<PAGE> 1
As filed with the Securities and Exchange Commission
on August __, 1997
Registration No. 333-_______
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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)
--------------------
Delaware 5984 77-0439862
(State or other (Primary Standard (I.R.S.
jurisdiction of Industrial Employer
incorporation or Classification Code Identification
organization) Number) number)
--------------------
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)
With a copy to:
Robert J. Minkus
Schiff Hardin & Waite
7200 Sears Tower
233 S. Wacker Drive
Chicago, Illinois 60606
(312) 258-5500
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<PAGE>
<PAGE> 2
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, please check the following box. /X/
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. /_/
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
-------------------------------
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Amount to be Offering Price Per Aggregate Offering Registration
Securities to be Registered Registered Unit(1) Price(1) Fee
--------------------------- ----------- ------------------ ------------------ -------------
<S> <C> <C> <C> <C>
Common Units . . . . . . . 1,000,000 $ 22.844 $ 22,844,000 $ 7,878
</TABLE>
(1) Calculated in accordance with Rule 457(c) on the basis of the
average of the high and low sale prices of the Common Units on
August 22, 1997, as reported on the New York Stock Exchange
composite tape.
--------------------
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.
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<PAGE> 3
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one
to be used by the Partnership in connection with the issuance and sale
from time to time by the Partnership of Common Units in connection
with its acquisition of the securities and assets of other businesses
(the "Partnership Prospectus") and one to be used principally by
persons who have received Common Units of the Partnership in
connection with acquisitions by the Partnership of securities or
assets held by such persons, or their transferees, and who wish to
offer and sell such Common Units in transactions in which they and any
broker-dealer through whom such Common Units are sold may be deemed to
be Underwriters within the meaning of the Securities Act of 1933, as
amended (the "Selling Unitholders Prospectus"). The Partnership
Prospectus and the Selling Unitholders Prospectus will be identical in
all respects except that they will contain different front cover pages
and the Selling Unitholders Prospectus will contain an ADDITIONAL
section under the caption "Manner of Offering." The Partnership
Prospectus is included herein and is followed by those pages to be
used in the Selling Unitholders Prospectus which differ from, or are
in addition to, those in the Partnership Prospectus. Each of the
alternate or additional pages for the Selling Unitholders Prospectus
included herein has been labeled "Alternate Page for Selling
Unitholders Prospectus."
If required pursuant to Rule 424(b) of the General Rules and
Regulations under the Securities Act of 1933, as amended, copies of
each of the prospectuses in the forms in which they are used after the
Registration Statement becomes effective will be filed with the
Securities and Exchange Commission.
<PAGE> 4
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 by 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.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 28, 1997
1,000,000 Common Units
REPRESENTING LIMITED PARTNER INTERESTS
CORNERSTONE PROPANE PARTNERS, L.P.
----------------------------
This Prospectus relates to up to 1,000,000 Common Units
representing limited partner interests in Cornerstone Propane
Partners, L.P., a Delaware limited partnership (the "Partnership"),
which may be issued from time to time by the Partnership in connection
with its acquisition of other businesses, properties or securities in
business combination transactions in accordance with Rule
415(a)(1)(viii) under the Securities Act of 1933, as amended (the
"Securities Act"). It is expected that the terms of such business
combination transactions will be determined by direct negotiations
with the owners or controlling persons of the businesses, properties
or securities to be acquired. Common Units issued in such business
combination transactions will be valued at prices reasonably related
to market prices of the Common Units either at the time the terms of
an acquisition are agreed upon or at the time of delivery of such
Common Units.
The Registration Statement of which this Prospectus is a part
also relates to the offer and sale of Common Units from time to time
by persons who have received Common Units in connection with business
combination transactions by the Partnership, or by transferees of such
persons, and who wish to offer and sell such Common Units in
transactions in which they and any broker-dealer through whom such
Common Units are sold may be deemed to be underwriters within the
meaning of the Securities Act.
----------------------------
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> 5
PAGE 56, 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 Common Units are traded on the New York Stock Exchange, Inc.
("NYSE") under the symbol "CNO." Application will be made to list the
Common Units offered hereby on the NYSE. The last reported sale price
of Common Units on the NYSE composite tape on August 27, 1997 was
$22-13/16 per Common Unit.
All expenses of this offering will be paid by the Partnership.
No underwriting discounts or commissions will be paid in connection
with the issuance of Common Units, although finder's fees may be paid
with respect to specific acquisitions. Any person receiving a
finder's fee may be deemed to be an "underwriter" within the meaning
of the Securities Act.
The Partnership will distribute to its partners, on a quarterly
basis, all of its Available Cash, which is generally all cash on hand
at the end of a quarter, as adjusted for reserves. The Managing
General Partner has broad discretion in making cash disbursements and
establishing reserves. The Partnership intends, to the extent there
is sufficient Available Cash, to distribute to each holder of Common
Units at least $.54 per Common Unit per quarter (the "Minimum
Quarterly Distribution") or $2.16 per Common Unit on an annualized
basis.
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 represent limited partner
interests in the Partnership, which the Partnership believes is the
fifth largest retail marketer of propane in the United States. The
<PAGE> 6
Partnership was formed in 1996 to acquire, own and operate the propane
businesses and assets (the "Combined Operations") of SYN Inc. and
Empire Energy Corporation (formerly subsidiaries of Northwestern
Growth Corporation ("Northwestern Growth")), Myers Propane Gas Company
and CGI Holdings, Inc. The Managing General Partner is Cornerstone
Propane GP, Inc. The Managing General Partner and Northwestern Growth
are subsidiaries of Northwestern Public Service Company ("NPS"), an
NYSE-listed energy distribution company.
----------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE 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.
The date of this Prospectus is ____________ __, 1997
. THE MINIMUM QUARTERLY DISTRIBUTION IS NOT GUARANTEED. THE ACTUAL
AMOUNT OF CASH DISTRIBUTIONS WILL DEPEND ON FUTURE PARTNERSHIP
OPERATING PERFORMANCE AND WILL BE AFFECTED BY THE FUNDING OF
RESERVES, OPERATING AND CAPITAL EXPENDITURES AND OTHER MATTERS
WITHIN THE DISCRETION OF THE MANAGING GENERAL PARTNER, AS WELL AS
REQUIRED INTEREST AND PRINCIPAL PAYMENTS ON, AND THE OTHER TERMS
OF, THE PARTNERSHIP'S INDEBTEDNESS. PRO FORMA AVAILABLE CASH
FROM OPERATING SURPLUS (AS DEFINED IN THE GLOSSARY) GENERATED
DURING FISCAL 1996 WOULD HAVE BEEN SUFFICIENT TO COVER THE
MINIMUM QUARTERLY DISTRIBUTION FOR SUCH FISCAL YEAR ON ALL OF THE
COMMON UNITS OUTSTANDING AS OF THE DATE OF THIS PROSPECTUS AND
THE RELATED DISTRIBUTION ON THE GENERAL PARTNER INTERESTS, BUT
WOULD HAVE BEEN INSUFFICIENT BY APPROXIMATELY $10.5 MILLION TO
COVER THE MINIMUM QUARTERLY DISTRIBUTION ON ALL THE SUBORDINATED
UNITS OUTSTANDING AS OF THE DATE OF THIS PROSPECTUS AND THE
RELATED DISTRIBUTION ON THE GENERAL PARTNER INTERESTS.
. THERE CAN BE NO ASSURANCE THAT THE PARTNERSHIP WILL BE ABLE TO
INTEGRATE SUCCESSFULLY THE COMBINED OPERATIONS, ACHIEVE
ANTICIPATED COST SAVINGS OR INSTITUTE THE NECESSARY SYSTEMS AND
PROCEDURES TO SUCCESSFULLY MANAGE THE COMBINED OPERATIONS ON A
PROFITABLE BASIS.
. AT MARCH 31, 1997, THE PARTNERSHIP'S TOTAL INDEBTEDNESS AS A
PERCENTAGE OF ITS TOTAL CAPITALIZATION WAS APPROXIMATELY 48.1%.
AS A RESULT, THE PARTNERSHIP HAS INDEBTEDNESS THAT IS SUBSTANTIAL
IN RELATION TO ITS PARTNERS' CAPITAL.
. HOLDERS OF COMMON UNITS HAVE ONLY LIMITED VOTING RIGHTS, AND THE
MANAGING GENERAL PARTNER MANAGES AND OPERATES THE PARTNERSHIP.
THE MANAGING GENERAL PARTNER MAY NOT BE REMOVED EXCEPT PURSUANT
TO THE VOTE OF THE HOLDERS OF AT LEAST 66-2/3% OF THE OUTSTANDING
UNITS (INCLUDING UNITS OWNED BY THE MANAGING GENERAL PARTNER AND
<PAGE> 7
ITS AFFILIATES). THE OWNERSHIP OF THE SUBORDINATED UNITS BY THE
MANAGING GENERAL PARTNER AND ITS AFFILIATES EFFECTIVELY GIVES THE
MANAGING GENERAL PARTNER THE ABILITY TO PREVENT ITS REMOVAL.
. CONFLICTS OF INTEREST MAY ARISE BETWEEN THE MANAGING GENERAL
PARTNER AND ITS AFFILIATES, ON THE ONE HAND, AND THE PARTNERSHIP
AND THE UNITHOLDERS, ON THE OTHER. THE PARTNERSHIP AGREEMENT
CONTAINS CERTAIN PROVISIONS THAT LIMIT THE LIABILITY AND REDUCE
THE FIDUCIARY DUTIES OF THE MANAGING GENERAL PARTNER TO THE
UNITHOLDERS. HOLDERS OF COMMON UNITS ARE DEEMED TO HAVE
CONSENTED TO CERTAIN ACTIONS AND CONFLICTS OF INTEREST THAT MIGHT
OTHERWISE BE DEEMED A BREACH OF FIDUCIARY OR OTHER DUTIES UNDER
APPLICABLE STATE LAW. THE VALIDITY AND ENFORCEABILITY OF THESE
TYPES OF PROVISIONS UNDER DELAWARE LAW ARE UNCERTAIN. UNDER
CERTAIN CIRCUMSTANCES, AFFILIATES OF THE MANAGING GENERAL PARTNER
MAY COMPETE WITH THE PARTNERSHIP.
. THE ISSUANCE OF THE COMMON UNITS OFFERED HEREBY MIGHT BE DILUTIVE
TO EARNINGS OF THE PARTNERSHIP AND DISTRIBUTIONS TO THE
UNITHOLDERS.
. PRIOR TO MAKING ANY DISTRIBUTION ON THE COMMON UNITS, THE
PARTNERSHIP WILL REIMBURSE THE MANAGING GENERAL PARTNER AND ITS
AFFILIATES AT COST FOR ALL EXPENSES INCURRED ON BEHALF OF THE
PARTNERSHIP. ON A PRO FORMA BASIS, APPROXIMATELY $48.0 MILLION
OF EXPENSES (PRIMARILY WAGES AND SALARIES) WOULD HAVE BEEN
REIMBURSED BY THE PARTNERSHIP TO THE MANAGING GENERAL PARTNER IN
FISCAL 1996.
. THE TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP ARE
COMPLEX. THE AVAILABILITY TO A COMMON UNITHOLDER OF THE FEDERAL
INCOME TAX BENEFITS OF AN INVESTMENT IN THE PARTNERSHIP LARGELY
DEPENDS ON THE CLASSIFICATION OF THE PARTNERSHIP AS A PARTNERSHIP
FOR THAT PURPOSE. THE PARTNERSHIP WILL RELY UPON AN OPINION OF
COUNSEL, AND NOT A RULING FROM THE INTERNAL REVENUE SERVICE, ON
THAT ISSUE AND OTHERS RELEVANT TO A COMMON UNITHOLDER.
. BECAUSE THE RETAIL PROPANE INDUSTRY IS MATURE AND OVERALL DEMAND
FOR PROPANE IS EXPECTED TO EXPERIENCE LIMITED GROWTH IN THE
FORESEEABLE FUTURE, THE PARTNERSHIP WILL DEPEND ON ACQUISITIONS
AS THE PRINCIPAL MEANS OF GROWTH. THERE CAN BE NO ASSURANCE THAT
THE PARTNERSHIP WILL BE ABLE TO COMPLETE FUTURE ACQUISITIONS.
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<PAGE> 8
TABLE OF CONTENTS
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . 12
CORNERSTONE PROPANE PARTNERS, L.P. . . . . . . . . . . . . . . 12
RECENT DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . . 25
SUMMARY PRO FORMA FINANCIAL AND OPERATING DATA . . . . . . . . 27
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
CASH AVAILABLE FOR DISTRIBUTION . . . . . . . . . . . . . . . 37
PARTNERSHIP STRUCTURE AND MANAGEMENT . . . . . . . . . . . . . . . 38
THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . 41
SUMMARY OF TAX CONSIDERATIONS . . . . . . . . . . . . . . . . 52
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Risks Inherent in the Partnership's Business . . . . . . . . . 57
Risks Inherent in an Investment in the Partnership . . . . . 59
Conflicts of Interest and Fiduciary Responsibilities . . . . . 65
Tax Risks . . . . . . . . . . . . . . . . . . . . . . . . . . 68
THE IPO AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . 73
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . 74
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . 74
PRICE RANGE OF COMMON UNITS . . . . . . . . . . . . . . . . . . . . 75
CASH DISTRIBUTION POLICY . . . . . . . . . . . . . . . . . . . . . 76
General . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Quarterly Distributions of Available Cash . . . . . . . . . . 78
Distributions from Operating Surplus during Subordination
Period . . . . . . . . . . . . . . . . . . . . . . . . . 78
Distributions from Operating Surplus after Subordination
Period . . . . . . . . . . . . . . . . . . . . . . . . . 80
Incentive Distributions-Hypothetical Annualized Yield . . . . 81
Distributions from Capital Surplus . . . . . . . . . . . . . . 82
Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels . . . . . . . . . . . . . . . . . . . 83
Distributions of Cash Upon Liquidation . . . . . . . . . . . . 84
CASH AVAILABLE FOR DISTRIBUTION . . . . . . . . . . . . . . . . . . 87
RECENT DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . . 90
SELECTED PRO FORMA FINANCIAL AND OPERATING DATA . . . . . . . . . 93
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA . . . . . . . . . 96
Synergy . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Empire Energy . . . . . . . . . . . . . . . . . . . . . . . . 98
<PAGE>
<PAGE> 9
Coast . . . . . . . . . . . . . . . . . . . . . . . . . . . .100
Myers . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . 103
General . . . . . . . . . . . . . . . . . . . . . . . . . . 103
The Partnership . . . . . . . . . . . . . . . . . . . . . . 105
Synergy . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Empire Energy . . . . . . . . . . . . . . . . . . . . . . . 115
Coast . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
Litigation and Other Contingencies . . . . . . . . . . . . . 123
Effects of Inflation . . . . . . . . . . . . . . . . . . . . 123
BUSINESS AND PROPERTIES . . . . . . . . . . . . . . . . . . . . . 124
General . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Business Strategy . . . . . . . . . . . . . . . . . . . . . 125
Continued Balanced Growth . . . . . . . . . . . . . . . . 125
Formation Background . . . . . . . . . . . . . . . . . . . . 127
Industry Background and Competition . . . . . . . . . . . . 128
Products, Services and Marketing . . . . . . . . . . . . . . 130
Propane Supply and Storage . . . . . . . . . . . . . . . . . 133
Pricing Policy . . . . . . . . . . . . . . . . . . . . . . . 134
Billing and Collection Procedures . . . . . . . . . . . . . 134
Properties . . . . . . . . . . . . . . . . . . . . . . . . . 134
Trademarks and Tradenames . . . . . . . . . . . . . . . . . 135
Government Regulation . . . . . . . . . . . . . . . . . . . 135
Employees . . . . . . . . . . . . . . . . . . . . . . . . . 137
Litigation and Other Contingencies . . . . . . . . . . . . . 137
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Partnership Management . . . . . . . . . . . . . . . . . . . 141
Directors and Executive Officers of the Managing General
Partner . . . . . . . . . . . . . . . . . . . . . . . . 145
Reimbursement of Expenses of the Managing General Partner
and its Affiliates . . . . . . . . . . . . . . . . . . 141
Executive Compensation . . . . . . . . . . . . . . . . . . . 141
Compensation of Directors . . . . . . . . . . . . . . . . . 145
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . 146
Ownership of Partnership Units by the General Partners
and Directors and Executive Officers of the Managing
General Partner . . . . . . . . . . . . . . . . . . . 146
Ownership of NPS Common Stock by Directors and Executive
Officers of the Managing General Partner . . . . . . . 147
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . 148
Rights of the General Partners . . . . . . . . . . . . . . . 148
Contribution, Conveyance and Assumption Agreement . . . . . 148
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES . . . . . . 148
Conflicts of Interest . . . . . . . . . . . . . . . . . . . 148
Fiduciary and Other Duties . . . . . . . . . . . . . . . . . 154
<PAGE>
<PAGE> 10
DESCRIPTION OF THE COMMON UNITS . . . . . . . . . . . . . . . . . 156
The Units . . . . . . . . . . . . . . . . . . . . . . . . . 156
Transfer Agent and Registrar . . . . . . . . . . . . . . . 157
Transfer of Common Units . . . . . . . . . . . . . . . . . . 157
THE PARTNERSHIP AGREEMENT . . . . . . . . . . . . . . . . . . . . 158
Organization and Duration . . . . . . . . . . . . . . . . . 159
Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . 159
Power of Attorney . . . . . . . . . . . . . . . . . . . . . 160
Capital Contributions . . . . . . . . . . . . . . . . . . . 160
Limited Liability . . . . . . . . . . . . . . . . . . . . . 160
Issuance of Additional Securities . . . . . . . . . . . . . 162
Amendment of Partnership Agreement . . . . . . . . . . . . . 163
Merger, Sale or Other Disposition of Assets . . . . . . . . 165
Termination and Dissolution . . . . . . . . . . . . . . . . 166
Liquidation and Distribution of Proceeds . . . . . . . . . . 166
Withdrawal or Removal of the General Partners . . . . . . . 167
Transfer of General Partners' Interests and Incentive
Distribution Rights . . . . . . . . . . . . . . . . . . 169
Change of Management Provisions . . . . . . . . . . . . . . 169
Limited Call Right . . . . . . . . . . . . . . . . . . . . . 170
Meetings; Voting . . . . . . . . . . . . . . . . . . . . . . 170
Status as Limited Partner or Assignee . . . . . . . . . . . 172
Non-citizen Assignees; Redemption . . . . . . . . . . . . . 172
Indemnification . . . . . . . . . . . . . . . . . . . . . . 172
Books and Reports . . . . . . . . . . . . . . . . . . . . . 173
Right to Inspect Partnership Books and Records . . . . . . . 174
Registration Rights . . . . . . . . . . . . . . . . . . . . 174
UNITS ELIGIBLE FOR FUTURE SALE . . . . . . . . . . . . . . . . . 175
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . 176
TAX CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . 177
Legal Opinions and Advice . . . . . . . . . . . . . . . . . 177
Tax Rates . . . . . . . . . . . . . . . . . . . . . . . . . 179
Consequences of Exchanging Property for Common Units . . . . 179
Ownership of Units by S Corporations . . . . . . . . . . . . 181
Partnership Status . . . . . . . . . . . . . . . . . . . . . 183
Limited Partner Status . . . . . . . . . . . . . . . . . . . 185
Tax Consequences of Unit Ownership . . . . . . . . . . . . . 186
Allocation of Partnership Income, Gain, Loss and Deduction . 189
Tax Treatment of Operations . . . . . . . . . . . . . . . . 190
Disposition of Common Units . . . . . . . . . . . . . . . . 195
Uniformity of Units . . . . . . . . . . . . . . . . . . . . 198
Administrative Matters . . . . . . . . . . . . . . . . . . . 201
State, Local and Other Tax Considerations . . . . . . . . . 204
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS . . . . . 205
VALIDITY OF THE COMMON UNITS . . . . . . . . . . . . . . . . . . 206
<PAGE>
<PAGE> 11
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . 207
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . 213
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . 316
APPENDIX B . . . . . . . . . . . . . . . . . . . . . . . . . . . 319
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.
