<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
CORNERSTONE PROPANE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 5984 77-0439862
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) number)
</TABLE>
---------------------
432 WESTRIDGE DRIVE
WATSONVILLE, CALIFORNIA 95076
(408) 724-1921
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------------
RONALD J. GOEDDE
432 WESTRIDGE DRIVE
WATSONVILLE, CALIFORNIA 95076
(408) 724-1921
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
COPIES TO:
<TABLE>
<S> <C> <C>
ANDREWS & KURTH L.L.P. SCHIFF HARDIN & WAITE BAKER & BOTTS,
425 LEXINGTON AVENUE 7200 SEARS TOWER L.L.P.
10TH FLOOR 233 S. WACKER DRIVE ONE SHELL PLAZA
NEW YORK, NEW YORK 10017 CHICAGO, ILLINOIS 60606 910 LOUISIANA
(212) 850-2800 (312) 258-5500 HOUSTON, TEXAS
ATTN: MICHAEL ROSENWASSER ATTN: LINDA JEFFRIES WIGHT 77002
(713) 229-1234
ATTN: WALTER J.
SMITH
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
---------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuing basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Units representing limited partner interests..................................... $206,425,000 $62,554
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED OCTOBER 10, 1996
8,975,000 COMMON UNITS
CORNERSTONE PROPANE PARTNERS, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
-----------------
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. IT IS CURRENTLY ESTIMATED THAT THE
INITIAL PUBLIC OFFERING PRICE PER COMMON UNIT WILL BE
BETWEEN $ AND $ . SEE "UNDERWRITERS" FOR A
DISCUSSION OF THE FACTORS TO BE 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 BUSINESS AND ASSETS (THE
"COMBINED OPERATIONS") OF SYN INC. ("SYNERGY") AND EMPIRE ENERGY
CORPORATION (THE PRINCIPAL PROPANE SUBSIDIARIES OF NORTHWESTERN
GROWTH CORPORATION ("NORTHWESTERN GROWTH")) 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, 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 $.50 PER COMMON
UNIT PER QUARTER (THE "MINIMUM QUARTERLY DISTRIBUTION") OR $2.00 PER
COMMON UNIT ON AN ANNUALIZED BASIS.
---------------------------
APPLICATION WILL BE MADE TO LIST THE COMMON UNITS FOR
TRADING ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL " ."
---------------------------
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 33, 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.
- 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.
(CONTINUED ON PAGE 3)
---------------------------
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 $ A COMMON UNIT
-------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) PARTNERSHIP(2)
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
PER COMMON UNIT............................ $ $ $
TOTAL(3)................................... $ $ $
</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) THE PARTNERSHIP HAS GRANTED TO THE UNDERWRITERS AN OPTION, EXERCISABLE
WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF
1,346,250 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 $ , $ AND $ ,
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 ,
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
, 1996
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
[DESCRIPTION OF MAP]
Map of the United States showing the locations of the Partership's Customer
Service Centers
- - Customer Service Centers
* Headquarters
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.
2
<PAGE>
(CONTINUED FROM PAGE 1)
- 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.
- ON A PRO FORMA BASIS AT JUNE 30, 1996, THE PARTNERSHIP'S TOTAL
INDEBTEDNESS AS A PERCENTAGE OF ITS TOTAL CAPITALIZATION WOULD HAVE BEEN
APPROXIMATELY 54.3%. 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.
- 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. 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 $17.87 PER COMMON
UNIT FROM THE INITIAL PUBLIC OFFERING PRICE (ASSUMING AN INITIAL PUBLIC
OFFERING PRICE OF $ PER COMMON UNIT).
- 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 A PRINCIPAL MEANS
OF GROWTH. THERE CAN BE NO ASSURANCE THAT THE PARTNERSHIP WILL BE ABLE TO
COMPLETE FUTURE ACQUISITIONS.
-------------------
To enhance the Partnership's ability to make the Minimum Quarterly
Distribution on the Common Units during the Subordination Period, which will
generally extend at least through 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 50.9% 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 8,296,314 Subordinated
Units representing an aggregate 47.1% limited partner interest in the
Partnership and the Operating Partnership (6,950,064 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 $200.0 million of Senior Secured Notes due 2010
(the "Notes"). See "The Transactions."
3
<PAGE>
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 , 1996 (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.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUMMARY.............................. 7
<S> <C>
Cornerstone Propane Partners, L.P............. 7
Summary Pro Forma Financial and Operating
Data......................................... 15
Risk Factors.................................. 16
Cash Available for Distribution............... 21
Partnership Structure and Management.......... 22
The Offering.................................. 24
Summary of Tax Considerations................. 30
RISK FACTORS.................................... 33
Risks Inherent in the Partnership's
Business..................................... 33
Risks Inherent in an Investment in the
Partnership.................................. 35
Conflicts of Interest and Fiduciary
Responsibilities............................. 40
Tax Risks..................................... 42
THE TRANSACTIONS................................ 45
USE OF PROCEEDS................................. 46
CAPITALIZATION.................................. 47
DILUTION........................................ 48
CASH DISTRIBUTION POLICY........................ 49
General....................................... 49
Quarterly Distributions of Available Cash..... 50
Distributions from Operating Surplus during
Subordination Period......................... 50
Distributions from Operating Surplus after
Subordination Period......................... 52
Incentive Distributions-Hypothetical
Annualized Yield............................. 52
Distributions from Capital Surplus............ 53
Adjustment of Minimum Quarterly Distribution
and Target Distribution Levels............... 54
Distributions of Cash Upon Liquidation........ 54
CASH AVAILABLE FOR DISTRIBUTION................. 56
SELECTED PRO FORMA FINANCIAL AND OPERATING
DATA........................................... 58
SELECTED HISTORICAL FINANCIAL AND OPERATING
DATA........................................... 59
Synergy and its predecessor................... 59
Empire Energy................................. 60
Coast and its predecessor..................... 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS..................................... 62
General....................................... 62
Synergy....................................... 63
Empire Energy................................. 66
Coast......................................... 70
Description of Indebtedness................... 74
Effects of Inflation.......................... 74
Recently Issued Accounting Pronouncements..... 75
BUSINESS AND PROPERTIES......................... 76
General....................................... 76
Business Strategy............................. 76
Transaction Background........................ 78
Industry Background and Competition........... 78
Products, Services and Marketing.............. 80
Propane Supply and Storage.................... 81
Pricing Policy................................ 82
Billing and Collection Procedures............. 82
Properties.................................... 82
Trademarks and Tradenames..................... 83
Government Regulation......................... 83
Employees..................................... 84
Litigation and Other Contingencies............ 84
Transfer of the Partnership Assets............ 84
MANAGEMENT...................................... 86
Partnership Management........................ 86
Directors and Executive Officers of the
Managing General Partner..................... 86
Reimbursement of Expenses of the Managing
General Partner and its Affiliates........... 87
Executive Compensation........................ 88
Compensation of Directors..................... 90
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................. 91
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS................................... 91
Rights of the General Partners................ 91
Contribution and Conveyance Agreement......... 91
Empire Gas Termination Agreement.............. 92
CONFLICTS OF INTEREST AND FIDUCIARY
RESPONSIBILITIES............................... 92
Conflicts of Interest......................... 92
Fiduciary and Other Duties.................... 95
DESCRIPTION OF THE COMMON UNITS................. 97
The Units..................................... 97
Transfer Agent and Registrar.................. 97
Transfer of Common Units...................... 98
THE PARTNERSHIP AGREEMENT....................... 98
Organization and Duration..................... 99
Purpose....................................... 99
Power of Attorney............................. 99
Capital Contributions......................... 99
Limited Liability............................. 100
Issuance of Additional Securities............. 100
Amendment of Partnership Agreement............ 102
Merger, Sale or Other Disposition of Assets... 103
Termination and Dissolution................... 103
Liquidation and Distribution of Proceeds...... 104
Withdrawal or Removal of the General
Partners..................................... 104
Transfer of General Partners' Interests....... 105
Change of Management Provisions............... 105
Limited Call Right............................ 106
Meetings; Voting.............................. 106
Status as Limited Partner or Assignee......... 107
Non-citizen Assignees; Redemption............. 107
Indemnification............................... 107
Books and Reports............................. 108
Right to Inspect Partnership Books and
Records...................................... 108
Registration Rights........................... 109
UNITS ELIGIBLE FOR FUTURE SALE.................. 109
TAX CONSIDERATIONS.............................. 110
Legal Opinions and Advice..................... 111
Tax Rates and Changes in Federal Income Tax
Laws......................................... 111
Partnership Status............................ 112
Limited Partner Status........................ 113
Tax Consequences of Unit Ownership............ 114
Allocation of Partnership Income, Gain, Loss
and Deduction................................ 116
Tax Treatment of Operations................... 117
Disposition of Common Units................... 120
Uniformity of Units........................... 122
Administrative Matters........................ 124
State, Local and Other Tax Considerations..... 126
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE
BENEFIT PLANS.................................. 128
UNDERWRITERS.................................... 129
VALIDITY OF THE COMMON UNITS.................... 130
EXPERTS......................................... 131
AVAILABLE INFORMATION........................... 131
INDEX TO FINANCIAL STATEMENTS................... F-1
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
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
APPENDIX D--PRO FORMA OPERATING SURPLUS......... D-1
</TABLE>
6
<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,
BUSINESS AND OPERATIONS OF SYNERGY AND EMPIRE ENERGY CORPORATION ("EMPIRE
ENERGY") (THE PRINCIPAL PROPANE SUBSIDIARIES OF NORTHWESTERN GROWTH) AND CGI
HOLDINGS, INC. ("COAST") AND THEIR PREDECESSORS 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 IN 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,
serving more than 360,000 active 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 and Empire Energy (the principal propane subsidiaries of
Northwestern Growth) and Coast. The Partnership's operations are concentrated in
the east coast, south-central and west coast regions of the United States. On a
pro forma basis for the fiscal year ended June 30, 1996, the Partnership had
retail propane sales of approximately 235 million gallons and operating income
plus depreciation and amortization ("EBITDA") of approximately $54.9 million.
Northwestern Growth is a wholly owned subsidiary of Northwestern Public
Service Company ("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, Northwestern Growth acquired Synergy in August 1995, then
the ninth largest retail marketer of propane in the United States, and on
October 7, 1996, 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.
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 managers who currently manage the propane business of Coast will
manage the Partnership's business in their capacities as the senior managers 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 strategy of balanced growth through
acquisitions and internal growth.
7
<PAGE>
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 Partnership's
significant proportion of retail sales 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 supply 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 growth and
consolidation of propane businesses.
BUSINESS STRATEGY
The principal elements of the Partnership's business strategy are to (i)
expand 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 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 propane supplier that is most focused on customer service.
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.
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 a principal means of growth for the Partnership.
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 companies account for
approximately 40% 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 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
8
<PAGE>
availability of an acquisition credit facility and the ability to fund
acquisitions through the issuance of additional limited partner interests.
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 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 starting up a
new customer service center. The Partnership believes it can successfully
initiate 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,
enabling 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 efficiencies and cost savings
opportunities. Furthermore, the Partnership believes that instituting management
incentive programs and an entrepreneurial approach at additional customer
service centers will give managers the incentive to increase such customer
service center's profitability.
CAPITALIZE ON NATIONAL SUPPLY AND LOGISTIC BUSINESS. The Partnership has a
national wholesale propane supply and logistics business with annual propane
sales of approximately 226 million gallons in fiscal 1996. The Partnership
believes that this business provides it with a relatively secure, efficient
supply base to support the service goals of its existing customer service
centers. In addition, the Partnership believes this 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
that position the Partnership to acquire such businesses in the event they
become available.
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 forms of stand-alone energy
9
<PAGE>
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 sold
by the Partnership were to residential customers, 25.9% were to industrial and
commercial customers, 13.1% were to agricultural customers and 3.2% were 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 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 gross profit from propane sales
for fiscal 1996, agricultural sales accounted for 6.1%, and all other retail
users accounted for 2.8%. Additional volumes sold to wholesale customers
contributed the remaining 5.4% of gross profit from propane sales. No single
customer accounted for more than 4% of the Partnership's revenues during fiscal
1996. On a pro forma basis during fiscal 1996, approximately 72.7% of the
Partnership's retail propane volume and in excess of 85% of the Partnership's
EBITDA were attributable to sales during the six-month peak heating season of
October through March. The Partnership believes that sales to the commercial and
industrial markets, while affected by economic patterns, are not as sensitive to
variations in weather conditions as 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 June 30, 1996, the Partnership
owned a fleet of 43 transport truck tractors, 98 transport trailers, 981 bobtail
trucks and 1,051 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 plant sites and leases
varying amounts of propane storage capacity in accordance with its needs. The
Partnership believes that in excess of 80% of the Partnership's customers use
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 is also engaged to a lesser extent in the natural gas
liquids processing and natural gas and crude oil marketing businesses. The
Partnership both owns and has contractual rights to use pipelines, transshipment
terminals and common carrier trucks and railcars, together with storage capacity
and the ability to buy large volumes of propane. As a result, the Partnership
believes that it is in a position to achieve product cost savings and 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 an alternative to natural gas in
rural and suburban areas where natural gas is unavailable or portability of
product is required. Propane is generally less expensive to use than electricity
for space heating, water heating, clothes drying and cooking.
10
<PAGE>
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 and Empire Energy
(the principal propane subsidiaries of Northwestern Growth) and Coast will enter
into a series of transactions which will result in the Combined Operations being
owned directly and indirectly 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 thereafter, all of the limited partner interests in the
Operating Partnership will be conveyed to the Partnership in exchange for
interests in the Partnership (including the right to receive Incentive
Distributions). As a result of such transactions, the General Partners will own
an aggregate of 8,296,314 Subordinated Units, representing an aggregate 47.1%
limited partner interest in the Partnership (approximately 39.4% if the
Underwriters over-allotment option is exercised in full) and an aggregate 2%
general partner interest in the Partnership.
The Partnership will contribute the proceeds from the sale of the Common
Units offered hereby (approximately $179.5 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 pay of 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. Also concurrently
with the closing of this offering, the Operating Partnership will issue $200.0
million aggregate principal amount of Notes to certain institutional investors
in the Note Placement. Proceeds from the sale of the Notes, together with $25.0
million borrowed by the Operating Partnership under the Working Capital Facility
described below, will be used by the Operating Partnership to pay approximately
$144.0 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 General Partners ($68.3
million) and the balance will be used to pay expenses. The Special General
Partner will use $47.5 million to redeem preferred stock, the Managing General
Partner will use $5.9 million to redeem preferred stock and the remainder ($15.0
million) will provide net worth for the General Partners. 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 $ million bank credit facility (the "Bank Credit
Facility"), which will include a $ million revolving credit facility
providing for up to $ million of borrowings to be used for working
capital and other general partnership purposes (the "Working Capital Facility"),
and a $ million revolving credit facility (the "Acquisition Facility")
providing for up to $ million of borrowings to be used for acquisitions and
improvements. It is expected that approximately $25.0 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."
11
<PAGE>
The following table sets forth an estimated breakdown of the sources and
uses of funds contemplated by the Transactions and as of the closing of this
offering.
<TABLE>
<CAPTION>
AMOUNTS
-------------
(IN MILLIONS)
<S> <C>
Sources of Funds
Proceeds from issuance of Common Units............................................................. $ 179.5
Proceeds from Note Placement....................................................................... 200.0
Drawdown on Working Capital Facility............................................................... 25.0
------
Total............................................................................................ $ 404.5
------
------
Uses of Funds
Repayment of outstanding indebtedness to NPS (a)................................................... $ 57.5
Repayment of other outstanding indebtedness (b).................................................... 179.2
Distributions to the General Partners (c).......................................................... 68.3
Repayment of acquisition bridge financing of Northwestern Growth (d)............................... 81.4
Payment of fees and expenses of the Transactions (including $12.6 in underwriting discounts and
commissions)..................................................................................... 18.1
------
Total............................................................................................ $ 404.5
------
------
</TABLE>
- ------------------------
(a) Reflects a note owed to NPS by Synergy (incurred in connection with an
acquisition) and assumed by the Operating Partnership and a $4.7 million
prepayment penalty.
(b) Represents outstanding indebtedness owed by Synergy to third parties ($30.1
million); outstanding indebtedness owed by Coast to third parties ($52.4
million); outstanding indebtedness owed by Empire Energy to third parties
($94.3 million); and outstanding indebtedness owed by Myers Propane Gas
Company ("Myers"), a subsidiary of NPS, to third parties ($2.4 million).
(c) Such distributions will be used to redeem preferred stock of the General
Partners held by NPS, Northwestern Growth and unaffiliated shareholders
($53.4 million) issued in connection with certain acquisitions, and to
provide net worth to the General Partners.
(d) Reflects bridge financing provided by Northwestern Growth principally
relating to the acquisitions of Synergy, Empire Energy, Myers and Coast.
For additional information regarding the Transactions, see "The
Transactions."
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."
12
<PAGE>
<TABLE>
<S> <C>
FORMATION STAGE
The consideration paid to the
General Partners and their
affiliates for the transfer of
the propane business and related
liabilities of the Combined
Operations to the Partnership... In exchange for conveying substantially all of the
assets to the Operating Partnership, the General
Partners will receive 8,296,314 Subordinated Units and
an aggregate 2% general partner interest in the
Partnership and the Operating Partnership, and the
Operating Partnership will assume substantially all of
the liabilities associated with the Combined
Operations. Of the proceeds from this offering and the
Note Placement, approximately $57.5 million of
indebtedness owed by Synergy to NPS will be repaid
(including a prepayment penalty of $4.7 million),
approximately $81.4 million of acquisition financing
incurred by Northwestern Growth principally in
connection with the acquisitions of Synergy, Empire
Energy, Myers and Coast, will be repaid, and
approximately $68.3 million will be distributed to the
General Partners to redeem preferred stock of the
General Partners held by NPS, Northwestern Growth and
the unaffiliated shareholders ($53.4 million) and
provide net worth to the General Partners ($15.0
million). The shareholders of Coast who will become
senior managers of the Managing General Partner will
receive approximately $9.0 million in connection with
the Coast Merger (as defined in the Glossary). To the
extent the Underwriters exercise their over-allotment
option, the Partnership will use the proceeds to pay
certain expenses of this offering and then to redeem
Subordinated Units held by the General Partners ($25.0
million if such option is exercised in full). 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 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. 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
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
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.
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 (as defined in the Glossary),
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, as such term is defined in the
Glossary) 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>
14
<PAGE>
SUMMARY PRO FORMA FINANCIAL AND OPERATING DATA
The following unaudited Summary Pro Forma Financial and Operating Data
reflect the 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 following information should not be deemed indicative of
future operating results of the Partnership.
<TABLE>
<CAPTION>
PARTNERSHIP PRO
FORMA YEAR ENDED
JUNE 30, 1996
-------------------
(IN THOUSANDS,
EXCEPT PER UNIT
DATA)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................................................... $ 595,790
Gross profit(a)............................................................................ 141,306
Depreciation and amortization.............................................................. 14,500
Operating income........................................................................... 40,397
Interest expense, net...................................................................... 18,702
Net income................................................................................. 21,595
Net income per Unit(b)..................................................................... $ 1.23
BALANCE SHEET DATA (END OF PERIOD):
Current assets............................................................................. $ 61,453
Total assets............................................................................... 450,924
Current liabilities........................................................................ 58,646
Long-term debt............................................................................. 200,000
Partners' capital -- General Partners...................................................... 3,792
Partners' capital -- Limited Partners...................................................... 185,784
OPERATING DATA:
EBITDA(c).................................................................................. $ 54,897
Capital expenditures(d):
Growth and Maintenance................................................................... 9,648
Acquisition.............................................................................. 44,303(e)
Retail propane gallons sold................................................................ 235,000
</TABLE>
- ------------------------
(a) Gross profit is computed by reducing total revenues by the direct cost of
the products sold.
(b) Net income per Unit is computed by dividing the limited partners' interest
in net income by the weighted average number of Units outstanding.
(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) The Partnership's capital expenditures fall generally into three categories:
(i) growth capital expenditures, which include expenditures for purchase of
new propane tanks and other equipment to facilitate expansion of the
Partnership's retail customer base, (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, which include expenditures related to the acquisition
of retail propane operations and the portion of the purchase price allocated
to intangibles associated with such acquired businesses.
(e) Approximately $36.0 million relates to the Empire Acquisition of Certain
Synergy Assets (as defined below).
15
<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. On a pro forma basis during fiscal 1996, approximately
72.7% of the Partnership's retail propane volume and in excess of 85% of
the Partnership 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 decreasing prices, the Partnership's financial condition
and results of operations could be materially adversely affected. In
addition, propane competes with other sources of energy, some of which are
less costly for equivalent energy value.
- Acquisitions will be a 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, the companies that comprise the
Combined Operations have been, and the Partnership is likely to be, a
defendant in various legal proceedings and litigation arising in the
ordinary course of business. The
16
<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 three-year employment contracts.
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 may 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 $32.7 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 $2.6 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 managers who currently
manage the propane business of Coast. Such managers 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 will rely 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.
17
<PAGE>
- On a pro forma basis as of June 30, 1996, the Partnership's total
indebtedness as a percentage of its total capitalization would have been
approximately 54.3%. 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 $ million of unused borrowing capacity
under the Bank Credit Facility at the closing of this offering. Future
borrowings could result in a significant increase in the Partnership's
leverage. The Notes and the Bank Credit Facility will contain restrictive
covenants that will limit the ability of the Partnership to incur
additional indebtedness and to make distributions to Unitholders. The
payment of principal and interest on the Partnership's indebtedness will
reduce the cash available to make distributions on the Units.
- The Partnership's indebtedness will contain provisions relating to changes
in ownership. If such provisions are triggered, such outstanding
indebtedness may become due. There is no restriction on the ability of the
Managing General Partner or its stockholder to enter into a transaction
which would trigger such change in ownership provisions.
- Prior to making any distribution on the Common Units, the Partnership will
reimburse the Managing General Partner and its affiliates at cost for all
expenses incurred on behalf of the Partnership.
- 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
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 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 $17.87 per Common
Unit from the initial public offering price (assuming an initial public
offering price of $ per Common Unit).
- Prior to this offering, there has been no public market for the Common
Units. The initial public offering price for the Common Units will be
determined through negotiations between the 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 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 Common Units held by such unaffiliated
persons at a price generally equal to the then-current market price of the
Common Units. As a consequence, a holder of
18
<PAGE>
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 (as defined below)
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 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 Northwestern Growth,
NPS and the Special General Partner) to compete with the Partnership under
certain circumstances. Although neither NPS, Northwestern Growth nor any
of the Managing General Partner's other affiliates have any current plans
to compete with the Partnership, there can be no assurance that there will
not be competition between the Partnership and affiliates of the Managing
General Partner in the future.
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
Managing General Partner and the Partnership have made representations,
Andrews & Kurth L.L.P., special counsel to the Managing General Partner
and the Partnership ("Counsel"), is of the opinion that, under current
law, the Partnership will be classified as a partnership for federal
income tax purposes.
19
<PAGE>
- No ruling has been requested from the Internal Revenue Service ("IRS")
with respect to classification of the Partnership as a partnership for
federal income tax purposes, whether the Partnership's propane operations
generate "qualifying income" under Section 7704 of the Internal Revenue
Code of 1986, as amended (the "Code"), or any other matter affecting the
Partnership.
- A Unitholder will be required to pay income taxes on his allocable share
of the Partnership's income, whether or not he receives cash distributions
from the Partnership.
- It is anticipated that through , 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.
- 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 will be registered with the IRS as a "tax shelter." No
assurance can be given that the Partnership will not be audited by the IRS
or that tax adjustments will not be made. Any adjustments in the
Partnership's tax returns will lead to adjustments in the Unitholders' tax
returns and may lead to audits of the Unitholders' tax returns and
adjustments of items unrelated to the Partnership.
- The Partnership will adopt certain depreciation and amortization
conventions that do not conform with all aspects of certain proposed and
final Treasury regulations. A successful challenge of those conventions by
the IRS could adversely affect the amount of tax benefits available to a
purchaser of Common Units 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,
Missouri, Mississippi, New Hampshire, New Jersey, New Mexico, New York,
North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Utah, Virginia
and Vermont.
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.
20
<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 logistic cost savings associated with propane purchasing,
insurance premium reductions and certain operating and general and
administrative costs 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 intend 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 immediately after this offering and on the
aggregate 2% general partner interests of the General Partners is approximately
$35.3 million ($18.0 million for the Common Units, $16.6 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 $20.7 million for the Common Units,
$13.9 million for the Subordinated Units and $.7 million for the aggregate 2%
general partner interest of the General Partners, or an aggregate of
approximately $35.3 million. The amount of pro forma Available Cash from
Operating Surplus generated during fiscal 1996 was approximately $32.7 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 $2.6 million to cover the Minimum Quarterly
Distribution for such fiscal year 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."
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 Appendix D hereto. The pro forma
adjustments are based upon currently available information and certain estimates
and assumptions. The pro forma financial statements do not purport to present
the results of operations of the Partnership had the Transactions referred to
therein actually been completed as of the dates indicated.
21
<PAGE>
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. For a
more complete definition of Operating Surplus, see the Glossary.
The Partnership will be required to establish reserves for the future
payment of principal and interest on the Notes and the indebtedness under the
Bank Credit Facility. There are other provisions in such agreements which will,
under certain circumstances, restrict the Partnership's ability to make
distributions to its partners. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Description of Indebtedness."
PARTNERSHIP STRUCTURE AND MANAGEMENT
The Partnership will conduct, in substantially every respect, the propane
business that was formerly conducted by Synergy, Empire Energy 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 (collectively, the "Operating Partnership"). 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 managers who currently manage the
propane business of Coast will manage and operate the Partnership's business as
officers and employees 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.
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
sale of the Common Units offered hereby and the consummation of the other
Transactions 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.
22
<PAGE>
[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
Cornerstone Propane GP, Inc. 100% Interest
Cornerstone Propane Partners, L.P. 51.4% Limited Partner Interest
Cornerstone Propane Partners, L.P. * % Limited Partner Interest
Cornerstone Propane Partners, L.P. * % Managing General Partner Interest
Cornerstone Propane Partners, L.P. * % Limited Partner Interest
Cornerstone Propane Partners, L.P. * % Special General Partner Interest
Cornerstone Propane, L.P. 98.9899% Limited Partner Interest
Cornerstone Propane, L.P. * % Managing General Partner Interest
Cornerstone Propane, L.P. * % Special General Partner Interest
Corporate Subsidiary 100%
SYN Inc. 17.5% Common Ownership
SYN, Inc. 82.5% Common Ownership
</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 to be determined and will
be based on the relative value of the assets to be contributed by them.
23
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ 8,975,000 Common Units (10,321,250 Common Units if the
Underwriters' over-allotment option is exercised in
full).
Units to be Outstanding After This
Offering........................ 8,975,000 Common Units and 8,296,314 Subordinated Units,
representing an aggregate 50.9% and 47.1% limited
partner interest in the Partnership, respectively. If
the Underwriters' over-allotment option is exercised
in full, 1,346,250 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 10,321,250 Common
Units and 6,950,064 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. 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 $.50 per Common Unit
per quarter. The Minimum Quarterly Distribution is not
guaranteed and is subject to adjustment as described
under "Cash Distribution Policy -- Adjustment of
Minimum Quarterly Distribution and Target Distribution
Levels." The Minimum Quarterly Distribution for the
period from the closing of this offering through March
31, 1997 will be adjusted based on the actual length
of such period.
</TABLE>
24
<PAGE>
<TABLE>
<S> <C>
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 (as
defined in the Glossary) generated during each of the
three consecutive four-quarter periods immediately
preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the
outstanding Common Units and Subordinated Units and
the related distribution on the general partner
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 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
</TABLE>
25
<PAGE>
<TABLE>
<S> <C>
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 tranche of Subordinated Units may not occur
until at least one year following the early conversion
of the first tranche of Subordinated Units. See "Cash
Distribution Policy -- Distributions from Operating
Surplus during Subordination Period."
Incentive Distributions........... If quarterly distributions of Available Cash exceed the
Target Distribution Levels, the General 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 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
(as defined in the Glossary) or legislation is enacted
or existing law is modified or interpreted by the
relevant governmental authority in a manner that
causes the Partnership to be treated as an association
taxable as a corporation or otherwise taxable as an
entity for federal, state or local income tax
purposes. If, as a result of distributions of
Available Cash from Capital Surplus, the Unitholders
receive a full return of the initial public offering
price of the Common Units and any unpaid Common Unit
Arrearages, the distributions of Available Cash
payable to the General Partners and its affiliates
will increase to 50% of all amounts distributed
thereafter. See "Cash Distribution Policy -- General,"
"-- Distributions from Capital Surplus" and "--
Adjustment of Minimum Quarterly Distribution and
Target Distribution Levels."
</TABLE>
26
<PAGE>
<TABLE>
<S> <C>
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 4,487,500
Common Units (excluding Common Units issued upon the
exercise of the Underwriters' over-allotment option,
upon conversion of Subordinated Units or in connection
with certain acquisitions or capital improvements or
the repayment of certain indebtedness) or an
equivalent number of securities ranking on a parity
with the Common Units, without the approval of the
holders of a Unit Majority. See "The Partnership
Agreement -- Issuance of Additional Securities."
Limited Call Right................ If at any time less than 20% of the issued and
outstanding Common Units are held by persons other than
the 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............. Holders of Common Units will have only limited voting
rights on matters affecting the Partnership's business.
See "The Partnership Agreement."
Change of Management
Provisions...................... Any person or group (other than the Managing General
Partner or its affiliates) that acquires beneficial
ownership of 20% or more of the Common Units will lose
its voting rights with respect to all of its Common
Units. In addition, if the Managing General Partners
is removed other than for Cause (as defined in the
Glossary) 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 Unit 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 would trade under certain
circumstances. See "The
</TABLE>
27
<PAGE>
<TABLE>
<S> <C>
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."
Distributions Upon Liquidation.... In the event of any liquidation of the Partnership
during the Subordination Period, the outstanding Common
Units will be entitled to receive a distribution out
of the net assets of the Partnership in preference to
liquidating distributions on the Subordinated Units to
the extent of their Unrecovered Capital (as defined in
the Glossary) and any unpaid Common Unit Arrearages.
Under certain circumstances there may be insufficient
gain for the holders of Common Units to fully recover
all such amounts, even though there may be cash
available for distribution to holders of Subordinated
Units. Following conversion of the Subordinated Units
into Common Units, all Units will be treated the same
upon liquidation of the Partnership. See "Cash
Distribution Policy -- Distributions of Cash Upon
Liquidation."
Use of Proceeds................... The proceeds to the Partnership from the sale of Common
Units offered hereby are estimated to be approximately
$179.5 million before deducting estimated underwriting
discounts and commissions and expenses of this
offering. The proceeds of this offering will be used
to pay a portion of the indebtedness assumed by the
Operating Partnership 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 pay
indebtedness assumed by the Operating Partnership upon
</TABLE>
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<TABLE>
<S> <C>
consummation of the Transactions, to pay expenses and
to make a distribution to the General Partners. 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.
As a result of such exercise, 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........................... Application will be made to list the Common Units for
trading on the New York Stock Exchange.
Proposed NYSE Symbol.............. " "
</TABLE>
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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 Managing General
Partner and the Partnership, described in "Tax Considerations." This summary is
qualified by the discussion in "Tax Considerations," particularly the
qualifications on the opinions of Counsel described therein.
PARTNERSHIP STATUS
In the opinion of Counsel, the Partnership will be classified for federal
income tax purposes as a partnership, and the beneficial owners of Common Units
will generally be considered partners in the Partnership. Accordingly, the
Partnership will pay no federal income taxes, and a Common Unitholder will be
required to report in his federal income tax return his share of the
Partnership's income, gains, losses and deductions. In general, cash
distributions to a Common Unitholder will be taxable only if, and to the extent
that, they exceed the tax basis in his Common Units.
PARTNERSHIP ALLOCATIONS
In general, income and loss of the Partnership will be allocated to the
General 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. 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 , will be allocated, on a cumulative
basis, an amount of federal taxable income for such period that will be
approximately % of cash distributed with respect to that period. The
Partnership further estimates that for taxable years after the taxable year
ending , the taxable income allocable to them will represent a
significantly higher percentage (and could in certain circumstances exceed the
amount) of cash distributed to the Unitholders. These estimates are based upon
the assumption that the gross income from operations will approximate an amount
required to make the Minimum Quarterly Distribution with respect to all Units
and other assumptions with respect to capital expenditures, cash flow and
anticipated cash distributions. These estimates and assumptions are subject to,
among other things, numerous business, economic, regulatory, competitive and
political uncertainties which are beyond the control of the Partnership.
Further, the estimates are based on current tax law and certain tax reporting
positions that the Partnership intends to adopt and with which the IRS could
disagree. Accordingly, no assurance can be given that the estimates will prove
to be correct. The actual percentages could be higher or lower than as described
above and any differences could be material. See "Tax Considerations -- Tax
Consequences of Unit Ownership -- Ratio of Taxable Income to Distributions."
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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 is generally 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, Missouri, Mississippi, New Hampshire, New Jersey, New
Mexico, New York, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee,
Utah, Virginia and Vermont. 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 local tax returns that may be required of such
Unitholder. Counsel has not rendered an opinion on the
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<PAGE>
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
individual retirement accounts (IRAs) and other retirement plans), regulated
investment companies and foreign persons raises issues unique to such persons.
Virtually all of the Partnership income allocated to a Unitholder which is a
tax-exempt organization will be unrelated business taxable income and, thus,
will be taxable to such Unitholder; no significant amount of the Partnership's
gross income will be qualifying income for purposes of determining whether a
Unitholder will qualify as a regulated investment company; and a Unitholder who
is a nonresident alien, foreign corporation or other foreign person will be
regarded as being engaged in a trade or business in the United States as a
result of ownership of a Common Unit and thus will be required to file federal
income tax returns and to pay tax on such Unitholder's share of Partnership
taxable income. 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 IRS.
It is arguable that the Partnership will not be subject to this registration
requirement. Nevertheless, the Partnership will be registered as a tax shelter
with the IRS. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN
INVESTMENT IN THE PARTNERSHIP OR THE CLAIMED TAX BENEFITS HAS BEEN REVIEWED,
EXAMINED OR APPROVED BY THE IRS. See "Tax Considerations -- Administrative
Matters -- Registration as a Tax Shelter."
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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. On a pro
forma basis during fiscal 1996, approximately 72.7% of the Partnership's retail
propane volume and in excess of 85% of the Partnership's 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 adversely
affecting gross margins or sales or rendering sales from such inventory
unprofitable. The
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Partnership does not currently intend to engage in any significant hedging
activities with respect to its propane supply requirements, although it may do
so in the future. See "Business and Properties -- Propane Supply and Storage."
THE RETAIL PROPANE BUSINESS IS HIGHLY COMPETITIVE
The Partnership's profitability is affected by the competition for customers
among all participants in the retail propane business. The Partnership competes
with other distributors of propane, including a number of large national and
regional firms and several thousand small independent firms. Some of these
competitors are larger or have greater financial resources than the Partnership.
Should a competitor attempt to increase market share by decreasing prices, the
Partnership's financial condition and results of operations could be materially
adversely affected. Generally, warmer-than-normal weather further intensifies
competition. The Partnership believes that its ability to compete effectively
depends on the reliability of its service, its responsiveness to customers and
its ability to maintain competitive retail prices.
THE RETAIL PROPANE BUSINESS FACES COMPETITION FROM ALTERNATIVE ENERGY
SOURCES
Propane competes with other sources of energy, some of which are less costly
for equivalent energy value. The Partnership competes for customers against
suppliers of electricity, natural gas and fuel oil. Electricity is a major
competitor of propane, but propane generally enjoys a competitive price
advantage over electricity. Except for certain industrial and commercial
applications, propane is generally not competitive with natural gas in areas
where natural gas pipelines already exist because natural gas is a significantly
less expensive source of energy than propane. The gradual expansion of the
nation's natural gas distribution systems has resulted in the availability of
natural gas in many areas that previously depended upon propane. Although
propane is similar to fuel oil in certain applications and market demand,
propane and fuel oil compete to a lesser extent primarily because of the cost of
converting from one to the other. In addition, the Partnership cannot predict
the effect that the development of alternative energy sources might have on its
operations.
THE PARTNERSHIP MAY NOT BE SUCCESSFUL IN GROWING THROUGH ACQUISITIONS
The retail propane industry is mature, and the Partnership foresees only
limited growth in total retail demand for propane. Moreover, as a result of
long-standing customer relationships that are typical in the retail home propane
industry, the inconvenience of switching tanks and suppliers and propane's
higher cost than certain other energy sources, such as natural gas, the
Partnership may experience difficulty in acquiring new retail customers, other
than through acquisitions. Therefore, while the Partnership's business strategy
includes 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 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, the companies that comprise the Combined Operations
have 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
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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 three-year employment contracts. See "Management --
Executive Compensation -- Employment Agreements and 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 may 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 $35.3
million ($18.0 million for the Common Units, $16.6 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
$20.7 million for the Common Units, $13.9 million for the Subordinated Units and
$.7 million for the aggregate 2% general partner interest of the General
Partners, or an aggregate of approximately $35.3 million. The amount of pro
forma Available Cash from Operating Surplus generated during fiscal 1996 was
approximately $32.7 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 $2.6 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 Appendix D.
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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 any indebtedness
under the Bank Credit Facility. The Notes and the Bank Credit Facility will
limit the Operating Partnership's ability to distribute cash to the Partnership.
Distributions from the Operating Partnership will be the Partnership's primary
source of Available Cash. Any subsequent refinancing of the Notes, the Bank
Credit Facility or any other indebtedness incurred by the Partnership may have
similar restrictions, and the Partnership's ability to distribute cash may also
be limited during the existence of defaults under any of the Partnership's debt
instruments. As a result of these and other factors, there can be no assurance
regarding the actual levels of cash distributions to Unitholders by the
Partnership.
PARTNERSHIP 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 managers who currently manage the
propane business of Coast. Such managers 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 will rely on certain assumptions
concerning its operations, including the assumptions that the 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.
Although the Partnership believes its assumptions are within a range of
reasonableness, whether the assumptions are realized is not, in many cases,
within the control of the Partnership and cannot be predicted with any degree of
certainty. In the event that the Partnership's assumptions are not realized, the
actual Available Cash from Operating Surplus generated by the Partnership could
deviate substantially from that currently expected. See "Cash Available for
Distribution."
