALANCE, MARCH 31, 1994.......... -- -- 1 40 -- (55,465) (55,424)
Long-term debt converted to
preferred stock................. 25,000 16,700 -- -- -- -- 41,700
Stockholder wages, related-party
rent and accrued interest
converted to additional paid-in
capital net of unamortized debt
costs........................... -- -- -- -- 11,378 -- 11,378
NET LOSS......................... -- -- -- -- -- (13,417) (13,417)
----------- ----------- --- --- ----------- ----------- -------------
BALANCE, MARCH 31, 1995.......... 25,000 16,700 1 40 11,378 (68,882) (15,763)
NET LOSS......................... -- -- -- -- -- (9,813) (9,813)
----------- ----------- --- --- ----------- ----------- -------------
BALANCE, AUGUST 14, 1995......... $ 25,000 $ 16,700 $ 1 $ 40 $ 11,378 $ (78,695) $ (25,576)
----------- ----------- --- --- ----------- ----------- -------------
----------- ----------- --- --- ----------- ----------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-80
<PAGE>
SYNERGY GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED 4 1/2
MARCH 31, MONTHS
---------------------- ENDED
1994 1995 AUGUST 14,
RESTATED RESTATED 1995
---------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................................... $ (11,615) $ (13,417) $ (9,813)
Items not requiring (providing) cash:
Depreciation............................................................. 4,611 5,014 1,770
Amortization............................................................. 559 86 75
Gain on sale of assets................................................... (730) (237) (61)
Deferred income taxes.................................................... (428) (125) --
Changes in:
Trade receivables........................................................ 1,612 2,486 5,139
Inventories.............................................................. 43 (814) 1,251
Accounts payable and accrued expenses.................................... 12,346 2,841 3,591
Prepaid expenses and other............................................... 127 (902) 764
---------- ---------- -----------
Net cash provided by (used in) operating activities.................... 6,525 (5,068) 2,716
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets............................................... 1,862 404 104
Purchase of property and equipment......................................... (3,141) (3,737) (596)
Change in restricted cash deposits......................................... (2,581) 3,181 (615)
---------- ---------- -----------
Net cash used in investing activities.................................. (3,860) (152) (1,107)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt................................................. (542) (260) (108)
Increase (decrease) in credit facilities................................... -- 3,100 (1,000)
---------- ---------- -----------
Net cash provided by (used in) financing activities.................... (542) 2,840 (1,108)
---------- ---------- -----------
INCREASE (DECREASE) IN CASH.................................................. 2,123 (2,380) 501
CASH, BEGINNING OF PERIOD.................................................... 1,503 3,626 1,246
---------- ---------- -----------
CASH, END OF PERIOD.......................................................... $ 3,626 $ 1,246 $ 1,747
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-81
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Synergy Group Incorporated (the Company) is engaged primarily in the retail
sale of liquid propane gas through its branch offices located in the Northeast,
Mid-Atlantic, Southeast and Southcentral regions of the United States. Most of
the Company's customers use propane for residential home heating and make
periodic purchases with cash or on credit.
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 amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Synergy Group
Incorporated and its subsidiaries. All significant intercompany balances have
been eliminated in consolidation.
REVENUE RECOGNITION POLICY
Sales and related cost of product sold are recognized upon delivery of the
product or service.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the last-in, first-out (LIFO) method for propane and the first-in, first-out
(FIFO) method for all others. At August 14, 1995, inventories consisted of the
following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Gas and other petroleum products.............................................. $ 5,549
Gas distribution parts, appliances and equipment.............................. 4,651
Obsolescence reserve.......................................................... (772)
LIFO reserve.................................................................. (72)
------
$ 9,356
------
------
</TABLE>
PROPERTY AND EQUIPMENT
Depreciation is provided on all property and equipment primarily by the
straight-line method over the estimated useful lives of 3 to 30 years.
F-82
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
At August 14, 1995, the Company's only financial instruments are cash,
long-term debt and related accrued interest for which their carrying amounts
approximate fair value.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
AMORTIZATION
The excess of current fair value over cost of net assets acquired is being
amortized on the straight-line basis over 40 years.
CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents. At August 14, 1995, cash
equivalents consisted primarily of overnight investing in commercial paper.
NOTE 2: SALE OF THE COMPANY
On August 15, 1995, the Company was acquired by SYN Inc. which is majority
owned by Northwestern Growth Corporation, a wholly owned subsidiary of
Northwestern Public Service Company. The acquisition cost was approximately $151
million and included the redemption of the Senior Secured Notes at par value and
the repayment of the Company's existing revolving credit facility. As a result
of the above sale the financial statements reflect operations for the four and
one-half month period ended August 14, 1995.
NOTE 3: DEBT RESTRUCTURING
On September 2, 1993, the Company and a committee of holders of the
Company's 11 5/8% Senior Subordinated Notes due 1997 (the 11 5/8% Notes)
announced that they had reached agreement on the major issues to restructure the
Company's outstanding debt and on August 23, 1994, the Company completed the
restructuring. The agreement contemplated that certain related parties to the
Company exchange $41,700,000 in debt for Series A Preferred Stock and Series B
Preferred Stock (the Recapitalization). This amount included $16,700,000 in
90-day unsecured promissory notes and $25,000,000 of 11 5/8% Notes (see Note 4).
The remaining 11 5/8% Notes plus accrued interest through September 14, 1993,
were proposed to be exchanged (the Exchange Offer) for new Increasing Rate
Senior Secured Notes due 2000 (the Senior Secured Notes).
F-83
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 3: DEBT RESTRUCTURING (CONTINUED)
Debt restructuring costs, principally legal fees and banking fees, incurred
in connection with the restructuring, amounting to $2,650,000 and $350,000 for
the years ended March 31, 1994 and 1995, respectively, have been expensed.
NOTE 4: NOTES PAYABLE
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, AUGUST 14,
1994 1995 1995
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
11 5/8% Senior subordinated notes due 1997 (A)................................ $ 85,000 $ 1,700 $ 1,700
Increasing rate senior secured notes due 2000 (A)............................. -- 65,054 65,054
Revolving credit facility (B)................................................. 20,000 23,100 22,100
Unsecured notes payable (C)................................................... 16,700 -- --
Purchase contract obligations (D)............................................. 926 795 687
---------- ----------- -----------
122,626 90,649 89,541
Less current maturities................................................... 122,002 90,087 89,104
---------- ----------- -----------
$ 624 $ 562 $ 437
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
(A) On April 2, 1987, the Company sold $85,000,000 of 11 5/8% Notes in a public
offering. On March 15, 1993, September 15, 1993, and March 15, 1994, the
Company failed to make the required $4,941,000 interest payments due on each
of such dates on the 11 5/8% Notes. Under the terms of the Indenture to the
11 5/8% Notes, the failure to pay such interest constituted an Event of
Default.
On August 23, 1994, the Company completed the Exchange Offer and
Recapitalization (see Note 3). The 11 5/8% Notes not tendered in the
Exchange Offer, amounting to $1,700,000, remain outstanding at August 14,
1995.
The Indenture governing the new Senior Secured Notes contains provisions,
among others, that require the Company to maintain certain financial ratios
and limit additional debt, asset dispositions and management salaries. As of
March 31, 1995, the Company was not in compliance with certain financial
covenants. Such noncompliance constitutes an Event of Default.
(B) In August 1989, the Company entered into a revolving credit agreement with a
bank under which the maximum credit line available is $20,000,000. On
September 14, 1990, the bank was repaid by a related party to the Company
and the credit agreement was assigned by the bank to the related party. The
credit agreement contains certain restrictive covenants. Borrowings under
the credit facility are secured by cash, accounts receivable and inventory.
Interest based on the prime rate plus 1 1/2% is payable quarterly. The
amount outstanding under the facility was not repaid by the Company on the
maturity date of April 1, 1993. The failure to repay the facility
constituted an Event of Default. In November 1993 the maximum credit line
available under the facility was increased to $25,000,000 with advances in
excess of $20,000,000 at the discretion of the related party. The maturity
date of the revolving credit agreement was extended to September 30, 1996.
F-84
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 4: NOTES PAYABLE (CONTINUED)
(C) At March 31, 1994, the Company had outstanding borrowings of $16,700,000
from an affiliate evidenced by 90-day unsecured promissory notes. Interest
based on the prime rate plus 2 1/2% was payable at the respective maturity
dates of each note. Since June 1993 neither the principal nor the interest
on $16,700,000 of notes was paid by the Company. On August 23, 1994, in
connection with the Recapitalization, the Company issued 1,670 shares of
Series B Preferred Stock in exchange for the $16,700,000 of 90-day unsecured
notes.
(D) Purchase contract obligations arise from the purchase of operating
businesses or other assets and are collateralized by the respective assets
acquired. At August 14, 1995, these obligations carried interest rates from
8% to 14.5% and are due periodically through 1999.
Aggregate annual maturities of long-term debt at August 14, 1995 are:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996.......................................................................... $ 89,104
1997.......................................................................... 251
1998.......................................................................... 80
1999.......................................................................... 83
2000.......................................................................... 23
-------
$ 89,541
-------
-------
</TABLE>
NOTE 5: OPERATING LEASES
The Company leases certain property and equipment under lease agreements
expiring through 2011. At August 14, 1995, future minimum lease payments under
noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
- ------------------------------------------------------------------------------ ---------------
<S> <C>
1996.......................................................................... $ 907
1997.......................................................................... 971
1998.......................................................................... 402
1999.......................................................................... 238
2000 and thereafter........................................................... 191
------
$ 2,709
------
------
</TABLE>
Rent charged to operations including rental expense to related parties (see
Note 6) for the years ended March 31, 1994 and 1995, and the period ended August
14, 1995, aggregated $4,303,000, $2,687,000 and $929,000, respectively.
NOTE 6: RELATED PARTY TRANSACTIONS
On March 31, 1995, the stockholders of the Company determined that they
would forego the payment of an aggregate of $4,766,000 of accrued and unpaid
wages due to the stockholders from the Company as of March 31, 1995. The
foregone wages have been recorded as a contribution to additional paid-in
capital.
F-85
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 6: RELATED PARTY TRANSACTIONS (CONTINUED)
The Company leases certain property and equipment from related parties under
operating lease agreements. Rental expense for the years ended March 31, 1994
and 1995, and the period ended August 14, 1995, was $3,276,000, $1,491,000 and
$318,000, respectively. On March 31, 1995, the related parties determined that
they would forego the payment of accrued and unpaid vehicle and equipment
rentals due from the Company as of March 31, 1995, amounting to $1,328,000. The
foregone rent has been recorded as a contribution to additional paid-in capital.
For the years ended March 31, 1994 and 1995, and the period ended August 14,
1995, interest expense related to the Company's revolving credit facility from a
related party (see Note 4) amounted to $3,047,000, $2,701,000 and $787,000,
respectively.
NOTE 7: INCOME TAXES
The provision for income taxes includes these components (in thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, AUGUST 14,
1994 1995 1995
----------- ----------- -------------
<S> <C> <C> <C>
Taxes currently payable............................................. $ 29 $ 41 $ 31
Deferred income taxes............................................... (429) (125) --
----- ----- -----
$ (400) $ (84) $ 31
----- ----- -----
----- ----- -----
</TABLE>
The tax effects of temporary differences related to deferred taxes shown on
the balance sheets were (in thousands):
<TABLE>
<CAPTION>
AUGUST 14,
1995
-----------
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts......................................................... $ 3,536
Inventory overhead costs capitalized for tax purposes................................... 421
Accrued expenses........................................................................ 1,390
Self-insurance liabilities and contingencies............................................ 4,185
Net operating loss carry-forwards....................................................... 35,948
-----------
45,480
Deferred tax liabilities:
Accumulated depreciation................................................................ (29,913)
-----------
Net deferred tax asset before valuation allowance........................................... $ 15,567
-----------
Valuation allowance:
Beginning balance....................................................................... (14,350)
Increase during the period.............................................................. (3,310)
-----------
Ending balance.......................................................................... (17,660)
-----------
Net deferred tax liability.......................................................... (2,093)
-----------
-----------
</TABLE>
F-86
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 7: INCOME TAXES (CONTINUED)
The above net deferred tax liability is presented on the balance sheets as
follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 14,
1995
-----------
<S> <C>
Deferred tax liability -- long-term................................................... $ (2,093)
-----------
-----------
</TABLE>
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
<TABLE>
<CAPTION>
MARCH 31 MARCH 31 AUGUST 14
1994 1995 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed at the statutory rate (34%).......................................... $ (4,085) $ (2,518) $ (3,326)
Increase (decrease) resulting from:
Amortization of excess cost over fair value of net assets acquired.......... 27 27 9
Interest expense transferred to paid-in capital............................. -- 1,916 --
State income taxes--net of federal tax benefit.............................. (69) -- 31
Change in deferred tax asset valuation allowance............................ 4,149 576 3,310
Other....................................................................... (422) (85) 7
----------- ----------- -----------
Actual tax provision.......................................................... $ (400) $ (84) $ 31
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The Company estimates that as of August 14, 1995, it has available net
operating loss carryforwards of approximately $94.6 million to offset future
taxable income.
NOTE 8: EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution retirement plan covering
substantially all salaried employees. Employees who elect to participate may
contribute a percentage of their salaries to the plan, and the Company at its
discretion may match a portion of the employee contribution. The Company may
also make profit-sharing contributions to the plan at the discretion of its
Board of Directors. Contribution expense amounted to $60,000 for the years ended
March 31, 1995 and 1994, and $37,000 for the period ended August 14, 1995.
The plan is currently under audit by the U.S. Department of Labor (DOL),
which has notified the Company that the prior Plan Trustees engaged in
prohibited transactions. The DOL audit is continuing and the outcome cannot be
determined at this time. In addition, the Internal Revenue Service has been
notified of prohibited transactions. The Company believes that it may be subject
to excise taxes, penalties and interest in connection with these prohibited
transactions and has recorded its best estimates of the potential liabilities
expected to arise from these matters (see Note 13).
NOTE 9: SELF-INSURANCE AND LITIGATION CONTINGENCIES
Under the Company's insurance program, coverage for comprehensive general
liability, workers' compensation and vehicle liability was obtained for
catastrophic exposures as well as those risks required to be insured by law or
contract. The Company retains a significant portion of certain expected losses
F-87
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 9: SELF-INSURANCE AND LITIGATION CONTINGENCIES (CONTINUED)
related primarily to comprehensive general liability. Under this insurance
program, the Company self insures the first $250,000 of coverage (per incident).
The Company obtained excess coverage from carriers for this program. The Company
currently self insures health benefits provided to employees of the Company and
its subsidiaries.
Provisions for losses expected under these programs are recorded based upon
the Company's estimates of the aggregate liability for claims incurred. The
Company provides letters of credit aggregating $2,875,000 in connection with
these programs which are collateralized with restricted cash deposits.
At August 14, 1995, the self-insured liability accrued in the balance sheet
totaled $4,160,000, which includes $500,000 of incurred but not reported claims.
The Company and its subsidiaries are presently defendants in various lawsuits
related to the self-insurance program and other business-related lawsuits which
are not expected to have a material adverse effect on the Company's results of
operations.
NOTE 10: ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 PERIOD
ENDED
-------------------- AUGUST 14,
1994 1995 1995
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ADDITIONAL CASH PAYMENT INFORMATION
Interest paid.............................................. $ 1,873 $ 11,877 $ 1,146
Income taxes paid.......................................... $ 35 $ 41 $ 15
NONCASH INVESTING AND FINANCING ACTIVITIES
Purchase contract obligation incurred...................... $ -- $ 129 $ --
Long-term debt converted to preferred stock................ $ -- $ 41,700 $ --
Accrued interest converted to additional paid-in capital
net of unamortized debt costs............................ $ -- $ 5,284 $ --
Accrued interest converted to long-term debt............... $ -- $ 7,054 $ --
Accrued wages converted to additional paid-in-capital...... $ -- $ 4,766 $ --
Accrued rent converted to additional paid-in capital....... $ -- $ 1,328 $ --
</TABLE>
NOTE 11: FUTURE ACCOUNTING PRONOUNCEMENTS
IMPACT OF SFAS NO. 121
In 1995 the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for the Impairment of Long-Lived Assets to be Disposed
of." The Company must adopt this standard effective April 1, 1996. The Company
does not expect that the adoption of this standard will have a material impact
on its financial position or results of operations.
F-88
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 12: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
DEPENDENCE ON PRINCIPAL SUPPLIERS
Three suppliers, Chevron, Texaco and Powder Horn Petroleum, account for
approximately 55% of the Company's volume of propane purchases. Although the
Company believes that alternative sources of propane are readily available, in
the event that the Company is unable to obtain alternate sources of supply at
competitive prices and on a timely basis, such inability would have a material,
adverse effect on the Company.
ESTIMATES
Significant estimates related to tax liabilities, self-insurance and
litigation are discussed in Notes 8 and 9. Actual losses related to these items
could vary materially from amounts reflected in the financial statements.
NOTE 13: RESTATEMENT OF PRIOR YEARS' FINANCIAL STATEMENTS
Fiscal years 1994 and 1995 have been restated to reflect excise taxes,
penalties and interest related to prohibited transactions involving the employee
benefit plan. This correction decreased previously reported March 31, 1994 and
1995, net income by $3,667,000 and $794,000, respectively.
Fiscal year 1995 has been restated to reflect the conversion of foregone
wages and rents to additional paid-in capital in the amounts of $4,766,000 and
$1,328,000, respectively, resulting in a further reduction in March 31, 1995 net
income of $6,094,000.
In addition, the retained earnings (deficit) as of March 31, 1993 has been
restated for the effect of adjustments related to the allowance for doubtful
accounts, self insurance reserves, accrued vacation pay, reserves for state
taxes and for the effect of the above employee benefit plan. This correction
decreased previously reported retained earnings by $9,934,000.
F-89
<PAGE>
APPENDIX A
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
CORNERSTONE PROPANE PARTNERS, L.P.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS.................................................................. A-1
1.2 CONSTRUCTION................................................................. A-15
ARTICLE II
ORGANIZATION
2.1 FORMATION.................................................................... A-15
2.2 NAME......................................................................... A-15
2.3 REGISTERED OFFICE; REGISTERED AGENT; PRINCIPAL OFFICE; OTHER OFFICES......... A-16
2.4 PURPOSE AND BUSINESS......................................................... A-16
2.5 POWERS....................................................................... A-16
2.6 POWER OF ATTORNEY............................................................ A-17
2.7 TERM......................................................................... A-18
2.8 TITLE TO PARTNERSHIP ASSETS.................................................. A-18
ARTICLE III
RIGHTS OF LIMITED PARTNERS
3.1 LIMITATION OF LIABILITY...................................................... A-18
3.2 MANAGEMENT OF BUSINESS....................................................... A-18
3.3 OUTSIDE ACTIVITIES OF THE LIMITED PARTNERS................................... A-19
3.4 RIGHTS OF LIMITED PARTNERS................................................... A-19
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF
PARTNERSHIP INTERESTS; REDEMPTION OF
PARTNERSHIP INTERESTS
4.1 CERTIFICATES................................................................. A-20
4.2 MUTILATED, DESTROYED, LOST OR STOLEN CERTIFICATES............................ A-20
4.3 RECORD HOLDERS............................................................... A-21
4.4 TRANSFER GENERALLY........................................................... A-21
4.5 REGISTRATION AND TRANSFER OF LIMITED PARTNER INTERESTS....................... A-21
4.6 TRANSFER OF A GENERAL PARTNER'S GENERAL PARTNER INTEREST..................... A-22
4.7 RESTRICTION ON TRANSFER OF SPECIAL GENERAL PARTNER'S GENERAL PARTNER A-23
INTEREST....................................................................
4.8 TRANSFER OF INCENTIVE DISTRIBUTION RIGHTS.................................... A-23
4.9 RESTRICTIONS ON TRANSFERS.................................................... A-23
4.10 CITIZENSHIP CERTIFICATES; NON-CITIZEN ASSIGNEES.............................. A-24
4.11 REDEMPTION OF PARTNERSHIP INTERESTS OF NON-CITIZEN ASSIGNEES................. A-24
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
5.1 ORGANIZATIONAL CONTRIBUTIONS................................................. A-25
5.2 CONTRIBUTIONS BY THE GENERAL PARTNERS AND THEIR AFFILIATES................... A-26
5.3 CONTRIBUTIONS BY INITIAL LIMITED PARTNERS.................................... A-26
5.4 INTEREST AND WITHDRAWAL...................................................... A-27
5.5 CAPITAL ACCOUNTS............................................................. A-27
</TABLE>
A-i
<PAGE>
<TABLE>
<S> <C> <C>
5.6 ISSUANCES OF ADDITIONAL PARTNERSHIP SECURITIES............................... A-30
5.7 LIMITATIONS ON ISSUANCE OF ADDITIONAL PARTNERSHIP SECURITIES................. A-31
5.8 CONVERSION OF SUBORDINATED UNITS............................................. A-32
5.9 LIMITED PREEMPTIVE RIGHT..................................................... A-33
5.10 SPLITS AND COMBINATION....................................................... A-33
5.11 FULLY PAID AND NON-ASSESSABLE NATURE OF LIMITED PARTNER INTERESTS............ A-34
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
6.1 ALLOCATIONS FOR CAPITAL ACCOUNT PURPOSES..................................... A-34
6.2 ALLOCATIONS FOR TAX PURPOSES................................................. A-40
6.3 REQUIREMENT AND CHARACTERIZATION OF DISTRIBUTIONS; DISTRIBUTIONS TO RECORD A-41
HOLDERS.....................................................................
6.4 DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS....................... A-42
6.5 DISTRIBUTIONS OF AVAILABLE CASH FROM CAPITAL SURPLUS......................... A-43
6.6 ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION A-44
LEVELS......................................................................
6.7 SPECIAL PROVISIONS RELATING TO THE HOLDERS OF SUBORDINATED UNITS............. A-44
6.8 SPECIAL PROVISIONS RELATING TO THE HOLDERS OF INCENTIVE DISTRIBUTION A-44
RIGHTS......................................................................
6.9 ENTITY-LEVEL TAXATION........................................................ A-45
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
7.1 MANAGEMENT................................................................... A-45
7.2 CERTIFICATE OF LIMITED PARTNERSHIP........................................... A-47
7.3 RESTRICTIONS ON GENERAL PARTNERS' AUTHORITY.................................. A-47
7.4 REIMBURSEMENT OF THE MANAGING GENERAL PARTNER................................ A-48
7.5 OUTSIDE ACTIVITIES........................................................... A-49
7.6 LOANS FROM THE GENERAL PARTNERS; LOANS OR CONTRIBUTIONS FROM THE PARTNERSHIP; A-50
CONTRACTS WITH AFFILIATES; CERTAIN RESTRICTIONS ON THE GENERAL PARTNERS.....
7.7 INDEMNIFICATION.............................................................. A-51
7.8 LIABILITY OF INDEMNITEES..................................................... A-52
7.9 RESOLUTION OF CONFLICTS OF INTEREST.......................................... A-53
7.10 OTHER MATTERS CONCERNING THE MANAGING GENERAL PARTNER........................ A-54
7.11 INTENTIONALLY DELETED........................................................ A-55
7.12 PURCHASE OR SALE OF PARTNERSHIP SECURITIES................................... A-55
7.13 REGISTRATION RIGHTS OF THE GENERAL PARTNERS AND THEIR AFFILIATES............. A-55
7.14 RELIANCE BY THIRD PARTIES.................................................... A-57
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
8.1 RECORDS AND ACCOUNTING....................................................... A-57
8.2 FISCAL YEAR.................................................................. A-57
8.3 REPORTS...................................................................... A-57
ARTICLE IX
TAX MATTERS
9.1 TAX RETURNS AND INFORMATION.................................................. A-58
9.2 TAX ELECTIONS................................................................ A-58
9.3 TAX CONTROVERSIES............................................................ A-58
9.4 WITHHOLDING.................................................................. A-58
</TABLE>
A-ii
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE X
ADMISSION OF PARTNERS
10.1 ADMISSION OF INITIAL LIMITED PARTNERS........................................ A-59
10.2 ADMISSION OF SUBSTITUTED LIMITED PARTNER..................................... A-59
10.3 ADMISSION OF SUCCESSOR GENERAL PARTNER....................................... A-59
10.4 ADMISSION OF ADDITIONAL LIMITED PARTNERS..................................... A-60
10.5 AMENDMENT OF AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP................ A-60
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
11.1 WITHDRAWAL OF THE GENERAL PARTNERS........................................... A-60
11.2 REMOVAL OF THE MANAGING GENERAL PARTNER...................................... A-62
11.3 INTEREST OF DEPARTING PARTNER AND SUCCESSOR GENERAL PARTNER.................. A-62
11.4 TERMINATION OF SUBORDINATION PERIOD, CONVERSION OF SUBORDINATED UNITS AND A-63
EXTINGUISHMENT OF CUMULATIVE COMMON UNIT ARREARAGES.........................
11.5 WITHDRAWAL OF LIMITED PARTNERS............................................... A-64
ARTICLE XII
DISSOLUTION AND LIQUIDATION
12.1 DISSOLUTION.................................................................. A-64
12.2 CONTINUATION OF THE BUSINESS OF THE PARTNERSHIP AFTER DISSOLUTION............ A-64
12.3 LIQUIDATOR................................................................... A-65
12.4 LIQUIDATION.................................................................. A-65
12.5 CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP........................... A-66
12.6 RETURN OF CONTRIBUTIONS...................................................... A-66
12.7 WAIVER OF PARTITION.......................................................... A-66
12.8 CAPITAL ACCOUNT RESTORATION.................................................. A-66
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
13.1 AMENDMENT TO BE ADOPTED SOLELY BY THE MANAGING GENERAL PARTNER............... A-67
13.2 AMENDMENT PROCEDURES......................................................... A-68
13.3 AMENDMENT REQUIREMENTS....................................................... A-68
13.4 SPECIAL MEETINGS............................................................. A-69
13.5 NOTICE OF A MEETING.......................................................... A-69
13.6 RECORD DATE.................................................................. A-69
13.7 ADJOURNMENT.................................................................. A-69
13.8 WAIVER OF NOTICE; APPROVAL OF MEETING; APPROVAL OF MINUTES................... A-70
13.9 QUORUM....................................................................... A-70
13.10 CONDUCT OF A MEETING......................................................... A-70
13.11 ACTION WITHOUT A MEETING..................................................... A-71
13.12 VOTING AND OTHER RIGHTS...................................................... A-71
ARTICLE XIV
MERGER
14.1 AUTHORITY.................................................................... A-72
14.2 PROCEDURE FOR MERGER OR CONSOLIDATION........................................ A-72
14.3 APPROVAL BY LIMITED PARTNERS OF MERGER OR CONSOLIDATION...................... A-73
</TABLE>
A-iii
<PAGE>
<TABLE>
<S> <C> <C>
14.4 CERTIFICATE OF MERGER........................................................ A-73
14.5 EFFECT OF MERGER............................................................. A-73
ARTICLE XV
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
15.1 RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS................................... A-74
ARTICLE XVI
GENERAL PROVISIONS
16.1 ADDRESSES AND NOTICES........................................................ A-75
16.2 FURTHER ACTION............................................................... A-76
16.3 BINDING EFFECT............................................................... A-76
16.4 INTEGRATION.................................................................. A-76
16.5 CREDITORS.................................................................... A-76
16.6 WAIVER....................................................................... A-76
16.7 COUNTERPARTS................................................................. A-76
16.8 APPLICABLE LAW............................................................... A-77
16.9 INVALIDITY OF PROVISIONS..................................................... A-77
16.10 CONSENT OF PARTNERS.......................................................... A-77
</TABLE>
A-iv
<PAGE>
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF
CORNERSTONE PROPANE PARTNERS, L.P.
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF CORNERSTONE
PROPANE PARTNERS, L.P. dated as of December 17, 1996, is entered into by and
among Cornerstone Propane GP, Inc., a California corporation, as the Managing
General Partner, SYN Inc., a Delaware corporation, as Special General Partner
and Northwestern Growth Corporation, a South Dakota corporation, as the
Organizational Limited Partner, together with any other Persons who become
Partners in the Partnership or parties hereto as provided herein. In
consideration of the covenants, conditions and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"Acquisition" means any transaction in which any Group Member acquires
(through an asset acquisition, merger, stock acquisition or other form of
investment) control over all or a portion of the assets, properties or business
of another Person for the purpose of increasing the operating capacity or
revenues of the Partnership Group from the operating capacity or revenues of the
Partnership Group existing immediately prior to such transaction.
"Additional Book Basis" means the portion of any remaining Carrying Value of
an Adjusted Property that is attributable to positive adjustments made to such
Carrying Value as a result of Book-Up Events. For purposes of determining the
extent that Carrying Value constitutes Additional Book Basis:
(i) Any negative adjustment made to the Carrying Value of an Adjusted
Property as a result of either a Book-Down Event or a Book-Up Event shall
first be deemed to offset or decrease that portion of the Carrying Value of
such Adjusted Property that is attributable to any prior positive
adjustments made thereto pursuant to a Book-Up Event or Book-Down Event.
(ii) If Carrying Value that constitutes Additional Book Basis is reduced
as a result of a Book-Down Event and the Carrying Value of other property is
increased as a result of such Book-Down Event, an allocable portion of any
such increase in Carrying Value shall be treated as Additional Book Basis;
provided that the amount treated as Additional Book Basis pursuant hereto as
a result of such Book-Down Event shall not exceed the amount by which the
Aggregate Remaining Net Positive Adjustments after such Book-Down Event
exceeds the remaining Additional Book Basis attributable to all of the
Partnership's Adjusted Property after such Book-Down Event (determined
without regard to the application of this clause (ii) to such Book-Down
Event).
"Additional Book Basis Derivative Items" means any Book Basis Derivative
Items that are computed with reference to Additional Book Basis. To the extent
that the Additional Book Basis attributable to all of the Partnership's Adjusted
Property as of the beginning of any taxable period exceeds the Aggregate
Remaining Net Positive Adjustments as of the beginning of such period (the
"Excess Additional Book Basis"), the Additional Book Basis Derivative Items for
such period shall be reduced by the amount that bears the same ratio to the
amount of Additional Book Basis Derivative Items determined without regard to
this sentence as the Excess Additional Book Basis bears to the Additional Book
Basis as of the beginning of such period.
A-1
<PAGE>
"Additional Limited Partner" means a Person admitted to the Partnership as a
Limited Partner pursuant to Section 10.4 and who is shown as such on the books
and records of the Partnership.
"Adjusted Capital Account" means the Capital Account maintained for each
Partner as of the end of each fiscal year of the Partnership, (a) increased by
any amounts that such Partner is obligated to restore under the standards set by
Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to
restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5)) and (b)
decreased by (i) the amount of all losses and deductions that, as of the end of
such fiscal year, are reasonably expected to be allocated to such Partner in
subsequent years under Sections 704(e)(2) and 706(d) of the Code and Treasury
Regulation Section 1.751-1(b)(2)(ii), and (ii) the amount of all distributions
that, as of the end of such fiscal year, are reasonably expected to be made to
such Partner in subsequent years in accordance with the terms of this Agreement
or otherwise to the extent they exceed offsetting increases to such Partner's
Capital Account that are reasonably expected to occur during (or prior to) the
year in which such distributions are reasonably expected to be made (other than
increases as a result of a minimum gain chargeback pursuant to Section 6.1(d)(i)
or 6.1(d)(ii)). The foregoing definition of Adjusted Capital Account is intended
to comply with the provisions of Treasury Regulation Section
1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. The
"Adjusted Capital Account" of a Partner in respect of a general partner
interest, a Common Unit, a Subordinated Unit or an Incentive Distribution Right
or any other specified interest in the Partnership shall be the amount which
such Adjusted Capital Account would be if such general partner interest, Common
Unit, Subordinated Unit, Incentive Distribution Right or other interest in the
Partnership were the only interest in the Partnership held by a Partner from and
after the date on which such general partner interest, Common Unit, Subordinated
Unit, Incentive Distribution Right or other interest was first issued.
"Adjusted Operating Surplus" means, with respect to any period, Operating
Surplus generated during such period (a) less (i) any net increase in working
capital borrowings during such period and (ii) any net reduction in cash
reserves for Operating Expenditures during such period not relating to an
Operating Expenditure made during such period, and (b) plus (i) any net decrease
in working capital borrowings during such period and (ii) any net increase in
cash reserves for Operating Expenditures during such period required by any debt
instrument for the repayment of principal, interest or premium. Adjusted
Operating Surplus does not include that portion of Operating Surplus included in
clause (a)(i) of the definition of Operating Surplus.
"Adjusted Property" means any property the Carrying Value of which has been
adjusted pursuant to Section 5.5(d)(i) or 5.5(d)(ii). Once an Adjusted Property
is deemed distributed by, and recontributed to, the Partnership for federal
income tax purposes upon a termination of the Partnership pursuant to Treasury
Regulation Section 1.708-(b)(1)(iv), such property shall thereafter constitute a
Contributed Property until the Carrying Value of such property is subsequently
adjusted pursuant to Section 5.5(d)(i) or 5.5(d)(ii). Upon termination of the
Partnership following the publication of Proposed Treasury Regulation
1.708-1(b)(1)(iv) as a final regulation, an Adjusted Property deemed contributed
to a new partnership in exchange for an interest in the new partnership,
followed by the deemed liquidation of the Partnership, shall thereafter
constitute a Contributed Property until the Carrying Value of such property is
subsequently adjusted pursuant to Section 5.5(d)(i) or 5.5(d)(ii).
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly through one or more intermediaries controls, is
controlled by or is under common control with, the Person in question. As used
herein, the term "control" means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
Person, whether through ownership of voting securities, by contract or
otherwise.
"Aggregate Remaining Net Positive Adjustments" means, as of the end of any
taxable period, the sum of the Remaining Net Positive Adjustments of all the
Partners.
A-2
<PAGE>
"Agreed Allocation" means any allocation, other than a Required Allocation,
of an item of income, gain, loss or deduction pursuant to the provisions of
Section 6.1, including, without limitation, a Curative Allocation (if
appropriate to the context in which the term "Agreed Allocation" is used).
"Agreed Value" of any Contributed Property means the fair market value of
such property or other consideration at the time of contribution as determined
by the Managing General Partner using such reasonable method of valuation as it
may adopt; provided, however, that the Agreed Value of any property deemed
contributed to the Partnership for federal income tax purposes upon termination
and reconstitution thereof pursuant to Section 708 of the Code (whether before
or after finalization of Proposed Treasury Regulation Section 1.708-1(b)(l)(iv))
shall be determined in accordance with Section 5.5(c)(i). Subject to Section
5.5(c)(i), the Managing General Partner shall, in its discretion, use such
method as it deems reasonable and appropriate to allocate the aggregate Agreed
Value of Contributed Properties contributed to the Partnership in a single or
integrated transaction among each separate property on a basis proportional to
the fair market value of each Contributed Property.
"Agreement" means this Amended and Restated Agreement of Limited Partnership
of Cornerstone Propane Partners, L.P., as it may be amended, supplemented or
restated from time to time.
"Assignee" means a Non-citizen Assignee or a Person to whom one or more
Limited Partner Interests have been transferred in a manner permitted under this
Agreement and who has executed and delivered a Transfer Application as required
by this Agreement, but who has not been admitted as a Substituted Limited
Partner.
"Associate" means, when used to indicate a relationship with any Person, (a)
any corporation or organization of which such Person is a director, officer or
partner or is, directly or indirectly, the owner of 20% or more of any class of
voting stock or other voting interest; (b) any trust or other estate in which
such Person has at least a 20% beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity; and (c) any relative or
spouse of such Person, or any relative of such spouse, who has the same
principal residence as such Person.
"Audit Committee" means a committee of the Board of Directors of the
Managing General Partner composed entirely of two or more directors who are
neither officers nor employees of either of the General Partners nor officers,
directors or employees of any Affiliate of the General Partners.
"Available Cash" means, with respect to any Quarter ending prior to the
Liquidation Date,
(a) the sum of (i) all cash and cash equivalents of the Partnership
Group on hand at the end of such Quarter, and (ii) all additional cash and
cash equivalents of the Partnership Group on hand on the date of
determination of Available Cash with respect to such Quarter resulting from
borrowings for working capital purposes made subsequent to the end of such
Quarter, less
(b) the amount of any cash reserves that is necessary or appropriate in
the reasonable discretion of the Managing General Partner to (i) provide for
the proper conduct of the business of the Partnership Group (including
reserves for future capital expenditures and for anticipated future credit
needs of the Partnership Group) subsequent to such Quarter, (ii) comply with
applicable law or any loan agreement, security agreement, mortgage, debt
instrument or other agreement or obligation to which any Group Member is a
party or by which it is bound or its assets are subject or (iii) provide
funds for distributions under Section 6.4 or 6.5 in respect of any one or
more of the next four Quarters; provided, however, that the Managing General
Partner may not establish cash reserves pursuant to (iii) above if the
effect of such reserves would be that the Partnership is unable to
distribute the Minimum Quarterly Distribution on all Common Units with
respect to such Quarter; and, provided further, that disbursements made by a
Group Member or cash reserves established, increased or reduced after the
end of such Quarter but on or before the date of determination of Available
Cash with respect to such Quarter shall be deemed to have been made,
established,
A-3
<PAGE>
increased or reduced, for purposes of determining Available Cash, within
such Quarter if the Managing General Partner so determines.
Notwithstanding the foregoing, "Available Cash" with respect to the Quarter
in which the Liquidation Date occurs and any subsequent Quarter shall equal
zero.
"Book Basis Derivative Items" means any item of income, deduction, gain or
loss included in the determination of Net Income or Net Loss that is computed
with reference to the Carrying Value of an Adjusted Property (e.g.,
depreciation, depletion, or gain or loss with respect to an Adjusted Property).
"Book-Down Event" means an event which triggers a negative adjustment to the
Capital Accounts of the Partners pursuant to Section 5.5(d).
"Book-Tax Disparity" means with respect to any item of Contributed Property
or Adjusted Property, as of the date of any determination, the difference
between the Carrying Value of such Contributed Property or Adjusted Property and
the adjusted basis thereof for federal income tax purposes as of such date. A
Partner's share of the Partnership's Book-Tax Disparities in all of its
Contributed Property and Adjusted Property will be reflected by the difference
between such Partner's Capital Account balance as maintained pursuant to Section
5.5 and the hypothetical balance of such Partner's Capital Account computed as
if it had been maintained strictly in accordance with federal income tax
accounting principles.
"Book-Up Event" means an event which triggers a positive adjustment to the
Capital Accounts of the Partners pursuant to Section 5.5(d).
"Business Day" means Monday through Friday of each week, except that a legal
holiday recognized as such by the government of the United States of America or
the states of New York or California shall not be regarded as a Business Day.