<PAGE> 12
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.
THE TRANSACTIONS RELATED TO THE FORMATION OF THE PARTNERSHIP, THE
PARTNERSHIP'S ACQUISITION OF THE COMBINED OPERATIONS, THE
PARTNERSHIP'S INITIAL PUBLIC OFFERING OF COMMON UNITS IN DECEMBER 1996
(THE "IPO"), THE ISSUANCE OF $220.0 MILLION OF SENIOR SECURED NOTES
DUE 2010 (THE "NOTES") BY CORNERSTONE PROPANE, L.P., THE PARTNERSHIP'S
OPERATING SUBSIDIARY (THE "OPERATING PARTNERSHIP"), THE ENTERING INTO
BANK CREDIT FACILITIES AND THE OTHER TRANSACTIONS THAT OCCURRED IN
CONNECTION THEREWITH ARE REFERRED TO IN THIS PROSPECTUS AS THE
"TRANSACTIONS." SEE "THE IPO AND RELATED TRANSACTIONS." EXCEPT AS THE
CONTEXT OTHERWISE REQUIRES, REFERENCES TO, OR DESCRIPTIONS OF, THE
ASSETS, BUSINESS AND OPERATIONS OF THE PARTNERSHIP GIVE PRO FORMA
EFFECT TO THE TRANSACTIONS AND, ACCORDINGLY, INCLUDE THE PROPANE
ASSETS, BUSINESSES AND OPERATIONS OF SYN INC. ("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"), EMPIRE ENERGY CORPORATION ("EMPIRE
ENERGY"), MYERS PROPANE GAS COMPANY ("MYERS") AND CGI HOLDINGS, INC.
("COAST") AS CONDUCTED PRIOR TO THE IPO. THE COMMON UNITS AND THE
SUBORDINATED UNITS ARE COLLECTIVELY REFERRED TO HEREIN AS THE "UNITS,"
AND HOLDERS OF THE COMMON UNITS AND SUBORDINATED UNITS ARE
COLLECTIVELY REFERRED TO HEREIN AS "UNITHOLDERS." UNLESS OTHERWISE
SPECIFIED, REFERENCES TO THE PARTNERSHIP IN THIS PROSPECTUS INCLUDE
THE OPERATING PARTNERSHIP, AND REFERENCES TO PERCENTAGE OWNERSHIP OF
THE PARTNERSHIP REFLECT THE APPROXIMATE EFFECTIVE OWNERSHIP INTEREST
OF THE UNITHOLDERS AND THE GENERAL PARTNERS IN THE PARTNERSHIP AND THE
OPERATING PARTNERSHIP ON A COMBINED BASIS. FOR EASE OF REFERENCE, A
GLOSSARY OF CERTAIN TERMS USED IN THIS PROSPECTUS IS INCLUDED AS
APPENDIX B 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 it is the fifth largest retail
marketer of propane in the United States in terms of volume, serving
more than 360,000 residential, commercial, industrial and agricultural
customers from 296 customer service centers in 26 states as of June
30, 1997. The Partnership's operations are concentrated in the east
coast, south-central and west coast regions of the United States. For
the fiscal year ended June 30, 1996, the Partnership had combined
retail propane sales of approximately 235 million gallons and pro
forma operating income plus depreciation and amortization ("EBITDA")
of approximately $47.0 million. Pro forma EBITDA would have been
approximately $54.9 million if effect were given to an additional $7.9
million of expense reductions which the Partnership believes are
achievable as a result of the Transactions, but which have not been
included in the pro forma adjustments.
<PAGE> 13
The Partnership was formed in 1996 to acquire, own and operate
the propane businesses and assets of Synergy and Empire Energy
(formerly subsidiaries of Northwestern Growth), Myers and Coast.
Northwestern Growth is a wholly owned subsidiary of NPS, an
NYSE-listed energy distribution company. Northwestern Growth was
formed in 1994 to pursue and manage nonutility investments and
development activities for NPS, with a primary focus on growth
opportunities in the energy, energy equipment and energy services
industries. To capitalize on the growth and consolidation
opportunities in the propane distribution market, in August 1995,
Northwestern Growth acquired the predecessor of Synergy, then the
sixth largest retail marketer of propane in the United States; in
October 1996 it acquired Empire Energy, then the eighth largest retail
marketer of propane in the United States; and immediately prior to the
IPO it acquired Coast, then the 18th largest retail marketer of
propane in the United States. NPS acquired Myers, a smaller retail
marketer of propane, in December 1995.
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
reduces the effects of adverse weather conditions in any one region on
EBITDA and allows it to achieve economies of scale; (iii) the
significant proportion of the Partnership's retail sales that is made
to residential customers, which are generally more profitable than
sales to other customers; (iv) management's experience in identifying,
evaluating and completing both small and large acquisitions; (v) the
Partnership's substantial national wholesale supply and logistics
business, which provides it with a national presence and a relatively
secure source of propane to support the service goals of its customer
service centers; (vi) the Partnership's centralized administrative
systems that enable local managers to focus on customer service and
growth; and (vii) the Partnership's relationship with Northwestern
Growth, which has proven experience in the energy distribution
business and in the acquisition and growth of propane businesses.
Although the Partnership believes it has a number of competitive
strengths, the propane industry is highly competitive and includes a
number of large national firms and regional firms and several thousand
small independent firms. Certain competitors may have greater
financial resources or lower operating costs than the Partnership.
Further, variations in the weather or the economy in one or more
regions in which the Partnership operates can significantly affect the
total volume of propane sold by the Partnership and, consequently, the
Partnership's results of operations.
BUSINESS STRATEGY
The principal elements of the Partnership's business strategy are
to (i) extend and refine its existing service orientation,
<PAGE> 14
(ii) continue to pursue balanced growth through small and large
acquisitions, internal growth at its existing customer service centers
and start-ups of new customer service centers, (iii) enhance the
profitability of its existing operations by integrating the Combined
Operations, implementing entrepreneurially oriented local manager
incentive programs, where appropriate, and continuing to centralize
administrative systems and (iv) capitalize on the Partnership's
national wholesale supply and logistics business.
FOCUS ON CUSTOMER SERVICE. The Partnership seeks to be
recognized in the marketplace as the most customer service-oriented
propane supplier. Although propane is a commodity product, the
Partnership believes that it will be able to distinguish itself from
the competition by providing reliable and timely delivery of propane
at competitive prices. The Partnership believes that establishing and
clearly communicating standards of service and performance
expectations at all levels of the Partnership, and rewarding its
employees accordingly, will enable the Partnership to achieve its
service goals. The Partnership has incentive programs at certain
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, where appropriate.
CONTINUED BALANCED GROWTH. The Partnership intends to continue
to pursue balanced growth through small and large acquisitions,
internal growth at its existing customer service centers and start-ups
of new customer service centers. Acquisitions are expected to be the
principal means of growth for the Partnership, as the retail propane
industry is mature and overall demand for propane is expected to
experience limited growth in the foreseeable future. The Partnership
believes that the fragmented nature of the retail propane industry
provides significant opportunities for growth through strategic
acquisitions. Industry sources indicate that there are over 8,000
retail propane operations in the United States, of which the ten
largest account for approximately 33% of industry volumes. The
Partnership's acquisition strategy will concentrate on companies that
have one or more of the following characteristics: (i) locations in
areas serviced by the Partnership that may be combined with existing
operations, providing greater economies of scale at the customer
service center level, (ii) a recent record of growth and a local
reputation for quality service, (iii) locations in areas that are
relatively colder and (iv) operations with a relatively high
proportion of sales to the more profitable residential customer
segment. As part of its acquisition program, the Partnership
generally expects to retain the name and identity of the acquired
entity, which the Partnership believes will preserve the goodwill of
the acquired business and promote continued local customer loyalty.
The Partnership's ability to make acquisitions is facilitated by the
availability of a $75.0 million acquisition credit facility and the
<PAGE> 15
ability to issue additional limited partner interests. In the first
six months of 1997, the Partnership acquired businesses in California,
Florida and New Hampshire which added approximately 12,000 customers
and annual retail propane sales of approximately 12.5 million gallons.
The aggregate purchase price for these acquisitions was approximately
$20.9 million, of which approximately $14.8 million was in the form of
Common Units (approximately 700,000 Common Units). There can be no
assurance, however, that the Partnership will continue to 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 an acquisition will not affect the ability of the
Partnership to make distributions to the Unitholders. The Partnership
is not required under the Partnership Agreement to seek Unitholder
approval of any acquisition.
The Partnership is from time to time engaged in ongoing
discussions with respect to acquisitions, and expects to continue to
pursue such acquisition opportunities actively. As of the date of
this Prospectus, the Partnership does not have any agreements with
respect to any material acquisitions but is involved in ongoing
discussions with several companies and is continuing to assess these
and other acquisition opportunities. The Partnership is unable to
predict the size, number or timing of any future acquisitions.
In addition to pursuing growth through acquisitions, the
Partnership continues to focus on internal growth at its existing
customer service centers. The Partnership seeks 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 is being 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 establishing a new customer
service center. The Partnership believes it can successfully initiate
these start-up operations in attractive markets by identifying and
hiring local managers with proven propane service experience and
establishing programs that reward service-oriented and profitable
operations and that allow the managers to share in the growth of the
business.
ENHANCE PROFITABILITY OF ITS EXISTING OPERATIONS. The
Partnership believes that it can enhance the profitability of its
customer service centers by integrating the Combined Operations,
reducing inefficiencies in areas where there is a geographic overlap
<PAGE> 16
of services and implementing "best practices" and management incentive
programs throughout the Partnership's operations. In integrating the
Combined Operations, the Partnership is in the process of
consolidating and centralizing ongoing administrative functions and
systems, which should enable local managers to devote their time to
providing customer service and achieving other performance goals. In
addition, the Partnership believes it can improve efficiencies in
areas where there is a geographic overlap of services provided by
customer service centers. The Partnership's management has identified
effective operating programs and strategies used by one of the
constituent companies prior to the IPO but not used by one or more of
the others. The Partnership believes that the implementation of these
"best practices" throughout the Combined Operations will improve
customer retention, foster expansion of its customer base and create
operating efficiencies and cost savings opportunities. Furthermore,
the Partnership believes that instituting management incentive
programs, where appropriate, and fostering an entrepreneurial approach
at additional customer service centers will give managers the
incentive to increase such customer service centers' profitability.
CAPITALIZE ON NATIONAL SUPPLY AND LOGISTICS BUSINESS. The
Partnership has a national wholesale propane supply and logistics
business with sales of approximately 226 million gallons in fiscal
1996. The Partnership believes that this business provides it with a
reasonably secure, competitively priced and efficient supply base to
support the service goals of its existing customer service centers.
In addition, the Partnership believes its wholesale and logistics
business positions it well for expansion through acquisitions or
start-up operations in new markets. As part of its wholesale
business, the Partnership also provides product supply and financial
and technical assistance to certain small independent retailers.
While these arrangements provide some economic return to the
Partnership, the Partnership believes their greater value lies in the
resulting relationships, which position the Partnership to acquire
such businesses in the event they become available for purchase.
GENERAL
The Partnership is principally engaged in (i) the retail
distribution of propane for residential, commercial, industrial,
agricultural and other retail uses, (ii) the wholesale marketing and
distribution of propane and natural gas liquids to the retail propane
industry, the chemical and petrochemical industries and other
commercial and agricultural markets, (iii) the repair and maintenance
of propane heating systems and appliances and (iv) the sale of
propane-related supplies, appliances and other equipment.
Propane, a by-product of natural gas processing and petroleum
refining, is a clean-burning energy source recognized for its
transportability and ease of use relative to alternative stand-alone
energy sources. The retail propane business of the Partnership
consists principally of transporting propane to its retail
<PAGE> 17
distribution outlets and then to tanks located on its customers'
premises. Retail propane use falls into four broad categories:
(i) residential, (ii) industrial and commercial, (iii) agricultural
and (iv) other applications, including motor fuel sales. Residential
customers use propane primarily for space and water heating.
Industrial customers use propane primarily as fuel for forklifts and
stationary engines, to fire furnaces, as a cutting gas, in mining
operations and in other process applications. Commercial customers,
such as restaurants, motels, laundries and commercial buildings, use
propane in a variety of applications, including cooking, heating and
drying. In the agricultural market, propane is primarily used for
tobacco curing, crop drying, poultry brooding and weed control. Other
retail uses include motor fuel for cars and trucks, outdoor cooking
and other recreational purposes, propane resales and sales to state
and local governments. In its wholesale operations, the Partnership
sells propane principally to large industrial customers and other
propane distributors.
On a combined basis during fiscal 1996, the Partnership sold
approximately 235 million gallons of propane to retail customers and
226 million gallons of propane to wholesale customers. Approximately
57.8% of the retail gallons was sold to residential customers, 25.9%
was sold to industrial and commercial customers, 13.1% was sold to
agricultural customers and 3.2% was sold to all other retail users.
Sales to residential customers in fiscal 1996 accounted for
approximately 29.5% of total gallons (including wholesale gallons)
sold, but approximately 67.0% of the Partnership's pro forma gross
profit from propane sales. Residential sales have a greater profit
margin and a more stable customer base than other retail markets
served by the Partnership. Industrial and commercial sales accounted
for 18.7% of the Partnership's pro forma gross profit from propane
sales for fiscal 1996, agricultural sales accounted for 6.1%, and all
other retail sales accounted for 2.8%. Sales to wholesale customers
contributed the remaining 5.4% of pro forma gross profit from propane
sales. No single retail customer accounted for more than 1% of the
Partnership's pro forma revenues during fiscal 1996. During fiscal
1996, approximately 72.7% of the Partnership's combined retail propane
volume and in excess of 85% of the Partnership's pro forma EBITDA were
attributable to sales during the six-month peak heating season of
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 June 30, 1997, the Partnership's retail operations
consisted of 296 customer service centers in 26 states. As of such
date, the Partnership owned a fleet of 34 transport truck tractors, 63
transport trailers, approximately 900 bobtail trucks and approximately
1,000 other delivery and service vehicles. In addition, in its retail
operations, the Partnership owns an aggregate of approximately
21 million gallons of above-ground propane storage capacity at its
customer service centers. In many states, certain fire safety
<PAGE> 18
regulations restrict the refilling of a leased tank solely to the
propane supplier that owns the tank. The inconvenience of switching
tanks minimizes a customer's tendency to switch among suppliers of
propane.