Because a substantial portion of the Partnership's propane is used in the
heating-sensitive residential and commercial markets, the temperatures realized
in the Partnership's areas of operations, particularly during the six-month peak
heating season, have a significant effect on the financial performance of the
Partnership. In any given area, sustained above-normal temperatures will tend to
result in reduced propane use, while sustained below-normal temperatures will
tend to result in greater propane use.
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THE PARTNERSHIP'S INDEBTEDNESS MAY LIMIT THE PARTNERSHIP'S ABILITY TO MAKE
DISTRIBUTIONS AND MAY AFFECT ITS OPERATIONS
On a pro forma basis at June 30, 1996, the Partnership's total indebtedness
as a percentage of its total capitalization would have been approximately 54.3%.
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 $200.0 million in Notes and $25.0 million under the Working Capital
Facility. The Partnership expects to have an additional $ million of unused
borrowing capacity under the Bank Credit Facility at the closing of this
offering. Future borrowings could result in a significant increase in the
Partnership's leverage. The ability of the Partnership to make principal and
interest payments depends on future performance, which performance is subject to
many factors, a number of which will be outside the Partnership's control. The
Notes and the Bank Credit Facility contain provisions relating to change in
ownership. If such change in ownership provisions are triggered, such
outstanding indebtedness may become due. In such event, there is no assurance
that the Partnership would be able to pay the indebtedness. There is no
restriction on the ability of the General Partners or their stockholders to
enter into a transaction which would trigger such change in ownership
provisions. The Notes and the Bank Credit Facility will contain restrictive
covenants that limit the ability of the Operating Partnership to distribute cash
and to incur additional indebtedness. The payment of principal and interest on
such indebtedness and the reserves required by the terms of the Partnership's
indebtedness for the future payment thereof will reduce the cash available to
make distributions on the Units. The Partnership's leverage 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 additional services to the Partnership for which the Partnership will be
charged reasonable fees as determined by the Managing General Partner.
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 not less than 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."
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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 4,487,500 additional Common Units (excluding Common Units
issued upon the exercise of the Underwriters' over-allotment option, upon
conversion of Subordinated Units or in connection with certain acquisitions or
capital improvements or the repayment of certain indebtedness) or an equivalent
number of securities ranking on a parity with the Common Units without the
approval of holders of a Unit Majority. After the end of the Subordination
Period, the Partnership may issue an unlimited number of limited partner
interests of any type without the approval of the Unitholders. The Partnership
Agreement does not give the holders of Common Units the right to approve the
issuance by the Partnership of equity securities ranking junior to the Common
Units at any time. Based on the circumstances of each case, the issuance of
additional Common Units or securities ranking on a parity with the Common Units
may dilute the value of the interests of the then-existing holders of Common
Units in the net assets of the Partnership or make it more difficult for a
person or group to remove the Managing General Partner or otherwise change the
management of the Partnership.
The conversion of some or all the Subordinated Units into Common Units will
increase the Partnership's aggregate Minimum Quarterly Distribution obligation
with respect to the Common Units while simultaneously reducing or eliminating
the aggregate Minimum Quarterly Distribution obligation with respect to the
Subordinated Units.
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 General Partners 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 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 $17.87 per Common Unit from the
initial public offering price (assuming an initial public offering price of
$ per Common Unit). See "Dilution."
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NO PRIOR PUBLIC MARKET FOR COMMON UNITS
Prior to this offering, there has been no public market for the Common
Units. The initial public offering price for the Common Units will be determined
through negotiations between the Managing General Partner and the
representatives of the Underwriters. For a description of the factors to be
considered in determining the initial public offering price, see "Underwriters."
No assurance can be given as to the market prices at which the Common Units will
trade. Application will be made to list the Common Units for trading on the New
York Stock Exchange under the symbol " ."
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 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 any class held by such unaffiliated persons at a price generally equal to the
then-current market price of the limited partner interests of any class. As a
consequence, a holder of Common Units may be required to sell his Common Units
at a time when he may not desire to sell them or at a price that is less than
the price he would desire to receive upon such sale. See "The Partnership
Agreement -- Limited Call Right."
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.
POSSIBLE INABILITY TO OBTAIN CONSENTS AND TITLE DOCUMENTS TO ASSET TRANSFERS
Concurrently with the closing of this offering, Northwestern Growth
(including Synergy, Empire Energy and, following the Coast Merger, Coast) 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
local records may be necessary to obtain documents evidencing chain of title in
order to prepare the documentation to transfer such real property interests and
certain of such documents may not be available on a timely basis. The failure by
the Partnership to obtain any such consents or title documents and its resulting
inability to obtain any such leasehold rights, permits, licenses, other rights
or property interests could have a material adverse effect on the Partnership.
However, the Partnership believes that it will have the licenses, permits,
rights and property interests which will enable it to conduct its propane
business in a manner which is similar in all material respects to that which was
conducted by such entities prior to the closing of this offering and that any
failure to obtain such licenses, permits, rights or property interests will not
have a material adverse impact on the business of the Partnership as described
in this Prospectus. See "Business and Properties -- Transfer of the Partnership
Assets."
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HOLDERS OF COMMON UNITS HAVE NOT BEEN REPRESENTED BY COUNSEL
The holders of Common Units have not been represented by counsel in
connection with this offering, including the preparation of the Partnership
Agreement or the other agreements referred to herein or in establishing the
terms of this offering.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Conflicts of interest could arise as a result of the relationships between
the Partnership, on the one hand, and the General 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.
Such 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) 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.
(v) 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.
(vi) 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.
(vii) 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.
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(viii) 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 Northwestern
Growth, NPS and the Special General Partner) to compete with the Partnership
if the Managing General Partner determines, in its reasonable judgment prior
to the commencement of such activity, that it is inadvisable for the
Partnership to engage in such activity either because (A) of the financial
commitments or operating characteristics associated with such activity, or
(B) 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, or (C) 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 by the Managing General Partner, in its reasonable
judgment, to be fair to the Partnership at the time it was entered into. See
"Conflicts of Interest and Fiduciary Duties -- Conflicts of Interest -- The
General Partners' Affiliates May Compete with the Partnership." Although
neither NPS, Northwestern Growth, the Special General Partner nor any of the
Managing General Partner's other affiliates have any current plans to
compete with the Partnership, there can be no assurance that there will not
be competition between the Partnership and affiliates of the Managing
General Partner in the future.
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 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)-(viii) 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 Managing
General Partner believes, however, that such latitude is necessary and
appropriate to enable it to serve as the managing general partner of the
Partnership without undue risk of liability.
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
and agents 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 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 Managing General
Partner that
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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
Managing General Partner and the Partnership have made representations, Counsel
is of the opinion that, under current law, the Partnership will be classified as
a partnership for federal income tax purposes. No ruling from the IRS as to
classification has been or is expected to be requested. Instead, the Partnership
intends to rely on such opinion of Counsel (which is not binding on the IRS).
One of the representations of the Partnership on which the opinion of Counsel is
based is that at least 90% of the Partnership's gross income for each taxable
year in the future will be "qualifying income." Whether the Partnership will
continue to be classified as a partnership in part depends, 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 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.
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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 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. 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 from other passive activities, including losses from
other publicly traded partnerships. See "Tax Considerations -- Tax Consequences
of Unit Ownership -- Limitations on Deductibility of Partnership Losses."
TAX SHELTER REGISTRATION; POTENTIAL IRS AUDIT
The Partnership will be registered with the IRS as a "tax shelter." No
assurance can be given that the Partnership will not be audited by the IRS or
that tax adjustments will not be made. The rights of a Unitholder owning less
than a 1% profits interest in the Partnership to participate in the income tax
audit process are very limited. Further, any adjustments in the Partnership's
tax returns will lead to adjustments in the Unitholders' tax returns and may
lead to audits of Unitholders' tax returns and adjustments of items unrelated to
the Partnership. Each Unitholder would bear the cost of any expenses incurred in
connection with an examination of such Unitholder's personal tax return.
UNIFORMITY OF COMMON UNITS AND NONCONFORMING DEPRECIATION CONVENTIONS
Because the Partnership cannot match transferors and transferees of Common
Units, uniformity of the economic and tax characteristics of the Common Units to
a purchaser of Common Units must be maintained. To maintain uniformity and for
other reasons, the Partnership will adopt certain depreciation and amortization
conventions that do not conform with all aspects of certain proposed and final
Treasury Regulations. A successful challenge of those conventions by the IRS
could adversely affect the amount of tax benefits available to a purchaser of
Common Units and could have a negative impact on the value of the Common Units.
See "Tax Considerations -- Uniformity of Units."
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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, Missouri, Mississippi, New Hampshire, New
Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, South Carolina,
Tennessee, Utah, Virginia and Vermont. 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 tax legislation known as the Revenue
Reconciliation Act of 1996, was presented to Congress that would impact the
taxation of certain financial products, including partnership interests. One
proposal would treat a taxpayer as having sold an "appreciated" partnership
interest (one in which gain would be recognized if such interest were sold) if
the taxpayer or related persons enters into one or more positions with respect
to the same or substantially identical property which, for some period,
substantially eliminates both the risk of loss and opportunity for gain on the
appreciated financial position (including selling "short against the box"
transactions).
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.
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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.
THE TRANSACTIONS
Immediately prior to the closing of this offering, Synergy and Empire
Energy, the principal propane subsidiaries of Northwestern Growth, and Coast
will enter into a series of transactions which will result in the Combined
Operations being owned directly and indirectly 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 thereafter, all of the limited partner interests in the
Operating Partnership will be conveyed to the Partnership in exchange for
interests in the Partnership (including the right to receive Incentive
Distributions). As a result of such transactions, the General Partners will own
an aggregate of 8,296,314 Subordinated Units, representing an aggregate 47.1%
limited partner interest in the Partnership (approximately 39.4% if the
Underwriters over-allotment option is exercised in full) and an aggregate 2%
general partner interest in the Partnership.
The Partnership will contribute the proceeds from the sale of the Common
Units offered hereby (approximately $179.5 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 pay 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. Also concurrently
with the closing, the Operating Partnership will issue $200.0 million aggregate
principal amount of Notes to certain institutional investors in the Note
Placement. Proceeds from the sale of the Notes, together with $25.0 million
borrowed by the Operating Partnership under the Working Capital Facility, will
be used by the Operating Partnership to pay approximately $144.0 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 General Partners ($68.3 million)
and the balance will be used to pay expenses. The Special General Partner will
use $47.5 million to redeem preferred stock, the Managing General Partner will
use $5.9 million to redeem preferred stock and the remainder ($15.0 million)
will provide net worth for the General Partners. 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 the Bank Credit Facility, which will include the Working Capital
Facility, a revolving credit facility providing for up to $ million of
borrowings to be used for working capital and other general partnership
purposes, and the Acquisition Facility, a revolving credit facility providing
for up to $ million of borrowing to be used for acquisitions and improvements.
It is expected that approximately $25.0 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."
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USE OF PROCEEDS
The proceeds to the Partnership from the sale of Common Units offered hereby
are estimated to be approximately $179.5 million, before deducting estimated
underwriting discounts and commissions and expenses of this offering (estimated
to be $15.1 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 $87.7 million of indebtedness of Synergy comprised
of a $57.5 million note payable to NPS (including a prepayment penalty of $4.7
million), $27.3 million of existing revolving credit indebtedness, and $2.9
million of other liabilities; (B) approximately $52.4 million of indebtedness of
Coast comprised of $18.8 million of borrowings under a working capital facility,
$12.2 million in bank term notes, $15.0 million in subordinated notes and $6.4
million in other obligations; (C) approximately $31.7 million of indebtedness of
Empire Energy; and (D) approximately $2.4 million of indebtedness associated
with Myers.
The Operating Partnership will use the approximately $200.0 million in
proceeds from the sale of the Notes, together with $25.0 million borrowed by the
Operating Partnership under the Working Capital Facility, to repay (i) $81.4
million in bridge financing provided by Northwestern Growth, (ii) $62.5 million
of existing bank indebtedness of Empire Energy and (iii) fees and expenses of
the Transactions. The remaining $68.3 million of Note proceeds will be
distributed to the General Partners. The Managing General Partner will use $5.9
million to redeem preferred stock and the Special General Partner will use $47.5
million of the $59.5 million it receives to redeem preferred stock. The
remainder ($15.0 million) will provide net worth for the General Partners. The
NPS bridge loans were incurred to finance the purchase by Northwestern Growth of
(A) all the stock of Empire Energy from its shareholders ($15.0 million), (B) an
$8.0 million note owed by Empire Energy, (C) the common stock of Coast ($42
million), (D) the stock of and certain rights relating to Synergy and Myers
owned by Empire Gas ($13.9 million) and (E) preferred stock of Myers owned by
NPS ($2.5 million).
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. As a result of such
exercise, the number of Subordinated Units outstanding will be reduced by the
number of Common Units issued upon the exercise of such option.
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CAPITALIZATION
The following table sets forth: (i) the consolidated capitalization of the
companies comprising the Combined Operations as of June 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 Common Units offered
hereby (assuming an initial offering price of $20.00 per Common Unit) 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 June 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>
JUNE 30, 1996
-----------------------------------------------------------
PURCHASE
COMBINED ACCOUNTING PRO FORMA PARTNERSHIP
HISTORICAL ADJUSTMENTS (A) ADJUSTMENTS (A) PRO FORMA (B)
---------- --------------- --------------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Short-term indebtedness, including current portion
of long-term indebtedness......................... $ 10,968 $ 5,888 $ 8,144 $ 25,000(b)
Long-term debt...................................... 147,692 72,602 (20,294) 200,000
---------- --------------- --------------- -------------
Total indebtedness................................ 158,660 78,490 (12,150) 225,000
---------- --------------- --------------- -------------
Preferred stock..................................... 66,171 311 (66,482) --
Common stock equity................................. 54,524 19,669 (74,193) --
Partners' capital:
Common Unitholders................................ -- -- 96,494 96,494
Subordinated Unitholders.......................... -- -- 89,290 89,290
General Partners.................................. -- -- 3,792 3,792
---------- --------------- --------------- -------------
Total stockholders' equity/partners' capital...... 120,695 19,980 48,901 189,576
---------- --------------- --------------- -------------
Total capitalization.............................. $ 279,355 $ 98,470 $ 36,751 $ 414,576
---------- --------------- --------------- -------------
---------- --------------- --------------- -------------
</TABLE>
- -------------------
(a) See Notes to Pro Forma Condensed 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 June 30, 1996, there would have been $25.0
million of borrowings under the Working Capital Facility.
47
<PAGE>
DILUTION
On a pro forma basis as of June 30, 1996, after giving effect to the
Transactions, the net tangible book value was $37.5 million or $2.13 per Common
Unit (assuming an initial public offering price of $20.00 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>
Assumed initial public offering price per Common Unit...................... $ 20.00
Net tangible book value per Unit before the offering (a)(b)................ $ (16.61)
Increase in net tangible book value per Common Unit attributable to new
investors................................................................. 18.74
---------
Less: Pro forma net tangible book value per Common Unit after the
offering(b)(c)............................................................ 2.13
---------
Immediate dilution in net tangible book value per Common Unit to new
investors................................................................. $ 17.87
---------
---------
</TABLE>
- -------------------
(a) Determined by dividing the number of Units (8,296,314 Subordinated Units and
the 2% general partner interest of the General Partners having a dilutive
effect equivalent to 352,476 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 $152.1 million ($8.63 per Unit).
(c) Determined by dividing the total number of Units (8,975,000 Common Units,
8,296,314 Subordinated Units and the 2% general partner interest of the
General Partners having a dilutive effect equivalent to 352,476 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.................................................. 8,648,790(a) 49.1% $ 25,141,000(b)
New Investors..................................................... 8,975,000 50.9 179,500,000
---------------- --------- ----------------
Total......................................................... 17,623,790 100.0% $ 204,641,000
---------------- --------- ----------------
---------------- --------- ----------------
</TABLE>
- -------------------
(a) Upon the consummation of the Transactions, the General Partners will own
8,296,314 Subordinated Units and the 2% general partner interests in the
Partnership having a dilutive effect equivalent to 352,476 Units.
(b) Total consideration for the General Partners represents the book value of
the net assets and liabilities contributed by the General Partners at June
30, 1996. 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 $152.1
million of intangible assets.
48
<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, less (ii) all Partnership operating expenses, debt service
payments (including reserves therefor but not including payments required in
connection with the sale of assets or any refinancing with the proceeds of new
indebtedness or an equity offering), maintenance capital expenditures and
reserves established for future Partnership operations.
Capital Surplus is also defined in the Glossary and will generally be
generated only by borrowings (other than for working capital purposes), sales of
debt and equity securities and sales or other dispositions of assets for cash
(other than inventory, accounts receivable and other assets all as disposed of
in the ordinary course of business).
To avoid the difficulty of trying to determine whether Available Cash
distributed by the Partnership is from Operating Surplus or from Capital
Surplus, all Available Cash distributed by the Partnership from any source will
be treated as distributed from Operating Surplus until the sum of all Available
Cash distributed since the commencement of the Partnership equals the Operating
Surplus with respect to the quarter prior to such distribution. Any Available
Cash in excess of such amount (irrespective of its source) will be deemed to be
from Capital Surplus and distributed accordingly.
If Available Cash from Capital Surplus is distributed in respect of each
Common Unit in an aggregate amount per Common Unit equal to the initial public
offering price of the Common Units (the "Initial Unit Price"), plus any Common
Unit Arrearages, the distinction between Operating Surplus and Capital Surplus
will cease, and all distributions of Available Cash will be treated as if they
were from Operating Surplus. The Partnership does not anticipate that there will
be significant distributions from Capital Surplus.
The Subordinated Units are a separate class of interests in the Partnership,
and the rights of holders of such interests to participate in distributions to
partners differ from the rights of the holders of Common Units. For any given
quarter, any Available Cash will be distributed to the General 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, whether the Subordination Period
has ended and other factors discussed below.
The Incentive Distributions represent the right to receive an increasing
percentage of quarterly distributions of Available Cash from Operating Surplus
after the Target Distribution Levels have been achieved. The Target Distribution
Levels are based on the amounts of Available Cash from Operating Surplus
distributed in excess of the payments made with respect to the Minimum Quarterly
Distribution and Common Unit Arrearages and the related 2% distribution to the
General Partners.
49
<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 indicate 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 4,148,158 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-
50
<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 2,074,079 Subordinated
Units, or 1,737,516 Subordinated Units if the over-allotment option is exercised
in full) and (b) December 31, 2000 (with respect to 2,074,079 Subordinated
Units, or 1,737,516 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 tranche of Subordinated Units may not occur until at least one year
following the early conversion of the first tranche of Subordinated Units.
Upon expiration of the Subordination Period, all remaining Subordinated
Units will convert into Common Units on a one-for-one basis and will thereafter
participate, pro rata, with the other Common Units in distributions of Available
Cash. In addition, if the 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;
51
<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 $ 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 $ 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 $ for such quarter in respect of each outstanding Unit (the "Third
Target Distribution"); and
52
<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 and
are payable to the General Partners.
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 an assumed initial public offering
price of $ 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
TOTAL
QUARTERLY IN DISTRIBUTIONS
DISTRIBUTION HYPOTHETICAL ----------------------------
TARGET ANNUALIZED GENERAL
AMOUNT YIELD UNITHOLDERS PARTNERS
----------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Minimum Quarterly Distribution............................ $ % 98% 2%
First Target Distribution................................. $ % 98% 2%
Second Target Distribution................................ $ % 85% 15%
Third Target Distribution................................. $ % 75% 25%
Thereafter................................................ above $ above% 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 Unit
issued in this offering, Available Cash from Capital Surplus in an aggregate
amount per Unit equal to the Initial Unit Price;
SECOND, 98% to the holders of Common Units, pro rata, and 2% to the
General 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 immediately prior to such repayment.
This adjustment to the Minimum Quarterly Distribution may
53
<PAGE>
accelerate the termination of the Subordination Period, thereby increasing the
likelihood of the conversion of Subordinated Units into Common Units.
When "payback" of the Initial Unit Price has occurred, i.e., when the
Unrecovered Capital of the Common Units is zero (and any accrued Common Unit
Arrearages have been paid), then in effect the Minimum Quarterly Distribution
and each of the Target Distribution Levels will have been reduced to zero for
subsequent quarters. Thereafter, all distributions of Available Cash from all
sources will be treated as if they were from Operating Surplus. Because the
Minimum Quarterly Distribution and the Target Distribution Levels will have been
reduced to zero, the General Partners will be entitled thereafter to receive 50%
of all distributions of Available Cash (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 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.
54
<PAGE>
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 clause fourth an amount
per Unit equal to (a) the sum of the excess of the First Target Distribution
per Unit over the Minimum Quarterly Distribution per Unit for each quarter
of the Partnership's existence, less (b) the cumulative amount per Unit of
any distributions of Available Cash from Operating Surplus in excess of the
Minimum Quarterly Distribution per Unit that were distributed 98% to the
Unitholders, pro rata, and 2% to the General 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 clause fifth an amount
per Unit equal to (a) the sum of the excess of the Second Target
Distribution per Unit over the First Target Distribution per Unit for each
quarter of the Partnership's existence, less (b) the cumulative amount per
Unit of any distributions of Available Cash from Operating Surplus in excess
of the First Target Distribution per Unit that were distributed 85% to the
Unitholders, pro rata, and 15% to the General 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 clause sixth an amount
per Unit equal to (a) the sum of the excess of the Third Target Distribution
per Unit over the Second Target Distribution per Unit for each quarter of
the Partnership's existence, less (b) the cumulative amount per Unit of any
distributions of Available Cash from Operating Surplus in excess of the
Second Target Distribution per Unit that were distributed
55
<PAGE>
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 balance
of the General Partners equaling the amount which would have been the General
Partners' capital account if no prior positive adjustments to the capital
accounts had been made.
CASH AVAILABLE FOR DISTRIBUTION
Based on the amount of working capital that the Partnership is expected to
have at the time it commences operations and the availability of the Working
Capital Facility, the Partnership believes that, if its assumptions about
operating conditions prove correct, the Partnership should have sufficient
Available Cash from Operating Surplus to enable the Partnership to distribute
the Minimum Quarterly Distribution on the 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 logistic cost savings associated with propane purchasing,
insurance premium reductions and certain operating and 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
56
<PAGE>
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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Description of
Indebtedness." Accordingly, no assurance can be given that distributions of the
Minimum Quarterly Distribution or any other amounts will be made. The
Partnership does not intend to update the expression of belief set forth above.
The amount of Available Cash from Operating Surplus needed to distribute the
Minimum Quarterly Distribution for four quarters on the Common Units and
Subordinated Units to be outstanding immediately after this offering and on the
aggregate 2% general partner interest of the General Partners is approximately
$35.3 million ($18.0 million for the Common Units, $16.6 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 $20.7 million for the Common Units,
$13.9 million for the Subordinated Units and $.7 million for the aggregate 2%
general partner interest of the General Partners, or an aggregate of
approximately $35.3 million. The amount of pro forma Available Cash from
Operating Surplus generated during fiscal 1996 was approximately $32.7 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 $2.6 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."
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 Appendix D hereto. The pro forma
adjustments are based upon currently available information and certain estimates
and assumptions. The pro forma financial statements do not purport to present
the results of operations of the Partnership had the Transactions and the
acquisitions referred to therein actually been completed as of the dates
indicated. Furthermore, the pro forma financial statements are based on accrual
accounting concepts while Operating Surplus is defined in the Partnership
Agreement on a cash accounting basis. As a consequence, the 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. Operating Surplus is defined in the Glossary and generally
refers to (i) the cash balance of the Partnership on the date the Partnership
commences operations, plus $25 million, plus all cash receipts of the
Partnership from its operations, less (ii) all Partnership operating expenses,
debt service payments (including reserves therefor but not including payments
required in connection with the sale of assets or any refinancing with the
proceeds of new indebtedness or any equity offering), maintenance capital
expenditures and reserves established for future Partnership operations. For a
more complete definition of Operating Surplus, see the Glossary.
The Partnership will be required to establish reserves for the future
payment of principal and interest on the Notes and the indebtedness under the
Bank Credit Facility. There are other provisions in such agreements which will,
under certain circumstances, restrict the Partnership's ability to make
distributions to its partners. See "Cash Distribution Policy" and "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 unaudited Selected Pro Forma Financial and Operating Data
reflect the 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 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
following information should not be deemed indicative of future operating
results of the Partnership.
<TABLE>
<CAPTION>
PARTNERSHIP PRO FORMA
YEAR ENDED JUNE 30, 1996
---------------------------------
(IN THOUSANDS, EXCEPT PER UNIT
DATA)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................................................... $ 595,790
Gross profit(a).............................................................. 141,306
Depreciation and amortization................................................ 14,500
Operating income............................................................. 40,397
Interest expense, net........................................................ 18,702
Net income................................................................... 21,595
Net income per Unit(b)....................................................... $ 1.23
BALANCE SHEET DATA (END OF PERIOD):
Current assets............................................................... $ 61,453
Total assets................................................................. 450,924
Current liabilities.......................................................... 58,646
Long-term debt............................................................... 200,000
Partners' capital--General Partners.......................................... 3,792
Partners' capital--Limited Partners.......................................... 185,784
OPERATING DATA:
EBITDA(c).................................................................... $ 54,897
Capital expenditures(d):
Growth and Maintenance .................................................... 9,648
Acquisition................................................................ 44,303(e)
Retail propane gallons sold.................................................. 235,000
</TABLE>
- -------------------
(a) Gross profit is computed by reducing total revenues by the direct cost of
the products sold.
(b) Net income per Unit is computed by dividing the limited partners' interest
in net income by the weighted average number of Units outstanding.
(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) The Partnership's capital expenditures fall generally into three categories:
(i) growth capital expenditures, which include expenditures for purchase of
new propane tanks and other equipment to facilitate expansion of the
Partnership's retail customer base, (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, which include expenditures related to the acquisition
of retail propane operations and the portion of the purchase price allocated
to intangibles associated with such acquired businesses.
(e) Approximately $36.0 million relates to the Empire Acquisition of Certain
Synergy Assets.
58
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
SYNERGY AND ITS PREDECESSOR
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 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, the predecessor of Synergy which was acquired by
Synergy on August 15, 1995 (the "Synergy Acquisition") 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 Operations Data for the 4 1/2-month period
ended August 14, 1995 represent information for the period from the end of the
last fiscal year of SGI and the date of the Synergy Acquisition, and is
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 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" included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
SYNERGY GROUP INCORPORATED SYNERGY
--------------------------------------------------------- -------------------
4 1/2 MONTHS 10 1/2 MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED ENDED
------------------------------------------ AUGUST 14, JUNE 30,
1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- ------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................ $ 121,761 $ 132,855 $ 133,731 $ 123,562 $ 32,179 $ 96,062
Gross profit (a)................ 63,082 65,964 70,233 63,653 16,792 49,875
Depreciation and amortization... 5,919 5,381 5,170 5,100 1,845 3,329
Operating income (loss)......... 1,347 (809) 7,276 4,597 (6,216) 14,520
Interest expense................ 13,159 13,343 13,126 11,086 3,223 5,584
Provision (benefit) for income
taxes......................... (314) 351 (400) (84) 31 3,675
Net income (loss)............... (11,553) (15,274) (11,615) (7,323) (9,813) 5,261
BALANCE SHEET DATA (END OF
PERIOD):
Working capital................. $ 12,433 ($101,339) $(113,511) $ (85,911) $ (98,045) $ 24,177
Total assets.................... 112,089 112,152 111,913 103,830 96,500 166,762
Total debt...................... 119,543 123,168 122,626 90,649 89,541 79,524
Redeemable preferred stock...... -- -- -- -- -- 55,312
Stockholders' equity
(deficit)..................... (28,535) (43,809) (55,424) (15,763) (25,576) (1,899)
OPERATIONS DATA:
EBITDA (b)...................... $ 7,266 $ 4,572 $ 12,446 $ 9,697 $ (4,371) $ 17,849
Capital expenditures (c)........ 1,133 2,504 3,141 3,737 596 8,708
Retail propane gallons sold..... 125,946 137,316 137,937 126,205 92,621
</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 for 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,
which include expenditures related to the acquisition of retail propane
operations and the portion of the purchase price allocated to intangibles
associated with such acquired businesses.
59
<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 Corporation
("Empire Gas"). These financial statements give effect to the Split-Off as if it
occurred on July 1, 1991. As discussed elsewhere in this Prospectus, on August
15, 1995, Empire Energy acquired from Synergy approximately 25% of the
operations of SGI. The retail propane gallons sold for all periods presented is
derived from the accounting records of Empire Energy and is unaudited. 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" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
EMPIRE ENERGY
--------------------------------------------------------
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................. $ 52,683 $ 61,057 $ 60,216 $ 56,689 $ 98,821
Gross profit (a)..................................... 28,141 31,900 32,187 29,841 48,741
Depreciation and amortization........................ 4,143 4,257 4,652 4,322 5,875
Operating income..................................... 5,560 8,097 6,015 1,084 9,846
Interest expense..................................... 310 366 118 39 2,598
Provision for income taxes........................... 2,050 2,900 2,400 600 3,550
Net income........................................... 2,988 4,726 3,497 445 3,698
BALANCE SHEET DATA (END OF PERIOD):
Current assets....................................... $ 7,374 $ 8,751 $ 9,292 $ 9,615 $ 16,046
Total assets......................................... 66,341 64,866 64,734 69,075 107,102
Current liabilities.................................. 8,741 3,620 2,697 4,277 12,126
Long-term debt....................................... 1,738 2,258 135 1,701 25,442
Stockholders' equity................................. 37,888 42,614 46,111 46,535 50,233
OPERATING DATA:
EBITDA (b)........................................... $ 9,703 $ 12,354 $ 10,667 $ 5,406 $ 15,721
Capital expenditures (c)............................. 2,446 4,058 8,365 39,164
Retail propane gallons sold.......................... 57,627 66,456 67,788 62,630 104,036
</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 for 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,
which include expenditures related to the acquisition of retail propane
operations and the portion of the purchase price allocated to intangibles
associated with such acquired businesses.
60
<PAGE>
COAST AND ITS PREDECESSOR
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 Selected Historical 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" included elsewhere in the Prospectus.
<TABLE>
<CAPTION>
COAST GAS
INDUSTRIES, COAST
INC. ----------------------------------------------
--------------
FISCAL YEAR FISCAL YEAR ENDED JULY 31,
ENDED JULY 31, ----------------------------------------------
1992 1993 1994 1995 1996
-------------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................................... $ 216,772 $ 229,860 $ 242,986 $ 266,842 $ 384,354
Gross profit (a)............................... 27,375 25,885 28,354 32,304 33,141
Depreciation and amortization.................. 2,882 3,184 3,282 3,785 4,216
Operating income............................... 3,620 3,399 3,843 4,535 4,044
Interest expense............................... 4,291 4,017 4,029 5,120 5,470
Provision (benefit) for income taxes........... 190 (123) (28) (202) (473)
Net loss (b)................................... (861) (495) (158) (889) (953)
BALANCE SHEET DATA (END OF PERIOD):
Current assets................................. $ 22,563 $ 21,962 $ 29,150 $ 33,676 $ 35,297
Total assets................................... 65,644 82,626 93,559 101,545 106,179
Current liabilities............................ 22,643 23,182 31,178 27,605 37,849
Long-term debt................................. 28,811 29,241 31,080 46,021 41,801
Mandatorily redeemable securities.............. 1,800 8,325 8,874 7,781 8,559
Stockholders' equity .......................... 4,262 8,368 7,661 7,853 6,098
OPERATING DATA (UNAUDITED):
EBITDA (c)..................................... $ 6,502 $ 6,583 $ 7,125 $ 8,320 $ 8,260
Capital expenditures (d)....................... 4,590 6,114 4,451 5,581 6,060
Retail propane gallons sold.................... 23,495 27,385 30,918 36,569 34,888
</TABLE>
- ------------------------
(a) Gross profit is computed by reducing total revenues by the direct cost of
the products sold and excluded applicable depreciation and amortization.
(b) Included in the net loss for the year ended July 31, 1995 is an
extraordinary charge of $506,000 to income 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 for 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,
which include expenditures related to the acquisition of retail propane
operations and the portion of the purchase price allocated to intangibles
associated with such acquired businesses.
61
<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 AND EMPIRE ENERGY (THE PRINCIPAL PROPANE SUBSIDIARIES OF NORTHWESTERN
GROWTH) 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.
GENERAL
The Partnership is a Delaware limited partnership recently formed to own and
operate the propane business and assets of Synergy and Empire Energy (the
principal propane subsidiaries of Northwestern Growth) 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 active 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 sold approximately 235
million gallons of propane to retail customers and 226 million gallons of
propane to wholesale customers. During fiscal year 1996, approximately 57.8% of
the Partnership's retail gallons sold was to residential customers, 25.9% was to
industrial and commercial customers, 13.1% was to agricultural customers and
3.2% was to all other retail users. Sales to residential customers during that
period accounted for approximately 67.0% of the Partnership's 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 and commercial buildings. On a pro forma basis
during fiscal 1996, approximately 72.7% of the Partnership's retail propane
volume and in excess of 85% of the Partnership's 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 and commercial markets, the temperatures realized
in the Partnership's areas of operations, particularly during the six-month peak
heating season, have a significant effect on the financial performance of the
Partnership. In any given area, 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 will compare the actual number of Degree Days for such period to the
average number of Degree Days for a longer term 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 Degree Days within each region. Based on this information,
the Partnership calculates a ratio of actual Degree Days to normal Degree Days,
first on a regional basis and then on a Partnership-wide basis. The Partnership
believes that the weather in its northeastern market area, which is a relatively
high margin
62
<PAGE>
market and is particularly weather-sensitive, was relatively colder in fiscal
1994, relatively warmer in fiscal 1995 and relatively colder in fiscal 1996 than
the weather on a national 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 operation, 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
agricultural customers. In addition, gross profit margins vary by geographical
region. Accordingly, profit margins could vary significantly from year to year
in a period of identical sales volumes.
The Partnership intends to purchase propane (approximately 50% to 60% of a
given typical year's projected propane needs) under one-year supply contracts 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 any 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. The Partnership will not engage in speculative
hedging. 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 ten and one-half month period ended June 30, 1996 with the
year ended March 31, 1995, and the year ended March 31, 1995 with the year ended
March 31, 1994. As discussed below, the comparability of financial matters for
the three periods is affected by the Synergy Acquisition and the concurrent
Empire Acquisition of Certain Synergy Assets.
TEN AND ONE-HALF MONTHS ENDED JUNE 30, 1996 COMPARED TO 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 areas of operations was approximately 3.5%
colder than normal for such areas during fiscal 1996, and 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 Empire Acquisition of Certain Synergy
Assets and was partially offset by the colder weather during fiscal 1996.
COST OF PRODUCT SOLD. 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 weather during fiscal 1996. As a percentage of
revenues, cost of product sold decreased slightly to 48.1% for fiscal 1996, as
compared to 48.6% for fiscal 1995.
63
<PAGE>
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 $.03 per gallon, or 5.9%, to $.538 per gallon for fiscal 1996, as
compared to $.508 per gallon for fiscal 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased by $22.0 million, or 40.7%, to $32.0 million for fiscal 1996, as
compared to $54.0 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 43.7% 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 $9.9 million, or 215.2%, to
$14.5 million for fiscal 1996, as compared to $4.6 million for fiscal 1995. This
increase was primarily due to the significant reduction in operating expenses
and 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 3.7% 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,
mainly 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 $7.3 million for fiscal 1995. The increase was
primarily the result of the reduction in operating expenses, general and
administrative expenses and interest expense, partially offset by the effect of
the Empire Acquisition of Certain Synergy Assets.
EBITDA. EBITDA increased $8.1 million, or 83.5%, to $17.8 million in fiscal
1996, as compared to $9.7 million for fiscal 1995. This increase was due to the
reduction in operating, general and administrative expenses and cooler 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 7.8% 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.
YEAR ENDED MARCH 31, 1995 COMPARED TO 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 declined 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 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.
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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 and to the lower average gross margin per gallon of
propane. Gross profit per retail gallon (which includes non-propane related
sales) decreased by $.002 per gallon, or .4%, to $.508 per gallon for fiscal
1995, as compared to $.510 per gallon for fiscal 1994.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased by $3.8 million, or 6.6%, to $54.0 million for fiscal 1995, as
compared to $57.8 million for fiscal 1994, primarily due to decreases in payroll
expense and other costs associated with Synergy's corporate headquarters. The
decreases were more than offset by an increase in the amount provided for
doubtful accounts. The decrease in payroll expense was primarily attributable to
executive management salaries accrued in fiscal 1995 and earlier years,
amounting to $4.8 million, which such executive management agreed to forego. As
a percentage of revenues, general and administrative expenses increased to 43.7%
for fiscal 1995, as compared to 43.2% 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 and
the retirement of certain assets. 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 $2.7 million, or 37.0%, in
fiscal 1995 to $4.6 million, as compared to $7.3 million in fiscal 1994, since
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 operating expenses more than offset the decrease in general and
administrative expenses. As a percentage of revenues, operating income decreased
to 3.7% for fiscal 1995, as compared to 5.5% for fiscal 1994.
INTEREST EXPENSE. 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 INCOME. Synergy had a net loss of $7.3 million for fiscal 1995, as
compared to a net loss of $11.6 million for fiscal 1994. The decrease in net
loss was primarily due to the reduction in interest expense and debt
restructuring costs and the reduction in general and administrative expenses,
partially offset by a decrease in operating income as a result of the warmer
weather.
EBITDA. EBITDA decreased by $2.7 million, or 21.8%, to $9.7 million for
fiscal 1995, as compared to $12.4 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 7.8%
for fiscal 1995, as compared to 9.3% 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 fiscal 1996 was $2.9 million,
as compared to $5.1 million used by operating activities during fiscal 1995. The
cash flows from operations consisted primarily of net income of $5.3 million and
non-cash charges of $6.9 million for fiscal 1996. The impact of working capital
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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 the Empire Acquisition of Certain Synergy Assets. Synergy also
incurred $8.7 million during fiscal 1996 for purchases of property and equipment
in the ordinary course of business and small acquisitions. Synergy has budgeted
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 $120.7 million for fiscal 1996.