"Capital Account" means the capital account maintained for a Partner
pursuant to Section 5.5. The "Capital Account" of a Partner in respect of a
general partner interest, a Common Unit, a Subordinated Unit, an Incentive
Distribution Right or any other Partnership Interest shall be the amount which
such Capital Account would be if such general partner interest, Common Unit,
Subordinated Unit, Incentive Distribution Right, or other Partnership Interest
were the only interest in the Partnership held by a Partner from and after the
date on which such general partner interest, Common Unit, Subordinated Unit,
Incentive Distribution Right or other Partnership Interest was first issued.
"Capital Contribution" means any cash, cash equivalents or the Net Agreed
Value of Contributed Property that a Partner contributes to the Partnership
pursuant to this Agreement.
"Capital Improvement" means any (a) addition or improvement to the capital
assets owned by any Group Member or (b) acquisition of existing, or the
construction of new, capital assets (including retail distribution outlets,
propane tanks, pipeline systems, storage facilities, appliance showrooms,
training facilities and related assets), in each case made to increase the
operating capacity or revenues of the Partnership Group from the operating
capacity or revenues of the Partnership Group existing immediately prior to such
addition, improvement, acquisition or construction.
"Capital Surplus" has the meaning assigned to such term in Section 6.3(a).
"Carrying Value" means (a) with respect to a Contributed Property, the
Agreed Value of such property reduced (but not below zero) by all depreciation,
amortization and cost recovery deductions charged to the Partners' and
Assignees' Capital Accounts in respect of such Contributed Property, and (b)
with respect to any other Partnership property, the adjusted basis of such
property for federal income tax purposes, all as of the time of determination.
The Carrying Value of any property shall be adjusted from time to time in
accordance with Sections 5.5(d)(i) and 5.5(d)(ii) and to reflect changes,
additions or other adjustments to the Carrying Value for dispositions and
acquisitions of Partnership properties, as deemed appropriate by the Managing
General Partner.
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"Cause" means a court of competent jurisdiction has entered a final,
non-appealable judgment finding the Managing General Partner liable for actual
fraud, gross negligence or willful or wanton misconduct in its capacity as
general partner of the Partnership.
"Certificate" means a certificate, substantially in the form of Exhibit A to
this Agreement or in such other form as may be adopted by the Managing General
Partner in its discretion, issued by the Partnership evidencing ownership of one
or more Common Units or a certificate, in such form as may be adopted by the
Managing General Partner in its discretion, issued by the Partnership evidencing
ownership of one or more other Partnership Securities.
"Certificate of Limited Partnership" means the Certificate of Limited
Partnership of the Partnership filed with the Secretary of State of the State of
Delaware as referenced in Section 2.1, as such Certificate of Limited
Partnership may be amended, supplemented or restated from time to time.
"Citizenship Certification" means a properly completed certificate in such
form as may be specified by the Managing General Partner by which an Assignee or
a Limited Partner certifies that he (and if he is a nominee holding for the
account of another Person, that to the best of his knowledge such other Person)
is an Eligible Citizen.
"Claim" has the meaning assigned to such term in Section 7.13(c).
"Closing Date" means the first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement.
"Closing Price" has the meaning assigned to such term in Section 15.1(a).
"Code" means the Internal Revenue Code of 1986, as amended and in effect
from time to time. Any reference herein to a specific section or sections of the
Code shall be deemed to include a reference to any corresponding provision of
successor law.
"Combined Interest" has the meaning assigned to such term in Section
11.3(a).
"Commission" means the United States Securities and Exchange Commission.
"Common Unit" means a Partnership Security representing a fractional part of
the Partnership Interests of all Limited Partners and Assignees and of the
General Partners (exclusive of their interest as holders of the general partner
interests and the Incentive Distribution Rights) and having the rights and
obligations specified with respect to Common Units in this Agreement. The term
"Common Unit" does not refer to a Subordinated Unit prior to its conversion into
Common Unit pursuant to the terms hereof.
"Common Unit Arrearage" means, with respect to any Common Unit, whenever
issued, as to any Quarter within the Subordination Period, the excess, if any,
of (a) the Minimum Quarterly Distribution with respect to a Common Unit in
respect of such Quarter over (b) the sum of all Available Cash distributed with
respect to a Common Unit in respect of such Quarter pursuant to Section
6.4(a)(i).
"Contributed Property" means each property or other asset, in such form as
may be permitted by the Delaware Act, but excluding cash, contributed to the
Partnership (or deemed contributed to the Partnership on termination and
reconstitution thereof pursuant to Section 708 of the Code, whether before or
after finalization of Proposed Treasury Regulation Section 1.708-1(b)(1)(iv)).
Once the Carrying Value of a Contributed Property is adjusted pursuant to
Section 5.5(d), such property shall no longer constitute a Contributed Property,
but shall be deemed an Adjusted Property.
"Contribution and Conveyance Agreement" means that certain Contribution,
Conveyance and Assumption Agreement, dated as of the Closing Date, among the
General Partners, the Partnership, the Operating Partnership and certain other
parties, together with the additional conveyance documents and instruments
contemplated or referenced thereunder.
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"Cornerstone Propane GP, Inc." means Cornerstone Propane GP, Inc., a
California corporation, which is currently the Managing General Partner of the
Partnership, and is the successor to Cornerstone Propane GP, Inc., a Delaware
corporation.
"Cumulative Common Unit Arrearage" means, with respect to any Common Unit,
whenever issued, and as of the end of any Quarter, the excess, if any, of (a)
the sum resulting from adding together the Common Unit Arrearage as to an
Initial Common Unit for each of the Quarters within the Subordination Period
ending on or before the last day of such Quarter over (b) the sum of any
distributions theretofore made pursuant to Section 6.4(a)(ii) and the second
sentence of Section 6.5 with respect to an Initial Common Unit (including any
distributions to be made in respect of the last of such Quarters).
"Curative Allocation" means any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 6.1(d)(xi).
"Current Market Price" has the meaning assigned to such term in Section
15.1(a).
"Delaware Act" means the Delaware Revised Uniform Limited Partnership Act, 6
Del C. Section17-101, et seq., as amended, supplemented or restated from time to
time, and any successor to such statute.
"Departing Partner" means a former General Partner, either Managing General
Partner or Special General Partner, from and after the effective date of any
withdrawal or removal of such former General Partner pursuant to Section 11.1 or
11.2.
"Economic Risk of Loss" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
"EESC" means Empire Energy SC Corporation, a Delaware corporation.
"Eligible Citizen" means a Person qualified to own interests in real
property in jurisdictions in which any Group Member does business or proposes to
do business from time to time, and whose status as a Limited Partner or Assignee
does not or would not subject such Group Member to a significant risk of
cancellation or forfeiture of any of its properties or any interest therein.
"Event of Withdrawal" has the meaning assigned to such term in Section
11.1(a).
"Final Subordinated Units" has the meaning assigned to such term in Section
6.1(d)(x).
"First Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(D).
"First Target Distribution" means $0.594 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on March 31,
1997, it means the product of $0.594 multiplied by a fraction of which the
numerator is the number of days in such period, and of which the denominator is
90), subject to adjustment in accordance with Sections 6.6 and 6.9.
"General Partners" means the Managing General Partner and the Special
General Partner and their successors and permitted assigns as general partners
of the Partnership.
"Group" means a Person that with or through any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent solicitation made
to 10 or more Persons) or disposing of any Partnership Securities with any other
Person that beneficially owns, or whose Affiliates or Associates beneficially
own, directly or indirectly, Partnership Securities.
"Group Member" means a member of the Partnership Group.
"Holder" as used in Section 7.13, has the meaning assigned to such term in
Section 7.13(a).
"Incentive Distribution Right" means a non-voting limited partner
Partnership Interest issued to the General Partners in connection with the
transfer of their assets to the Partnership pursuant to Section 5.2, which
Partnership Interest shall confer upon the holder thereof only the rights and
obligations specifically
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provided in this Agreement with respect to Incentive Distribution Rights (and no
other rights otherwise available to or other obligations of holders of a
Partnership Interest).
"Incentive Distributions" means any amount of cash distributed to the
holders of the Incentive Distribution Rights pursuant to Sections 6.4(a)(v),
(vi) and (vii) and 6.4(b)(iii), (iv) and (v).
"Indemnified Persons" has the meaning assigned to such term in Section
7.13(c).
"Indemnitee" means (a) any General Partner, any Departing Partner and any
Person who is or was an Affiliate of any General Partner or any Departing
Partner, (b) any Person who is or was a director, officer, employee, agent or
trustee of a Group Member, (c) any Person who is or was an officer, member,
partner, director, employee, agent or trustee of any General Partner or any
Departing Partner or any Affiliate of the General Partner or any Departing
Partner, or any Affiliate of any such Person and (d) any Person who is or was
serving at the request of any General Partner or any Departing Partner or any
such Affiliate as a director, officer, employee, member, partner, agent,
fiduciary or trustee of another Person; provided, that a Person shall not be an
Indemnitee by reason of providing, on a fee-for-services basis, trustee,
fiduciary or custodial services.
"Initial Common Units" means the Common Units sold in the Initial Offering.
"Initial Limited Partners" means the General Partners (with respect to the
Subordinated Units and the Incentive Distribution Rights received by them
pursuant to Section 5.2), EESC (with respect to the Subordinated Units it
receives pursuant to Section 5.2) and the Underwriters, in each case upon being
admitted to the Partnership in accordance with Section 10.1.
"Initial Offering" means the initial offering and sale of Common Units to
the public, as described in the Registration Statement.
"Initial Unit Price" means (a) with respect to the Common Units and the
Subordinated Units, the initial public offering price per Common Unit at which
the Underwriters offered the Common Units to the public for sale as set forth on
the cover page of the prospectus included as part of the Registration Statement
and first issued at or after the time the Registration Statement first became
effective or (b) with respect to any other class or series of Units, the price
per Unit at which such class or series of Units is initially sold by the
Partnership, as determined by the Managing General Partner, in each case
adjusted as the Managing General Partner determines to be appropriate to give
effect to any distribution, subdivision or combination of Units.
"Interim Capital Transactions" means the following transactions if they
occur prior to the Liquidation Date: (a) borrowings, refinancings or refundings
of indebtedness and sales of debt securities (other than for working capital
purposes and other than for items purchased on open account in the ordinary
course of business) by any Group Member; (b) sales of equity interests by any
Group Member (including Initial Common Units sold to the Underwriters pursuant
to the exercise of the Over-allotment Option); and (c) sales or other voluntary
or involuntary dispositions of any assets of any Group Member other than (x)
sales or other dispositions of inventory in the ordinary course of business, (y)
sales or other dispositions of other current assets, including receivables and
accounts in the ordinary course of business, and (z) sales or other dispositions
of assets as part of normal retirements or replacements.
"Issue Price" means the price at which a Unit is purchased from the
Partnership, after taking into account any sales commission or underwriting
discount charged to the Partnership.
"Limited Partner" means, unless the context otherwise requires, (a) the
Organizational Limited Partner, each Initial Limited Partner, each Substituted
Limited Partner, each Additional Limited Partner and any Partner upon the change
of its status from General Partner to Limited Partner pursuant to Section 11.3
or (b) solely for purposes of Articles V, VI, VII and IX and Sections 12.3 and
12.4, each Assignee.
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"Limited Partner Interest" means the ownership interest of a Limited Partner
or Assignee in the Partnership, which may be evidenced by Common Units,
Subordinated Units, Incentive Distribution Rights or other Partnership
Securities or a combination thereof or interest therein, and includes any and
all benefits to which such Limited Partner or Assignee is entitled as provided
in this Agreement, together with all obligations of such Limited Partner or
Assignee to comply with the terms and provisions of this Agreement.
"Liquidation Date" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in clauses (a) and (b) of
the first sentence of Section 12.2, the date on which the applicable time period
during which the holders of Outstanding Units have the right to elect to
reconstitute the Partnership and continue its business has expired without such
an election being made, and (b) in the case of any other event giving rise to
the dissolution of the Partnership, the date on which such event occurs.
"Liquidator" means one or more Persons selected by the Managing General
Partner to perform the functions described in Section 12.3 as liquidating
trustee of the Partnership within the meaning of the Delaware Act.
"Managing General Partner" means Cornerstone Propane GP, Inc. and its
predecessors, successors and permitted assigns as general partner of the
Partnership.
"Merger Agreement" has the meaning assigned to such term in Section 14.1.
"Minimum Quarterly Distribution" means $0.54 per Unit per Quarter (or with
respect to the period commencing on the Closing Date and ending on March 31,
1997, it means the product of $0.54 multiplied by a fraction of which the
numerator is the number of days in such period and of which the denominator is
90), subject to adjustment in accordance with Sections 6.6 and 6.9.
"National Securities Exchange" means an exchange registered with the
Commission under Section 6(a) of the Securities Exchange Act of 1934, as
amended, supplemented or restated from time to time, and any successor to such
statute, or the Nasdaq Stock Market or any successor thereto.
"Net Agreed Value" means, (a) in the case of any Contributed Property, the
Agreed Value of such property reduced by any liabilities either assumed by the
Partnership upon such contribution or to which such property is subject when
contributed, and (b) in the case of any property distributed to a Partner or
Assignee by the Partnership, the Partnership's Carrying Value of such property
(as adjusted pursuant to Section 5.5(d)(ii)) at the time such property is
distributed, reduced by any indebtedness either assumed by such Partner or
Assignee upon such distribution or to which such property is subject at the time
of distribution, in either case, as determined under Section 752 of the Code.
"Net Income" means, for any taxable year, the excess, if any, of the
Partnership's items of income and gain (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of loss and deduction (other than
those items taken into account in the computation of Net Termination Gain or Net
Termination Loss) for such taxable year. The items included in the calculation
of Net Income shall be determined in accordance with Section 5.5(b) and shall
not include any items specially allocated under Section 6.1(d); provided that
the determination of the items that have been specially allocated under Section
6.1(d) shall be made as if Section 6.1(d)(xii) were not in this Agreement.
"Net Loss" means, for any taxable year, the excess, if any, of the
Partnership's items of loss and deduction (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of income and gain (other than
those items taken into account in the computation of Net Termination Gain or Net
Termination Loss) for such taxable year. The items included in the calculation
of Net Loss shall be determined in accordance with Section 5.5(b) and shall not
include any items specially allocated under Section 6.1(d); provided that the
determination of the items that have been specially allocated under Section
6.1(d) shall be made as if Section 6.1(d)(xii) were not in this Agreement.
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"Net Positive Adjustments" means, with respect to any Partner, the excess,
if any, of the total positive adjustments over the total negative adjustments
made to the Capital Account of such Partner pursuant to Book-Up Events and
Book-Down Events.
"Net Termination Gain" means, for any taxable year, the sum, if positive, of
all items of income, gain, loss or deduction recognized by the Partnership after
the Liquidation Date. The items included in the determination of Net Termination
Gain shall be determined in accordance with Section 5.5(b) and shall not include
any items of income, gain or loss specially allocated under Section 6.1(d).
"Net Termination Loss" means, for any taxable year, the sum, if negative, of
all items of income, gain, loss or deduction recognized by the Partnership after
the Liquidation Date. The items included in the determination of Net Termination
Loss shall be determined in accordance with Section 5.5(b) and shall not include
any items of income, gain or loss specially allocated under Section 6.1(d).
"Non-citizen Assignee" means a Person whom the Managing General Partner has
determined in its discretion does not constitute an Eligible Citizen and as to
whose Partnership Interest the Managing General Partner has become the
Substituted Limited Partner, pursuant to Section 4.10.
"Nonrecourse Built-in Gain" means with respect to any Contributed Properties
or Adjusted Properties that are subject to a mortgage or pledge securing a
Nonrecourse Liability, the amount of any taxable gain that would be allocated to
the Partners pursuant to Sections 6.2(b)(i)(A), 6.2(b)(ii)(A) and 6.2(b)(iii) if
such properties were disposed of in a taxable transaction in full satisfaction
of such liabilities and for no other consideration.
"Nonrecourse Deductions" means any and all items of loss, deduction or
expenditures (described in Section 705(a)(2)(B) of the Code) that, in accordance
with the principles of Treasury Regulation Section 1.704-2(b), are attributable
to a Nonrecourse Liability.
"Nonrecourse Liability" has the meaning set forth in Treasury Regulation
Section 1.752-1(a)(2).
"Notes" means the $220 million of Senior Secured Notes issued by the
Operating Partnership in a private placement in conjunction with the Initial
Offering.
"Notice of Election to Purchase" has the meaning assigned to such term in
Section 15.1(b) hereof.
"NPS Note" means the note evidencing the loan from Northwestern Public
Service Company to the Partnership on the Closing Date to finance certain fees
and expenses incurred in connection with the Initial Offering and the issuance
of the Notes.
"Operating Expenditures" means all Partnership Group expenditures,
including, but not limited to, taxes, reimbursements of the General Partners,
debt service payments, and capital expenditures, subject to the following:
(a) Payments (including prepayments) of principal of and premium on
indebtedness shall not be an Operating Expenditure if the payment is (i)
required in connection with the sale or other disposition of assets or (ii)
made in connection with the refinancing or refunding of indebtedness with
the proceeds from new indebtedness or from the sale of equity interests. For
purposes of the foregoing, at the election and in the reasonable discretion
of the Managing General Partner, any payment of principal or premium shall
be deemed to be refunded or refinanced by any indebtedness incurred or to be
incurred by the Partnership Group within 180 days before or after such
payment to the extent of the principal amount of such indebtedness.
(b) Operating Expenditures shall not include (i) capital expenditures
made for Acquisitions or for Capital Improvements, (ii) payment of
transaction expenses relating to Interim Capital Transactions or (iii)
distributions to Partners. Where capital expenditures are made in part for
Acquisitions or for Capital Improvements and in part for other purposes, the
Managing General Partner's good faith allocation between the amounts paid
for each shall be conclusive.
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"Operating Partnership" means Cornerstone Propane L.P., a Delaware limited
partnership, and any successors thereto.
"Operating Partnership Agreement" means the Amended and Restated Agreement
of Limited Partnership of the Operating Partnership, as it may be amended,
supplemented or restated from time to time.
"Operating Surplus," means, with respect to any period ending prior to the
Liquidation Date, on a cumulative basis and without duplication,
(a) the sum of (i) $25 million plus all cash and cash equivalents of the
Partnership Group on hand as of the close of business on the Closing Date,
(ii) all cash receipts of the Partnership Group for the period beginning on
the Closing Date and ending with the last day of such period, other than
cash receipts from Interim Capital Transactions (except to the extent
specified in Section 6.5) and (iii) all cash receipts of the Partnership
Group after the end of such period but on or before the date of
determination of Operating Surplus with respect to such period resulting
from borrowings for working capital purposes, less
(b) the sum of (i) Operating Expenditures for the period beginning on
the Closing Date and ending with the last day of such period and (ii) the
amount of cash reserves that is necessary or advisable in the reasonable
discretion of the Managing General Partner to provide funds for future
Operating Expenditures, provided, however, that disbursements made
(including contributions to a Group Member or disbursements on behalf of a
Group Member) or cash reserves established, increased or reduced after the
end of such period but on or before the date of determination of Available
Cash with respect to such period shall be deemed to have been made,
established, increased or reduced, for purposes of determining Operating
Surplus, within such period if the Managing General Partner so determines.
Notwithstanding the foregoing, "Operating Surplus" with respect to the
Quarter in which the Liquidation Date occurs and any subsequent Quarter shall
equal zero.
"Opinion of Counsel" means a written opinion of counsel (who may be regular
counsel to the Partnership or the General Partners or any of their Affiliates)
acceptable to the Managing General Partner in its reasonable discretion.
"Option Closing Date" has the meaning assigned to such term in the
Underwriting Agreement.
"Organizational Limited Partner" means Northwestern Growth Corporation in
its capacity as the organizational limited partner of the Partnership pursuant
to this Agreement.
"Outstanding" means, with respect to Partnership Securities, all Partnership
Securities that are issued by the Partnership and reflected as outstanding on
the Partnership's books and records as of the date of determination; provided,
however, that if at any time any Person or Group (other than the Managing
General Partner or its Affiliates) beneficially owns 20% or more of any
Outstanding Partnership Securities of any class then Outstanding, all
Partnership Securities owned by such Person or Group shall not be voted on any
matter and shall not be considered to be Outstanding when sending notices of a
meeting of Limited Partners to vote on any matter (unless otherwise required by
law), calculating required votes, determining the presence of a quorum or for
other similar purposes under this Agreement, except that Common Units so owned
shall be considered to be Outstanding for purposes of Section 11.1(b)(iv) (such
Common Units shall not, however, be treated as a separate class of Partnership
Securities for purposes of this Agreement).
"Over-allotment Option" means the over-allotment option granted to the
Underwriters by the Partnership pursuant to the Underwriting Agreement.
"Parity Units" means Common Units and all other Units having rights to
distributions or in liquidation ranking on a parity with the Common Units.
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"Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(4).
"Partner Nonrecourse Debt Minimum Gain" has the meaning set forth in
Treasury Regulation Section 1.704-2(i)(2).
"Partner Nonrecourse Deductions" means any and all items of loss, deduction
or expenditure (including, without limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with the principles of
Treasury Regulation Section 1.704-2(i), are attributable to a Partner
Nonrecourse Debt.
"Partners" means the General Partners, the Limited Partners and the holders
of Common Units, Subordinated Units and Incentive Distribution Rights.
"Partnership" means Cornerstone Propane Partners, L.P., a Delaware limited
partnership, and any successors thereto.
"Partnership Group" means the Partnership, the Operating Partnership and any
Subsidiary of either such entity, treated as a single consolidated entity.
"Partnership Interest" means an interest in the Partnership, which shall
include general partner interests, Common Units, Subordinated Units, Incentive
Distribution Rights and other Partnership Securities, or a combination thereof
or interest therein, as the case may be.
"Partnership Minimum Gain" means that amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
"Partnership Security" means any class or series of Unit, any option, right,
warrant or appreciation rights relating thereto, or any other type of equity
interest that the Partnership may lawfully issue, or any unsecured or secured
debt obligation of the Partnership that is convertible into any class or series
of equity interests of the Partnership.
"Percentage Interest" means as of the date of such determination (a) as to
the General Partners (in their capacity as General Partners without reference to
any Units or limited partner interests held by them), an aggregate 1.0%, (b) as
to any Unitholder or Assignee holding Units, the product obtained by multiplying
(i) 99% less the percentage applicable to paragraph (c) by (ii) the quotient
obtained by dividing (A) the number of Units held by such Unitholder or Assignee
by (B) the total number of all Outstanding Units, and (c) as to the holders of
additional Partnership Securities issued by the Partnership in accordance with
Section 5.6, the percentage established as a part of such issuance. The
Percentage Interest with respect to an Incentive Distribution Right shall at all
times be zero.
"Person" means an individual or a corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization, association,
government agency or political subdivision thereof or other entity.
"Per Unit Capital Amount" means, as of any date of determination, the
Capital Account, stated on a per Unit basis, underlying any Unit held by a
Person other than the General Partners or any Affiliate of a General Partner who
holds Units.
"Proportionate Share" means (i) with respect to the Managing General
Partner, the percentage share equal to the quotient of (A) the Net Agreed Value
of the assets contributed by the Managing General Partner to the Partnership
reduced by the value of the general partner interest and Incentive Distribution
Rights received by the Managing General Partner divided by (B) the sum of the
amount described in (A) above plus the Net Agreed Value of the assets
contributed by EESC to the Partnership and (ii) with respect to EESC, the
percentage share equal to the quotient of (A) the Net Agreed Value of the assets
contributed by EESC to the Partnership divided by the amount described in (B)
above.
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"Pro Rata" means (a) when modifying Units or any class thereof, apportioned
equally among all designated Units in accordance with their relative Percentage
Interests, (b) when modifying Partners and Assignees, apportioned among all
Partners and Assignees in accordance with their respective Percentage Interests,
(c) when modifying holders of Incentive Distribution Rights, apportioned equally
among all holders of Incentive Distribution Rights in accordance with the
relative number of Incentive Distribution Rights held by each such holder and
(d) when modifying the General Partners, apportioned 76.8645% to the Managing
General Partner and 23.1355% to the Special General Partner, provided, however,
to the extent an allocation of losses pursuant to Section 6.1(b) or Section
6.1(c)(ii) would cause the Special General Partner to have a deficit balance in
its Adjusted Capital Account at the end of such taxable year (or increase any
existing deficit in its Adjusted Capital Account), then Pro Rata shall mean 100%
to the Managing General Partner and zero to the Special General Partner.
"Purchase Date" means the date determined by the Managing General Partner as
the date for purchase of all Outstanding Units (other than Units owned by the
General Partners and their Affiliates) pursuant to Article XV.
"Quarter" means, unless the context requires otherwise, a fiscal quarter of
the Partnership.
"Recapture Income" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Sections 734 or 743 of the Code)
upon the disposition of any property or asset of the Partnership, which gain is
characterized as ordinary income because it represents the recapture of
deductions previously taken with respect to such property or asset.
"Record Date" means the date established by the Managing General Partner for
determining (a) the identity of the Record Holders entitled to notice of, or to
vote at, any meeting of Limited Partners or entitled to vote by ballot or give
approval of Partnership action in writing without a meeting or entitled to
exercise rights in respect of any lawful action of Limited Partners or (b) the
identity of Record Holders entitled to receive any report or distribution or to
participate in any offer.
"Record Holder" means the Person in whose name a Common Unit is registered
on the books of the Transfer Agent as of the opening of business on a particular
Business Day, or with respect to other Partnership Securities, the Person in
whose name any such other Partnership Security is registered on the books which
the Managing General Partner has caused to be kept as of the opening of business
on such Business Day.
"Redeemable Interests" means any Partnership Interests for which a
redemption notice has been given, and has not been withdrawn, pursuant to
Section 4.11.
"Registration Statement" means the Registration Statement on Form S-1
(Registration No. 333-13879) as it has been or as it may be amended or
supplemented from time to time, filed by the Partnership with the Commission
under the Securities Act to register the offering and sale of the Common Units
in the Initial Offering.
"Remaining Net Positive Adjustments" means as of the end of any taxable
period, (i) with respect to the Unitholders holding Common Units or Subordinated
Units, the excess of (a) the Net Positive Adjustments of the Unitholders holding
Common Units or Subordinated Units as of the end of such period over (b) the sum
of those Partners' Share of Additional Book Basis Derivative Items for each
prior taxable period, (ii) with respect to the General Partners (as holders of
the general partner interests), the excess of (a) the Net Positive Adjustments
of the General Partners as of the end of such period over (b) the sum of the
General Partners' Share of Additional Book Basis Derivative Items with respect
to the general partner interests for each prior taxable period, and (iii) with
respect to the holders of Incentive Distribution Rights, the excess of (a) the
Net Positive Adjustments of the holders of Incentive Distribution Rights as of
the end of such period over (b) the sum of the Share of Additional Book Basis
Derivative Items of the holders of the Incentive Distribution Rights for each
prior taxable period.
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"Required Allocations" means (a) any limitation imposed on any allocation of
Net Losses or Net Termination Losses under Section 6.1(b) or 6.1(c)(ii) and (b)
any allocation of an item of income, gain, loss or deduction pursuant to Section
6.1(d)(i), 6.1(d)(ii), 6.1(d)(iv), 6.1(d)(vii) or 6.1(d)(ix).
"Residual Gain" or "Residual Loss" means any item of gain or loss, as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of a Contributed Property
or Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Section 6.2(b)(i)(A) or 6.2(b)(ii)(A), respectively, to eliminate
Book-Tax Disparities.
"Second Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(E).
"Second Target Distribution" means $0.700 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on March 31,
1997, it means the product of $0.700 multiplied by a fraction of which the
numerator is equal to the number of days in such period and of which the
denominator is 90), subject to adjustment in accordance with Sections 6.6 and
6.9.
"Securities Act" means the Securities Act of 1933, as amended, supplemented
or restated from time to time and any successor to such statute.
"Share of Additional Book Basis Derivative Items" means in connection with
any allocation of Additional Book Basis Derivative Items for any taxable period,
(i) with respect to the Unitholders holding Common Units or Subordinated Units,
the amount that bears the same ratio to such Additional Book Basis Derivative
Items as the Unitholders' Remaining Net Positive Adjustments as of the end of
such period bears to the Aggregate Remaining Net Positive Adjustments as of that
time, (ii) with respect to the General Partners (as holders of the general
partner interests), the amount that bears the same ratio to such additional Book
Basis Derivative Items as the General Partners' Remaining Net Positive
Adjustments as of the end of such period bears to the Aggregate Remaining Net
Positive Adjustment as of that time, and (iii) with respect to the Partners
holding Incentive Distribution Rights, the amount that bears the same ratio to
such Additional Book Basis Derivative Items as the Remaining Net Positive
Adjustments of the Partners holding the Incentive Distribution Rights as of the
end of such period bears to the Aggregate Remaining Net Positive Adjustments as
of that time.
"Special Approval" means approval by a majority of the members of the Audit
Committee.
"Special General Partner" means SYN and its successors and assigns as
special general partner of the Partnership.
"Subordinated Unit" means a Unit representing a fractional part of the
Partnership Interests of all Limited Partners and Assignees (other than of
holders of the Incentive Distribution Rights) and having the rights and
obligations specified with respect to Subordinated Units in this Agreement. The
term "Subordinated Unit" as used herein does not include a Common Unit.
"Subordination Period" means the period commencing on the Closing Date and
ending on the first to occur of the following dates:
(a) the first day of any Quarter beginning after December 31, 2001 in
respect of which (i) (A) distributions of Available Cash from Operating
Surplus on each of the Outstanding Common Units and Subordinated Units with
respect to each of the three consecutive, non-overlapping four-Quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all Outstanding Common Units and
Subordinated Units during such periods and (B) the Adjusted Operating
Surplus generated during each of the three consecutive, non-overlapping
four-Quarter periods immediately preceding such date equaled or exceeded the
sum of the Minimum Quarterly Distribution on all of the Outstanding Common
Units and Subordinated Units, plus the related distribution on the general
partner interests in the Partnership and in the Operating Partnership,
during such periods and (ii) there are no Cumulative Common Unit Arrearages;
and
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(b) the date on which the Managing General Partner is removed as general
partner of the Partnership upon the requisite vote by holders of Outstanding
Units under circumstances where Cause does not exist and Units held by the
General Partners and their Affiliates are not voted in favor of such
removal.
"Subsidiary" means, with respect to any Person, (a) a corporation of which
more than 50% of the voting power of shares entitled (without regard to the
occurrence of any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or indirectly, at the date
of determination, by such Person, by one or more Subsidiaries of such Person or
a combination thereof, (b) a partnership (whether general or limited) in which
such Person or a Subsidiary of such Person is, at the date of determination, a
general or limited partner of such partnership, but only if more than 50% of the
partnership interests of such partnership (considering all of the partnership
interests of the partnership as a single class) is owned, directly or
indirectly, at the date of determination, by such Person, by one or more
Subsidiaries of such Person, or a combination thereof, or (c) any other Person
(other than a corporation or a partnership) in which such Person, one or more
Subsidiaries of such Person, or a combination thereof, directly or indirectly,
at the date of determination, has (i) at least a majority ownership interest or
(ii) the power to elect or direct the election of a majority of the directors or
other governing body of such Person.
"Substituted Limited Partner" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 10.2 in place of and with all the
rights of a Limited Partner and who is shown as a Limited Partner on the books
and records of the Partnership.
"Surviving Business Entity" has the meaning assigned to such term in Section
14.2(b).
"SYN" means SYN Inc., a Delaware corporation.
"Third Target Distribution" means $0.900 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on March 31,
1997, it means the product of $0.900 multiplied by a fraction of which the
numerator is equal to the number of days in such period and of which the
denominator is 90), subject to adjustment in accordance with Sections 6.6 and
6.9.
"Trading Day" has the meaning assigned to such term in Section 15.1(a).
"Transfer" has the meaning assigned to such term in Section 4.4(a).
"Transfer Agent" means such bank, trust company or other Person (including
the Managing General Partner or one of its Affiliates) as shall be appointed
from time to time by the Partnership to act as registrar and transfer agent for
the Common Units.
"Transfer Application" means an application and agreement for transfer
Limited Partner Interests in the form set forth on the back of a Certificate or
in a form substantially to the same effect in a separate instrument.
"Underwriter" means each Person named as an underwriter in Schedule I to the
Underwriting Agreement who purchases Common Units pursuant thereto.
"Underwriting Agreement" means the Underwriting Agreement dated December 11,
1996, among the Underwriters, the Partnership and certain other parties,
providing for the purchase of Common Units by such Underwriters.
"Unit" means a Partnership Interest of a Limited Partner or Assignee in the
Partnership and shall include Common Units and Subordinated Units but shall not
include (x) the general partner interests in the Partnership or (y) Incentive
Distribution Rights.
"Unitholders" means the holders of Common Units and Subordinated Units.
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"Unit Majority" means, during the Subordination Period, at least a majority
of the Outstanding Common Units voting as a class and at least a majority of the
Outstanding Subordinated Units voting as a class, and thereafter, at least a
majority of the Outstanding Units.
"Unpaid MQD" has the meaning assigned to such term in Section 6.1(c)(i)(B).
"Unrealized Gain" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the fair market value
of such property as of such date (as determined under Section 5.5(d)) over (b)
the Carrying Value of such property as of such date (prior to any adjustment to
be made pursuant to Section 5.5(d) as of such date).
"Unrealized Loss" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the Carrying Value of
such property as of such date (prior to any adjustment to be made pursuant to
Section 5.5(d) as of such date) over (b) the fair market value of such property
as of such date (as determined under Section 5.5(d)).
"Unrecovered Capital" means at any time, with respect to a Unit, the Initial
Unit Price less the sum of all distributions constituting Capital Surplus
theretofore made in respect of an Initial Common Unit and any distributions of
cash (or the Net Agreed Value of any distributions in kind) in connection with
the dissolution and liquidation of the Partnership theretofore made in respect
of an Initial Common Unit, adjusted as the Managing General Partner determines
to be appropriate to give effect to any distribution, subdivision or combination
of such Units.
"U.S. GAAP" means United States Generally Accepted Accounting Principles
consistently applied.
"Withdrawal Opinion of Counsel" has the meaning assigned to such term in
Section 11.1(b).
1.2. CONSTRUCTION
Unless the context requires otherwise: (a) any pronoun used in this
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular form of nouns, pronouns and verbs shall include the plural and
vice versa; (b) references to Articles and Sections refer to Articles and
Sections of this Agreement; and (c) "include" or "includes" means includes,
without limitation, and "including" means including, without limitation.
ARTICLE II
ORGANIZATION
2.1 FORMATION
The Managing General Partner and the Organizational Limited Partner have
previously formed the Partnership as a limited partnership pursuant to the
provisions of the Delaware Act and hereby amend and restate the original
Agreement of Limited Partnership of Cornerstone Propane Partners, L.P. in its
entirety. This amendment and restatement shall become effective on the date of
this Agreement. Except as expressly provided to the contrary in this Agreement,
the rights, duties (including fiduciary duties), liabilities and obligations of
the Partners and the administration, dissolution and termination of the
Partnership shall be governed by the Delaware Act. All Partnership Interests
shall constitute personal property of the owner thereof for all purposes and a
Partner has no interest in specific Partnership property.
2.2 NAME
The name of the Partnership shall be "Cornerstone Propane Partners, L.P."
The Partnership's business may be conducted under any other name or names deemed
necessary or appropriate by the Managing General Partner in its sole discretion,
including the name of the Managing General Partner. The
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words "Limited Partnership," "L.P.," "Ltd." or similar words or letters shall be
included in the Partnership's name where necessary for the purpose of complying
with the laws of any jurisdiction that so requires. The Managing General Partner
in its discretion may change the name of the Partnership at any time and from
time to time and shall notify the Limited Partners of such change in the next
regular communication to the Limited Partners.
2.3 REGISTERED OFFICE; REGISTERED AGENT; PRINCIPAL OFFICE; OTHER OFFICES
Unless and until changed by the Managing General Partner, the registered
office of the Partnership in the State of Delaware shall be located at 1209
Orange Street, New Castle County, Wilmington, Delaware 19801, and the registered
agent for service of process on the Partnership in the State of Delaware at such
registered office shall be The Corporation Trust Company. The principal office
of the Partnership shall be located at 432 Westridge Drive, Watsonville,
California 95076 or such other place as the Managing General Partner may from
time to time designate by notice to the Limited Partners. The Partnership may
maintain offices at such other place or places within or outside the State of
Delaware as the Managing General Partner deems necessary or appropriate. The
address of the Managing General Partner shall be 432 Westridge Drive,
Watsonville, California 95076 or such other place as the Managing General
Partner may from time to time designate by notice to the Limited Partners.
2.4 PURPOSE AND BUSINESS
The purpose and nature of the business to be conducted by the Partnership
shall be to (a) serve as a limited partner in the Operating Partnership and, in
connection therewith, to exercise all the rights and powers conferred upon the
Partnership as a limited partner in the Operating Partnership pursuant to the
Operating Partnership Agreement or otherwise, (b) engage directly in, or enter
into or form any corporation, partnership, joint venture, limited liability
company or other arrangement to engage indirectly in, any business activity that
the Operating Partnership is permitted to engage in by the Operating Partnership
Agreement and, in connection therewith, to exercise all of the rights and powers
conferred upon the Partnership pursuant to the agreements relating to such
business activity, (c) engage directly in, or enter into or form any
corporation, partnership, joint venture, limited liability company or other
arrangement to engage indirectly in, any business activity that is approved by
the Managing General Partner and which lawfully may be conducted by a limited
partnership organized pursuant to the Delaware Act and, in connection therewith,
to exercise all of the rights and powers conferred upon the Partnership pursuant
to the agreements relating to such business activity; provided, however, that
the Managing General Partner reasonably determines, as of the date of the
acquisition or commencement of such activity, that such activity (i) generates
"qualifying income" (as such term is defined pursuant to Section 7704 of the
Code) or (ii) enhances the operations of an activity of the Operating
Partnership or a Partnership activity that generates qualifying income, and (d)
do anything necessary or appropriate to the foregoing, including the making of
capital contributions or loans to a Group Member. The Managing General Partner
has no obligation or duty to the Partnership, the Limited Partners, or the
Assignees to propose or approve, and in its discretion may decline to propose or
approve, the conduct by the Partnership of any business.
2.5 POWERS
The Partnership shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described in Section
2.4 and for the protection and benefit of the Partnership.