The Partnership's wholesale operations engage in the marketing of
propane to independent dealers, major interstate marketers and the
chemical and petrochemical industries. The Partnership participates
to a lesser extent in the marketing of other natural gas liquids, the
processing and marketing of natural gas and the gathering of crude
oil. The Partnership either owns or has contractual rights to use
transshipment terminals, rail cars, long-haul tanker trucks, pipelines
and storage capacity. The Partnership believes that its wholesale
marketing and processing activities position it to achieve product
cost advantages and to avoid shortages during periods of tight supply
to an extent not generally available to other retail propane
distributors.
Propane competes primarily with natural gas, electricity and fuel
oil as an energy source, principally on the basis of price,
availability and portability. Propane is more expensive than natural
gas on an equivalent BTU basis in locations served by natural gas, but
serves as a substitute for natural gas in rural and suburban areas
where natural gas is unavailable or portability of product is
required. Propane is generally less expensive to use than electricity
for space heating, water heating, clothes drying and cooking.
Although propane is similar to fuel oil in certain applications and
market demand, propane and fuel oil compete to a lesser extent
primarily because of the cost of converting from one to the other.
THE IPO AND RELATED TRANSACTIONS
On December 17, 1996, the Partnership consummated the IPO,
issuing 9,821,000 Common Units (including 1,281,000 Common Units
issued pursuant to the exercise in full of the underwriters' over-
allotment option), and received gross proceeds of $206.2 million. In
addition, the Operating Partnership issued $220.0 million aggregate
principal amount of Notes to certain institutional investors in a
private placement (the "Note Placement").
Immediately prior to the closing of the IPO, Synergy, Empire
Energy, Myers and Coast entered into a series of transactions which
resulted in the Combined Operations being owned by the General
Partners. Concurrently with the IPO closing, the General Partners
contributed, or caused 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 assumed
substantially all of the liabilities associated with the Combined
Operations. Immediately after such contributions, all of the limited
partner interests in the Operating Partnership were conveyed to the
Partnership in exchange for interests in the Partnership. In
addition, the Operating Partnership contributed the portion of the
<PAGE> 19
Combined Operations utilized in the parts and appliance sales and
service business to its corporate subsidiary. As a result of these
transactions, the General Partners own an aggregate of 6,597,619
Subordinated Units, representing an aggregate 39.4% limited partner
interest in the Partnership, an aggregate 2% general partner interest
in the Partnership and the right to receive Incentive Distributions
(as defined below).
Concurrently with the closing of the IPO, the Operating
Partnership entered into a $125.0 million bank credit facility (the
"Bank Credit Facility"), which includes a $50.0 million revolving
credit facility to be used for working capital and other general
partnership purposes (the "Working Capital Facility"), and a
$75.0 million revolving credit facility (the "Acquisition Facility")
to be used for acquisitions and capital improvements. 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 - The Partnership - Financing and
Sources of Liquidity."
DISTRIBUTIONS AND PAYMENTS TO THE GENERAL PARTNERS AND THEIR
AFFILIATES
The following information summarizes the distributions and
payments made and 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."
FORMATION STAGE
The Consideration Paid to the
General Partners and their
Affiliates for the Transfer
of the Propane Business of
the Combined Operations to
the Partnership . . . . In exchange for conveying
substantially all of the
assets of the Combined
Operations to the Operating
Partnership, the General
Partners received 6,597,619
Subordinated Units, an
aggregate 2% general partner
interest in the Partnership
and the Operating Partnership,
and all of the Incentive
Distribution Rights, and the
Operating Partnership assumed
substantially all of the
<PAGE> 20
liabilities associated with
the Combined Operations. Of
the proceeds from the IPO and
the Note Placement,
approximately $59.9 million
was used to repay indebtedness
owed by Synergy to NPS
(including a prepayment
penalty of $6.5 million),
approximately $81.9 million
was used to repay acquisition
financing incurred by
Northwestern Growth
principally in connection with
the acquisitions of Empire
Energy and Coast and the
purchase of stock of (and
certain rights related to)
Synergy and Myers, and
approximately $76.7 million
was distributed to the Special
General Partner and used to
redeem its preferred stock
issued in connection with the
August 15, 1995 acquisition of
Synergy's predecessor (the
"Synergy Acquisition") and
held by NPS and the
unaffiliated shareholders
($61.2 million) and provide
net worth to the Special
General Partner ($15.5
million). The shareholders of
Coast who became senior
executives of the Managing
General Partner received
approximately $9.3 million in
connection with Northwestern
Growth's acquisition of Coast
(the "Coast Merger"). The
Partnership used the proceeds
from the exercise of the over-
allotment option to pay
certain expenses relating to
the Transactions. See "The
IPO and Related Transactions"
and "Certain Relationships and
Related Transactions."
<PAGE> 21
OPERATIONAL STAGE
Distributions of Available Cash to
the General Partners . . Available Cash will generally be
distributed 98% to the
Unitholders (including any
distributions to the General
Partners as holders of the
Subordinated Units) and 2% to
the General Partners, except
that if distributions of
Available Cash from Operating
Surplus exceed the Target
Distribution Levels (as
defined below), the General
Partners will receive a
percentage of such excess
distributions that will
increase to up to 50% of the
excess distributions above the
highest Target Distribution
Level (such distributions to
the General Partners in excess
of their aggregate 2% general
partner interest being
referred to as the "Incentive
Distributions"). See "Cash
Distribution Policy."
Other Payments to the Managing
General Partner and its
Affiliates. . . . . . . The Managing General Partner does
not receive a management fee
or other compensation in
connection with its management
of the Partnership, but is
reimbursed at cost for all
direct and indirect expenses
incurred on behalf of the
Partnership, including the
costs of compensation and
employee benefit plans
described herein properly
allocable to the Partnership
(including the Annual
Operating Performance
Incentive Plan, the New
Acquisition Incentive Plan and
the Restricted Unit Plan
described herein), and all
other expenses necessary or
appropriate to the conduct of
<PAGE> 22
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.
The Managing General Partner
adopted the Restricted Unit
Plan, which was effective upon
the consummation of the
Transactions, under which
certain officers and directors
of the Managing General
Partner have rights to receive
authorized but unissued Common
Units with an aggregate value
of $12.5 million (determined
as of the IPO closing). As of
June 30, 1997, restricted
Common Units with an aggregate
value of $8.3 million were
awarded under the Restricted
Unit Plan. In addition, the
Managing General Partner
adopted the Annual Operating
Performance Incentive Plan and
the New Acquisition Incentive
Plan, pursuant to which
certain members of management
<PAGE> 23
are eligible to receive cash
bonuses.
Withdrawal or Removal of the
General Partners . . . . If the Managing General Partner
withdraws in violation of the
Partnership Agreement or is
removed by the Unitholders for
Cause, the successor general
partner will have the option
to purchase the general
partner interests of the
General Partners in the
Partnership and the Operating
Partnership (and the right to
receive Incentive
Distributions) for a cash
payment equal to the fair
market value thereof. If the
Managing General Partner
withdraws in accordance with
the Partnership Agreement or
is removed without Cause, it
will have the option to
require a successor general
partner to purchase the
general partner interests of
the General Partners in the
Partnership and the Operating
Partnership (and the right to
receive Incentive
Distributions) for such price.
If the general partner
interests of the General
Partners in the Partnership
and the Operating Partnership
(and the right to receive
Incentive Distributions) are
not so purchased by the
successor general partner,
such general partner interests
will be converted into a
number of Common Units equal
in value to the fair market
value thereof as determined by
an independent investment
banking firm or other
independent experts. The
Special General Partner must
withdraw or be removed as a
general partner upon the
withdrawal or removal of the
<PAGE> 24
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."
<PAGE> 25
RECENT DEVELOPMENTS
On August 4, 1997, the Partnership announced its preliminary
results of operations for the quarter ended June 30, 1997, and the pro
forma results of operations for the fiscal year ended June 30, 1997.
The Partnership's condensed consolidated statements of operations for
the quarter and pro forma years ended June 30, 1997 and 1996, and the
consolidated balance sheet at June 30, 1997 are presented below.
Figures are in thousands of dollars, except per unit and per gallon
data.
<TABLE>
<CAPTION>
CORNERSTONE PROPANE PARTNERS, L.P.
FINANCIAL RESULTS OF OPERATIONS
(UNAUDITED)
QUARTER ENDED JUNE 30, PRO FORMA FISCAL YEAR
(PRO FORMA)(a) ENDED JUNE 30,(a)
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues $ 128,694 $ 143,313 $ 664,197 $ 595,790
Cost of Sales 105,933 119,673 534,892 455,984
Gross Profit 22,761 23,640 129,305 139,806
Operating, SG&A Expenses 22,055 24,576 88,264 92,771
EBITDA (b) 706 ( 936) 41,041 47,035
Depreciation and Amortization 4,125 4,331 15,073 14,500
Net Income (Loss) $ (8,174) (9,856) $ 7,644 $ 14,570
Weighted Average Units
Outstanding 16,531 16,513 16,531 16,513
Net Income (Loss) per Unit $ (.49) $ ( .60) $ .46 $ .88
EBITDA per Unit $ .04 $ ( .06) $ 2.48 $ 2.85
EBITDA per Retail Gallon $ .02 $ ( .03) $ .19 $ .20
Retail Gallons Sold 30,573 33,685 213,700 235,000
</TABLE>
(a) Pro forma results for the year ended June 30, 1996 reflect
certain adjustments as if the Partnership was formed at the
beginning of the period reported.
(b) EBITDA is defined as earnings before interest, income taxes,
depreciation and amortization. EBITDA should not be considered
as an alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations) and it is not
in accordance with nor superior to generally accepted accounting
<PAGE> 26
principles but provides additional information for evaluating the
Partnership's ability to distribute the Minimum Quarterly
Distribution ("MQD").
<TABLE>
<CAPTION>
CORNERSTONE PROPANE PARTNERS, L.P.
BALANCE SHEETS AS OF JUNE 30, 1997
(UNAUDITED)
JUNE 30,
1997
-------
<S>
ASSETS <C>
Cash and cash equivalents $ 8,406
Trade receivables 41,924
Inventories 17,338
Prepayments and other current assets 4,393
-------
Total current assets 72,061
-------
Property, plant and equipment, net of
accumulated depreciation 251,943
Excess of Cost over fair value, net 210,234
Other assets, net 15,580
-------
Total assets $ 549,818
-------
LIABILITIES AND PARTNERS' CAPITAL
Current portion of long-term debt $ 5,735
Trade accounts payable 42,334
Accrued liabilities 21,498
-------
Total current liabilities 69,567
-------
Notes payable 220,000
Long-term debt 11,532
Due to related parties 740
Other non-current liabilities 4,050
Partners' Capital 243,929
-------
Total liabilities and partners' capital $ 549,818
-------
</TABLE>
<PAGE> 27
SUMMARY PRO FORMA FINANCIAL AND OPERATING DATA
The following Summary Pro Forma Financial and Operating Data
reflect the consolidated historical operating results of the companies
that comprised the Combined Operations, as adjusted for the
Transactions (through December 16, 1996), and the actual consolidated
operating results of the Partnership (after December 16, 1996) and are
derived from the unaudited Pro Forma Consolidated Financial Statements
of Cornerstone Propane Partners, L.P. included elsewhere in this
Prospectus. For a description of the assumptions used in preparing
the Summary Pro Forma Financial and Operating Data, see "Pro Forma
Consolidated Financial Statements of Cornerstone Propane Partners,
L.P." The pro forma information set forth below has been prepared by
combining the historical results of operations of Synergy for the 10-1/2
months ended June 30, 1996 and for the five and one-half months ended
December 16, 1996; Coast for the fiscal year ended July 31, 1996 and
for the four and one-half months ended December 16, 1996; Empire
Energy for the fiscal year ended June 30, 1996 and for the five and
one-half months ended December 16, 1996; Myers for the six and
one-half months ended June 30, 1996 and for the five and one-half
months ended December 16, 1996; and the Partnership for the three and
one-half months ended March 31, 1997. The Partnership believes that
it is reasonable to combine the results of operations of companies
having different fiscal years because each of the fiscal years being
combined includes the same winter heating seasons in which the
majority of the Partnership's revenue and cash flow was generated.
The following information should not be deemed indicative of future
operating results of the Partnership.
<TABLE>
<CAPTION>
PARTNERSHIP PRO FORMA
YEAR ENDED NINE MONTHS ENDED
JUNE 30, 1996 MARCH 31, 1997
------------- -----------------
(IN THOUSANDS,
EXCEPT PER UNIT DATA)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C>
Revenues . . . . . . . . . . . . . . $ 595,790 $ 535,503
Gross profit(b) . . . . . . . . . . . 139,806 (a) 106,544
Depreciation and amortization . . . . 14,500 10,948
Operating income . . . . . . . . . . 32,535 (a) 29,387
Interest expense, net . . . . . . . . 17,865 13,499
Net income . . . . . . . . . . . . . 14,570 (a) 15,818
Net income per Unit(c) . . . . . . . .87 (a) .96
OPERATING DATA:
EBITDA(d) . . . . . . . . . . . . . . $ 47,035 (a) $ 40,335
Capital expenditures(e) . . . . . . . 53,951 (f) 10,690
Retail propane gallons sold . . . . . 235,000 183,100
</TABLE>
<PAGE> 28
<TABLE>
<CAPTION>
AT MARCH 31, 1997
------------------
BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C>
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89,561
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543,559
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,775
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224,135
Partners' capital - General Partners . . . . . . . . . . . . . . . . . . . 5,050
Partners' capital - Limited Partners . . . . . . . . . . . . . . . . . . . 242,583
</TABLE>
_________
(a) Pro forma gross profit for the year ended June 30, 1996 does not
reflect propane acquisition and logistics cost savings of
approximately $1.5 million that the Partnership believes are
achievable as a result of the Transactions. The pro forma
amounts of operating income, net income, net income per Unit and
EBITDA for the year ended June 30, 1996 do not reflect certain
non-recurring expenses incurred by Empire Energy of approximately
$4.3 million, propane acquisition and logistics cost savings of
approximately $1.5 million, and insurance savings of
approximately $2.1 million that the Partnership believes are
achievable as a result of the Transactions. If effect were given
to such anticipated expense reductions, the following amounts
would have been reflected:
YEAR ENDED
JUNE 30, 1996
-------------
(IN THOUSANDS,
EXCEPT PER UNIT
DATA)
Pro forma gross profit . . . . . $141,306
Pro forma operating income . . . 40,397
Pro forma net income . . . . . . 22,432
Pro forma net income per Unit . . 1.34
Pro forma EBITDA . . . . . . . . 54,897
See Note 3 to the Pro Forma Consolidated Financial Statements of
Cornerstone Propane Partners, L.P. and "Risk Factors - Risks
Inherent in an Investment in the Partnership - Partnership
Profitability Will Depend on Successful Integration of the
Combined Operations."
<PAGE> 29
(b) Gross profit is computed by reducing total revenues by the direct
cost of the products sold.
(c) Net income per Unit is computed by dividing the limited partners'
interest in net income by the weighted average number of Units
outstanding.
(d) EBITDA is defined as operating income plus depreciation and
amortization. EBITDA should not be considered as an alternative
to net income (as an indicator of operating performance) or as an
alternative to cash flow (as a measure of liquidity or ability to
service debt obligations), but provides additional information
for evaluating the Partnership's ability to make the Minimum
Quarterly Distribution. Cash flows in accordance with generally
accepted accounting principles consist of cash flows from
operating, investing and financing activities. Cash flows from
operating activities reflect net income (loss) (including charges
for interest and income taxes not reflected in EBITDA), adjusted
for (i) all non-cash charges or income (which are reflected in
EBITDA) and (ii) changes in operating assets and liabilities
(which are not reflected in EBITDA). Further, cash flows from
investing and financing activities are not included in EBITDA.
(e) The Partnership's capital expenditures fall generally into three
categories: (i) growth capital expenditures, which include
expenditures for the purchase of new propane tanks and other
equipment to facilitate expansion of the Partnership's retail
customer base, (ii) maintenance capital expenditures, which
include expenditures for repairs that extend the life of the
assets and replacement of property, plant and equipment, and
(iii) acquisition capital expenditures.
(f) Approximately $36.0 million relates to the Empire Acquisition of
Certain Synergy Assets.