This amount primarily reflects borrowing of $52.8 million and the issuing of
$52.8 million of preferred stock to finance the Synergy Acquisition, and an
additional borrowing of $23.9 million under a revolving credit facility to fund
working capital and small acquisitions.
FINANCING AND SOURCES OF LIQUIDITY
On December 28, 1995, Synergy and its subsidiaries 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 in the
principal amount of up to $30.0 million, including up to $7.5 million of letters
of credit. The revolving credit facility bears interest at either the Eurodollar
rate plus 2.0% or the prime rate plus .75%. The obligations of Synergy and its
subsidiaries under the revolving credit agreement are secured by their accounts
receivable, inventory, instruments and documents and a pledge of the capital
stock of Synergy and its subsidiaries. The revolving credit agreement contains
customary financial and performance 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 June 30, 1996, the total outstanding indebtedness under the revolving credit
agreement was approximately $23.9 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 anticipated that, at the closing of the offering, both the Bank of
Boston revolving credit facility and the NPS term loan will be repaid in full
from the proceeds of the offering and will be terminated, and all security
interest relating thereto 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 year ended June 30, 1996 with the year ended June 30,
1995, and the year ended June 30, 1995 with the year ended June 30, 1994. As
discussed below, the comparability of financial matters is 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.
YEAR ENDED JUNE 30, 1996 COMPARED TO 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
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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 operating expenses, 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 expense 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, due primarily to the acquisition of assets in 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's
existing business, and an increase in propane sales volumes resulting from the
colder winter in 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
1995, as compared to $39,000 for fiscal 1996, 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 the 1996
period.
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
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liquidity or ability to service debt obligations) but provides additional
information for evaluating the Partnership's ability to distribute the Minimum
Quarterly Distribution.
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
VOLUME. During fiscal 1995, Empire Energy sold 62.6 million retail propane
gallons, a decrease of 5.2 million gallons, or 7.6%, from the 67.8 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 products sold
increased to 47.4% for fiscal 1995, as compared to 46.5% for fiscal 1994.
GROSS PROFIT. Gross profit decreased by $2.3 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 $.001 per gallon, or .2%, to $.476 per
gallon for fiscal 1995, as compared to $.475 per gallon for fiscal 1994.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses,
which include operating expenses, 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.
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, compared to $6.0 million for fiscal 1994. This
decrease was primarily due to the warmer than normal weather for fiscal 1995 and
the increase in salaries and commissions, as a result of the restructuring due
to the Split-Off. 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 on account of the reduction in propane sales volume.
NET INCOME. Empire Energy had net income of $.4 million for the 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
than normal winter in fiscal 1994.
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 unfavorable weather conditions and an
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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 provided by operating activities during fiscal 1996 was $11.9 million,
as compared to $5.4 million for fiscal 1995. The cash flows 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 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
$.28 million in principal payments on purchase obligations and checks in process
of collection.
FINANCING AND SOURCES OF LIQUIDITY
Prior to the closing of the Empire Acquisition of Synergy, Empire Energy and
its subsidiaries had a $20.0 million revolving credit facility from the Bank of
Boston, bearing interest at either .50% over the lender's prime rate or 1.125%
over the Eurodollar rate and maturing on June 30, 2000. On August 15, 1995, in
connection with the Empire Acquisition of Certain Synergy Assets, Empire Energy
and its subsidiaries modified the Bank of Boston facility by entering into an
additional $35.0 million acquisition credit facility, bearing interest at either
.50% over the lender's prime rate or 1.125% over the Eurodollar rate and
maturing on June 30, 2000. The credit facility contains customary financial and
performance covenants. Empire Energy's obligations under the credit facilities
have been jointly and severally guaranteed by each of its subsidiaries. As of
June 30, 1996, the total outstanding indebtedness under the credit facility was
$31.1 million.
On August 1, 1996, the principal shareholder of Empire Energy since its
inception and certain other shareholders sold their interest in Empire Energy to
the remaining shareholders, all of which were members of management of Empire
Energy. In connection therewith, Empire Energy obtained a new credit facility
with Bank of Boston replacing its existing 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, capital
expenditures, cash flow and net worth requirements as well as dividend
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.
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It is anticipated that, at the closing of the offering, the Bank of Boston
credit facility will be repaid in full from the proceeds of the offering and
will be terminated, and all security interests relating thereto released.
COAST
ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS
The following discussion compares the results of operations and other data
for Coast for the year ended July 31, 1996 with the year ended July 31, 1995,
and the year ended July 31, 1995 with the year ended July 31, 1994.
YEAR ENDED JULY 31, 1996 COMPARED TO 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 301.4 million gallons in fiscal 1995. The increase in volume was primarily
attributable to the impact of colder weather in the wholesale markets served by
Coast. 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 existing 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 .2%, 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 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 is related primarily 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.
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 profits 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 the wholesale natural gas liquid sales are currently transacted.
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 from 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 expenses 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
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attributable to acquisitions and start-up operations in fiscal 1996 that
experienced higher operating costs that were not offset by added sales volumes
due to warmer weather. 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 in fiscal
1995. The majority of this increase was attributable to normal salary increases
and the addition of one staff position to assist on 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 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 in fiscal 1995. This
decrease was primarily due to the decrease in retail gallons sold because of
warmer 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 for 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, before extraordinary charges, for fiscal 1995. The
net loss in fiscal 1996 was $.6 million greater than in fiscal 1995, before an
extraordinary charge to income in fiscal 1995 for the early retirement of debt,
net of income taxes. The greater loss in fiscal 1996 reflects the impact of a
winter heating season that was significantly warmer than normal and higher
interest expenses.
EBITDA. Total EBITDA decreased by $.1 million, or .7%, to 8.2 million in
fiscal 1996, as compared to $8.3 million in 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 in fiscal 1995. The warmer weather in Coast's retail marketing
areas 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.
YEAR ENDED JULY 31, 1995 COMPARED TO 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 for fiscal 1994. The decrease in sales was due to
warmer than normal weather in Coast's wholesale marketing areas during fiscal
1995. Retail propane sales volumes increased by 5.7 millions gallons, or 18.3%,
to 36.6 million gallons for fiscal 1995, as compared to 30.9 million gallons in
fiscal 1994. The increase in volume was primarily attributable to the
consummation of two acquisitions in fiscal 1995, with annual sales of
approximately .9 million gallons, the net addition of 6,295 new customers from
internal growth and colder 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.
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REVENUES. Revenues increased by $23.8 million, or 9.8%, to $266.8 million
in fiscal 1995, as compared to $243.0 million for fiscal 1994. The increase in
sales primarily reflects increased natural gas liquid sales in Coast's natural
gas procurement and marketing operations. Retail sales revenue 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 new
customer additions, resulting from both acquisitions and internal growth, and
weather for fiscal 1995 that was cooler 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 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 profits increased by $4.0 million, or 13.9%, to $32.3
million in fiscal 1995, as compared to $28.3 million in fiscal 1994. Most of the
increase in gross profit was in the retail business which 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 gallons sold was $3.4 million. The remaining increase was due to the
increase in the gross profit per gallon, as well as increases in gross profit
from other sales. In addition, 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.
OPERATING EXPENSES. Operating expenses increased by $2.5 million, or 13.9%,
to $20.2 million in fiscal 1995, as compared to $17.8 million in fiscal 1994.
This increase was 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 acquisition 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 administration expenses, increased by $.2 million, or
8.2%, to $3.7 million for fiscal 1995, as compared to $3.5 million for fiscal
1994, 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 from 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 in conjunction with higher sales
both from 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 for acquisitions and increases in the interest rate on
borrowings.
NET LOSS. Coast had a net loss of $.9 million for fiscal 1995, as compared
to a net loss of $.2 million for fiscal 1994. The increased loss was primarily
due to the early retirement of debt that resulted in a
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charge to earnings of $.5 million in fiscal 1995 and 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 in fiscal
1995, as compared to $7.1 million in fiscal 1994. This increase primarily
reflects the benefit of colder weather in Coast's retail marketing areas
partially offset by warmer weather in the 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 fiscal 1996 was $7.2 million.
The cash flows from operations include a net loss of $1.0 million offset by
non-cash charges of $3.7 million for the period, comprised principally of
depreciation and amortization. The impact of working capital changes increased
cash flow from operations by approximately $4.4 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 borrowings of $1.2 million under capital lease obligations to
finance purchases of tanks, offset by $1.2 million in principal repayments 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 consisting of (i) a reducing revolving
credit facility in the amount of up to $23.0 million, (ii) bank term notes in
the original amount of up to $15.0 million, (iii) subordinated notes in the
amount of $15.0 million, and (iv) a letter of credit guidance line for up to
$20.0 million. 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 subordinated notes bear interest at 12.50% 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.
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. As of July 31,
1996, the total outstanding indebtedness under the existing credit facilities
was approximately $39.1 million. It is anticipated that, at the closing of the
offering, Coast's credit facility will be repaid in full from the proceeds of
this offering and will be terminated, and all security interests related thereto
will be released.
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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 the offering, the Operating Partnership will issue $200
million aggregate principal amount of Notes in a private placement. The
following is a summary of the anticipated material terms of the Notes, all of
which will be issued pursuant to a Note Agreement (the "Note Agreement"), a form
of which will be 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 the Operating
Partnership's obligations under the Bank Credit Facilities, by a first priority
security interest in certain personal property of the Operating Partnership,
including inventory, accounts receivable and storage tanks and by a pledge of
the capital stock of a subsidiary of the Operating Partnership propane tanks. It
is anticipated that the Notes will mature approximately years from their date
of issuance, and will require equal annual prepayments, without premium, of
the principal thereof beginning years from the date of issuance. The
Operating Partnership may, at its option, and under certain circumstances
following the disposition of assets may be required to, prepay the Notes or
other pari pasu indebtedness, in whole or in part. Certain of these prepayments
may be required to be made at a premium as defined in the Note Agreement. The
per annum interest rate on the Notes is expected to be %, payable
semi-annually in arrears.
The Note Agreement is expected to contain various restrictive and
affirmative covenants applicable to the Operating Partnership and its Restricted
Subsidiaries (as defined in the Note Agreement). The Partnership believes that,
upon the consummation of the Transactions contemplated by this Prospectus, the
Operating Partnership would be in compliance with the restrictive and
affirmative covenants applicable under the Notes.
DESCRIPTION OF THE BANK CREDIT FACILITY
Concurrently with the offering, the Operating Partnership will enter into
the Bank Credit Facility with a group of commercial banks. The following is a
summary of the anticipated material terms of the Bank Credit Facility, the form
of which will be 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 $ million Acquisition Facility and
a $ million Working Capital Facility. The agreement governing the Bank Credit
Facility will contain events of default and other provisions typical in
facilities of this type. The Operating Partnership's obligations under the Bank
Credit Facility will be secured, on an equal and ratable basis, with the
Operating Partnership's obligations under the Note Agreement and the Notes. The
Bank Credit Facility will bear interest at a rate based upon, at the Operating
Partnership's option, either or
. The Working Capital Facility will expire after
years, but may be extended annually thereafter with the consent of the banks.
The Acquisition Facility will revolve for at least years. Amounts borrowed
under both facilities are due at maturity. The Bank Credit Facility will contain
customary financial and performance covenants.
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
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Partnership pays for propane as well as operating and administrative expenses,
the Partnership attempts to limit the effects of inflation through passing on
propane cost increases to customers in the form of higher selling prices to the
extent it can do so, as well as 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 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,
serving more than 360,000 active 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 and Energy (the principal propane subsidiaries of Northwestern
Growth) and Coast. The Partnership's operations are located in the east coast,
south-central and west coast regions of the United States. On a pro forma basis
for the fiscal year ended June 30, 1996, the Partnership had retail propane
sales of approximately 235 million gallons and EBITDA of approximately $54.9
million.
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 Partnership's
significant proportion of retail sales 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 supply 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 growth and
consolidation of propane businesses.
BUSINESS STRATEGY
The principal elements of the Partnership's business strategy are to (i)
expand 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 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 propane supplier that is most focused on customer service.
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.
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 a principal means of growth for the Partnership. 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
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retail propane operations in the United States, of which the ten largest
companies account for approximately 40% 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 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 an acquisition credit facility and
the ability to fund acquisitions through the issuance of additional limited
partner interests.
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 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 starting up a
new customer service center. The Partnership believes that it can successfully
initiate 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,
enabling 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 efficiencies and cost savings
opportunities. Furthermore, the Partnership believes that instituting management
incentive programs and an entrepreneurial approach at additional customer
service centers will give managers the incentive to increase such customer
service center's profitability.
CAPITALIZE ON NATIONAL SUPPLY AND LOGISTIC BUSINESS. The Partnership has a
national wholesale propane supply and logistics business with annual propane
sales of approximately 226 million gallons in fiscal 1996. The Partnership
believes that this business provides it with a relatively secure, efficient
supply base to support the service goals of its existing customer service
centers. In addition, the Partnership believes this 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
that position the Partnership to acquire such businesses in the event they
become available.
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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, Northwestern Growth acquired SGI in August 1995, then the
ninth largest retail marketer of propane in the United States with operations in
the east and south-central regions. Northwestern Growth made such acquisition
through its subsidiary, Synergy. SGI has been in the retail propane distribution
business since 1969. As of the time of acquisition, SGI maintained 152 retail
branches serving approximately 200,000 customers in 23 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 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 five smaller propane companies
which have aggregate annual retail propane sales of approximately 10 million
gallons.
On October 7, 1996, Northwestern Growth acquired Empire Energy, then the
eighth largest retail marketer of propane in the United States with operations
primarily concentrated in the midwest and southeast region. 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 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, including the 38
retail propane locations acquired by Empire Energy from Synergy described above.
On September 4, 1996, Northwestern Growth entered into a Stock Purchase and
Merger Agreement with Coast, CGI Acquisition Corp. and the holders of Coast's
preferred stock to acquire Coast (the "Coast Merger"), currently the 18th
largest retail marketer of propane in the United States with operations
primarily concentrated in the west coast region. 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 managers
who currently manage the propane business of Coast will manage the Partnership's
business in their capacities as the senior managers of the General Partner.
Under this current management, 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
strategy of balanced growth through acquisitions and internal growth.
INDUSTRY BACKGROUND AND COMPETITION
Propane, a by-product of natural gas processing and petroleum refining, is a
clean-burning energy source recognized for its transportability and ease of use
relative to alternative forms of stand-alone energy sources. 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
applications, (ii) industrial and commercial applications, (iii) agricultural
applications and (iv) other retail applications, including motor fuel sales.
Residential customers use propane primarily for space and water heating.
Industrial customers use propane primarily as fuel for forklifts and stationary
engines, to fire furnaces, as a cutting gas, in mining operations and in other
process applications. Commercial customers, such as restaurants, motels,
laundries and commercial
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buildings, use propane in a variety of applications, including cooking, heating
and drying. In the agricultural market, propane is primarily used for tobacco
curing, crop drying, poultry brooding and weed control. Other retail uses
include motor fuel for cars and trucks, outdoor cooking and other recreational
uses, propane resales and sales to state and local governments. In its wholesale
operations, the Partnership sells propane principally to large industrial
end-users and other propane distributors.
Propane is extracted from natural gas or oil wellhead gas at processing
plants or separated from crude oil during the refining process. Propane is
normally transported and stored in a liquid state under moderate pressure or
refrigeration for ease of handling in shipping and distribution. When the
pressure is released or the temperature is increased, it is usable as a
flammable gas. Propane is colorless and odorless; an odorant is added to allow
its detection. Like natural gas, propane is a clean burning fuel and is
considered an environmentally preferred energy source.
Based upon information provided by the Energy Information Agency, propane
accounts for approximately three to four percent of household energy consumption
in the United States. Propane competes primarily with natural gas, electricity
and fuel oil as an energy source, principally on the basis of price,
availability and portability. Propane is more expensive than natural gas on an
equivalent BTU basis in locations served by natural gas, but serves as an
alternative to natural gas in rural and suburban areas where natural gas is
unavailable or portability of product is required. Historically, the expansion
of natural gas into traditional propane markets has been inhibited by the
capital costs required to expand pipeline and retail distribution systems.
Although the extension of natural gas pipelines tends to displace propane
distribution in areas affected, the Partnership believes that new opportunities
for propane sales arise as more geographically remote neighborhoods are
developed. Propane is generally less expensive to use than electricity for space
heating, water heating, clothes drying and cooking. 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
less than 35% of the total retail sales of propane in the United States, and
that no single marketer has a greater than 10% share of the total retail market
in the United States. Most of the Partnership's retail distribution branches
compete with five or more marketers or distributors. Each retail distribution
outlet operates in its own competitive environment because retail marketers tend
to locate in close proximity to customers. The typical retail distribution
outlet generally has an effective marketing radius of approximately 50 miles
although in certain rural areas the marketing radius may be extended by a
satellite location.
The ability to compete effectively further depends on the reliability of
service, responsiveness to customers and the ability to maintain competitive
prices. The Partnership believes that its safety programs, policies and
procedures are more comprehensive than many of its smaller, independent
competitors and give it a competitive advantage over such retailers. The
Partnership also believes that its service capabilities and customer
responsiveness differentiate it from many of these smaller competitors. The
Partnership's employees are on call 24 hours a day and seven days a week for
emergency repairs and deliveries.
The wholesale propane business is highly competitive. On a combined basis
for fiscal year 1996, the Partnership's wholesale propane operations accounted
for 49% of total propane volumes but less than 6% of gross profit. The
Partnership believes that its wholesale business provides it with a national
presence and a secure, efficient supply base, and positions it well for
expansion through acquisitions or start-up operations in new markets.
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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. On a pro
forma basis during fiscal 1996, approximately 72.7% of the Partnership's 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 during the third and fourth fiscal quarters,
when customers pay for propane purchased during the six-month peak season. To
the extent necessary, the Partnership will reserve cash from these periods for
distribution to Unitholders during 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 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 locations where it is unloaded into the storage
tanks. In order to make a retail delivery of propane to a customer, a bobtail
truck is loaded with propane from the storage tank. Propane is then pumped from
the bobtail truck, which generally holds 2,500 to 3,000 gallons of propane, into
a stationary storage tank on the customer's premises. The capacity of these
customer tanks ranges from approximately 100 gallons to 1,200 gallons, with a
typical tank having a capacity of 100 to 300 gallons in milder climates and from
500 to 1,000 gallons in colder climates. The Partnership also delivers propane
to retail customers in portable cylinders, which typically have a capacity of 5
to 35 gallons. When these cylinders are delivered to customers, empty cylinders
are picked up for refilling at the Partnership's distribution locations or are
refilled in place. The Partnership also delivers propane to certain other bulk
end users of propane in tractor trailers known as transports, which have an
average capacity of approximately 10,500 gallons. End users receiving transport
deliveries include industrial customers, large-scale heating accounts 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.
Propane use falls into four broad categories: (i) residential applications,
(ii) industrial and commercial applications, (iii) agricultural applications and
(iv) other retail 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 sold by the Partnership
were to residential customers, 25.9% were to industrial and commercial
customers, 13.1% were to agricultural customers, and 3.2% were 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 gross profit from propane sales. Residential sales have a
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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 gross profit from propane sales for fiscal 1996,
agricultural sales accounted for 6.1% and all other retail users accounted for
2.8%. Additional volumes sold to wholesale customers contributed the remaining
5.4% of gross profit from propane sales. No single customer accounted for more
than 4% of the Partnership's 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 nationwide exposure
to regional weather. Although overall demand for propane is affected by climate,
changes in price and other factors, the Partnership believes its residential
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 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 the product being delivered pursuant to a regular
delivery schedule and to the Partnership's ownership of over 80% of the storage
tanks utilized by its customers and (iv) the Combined Operations have been able
to more than offset customer losses through internal growth of its customer base
in existing markets. Since home heating usage is the most sensitive to
temperature, residential customers account for the greatest usage variation due
to weather. Variations in the weather in one or more regions in which the
Partnership operates, however, can significantly affect the total volumes of
propane sold by the Partnership and the margins realized thereon and,
consequently, the Partnership's results of operations. The Partnership believes
that sales to the commercial and industrial markets, while affected by economic
patterns, are not as sensitive to variations in weather conditions as sales to
residential and agricultural markets.
The Partnership is also engaged to a lesser extent in natural gas liquids
processing and natural gas and crude oil marketing. The Partnership both owns
and has contractual rights to use pipelines, transshipment terminals and common
carrier transportation assets, together with storage capacity and the ability to
buy large volumes of propane. As a result, the Partnership believes that it is
in a position to achieve product cost savings and 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. In addition, the Partnership makes purchases on the spot market from
time to time to take advantage of favorable pricing. Most of the propane
purchased by the Partnership in fiscal 1996 was purchased pursuant to one-year
agreements subject to annual renewal, but the percentage of contract purchases
may vary from year to year as determined by the Partnership. Supply contracts
generally provide for pricing in accordance with posted prices at the time of
delivery or the current prices established at major delivery points. Most of
these agreements provide maximum and minimum seasonal purchase guidelines. The
Partnership receives its supply of propane predominately through railroad tank
cars and common carrier transport.
Supplies of propane from the Partnership's sources historically have been
readily available. In fiscal 1996, Warren Gas Liquids provided 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
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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 rapid increases in the wholesale cost of propane may not be
immediately passed on to customers, such increases could reduce the
Partnership's gross profits. Consequently, the Partnership's profitability will
be sensitive to changes in wholesale propane prices. The Partnership does not
currently intend to engage in any significant hedging activities with respect to
its propane supply requirements, although it may do so in the future.
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.
PRICING POLICY
The Partnership expects to rely on customer service center managers to set
prices based on prevailing market conditions and product cost. 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
efficiences and reduce the time spent by local managers on billing, and customer
account collection responsibilities are 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. In addition, as of September 30, 1996, the Partnership operated 312
customer service centers, of which approximately % are owned and % are
leased. The Partnership does not own or operate any underground propane storage
facilities (excluding customer and local distribution tanks) or pipeline
transportation assets (excluding local delivery systems).
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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 approximately 43 transport truck tractors, 98
transport trailers, 981 bobtail trucks and 1,051 other delivery and service
vehicles. As of September 30, 1996, the Partnership owned, and customers leased,
approximately 292,000 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. Substantially all of the Operating
Partnership's assets will be pledged to secure the Notes and indebtedness under
the Bank Credit Facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Description of Indebtedness." In
addition, 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 materially interfere with the continued use of such properties by the
Partnership in its business, taken as a whole. In addition, the Partnership
believes that it has or is in the process of obtaining all required material
approvals, authorizations, orders, licenses, permits, franchises and consents
of, and has obtained or made all required material registrations, qualifications
and filings with, the various state and local governmental and regulatory
authorities which relate to ownership of the Partnership's properties or the
operations of its business.
TRADEMARKS AND TRADENAMES
The Partnership utilizes a variety of trademarks and tradenames which it
owns, including "Synergy Gas" and its related design, and "Empire Gas" and its
related design. The Partnership 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, tradenames and other proprietary rights as valuable
assets and believes that they have significant value in the marketing of its
products.
GOVERNMENT REGULATION
The Partnership is subject to various federal, state and local
environmental, health and safety laws and regulations. Generally, these laws
impose limitations on the discharge of pollutants and establish standards for
the handling of solid and hazardous wastes. These laws include the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), the Clean Air Act, the Occupational
Safety and Health Act, the Emergency Planning and Community Right-to-Know Act,
the Clean Water Act and comparable state statutes. CERCLA, also known as the
"Superfund" law, imposes joint and several liability without regard to fault or
the legality of the original conduct on certain classes of persons that are
considered to have contributed to the release or threatened release of a
"hazardous substance" into the environment. Propane is not a hazardous substance
within the meaning of CERCLA. However, automotive waste products, such as waste
oil, generated by the Partnership's truck fleet, as well as "hazardous
substances" disposed of during past operations by third parties on the
Partnership's properties, could subject the Partnership to liability under
CERCLA. Such laws and regulations could result in civil or criminal penalties in
cases of non-compliance or impose liability for remediation costs. Also, third
parties may make claims against owners or operators of properties for personal
injuries and property damage associated with releases of hazardous or toxic
substances.
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
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are administered by the United States Department of Transportation. The
Partnership conducts ongoing training programs to help ensure that its
operations are in compliance with applicable regulations. The Partnership
maintains various permits that are necessary to operate some of its facilities,
some of which may be material to its operations. The Partnership believes that
the procedures currently in effect at all of its facilities for the handling,
storage and distribution of propane are consistent with industry standards and
are in compliance in all material respects with applicable laws and regulations.
Future developments, such as stricter environmental, health or safety laws
and regulations promulgated thereunder, could affect Partnership operations. It
is not anticipated that the Partnership's compliance with or liabilities under
environmental, health and safety laws and regulations, including CERCLA, will
have a material adverse effect on the Partnership. To the extent that there are
any environmental liabilities unknown to the Partnership or environmental,
health or safety laws or regulations are made more stringent, there can be no
assurance that the Partnership's results of operations will not be materially
and adversely affected.
EMPLOYEES
As of September 30, 1996, the Partnership had 1,685 full time employees, of
whom 121 were general and administrative and 1,564 were operational employees.
Approximately 28 of the Partnership's employees at four customer service centers
are represented by labor unions. The Partnership believes that its relations
with its employees are satisfactory. The Partnership generally hires seasonal
workers to meet peak winter demands.
LITIGATION AND OTHER CONTINGENCIES
A number of personal injury, property damage and products liability suits
are pending or threatened against the Partnership. In general, these lawsuits
have arisen in the ordinary course of the Partnership's business 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, Northwestern Growth (including
Synergy, Empire Energy and, following the Coast Merger, Coast) 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.
Retained assets will include certain claims related to the operations of Synergy
prior to the Synergy Acquisition and all income tax assets related to the
Combined Operations relative to periods prior to the consummation of the
Transactions, and retained liabilities will include certain liabilites 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.
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
sales, installation and service activities will be conducted through a wholly
owned corporate subsidiary of the Operating Partnership.
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Most of the leases associated with the Combined Operations are transferable
to the 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 Partnership are not transferable or are transferable only with
the consent of third parties. Such transferable rights will not be transferred
to the Partnership at the closing of this offering unless applicable consents
have been obtained. The Managing General Partner expects to obtain, prior to the
closing of this offering, third party consents which are sufficient to enable
the Managing General Partner to transfer to the Partnership the assets necessary
to enable the 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
Partnership. Numerous licenses, permits and rights will be required for the
operation of the Partnership's business, and no assurance can be given that the
Partnership will obtain all licenses, permits and rights which are required in
connection with the ownership and operation of its business. In order to
transfer real property interests, documents evidencing chain of title may be
required to be obtained from searches of local records in order to prepare and
record the necessary transfer documents. The Managing General Partner expects to
obtain, prior to the closing of this offering, documents evidencing title that
are sufficient to enable the Managing General Partner to record the transfer of
such real property interests to the Partnership, although no assurance can be
given that such documents can be obtained in a timely manner.
If consent to the assignment or reissuance of any lease, license, permit or
other similar right being transferred is not obtained, or if documents
evidencing title to real property interests being transferred are not obtained,
the Managing General Partner and the Partnership will develop alternative
approaches so that, to the maximum extent possible, the Partnership will receive
the benefits of such lease, license, permit, right or property interest and will
discharge the duties and bear the costs and risks thereunder. The Partnership
will bear the risk that such alternative arrangements will not provide the
Partnership with the full benefits of such lease, license, permit, right or
property interest. Although failure by the Partnership to obtain licenses,
permits, rights or title documents could have a material adverse effect on the
Partnership, the Managing General Partner believes that the Partnership will
have the licenses, permits and rights and will obtain title documents or will be
able to enter into alternative arrangements which will enable the Partnership to
conduct its propane business in a manner which is similar in all material
respects to that which was conducted by 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. Unitholders will not directly or indirectly participate in the
management or operation of the Partnership and will not have actual or apparent
authority to enter into contracts on behalf of, or to otherwise bind, the
Partnership. Notwithstanding any limitation on its obligations or duties, the
Managing General Partner will be liable, as a general partner of the
Partnership, for all debts of the Partnership (to the extent not paid by the
Partnership), except to the extent that indebtedness or other obligations
incurred by the Partnership are made specifically non-recourse to the Managing
General Partner. 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 will serve on the Audit Committee with the authority to review
specific matters as to which the Board of Directors believes there may be a
conflict of interest in order to determine if the resolution of such conflict
proposed by the 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. In
addition, the Audit Committee will review external financial reporting of the
Partnership, will recommend engagement of the Partnership's independent
accountants and will review the Partnership's procedures for internal auditing
and the adequacy of the Partnership's internal accounting controls.
As is commonly the case with publicly traded limited partnerships, the
Partnership will not directly employ any of the persons responsible for managing
or operating the Partnership. In general, the current management of 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 48 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 38 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. Mr. Lewis also served as: Executive
Vice President of NPS from May 1993 to February 1994; and Vice President --
Corporate Services from 1987 to 1992; Mr. Lewis joined NPS in 1982 and has
served as a director of NPS since 1993. Mr. Lewis is also Chairman of Synergy
and Empire Energy and is a director of
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Lucht, Inc. (a manufacturer of photographic equipment) and Northwestern Energy
Corporation ("Northwestern Energy").
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 from April 1991 to August 1995. Mr.
Hylland has served as a director of NPS since 1995 and also serves as Vice
Chairman of Synergy and on the boards of directors of Northwestern Growth,
Empire Energy, Lucht, Inc., Franklin Industries, 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). Mr. Baxter received a BA in Biology from
Stanford University and an MBA from Pepperdine University.
CHARLES J. KITTRELL has been the 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).
Mr. Kittrell received a BS in Finance from the University of Alabama.
RONALD J. GOEDDE has been the Chief Financial Officer of Coast since 1986.
Prior to joining Coast, Mr. Goedde was the Vice President of Finance and
Controller for Cal Gas Corporation (an integrated propane company). Mr. Goedde
is a C.P.A. and received a BS in Accounting from the University of Oregon.
VINCENT J. DICOSIMO has been the Senior Vice President of Coast since 1990
and is the President of Coast Energy Group, Inc. Prior to joining Coast, Mr.
DiCosimo was Manager of Supply/Distribution for Cal Gas Corporation from 1981 to
1990 and was Senior Financial Analyst with Unocal Oil & Gas. Mr. DiCosimo
received a BS in Public Administration from West Texas State University.
DANIEL K. NEWELL has been the Executive Vice President of Northwestern
Growth since August 1995 and has served as Vice President -- Finance of NPS
since August 1995 and Chief Financial Officer of NPS since May 1996. Prior to
joining NPS, Mr. Newell was Vice President-Finance and Treasurer of Energy Fuels
Corporation from 1991 to 1995. Mr. Newell serves on the boards of Northwestern
Growth, Synergy, Empire Energy 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 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 and 8,296,314 Subordinated Units as consideration for their
contribution to the Partnership of their limited partner interest in the
Operating Partnership, which will be received as consideration for their
contribution of the
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Combined Operations to the Operating Partnership. The General Partners will be
entitled to distributions on their general partner interests (including rights
to receive Incentive Distributions) and 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 with
respect to its directors and officers with respect to the fiscal 1996, nor did
any obligations accrue with respect to 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 AND SEVERANCE ARRANGEMENTS
Effective immediately prior to the closing of this offering, 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 such agreements (the "Employment
Agreements") which follows does not purport to be complete and is qualified in
its entirety by reference to the Employment Agreements which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
Pursuant to the Employment Agreements, Messrs. 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. The Employment Agreements will have a term of three years from
the effective date thereof 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. 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 be eligible to participate in the
Annual Operating Performance Incentive Plan of the Managing General Partner and
Messrs. Baxter, Kittrell and Goedde will be eligible to 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 shall 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").
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 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
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after termination. In the event of termination due to disability, the Executive
will be entitled to his base salary 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 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.
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 certain
acquisition management fees related to the acquisition of Empire Energy and
Coast by Northwestern Growth. Awards will be payable annually for achievement of
established annual net income and EBITDA goals. The period covered by the plan
will begin upon the closing of the Coast Merger and end on the fifth anniversary
thereof.
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, based upon 5% 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 Partnership intends to adopt a restricted unit plan (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.
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 selected 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 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
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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. Seven individuals are currently
eligible to receive an award under the Restricted Unit Plan.
The right to receive the remaining $4.6 million of the $12.5 million
aggregate value of Common Units initially available under the Restricted Unit
Plan will be reserved and allocated to future directors as described below 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, or a compensation committee thereof, shall determine. Each
director appointed or elected subsequent to 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), a portion of the grantee's rights to receive Common Units
which vest over time will vest upon the next succeeding scheduled vesting date
such that one-seventh of such rights will have vested as of such date (including
any portion of the rights which have previously vested) for each year of service
by the grantee for the Partnership from the date of grant to the date of
termination. 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 and not
primarily as an opportunity to participate in the equity appreciation in respect
of the Common Units. Therefore, no consideration will be payable by the plan
participants upon vesting and issuance of the Common Units.
COMPENSATION OF DIRECTORS
The Managing General Partner currently pays no additional remuneration to
its officers that 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-officer 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)................................. 12,982
</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 47.1% 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 AND CONVEYANCE 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 and Conveyance 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 each of the transactions provided for
therein, will be effected on terms at least as favorable to the parties to such
agreement as could have been obtained from unaffiliated third parties. All of
the transaction expenses incurred in connection with the Transactions, including
the expense associated with transferring assets into the Operating Partnership,
will be paid from the proceeds of this offering. See "Business and Properties --
Transfer of the Partnership Assets."
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EMPIRE GAS TERMINATION AGREEMENT
On September 28, 1996, Northwestern Growth, Synergy, Myers and Empire Gas
entered into a Termination Agreement that provides for, among other things, the
termination of the existing arrangements pursuant to which Empire Gas manages
the operations of Synergy and Myers, effective immediately following the closing
of the Transactions. However, Empire Gas has agreed to continue to perform
management services during a transition period to be specified by Synergy in a
written "Transition Plan" in order to facilitate the transfer of management
responsibilities for the Synergy and Myers properties from Empire Gas to the
Managing General Partner. As compensation for these services, Empire Gas will be
reimbursed for its out-of-pocket expenses and will be paid (i) a fixed fee at
the initial rate of approximately $270,000 per month during the transition
period, which amount will be reduced in accordance with the Transition Plan as
Empire Gas's fixed operating overhead is reduced relative to the reduction of
Empire Gas's services, and (ii) a management fee of approximately $42,000 per
month during the transition period.
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 stockholders. In
general, 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 the stockholders of the Managing General Partner
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.
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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 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 may affect whether, or the extent to which, there is
sufficient Available Cash from Operating Surplus to meet the Minimum Quarterly
Distribution and Target Distributions Levels on all Units in such quarter or in
subsequent quarters. The Partnership Agreement provides that any borrowings by
the Partnership or the approval thereof by the Managing General Partner shall
not constitute a breach of any duty owned 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."
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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.
COMMON UNITS ARE SUBJECT TO THE MANAGING GENERAL PARTNER'S LIMITED CALL
RIGHT
The Managing General Partner may exercise its right to call for and purchase
Common Units as provided in the Partnership Agreement or assign such right to
one of its affiliates or to the Partnership. The Managing General Partner thus
may use its own discretion, free of fiduciary duty restrictions, in determining
whether to exercise such right. As a consequence, a Common Unitholder may have
his Common Units purchased from him even though he may not desire to sell them,
and the price paid may be less than the amount the holder would desire to
receive upon sale of his Common Units. For a description of such right, see "The
Partnership Agreement -- Limited Call Right."
THE PARTNERSHIP MAY RETAIN SEPARATE COUNSEL FOR ITSELF OR FOR THE HOLDERS OF
COMMON UNITS; ADVISORS RETAINED BY THE PARTNERSHIP FOR THIS OFFERING HAVE
NOT BEEN RETAINED TO ACT FOR HOLDERS OF COMMON UNITS
The Common Unitholders have not been represented by counsel in connection
with the preparation of the Partnership Agreement or other agreements referred
to herein or in establishing the terms of this offering. The 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 IN OWNERSHIP PROVISIONS
The Partnership's indebtedness contains provisions relating to change in
ownership. If such change in ownership provisions are triggered, such
outstanding indebtedness may become due. There is no restriction on the ability
of the Managing General Partner from entering into a transaction which would
trigger such change in ownership provisions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Description of
Indebtedness."
THE GENERAL 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
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the Managing General Partner are not restricted from engaging in any business
activities, including those in competition with the Partnership.
Affiliates of the Managing General Partner may engage in business activity
that involves the retail sale of propane to end users in the continental United
States only if the Managing General Partner determines, in its reasonable
judgment prior to the commencement of such activity, that it is inadvisable for
the Partnership to engage in such activity either because (i) of the financial
commitments or operating characteristics associated with such activity or (ii)
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, or (iii) 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 by the Managing General Partner, in its reasonable judgment, to be
fair to the Partnership at the time it was entered into.
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.
FIDUCIARY AND OTHER DUTIES
The General Partners will be accountable to the Partnership and the
Unitholders as a fiduciary. 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.
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
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breach of its obligations under the Partnership Agreement or their 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 or
engineering practices or principles and such other factors as its deems
relevant. Thus, unlike the strict duty of a fiduciary who must act solely in the
best interests of his beneficiary, the Partnership Agreement permits the
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 or all other similarly situated limited partners (a class action) to
recover damages from a general partner for violations of its fiduciary duties to
the limited partners.
The Partnership Agreement also provides that any standard of care and duty
imposed thereby or under the Delaware Act or any applicable law, rule or
regulation will be modified, waived or limited, to the extent permitted by law,
as required to permit the 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, agents and trustees, to the fullest extent
permitted by law, against liabilities, costs and expenses incurred by the
General Partners or other such 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 the 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
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 Partnership 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 Partnership and the recordation of the name of the
assignee on the books and records of the Partnership. Such consent may be
withheld in the sole discretion of the 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 or chooses not to execute and forward the Transfer
Application to the Transfer Agent. See "The Partnership Agreement -- Status as
Limited Partner or Assignee."
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
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Partnership, owning an aggregate 2% general partner interest in the business and
properties owned by the Partnership and the Operating Partnership on a combined
basis. Unless specifically described otherwise, references herein to the
"Partnership Agreement" constitute references to the Partnership Agreement and
the Operating Partnership Agreement, collectively.