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2.6 POWER OF ATTORNEY
(a) The Special General Partner, each Limited Partner and each Assignee
hereby constitutes and appoints the Managing General Partner and, if a
Liquidator shall have been selected pursuant to Section 12.3, the Liquidator,
severally (and any successor to the Liquidator by merger, transfer, assignment,
election or otherwise) and each of their authorized officers and
attorneys-in-fact, as the case may be, with full power of substitution, as his
true and lawful agent and attorney-in-fact, with full power and authority in his
name, place and stead, to:
(i) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (A) all certificates, documents and other
instruments (including this Agreement and the Certificate of Limited
Partnership and all amendments or restatements hereof or thereof) that the
Managing General Partner or the Liquidator deems necessary or appropriate to
form, qualify or continue the existence or qualification of the Partnership
as a limited partnership (or a partnership in which the limited partners
have limited liability) in the State of Delaware and in all other
jurisdictions in which the Partnership may conduct business or own property;
(B) all certificates, documents and other instruments that the Managing
General Partner or the Liquidator deems necessary or appropriate to reflect,
in accordance with its terms, any amendment, change, modification or
restatement of this Agreement; (C) all certificates, documents and other
instruments (including conveyances and a certificate of cancellation) that
the Managing General Partner or the Liquidator deems necessary or
appropriate to reflect the dissolution and liquidation of the Partnership
pursuant to the terms of this Agreement; (D) all certificates, documents and
other instruments relating to the admission, withdrawal, removal or
substitution of any Partner pursuant to, or other events described in,
Article IV, X, XI or XII; (E) all certificates, documents and other
instruments relating to the determination of the rights, preferences and
privileges of any class or series of Partnership Securities issued pursuant
to Section 5.6; and (F) all certificates, documents and other instruments
(including agreements and a certificate of merger) relating to a merger or
consolidation of the Partnership pursuant to Article XIV; and
(ii) execute, swear to, acknowledge, deliver, file and record all
ballots, consents, approvals, waivers, certificates, documents and other
instruments necessary or appropriate, in the discretion of the Managing
General Partner or the Liquidator, to make, evidence, give, confirm or
ratify any vote, consent, approval, agreement or other action that is made
or given by the Partners hereunder or is consistent with the terms of this
Agreement or is necessary or appropriate, in the discretion of the Managing
General Partner or the Liquidator, to effectuate the terms or intent of this
Agreement; provided, that when required by Section 13.3 or any other
provision of this Agreement that establishes a percentage of the Limited
Partners or of the Limited Partners of any class or series required to take
any action, the Managing General Partner and the Liquidator may exercise the
power of attorney made in this Section 2.6(a)(ii) only after the necessary
vote, consent or approval of the Limited Partners or of the Limited Partners
of such class or series, as applicable.
Nothing contained in this Section 2.6(a) shall be construed as authorizing
the Managing General Partner to amend this Agreement except in accordance with
Article XIII or as may be otherwise expressly provided for in this Agreement.
(b) The foregoing power of attorney is hereby declared to be irrevocable and
a power coupled with an interest, and it shall survive and, to the maximum
extent permitted by law, not be affected by the subsequent death, incompetency,
disability, incapacity, dissolution, bankruptcy or termination of any Limited
Partner or Assignee and the transfer of all or any portion of such Special
General Partner's, Limited Partner's or Assignee's Partnership Interest and
shall extend to such Special General Partner's, Limited Partner's or Assignee's
heirs, successors, assigns and personal representatives. Each such Special
General Partner, Limited Partner or Assignee hereby agrees to be bound by any
representation made by the Managing General Partner or the Liquidator acting in
good faith pursuant to such power of attorney;
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and each such Special General Partner, Limited Partner or Assignee, to the
maximum extent permitted by law, hereby waives any and all defenses that may be
available to contest, negate or disaffirm the action of the Managing General
Partner or the Liquidator taken in good faith under such power of attorney. Each
Special General Partner, Limited Partner or Assignee shall execute and deliver
to the Managing General Partner or the Liquidator, within 15 days after receipt
of the request therefor, such further designation, powers of attorney and other
instruments as the Managing General Partner or the Liquidator deems necessary to
effectuate this Agreement and the purposes of the Partnership.
2.7 TERM
The term of the Partnership commenced upon the filing of the Certificate of
Limited Partnership in accordance with the Delaware Act and shall continue in
existence until the close of Partnership business on December 31, 2086 or until
the earlier dissolution of the Partnership in accordance with the provisions of
Article XII. The existence of the Partnership as a separate legal entity shall
continue until the cancellation of the Certificate of Limited Partnership as
provided in the Delaware Act.
2.8 TITLE TO PARTNERSHIP ASSETS
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partner or Assignee, individually or collectively, shall have any
ownership interest in such Partnership assets or any portion thereof. Title to
any or all of the Partnership assets may be held in the name of the Partnership,
a General Partner, one or more of its Affiliates or one or more nominees, as the
Managing General Partner may determine. The General Partners hereby declare and
warrant that any Partnership assets for which record title is held in the name
of a General Partner or one or more of its Affiliates or one or more nominees
shall be held by such General Partner or such Affiliate or nominee for the use
and benefit of the Partnership in accordance with the provisions of this
Agreement; provided, however, that such General Partner shall use reasonable
efforts to cause record title to such assets (other than those assets in respect
of which the Managing General Partner determines that the expense and difficulty
of conveyancing makes transfer of record title to the Partnership impracticable)
to be vested in the Partnership as soon as reasonably practicable; provided,
further, that, prior to the withdrawal or removal of such General Partner or as
soon thereafter as practicable, such General Partner shall use reasonable
efforts to effect the transfer of record title to the Partnership and, prior to
any such transfer, will provide for the use of such assets in a manner
satisfactory to the Managing General Partner. All Partnership assets shall be
recorded as the property of the Partnership in its books and records,
irrespective of the name in which record title to such Partnership assets is
held.
ARTICLE III
RIGHTS OF LIMITED PARTNERS
3.1 LIMITATION OF LIABILITY
The Limited Partners and the Assignees shall have no liability under this
Agreement except as expressly provided in this Agreement or the Delaware Act.
3.2 MANAGEMENT OF BUSINESS
No Limited Partner or Assignee, in its capacity as such, shall participate
in the operation, management or control (within the meaning of the Delaware Act)
of the Partnership's business, transact any business in the Partnership's name
or have the power to sign documents for or otherwise bind the Partnership. Any
action taken by any Affiliate of the Managing General Partner or any officer,
director, employee, member, general partner, agent or trustee of the Managing
General Partner or any of its
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Affiliates, or any officers, director, employee, member, general partner, agent
or trustee of a Group Member, in its capacity as such, shall not be deemed to be
participation in the control of the business of the Partnership by a limited
partner of the Partnership (within the meaning of Section 17-303(a) of the
Delaware Act) and shall not affect, impair or eliminate the limitations on the
liability of the Limited Partners or Assignees under this Agreement.
3.3 OUTSIDE ACTIVITIES OF THE LIMITED PARTNERS
Subject to the provisions of Section 7.5, which shall continue to be
applicable to the Persons referred to therein, regardless of whether such
Persons shall also be Limited Partners or Assignees, any Limited Partner or
Assignee shall be entitled to and may have business interests and engage in
business activities in addition to those relating to the Partnership, including
business interests and activities in direct competition with the Partnership
Group. Neither the Partnership nor any of the other Partners or Assignees shall
have any rights by virtue of this Agreement in any business ventures of any
Limited Partner or Assignee.
3.4 RIGHTS OF LIMITED PARTNERS
(a) In addition to other rights provided by this Agreement or by applicable
law, and except as limited by Section 3.4(b), each Limited Partner shall have
the right, for a purpose reasonably related to such Limited Partner's interest
as a limited partner in the Partnership, upon reasonable written demand and at
such Limited Partner's own expense:
(i) to obtain true and full information regarding the status of the
business and financial condition of the Partnership;
(ii) promptly after becoming available, to obtain a copy of the
Partnership's federal, state and local income tax returns for each year;
(iii) to have furnished to him a current list of the name and last known
business, residence or mailing address of each Partner;
(iv) to have furnished to him a copy of this Agreement and the
Certificate of Limited Partnership and all amendments thereto, together with
a copy of the executed copies of all powers of attorney pursuant to which
this Agreement, the Certificate of Limited Partnership and all amendments
thereto have been executed;
(v) to obtain true and full information regarding the amount of cash and
a description and statement of the Net Agreed Value of any other Capital
Contribution by each Partner and which each Partner has agreed to contribute
in the future, and the date on which each became a Partner; and
(vi) to obtain such other information regarding the affairs of the
Partnership as is just and reasonable.
(b) The General Partners may keep confidential from the Limited Partners and
Assignees, for such period of time as the Managing General Partner deems
reasonable, (i) any information that the Managing General Partner reasonably
believes to be in the nature of trade secrets or (ii) other information the
disclosure of which the Managing General Partner in good faith believes (A) is
not in the best interests of the Partnership Group, (B) could damage the
Partnership Group or (C) that any Group Member is required by law or by
agreement with any third party to keep confidential (other than agreements with
Affiliates of the Partnership the primary purpose of which is to circumvent the
obligations set forth in this Section 3.4).
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ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF
PARTNERSHIP INTERESTS; REDEMPTION OF PARTNERSHIP
INTERESTS
4.1 CERTIFICATES
Upon the Partnership's issuance of Common Units or Subordinated Units to any
Person, the Partnership shall issue one or more Certificates in the name of such
Person evidencing the number of such Units being so issued. In addition, (a)
upon a General Partner's request, the Partnership shall issue to it one or more
Certificates in the name of such General Partner evidencing its interests in the
Partnership and (b) upon the request of any Person owning Incentive Distribution
Rights or any Partnership Securities, the Partnership shall issue to such Person
one or more certificates evidencing such Incentive Distribution Rights or
Partnership Securities. Certificates shall be executed on behalf of the
Partnership by the Chairman of the Board, President or any Vice President and
the Secretary or any Assistant Secretary of the Managing General Partner. No
Common Unit Certificate shall be valid for any purpose until it has been
countersigned by the Transfer Agent. Subject to the requirements of Section
6.7(b), the Partners holding Certificates evidencing Subordinated Units may
exchange such Certificates for Certificates evidencing Common Units on or after
the date on which such Subordinated Units are converted into Common Units
pursuant to the terms of Section 5.8.
4.2 MUTILATED, DESTROYED, LOST OR STOLEN CERTIFICATES
(a) If any mutilated Certificate is surrendered to the Transfer Agent, the
appropriate officers of the Managing General Partner on behalf of the
Partnership shall execute, and the Transfer Agent shall countersign and deliver
in exchange therefor, a new Certificate evidencing the same number and type of
Partnership Securities as the Certificate so surrendered.
(b) The appropriate officers of the Managing General Partner on behalf of
the Partnership shall execute and deliver, and the Transfer Agent shall
countersign a new Certificate in place of any Certificate previously issued if
the Record Holder of the Certificate:
(i) makes proof by affidavit, in form and substance satisfactory to the
Partnership, that a previously issued Certificate has been lost, destroyed
or stolen;
(ii) requests the issuance of a new Certificate before the Partnership
has notice that the Certificate has been acquired by a purchaser for value
in good faith and without notice of an adverse claim;
(iii) if requested by the Partnership, delivers to the Partnership a
bond, in form and substance satisfactory to the Partnership, with surety or
sureties and with fixed or open penalty as the Partnership may reasonably
direct, in its sole discretion, to indemnify the Partnership, the Partners,
the Managing General Partner and the Transfer Agent against any claim that
may be made on account of the alleged loss, destruction or theft of the
Certificate; and
(iv) satisfies any other reasonable requirements imposed by the
Partnership.
If a Limited Partner or Assignee fails to notify the Partnership within a
reasonable time after he has notice of the loss, destruction or theft of a
Certificate, and a transfer of the Limited Partner Interests represented by the
Certificate is registered before the Partnership, the Managing General Partner
or the Transfer Agent receives such notification, the Limited Partner or
Assignee shall be precluded from making any claim against the Partnership, the
Managing General Partner or the Transfer Agent for such transfer or for a new
Certificate.
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(c) As a condition to the issuance of any new Certificate under this Section
4.2, the Partnership may require the payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in relation thereto and any
other expenses (including the fees and expenses of the Transfer Agent)
reasonably connected therewith.
4.3 RECORD HOLDERS
The Partnership shall be entitled to recognize the Record Holder as the
Partner or Assignee with respect to any Partnership Interest and, accordingly,
shall not be bound to recognize any equitable or other claim to or interest in
such Partnership Interest on the part of any other Person, regardless of whether
the Partnership shall have actual or other notice thereof, except as otherwise
provided by law or any applicable rule, regulation, guideline or requirement of
any National Securities Exchange on which such Partnership Interests are listed
for trading. Without limiting the foregoing, when a Person (such as a broker,
dealer, bank, trust company or clearing corporation or an agent of any of the
foregoing) is acting as nominee, agent or in some other representative capacity
for another Person in acquiring and/or holding Partnership Interests, as between
the Partnership on the one hand, and such other Persons on the other, such
representative Person (a) shall be the Partner or Assignee (as the case may be)
of record and beneficially, (b) must execute and deliver a Transfer Application
and (c) shall be bound by this Agreement and shall have the rights and
obligations of a Partner or Assignee (as the case may be) hereunder and as, and
to the extent, provided for herein.
4.4 TRANSFER GENERALLY
(a) The term "transfer," when used in this Agreement with respect to a
Partnership Interest, shall be deemed to refer to a transaction by which a
General Partner assigns its Partnership Interest as a general partner in the
Partnership to another Person who becomes the General Partner, by which the
holder of a Limited Partner Interest assigns such Limited Partner Interest to
another Person who is or becomes a Limited Partner or an Assignee, and includes
a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange
or any other disposition by law or otherwise.
(b) No Partnership Interest shall be transferred, in whole or in part,
except in accordance with the terms and conditions set forth in this Article IV.
Any transfer or purported transfer of a Partnership Interest not made in
accordance with this Article IV shall be null and void.
(c) Nothing contained in this Agreement shall be construed to prevent a
disposition by any shareholder of a General Partner of any or all of the issued
and outstanding capital stock of a General Partner.
4.5 REGISTRATION AND TRANSFER OF LIMITED PARTNER INTERESTS
(a) The Partnership shall keep or cause to be kept on behalf of the
Partnership a register in which, subject to such reasonable regulations as it
may prescribe and subject to the provisions of Section 4.5(b), the Partnership
will provide for the registration and transfer of Limited Partner Interests. The
Transfer Agent is hereby appointed registrar and transfer agent for the purpose
of registering Common Units and transfers of such Common Units as herein
provided. The Partnership shall not recognize transfers of Certificates
evidencing Limited Partner Interests unless such transfers are effected in the
manner described in this Section 4.5. Upon surrender of a Certificate for
registration of transfer of any Limited Partner Interests evidenced by a
Certificate, and subject to the provisions of Section 4.5(b), the appropriate
officers of the Managing General Partner on behalf of the Partnership shall
execute and deliver, and in the case of Common Units, the Transfer Agent shall
countersign and deliver, in the name of the holder or the designated transferee
or transferees, as required pursuant to the holder's instructions, one or more
new Certificates evidencing the same aggregate number and type of Limited
Partner Interests as was evidenced by the Certificate so surrendered.
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(b) Except as otherwise provided in Section 4.10, the Partnership shall not
recognize any transfer of Limited Partner Interests until the Certificates
evidencing such Limited Partner Interests are surrendered for registration of
transfer and such Certificates are accompanied by a Transfer Application duly
executed by the transferee (or the transferee's attorney-in-fact duly authorized
in writing). No charge shall be imposed by the Partnership for such transfer;
provided, that as a condition to the issuance of any new Certificate under this
Section 4.5, the Partnership may require the payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed with respect
thereto.
(c) Limited Partner Interests may be transferred only in the manner
described in this Section 4.5. The transfer of any Limited Partner Interests and
the admission of any new Limited Partner shall not constitute an amendment to
this Agreement.
(d) Until admitted as a Substituted Limited Partner pursuant to Section
10.2, the Record Holder of a Limited Partner Interest shall be an Assignee in
respect of such Limited Partner Interest. Limited Partners may include
custodians, nominees or any other individual or entity in its own or any
representative capacity.
(e) A transferee of a Limited Partner Interest who has completed and
delivered a Transfer Application shall be deemed to have (i) requested admission
as a Substituted Limited Partner, (ii) agreed to comply with and be bound by and
to have executed this Agreement, (iii) represented and warranted that such
transferee has the right, power and authority and, if an individual, the
capacity to enter into this Agreement, (iv) granted the powers of attorney set
forth in this Agreement and (v) given the consents and approvals and made the
waivers contained in this Agreement.
(f) The General Partners and EESC shall have the right at any time to
transfer their Subordinated Units and Common Units (whether issued upon
conversion of the Subordinated Units or otherwise) to one or more Persons.
4.6 TRANSFER OF A GENERAL PARTNER'S GENERAL PARTNER INTEREST
(a) Subject to Section 4.6(c) below, prior to December 31, 2006, a General
Partner shall not transfer all or any part of its Partnership Interest as
general partner in the Partnership to a Person unless such transfer (i) has been
approved by the prior written consent or vote of the holders of at least a Unit
Majority or (ii) is of all, but not less than all, of its Partnership Interest
as general partner in the Partnership to (A) an Affiliate of such General
Partner or (B) another Person in connection with the merger or consolidation of
such General Partner with or into another Person or the transfer by such General
Partner of all or substantially all of its assets to another Person.
(b) Subject to Section 4.6(c) below, on or after December 31, 2006, a
General Partner may transfer all or any of its Partnership Interest as general
partner in the Partnership without Unitholder approval.
(c) Notwithstanding anything herein to the contrary, no transfer by a
General Partner of all or any part of its Partnership Interest as general
partner in the Partnership to another Person shall be permitted unless (i) the
transferee agrees to assume the rights and duties of such General Partner under
this Agreement and the Operating Partnership Agreement and to be bound by the
provisions of this Agreement and the Operating Partnership Agreement, (ii) the
Partnership receives an Opinion of Counsel that such transfer would not result
in the loss of limited liability of any Limited Partner or of any limited
partner of the Operating Partnership or cause the Partnership or the Operating
Partnership to be treated as an association taxable as a corporation or
otherwise to be taxed as an entity for federal income tax purposes (to the
extent not already so treated or taxed) and (iii) such transferee also agrees to
purchase all (or the appropriate portion thereof, if applicable) of the
partnership interest of such General Partner as the General Partner of each
other Group Member. In the case of a transfer pursuant to and in compliance with
this Section 4.6, the transferee or successor (as the case may be) shall,
subject to compliance with the
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terms of Section 10.3, be admitted to the Partnership as a General Partner
immediately prior to the transfer of the Partnership Interest, and the business
of the Partnership shall continue without dissolution.
4.7 RESTRICTION ON TRANSFER OF SPECIAL GENERAL PARTNER'S GENERAL PARTNER
INTEREST
Notwithstanding anything else herein contained, the Special General Partner
cannot transfer its general partner interest in the Partnership without the
approval of the Managing General Partner, which approval is in the sole
discretion of the Managing General Partner.
4.8 TRANSFER OF INCENTIVE DISTRIBUTION RIGHTS
Prior to December 31, 2006, a holder of Incentive Distribution Rights may
transfer any or all of the Incentive Distribution Rights held by such holder
without any consent of the Unitholders (a) to an Affiliate or (b) to another
Person in connection with (i) the merger or consolidation of such holder of
Incentive Distribution Rights with or into such other Person or (ii) the
transfer by such holder of all or substantially all of its assets to such other
Person. Any other transfer of the Incentive Distribution Rights prior to
December 31, 2006, shall require the prior approval of holders of at least a
Unit Majority. On or after December 31, 2006, a General Partner may transfer any
or all of its Incentive Distribution Rights without Unitholder approval. The
Managing General Partner shall have the authority (but shall not be required) to
adopt such reasonable restrictions on the transfer of Incentive Distribution
Rights and requirements for registering the transfer of Incentive Distribution
Rights as the Managing General Partner, in its sole discretion, shall determine
are necessary or appropriate.
4.9 RESTRICTIONS ON TRANSFERS
(a) Except as provided in Section 4.9(d) below, but notwithstanding the
other provisions of this Article IV, no transfer of any Partnership Interests
shall be made if such transfer would (i) violate the then applicable federal or
state securities laws or rules and regulations of the Commission, any state
securities commission or any other governmental authority with jurisdiction over
such transfer, (ii) terminate the existence or qualification of the Partnership
or the Operating Partnership under the laws of the jurisdiction of its
formation, or (iii) cause the Partnership or the Operating Partnership to be
treated as an association taxable as a corporation or otherwise to be taxed as
an entity for federal income tax purposes (to the extent not already so treated
or taxed).
(b) The Managing General Partner may impose restrictions on the transfer of
Partnership Interests if a subsequent Opinion of Counsel determines that such
restrictions are necessary to avoid a significant risk of the Partnership or the
Operating Partnership becoming taxable as a corporation or otherwise to be taxed
as an entity for federal income tax purposes. The restrictions may be imposed by
making such amendments to this Agreement as the Managing General Partner may
determine to be necessary or appropriate to impose such restrictions; provided,
however, that any amendment that the Managing General Partner believes, in the
exercise of its reasonable discretion, could result in the delisting or
suspension of trading of any class of Limited Partner Interests on the principal
National Securities Exchange on which such class of Limited Partner Interests is
then traded must be approved, prior to such amendment being effected, by the
holders of at least a majority of the Outstanding Limited Partner Interests of
such class.
(c) The transfer of a Subordinated Unit that has converted into a Common
Unit shall be subject to the restrictions imposed by Section 6.7(b).
(d) Nothing contained in this Article IV, or elsewhere in this Agreement,
shall preclude the settlement of any transactions involving Partnership
Interests entered into through the facilities of any National Securities
Exchange on which such Partnership Interests are listed for trading.
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4.10 CITIZENSHIP CERTIFICATES; NON-CITIZEN ASSIGNEES
(a) If any Group Member is or becomes subject to any federal, state or local
law or regulation that, in the reasonable determination of the Managing General
Partner, creates a substantial risk of cancellation or forfeiture of any
property in which the Group Member has an interest based on the nationality,
citizenship or other related status of a Limited Partner or Assignee, the
Managing General Partner may request any Partner or Assignee to furnish to the
Managing General Partner, within 30 days after receipt of such request, an
executed Citizenship Certification or such other information concerning his
nationality, citizenship or other related status (or, if the Limited Partner or
Assignee is a nominee holding for the account of another Person, the
nationality, citizenship or other related status of such Person) as the Managing
General Partner may request. If a Limited Partner or Assignee fails to furnish
to the Managing General Partner within the aforementioned 30-day period such
Citizenship Certification or other requested information or if upon receipt of
such Citizenship Certification or other requested information the Managing
General Partner determines, with the advice of counsel, that a Limited Partner
or Assignee is not an Eligible Citizen, the Partnership Interests owned by such
Limited Partner or Assignee shall be subject to redemption in accordance with
the provisions of Section 4.11. In addition, the Managing General Partner may
require that the status of any such Partner or Assignee be changed to that of a
Non-citizen Assignee and, thereupon, the Managing General Partner shall be
substituted for such Non-citizen Assignee as the Limited Partner in respect of
his Limited Partner Interests.
(b) The Managing General Partner shall, in exercising voting rights in
respect of Limited Partner Interests held by it on behalf of Non-citizen
Assignees, distribute the votes in the same ratios as the votes of Partners
(including without limitation the General Partners) in respect of Limited
Partner Interests other than those of Non-citizen Assignees are cast, either
for, against or abstaining as to the matter.
(c) Upon dissolution of the Partnership, a Non-citizen Assignee shall have
no right to receive a distribution in kind pursuant to Section 12.4 but shall be
entitled to the cash equivalent thereof, and the Partnership shall provide cash
in exchange for an assignment of the Non-citizen Assignee's share of the
distribution in kind. Such payment and assignment shall be treated for
Partnership purposes as a purchase by the Partnership from the Non-citizen
Assignee of his Limited Partner Interest (representing his right to receive his
share of such distribution in kind).
(d) At any time after he can and does certify that he has become an Eligible
Citizen, a Non-citizen Assignee may, upon application to the Managing General
Partner, request admission as a Substituted Limited Partner with respect to any
Limited Partner Interests of such Non-citizen Assignee not redeemed pursuant to
Section 4.11, and upon his admission pursuant to Section 10.2, the Managing
General Partner shall cease to be deemed to be the Limited Partner in respect of
the Non-citizen Assignee's Limited Partner Interests.
4.11 REDEMPTION OF PARTNERSHIP INTERESTS OF NON-CITIZEN ASSIGNEES
(a) If at any time a Limited Partner or Assignee fails to furnish a
Citizenship Certification or other information requested within the 30-day
period specified in Section 4.10(a), or if upon receipt of such Citizenship
Certification or other information the Managing General Partner determines, with
the advice of counsel, that a Limited Partner or Assignee is not an Eligible
Citizen, the Partnership may, unless the Limited Partner or Assignee establishes
to the satisfaction of the Managing General Partner that such Limited Partner or
Assignee is an Eligible Citizen or has transferred his Partnership Interests to
a Person who is an Eligible Citizen and who furnishes a Citizenship
Certification to the Managing General Partner prior to the date fixed for
redemption as provided below, redeem the Partnership Interest of such Limited
Partner or Assignee as follows:
(i) The Managing General Partner shall, not later than the 30th day
before the date fixed for redemption, give notice of redemption to the
Limited Partner or Assignee, at his last address designated on the records
of the Partnership or the Transfer Agent, by registered or certified mail,
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postage prepaid. The notice shall be deemed to have been given when so
mailed. The notice shall specify the Redeemable Interests, the date fixed
for redemption, the place of payment, that payment of the redemption price
will be made upon surrender of the Certificate evidencing the Redeemable
Interests and that on and after the date fixed for redemption no further
allocations or distributions to which the Limited Partner or Assignee would
otherwise be entitled in respect of the Redeemable Interests will accrue or
be made.
(ii) The aggregate redemption price for Redeemable Interests shall be an
amount equal to the Current Market Price (the date of determination of which
shall be the date fixed for redemption) of Limited Partner Interests of the
class to be so redeemed multiplied by the number of Limited Partner
Interests of each such class included among the Redeemable Interests. The
redemption price shall be paid, in the discretion of the Managing General
Partner, in cash or by delivery of a promissory note of the Partnership in
the principal amount of the redemption price, bearing interest at the rate
of 10% annually and payable in three equal annual installments of principal
together with accrued interest, commencing one year after the redemption
date.
(iii) Upon surrender by or on behalf of the Limited Partner or Assignee,
at the place specified in the notice of redemption, of the Certificate
evidencing the Redeemable Interests, duly endorsed in blank or accompanied
by an assignment duly executed in blank, the Limited Partner or Assignee or
his duly authorized representative shall be entitled to receive the payment
therefor.
(iv) After the redemption date, Redeemable Interests shall no longer
constitute issued and Outstanding Limited Partner Interests.
(b) The provisions of this Section 4.11 shall also be applicable to Limited
Partner Interests held by a Limited Partner or Assignee as nominee of a Person
determined to be other than an Eligible Citizen.
(c) Nothing in this Section 4.11 shall prevent the recipient of a notice of
redemption from transferring his Limited Partner Interest before the redemption
date if such transfer is otherwise permitted under this Agreement. Upon receipt
of notice of such a transfer, the Managing General Partner shall withdraw the
notice of redemption, provided the transferee of such Limited Partner Interest
certifies to the satisfaction of the Managing General Partner in a Citizenship
Certification delivered in connection with the Transfer Application that he is
an Eligible Citizen. If the transferee fails to make such certification, such
redemption shall be effected from the transferee on the original redemption
date.
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
5.1 ORGANIZATIONAL CONTRIBUTIONS
In connection with the formation of the Partnership under the Delaware Act,
the Managing General Partner made an initial Capital Contribution to the
Partnership in the amount of $10.00, for an interest in the Partnership and has
been admitted as the Managing General Partner of the Partnership, and the
Organizational Limited Partner made an initial Capital Contribution to the
Partnership in the amount of $990.00 for an interest in the Partnership and has
been admitted as a Limited Partner of the Partnership. As of the Closing Date,
the interest of the Organizational Limited Partner shall be redeemed as provided
in the Contribution and Conveyance Agreement; the initial Capital Contributions
of each Partner shall thereupon be refunded; and the Organizational Limited
Partner shall cease to be a Limited Partner of the Partnership. Ninety-nine
percent of any interest or other profit that may have resulted from the
investment or other use of such initial Capital Contributions shall be allocated
and distributed to the Organizational Limited Partner, and the balance thereof
shall be allocated and distributed to the Managing General Partner.
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5.2 CONTRIBUTIONS BY THE GENERAL PARTNERS AND THEIR AFFILIATES
(a) On the Closing Date and pursuant to the Contribution and Conveyance
Agreement, the Managing General Partner shall contribute to the Partnership, as
a Capital Contribution, all of its limited partner interest in the Operating
Partnership in exchange for (i) its .7686% Partnership Interest as Managing
General Partner of the Partnership, subject to all of the rights, privileges and
duties of the Managing General Partner under this Agreement, (ii) its
Proportionate Share of 5,352,162 Subordinated Units and (iii) 7,686 Incentive
Distribution Rights.
(b) On the Closing Date and pursuant to the Contribution and Conveyance
Agreement, the Special General Partner shall contribute to the Partnership, as a
Capital Contribution, all of its limited partner interest in the Operating
Partnership in exchange for (i) its .2314% Partnership Interest as Special
General Partner of the Partnership , (ii) 1,610,942 Subordinated Units, and
(iii) 2,314 Incentive Distribution Rights.
(c) On the Closing Date and pursuant to the Contribution and Conveyance
Agreement, EESC shall contribute to the Partnership, as a Capital Contribution,
all of its limited partner interest in the Operating Partnership in exchange for
its Proportionate Share of 5,352,162 Subordinated Units.
(d) Upon the issuance of any additional Limited Partner Partnership
Interests by the Partnership (other than the issuance of the Common Units issued
in the Initial Offering or pursuant to the Over-allotment Option), the General
Partners shall be required to make additional combined Capital Contributions
equal to 1/99th of any amount contributed to the Partnership in exchange for
such Additional Units. Each General Partner shall contribute its Pro Rata share
of such additional Capital Contributions. Except as set forth in the immediately
preceding sentence, Section 5.2(e) and Article XII, the General Partners shall
not be obligated to make any additional Capital Contributions to the
Partnership.
(e) Immediately after the exercise or lapse of the Over-allotment Option, if
any amount remains outstanding with respect to the NPS Note after the payments
described in Section 5.3(b) below, the General Partners shall contribute, Pro
Rata, cash to the Partnership in an amount equal to the outstanding balance of
the NPS Note in exchange for the issuance to the General Partners, Pro Rata, of
an aggregate number of Subordinated Units equal to the quotient obtained by
dividing (i) such cash contribution to the Partnership by (ii) the Issue Price
per Initial Common Unit. The cash received by the Partnership pursuant to this
Section 5.2(e) shall be used to satisfy the NPS Note.
5.3 CONTRIBUTIONS BY INITIAL LIMITED PARTNERS
(a) On the Closing Date and pursuant to the Underwriting Agreement, each
Underwriter shall contribute to the Partnership cash in an amount equal to the
Issue Price per Initial Common Unit, multiplied by the number of Common Units
specified in the Underwriting Agreement to be purchased by such Underwriter at
the Closing Date. In exchange for such Capital Contributions by the
Underwriters, the Partnership shall issue Common Units to each Underwriter on
whose behalf such Capital Contribution is made in an amount equal to the
quotient obtained by dividing (i) the cash contribution to the Partnership by or
on behalf of such Underwriter by (ii) the Issue Price per Initial Common Unit.
(b) Upon the exercise of the Over-allotment Option, each Underwriter shall
contribute to the Partnership cash in an amount equal to the Issue Price per
Initial Common Unit, multiplied by the number of Common Units specified in the
Underwriting Agreement to be purchased by such Underwriter at the Option Closing
Date. In exchange for such Capital Contributions by the Underwriters, the
Partnership shall issue Common Units to each Underwriter on whose behalf such
Capital Contribution is made in an amount equal to the quotient obtained by
dividing (i) the cash contributions to the Partnership by or on behalf of such
Underwriter by (ii) the Issue Price per Initial Common Unit.
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Notwithstanding anything else herein contained, but subject to Section
17-607 of the Delaware Act, the proceeds received by the Partnership from the
issuance of Common Units upon the exercise of the Over-allotment Option will be
utilized: first, to pay any underwriting commissions and expenses relating to
the exercise of the Over-allotment Option; second, to satisfy the NPS Note; and
third, the remaining proceeds (if any) will be distributed to the General
Partners, Pro Rata, to redeem from the General Partners, Pro Rata, an aggregate
number of Subordinated Units equal to the quotient obtained by dividing (i) such
remaining proceeds by (ii) the Issue Price per Initial Common Unit. Such
redemption shall be a partial reimbursement for capital expenditures incurred by
the General Partners within two years preceding the Closing Date with respect to
Assets they contributed to the Partnership Group.
(c) No Limited Partner Partnership Interests will be issued or issuable as
of or at the Closing Date other than (i) the Common Units issuable pursuant to
subparagraph (a) hereof in aggregate number equal to 8,540,000, (ii) the
"Additional Units" as such term is defined in the Underwriting Agreement in
aggregate number up to 1,281,000 issuable upon exercise of the Over-allotment
Option pursuant to subparagraph (b) hereof, (iii) the 7,878,619 Subordinated
Units issuable to the General Partners and EESC pursuant to Section 5.2 hereof,
and (iv) the 10,000 Incentive Distribution Rights issuable to the General
Partners pursuant to Section 5.2 hereof.
5.4 INTEREST AND WITHDRAWAL
No interest shall be paid by the Partnership on Capital Contributions. No
Partner or Assignee shall be entitled to the withdrawal or return of its Capital
Contribution, except to the extent, if any, that distributions made pursuant to
this Agreement or upon termination of the Partnership may be considered as such
by law and then only to the extent provided for in this Agreement. Except to the
extent expressly provided in this Agreement, no Partner or Assignee shall have
priority over any other Partner or Assignee either as to the return of Capital
Contributions or as to profits, losses or distributions. Any such return shall
be a compromise to which all Partners and Assignees agree within the meaning of
17-502(b) of the Delaware Act.
5.5 CAPITAL ACCOUNTS
(a) The Partnership shall maintain for each Partner (or a beneficial owner
of Partnership Interests held by a nominee in any case in which the nominee has
furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the Managing
General Partner in its sole discretion) owning a Partnership Interest a separate
Capital Account with respect to such Partnership Interest in accordance with the
rules of Treasury Regulation Section 1.704-1(b)(2)(iv). Such Capital Account
shall be increased by (i) the amount of all Capital Contributions made to the
Partnership with respect to such Partnership Interest pursuant to this Agreement
and (ii) all items of Partnership income and gain (including, without
limitation, income and gain exempt from tax) computed in accordance with Section
5.5(b) and allocated with respect to such Partnership Interest pursuant to
Section 6.1, and decreased by (x) the amount of cash or Net Agreed Value of all
actual and deemed distributions of cash or property made with respect to such
Partnership Interest pursuant to this Agreement and (y) all items of Partnership
deduction and loss computed in accordance with Section 5.5(b) and allocated with
respect to such Partnership Interest pursuant to Section 6.1.
(b) For purposes of computing the amount of any item of income, gain, loss
or deduction which is to be allocated pursuant to Article VI and is to be
reflected in the Partners' Capital Accounts, the determination, recognition and
classification of any such item shall be the same as its determination,
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recognition and classification for federal income tax purposes (including,
without limitation, any method of depreciation, cost recovery or amortization
used for that purpose), provided, that:
(i) Solely for purposes of this Section 5.5, the Partnership shall be
treated as owning directly its proportionate share (as determined by the
Managing General Partner based upon the provisions of the Operating
Partnership Agreement) of all property owned by the Operating Partnership.
(ii) All fees and other expenses incurred by the Partnership to promote
the sale of (or to sell) a Partnership Interest that can neither be deducted
nor amortized under Section 709 of the Code, if any, shall, for purposes of
Capital Account maintenance, be treated as an item of deduction at the time
such fees and other expenses are incurred and shall be allocated among the
Partners pursuant to Section 6.1.
(iii) Except as otherwise provided in Treasury Regulation Section
1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss and
deduction shall be made without regard to any election under Section 754 of
the Code which may be made by the Partnership and, as to those items
described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without
regard to the fact that such items are not includable in gross income or are
neither currently deductible nor capitalized for federal income tax
purposes. To the extent an adjustment to the adjusted tax basis of any
Partnership asset pursuant to Section 734(b) or 743(b) of the Code is
required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to
be taken into account in determining Capital Accounts, the amount of such
adjustment in the Capital Accounts shall be treated as an item of gain or
loss.
(iv) Any income, gain or loss attributable to the taxable disposition of
any Partnership property shall be determined as if the adjusted basis of
such property as of such date of disposition were equal in amount to the
Partnership's Carrying Value with respect to such property as of such date.
(v) In accordance with the requirements of Section 704(b) of the Code,
any deductions for depreciation, cost recovery or amortization attributable
to any Contributed Property shall be determined as if the adjusted basis of
such property on the date it was acquired by the Partnership were equal to
the Agreed Value of such property. Upon an adjustment pursuant to Section
5.5(d) to the Carrying Value of any Partnership property subject to
depreciation, cost recovery or amortization, any further deductions for such
depreciation, cost recovery or amortization attributable to such property
shall be determined (A) as if the adjusted basis of such property were equal
to the Carrying Value of such property immediately following such adjustment
and (B) using a rate of depreciation, cost recovery or amortization derived
from the same method and useful life (or, if applicable, the remaining
useful life) as is applied for federal income tax purposes; provided,
however, that, if the asset has a zero adjusted basis for federal income tax
purposes, depreciation, cost recovery or amortization deductions shall be
determined using any reasonable method that the Managing General Partner may
adopt.
(vi) If the Partnership's adjusted basis in a depreciable or cost
recovery property is reduced for federal income tax purposes pursuant to
Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction
shall, solely for purposes hereof, be deemed to be an additional
depreciation or cost recovery deduction in the year such property is placed
in service and shall be allocated among the Partners pursuant to Section
6.1. Any restoration of such basis pursuant to Section 48(q)(2) of the Code
shall, to the extent possible, be allocated in the same manner to the
Partners to whom such deemed deduction was allocated.