<PAGE> 30
RISK FACTORS
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL
STOCK OF A CORPORATION, ALTHOUGH MANY OF THE BUSINESS RISKS TO WHICH
THE PARTNERSHIP IS SUBJECT ARE SIMILAR TO THOSE THAT WOULD BE FACED BY
A CORPORATION ENGAGED IN A SIMILAR BUSINESS. PROSPECTIVE PURCHASERS
OF THE COMMON UNITS SHOULD CONSIDER THE FOLLOWING RISK FACTORS IN
EVALUATING AN INVESTMENT IN THE COMMON UNITS. ALL STATEMENTS OTHER
THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS PROSPECTUS,
INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE PARTNERSHIP'S
BUSINESS STRATEGY, PLANS AND OBJECTIVES OF MANAGEMENT OF THE
PARTNERSHIP FOR FUTURE OPERATIONS AND THE STATEMENTS UNDER "- CASH
AVAILABLE FOR DISTRIBUTION" AND "CASH AVAILABLE FOR DISTRIBUTION," ARE
FORWARD-LOOKING STATEMENTS. ALTHOUGH THE PARTNERSHIP BELIEVES THAT
THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE
TO BE CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THE PARTNERSHIP'S EXPECTATIONS ARE DISCLOSED
BELOW, UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
. Weather conditions have a significant impact on the demand for
propane for both heating and agricultural purposes. Many
customers of the Partnership rely heavily on propane as a heating
fuel. Accordingly, the volume of retail propane sold is highest
during the six-month peak heating season of October through
March and is directly affected by the severity of the winter
weather. During fiscal 1996, approximately 72.7% of the
Partnership's combined retail propane volume and in excess of 85%
of the Partnership's pro forma EBITDA were attributable to sales
during the peak heating season. Actual weather conditions can
vary substantially from year to year, significantly affecting the
Partnership's financial performance. Furthermore, variations in
weather in one or more regions in which the Partnership operates
can significantly affect the total volumes sold by the
Partnership and the margins realized on such sales and,
consequently, the Partnership's results of operations.
. The retail propane business is a "margin-based" business in which
gross profits depend on the excess of sales prices over propane
supply costs. Consequently, the Partnership's profitability will
be sensitive to changes in wholesale propane prices. Propane is
a commodity, the market price of which can be subject to volatile
changes in response to changes in supply or other market
conditions. As it may not be possible immediately to pass on to
customers rapid increases in the wholesale cost of propane, such
increases could reduce the Partnership's gross profits.
. The Partnership's profitability is affected by the competition
for customers among all participants in the retail propane
business. Some of the Partnership's competitors are larger or
<PAGE> 31
have greater financial resources than the Partnership. Should a
competitor attempt to increase market share by reducing prices,
the Partnership's financial condition and results of operations
could be materially adversely affected. In addition, propane
competes with other sources of energy, some of which are less
costly for equivalent energy value.
. Acquisitions will be the principal means of growth for the
Partnership, as the retail propane industry is mature and overall
demand for propane is expected to experience limited growth.
There can be no assurance, however, that the Partnership will
identify attractive acquisition candidates in the future, that
the Partnership will be able to acquire such businesses on
economically acceptable terms, that any acquisitions will not be
dilutive to earnings and distributions to the Unitholders or that
any additional debt incurred to finance acquisitions will not
affect the ability of the Partnership to make distributions to
the Unitholders.
. The Partnership's operations are subject to all operating hazards
and risks normally incidental to handling, storing and delivering
combustible liquids such as propane. As a result, the
Partnership is a defendant in various legal proceedings and
litigation arising in the ordinary course of business. The
Partnership maintains 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 is employed by the
Managing General Partner pursuant to a three-year employment
contract.
RISKS INHERENT IN AN INVESTMENT IN THE PARTNERSHIP
. The Minimum Quarterly Distribution is not guaranteed. The actual
amount of cash distributions may fluctuate and will depend on
future Partnership operating performance. Cash distributions are
dependent primarily on cash flow, including from reserves and
working capital borrowings, and not on profitability, which is
affected by non-cash items. Therefore, cash distributions might
be made during periods when the Partnership records losses and
might not be made during periods when the Partnership records
<PAGE> 32
profits. Decisions of the Managing General Partner with respect
to the amount and timing of cash expenditures, borrowings,
issuances of additional Units and reserves will affect the amount
of Available Cash. Because the business of the Partnership is
seasonal, it is likely that the Managing General Partner will
make additions to reserves during certain quarters in order to
fund operating expenses, interest payments and cash distributions
to partners with respect to other quarters.
. The amount of pro forma Available Cash from Operating Surplus
generated during fiscal 1996 was approximately $25.7 million.
Such amount would have been sufficient to cover the Minimum
Quarterly Distribution for such fiscal year on all of the Common
Units outstanding as of the date of this Prospectus and the
related distribution on the aggregate 2% general partner
interests, but would have been insufficient by approximately
$12.0 million to cover the Minimum Quarterly Distribution on all
the Subordinated Units outstanding as of the date of this
Prospectus 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 is managed by the senior
executives who previously managed Coast, and such executives have
been involved with the operations of Synergy and Empire Energy
only since December 17, 1996. The historical financial results
of the Partnership include 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.
. At March 31, 1997, the Partnership's total indebtedness as a
percentage of its total capitalization was approximately 48.1%.
As a result, the Partnership is significantly leveraged and has
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, as of March 31, 1997 the Partnership had approximately
$125.0 million of unused borrowing capacity under the Bank Credit
Facility. Future borrowings could result in a significant
increase in the Partnership's leverage. The Notes and the Bank
Credit Facility contain restrictive covenants that will limit the
ability of the Partnership to incur additional indebtedness and
<PAGE> 33
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 contains provisions relating to
changes of control. If such provisions are triggered, such
outstanding indebtedness may become due. There is no restriction
on the ability of the Managing General Partner or Northwestern
Growth to enter into a transaction which would trigger such
change of control provisions.
. Prior to making any distribution on the Common Units, the
Partnership will reimburse the Managing General Partner and its
affiliates at cost for all expenses incurred on behalf of the
Partnership. On a pro forma basis, approximately $48.0 million
of expenses (primarily wages and salaries) would have been
reimbursed by the Partnership to the Managing General Partner in
fiscal 1996. In addition, the Managing General Partner and its
affiliates may provide services to the Partnership for which the
Partnership will be charged reasonable fees as determined by the
Managing General Partner. The reimbursement of such expenses and
the payment of any such fees could adversely affect the ability
of the Partnership to make distributions.
. The Managing General Partner manages and operates the
Partnership. Holders of Common Units have no right to elect the
Managing General Partner on an annual or other continuing basis
and have only limited voting rights on matters affecting the
Partnership's business. The Managing General Partner may not be
removed except pursuant to the vote of the holders of at least 66
% of the outstanding Units (including Units owned by the
Managing General Partner and its affiliates). The ownership of
the Subordinated Units by the Managing General Partner and its
affiliates effectively gives the Managing General Partner the
ability to prevent its removal. The management control exercised
by the Managing General Partner may make it more difficult for
others to control, or influence the activities of, the
Partnership.
. Subject to certain limitations, the Partnership may issue
additional Common Units and other interests in the Partnership,
the effect of which may be to dilute the value of the interests
of the then-existing holders of Common Units in the net assets of
the Partnership, dilute the interests of holders of Common Units
in distributions by the Partnership or to make it more difficult
for a person or group to remove the Managing General Partner or
otherwise change the management of the Partnership.
. The Partnership Agreement contains certain provisions that may
have the effect of discouraging a person or group from attempting
to remove the Managing General Partner or otherwise change the
management of the Partnership. The effect of these provisions
<PAGE> 34
may be to diminish the price at which the Common Units 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.
. If at any time less than 20% of the then-issued and outstanding
limited partner interests of any class (including Common Units)
are held by persons other than the Managing General Partner and
its affiliates, the Managing General Partner will have the right,
which it may assign to any of its affiliates or the Partnership,
to acquire all, but not less than all, of the remaining limited
partner interests of such class held by such unaffiliated persons
at a price generally equal to the then-current market price of
limited partner interests of such class. As a consequence, a
holder of Common Units may be required to sell his Common Units
at a time when he may not desire to sell them or at a price that
is less than the price he would desire to receive upon such sale.
. Under certain circumstances, holders of the Common Units could
lose their limited liability and could become liable for amounts
improperly distributed to them by the Partnership.
. The holders of the Common Units were not represented by counsel
in connection with the preparation of the Partnership Agreement
or the other agreements referred to herein.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
. The Managing General Partner and its affiliates may have
conflicts of interest with the Partnership and its limited
partners. The Partnership Agreement contains certain provisions
that limit the liability and reduce the fiduciary duties of the
Managing General Partner to the Unitholders, as well as
provisions that may restrict the remedies available to
Unitholders for actions that might, without such limitations,
constitute breaches of fiduciary duty. Holders of Common Units
are deemed to have consented to certain actions and conflicts of
interest that might otherwise be deemed a breach of fiduciary or
other duties under applicable state law. The validity and
enforceability of these types of provisions under Delaware law
are uncertain.
. Decisions of the Managing General Partner with respect to the
amount and timing of cash expenditures, borrowings, issuances of
additional Units and reserves in any quarter will affect whether
or the extent to which there is sufficient Available Cash from
Operating Surplus to meet the Minimum Quarterly Distribution and
Target Distribution Levels on all Units in a given quarter. In
addition, actions by the Managing General Partner may have the
effect of enabling the General Partners to receive distributions
on the Subordinated Units or Incentive Distributions or hastening
<PAGE> 35
the expiration of the Subordination Period or the conversion of
Subordinated Units into Common Units.
. The terms of the New Acquisition Incentive Plan (described below
under "Management - Executive Compensation - Incentive Plans")
could give the senior executives of the Managing General Partner
an incentive to cause the Partnership to acquire additional
propane operations without regard to whether the operations would
prove beneficial to the Partnership and may present the senior
executives of the Managing General Partner with a conflict of
interest in negotiating the acquisition price on behalf of the
Partnership.
. The Partnership Agreement provides that the Managing General
Partner is generally restricted from engaging in any business
activities other than those incidental to its ownership of
interests in the Partnership. Notwithstanding the foregoing, the
Partnership Agreement permits affiliates of the Managing General
Partner (including NPS, Northwestern Growth and the Special
General Partner) to compete with the Partnership under certain
circumstances. There can be no assurance that there will not be
competition between the Partnership and affiliates of the
Managing General Partner in the future.
. The Partnership Agreement does not prohibit the Partnership from
engaging in roll-up transactions. Were the Managing General
Partner to cause the Partnership to engage in a roll-up
transaction, there could be no assurance that such a transaction
would not have a material adverse effect on a Unitholder's
investment in the Partnership.
TAX RISKS
. The availability to a Common Unitholder of the federal income tax
benefits of an investment in the Partnership depends, in large
part, on the classification of the Partnership as a partnership
for federal income tax purposes. Assuming the accuracy of
certain factual matters as to which the General Partners and the
Partnership have made representations, Schiff Hardin & Waite,
counsel to the General Partners and the Partnership, is of the
opinion that, under current law, the Partnership will be
classified as a partnership for federal income tax purposes.
. No ruling has been requested from the Internal Revenue Service
(the "IRS") with respect to classification of the Partnership as
a partnership for federal income tax purposes, whether the
Partnership's propane operations generate "qualifying income"
under Section 7704 of the Internal Revenue Code of 1986, as
amended (the "Code"), or any other matter affecting the
Partnership.
<PAGE> 36
. 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.
. 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 Common Units will
be unrelated business taxable income and thus will be taxable to
such a Unitholder.
. In the case of taxpayers subject to the passive loss
rules (generally, individuals and closely held corporations), any
losses generated by the Partnership will generally only be
available to offset future income generated by the Partnership
and cannot be used to offset income from other activities,
including other passive activities or investments. Passive
losses which are not deductible because they exceed the
Unitholder's income generated by the Partnership may be deducted
in full when the Unitholder disposes of his entire investment in
the Partnership in a fully taxable transaction to an unrelated
party.
. The Partnership has registered with the Secretary of the Treasury
as a "tax shelter." No assurance can be given that the
Partnership will not be audited by the IRS or that tax
adjustments will not be made. Any adjustments in the
Partnership's tax returns will lead to adjustments in the
Unitholders' tax returns and may lead to audits of the
Unitholders' tax returns and adjustments of items unrelated to
the Partnership.
. The Partnership will adopt certain depreciation and amortization
conventions that do not conform with all aspects of certain
proposed and final Treasury regulations. A successful challenge
to those conventions by the IRS could adversely affect the amount
of tax benefits available to a purchaser of Common Units or could
affect the timing of such tax benefits or the amount of gain from
the sale of Units and could have a negative impact on the value
of the Common Units or result in audit adjustments to the tax
returns of Unitholders.
. A Unitholder will likely be required to file state and local
income tax returns and pay state and local income taxes in some
or all of the jurisdictions in which the Partnership does
business or owns property. The Partnership currently owns
property and conducts business in the following states which
currently impose a personal income tax: Alabama, Arkansas,
California, Georgia, Illinois, Indiana, Kentucky, Maryland,
Mississippi, Missouri, New Hampshire, New Jersey, New Mexico, New
<PAGE> 37
York, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee,
Utah, Vermont and Virginia.
See "Risk Factors," "Cash Distribution Policy," "Cash Available
for Distribution," "Conflicts of Interest and Fiduciary
Responsibilities," "The Partnership Agreement" and "Tax
Considerations" for a more detailed description of these and other
risk factors and conflicts of interest that should be considered in
evaluating an investment in the Common Units.
CASH AVAILABLE FOR DISTRIBUTION
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 outstanding as of the date of this
Prospectus and on the aggregate 2% general partner interests of the
General Partners is approximately $37.7 million ($22.7 million for the
Common Units, $14.3 million for the Subordinated Units and $700,000
for the aggregate 2% general partner interest of the General
Partners). The amount of pro forma Available Cash from Operating
Surplus generated during fiscal 1996 was approximately $25.7 million.
Such amount would have been sufficient to cover the Minimum Quarterly
Distribution for such fiscal year on all of the Common Units currently
outstanding and the related distribution on the general partner
interests, but would have been insufficient by approximately $12.0
million to cover the Minimum Quarterly Distribution for such fiscal
year on all Subordinated Units currently outstanding and the related
distribution on the general partner interests. If effect were given
to an additional $7.9 million of expense reductions which the
Partnership believes are achievable as a result of the Transactions,
pro forma Available Cash from Operating Surplus would have been
approximately $33.5 million, which amount would have been insufficient
by approximately $4.2 million to cover the Minimum Quarterly
Distribution for fiscal 1996 on all Subordinated Units and the related
distribution on the general partner interests. See Note 3 to the Pro
Forma Consolidated Financial Statements of Cornerstone Propane
Partners, L.P., "Risk Factors - Risks Inherent in an Investment in the
Partnership - Partnership Profitability Will Depend on Successful
Integration of the Combined Operations" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The amount of pro forma Available Cash from Operating Surplus for
fiscal 1996 set forth above was derived from the pro forma financial
statements of the Partnership in the manner set forth in "Cash
Available for Distribution." The pro forma adjustments are based upon
currently available information and certain estimates and assumptions.
The pro forma financial statements do not purport to present the
results of operations of the Partnership had the Transactions referred
to therein actually been completed as of the dates indicated.
Furthermore, the pro forma financial statements are based on accrual
accounting concepts while Operating Surplus is defined in the
Partnership Agreement on a cash accounting basis. As a consequence,
<PAGE> 38
the amount of pro forma Available Cash from Operating Surplus shown
above should only be viewed as a general indication of the amount of
Available Cash from Operating Surplus that might in fact have been
generated by the Partnership had it been formed in earlier periods.
Available Cash from Operating Surplus generated during a specified
period refers generally to (i) all cash receipts of the Partnership
from its operations generated during such period, less (ii) all
Partnership operating expenses, debt service payments (including any
increases in reserves therefor but not including amounts paid from any
reduction in reserves, or payments required in connection with the
sale of assets, or any refinancing with the proceeds of new
indebtedness or an equity offering) and maintenance capital
expenditures, in each case during such period. For a complete
definition of Operating Surplus, see the Glossary.
The Partnership is 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 - The Partnership - Financing and Sources of
Liquidity ."
PARTNERSHIP STRUCTURE AND MANAGEMENT
The Partnership conducts, in substantially every respect, the
propane businesses that were formerly conducted by Synergy, Empire
Energy, Myers and Coast. The operations of the Partnership are
conducted through, and the operating assets are owned by, the
Operating Partnership, a Delaware limited partnership, and any other
subsidiary operating partnerships and corporations. The Partnership
owns 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 therefore own an
aggregate 2% general partner interest in the Partnership and the
Operating Partnership on a combined basis.
The senior executives who managed Coast prior to the IPO manage
and operate the Partnership's business as the senior executives of the
Managing General Partner. The Managing General Partner and its
affiliates do not receive any management fee or other compensation in
connection with its management of the Partnership, but are reimbursed
at cost for all direct and indirect expenses incurred on behalf of the
Partnership and all other necessary or appropriate expenses allocable
to the Partnership or otherwise reasonably incurred by the Managing
General Partner or its affiliates in connection with the operation of
the Partnership's business. The Special General Partner has no duty
or right to participate in the management or operation of the
Partnership.
<PAGE> 39
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 has an audit committee (the "Audit Committee"), consisting of
three members, including two independent members of its Board of
Directors, that is 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 as of the date of this
Prospectus. 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.