Certain provisions of the Partnership Agreement are summarized elsewhere in
this Prospectus under various headings. With regard to the transfer of Common
Units, see "Description of the Common Units -- Transfer of Common Units." With
regard to distributions of Available Cash, see "Cash Distribution Policy." With
regard to allocations of taxable income and taxable loss, see "Tax
Considerations." Prospective investors are urged to review these sections of
this Prospectus and the Partnership Agreement carefully.
ORGANIZATION AND DURATION
The Partnership and the Operating Partnership were organized in October 1996
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 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.
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."
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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 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
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or senior to the Common Units or an aggregate of more than 4,487,500 additional
Common Units (excluding Common Units issued upon the exercise of the
Underwriters' over-allotment option, upon conversion of Subordinated Units and
pursuant to the employee benefit plans of the Partnership or other members of
the Partnership Group and subject to adjustment in the event of a combination or
subdivision of Common Units) or an equivalent number of securities ranking on a
parity with the Common Units without the approval of the holders of at least a
Unit Majority. During the Subordination Period, the Partnership may also issue
(i) an unlimited number of additional Common Units or parity securities without
the approval of the Unitholders if such issuance occurs (A) in connection with
an Acquisition or a Capital Improvement or (B) within 365 days of, and the net
proceeds from such issuance are used to repay debt incurred in connection with,
an Acquisition or a Capital Improvement, in each case where such Acquisition or
Capital Improvement involves assets that, if acquired by the Partnership as of
the date that is one year prior to the first day of the quarter in which such
transaction is to be effected, would have resulted in an increase in (1) the
amount of Adjusted Operating Surplus generated by the Partnership on a per-Unit
basis for all outstanding Units with respect to each of the four most recently
completed quarters (on a pro forma basis) as compared to (2) the actual amount
of Adjusted Operating Surplus generated by the Partnership on a per-Unit basis
for all outstanding Units (excluding Adjusted Operating Surplus attributable to
the Acquisition or Capital Improvement) with respect to each of such four most
recently completed quarters (provided that if the issuance of Units with respect
to an Acquisition or Capital Improvement occurs within the first four full
quarters after the closing of this offering, then Adjusted Operating Surplus as
used in clauses (1) (determined on a pro forma basis) and (2) above will be
calculated (A) for each quarter, if any, that commenced after the closing of
this offering for which actual results of operations are available, based on the
actual Adjusted Operating Surplus of the Partnership generated with respect to
such quarter and (B) for each other quarter, on a pro forma basis not
inconsistent with the procedures, as applicable, set forth in Appendix D to this
Prospectus); and (ii) an unlimited number of Common Units or parity securities
prior to the end of the Subordination Period and without the approval of the
Unitholders if the proceeds from such issuance are used exclusively to repay up
to $ 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.
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 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.
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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, the Partnership
is required to seek written approval of the holders of the number of Units
required to approve such amendment or call a meeting of the Limited Partners to
consider and vote upon the proposed amendment, except as described below.
Proposed amendments (unless otherwise specified) must be approved by holders of
a Unit Majority, except that no amendment may be made which would (i) enlarge
the obligations of any Limited Partner, without its consent, (ii) enlarge the
obligations of, restrict in any way any action by or rights of, or reduce in any
way the amounts distributable, reimbursable or otherwise payable by the
Partnership to, the General Partners or any of their affiliates without the
Managing General Partner's consent, which may be given or withheld in its sole
discretion, (iii) change the term of the Partnership, (iv) provide that the
Partnership is not dissolved upon the expiration of its term or upon an election
of the 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 Limited Partner or assignee to
reflect (i) a change in the name of the Partnership, the location of the
principal place of business of the Partnership, the registered agent or the
registered office of the Partnership, (ii) admission, substitution, withdrawal
or removal of partners in accordance with the Partnership Agreement, (iii) a
change that, in the discretion of the 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 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 Limited 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, 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
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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
Unitholders, (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 in the Glossary) in the event of the amendments described in
the two immediately preceding paragraphs. No other amendments to the Partnership
Agreement will become effective without the approval of holders of at least 90%
of the Units unless the Partnership obtains an Opinion of Counsel to the effect
that such amendment will not affect the limited liability under applicable law
of any limited partner in the Partnership or the limited partner of the
Operating Partnership.
Any amendment that materially and adversely affects the rights or
preferences of any type or class of outstanding Units in relation to other
classes of Units will require the approval of at least a majority of the type or
class of Units so affected. Any amendment that reduces the voting percentage
required to take any action is required to be approved by the affirmative vote
of limited partners constituting not less than the voting requirement sought to
be reduced.
MERGER, SALE OR OTHER DISPOSITION OF ASSETS
The 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, the Managing General
Partner may, assuming certain conditions are satisfied, merge the Partnership or
any member of the Partnership Group into, or convey some or all of the
Partnership Group's assets to, a newly formed entity if the sole purpose of such
merger or conveyance is to effect a mere change in the legal form of the
Partnership into another limited liability entity. The Unitholders are not
entitled to dissenters' rights of appraisal under the Partnership Agreement or
applicable Delaware law in the event of a merger or consolidation of the
Partnership, a sale of substantially all of the Partnership's assets or any
other transaction or event.
TERMINATION AND DISSOLUTION
The Partnership will continue until 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
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Partnership, the reconstituted limited partnership nor any other member of the
Partnership Group would be treated as an association taxable as a corporation or
otherwise be taxable as an entity for federal income tax purposes upon the
exercise of such right to continue (hereinafter, an "Opinion of Counsel").
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 more than 50% of the outstanding
Common Units are held or controlled by one person and its affiliates (other than
the General Partners and their 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 the
appointment of a successor General Partner. See "-- Termination and
Dissolution."
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 General Partners 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
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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.
In the event of 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 interest 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 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
will have the right to convert their general partner interests in the
Partnership and the Operating Partnership into Common Units equal to the fair
market value of such interests as determined by an investment banking firm or
other independent expert selected in the manner described in the preceding
paragraph or to receive cash in exchange for such interests.
TRANSFER OF GENERAL PARTNERS' INTERESTS
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 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 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 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
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. The General Partners
or their affiliates or a subsequent holder may transfer their right to receive
Incentive Distributions to one or more persons without Unitholder approval.
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
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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 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 General Partners or any of
their 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."
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 limited partners in respect of other Common
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.
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Each record holder of a Unit has a vote according to his percentage interest
in the Partnership, although additional limited partner interests having special
voting rights could be issued by the General Partner. See "-- Issuance of
Additional Securities." However, if any Person or group (other than the General
Partners and their affiliates) acquires, in the aggregate, beneficial ownership
of 20% or more of the total Unit of any class, 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 vote and exercise other powers attributable to
Common Units owned by an assignee who has not become a substitute Limited
Partner at the written direction of such assignee. See "-- Meetings; Voting."
Transferees who do not execute and deliver a Transfer Application will be
treated neither as assignees nor as record holders of Common Units, and will not
receive cash distributions, federal income tax allocations or reports furnished
to record holders of Common Units. See "Description of the Common Units --
Transfer of Common Units."
NON-CITIZEN ASSIGNEES; REDEMPTION
If the Partnership is or becomes subject to federal, state or local laws or
regulations that, in the reasonable determination of the Partnership, create a
substantial risk of cancellation or forfeiture of any property in which the
Partnership has an interest because of the nationality, citizenship, residency
or other related status of any Limited Partner or assignee, the Partnership may
redeem the Common Units held by such Limited Partner or assignee at their
Current Market Price (as defined in the Glossary). In order to avoid any such
cancellation or forfeiture, the Partnership may require each Limited Partner or
assignee to furnish information about his nationality, citizenship, residency or
related status. If a Limited Partner or assignee fails to furnish information
about such nationality, citizenship, residency or other related status within 30
days after a request for such information, such Limited Partner or assignee may
be treated as a non-citizen assignee ("Non-citizen Assignee"). In addition to
other limitations on the rights of an assignee who is not a substituted Limited
Partner, a Non-citizen Assignee does not have the right to direct the voting of
his Common Units and may not receive distributions in kind upon liquidation of
the Partnership.
INDEMNIFICATION
The Partnership Agreement provides that the Partnership will indemnify the
General 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 an
officer, director, partner or trustee of a General Partner or any Departing
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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 a General Partner or any Departing Partner
as an officer, director, employee, partner, agent or trustee of another Person
("Indemnitees"), to the fullest extent permitted by law, from and against any
and all losses, claims, damages, liabilities (joint or several), expenses
(including, without limitation, legal fees and expenses), judgments, fines,
penalties, interest, settlements and other amounts arising from any and all
claims, demands, actions, suits or proceedings, whether civil, criminal,
administrative or investigative, in which any Indemnitee may be involved, or is
threatened to be involved, as a party or otherwise, by reason of its status as
any of the foregoing; provided that in each case the Indemnitee acted in good
faith and in a manner that such Indemnitee reasonably believed to be in or not
opposed to the best interests of the Partnership and, with respect to any
criminal proceeding, had no reasonable cause to believe its conduct was
unlawful. Any indemnification under these provisions will be only out of the
assets of the Partnership, and the General 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 Partnership is required to keep appropriate books of the business of the
Partnership at the principal offices of the Partnership. The books will be
maintained for both tax and financial reporting purposes on an accrual basis.
For tax purposes, the fiscal year of the Partnership is the calendar year. For
financial reporting purposes, however, the fiscal year of the Partnership is a
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 Partnership 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 Partnership 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
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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."
UNITS ELIGIBLE FOR FUTURE SALE
After the sale of the Common Units offered hereby, the General Partners will
hold an aggregate of 8,296,314 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 an offering to be sold into the market in an amount that does
not exceed, during any three-month period, the greater of (i) 1% of the total
number of such securities outstanding or (ii) the average weekly reported
trading volume of the Common Units for the four calendar weeks prior to such
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Partnership. A person who is not deemed to have been an
affiliate of the Partnership at any time during the three months preceding a
sale, and who has beneficially owned his Common Units for at least three years,
would be entitled to sell such Common Units under Rule 144 without regard to the
public information requirements, volume limitations, manner of sale provisions
or notice requirements of Rule 144.
Prior to the end of the Subordination Period, the Partnership may not issue
equity securities of the Partnership ranking prior or senior to the Common Units
or an aggregate of more than 4,487,500 additional Common Units (excluding Common
Units issued upon exercise of the Underwriters' over-allotment option and upon
conversion of Subordinated Units or in connection with certain acquisitions or
the repayment of certain indebtedness), or an equivalent amount of securities
ranking on a parity with the Common Units, without the approval of the holders
of at least a Unit Majority, except under certain circumstances. 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 Subordinated Units at any time. Any issuance of additional Common
Units
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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 the general partner of
the Partnership. In connection with any such registration, the Partnership will
indemnify each Unitholder participating in such registration and its officers,
directors and controlling persons from and against any liabilities under the
Securities Act or any state securities laws arising from the registration
statement or prospectus. The Partnership will bear all costs and expenses of any
such registration. In addition, the General 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 exchangeable for Common Units or Subordinated
Units or (ii) enter into any swap or other agreement 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 of this Prospectus, except for (i) the Common Units offered hereby, (ii)
issuances of Common Units pursuant to employee plans described in this
Prospectus or (iii) 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.
TAX CONSIDERATIONS
This section is a summary of material tax considerations that may be
relevant to prospective Unitholders and, to the extent set forth below under "--
Legal Opinions and Advice," represents the opinion of Andrews & Kurth L.L.P.,
special counsel to the General 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
("Code"), existing and proposed regulations thereunder and current
administrative rulings and court decisions, all of which are subject to change.
Subsequent changes in such authorities may cause the tax consequences to vary
substantially from the consequences described below. Unless the context
otherwise requires, references in this section to Partnership are references to
both the Partnership and the Operating Partnership.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting the Partnership or the Unitholders.
Moreover, the discussion focuses on Unitholders who are individual citizens or
residents of the United States and has only limited application to corporations,
estates, trusts, non-resident aliens or other Unitholders subject to specialized
tax treatment (such as tax-exempt institutions, 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.
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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 Section7704 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 must maintain a single aggregate adjusted tax basis in his
Common Units (see "-- Disposition of Common Units -- Recognition of Gain or
Loss"), (iii) whether the Partnership's monthly convention for allocating
taxable income and losses is permitted by existing Treasury Regulations (see "--
Disposition of Common Units -- Allocations Between Transferors and
Transferees"), and (iv) whether the Partnership's method for depreciating
Section 743 adjustments is sustainable (see "-- Uniformity of Units").
TAX RATES AND CHANGES IN FEDERAL INCOME TAX LAWS
The top marginal income tax rate for individuals is 36% subject to a 10%
surtax on individuals with taxable income in excess of $263,750 per year. The
surtax is computed by applying a 39.6% rate to taxable income in excess of the
threshold. The net capital gain of an individual remains subject to a maximum
28% tax rate.
The 1995 Proposed Legislation that was passed by Congress 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 is generally intended to simplify the administration of the tax
rules governing large partnerships such as the Partnership. In addition, the
1995 Proposed
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Legislation contained provisions which would have reduced the maximum tax rate
applicable to the net capital gains of an individual to 19.8%.
On March 19, 1996, certain tax legislation, known as the Revenue
Reconciliation Act of 1996, was presented to Congress that would impact the
taxation of certain financial products, including partnership interests. One
proposal would treat a taxpayer as having sold an "appreciated" partnership
interest (one in which gain would be recognized if such interest were sold) if
the taxpayer or related persons enters into one or more positions with respect
to the same or substantially identical property which, for some period,
substantially eliminates both the risk of loss and opportunity for gain on the
appreciated financial position (including selling "short against the box"
transactions). Certain of these proposed changes are also discussed under "--
Disposition of Common Units."
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.
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 its interests in the
Partnership and in the Operating Partnership and any notes or receivables
due from the Partnership or the Operating Partnership, of not less than $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.
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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 % of its gross
income for each taxable year will not constitute qualifying income.
If the Partnership fails to meet the Qualifying Income Exception (other than
a failure which is determined by the IRS to be inadvertent and which is cured
within a reasonable time after discovery), the Partnership will be treated as if
it had transferred all of its assets (subject to liabilities) to a newly formed
corporation (on the first day of the year in which it fails to meet the
Qualifying Income Exception) in return for stock in that corporation, and then
distributed that stock to the partners in liquidation of their interests in the
Partnership. This contribution and liquidation should be tax-free to Unitholders
and the Partnership, so long as the Partnership, at that time, does not have
liabilities in excess of the basis of its assets. Thereafter, the Partnership
would be treated as a corporation for federal income tax purposes.
If the Partnership or the Operating Partnership were treated as an
association taxable as a corporation in any taxable year, either as a result of
a failure to meet the Qualifying Income Exception or otherwise, its items of
income, gain, loss and deduction would be reflected only on its tax return
rather than being passed through to the Unitholders, and its net income would be
taxed to the Partnership or the Operating Partnership at corporate rates. In
addition, any distribution made to a Unitholder would be treated as either
taxable dividend income (to the extent of the Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
nontaxable return of capital (to the extent of the Unitholder's tax basis in his
Common Units) or taxable capital gain (after the Unitholder's tax basis in the
Common Units is reduced to zero). Accordingly, treatment of either the
Partnership or the Operating Partnership as an association taxable as a
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
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these persons. Income, gain, deductions or losses would not appear to be
reportable by a Unitholder who is not a partner for federal income tax purposes,
and any cash distributions received by such a Unitholder would therefore be
fully taxable as ordinary income. These holders should consult their own tax
advisors with respect to their status as partners in the Partnership for federal
income tax purposes. A purchaser or other transferee of Common Units who does
not execute and deliver a Transfer Application may not receive certain federal
income tax information or reports furnished to record holders of Common Units
unless the Common Units are held in a nominee or street name account and the
nominee or broker has executed and delivered a Transfer Application with respect
to such Common Units.
A beneficial owner of Common Units whose Common Units have been transferred
to a short seller to complete a short sale would appear to lose his status as a
partner with respect to such Common Units for federal income tax purposes. See
"-- Tax Treatment of Operations -- Treatment of Short Sales."
TAX CONSEQUENCES OF UNIT OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME
No federal income tax will be paid by the Partnership. Instead, each
Unitholder will be required to report on his income tax return his allocable
share of the income, gains, losses and deductions of the Partnership without
regard to whether corresponding cash distributions are received by such
Unitholder. Consequently, a Unitholder may be allocated income from the
Partnership even if he has not received a cash distribution. Each Unitholder
will be required to include in income his allocable share of Partnership income,
gain, loss and deduction for the taxable year of the Partnership ending with or
within the taxable year of the Unitholder.
TREATMENT OF PARTNERSHIP DISTRIBUTIONS
Distributions by the Partnership to a Unitholder generally will not be
taxable to the Unitholder for federal income tax purposes to the extent of his
basis in his Common Units immediately before the distribution. Cash
distributions in excess of a Unitholder's basis generally will be considered to
be gain from the sale or exchange of the Common Units, taxable in accordance
with the rules described under "-- Disposition of Common Units" below. Any
reduction in a Unitholder's share of the Partnership's liabilities for which no
partner, including the General 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 basis in his Common Units, if such distribution reduces the
Unitholder's share of the Partnership's "unrealized receivables" (including
depreciation recapture) and/or substantially appreciated "inventory items" (both
as defined in Section 751 of the Code) (collectively, "Section 751 Assets"). To
that extent, the Unitholder will be treated as having been distributed his
proportionate share of the Section 751 Assets and having exchanged such assets
with the Partnership in return for the non-pro rata portion of the actual
distribution made to him. This latter deemed exchange will generally result in
the Unitholder's realization of ordinary income under Section 751(b) of the
Code. Such income will equal the excess of (1) the non-pro rata portion of such
distribution over (2) the Unitholder's basis for the share of such Section 751
Assets deemed relinquished in the exchange.
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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 , will be allocated, on a cumulative basis, an amount of
federal taxable income for such period that will be approximately % of the
cash distributed with respect to that period. The Partnership further estimates
that for taxable years after the taxable year ending , the taxable
income allocable to the Unitholders will constitute a significantly higher
percentage of cash distributed to Unitholders. The foregoing estimates are based
upon the assumption that gross income from operations will approximate the
amount required to make the Minimum Quarterly Distribution with respect to all
Units and other assumptions with respect to capital expenditures, cash flow and
anticipated cash distributions. These estimates and assumptions are subject to,
among other things, numerous business, economic, regulatory, competitive and
political uncertainties beyond the control of the Partnership. Further, the
estimates are based on current tax law and certain tax reporting positions that
the Partnership intends to adopt and with which the IRS could disagree.
Accordingly, no assurance can be given that the estimates will prove to be
correct. The actual percentage could be higher or lower, and any such
differences could be material and could materially affect the value of the
Common Units.
BASIS OF COMMON UNITS
A Unitholder's initial tax basis for his Common Units will be the amount he
paid for the Common Units plus his share of the Partnership's nonrecourse
liabilities. That basis will be increased by his share of Partnership income and
by any increases in his share of Partnership nonrecourse liabilities. That basis
will be decreased (but not below zero) by distributions from the Partnership, by
the Unitholder's share of Partnership losses, by any decrease in his share of
Partnership nonrecourse liabilities and by his share of expenditures of the
Partnership that are not deductible in computing its taxable income and are not
required to be capitalized. A limited partner will have no share of Partnership
debt which is recourse to the General 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."
LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES
The deduction by a Unitholder of his share of Partnership losses will be
limited to the tax basis in his Units and, in the case of an individual
Unitholder or a corporate Unitholder (if more than 50% in the value of its stock
is owned directly or indirectly by five or fewer individuals or certain
tax-exempt organizations), to the amount which the Unitholder is considered to
be "at risk" with respect to the Partnership's activities, if that is less than
the Unitholder's basis. A Unitholder must recapture losses deducted in previous
years to the extent that Partnership distributions cause the Unitholder's at
risk amount to be less than zero at the end of any taxable year. Losses
disallowed to a Unitholder or recaptured as a result of these limitations will
carry forward and will be allowable to the extent that the Unitholder's basis or
at risk amount (whichever is the limiting factor) is subsequently increased.
Upon the taxable disposition of a Unit, any gain recognized by a Unitholder can
be offset by losses that were previously suspended by the at risk limitation but
may not be offset by losses suspended by the basis limitation. Any excess loss
(above such gain) previously suspended by the at risk or basis limitations is no
longer utilizable.
In general, a Unitholder will be at risk to the extent of the tax basis of
his Units, excluding any portion of that basis attributable to his share of
Partnership nonrecourse liabilities, reduced by any amount of money the
Unitholder borrows to acquire or hold his Units if the lender of such borrowed
funds owns an interest in the Partnership, is related to such a person or can
look only to Units for repayment. A Unitholder's at risk amount will increase or
decrease as the basis of the Unitholder's Units increases or decreases (other
than basic increases or decreases attributable to increases or decreases in his
share of Partnership nonrecourse liabilities).
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The passive loss limitations generally provide that individuals, estates,
trusts and certain closely-held corporations and personal service corporations
can deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) only to the extent of the taxpayer's
income from those passive activities. The passive loss limitations are applied
separately with respect to each publicly-traded partnership. Consequently, any
passive losses generated by the Partnership will only be available to offset
future income generated by the Partnership and will not be available to offset
income from other passive activities or investments (including other
publicly-traded partnerships) or salary or active business income. Passive
losses which are not deductible because they exceed a Unitholder's income
generated by the Partnership may be deducted in full when he disposes of his
entire investment in the Partnership in a fully taxable transaction to an
unrelated party. The passive activity loss rules are applied after other
applicable limitations on deductions such as the at risk rules and the basis
limitation.
A Unitholder's share of net income from the Partnership may be offset by any
suspended passive losses from the Partnership, but it may not be offset by any
other current or carryover losses from other passive activities, including those
attributable to other publicly-traded partnerships. The IRS has announced that
Treasury Regulations will be issued which characterize net passive income from a
publicly-traded Partnership as investment income for purposes of the limitations
on the deductibility of investment interest.
LIMITATIONS ON INTEREST DEDUCTIONS
The deductibility of a non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of such taxpayer's "net investment
income." As noted, a Unitholder's net passive income from the Partnership will
be treated as investment income for this purpose. In addition, the Unitholder's
share of the Partnership's portfolio income will be treated as investment
income. Investment interest expense includes (i) interest on indebtedness
properly allocable to property held for investment, (ii) the Partnership's
interest expense attributed to portfolio income, and (iii) the portion of
interest expense incurred to purchase or carry an interest in a passive activity
to the extent attributable to portfolio income. The computation of a
Unitholder's investment interest expense will take into account interest on any
margin account borrowing or other loan incurred to purchase or carry a Unit. Net
investment income includes gross income from property held for investment and
amounts treated as portfolio income pursuant to the passive loss rules less
deductible expenses (other than interest) directly connected with the production
of investment income, but generally does not include gains attributable to the
disposition of property held for investment.
ALLOCATION OF PARTNERSHIP INCOME, GAIN, LOSS AND DEDUCTION
In general, if the Partnership has a net profit, items of income, gain, loss
and deduction will be allocated among the General Partners and the Unitholders
in accordance with their respective percentage interests in the Partnership.
With respect to any taxable year, a class of Unitholders that receives more cash
than another class, on a per Unit basis, will be allocated additional income
equal to that excess. If the Partnership has a net loss, items of income, gain,
loss and deduction will generally be allocated first, to the General 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
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the recognition of ordinary income by some Unitholders, but these allocations
may not be respected. If these allocations of recapture income are not
respected, the amount of the income or gain allocated to a Unitholder will not
change but instead a change in the character of the income allocated to a
Unitholder would result. Finally, although the Partnership does not expect that
its operations will result in the creation of negative capital accounts, if
negative capital accounts nevertheless result, items of Partnership income and
gain will be allocated in an amount and manner sufficient to eliminate the
negative balance as quickly as possible.
Regulations provide that an allocation of items of partnership income, gain,
loss or deduction, other than an allocation required by Section 704(c) of the
Code to eliminate the disparity between a partner's "book" capital account
(credited with the fair market value of Contributed Property) and "tax" capital
account (credited with the tax basis of Contributed Property) (the "Book-Tax
Disparity"), will generally be given effect for federal income tax purposes in
determining a partner's distributive share of an item of income, gain, loss or
deduction only if the allocation has substantial economic effect. In any other
case, a partner's distributive share of an item will be determined on the basis
of the partner's interest in the partnership, which will be determined by taking
into account all the facts and circumstances, including the partner's relative
contributions to the partnership, the interests of the partners in economic
profits and losses, the interest of the partners in cash flow and other
nonliquidating distributions and rights of the partners to distributions of
capital upon liquidation.
Counsel is of the opinion that, with the exception of the allocation of
recapture income discussed above, allocations under the Partnership Agreement
will be given effect for federal income tax purposes in determining a partner's
distributive share of an item of income, gain, loss or deduction. There are,
however, uncertainties in the Treasury Regulations relating to allocations of
Partnership income, and investors should be aware that the allocations of
recapture income in the Partnership Agreement may be successfully challenged by
the IRS.
TAX TREATMENT OF OPERATIONS
ACCOUNTING METHOD AND TAXABLE YEAR
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 fiscal 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 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."
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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 must be capitalized and cannot be
deducted currently, ratably or upon termination of the Partnership. There are
uncertainties regarding the classification of costs as organization expenses,
which may be amortized, and as syndication expenses, which may not be amortized.
For example, under recently adopted regulations, the Underwriters' discount and
commissions would be treated as a syndication cost.
SECTION 754 ELECTION
The Partnership will make the election permitted by Section 754 of the Code.
That election is irrevocable without the consent of the IRS. The election will
generally permit the Partnership to adjust a Common Unit purchaser's basis in
the Partnership's assets ("inside basis") pursuant to Section 743(b) of the Code
to reflect his purchase price. The Section 743(b) adjustment belongs to the
purchaser and not to other partners. (For purposes of this discussion, a
partner's inside basis in the Partnership's assets will be considered to have
two components: (1) his share of the Partnership's basis in such assets ("Common
Basis") and (2) his Section 743(b) adjustment to that basis.)
Proposed Treasury Regulation Section 1.168-2(n) generally requires the
Section 743(b) adjustment attributable to recovery property to be depreciated as
if the total amount of such adjustment were attributable to newly-acquired
recovery property placed in service when the purchaser acquires the Unit.
Similarly, the legislative history of Section 197 indicates that the Section
743(b) adjustment attributable to an amortizable Section 197 intangible should
be treated as a newly-acquired asset placed in service in the month when the
purchaser acquires the Unit. Under Treasury Regulation Section 1.167(c)-1(a)(6),
a Section 743(b) adjustment attributable to property subject to depreciation
under Section 167 of the Code rather than cost recovery deductions under Section
168 is generally required to be depreciated using either the straight-line
method or the 150% declining balance method. The depreciation and amortization
methods and useful lives associated with the Section 743(b) adjustment,
therefore, may differ from the methods and useful lives generally used to
depreciate the Common Basis in such properties. Pursuant to the Partnership
Agreement, the Partnership is authorized to adopt a convention to preserve the
uniformity of Units even if such convention is not consistent with Treasury
Regulation Sections 1.167(c)-1(a)(6), Proposed Treasury Regulation Section
1.168-2(n) or the legislative history of Section 197 of the Code. See "--
Uniformity of Units."
Although Counsel is unable to opine as to the validity of such an approach,
the Partnership intends to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property (to
the extent of any unamortized book-tax disparity) using a rate of depreciation
or amortization derived from the depreciation or amortization method and useful
life applied to the Common Basis of such property, 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
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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 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 basis in his
Units is higher than such Units' share of the aggregate basis to the Partnership
of the Partnership's assets immediately prior to the transfer. In such a case,
as a result of the election, the transferee would have a higher basis in his
share of the Partnership's assets for purposes of calculating, among other
items, his depreciation and depletion deductions and his share of any gain or
loss on a sale of the Partnership's assets. Conversely, a Section 754 election
is disadvantageous if the transferee's basis in such Units is lower than such
Unit's share of the aggregate basis of the Partnership's assets immediately
prior to the transfer. Thus, the fair market value of the Units may be affected
either favorably or adversely by the election.
The calculations involved in the Section 754 election are complex and will
be made by the Partnership on the basis of certain assumptions as to the value
of Partnership assets and other matters. There is no assurance that the
determinations made by the Partnership will not be successfully challenged by
the IRS and that the deductions resulting from them will not be reduced or
disallowed altogether. Should the IRS require a different basis adjustment to be
made, and should, in the Partnership's opinion, the expense of compliance exceed
the benefit of the election, the Partnership may seek permission from the IRS to
revoke the Section 754 election for the Partnership. If such permission is
granted, a subsequent purchaser of Units may be allocated more income than he
would have been allocated had the election not been revoked.
ALTERNATIVE MINIMUM TAX
Each Unitholder will be required to take into account his distributive share
of any items of Partnership income, gain, deduction or loss for purposes of the
alternative minimum tax.
A Unitholder's alternative minimum taxable income derived from the
Partnership may be higher than his share of Partnership net income because the
Partnership may use accelerated methods of depreciation for purposes of
computing federal taxable income or loss. The minimum tax rate for noncorporate
taxpayers is 26% on the first $175,000 of alternative minimum taxable income in
excess of the exemption amount and to 28% on any additional alternative minimum
taxable income. Prospective Unitholders should consult with their tax advisors
as to the impact of an investment in Units on their liability for the
alternative minimum tax.
VALUATION OF PARTNERSHIP PROPERTY AND BASIS OF PROPERTIES
The federal income tax consequences of the ownership and disposition of
Units will depend in part on estimates by the Partnership of the relative fair
market values, and determinations of the initial tax basis, of the assets of the
Partnership. Although the Partnership may from time to time consult with
professional appraisers with respect to valuation matters, many of the relative
fair market value estimates will be made by the Partnership. These estimates and
determinations of basis are subject to challenge and will not be binding on the
IRS or the courts. If the estimates of fair market value or determinations of
basis are subsequently found to be incorrect, the character and amount of items
of income, gain, loss or deductions
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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.
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
"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.
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The IRS has ruled that a partner who acquires interests in a Partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of such
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. The ruling is unclear as to how the
holding period of these interests is determined once they are combined. If this
ruling is applicable to the holders of Common Units, a Common Unitholder will be
unable to select high or low basis Common Units to sell as would be the case
with corporate stock. It is not clear whether the ruling applies to the
Partnership, because, similar to corporate stock, interests in the Partnership
are evidenced by separate certificates. Accordingly Counsel is unable to opine
as to the effect such ruling will have on the Unitholders. In addition, under
the financial product provisions of the Revenue Reconciliation Act of 1996, in
the case of partnership interests in publicly traded partnerships which are
substantially identical, the basis of such interests and any adjustments to
basis, would be determined on an average basis and a taxpayer would be treated
as selling such interests on a first-in, first-out basis. A Unitholder
considering the purchase of additional Common Units or a sale of Common Units
purchased in separate transactions should consult his tax advisor as to the
possible consequences of such ruling and subsequent legislation.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES
In general, the Partnership's taxable income and losses will be determined
annually, will be prorated on a monthly basis and subsequently apportioned among
the Unitholders in proportion to the number of Units owned by each of them as of
the opening of the NYSE on the first business day of the month (the "Allocation
Date"). However, gain or loss realized on a sale or other disposition of
Partnership assets other than in the ordinary course of business will be
allocated among the Unitholders on the Allocation Date in the month in which
that gain or loss is recognized. As a result, a Unitholder transferring Common
Units in the open market may be allocated income, gain, loss and deduction
accrued after the date of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, Counsel is unable to opine on the validity of this
method of allocating income and deductions between the transferors and the
transferees of Units. If this method is not allowed under the Treasury
Regulations (or only applies to transfers of less than all of the Unitholder's
interest), taxable income or losses of the Partnership might be reallocated
among the Unitholders. The Partnership is authorized to revise its method of
allocation between transferors and transferees (as well as among partners whose
interests otherwise vary during a taxable period) to conform to a method
permitted under future Treasury Regulations.
A Unitholder who owns Units at any time during a quarter and who disposes of
such Units prior to the record date set for a cash distribution with respect to
such quarter will be allocated items of Partnership income, gain, loss and
deductions attributable to such quarter but will not be entitled to receive that
cash distribution.
NOTIFICATION REQUIREMENTS
A Unitholder who sells or exchanges Units is required to notify the
Partnership in writing of that sale or exchange within 30 days after the sale or
exchange and in any event by no later than January 15 of the year following the
calendar year in which the sale or exchange occurred. The Partnership is
required to notify the IRS of that transaction and to furnish certain
information to the transferor and transferee. However, these reporting
requirements do not apply with respect to a sale by an individual who is a
citizen of the United States and who effects the sale or exchange through a
broker. Additionally, a transferor and a transferee of a Unit will be required
to furnish statements to the IRS, filed with their income tax returns for the
taxable year in which the sale or exchange occurred, that set forth the amount
of the consideration received for the Unit that is allocated to goodwill or
going concern value of the Partnership. Failure to satisfy these reporting
obligations may lead to the imposition of substantial penalties.
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CONSTRUCTIVE TERMINATION
The Partnership and the Operating Partnership will be considered to have
been terminated if there is a sale or exchange of 50% or more of the total
interests in Partnership capital and profits within a 12-month period. A
termination results in the closing of a Partnership's taxable year for all
partners and the Partnership's assets are regarded as having been distributed to
the partners and reconveyed to the Partnership, which is then treated as a new
partnership. However, under new proposed regulations which are not yet
effective, the Partnership will be deemed to have conveyed all its assets and
liabilities to a newly formed partnership in exchange for all the interests in
such partnership and then the Partnership will be deemed to have liquidated and
to have distributed to its partners the interests in this newly formed
partnership. A termination of the Partnership will cause a termination of the
Operating Partnership and any Subsidiary Partnership. Such a termination could
also result in penalties or loss of basis adjustments under Section 754 of the
Code if the Partnership were unable to determine that the termination had
occurred. (Under the 1995 Proposed Legislation, termination of a large
partnership, such as the Partnership, would not occur by reason of the sale or
exchange of interests in the partnership.)
In the case of a Unitholder reporting on a taxable year other than a fiscal
year ending December 31, the closing of the tax year of the Partnership may
result in more than 12 months' taxable income or loss of the Partnership being
includable in his taxable income for the year of termination. In addition, each
Unitholder will realize taxable gain to the extent that any money deemed as a
result of the termination to have been distributed to him exceeds the adjusted
basis of his Units. New tax elections required to be made by the Partnership,
including a new election under Section 754 of the Code, must be made subsequent
to a constructive termination. A termination could also result in a deferral of
Partnership deductions for depreciation. Finally, a termination might either
accelerate the application of or subject the Partnership to any tax legislation
enacted prior to the termination.
ENTITY-LEVEL COLLECTIONS
If the Partnership is required or elects under applicable law to pay any
federal, state or local income tax on behalf of any Unitholder or any General
Partner or any former Unitholder, the Partnership is authorized to pay those
taxes from Partnership funds. Such payment, if made, will be treated as a
distribution of cash to the partner on whose behalf the payment was made. If the
payment is made on behalf of a person whose identity cannot be determined, the
Partnership is authorized to treat the payment as a distribution to current
Unitholders. Alternatively, the Partnership may elect to treat an amount paid on
behalf of the General Partners and Unitholders as an expenditure of the
Partnership if the amount paid on behalf of the General Partners is not
substantially greater than 2% of the total amount paid. The Partnership is
authorized to amend the Partnership Agreement in the manner necessary to
maintain uniformity of intrinsic tax characteristics of Units and to adjust
subsequent distributions, so that after giving effect to such distributions, the
priority and characterization of distributions otherwise applicable under the
Partnership Agreement is maintained as nearly as is practicable. Payments by the
Partnership as described above could give rise to an overpayment of tax on
behalf of an individual partner in which event the partner could file a claim
for credit or refund.
UNIFORMITY OF UNITS
Because the Partnership cannot match transferors and transferees of Units,
uniformity of the economic and tax characteristics of the Units to a purchaser
of such Units must be maintained. In the absence of uniformity, compliance with
a number of federal income tax requirements, both statutory and regulatory,
could be substantially diminished. A lack of uniformity can result from a
literal application of Proposed Treasury Regulation Section 1.168-2(n) and
Treasury Regulation Section 1.167(c)-1(a)(6) or the legislative history of
Section 197 and from the application of the "ceiling limitation" on the
Partnership's ability to make allocations to eliminate book-tax disparities
attributable to Contributed Properties and Partnership property that has been
revalued and reflected in the partners capital accounts ("Adjusted
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Properties"). Any non-uniformity could have a negative impact on the value of
the Units. See "-- Tax Treatment of Operations -- Section 754 Election."
The Partnership intends to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value of Contributed
Property or Adjusted Property (to the extent of any unamortized Book-Tax
Disparity) using a rate of depreciation or amortization derived from the
depreciation or amortization method and useful life applied to the Common Basis
of such property, 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 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.".
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
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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 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
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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.
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.
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REGISTRATION AS A TAX SHELTER
The Code requires that "tax shelters" be registered with the IRS. The
temporary Treasury Regulations interpreting the tax shelter registration
provisions of the Code are extremely broad. It is arguable that the Partnership
will not be subject to the registration requirement on the basis that it will
not constitute a tax shelter. However, the Managing General Partner, as a
principal organizer of the Partnership, will register the Partnership as a tax
shelter with the IRS in the absence of assurance that the Partnership will not
be subject to tax shelter registration and in light of the substantial penalties
which might be imposed if registration is required and not undertaken. The
Partnership will apply for a tax shelter registration number with the IRS.
ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN THE
PARTNERSHIP OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED
BY THE IRS. The Partnership must furnish the registration number to the
Unitholders, and a Unitholder who sells or otherwise transfers a Unit in a
subsequent transaction must furnish the registration number to the transferee.
The penalty for failure of the transferor of a Unit to furnish the registration
number to the transferee is $100 for each such failure. The Unitholders must
disclose the tax shelter registration number of the Partnership on Form 8271 to
be attached to the tax return on which any deduction, loss or other benefit
generated by the Partnership is claimed or income of the Partnership is
included. A Unitholder who fails to disclose the tax shelter registration number
on his return, without reasonable cause for that failure, will be subject to a
$250 penalty for each failure. Any penalties discussed herein are not deductible
for federal income tax purposes.