(c) (i) A transferee of a Partnership Interest shall succeed to a pro rata
portion of the Capital Account of the transferor relating to the Partnership
Interest so transferred; provided, however, that, if the transfer causes a
termination of the Partnership under Section 708(b)(1)(B) of the Code, the
Partnership's properties and liabilities shall be deemed (i) to have been
distributed in liquidation of the Partnership to the Partners (including any
transferee of a Partnership Interest that is a party to the transfer causing
such
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termination) pursuant to Section 12.4 (after adjusting the balance of the
Capital Accounts of the Partners as provided in Section 5.5(d)(ii)) and
recontributed by such Partners in reconstitution of the Partnership or (ii) in
the event of a termination of the Partnership that occurs after the finalization
of Proposed Treasury Regulation Section 1.704-1(b)(1)(iv), to have been
contributed to a new partnership which will be deemed to be a continuation of,
and successor to, the Partnership and the Partnership will be deemed to make
liquidating distributions of the interests in this new partnership to the
Partners (including any transferee of a Partnership Interest that is a party to
the transfer causing such termination) pursuant to Section 12.4 (after adjusting
the balance of the Capital Accounts of the Partners as provided in Section
5.5(d)(ii)). Any such deemed distribution and contribution, in the case of a
characterization under clause (i) of the preceding sentence, or any such deemed
contribution and distribution, in the case of a characterization under clause
(ii) of the preceding sentence, shall be treated as an actual contribution and
distribution for purposes of this Section 5.5. In such event, the Carrying
Values of the Partnership's properties shall be adjusted immediately prior to
such deemed distribution and contribution, or deemed contribution and
distribution, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv) and this
Section 5.5 and such Carrying Values shall then constitute the Agreed Values of
such properties upon such deemed contribution to the new partnership. In either
case, the Capital Accounts of the new partnership that results under the
applicable characterization shall be maintained in accordance with the
principles of this Section 5.5.
(ii) Immediately prior to the transfer of a Subordinated Unit or of a
Subordinated Unit that has converted into a Common Unit pursuant to Section 5.8
by a holder thereof (other than a transfer to an Affiliate unless the Managing
General Partner elects to have this subparagraph 5.5(c)(ii) apply), the Capital
Account maintained for such Person with respect to its Subordinated Units or
converted Subordinated Units will (A) first, be allocated to the Subordinated
Units or converted Subordinated Units to be transferred in an amount equal to
the product of (x) the number of such Subordinated Units or converted
Subordinated Units to be transferred and (y) the Per Unit Capital Amount for a
Common Unit, and (B) second, any remaining balance in such Capital Account will
be retained by the transferor, regardless of whether it has retained any
Subordinated Units or converted Subordinated Units. Following any such
allocation, the transferor's Capital Account, if any, maintained with respect to
the retained Subordinated Units or converted Subordinated Units, if any, will
have a balance equal to the amount allocated under clause (B) hereinabove, and
the transferee's Capital Account established with respect to the transferred
Subordinated Units or converted Subordinated Units will have a balance equal to
the amount allocated under clause (A) hereinabove.
(d) (i) In accordance with Treasury Regulation Section
1.704-1(b)(2)(iv)(f), on an issuance of additional Partnership Interests for
cash or Contributed Property or the conversion of the General Partners' Combined
Interest to Common Units pursuant to Section 11.3(b), the Capital Account of all
Partners and the Carrying Value of each Partnership property immediately prior
to such issuance shall be adjusted upward or downward to reflect any Unrealized
Gain or Unrealized Loss attributable to such Partnership property, as if such
Unrealized Gain or Unrealized Loss had been recognized on an actual sale of each
such property immediately prior to such issuance and had been allocated to the
Partners at such time pursuant to Section 6.1 in the same manner as any item of
gain or loss actually recognized during such period would have been allocated.
In determining such Unrealized Gain or Unrealized Loss, the aggregate cash
amount and fair market value of all Partnership assets (including, without
limitation, cash or cash equivalents) immediately prior to the issuance of
additional Partnership Interests shall be determined by the Managing General
Partner using such reasonable method of valuation as it may adopt; provided,
however, that the Managing General Partner, in arriving at such valuation, must
take fully into account the fair market value of the Partnership Interests of
all Partners at such time. The Managing General Partner shall allocate such
aggregate value among the assets of the Partnership (in such manner as it
determines in its discretion to be reasonable) to arrive at a fair market value
for individual properties.
(ii) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f),
immediately prior to any actual or deemed distribution to a Partner of any
Partnership property (other than a distribution of cash
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that is not in redemption or retirement of a Partnership Interest), the Capital
Accounts of all Partners and the Carrying Value of all Partnership property
shall be adjusted upward or downward to reflect any Unrealized Gain or
Unrealized Loss attributable to such Partnership property, as if such Unrealized
Gain or Unrealized Loss had been recognized in a sale of such property
immediately prior to such distribution for an amount equal to its fair market
value, and had been allocated to the Partners, at such time, pursuant to Section
6.1 in the same manner as any item of gain or loss actually recognized during
such period would have been allocated. In determining such Unrealized Gain or
Unrealized Loss the aggregate cash amount and fair market value of all
Partnership assets (including, without limitation, cash or cash equivalents)
immediately prior to a distribution shall (A) in the case of an actual
distribution which is not made pursuant to Section 12.4 or in the case of a
deemed contribution and/or distribution occurring as a result of a termination
of the Partnership pursuant to Section 708 of the Code, be determined and
allocated in the same manner as that provided in Section 5.5(d)(i) or (B) in the
case of a liquidating distribution pursuant to Section 12.4, be determined and
allocated by the Liquidator using such reasonable method of valuation as it may
adopt.
5.6 ISSUANCES OF ADDITIONAL PARTNERSHIP SECURITIES
(a) Subject to Section 5.7, the Partnership may issue additional Partnership
Securities and options, rights, warrants and appreciation rights relating to the
Partnership Securities for any Partnership purpose at any time and from time to
time to such Persons for such consideration and on such terms and conditions as
shall be established by the Managing General Partner in its sole discretion, all
without the approval of any Limited Partners.
(b) Each additional Partnership Security authorized to be issued by the
Partnership pursuant to Section 5.6(a) may be issued in one or more classes, or
one or more series of any such classes, with such designations, preferences,
rights, powers and duties (which may be senior to existing classes and series of
Partnership Securities), as shall be fixed by the Managing General Partner in
the exercise of its sole discretion, including (i) the right to share
Partnership profits and losses or items thereof; (ii) the right to share in
Partnership distributions; (iii) the rights upon dissolution and liquidation of
the Partnership; (iv) whether, and the terms and conditions upon which, the
Partnership may redeem the Partnership Security; (v) whether such Partnership
Security is issued with the privilege of conversion or exchange and, if so, the
terms and conditions of such conversion or exchange; (vi) the terms and
conditions upon which each Partnership Security will be issued, evidenced by
certificates and assigned or transferred; and (vii) the right, if any, of each
such Partnership Security to vote on Partnership matters, including matters
relating to the relative rights, preferences and privileges of such Partnership
Security.
(c) The Managing General Partner is hereby authorized and directed to take
all actions that it deems necessary or appropriate in connection with (i) each
issuance of Partnership Securities and options, rights, warrants and
appreciation rights relating to Partnership Securities pursuant to this Section
5.6, (ii) the conversion of a general partner interest and Incentive
Distribution Rights into Units pursuant to the terms of this Agreement, (iii)
the admission of Additional Limited Partners and (iv) all additional issuances
of Partnership Securities. The Managing General Partner is further authorized
and directed to specify the relative rights, powers and duties of the holders of
the Units or other Partnership Securities being so issued. The Managing General
Partner shall do all things necessary to comply with the Delaware Act and is
authorized and directed to do all things it deems to be necessary or advisable
in connection with any future issuance of Partnership Securities or in
connection with the conversion of a general partner interest into Units pursuant
to the terms of this Agreement, including compliance with any statute, rule,
regulation or guideline of any federal, state or other governmental agency or
any National Securities Exchange on which the Units or other Partnership
Securities are listed for trading.
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5.7 LIMITATIONS ON ISSUANCE OF ADDITIONAL PARTNERSHIP SECURITIES
The issuance of Partnership Securities pursuant to Section 5.6 shall be
subject to the following restrictions and limitations:
(a) During the Subordination Period, the Partnership shall not issue (and
shall not issue any options, rights, warrants or appreciation rights relating
to) an aggregate of more than 4,270,000 additional Parity Units without the
prior approval of the holders of a Unit Majority. In applying this limitation,
there shall be excluded Common Units and other Parity Units issued (A) in
connection with the exercise of the Over-allotment Option, (B) in accordance
with Sections 5.7(b) and 5.7(c), (C) upon conversion of Subordinated Units
pursuant to Section 5.8, (D) upon conversion of general partner interests and
Incentive Distribution Rights pursuant to Section 11.3(b),(E) pursuant to the
employee benefit plans of the Managing General Partner, the Partnership or any
other Group Member and (F) in the event of a combination or subdivision of
Common Units.
(b) The Partnership may also issue an unlimited number of Parity Units,
prior to the end of the Subordination Period and without the prior approval of
the Unitholders, if such issuance occurs (i) in connection with an Acquisition
or a Capital Improvement or (ii) within 365 days of, and the net proceeds from
such issuance are used to repay debt incurred in connection with, an Acquisition
or a Capital Improvement, in each case where such Acquisition or Capital
Improvement involves assets that, if acquired by the Partnership as of the date
that is one year prior to the first day of the Quarter in which such Acquisition
is to be consummated or such Capital Improvement is to be completed, would have
resulted in an increase in:
(A) the amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) with respect to
each of the four most recently completed Quarters (on a pro-forma basis as
described below) as compared to
(B) the actual amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) (excluding
Adjusted Operating Surplus attributable to the Acquisition or Capital
Improvement) with respect to each of such four most recently completed
Quarters.
If the issuance of Parity Units with respect to an Acquisition or
Capital Improvement occurs within the first four full Quarters after the
Closing Date, then Adjusted Operating Surplus as used in clauses (A)
(subject to the succeeding sentence) and (B) above shall be calculated (i)
for each Quarter, if any, that commenced after the Closing Date for which
actual results of operations are available, based on the actual Adjusted
Operating Surplus of the Partnership generated with respect to such Quarter,
and (ii) for each other Quarter, on a pro forma basis consistent with the
procedure, as applicable, set forth in Appendix D to the Registration
Statement. Furthermore, the amount in clause (A) shall be determined on a
pro forma basis assuming that (1) all of the Parity Units or Partnership
Securities to be issued in connection with or within 365 days of such
Acquisition or Capital Improvement had been issued and outstanding, (2) all
indebtedness for borrowed money to be incurred or assumed in connection with
such Acquisition or Capital Improvement (other than any such indebtedness
that is to be repaid with the proceeds of such issuance of Parity Units) had
been incurred or assumed, in each case as of the commencement of such
four-Quarter period, (3) the personnel expenses that would have been
incurred by the Partnership in the operation of the acquired assets are the
personnel expenses for employees to be retained by the Partnership in the
operation of the acquired assets, and (4) the non-personnel costs and
expenses are computed on the same basis as those incurred by the Partnership
in the operation of the Partnership's business at similarly situated
Partnership facilities.
(c) The Partnership may also issue an unlimited number of Parity Units,
prior to the end of the Subordination Period and without the approval of the
Unitholders, if the proceeds from such issuance are
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used exclusively to repay up to $75 million of indebtedness of a Group Member
where the aggregate amount of distributions that would have been paid with
respect to such newly issued Units or Partnership Securities, plus the related
distributions on the general partner interests in the Partnership and the
Operating Partnership in respect of the four-Quarter period ending prior to the
first day of the Quarter in which the issuance is to be consummated (assuming
such additional Units or Partnership Securities had been Outstanding throughout
such period and that distributions equal to the distributions that were actually
paid on the Outstanding Units during the period were paid on such additional
Units or Partnership Securities) did not exceed the interest costs actually
incurred during such period on the indebtedness that is to be repaid (or, if
such indebtedness was not outstanding throughout the entire period, would have
been incurred had such indebtedness been outstanding for the entire period).
(d) During the Subordination Period, the Partnership shall not issue (and
shall not issue any options, rights, warrants or appreciation rights relating
to) additional Partnership Securities having rights to distributions or in
liquidation ranking prior or senior to the Common Units, without the prior
approval of the holders of a Unit Majority.
(e) No fractional Units shall be issued by the Partnership.
5.8 CONVERSION OF SUBORDINATED UNITS
(a) A total of one-quarter of the Outstanding Subordinated Units (determined
upon the exercise or expiration of the Over-allotment Option after taking into
account the redemption of Subordinated Units pursuant to Section 5.3 or the
issuance of additional Subordinated Units pursuant to Section 5.2) will convert
into Common Units on a one-for-one basis on the first day after the Record Date
for distribution in respect of any Quarter ending on or after December 31, 1999,
in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding Common
Units and Subordinated Units with respect to each of the three consecutive,
non-overlapping four-Quarter periods immediately preceding such date equaled
or exceeded the sum of the Minimum Quarterly Distribution on all of the
Outstanding Common Units and Subordinated Units during such periods;
(ii) the Adjusted Operating Surplus generated during each of the two
consecutive, non-overlapping four-Quarter periods immediately preceding such
date equaled or exceeded the sum of the Minimum Quarterly Distribution on
all of the Outstanding Common Units and Subordinated Units, plus the related
distribution on the general partner interests in the Partnership and in the
Operating Partnership, during such periods; and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units is
zero.
(b) An additional one-quarter of the Outstanding Subordinated Units
(determined upon the exercise or expiration of the Over-allotment Option after
taking into account the redemption of Subordinated Units pursuant to Section 5.3
or the issuance of additional Subordinated Units pursuant to Section 5.2) will
convert into Common Units on a one-for-one basis on the first day after the
Record Date for distribution in respect of any Quarter ending on or after
December 31, 2000, in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding Common
Units and Subordinated Units with respect to each of the three consecutive,
non-overlapping four-Quarter periods immediately preceding such date equaled
or exceeded the sum of the Minimum Quarterly Distribution on all of the
Outstanding Common Units and Subordinated Units during such periods;
(ii) the Adjusted Operating Surplus generated during each of the two
consecutive, non-overlapping four-Quarter periods immediately preceding such
date equaled or exceeded the sum of the Minimum Quarterly Distribution on
all of the Outstanding Common Units and Subordinated Units, plus the related
distribution on the general partner interests in the Partnership and in the
Operating Partnership, during such periods; and
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(iii) the Cumulative Common Unit Arrearage on all of the Common Units is
zero;
provided, however, that the conversion of Subordinated Units pursuant to this
Section 5.8(b) may not occur until at least one year following the conversion of
Subordinated Units pursuant to Section 5.8(a).
(c) In the event that less than all of the Outstanding Subordinated Units
shall convert into Common Units pursuant to Section 5.8(a) or 5.8(b) at a time
when there shall be more than one holder of Subordinated Units, then, unless all
of the holders of Subordinated Units shall agree to a different allocation, the
Subordinated Units that are to be converted into Common Units shall be allocated
among the holders of Subordinated Units pro rata based on the number of
Subordinated Units held by each such holder.
(d) Any Subordinated Units that are not converted into Common Units pursuant
to Sections 5.8(a) and (b) shall convert into Common Units on a one-for-one
basis on the first day following the Record Date for distributions in respect of
the final Quarter of the Subordination Period.
(e) Notwithstanding any other provision of this Agreement, all the then
Outstanding Subordinated Units will automatically convert into Common Units on a
one-for-one basis as set forth in, and pursuant to the terms of, Section 11.4.
(f) A Subordinated Unit that has converted into a Common Unit shall be
subject to the provisions of Section 6.7(b).
5.9 LIMITED PREEMPTIVE RIGHT
Except as provided in this Section 5.9 and in Section 5.2, no Person shall
have any preemptive, preferential or other similar right with respect to the
issuance of any Partnership Security, whether unissued, held in the treasury or
hereafter created. The Managing General Partner shall have the right, which it
may from time to time assign in whole or in part to any of its Affiliates, to
purchase Partnership Securities from the Partnership whenever, and on the same
terms that, the Partnership issues Partnership Securities to Persons other than
the General Partners and their Affiliates, to the extent necessary to maintain
the Percentage Interests of the General Partners and their Affiliates equal to
that which existed immediately prior to the issuance of such Partnership
Securities.
5.10 SPLITS AND COMBINATION
(a) Subject to Sections 5.10(d), 6.6 and 6.9 (dealing with adjustments of
distribution levels), the Partnership may make a Pro Rata distribution of
Partnership Securities to all Record Holders or may effect a subdivision or
combination of Partnership Securities so long as, after any such event, each
Partner shall have the same Percentage Interest in the Partnership as before
such event, and any amounts calculated on a per Unit basis (including any Common
Unit Arrearage or Cumulative Common Unit Arrearage) or stated as a number of
Units (including the number of Subordinated Units that may convert prior to the
end of the Subordination Period and the number of additional Parity Units that
may be issued pursuant to Section 5.7 without a Unitholder vote) are
proportionately adjusted retroactive to the beginning of the Partnership.
(b) Whenever such a distribution, subdivision or combination of Partnership
Securities is declared, the Managing General Partner shall select a Record Date
as of which the distribution, subdivision or combination shall be effective and
shall send notice thereof at least 20 days prior to such Record Date to each
Record Holder as of a date not less than 10 days prior to the date of such
notice. The Managing General Partner also may cause a firm of independent public
accountants selected by it to calculate the number of Partnership Securities to
be held by each Record Holder after giving effect to such distribution,
subdivision or combination. The Managing General Partner shall be entitled to
rely on any certificate provided by such firm as conclusive evidence of the
accuracy of such calculation.
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(c) Promptly following any such distribution, subdivision or combination,
the Partnership may issue Certificates to the Record Holders of Partnership
Securities as of the applicable Record Date representing the new number of
Partnership Securities held by such Record Holders, or the Managing General
Partner may adopt such other procedures as it may deem appropriate to reflect
such changes. If any such combination results in a smaller total number of
Partnership Securities Outstanding, the Partnership shall require, as a
condition to the delivery to a Record Holder of such new Certificate, the
surrender of any Certificate held by such Record Holder immediately prior to
such Record Date.
(d) The Partnership shall not issue fractional Units upon any distribution,
subdivision or combination of Units. If a distribution, subdivision or
combination of Units would result in the issuance of fractional Units but for
the provisions of Section 5.7(e) and this Section 5.10(d), each fractional Unit
shall be rounded to the nearest whole Unit (and a 0.5 Unit shall be rounded to
the next higher Unit).
5.11 FULLY PAID AND NON-ASSESSABLE NATURE OF LIMITED PARTNER INTERESTS
All Limited Partner Interests issued pursuant to, and in accordance with the
requirements of, this Article V shall be fully paid and non-assessable Limited
Partner Interests in the Partnership, except as such non-assessability may be
affected by Section 17-607 of the Delaware Act.
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
6.1 ALLOCATIONS FOR CAPITAL ACCOUNT PURPOSES
For purposes of maintaining the Capital Accounts and in determining the
rights of the Partners among themselves, the Partnership's items of income,
gain, loss and deduction (computed in accordance with Section 5.5(b)) shall be
allocated among the Partners in each taxable year (or portion thereof) as
provided herein below.
(a) NET INCOME. After giving effect to the special allocations set forth
in Section 6.1(d), Net Income for each taxable year and all items of income,
gain, loss and deduction taken into account in computing Net Income for such
taxable year shall be allocated as follows:
(i) First, 100% to the General Partners in proportion to the aggregate
Net Losses allocated to the General Partners pursuant to Section 6.1(b)(iii)
for all previous taxable years until the aggregate Net Income allocated to
the General Partners pursuant to this Section 6.1(a)(i) for the current
taxable year and all previous taxable years is equal to the aggregate Net
Losses allocated to the General Partners pursuant to Section 6.1(b)(iii) for
all previous taxable years;
(ii) Second, 1% to the General Partners in proportion to the aggregate
Net Losses allocated to the General Partners pursuant to Section 6.1(b)(ii)
for all previous taxable years and 99% to the Unitholders, in accordance
with their respective Percentage Interests, until the aggregate Net Income
allocated to such Partners pursuant to this Section 6.1(a)(ii) for the
current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to such Partners pursuant to Section
6.1(b)(ii) for all previous taxable years; and
(iii) Third, the balance, if any, 100% to the General Partners, Pro Rata,
and the Unitholders in accordance with their respective Percentage
Interests.
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(b) NET LOSSES. After giving effect to the special allocations set forth
in Section 6.1(d), Net Losses for each taxable period and all items of income,
gain, loss and deduction taken into account in computing Net Losses for such
taxable period shall be allocated as follows:
(i) First, 1% to the General Partners, Pro Rata, and 99% to the
Unitholders, in accordance with their respective Percentage Interests, until
the aggregate Net Losses allocated pursuant to this Section 6.1(b)(i) for
the current taxable year and all previous taxable years is equal to the
aggregate Net Income allocated to such Partners pursuant to Section
6.1(a)(iii) for all previous taxable years, provided that the Net Losses
shall not be allocated pursuant to this Section 6.1(b)(i) to the extent that
such allocation would cause any Unitholder to have a deficit balance in its
Adjusted Capital Account at the end of such taxable year (or increase any
existing deficit balance in its Adjusted Capital Account);
(ii) Second, 1% to the General Partners, Pro Rata, and 99% to the
Unitholders in accordance with their respective Percentage Interests;
provided, that Net Losses shall not be allocated pursuant to this Section
6.1(b)(ii) to the extent that such allocation would cause any Unitholder to
have a deficit balance in its Adjusted Capital Account at the end of such
taxable year (or increase any existing deficit balance in its Adjusted
Capital Account);
(iii) Third, the balance, if any, 100% to the General Partners, Pro Rata.
(c) NET TERMINATION GAINS AND LOSSES. After giving effect to the special
allocations set forth in Section 6.1(d), all items of income, gain, loss and
deduction taken into account in computing Net Termination Gain or Net
Termination Loss for such taxable period shall be allocated in the same manner
as such Net Termination Gain or Net Termination Loss is allocated hereunder. All
allocations under this Section 6.1(c) shall be made after Capital Account
balances have been adjusted by all other allocations provided under this Section
6.1 and after all distributions of Available Cash provided under Sections 6.4
and 6.5 have been made; provided, however, that solely for purposes of this
Section 6.1(c), Capital Accounts shall not be adjusted for distributions made
pursuant to Section 12.4.
(i) If a Net Termination Gain is recognized (or deemed recognized pursuant
to Section 5.5(d)), such Net Termination Gain shall be allocated among the
Partners in the following manner (and the Capital Accounts of the Partners shall
be increased by the amount so allocated in each of the following subclauses, in
the order listed, before an allocation is made pursuant to the next succeeding
subclause):
(A) First, to each Partner having a deficit balance in its Capital
Account, in the proportion that such deficit balance bears to the total
deficit balances in the Capital Accounts of all Partners, until each such
Partner has been allocated Net Termination Gain equal to any such deficit
balance in its Capital Account;
(B) Second, 99% to all Unitholders holding Common Units, in proportion
to their relative Percentage Interests, and 1% to the General Partners, Pro
Rata, until the Capital Account in respect of each Common Unit then
Outstanding is equal to the sum of (1) its Unrecovered Capital plus (2) the
Minimum Quarterly Distribution for the Quarter during which the Liquidation
Date occurs, (the amount determined pursuant to this clause (2) is
hereinafter defined as the "Unpaid MQD") plus (3) any then existing
Cumulative Common Unit Arrearage;
(C) Third, if such Net Termination Gain is recognized (or is deemed to
be recognized) prior to the expiration of the Subordination Period, 99% to
all Unitholders holding Subordinated Units, in proportion to their relative
Percentage Interests, and 1% to the General Partners, Pro Rata, until the
Capital Account in respect of each Subordinated Unit then Outstanding equals
the sum of (1) its Unrecovered Capital, determined for the taxable year (or
portion thereof) to which this allocation of gain relates, plus (2) the
Minimum Quarterly Distribution for the Quarter during which the Liquidation
Date occurs;
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(D) Fourth, 99% to all Unitholders, in accordance with their relative
Percentage Interests, and 1% to the General Partners, Pro Rata, until the
Capital Account in respect of each Common Unit then Outstanding is equal to
the sum of (1) its Unrecovered Capital, plus (2) the Unpaid MQD, plus (3)
any then existing Cumulative Common Unit Arrearage, plus (4) the excess of
(aa) the First Target Distribution less the Minimum Quarterly Distribution
for each Quarter of the Partnership's existence over (bb) the cumulative per
Unit amount of any distributions of Operating Surplus that was distributed
pursuant to Sections 6.4(a)(iv) and 6.4(b)(ii) (the sum of (1) plus (2) plus
(3) plus (4) is hereinafter defined as the "First Liquidation Target
Amount");
(E) Fifth, 85.8673% to all Unitholders, in accordance with their
relative Percentage Interests, 13.1327% to the holders of the Incentive
Distribution Rights, Pro Rata, and 1% to the General Partners, Pro Rata,
until the Capital Account in respect of each Common Unit then Outstanding is
equal to the sum of (1) the First Liquidation Target Amount, plus (2) the
excess of (aa) the Second Target Distribution less the First Target
Distribution for each Quarter of the Partnership's existence over (bb) the
cumulative per Unit amount of any distributions of Operating Surplus that
was distributed pursuant to Sections 6.4(a)(v) and 6.4(b)(iii) (the sum of
(1) plus (2) is hereinafter defined as the "Second Liquidation Target
Amount");
(F) Sixth, 75.7653% to all Unitholders, in accordance with their
relative Percentage Interests, 23.2347% to the holders of the Incentive
Distribution Rights, Pro Rata, and 1% to the General Partners, Pro Rata,
until the Capital Account in respect of each Common Unit then Outstanding is
equal to the sum of (1) the Second Liquidation Target Amount, plus (2) the
excess of (aa) the Third Target Distribution less the Second Target
Distribution for each Quarter of the Partnership's existence over (bb) the
cumulative per Unit amount of any distributions of Operating Surplus that
was distributed pursuant to Sections 6.4(a)(vi) and 6.4(b)(iv); and
(G) Finally, any remaining amount 50.5102% to all Unitholders, in
accordance with their relative Percentage Interests, 48.4898% to the holders
of the Incentive Distribution Rights, Pro Rata, and 1% to the General
Partners, Pro Rata.
(ii) If a Net Termination Loss is recognized (or deemed recognized pursuant
to Section 5.5(d)), such Net Termination Loss shall be allocated among the
Partners in the following manner:
(A) First, if such Net Termination Loss is recognized (or is deemed to
be recognized) prior to the conversion of the last Outstanding Subordinated
Unit, 99% to the Unitholders holding Subordinated Units, in proportion to
their relative Percentage Interests, and 1% to the General Partners, Pro
Rata, until the Capital Account in respect of each Subordinated Unit then
Outstanding has been reduced to zero;
(B) Second, 99% to all Unitholders holding Common Units, in proportion
to their relative Percentage Interests, and 1% to the General Partners, Pro
Rata, until the Capital Account in respect of each Common Unit then
Outstanding has been reduced to zero; and
(C) Third, the balance, if any, 100% to the General Partners, Pro Rata.
(d) SPECIAL ALLOCATIONS. Notwithstanding any other provision of this
Section 6.1, the following special allocations shall be made for such taxable
period:
(i) PARTNERSHIP MINIMUM GAIN CHARGEBACK. Notwithstanding any other provision
of this Section 6.1, if there is a net decrease in Partnership Minimum Gain
during any Partnership taxable period, each Partner shall be allocated items of
Partnership income and gain for such period (and, if necessary, subsequent
periods) in the manner and amounts provided in Treasury Regulation Sections
1.704-2(f)(6), 1.704-2(g)(2) and 1.704-2(j)(2)(i), or any successor provision.
For purposes of this Section 6.1(d), each Partner's Adjusted Capital Account
balance shall be determined, and the allocation of income or gain required
hereunder shall be effected, prior to the application of any other allocations
pursuant to this
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Section 6.1(d) with respect to such taxable period (other than an allocation
pursuant to Sections 6.1(d)(vi) and 6.1(d)(vii)). This Section 6.1(d)(i) is
intended to comply with the Partnership Minimum Gain chargeback requirement in
Treasury Regulation Section 1.704-2(f) and shall be interpreted consistently
therewith.
(ii) CHARGEBACK OF PARTNER NONRECOURSE DEBT MINIMUM GAIN. Notwithstanding
the other provisions of this Section 6.1 (other than Section 6.1(d)(i)), except
as provided in Treasury Regulation Section 1.704-2(i)(4), if there is a net
decrease in Partner Nonrecourse Debt Minimum Gain during any Partnership taxable
period, any Partner with a share of Partner Nonrecourse Debt Minimum Gain at the
beginning of such taxable period shall be allocated items of Partnership income
and gain for such period (and, if necessary, subsequent periods) in the manner
and amounts provided in Treasury Regulation Sections 1.704-2(i)(4) and
1.704-2(j)(2)(ii), or any successor provisions. For purposes of this Section
6.1(d), each Partner's Adjusted Capital Account balance shall be determined, and
the allocation of income or gain required hereunder shall be effected, prior to
the application of any other allocations pursuant to this Section 6.1(d), other
than Section 6.1(d)(i) and other than an allocation pursuant to Sections
6.1(d)(vi) and 6.1(d)(vii), with respect to such taxable period. This Section
6.1(d)(ii) is intended to comply with the chargeback of items of income and gain
requirement in Treasury Regulation Section 1.704-2(i)(4) and shall be
interpreted consistently therewith.
(iii) PRIORITY ALLOCATIONS.
(A) If the amount of cash or the Net Agreed Value of any property
distributed (except cash or property distributed pursuant to Section 12.4)
to any Unitholder with respect to its Units for a taxable year is greater
(on a per Unit basis) than the amount of cash or the Net Agreed Value of
property distributed to the other Unitholders with respect to their Units
(on a per Unit basis), then (1) each Unitholder receiving such greater cash
or property distribution shall be allocated gross income in an amount equal
to the product of (aa) the amount by which the distribution (on a per Unit
basis) to such Unitholder exceeds the distribution (on a per Unit basis) to
the Unitholders receiving the smallest distribution and (bb) the number of
Units owned by the Unitholder receiving the greater distribution; and (2)
the General Partners shall be allocated gross income, Pro Rata, in an
aggregate amount equal to 1/99 of the sum of the amounts allocated in clause
(1) above.
(B) After the application of Section 6.1(d)(iii)(A), all or any portion
of the remaining items of Partnership gross income or gain for the taxable
period, if any, shall be allocated 100% to the holders of Incentive
Distribution Rights, Pro Rata, until the aggregate amount of such items
allocated to the holders of Incentive Distribution Rights pursuant to this
paragraph 6.1(d)(iii)(B) for the current taxable year and all previous
taxable years is equal to the cumulative amount of all Incentive
Distributions made to the holders of Incentive Distribution Rights from the
Closing Date to a date 45 days after the end of the current taxable year.
(iv) QUALIFIED INCOME OFFSET. In the event any Partner unexpectedly receives
any adjustments, allocations or distributions described in Treasury Regulation
Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or
1.704-1(b)(2)(ii)(d)(6), items of Partnership income and gain shall be specially
allocated to such Partner in an amount and manner sufficient to eliminate, to
the extent required by the Treasury Regulations promulgated under Section 704(b)
of the Code, the deficit balance, if any, in its Adjusted Capital Account
created by such adjustments, allocations or distributions as quickly as possible
unless such deficit balance is otherwise eliminated pursuant to Section
6.1(d)(i) or (ii).
(v) GROSS INCOME ALLOCATIONS. In the event any Partner has a deficit balance
in its Capital Account at the end of any Partnership taxable period in excess of
the sum of (A) the amount such Partner is required to restore pursuant to the
provisions of this Agreement and (B) the amount such Partner is deemed obligated
to restore pursuant to Treasury Regulation Sections 1.704-2(g) and
1.704-2(i)(5), such Partner shall be specially allocated items of Partnership
gross income and gain in the amount of such excess as quickly as possible;
provided, that an allocation pursuant to this Section 6.1(d)(v) shall be made
only if and
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to the extent that such Partner would have a deficit balance in its Capital
Account as adjusted after all other allocations provided for in this Section 6.1
have been tentatively made as if this Section 6.1(d)(v) were not in this
Agreement.
(vi) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions for any taxable period
shall be allocated to the Partners in accordance with their respective
Percentage Interests. If the Managing General Partner determines in its good
faith discretion that the Partnership's Nonrecourse Deductions must be allocated
in a different ratio to satisfy the safe harbor requirements of the Treasury
Regulations promulgated under Section 704(b) of the Code, the Managing General
Partner is authorized, upon notice to the other Partners, to revise the
prescribed ratio to the numerically closest ratio that does satisfy such
requirements.
(vii) PARTNER NONRECOURSE DEDUCTIONS. Partner Nonrecourse Deductions for any
taxable period shall be allocated 100% to the Partner that bears the Economic
Risk of Loss with respect to the Partner Nonrecourse Debt to which such Partner
Nonrecourse Deductions are attributable in accordance with Treasury Regulation
Section 1.704-2(i). If more than one Partner bears the Economic Risk of Loss
with respect to a Partner Nonrecourse Debt, such Partner Nonrecourse Deductions
attributable thereto shall be allocated between or among such Partners in
accordance with the ratios in which they share such Economic Risk of Loss.
(viii) NONRECOURSE LIABILITIES. For purposes of Treasury Regulation Section
1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of the
Partnership in excess of the sum of (A) the amount of Partnership Minimum Gain
and (B) the total amount of Nonrecourse Built-in Gain shall be allocated among
the Partners in accordance with their respective Percentage Interests.
(ix) CODE SECTION 754 ADJUSTMENTS. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(c)
of the Code is required, pursuant to Treasury Regulation Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts,
the amount of such adjustment to the Capital Accounts shall be treated as an
item of gain (if the adjustment increases the basis of the asset) or loss (if
the adjustment decreases such basis), and such item of gain or loss shall be
specially allocated to the Partners in a manner consistent with the manner in
which their Capital Accounts are required to be adjusted pursuant to such
Section of the Treasury Regulations.
(x) ECONOMIC UNIFORMITY. At the election of the Managing General Partner
with respect to any taxable period ending upon, or after, the termination of the
Subordination Period, all or a portion of the remaining items of Partnership
gross income or gain for such taxable period, after taking into account
allocations pursuant to Section 6.1(d)(iii), shall be allocated 100% to each
Partner holding Subordinated Units that are Outstanding as of the termination of
the Subordination Period ("Final Subordinated Units") in the proportion of the
number of Final Subordinated Units held by such Partner to the total number of
Final Subordinated Units then Outstanding, until each such Partner has been
allocated an amount of gross income or gain which increases the Capital Account
maintained with respect to such Final Subordinated Units to an amount equal to
the product of (A) the number of Final Subordinated Units held by such Partner
and (B) the Per Unit Capital Amount for a Common Unit. The purpose of this
allocation is to establish uniformity between the Capital Accounts underlying
Final Subordinated Units and the Capital Accounts underlying Common Units held
by Persons other than the General Partners and their Affiliates immediately
prior to the conversion of such Final Subordinated Units into Common Units. This
allocation method for establishing such economic uniformity will only be
available to the Managing General Partner if the method for allocating the
Capital Account maintained with respect to the Subordinated Units between the
transferred and retained Subordinated Units pursuant to Section 5.5(c)(ii) does
not otherwise provide such economic uniformity to the Final Subordinated Units.
(xi) CURATIVE ALLOCATION.
(A) Notwithstanding any other provision of this Section 6.1, other than
the Required Allocations, the Required Allocations shall be taken into
account in making the Agreed Allocations so that, to the
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extent possible, the net amount of items of income, gain, loss and deduction
allocated to each Partner pursuant to the Required Allocations and the
Agreed Allocations, together, shall be equal to the net amount of such items
that would have been allocated to each such Partner under the Agreed
Allocations had the Required Allocations and the related Curative Allocation
not otherwise been provided in this Section 6.1. Notwithstanding the
preceding sentence, Required Allocations relating to (1) Nonrecourse
Deductions shall not be taken into account except to the extent that there
has been a decrease in Partnership Minimum Gain and (2) Partner Nonrecourse
Deductions shall not be taken into account except to the extent that there
has been a decrease in Partner Nonrecourse Debt Minimum Gain. Allocations
pursuant to this Section 6.1(d)(xi)(A) shall only be made with respect to
Required Allocations to the extent the Managing General Partner reasonably
determines that such allocations will otherwise be inconsistent with the
economic agreement among the Partners. Further, allocations pursuant to this
Section 6.1(d)(xi)(A) shall be deferred with respect to allocations pursuant
to clauses (1) and (2) hereof to the extent the Managing General Partner
reasonably determines that such allocations are likely to be offset by
subsequent Required Allocations.
(B) The Managing General Partner shall have reasonable discretion, with
respect to each taxable period, to (1) apply the provisions of Section
6.1(d)(xi)(A) in whatever order is most likely to minimize the economic
distortions that might otherwise result from the Required Allocations, and
(2) divide all allocations pursuant to Section 6.1(d)(xi)(A) among the
Partners in a manner that is likely to minimize such economic distortions.
(xii) CORRECTIVE ALLOCATIONS. In the event of any allocation of Additional
Book Basis Derivative Items or any Book-Down Event or any recognition of a Net
Termination Loss, the following rules shall apply:
(A) In the case of any allocation of Additional Book Basis Derivative
Items (other than an allocation of Unrealized Gain or Unrealized Loss under
Section 5.5(d) hereof), the Managing General Partner shall allocate
additional items of gross income and gain away from the holders of Incentive
Distribution Rights to the Unitholders and the General Partners, or
additional items of deduction and loss away from the Unitholders and the
General Partners to the holders of Incentive Distribution Rights, to the
extent that the Additional Book Basis Derivative Items allocated to the
Unitholders or the General Partners exceed their Share of Additional Book
Basis Derivative Items. For this purpose, the Unitholders and the General
Partners shall be treated as being allocated Additional Book Basis
Derivative Items to the extent that such Additional Book Basis Derivative
Items have reduced the amount of income that would otherwise have been
allocated to the Unitholders or the General Partners under the Partnership
Agreement (e.g., Additional Book Basis Derivative Items taken into account
in computing cost of goods sold would reduce the amount of book income
otherwise available for allocation among the Partners). Any allocation made
pursuant to this Section 6.1(d)(xii)(A) shall be made after all of the other
Agreed Allocations have been made as if this Section 6.1(d)(xii) were not in
this Agreement and, to the extent necessary, shall require the reallocation
of items that have been allocated pursuant to such other Agreed Allocations.
(B) In the case of any negative adjustments to the Capital Accounts of
the Partners resulting from a Book-Down Event or from the recognition of a
Net Termination Loss, such negative adjustment (1) shall first be allocated,
to the extent of the Aggregate Remaining Net Positive Adjustments, in such a
manner, as reasonably determined by the Managing General Partner, that to
the extent possible the aggregate Capital Accounts of the Partners will
equal the amount which would have been the Capital Account balance of the
Partners if no prior Book-Up Events had occurred, and (2) any negative
adjustment in excess of the Aggregate Remaining Net Positive Adjustments
shall be allocated pursuant to Section 6.1(c) hereof.
(C) In making the allocations required under this Section 6.1(d)(xii),
the Managing General Partner, in its sole discretion, may apply whatever
conventions or other methodology it deems reasonable to satisfy the purpose
of this Section 6.1(d)(xii).
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(xiii) FIRST YEAR ALLOCATION. Net Income or Net Loss of the Partnership for
the period beginning on the Closing Date and ending on the last day of the
taxable year of the Partnership that includes the Closing Date shall be
allocated 100% to the General Partners, Pro Rata.