<PAGE> 40
<TABLE>
<CAPTION>
<S> <C> <C>
|-------------------------------------------|
| EFFECTIVE AGGREGATE OWNERSHIP | |---------------------|
| OF THE PARTNERSHIP AND THE | | NORTHWESTERN PUBLIC |
| OPERATING PARTNERSHIP | | SERVICE COMPANY |
| | | ("NPS") |
| Public Unitholders' Common | |---------------------|
| Units.............................60.2% | |
| General Partners Subordinated | 100% |
| Units.............................37.8% | Ownership |
| General Partners' Combined General | |
| Partner Interest...................2.0% | |------------------------|
|-------------------------------------------| | NORTHWESTERN GROWTH |
| CORPORATION |
|("Northwestern Growth") |
|------------------------| |---------------------------|
100% | | UNAFFILIATED |
Ownership | | SHAREHOLDERS |
| |---------------------------|
|-------------------------| |------------------------------| 17.5% |
| PUBLIC UNITHOLDERS | | CORNERSTONE PROPANE GP, INC. | Common |
| 10,512,805 Common Units | | ("Managing General Partner") | Stock |
|-------------------------| | 5,677,040 Subordinated Units | Ownership |
| |------------------------------|------------------| |
| | | | | |
60.8265% | 32.8576% | | 0.7686% | 82.5% |-----------------------------|
Limited | Limited | | Managing | Common | SYN, INC. ("Synergy" of |
Partnership ------------------| Partner | | General | Stock | "Special General Partner" |
Interest | Interest | | Partner | Ownership | 920,579 Subordinated |
| | | Interest | | Units |
| | | | |-----------------------------|
| | | | 5.3281% Limited | | 0.2314% |
|---------------------------------------------| | Partner Interest | | Special |
| CORNERSTONE PROPANE PARTNERS, L.P. |--)----------------------------| | General |
| ("Partnership") | ( | Partner |
|---------------------------------------------|--)--------------------------------| Interest|
| | |
98.9899% | | 0.7764% |
Limited Partner | | Managing |
Interest | | General |
| | Partner | 0.2337%
|---------------------------| | Interest | Special
| CORNERSTONE PROPANE, L.P. |------------| | General
| ("Operating Partnership") | | Partner
|---------------------------|-------------------------------------------------------| Interest
|
100% |
Ownership |
|
|--------------------------|
| CORNERSTONE SALES & |
| SERVICE |
| CORPORATION |
|--------------------------|
<PAGE> 41
THE OFFERING
Securities Offered . . . . . 1,000,000 Common Units to be issued
in connection with the
acquisition of businesses,
properties or securities in
business combinations.
Units Outstanding As of
The Date of This
Prospectus . . . . . . . 10,512,805 Common Units and
6,597,619 Subordinated Units,
representing an aggregate
60.2% and 37.8% limited
partner interest in the
Partnership, respectively.
Distributions of Available
Cash . . . . . . . . . . The Partnership will distribute all
Cash of its Available Cash
within 45 days after the end
of each quarter to the
Unitholders of record on the
applicable record date and to
the General Partners.
"Available Cash" for any
quarter will consist generally
of all cash on hand at the end
of such quarter, as adjusted
for reserves. The complete
definition of Available Cash
is set forth in the Glossary.
The Managing General Partner
has broad discretion in making
cash disbursements and
establishing reserves, thereby
affecting the amount of
Available Cash that will be
distributed with respect to
any quarter. In addition, the
terms of the Partnership's
indebtedness require that
certain reserves for the
payment of principal and
interest be maintained. See
"Risk Factors - Risks Inherent
in an Investment in the
Partnership - Cash
Distributions Are Not
Guaranteed and May Fluctuate
with Partnership Performance"
for a description of the
<PAGE> 42
reserves for the payment of
principal and interest that
the Partnership will be
required to maintain.
Available Cash will generally
be distributed 98% to
Unitholders and 2% to the
General Partners, except that
if distributions of Available
Cash from Operating Surplus
exceed specified target levels
("Target Distribution Levels")
in excess of the Minimum
Quarterly Distribution, the
General Partners will receive
a percentage of such excess
distributions that will
increase to up to 50% of the
excess distributions above the
highest Target Distribution
Level. See "Cash Distribution
Policy - Incentive
Distributions - Hypothetical
Annualized Yield."
Distributions to Common
and Subordinated
Unitholders . . . . . . The Partnership intends, to the
extent there is sufficient
Available Cash from Operating
Surplus, to distribute to each
holder of Common Units at
least the Minimum Quarterly
Distribution of $.54 per
Common Unit per quarter. The
Minimum Quarterly Distribution
is not guaranteed and is
subject to adjustment as
described under "Cash
Distribution Policy -
Adjustment of Minimum
Quarterly Distribution and
Target Distribution Levels."
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
<PAGE> 43
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 until the
first day of any quarter
beginning after December 31,
2001 in respect of which
(i) distributions of Available
Cash from Operating Surplus on
the Common Units and the
Subordinated Units with
respect to each of the three
consecutive four-quarter
periods immediately preceding
such date equaled or exceeded
the sum of the Minimum
Quarterly Distribution on all
of the outstanding Common
Units and Subordinated Units
during such periods, (ii) the
Adjusted Operating Surplus
generated during each of the
three consecutive four-quarter
periods immediately preceding
such date equaled or exceeded
the sum of the Minimum
Quarterly Distribution on all
of the outstanding Common
Units and Subordinated Units
<PAGE> 44
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 sum of the Minimum
Quarterly Distribution on all
of the outstanding Common
Units and Subordinated Units
<PAGE> 45
and the related distribution
on the general partner
interests in the Partnership
during such periods, and
(iii) there are no outstanding
Common Unit Arrearages;
provided, however, that the
early conversion of the second
one-quarter of Subordinated
Units may not occur until at
least one year following the
early conversion of the first
one-quarter of Subordinated
Units. See "Cash Distribution
Policy - Distributions from
Operating Surplus During
Subordination Period."
Incentive Distributions . . . If quarterly distributions of
Available Cash exceed the
Target Distribution Levels,
the General Partners will
receive distributions which
are generally equal to 15%,
then 25% and then 50% of the
distributions of Available
Cash that exceed such Target
Distribution Levels. The
Target Distribution Levels are
based on the amounts of
Available Cash from Operating
Surplus distributed with
respect to a given quarter
that exceed distributions made
with respect to the Minimum
Quarterly Distribution and
Common Unit Arrearages, if
any. See "Cash Distribution
Policy - Incentive
Distributions -Hypothetical
Annualized Yield." The
distributions to the General
Partners described above that
are in excess of their
aggregate 2% general partner
interest are referred to
herein as the "Incentive
Distributions."
<PAGE> 46
Adjustment of Minimum
Quarterly Distribution
and Target Distribution
Levels . . . . . . . . . The Minimum Quarterly Distribution
and the Target Distribution
Levels are subject to downward
adjustments in the event that
the Unitholders receive
distributions of Available
Cash from Capital Surplus or
legislation is enacted or
existing law is modified or
interpreted by the relevant
governmental authority in a
manner that causes the
Partnership to be treated as
an association taxable as a
corporation or otherwise
taxable as an entity for
federal, state or local income
tax purposes. If, as a result
of distributions of Available
Cash from Capital Surplus, the
Unitholders receive an amount
equal to the initial public
offering price of the Common
Units and any unpaid Common
Unit Arrearages, the
distributions of Available
Cash payable to the General
Partners and their affiliates
will increase to 50% of all
amounts distributed
thereafter. See "Cash
Distribution Policy -
General," "- Distributions
from Capital Surplus" and "-
Adjustment of Minimum
Quarterly Distribution and
Target Distribution Levels."
Partnership's Ability to
Issue Additional Units . The Partnership Agreement generally
authorizes the Partnership to
issue an unlimited number of
additional limited partner
interests and other equity
securities of the Partnership
for such consideration and on
such terms and conditions as
shall be established by the
Managing General Partner in
<PAGE> 47
its sole discretion without
the approval of the
Unitholders. During the
Subordination Period, however,
the Partnership may not issue
equity securities ranking
prior or senior to the Common
Units or an aggregate of more
than 4,270,000 Common Units
(excluding Common Units issued
upon conversion of
Subordinated Units, pursuant
to employee benefit plans or
in connection with certain
acquisitions (such as the
Common Units offered hereby)
or capital improvements or the
repayment of certain
indebtedness) or an equivalent
number of securities ranking
on a parity with the Common
Units, without the approval of
the holders of a Unit
Majority. See "The
Partnership Agreement -
Issuance of Additional
Securities."
Limited Call Right . . . . . If at any time less than 20% of the
issued and outstanding Common
Units are held by persons
other than the Managing
General Partner and its
affiliates, the Managing
General Partner may purchase
all of the remaining Common
Units at a price generally
equal to the then current
market price of the Common
Units. See "The Partnership
Agreement - Limited Call
Right."
Limited Voting Rights . . . . Unitholders do not have voting
rights except with respect to
the following matters, for
which the Partnership
Agreement requires the
approval of at least a
majority (and in certain cases
a greater percentage) of all
of the holders of the
<PAGE> 48
Subordinated Units and of all
of the holders of the Common
Units: a sale or exchange of
all or substantially all of
the Partnership's assets, the
removal or the withdrawal of
the General Partners, the
election of a successor
Managing General Partner, a
dissolution or reconstitution
of the Partnership, a merger
of the Partnership, issuance
of limited partner interests
in certain circumstances,
approval of certain actions of
the General Partners
(including the transfer by
either of the General Partners
of its general partner
interest or Incentive
Distribution Rights under
certain circumstances) and
certain amendments to the
Partnership Agreement,
including any amendment that
would cause the Partnership to
be treated as an association
taxable as a corporation.
Holders of Subordinated Units
will generally vote as a class
separate from the holders of
Common Units. After
Subordinated Units convert
into Common Units (either upon
termination of the
Subordination Period or upon
early conversion), holders of
such Common Units will vote as
a single class together with
the holders of the other
Common Units. Under the
Partnership Agreement, the
Managing General Partner
generally is permitted to
effect amendments to the
Partnership Agreement that do
not adversely affect
Unitholders. See "The
Partnership Agreement."
<PAGE> 49
Change of Management
Provisions . . . . . . . Any person or group (other than the
Managing General Partner and
its affiliates) that acquires
beneficial ownership of 20% or
more of the Common Units will
lose its voting rights with
respect to all of its Common
Units. In addition, if the
Managing General Partner is
removed other than for Cause
and Units held by the General
Partners and their affiliates
are not voted in favor of such
removal, (i) the Subordination
Period will end and all
outstanding Subordinated Units
will immediately convert into
Common Units on a one-for-one
basis, (ii) any existing
Common Unit Arrearages will be
extinguished and (iii) the
General Partners will have the
right to convert their general
partner interests (and their
rights to receive Incentive
Distributions) into Common
Units or to receive cash in
exchange for such interests.
These provisions are intended
to discourage a person or
group from attempting to
remove the current Managing
General Partner or otherwise
change the management of the
Partnership. The effect of
these provisions may be to
diminish the price at which
the Common Units trade under
certain circumstances. See
"The Partnership Agreement -
Change of Management
Provisions."
Removal and Withdrawal of
the General Partners . . Subject to certain conditions, the
Managing General Partner may
be removed upon the approval
of the holders of at least 66-
2/3% of the outstanding Units
(including Units held by the
General Partners and their
<PAGE> 50
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 . . . . . . If the Partnership liquidates
during the Subordination
Period, under certain
circumstances holders of
outstanding Common Units will
be entitled to receive more
per Unit in liquidating
distributions than holders of
outstanding Subordinated
Units. The per Unit
difference will be dependent
upon the amount of gain or
<PAGE> 51
loss recognized by the
Partnership in liquidating its
assets and will be limited to
the Unrecovered Capital of a
Common Unit and any Common
Unit Arrearages thereon.
Under certain circumstances
there may be insufficient gain
for the holders of Common
Units to fully recover all
such amounts, even though
there may be cash available
for distribution to holders of
Subordinated Units. Following
conversion of the Subordinated
Units into Common Units, all
Units will be treated the same
upon liquidation of the
Partnership. See "Cash
Distribution Policy -
Distributions of Cash Upon
Liquidation."
Listing . . . . . . . . . . . The Common Units are listed on the
New York Stock Exchange.
Application will be made to
list the Common Units offered
hereby on the New York Stock
Exchange.
NYSE Symbol . . . . . . . . . "CNO"
<PAGE> 52
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 acquiring 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 Schiff Hardin &
Waite, counsel to the General Partners and the Partnership
("Counsel"), described in "Tax Considerations." This summary is
qualified by the discussion in "Tax Considerations," particularly the
qualifications on the opinion 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 holder of Common Units 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
holder of Common Units 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. As described in greater
detail in "Consequences of Exchanging Property for Common Units,"
however, a Unitholder acquiring Units in exchange for a conveyance of
assets to the Partnership will be required to take into account
certain special allocations of income and loss for federal income tax
purposes related to the conveyed assets. At any time that
distributions are made on the Common Units and not on the Subordinated
Units, or that Incentive Distributions are made to the General
Partners, gross income will be allocated to the recipients to the
extent of such distribution. A Unitholder will be required to take
into account, in determining his federal income tax liability, his
share of income generated by the Partnership for each taxable year of
the Partnership ending within or with the Unitholder's taxable year
even if cash distributions are not made to him. As a consequence, a
<PAGE> 53
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.
CONSEQUENCES OF EXCHANGING PROPERTY FOR COMMON UNITS
In general, no gain or loss will be recognized for federal income
tax purposes by the Partnership or by a person (including any
individual, partnership, S corporation or corporation taxed under
Subchapter C of the Code) contributing property (including stock) to
the Partnership in exchange for Common Units. If the Partnership
assumes liabilities or takes assets subject to liabilities in
connection with a contribution of assets in exchange for Common Units,
however, taxable gain may be recognized by the contributing person in
certain circumstances. Any existing tax gain (generally, the excess
of fair market value over tax basis) is recognized over the period of
time during which the Partnership claims depreciation or amortization
deductions with respect to the contributed property, or when the
contributed property is disposed of by the Partnership. See "Tax
Considerations-Consequences of Exchanging Property for Common Units."
BASIS OF COMMON UNITS
A person who contributes property (including stock) to the
Partnership in exchange for Common Units will generally have an
initial tax basis for his Common Units equal to the tax basis of the
property contributed to the Partnership in exchange for Common Units.
The tax basis for a Common Unit will be increased by the Unitholder's
share of Partnership income and his share of increases in Partnership
debt. The basis for a Common Unit will be decreased (but not below
zero) by distributions from the Partnership (including deemed
distributions resulting from the assumption of indebtedness by the
Partnership), by the Unitholder's share of Partnership losses, by his
share of decreases in Partnership debt and by the Unitholder's share
of expenditures of the Partnership that are not deductible in
computing the taxable income and are not required to be capitalized.
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
<PAGE> 54
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 currently owns property and conducts business in the
following states which currently impose a personal income tax:
Alabama, Arkansas, California, Georgia, Illinois, Indiana, Kentucky,
Maryland, Mississippi, Missouri, New Hampshire, New Jersey,
New Mexico, New York, North Carolina, Ohio, Oklahoma, South Carolina,
Tennessee, Utah, Vermont and Virginia. In certain states, tax losses
may not produce a tax benefit in the year incurred (if, for example,
the Partnership has no income from sources within that state) and also
may not be available to offset income in subsequent taxable years.
Some of the states may require the Partnership, or the Partnership may
elect, to withhold a percentage of income from amounts to be
distributed to a Unitholder. Withholding, the amount of which may be
more or less than a particular Unitholder's income tax liability owed
to the state, may not relieve the nonresident Unitholder from the
obligation to file an income tax return. Amounts withheld may be
treated as if distributed to Unitholders for purposes of determining
the amounts distributed by the Partnership. Based on current law and
its estimate of future Partnership operations, the Partnership
anticipates that any amounts required to be withheld will not be
material.
It is the responsibility of each prospective Unitholder to
investigate the legal and tax consequences, under the laws of
pertinent states and localities, of his investment in the Partnership.
Accordingly, each prospective Unitholder should consult, and must
depend upon, his own tax counsel or other advisor with regard to those
<PAGE> 55
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 state or
local tax consequences of an investment in the Partnership.
OWNERSHIP OF COMMON UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN
OTHER INVESTORS
An investment in Common Units by tax-exempt organizations
(including IRAs) and other retirement plans), regulated investment
companies and foreign persons raises issues unique to such persons.
Virtually all of the Partnership income allocated to a Unitholder
which is a tax-exempt organization will be unrelated business taxable
income and, thus, will be taxable to such Unitholder; no significant
amount of the Partnership's gross income will be qualifying income for
purposes of determining whether a Unitholder will qualify as a
regulated investment company; and a Unitholder who is a nonresident
alien, foreign corporation or other foreign person will be regarded as
being engaged in a trade or business in the United States as a result
of ownership of Common Units and thus will be required to file
federal income tax returns and to pay tax on such Unitholder's share
of Partnership taxable income. Furthermore, distributions to foreign
Unitholders will be subject to federal income tax withholding. See
"Tax Considerations - Uniformity of Units - Tax-Exempt Organizations
and Certain Other Investors."