ACCURACY-RELATED PENALTIES
An additional tax equal to 20% of the amount of any portion of an
underpayment of tax which is attributable to one or more of certain listed
causes, including negligence or disregard of rules or regulations, substantial
understatements of income tax and substantial valuation misstatements, is
imposed by the Code. No penalty will be imposed, however, with respect to any
portion of an underpayment if it is shown that there was a reasonable cause for
that portion and that the taxpayer acted in good faith with respect to that
portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on the return (i)
with respect to which there is, or was, "substantial authority" or (ii) as to
which there is a reasonable basis and the pertinent facts of such position are
disclosed on the return. Certain more stringent rules apply to "tax shelters," a
term that in this context does not appear to include the Partnership. If any
Partnership item of income, gain, loss or deduction included 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
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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, Missouri,
Mississippi, 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 Individual Retirement Accounts established
or maintained by an employer or employee organization. Among other things,
consideration should be given to (a) whether such investment is prudent under
Section 404(a)(1)(B) of ERISA; (b) whether in making such investment, such plan
will satisfy the diversification requirement of Section 404(a)(1)(C) of ERISA;
and (c) whether such investment will result in recognition of unrelated business
taxable income by such plan and, if so, the potential after-tax investment
return. See "Tax Considerations -- Uniformity of Units -- Tax-Exempt
Organizations and Certain Other Investors." The person with investment
discretion with respect to the assets of an employee benefit plan (a
"fiduciary") should determine whether an investment in the Partnership is
authorized by the appropriate governing instrument and is a proper investment
for such plan.
Section 406 of ERISA and Section 4975 of the Code (which also applies to
Individual Retirement Accounts that are not considered part of an employee
benefit plan) prohibit an employee benefit plan from engaging in certain
transactions involving "plan assets" with parties that are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to the plan.
In addition to considering whether the purchase of Common Units is a
prohibited transaction, a fiduciary of an employee benefit plan should consider
whether such plan will, by investing in the Partnership, be deemed to own an
undivided interest in the assets of the Partnership, with the result that the
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, Individual Retirement Accounts and
other employee benefit plans not subject to ERISA (such as governmental plans).
The Partnership's assets should not be considered "plan assets" under these
regulations because it is expected that the investment will satisfy the
requirements in (a) and (b) above and may also satisfy the requirements in (c).
Plan fiduciaries contemplating a purchase of Common Units should consult
with their own counsel regarding the consequences under ERISA and the Code in
light of the serious penalties imposed on persons who engage in prohibited
transactions or other violations.
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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. and
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 COMMON
NAME UNITS
- --------------------------------------------------------------------------- -----------------
<S> <C>
Morgan Stanley & Co. Incorporated..........................................
Dean Witter Reynolds Inc...................................................
-----------------
Total..................................................................
-----------------
-----------------
</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 $ per Common Unit under the public offering price.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ 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 1,346,250 additional Common Units at the public
offering price set forth on the cover page hereof less underwriting discounts
and 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.
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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, directly or indirectly, dispose of
any Common Units, Subordinated Units or any securities convertible into or
exchangeable for Common Units or Subordinated Units or (ii) enter into any swap
or other agreement that transfers, in whole or in part, any of the ecomonic
consequences or 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) issuances of Common Units pursuant to employee
plans described in this Prospectus or (iii) 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.
Application will be made to list the Common Units for trading on the New
York Stock Exchange ("NYSE") under the symbol " ." 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 agent in connection with the private placement of the Notes for
which they will receive customary compensation. From time to time, Morgan
Stanley & Co. Incorporated renders investment banking services to NPS and
Northwestern Growth, for which it receives 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 will be determined by
negotiations between the Managing General Partner and the Representatives. Among
the factors considered in determining the initial public offering price will be
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 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.
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EXPERTS
The audited financial statements of Cornerstone Propane GP, Inc. and of
Cornerstone Propane Partners, L.P. and the pro forma consolidated financial
statements of Cornerstone Propane Partners, L.P. included in this Prospectus and
elsewhere in the Registration Statement, to the extent indicated in their
reports, have been audited by Arthur Andersen LLP, independent public
accountants, and are included herein in reliance upon the authority of said firm
as experts in giving said reports.
The audited financial statements included in this Prospectus and elsewhere
in the Registration Statement for 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 and elsewhere
in the Registration Statement for SYN Inc., to the extent and for the periods
indicated in the report, have been audited by Arthur Andersen LLP, independent
public accountant, and are included herein in reliance upon the report of said
firm given upon its authority as experts in giving such 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 and elsewhere
in the Registration Statement 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.
AVAILABLE INFORMATION
The Company has not previously been subject to the informational
requirements of the Securities Exchange Act of 1934 (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 Company 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 or
on the Internet at http://www.sec.gov. 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.
131
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<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 June 30, 1996................................................. F-5
Pro Forma Consolidated Statement of Operations for the Period Ended June 30, 1996........................ F-7
Notes to Pro Forma Consolidated Financial Statements..................................................... F-8
CORNERSTONE PROPANE PARTNERS, L.P.
Report of Independent Public Accountants................................................................. F-11
Balance Sheet dated October 7, 1996...................................................................... F-12
Note to Balance Sheet dated October 7, 1996.............................................................. F-13
CORNERSTONE PROPANE GP, INC.
Report of Independent Public Accountants................................................................. F-14
Balance Sheet dated October 7, 1996...................................................................... F-15
Note to Balance Sheet dated October 7, 1996.............................................................. F-16
EMPIRE ENERGY CORPORATION CONSOLIDATED FINANCIAL STATEMENTS
Independent Accountants' Report.......................................................................... F-17
Consolidated Balance Sheets dated June 30, 1995 and 1996................................................. F-18
Consolidated Statements of Income Years Ended June 30, 1994, 1995 and 1996............................... F-19
Consolidated Statements of Stockholders' Equity Years Ended June 30, 1994, 1995 and 1996................. F-20
Consolidated Statements of Cash Flows Years Ended June 30, 1994, 1995 and 1996........................... F-21
Notes to Consolidated Financial Statements dated June 30, 1996........................................... F-22
CGI HOLDINGS, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................................................................ F-31
Consolidated Balance Sheets.............................................................................. F-32
Consolidated Statements of Operations.................................................................... F-34
Consolidated Statements of Stockholders' Equity.......................................................... F-35
Consolidated Statements of Cash Flows.................................................................... F-36
Notes to Consolidated Financial Statements............................................................... F-37
SYN INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants................................................................. F-49
Consolidated Balance Sheet dated June 30, 1996........................................................... F-50
Consolidated Statement of Income for the Period from Inception (August 15, 1995) through June 30, 1996... F-51
Consolidated Statement of Stockholders' Equity for the Period from Inception (August 15, 1995) through
June 30, 1996.......................................................................................... F-52
Consolidated Statement of Cash Flows for the Period from Inception (August 15, 1995) through June 30,
1996................................................................................................... F-53
Notes to Consolidated Financial Statements dated June 30, 1996........................................... F-54
</TABLE>
F-1
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SYNERGY GROUP, INCORPORATED CONSOLIDATED FINANCIAL STATEMENTS
Independent Accountants' Report.......................................................................... F-60
Consolidated Balance Sheet dated August 14, 1995......................................................... F-61
Consolidated Statements of Operations for the Years Ended March 31, 1994 and 1995 and the Period Ended
August 14, 1995........................................................................................ F-62
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended March 31, 1994 and 1995 and
the Period Ended August 14, 1995....................................................................... F-63
Consolidated Statements of Cash Flows for the Years Ended March 31, 1994 and 1995 and for the Period
Ended August 14, 1995.................................................................................. F-64
Notes to Consolidated Financial Statements............................................................... F-65
</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 financial
statements of SYN Inc. and subsidiaries ("Synergy"), Empire Energy Corporation
("Empire Energy") and CGI Holdings, Inc. ("Coast") and 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"). 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 SYN Inc., Empire Energy Corporation and CGI Holdings, Inc.:
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 balance sheet of Cornerstone Propane
Partners, L.P. (a Delaware limited partnership), and the related pro forma
consolidated statement of operations 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 Company were derived from the
unaudited historical financial statements of Myers Propane Company. Such 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.
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.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
October 7, 1996
F-4
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL AMOUNTS
------------------------------------
EMPIRE PURCHASE PRO FORMA PARTNERSHIP
SYNERGY ENERGY COAST MYERS ADJUSTMENTS ADJUSTMENTS PRO FORMA
-------- -------- -------- ------ ------------ ----------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............. $ 14 $ 2,064 $ 1,519 $ 372 $ (2,064)(A) 386,435(F) $ 1,886
(19)(B) (386,435)(G)
Trade receivables..................... 9,195 5,724 23,664 328 1,190(A) -- 34,542
(5,559)(B)
Related party receivables............. 37,966 7,978 -- -- (7,978)(C) (21,328)(H) --
(16,638)(D)
Inventories........................... 7,447 6,702 7,316 102 340(A) -- 20,263
(1,644)(B)
Current deferred income tax assets.... 3,727 996 802 -- (16)(A) (5,509)(I) --
Other................................. 678 560 1,996 7 869(A) -- 4,762
652(B)
-------- -------- -------- ------ ------------ ----------------- -----------
Total current assets................ 59,027 24,024 35,297 809 (30,867) (26,837) 61,453
-------- -------- -------- ------ ------------ ----------------- -----------
Property, plant and equipment........... 68,691 79,534 51,495 2,057 29,073(A) -- 231,218
368(B)
Deferred income tax asset............... 4,849 -- -- -- -- (4,849)(I) --
Excess of cost over fair value.......... 30,943 3,033 11,844 2,009 19,189(A) -- 144,544
40,888(B)
16,638(D)
20,000(E)
Other assets, net....................... 3,252 511 7,543 476 2,704(A) 3,000(F) 13,709
(3,777)(B)
-------- -------- -------- ------ ------------ ----------------- -----------
$166,762 $107,102 $106,179 $5,351 $ 94,216 $ (28,686) $450,924
-------- -------- -------- ------ ------------ ----------------- -----------
-------- -------- -------- ------ ------------ ----------------- -----------
</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 JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL AMOUNTS
------------------------------------
EMPIRE PURCHASE PRO FORMA PARTNERSHIP
SYNERGY ENERGY COAST MYERS ADJUSTMENTS ADJUSTMENTS PRO FORMA
-------- -------- -------- ------ ---------------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current portion of long-term debt..... $ 1,025 $ 6,019 $ 3,924 $ -- $ (777)(A) $ (16,856)(G) $ 25,000
6,665(B) 25,000(F)
Trade accounts payable................ 1,604 3,368 30,824 58 (153)(A) -- 22,802
(12,899)(B)
Accrued liabilities................... 2,915 5,163 3,101 46 (381)(A) -- 10,844
Acquisition liabilities............... 29,306 -- -- -- (7,978)(C) (21,328)(H) --
Accrued income taxes.................. -- -- -- 203 25(B) (228)(I) --
-------- -------- -------- ------ -------- ----------------- -----------
Total current liabilities........... 34,850 14,550 37,849 307 (15,498) (13,412) 58,646
-------- -------- -------- ------ -------- ----------------- -----------
Long-term debt.......................... 25,687 25,442 41,801 1,950 72,602(A) (172,230)(G) 200,000
200,000(F)
4,748(G)
Notes payable--related party............ 52,812 -- -- -- -- (52,812)(G) --
Deferred income tax liability........... -- 16,877 10,777 -- 11,227(A) (38,881)(I) --
Other................................... -- -- 1,095 702 5,000(A) (5,000)(G) 2,702
905(B)
-------- -------- -------- ------ -------- ----------------- -----------
Total liabilities................... 113,349 56,869 91,522 2,959 74,236 (77,587) 261,348
-------- -------- -------- ------ -------- ----------------- -----------
STOCKHOLDERS' EQUITY
Preferred stock....................... 55,312 -- 8,559 2,300 311(B) (55,312)(G) --
(2,300)(G)
(8,870)(G)
Common stock equity................... (1,899) 50,233 6,098 92 (36,233)(A) (68,733)(G) --
35,902(B) 28,751(I)
20,000(E) (4,322)(G)
(4,748)(G)
164,435(F)
(189,576)(J)
PARTNERS' CAPITAL
Common unitholders.................... -- -- -- -- -- 96,494(J) 96,494
Subordinated unitholders.............. -- -- -- -- -- 89,290(J) 89,290
General partners...................... -- -- -- -- -- 3,792(J) 3,792
-------- -------- -------- ------ -------- ----------------- -----------
Total stockholders' equity partners'
capital........................... 53,413 50,233 14,657 2,392 19,980 48,901 189,576
-------- -------- -------- ------ -------- ----------------- -----------
$166,762 $107,102 $106,179 $5,351 $ 94,216 $ (28,686) $ 450,924
-------- -------- -------- ------ -------- ----------------- -----------
-------- -------- -------- ------ -------- ----------------- -----------
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-6
<PAGE>
CORNERSTONE PROPANE PARTNERS, LP
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
(K)
HISTORICAL AMOUNTS ADJUST (L)
---------------------------------- HISTORICAL ACQUISITION/
EMPIRE TO DISPOSITION PRO FORMA PARTNERSHIP
SYNERGY ENERGY COAST MYERS FULL YEAR ADJUSTMENTS ADJUSTMENTS PRO FORMA
-------- -------- -------- ------- ---------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE.................. $96,062 $ 98,821 $384,354 $ 3,178 $9,115 $ 4,260 $ -- $ 595,790
COST OF SALES............ 46,187 50,080 351,213 1,842 4,556 2,106 (1,500)(M) 454,484
-------- -------- -------- ------- ---------- ------ ------- --------------
GROSS PROFIT............. 49,875 48,741 33,141 1,336 4,559 2,154 1,500 141,306
-------- -------- -------- ------- ---------- ------ ------- --------------
EXPENSES
Operating.............. 28,745 24,766 21,046 554 3,511 685 (2,833)(N) 76,474
General and
administrative....... 3,281 8,254 3,835 -- 469 -- (5,904)(N) 9,935
Depreciation and
amortization......... 3,329 5,875 4,216 103 553 346 78(O) 14,500
-------- -------- -------- ------- ---------- ------ ------- --------------
35,355 38,895 29,097 657 4,533 1,031 (8,659) 100,909
-------- -------- -------- ------- ---------- ------ ------- --------------
OPERATING INCOME......... 14,520 9,846 4,044 679 26 1,123 10,159 40,397
INTEREST EXPENSE, NET.... 5,584 2,598 5,470 101 890 495 3,564(P) 18,702
-------- -------- -------- ------- ---------- ------ ------- --------------
INCOME BEFORE INCOME
TAXES................... 8,936 7,248 (1,426) 578 (864) 628 6,595 21,695
INCOME TAX PROVISION..... 3,675 3,550 (473) 220 (328) 235 (6,779)(I) 100
-------- -------- -------- ------- ---------- ------ ------- --------------
NET INCOME............... $ 5,261 $ 3,698 $ (953) $ 358 $ (536) $ 393 $ 13,374 $ 21,595
-------- -------- -------- ------- ---------- ------ -------
-------- -------- -------- ------- ---------- ------ -------
General partners'
interest in net
income.................. 432
--------------
Limited partner's
interest in net
income.................. $ 21,163
--------------
Net income per unit...... $ 1.23(Q)
--------------
--------------
Weighted average number
of Units outstanding.... 17,272
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these pro forma consoildated
financial statements.
F-7
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
1. BASIS OF PRESENTATION:
The following pro forma adjustments described in Note 3 below have been
prepared as if the Transactions to be effected at the closing of the Offering
had taken place on June 30, 1996 with respect to balance sheet information and
on July 1, 1995 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, Myers Propane Gas Company
("Myers") and Empire Energy Corporation ("Empire Energy") (the principal propane
subsidiaries or Northwestern Growth Corporation ("Northwestern Growth")) 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 (including the right to
receive incentive distributions). As a result of such transactions, the Managing
General Partner and the Special General Partner will own an aggregate 47.1%
limited partner interest in the Partnership and an aggregate 2% general partner
interest in the Partnership and the Operating Partnership.
3. PRO FORMA ADJUSTMENTS:
PURCHASE ACCOUNTING ADJUSTMENTS
A. Reflects the purchase by Empire Energy management of Empire Energy and the
related issuance of new debt and the repayment of outstanding debt in
connection with such purchase. Also reflects the subsequent purchase of
Empire Energy by Northwestern Growth and the issuance of long-term debt to
finance such purchase.
B. Reflects the purchase of Coast by Northwestern Growth and the issuance of
short-term debt to finance the transaction.
C. Reflects the elimination of accounts receivable and claims by Empire Energy
arising in connection with the Empire Acquisition of Certain Synergy Assets.
D. 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.
E. 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.
F-8
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
3. PRO FORMA ADJUSTMENTS: (CONTINUED)
PRO FORMA ADJUSTMENTS
F. Reflects the receipt of proceeds from the Offering of $179,500, the Note
Placement of $200,000 and borrowings under the working capital line of
$25,000, net of offering costs of $18,065.
G. 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............................................ 189,086
Payment of Related Party indebtedness.............................. 52,812
Distribution to the General Partners............................... 73,733
Redemption of preferred stock...................................... 70,804
---------
Total cash distributions......................................... 386,435
---------
---------
</TABLE>
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 income tax related accounts because income taxes
will be borne by the Partnership, except for income taxes applicable to
operations to be conducted by the Partnership's wholly owned corporate
subsidiary.
J. 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 50.9% limited partner interest; and (3) Subordinated Units
equal to an approximate 47.1% limited partner interest.
K. Reflects the results of operations for the pre-acquisition period July 1,
1995 to August 14, 1995 for Synergy and the results of operations for the
pre-acquisition period July 1, 1995 to December 6, 1995 for Myers.
L. Reflects the pro forma full year results of propane operations acquired by
Coast and Synergy subsequent to July 1, 1995. Also reflects the elimination
of results of discontinued operations subsequent to July 1, 1995.
M. Reflects acquisition and logistic cost savings associated with propane
purchasing from the integration of the Coast wholesale operation with the
Combined Operations.
N. Reflects the full year 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-9
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
3. PRO FORMA ADJUSTMENTS: (CONTINUED)
operating and general and administrative expenses associated with the
operation of the Partnership, as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
Operating: JUNE 30, 1996
- ------------------------------------------------------------------------------- -------------
<S> <C>
Retail overlap consolidations.................................................. $ 700
Insurance savings.............................................................. 2,133
------
$ 2,833
------
------
General and Administrative:
- -------------------------------------------------------------------------------
Nonrecurring expenses of former Empire Energy shareholder...................... $ 4,229
Corporate overhead consolidation............................................... 2,100
Eliminated bank and consulting fees............................................ 325
Estimated incremental general and administrative cost associated with the
Partnership................................................................... (750)
------
$ 5,904
------
------
</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.
O. 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.
P. Reflects the following adjustment to interest expense from the Transaction
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1996
-------------
<S> <C>
Historical interest expense.............................................................. $ 13,753
Pro forma interest expense from adjustment to full year. Note (K)........................ 890
Pro forma interest expense from current year acquisitions. Note (L)...................... 495
-------------
$ 15,138
-------------
Pro forma interest expense applicable to the Partnership:
$200,000 Senior Secured Notes at an assumed rate of 8.40% per annum.................... $ 16,800
Interest expense attributable to the working capital line based on an average
outstanding principal balance of $25,000 at 6.75% per annum.......................... 1,688
Debt expense amortization based on $3,000 estimated debt issuance costs................ 214
-------------
$ 18,702
-------------
Pro forma interest expense addition...................................................... $ 3,564
-------------
-------------
</TABLE>
Q. Net income per Unit is determined by dividing the net income that would be
allocated to the Unitholders, which is 98% of net income, by the number of
units outstanding. The number of units outstanding, 17,272, were assumed to
have been outstanding the entire period.
F-10
<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 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-11
<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-12
<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 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 third parties.
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.
F-13
<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-14
<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 SHAREHOLDER'S EQUITY
Payable to Cornerstone Propane Partners, L.P........................................ $ 10
Shareholder's equity................................................................ 1,000
---------
Total Liabilities and Shareholder's Equity........................................ $ 1,010
---------
---------
</TABLE>
The accompanying note is an integral part of this balance sheet.
F-15
<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-16
<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-17
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
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-18
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING REVENUE................................................................ $ 60,216 $ 56,689 $ 98,821
COST OF PRODUCT SOLD............................................................. 28,029 26,848 50,080
--------- --------- ---------
GROSS PROFIT..................................................................... 32,187 29,841 48,741
--------- --------- ---------
OPERATING COSTS AND EXPENSES:
Provision for doubtful accounts................................................ 537 983 1,450
General and administrative..................................................... 20,983 23,452 31,570
Depreciation and amortization.................................................. 4,652 4,322 5,875
--------- --------- ---------
26,172 28,757 38,895
--------- --------- ---------
OPERATING INCOME................................................................. 6,015 1,084 9,846
INTEREST EXPENSE (Net)........................................................... 118 39 2,598
--------- --------- ---------
INCOME BEFORE INCOME TAXES....................................................... 5,897 1,045 7,248
PROVISION FOR INCOME TAXES....................................................... 2,400 600 3,550
--------- --------- ---------
NET INCOME....................................................................... $ 3,497 $ 445 $ 3,698
--------- --------- ---------
--------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
F-19
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1994, 1995 AND 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
--- ----------- ---------- --- ------------
--- ----------- ---------- --- ------------
</TABLE>
See Notes to Consolidated Financial Statements
F-20
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $ 3,497 $ 445 $ 3,698
Items not requiring (providing) cash:
Depreciation............................................................ 4,336 4,084 5,593
Amortization............................................................ 316 238 282
Gain on sale of assets.................................................. (31) (145) (67)
Deferred income taxes................................................... (849) 194 1,075
Changes in:
Trade receivables......................................................... (522) 388 (1,799)
Inventories............................................................... 952 (985) (348)
Accounts payable.......................................................... (821) 1,444 1,301
Accrued expenses and self insurance....................................... 229 325 2,124
Prepaid expenses and other................................................ (7) 72 (279)
Income taxes payable (refundable)......................................... (53) (702) 270
--------- --------- -----------
Net cash provided by operating activities............................... 7,047 5,358 11,850
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets................................................ 125 295 162
Purchases of property and equipment......................................... (4,058) (8,365) (3,184)
Purchase of assets from SYN Inc............................................. -- -- (35,980)
--------- --------- -----------
Net cash used in investing activities................................... (3,933) (8,070) (39,002)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in credit facilities.................................... (2,051) 1,600 (5,500)
Principal payments on purchase obligations.................................. (109) (132) (126)
Checks in process of collection............................................. -- 158 (158)
Purchase of treasury stock.................................................. -- (21) --
Proceeds from acquisition credit facility................................... -- -- 35,000
--------- --------- -----------
Net cash provided by (used in) financing activities..................... (2,160) 1,605 29,216
--------- --------- -----------
INCREASE (DECREASE) IN CASH................................................... 954 (1,107) 2,064
CASH, BEGINNING OF PERIOD..................................................... 153 1,107 (0)
--------- --------- -----------
CASH, END OF PERIOD........................................................... $ 1,107 $ (0) $ 2,064
--------- --------- -----------
--------- --------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
F-21
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. 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.
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.
F-22
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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).
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 interest
in the Company to a new entity formed by the remaining shareholders of the
Company, all of which are 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, 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
F-23
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
NOTE 3: MANAGEMENT BUY OUT (CONTINUED)
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, Inc. 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.
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, 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 has been 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 has been assigned
to the former principal shareholder in connection with the management buy out.
F-24
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
NOTE 4: SYNERGY ACQUISITION (CONTINUED)
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.
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.
F-25
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
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 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>
F-26
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
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>
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>
F-27
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
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, 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.
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.
In conjunction with the restructuring that occurred in June 1994 between the
Company and Empire Gas, the two companies agreed to share on a percentage basis
the self-insured liabilities prior to June 30, 1994. Under the agreement, the
Company will assume 47.7% of the liability with Empire Gas assuming the
remaining 52.3%. The self-insurance liability, which is included in the
Company's financial statements at June 30, 1996, includes 47.7% of the estimated
total shared liability.
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
F-28
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
NOTE 9: INCOME TAX AUDITS (CONTINUED)
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 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 in 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 will assume 47.7% of the
total shared liabilities related to these tax audits of the years ended June 30,
1994, and prior.
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 Transaction, the
amount of this liability could be substantial and could adversely effect the
Company's financial position.
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
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.
F-29
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
NOTE 11: ADDITIONAL CASH FLOW INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
NONCASH INVESTING AND FINANCING ACTIVITIES
Purchase contract obligations incurred................................... $ -- $ 172 $ 222
ADDITIONAL CASH PAYMENT INFORMATION
Interest paid............................................................ $ 155 $ 64 $ 2,432
Income taxes paid........................................................ $ 3,302 $ 1,108 $ 2,995
</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.
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 (NGC).
F-30
<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-31
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JULY 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 1,519 $ 4,423
Accounts and notes receivable........................................................... 23,664 20,817
Inventories............................................................................. 7,316 5,870
Prepaid expenses and deposits........................................................... 1,996 1,586
Deferred income tax benefit............................................................. 802 980
---------- ----------
Total current assets.................................................................. 35,297 33,676
---------- ----------
Property and equipment, at cost less accumulated depreciation............................. 51,495 50,860
Cost in excess of net assets acquired, net of amortization................................ 11,844 9,447
Notes receivable.......................................................................... 1,357 1,108
Deferred charges and other assets......................................................... 6,186 6,454
---------- ----------
$ 106,179 $ 101,545
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
LIABILITIES, MANDATORILY REDEEMABLE SECURITIES
AND STOCKHOLDERS' EQUITY
JULY 31,
--------------------
1996 1995
--------- ---------
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable...................................................... $ 30,824 $ 21,248
Accrued liabilities................................................... 3,101 3,210
Current maturities of long-term debt and capital lease obligations.... 3,924 3,147
--------- ---------
Total current liabilities........................................... 37,849 27,605
--------- ---------
Long-term debt and capital lease obligations............................ 41,801 46,021
Deferred income taxes................................................... 10,777 11,471
Other liabilities....................................................... 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.............................. 8,559 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
Class B voting common stock, $0.01 par value, 200,000 shares
authorized; 149,485 issued and outstanding........................ 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
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
Additional paid-in capital............................................ 8,945 8,969
Accumulated deficit................................................... (5,023) (3,292)
--------- ---------
Total stockholders' equity.......................................... 6,098 7,853
--------- ---------
$ 106,179 $ 101,545
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Sales and other revenue...................................................... $ 384,354 $ 266,842 $ 242,986
Costs and expenses:
Cost of sales, except for depreciation and amortization.................... 351,213 234,538 214,632
Operating expenses......................................................... 21,046 20,239 17,767
General and administrative expenses........................................ 3,835 3,745 3,462
Depreciation and amortization.............................................. 4,216 3,785 3,282
Interest expense........................................................... 5,470 5,120 4,029
---------- ---------- ----------
Loss before income taxes and extraordinary charge............................ (1,426) (585) (186)
Income tax benefit........................................................... (473) (202) (28)
---------- ---------- ----------
Loss before extraordinary charge............................................. (953) (383) (158)
Extraordinary charge for early retirement of debt, net of income tax
benefit.................................................................... -- (506) --
---------- ---------- ----------
Net loss..................................................................... $ (953) $ (889) $ (158)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<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)
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES:
Net loss....................................................................... $ (953) $ (889) $ (158)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization................................................ 4,216 3,785 3,282
Deferred income taxes........................................................ (516) (488) (66)
Extraordinary charge to earnings............................................. -- 506 --
--------- --------- ---------
2,747 2,914 3,058
Changes in assets and liabilities net of acquisitions:
Accounts and notes receivable.............................................. (2,950) (2,700) (5,122)
Inventories................................................................ (1,511) (617) (1,121)
Prepaid expenses and deposits.............................................. (410) 1,451 (1,307)
Other assets............................................................... (193) (495) --
Accounts payable........................................................... 9,327 (3,897) 8,103
Accrued liabilities........................................................ 172 (1,630) 434
--------- --------- ---------
7,182 (4,974) 4,045
--------- --------- ---------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES:
Payments for acquisitions of retail outlets.................................... (3,000) (1,091) (1,030)
Proceeds from sale of property and equipment................................... 415 878 239
Purchases of and investments in property and equipment......................... (3,060) (4,490) (3,421)
Other, net..................................................................... -- -- (890)
--------- --------- ---------
(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.................................................... (1,250) (1,000) (850)
Borrowings on capital leases and other term loans.............................. 1,248 2,263 1,113
Repayment of other notes payable............................................... (561) (739) (741)
Principal payments under capital lease obligations............................. (1,579) (2,929) (1,607)
Borrowings (repayments) under acquisition line................................. (2,275) 1,054 3,041
--------- --------- ---------
(4,441) 11,893 956
--------- --------- ---------
Net (decrease) increase in cash................................................ (2,904) 2,216 (101)
Cash balance, beginning of year................................................ 4,423 2,207 2,308
--------- --------- ---------
Cash balance, end of year...................................................... $ 1,519 $ 4,423 $ 2,207
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<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. (CGI Holdings, a Delaware corporation formed to effect this
transaction) and a major shareholder of Coast Gas Industries ("Industries"); CGI
Holdings 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.
CGI Holdings, Inc. (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 in 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.
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 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
F-37
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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's 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 as of July 31, 1996 and 1995 consist of
the following (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
LPG........................................................................ $ 6,474 $ 5,085
Parts and fittings......................................................... 842 785
--------- ---------
$ 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.
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.
F-38
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
F-39
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
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).
F-40
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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>
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
F-41
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
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, 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 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.
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
F-42
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. MANDATORILY REDEEMABLE SECURITIES (CONTINUED)
accrued and unpaid dividends. The redemption amounts per share at July 31, 1996
and 1995 were $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; accrued dividends were $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>
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>
F-43
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. INCOME TAXES (CONTINUED)
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.
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
F-44
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. LEASES (CONTINUED)
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 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
F-45
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
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 CGI Holdings, Inc., 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 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>
F-46
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
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 July 31, 1996 other than the $11.3 million 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.
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
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.
F-47
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. SUBSEQUENT EVENTS (CONTINUED)
In conjunction with the Merger Agreement, Coast Gas, Inc. will be
terminating its participation and interest in Coast Energy Investments, Inc., a
limited partnership in which Coast Energy Group, Inc. is a 50% limited partner,
on or before the sale of the common stock. The original partnership agreement
provided for a minimum investment term through December 1997. The Company has
entered into an agreement in principal with the general partner as to the terms
of early termination of the partnership agreement in early fiscal 1997. The
settlement will be approximately $600,000 in the form of both cash consideration
and assignment of partnership interest to the general partner.
F-48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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-49
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash...................................................... $ 14
Trade receivables, less allowance for doubtful accounts of
$1,505.................................................. 9,195
Inventories............................................... 7,447
Prepaid expenses.......................................... 678
Deferred income tax benefit............................... 3,727
Due from Former Stockholders.............................. 37,966
------------
Total current assets.................................... 59,027
------------
PROPERTY AND EQUIPMENT:
Land and buildings........................................ 6,420
Storage and consumer service facilities................... 52,953
Transportation, office and other equipment................ 11,910
Less--Accumulated depreciation............................ (2,592)
------------
Total property and equipment............................ 68,691
------------
OTHER ASSETS:
Investments and restricted cash deposits.................. 3,025
Deferred income tax benefit............................... 4,849
Intangible assets, primarily the excess of cost over fair
value of net assets acquired, net of accumulated
amortization............................................ 30,943
Other..................................................... 227
------------
Total other assets...................................... 39,044
------------
$ 166,762
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 1,025
Accounts payable.......................................... 1,604
Accrued expenses.......................................... 2,915
Acquisition related liabilities........................... 29,306
------------
Total current liabilities............................... 34,850
LONG-TERM DEBT.............................................. 25,687
NOTE PAYABLE--RELATED PARTY................................. 52,812
------------
Total liabilities....................................... 113,349
------------
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
Common stock; $0.01 par value; 100,000 shares authorized,
issued and outstanding.................................. 1
Additional paid-in capital................................ 99
Accumulated deficit....................................... (1,999)
------------
Total stockholders' equity.............................. 53,413
------------
$ 166,762
------------
------------
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-50
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD FROM INCEPTION (AUGUST 15, 1995) THROUGH JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUES:
Propane sales............................................. $ 81,706
Appliance and parts sales................................. 5,546
Other..................................................... 8,810
------------
Total revenues.......................................... 96,062
COST OF PRODUCT SOLD........................................ 46,187
------------
Gross profit............................................ 49,875
------------
OPERATING EXPENSES:
Salaries and commissions.................................. 14,520
General and administrative................................ 14,225
Depreciation and amortization............................. 3,329
Related-party corporate administration and management
fees.................................................... 3,281
------------
Total operating expenses................................ 35,355
------------
Operating income........................................ 14,520
INTEREST EXPENSE, including $4,388 to related party......... (5,584)
------------
INCOME BEFORE INCOME TAXES.................................. 8,936
PROVISION FOR INCOME TAXES.................................. 3,675
------------
Net income.............................................. 5,261
DIVIDENDS ON CUMULATIVE PREFERRED STOCK..................... (7,260)
------------
Loss on common stock.................................... $ (1,999)
------------
------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-51
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (AUGUST 15, 1995) THROUGH JUNE 30, 1996
(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)
---------- ------- -------- --- --- ------------
---------- ------- -------- --- --- ------------
<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
-------------
-------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-52
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (AUGUST 15, 1995) THROUGH JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 5,261
Items not requiring (providing) cash--
Depreciation and amortization........................... 3,329
Deferred income tax provision........................... 3,624
Changes in operating items--
Trade receivables....................................... (1,247)
Inventories............................................. 704
Prepaid expenses........................................ 189
Accounts payable........................................ (5,571)
Accrued expenses........................................ (3,423)
----------
Net cash provided by operating activities............. 2,866
----------
INVESTING ACTIVITIES:
Acquisition of assets of Synergy Group Incorporated....... (150,922)
Proceeds from the sale of Synergy Group Incorporated
assets to Empire Energy Corporation..................... 35,980
Purchases of property and equipment, net.................. (8,708)
Decrease in investments and restricted cash deposits...... 70
----------
Net cash used in investing activities................. (123,580)
----------
FINANCING ACTIVITIES:
Borrowing under long-term debt agreements................. 23,910
Proceeds from issuance of common stock.................... 100
Proceeds from issuance of preferred stock................. 52,812
Proceeds from issuance of note payable--related party..... 52,812
Borrowings from related party............................. 36,458
Repayments to related party............................... (36,458)
Payment on long-term debt................................. (1,834)
Preferred stock dividends paid............................ (7,072)
----------
Net cash provided by financing activities............. 120,728
----------
Increase in cash...................................... 14
CASH:
Beginning of period....................................... --
----------
End of period............................................. $ 14
----------
----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-53
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
SYN Inc. (the Company) is engaged in the retail sale of liquid propane gas
primarily in the southern, midwest and eastern 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. The Company was formed to
acquire Synergy Group Incorporated (Synergy).
SYNERGY ACQUISITION
On August 15, 1995, the Company completed its acquisition of Synergy, a
retail distributor of propane with 152 locations. In conjunction with the
acquisition, the Company sold certain retail locations to Empire Energy
Corporation (Energy) for approximately $36 million in cash and the assets of
nine retail locations valued at $2 million.
The total net purchase price paid by the Company for the acquisition of
Synergy 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 the Company. The Company has made a claim against the former
owners of Synergy (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. The Company 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 Synergy acquisition 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 the
Company. An adjustment of the consideration paid for Synergy could also result
in an adjustment in the amount of consideration received from Energy.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
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
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
The Company obtains management services and all of its propane supplies
through Empire Gas Corporation (Empire Gas) which sells such propane to the
Company at cost. Although the Company
F-54
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
believes that alternative sources of propane are readily available, in the event
that Empire Gas ceases to supply propane to the Company 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 the Company.
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. At June 30,
the inventories were as follows (in thousands):
<TABLE>
<S> <C>
Gas and other petroleum products.................. $ 4,058
Gas distribution parts, appliances and
equipment....................................... 4,034
Obsolescence reserve.............................. (645)
-------
$ 7,447
-------
-------
</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 Synergy
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 Synergy acquisition 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.
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 the Company in fiscal 1997, and,
while the Company has
F-55
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 the Company's
financial position or results of operations.
2. RELATED-PARTY TRANSACTIONS:
The Company entered into a Management Service Agreement with Empire Gas, a
30% common stockholder of the Company, under which Empire Gas provides all
management services to the Company 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, the Company 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 note payable to related party represents borrowings by the Company from
Northwestern Public Service Company (the parent corporation of the controlling
stockholder of the Company). This note is subordinate to the Company'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.
The Company 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.
The Company paid $6,343,000 in 1996 to the controlling stockholder of the
Company and $1,103,000 to Empire Gas for reimbursement of costs incurred
relating to the Synergy acquisition.
During 1996, the Company leased, under operating leases, transportation
equipment to Propane Resources Transportation, Inc. (PRT) in which the Company
owns a 15% common stock interest. The Company received $274,000 in lease income
during 1996 from these leases.
3. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<S> <C>
Working capital facility.......................... $23,910
Note payable to Former Stockholders, 9 1/2%
payable in three
equal annual installments through August 15,
1998............................................ 1,250
Other, interest at 7.5% to 11.6%, due through
2001,
collateralized by certain equipment and
materials....................................... 1,552
-------
26,712
Less--Current maturities.......................... 1,025
-------
$25,687
-------
-------
</TABLE>
On December 28, 1995, the Company 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.
The Company 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 the Company.
F-56
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(CONTINUED)
3. LONG-TERM DEBT: (CONTINUED)
Based on the borrowing rates currently available to the Company 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:
The Company leases retail location sales offices under noncancelable
operating leases expiring at various times through 2006. These leases generally
contain renewal options and require the Company to pay all executory costs
(property taxes, maintenance and insurance).
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>
F-57
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(CONTINUED)
5. INCOME TAXES: (CONTINUED)
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, the Company 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 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
The Company 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. The Company
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 the Company's
estimates of the aggregate self-insured liability for claims incurred. The
Company has provided letters of credit aggregating approximately $2.875 million
in connection with these programs.
The Company self-insures for health benefits provided to its employees.
Provisions for losses expected under this program are recorded based upon the
Company's estimate of the aggregate liability for claims incurred.