6.2 ALLOCATIONS FOR TAX PURPOSES
(a) Except as otherwise provided herein, for federal income tax purposes,
each item of income, gain, loss and deduction shall be allocated among the
Partners in the same manner as its correlative item of "book" income, gain, loss
or deduction is allocated pursuant to Section 6.1.
(b) In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss,
depreciation, amortization and cost recovery deductions shall be allocated for
federal income tax purposes among the Partners as follows:
(i) (A) In the case of a Contributed Property, such items attributable
thereto shall be allocated among the Partners in the manner provided under
Section 704(c) of the Code that takes into account the variation between the
Agreed Value of such property and its adjusted basis at the time of
contribution; and (B) any item of Residual Gain or Residual Loss
attributable to a Contributed Property shall be allocated among the Partners
in the same manner as its correlative item of "book" gain or loss is
allocated pursuant to Section 6.1.
(ii) (A) In the case of an Adjusted Property, such items shall (1)
first, be allocated among the Partners in a manner consistent with the
principles of Section 704(c) of the Code to take into account the Unrealized
Gain or Unrealized Loss attributable to such property and the allocations
thereof pursuant to Section 5.5(d)(i) or 5.5(d)(ii), and (2) second, in the
event such property was originally a Contributed Property, be allocated
among the Partners in a manner consistent with Section 6.2(b)(i)(A); and (B)
any item of Residual Gain or Residual Loss attributable to an Adjusted
Property shall be allocated among the Partners in the same manner as its
correlative item of "book" gain or loss is allocated pursuant to Section
6.1.
(iii) The Managing General Partner shall apply the principles of Treasury
Regulation Section 1.704-3(d) to eliminate Book-Tax Disparities.
(c) For the proper administration of the Partnership and for the
preservation of uniformity of the Limited Partner Interests (or any class or
classes thereof), the Managing General Partner shall have sole discretion to (i)
adopt such conventions as it deems appropriate in determining the amount of
depreciation, amortization and cost recovery deductions; (ii) make special
allocations for federal income tax purposes of income (including, without
limitation, gross income) or deductions; and (iii) amend the provisions of this
Agreement as appropriate (x) to reflect the proposal or promulgation of Treasury
Regulations under Section 704(b) or Section 704(c) of the Code or (y) otherwise
to preserve or achieve uniformity of the Limited Partner Interests (or any class
or classes thereof). The Managing General Partner may adopt such conventions,
make such allocations and make such amendments to this Agreement as provided in
this Section 6.2(c) only if such conventions, allocations or amendments would
not have a material adverse effect on the Partners, the holders of any class or
classes of Limited Partner Interests issued and Outstanding or the Partnership,
and if such allocations are consistent with the principles of Section 704 of the
Code.
(d) The Managing General Partner in its discretion may determine to
depreciate or amortize the portion of an adjustment under Section 743(b) of the
Code attributable to unrealized appreciation in any Adjusted Property (to the
extent of the unamortized Book-Tax Disparity) using a predetermined rate derived
from the depreciation or amortization method and useful life applied to the
Partnership's common basis of such property, despite any inconsistency of such
approach with Proposed Treasury Regulation Section 1.168-2(n), Treasury
Regulation Section 1.167(c)-l(a)(6) or the legislative history of Section 197 of
the Code. If the Managing General Partner determines that such reporting
position cannot reasonably be
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taken, the Managing General Partner may adopt depreciation and amortization
conventions under which all purchasers acquiring Limited Partner Interests in
the same month would receive depreciation and amortization deductions, based
upon the same applicable rate as if they had purchased a direct interest in the
Partnership's property. If the Managing General Partner chooses not to utilize
such aggregate method, the Managing General Partner may use any other reasonable
depreciation and amortization conventions to preserve the uniformity of the
intrinsic tax characteristics of any Limited Partner Interests that would not
have a material adverse effect on the Limited Partners or the Record Holders of
any class or classes of Limited Partner Interests.
(e) Any gain allocated to the Partners upon the sale or other taxable
disposition of any Partnership asset shall, to the extent possible, after taking
into account other required allocations of gain pursuant to this Section 6.2, be
characterized as Recapture Income in the same proportions and to the same extent
as such Partners (or their predecessors in interest) have been allocated any
deductions directly or indirectly giving rise to the treatment of such gains as
Recapture Income.
(f) All items of income, gain, loss, deduction and credit recognized by the
Partnership for federal income tax purposes and allocated to the Partners in
accordance with the provisions hereof shall be determined without regard to any
election under Section 754 of the Code which may be made by the Partnership;
provided, however, that such allocations, once made, shall be adjusted as
necessary or appropriate to take into account those adjustments permitted or
required by Sections 734 and 743 of the Code.
(g) Each item of Partnership income, gain, loss and deduction attributable
to a transferred Partnership Interest, shall for federal income tax purposes, be
determined on an annual basis and prorated on a monthly basis and shall be
allocated to the Partners as of the opening of the New York Stock Exchange on
the first Business Day of each month; provided, however, that (i) such items for
the period beginning on the Closing Date and ending on the last day of the month
in which the Option Closing Date or the expiration of the Over-allotment Option
occurs shall be allocated to the Partners as of the opening of the New York
Stock Exchange on the first Business Day of the next succeeding month; and
provided, further, that gain or loss on a sale or other disposition of any
assets of the Partnership other than in the ordinary course of business shall be
allocated to the Partners as of the opening of the New York Stock Exchange on
the first Business Day of the month in which such gain or loss is recognized for
federal income tax purposes. The Managing General Partner may revise, alter or
otherwise modify such methods of allocation as it determines necessary, to the
extent permitted or required by Section 706 of the Code and the regulations or
rulings promulgated thereunder.
(h) Allocations that would otherwise be made to a Limited Partner under the
provisions of this Article VI shall instead be made to the beneficial owner of
Limited Partner Interests held by a nominee in any case in which the nominee has
furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the Managing
General Partner in its sole discretion.
6.3 REQUIREMENT AND CHARACTERIZATION OF DISTRIBUTIONS; DISTRIBUTIONS TO RECORD
HOLDERS
(a) Within 45 days following the end of each Quarter commencing with the
Quarter ending on March 31, 1997, an amount equal to 100% of Available Cash with
respect to such Quarter shall, subject to Section 17-607 of the Delaware Act, be
distributed in accordance with this Article VI by the Partnership to the
Partners as of the Record Date selected by the Managing General Partner in its
reasonable discretion. All amounts of Available Cash distributed by the
Partnership on any date from any source shall be deemed to be Operating Surplus
until the sum of all amounts of Available Cash theretofore distributed by the
Partnership to the Partners pursuant to Section 6.4 equals the Operating Surplus
from the Closing Date through the close of the immediately preceding Quarter.
Any remaining amounts of Available Cash distributed by the Partnership on such
date shall, except as otherwise provided in Section 6.5, be deemed to
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be "Capital Surplus." All distributions required to be made under this Agreement
shall be made subject to Section 17-607 of the Delaware Act.
(b) Notwithstanding Section 6.3(a), in the event of the dissolution and
liquidation of the Partnership, all receipts received during or after the
Quarter in which the Liquidation Date occurs, other than from borrowings
described in (a)(ii) of the definition of Available Cash, shall be applied and
distributed solely in accordance with, and subject to the terms and conditions
of, Section 12.4.
(c) The Managing General Partner shall have the discretion to treat taxes
paid by the Partnership on behalf of, or amounts withheld with respect to, all
or less than all of the Partners, as a distribution of Available Cash to such
Partners.
(d) Each distribution in respect of a Partnership Interest shall be paid by
the Partnership, directly or through the Transfer Agent or through any other
Person or agent, only to the Record Holder of such Partnership Interest as of
the Record Date set for such distribution. Such payment shall constitute full
payment and satisfaction of the Partnership's liability in respect of such
payment, regardless of any claim of any Person who may have an interest in such
payment by reason of an assignment or otherwise.
6.4 DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS
(a) DURING SUBORDINATION PERIOD. Available Cash with respect to any Quarter
within the Subordination Period that is deemed to be Operating Surplus pursuant
to the provisions of Section 6.3 or 6.5 shall, subject to Section 17-607 of the
Delaware Act, be distributed as follows, except as otherwise required by Section
5.6(b) in respect of additional Partnership Securities issued pursuant thereto:
(i) First, 99% to the Unitholders holding Common Units, in proportion to
their relative Percentage Interests, and 1% to the General Partners, Pro
Rata, until there has been distributed in respect of each Common Unit then
Outstanding an amount equal to the Minimum Quarterly Distribution for such
Quarter;
(ii) Second, 99% to the Unitholders holding Common Units, in proportion
to their relative Percentage Interests, and 1% to the General Partners, Pro
Rata, until there has been distributed in respect of each Common Unit then
Outstanding an amount equal to the Cumulative Common Unit Arrearage existing
with respect to such Quarter;
(iii) Third, 99% to the Unitholders holding Subordinated Units, in
proportion to their relative Percentage Interests, and 1% to the General
Partners, Pro Rata, until there has been distributed in respect of each
Subordinated Unit then Outstanding an amount equal to the Minimum Quarterly
Distribution for such Quarter;
(iv) Fourth, 99% to all Unitholders, in accordance with their relative
Percentage Interests, and 1% to the General Partners, Pro Rata, until there
has been distributed in respect of each Unit then Outstanding an amount
equal to the excess of the First Target Distribution over the Minimum
Quarterly Distribution for such Quarter;
(v) Fifth, 85.8673% to all Unitholders, in accordance with their
relative Percentage Interests, 13.1327% to the holders of the Incentive
Distribution Rights, Pro Rata, and 1% to the General Partners, Pro Rata,
until there has been distributed in respect of each Unit then Outstanding an
amount equal to the excess of the Second Target Distribution over the First
Target Distribution for such Quarter;
(vi) Sixth, 75.7653% to all Unitholders, in accordance with their
relative Percentage Interests, 23.2347% to the holders of the Incentive
Distribution Rights, Pro Rata, and 1% to the General Partners, Pro Rata,
until there has been distributed in respect of each Unit then Outstanding an
amount equal to the excess of the Third Target Distribution over the Second
Target Distribution for such Quarter; and
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(vii) Thereafter, 50.5102% to all Unitholders, in accordance with their
relative Percentage Interests, 48.4898% to the holders of the Incentive
Distribution Rights, Pro Rata, and 1% to the General Partners, Pro Rata;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 6.6(a), the
distribution of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made solely in accordance with Section
6.4(a)(vii).
(b) AFTER SUBORDINATION PERIOD. Available Cash with respect to any Quarter
after the Subordination Period that is deemed to be Operating Surplus pursuant
to the provisions of Section 6.3 or 6.5, subject to Section 17-607 of the
Delaware Act, shall be distributed as follows, except as otherwise required by
Section 5.6(b) in respect of additional Partnership Securities issued pursuant
thereto:
(i) First, 99% to all Unitholders, in accordance with their relative
Percentage Interests, and 1% to the General Partners, Pro Rata, until there
has been distributed in respect of each Unit then Outstanding an amount
equal to the Minimum Quarterly Distribution for such Quarter;
(ii) Second, 99% to all Unitholders, in accordance with their relative
Percentage Interests, and 1% to the General Partners, Pro Rata, until there
has been distributed in respect of each Unit then Outstanding an amount
equal to the excess of the First Target Distribution over the Minimum
Quarterly Distribution for such Quarter;
(iii) Third, 85.8673% to all Unitholders, in accordance with their
relative Percentage Interests, and 13.1327% to the holders of the Incentive
Distribution Rights, Pro Rata, and 1% to the General Partners, Pro Rata,
until there has been distributed in respect of each Unit then Outstanding an
amount equal to the excess of the Second Target Distribution over the First
Target Distribution for such Quarter;
(iv) Fourth, 75.7653% to all Unitholders, in accordance with their
relative Percentage Interests, and 23.2347% to the holders of the Incentive
Distribution Rights, Pro Rata, and 1% to the General Partners, Pro Rata,
until there has been distributed in respect of each Unit then Outstanding an
amount equal to the excess of the Third Target Distribution over the Second
Target Distribution for such Quarter; and
(v) Thereafter, 50.5102% to all Unitholders, in accordance with their
relative Percentage Interests, and 48.4898% to the holders of the Incentive
Distribution Rights, Pro Rata, and 1% to the General Partners, Pro Rata;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 6.6(a), the
distribution of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made solely in accordance with Section 6.4(b)(v).
6.5 DISTRIBUTIONS OF AVAILABLE CASH FROM CAPITAL SURPLUS
Available Cash that is deemed to be Capital Surplus pursuant to the
provisions of Section 6.3(a) shall, subject to Section 17-607 of the Delaware
Act, be distributed, unless the provisions of Section 6.3 require otherwise, 99%
to all Unitholders, in accordance with their relative Percentage Interests, and
1% to the General Partners, Pro Rata, until a hypothetical holder of a Common
Unit acquired on the Closing Date has received with respect to such Common Unit,
during the period since the Closing Date through such date, distributions of
Available Cash that are deemed to be Capital Surplus in an aggregate amount
equal to the Initial Unit Price. Available Cash that is deemed to be Capital
Surplus shall then be distributed 99% to all Unitholders holding Common Units,
in accordance with their relative Percentage Interests, and 1% to the General
Partners, Pro Rata, until there has been distributed in respect of each Common
Unit then
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Outstanding an amount equal to the Cumulative Common Unit Arrearage. Thereafter,
all Available Cash shall be distributed as if it were Operating Surplus and
shall be distributed in accordance with Section 6.4.
6.6 ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
(a) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution, Third Target Distribution, Common Unit Arrearages and
Cumulative Common Unit Arrearages shall be proportionately adjusted in the event
of any distribution, combination or subdivision (whether effected by a
distribution payable in Units or otherwise) of Units or other Partnership
Securities in accordance with Section 5.10. In the event of a distribution of
Available Cash that is deemed to be from Capital Surplus, the then applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution shall be adjusted proportionately
downward to equal the product obtained by multiplying the otherwise applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution, as the case may be, by a fraction of
which the numerator is the Unrecovered Capital of the Common Units immediately
after giving effect to such distribution and of which the denominator is the
Unrecovered Capital of the Common Units immediately prior to giving effect to
such distribution.
(b) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution shall also be subject to
adjustment pursuant to Section 6.9.
6.7 SPECIAL PROVISIONS RELATING TO THE HOLDERS OF SUBORDINATED UNITS
(a) Except with respect to the right to vote on or approve matters requiring
the vote or approval of a percentage of the holders of Outstanding Common Units
and the right to participate in allocations of income, gain, loss and deduction
and distributions made with respect to Common Units, the holder of a
Subordinated Unit shall have all of the rights and obligations of a Unitholder
holding Common Units hereunder; provided, however, that immediately upon the
conversion of Subordinated Units into Common Units pursuant to Section 5.8, the
Unitholder holding a Subordinated Unit shall possess all of the rights and
obligations of a Unitholder holding Common Units hereunder, including the right
to vote as a Common Unitholder and the right to participate in allocations of
income, gain, loss and deduction and distributions made with respect to Common
Units; provided, however, that such converted Subordinated Units shall remain
subject to the provisions of Sections 5.5(c)(ii), 6.1(d)(x) and 6.7(b).
(b) The Unitholder holding a Subordinated Unit which has converted into a
Common Unit pursuant to Section 5.8 shall not be issued a Common Unit
Certificate pursuant to Section 4.1, and shall not be permitted to transfer its
converted Subordinated Units to a Person which is not an Affiliate of the holder
until such time as the Managing General Partner determines, based on advice of
counsel, that a converted Subordinated Unit should have, as a substantive
matter, like intrinsic economic and federal income tax characteristics, in all
material respects, to the intrinsic economic and federal income tax
characteristics of an Initial Common Unit. In connection with the condition
imposed by this Section 6.7(b), the Managing General Partner may take whatever
reasonable steps are required to provide economic uniformity to the converted
Subordinated Units in preparation for a transfer of such converted Subordinated
Units, including the application of Sections 5.5(c)(ii) and 6.1(d)(x); provided,
however, that no such steps may be taken that would have a material adverse
effect on the Unitholders holding Common Units represented by Common Unit
Certificates.
6.8 SPECIAL PROVISIONS RELATING TO THE HOLDERS OF INCENTIVE DISTRIBUTION RIGHTS
Notwithstanding anything to the contrary set forth in this Agreement, the
holders of the Incentive Distribution Rights (a) shall (i) possess the rights
and obligations provided in this Agreement with respect to a Limited Partner
pursuant to Articles III and VII and (ii) have a Capital Account as a Partner
pursuant to Section 5.5 and all other provisions related thereto and (b) shall
not (i) be entitled to vote on any
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matters requiring the approval or vote of the holders of Outstanding Units, (ii)
be entitled to any distributions other than as provided in Sections 6.4(a)(v),
(vi) and (vii), 6.4(b)(iii), (iv) and (v), and 12.4 or (iii) be allocated items
of income, gain, loss or deduction other than as specified in this Article VI.
6.9 ENTITY-LEVEL TAXATION
If legislation is enacted or the interpretation of existing language is
modified by the relevant governmental authority which causes the Partnership or
the Operating Partnership to be treated as an association taxable as a
corporation or otherwise subjects the Partnership or the Operating Partnership
to entity-level taxation for federal income tax purposes, the then applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution shall be adjusted to equal the
product obtained by multiplying (a) the amount thereof by (b) one minus the sum
of (i) the highest marginal federal corporate (or other entity, as applicable)
income tax rate of the Partnership or the Operating Partnership for the taxable
year of the Partnership or the Operating Partnership in which such Quarter
occurs (expressed as a percentage) plus (ii) the effective overall state and
local income tax rate (expressed as a percentage) applicable to the Partnership
or the Operating Partnership for the calendar year next preceding the calendar
year in which such Quarter occurs (after taking into account the benefit of any
deduction allowable for federal income tax purposes with respect to the payment
of state and local income taxes), but only to the extent of the increase in such
rates resulting from such legislation or interpretation. Such effective overall
state and local income tax rate shall be determined for the taxable year next
preceding the first taxable year during which the Partnership or the Operating
Partnership is taxable for federal income tax purposes as an association taxable
as a corporation or is otherwise subject to entity-level taxation by determining
such rate as if the Partnership or the Operating Partnership had been subject to
such state and local taxes during such preceding taxable year.
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
7.1 MANAGEMENT
(a) The Managing General Partner shall conduct, direct and manage all
activities of the Partnership. Except as otherwise expressly provided in this
Agreement, all management powers over the business and affairs of the
Partnership shall be exclusively vested in the Managing General Partner, and
neither the Special General Partner nor any Limited Partner or Assignee shall
have any management power over the business and affairs of the Partnership. In
addition to the powers now or hereafter granted a general partner of a limited
partnership under applicable law or which are granted to the Managing General
Partner under any other provision of this Agreement, the Managing General
Partner, subject to Section 7.3, shall have full power and authority to do all
things and on such terms as it, in its sole discretion, may deem necessary or
appropriate to conduct the business of the Partnership, to exercise all powers
set forth in Section 2.5 and to effectuate the purposes set forth in Section
2.4, including the following:
(i) the making of any expenditures, the lending or borrowing of money,
the assumption or guarantee of, or other contracting for, indebtedness and
other liabilities, the issuance of evidences of indebtedness, including
indebtedness that is convertible into Partnership Securities, and the
incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(iii) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the Partnership or
the merger or other combination of the Partnership with or into another
Person (the matters described in this clause (iii) being subject, however,
to any prior approval that may be required by Section 7.3);
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(iv) the use of the assets of the Partnership (including cash on hand)
for any purpose consistent with the terms of this Agreement, including the
financing of the conduct of the operations of the Partnership Group, the
lending of funds to other Persons (including the Operating Partnership), the
repayment of obligations of the Partnership Group and the making of capital
contributions to any member of the Partnership Group;
(iv) the negotiation, execution and performance of any contracts,
conveyances or other instruments (including instruments that limit the
liability of the Partnership under contractual arrangements to all or
particular assets of the Partnership, with the other party to the contract
to have no recourse against the General Partners or their assets other than
their interest in the Partnership, even if same results in the terms of the
transaction being less favorable to the Partnership than would otherwise be
the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees (including employees
having titles such as "president," "vice president," "secretary" and
"treasurer") and agents, outside attorneys, accountants, consultants and
contractors and the determination of their compensation and other terms of
employment or hiring;
(viii) the maintenance of such insurance for the benefit of the
Partnership Group and the Partners as it deems necessary or appropriate;
(ix) the formation of, or acquisition of an interest in, and the
contribution of property and the making of loans to, any further limited or
general partnerships, joint ventures, corporations or other relationships
(including the acquisition of interests in, and the contributions of
property to, the Operating Partnership from time to time) subject to the
restrictions set forth in Section 2.4;
(x) the control of any matters affecting the rights and obligations of
the Partnership, including the bringing and defending of actions at law or
in equity and otherwise engaging in the conduct of litigation and the
incurring of legal expense and the settlement of claims and litigation;
(xi) the indemnification of any Person against liabilities and
contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any National
Securities Exchange and the delisting of some or all of the Limited Partner
Interests from, or requesting that trading be suspended on, any such
exchange (subject to any prior approval that may be required under Section
4.9);
(xiii) unless restricted or prohibited by Section 5.7, the purchase, sale
or other acquisition or disposition of Partnership Securities, or the
issuance of additional options, rights, warrants and appreciation rights
relating to Partnership Securities; and
(xiv) the undertaking of any action in connection with the Partnership's
participation in the Operating Partnership as the limited partner.
(b) Notwithstanding any other provision of this Agreement, the Operating
Partnership Agreement, the Delaware Act or any applicable law, rule or
regulation, each of the Partners and Assignees and each other Person who may
acquire an interest in Partnership Securities hereby (i) approves, ratifies and
confirms the execution, delivery and performance by the parties thereto of the
Operating Partnership Agreement, the Underwriting Agreement, the Contribution
and Conveyance Agreement, the agreements and other documents filed as exhibits
to the Registration Statement, and the other agreements described in or filed as
a part of the Registration Statement; (ii) agrees that the Managing General
Partner (on its own or through any officer of the Partnership) is authorized to
execute, deliver and perform the agreements referred to in clause (i) of this
sentence and the other agreements, acts, transactions and matters described in
or contemplated by the Registration Statement on behalf of the Partnership
without any further act,
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approval or vote of the Partners or the Assignees or the other Persons who may
acquire an interest in Partnership Securities; and (iii) agrees that the
execution, delivery or performance by the General Partners, any Group Member or
any Affiliate of any of them, of this Agreement or any agreement authorized or
permitted under this Agreement (including the exercise by the Managing General
Partner or any Affiliate of the Managing General Partner of the rights accorded
pursuant to Article XV), shall not constitute a breach by the General Partners
of any duty that the General Partners may owe the Partnership or the Limited
Partners or any other Persons under this Agreement (or any other agreements) or
of any duty stated or implied by law or equity.
7.2 CERTIFICATE OF LIMITED PARTNERSHIP
The Managing General Partner has caused the Certificate of Limited
Partnership to be filed with the Secretary of State of the State of Delaware as
required by the Delaware Act and shall use all reasonable efforts to cause to be
filed such other certificates or documents as may be determined by the Managing
General Partner in its sole discretion to be reasonable and necessary or
appropriate for the formation, continuation, qualification and operation of a
limited partnership (or a partnership in which the limited partners have limited
liability) in the State of Delaware or any other state in which the Partnership
may elect to do business or own property. To the extent that such action is
determined by the Managing General Partner in its sole discretion to be
reasonable and necessary or appropriate, the Managing General Partner shall file
amendments to and restatements of the Certificate of Limited Partnership and do
all things to maintain the Partnership as a limited partnership (or a
partnership or other entity in which the limited partners have limited
liability) under the laws of the State of Delaware or of any other state in
which the Partnership may elect to do business or own property. Subject to the
terms of Section 3.4(a), the Managing General Partner shall not be required,
before or after filing, to deliver or mail a copy of the Certificate of Limited
Partnership, any qualification document or any amendment thereto to any Limited
Partner.
7.3 RESTRICTIONS ON GENERAL PARTNERS' AUTHORITY
(a) The Managing General Partner may not, without written approval of the
specific act by holders of all of the Outstanding Limited Partner Interests or
by other written instrument executed and delivered by holders of all of the
Outstanding Limited Partner Interests subsequent to the date of this Agreement,
take any action in contravention of this Agreement, including, except as
otherwise provided in this Agreement, (i) committing any act that would make it
impossible to carry on the ordinary business of the Partnership; (ii) possessing
Partnership property, or assigning any rights in specific Partnership property,
for other than a Partnership purpose; (iii) admitting a Person as a Partner;
(iv) amending this Agreement in any manner; or (v) transferring its interest as
general partner of the Partnership.
(b) Except as provided in Articles XII and XIV, the Managing General Partner
may not sell, exchange or otherwise dispose of all or substantially all of the
Partnership's assets in a single transaction or a series of related transactions
or approve on behalf of the Partnership the sale, exchange or other disposition
of all or substantially all of the assets of the Operating Partnership, without
the approval of holders of at least a Unit Majority; provided however that this
provision shall not preclude or limit the Managing General Partner's ability to
mortgage, pledge, hypothecate or grant a security interest in all or
substantially all of the assets of the Partnership or Operating Partnership and
shall not apply to any forced sale of any or all of the assets of the
Partnership or Operating Partnership pursuant to the foreclosure of, or other
realization upon, any such encumbrance. Without the approval of holders of at
least a Unit Majority, the Managing General Partner shall not, on behalf of the
Partnership, (i) consent to any amendment to the Operating Partnership Agreement
or, except as expressly permitted by Section 7.9(d), take any action permitted
to be taken by a partner of the Operating Partnership, in either case, that
would have a material adverse effect on the Partnership as a partner of the
Operating Partnership or (ii) except as
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permitted under Sections 4.6, 11.1 and 11.2, elect or cause the Partnership to
elect a successor general partner of the Partnership or the Operating
Partnership.
(c) At all times while serving as a General Partner of the Partnership, each
General Partner shall not make any dividend or distribution on, or repurchase
any shares of, its stock or take any other action within its control if the
effect of such action would cause the combined net worth of the General
Partners, independent of their interest in the Partnership Group, to be less
than $15.0 million or such lower amount, which lower amount is based on an
Opinion of Counsel that states, (i) based on a change in the position of the
Internal Revenue Service with respect to partnership status pursuant to Code
Section 7701, such lower amount would not cause the Partnership or the Operating
Partnership to be treated as an association taxable as a corporation or
otherwise to be taxed as an entity for federal income tax purposes and (ii)
would not result in the loss of the limited liability of any Limited Partner or
of the limited partner of the Operating Partnership.
7.4 REIMBURSEMENT OF THE MANAGING GENERAL PARTNER
(a) Except as provided in this Section 7.4 and elsewhere in this Agreement
or in the Operating Partnership Agreement, the Managing General Partner shall
not be compensated for its services as general partner of any Group Member.
(b) The Managing General Partner shall be reimbursed on a monthly basis, or
such other reasonable basis as the Managing General Partner may determine in its
sole discretion, for (i) all direct and indirect expenses it incurs or payments
it makes on behalf of the Partnership (including salary, bonus, incentive
compensation and other amounts paid to any Person including Affiliates of the
Managing General Partner to perform services for the Partnership or for the
Managing General Partner in the discharge of its duties to the Partnership), and
(ii) all other necessary or appropriate expenses allocable to the Partnership or
otherwise reasonably incurred by the Managing General Partner in connection with
operating the Partnership's business (including expenses allocated to the
Managing General Partner by its Affiliates). The Managing General Partner shall
determine the expenses that are allocable to the Partnership in any reasonable
manner determined by the Managing General Partner in its sole discretion.
Reimbursements pursuant to this Section 7.4 shall be in addition to any
reimbursement to the Managing General Partner as a result of indemnification
pursuant to Section 7.7.
(c) Subject to Section 5.7, the Managing General Partner, in its sole
discretion and without the approval of the Limited Partners (who shall have no
right to vote in respect thereof), may propose and adopt on behalf of the
Partnership employee benefit plans, employee programs and employee practices
(including plans, programs and practices involving the issuance of Partnership
Securities or options to purchase Partnership Securities), or cause the
Partnership to issue Partnership Securities in connection with, or pursuant to,
any employee benefit plan, employee program or employee practice maintained or
sponsored by the Managing General Partner or any of its Affiliates, in each case
for the benefit of employees of the Managing General Partner, any Group Member
or any Affiliate, or any of them, in respect of services performed, directly or
indirectly, for the benefit of the Partnership Group. The Partnership agrees to
issue and sell to the Managing General Partner or any of its Affiliates any
Partnership Securities that the Managing General Partner or such Affiliate is
obligated to provide to any employees pursuant to any such employee benefit
plans, employee programs or employee practices. Expenses incurred by the
Managing General Partner in connection with any such plans, programs and
practices (including the net cost to the Managing General Partner or such
Affiliate of Partnership Securities purchased by the Managing General Partner or
such Affiliate from the Partnership to fulfill options or awards under such
plans, programs and practices) shall be reimbursed in accordance with Section
7.4(b). Any and all obligations of the Managing General Partner under any
employee benefit plans, employee programs or employee practices adopted by the
Managing General Partner as permitted by this Section 7.4(c) shall constitute
obligations of the Managing General Partner hereunder and shall be assumed by
any successor Managing General Partner approved pursuant to Section 11.1 or 11.2
or the
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transferee of or successor to all of the Managing General Partner's Partnership
Interest as a general partner in the Partnership pursuant to Section 4.6.
7.5 OUTSIDE ACTIVITIES
(a) After the Closing Date, the Managing General Partner, for so long as it
is the Managing General Partner of the Partnership (i) agrees that its sole
business will be to act as a general partner of the Partnership, the Operating
Partnership, and any other partnership of which the Partnership or the Operating
Partnership is, directly or indirectly, a partner and to undertake activities
that are ancillary or related thereto (including being a limited partner in the
partnership), (ii) shall not engage in any business or activity or incur any
debts or liabilities except in connection with or incidental to (A) its
performance as general partner of one or more Group Members or as described in
or contemplated by the Registration Statement or (B) the acquiring, owning or
disposing of debt or equity securities in any Group Member and (iii) shall not
engage in the retail sale of propane to end users in the continental United
States. Except as provided in this Section 7.5(a) with respect to the retail
sale of propane to end users in the continental United States, nothing herein
contained in this paragraph shall prohibit an Affiliate of the Managing General
Partner (including the Special General Partner) from competing with the
Partnership.
Affiliates of the Managing General Partner may engage in a business activity
that involves the retail sales of propane to end users in the continental United
States only if (i) the Managing General Partner determines in its reasonable
judgment, prior to the commencement of such activity, that it is not in the best
interests of the Partnership to engage in such activity either (A) because of
the financial commitments or operating characteristics associated with such
activity or (B) because such activity is not consistent with the Partnership's
business strategy or cannot otherwise be integrated with the Partnership's
operations on a beneficial basis to the Partnership or (ii) such activity is
being undertaken as provided in a joint venture agreement or other agreement
between the Partnership and an Affiliate of a General Partner and such joint
venture or other agreement was determined at the time it was entered into to be
fair to the Partnership in the reasonable judgment of the Managing General
Partner.
(b) Except as specifically restricted by Section 7.5(a), each Indemnitee
shall have the right to engage in businesses of every type and description and
other activities for profit and to engage in and possess an interest in other
business ventures of any and every type or description, whether in businesses
engaged in or anticipated to be engaged in by any Group Member, independently or
with others, including business interests and activities in direct competition
with the business and activities of any Group Member, and none of the same shall
constitute a breach of this Agreement or any duty express or implied by law to
any Group Member or any Partner or Assignee. Neither any Group Member, any
Limited Partner nor any other Person shall have any rights by virtue of this
Agreement, the Operating Partnership Agreement or the partnership relationship
established hereby or thereby in any business ventures of any Indemnitee.
(c) Subject to the terms of Section 7.5(a) and (b), but otherwise
notwithstanding anything to the contrary in this Agreement, (i) the engaging in
competitive activities by any Indemnitees (other than the Managing General
Partner) in accordance with the provisions of this Section 7.5 is hereby
approved by the Partnership and all Partners and (ii) it shall be deemed not to
be a breach of the Managing General Partner's fiduciary duty or any other
obligation of any type whatsoever of the General Partners for the Indemnitees
(other than the Managing General Partner) to engage in such business interests
and activities in preference to or to the exclusion of the Partnership
(including, without limitation, the Managing General Partner and the Indemnities
shall have no obligation to present business opportunities to the Partnership).
(d) The Managing General Partner and any of its Affiliates may acquire Units
or other Partnership Securities in addition to those acquired on the Closing
Date and, except as otherwise provided in this Agreement, shall be entitled to
exercise all rights of a General Partner or Limited Partner, as applicable,
relating to such Units or Partnership Securities.
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(e) The term "Affiliates" when used in Sections 7.5(a) and 7.5(b) with
respect to the Managing General Partner shall not include any Group Member or
any Subsidiary of the Group Member.
(f) Anything in this Agreement to the contrary notwithstanding, to the
extent that provisions of Sections 7.7, 7.8, 7.9, 7.10 or other Sections of this
Agreement purport or are interpreted to have the effect of restricting the
fiduciary duties that might otherwise, as a result of Delaware or other
applicable law, be owed by the Managing General Partner to the Partnership and
its Limited Partners, or to constitute a waiver or consent by the Limited
Partners to any such restriction, such provisions shall be inapplicable and have
no effect in determining whether the Managing General Partner has complied with
its fiduciary duties in connection with determinations made by it under this
Section 7.5.
7.6 LOANS FROM THE GENERAL PARTNERS; LOANS OR CONTRIBUTIONS FROM THE
PARTNERSHIP; CONTRACTS WITH
AFFILIATES; CERTAIN RESTRICTIONS ON THE GENERAL PARTNERS
(a) The General Partners or their Affiliates may lend to any Group Member,
and any Group Member may borrow from the General Partners or any of their
Affiliates, funds needed or desired by the Group Member for such periods of time
and in such amounts as the Managing General Partner may determine; provided,
however, that in any such case the lending party may not charge the borrowing
party interest at a rate greater than the rate that would be charged the
borrowing party or impose terms less favorable to the borrowing party than would
be charged or imposed on the borrowing party by unrelated lenders on comparable
loans made on an arm's-length basis (without reference to the lending party's
financial abilities or guarantees). The borrowing party shall reimburse the
lending party for any costs (other than any additional interest costs) incurred
by the lending party in connection with the borrowing of such funds. For
purposes of this Section 7.6(a) and Section 7.6(b), the term "Group Member"
shall include any Affiliate of a Group Member that is controlled by the Group
Member. No Group Member may lend funds to the General Partners or any of their
Affiliates (other than another Group Member).
(b) The Partnership may lend or contribute to any Group Member, and any
Group Member may borrow from the Partnership, funds on terms and conditions
established in the sole discretion of the Managing General Partner; provided,
however, that the Partnership may not charge the Group Member interest at a rate
less than the rate that would be charged to the Group Member (without reference
to the General Partners' financial abilities or guarantees) by unrelated lenders
on comparable loans. The foregoing authority shall be exercised by the Managing
General Partner in its sole discretion and shall not create any right or benefit
in favor of any Group Member or any other Person.
(c) The Managing General Partner may itself, or may enter into an agreement
with any of its Affiliates to, render services to a Group Member or to the
Managing General Partner in the discharge of its duties as general partner of
the Partnership. Any services rendered to a Group Member by the Managing General
Partner or any of its Affiliates shall be on terms that are fair and reasonable
to the Partnership; provided, however, that the requirements of this Section
7.6(c) shall be deemed satisfied as to (i) any transaction approved by Special
Approval, (ii) any transaction, the terms of which are no less favorable to the
Partnership Group than those generally being provided to or available from
unrelated third parties or (iii) any transaction that, taking into account the
totality of the relationships between the parties involved (including other
transactions that may be particularly favorable or advantageous to the
Partnership Group), is equitable to the Partnership Group. The provisions of
Section 7.4 shall apply to the rendering of services described in this Section
7.6(c).
(d) The Partnership Group may transfer assets to joint ventures, other
partnerships, corporations, limited liability companies or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions as are consistent with this Agreement and applicable
law.
(e) Neither the General Partners nor any of their Affiliates shall sell,
transfer or convey any property to, or purchase any property from, the
Partnership, directly or indirectly, except pursuant to transactions that are
fair and reasonable to the Partnership; provided, however, that the requirements
of this
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Section 7.6(e) shall be deemed to be satisfied as to (i) the transactions
effected pursuant to Sections 5.2 and 5.3, the Contribution and Conveyance
Agreement and any other transactions described in or contemplated by the
Registration Statement, (ii) any transaction approved by Special Approval, (iii)
any transaction, the terms of which are no less favorable to the Partnership
than those generally being provided to or available from unrelated third
parties, or (iv) any transaction that, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership), is equitable
to the Partnership. With respect to any contribution of assets to the
Partnership in exchange for Partnership Securities, the Audit Committee, in
determining whether the appropriate number of Partnership Securities are being
issued, may take into account, among other things, the fair market value of the
assets, the liquidated and contingent liabilities assumed, the tax basis in the
assets, the extent to which tax-only allocations to the transferor will protect
the existing partners of the Partnership against a low tax basis, and such other
factors as the Audit Committee deems relevant under the circumstances.
(f) The General Partners and their Affiliates will have no obligation to
permit any Group Member to use any facilities or assets of the General Partners
and their Affiliates, except as may be provided in contracts entered into from
time to time specifically dealing with such use, nor shall there be any
obligation on the part of the General Partners or their Affiliates to enter into
such contracts.
(g) Without limitation of Sections 7.6(a) through 7.6(f), and
notwithstanding anything to the contrary in this Agreement, the existence of the
conflicts of interest described in the Registration Statement are hereby
approved by all Partners.
7.7 INDEMNIFICATION
(a) To the fullest extent permitted by law but subject to the limitations
expressly provided in this Agreement, all Indemnitees shall be indemnified and
held harmless by the Partnership from and against any and all losses, claims,
damages, liabilities, joint or several, expenses (including legal fees and
expenses), judgments, fines, penalties, interest, settlements or other amounts
arising from any and all claims, demands, actions, suits or proceedings, whether
civil, criminal, administrative or investigative, in which any Indemnitee may be
involved, or is threatened to be involved, as a party or otherwise, by reason of
its status as an Indemnitee; provided, that in each case the Indemnitee acted in
good faith and in a manner that such Indemnitee reasonably believed to be in, or
(in the case of a Person other than a General Partner) not opposed to, the best
interests of the Partnership and, with respect to any criminal proceeding, had
no reasonable cause to believe its conduct was unlawful; provided, further, no
indemnification pursuant to this Section 7.7 shall be available to the General
Partners with respect to their obligations incurred pursuant to the Underwriting
Agreement or the Contribution and Conveyance Agreement (other than obligations
incurred by the Managing General Partner on behalf of the Partnership or the
Operating Partnership). The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that the Indemnitee acted in a
manner contrary to that specified above. Any indemnification pursuant to this
Section 7.7 shall be made only out of the assets of the Partnership, it being
agreed that the General Partners shall not be personally liable for such
indemnification and shall have no obligation to contribute or loan any monies or
property to the Partnership to enable it to effectuate such indemnification.