TAX SHELTER REGISTRATION
The Code generally requires that "tax shelters" be registered
with the Secretary of the Treasury. It is arguable that the
Partnership is not subject to this registration requirement.
Nevertheless, the Partnership has registered as a tax shelter (I.D.
No. 97071000067) with the Secretary of the Treasury. ISSUANCE OF THE
REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN THE
PARTNERSHIP OR THE CLAIMED TAX BENEFITS HAS BEEN REVIEWED, EXAMINED OR
APPROVED BY THE IRS. See "Tax Considerations - Administrative Matters -
Registration as a Tax Shelter."
<PAGE> 56
RISK FACTORS
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL
STOCK OF A CORPORATION, ALTHOUGH MANY OF THE BUSINESS RISKS TO WHICH
THE PARTNERSHIP IS SUBJECT ARE SIMILAR TO THOSE THAT WOULD BE FACED BY
A CORPORATION ENGAGED IN A SIMILAR BUSINESS. PROSPECTIVE PURCHASERS
OF THE COMMON UNITS SHOULD CONSIDER THE FOLLOWING RISK FACTORS IN
EVALUATING AN INVESTMENT IN THE COMMON UNITS. ALL STATEMENTS OTHER
THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS PROSPECTUS,
INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE PARTNERSHIP'S
BUSINESS STRATEGY, PLANS AND OBJECTIVES OF MANAGEMENT OF THE
PARTNERSHIP FOR FUTURE OPERATIONS AND STATEMENTS UNDER "PROSPECTUS
SUMMARY - CASH AVAILABLE FOR DISTRIBUTION" AND "CASH AVAILABLE FOR
DISTRIBUTION," ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE
PARTNERSHIP BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE
THAT SUCH EXPECTATIONS WILL PROVE TO BE CORRECT. IMPORTANT FACTORS
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
PARTNERSHIP'S EXPECTATIONS ARE DISCLOSED BELOW AND ELSEWHERE IN THIS
PROSPECTUS.
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
WEATHER CONDITIONS AFFECT THE DEMAND FOR PROPANE
Weather conditions have a significant impact on the demand for
propane for both heating and agricultural purposes. Many customers of
the Partnership rely heavily on propane as a heating fuel.
Accordingly, the volume of retail propane sold is highest during the
six-month peak heating season of October through March and is directly
affected by the severity of the winter weather. During fiscal 1996,
approximately 72.7% of the Partnership's combined retail propane
volume and in excess of 85% of the Partnership's pro forma EBITDA were
attributable to sales during the peak heating season. Actual weather
conditions can vary substantially from year to year, significantly
affecting the Partnership's financial performance. Furthermore,
variations in weather in one or more regions in which the Partnership
operates can significantly affect the total volume of propane sold by
the Partnership and the margins realized on such sales and,
consequently, the Partnership's results of operations. Agricultural
demand is also affected by weather, as dry weather during the harvest
season reduces demand for propane used in crop drying. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
THE PARTNERSHIP WILL BE SUBJECT TO PRICING AND INVENTORY RISKS
The retail propane business is a "margin-based" business in which
gross profits depend on the excess of sales prices over propane supply
costs. Consequently, the Partnership's profitability will be
sensitive to changes in wholesale propane prices. Propane is a
commodity, the market price of which can be subject to volatile
<PAGE> 57
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 Partnership
engages in hedging of product cost and supply through common hedging
practices. See "Business and Properties - Propane Supply and
Storage."
THE RETAIL PROPANE BUSINESS IS HIGHLY COMPETITIVE
The Partnership's profitability is affected by the competition
for customers among all participants in the retail propane business.
The Partnership competes with other distributors of propane, including
a number of large national and regional firms and several thousand
small independent firms. Some of these competitors are larger or have
greater financial resources than the Partnership. Should a competitor
attempt to increase market share by reducing prices, the Partnership's
financial condition and results of operations could be materially
adversely affected. Generally, warmer-than-normal weather further
intensifies competition. The Partnership believes that its ability to
compete effectively depends on the reliability of its service, its
responsiveness to customers and its ability to maintain competitive
retail prices.
THE RETAIL PROPANE BUSINESS FACES COMPETITION FROM ALTERNATIVE
ENERGY SOURCES
Propane competes with other sources of energy, some of which are
less costly for equivalent energy value. The Partnership competes for
<PAGE> 58
customers against suppliers of electricity, natural gas and fuel oil.
Electricity is a major competitor of propane, but propane generally
enjoys a competitive price advantage over electricity. Except for
certain industrial and commercial applications, propane is generally
not competitive with natural gas in areas where natural gas pipelines
already exist because natural gas is a significantly less expensive
source of energy than propane. The gradual expansion of the nation's
natural gas distribution systems has resulted in the availability of
natural gas in many areas that previously depended upon propane.
Although propane is similar to fuel oil in certain applications and
market demand, propane and fuel oil compete to a lesser extent
primarily because of the cost of converting from one to the other.
The Partnership cannot predict the effect that the development of
alternative energy sources might have on its operations.
THE PARTNERSHIP MAY NOT BE SUCCESSFUL IN GROWING THROUGH
ACQUISITIONS
The retail propane industry is mature, and the Partnership
foresees only limited growth in total retail demand for propane.
Moreover, as a result of long-standing customer relationships that are
typical in the retail home propane industry, the inconvenience of
switching tanks and suppliers and propane's higher cost as compared to
certain other energy sources, such as natural gas, the Partnership may
experience difficulty in acquiring new retail customers, other than
through acquisitions. Therefore, while the Partnership's business
strategy includes internal growth and start-ups of new customer
service locations, the ability of the Partnership's propane business
to grow will depend principally upon its ability to acquire other
retail propane distributors. There can be no assurance that the
Partnership will identify attractive acquisition candidates in the
future, that the Partnership will be able to acquire such businesses
on economically acceptable terms, that any acquisitions will not be
dilutive to earnings and distributions to the Unitholders or that any
additional debt incurred to finance acquisitions will not affect the
ability of the Partnership to make distributions to the Unitholders.
The Partnership is not required under the Partnership Agreement to
seek Unitholder approval of any acquisition. The Partnership is
subject to certain covenants in agreements governing its indebtedness
that restrict the Partnership's ability to incur indebtedness to
finance acquisitions. In addition, to the extent that warm weather
adversely affects the Partnership's operating and financial results,
the Partnership's access to capital and its acquisition activities may
be limited.
THE PARTNERSHIP IS SUBJECT TO OPERATING AND LITIGATION RISKS
WHICH MAY NOT BE COVERED BY INSURANCE
The Partnership's operations are subject to all operating hazards
and risks normally incidental to handling, storing and delivering
combustible liquids such as propane. As a result, the Partnership is
a defendant in various legal proceedings and litigation arising in the
<PAGE> 59
ordinary course of business. The Partnership maintains 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 IS DEPENDENT UPON KEY PERSONNEL
The Partnership believes that its success depends 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 is employed by
the Managing General Partner pursuant to a three-year employment
contract. However, each of the executives will be entitled to
terminate his agreement and receive a severance amount equal to the
total compensation due for the remainder of the employment term upon a
"change of control" of NPS, which is defined to include any person or
group becoming the beneficial owner of 10% of the voting securities of
NPS, and upon certain other circumstances. See "Management -
Executive Compensation - Employment Agreements, Severance
Arrangements."
ENERGY EFFICIENCY AND TECHNOLOGY ADVANCES MAY AFFECT DEMAND
The national trend toward increased conservation and
technological advances, including installation of improved insulation
and the development of more efficient furnaces and other heating
devices, has adversely affected the demand for propane by retail
customers. The Partnership cannot predict the materiality of the
effect of future conservation measures or the effect that any
technological advances in heating, conservation, energy generation or
other devices might have on its operations.
RISKS INHERENT IN AN INVESTMENT IN THE PARTNERSHIP
CASH DISTRIBUTIONS ARE NOT GUARANTEED AND MAY FLUCTUATE WITH
PARTNERSHIP PERFORMANCE
Although the Partnership will distribute all of its Available
Cash, there can be no assurance regarding the amounts of Available
Cash to be generated by the Partnership. The actual amounts of
Available Cash will depend upon numerous factors, including cash flow
generated by operations, required principal and interest payments on
the Partnership's debt, the costs of acquisitions (including related
debt service payments), restrictions contained in the Partnership's
debt instruments, issuances of debt and equity securities by the
Partnership, fluctuations in working capital, capital expenditures,
adjustments in reserves, prevailing economic conditions and financial,
<PAGE> 60
business and other factors, a number of which are beyond the control
of the Partnership and the Managing General Partner. Cash
distributions are dependent primarily on cash flow, including from
reserves and working capital borrowings, and not on profitability,
which is affected by non-cash items. Therefore, cash distributions
might be made during periods when the Partnership records losses and
might not be made during periods when the Partnership records profits.
The amount of Available Cash from Operating Surplus needed to
distribute the Minimum Quarterly Distribution for four quarters on the
Common Units and Subordinated Units outstanding as of the date of this
Prospectus and on the General Partners' aggregate 2% general partner
interest is approximately $37.7 million ($22.7 million for the Common
Units, $14.3 million for the Subordinated Units and $700,000 for the
aggregate 2% general partner interest). The amount of pro forma
Available Cash from Operating Surplus generated during fiscal 1996 was
approximately $25.7 million. Such amount would have been sufficient
to cover the Minimum Quarterly Distribution for such fiscal year on
all of the Common Units currently outstanding and the related
distribution on the general partner interests, but would have been
insufficient by approximately $12.0 million to cover the Minimum
Quarterly Distribution on all Subordinated Units and the related
distribution on the general partner interests. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations." For the calculation of pro forma Available Cash from
Operating Surplus, see "Cash Available for Distribution."
The Partnership Agreement gives the Managing General Partner
broad discretion in establishing reserves for the proper conduct of
the Partnership's business that will affect the amount of Available
Cash. Because the business of the Partnership is seasonal, the
Managing General Partner will make additions to reserves during
certain quarters in order to fund operating expenses, interest
payments and cash distributions to partners with respect to other
quarters. In addition, the Partnership is required to establish
reserves in respect of future payments of principal and interest on
the Notes and, in certain instances, in respect of future payments of
principal and interest under the Bank Credit Facility. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - The Partnership - Financing and Sources of
Liquidity." The Partnership anticipates that reserves for interest on
the Notes will be established at approximately $4.1 million at each
March and September, and the reserves will be eliminated when interest
payments are made on the Notes in June and December. The $4.1 million
reserved for interest is approximately 10.9% of the amount of
Available Cash needed to distribute the Minimum Quarterly Distribution
for four quarters on the Common Units and the Subordinated Units
outstanding as of the date of this Prospectus and on the General
Partners' general partner interests. Reserves for repayment of
principal on the Notes are not required until March 2003 and then will
equal 25%, 50% and 75% at each March, June and September,
<PAGE> 61
respectively, of the next installment of principal, and the reserves
will be eliminated when principal payments are made on the Notes in
December. The $20.6 million reserved for principal payments is
approximately 54.7% of the amount of Available Cash needed to
distribute the Minimum Quarterly Distribution for four quarters on the
Common Units and the Subordinated Units outstanding as of the date of
this Prospectus and on the General Partners' general partner
interests. Furthermore, the Notes and the Bank Credit Facility 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 is managed by the senior executives who managed Coast
prior to the IPO, and such executives have been involved with the
operations of Synergy and Empire Energy only since December 17, 1996.
The historical financial results of the Partnership include 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.
THE PARTNERSHIP'S INDEBTEDNESS MAY LIMIT THE PARTNERSHIP'S
ABILITY TO MAKE DISTRIBUTIONS AND MAY AFFECT ITS OPERATIONS
At March 31, 1997, the Partnership's total indebtedness as a
percentage of its total capitalization was approximately 48.1%. As a
result, the Partnership is significantly leveraged and has
indebtedness that is substantial in relation to its partners' capital.
As of March 31, 1997, the Partnership had approximately $125.0 million
of unused borrowing capacity under the Bank Credit Facility. Future
borrowings could result in a significant increase in the Partnership's
leverage. The ability of the Partnership to make principal and
interest payments depends on future performance, which performance is
subject to many factors, a number of which will be outside the
Partnership's control. The Notes and the Bank Credit Facility contain
provisions relating to change of control. If such change of control
<PAGE> 62
provisions are triggered, such outstanding indebtedness may become
due. In such event, there is no assurance that the Partnership would
be able to pay the indebtedness. There is no restriction on the
ability of the Managing General Partner or Northwestern Growth to
enter into a transaction which would trigger such change of control
provisions. The Notes and the Bank Credit Facility 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 - The Partnership - Financing and Sources of
Liquidity."
COST REIMBURSEMENTS AND FEES DUE TO THE MANAGING GENERAL PARTNER
MAY BE SUBSTANTIAL
Prior to making any distribution on the Common Units, the
Partnership will reimburse the Managing General Partner and its
affiliates at cost for all expenses incurred on behalf of the
Partnership. On a pro forma basis, approximately $48.0 million of
expenses (primarily wages and salaries) would have been reimbursed by
the Partnership to the Managing General Partner in fiscal 1996. In
addition, the Managing General Partner and its affiliates may provide
services to the Partnership for which the Partnership will be charged
reasonable fees as determined by the Managing General Partner. The
reimbursement of such expenses and the payment of any such fees could
adversely affect the ability of the Partnership to make distributions.
UNITHOLDERS HAVE CERTAIN LIMITS ON THEIR VOTING RIGHTS; THE
MANAGING GENERAL PARTNER MANAGES AND OPERATES THE PARTNERSHIP
The Managing General Partner manages and operates the
Partnership. Unlike the holders of common stock in a corporation,
holders of Common Units have only limited voting rights on matters
affecting the Partnership's business. Holders of Common Units have no
right to elect the Managing General Partner on an annual or other
continuing basis, and the Managing General Partner may not be removed
except pursuant to the vote of the holders of at least 66-2/3% of the
outstanding Units (including Units owned by the General Partners and
their affiliates) and upon the election of a successor general partner
by the vote of the holders of not less than a majority of the
Outstanding Units. The ownership of the Subordinated Units by the
Managing General Partner and its affiliates effectively gives the
Managing General Partner the ability to prevent its removal. As a
<PAGE> 63
result, holders of Common Units will have limited influence on matters
affecting the operation of the Partnership, and third parties may find
it difficult to attempt to gain control, or influence the activities,
of the Partnership. See "The Partnership Agreement."
THE PARTNERSHIP MAY ISSUE ADDITIONAL COMMON UNITS THEREBY
DILUTING EXISTING UNITHOLDERS' INTERESTS
The Partnership has the authority under the Partnership Agreement
to issue an unlimited number of additional Common Units or other
equity securities for such consideration and on such terms and
conditions as are established by the Managing General Partner, in its
sole discretion without the approval of the Unitholders. During the
Subordination Period, however, the Partnership may not issue equity
securities ranking prior or senior to the Common Units or an aggregate
of more than 4,270,000 additional Common Units (excluding Common Units
issued upon conversion of Subordinated Units, pursuant to employee
benefit plans or in connection with certain acquisitions (such as the
Common Units offered hereby) or capital improvements or the repayment
of certain indebtedness) or an equivalent number of securities ranking
on a parity with the Common Units without the approval of holders of a
Unit Majority. After the end of the Subordination Period, the
Partnership may issue an unlimited number of limited partner interests
of any type without the approval of the Unitholders. The Partnership
Agreement does not give the holders of Common Units the right to
approve the issuance by the Partnership of equity securities ranking
junior to the Common Units at any time. Based on the circumstances of
each case, the issuance of additional Common Units or securities
ranking on a parity with the Common Units may dilute the value of the
interests of the then-existing holders of Common Units in the net
assets of the Partnership, dilute the interests of holders of Common
Units in distributions by the Partnership or make it more difficult
for a person or group to remove the Managing General Partner or
otherwise change the management of the Partnership.
If some or all of the Subordinated Units are converted into
Common Units, the amount of Available Cash necessary to pay the
Minimum Quarterly Distribution with respect to all of the Common Units
would be increased proportionately, thereby resulting in a dilution of
the interests of existing Common Unitholders in distributions by the
Partnership.
CHANGE OF MANAGEMENT PROVISIONS
The ownership of Subordinated Units by the Managing General
Partner and its affiliates effectively preclude the removal of the
Managing General Partner without its consent. In addition, the
Partnership Agreement contains certain provisions that may have the
effect of discouraging a person or group from attempting to remove the
Managing General Partner of the Partnership or otherwise change the
management of the Partnership. If the Managing General Partner is
removed as general partner of the Partnership under circumstances
<PAGE> 64
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 trade under certain circumstances.
See "The Partnership Agreement - Withdrawal or Removal of the General
Partners."
THE MANAGING GENERAL PARTNER WILL HAVE A LIMITED CALL RIGHT WITH
RESPECT TO THE LIMITED PARTNER INTERESTS
If at any time less than 20% of the then-issued and outstanding
limited partner interests of any class (including Common Units) are
held by persons other than the Managing General Partner and its
affiliates, the Managing General Partner will have the right, which it
may assign to any of its affiliates or the Partnership, to acquire
all, but not less than all, of the remaining limited partner interests
of such class held by such unaffiliated persons at a price generally
equal to the then-current market price of limited partner interests of
such class. As a consequence, a holder of Common Units may be
required to sell his Common Units at a time when he may not desire to
sell them or at a price that is less than the price he would desire to
receive upon such sale. See "The Partnership Agreement - Limited Call
Right."