CONTINGENCIES
The Company and the acquired operations of Synergy 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 the Company's financial position or results of operations.
In conjunction with the Synergy acquisition, the Former Stockholders of
Synergy 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, the Company could
be obligated to fund any additional amounts due and would have to seek
reimbursement from the Former Stockholders for such amounts. The Company 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-58
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(CONTINUED)
7. EMPLOYEE BENEFIT PLAN:
The Company succeeded to the Synergy-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 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. The Company 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, the Company could be obligated to fund these liabilities and
seek reimbursement from the Former Stockholders. The Company 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).
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:
The Company 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 the Company 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 the Company's controlling stockholder which is also in the
process of arranging for alternative management services. The Company does not
expect that this ownership and managerial change will have a significant effect
on its operations or financial position.
F-59
<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 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.
BAIRD, KURTZ & DOBSON
Springfield, Missouri
October 9, 1996
F-60
<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: $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....................................................... 5,284
---------
Retained earnings (deficit)...................................................... (72,601)
---------
(25,576)
---------
$ 96,500
---------
---------
</TABLE>
See Notes to Consolidated Financial Statements
F-61
<PAGE>
SYNERGY GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, PERIOD
---------------------- 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.................................................. 54,735 50,170 20,237
Depreciation and amortization............................................... 5,170 5,100 1,845
---------- ---------- -----------
62,957 59,056 23,008
---------- ---------- -----------
OPERATING INCOME (LOSS)....................................................... 7,276 4,597 (6,216)
---------- ---------- -----------
OTHER INCOME (EXPENSE)
Interest expense............................................................ (13,126) (11,086) (3,223)
Debt restructuring costs.................................................... (2,650) (350) --
Other income................................................................ 152 226 101
Excise tax liability........................................................ (3,667) (794) (444)
---------- ---------- -----------
(19,291) (12,004) (3,566)
---------- ---------- -----------
LOSS BEFORE INCOME TAXES...................................................... (12,015) (7,407) (9,782)
PROVISION (CREDIT) FOR INCOME TAXES........................................... (400) (84) 31
---------- ---------- -----------
NET LOSS...................................................................... $ (11,615) $ (7,323) $ (9,813)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-62
<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
Accrued interest converted to
additional paid-in capital net
of unamortized debt costs....... 5,284 5,284
NET LOSS......................... (7,323) (7,323)
----------- ----------- --- --- ----------- ----------- -------------
BALANCE, MARCH 31, 1995.......... 25,000 16,700 1 40 5,284 (62,788) (15,763)
NET LOSS......................... (9,813) (9,813)
----------- ----------- --- --- ----------- ----------- -------------
BALANCE, AUGUST 14, 1995......... $ 25,000 $ 16,700 $ 1 $ 40 $ 5,284 $ (72,601) $ (25,576)
----------- ----------- --- --- ----------- ----------- -------------
----------- ----------- --- --- ----------- ----------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-63
<PAGE>
SYNERGY GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, PERIOD
--------------------- ENDED
1994 1995 AUGUST 14,
RESTATED RESTATED 1995
---------- --------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss..................................................................... $ (11,615) $ (7,323) $ (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 (3,253) 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-64
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND THE PERIOD 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-65
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND THE PERIOD 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-66
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND THE PERIOD 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-67
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND THE PERIOD 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
F-68
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND THE PERIOD ENDED AUGUST 14, 1995
NOTE 6: RELATED PARTY TRANSACTIONS (CONTINUED)
of March 31, 1995. General and administrative expenses have been reduced in the
year ended March 31, 1995, for such amount.
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.
Rental expense for the year ended March 31, 1995, has been reduced by such
amount.
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-69
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND THE PERIOD 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-70
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND THE PERIOD 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
</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-71
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND THE PERIOD 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 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.
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-72
<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-15
2.4 PURPOSE AND BUSINESS......................................................... A-15
2.5 POWERS....................................................................... A-16
2.6 POWER OF ATTORNEY............................................................ A-16
2.7 TERM......................................................................... A-17
2.8 TITLE TO PARTNERSHIP ASSETS.................................................. A-17
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-18
3.4 RIGHTS OF LIMITED PARTNERS................................................... A-18
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF
PARTNERSHIP INTERESTS; REDEMPTION OF
PARTNERSHIP INTERESTS
4.1 CERTIFICATES................................................................. A-19
4.2 MUTILATED, DESTROYED, LOST OR STOLEN CERTIFICATES............................ A-19
4.3 RECORD HOLDERS............................................................... A-20
4.4 TRANSFER GENERALLY........................................................... A-20
4.5 REGISTRATION AND TRANSFER OF UNITS........................................... A-21
4.6 TRANSFER OF A GENERAL PARTNER'S GENERAL PARTNER INTEREST..................... A-21
4.7 RESTRICTION ON TRANSFER OF SPECIAL GENERAL PARTNER'S GENERAL PARTNER A-22
INTEREST....................................................................
4.8 TRANSFER OF INCENTIVE DISTRIBUTION RIGHTS.................................... A-22
4.9 RESTRICTIONS ON TRANSFERS.................................................... A-22
4.10 CITIZENSHIP CERTIFICATES; NON-CITIZEN ASSIGNEES.............................. A-23
4.11 REDEMPTION OF PARTNERSHIP INTERESTS OF NON-CITIZEN ASSIGNEES................. A-23
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
5.1 ORGANIZATIONAL CONTRIBUTIONS................................................. A-24
5.2 CONTRIBUTIONS BY THE GENERAL PARTNERS........................................ A-24
5.3 CONTRIBUTIONS BY INITIAL LIMITED PARTNERS.................................... A-25
5.4 INTEREST AND WITHDRAWAL...................................................... A-26
5.5 CAPITAL ACCOUNTS............................................................. A-26
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
5.6 ISSUANCES OF ADDITIONAL PARTNERSHIP SECURITIES............................... A-28
5.7 LIMITATIONS ON ISSUANCE OF ADDITIONAL PARTNERSHIP SECURITIES................. A-29
5.8 CONVERSION OF SUBORDINATED UNITS............................................. A-30
5.9 LIMITED PREEMPTIVE RIGHT..................................................... A-31
5.10 SPLITS AND COMBINATION....................................................... A-31
5.11 FULLY PAID AND NON-ASSESSABLE NATURE OF LIMITED PARTNER PARTNERSHIP A-32
INTERESTS...................................................................
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
6.1 ALLOCATIONS FOR CAPITAL ACCOUNT PURPOSES..................................... A-32
6.2 ALLOCATIONS FOR TAX PURPOSES................................................. A-38
6.3 REQUIREMENT AND CHARACTERIZATION OF DISTRIBUTIONS; DISTRIBUTIONS TO RECORD A-40
HOLDERS.....................................................................
6.4 DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS....................... A-40
6.5 DISTRIBUTIONS OF AVAILABLE CASH FROM CAPITAL SURPLUS......................... A-42
6.6 ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION A-42
LEVELS......................................................................
6.7 SPECIAL PROVISIONS RELATING TO THE HOLDERS OF SUBORDINATED UNITS............. A-42
6.8 SPECIAL PROVISIONS RELATING TO THE HOLDERS OF INCENTIVE DISTRIBUTION A-43
RIGHTS......................................................................
6.9 ENTITY-LEVEL TAXATION........................................................ A-43
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
7.1 MANAGEMENT................................................................... A-43
7.2 CERTIFICATE OF LIMITED PARTNERSHIP........................................... A-45
7.3 RESTRICTIONS ON GENERAL PARTNERS' AUTHORITY.................................. A-45
7.4 REIMBURSEMENT OF THE MANAGING GENERAL PARTNER................................ A-46
7.5 OUTSIDE ACTIVITIES........................................................... A-47
7.6 LOANS FROM THE GENERAL PARTNERS; LOANS OR CONTRIBUTIONS FROM THE PARTNERSHIP; A-48
CONTRACTS WITH AFFILIATES; CERTAIN RESTRICTIONS ON THE GENERAL PARTNER......
7.7 INDEMNIFICATION.............................................................. A-49
7.8 LIABILITY OF INDEMNITEES..................................................... A-51
7.9 RESOLUTION OF CONFLICTS OF INTEREST.......................................... A-51
7.10 OTHER MATTERS CONCERNING THE MANAGING GENERAL PARTNER........................ A-52
7.11 INTENTIONALLY DELETED........................................................ A-53
7.12 PURCHASE OR SALE OF UNITS.................................................... A-53
7.13 REGISTRATION RIGHTS OF THE GENERAL PARTNERS AND THEIR AFFILIATES............. A-53
7.14 RELIANCE BY THIRD PARTIES.................................................... A-55
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
8.1 RECORDS AND ACCOUNTING....................................................... A-55
8.2 FISCAL YEAR.................................................................. A-55
8.3 REPORTS...................................................................... A-55
ARTICLE IX
TAX MATTERS
9.1 TAX RETURNS AND INFORMATION.................................................. A-56
9.2 TAX ELECTIONS................................................................ A-56
9.3 TAX CONTROVERSIES............................................................ A-56
9.4 WITHHOLDING.................................................................. A-57
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE X
ADMISSION OF PARTNERS
10.1 ADMISSION OF INITIAL LIMITED PARTNERS........................................ A-57
10.2 ADMISSION OF SUBSTITUTED LIMITED PARTNER..................................... A-57
10.3 ADMISSION OF SUCCESSOR GENERAL PARTNER....................................... A-58
10.4 ADMISSION OF ADDITIONAL LIMITED PARTNERS..................................... A-58
10.5 AMENDMENT OF AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP................ A-58
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
11.1 WITHDRAWAL OF THE MANAGING GENERAL PARTNER................................... A-58
11.2 REMOVAL OF THE MANAGING GENERAL PARTNER...................................... A-60
11.3 INTEREST OF DEPARTING PARTNER AND SUCCESSOR GENERAL PARTNER.................. A-60
11.4 TERMINATION OF SUBORDINATION PERIOD, CONVERSION OF SUBORDINATED UNITS AND A-61
EXTINGUISHMENT OF CUMULATIVE COMMON UNIT ARREARAGES.........................
11.5 WITHDRAWAL OF LIMITED PARTNERS............................................... A-62
ARTICLE XII
DISSOLUTION AND LIQUIDATION
12.1 DISSOLUTION.................................................................. A-62
12.2 CONTINUATION OF THE BUSINESS OF THE PARTNERSHIP AFTER DISSOLUTION............ A-62
12.3 LIQUIDATOR................................................................... A-63
12.4 LIQUIDATION.................................................................. A-63
12.5 CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP........................... A-64
12.6 RETURN OF CONTRIBUTIONS...................................................... A-64
12.7 WAIVER OF PARTITION.......................................................... A-64
12.8 CAPITAL ACCOUNT RESTORATION.................................................. A-64
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
13.1 AMENDMENT TO BE ADOPTED SOLELY BY THE MANAGING GENERAL PARTNER............... A-65
13.2 AMENDMENT PROCEDURES......................................................... A-66
13.3 AMENDMENT REQUIREMENTS....................................................... A-66
13.4 SPECIAL MEETINGS............................................................. A-67
13.5 NOTICE OF A MEETING.......................................................... A-67
13.6 RECORD DATE.................................................................. A-67
13.7 ADJOURNMENT.................................................................. A-67
13.8 WAIVER OF NOTICE; APPROVAL OF MEETING; APPROVAL OF MINUTES................... A-68
13.9 QUORUM....................................................................... A-68
13.10 CONDUCT OF A MEETING......................................................... A-68
13.11 ACTION WITHOUT A MEETING..................................................... A-69
13.12 VOTING AND OTHER RIGHTS...................................................... A-69
ARTICLE XIV
MERGER
14.1 AUTHORITY.................................................................... A-69
14.2 PROCEDURE FOR MERGER OR CONSOLIDATION........................................ A-70
14.3 APPROVAL BY UNITHOLDERS OF MERGER OR CONSOLIDATION........................... A-70
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C> <C>
14.4 CERTIFICATE OF MERGER........................................................ A-71
14.5 EFFECT OF MERGER............................................................. A-71
ARTICLE XV
RIGHT TO ACQUIRE UNITS
15.1 RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS................................... A-72
ARTICLE XVI
GENERAL PROVISIONS
16.1 ADDRESSES AND NOTICES........................................................ A-73
16.2 FURTHER ACTION............................................................... A-74
16.3 BINDING EFFECT............................................................... A-74
16.4 INTEGRATION.................................................................. A-74
16.5 CREDITORS.................................................................... A-74
16.6 WAIVER....................................................................... A-74
16.7 COUNTERPARTS................................................................. A-74
16.8 APPLICABLE LAW............................................................... A-74
16.9 INVALIDITY OF PROVISIONS..................................................... A-74
16.10 CONSENT OF PARTNERS.......................................................... A-75
</TABLE>
v
<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 , 1996, is entered into by and
among Cornerstone Propane GP, Inc., a Delaware corporation, as the Managing
General Partner, SYN Inc., a Delaware corporation, as Special General Partner
and , as the Organizational Limited Partner, together with any other
Persons who become Partners in the Partnership or parties hereto as provided
herein. In consideration of the covenants, conditions and agreements contained
herein, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"Acquisition" means any transaction in which any Group Member acquires
(through an asset acquisition, merger, stock acquisition or other form of
investment) control over all or a portion of the assets, properties or business
of another Person for the purpose of increasing the operating capacity or
revenues of the Partnership Group from the operating capacity or revenues of the
Partnership Group existing immediately prior to such transaction.
"Additional Book Basis" means the portion of any remaining Carrying Value of
an Adjusted Property that is attributable to positive adjustments made to such
Carrying Value as a result of Book-Up Events. For purposes of determining the
extent to which Carrying Value constitutes Additional Book Basis:
(i) Any negative adjustment made to the Carrying Value of an Adjusted
Property as a result of either a Book-Down Event or a Book-Up Event shall
first be deemed to offset or decrease that portion of the Carrying Value of
such Adjusted Property that is attributable to any prior positive
adjustments made thereto pursuant to a Book-Up Event or Book-Down Event.
(ii) If Carrying Value that constitutes Additional Book Basis is reduced
as a result of a Book-Down Event and the Carrying Value of other property is
increased as a result of such Book-Down Event, an allocable portion of any
such increase in Carrying Value shall be treated as Additional Book Basis;
provided that the amount treated as Additional Book Basis pursuant hereto as
a result of such Book-Down Event shall not exceed the amount by which the
Aggregate Remaining Net Positive Adjustments after such Book-Down Event
exceeds the remaining Additional Book Basis attributable to all of the
Partnership's Adjusted Property after such Book-Down Event (determined
without regard to the application of this clause (ii) to such Book-Down
Event).
"Additional Book Basis Derivative Items" means any Book Basis Derivative
Items that are computed with reference to Additional Book Basis. To the extent
that the Additional Book Basis attributable to all of the Partnership's Adjusted
Property as of the beginning of any taxable period exceeds the Aggregate
Remaining Net Positive Adjustments as of the beginning of such period (the
"Excess Additional Book Basis"), the Additional Book Basis Derivative Items for
such period shall be reduced by the amount that bears the same ratio to the
amount of Additional Book Basis Derivative Items determined without regard to
this sentence as the Excess Additional Book Basis bears to the Additional Book
Basis as of the beginning of such period.
A-1
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"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 thereof pursuant to Section 708 of the
Code, such property shall thereafter constitute a Contributed Property until the
Carrying Value of such property is subsequently adjusted pursuant to Section
5.5(d)(i) or 5.5(d)(ii).
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly through one or more intermediaries controls, is
controlled by or is under common control with, the Person in question. As used
herein, the term "control" means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
Person, whether through ownership of voting securities, by contract or
otherwise.
"Aggregate Remaining Net Positive Adjustments" means, as of the end of any
taxable period, the sum of the Remaining Net Positive Adjustments of all the
Partners.
"Agreed Allocation" means any allocation, other than a Required Allocation,
of an item of income, gain, loss or deduction pursuant to the provisions of
Section 6.1, including, without limitation, a Curative Allocation (if
appropriate to the context in which the term "Agreed Allocation" is used).
"Agreed Value" of any Contributed Property means the fair market value of
such property or other consideration at the time of contribution as determined
by the Managing General Partner using such
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reasonable method of valuation as it may adopt; provided, however, that the
Agreed Value of any property deemed contributed to the Partnership for federal
income tax purposes upon termination and reconstitution thereof pursuant to
Section 708 of the Code shall be determined in accordance with Section
5.5(c)(i). Subject to Section 5.5(c)(i), the 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
Units have been transferred in a manner permitted under this Agreement and who
has executed and delivered a Transfer Application as required by this Agreement,
but who has not been admitted as a Substituted Limited Partner.
"Associate" means, when used to indicate a relationship with any Person, (a)
any corporation or organization of which such Person is a director, officer or
partner or is, directly or indirectly, the owner of 20% or more of any class of
voting stock or other voting interest; (b) any trust or other estate in which
such Person has at least a 20% beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity; and (c) any relative or
spouse of such Person, or any relative of such spouse, who has the same
principal residence as such Person.
"Audit Committee" means a committee of the Board of Directors of the
Managing General Partner composed entirely of two or more directors who are
neither officers nor employees of either of the General Partners or 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) subsequent to such Quarter, (ii)
comply with applicable law or any loan agreement, security agreement,
mortgage, debt instrument or other agreement or obligation to which any
member of the Partnership Group is a party or by which it is bound or its
assets are subject or (iii) provide funds for distributions under Section
6.4 or 6.5 in respect of any one or more of the next four Quarters;
provided, however, that the 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, 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).
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"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 Improvements" means (a) additions or improvements to the capital
assets owned by any Group Member or (b) the acquisition of existing or the
construction of new capital assets (including retail distribution outlets,
propane tanks, pipeline systems, storage facilities, appliance showrooms,
training facilities and related assets), made to increase the operating capacity
of the Partnership Group from the operating capacity of the Partnership Group
existing immediately prior to such addition, improvement, acquisition or
construction.
"Capital Surplus" has the meaning assigned to such term in Section 6.3(a).
"Carrying Value" means (a) with respect to a Contributed Property, the
Agreed Value of such property reduced (but not below zero) by all depreciation,
amortization and cost recovery deductions charged to the Partners' and
Assignees' Capital Accounts in respect of such Contributed Property, and (b)
with respect to any other Partnership property, the adjusted basis of such
property for federal income tax purposes, all as of the time of determination.
The Carrying Value of any property shall be adjusted from time to time in
accordance with Sections 5.5(d)(i) and 5.5(d)(ii) and to reflect changes,
additions or other adjustments to the Carrying Value for dispositions and
acquisitions of Partnership properties, as deemed appropriate by the Managing
General Partner.
"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 Interests.
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"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).
"Cornerstone Propane GP, Inc." means Cornerstone Propane GP, Inc., a
Delaware corporation, which is currently the Managing General Partner of the
Partnership.
"Code" means the Internal Revenue Code of 1986, as amended and in effect
from time to time. Any reference herein to a specific section or sections of the
Code shall be deemed to include a reference to any corresponding provision of
future law.
"Combined Interest" has the meaning assigned to such term in Section
11.3(a).
"Commission" means the United States Securities and Exchange Commission.
"Common Unit" means a Unit representing a fractional part of the Partnership
Interests of all Limited Partners and Assignees and of the General 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 such Common Unit in
respect of such Quarter over (b) the sum of all Available Cash distributed with
respect to such Common Unit in respect of such Quarter pursuant to Section
6.4(a)(i).
"Contributed Property" means each property or other asset, in such form as
may be permitted by the Delaware Act, but excluding cash, contributed to the
Partnership (or deemed contributed to the Partnership on termination and
reconstitution thereof pursuant to Section 708 of the Code). Once the Carrying
Value of a Contributed Property is adjusted pursuant to Section 5.5(d), such
property shall no longer constitute a Contributed Property, but shall be deemed
an Adjusted Property.
"Contribution and Conveyance Agreement" means that certain Contribution,
Conveyance and Assumption Agreement, dated as of the Closing Date, among the
General Partners, the Partnership, the Operating Partnership and certain other
parties, together with the additional conveyance documents and instruments
contemplated or referenced thereunder.
"Cumulative Common Unit Arrearage" means, with respect to any Common Unit,
whenever issued, and as of the end of any Quarter, the excess, if any, of (a)
the sum resulting from adding together the Common Unit Arrearage as to an
Initial Common Unit for each of the Quarters within the Subordination Period
ending on or before the last day of such Quarter over (b) the sum of any
distributions theretofore made pursuant to Section 6.4(a)(ii) and the second
sentence of Section 6.5 with respect to an Initial Common Unit (including any
distributions to be made in respect of the last of such Quarters).
"Curative Allocation" means any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 6.1(d)(xi).
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"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).
"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. 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. 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 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 the Partnership, the Operating Partnership or any other Subsidiary,
(c) any Person who is or was an officer, director, employee, agent or trustee of
any General Partner or any Departing Partner or any such Affiliate, (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,
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.
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"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 it pursuant
to Section 5.2) and the Underwriters, in each case upon being admitted to the
Partnership in accordance with Section 10.1.
"Initial Offering" means the initial offering and sale of Common Units to
the public, as described in the Registration Statement.
"Initial Unit Price" means (a) with respect to the Common Units and the
Subordinated Units, the initial public offering price per Common Unit at which
the Underwriters offered the Common Units to the public for sale as set forth on
the cover page of the prospectus included as part of the Registration Statement
and first issued at or after the time the Registration Statement first became
effective or (b) with respect to any other class or series of Units, the price
per Unit at which such class or series of Units is initially sold by the
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, any Partner upon the change of
its status from General Partner to Limited Partner pursuant to Section 11.3 or
(b) solely for purposes of Articles V, VI, VII and IX and Sections 12.3 and
12.4, each Assignee.
"Liquidation Date" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in clauses (a) and (b) of
the first sentence of Section 12.2, the date on which the applicable time period
during which the holders of Outstanding Units have the right to elect to
reconstitute the Partnership and continue its business has expired without such
an election being made, and (b) in the case of any other event giving rise to
the dissolution of the Partnership, the date on which such event occurs.
"Liquidator" means one or more Persons selected by the Managing General
Partner to perform the functions described in Section 12.3.
"Managing General Partner" means Cornerstone Propane GP, Inc. and its
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. 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. 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.
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"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.
"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.
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"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 $200 million of Senior Secured Notes issued by the
Operating Partnership in conjunction with the Initial Offering.
"Notice of Election to Purchase" has the meaning assigned torr 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.
"Operating Partnership" means Cornerstone Operating L.P., a Delaware limited
partnership, and any successors thereto.
"Operating Partnership Agreement" means the Amended and Restated Agreement
of Limited Partnership of the Operating Partnership, as it may be amended,
supplemented or restated from time to time.
"Operating Surplus," means, with respect to any period ending prior to the
Liquidation Date, on a cumulative basis and without duplication,
(a) the sum of (i) $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,
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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 such Common Units shall
be considered to be Outstanding for purposes of Section 11.1(b)(iv) (such Common
Units shall not, however, be treated as a separate class of Partnership
Securities for purposes of this Agreement).
"Over-allotment Option" means the over-allotment option granted to the
Underwriters by the Partnership pursuant to the Underwriting Agreement.
"Parity Units" means Common Units and all other Units having rights to
distributions or in liquidation ranking on a parity with the Common Units.
"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.
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"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), 1.0%, (b) as to any
Unitholder or Assignee holding Units, the product of (i) 99% less the percentage
applicable to paragraph (c) multiplied by (ii) the quotient of the number of
Units held by such Unitholder or Assignee divided by the total number of all
Outstanding Units, and (c) as to the holders of additional Partnership
Securities issued by the Partnership in accordance with Section 5.6, the
percentage established as a part of such issuance. The Percentage Interest with
respect to an Incentive Distribution Right shall at all times be zero.
"Person" means an individual or a corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization, association,
government agency or political subdivision thereof or other entity.
"Per Unit Capital Amount" means, as of any date of determination, the
Capital Account, stated on a per Unit basis, underlying any Unit held by a
Person other than the General Partners or any Affiliate of a General Partner who
holds Units.
"Pro Rata" means (a) when modifying Units or any class thereof, apportioned
equally among all designated Units in accordance with their relative Percentage
Interests, (b) when modifying Partners, Unitholders and Assignees, in accordance
with their respective Percentage Interests, (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 % to the Managing General Partner and
% 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
participate in any offer.
"Record Holder" means the Person in whose name a Common Unit is registered
on the books of the Transfer Agent as of the opening of business on a particular
Business Day, or with respect to a holder of a
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general partner interest, a Subordinated Unit, an Incentive Distribution Right
or other Partnership Interest, the Person in whose name such general partner
interest, Subordinated Unit, Incentive Distribution Right or other Partnership
Interest is registered on the books which the 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. 333-4018) as it has been or as it may be amended or
supplemented from time to time, filed by the Partnership with the Commission
under the Securities Act to register the offering and sale of the Common Units
in the Initial Offering.
"Remaining Net Positive Adjustments" means as of the end of any taxable
period, (i) with respect to the Unitholders holding Common Units or Subordinated
Units, the excess of (a) the Net Positive Adjustments of the Unitholders holding
Common Units or Subordinated Units as of the end of such period over (b) the sum
of those Partners' Share of Additional Book Basis Derivative Items for each
prior taxable period, (ii) with respect to the General 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.
"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. 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. 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
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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" mean SYN and it 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
(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.
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"Third Target Distribution" means $0. 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. 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 Units.
"Transfer Application" means an application and agreement for transfer of
Units in the form set forth on the back of a Certificate or in a form
substantially to the same effect in a separate instrument.
"Underwriter" means each Person named as an underwriter in Schedule I to the
Underwriting Agreement who purchases Common Units pursuant thereto.
"Underwriting Agreement" means the Underwriting Agreement dated June 25,
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.
"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).
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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 General Partners 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 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.
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 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 CT Corporation System. 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 to
enter into or form any corporation, partnership, joint venture, limited
liability company or other arrangement to engage indirectly in, any business
activity that the Operating Partnership is permitted to engage in by the
Operating
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Partnership Agreement and, in connection therewith, to exercise all of the
rights and powers conferred upon the Partnership pursuant to the agreements
relating to such business activity, (c) engage directly in, or to enter into or
form any corporation, partnership, joint venture, limited liability company or
other arrangement to engage indirectly in, any business activity that is
approved by the 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) generated "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.
2.6 POWER OF ATTORNEY
(a) 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,
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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 Limited
Partner's or Assignee's Partnership Interest and shall extend to such Limited
Partner's or Assignee's heirs, successors, assigns and personal representatives.
Each such Limited Partner or Assignee hereby agrees to be bound by any
representation made by the Managing General Partner or the Liquidator acting in
good faith pursuant to such power of attorney; and each such Limited Partner or
Assignee, to the maximum extent permitted by law, hereby waives any and all
defenses that may be available to contest, negate or disaffirm the action of the
Managing General Partner or the Liquidator taken in good faith under such power
of attorney. Each Limited Partner or Assignee shall execute and deliver to the
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 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 termination of the Partnership in accordance with the provisions of
Article XII.
2.8 TITLE TO PARTNERSHIP ASSETS
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partner or Assignee, individually or collectively, shall have any
ownership interest in such Partnership assets or any portion thereof. Title to
any or all of the Partnership assets may be held in the name of the Partnership,
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
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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 (other than the Managing General Partner or
any of its Affiliates or any officer, director, employee, partner, agent or
trustee of the Managing General Partner or any of its Affiliates, or any
director, employee or agent of a Group Member, in its capacity as such, if such
Person shall also be a Limited Partner or Assignee) shall participate in the
operation, management or control (within the meaning of the Delaware Act) of the
Partnership's business, transact any business in the Partnership's name or have
the power to sign documents for or otherwise bind the Partnership. Any action
taken by any Affiliate of the Managing General Partner or any officer, director,
employee, partner, agent or trustee of the Managing General Partner or any of
its Affiliates, or any director, employee or agent of a Group Member, in its
capacity as such, shall not be deemed to be participation in the control of the
business of the Partnership by a limited partner of the Partnership (within the
meaning of Section 17-303(a) of the Delaware Act) and shall not affect, impair
or eliminate the limitations on the liability of the Limited Partners or
Assignees under this Agreement.
3.3 OUTSIDE ACTIVITIES OF THE LIMITED PARTNERS
Subject to the provisions of Section 7.5, which shall continue to be
applicable to the Persons referred to therein, regardless of whether such
Persons shall also be Limited Partners or Assignees, any Limited Partner or
Assignee shall be entitled to and may have business interests and engage in
business activities in addition to those relating to the Partnership, including
business interests and activities in direct competition with the Partnership
Group. Neither the Partnership nor any of the other Partners or Assignees shall
have any rights by virtue of this Agreement in any business ventures of any
Limited Partner or Assignee.
3.4 RIGHTS OF LIMITED PARTNERS
(a) In addition to other rights provided by this Agreement or by applicable
law, and except as limited by Section 3.4(b), each Limited Partner shall have
the right, for a purpose reasonably related to such Limited Partner's interest
as a limited partner in the Partnership, upon reasonable written demand and at
such Limited Partner's own expense:
(i) to obtain true and full information regarding the status of the
business and financial condition of the Partnership;
(ii) promptly after becoming available, to obtain a copy of the
Partnership's federal, state and local tax returns for each year;
(iii) to have furnished to him a current list of the name and last known
business, residence or mailing address of each Partner;
(iv) to have furnished to him a copy of this Agreement and the
Certificate of Limited Partnership and all amendments thereto, together with
a copy of the executed copies of all powers of attorney
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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 the primary purpose of which is to circumvent the obligations set
forth in this Section 3.4).
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF
PARTNERSHIP INTERESTS; REDEMPTION OF PARTNERSHIP
INTERESTS
4.1 CERTIFICATES
Upon the Partnership's issuance of Common Units or Subordinated Units to any
Person, the Partnership shall issue one or more Certificates in the name of such
Person evidencing the number of such Units being so issued. In addition, (a)
upon a General Partner's request, the Partnership shall issue to it one or more
Certificates in the name of each of the General Partners evidencing their
interests in the Partnership and (b) upon the request of any Person owning
Incentive Distribution Rights, the Partnership shall issue to such Person one or
more certificates evidencing such Incentive Distribution Rights. Certificates
shall be executed on behalf of the Partnership by the Managing General Partner.
No Common Unit Certificate shall be valid for any purpose until it has been
countersigned by the Transfer Agent. The Partners holding Certificates
evidencing Subordinated Units may exchange such Certificates for Certificates
evidencing Common Units on or after the date on which such Subordinated Units
are converted into Common Units pursuant to the terms of Section 5.8.
4.2 MUTILATED, DESTROYED, LOST OR STOLEN CERTIFICATES
(a) If any mutilated Certificate is surrendered to the Transfer Agent, the
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 of Units as the Certificate so
surrendered.
(b) The Managing General Partner shall execute, and the Transfer Agent shall
countersign and deliver a new Certificate in place of any Certificate previously
issued if the Record Holder of the Certificate:
(i) makes proof by affidavit, in form and substance satisfactory to the
Partnership, that a previously issued Certificate has been lost, destroyed
or stolen;
(ii) requests the issuance of a new Certificate before the Partnership
has notice that the Certificate has been acquired by a purchaser for value
in good faith and without notice of an adverse claim;
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(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 Units 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 and the Transfer Agent for such transfer or for a new Certificate.
(c) As a condition to the issuance of any new Certificate under this Section
4.2, the Partnership may require the payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in relation thereto and any
other expenses (including the fees and expenses of the Transfer Agent)
reasonably connected therewith.
4.3 RECORD HOLDERS
The Partnership shall be entitled to recognize the Record Holder as the
Partner or Assignee with respect to any Partnership Interest and, accordingly,
shall not be bound to recognize any equitable or other claim to or interest in
such Partnership Interest on the part of any other Person, regardless of whether
the Partnership shall have actual or other notice thereof, except as otherwise
provided by law or any applicable rule, regulation, guideline or requirement of
any National Securities Exchange on which the Units are listed for trading.
Without limiting the foregoing, when a Person (such as a broker, dealer, bank,
trust company or clearing corporation or an agent of any of the foregoing) is
acting as nominee, agent or in some other representative capacity for another
Person in acquiring and/or holding Units, as between the Partnership on the one
hand, and such other Persons on the other, such representative Person (a) shall
be the Partner or Assignee (as the case may be) of record and beneficially, (b)
must execute and deliver a Transfer Application and (c) shall be bound by this
Agreement and shall have the rights and obligations of a Partner or Assignee (as
the case may be) hereunder and as, and to the extent, provided for herein.
4.4 TRANSFER GENERALLY
(a) The term "transfer," when used in this Agreement with respect to a
Partnership Interest, shall be deemed to refer to a transaction by which a
General Partner assigns its Partnership Interest as a general partner in the
Partnership to another Person, by which the holder of a Unit assigns such Unit
to another Person who is or becomes a Partner or an Assignee, by which the
holder of an Incentive Distribution Right assigns such Partnership Interest to
another Person, and includes a sale, assignment, gift, pledge, encumbrance,
hypothecation, mortgage, exchange or any other disposition by law or otherwise.
(b) No Partnership Interest shall be transferred, in whole or in part,
except in accordance with the terms and conditions set forth in this Article IV.
Any transfer or purported transfer of a Partnership Interest not made in
accordance with this Article IV shall be null and void.
(c) Nothing contained in this Agreement shall be construed to prevent a
disposition by any shareholder of a General Partner of any or all of the issued
and outstanding capital stock of a General Partner.
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4.5 REGISTRATION AND TRANSFER OF UNITS
(a) The Partnership shall keep or cause to be kept on behalf of the
Partnership a register in which, subject to such reasonable regulations as it
may prescribe and subject to the provisions of Section 4.5(b), the Partnership
will provide for the registration and transfer of Units. The Transfer Agent is
hereby appointed registrar and transfer agent for the purpose of registering
Common Units and transfers of such Common Units as herein provided. The
Partnership shall not recognize transfers of Certificates representing Units
unless such transfers are effected in the manner described in this Section 4.5.
Upon surrender for registration of transfer of any Units evidenced by a
Certificate, and subject to the provisions of Section 4.5(b), the appropriate
officers on behalf of the Partnership shall execute, and in the case of Common
Units, the Transfer Agent shall countersign and deliver, in the name of the
holder or the designated transferee or transferees, as required pursuant to the
holder's instructions, one or more new Certificates evidencing the same
aggregate number of Units as was evidenced by the Certificate so surrendered.
(b) Except as otherwise provided in Section 4.10, the Partnership shall not
recognize any transfer of Units until the Certificates evidencing such Units are
surrendered for registration of transfer and such Certificates are accompanied
by a Transfer Application duly executed by the transferee (or the transferee's
attorney-in-fact duly authorized in writing). No charge shall be imposed by the
Partnership for such transfer; provided, that as a condition to the issuance of
any new Certificate under this Section 4.5, the Partnership may require the
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed with respect thereto.
(c) Units may be transferred only in the manner described in this Section
4.5. The transfer of any Units and the admission of any new Partner shall not
constitute an amendment to this Agreement.
(d) Until admitted as a Substituted Limited Partner pursuant to Section
10.2, the Record Holder of a Unit shall be an Assignee in respect of such Unit.
Limited Partners may include custodians, nominees or any other individual or
entity in its own or any representative capacity.
(e) A transferee who has completed and delivered a Transfer Application
shall be deemed to have (i) requested admission as a Substituted Limited
Partner, (ii) agreed to comply with and be bound by and to have executed this
Agreement, (iii) represented and warranted that such transferee has the right,
power and authority and, if an individual, the capacity to enter into this
Agreement, (iv) granted the powers of attorney set forth in this Agreement and
(v) given the consents and approvals and made the waivers contained in this
Agreement.
(f) The General Partners 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
Except for a transfer by one of the General Partners 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, (which in any such case, shall only be limited by
the other provisions of this Section 4.6), 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 has been
approved by the prior written consent or vote of the holders of at least a Unit
Majority. Notwithstanding anything herein to the contrary, no transfer by 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
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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 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 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
A holder of Incentive Distribution Rights may transfer any or all of the
Incentive Distribution Rights held by such holder to any transferee without any
consent of the Unitholders.
4.9 RESTRICTIONS ON TRANSFERS
(a) Notwithstanding the other provisions of this Article IV, no transfer of
any Partnership Interest shall be made if such transfer would (i) violate the
then applicable federal or state securities laws or rules and regulations of the
Commission, any state securities commission or any other governmental
authorities with jurisdiction over such transfer, (ii) terminate the existence
or qualification of the Partnership or the Operating Partnership under the laws
of the jurisdiction of its formation, or (iii) cause the Partnership or the
Operating Partnership to be treated as an association taxable as a corporation
or otherwise to be taxed as an entity for federal income tax purposes (to the
extent not already so treated or taxed).
(b) The 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 Units on the principal National Securities
Exchange on which such class of Units is then traded must be approved, prior to
such amendment being effected, by the holders of at least a majority of the
Outstanding Units of such class.
(c) The transfer of a Subordinated Unit that has converted into a Common
Unit shall be subject to the restrictions imposed by Section 6.7(b).
(d) 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 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 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
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 Partner or Assignee is not an Eligible Citizen, the
Partnership Interests owned by such 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 Partner in respect of his Units.
(b) The Managing General Partner shall, in exercising voting rights in
respect of Units held by it on behalf of Non-citizen Assignees, distribute the
votes in the same ratios as the votes of Partners (including without limitation
the General Partners) in respect of Units other than those of Non-citizen
Assignees are cast, either for, against or abstaining as to the matter.
(c) [Intentionally Deleted]
(d) At any time after he can and does certify that he has become an Eligible
Citizen, a Non-citizen Assignee may, upon application to the Managing General
Partner, request admission as a Substituted Limited Partner with respect to any
Units of such Non-citizen Assignee not redeemed pursuant to Section 4.11, and
upon his admission pursuant to Section 10.2, the Managing General Partner shall
cease to be deemed to be the Limited Partner in respect of the Non-citizen
Assignee's Units.