(b) To the fullest extent permitted by law, expenses (including legal fees
and expenses) incurred by an Indemnitee who is indemnified pursuant to Section
7.7(a) in defending any claim, demand, action, suit or proceeding shall, from
time to time, be advanced by the Partnership prior to the final disposition of
such claim, demand, action, suit or proceeding upon receipt by the Partnership
of any undertaking by or on behalf of the Indemnitee to repay such amount if it
shall be determined that the Indemnitee is not entitled to be indemnified as
authorized in this Section 7.7.
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(c) The indemnification provided by this Section 7.7 shall be in addition to
any other rights to which an Indemnitee may be entitled under any agreement,
pursuant to any vote of the holders of Outstanding Limited Partner Interests, as
a matter of law or otherwise, both as to actions in the Indemnitee's capacity as
an Indemnitee and as to actions in any other capacity (including any capacity
under the Underwriting Agreement), and shall continue as to an Indemnitee who
has ceased to serve in such capacity and shall inure to the benefit of the
heirs, successors, assigns and administrators of the Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse the General
Partners or their Affiliates for the cost of) insurance, on behalf of the
General Partners, their Affiliates and such other Persons as the Managing
General Partner shall determine, against any liability that may be asserted
against or expense that may be incurred by such Person in connection with the
Partnership's activities or such Person's activities on behalf of the
Partnership, regardless of whether the Partnership would have the power to
indemnify such Person against such liability under the provisions of this
Agreement.
(e) For purposes of this Section 7.7, the Partnership shall be deemed to
have requested an Indemnitee to serve as fiduciary of an employee benefit plan
whenever the performance by it of its duties to the Partnership also imposes
duties on, or otherwise involves services by, it to the plan or participants or
beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect
to an employee benefit plan pursuant to applicable law shall constitute "fines"
within the meaning of Section 7.7(a); and action taken or omitted by it with
respect to any employee benefit plan in the performance of its duties for a
purpose reasonably believed by it to be in the interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose which is in, or
not opposed to, the best interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited Partners to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in part
under this Section 7.7 because the Indemnitee had an interest in the transaction
with respect to which the indemnification applies if the transaction was
otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 7.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this Section 7.7 or any
provision hereof shall in any manner terminate, reduce or impair the right of
any past, present or future Indemnitee to be indemnified by the Partnership, nor
the obligations of the Partnership to indemnify any such Indemnitee under and in
accordance with the provisions of this Section 7.7 as in effect immediately
prior to such amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or in part, prior to such
amendment, modification or repeal, regardless of when such claims may arise or
be asserted.
7.8 LIABILITY OF INDEMNITEES
(a) Notwithstanding anything to the contrary set forth in this Agreement, no
Indemnitee shall be liable for monetary damages to the Partnership, the Limited
Partners, the Assignees or any other Persons who have acquired interests in the
Partnership Securities, for losses sustained or liabilities incurred as a result
of any act or omission if such Indemnitee acted in good faith.
(b) Subject to its obligations and duties as Managing General Partner set
forth in Section 7.1(a), the Managing General Partner may exercise any of the
powers granted to it by this Agreement and perform any of the duties imposed
upon it hereunder either directly or by or through its agents, and the Managing
General Partner shall not be responsible for any misconduct or negligence on the
part of any such agent appointed by the Managing General Partner in good faith.
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(c) To the extent that, at law or in equity, an Indemnitee has duties
(including fiduciary duties) and liabilities relating thereto to the Partnership
or to the Partners, the General Partners and any other Indemnitee acting in
connection with the Partnership's business or affairs shall not be liable to the
Partnership or to any Partner for its good faith reliance on the provisions of
this Agreement. The provisions of this Agreement, to the extent that they
restrict or otherwise modify the duties and liabilities of an Indemnitee
otherwise existing at law or in equity, are agreed by the Partners to replace
such other duties and liabilities of such Indemnitee.
(d) Any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the liability to the Partnership, the Limited Partners, the
General Partners, and the Partnership's and General Partners' directors,
officers and employees under this Section 7.8 as in effect immediately prior to
such amendment, modification or repeal with respect to claims arising from or
relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise or be asserted.
7.9 RESOLUTION OF CONFLICTS OF INTEREST
(a) Unless otherwise expressly provided in this Agreement or the Operating
Partnership Agreement, whenever a potential conflict of interest exists or
arises between any of the General Partners or any of their Affiliates, on the
one hand, and the Partnership, the Operating Partnership, any Partner or any
Assignee, on the other, any resolution or course of action by the Managing
General Partner or its Affiliates in respect of such conflict of interest shall
be permitted and deemed approved by all Partners, and shall not constitute a
breach of this Agreement, of the Operating Partnership Agreement, of any
agreement contemplated herein or therein, or of any duty stated or implied by
law or equity, if the resolution or course of action is, or by operation of this
Agreement is deemed to be, fair and reasonable to the Partnership. The Managing
General Partner shall be authorized but not required in connection with its
resolution of such conflict of interest to seek Special Approval of such
resolution. Any conflict of interest and any resolution of such conflict of
interest shall be conclusively deemed fair and reasonable to the Partnership if
such conflict of interest or resolution is (i) approved by Special Approval (as
long as the material facts known to the Managing General Partner or any of its
Affiliates regarding any proposed transaction were disclosed to the Audit
Committee at the time it gave its approval), (ii) on terms no less favorable to
the Partnership than those generally being provided to or available from
unrelated third parties or (iii) fair to the Partnership, taking into account
the totality of the relationships between the parties involved (including other
transactions that may be particularly favorable or advantageous to the
Partnership). The Managing General Partner may also adopt a resolution or course
of action that has not received Special Approval. The Managing General Partner
(including the Audit Committee in connection with Special Approval) shall be
authorized in connection with its determination of what is "fair and reasonable"
to the Partnership and in connection with its resolution of any conflict of
interest to consider (A) the relative interests of any party to such conflict,
agreement, transaction or situation and the benefits and burdens relating to
such interest; (B) any customary or accepted industry practices and any
customary or historical dealings with a particular Person; (C) any applicable
generally accepted accounting practices or principles; and (D) such additional
factors as the Managing General Partner (including the Audit Committee)
determines in its sole discretion to be relevant, reasonable or appropriate
under the circumstances. Nothing contained in this Agreement, however, is
intended to nor shall it be construed to require the Managing General Partner
(including the Audit Committee) to consider the interests of any Person other
than the Partnership. In the absence of bad faith by the Managing General
Partner, the resolution, action or terms so made, taken or provided by the
Managing General Partner with respect to such matter shall not constitute a
breach of this Agreement or any other agreement contemplated herein or a breach
of any standard of care or duty imposed herein or therein or, to the extent
permitted by law, under the Delaware Act or any other law, rule or regulation.
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(b) Whenever this Agreement or any other agreement contemplated hereby
provides that the Managing General Partner or any of its Affiliates is permitted
or required to make a decision (i) in its "sole discretion" or "discretion,"
that it deems "necessary or appropriate" or "necessary or advisable" or under a
grant of similar authority or latitude, except as otherwise provided herein, the
Managing General Partner or such Affiliate shall be entitled to consider only
such interests and factors as it desires and shall have no duty or obligation to
give any consideration to any interest of, or factors affecting, the
Partnership, the Operating Partnership, any Limited Partner or any Assignee,
(ii) it may make such decision in its sole discretion (regardless of whether
there is a reference to "sole discretion" or "discretion") unless another
express standard is provided for, or (iii) in "good faith" or under another
express standard, the Managing General Partner or such Affiliate shall act under
such express standard and shall not be subject to any other or different
standards imposed by this Agreement, the Operating Partnership Agreement, any
other agreement contemplated hereby or under the Delaware Act or any other law,
rule or regulation. In addition, any actions taken by the Managing General
Partner or such Affiliate consistent with the standards of "reasonable
discretion" set forth in the definitions of Available Cash or Operating Surplus
shall not constitute a breach of any duty of the Managing General Partner to the
Partnership or the Limited Partners. The Managing General Partner shall have no
duty, express or implied, to sell or otherwise dispose of any asset of the
Partnership Group other than in the ordinary course of business. No borrowing by
any Group Member or the approval thereof by the Managing General Partner shall
be deemed to constitute a breach of any duty of the Managing General Partner to
the Partnership or the Limited Partners by reason of the fact that the purpose
or effect of such borrowing is directly or indirectly to (A) enable
distributions to the General Partners or their Affiliates (including in their
capacities as Limited Partners) to exceed 1% of the total amount distributed to
all partners or (B) hasten the expiration of the Subordination Period or the
conversion of any Subordinated Units into Common Units.
(c) Whenever a particular transaction, arrangement or resolution of a
conflict of interest is required under this Agreement to be "fair and
reasonable" to any Person, the fair and reasonable nature of such transaction,
arrangement or resolution shall be considered in the context of all similar or
related transactions.
(d) The Unitholders hereby authorize the Managing General Partner, on behalf
of the Partnership as a partner of a Group Member, to approve of actions by the
general partner of such Group Member similar to those actions permitted to be
taken by the Managing General Partner pursuant to this Section 7.9.
7.10 OTHER MATTERS CONCERNING THE MANAGING GENERAL PARTNER
(a) The Managing General Partner may rely and shall be protected in acting
or refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, bond, debenture or
other paper or document believed by it to be genuine and to have been signed or
presented by the proper party or parties.
(b) The Managing General Partner may consult with legal counsel,
accountants, appraisers, management consultants, investment bankers and other
consultants and advisers selected by it, and any act taken or omitted to be
taken in reliance upon the opinion (including an Opinion of Counsel) of such
Persons as to matters that the Managing General Partner reasonably believes to
be within such Person's professional or expert competence shall be conclusively
presumed to have been done or omitted in good faith and in accordance with such
opinion.
(c) The Managing General Partner shall have the right, in respect of any of
its powers or obligations hereunder, to act through any of its duly authorized
officers, a duly appointed attorney or attorneys-in-fact or the duly authorized
officers of the Partnership.
(d) Any standard of care and duty imposed by this Agreement or under the
Delaware Act or any applicable law, rule or regulation shall be modified, waived
or limited, to the extent permitted by law, as required to permit the Managing
General Partner to act under this Agreement or any other agreement
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contemplated by this Agreement and to make any decision pursuant to the
authority prescribed in this Agreement, so long as such action is reasonably
believed by the Managing General Partner to be in, or not inconsistent with, the
best interests of the Partnership.
7.11 INTENTIONALLY DELETED
7.12 PURCHASE OR SALE OF PARTNERSHIP SECURITIES
The Managing General Partner may cause the Partnership to purchase or
otherwise acquire Partnership Securities; provided that, the Managing General
Partner may not cause any Group Member to purchase Subordinated Units during the
Subordination Period. As long as Partnership Securities are held by any Group
Member, such Partnership Securities shall not be considered outstanding for any
purpose, except as otherwise provided herein. The General Partners or any
Affiliate of the General Partners may also purchase or otherwise acquire and
sell or otherwise dispose of Partnership Securities for its own account, subject
to the provisions of Articles IV and X.
7.13 REGISTRATION RIGHTS OF THE GENERAL PARTNERS AND THEIR AFFILIATES
(a) If (i) either of the General Partners or any Affiliate of a General
Partner (including for purposes of this Section 7.13, any Person that is an
Affiliate of a General Partner at the date hereof notwithstanding that it may
later cease to be an Affiliate of a General Partner) holds Partnership
Securities that it desires to sell and (ii) Rule 144 of the Securities Act (or
any successor rule or regulation to Rule 144) or another exemption from
registration is not available to enable such holder of Partnership Securities
(the "Holder") to dispose of the number of Partnership Securities it desires to
sell at the time it desires to do so without registration under the Securities
Act, then upon the request of either of the General Partners or any of their
Affiliates, the Partnership shall file with the Commission as promptly as
practicable after receiving such request, and use all reasonable efforts to
cause to become effective and remain effective for a period of not less than six
months following its effective date or such shorter period as shall terminate
when all Partnership Securities covered by such registration statement have been
sold, a registration statement under the Securities Act registering the offering
and sale of the number of Partnership Securities specified by the Holder;
provided, however, that the Partnership shall not be required to effect more
than three registrations pursuant to this Section 7.13(a); and provided further,
however, that if the Audit Committee determines in its good faith judgment that
a postponement of the requested registration for up to six months would be in
the best interests of the Partnership and its Partners due to a pending
transaction, investigation or other event, the filing of such registration
statement or the effectiveness thereof may be deferred for up to six months, but
not thereafter. In connection with any registration pursuant to the immediately
preceding sentence, the Partnership shall promptly prepare and file (x) such
documents as may be necessary to register or qualify the securities subject to
such registration under the securities laws of such states as the Holder shall
reasonably request; provided, however, that no such qualification shall be
required in any jurisdiction where, as a result thereof, the Partnership would
become subject to general service of process or to taxation or qualification to
do business as a foreign corporation or partnership doing business in such
jurisdiction solely as a result of such registration, and (y) such documents as
may be necessary to apply for listing or to list the Partnership Securities
subject to such registration on such National Securities Exchange as the Holder
shall reasonably request, and do any and all other acts and things that may
reasonably be necessary or advisable to enable the Holder to consummate a public
sale of such Partnership Securities in such states. Except as set forth in
Section 7.13(c), all costs and expenses of any such registration and offering
(other than the underwriting discounts and commissions) shall be paid by the
Partnership, without reimbursement by the Holder.
(b) If the Partnership shall at any time propose to file a registration
statement under the Securities Act for an offering of equity securities of the
Partnership for cash (other than an offering relating solely to an employee
benefit plan), the Partnership shall use all reasonable efforts to include such
number or amount of
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securities held by the Holder in such registration statement as the Holder shall
request. If the proposed offering pursuant to this Section 7.13(b) shall be an
underwritten offering, then, in the event that the managing underwriter or
managing underwriters of such offering advise the Partnership and the Holder in
writing that in their opinion the inclusion of all or some of the Holder's
Partnership Securities would adversely and materially affect the success of the
offering, the Partnership shall include in such offering only that number or
amount, if any, of securities held by the Holder which, in the opinion of the
managing underwriter or managing underwriters, will not so adversely and
materially affect the offering. Except as set forth in Section 7.13(c), all
costs and expenses of any such registration and offering (other than the
underwriting discounts and commissions) shall be paid by the Partnership,
without reimbursement by the Holder.
(c) If underwriters are engaged in connection with any registration referred
to in this Section 7.13, the Partnership shall provide indemnification,
representations, covenants, opinions and other assurance to the underwriters in
form and substance reasonably satisfactory to such underwriters. Further, in
addition to and not in limitation of the Partnership's obligation under Section
7.7, the Partnership shall, to the fullest extent permitted by law, indemnify
and hold harmless the Holder, its officers, directors and each Person who
controls the Holder (within the meaning of the Securities Act) and any agent
thereof (collectively, "Indemnified Persons") against any losses, claims,
demands, actions, causes of action, assessments, damages, liabilities (joint or
several), costs and expenses (including interest, penalties and reasonable
attorneys' fees and disbursements), resulting to, imposed upon, or incurred by
the Indemnified Persons, directly or indirectly, under the Securities Act or
otherwise (hereinafter referred to in this Section 7.13(c) as a "claim" and in
the plural as "claims") based upon, arising out of or resulting from any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which any Partnership Securities were registered
under the Securities Act or any state securities or Blue Sky laws, in any
preliminary prospectus (if used prior to the effective date of such registration
statement), or in any summary or final prospectus or in any amendment or
supplement thereto (if used during the period the Partnership is required to
keep the registration statement current), or arising out of, based upon or
resulting from the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements made therein
not misleading; provided, however, that the Partnership shall not be liable to
any Indemnified Person to the extent that any such claim arises out of, is based
upon or results from an untrue statement or alleged untrue statement or omission
or alleged omission made in such registration statement, such preliminary,
summary or final prospectus or such amendment or supplement, in reliance upon
and in conformity with written information furnished to the Partnership by or on
behalf of such Indemnified Person specifically for use in the preparation
thereof.
(d) The provisions of Section 7.13(a) and 7.13(b) shall continue to be
applicable with respect to each of the General Partners (and any of the General
Partners' Affiliates) after it ceases to be a Partner of the Partnership, during
a period of two years subsequent to the effective date of such cessation and for
so long thereafter as is required for the Holder to sell all of the Partnership
Securities with respect to which it has requested during such two-year period
inclusion in a registration statement otherwise filed or that a registration
statement be filed; provided, however, that the Partnership shall not be
required to file successive registration statements covering the same
Partnership Securities for which registration was demanded during such two-year
period. The provisions of Section 7.13(c) shall continue in effect thereafter.
(e) Any request to register Partnership Securities pursuant to this Section
7.13 shall (i) specify the Partnership Securities intended to be offered and
sold by the Person making the request, (ii) express such Person's present intent
to offer such shares for distribution, (iii) describe the nature or method of
the proposed offer and sale of Partnership Securities, and (iv) contain the
undertaking of such Person to provide all such information and materials and
take all action as may be required in order to permit the Partnership to comply
with all applicable requirements in connection with the registration of such
Partnership Securities.
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7.14 RELIANCE BY THIRD PARTIES
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the Managing
General Partner and any officer of the Managing General Partner authorized by
the Managing General Partner to act on behalf of and in the name of the
Partnership has full power and authority to encumber, sell or otherwise use in
any manner any and all assets of the Partnership and to enter into any
authorized contracts on behalf of the Partnership, and such Person shall be
entitled to deal with the Managing General Partner or any such officer as if it
were the Partnership's sole party in interest, both legally and beneficially.
Each Limited Partner hereby waives any and all defenses or other remedies that
may be available against such Person to contest, negate or disaffirm any action
of the Managing General Partner or any such officer in connection with any such
dealing. In no event shall any Person dealing with the Managing General Partner
or any such officer or its representatives be obligated to ascertain that the
terms of the Agreement have been complied with or to inquire into the necessity
or expedience of any act or action of the Managing General Partner or any such
officer or its representatives. Each and every certificate, document or other
instrument executed on behalf of the Partnership by the Managing General Partner
or its representatives shall be conclusive evidence in favor of any and every
Person relying thereon or claiming thereunder that (a) at the time of the
execution and delivery of such certificate, document or instrument, this
Agreement was in full force and effect, (b) the Person executing and delivering
such certificate, document or instrument was duly authorized and empowered to do
so for and on behalf of the Partnership and (c) such certificate, document or
instrument was duly executed and delivered in accordance with the terms and
provisions of this Agreement and is binding upon the Partnership.
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
8.1 RECORDS AND ACCOUNTING
The Managing General Partner shall keep or cause to be kept at the principal
office of the Partnership appropriate books and records with respect to the
Partnership's business, including all books and records necessary to provide to
the Limited Partners any information required to be provided pursuant to Section
3.4(a). Any books and records maintained by or on behalf of the Partnership in
the regular course of its business, including the record of the Record Holders
and Assignees of Units or other Partnership Securities, books of account and
records of Partnership proceedings, may be kept on, or be in the form of,
computer disks, hard drives, punch cards, magnetic tape, photographs,
micrographics or any other information storage device; provided, that the books
and records so maintained are convertible into clearly legible written form
within a reasonable period of time. The books of the Partnership shall be
maintained, for financial reporting purposes, on an accrual basis in accordance
with U.S. GAAP.
8.2 FISCAL YEAR
The fiscal year of the Partnership shall be a fiscal year ending June 30.
8.3 REPORTS
(a) As soon as practicable, but in no event later than 120 days after the
close of each fiscal year of the Partnership, the Managing General Partner shall
cause to be mailed or furnished to each Record Holder of a Unit as of a date
selected by the Managing General Partner in its discretion, an annual report
containing financial statements of the Partnership for such fiscal year of the
Partnership, presented in accordance with U.S. GAAP, including a balance sheet
and statements of operations, Partnership equity and cash flows, such statements
to be audited by a firm of independent public accountants selected by the
Managing General Partner.
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(b) As soon as practicable, but in no event later than 90 days after the
close of each Quarter except the last Quarter of each fiscal year, the Managing
General Partner shall cause to be mailed or furnished to each Record Holder of a
Unit, as of a date selected by the Managing General Partner in its discretion, a
report containing unaudited financial statements of the Partnership and such
other information as may be required by applicable law, regulation or rule of
any National Securities Exchange on which the Units are listed for trading, or
as the Managing General Partner determines to be necessary or appropriate.
ARTICLE IX
TAX MATTERS
9.1 TAX RETURNS AND INFORMATION
The Partnership shall timely file all returns of the Partnership that are
required for federal, state and local income tax purposes on the basis of the
accrual method and a taxable year ending on December 31. The tax information
reasonably required by Record Holders for federal and state income tax reporting
purposes with respect to a taxable year shall be furnished to them within 90
days of the close of the calendar year in which the Partnership's taxable year
ends. The classification, realization and recognition of income, gain, losses
and deductions and other items shall be on the accrual method of accounting for
federal income tax purposes.
9.2 TAX ELECTIONS
(a) The Partnership shall make the election under Section 754 of the Code in
accordance with applicable regulations thereunder, subject to the reservation of
the right to seek to revoke any such election upon the Managing General
Partner's determination that such revocation is in the best interests of the
Limited Partners. Notwithstanding any other provision herein contained, for the
purposes of computing the adjustments under Section 743(b) of the Code, the
Managing General Partner shall be authorized (but not required) to adopt a
convention whereby the price paid by a transferee of a Limited Partner Interest
will be deemed to be the lowest quoted closing price of the Limited Partner
Interests on any National Securities Exchange on which such Limited Partner
Interests are traded during the calendar month in which such transfer is deemed
to occur pursuant to Section 6.2(g) without regard to the actual price paid by
such transferee.
(b) The Partnership shall elect to deduct expenses incurred in organizing
the Partnership ratably over a sixty-month period as provided in Section 709 of
the Code.
(c) Except as otherwise provided herein, the Managing General Partner shall
determine whether the Partnership should make any other elections permitted by
the Code.
9.3 TAX CONTROVERSIES
Subject to the provisions hereof, the Managing General Partner is designated
as the Tax Matters Partner (as defined in the Code) and is authorized and
required to represent the Partnership (at the Partnership's expense) in
connection with all examinations of the Partnership's affairs by tax
authorities, including resulting administrative and judicial proceedings, and to
expend Partnership funds for professional services and costs associated
therewith. Each Partner agrees to cooperate with the Managing General Partner
and to do or refrain from doing any or all things reasonably required by the
Managing General Partner to conduct such proceedings.
9.4 WITHHOLDING
Notwithstanding any other provision of this Agreement, the Managing General
Partner is authorized to take any action that it determines in its discretion to
be necessary or appropriate to cause the Partnership and the Operating
Partnership to comply with any withholding requirements established under
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the Code or any other federal, state or local law including, without limitation,
pursuant to Sections 1441, 1442, 1445 and 1446 of the Code. To the extent that
the Partnership is required or elects to withhold and pay over to any taxing
authority any amount resulting from the allocation or distribution of income to
any Partner or Assignee (including, without limitation, by reason of Section
1446 of the Code), the amount withheld may at the discretion of the Managing
General Partner be treated by the Partnership as a distribution of cash pursuant
to Section 6.3 in the amount of such withholding from such Partner.
ARTICLE X
ADMISSION OF PARTNERS
10.1 ADMISSION OF INITIAL LIMITED PARTNERS
Upon the issuance by the Partnership of Subordinated Units and Incentive
Distribution Rights to the General Partners and Subordinated Units to EESC as
described in Section 5.2, each of the General Partners and EESC shall be deemed
to have been admitted to the Partnership as a Limited Partner in respect of the
Subordinated Units and Incentive Distribution Rights issued to it. Upon the
issuance by the Partnership of Common Units to the Underwriters as described in
Section 5.3 in connection with the Initial Offering and the execution by each
Underwriter of a Transfer Application, the Managing General Partner shall admit
the Underwriters to the Partnership as Initial Limited Partners in respect of
the Common Units purchased by them.
10.2 ADMISSION OF SUBSTITUTED LIMITED PARTNER
By transfer of a Limited Partner Interest in accordance with Article IV, the
transferor shall be deemed to have given the transferee the right to seek
admission as a Substituted Limited Partner subject to the conditions of, and in
the manner permitted under, this Agreement. A transferor of a Certificate
representing a Limited Partner Interest shall, however, only have the authority
to convey to a purchaser or other transferee who does not execute and deliver a
Transfer Application (a) the right to negotiate such Certificate to a purchaser
or other transferee and (b) the right to transfer the right to request admission
as a Substituted Limited Partner to such purchaser or other transferee in
respect of the transferred Limited Partner Interests. Each transferee of a
Limited Partner Interest (including any nominee holder or an agent acquiring
such Limited Partner Interest for the account of another Person) who executes
and delivers a Transfer Application shall, by virtue of such execution and
delivery, be an Assignee and be deemed to have applied to become a Substituted
Limited Partner with respect to the Limited Partner Interests so transferred to
such Person. Such Assignee shall become a Substituted Limited Partner (x) at
such time as the Managing General Partner consents thereto, which consent may be
given or withheld in the Managing General Partner's discretion, and (y) when any
such admission is shown on the books and records of the Partnership. If such
consent is withheld, such transferee shall be an Assignee. An Assignee shall
have an interest in the Partnership equivalent to that of a Limited Partner with
respect to allocations and distributions, including liquidating distributions,
of the Partnership. With respect to voting rights attributable to Limited
Partner Interests that are held by Assignees, the Managing General Partner shall
be deemed to be the Limited Partner with respect thereto and shall, in
exercising the voting rights in respect of such Limited Partner Interests on any
matter, vote such Limited Partner Interests at the written direction of the
Assignee who is the Record Holder of such Limited Partner Interests. If no such
written direction is received, such Limited Partner Interests will not be voted.
An Assignee shall have no other rights of a Limited Partner.
10.3 ADMISSION OF SUCCESSOR GENERAL PARTNER
A successor General Partner approved pursuant to Section 11.1 or 11.2 or the
transferee of or successor to all of a General Partner's Partnership Interest as
general partner in the Partnership pursuant to Section 4.6 who is proposed to be
admitted as a successor General Partner shall be admitted to the
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Partnership as a General Partner, effective immediately prior to the withdrawal
or removal of the predecessor or transferring General Partner pursuant to
Section 11.1 or 11.2 or the transfer of a General Partner's Partnership Interest
as a general partner in the Partnership pursuant to Section 4.6, provided,
however, that no such successor shall be admitted to the Partnership until
compliance with the terms of Section 4.6 has occurred and such successor has
executed and delivered such other documents or instruments as may be required to
effect such admission. Any such successor shall, subject to the terms hereof,
carry on the business of the members of the Partnership Group without
dissolution.
10.4 ADMISSION OF ADDITIONAL LIMITED PARTNERS
(a) A Person (other than the General Partners, an Initial Limited Partner or
a Substituted Limited Partner) who makes a Capital Contribution to the
Partnership in accordance with this Agreement shall be admitted to the
Partnership as an Additional Limited Partner only upon furnishing to the
Managing General Partner (i) evidence of acceptance in form satisfactory to the
Managing General Partner of all of the terms and conditions of this Agreement,
including the power of attorney granted in Section 2.6, and (ii) such other
documents or instruments as may be required in the discretion of the Managing
General Partner to effect such Person's admission as an Additional Limited
Partner.
(b) Notwithstanding anything to the contrary in this Section 10.4, no Person
shall be admitted as an Additional Limited Partner without the consent of the
Managing General Partner, which consent may be given or withheld in the Managing
General Partner's discretion. The admission of any Person as an Additional
Limited Partner shall become effective on the date upon which the name of such
Person is recorded as such in the books and records of the Partnership,
following the consent of the Managing General Partner to such admission.
10.5 AMENDMENT OF AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP
To effect the admission to the Partnership of any Partner, the Managing
General Partner shall take all steps necessary and appropriate under the
Delaware Act to amend the records of the Partnership to reflect such admission
and, if necessary, to prepare as soon as practicable an amendment to this
Agreement and, if required by law, the Managing General Partner shall prepare
and file an amendment to the Certificate of Limited Partnership, and the
Managing General Partner may for this purpose, among others, exercise the power
of attorney granted pursuant to Section 2.6.
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
11.1 WITHDRAWAL OF THE GENERAL PARTNERS
(a) The Managing General Partner shall be deemed to have withdrawn from the
Partnership upon the occurrence of any one of the following events (each such
event herein referred to as an "Event of Withdrawal");
(i) The Managing General Partner voluntarily withdraws from the
Partnership by giving written notice to the other Partners (and it shall be
deemed that the Managing General Partner has withdrawn pursuant to this
Section 11.1(a)(i) if the Managing General Partner voluntarily withdraws as
general partner of the Operating Partnership);
(ii) The Managing General Partner transfers all of its rights as
Managing General Partner pursuant to Section 4.6;
(iii) The Managing General Partner is removed pursuant to Section 11.2;
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(iv) The Managing General Partner (A) makes a general assignment for the
benefit of creditors; (B) files a voluntary bankruptcy petition for relief
under Chapter 7 of the United States Bankruptcy Code; (C) files a petition
or answer seeking for itself a liquidation, dissolution or similar relief
(but not a reorganization) under any law; (D) files an answer or other
pleading admitting or failing to contest the material allegations of a
petition filed against the Managing General Partner in a proceeding of the
type described in clauses (A)-(C) of this Section 11.1(a)(iv); or (E) seeks,
consents to or acquiesces in the appointment of a trustee (but not a debtor
in possession), receiver or liquidator of the Managing General Partner or of
all or any substantial part of its properties;
(v) A final and non-appealable order of relief under Chapter 7 of the
United States Bankruptcy Code is entered by a court with appropriate
jurisdiction pursuant to a voluntary or involuntary petition by or against
the Managing General Partner; or
(vi) (A) in the event the Managing General Partner is a corporation, a
certificate of dissolution or its equivalent is filed for the Managing
General Partner, or 90 days expire after the date of notice to the Managing
General Partner of revocation of its charter without a reinstatement of its
charter, under the laws of its state of incorporation; (B) in the event the
Managing General Partner is a partnership, the dissolution and commencement
of winding up of the Managing General Partner; (C) in the event the Managing
General Partner is acting in such capacity by virtue of being a trustee of a
trust, the termination of the trust; (D) in the event the Managing General
Partner is a natural person, his death or adjudication of incompetency; and
(E) otherwise in the event of the termination of the Managing General
Partner.
If an Event of Withdrawal specified in Section 11.1(a)(iv), (v) or (vi)(A),
(B), (C) or (E) occurs, the withdrawing Managing General Partner shall give
notice to the Limited Partners within 30 days after such occurrence. The
Partners hereby agree that only the Events of Withdrawal described in this
Section 11.1 shall result in the withdrawal of the Managing General Partner from
the Partnership.
(b) Withdrawal of the Managing General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall not constitute a breach of this
Agreement under the following circumstances: (i) at any time during the period
beginning on the Closing Date and ending at 12:00 midnight, Eastern Standard
Time, on December 31, 2006, the Managing General Partner voluntarily withdraws
by giving at least 90 days' advance notice of its intention to withdraw to the
Limited Partners; provided that prior to the effective date of such withdrawal,
the withdrawal is approved by Unitholders holding at least a Unit Majority and
the Managing General Partner delivers to the Partnership an Opinion of Counsel
("Withdrawal Opinion of Counsel") that such withdrawal (following the selection
of the successor General Partner) would not result in the loss of the limited
liability of any Limited Partner or of the limited partner of the Operating
Partnership or cause the Partnership or the Operating Partnership to be treated
as an association taxable as a corporation or otherwise to be taxed as an entity
for federal income tax purposes (to the extent not previously treated as such);
(ii) at any time after 12:00 midnight, Eastern Standard Time, on December 31,
2006, the Managing General Partner voluntarily withdraws by giving at least 90
days' advance notice to the Unitholders, such withdrawal to take effect on the
date specified in such notice; (iii) at any time that the Managing General
Partner ceases to be the Managing General Partner pursuant to Section
11.1(a)(ii) or is removed pursuant to Section 11.2; or (iv) notwithstanding
clause (i) of this sentence, at any time that the Managing General Partner
voluntarily withdraws by giving at least 90 days' advance notice of its
intention to withdraw to the Limited Partners, such withdrawal to take effect on
the date specified in the notice, if at the time such notice is given one Person
and its Affiliates (other than the Managing General Partner and its Affiliates)
own beneficially or of record or control at least 50% of the Outstanding Units.
The withdrawal of the Managing General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall also constitute the withdrawal of the
Managing General Partner as general partner of the other Group Members. If the
Managing General Partner gives a notice of withdrawal pursuant to Section
11.1(a)(i), the holders of a Unit Majority, may, prior to the effective date of
such withdrawal, elect a successor Managing General Partner. The Person so
elected as successor
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Managing General Partner shall automatically become the successor general
partner of the other Group Members of which the Managing General Partner is a
general partner. If, prior to the effective date of the Managing General
Partner's withdrawal, a successor is not selected by the Unitholders as provided
herein or the Partnership does not receive a Withdrawal Opinion of Counsel, the
Partnership shall be dissolved in accordance with Section 12.1. Any successor
Managing General Partner elected in accordance with the terms of this Section
11.1 shall be subject to the provisions of Section 10.3.
(c) An Event of Withdrawal of the Managing General Partner shall also be an
Event of Withdrawal of the Special General Partner from the Partnership and as
general partner of other Group Members of which the Special General Partner is a
general partner at the same time and upon the same conditions as set forth in
Sections 11.1(a) and 11.1(b) with respect to the Managing General Partner. The
Partners hereby agree that only the Withdrawal Events described in Section 11.1
with respect to the Managing General Partner shall result in the withdrawal of
the Special General Partner. Upon a withdrawal of the Special General Partner,
the Unitholders are not required to elect a successor Special General Partner of
the Partnership.
11.2 REMOVAL OF THE MANAGING GENERAL PARTNER
The Managing General Partner may be removed if such removal is approved by
the Unitholders holding at least 66 2/3% of the Outstanding Units (including
Units held by the General Partners and their Affiliates). Any such action by
such holders for removal of the Managing General Partner must also provide for
the election of a successor Managing General Partner by the Unitholders holding
at least a Unit Majority (including Units held by the General Partners and their
Affiliates). Such removal shall be effective immediately following the admission
of a successor Managing General Partner pursuant to Section 10.3. The removal of
the Managing General Partner shall also automatically constitute the removal of
the Managing General Partner as general partner of the other Group Members of
which the Managing General Partner is a general partner. If a Person is elected
as a successor Managing General Partner in accordance with the terms of this
Section 11.2, such Person shall, upon admission pursuant to Section 10.3,
automatically become a successor general partner of the other Group Members of
which the Managing General Partner is a general partner. The right of the
holders of Outstanding Units to remove the Managing General Partner shall not
exist or be exercised unless the Partnership has received an opinion opining as
to the matters covered by a Withdrawal Opinion of Counsel. Any successor
Managing General Partner elected in accordance with the terms of this Section
11.2 shall be subject to the provisions of Section 10.3.
11.3 INTEREST OF DEPARTING PARTNER AND SUCCESSOR GENERAL PARTNER
(a) In the event of (i) withdrawal of the Managing General Partner under
circumstances where such withdrawal does not violate this Agreement or (ii)
removal of the Managing General Partner by the holders of Outstanding Units
under circumstances where Cause does not exist, if a successor Managing General
Partner is elected in accordance with the terms of Section 11.1 or 11.2, the
Departing Partner shall have the option exercisable prior to the effective date
of the departure of such Departing Partner to require its successor to purchase
its Partnership Interest as a general partner in the Partnership and its
partnership interest as the general partner in the other Group Members and all
of its Incentive Distribution Rights (collectively, the "Combined Interest") in
exchange for an amount in cash equal to the fair market value of such Combined
Interest, such amount to be determined and payable as of the effective date of
its departure. If the Managing General Partner is removed by the Unitholders
under circumstances where Cause exists or if the Managing General Partner
withdraws under circumstances where such withdrawal violates this Agreement or
the Operating Partnership Agreement, and if a successor Managing General Partner
is elected in accordance with the terms of Section 11.1 or 11.2, such successor
shall have the option, exercisable prior to the effective date of the departure
of such Departing Partner, to purchase the Combined Interest for such fair
market value of such Combined Interest. In either event, the
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Departing Partner shall be entitled to receive all reimbursements due such
Departing Partner pursuant to Section 7.4, including any employee-related
liabilities (including severance liabilities), incurred in connection with the
termination of any employees employed by the Managing General Partner for the
benefit of the Partnership or the other Group Members.
For purposes of this Section 11.3(a), the fair market value of the Combined
Interest shall be determined by agreement between the Departing Partner and its
successor or, failing agreement within 30 days after the effective date of such
Departing Partner's departure, by an independent investment banking firm or
other independent expert selected by the Departing Partner and its successor,
which, in turn, may rely on other experts, and the determination of which shall
be conclusive as to such matter. If such parties cannot agree upon one
independent investment banking firm or other independent expert within 45 days
after the effective date of such departure, then the Departing Partner shall
designate an independent investment banking firm or other independent expert,
the Departing Partner's successor shall designate an independent investment
banking firm or other independent expert, and such firms or experts shall
mutually select a third independent investment banking firm or independent
expert, which third independent investment banking firm or other independent
expert shall determine the fair market value of the Combined Interest. In making
its determination, such third independent investment banking firm or other
independent expert may consider the then current trading price of Units on any
National Securities Exchange on which Units are then listed, the value of the
Partnership's assets, the rights and obligations of the Departing Partner and
other factors it may deem relevant.
(b) If the Combined Interest is not purchased in the manner set forth in
Section 11.3(a), the Departing Partners (or their transferees) shall become
Limited Partners and their Combined Interest shall be converted into Common
Units pursuant to a valuation made by an investment banking firm or other
independent expert selected pursuant to Section 11.3(a), without reduction in
such Partnership Interest (but subject to proportionate dilution by reason of
the admission of its successor). Any successor Managing General Partner shall
indemnify the Departing Partners (or their transferees) as to all debts and
liabilities of the Partnership arising on or after the date on which the
Departing Partners (or their transferees) become Limited Partners. For purposes
of this Agreement, conversion of the Combined Interest to Common Units will be
characterized as if the General Partners (or their transferees) contributed
their Combined Interest to the Partnership in exchange for the newly issued
Common Units.