UNITHOLDERS MAY NOT HAVE LIMITED LIABILITY IN CERTAIN
CIRCUMSTANCES; LIABILITY FOR RETURN OF CERTAIN DISTRIBUTIONS
The limitations on the liability of holders of limited partner
interests for the obligations of a limited partnership have not been
clearly established in some states. If it were determined that the
Partnership had been conducting business in any state without
compliance with the applicable limited partnership statute, or that
the right or the exercise of the right by the Unitholders as a group
to remove or replace the General Partners, to make certain amendments
to the Partnership Agreement or to take other action pursuant to the
Partnership Agreement constituted participation in the "control" of
<PAGE> 65
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.
HOLDERS OF COMMON UNITS HAVE NOT BEEN REPRESENTED BY COUNSEL
The holders of the Common Units were not represented by counsel
in connection with the preparation of the Partnership Agreement or the
other agreements referred to herein.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Conflicts of interest could arise as a result of the
relationships between the Partnership, on the one hand, and the
General Partners and their affiliates, on the other. The directors
and officers of the Managing General Partner have fiduciary duties to
manage the Managing General Partner in a manner beneficial to its
stockholder. At the same time, the Managing General Partner has
fiduciary duties to manage the Partnership in a manner beneficial to
the Partnership and the Unitholders. The duties of the Managing
General Partner, as managing general partner, to the Partnership and
the Unitholders, therefore, may come into conflict with the duties of
management of the Managing General Partner to its stockholder.
Conflicts of interest might arise with respect to the following
matters, among others:
(i) Decisions of the Managing General Partner with respect
to the amount and timing of cash expenditures, borrowings,
issuances of additional Units and reserves in any quarter will
affect whether, or the extent to which, there is sufficient
Available Cash from Operating Surplus to meet the Minimum
Quarterly Distribution and Target Distribution Levels on all
Units in a given quarter. In addition, actions by the Managing
General Partner may have the effect of enabling the General
Partners to receive distributions on the Subordinated Units or
Incentive Distributions or hastening the expiration of the
Subordination Period or the conversion of Subordinated Units into
Common Units.
(ii) The Partnership does not have any employees and relies
solely on employees of the Managing General Partner and its
affiliates.
(iii) Under the terms of the Partnership Agreement, the
Partnership reimburses the Managing General Partner and its
affiliates for costs incurred in managing and operating the
<PAGE> 66
Partnership, including costs incurred in rendering corporate
staff and support services to the Partnership.
(iv) The terms of the New Acquisition Incentive Plan
(described below under "Management - Executive Compensation -
Incentive Plans") could give the senior executives of the
Managing General Partner an incentive to cause the Partnership to
acquire additional propane operations without regard to whether
the operations would prove beneficial to the Partnership and may
present the senior executives of the Managing General Partner
with a conflict of interest in negotiating the acquisition price
on behalf of the Partnership.
(v) Whenever possible, the Managing General Partner intends
to limit the Partnership's liability under contractual
arrangements to all or particular assets of the Partnership, with
the other party thereto to have no recourse against the General
Partners or their assets.
(vi) Any agreements between the Partnership and the Managing
General Partner and its affiliates will not grant to the holders
of Common Units, separate and apart from the Partnership, the
right to enforce the obligations of the Managing General Partner
and such affiliates in favor of the Partnership. Therefore, the
Managing General Partner, in its capacity as the managing general
partner of the Partnership, will be primarily responsible for
enforcing such obligations.
(vii) Under the terms of the Partnership Agreement, the
Managing General Partner is not restricted from causing the
Partnership to pay the Managing General Partner or its affiliates
for any services rendered on terms that are fair and reasonable
to the Partnership or entering into additional contractual
arrangements with any of such entities on behalf of the
Partnership. Neither the Partnership Agreement nor any of the
other agreements, contracts and arrangements between the
Partnership, on the one hand, and the Managing General Partner
and its affiliates, on the other, are or will be the result of
arm's-length negotiations.
(viii) The Managing General Partner may exercise its
right to call for and purchase Units as provided in the
Partnership Agreement or assign such right to one of its
affiliates or to the Partnership.
(ix) The Partnership Agreement provides that the Managing
General Partner is generally restricted from engaging in any
business activities other than those incidental to its ownership
of interests in the Partnership. Notwithstanding the foregoing,
the Partnership Agreement permits affiliates of the Managing
General Partner (including NPS, Northwestern Growth and the
Special General Partner) to compete with the Partnership in the
<PAGE> 67
retail sale of propane in the continental United States only if
(A) the Managing General Partner determines, in its reasonable
judgment prior to the commencement of such activity, that it is
not in the best interests of the Partnership to engage in such
activity either (1) because of the financial commitments or
operating characteristics associated with such activity, or
(2) because such activity is not consistent with the
Partnership's business strategy or cannot otherwise be integrated
with the Partnership's operations on a basis beneficial to the
Partnership; or (B) such activity is being undertaken as provided
in a joint venture agreement or other agreement between the
Partnership and an affiliate of the Managing General Partner and
such joint venture or other agreement was determined at the time
it was entered into to be fair to the Partnership in the
reasonable judgment of the Managing General Partner. See
"Conflicts of Interest and Fiduciary Responsibilities - Conflicts
of Interest - The General Partners' Affiliates May Compete with
the Partnership." In addition, affiliates of the Managing General
Partner (including the Special General Partner) may compete with
the Partnership in businesses other than the retail sale of
propane in the continental United States. There can be no
assurance that there will not be competition between the
Partnership and affiliates of the Managing General Partner in the
future.
(x) The Partnership Agreement does not prohibit the
Partnership from engaging in roll-up transactions. Were the
Managing General Partner to cause the Partnership to engage in a
roll-up transaction, there could be no assurance that such a
transaction would not have a material adverse effect on a
Unitholder's investment in the Partnership.
Unless provided for otherwise in the partnership agreement,
Delaware law generally requires a general partner of a Delaware
limited partnership to adhere to fiduciary duty standards under which
it owes its limited partners the highest duties of good faith,
fairness and loyalty and which generally prohibit such general partner
from taking any action or engaging in any transaction as to which it
has a conflict of interest. The Partnership Agreement expressly
permits the Managing General Partner to resolve conflicts of interest
between itself or its affiliates, on the one hand, and the Partnership
or the Unitholders, on the other, and to consider, in resolving such
conflicts of interest, the interests of other parties in addition to
the interests of the Unitholders. In addition, the Partnership
Agreement provides that a purchaser of Common Units is deemed to have
consented to certain conflicts of interest and actions of the Managing
General Partner and its affiliates that might otherwise be prohibited,
including those described in clauses (i)-(x) above, and to have agreed
that such conflicts of interest and actions do not constitute a breach
by the Managing General Partner of any duty stated or implied by law
or equity. The Managing General Partner will not be in breach of its
obligations under the Partnership Agreement or its duties to the
<PAGE> 68
Partnership or the Unitholders if the resolution of such conflict is
fair and reasonable to the Partnership. The latitude given in the
Partnership Agreement to the Managing General Partner in resolving
conflicts of interest may significantly limit the ability of a
Unitholder to challenge what might otherwise be a breach of fiduciary
duty.
The Partnership Agreement expressly limits the liability of the
General Partners by providing that the General Partners, their
affiliates and their officers and directors will not be liable for
monetary damages to the Partnership, the limited partners or assignees
for errors of judgment or for any acts or omissions if the General
Partners and such other persons acted in good faith. In addition, the
Partnership is required to indemnify the General Partners, their
affiliates and their respective officers, directors, employees, agents
and trustees to the fullest extent permitted by law against
liabilities, costs and expenses incurred by the General Partners or
such other persons, if the General Partners or such persons acted in
good faith and in a manner they reasonably believed to be in, or (in
the case of a person other than a General Partner) not opposed to, the
best interests of the Partnership and, with respect to any criminal
proceedings, had no reasonable cause to believe the conduct was
unlawful.
The provisions of Delaware law that allow the common law
fiduciary duties of a general partner to be modified by a partnership
agreement have not been tested in a court of law, and the Managing
General Partner has not obtained an opinion of counsel covering the
provisions set forth in the Partnership Agreement that purport to
waive or restrict the fiduciary duties of the General Partners that
would be in effect under common law were it not for the Partnership
Agreement. See "Conflicts of Interest and Fiduciary Responsibilities -
Conflicts of Interest."
TAX RISKS
For a general discussion of the expected federal income tax
consequences of owning and disposing of Common Units, see "Tax
Considerations."
TAX TREATMENT IS DEPENDENT ON PARTNERSHIP STATUS
The availability to a Common Unitholder of the federal income tax
benefits of an investment in the Partnership depends, in large part,
on the classification of the Partnership as a partnership for federal
income tax purposes. Assuming the accuracy of certain factual matters
as to which the General Partners and the Partnership have made
representations, Counsel is of the opinion that, under current law,
the Partnership will be classified as a partnership for federal income
tax purposes. No ruling from the IRS as to classification has been or
is expected to be requested. Instead, the Partnership intends to rely
on such opinion of Counsel (which is not binding on the IRS). One of
<PAGE> 69
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
<PAGE> 70
or indirectly by some or all of the Unitholders and the General
Partners.
CONSEQUENCES OF EXCHANGING PROPERTY FOR COMMON UNITS
In general, no gain or loss will be recognized for federal income
tax purposes by the Partnership or by a person (including any
individual, partnership, S corporation or corporation taxed under
Subchapter S of the Code) contributing property (including stock) to
the Partnership in exchange for Common Units. If the Partnership
assumes liabilities in connection with a contribution of assets in
exchange for Common Units, however, taxable gain may be recognized by
the contributing person in certain circumstances.
TAX LIABILITY EXCEEDING CASH DISTRIBUTIONS
A Unitholder will be required to pay federal income taxes and, in
certain cases, state and local income taxes on his allocable share of
the Partnership's income, whether or not he receives cash
distributions from the Partnership. There is no assurance that a
Unitholder will receive cash distributions equal to his allocable
share of taxable income from the Partnership or even the tax liability
to him resulting from that income. Further, a holder of Common Units
may incur a tax liability, in excess of the amount of cash received,
upon the sale of his Common Units. See "Tax Considerations - Tax
Consequences of Unit Ownership" and "- Disposition of Common Units."
OWNERSHIP OF COMMON UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN
OTHER INVESTORS
Investment in Common Units by certain tax-exempt entities,
regulated investment companies and foreign persons raises issues
unique to such persons. For example, virtually all of the taxable
income derived by most organizations exempt from federal income tax
(including IRAs and other retirement plans) from the ownership of
Common Units 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
<PAGE> 71
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 has registered with the Secretary of the Treasury
as a "tax shelter." No assurance can be given that the Partnership
will not be audited by the IRS or that tax adjustments will not be
made. The rights of a Unitholder owning less than a 1% profits
interest in the Partnership to participate in the income tax audit
process are very limited. Further, any adjustments in the
Partnership's tax returns will lead to adjustments in the Unitholders'
tax returns and may lead to audits of Unitholders' tax returns and
adjustments of items unrelated to the Partnership. Each Unitholder
would bear the cost of any expenses incurred in connection with an
examination of such Unitholder's personal tax return.
UNIFORMITY OF COMMON UNITS AND NONCONFORMING DEPRECIATION
CONVENTIONS
Because the Partnership cannot match transferors and transferees
of Common Units, uniformity of the economic and tax characteristics of
the Common Units to a purchaser of Common Units must be maintained.
To maintain uniformity and for other reasons, the Partnership will
adopt certain depreciation and amortization conventions that do not
conform with all aspects of certain proposed and final Treasury
Regulations. A successful challenge to those conventions by the IRS
could adversely affect the amount of tax benefits available to a
purchaser of Common Units and could have a negative impact on the
value of the Common Units. See "Tax Considerations - Uniformity of
Units."
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will likely be
subject to other taxes, such as state and local taxes, unincorporated
business taxes and estate, inheritance or intangible taxes that are
imposed by the various jurisdictions in which the Partnership does
business or owns property. A Unitholder will likely be required to
file state and local income tax returns and pay state and local income
taxes in some or all of the various jurisdictions in which the
Partnership does business or owns property and may be subject to
penalties for failure to comply with those requirements. The
Partnership currently owns property and conducts business in the
following states which currently impose a personal income tax:
Alabama, Arkansas, California, Georgia, Illinois, Indiana, Kentucky,
Maryland, Mississippi, Missouri, New Hampshire, New Jersey, New
Mexico, New York, North Carolina, Ohio, Oklahoma, South Carolina,
Tennessee, Utah, Vermont and Virginia. It is the responsibility of
each Unitholder to file all United States federal, state and local tax
<PAGE> 72
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."
DISPOSITION OF COMMON UNITS
A Unitholder who sells Common Units will recognize gain or loss
equal to the difference between the amount realized (including his
share of Partnership nonrecourse liabilities) and his adjusted tax
basis in such Common Units. Thus, prior Partnership distributions in
excess of cumulative net taxable income in respect of a Common Unit
which decreased a Unitholder's tax basis in such Common Unit will, in
effect, become taxable income if the Common Unit is sold at a price
greater than the Unitholder's tax basis in such Common Units, even if
the price is less than his original cost. A portion of the amount
realized (whether or not representing gain) may be ordinary income.
Furthermore, should the IRS successfully contest certain conventions
to be used by the Partnership, a Unitholder could realize more gain on
the sale of Units than would be the case under such conventions
without the benefit of decreased income in prior years.
PARTNERSHIP TAX INFORMATION AND AUDITS
The Partnership will furnish each holder of Common Units with a
Schedule K-1 that sets forth his allocable share of income, gains,
losses and deductions. In preparing these schedules, the Partnership
will use various accounting and reporting conventions and adopt
various depreciation and amortization methods. There is no assurance
that these schedules will yield a result that conforms to statutory or
regulatory requirements or to administrative pronouncements of the
IRS. Further, the Partnership's tax return may be audited, and any
such audit could result in an audit of a partner's individual tax
return as well as increased liabilities for taxes because of
adjustments resulting from the audit.
<PAGE> 73
THE IPO AND RELATED TRANSACTIONS
On December 17, 1996, the Partnership consummated the IPO,
issuing 9,821,000 Common Units (including 1,281,000 Common Units
issued pursuant to the underwriters' over-allotment option that was
exercised in full), and received gross proceeds of $206.2 million. In
addition, the Operating Partnership issued $220.0 million aggregate
principal amount of Notes to certain institutional investors in the
Note Placement.
Immediately prior to the closing of the IPO, Synergy, Empire
Energy, Myers and Coast entered into a series of transactions which
resulted in the Combined Operations being owned by the General
Partners. Concurrently with the IPO closing, the General Partners
contributed, or caused 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 assumed
substantially all of the liabilities associated with the Combined
Operations. Immediately after such contributions, all of the limited
partner interests in the Operating Partnership were conveyed to the
Partnership in exchange for interests in the Partnership. In
addition, the Operating Partnership contributed the portion of the
Combined Operations utilized in the parts and appliance sales and
service businesses to its corporate subsidiary. As a result of such
transactions, the General Partners own an aggregate of 6,597,619
Subordinated Units, representing an aggregate 39.4% limited partner
interest in the Partnership, an aggregate 2% general partner interest
in the Partnership and the right to receive Incentive Distributions.
Concurrently with the closing of the IPO, the Operating
Partnership entered into the Bank Credit Facility, which included the
$50.0 million Working Capital Facility to be used for working capital
and other general partnership purposes, and the $75.0 million
Acquisition Facility to be used for acquisitions and capital
improvements. 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 - The
Partnership - Financing and Sources of Liquidity."
<PAGE> 74
USE OF PROCEEDS
The Common Units offered hereby may be issued from time to time
by the Partnership in connection with the Partnership's acquisition of
other businesses, properties or securities in business combination
transactions. See "Plan of Distribution." The Partnership is from
time to time engaged in ongoing discussions with respect to
acquisitions, and expects to continue to pursue such acquisition
opportunities actively. As of the date of this Prospectus, the
Partnership does not have any agreements with respect to any material
acquisitions but is involved in ongoing discussions with several
companies and is continuing to assess these and other acquisition
opportunities.
</TABLE>
<TABLE>
<CAPTION>
CAPITALIZATION
The following table sets forth the capitalization of the
Partnership at March 31, 1997. The table should be read in
conjunction with the historical financial statements and notes thereto
included elsewhere in this Prospectus.