4.11 REDEMPTION OF PARTNERSHIP INTERESTS OF NON-CITIZEN ASSIGNEES
(a) If at any time a Partner or Assignee fails to furnish a Citizenship
Certification or other information requested within the 30-day period specified
in Section 4.10(a), or if upon receipt of such Citizenship Certification or
other information the Managing General Partner determines, with the advice of
counsel, that a Partner or Assignee is not an Eligible Citizen, the Partnership
may, unless the Partner or Assignee establishes to the satisfaction of the
Managing General Partner that such Partner or Assignee is an Eligible Citizen or
has transferred his Partnership Interests to a Person who is an Eligible Citizen
and who furnishes a Citizenship Certification to the Managing General Partner
prior to the date fixed for redemption as provided below, redeem the Partnership
Interest of such Partner or Assignee as follows:
(i) The Managing General Partner shall, not later than the 30th day
before the date fixed for redemption, give notice of redemption to the
Partner or Assignee, at his last address designated on the records of the
Partnership or the Transfer Agent, by registered or certified mail, postage
prepaid. The notice shall be deemed to have been given when so mailed. The
notice shall specify the Redeemable Interests, the date fixed for
redemption, the place of payment, that payment of the redemption price will
be made upon surrender of the Certificate evidencing the Redeemable
Interests and that on and after the date fixed for redemption no further
allocations or distributions to which the Partner or Assignee would
otherwise be entitled in respect of the Redeemable Interests will accrue or
be made.
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(ii) The aggregate redemption price for Redeemable Interests shall be an
amount equal to the Current Market Price (the date of determination of which
shall be the date fixed for redemption) of Partnership Interests of the
class to be so redeemed multiplied by the number of Partnership Interests of
each such class included among the Redeemable Interests. The redemption
price shall be paid, in the discretion of the 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 Partner or Assignee, at the
place specified in the notice of redemption, of the Certificate evidencing
the Redeemable Interests, duly endorsed in blank or accompanied by an
assignment duly executed in blank, the Partner or Assignee or his duly
authorized representative shall be entitled to receive the payment therefor.
(iv) After the redemption date, Redeemable Interests shall no longer
constitute issued and Outstanding Partnership Interests.
(b) The provisions of this Section 4.11 shall also be applicable to
Partnership Interests held by a Partner or Assignee as nominee of a Person
determined to be other than an Eligible Citizen.
(c) Nothing in this Section 4.11 shall prevent the recipient of a notice of
redemption from transferring his Partnership Interests before the redemption
date if such transfer is otherwise permitted under this Agreement. Upon receipt
of notice of such a transfer, the Managing General Partner shall withdraw the
notice of redemption, provided the transferee of such Partnership Interests
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 $ , for an interest in the Partnership
and has been admitted as the Managing General Partner of the Partnership, the
Special General Partner made an initial Capital Contribution to the Partnership
in the amount of $ for an interest in the Partnership and has been
admitted as the Special General Partner, and the Organizational Limited Partner
made an initial Capital Contribution to the Partnership in the amount of
$ for an interest in the Partnership and has been admitted as a
Limited Partner of the Partnership. As of the Closing Date, the interest of the
Organizational Limited Partner shall be redeemed as provided in the Contribution
and Conveyance Agreement; the initial Capital Contributions of each Partner
shall thereupon be refunded; and the Organizational Limited Partner shall cease
to be a Limited Partner of the Partnership. Ninety-nine percent of any interest
or other profit that may have resulted from the investment or other use of such
initial Capital Contributions shall be allocated and distributed to the
Organizational Limited Partner, and the balance thereof shall be allocated and
distributed to the General Partners, Pro Rata.
5.2 CONTRIBUTIONS BY THE GENERAL PARTNERS
(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) the continuation of its Partnership
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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) Subordinated Units and (iii) 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) the continuation of its Partnership Interest as
Special General Partner of the Partnership , (ii) Subordinated
Units, and (iii) Incentive Distribution Rights.
(c) 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 and Article XII, the General Partners shall not be obligated
to make any additional Capital Contributions to the Partnership.
(d) 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 additional Subordinated Units. The cash received by
the Partnership pursuant to this Section 5.2(b) shall be used to satisfy the NPS
Note. The Partnership shall issue a number of Subordinated Units for such cash
contribution so that the Subordinated Units so issued will have the same Issue
Price as the Initial Common Units.
5.3 CONTRIBUTIONS BY INITIAL LIMITED PARTNERS
(a) On the Closing Date and pursuant to the Underwriting Agreement, each
Underwriter shall contribute to the Partnership cash in an amount equal to the
Issue Price per Initial Common Unit, multiplied by the number of Common Units
specified in the Underwriting Agreement to be purchased by such Underwriter at
the "Closing Date," as such term is defined in the Underwriting Agreement. In
exchange for such Capital Contributions by the Underwriters, the Partnership
shall issue Common Units to each Underwriter on whose behalf such Capital
Contribution is made in an amount equal to the quotient obtained by dividing (i)
the cash contribution to the Partnership by or on behalf of such Underwriter by
(ii) the Issue Price per Initial Common Unit.
(b) Upon the exercise of the Over-allotment Option, each Underwriter shall
contribute to the Partnership cash in an amount equal to the Issue Price per
Initial Common Unit, multiplied by the number of Common Units specified in the
Underwriting Agreement to be purchased by such Underwriter at the Option 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.
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 pay the NPS Note; and
third, the remaining proceeds (if any) will be distributed to the General
Partners, Pro Rata, in redemption of Subordinated Units equal in number to the
Common Units, net of underwriters discounts and commissions, issued in exchange
for such remaining proceeds.
(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
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to 8,975,000 and (ii) the "Optional Units" as such term is defined in the
Underwriting Agreement in aggregate number up to 1,346,250 issuable upon
exercise of the Over-allotment Option pursuant to subparagraph (b) hereof, (iii)
the 8,296,314 Subordinated Units issuable to the General Partners pursuant to
Section 5.2 hereof, and (iv) the 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,
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. 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.
(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
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described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without
regard to the fact that such items are not includable in gross income or are
neither currently deductible nor capitalized for federal income tax
purposes.
(iv) Any income, gain or loss attributable to the taxable disposition of
any Partnership property shall be determined as if the adjusted basis of
such property as of such date of disposition were equal in amount to the
Partnership's Carrying Value with respect to such property as of such date.
(v) In accordance with the requirements of Section 704(b) of the Code,
any deductions for depreciation, cost recovery or amortization attributable
to any Contributed Property shall be determined as if the adjusted basis of
such property on the date it was acquired by the Partnership were equal to
the Agreed Value of such property. Upon an adjustment pursuant to Section
5.5(d) to the Carrying Value of any Partnership property subject to
depreciation, cost recovery or amortization, any further deductions for such
depreciation, cost recovery or amortization attributable to such property
shall be determined (A) as if the adjusted basis of such property were equal
to the Carrying Value of such property immediately following such adjustment
and (B) using a rate of depreciation, cost recovery or amortization derived
from the same method and useful life (or, if applicable, the remaining
useful life) as is applied for federal income tax purposes; provided,
however, that, if the asset has a zero adjusted basis for federal income tax
purposes, depreciation, cost recovery or amortization deductions shall be
determined using any reasonable method that the 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) Except as otherwise provided in Section 5.5(c)(ii), a transferee of
a Partnership Interest shall succeed to a pro rata portion of the Capital
Account of the transferor relating to the Partnership Interest so transferred;
provided, however, that, if the transfer causes a termination of the Partnership
under Section 708(b)(1)(B) of the Code, the Partnership's properties and
liabilities shall be deemed (i) to have been distributed in liquidation of the
Partnership to the Partners (including any transferee of a Partnership Interest
that is a party to the transfer causing such termination) pursuant to Section
12.4 (after adjusting the balance of the Capital Accounts of the Partners as
provided in Section 5.5(d)(ii)) and recontributed by such Partners in
reconstitution of the Partnership or (ii) to be treated as mandated by Treasury
Regulations issued pursuant to Sections 708 and 704 of the Code as amended. Any
such deemed contribution and distribution shall be treated as an actual
contribution and distribution for purposes of this Section 5.5. In such event,
the Carrying Values of the Partnership properties shall be adjusted immediately
prior to such deemed contribution and distribution pursuant to Section
5.5(d)(ii) and such Carrying Values shall then constitute the Agreed Values of
such properties upon such deemed contribution to the new Partnership. The
Capital Accounts of such new Partnership shall be maintained in accordance with
the principles of this Section 5.5.
(ii) Immediately prior to the transfer of a Subordinated Unit or of a
Subordinated Unit that has converted into a Common Unit pursuant to Section 5.8
by a holder thereof (other than a transfer to an Affiliate unless the 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,
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regardless of whether it has retained any Subordinated Units or converted
Subordinated Units. Following any such allocation, the transferor's Capital
Account, if any, maintained with respect to the retained Subordinated Units or
converted Subordinated Units, if any, will have a balance equal to the amount
allocated under clause (B) hereinabove, and the transferee's Capital Account
established with respect to the transferred Subordinated Units or converted
Subordinated Units will have a balance equal to the amount allocated under
clause (A) hereinabove.
(d) (i) In accordance with Treasury Regulation Section
1.704-1(b)(2)(iv)(f), on an issuance of additional Units for cash or Contributed
Property or the conversion of the General 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(c). In determining such Unrealized
Gain or Unrealized Loss, the aggregate cash amount and fair market value of all
Partnership assets (including, without limitation, cash or cash equivalents)
immediately prior to the issuance of additional Units shall be determined by the
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 that is not in
redemption or retirement of a Partnership Interest), the Capital Accounts of all
Partners and the Carrying Value of all Partnership property shall be adjusted
upward or downward to reflect any Unrealized Gain or Unrealized Loss
attributable to such Partnership property, as if such Unrealized Gain or
Unrealized Loss had been recognized in a sale of such property immediately prior
to such distribution for an amount equal to its fair market value, and had been
allocated to the Partners, at such time, pursuant to Section 6.1(c). In
determining such Unrealized Gain or Unrealized Loss the aggregate cash amount
and fair market value of all Partnership assets (including, without limitation,
cash or cash equivalents) immediately prior to a distribution shall (A) in the
case of an actual distribution which is not made pursuant to Section 12.4 or in
the case of a deemed contribution and/or distribution occurring as a result of a
termination of the Partnership pursuant to Section 708 of the Code, be
determined and allocated in the same manner as that provided in Section
5.5(d)(i) or (B) in the case of a liquidating distribution pursuant to Section
12.4, be determined and allocated by the Liquidator using such reasonable method
of valuation as it may adopt.
5.6 ISSUANCES OF ADDITIONAL PARTNERSHIP SECURITIES
(a) Subject to Section 5.7, the Partnership may issue additional Partnership
Securities for any Partnership purpose at any time and from time to time to such
Persons for such consideration and on such terms and conditions as shall be
established by the 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
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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 pursuant to this Section 5.6, (ii) the
conversion of a general partner interest into Units pursuant to the terms of
this Agreement, (iii) the admission of Additional Limited Partners and (iv) all
additional issuances of Partnership Securities. The 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.
5.7 LIMITATIONS ON ISSUANCE OF ADDITIONAL PARTNERSHIP SECURITIES
The issuance of Partnership Securities pursuant to Section 5.6 shall be
subject to the following restrictions and limitations:
(a) During the Subordination Period, the Partnership shall not issue an
aggregate of more than 4,487,500 additional Parity Units without the prior
approval of the holders of a Unit Majority. In applying this limitation, there
shall be excluded Common Units issued (A) in connection with the exercise of the
Over-allotment Option, (B) in accordance with Sections 5.7(b) and 5.7(c), (C)
upon conversion of Subordinated Units pursuant to Section 5.8, (D) upon an
exchange by the Special General Partner or its transferee of its interest in the
Operating Partnership pursuant to Section 5.12, (E) pursuant to the employee
benefit plans of 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 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
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actual Adjusted Operating Surplus of the Partnership generated with respect
to such Quarter, and (ii) for each other Quarter, on a pro forma basis not
inconsistent with the procedure, as applicable, set forth in Appendix D to
the Registration Statement. Furthermore, the amount in clause (A) shall be
determined on a pro forma basis assuming that (1) all of the Parity Units or
Partnership Securities to be issued in connection with or within 365 days of
such Acquisition or Capital Improvement had been issued and outstanding, (2)
all indebtedness for borrowed money to be incurred or assumed in connection
with such Acquisition or Capital Improvement (other than any such
indebtedness that is to be repaid with the proceeds of such debt issuance)
had been incurred or assumed, in each case as of the commencement of such
four-Quarter period, (3) the personnel expenses that would have been
incurred by the Partnership in the operation of the acquired assets are the
personnel expenses for employees to be retained by the Partnership in the
operation of the acquired assets, and (4) the non-personnel costs and
expenses are computed on the same basis as those incurred by the Partnership
in the operation of the Partnership's business at similarly situated
Partnership facilities.
(c) The Partnership may also issue an unlimited number of Parity Units,
prior to the end of the Subordination Period and without the approval of the
Unitholders if the proceeds from such issuance are used exclusively to repay up
to $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
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
as of the Closing Date, or, if the Over-allotment option is exercised,
determined as of the Option Closing Date) 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 equals
or exceeds the sum of the Minimum Quarterly Distribution on all of the
Outstanding Common Units and Subordinated Units during such periods;
(ii) the Adjusted Operating Surplus generated during each of the two
consecutive, non-overlapping four-Quarter periods immediately preceding such
date equals or exceeds the sum of the Minimum Quarterly Distribution on all
of the Outstanding Common Units and Subordinated Units, plus the related
distribution on the General Partner 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 as of the Closing Date, or, if the Over-allotment Option is
exercised, determined as of the Option Closing Date) will convert
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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 equals
or exceeds the sum of the Minimum Quarterly Distribution on all of the
Outstanding Common Units and Subordinated Units during such periods;
(ii) the Adjusted Operating Surplus generated during each of the two
consecutive, non-overlapping four-Quarter periods immediately preceding such
date equals or exceeds the sum of the Minimum Quarterly Distribution on all
of the Outstanding Common Units and Subordinated Units, plus the related
distribution on the General Partner 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;
provided, however, that the conversion of Subordinated Units pursuant to this
Section 5.8(b) may not occur until at least one year following the conversion of
Subordinated Units pursuant to Section 5.8(a).
(c) In the event that less than all of the Outstanding Subordinated Units
shall convert into Common Units pursuant to Section 5.8(a) or 5.8(b) at a time
when there shall be more than one holder of Subordinated Units, then, unless all
of the holders of Subordinated Units shall agree to a different allocation, the
Subordinated Units that are to be converted into Common Units shall be allocated
among the holders of Subordinated Units pro rata based on the number of
Subordinated Units held by each such holder.
(d) Any Subordinated Units that are not converted into Common Units pursuant
to Sections 5.8(a) and (b) shall convert into Common Units on a one-for-one
basis on the first day following the Record Date for distributions in respect of
the final Quarter of the Subordination Period.
(e) Notwithstanding any other provision of this Agreement, all the then
Outstanding Subordinated Units will automatically convert into Common Units on a
one-for-one basis as set forth in, and pursuant to the terms of, Section 11.4
hereof.
(f) A Subordinated Unit that has converted into a Common Unit shall be
subject to the provisions of Section 6.7(b).
5.9 LIMITED PREEMPTIVE RIGHT
Except as provided in this Section 5.9 and Section 5.2, no Person shall have
any preemptive, preferential or other similar right with respect to the issuance
of any Partnership Security, whether unissued, held in the treasury or hereafter
created. The 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
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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.
(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 PARTNERSHIP
INTERESTS
All Limited Partner Partnership Interests issued pursuant to, and in
accordance with the requirements of, this Article V shall be fully paid and
non-assessable Limited Partner Partnership Interests in the Partnership, except
as such non-assessability may be affected by Section 17-607 of the Delaware Act.
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
6.1 ALLOCATIONS FOR CAPITAL ACCOUNT 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 hereinbelow.
(a) NET INCOME. After giving effect to the special allocations set forth
in Section 6.1(d), Net Income for each taxable year and all items of income,
gain, loss and deduction taken into account in computing Net Income for such
taxable year shall be allocated as follows:
(i) First, 100% to the General 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, 100% 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 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
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previous taxable years is equal to the aggregate Net Losses allocated to the
General 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.
(b) NET LOSSES. After giving effect to the special allocations set forth
in Section 6.1(d), Net Losses for each taxable period and all items of income,
gain, loss and deduction taken into account in computing Net Losses for such
taxable period shall be allocated as follows:
(i) First, 100% to the General Partners, Pro Rata, and the Unitholders,
in accordance with their respective Percentage Interests, until the
aggregate Net Losses allocated pursuant to this Section 6.1(b)(i) for the
current taxable year and all previous taxable years is equal to the
aggregate Net Income allocated to such Partners pursuant to Section
6.1(a)(iii) for all previous taxable years, provided that the Net Losses
shall not be allocated pursuant to this Section 6.1(b)(i) to the extent that
such allocation would cause any Unitholder to have a deficit balance in its
Adjusted Capital Account at the end of such taxable year (or increase any
existing deficit balance in its Adjusted Capital Account);
(ii) Second, 100% to the General Partners, Pro Rata, and the Unitholders
in accordance with their respective Percentage Interests; provided, that Net
Losses shall not be allocated pursuant to this Section 6.1(b)(ii) to the
extent that such allocation would cause any Unitholder to have a deficit
balance in its Adjusted Capital Account at the end of such taxable year (or
increase any existing deficit balance in its Adjusted Capital Account);
(iii) Third, the balance, if any, 100% to the General 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, reduced by any distribution pursuant to Section 6.4(a)(i) or
(b)(i) with respect to such Common Unit for such Quarter (the amount
determined pursuant to this clause (2) is hereinafter defined as the "Unpaid
MQD") plus (3) any then existing Cumulative Common Unit Arrearage;
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(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, reduced by any distribution pursuant to Section 6.4(a)(iii)
with respect to such Subordinated Unit for such Quarter;
(D) Fourth, 99% to all Unitholders, in accordance with their relative
Percentage Interests, and 1% to the General 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, 85.7436% to all Unitholders, in accordance with their
relative Percentage Interests, 12.2564% 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, 75.5385% to all Unitholders, in accordance with their
relative Percentage Interests, 22.4615% 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 51.0557% to all Unitholders, in
accordance with their relative Percentage Interests, 47.9743% 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.
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(d) SPECIAL ALLOCATIONS. Notwithstanding any other provision of this
Section 6.1, the following special allocations shall be made for such taxable
period:
(i) PARTNERSHIP MINIMUM GAIN CHARGEBACK. Notwithstanding any other provision
of this Section 6.1, if there is a net decrease in Partnership Minimum Gain
during any Partnership taxable period, each Partner shall be allocated items of
Partnership income and gain for such period (and, if necessary, subsequent
periods) in the manner and amounts provided in Treasury Regulation Sections
1.704-2(f)(6), 1.704-2(g)(2) and 1.704-2(j)(2)(i), or any successor provision.
For purposes of this Section 6.1(d), each Partner's Adjusted Capital Account
balance shall be determined, and the allocation of income or gain required
hereunder shall be effected, prior to the application of any other allocations
pursuant to this Section 6.1(d) with respect to such taxable period (other than
an allocation pursuant to Sections 6.1(d)(vi) and 6.1(d)(vii)). This Section
6.1(d)(i) is intended to comply with the Partnership Minimum Gain chargeback
requirement in Treasury Regulation Section 1.704-2(f) and shall be interpreted
consistently therewith.
(ii) CHARGEBACK OF PARTNER NONRECOURSE DEBT MINIMUM GAIN. Notwithstanding
the other provisions of this Section 6.1 (other than Section 6.1(d)(i)), except
as provided in Treasury Regulation Section 1.704-2(i)(4), if there is a net
decrease in Partner Nonrecourse Debt Minimum Gain during any Partnership taxable
period, any Partner with a share of Partner Nonrecourse Debt Minimum Gain at the
beginning of such taxable period shall be allocated items of Partnership income
and gain for such period (and, if necessary, subsequent periods) in the manner
and amounts provided in Treasury Regulation 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
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Treasury Regulations promulgated under Section 704(b) of the Code, the deficit
balance, if any, in its Adjusted Capital Account created by such adjustments,
allocations or distributions as quickly as possible unless such deficit balance
is otherwise eliminated pursuant to Section 6.1(d)(i) or (ii).
(v) GROSS INCOME ALLOCATIONS. In the event any Partner has a deficit balance
in its Capital Account at the end of any Partnership taxable period in excess of
the sum of (A) the amount such Partner is required to restore pursuant to the
provisions of this Agreement and (B) the amount such Partner is deemed obligated
to restore pursuant to Treasury Regulation Sections 1.704-2(g) and
1.704-2(i)(5), such Partner shall be specially allocated items of Partnership
gross income and gain in the amount of such excess as quickly as possible;
provided, that an allocation pursuant to this Section 6.1(d)(v) shall be made
only if and to the extent that such Partner would have a deficit balance in its
Capital Account as adjusted after all other allocations provided for in this
Section 6.1 have been tentatively made as if this Section 6.1(d)(v) were not in
this Agreement.
(vi) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions for any taxable period
shall be allocated to the Partners in accordance with their respective
Percentage Interests. If the 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 Sections 6.1(d)(iii), shall be allocated 100% to each
Partner holding Subordinated Units that are Outstanding as of the termination of
the Subordination Period ("Final Subordinated Units") in the proportion of the
number of Final Subordinated Units held by such Partner to the total number of
Final Subordinated Units then Outstanding, until each such Partner has been
allocated an amount of gross income or gain which increases the Capital Account
maintained with respect to such Final Subordinated Units to an amount equal to
the product of (A) the number of Final Subordinated Units held by such Partner
and (B) the Per Unit Capital Amount for a Common Unit. The purpose of this
allocation is to establish uniformity between the Capital Accounts underlying
Final Subordinated Units and the Capital Accounts underlying Common Units held
by Persons other than the General Partners and
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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 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 exceeds 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
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Adjustments, in such a manner, as reasonably determined by the Managing
General Partner, that to the extent possible the aggregate Capital Accounts
of the holders of Incentive Distribution Rights will equal the amount which
would have been the holders of Incentive Distribution Rights Capital Account
balance if no prior Book-Up Events had occurred, and (2) any negative
adjustment in excess of the Aggregate Remaining Net Positive Adjustments
shall be allocated pursuant to Section 6.1(c) hereof.
(C) In making the allocations required under this Section 6.1(d)(xii),
the 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).
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 (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 Units (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 Units (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 Units issued and
Outstanding or the Partnership, and if such allocations are consistent with the
principles of Section 704 of the Code.
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(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 taken, the Managing General Partner may adopt
depreciation and amortization conventions under which all purchasers acquiring
Units in the same month would receive depreciation and amortization deductions,
based upon the same applicable rate as if they had purchased a direct interest
in the Partnership's property. If the 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 Units that would not have a material
adverse effect on the Limited Partners or the Record Holders of any class or
classes of Units.
(e) Any gain allocated to the Partners upon the sale or other taxable
disposition of any Partnership asset shall, to the extent possible, after taking
into account other required allocations of gain pursuant to this Section 6.2, be
characterized as Recapture Income in the same proportions and to the same extent
as such Partners (or their predecessors in interest) have been allocated any
deductions directly or indirectly giving rise to the treatment of such gains as
Recapture Income.
(f) All items of income, gain, loss, deduction and credit recognized by the
Partnership for federal income tax purposes and allocated to the Partners in
accordance with the provisions hereof shall be determined without regard to any
election under Section 754 of the Code which may be made by the Partnership;
provided, however, that such allocations, once made, shall be adjusted as
necessary or appropriate to take into account those adjustments permitted or
required by Sections 734 and 743 of the Code.
(g) Each item of Partnership income, gain, loss and deduction attributable
to a transferred general partner interest or to transferred Units or Incentive
Distribution Rights, shall for federal income tax purposes, be determined on an
annual basis and prorated on a monthly basis and shall be allocated to the
Partners as of the opening of the New York Stock Exchange on the first Business
Day of each month; provided, however, that (i) if the Over-allotment Option is
not exercised, such items for the period beginning on the Closing Date and
ending on the last day of the month in which the Closing Date occurs shall be
allocated to Partners as of the opening of the New York Stock Exchange on the
first Business Day of the next succeeding month or (ii) if the Over-allotment
Option is exercised, such items for the period beginning on the Closing Date and
ending on the last day of the month in which the Option Closing Date 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
Units held by a nominee in any case in which the nominee has furnished the
identity of such owner to the Partnership in accordance with Section 6031(c) of
the Code or any other method acceptable to the Managing General Partner in its
sole discretion.
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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 be
"Capital Surplus." All distributions required to be made under this Agreement
shall be made subject to Section 17-607 of the Delaware Act.
(b) In the event of the dissolution and liquidation of the Partnership, all
receipts received during or after the Quarter in which the Liquidation Date
occurs, other than from borrowings described in (a)(ii) of the definition of
Available Cash, shall be applied and distributed solely in accordance with, and
subject to the terms and conditions of, Section 12.4.
(c) The 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;
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(v) Fifth, 86.7436% to all Unitholders, in accordance with their
relative Percentage Interests, 12.2564% 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, 76.5385% to all Unitholders, in accordance with their
relative Percentage Interests, 22.4615% 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
(vii) Thereafter, 51.0257% to all Unitholders, in accordance with their
relative Percentage Interests, 47.9743% 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, 86.7436% to all Unitholders, in accordance with their
relative Percentage Interests, and 12.2564% 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, 76.5385% to all Unitholders, in accordance with their
relative Percentage Interests, and 22.4615% 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, 51.0257% to all Unitholders, in accordance with their
relative Percentage Interests, and 47.9743% 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).
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6.5 DISTRIBUTIONS OF AVAILABLE CASH FROM CAPITAL SURPLUS
Available Cash that is deemed to be Capital Surplus pursuant to the
provisions of Section 6.3 shall, subject to Section 17-607 of the Delaware Act,
be distributed, unless the provisions of Section 6.3 require otherwise, 99% to
all Unitholders, in accordance with their relative Percentage Interests, and 1%
to the General 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 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, 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
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in preparation for a transfer of such converted Subordinated Units, including
the application of Sections 5.5(c)(ii) and 6.1(d)(x); provided, however, that no
such steps may be taken that would have a material adverse effect on the
Unitholders holding Common Units represented by Common Unit Certificates.
6.8 SPECIAL PROVISIONS RELATING TO THE HOLDERS OF INCENTIVE DISTRIBUTION RIGHTS
Notwithstanding anything to the contrary set forth in this Agreement, the
holders of the Incentive Distribution Rights (a) shall (i) possess the rights
and obligations provided in this Agreement with respect to a Limited Partner
pursuant to Articles III and VII and (ii) have a Capital Account as a Partner
pursuant to Section 5.5 and all other provisions related thereto and (b) shall
not (i) be entitled to vote on any matters requiring the approval or vote of the
holders of Outstanding Units, (ii) be entitled to any distributions other than
as provided in Sections 6.4(a)(v), (vi) and (vii), 6.4(b)(iii), (iv) and (v),
and 12.4 or (iii) be allocated items of income, gain, loss or deduction other
than as specified in this Article VI.
6.9 ENTITY-LEVEL TAXATION
If legislation is enacted or the interpretation of existing language is
modified by the relevant governmental authority which causes the Partnership or
the Operating Partnership to be treated as an association taxable as a
corporation or otherwise subjects the Partnership or the Operating Partnership
to entity-level taxation for federal income tax purposes, the then applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution shall be adjusted to equal the
product obtained by multiplying (a) the amount thereof by (b) one minus the sum
of (i) the highest marginal federal corporate (or other entity, as applicable)
income tax rate of the Partnership for the taxable year of the Partnership in
which such Quarter occurs (expressed as a percentage) plus (ii) the effective
overall state and local income tax rate (expressed as a percentage) applicable
to the Partnership for the calendar year next preceding the calendar year in
which such Quarter occurs (after taking into account the benefit of any
deduction allowable for federal income tax purposes with respect to the payment
of state and local income taxes), but only to the extent of the increase in such
rates resulting from such legislation or interpretation. Such effective overall
state and local income tax rate shall be determined for the taxable year next
preceding the first taxable year during which the Partnership or the Operating
Partnership is taxable for federal income tax purposes as an association taxable
as a corporation or is otherwise subject to entity-level taxation by determining
such rate as if the Partnership or the Operating Partnership had been subject to
such state and local taxes during such preceding taxable year.
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
7.1 MANAGEMENT
(a) The 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 no
Special General Partner, 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
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appropriate to conduct the business of the Partnership, to exercise all powers
set forth in Section 2.5 and to effectuate the purposes set forth in Section
2.4, including the following:
(i) the making of any expenditures, the lending or borrowing of money,
the assumption or guarantee of, or other contracting for, indebtedness and
other liabilities, the issuance of evidences of indebtedness and the
incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(iii) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the Partnership or
the merger or other combination of the Partnership with or into another
Person (the matters described in this clause (iii) being subject, however,
to any prior approval that may be required by Section 7.3);
(iv) the use of the assets of the Partnership (including cash on hand)
for any purpose consistent with the terms of this Agreement, including the
financing of the conduct of the operations of the Partnership Group, the
lending of funds to other Persons (including the Operating Partnership), the
repayment of obligations of the Partnership and the Operating Partnership
and the making of capital contributions to any member of the Partnership
Group;
(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);
(x) the control of any matters affecting the rights and obligations of
the Partnership, including the bringing and defending of actions at law or
in equity and otherwise engaging in the conduct of litigation and the
incurring of legal expense and the settlement of claims and litigation;
(xi) the indemnification of any Person against liabilities and
contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any National
Securities Exchange and the delisting of some or all of the Units from, or
requesting that trading be suspended on, any such exchange (subject to any
prior approval that may be required under Section 4.9);
(xiii) the purchase, sale or other acquisition or disposition of Units,
or, unless restricted or prohibited by Section 5.7, the issuance of
additional Units or other Partnership Securities; and
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(xiv) the undertaking of any action in connection with the Partnership's
participation in the Operating Partnership as the limited partner.
(b) Notwithstanding any other provision of this Agreement, the Operating
Partnership Agreement, the Delaware Act or any applicable law, rule or
regulation, each of the Partners and Assignees and each other Person who may
acquire an interest in Units hereby (i) approves, ratifies and confirms the
execution, delivery and performance by the parties thereto of the Operating
Partnership Agreement, the Underwriting Agreement, the Conveyance and
Contribution Agreement, the agreements and other documents filed as exhibits to
the Registration Statement, and the other agreements described in or filed as a
part of the Registration Statement; (ii) agrees that the 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, approval or vote of the Partners or the Assignees or
the other Persons who may acquire an interest in Units; and (iii) agrees that
the execution, delivery or performance by the General 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 Managing
General Partners of any duty that the General Partners may owe the Partnership
or the Limited Partners or the Assignees or any other Persons under this
Agreement (or any other agreements) or of any duty stated or implied by law or
equity.
7.2 CERTIFICATE OF LIMITED PARTNERSHIP
The 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 or Assignee.
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 Units or by other written
instrument executed and delivered by all of the Outstanding Units subsequent to
the date of this Agreement, take any action in contravention of this Agreement,
including, except as otherwise provided in this Agreement, (i) committing any
act that would make it impossible to carry on the ordinary business of the
Partnership; (ii) possessing Partnership property, or assigning any rights in
specific Partnership property, for other than a Partnership purpose; (iii)
admitting a Person as a Partner; (iv) amending this Agreement in any manner; or
(v) transferring its interest as general partner of the Partnership.
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(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 permitted under Sections 4.6, 11.1 and
11.2, elect or cause the Partnership to elect a successor general partner of the
Operating Partnership.
(c) At all times while serving as the General Partner of the Partnership,
and each of the Managing 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 their combined net
worth, independent of their interest in the Partnership Group, to be less than
$15.0 million or such lower amount, which based on an Opinion of Counsel that
states, (i) based on a change in the position of the Internal Revenue Service
with respect to partnership status pursuant to Code Section 7701, such lower
amount would not cause the Partnership or the Operating Partnership to be
treated as an association taxable as a corporation or otherwise to be taxed as
an entity for federal income tax purposes and (ii) would not result in the loss
of the limited liability of any Limited Partner or of the limited partner of the
Operating Partnership.
7.4 REIMBURSEMENT OF THE 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 Units or
options to purchase Units), or cause the Partnership to issue Partnership
Securities, in connection with, pursuant to any employee benefit plan, employee
program or employee practice maintained or sponsored by the 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
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the benefit of the Partnership Group. The Partnership agrees to issue and sell
to the Managing General Partner or any of its Affiliates any Units or other
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 Units or other 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 General Partner approved pursuant to
Section 11.1 or 11.2 or the 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 (ii) shall not
engage in 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 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 the Managing General Partner determines in its reasonable
judgment, prior to the commencement of such activity, that it is inadvisable for
the Partnership to engage in such activity either because (i) of the financial
commitments or operating characteristics associated with such activity or (ii)
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 or (iii) 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 and 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 restricted by Sections 7.5(a), each Indemnitee shall have the
right to engage in businesses of every type and description and other activities
for profit and to engage in and possess an interest in other business ventures
of any and every type or description, whether in businesses engaged in or
anticipated to be engaged in by any Group Member, independently or with others,
including business interests and activities in direct competition with the
business and activities of any Group Member, and none of the same shall
constitute a breach of this Agreement or any duty express or implied by law to
any Group Member or any Partner or Assignee. Neither any Group Member, any
Limited Partner nor any other Person shall have any rights by virtue of this
Agreement, the Operating Partnership Agreement or the partnership relationship
established hereby or thereby in any business ventures of any Indemnitee.
(c) Subject to the terms of Section 7.5(a) and (b), but otherwise
notwithstanding anything to the contrary in this Agreement, (i) the engaging in
competitive activities by any Indemnitees (other than the 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
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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 an Assignee or Limited Partner, as applicable, relating
to such Units or Partnership Securities.
(e) The term "Affiliates" when used in Section 7.5(b) with respect to the
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, or 7.9 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 PARTNER
(a) The General Partners or their Affiliates thereof 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
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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 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 Conveyance and
Contribution Agreement and any other transactions described in or contemplated
by the Registration Statement, (ii) any transaction approved by Special
Approval, (iii) any transaction, the terms of which are no less favorable to the
Partnership than those generally being provided to or available from unrelated
third parties, or (iv) any transaction that, taking into account the totality of
the relationships between the parties involved (including other transactions
that may be particularly favorable or advantageous to the Partnership), is
equitable to the Partnership. With respect to any contribution of assets to the
Partnership in exchange for Units, the Audit Committee, in determining whether
the appropriate number of Units are being issued, may take into account, among
other things, the fair market value of the assets, the liquidated and contingent
liabilities assumed, the tax basis in the assets, the extent to which tax-only
allocations to the transferor will protect the existing partners of the
Partnership against a low tax basis, and such other factors as the Audit
Committee deems relevant under the circumstances.
(f) The General 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 Conveyance and Contribution 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
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such indemnification and shall have no obligation to contribute or loan any
monies or property to the Partnership to enable it to effectuate such
indemnification.
(b) To the fullest extent permitted by law, expenses (including legal fees
and expenses) incurred by an Indemnitee who is indemnified pursuant to Section
7.7(a) in defending any claim, demand, action, suit or proceeding shall, from
time to time, be advanced by the Partnership prior to the final disposition of
such claim, demand, action, suit or proceeding upon receipt by the Partnership
of any undertaking by or on behalf of the Indemnitee to repay such amount if it
shall be determined that the Indemnitee is not entitled to be indemnified as
authorized in this Section 7.7.
(c) The indemnification provided by this Section 7.7 shall be in addition to
any other rights to which an Indemnitee may be entitled under any agreement,
pursuant to any vote of the holders of Outstanding Units, as a matter of law or
otherwise, both as to actions in the Indemnitee's capacity as an Indemnitee and
as to actions in any other capacity (including any capacity under the
Underwriting Agreement), and shall continue as to an Indemnitee who has ceased
to serve in such capacity and shall inure to the benefit of the heirs,
successors, assigns and administrators of the Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse the General
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.
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7.8 LIABILITY OF INDEMNITEES
(a) Notwithstanding anything to the contrary set forth in this Agreement, no
Indemnitee shall be liable for monetary damages to the Partnership, the Limited
Partners, the Assignees or any other Persons who have acquired interests in the
Units, for losses sustained or liabilities incurred as a result of any act or
omission if such Indemnitee acted in good faith.
(b) Subject to its obligations and duties as 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.
(c) Any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the liability to the Partnership, the Limited Partners, the
General 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
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imposed herein or therein or, to the extent permitted by law, under the Delaware
Act or any other law, rule or regulation.
(b) Whenever this Agreement or any other agreement contemplated hereby
provides that the 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.
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(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 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 UNITS
The Managing General Partner may cause the Partnership to purchase or
otherwise acquire Units; provided that, except as permitted pursuant to Section
4.10, the Managing General Partner may not cause the Partnership to purchase
Subordinated Units during the Subordination Period. As long as Units are held by
any Group Member, such Units shall not be considered outstanding for any
purpose, except as otherwise provided herein. The General Partners or any
Affiliate of the General Partners may also purchase or otherwise acquire and
sell or otherwise dispose of Units for its own account, subject to the
provisions of Articles IV and X.
7.13 REGISTRATION RIGHTS OF THE GENERAL 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 Units or other
Partnership Securities that it desires to sell and (ii) Rule 144 of the
Securities Act (or any successor rule or regulation to Rule 144) or another
exemption from registration is not available to enable such holder of Units (the
"Holder") to dispose of the number of Units or other securities it desires to
sell at the time it desires to do so without registration under the Securities
Act, then upon the request of 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 Units or other Partnership Securities covered by such registration
statement have been sold, a registration statement under the Securities Act
registering the offering and sale of the number of Units or other securities
specified by the Holder; provided, however, that the Partnership shall not be
required to effect more than three registrations pursuant to this Section
7.13(a); and provided further, however, that if the Audit Committee determines
in its good faith judgment that a postponement of the requested registration for
up to six months would be in the best interests of the Partnership and its
Partners due to a pending transaction, investigation or other event, the filing
of such registration statement or the effectiveness thereof may be deferred for
up to six months, but not thereafter. In connection with any registration
pursuant to the immediately preceding sentence, the Partnership shall promptly
prepare and file (x) such documents as may be necessary to register or qualify
the securities subject to such registration under the securities laws of such
states as the Holder shall reasonably request; provided, however, that no such
qualification shall be required in any jurisdiction where, as a result thereof,
the Partnership would become subject to general service of process or to
taxation or qualification to do business as a foreign corporation or partnership
doing business in such jurisdiction solely as a result of such registration, and
(y) such documents as may be necessary to apply for listing or to list the
securities subject to such registration on such National Securities Exchange as
the Holder shall reasonably request, and do any and all other acts and things
that may reasonably be necessary or advisable to enable the Holder to consummate
a public sale of such Units in such states. Except as set forth in Section
7.12(c), all costs and expenses of any such registration and offering (other
than the underwriting discounts and commissions) shall be paid by the
Partnership, without reimbursement by the Holder.