(c) If a successor Managing General Partner is elected in accordance with
the terms of Section 11.1 or 11.2 and the option described in Section 11.3(a) is
not exercised by the party entitled to do so, the successor Managing General
Partner shall, at the effective date of its admission to the Partnership,
contribute to the Partnership cash in the amount equal to 1/99th of the Net
Agreed Value of the Partnership's assets on such date. In such event, such
successor Managing General Partner shall, subject to the following sentence, be
entitled to 1% of all Partnership allocations and distributions. The successor
Managing General Partner shall cause this Agreement to be amended to reflect
that, from and after the date of such successor Managing General Partner's
admission, the successor Managing General Partner's interest in all Partnership
distributions and allocations shall be 1%.
11.4 TERMINATION OF SUBORDINATION PERIOD, CONVERSION OF SUBORDINATED UNITS AND
EXTINGUISHMENT OF CUMULATIVE COMMON UNIT ARREARAGES
Notwithstanding any provision of this Agreement, if the Managing General
Partner is removed as general partner of the Partnership under circumstances
where Cause does not exist and Units held by the General Partners and their
Affiliates are not voted in favor of such removal, (i) the Subordination Period
will end and all Outstanding Subordinated Units will immediately and
automatically convert into Common Units on a one-for-one basis and (ii) all
Cumulative Common Unit Arrearages on the Common Units will be extinguished.
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11.5 WITHDRAWAL OF LIMITED PARTNERS
No Limited Partner shall have any right to withdraw from the Partnership;
provided, however, that when a transferee of a Limited Partner's Limited Partner
Interest becomes a Record Holder of the Limited Partner Interest so transferred,
such transferring Limited Partner shall cease to be a Limited Partner with
respect to the Limited Partner Interest so transferred.
ARTICLE XII
DISSOLUTION AND LIQUIDATION
12.1 DISSOLUTION
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor Managing General Partner in accordance with the terms of this
Agreement. Upon the removal or withdrawal of the Managing General Partner, if a
successor Managing General Partner is elected pursuant to Section 11.1 or 11.2,
the Partnership shall not be dissolved and such successor Managing General
Partner shall continue the business of the Partnership. The Partnership shall
dissolve, and (subject to Section 12.2) its affairs shall be wound up, upon:
(a) the expiration of its term as provided in Section 2.7;
(b) an Event of Withdrawal of the Managing General Partner as provided
in Section 11.1(a) (other than Section 11.1(a)(ii)), unless a successor is
elected and an Opinion of Counsel is received as provided in Section 11.1(b)
or 11.2 and such successor is admitted to the Partnership pursuant to
Section 10.3;
(c) an election to dissolve the Partnership by the Managing General
Partner that is approved by the holders of a Unit Majority;
(d) the entry of a decree of judicial dissolution of the Partnership
pursuant to the provisions of the Delaware Act; or
(e) the sale of all or substantially all of the assets and properties of
the Partnership Group.
12.2 CONTINUATION OF THE BUSINESS OF THE PARTNERSHIP AFTER DISSOLUTION
Upon (a) dissolution of the Partnership following an Event of Withdrawal
caused by the withdrawal or removal of the Managing General Partner as provided
in Section 11.1(a)(i) or (iii) and the failure of the Partners to select a
successor to such Departing Partner pursuant to Section 11.1 or 11.2, then
within 90 days thereafter, or (b) dissolution of the Partnership upon an event
constituting an Event of Withdrawal as defined in Section 11.1(a)(iv), (v) or
(vi), then, to the maximum extent permitted by law, within 180 days thereafter,
the holders of a Unit Majority may elect to reconstitute the Partnership and
continue its business on the same terms and conditions set forth in this
Agreement by forming a new limited partnership on terms identical to those set
forth in this Agreement and having as the successor general partner a Person
approved by the holders of a Unit Majority. Unless such an election is made
within the applicable time period as set forth above, the Partnership shall
conduct only activities necessary to wind up its affairs. If such an election is
so made, then:
(i) the reconstituted Partnership shall continue until the end of the
term set forth in Section 2.7 unless earlier dissolved in accordance with
this Article XII;
(ii) if the successor Managing General Partner is not the former
Managing General Partner, then the interest of the former Managing General
Partner shall be treated in the manner provided in Section 11.3; and
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(iii) all necessary steps shall be taken to cancel this Agreement and the
Certificate of Limited Partnership and to enter into and, as necessary, to
file a new partnership agreement and certificate of limited partnership, and
the successor general partner may for this purpose exercise the powers of
attorney granted the Managing General Partner pursuant to Section 2.6;
provided, that the right of the holders of a Unit Majority to approve a
successor Managing General Partner and to reconstitute and to continue the
business of the Partnership shall not exist and may not be exercised unless
the Partnership has received an Opinion of Counsel that (x) the exercise of
the right would not result in the loss of limited liability of any Limited
Partner and (y) neither the Partnership, the reconstituted limited
partnership nor the Operating Partnership would be treated as an association
taxable as a corporation or otherwise be taxable as an entity for federal
income tax purposes upon the exercise of such right to continue.
12.3 LIQUIDATOR
Upon dissolution of the Partnership, unless the Partnership is continued
under an election to reconstitute and continue the Partnership pursuant to
Section 12.2, the Managing General Partner shall select one or more Persons to
act as Liquidator. The Liquidator (if other than the Managing General Partner)
shall be entitled to receive such compensation for its services as may be
approved by holders of at least a majority of the Outstanding Common Units and
Subordinated Units voting as a single class. The Liquidator (if other than the
Managing General Partner) shall agree not to resign at any time without 15 days'
prior notice and may be removed at any time, with or without cause, by notice of
removal approved by holders of at least a majority of the Outstanding Common
Units and Subordinated Units voting as a single class. Upon dissolution, removal
or resignation of the Liquidator, a successor and substitute Liquidator (who
shall have and succeed to all rights, powers and duties of the original
Liquidator) shall within 30 days thereafter be approved by holders of at least a
majority of the Outstanding Common Units and Subordinated Units voting as a
single class. The right to approve a successor or substitute Liquidator in the
manner provided herein shall be deemed to refer also to any such successor or
substitute Liquidator approved in the manner herein provided. Except as
expressly provided in this Article XII, the Liquidator approved in the manner
provided herein shall have and may exercise, without further authorization or
consent of any of the parties hereto, all of the powers conferred upon the
Managing General Partner under the terms of this Agreement (but subject to all
of the applicable limitations, contractual and otherwise, upon the exercise of
such powers, other than the limitation on sale set forth in Section 7.3(b)) to
the extent necessary or desirable in the good faith judgment of the Liquidator
to carry out the duties and functions of the Liquidator hereunder for and during
such period of time as shall be reasonably required in the good faith judgment
of the Liquidator to complete the winding up and liquidation of the Partnership
as provided for herein.
12.4 LIQUIDATION
The Liquidator shall proceed to dispose of the assets of the Partnership,
discharge its liabilities, and otherwise wind up its affairs in such manner and
over such period as the Liquidator determines to be in the best interest of the
Partners, subject to Section 17-804 of the Delaware Act and the following:
(a) Disposition of Assets. The assets may be disposed of by public or
private sale or by distribution in kind to one or more Partners on such terms as
the Liquidator and such Partner or Partners may agree. If any property is
distributed in kind, the Partner receiving the property shall be deemed for
purposes of Section 12.4(c) to have received cash equal to its fair market
value; and contemporaneously therewith, appropriate cash distributions must be
made to the other Partners. The Liquidator may, in its absolute discretion,
defer liquidation or distribution of the Partnership's assets for a reasonable
time if it determines that an immediate sale or distribution of all or some of
the Partnership's assets would be impractical or would cause undue loss to the
Partners. The Liquidator may, in its absolute discretion, distribute the
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Partnership's assets, in whole or in part, in kind if it determines that a sale
would be impractical or would cause undue loss to the partners.
(b) Discharge of Liabilities. Liabilities of the Partnership include
amounts owed to Partners otherwise than in respect of their distribution rights
under Article VI. With respect to any liability that is contingent, conditional
or unmatured or is otherwise not yet due and payable, the Liquidator shall
either settle such claim for such amount as it thinks appropriate or establish a
reserve of cash or other assets to provide for its payment. When paid, any
unused portion of the reserve shall be distributed as additional liquidation
proceeds.
(c) Liquidation Distributions. All property and all cash in excess of that
required to discharge liabilities as provided in Section 12.4(b) shall be
distributed to the Partners in accordance with, and to the extent of, the
positive balances in their respective Capital Accounts, as determined after
taking into account all Capital Account adjustments (other than those made by
reason of distributions pursuant to this Section 12.4(c)) for the taxable year
of the Partnership during which the liquidation of the Partnership occurs (with
such date of occurrence being determined pursuant to Treasury Regulation Section
1.704-1(b)(2)(ii)(g)), and such distribution shall be made by the end of such
taxable year (or, if later, within 90 days after said date of such occurrence).
12.5 CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP
Upon the completion of the distribution of Partnership cash and property as
provided in Section 12.4 in connection with the liquidation of the Partnership,
the Partnership shall be terminated and the Certificate of Limited Partnership
and all qualifications of the Partnership as a foreign limited partnership in
jurisdictions other than the State of Delaware shall be canceled and such other
actions as may be necessary to terminate the Partnership shall be taken.
12.6 RETURN OF CONTRIBUTIONS
The General Partners shall not be personally liable for, and shall have no
obligation to contribute or loan any monies or property to the Partnership to
enable it to effectuate, the return of the Capital Contributions of the Limited
Partners or Unitholders, or any portion thereof, it being expressly understood
that any such return shall be made solely from Partnership assets.
12.7 WAIVER OF PARTITION
To the maximum extent permitted by law, each Partner hereby waives any right
to partition of the Partnership property.
12.8 CAPITAL ACCOUNT RESTORATION
No Limited Partner shall have any obligation to restore any negative balance
in its Capital Account upon liquidation of the Partnership. Each of the General
Partners shall be obligated to restore any negative balance in its Capital
Account upon liquidation of its interest in the Partnership by the end of the
taxable year of the Partnership during which such liquidation occurs, or, if
later, within 90 days after the date of such liquidation; provided, however, the
Special General Partner's total obligation pursuant to this Section 12.8 and
Section 12.8 of the Operating Partnership Agreement shall be limited to
$78,000,000. The non-contributing General Partner shall indemnify the
contributing General Partner for amounts contributed to the Partnership pursuant
to this Section 12.8 and by it to the Operating Partnership pursuant to Section
12.8 of the Operating Partnership Agreement to the extent it exceeds the
contributing General Partner's Pro Rata share of the amounts so contributed,
provided, however, that the Special General Partner's total indemnification
obligation is limited by the excess of $78,000,000 over the aggregate amount
previously contributed by it to the Partnership pursuant to this Section 12.8
and by it to the Operating Partnership pursuant to Section 12.8 of the Operating
Partnership Agreement.
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ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
13.1 AMENDMENT TO BE ADOPTED SOLELY BY THE MANAGING GENERAL PARTNER
Each Partner agrees that the Managing General Partner, without the approval
of any Partner or Assignee, may amend any provision of this Agreement and
execute, swear to, acknowledge, deliver, file and record whatever documents may
be required in connection therewith, to reflect:
(a) a change in the name of the Partnership, the location of the
principal place of business of the Partnership, the registered agent of the
Partnership or the registered office of the Partnership;
(b) admission, substitution, withdrawal or removal of Partners in
accordance with this Agreement;
(c) a change that, in the sole discretion of the Managing General
Partner, is necessary or advisable to qualify or continue the qualification
of the Partnership as a limited partnership or a partnership in which the
Limited Partners have limited liability under the laws of any state or to
ensure that the Partnership and the Operating Partnership will not be
treated as an association taxable as a corporation or otherwise taxed as an
entity for federal income tax purposes;
(d) a change that, in the discretion of the Managing General Partner,
(i) does not adversely affect the Limited Partners in any material respect,
(ii) is necessary or advisable to (A) satisfy any requirements, conditions
or guidelines contained in any opinion, directive, order, ruling or
regulation of any federal or state agency or judicial authority or contained
in any federal or state statute (including the Delaware Act) or (B)
facilitate the trading of the Limited Partner Interest (including the
division of any class or classes of Outstanding Limited Partner Interest
into different classes to facilitate uniformity of tax consequences within
such classes of Limited Partner Interests) or comply with any rule,
regulation, guideline or requirement of any National Securities Exchange on
which the Limited Partner Interests are or will be listed for trading,
compliance with any of which the Managing General Partner determines in its
discretion to be in the best interests of the Partnership and the Limited
Partners, (iii) is necessary or advisable in connection with action taken by
the Managing General Partner pursuant to Section 5.10, or (iv) is required
to effect the intent expressed in the Registration Statement or the intent
of the provisions of this Agreement or is otherwise contemplated by this
Agreement;
(e) a change in the fiscal year or taxable year of the Partnership and
any changes that, in the discretion of the Managing General Partner, are
necessary or advisable as a result of a change in the fiscal year or taxable
year of the Partnership including, if the Managing General Partner shall so
determine, a change in the definition of "Quarter" and the dates on which
distributions are to be made by the Partnership;
(f) an amendment that is necessary, in the Opinion of Counsel, to
prevent the Partnership, or the General Partners or their directors,
officers, trustees or agents from in any manner being subjected to the
provisions of the Investment Company Act of 1940, as amended, the Investment
Advisers Act of 1940, as amended, or "plan asset" regulations adopted under
the Employee Retirement Income Security Act of 1974, as amended, regardless
of whether such are substantially similar to plan asset regulations
currently applied or proposed by the United States Department of Labor;
(g) subject to the terms of Section 5.7, an amendment that, in the
discretion of the Managing General Partner, is necessary or advisable in
connection with the authorization of issuance of any class or series of
Partnership Securities pursuant to Section 5.6;
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(h) any amendment expressly permitted in this Agreement to be made by
the Managing General Partner acting alone;
(i) an amendment effected, necessitated or contemplated by a Merger
Agreement approved in accordance with Section 14.3;
(j) an amendment that, in the discretion of the Managing General
Partner, is necessary or advisable to reflect, account for and deal with
appropriately the formation by the Partnership of, or investment by the
Partnership in, any corporation, partnership, joint venture, limited
liability company or other entity other than the Operating Partnership, in
connection with the conduct by the Partnership of activities permitted by
the terms of Section 2.4;
(k) a merger or conveyance pursuant to Section 14.3(d); or
(l) any other amendments substantially similar to the foregoing.
13.2 AMENDMENT PROCEDURES
Except as provided in Sections 13.1 and 13.3, all amendments to this
Agreement shall be made in accordance with the following requirements.
Amendments to this Agreement may be proposed only by or with the consent of the
Managing General Partner which consent may be given or withheld in its sole
discretion. A proposed amendment shall be effective upon its approval by the
holders of at least a Unit Majority, unless a greater or different percentage is
required under this Agreement or by Delaware law. Each proposed amendment that
requires the approval of the holders of a specified percentage of Outstanding
Units shall be set forth in a writing that contains the text of the proposed
amendment. If such an amendment is proposed, the Managing General Partner shall
seek the written approval of the requisite percentage of Outstanding Units or
call a meeting of the Unitholders to consider and vote on such proposed
amendment. The Managing General Partner shall notify all Record Holders upon
final adoption of any such proposed amendments.
13.3 AMENDMENT REQUIREMENTS
(a) Notwithstanding the provisions of Sections 13.1 and 13.2, no
provision of this Agreement that establishes a percentage of Outstanding
Units (including Units deemed owned by the General Partners) required to
take any action shall be amended, altered, changed, repealed or rescinded in
any respect that would have the effect of reducing such voting percentage
unless such amendment is approved by the written consent or the affirmative
vote of holders of Outstanding Units whose aggregate Outstanding Units
constitute not less than the voting requirement sought to be reduced.
(b) Notwithstanding the provisions of Sections 13.1 and 13.2, no
amendment to this Agreement may (i) enlarge the obligations of any Limited
Partner without its consent, unless such shall be deemed to have occurred as
a result of an amendment approved pursuant to Section 13.3(c), (ii) enlarge
the obligations of, restrict in any way any action by or rights of, or
reduce in any way the amounts distributable, reimbursable or otherwise
payable to, the Managing General Partner or any of its Affiliates without
its consent, which may be given or withheld in its sole discretion, (iii)
change Section 12.1(a) or 12.1(c), or (iv) change the term of the
Partnership or, except as set forth in Section 12.1(c), give any Person the
right to dissolve the Partnership.
(c) Except as provided in Section 14.3, and except as otherwise
provided, and without limitation of the Managing General Partner's authority
to adopt amendments to this Agreement as contemplated in Section 13.1, any
amendment that would have a material adverse effect on the rights or
preferences of any class of Partnership Interests in relation to other
classes of Partnership Interests must be approved by the holders of not less
than a majority of the Outstanding Partnership Interests of the class
affected.
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(d) Notwithstanding any other provision of this Agreement, except for
amendments pursuant to Section 13.1 and except as otherwise provided by
Section 14.3(b), no amendments shall become effective without the approval
of the holders of at least 90% of the Outstanding Common Units and
Subordinated Units voting as a single class unless the Partnership obtains
an Opinion of Counsel to the effect that such amendment will not affect the
limited liability of any Limited Partner under applicable law.
(e) Except as provided in Section 13.1, this Section 13.3 shall only be
amended with the approval of the holders of at least 90% of the Outstanding
Units.
13.4 SPECIAL MEETINGS
All acts of Limited Partners to be taken pursuant to this Agreement shall be
taken in the manner provided in this Article XIII. Special meetings of the
Limited Partners may be called by the Managing General Partner or by Limited
Partners owning 20% or more of the Outstanding Limited Partner Interests of the
class or classes for which a meeting is proposed. Limited Partners shall call a
special meeting by delivering to the Managing General Partner one or more
requests in writing stating that the signing Limited Partners wish to call a
special meeting and indicating the general or specific purposes for which the
special meeting is to be called. Within 60 days after receipt of such a call
from Limited Partners or within such greater time as may be reasonably necessary
for the Partnership to comply with any statutes, rules, regulations, listing
agreements or similar requirements governing the holding of a meeting or the
solicitation of proxies for use at such a meeting, the Managing General Partner
shall send a notice of the meeting to the Limited Partners either directly or
indirectly through the Transfer Agent. A meeting shall be held at a time and
place determined by the Managing General Partner on a date not less than 10 days
nor more than 60 days after the mailing of notice of the meeting. Limited
Partners shall not vote on matters that would cause the Limited Partners to be
deemed to be taking part in the management and control of the business and
affairs of the Partnership so as to jeopardize the Limited Partners' limited
liability under the Delaware Act or the law of any other state in which the
Partnership is qualified to do business.
13.5 NOTICE OF A MEETING
Notice of a meeting called pursuant to Section 13.4 shall be given to the
Record Holders of the class or classes of Limited Partner Interests for which a
meeting is proposed in writing by mail or other means of written communication
in accordance with Section 16.1. The notice shall be deemed to have been given
at the time when deposited in the mail or sent by other means of written
communication.
13.6 RECORD DATE
For purposes of determining the Limited Partners entitled to notice of or to
vote at a meeting of the Limited Partners or to give approvals without a meeting
as provided in Section 13.11, the Managing General Partner may set a Record
Date, which shall not be less than 10 nor more than 60 days before (a) the date
of the meeting (unless such requirement conflicts with any rule, regulation,
guideline or requirement of any National Securities Exchange on which the
Limited Partner Interests are listed for trading, in which case the rule,
regulation, guideline or requirement of such exchange shall govern) or (b) in
the event that approvals are sought without a meeting, the date by which Limited
Partners are requested in writing by the Managing General Partner to give such
approvals.
13.7 ADJOURNMENT
When a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting and a new Record Date need not be fixed, if the
time and place thereof are announced at the meeting at which the adjournment is
taken, unless such adjournment shall be for more than 45 days. At the
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adjourned meeting, the Partnership may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than 45
days or if a new Record Date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given in accordance with this Article XIII.
13.8 WAIVER OF NOTICE; APPROVAL OF MEETING; APPROVAL OF MINUTES
The transactions of any meeting of Limited Partners, however called and
noticed, and whenever held, shall be as valid as if it had occurred at a meeting
duly held after regular call and notice, if a quorum is present either in person
or by proxy, and if, either before or after the meeting, Limited Partners
representing such quorum who were present in person or by proxy and entitled to
vote, sign a written waiver of notice or an approval of the holding of the
meeting or an approval of the minutes thereof. All waivers and approvals shall
be filed with the Partnership records or made a part of the minutes of the
meeting. Attendance of a Limited Partner at a meeting shall constitute a waiver
of notice of the meeting, except when the Limited Partner does not approve, at
the beginning of the meeting, of the transaction of any business because the
meeting is not lawfully called or convened; and except that attendance at a
meeting is not a waiver of any right to disapprove the consideration of matters
required to be included in the notice of the meeting, but not so included, if
the disapproval is expressly made at the meeting.
13.9 QUORUM
The holders of a majority of the Outstanding Limited Partner Interests of
the class or classes for which a meeting has been called (including Limited
Partner Interests deemed owned by the General Partners) represented in person or
by proxy shall constitute a quorum at a meeting of Limited Partners of such
class or classes unless any such action by the Limited Partners requires
approval by holders of a greater percentage of such Limited Partner Interests,
in which case the quorum shall be such greater percentage. At any meeting of the
Limited Partners duly called and held in accordance with this Agreement at which
a quorum is present, the act of Limited Partners holding Outstanding Limited
Partner Interests that in the aggregate represent a majority of the Outstanding
Limited Partner Interests entitled to vote and be present in person or by proxy
at such meeting shall be deemed to constitute the act of all Limited Partners,
unless a greater or different percentage is required with respect to such action
under the provisions of this Agreement, in which case the act of the Limited
Partners holding Outstanding Limited Partner Interests that in the aggregate
represent at least such greater or different percentage shall be required. The
Limited Partners present at a duly called or held meeting at which a quorum is
present may continue to transact business until adjournment, notwithstanding the
withdrawal of enough Limited Partners to leave less than a quorum, if any action
taken (other than adjournment) is approved by the required percentage of
Outstanding Limited Partner Interests specified in this Agreement (including
Limited Partner Interests deemed owned by the General Partners). In the absence
of a quorum any meeting of Limited Partners may be adjourned from time to time
by the affirmative vote of holders of at least a majority of the Outstanding
Limited Partner Interests entitled to vote at such meeting (including Limited
Partner Interests deemed owned by the General Partners) represented either in
person or by proxy, but no other business may be transacted, except as provided
in Section 13.7.
13.10 CONDUCT OF A MEETING
The Managing General Partner shall have full power and authority concerning
the manner of conducting any meeting of the Limited Partners or solicitation of
approvals in writing, including the determination of Persons entitled to vote,
the existence of a quorum, the satisfaction of the requirements of Section 13.4,
the conduct of voting, the validity and effect of any proxies and the
determination of any controversies, votes or challenges arising in connection
with or during the meeting or voting. The Managing General Partner shall
designate a Person to serve as chairman of any meeting and shall further
designate a Person to take the minutes of any meeting. All minutes shall be kept
with the records of the Partnership maintained by the Managing General Partner.
The Managing General Partner may make such
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other regulations consistent with applicable law and this Agreement as it may
deem advisable concerning the conduct of any meeting of the Limited Partners or
solicitation of approvals in writing, including regulations in regard to the
appointment of proxies, the appointment and duties of inspectors of votes and
approvals, the submission and examination of proxies and other evidence of the
right to vote, and the revocation of approvals in writing.
13.11 ACTION WITHOUT A MEETING
If authorized by the Managing General Partner, any action that may be taken
at a meeting of the Limited Partners may be taken without a meeting if an
approval in writing setting forth the action so taken is signed by Limited
Partners owning not less than the minimum percentage of the Outstanding Limited
Partner Interests (including Limited Partner Interests deemed owned by the
General Partners) that would be necessary to authorize or take such action at a
meeting at which all the Limited Partners were present and voted (unless such
provision conflicts with any rule, regulation, guideline or requirement of any
National Securities Exchange on which the Limited Partner Interests are listed
for trading, in which case the rule, regulation, guideline or requirement of
such exchange shall govern). Prompt notice of the taking of action without a
meeting shall be given to the Limited Partners who have not approved in writing.
The Managing General Partner may specify that any written ballot submitted to
Limited Partners for the purpose of taking any action without a meeting shall be
returned to the Partnership within the time period, which shall be not less than
20 days, specified by the Managing General Partner. If a ballot returned to the
Partnership does not vote all of the Limited Partner Interests held by the
Limited Partners the Partnership shall be deemed to have failed to receive a
ballot for the Limited Partner Interests that were not voted. If approval of the
taking of any action by the Limited Partners is solicited by any Person other
than by or on behalf of the Managing General Partner, the written approvals
shall have no force and effect unless and until (a) they are deposited with the
Partnership in care of the Managing General Partner, (b) approvals sufficient to
take the action proposed are dated as of a date not more than 90 days prior to
the date sufficient approvals are deposited with the Partnership and (c) an
Opinion of Counsel is delivered to the Managing General Partner to the effect
that the exercise of such right and the action proposed to be taken with respect
to any particular matter (i) will not cause the Limited Partners to be deemed to
be taking part in the management and control of the business and affairs of the
Partnership so as to jeopardize the Limited Partners' limited liability, and
(ii) is otherwise permissible under the state statutes then governing the
rights, duties and liabilities of the Partnership and the Partners.
13.12 VOTING AND OTHER RIGHTS
(a) Only those Record Holders of the Limited Partner Interests on the Record
Date set pursuant to Section 13.6 (and also subject to the limitations contained
in the definition of "Outstanding") shall be entitled to notice of, and to vote
at, a meeting of Limited Partners or to act with respect to matters as to which
the holders of the Outstanding Limited Partner Interests have the right to vote
or to act. All references in this Agreement to votes of, or other acts that may
be taken by, the Outstanding Limited Partner Interests shall be deemed to be
references to the votes or acts of the Record Holders of such Outstanding
Limited Partner Interests.
(b) With respect to Limited Partner Interests that are held for a Person's
account by another Person (such as a broker, dealer, bank, trust company or
clearing corporation, or an agent of any of the foregoing), in whose name such
Limited Partner Interests are registered, such other Person shall, in exercising
the voting rights in respect of such Limited Partner Interests on any matter,
and unless the arrangement between such Persons provides otherwise, vote such
Limited Partner Interests in favor of, and at the direction of, the Person who
is the beneficial owner, and the Partnership shall be entitled to assume it is
so acting without further inquiry. The provisions of this Section 13.12(b) (as
well as all other provisions of this Agreement) are subject to the provisions of
Section 4.3.
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ARTICLE XIV
MERGER
14.1 AUTHORITY
The Partnership may merge or consolidate with one or more corporations,
limited liability companies, business trusts or associations, real estate
investment trusts, common law trusts or unincorporated businesses, including a
general partnership or limited partnership, formed under the laws of the State
of Delaware or any other state of the United States of America, pursuant to a
written agreement of merger or consolidation ("Merger Agreement") in accordance
with this Article XIV.
14.2 PROCEDURE FOR MERGER OR CONSOLIDATION
Merger or consolidation of the Partnership pursuant to this Article XIV
requires the prior approval of the Managing General Partner. If the Managing
General Partner shall determine, in the exercise of its discretion, to consent
to the merger or consolidation, the Managing General Partner shall approve the
Merger Agreement, which shall set forth:
(a) The names and jurisdictions of formation or organization of each of
the business entities proposing to merge or consolidate;
(b) The name and jurisdiction of formation or organization of the
business entity that is to survive the proposed merger or consolidation (the
"Surviving Business Entity");
(c) The terms and conditions of the proposed merger or consolidation;
(d) The manner and basis of exchanging or converting the equity
securities of each constituent business entity for, or into, cash, property
or general or limited partner interests, rights, securities or obligations
of the Surviving Business Entity; and (i) if any general or limited partner
interests, securities or rights of any constituent business entity are not
to be exchanged or converted solely for, or into, cash, property or general
or limited partner interests, rights, securities or obligations of the
Surviving Business Entity, the cash, property or general or limited partner
interests, rights, securities or obligations of any limited partnership,
corporation, trust or other entity (other than the Surviving Business
Entity) which the holders of such general or limited partner interests,
securities or rights are to receive in exchange for, or upon conversion of
their general or limited partner interests, securities or rights, and (ii)
in the case of securities represented by certificates, upon the surrender of
such certificates, which cash, property or general or limited partner
interests, rights, securities or obligations of the Surviving Business
Entity or any general or limited partnership, corporation, trust or other
entity (other than the Surviving Business Entity), or evidences thereof, are
to be delivered;
(e) A statement of any changes in the constituent documents or the
adoption of new constituent documents (the articles or certificate of
incorporation, articles of trust, declaration of trust, certificate or
agreement of limited partnership or other similar charter or governing
document) of the Surviving Business Entity to be effected by such merger or
consolidation;
(f) The effective time of the merger, which may be the date of the
filing of the certificate of merger pursuant to Section 14.4 or a later date
specified in or determinable in accordance with the Merger Agreement
(provided, that if the effective time of the merger is to be later than the
date of the filing of the certificate of merger, the effective time shall be
fixed no later than the time of the filing of the certificate of merger and
stated therein); and
(g) Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or appropriate by the Managing General
Partner.
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14.3 APPROVAL BY LIMITED PARTNERS OF MERGER OR CONSOLIDATION
(a) Except as provided in Section 14.3(d), the Managing General Partner,
upon its approval of the Merger Agreement, shall direct that the Merger
Agreement be submitted to a vote of Limited Partners, whether at a special
meeting or by written consent, in either case in accordance with the
requirements of Article XIII. A copy or a summary of the Merger Agreement
shall be included in or enclosed with the notice of a special meeting or the
written consent.
(b) Except as provided in Section 14.3(d), the Merger Agreement shall be
approved upon receiving the affirmative vote or consent of the holders of a
Unit Majority unless the Merger Agreement contains any provision that, if
contained in an amendment to this Agreement, the provisions of this
Agreement or the Delaware Act would require for its approval the vote or
consent of a greater percentage of the Outstanding Limited Partner Interests
or of any class of Limited Partners, in which case such greater percentage
vote or consent shall be required for approval of the Merger Agreement.
(c) Except as provided in Section 14.3(d), after such approval by vote
or consent of the Limited Partners, and at any time prior to the filing of
the certificate of merger pursuant to Section 14.4, the merger or
consolidation may be abandoned pursuant to provisions therefor, if any, set
forth in the Merger Agreement.
(d) Notwithstanding anything else contained in this Article XIV or in
this Agreement, the Managing General Partner is permitted, in its
discretion, without Limited Partner approval, to merge the Partnership or
any Group Member into, or convey all of the Partnership's assets to, another
limited liability entity which shall be newly formed and shall have no
assets, liabilities or operations at the time of such Merger other than
those it receives from the Partnership or other Group Member if (i) the
Managing General Partner has received an Opinion of Counsel that the merger
or conveyance, as the case may be, would not result in the loss of the
limited liability of any Limited Partner or any limited partner in the
Operating Partnership or cause the Partnership or Operating Partnership to
be treated as an association taxable as a corporation or otherwise to be
taxed as an entity for federal income tax purposes (to the extent not
previously treated as such), (ii) the sole purpose of such merger or
conveyance is to effect a mere change in the legal form of the Partnership
into another limited liability entity and (iii) the governing instruments of
the new entity provide the Limited Partners and the Managing General Partner
with the same rights and obligations as are herein contained.
14.4 CERTIFICATE OF MERGER
Upon the required approval by the Managing General Partner and the
Unitholders of a Merger Agreement, a certificate of merger shall be executed and
filed with the Secretary of State of the State of Delaware in conformity with
the requirements of the Delaware Act.
14.5 EFFECT OF MERGER
(a) At the effective time of the certificate of merger:
(i) all of the rights, privileges and powers of each of the business
entities that has merged or consolidated, and all property, real, personal
and mixed, and all debts due to any of those business entities and all other
things and causes of action belonging to each of those business entities,
shall be vested in the Surviving Business Entity and after the merger or
consolidation shall be the property of the Surviving Business Entity to the
extent they were of each constituent business entity;
(ii) the title to any real property vested by deed or otherwise in any
of those constituent business entities shall not revert and is not in any
way impaired because of the merger or consolidation;
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(iii) all rights of creditors and all liens on or security interests in
property of any of those constituent business entities shall be preserved
unimpaired; and
(iv) all debts, liabilities and duties of those constituent business
entities shall attach to the Surviving Business Entity and may be enforced
against it to the same extent as if the debts, liabilities and duties had
been incurred or contracted by it.
(b) A merger or consolidation effected pursuant to this Article shall not be
deemed to result in a transfer or assignment of assets or liabilities from one
entity to another.
ARTICLE XV
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
15.1 RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
(a) Notwithstanding any other provision of this Agreement, if at any time
not more than 20% of the total Limited Partner Interests of any class then
Outstanding is held by Persons other than the Managing General Partner and its
Affiliates, the Managing General Partner shall then have the right, which right
it may assign and transfer in whole or in part to the Partnership or any
Affiliate of the Managing General Partner, exercisable in its sole discretion,
to purchase all, but not less than all, of such Limited Partner Interests of
such class then Outstanding held by Persons other than the Managing General
Partner and its Affiliates, at the greater of (x) the Current Market Price as of
the date three days prior to the date that the notice described in Section
15.1(b) is mailed and (y) the highest price paid by the Managing General Partner
or any of its Affiliates for any such Limited Partner Interest of such class
purchased during the 90-day period preceding the date that the notice described
in Section 15.1(b) is mailed. As used in this Agreement, (i) "Current Market
Price" as of any date of any class of limited partner interests listed or
admitted to trading on any National Securities Exchange means the average of the
daily Closing Prices (as hereinafter defined) per limited partner interest of
such class for the 20 consecutive Trading Days (as hereinafter defined)
immediately prior to such date; (ii) "Closing Price" for any day means the last
sale price on such day, regular way, or in case no such sale takes place on such
day, the average of the closing bid and asked prices on such day, regular way,
in either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted for trading on the
principal National Securities Exchange (other than the Nasdaq Stock Market) on
which such Limited Partner Interests of such class are listed or admitted to
trading or, if such Limited Partner Interests of such class are not listed or
admitted to trading on any National Securities Exchange (other than the Nasdaq
Stock Market), the last quoted price on such day or, if not so quoted, the
average of the high bid and low asked prices on such day in the over-the-counter
market, as reported by the Nasdaq Stock Market or such other system then in use,
or, if on any such day such Limited Partner Interests of such class are not
quoted by any such organization, the average of the closing bid and asked prices
on such day as furnished by a professional market maker making a market in such
Limited Partner Interests of such class selected by the Managing General
Partner, or if on any such day no market maker is making a market in such
Limited Partner Interests of such class, the fair value of such Limited Partner
Interests on such day as determined reasonably and in good faith by the Managing
General Partner; and (iii) "Trading Day" means a day on which the principal
National Securities Exchange on which such limited partner interests of any
class are listed or admitted to trading is open for the transaction of business
or, if Limited Partner Interests of a class are not listed or admitted to
trading on any National Securities Exchange, a day on which banking institutions
in New York City generally are open.
(b) If the Managing General Partner, any Affiliate of the Managing General
Partner or the Partnership elects to exercise the right to purchase Limited
Partner Interests granted pursuant to Section 15.1(a), the Managing General
Partner shall deliver to the Transfer Agent notice of such election to purchase
(the "Notice of Election to Purchase") and shall cause the Transfer Agent to
mail a copy of
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such Notice of Election to Purchase to the Record Holders of Limited Partner
Interests of such class (as of a Record Date selected by the Managing General
Partner) at least 10, but not more than 60, days prior to the Purchase Date.
Such Notice of Election to Purchase shall also be published for a period of at
least three consecutive days in at least two daily newspapers of general
circulation printed in the English language and published in the Borough of
Manhattan, New York. The Notice of Election to Purchase shall specify the
Purchase Date and the price (determined in accordance with Section 15.1(a)) at
which Limited Partner Interests will be purchased and state that the Managing
General Partner, its Affiliate or the Partnership, as the case may be, elects to
purchase such Limited Partner Interests, upon surrender of Certificates
representing such Limited Partner Interests in exchange for payment, at such
office or offices of the Transfer Agent as the Transfer Agent may specify, or as
may be required by any National Securities Exchange on which such Limited
Partner Interests are listed or admitted to trading. Any such Notice of Election
to Purchase mailed to a Record Holder of Limited Partner Interests at his
address as reflected in the records of the Transfer Agent shall be conclusively
presumed to have been given regardless of whether the owner receives such
notice. On or prior to the Purchase Date, the Managing General Partner, its
Affiliate or the Partnership, as the case may be, shall deposit with the
Transfer Agent cash in an amount sufficient to pay the aggregate purchase price
of all of such Limited Partner Interests to be purchased in accordance with this
Section 15.1. If the Notice of Election to Purchase shall have been duly given
as aforesaid at least 10 days prior to the Purchase Date, and if on or prior to
the Purchase Date the deposit described in the preceding sentence has been made
for the benefit of the holders of Limited Partner Interests subject to purchase
as provided herein, then from and after the Purchase Date, notwithstanding that
any Certificate shall not have been surrendered for purchase, all rights of the
holders of such Limited Partner Interests (including any rights pursuant to
Articles IV, V, VI, and XII) shall thereupon cease, except the right to receive
the purchase price (determined in accordance with Section 15.1(a)) for Limited
Partner Interests therefor, without interest, upon surrender to the Transfer
Agent of the Certificates representing such Limited Partner Interests, and such
Limited Partner Interests shall thereupon be deemed to be transferred to the
Managing General Partner, its Affiliate or the Partnership, as the case may be,
on the record books of the Transfer Agent and the Partnership, and the Managing
General Partner or any Affiliate of the Managing General Partner, or the
Partnership, as the case may be, shall be deemed to be the owner of all such
Limited Partner Interests from and after the Purchase Date and shall have all
rights as the owner of such Limited Partner Interests (including all rights as
owner of such Limited Partner Interests pursuant to Articles IV, V, VI and XII).
(c) At any time from and after the Purchase Date, a holder of an Outstanding
Limited Partner Interest subject to purchase as provided in this Section 15.1
may surrender his Certificate evidencing such Limited Partner Interest to the
Transfer Agent in exchange for payment of the amount described in Section
15.1(a), therefor, without interest thereon.
ARTICLE XVI
GENERAL PROVISIONS
16.1 ADDRESSES AND NOTICES
Any notice, demand, request, report or proxy materials required or permitted
to be given or made to a Partner or Assignee under this Agreement shall be in
writing and shall be deemed given or made when delivered in person or when sent
by first class United States mail or by other means of written communication to
the Partner or Assignee at the address described below. Any notice, payment or
report to be given or made to a Partner or Assignee hereunder shall be deemed
conclusively to have been given or made, and the obligation to give such notice
or report or to make such payment shall be deemed conclusively to have been
fully satisfied, upon sending of such notice, payment or report to the Record
Holder of such Partnership Securities at his address as shown on the records of
the Transfer Agent or as otherwise shown on the records of the Partnership,
regardless of any claim of any Person who may have an
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interest in such Partnership Securities by reason of any assignment or
otherwise. An affidavit or certificate of making of any notice, payment or
report in accordance with the provisions of this Section 16.1 executed by the
Managing General Partner, the Transfer Agent or the mailing organization shall
be prima facie evidence of the giving or making of such notice, payment or
report. If any notice, payment or report addressed to a Record Holder at the
address of such Record Holder appearing on the books and records of the Transfer
Agent or the Partnership is returned by the United States Post Office marked to
indicate that the United States Postal Service is unable to deliver it, such
notice, payment or report and any subsequent notices, payments and reports shall
be deemed to have been duly given or made without further mailing (until such
time as such Record Holder or another Person notifies the Transfer Agent or the
Partnership of a change in his address) if they are available for the Partner or
Assignee at the principal office of the Partnership for a period of one year
from the date of the giving or making of such notice, payment or report to the
other Partners and Assignees. Any notice to the Partnership shall be deemed
given if received by the Managing General Partner at the principal office of the
Partnership designated pursuant to Section 2.3. The Managing General Partner may
rely and shall be protected in relying on any notice or other document from a
Partner, Assignee or other Person if believed by it to be genuine.
16.2 FURTHER ACTION
The parties shall execute and deliver all documents, provide all information
and take or refrain from taking action as may be necessary or appropriate to
achieve the purposes of this Agreement.
16.3 BINDING EFFECT
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
16.4 INTEGRATION
This Agreement constitutes the entire agreement among the parties hereto
pertaining to the subject matter hereof and supersedes all prior agreements and
understandings pertaining thereto.
16.5 CREDITORS
None of the provisions of this Agreement shall be for the benefit of, or
shall be enforceable by, any creditor of the Partnership.
16.6 WAIVER
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach of any other covenant, duty, agreement or condition.
16.7 COUNTERPARTS
This Agreement may be executed in counterparts, all of which together shall
constitute an agreement binding on all the parties hereto, notwithstanding that
all such parties are not signatories to the original or the same counterpart.
Each party shall become bound by this Agreement immediately upon affixing its
signature hereto or, in the case of a Person acquiring a Unit, upon accepting
the certificate evidencing such Unit or executing and delivering a Transfer
Application as herein described, independently of the signature of any other
party.
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16.8 APPLICABLE LAW
This Agreement shall be construed in accordance with and governed by the
laws of the State of Delaware, without regard to the principles of conflicts of
law.
16.9 INVALIDITY OF PROVISIONS
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
16.10 CONSENT OF PARTNERS
Each Partner hereby expressly consents and agrees that, whenever in this
Agreement it is specified that an action may be taken upon the affirmative vote
or consent of less than all of the Partners, such action may be so taken upon
the concurrence of less than all of the Partners and each Partner shall be bound
by the results of such action.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
MANAGING GENERAL PARTNER:
CORNERSTONE PROPANE GP, INC.
By:
--------------------------------------
Name:
Title:
SPECIAL GENERAL PARTNER:
SYN INC.
By:
--------------------------------------
Name:
Title:
ORGANIZATIONAL LIMITED PARTNER:
NORTHWESTERN GROWTH CORPORATION
By:
--------------------------------------
Name:
Title:
LIMITED PARTNERS
All Limited Partners now and hereafter
admitted as Limited Partners of the
Partnership, pursuant to powers of
attorney now and hereafter executed in
favor of, and granted and delivered to
the Managing General Partner.
By:
--------------------------------------
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<PAGE>
EXHIBIT A TO THE AMENDED AND
RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
CORNERSTONE PROPANE PARTNERS, L.P.
CERTIFICATE EVIDENCING COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS IN
CORNERSTONE PROPANE PARTNERS, L.P.
NO. COMMON UNITS
In accordance with Section 4.1 of the Amended and Restated Agreement of
Limited Partnership of Cornerstone Propane Partners, L.P., as amended,
supplemented or restated from time to time (the "Partnership Agreement"),
Cornerstone Propane Partners, L.P., a Delaware limited partnership (the
"Partnership"), hereby certifies that (the "Holder") is the registered
owner of Common Units representing limited partner interests in the
Partnership (the "Common Units") transferable on the books of the Partnership,
in person or by duly authorized attorney, upon surrender of this Certificate
properly endorsed and accompanied by a properly executed application for
transfer of the Common Units represented by this Certificate. The rights,
preferences and limitations of the Common Units are set forth in, and this
Certificate and the Common Units represented hereby are issued and shall in all
respects be subject to the terms and provisions of, the Partnership Agreement.
Copies of the Partnership Agreement are on file at, and will be furnished
without charge on delivery of written request to the Partnership at, the
principal office of the Partnership located at 432 Westridge Drive, Watsonville,
California 95076. Capitalized terms used herein but not defined shall have the
meanings given them in the Partnership Agreement.
The Holder, by accepting this Certificate, is deemed to have (i) requested
admission as, and agreed to become, a Limited Partner and to have agreed to
comply with and be bound by and to have executed the Partnership Agreement, (ii)
represented and warranted that the Holder has all right, power and authority
and, if an individual, the capacity necessary to enter into the Partnership
Agreement, (iii) granted the powers of attorney provided for in the Partnership
Agreement and (iv) made the waivers and given the consents and approvals
contained in the Partnership Agreement.
This Certificate shall not be valid for any purpose unless it has been
countersigned and registered by the Transfer Agent and Registrar.
<TABLE>
<S> <C>
Dated: -------------------------------------- CORNERSTONE PROPANE PARTNERS, L.P.
Countersigned and Registered by: By: Cornerstone Propane GP, Inc., its
Managing General Partner
- -------------------------------------------- By: -----------------------------------------
as Transfer Agent and President and Chief Executive Officer
Registrar
By: ----------------------------------------- By: -----------------------------------------
Authorized Signature Secretary
</TABLE>
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<PAGE>
[REVERSE OF CERTIFICATE]
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as follows according to applicable laws or
regulations:
<TABLE>
<S> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT
TEN ENT -- as tenants by the -------------- Custodian
entireties ------------------------
JT TEN -- as joint tenants with right (Cust) (Minor)
of survivorship and not as
tenants in common under Uniform Gifts to Minors
Act --------------------------------------------
State
</TABLE>
Additional abbreviations, though not in the above list, may also be used.
ASSIGNMENT OF COMMON UNITS
IN
CORNERSTONE PROPANE PARTNERS, L.P.
IMPORTANT NOTICE REGARDING INVESTOR RESPONSIBILITIES
DUE TO TAX SHELTER STATUS OF CORNERSTONE PROPANE PARTNERS, L.P.
You have acquired an interest in Cornerstone Propane Partners, L.P., 432
Westridge Drive, Watsonville, California 95076, whose taxpayer identification
number is 77-0439862. The Internal Revenue Service has issued Cornerstone
Propane Partners, L.P. the following tax shelter registration number:
.
YOU MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF
YOU CLAIM ANY DEDUCTION, LOSS, CREDIT OR OTHER TAX BENEFIT OR REPORT ANY INCOME
BY REASON OF YOUR INVESTMENT IN CORNERSTONE PROPANE PARTNERS, L.P.
You must report the registration number as well as the name and taxpayer
identification number of CORNERSTONE PROPANE PARTNERS, L.P. on Form 8271. FORM
8271 MUST BE ATTACHED TO THE RETURN ON WHICH YOU CLAIM THE DEDUCTION, LOSS,
CREDIT OR OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN
CORNERSTONE PROPANE PARTNERS, L.P.
If you transfer your interest in Cornerstone Propane Partners, L.P. to
another person, you are required by the Internal Revenue Service to keep a list
containing (a) that person's name, address and taxpayer identification number,
(b) the date on which you transferred the interest and (c) the name, address and
tax shelter registration number of Cornerstone Propane Partners, L.P. If you do
not want to keep such a list, you must (1) send the information specified above
to the Partnership, which will keep the list for this tax shelter, and (2) give
a copy of this notice to the person to whom you transfer your interest. Your
failure to comply with any of the above-described responsibilities could result
in the imposition of a penalty under Section 6707(b) or 6708(a) of the Internal
Revenue Code of 1986, as amended, unless such failure is shown to be due to
reasonable cause.
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE
INTERNAL REVENUE SERVICE.
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FOR VALUE RECEIVED,
- ------------------------------------ HEREBY ASSIGNS, CONVEYS, SELLS AND
TRANSFERS UNTO
- ------------------------------------
<TABLE>
<S> <C>
- ------------------------------------------- -------------------------------------------
(Please print or typewrite name (Please insert Social Security or other
and address of Assignee) identifying number of Assignee)
</TABLE>
- ------------------------------------ Common Units representing limited partner
interests evidenced by this Certificate, subject to the Partnership Agreement,
and does hereby irrevocably constitute and appoint
- ------------------------------------ as its attorney-in-fact with full power of
substitution to transfer the same on the books of Cornerstone Propane Partners,
L.P.
<TABLE>
<S> <C> <C>
Date: ------------------------------------ NOTE: The signature to any endorsement hereon
must correspond with the name as written
upon the face of this Certificate in every
particular, without alteration,
enlargement or change.
SIGNATURE(S) MUST BE GUARANTEED BY A -----------------------------------------
MEMBER FIRM OF THE NATIONAL ASSOCIATION OF (Signature)
SECURITIES DEALERS, INC. OR BY A -----------------------------------------
COMMERCIAL BANK OR TRUST COMPANY (Signature)
</TABLE>
SIGNATURE(S) GUARANTEED
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the Certificate evidencing the Common Units to
be transferred is surrendered for registration or transfer and an Application
for Transfer of Common Units has been executed by a transferee either (a) on the
form set forth below or (b) on a separate application that the Partnership will
furnish on request without charge. A transferor of the Common Units shall have
no duty to the transferee with respect to execution of the transfer application
in order for such transferee to obtain registration of the transfer of the
Common Units.
-------------------
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<PAGE>
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("ASSIGNEE") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of Cornerstone Propane Partners, L.P.
(the "PARTNERSHIP"), as amended, supplemented or restated to the date hereof
(the "PARTNERSHIP AGREEMENT"), (b) represents and warrants that the Assignee has
all right, power and authority and, if an individual, the capacity necessary to
enter into the Partnership Agreement, (c) appoints the Managing General Partner
of the Partnership and, if a Liquidator shall be appointed, the Liquidator of
the Partnership as the Assignee's attorney-in-fact to execute, swear to,
acknowledge and file any document, including, without limitation, the
Partnership Agreement and any amendment thereto and the Certificate of Limited
Partnership of the Partnership and any amendment thereto, necessary or
appropriate for the Assignee's admission as a Substituted Limited Partner and as
a party to the Partnership Agreement, (d) gives the powers of attorney provided
for in the Partnership Agreement, and (e) makes the waivers and gives the
consents and approvals contained in the Partnership Agreement. Capitalized terms
not defined herein have the meanings assigned to such terms in the Partnership
Agreement.
Date: ____________________________
<TABLE>
<S> <C>
- -------------------------------------------- --------------------------------------------
Social Security or other identifying number Signature of Assignee
of Assignee
- -------------------------------------------- --------------------------------------------
Purchase Price including commissions, if any Name and Address of Assignee
</TABLE>
Type of Entity (check one):
<TABLE>
<C> <S> <C> <C> <C> <C>
/ / Individual / / Partnership / / Corporation
/ / Trust / / Other (specify)
Nationality (check one):
/ / U.S. Citizen, Resident or Domestic Entity
/ / Foreign Corporation / / Non-resident Alien
</TABLE>
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (Social Security Number) is ____.
3. My home address is ____________________________________________________.
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<PAGE>
B. Partnership, Corporation or Other Interestholder
1. _______________________________________________________ is not a foreign
(Name of Interestholder)
corporation, foreign partnership, foreign trust or foreign
estate (as those terms are defined in the Code and Treasury Regulations).
2. The interestholder's U.S. employer identification number is ___________.
3. The interestholder's office address and place of incorporation (if
applicable) is
________________________________________________________________________.
The interestholder agrees to notify the Partnership within sixty (60) days
of the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct and
complete and, if applicable, I further declare that I have authority to sign
this document on behalf of
----------------------------
Name of Interestholder
----------------------------
Signature and Date
----------------------------
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
A-83
<PAGE>
APPENDIX B
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the Certificate evidencing the Common Units to
be transferred is surrendered for registration or transfer and an Application
for Transfer of Common Units has been executed by a transferee either (a) on the
form set forth below or (b) on a separate application that the Partnership will
furnish on request without charge. A transferor of the Common Units shall have
no duty to the transferee with respect to execution of the transfer application
in order for such transferee to obtain registration of the transfer of the
Common Units.
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("ASSIGNEE") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of Cornerstone Propane Partners, L.P.
(the "PARTNERSHIP"), as amended, supplemented or restated to the date hereof
(the "PARTNERSHIP AGREEMENT"), (b) represents and warrants that the Assignee has
all right, power and authority and, if an individual, the capacity necessary to
enter into the Partnership Agreement, (c) appoints the Managing General Partner
and, if a Liquidator shall be appointed, the Liquidator of the Partnership as
the Assignee's attorney-in-fact to execute, swear to, acknowledge and file any
document, including, without limitation, the Partnership Agreement and any
amendment thereto and the Certificate of Limited Partnership of the Partnership
and any amendment thereto, necessary or appropriate for the Assignee's admission
as a Substituted Limited Partner and as a party to the Partnership Agreement,
(d) gives the powers of attorney provided for in the Partnership Agreement and
(e) makes the waivers and gives the consents and approvals contained in the
Partnership Agreement. Capitalized terms not defined herein have the meanings
assigned to such terms in the Partnership Agreement.
Date: ____________________________
<TABLE>
<S> <C>
- -------------------------------------------- --------------------------------------------
Social Security or other identifying number Signature of Assignee
of Assignee
- -------------------------------------------- --------------------------------------------
Purchase Price including commissions, if any Name and Address of Assignee
</TABLE>
Type of Entity (check one):
<TABLE>
<C> <S> <C> <C> <C> <C>
/ / Individual / / Partnership / / Corporation
/ / Trust / / Other (specify)
Nationality (check one):
/ / U.S. Citizen, Resident or Domestic Entity
/ / Foreign Corporation / / Non-resident Alien
</TABLE>
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the
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<PAGE>
Partnership is a foreign person. To inform the Partnership that no withholding
is required with respect to the undersigned interestholder's interest in it, the
undersigned hereby certifies the following (or, if applicable, certifies the
following on behalf of the interestholder).
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (Social Security Number) is ____.
3. My home address is ____________________________________________________.
B. Partnership, Corporation or Other Interestholder
1. _______________________________________________________ is not a foreign
(Name of Interestholder)
corporation, foreign partnership, foreign trust or foreign estate (as
those terms are defined in the Code and Treasury Regulations).
2. The interestholder's U.S. employer identification number is ___________.
3. The interestholder's office address and place of incorporation (if
applicable) is
________________________________________________________________________.
The interestholder agrees to notify the Partnership within sixty (60) days
of the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct and
complete and, if applicable, I further declare that I have authority to sign
this document on behalf of
----------------------------
Name of Interestholder
----------------------------
Signature and Date
----------------------------
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
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<PAGE>
APPENDIX C
GLOSSARY OF CERTAIN TERMS
1995 PROPOSED LEGISLATION: Legislation passed by Congress in 1995 but
vetoed by President Clinton which would have altered the tax reporting
procedures and the deficiency collection procedures applicable to electing
partnerships with more than 100 partners.
ACQUISITION: Any transaction in which any member of the Partnership Group
acquires (through an asset acquisition, merger, stock acquisition or other form
of investment) control over all or a portion of the assets, properties or
business of another person for the purpose of increasing the operating capacity
or revenues of the Partnership Group from the operating capacity or revenues of
the Partnership Group existing immediately prior to such transaction.
ACQUISITION FACILITY: A $75.0 million revolving credit facility entered
into by the Operating Partnership to be used for acquisitions and improvements.
ADJUSTED OPERATING SURPLUS: With respect to any period, Operating Surplus
generated during such period (a) less (i) any net increase in working capital
borrowings during such period and (ii) any net reduction in cash reserves for
Operating Expenditures during such period not relating to an Operating
Expenditure made during such period, and (b) plus (i) any net decrease in
working capital borrowings during such period and (ii) any net increase in cash
reserves for Operating Expenditures during such period required by any debt
instrument for the repayment of principal, interest or premium. Adjusted
Operating Surplus does not include that portion of Operating Surplus included in
clause (a)(i) of the definition of Operating Surplus.
ANNUAL OPERATING PERFORMANCE INCENTIVE PLAN: The plan providing that annual
incentive bonuses be paid to participants in the plan (who will be determined by
the Board of Directors of the Managing General Partner and who will include the
Executives) based on a percentage of annual salary plus certain acquisition
management fees related to the acquisition of Empire Energy and Coast by
Northwestern Growth for performance up to budgeted levels of net income and
EBITDA.
AUDIT COMMITTEE: A committee of the board of directors of the Managing
General Partner composed entirely of two or more directors who are neither
officers nor employees of either of the General Partners nor officers, directors
or employees of any affiliate of either of the General Partners.
AVAILABLE CASH: With respect to any quarter prior to liquidation:
(a) the sum of (i) all cash and cash equivalents of the Partnership
Group on hand at the end of such quarter and (ii) all additional cash and
cash equivalents of the Partnership Group on hand on the date of
determination of Available Cash with respect to such quarter resulting from
borrowings for working capital purposes made subsequent to the end of such
quarter, less
(b) the amount of any cash reserves that is necessary or appropriate in
the reasonable discretion of the Managing General Partner to (i) provide for
the proper conduct of the business of the Partnership Group (including
reserves for future capital expenditures and for anticipated future credit
needs of the Partnership Group) subsequent to such quarter, (ii) comply with
applicable law or any loan agreement, security agreement, mortgage, debt
instrument or other agreement or obligation to which any member of the
Partnership Group is a party or by which it is bound or its assets are
subject, or (iii) provide funds for distributions to Unitholders and the
General Partners in respect of any one or more of the next four quarters;
provided, however, that the Managing General Partner may not establish cash
reserves pursuant to (iii) above if the effect of such reserves would be
that the Partnership is unable to distribute the Minimum Quarterly
Distribution on all Common Units with respect to such quarter; and, provided
further, that disbursements made by a Group Member or cash
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<PAGE>
reserves established, increased or reduced after the end of such quarter but
on or before the date of determination of Available Cash with respect to
such quarter shall be deemed to have been made, established, increased or
reduced for purposes of determining Available Cash within such quarter if
the Managing General Partner so determines. Notwithstanding the foregoing,
"Available Cash" with respect to the quarter in which the liquidation of the
Partnership occurs and any subsequent quarter shall equal zero.
BANK CREDIT FACILITY: The $75.0 million Acquisition Facility and the $50.0
million Working Capital Facility both entered into by the Operating Partnership.
CAPITAL ACCOUNT: The capital account maintained for a Partner pursuant to
the Partnership Agreement. The Capital Account of a Partner in respect of a
general partner interest, a Common Unit, a Subordinated Unit, an Incentive
Distribution Right or any other Partnership Interest shall be the amount which
such Capital Account would be if such general partner interest, Common Unit,
Subordinated Unit, Incentive Distribution Right, or other Partnership Interest
were the only interest in the Partnership held by a Partner from and after the
date on which such general partner interest, Common Unit, Subordinated Unit,
Incentive Distribution Right or other Partnership Interest was first issued.
CAPITAL IMPROVEMENTS: Any addition or improvement to the capital assets
owned by any member of the Partnership Group or acquisition of existing or the
construction of new capital assets (including retail distribution outlets,
propane tanks, pipeline systems, storage facilities, appliance showrooms,
training facilities and related assets), made to increase the operating capacity
of the Partnership Group from the operating capacity of the Partnership Group
existing immediately prior to such addition, improvement, acquisition or
construction.
CAPITAL SURPLUS: All Available Cash distributed by the Partnership from any
source will be treated as distributed from Operating Surplus until the sum of
all Available Cash distributed since the commencement of the Partnership equals
the Operating Surplus as of the end of the quarter prior to such distribution.
Any excess Available Cash will be deemed to be Capital Surplus.
CAUSE: Means a court of competent jurisdiction has entered a final,
non-appealable judgment finding the Managing General Partner liable for actual
fraud, gross negligence or willful or wanton misconduct in its capacity as a
general partner of the Partnership.
CLOSING DATE: The first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement.
COAST: CGI Holdings, Inc., a Delaware corporation.
COAST MERGER: The merger of Coast and CGI Acquisition Corp. to be
consummated pursuant to the Stock Purchase and Merger Agreement dated September
4, 1996, between Northwestern Growth, Coast Acquisition Corp., Coast and the
holders of preferred stock of Coast.
CODE: Internal Revenue Code of 1986, as amended.
COMBINED OPERATIONS: The propane business and assets of Synergy, Empire
Energy, Myers and Coast to be contributed to the Partnership pursuant to the
Contribution Agreement.
COMMISSION: Securities and Exchange Commission.
COMMON UNIT ARREARAGE: The amount by which the Minimum Quarterly
Distribution in respect of a quarter during the Subordination Period exceeds the
distribution of Available Cash from Operating Surplus actually made for such
quarter on a Common Unit, cumulative for such quarter and all prior quarters
during the Subordination Period.
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<PAGE>
COMMON UNITS: A Unit representing a fractional part of the Partnership
Interests of all limited partners and assignees and having the rights and
obligations specified with respect to Common Units in the Partnership Agreement.
CONTRIBUTION AGREEMENT: The Contribution, Conveyance and Assumption
Agreement to be dated the Closing Date among the Operating Partnership, the
General Partners and certain other parties governing the Transactions pursuant
to which, among other things, the propane assets and operations of Synergy,
Empire Energy, Myers and Coast will be transferred and the liabilities will be
assumed.
CORNERSTONE: Cornerstone Propane Partners, L.P., a Delaware limited
partnership.
COUNSEL: Andrews & Kurth L.L.P., special counsel to the General Partners
and the Partnership.
CURRENT MARKET PRICE: With respect to any class of Units listed or admitted
to trading on any national securities exchange as of any date, the average of
the daily Closing Prices (as hereinafter defined) for the 20 consecutive Trading
Days (as hereinafter defined) immediately prior to such date. "Closing Price"
for any day means the last sale price on such day, regular way, or in case no
such sale takes place on such day, the average of the closing bid and asked
prices on such day, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the principal national securities exchange (other than
the Nasdaq Stock Market) on which the Units of such class are listed or admitted
to trading or, if the Units of such class are not listed or admitted to trading
on any national securities exchange (other than the Nasdaq Stock Market), the
last quoted price on such day, or, if not so quoted, the average of the high bid
and low asked prices on such day in the over-the-counter market, as reported by
the Nasdaq Stock Market or such other system then in use, or if on any such day
the Units of such class are not quoted by any such organization, the average of
the closing bid and asked prices on such day as furnished by a professional
market maker making a market in the Units of such class selected by the Managing
General Partner, or if on any such day no market maker is making a market in the
Units of such class, the fair value of such Units on such day as determined
reasonably and in good faith by the Managing General Partner. "Trading Days"
means a day on which the principal national securities exchange on which Units
of any class are listed or admitted to trading is open for the transaction of
business or, if the Units of a class are not listed or admitted to trading on
any national securities exchange, a day on which banking institutions in New
York City generally are open.
DELAWARE ACT: The Delaware Revised Uniform Limited Partnership Act, 6 Del
C. Section17-101, et seq., as amended, supplemented or restated from time to
time, and any successor to such statute.
DEPARTING PARTNER: A former General Partner, either Managing General
Partner or Special General Partner, from and after the effective date of any
withdrawal or removal of such former General Partner pursuant to the Partnership
Agreement.
EBITDA: Operating income plus depreciation and amortization. As used in
this Prospectus, EBITDA is not intended to be construed as an alternative to net
income as an indicator of operating performance or as an alternative to cash
flow as a measure of liquidity or ability to service debt obligations.
EMPLOYMENT AGREEMENTS: Employment agreements originally made between
Northwestern Growth and each of the Executives, as amended and assigned by
Northwestern Growth to and assumed by the Managing General Partner.
EMPIRE ACQUISITION OF CERTAIN SYNERGY ASSETS: The sale by Synergy to Empire
Energy of approximately 25% of the operations acquired in the Synergy
Acquisition.
EMPIRE ENERGY: Empire Energy Corporation, a Tennessee corporation.
EMPIRE GAS: Empire Gas Corporation, a Missouri corporation, now known as
All Star Gas Corporation.
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<PAGE>
EXCHANGE ACT: Securities Exchange Act of 1934, as amended.
EXECUTIVES: Messrs. Keith C. Baxter, Charles J. Kittrell, Ronald J. Goedde
and Vincent J. DiCosimo.
GENERAL PARTNERS: The Managing General Partner and the Special General
Partner and their successors and permitted assigns as general partners of the
Partnership and the Operating Partnership.
HEATING DEGREE DAY: Heating Degree Days measure the amount by which the
average of the high and low temperature on a given day is below 65 degrees
Fahrenheit. For example, if the high temperature is 60 degrees and the low
temperature is 40 degrees for a National Oceanic and Atmospheric Administration
measurement location, the average temperature is 50 degrees and the number of
heating degree days for that day is 15.
INCENTIVE DISTRIBUTION RIGHT: A non-voting limited partner Partnership
Interest issued to the General Partners in connection with the transfer of their
assets to the Partnership, which Partnership Interest will confer upon the
holder thereof only the rights and obligations specifically provided in the
Partnership Agreement with respect to Incentive Distribution Rights (and no
other rights otherwise available to or other obligations of holders of a
Partnership Interest).
INCENTIVE DISTRIBUTIONS: The distributions of Available Cash from Operating
Surplus initially made to the General Partners that are in excess of the General
Partners' aggregate 2% general partner interest.
INITIAL COMMON UNITS: The Common Units sold in this offering.
INITIAL UNIT PRICE: An amount per Unit equal to the initial public offering
price of the Common Units as set forth on the outside front cover page of this
Prospectus.
INITIAL UNITS: The Common Units with an aggregate value of $7.0 million
which will be allocated to selected executives upon the consummation of the
Transactions, subject to certain vesting conditions, under the Restricted Unit
Plan.
INTERIM CAPITAL TRANSACTIONS: (a) Borrowings, refinancings and refundings
of indebtedness and sales of debt securities (other than for working capital
purposes and other than for items purchased on open account in the ordinary
course of business) by any member of the Partnership Group, (b) sales of equity
interests (including the Common Units sold to the Underwriters pursuant to the
exercise of their over-allotment option) by any member of the Partnership Group
and (c) sales or other voluntary or involuntary dispositions of any assets of
any member of the Partnership Group (other than (i) sales or other dispositions
of inventory in the ordinary course of business, (ii) sales or other
dispositions of other current assets, including, without limitation, receivables
and accounts, in the ordinary course of business and (iii) sales or other
dispositions of assets as a part of normal retirements or replacements), in each
case prior to the commencement of the dissolution and liquidation of the
Partnership.
IRA: Individual retirement account.
IRS: Internal Revenue Service.
MANAGEMENT BUY-OUT: The August 1, 1996 sale by the principal founding
shareholder of Empire Energy and certain other shareholders of their interests
in Empire Energy to certain members of management of Empire Energy.
MANAGEMENT FEE: A fee for each of the Executives relating to the
acquisition of Empire Energy and Coast by Northwestern Growth.
MANAGING GENERAL PARTNER: Cornerstone Propane GP, Inc., a Delaware
corporation, and its successors, as managing general partner of the Partnership.
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MINIMUM QUARTERLY DISTRIBUTION: $.54 per Unit with respect to each quarter
or $2.16 per Unit on an annualized basis, subject to adjustment as described in
"Cash Distribution Policy -- Distributions from Capital Surplus" and "Cash
Distribution Policy -- Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels."
MYERS: Myers Propane Gas Company, a Delaware corporation and a subsidiary
of NPS.
NEW ACQUISITION INCENTIVE PLAN: The plan providing bonuses to participants
in the plan (who will be determined by the Board of Directors of the Managing
General Partner and will include the Executives) for adding new businesses to
the Partnership's propane operations, based upon 4% of the gross acquisition
price, spread among the participants in the plan based on their relative
salaries.
NON-CITIZEN ASSIGNEE: A Limited Partner or assignee who (i) fails to
furnish information about nationality, citizenship, residency or other related
status within 30 days after a request by the Managing General Partner for such
information, or (ii) the Managing General Partner determines after receipt of
such information is not an eligible citizen.
NORTHWESTERN GROWTH: Northwestern Growth Corporation, a South Dakota
corporation and a wholly owned subsidiary of NPS.
NOTE PLACEMENT: The private placement by the Operating Partnership of the
Notes.
NOTES: The $220.0 million aggregate principal amount of Senior Secured
Notes due 2010 to be privately placed by the Operating Partnership.
NPS: Northwestern Public Service Company, a Delaware corporation.
NYSE: The New York Stock Exchange, Inc.
OPERATING EXPENDITURES: All Partnership Group expenditures, including
taxes, reimbursements of the General Partners, debt service payments and capital
expenditures, subject to the following:
(a) Payments (including prepayments) of principal and premium on a debt
shall not be an Operating Expenditure if the payment is (i) required in
connection with the sale or other disposition of assets or (ii) made in
connection with the refinancing or refunding of indebtedness with the
proceeds from new indebtedness or from the sale of equity interests. For
purposes of the foregoing, at the election and in the reasonable discretion
of the Managing General Partner, any payment of principal or premium shall
be deemed to be refunded or refinanced by any indebtedness incurred or to be
incurred by the Partnership Group within 180 days before or after such
payment to the extent of the principal amount of such indebtedness.
(b) Operating Expenditures shall not include (i) capital expenditures
made for Acquisitions or for Capital Improvements (as opposed to capital
expenditures made to maintain assets), (ii) payment of transaction expenses
relating to Interim Capital Transactions or (iii) distributions to partners.
Where capital expenditures are made in part for Acquisitions or Capital
Improvements and in part for other purposes, the Managing General Partner's
good faith allocation between the amounts paid for each shall be conclusive.
OPERATING PARTNERSHIP: Cornerstone Propane, L.P., a Delaware limited
partnership, and any successors thereto.
OPERATING PARTNERSHIP AGREEMENT: The Amended and Restated Agreement of
Limited Partnership of the Operating Partnership (the form of which has been
filed as an exhibit to the registration statement of which this Prospectus is a
part).
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OPERATING SURPLUS: As to any period prior to liquidation, on a cumulative
basis and without duplication:
(a) the sum of (i) $25 million plus all cash and cash equivalents of the
Partnership Group on hand as of the close of business on the Closing Date,
(ii) all cash receipts of the Partnership Group for the period beginning on
the Closing Date and ending with the last day of such period, other than
cash receipts from Interim Capital Transactions and (iii) all cash receipts
of the Partnership Group after the end of such period but on or before the
date of determination of Operating Surplus with respect to such period
resulting from borrowings for working capital purposes, less
(b) the sum of (i) Operating Expenditures for the period beginning on
the Closing Date and ending with the last day of such period and (ii) the
amount of cash reserves that is necessary or advisable in the reasonable
discretion of the Managing General Partner to provide funds for future
Operating Expenditures, provided however, that disbursements made (including
contributions to a member of the Partnership Group or disbursements on
behalf of a member of the Partnership Group) or cash reserves established,
increased or reduced after the end of such period but on or before the date
of determination of Available Cash with respect to such period shall be
deemed to have been made, established, increased or reduced for purposes of
determining Operating Surplus, within such period if the Managing General
Partner so determines. Notwithstanding the foregoing, "Operating Surplus"
with respect to the quarter in which the liquidation occurs and any
subsequent quarter shall equal zero.
OPINION OF COUNSEL: A written opinion of counsel, acceptable to the
Managing General Partner in its reasonable discretion, to the effect that the
taking of a particular action will not result in the loss of the limited
liability of the limited partners of the Partnership or cause the Partnership to
be treated as an association taxable as a corporation or otherwise taxed as an
entity for federal income tax purposes.
PARTNERSHIP: Cornerstone Propane Partners, L.P., a Delaware limited
partnership, and any successors thereto.
PARTNERSHIP AGREEMENT: The Amended and Restated Agreement of Limited
Partnership of the Partnership (the form of which is included in this Prospectus
as Appendix A), as it may be amended, restated or supplemented from time to
time. Unless the context requires otherwise, references to the Partnership
Agreement constitute references to the Partnership Agreement of the Partnership
and to the Operating Partnership Agreement, collectively.
PARTNERSHIP GROUP: The Partnership, the Operating Partnership and any
subsidiary of either such entity, treated as a single consolidated entity.
PARTNERSHIP INTEREST: An interest in the Partnership, which shall include
general partner interests, Common Units, Subordinated Units, Incentive
Distribution Rights or other equity securities of the Partnership, or a
combination thereof or interest therein as the case may be.
PARTNERSHIP SECURITY: Means any class or series of Units, any option,
right, warrant or appreciation rights relating thereto, or any other type of
equity interest that the Partnership may lawfully issue, or any unsecured or
secured debt obligation of the Partnership that is convertible into any class or
series of equity interests of the Partnership.
PLANS: The New Acquisition Incentive Plan of the Managing General Partner,
together with the Annual Operating Performance Incentive Plan.
REGISTRATION STATEMENT: The Registration Statement on Form S-1, as amended
(No. 333-13879), filed by the Partnership with the Commission.
RESTRICTED UNIT PLAN: The Cornerstone Propane Partners, L.P. 1996
Restricted Unit Plan.
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RULE 144: Rule 144 of the Securities Act.
SECURITIES ACT: The Securities Act of 1933, as amended.
SGI: Synergy Group Incorporated, a Delaware corporation.
SPECIAL GENERAL PARTNER: Synergy and its successors and assigns as special
general partner of the Partnership.
SPLIT-OFF: The tax-free split-off of Empire Energy from Empire Gas in June
1994.
SUBORDINATED UNIT: A Unit representing a fractional part of the Partnership
Interests of all limited partners and assignees and having the rights and
obligations specified with respect to Subordinated Units in the Partnership
Agreement.
SUBORDINATION PERIOD: The Subordination Period will generally extend from
the closing of this offering until the first to occur of: (a) the first day of
any quarter beginning after December 31, 2001 in respect of which (i)
distributions of Available Cash from Operating Surplus on each of the
outstanding Common Units and the Subordinated Units with respect to each of the
three consecutive, non-overlapping four-quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly Distribution on
all of the outstanding Common Units and Subordinated Units during such periods,
(ii) the Adjusted Operating Surplus generated during each of the three
consecutive, non-overlapping four-quarter periods immediately preceding such
date equaled or exceeded the sum of the Minimum Quarterly Distribution on all of
the outstanding Common Units and Subordinated Units, plus the related
distribution on the general partner interests in the Partnership and in the
Operating Partnership during such periods, and (iii) there are no outstanding
Common Unit Arrearages; and (b) the date on which the Managing General Partner
is removed as general partner of the Partnership upon the requisite vote by
holders of Outstanding Units under circumstances where Cause does not exist and
Units held by the General Partners and their Affiliates are not voted in favor
of such removal. Prior to the end of the Subordination Period, a portion of the
Subordinated Units will convert into Common Units on a one-for-one basis on the
first day after the record date established by the Managing General Partner for
any quarter ending on or after (a) December 31, 1999 with respect to one-quarter
of the Subordinated Units (1,969,655 Subordinated Units, or 1,649,405
Subordinated Units if the over-allotment option is exercised in full) and (b)
December 31, 2000 with respect to an additional one-quarter of the Subordinated
Units (1,969,655 Subordinated Units, or 1,649,405 Subordinated Units if the
over-allotment option is exercised in full), on a cumulative basis, in respect
of which (i) distributions of Available Cash from Operating Surplus on the
Common Units and the Subordinated Units with respect to each of the three
consecutive, non-overlapping four-quarter periods immediately preceding such
date equaled or exceeded the sum of the Minimum Quarterly Distribution on all of
the outstanding Common Units and Subordinated Units during such periods, (ii)
the Adjusted Operating Surplus generated during each of the two consecutive,
non-overlapping four-quarter periods immediately preceding such date equaled or
exceeded the sum of the Minimum Quarterly Distribution on all of the outstanding
Common Units and Subordinated Units and the related distribution on the general
partner interests in the Partnership and in the Operating Partnership during
such periods, and (iii) there are no outstanding Common Unit Arrearages;
provided, however, that the early conversion of the second quarter of
Subordinated Units may not occur until at least one year following the early
conversion of the first quarter of Subordinated Units. In addition, if the
Managing General Partner is removed as general partner of the Partnership under
circumstances where Cause does not exist and Units held by the General Partners
and their affiliates are not voted in favor of such removal (i) the
Subordination Period will end and all outstanding Subordinated Units will
immediately and automatically convert into Common Units on a one-for-one basis,
(ii) any existing Common Unit Arrearages will be extinguished and (iii) the
General Partners will have the right to convert their 2% general partner
interests (and all the rights to the Incentive Distribution) into Common Units
or to receive cash in exchange for such interests.
C-7
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SYNERGY: SYN Inc., a Delaware corporation and majority-owned subsidiary of
Northwestern Growth.
SYNERGY ACQUISITION: The acquisition of SGI by Synergy on August 15, 1995.
TARGET DISTRIBUTION LEVELS: See "Cash Distribution Policy -- Incentive
Distributions -- Hypothetical Annualized Yield."
TRANSFER AGENT: Continental Stock Transfer & Trust Company serving as
registrar and transfer agent for the Common Units.
TRANSFER APPLICATION: An application for transfer of Units in the form set
forth on the back of a certificate, substantially in the form included in this
Prospectus as Appendix B, or in a form substantially to the same effect in a
separate instrument.
UNITHOLDERS: Holders of the Common Units and the Subordinated Units,
collectively.
UNIT MAJORITY: During the Subordination Period, at least a majority of the
outstanding Common Units, voting as a class, and at least a majority of the
outstanding Subordinated Units, voting as a class and, thereafter, at least a
majority of the outstanding Units.
UNITS: The Common Units and the Subordinated Units, collectively, but not
including the right to receive Incentive Distributions.
UNRECOVERED CAPITAL: At any time, the Initial Unit Price, less the sum of
all distributions theretofore made in respect of an Initial Common Unit
constituting Capital Surplus and any distributions of cash (or the net agreed
value of any distributions in kind) in connection with the dissolution and
liquidation of the Partnership theretofore made in respect of such Unit,
adjusted as the Managing General Partner determines to be appropriate to give
effect to any distribution, subdivision or combination of such Units.
WORKING CAPITAL FACILITY: A $50.0 million revolving credit facility entered
into by the Operating Partnership to be used for working capital and other
Partnership purposes.
C-8
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