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(b) If the Partnership shall at any time propose to file a registration
statement under the Securities Act for an offering of equity securities of the
Partnership for cash (other than an offering relating solely to an employee
benefit plan), the Partnership shall use all reasonable efforts to include such
number or amount of securities held by the Holder in such registration statement
as the Holder shall request. If the proposed offering pursuant to this Section
7.13(b) shall be an underwritten offering, then, in the event that the managing
underwriter or managing underwriters of such offering advise the Partnership and
the Holder in writing that in their opinion the inclusion of all or some of the
Holder's securities would adversely and materially affect the success of the
offering, the Partnership shall include in such offering only that number or
amount, if any, of securities held by the Holder which, in the opinion of the
managing underwriter or managing underwriters, will not so adversely and
materially affect the offering. Except as set forth in Section 7.13(c), all
costs and expenses of any such registration and offering (other than the
underwriting discounts and commissions) shall be paid by the Partnership,
without reimbursement by the Holder.
(c) If underwriters are engaged in connection with any registration referred
to in this Section 7.13, the Partnership shall provide indemnification,
representations, covenants, opinions and other assurance to the underwriters in
form and substance reasonably satisfactory to such underwriters. Further, in
addition to and not in limitation of the Partnership's obligation under Section
7.7, the Partnership shall, to the fullest extent permitted by law, indemnify
and hold harmless the Holder, its officers, directors and each Person who
controls the Holder (within the meaning of the Securities Act) and any agent
thereof (collectively, "Indemnified Persons") against any losses, claims,
demands, actions, causes of action, assessments, damages, liabilities (joint or
several), costs and expenses (including interest, penalties and reasonable
attorneys' fees and disbursements), resulting to, imposed upon, or incurred by
the Indemnified Persons, directly or indirectly, under the Securities Act or
otherwise (hereinafter referred to in this Section 7.13(c) as a "claim" and in
the plural as "claims") based upon, arising out of or resulting from any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which any Units were registered under the
Securities Act or any state securities or Blue Sky laws, in any preliminary
prospectus (if used prior to the effective date of such registration statement),
or in any summary or final prospectus or in any amendment or supplement thereto
(if used during the period the Partnership is required to keep the registration
statement current), or arising out of, based upon or resulting from the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements made therein not misleading;
PROVIDED, HOWEVER, that the Partnership shall not be liable to any Indemnified
Person to the extent that any such claim arises out of, is based upon or results
from an untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement, such preliminary, summary or final
prospectus or such amendment or supplement, in reliance upon and in conformity
with written information furnished to the Partnership by or on behalf of such
Indemnified Person specifically for use in the preparation thereof.
(d) The provisions of Section 7.13(a) and 7.13(b) shall continue to be
applicable with respect to both 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 Units or
other Partnership Securities with respect to which it has requested during such
two-year period inclusion in a registration statement otherwise filed or that a
registration statement be filed; provided, however, that the Partnership shall
not be required to file successive registration statements covering the same
securities for which registration was demanded during such two-year period. The
provisions of Section 7.13(c) shall continue in effect thereafter.
(e) Any request to register Partnership Securities pursuant to this Section
7.13 shall (i) specify the Partnership Securities intended to be offered and
sold by the Person making the request, (ii) express such Person's present intent
to offer such shares for distribution, (iii) describe the nature or method of
the proposed offer and sale of Partnership Securities, and (iv) contain the
undertaking of such Person to provide all such information and materials and
take all action as may be required in order to permit the
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Partnership to comply with all applicable requirements in connection with the
registration of such Partnership Securities.
7.14 RELIANCE BY THIRD PARTIES
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the 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 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 Unitholders any information required to be provided pursuant to Section
3.4(a). Any books and records maintained by or on behalf of the Partnership in
the regular course of its business, including the record of the Record Holders
and Assignees of Units or other Partnership Securities, books of account and
records of Partnership proceedings, may be kept on, or be in the form of,
computer disks, hard drives, punch cards, magnetic tape, photographs,
micrographics or any other information storage device; provided, that the books
and records so maintained are convertible into clearly legible written form
within a reasonable period of time. The books of the Partnership shall be
maintained, for financial reporting purposes, on an accrual basis in accordance
with U.S. GAAP.
8.2 FISCAL YEAR
The fiscal year of the Partnership shall be 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
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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.
(b) As soon as practicable, but in no event later than 90 days after the
close of each Quarter except the last Quarter of each year, the 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
Unitholders. 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 Units will be deemed to be
the lowest quoted closing price of the Units on any National Securities Exchange
on which such Units are traded during the calendar month in which such transfer
is deemed to occur pursuant to Section 6.2(g) without regard to the actual price
paid by such transferee.
(b) The Partnership shall elect to deduct expenses incurred in organizing
the Partnership ratably over a sixty-month period as provided in Section 709 of
the Code.
(c) Except as otherwise provided herein, the 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.
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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 the
Code or any other federal, state or local law including, without limitation,
pursuant to Sections 1441, 1442, 1445 and 1446 of the Code. To the extent that
the Partnership is required or elects to withhold and pay over to any taxing
authority any amount resulting from the allocation or distribution of income to
any Partner or Assignee (including, without limitation, by reason of Section
1446 of the Code), the amount withheld may be treated as a distribution of cash
pursuant to Section 6.3 in the amount of such withholding from such Partner.
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 as described in Section 5.2, each of
the General Partners shall be deemed to have been admitted to the Partnership as
a Limited Partner in respect of the Subordinated Units issued to it. Upon the
issuance by the Partnership of Common Units to the Underwriters as described in
Section 5.3 in connection with the Initial Offering and the execution by each
Underwriter of a Transfer Application, the 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 Unit in accordance with Article IV, the transferor shall be
deemed to have given the transferee the right to seek admission as a Substituted
Limited Partner subject to the conditions of, and in the manner permitted under,
this Agreement. A transferor of a Certificate shall, however, only have the
authority to convey to a purchaser or other transferee who does not execute and
deliver a Transfer Application (a) the right to negotiate such Certificate to a
purchaser or other transferee and (b) the right to transfer the right to request
admission as a Substituted Limited Partner to such purchaser or other transferee
in respect of the transferred Units. Each transferee of a Unit (including any
nominee holder or an agent acquiring such Unit for the account of another
Person) who executes and delivers a Transfer Application shall, by virtue of
such execution and delivery, be an Assignee and be deemed to have applied to
become a Substituted Limited Partner with respect to the Units so transferred to
such Person. Such Assignee shall become a Substituted Limited Partner (x) at
such time as the 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 Units 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 Units on any matter, vote such Units at the written direction
of the Assignee who is the Record Holder of such Units. If no such written
direction is received, such Units will not be voted. An Assignee shall have no
other rights of a Limited Partner.
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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 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
Partnership and the Operating Partnership 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
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 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 MANAGING GENERAL PARTNER
(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);
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(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;
(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; or (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 Unitholders, such withdrawal to take effect on the
date specified in the notice, if at the time such notice is given one Person and
its Affiliates (other than the 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
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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 General Partner. The Person so elected as
successor General Partner shall automatically become the successor general
partner of the other Group Members. If, prior to the effective date of the
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 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 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.
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 General Partner shall also automatically constitute the removal of the
Managing General Partner as general partner of the other Group Members. 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 the successor general partner of the other
Group Members. 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 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
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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 the 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 Partner and Synergy (or its transferee) 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 an 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 such Percentage Interest of all Partnership allocations and
distributions and any other allocations and distributions to which the Departing
Partner was entitled. In addition, the successor 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% (or if the Over-allotment Option is exercised, the Percentage
Interest of all of the Departing Partners), and that of the holders of
Outstanding Units shall be 99% (or if the Over-allotment Option is exercised,
100% less the Percentage Interest of all of the Departing Partners).
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 Units or
Incentive Distribution Rights becomes a Record Holder of the Units or Incentive
Distribution Rights so transferred, such transferring Limited Partner shall
cease to be a Limited Partner with respect to the Units or Incentive
Distribution Rights so transferred.
ARTICLE XII
DISSOLUTION AND LIQUIDATION
12.1 DISSOLUTION
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor 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) 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 of all or some of the Partnership's
assets would be impractical or would cause undue loss to the partners. The
Liquidator may, in its absolute discretion, distribute the Partnership's
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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 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. The General Partners
shall be obligated to restore any negative balance in their 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 obligation shall be limited by the amount of the Partnership
indebtedness for which it, but not the Managing General Partner, has recourse
liability.
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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 to
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 Unitholders in any material respect, (ii)
is necessary or advisable to (A) satisfy any requirements, conditions or
guidelines contained in any opinion, directive, order, ruling or regulation
of any federal or state agency or judicial authority or contained in any
federal or state statute (including the Delaware Act) or (B) facilitate the
trading of the Units (including the division of any class or classes of
Outstanding Units into different classes to facilitate uniformity of tax
consequences within such classes of Units) or comply with any rule,
regulation, guideline or requirement of any National Securities Exchange on
which the Units are or will be listed for trading, compliance with any of
which the Managing General Partner determines in its discretion to be in the
best interests of the Partnership and the Unitholders, (iii) is necessary or
advisable in connection with action taken by the 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;
(h) any amendment expressly permitted in this Agreement to be made by
the Managing General Partner acting alone;
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(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 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 (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 Partnership Interests of the class affected.
(d) Notwithstanding any other provision of this Agreement, except for
amendments pursuant to Section 7.3 or 13.1 and except as otherwise provided
by Section 14.3(b), no amendments shall become
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effective without the approval of the holders of at least 90% of the
Outstanding Common Units and Subordinated Units voting as a single class
unless the Partnership obtains an Opinion of Counsel to the effect that such
amendment will not affect the limited liability of any Limited Partner under
applicable law.
(e) Except as provided in Section 13.1, this Section 13.3 shall only be
amended with the approval of the holders of at least 90% of the Outstanding
Units.
13.4 SPECIAL MEETINGS
All acts of Unitholders to be taken pursuant to this Agreement shall be
taken in the manner provided in this Article XIII. Special meetings of the
Unitholders may be called by the Managing General Partner or by Unitholders
owning 20% or more of the Outstanding Units of the class or classes for which a
meeting is proposed. Unitholders shall call a special meeting by delivering to
the Managing General Partner one or more requests in writing stating that the
signing Unitholders wish to call a special meeting and indicating the general or
specific purposes for which the special meeting is to be called. Within 60 days
after receipt of such a call from Unitholders or within such greater time as may
be reasonably necessary for the Partnership to comply with any statutes, rules,
regulations, listing agreements or similar requirements governing the holding of
a meeting or the solicitation of proxies for use at such a meeting, the Managing
General Partner shall send a notice of the meeting to the Unitholders either
directly or indirectly through the Transfer Agent. A meeting shall be held at a
time and 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.
Unitholders shall not vote on matters that would cause the Limited Partners to
be deemed to be taking part in the management and control of the business and
affairs of the Partnership so as to jeopardize the Unitholders' limited
liability under the Delaware Act or the law of any other state in which the
Partnership is qualified to do business.
13.5 NOTICE OF A MEETING
Notice of a meeting called pursuant to Section 13.4 shall be given to the
Record Holders in writing by mail or other means of written communication in
accordance with Section 16.1. The notice shall be deemed to have been given at
the time when deposited in the mail or sent by other means of written
communication.
13.6 RECORD DATE
For purposes of determining the Unitholders entitled to notice of or to vote
at a meeting of the Unitholders or to give approvals without a meeting as
provided in Section 13.11, the 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 Units are listed
for trading, in which case the rule, regulation, guideline or requirement of
such exchange shall govern) or (b) in the event that approvals are sought
without a meeting, the date by which Unitholders are requested in writing by the
General Partner to give such approvals.
13.7 ADJOURNMENT
When a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting and a new Record Date need not be fixed, if the
time and place thereof are announced at the meeting at which the adjournment is
taken, unless such adjournment shall be for more than 45 days. At the adjourned
meeting, the Partnership may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than 45 days
or if a new Record Date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given in accordance with this Article XIII.
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13.8 WAIVER OF NOTICE; APPROVAL OF MEETING; APPROVAL OF MINUTES
The transactions of any meeting of Unitholders, however called and noticed,
and whenever held, shall be as valid as if occurred at a meeting duly held after
regular call and notice, if a quorum is present either in person or by proxy,
and if, either before or after the meeting, Unitholders representing such quorum
who were present in person or by proxy and entitled to vote, sign a written
waiver of notice or an approval of the holding of the meeting or an approval of
the minutes thereof. All waivers and approvals shall be filed with the
Partnership records or made a part of the minutes of the meeting. Attendance of
a Unitholder at a meeting shall constitute a waiver of notice of the meeting,
except when the Unitholder does not approve, at the beginning of the meeting, of
the transaction of any business because the meeting is not lawfully called or
convened; and except that attendance at a meeting is not a waiver of any right
to disapprove the consideration of matters required to be included in the notice
of the meeting, but not so included, if the disapproval is expressly made at the
meeting.
13.9 QUORUM
The holders of a majority of the Outstanding Units of the class or classes
for which a meeting has been called represented in person or by proxy shall
constitute a quorum at a meeting of Unitholders of such class or classes unless
any such action by the Unitholders requires approval by holders of a greater
percentage of such Units, in which case the quorum shall be such greater
percentage. At any meeting of the Unitholders duly called and held in accordance
with this Agreement at which a quorum is present, the act of Unitholders holding
Outstanding Units that in the aggregate represent a majority of the Outstanding
Units entitled to vote and be present in person or by proxy at such meeting
shall be deemed to constitute the act of all Unitholders, unless a greater or
different percentage is required with respect to such action under the
provisions of this Agreement, in which case the act of the Unitholders holding
Outstanding Units that in the aggregate represent at least such greater or
different percentage shall be required. The Unitholders present at a duly called
or held meeting at which a quorum is present may continue to transact business
until adjournment, notwithstanding the withdrawal of enough Unitholders to leave
less than a quorum, if any action taken (other than adjournment) is approved by
the required percentage of Outstanding Units specified in this Agreement. In the
absence of a quorum any meeting of Unitholders may be adjourned from time to
time by the affirmative vote of holders of at least a majority of the
Outstanding Units represented either in person or by proxy, but no other
business may be transacted, except as provided in Section 13.7.
13.10 CONDUCT OF A MEETING
The Managing General Partner shall have full power and authority concerning
the manner of conducting any meeting of the Unitholders or solicitation of
approvals in writing, including the determination of Persons entitled to vote,
the existence of a quorum, the satisfaction of the requirements of Section 13.4,
the conduct of voting, the validity and effect of any proxies and the
determination of any controversies, votes or challenges arising in connection
with or during the meeting or voting. The 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 other regulations consistent with
applicable law and this Agreement as it may deem advisable concerning the
conduct of any meeting of the Unitholders or solicitation of approvals in
writing, including regulations in regard to the appointment of proxies, the
appointment and duties of inspectors of votes and approvals, the submission and
examination of proxies and other evidence of the right to vote, and the
revocation of approvals in writing.
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13.11 ACTION WITHOUT A MEETING
If authorized by the Managing General Partner, any action that may be taken
at a meeting of the Unitholders may be taken without a meeting if an approval in
writing setting forth the action so taken is signed by Unitholders owning not
less than the minimum percentage of the Outstanding Units that would be
necessary to authorize or take such action at a meeting at which all the
Unitholders were present and voted (unless such provision conflicts with any
rule, regulation, guideline or requirement of any National Securities Exchange
on which the Units are listed for trading, in which case the rule, regulation,
guideline or requirement of such exchange shall govern). Prompt notice of the
taking of action without a meeting shall be given to the Unitholders who have
not approved in writing. The Managing General Partner may specify that any
written ballot submitted to Unitholders for the purpose of taking any action
without a meeting shall be returned to the Partnership within the time period,
which shall be not less than 20 days, specified by the Managing General Partner.
If a ballot returned to the Partnership does not vote all of the Units held by
the Unitholders the Partnership shall be deemed to have failed to receive a
ballot for the Units that were not voted. If approval of the taking of any
action by the Unitholders is solicited by any Person other than by or on behalf
of the 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 Units on the Record Date set pursuant
to Section 13.6 (and also subject to the limitations contained in the definition
of "Outstanding") shall be entitled to notice of, and to vote at, a meeting of
Limited Partners or to act with respect to matters as to which the holders of
the Outstanding Units have the right to vote or to act. All references in this
Agreement to votes of, or other acts that may be taken by, the Outstanding Units
shall be deemed to be references to the votes or acts of the Record Holders of
such Outstanding Units.
(b) With respect to Units that are held for a Person's account by another
Person (such as a broker, dealer, bank, trust company or clearing corporation,
or an agent of any of the foregoing), in whose name such Units are registered,
such other Person shall, in exercising the voting rights in respect of such
Units on any matter, and unless the arrangement between such Persons provides
otherwise, vote such Units in favor of, and at the direction of, the Person who
is the beneficial owner, and the Partnership shall be entitled to assume it is
so acting without further inquiry. The provisions of this Section 13.12(b) (as
well as all other provisions of this Agreement) are subject to the provisions of
Section 4.3.
ARTICLE XIV
MERGER
14.1 AUTHORITY
The Partnership may merge or consolidate with one or more corporations,
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 IV.
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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 jurisdictions of formation or organization of the
business entity that is to survive the proposed merger or consolidation (the
"Surviving Business Entity");
(c) The terms and conditions of the proposed merger or consolidation;
(d) The manner and basis of exchanging or converting the equity
securities of each constituent business entity for, or into, cash, property
or general or limited partner interests, rights, securities or obligations
of the Surviving Business Entity; and (i) if any general or limited partner
interests, securities or rights of any constituent business entity are not
to be exchanged or converted solely for, or into, cash, property or general
or limited partner interests, rights, securities or obligations of the
Surviving Business Entity, the cash, property or general or limited partner
interests, rights, securities or obligations of any limited partnership,
corporation, trust or other entity (other than the Surviving Business
Entity) which the holders of such general or limited partner interests,
securities or rights are to receive in exchange for, or upon conversion of
their general or limited partner interests, securities or rights, and (ii)
in the case of securities represented by certificates, upon the surrender of
such certificates, which cash, property or general or limited partner
interests, rights, securities or obligations of the Surviving Business
Entity or any general or limited partnership, corporation, trust or other
entity (other than the Surviving Business Entity), or evidences thereof, are
to be delivered;
(e) A statement of any changes in the constituent documents or the
adoption of new constituent documents (the articles or certificate of
incorporation, articles of trust, declaration of trust, certificate or
agreement of limited partnership or other similar charter or governing
document) of the Surviving Business Entity to be effected by such merger or
consolidation;
(f) The effective time of the merger, which may be the date of the
filing of the certificate of merger pursuant to Section 14.4 or a later date
specified in or determinable in accordance with the Merger Agreement
(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.
14.3 APPROVAL BY UNITHOLDERS 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.
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(b) Except as provided in Section 14.3(d), the Merger Agreement shall be
approved upon receiving the affirmative vote or consent of the holders of a
Unit Majority unless the Merger Agreement contains any provision that, if
contained in an amendment to this Agreement, the provisions of this
Agreement or the Delaware Act would require the vote or consent of a greater
percentage of the Outstanding Units or of any class of Unitholders, in which
case such greater percentage vote or consent shall be required for approval
of the Merger Agreement.
(c) Except as provided in Section 14.3(d), after such approval by vote
or consent of the Unitholders, and at any time prior to the filing of the
certificate of merger pursuant to Section 14.4, the merger or consolidation
may be abandoned pursuant to provisions therefor, if any, set forth in the
Merger Agreement.
(d) Notwithstanding anything else contained in this Article XIV or in
this Agreement, the Managing General Partner is permitted, in its
discretion, without Unitholder 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;
(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.
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ARTICLE XV
RIGHT TO ACQUIRE UNITS
15.1 RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
(a) Notwithstanding any other provision of this Agreement, if at any time
not more than 20% of the total limited partner interests of any class then
Outstanding are held by Persons other than the 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 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 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
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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 Unit or Incentive Distribution Right at his address as shown on
the records of the Transfer Agent or as otherwise shown on the records of the
Partnership, regardless of any claim of any Person who may have an interest in
such Unit or Incentive Distribution Right or the Partnership Interest of a
Managing General Partner by reason of any assignment or otherwise. An affidavit
or certificate of making of any notice, payment or report in accordance with the
provisions of this Section 16.1 executed by the 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
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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.
16.8 APPLICABLE LAW
This Agreement shall be construed in accordance with and governed by the
laws of the State of Delaware, without regard to the principles of conflicts of
law.
16.9 INVALIDITY OF PROVISIONS
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
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16.10 CONSENT OF PARTNERS
Each Partner hereby expressly consents and agrees that, whenever in this
Agreement it is specified that an action may be taken upon the affirmative vote
or consent of less than all of the Partners, such action may be so taken upon
the concurrence of less than all of the Partners and each Partner shall be bound
by the results of such action.
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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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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
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
meaning given them in the Partnership Agreement.
The Holder, by accepting this Certificate, is deemed to have (i) requested
admission as, and agreed to become, a Limited Partner and to have agreed to
comply with and be bound by and to have executed the Partnership Agreement, (ii)
represented and warranted that the Holder has all right, power and authority
and, if an individual, the capacity necessary to enter into the Partnership
Agreement, (iii) granted the powers of attorney provided for in the Partnership
Agreement and (iv) made the waivers and given the consents and approvals
contained in the Partnership Agreement.
This Certificate shall not be valid for any purpose unless it has been
countersigned and registered by the Transfer Agent and Registrar.
<TABLE>
<S> <C>
Dated: -------------------------------------- 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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[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 . 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 power of attorney provided
for in the Partnership Agreement, and (e) makes the waivers and gives the
consents and approvals contained in the Partnership Agreement. Capitalized terms
not defined herein have the meanings assigned to such terms in the Partnership
Agreement.
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 ____________________________________________________.
A-80
<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-81
<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
B-1
<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 national securities exchange or a member of the National Association
of Securities Dealers, Inc., or, in the case of any other nominee holder, a
person performing a similar function. If the Assignee is a broker, dealer, bank,
trust company, clearing corporation, other nominee owner or an agent of any of
the foregoing, the above certification as to any person for whom the Assignee
will hold the Common Units shall be made to the best of the Assignee's
knowledge.
B-2
<PAGE>
APPENDIX C
GLOSSARY OF CERTAIN TERMS
ACQUISITION: Any transaction in which any member of the Partnership Group
acquires (through an asset acquisition, merger, stock acquisition or other form
of investment) control over all or a portion of the assets, properties or
business of another Person for the purpose of increasing the operating capacity
or revenues of the Partnership Group from the operating capacity or revenues of
the Partnership Group existing immediately prior to such transaction.
ADJUSTED OPERATING SURPLUS: With respect to any period, Operating Surplus
generated during such period (a) less (i) any net increase in working capital
borrowings during such period and (ii) any net reduction in cash reserves for
Operating Expenditures during such period not relating to an Operating
Expenditure made during such period, and (b) plus (i) any net decrease in
working capital borrowings during such period and (ii) any net increase in cash
reserves for Operating Expenditures during such period required by any debt
instrument for the repayment of principal, interest or premium. Adjusted
Operating Surplus does not include that portion of Operating Surplus included in
clause (a)(i) of the definition of Operating Surplus.
AUDIT COMMITTEE: A committee of the board of directors of the 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) 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
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 $ million revolving acquisition facility (the
"Acquisition Facility") and the $ million revolving working capital facility
(the "Working Capital Facility") both entered into by the Operating Partnership.
CAPITAL ACCOUNT: The capital account maintained for a Partner pursuant to
the Partnership Agreement. The Capital Account of a Partner in respect of a
general partner interest, a Common Unit, a Subordinated Unit, an Incentive
Distribution Right or any other Partnership Interest shall be the amount
C-1
<PAGE>
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: Additions or improvements to the capital assets owned
by any member of the Partnership Group or the acquisition of existing or the
construction of new capital assets (including retail distribution outlets,
propane tanks, pipeline systems, storage facilities, appliance showrooms,
training facilities and related assets), made to increase the operating capacity
of the Partnership Group from the operating capacity of the Partnership Group
existing immediately prior to such addition, improvement, acquisition or
construction.
CAPITAL SURPLUS: All Available Cash distributed by the Partnership from any
source will be treated as distributed from Operating Surplus until the sum of
all Available Cash distributed since the commencement of the Partnership equals
the Operating Surplus as of the end of the quarter prior to such distribution.
Any excess Available Cash will be deemed to be Capital Surplus.
CAUSE: Means a court of competent jurisdiction has entered a final,
non-appealable judgment finding the General Partner liable for actual fraud,
gross negligence or willful or wanton misconduct in its capacity as a general
partner of the Partnership.
CLOSING DATE: The first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement.
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.
COMMON UNIT ARREARAGE: The amount by which the Minimum Quarterly
Distribution in respect of a quarter during the Subordination Period exceeds the
distribution of Available Cash from Operating Surplus actually made for such
quarter on a Common Unit, cumulative for such quarter and all prior quarters
during the Subordination Period.
COMMON UNITS: A Unit representing a fractional part of the Partnership
Interests of all limited partners and assignees and having the rights and
obligations specified with respect to Common Units in the Partnership Agreement.
CONTRIBUTION AGREEMENT: The Contribution and Conveyance 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 Northwestern Growth (including
Synergy and Empire Energy) and Coast will be transferred and the liabilities
will be assumed.
CURRENT MARKET PRICE: With respect to any class of Units listed or admitted
to trading on any national securities exchange as of any date, the average of
the daily Closing Prices (as hereinafter defined) for the 20 consecutive Trading
Days (as hereinafter defined) immediately prior to such date. "Closing Price"
for any day means the last sale price on such day, regular way, or in case no
such sale takes place on such day, the average of the closing bid and asked
prices on such day, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the principal national securities exchange (other than
the Nasdaq Stock Market) on which the Units of such class are listed or admitted
to trading or, if the Units of such class are not listed or admitted to trading
on any national securities exchange (other than the Nasdaq Stock Market), the
last quoted price on such
C-2
<PAGE>
day, or, if not so quoted, the average of the high bid and low asked prices on
such day in the over-the-counter market, as reported by the Nasdaq Stock Market
or such other system then in use, or if on any such day the Units of such class
are not quoted by any such organization, the average of the closing bid and
asked prices on such day as furnished by a professional market maker making a
market in the Units of such class elected by the 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.
DEGREE DAY: Degree days measure the amount by which the average of the high
and low temperature on a given day is below 65 degrees Fahrenheit. For example,
if the high temperature is 60 degrees and the low temperature is 40 degrees for
a National Oceanic and Atmospheric Administration measurement location, the
average temperature is 50 degrees and the number of degree days for that day is
15.
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.
EMPIRE ENERGY: Empire Energy Corporation, a Tennessee corporation.
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.
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.
MANAGING GENERAL PARTNER: Cornerstone Propane GP, Inc., a Delaware
corporation, and its successors, as general partner of the Partnership.
MINIMUM QUARTERLY DISTRIBUTION: $.50 per Unit with respect to each quarter
or $2.00 per Unit on an annualized basis, subject to adjustment as described in
"Cash Distribution Policy -- Distributions from Capital Surplus" and "Cash
Distribution Policy -- Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels."
MYERS: Myers Propane Gas Company, an Ohio corporation and a subsidiary of
NPS.
NORTHWESTERN GROWTH: Northwestern Growth Corporation, a South Dakota
corporation and a wholly owned subsidiary of NPS.
NPS: Northwestern Public Service Company, a Delaware corporation.
C-3
<PAGE>
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 and premiums on such
indebtedness.
(b) Operating Expenditures shall not include (i) capital expenditures
made for Acquisitions or for Capital Improvements (as opposed to capital
expenditures made to maintain assets), (ii) payment of transaction expenses
relating to Interim Capital Transactions or (iii) distributions to partners.
Where capital expenditures are made in part for Acquisitions or Capital
Improvements and in part for other purposes, the 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).
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.
C-4
<PAGE>
PARTNERSHIP AGREEMENT: The Amended and Restated Agreement of Limited
Partnership of the Partnership (the form of which is included in this Prospectus
at Appendix A), as it may be amended, restated or supplemented from time to
time. Unless the context requires otherwise, references to the Partnership
Agreement constitute references to the Partnership Agreement of the Partnership
and of the Operating Partnership Agreement, collectively.
PARTNERSHIP GROUP: The Partnership, the Operating Partnership and any
subsidiary of either such entity, treated as a single consolidated entity.
PARTNERSHIP INTEREST: An interest in the Partnership, which shall include
general partner interests, Common Units, Subordinated Units, Incentive
Distribution Rights or other equity securities of the Partnership, or a
combination thereof or interest therein as the case may be.
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.
SGI: Synergy Group, Incorporated, a Delaware corporation.
SPECIAL GENERAL PARTNER: Synergy and its transferees.
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 2,074,079
Subordinated Units, or 1,737,516 Subordinated Units if the over-allotment option
is exercised in full) and (b) December 31, 2000 (with respect to an additional
2,074,079 Subordinated Units, or 1,737,516 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
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<PAGE>
Partnership and the general partner interests in the Operating Partnership
during such periods, and (iii) there are no outstanding Common Unit Arrearages;
provided, however, that the early conversion of the second tranche of
Subordinated Units may not occur until at least one year following the early
conversion of the first tranche of Subordinated Units. In addition, if the
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.
SYNERGY: SYN Inc., a majority-owned subsidiary of Northwestern Growth.
TARGET DISTRIBUTION LEVELS: See "Cash Distribution Policy -- Incentive
Distributions -- Hypothetical Annualized Yield."
TRANSFER APPLICATION: An application for transfer of Units in the form set
forth on the back of a certificate, substantially in the form included in this
Prospectus as Appendix B, or in a form substantially to the same effect in a
separate instrument.
UNITHOLDERS: Holders of the Common Units and the Subordinated Units,
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 shall
not include the right to receive Incentive Distributions.
UNRECOVERED CAPITAL: At any time, the Initial Unit Price, less the sum of
all distributions theretofore made in respect of an Initial Common Unit
constituting Capital Surplus and any distributions of cash (or the net agreed
value of any distributions in kind) in connection with the dissolution and
liquidation of the Partnership theretofore made in respect of such Unit,
adjusted as the Managing General Partner determines to be appropriate to give
effect to any distribution, subdivision or combination of such Units.
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<PAGE>
APPENDIX D
PRO FORMA OPERATING SURPLUS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
JUNE 30, 1996
-------------
<S> <C>
Pro forma operating income......................................................................... $ 40,397
Add: Pro forma depreciation and amortization....................................................... 14,500
-------------
Pro forma EBITDA(a)................................................................................ 54,897
Less: Pro forma interest expense................................................................... 18,702
Pro forma capital expenditures -- maintenance(b).............................................. 3,500
-------------
Pro forma Operating Surplus........................................................................ $ 32,695
-------------
-------------
</TABLE>
- -------------------
(a) 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.
(b) Based upon historical maintenance capital expenditures for the Combined
Operations for fiscal 1996.
D-1
<PAGE>
CORNERSTONE
PROPANE
PARTNERS, L.P.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below are the expenses (other than underwriting discounts and
commissions) expected to be incurred in connection with the issuance and
distribution of the securities registered hereby. With the exception of the
Securities and Exchange Commission registration fee, the NASD filing fee and the
NYSE filing fee, the amounts set forth below are estimates.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 62,554
NASD filing fee.................................................. 21,143
NYSE filing fee.................................................. *
Printing and engraving expenses.................................. *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Blue Sky fees and expenses....................................... *
Transfer agent and registrar fees................................ *
Miscellaneous expenses........................................... *
---------
Total.......................................................... $ *
---------
---------
</TABLE>
- -------------------
* To be furnished by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Section of the Prospectus entitled "The Partnership Agreement --
Indemnification" is
incorporated herein by this reference.
Reference is made to Section 7 of the Underwriting Agreement filed as
Exhibit 1.1 to this Registration Statement.
Subject to any terms, conditions or restrictions set forth in the
Partnership Agreements, Section 17-108 of the Delaware Revised Limited
Partnership Act empowers a Delaware limited partnership to indemnify and hold
harmless any partner or other person from and against all claims and demands
whatsoever.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
There has been no sale of securities of the Partnership within the past
three years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Exhibits
<TABLE>
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
*3.1 -- Form of Amended and Restated Agreement of Limited Partnership of
Cornerstone Propane Partners, L.P. (included as Appendix A to the
Prospectus)
3.2 -- Form of Amended and Restated Agreement of Limited Partnership of
Cornerstone Propane, L.P.
5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality of the securities
being registered
8.1 -- Opinion of Andrews & Kurth L.L.P. relating to tax matters
10.1 -- Form of Credit Agreement among Cornerstone Propane, L.P. and certain banks
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <C> <S>
10.2 -- Form of Note Purchase Agreement among Cornerstone Propane, L.P. and
certain investors
10.3 -- Form of Contribution and Conveyance Agreement, among Cornerstone Propane
Partners, L.P., Cornerstone Propane, L.P., Cornerstone Propane GP, Inc.,
and certain other parties
10.4 -- Form of 1996 Cornerstone Propane Partners, L.P. Restricted Unit Plan
10.5 -- Form of Employment Agreements for Messrs. Baxter, Kittrell, Goedde and
DiCosimo
21.1 -- List of Subsidiaries
*23.1 -- Consent of Arthur Andersen LLP
*23.2 -- Consent of Baird, Kurtz & Dobson
*23.3 -- Consent of Price Waterhouse LLP
23.4 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1 and 8.1)
*24.1 -- Powers of Attorney (included on signature page)
27.1 -- Financial Data Schedule
</TABLE>
- -------------------
* Filed herewith
b. Financial Statement Schedules --
All Financial statement schedules are omitted because the information is not
required, is not material or is otherwise included in the financial statements
or related notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefor, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Watsonville, State of California, on October 10, 1996.
CORNERSTONE PROPANE PARTNERS, L.P.
By: CORNERSTONE PROPANE GP, INC.
AS GENERAL PARTNER
By:____/s/_KEITH G. BAXTER____________
Name: Keith G. Baxter
Title: President and Chief
Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below appoints Richard R. Hylland,
Daniel K. Newell, Keith G. Baxter and Ronald J. Goedde, and each of them, any of
whom may act without the joinder of the other, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement and any Registration Statement (including any
amendment thereto) for this Offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to
file the same, with all exhibits thereto, and all other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or would do in person, hereby ratifying and confirming
all that said attorney-in-fact and agents or any of them or their or his
substitute and substitutes, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND DATES INDICATED BELOW.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------ ------------------------------------------------------ -------------------
<C> <S> <C>
/s/ MERLE D. LEWIS Chairman of the Board and Director of Cornerstone
---------------------------- Propane GP, Inc.
Merle D. Lewis October 10, 1996
/s/ RICHARD R. HYLLAND Vice Chairman of the Board and Director of Cornerstone
---------------------------- Propane GP, Inc.
Richard R. Hylland October 10, 1996
/s/ KEITH G. BAXTER President, Chief Executive Officer and Director of
---------------------------- Cornerstone Propane GP, Inc. (Principal Executive
Keith G. Baxter Officer) October 10, 1996
/s/ RONALD J. GOEDDE Executive Vice President and Chief Financial Officer
---------------------------- of Cornerstone Propane GP, Inc. (Principal Financial
Ronald J. Goedde and Accounting Officer) October 10, 1996
/s/ DANIEL K. NEWELL Director of Cornerstone Propane GP, Inc.
----------------------------
Daniel K. Newell October 10, 1996
</TABLE>
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS PAGE
- ----------- ---------
<C> <S> <C>
1.1 Form of Underwriting Agreement
*3.1 Form of Amended and Restated Agreement of Limited Partnership of Cornerstone Propane Partners,
L.P. (included as Appendix A to the Prospectus)
3.2 Form of Amended and Restated Agreement of Limited Partnership of Cornerstone Propane, L.P.
5.1 Opinion of Andrews & Kurth L.L.P. as to the legality of the securities being registered
8.1 Opinion of Andrews & Kurth L.L.P. relating to tax matters
10.1 Form of Credit Agreement among Cornerstone Propane, L.P. and certain banks
10.2 Form of Note Purchase Agreement among Cornerstone Propane, L.P. and certain investors
10.3 Form of Contribution and Conveyance Agreement, among Cornerstone Propane Partners, L.P.,
Cornerstone Propane, L.P. Cornerstone Propane GP, Inc., and certain other parties
10.4 Form of 1996 Cornerstone Propane Partners, L.P. Restricted Unit Plan
10.5 Form of Employment Agreements for Messrs. Baxter, Kittrell, Goedde and DiCosimo
21.1 List of Subsidiaries
*23.1 Consent of Arthur Andersen LLP
*23.2 Consent of Baird, Kurtz & Dobson
*23.3 Consent of Price Waterhouse LLP
23.4 Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1 and 8.1)
*24.1 Powers of Attorney (included on signature page)
27.1 Financial Data Schedule
</TABLE>
- -------------------
* Filed herewith
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our reports dated October 7, 1996 on the financial
statements of Cornerstone Propane Partners L.P. and of Cornerstone Propane GP,
Inc. and on the pro forma financial statements of Cornerstone Propane Partners,
L.P., and to the use of our report dated August 9, 1996 on the consolidated
financial statements of SYN Inc. included herein and to all references to our
Firm included in this registration statement.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
October 7, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Registration Statement on Form S-1 of
our reports dated August 14, 1996, relating to the financial statements of
Empire Energy Corporation and our report dated October 9, 1996, relating to the
financial statements of Synergy Group Incorporated, all of which appear in such
Registration Statement. We also consent to the reference to us under the heading
"Experts" in such Registration Statement.
BAIRD, KURTZ & DOBSON
Springfield, Missouri
October 9, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated September 13, 1996,
relating to the consolidated financial statements of CGI Holdings, Inc. which
appears in such Prospectus. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
San Francisco, California
October 9, 1996