MARCH 31,
1997
-------------
-
(IN THOUSANDS
OF DOLLARS)
<S> <C>
Short-term indebtedness, including current $ 5,406
portion of long-term indebtedness . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . 224,135
-------
Total indebtedness . . . . . . . . . . . . . . . 229,541
-------
<PAGE> 75
Partners' capital:
Common Unitholders . . . . . . . . . . . . . . . 143,232
Subordinated Unitholders . . . . . . . . . . . . 99,351
General Partners . . . . . . . . . . . . . . . . 5,050
-------
Total partners' capital . . . . . . . . . . . . . 247,633
-------
Total capitalization . . . . . . . . . . . . . . 477,174
=======
</TABLE>
<PAGE> 76
PRICE RANGE OF COMMON UNITS
The Common Units began trading on the NYSE on December 12, 1996
under the trading symbol "CNO." Trading price data as reported by the
NYSE for each of the quarters indicated are as follows:
HIGH LOW
---- ----
1996
Fourth Quarter (from December 12, 1996) . . . $21-1/2 $ 21
1997
First Quarter . . . . . . . . . . . . . . . . 22-3/8 20-7/8
Second Quarter . . . . . . . . . . . . . . . 22-1/8 19-3/4
------ ------
Third Quarter (through August 27, 1997) . . . 23-9/16 21-1/16
------- -------
For a recent sale price of the Common Units, please see the cover
page of this Prospectus. The Common Units were held by approximately
12,000 holders as of June 30, 1997.
The Partnership expects to make distributions of all Available
Cash within 45 days after the end of each of quarter to holders of
record on the applicable record date.
For a description of certain limitations on the Partnership's
ability to make distributions to its partners, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-The Partnership-Financing and Sources of Liquidity."
<PAGE> 77
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
commenced operations, plus $25.0 million, plus all cash receipts of
the Partnership from its operations since the closing of the
Transactions, less (ii) all Partnership operating expenses, debt
service payments (including reserves therefor but not including
payments required in connection with the sale of assets or any
refinancing with the proceeds of new indebtedness or an equity
offering), maintenance capital expenditures and reserves established
for future Partnership operations, in each case since the closing of
the Transactions.
Capital Surplus is also defined in the Glossary and will
generally be generated only by borrowings (other than for working
capital purposes), sales of debt and equity securities and sales or
other dispositions of assets for cash (other than inventory, accounts
receivable and other assets all as disposed of in the ordinary course
of business).
To avoid the difficulty of trying to determine whether Available
Cash distributed by the Partnership is from Operating Surplus or from
Capital Surplus, all Available Cash distributed by the Partnership
from any source will be treated as distributed from Operating Surplus
until the sum of all Available Cash distributed since the commencement
of the Partnership equals the Operating Surplus as of the end of the
quarter prior to such distribution. Any Available Cash in excess of
such amount (irrespective of its source) will be deemed to be from
Capital Surplus and distributed accordingly.
<PAGE> 78
If Available Cash from Capital Surplus is distributed in respect
of each Common Unit in an aggregate amount per Common Unit equal to
$21.00 per Common Unit (the "Initial Unit Price"), plus any Common
Unit Arrearages, the distinction between Operating Surplus and Capital
Surplus will cease, and all distributions of Available Cash will be
treated as if they were from Operating Surplus. The Partnership does
not anticipate that there will be significant distributions from
Capital Surplus.
The Subordinated Units are a separate class of interests in the
Partnership, and the rights of holders of such interests to
participate in distributions to partners differ from the rights of the
holders of Common Units. For any given quarter, any Available Cash
will be distributed to the General Partners and to the holders of
Common Units, and may also be distributed to the holders of
Subordinated Units depending upon the amount of Available Cash for the
quarter, the amount of Common Unit Arrearages, if any, and other
factors discussed below.
The Incentive Distributions represent the right to receive an
increasing percentage of quarterly distributions of Available Cash
from Operating Surplus after the Target Distribution Levels have been
achieved. The Target Distribution Levels are based on the amounts of
Available Cash from Operating Surplus distributed in excess of the
payments made with respect to the Minimum Quarterly Distribution and
Common Unit Arrearages, if any, and the related 2% distribution to the
General Partners.
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 in connection with the issuance of additional
Partnership Interests.
The discussion in the sections below indicates the percentages of
cash distributions required to be made to the General Partners and the
holders of Common Units and the circumstances under which holders of
Subordinated Units are entitled to cash distributions and the amounts
thereof. Distributions and allocations to the General Partners will
<PAGE> 79
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
45 days after the end of each quarter to holders of record on the
applicable record date. The Minimum Quarterly Distribution and the
Target Distribution Levels are also subject to certain other
adjustments as described below under "- Distributions from Capital
Surplus" and "- Adjustment of Minimum Quarterly Distribution and
Target Distribution Levels."
With respect to each quarter during the Subordination Period, to
the extent there is sufficient Available Cash, the holders of Common
Units will have the right to receive the Minimum Quarterly
Distribution, plus any Common Unit Arrearages, prior to any
distribution of Available Cash to the holders of Subordinated Units.
This subordination feature will enhance the Partnership's ability to
distribute the Minimum Quarterly Distribution on the Common Units
during the Subordination Period. There is no guarantee, however, that
the Minimum Quarterly Distribution will be made on the Common Units.
Upon expiration of the Subordination Period, all Subordinated Units
will be converted on a one-for-one basis into Common Units and will
participate pro rata with all other Common Units in future
distributions of Available Cash. Under certain circumstances, up to
3,298,810 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 until the first
day of any quarter beginning after December 31, 2001 in respect of
which (i) distributions of Available Cash from Operating Surplus on
the Common Units and the Subordinated Units with respect to each of
the three consecutive four-quarter periods immediately preceding such
date equaled or exceeded the sum of the Minimum Quarterly Distribution
on all of the outstanding Common Units and Subordinated Units during
such periods, (ii) the Adjusted Operating Surplus generated during
each of the three consecutive four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum
Quarterly Distribution on all of the outstanding Common Units and
Subordinated Units and the related distribution on the general partner
<PAGE> 80
interests in the Partnership during such periods, and (iii) there are
no outstanding Common Unit Arrearages.
Prior to the end of the Subordination Period, a portion of the
Subordinated Units will convert into Common Units on a one-for-one
basis on the first day after the record date established for the
distribution in respect of any quarter ending on or after (a)
December 31, 1999 with respect to one-quarter of the Subordinated
Units (1,649,405 Subordinated Units) and (b) December 31, 2000 with
respect to one-quarter of the Subordinated Units (1,649,405
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 sum of the Minimum Quarterly Distribution on all of the
outstanding Common Units and Subordinated Units and the related
distribution on the general partner interests in the Partnership
during such periods, and (iii) there are no outstanding Common Unit
Arrearages; provided, however, that the early conversion of the second
one-quarter of Subordinated Units may not occur until at least one
year following the early conversion of the first one-quarter of
Subordinated Units.
Upon expiration of the Subordination Period, all remaining
Subordinated Units will convert into Common Units on a one-for-one
basis and will thereafter participate, pro rata, with the other Common
Units in distributions of Available Cash. In addition, if the
Managing General Partner is removed as managing general partner of the
Partnership under circumstances where Cause does not exist and Units
held by the Managing General Partner and its affiliates are not voted
in favor of such removal, (i) the Subordination Period will end and
all outstanding Subordinated Units will immediately convert into
Common Units on a one-for-one basis, (ii) any existing Common Unit
Arrearages will be extinguished and (iii) the General Partners will
have the right to convert their general partner interests (and the
rights of each of them to receive Incentive Distributions) into Common
Units or to receive cash in exchange for such interests.
"Adjusted Operating Surplus" for any period generally means
Operating Surplus generated during such period, less (a) any net
increase in working capital borrowings during such period and (b) any
net reduction in cash reserves for Operating Expenditures during such
period not relating to an Operating Expenditure made during such
period; and plus (x) any net decrease in working capital borrowings
during such period and (y) any net increase in cash reserves for
Operating Expenditures during such period required by any debt
instrument for the repayment of principal, interest or premium.
Operating Surplus generated during a period is equal to the difference
between (i) the Operating Surplus determined at the end of such period
<PAGE> 81
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;
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 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,
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:
<PAGE> 82
FIRST, 98% to all Unitholders, pro rata, and 2% to the
General Partners, until there has been distributed in respect of
each Unit an amount equal to the Minimum Quarterly Distribution
for such quarter; and
THEREAFTER, in the manner described in "- Incentive
Distributions - Hypothetical Annualized Yield" below.
INCENTIVE DISTRIBUTIONS-HYPOTHETICAL ANNUALIZED YIELD
For any quarter for which Available Cash from Operating Surplus
is distributed to the Common and Subordinated Unitholders in an amount
equal to the Minimum Quarterly Distribution on all Units and to the
Common Unitholders in an amount equal to any unpaid Common Unit
Arrearages, then any additional Available Cash from Operating Surplus
in respect of such quarter will be distributed among the Unitholders
and the General Partners in the following manner:
FIRST, 98% to all Unitholders, pro rata, and 2% to the
General Partners, until the Unitholders have received (in
addition to any distributions to Common Unitholders to eliminate
Common Unit Arrearages) a total of $0.594 for such quarter in
respect of each outstanding Unit (the "First Target
Distribution");
SECOND, 85% to all Unitholders, pro rata, and 15% to the
General Partners, until the Unitholders have received (in
addition to any distributions to Common Unitholders to eliminate
Common Unit Arrearages) a total of $0.700 for such quarter in
respect of each outstanding Unit (the "Second Target
Distribution");
THIRD, 75% to all Unitholders, pro rata, and 25% to the
General Partners, until the Unitholders have received (in
addition to any distributions to Common Unitholders to eliminate
Common Unit Arrearages) a total of $0.900 for such quarter in
respect of each outstanding Unit (the "Third Target
Distribution"); and
THEREAFTER, 50% to all Unitholders, pro rata, and 50% to the
General Partners.
The distributions to the General Partners set forth above (other than
in their capacity as holders of the Subordinated Units) that are in
excess of their aggregate 2% general partner interest represent the
Incentive Distributions. The right to receive Incentive Distributions
is not part of the general partner interest and may be transferred
separately from such interests. See "The Partnership Agreement-
Transfer of General Partners' Interests and Incentive Distribution
Rights."
<PAGE> 83
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
issued for a capital contribution of $21.00 per Common Unit (equal to
the initial public offering price) and (ii) the Partnership
distributed each quarter during the first year following the
investment the amount set forth under the column "Total Quarterly
Distribution Target Amount." The calculations are also based on the
assumption that the quarterly distribution amounts shown do not
include any Common Unit Arrearages. The amounts set forth under
"Marginal Percentage Interest in Distributions" are the percentage
interests of the General Partners and the Unitholders in any Available
Cash from Operating Surplus distributed up to and including the
corresponding amount in the column "Total Quarterly Distribution
Target Amount," until Available Cash distributed reaches the next
Target Distribution Level, if any. The percentage interests shown for
the Unitholders and the General Partners for the Minimum Quarterly
Distribution are also applicable to quarterly distribution amounts
that are less than the Minimum Quarterly Distribution.
<TABLE>
<CAPTION>
MARGINAL PERCENTAGE
INTEREST IN
DISTRIBUTIONS
-------------------
TOTAL QUARTERLY
DISTRIBUTION TARGET HYPOTHETICAL GENERAL
AMOUNT ANNUALIZED YIELD UNITHOLDERS PARTNERS
--------------------- ---------------- ----------- --------
<S> <C> <C> <C> <C>
Minimum Quarterly Distribution . . . . $0.540 10.286% 98% 2%
First Target Distribution . . . . . . . $0.594 11.314% 98% 2%
Second Target Distribution . . . . . . $0.700 13.333% 85% 15%
Third Target Distribution . . . . . . . $0.900 17.143% 75% 25%
Thereafter . . . . . . . . . . . . . . above $0.900 above 17.143% 50% 50%
</TABLE>
DISTRIBUTIONS FROM CAPITAL SURPLUS
Distributions by the Partnership of Available Cash from Capital
Surplus will be made in the following manner:
FIRST, 98% to all Unitholders, pro rata, and 2% to the
General Partners, until the Partnership has distributed, in
respect of each outstanding Common Unit issued in the IPO, with
the Available Cash from Capital Surplus in an aggregate amount
per Common Unit equal to the Initial Unit Price;
SECOND, 98% to the holders of Common Units, pro rata, and 2%
to the General Partners, until the Partnership has distributed,
in respect of each outstanding Common Unit, Available Cash from
<PAGE> 84
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 with
respect to Common Units issued in the IPO. 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 make it more likely that Subordinated Units
will be converted into Common Units (whether pursuant to the
termination of the Subordination Period or to the provisions
permitting early conversion of some Subordinated Units) and may
accelerate the dates at which such conversions occur.
When "payback" of the Initial Unit Price has occurred, i.e., when
the Unrecovered Capital of the Common Units is zero (and any accrued
Common Unit Arrearages have been paid), then in effect the Minimum
Quarterly Distribution and each of the Target Distribution Levels will
have been reduced to zero for subsequent quarters. Thereafter, all
distributions of Available Cash from all sources will be treated as if
they were from Operating Surplus. Because the Minimum Quarterly
Distribution and the Target Distribution Levels will have been reduced
to zero, the General Partners will be entitled thereafter to receive
50% of all distributions of Available Cash in their capacities as
General Partners and as holders of the Incentive Distribution Rights
(in addition to any distributions to which they may be entitled as
holders of Units).
Distributions of Available Cash from Capital Surplus will not
reduce the Minimum Quarterly Distribution or Target Distribution
Levels for the quarter with respect to which they are distributed.
ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION
LEVELS
In addition to reductions of the Minimum Quarterly Distribution
and Target Distribution Levels made upon a distribution of Available
Cash from Capital Surplus, the Minimum Quarterly Distribution, the
Target Distribution Levels, the Unrecovered Capital, the number of
additional Common Units issuable during the Subordination Period
without a Unitholder vote, the number of Common Units issuable upon
conversion of the Subordinated Units and other amounts calculated on a
per Unit basis will be proportionately adjusted upward or downward, as
appropriate, in the event of any combination or subdivision of Common
<PAGE> 85
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.
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
<PAGE> 86
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, which is an exhibit to the Registration Statement of which
this Prospectus is a part. If the liquidation of the Partnership
occurs before the end of the Subordination Period, any net gain (or
unrealized gain attributable to assets distributed in kind) will be
allocated to the partners as follows:
FIRST, to the General Partners and the holders of Units
having negative balances in their capital accounts to the extent
of and in proportion to such negative balances;
SECOND, 98% to the holders of Common Units, pro rata, and 2%
to the General Partners, until the capital account for each
Common Unit is equal to the sum of (i) the Unrecovered Capital in
respect of such Common Unit, (ii) the amount of the Minimum
Quarterly Distribution for the quarter during which liquidation
of the Partnership occurs and (iii) any unpaid Common Unit
Arrearages in respect of such Common Unit;
THIRD, 98% to the holders of Subordinated Units, pro rata,
and 2% to the General Partners, until the capital account for
each Subordinated Unit is equal to the sum of (i) the Unrecovered
Capital in respect of such Subordinated Unit and (ii) the amount
of the Minimum Quarterly Distribution for the quarter during
which the liquidation of the Partnership occurs;
FOURTH, 98% to all Unitholders, pro rata, and 2% to the
General Partners, until there has been allocated under this
paragraph FOURTH an amount per Unit equal to (a) the sum of the
excess of the First Target Distribution per Unit over the Minimum
Quarterly Distribution per Unit for each quarter of the
Partnership's existence, less (b) the cumulative amount per Unit
of any distributions of Available Cash from Operating Surplus in
excess of the Minimum Quarterly Distribution per Unit that were
distributed 98% to the Unitholders, pro rata, and 2% to the
General Partners for each quarter of the Partnership's existence;
FIFTH, 85% to the Unitholders, pro rata, and 15% to the
General Partners, until there has been allocated under this
<PAGE> 87
paragraph FIFTH an amount per Unit equal to (a) the sum of the
excess of the Second Target Distribution per Unit over the First
Target Distribution per Unit for each quarter of the
Partnership's existence, less (b) the cumulative amount per Unit
of any distributions of Available Cash from Operating Surplus in
excess of the First Target Distribution per Unit that were
distributed 85% to the Unitholders, pro rata, and 15% to the
General Partners for each quarter of the Partnership's existence;
SIXTH, 75% to all Unitholders, pro rata, and 25% to the
General Partners, until there has been allocated under this
paragraph SIXTH an amount per Unit equal to (a) the sum of the
excess of the Third Target Distribution per Unit over the Second
Target Distribution per Unit for each quarter of the
Partnership's existence, less (b) the cumulative amount per Unit
of any distributions of Available Cash from Operating Surplus in
excess of the Second Target Distribution per Unit that were
distributed 75% to the Unitholders, pro rata, and 25% to the
General Partners for each quarter of the Partnership's existence;
and
THEREAFTER, 50% to all Unitholders, pro rata, and 50% to the
General Partners.
If the liquidation occurs after the Subordination Period, the
distinction between Common Units and Subordinated Units will
disappear, so that clauses (ii) and (iii) of paragraph SECOND above
and all of paragraph THIRD above will no longer be applicable.
Upon liquidation of the Partnership, any loss will generally be
allocated to the General Partners and the Unitholders as follows:
FIRST, 98% to holders of Subordinated Units in proportion to
the positive balances in their respective capital accounts and 2%
to the General Partners, until the capital accounts of the
holders of the Subordinated Units have been reduced to zero;
SECOND, 98% to the holders of Common Units in proportion to
the positive balances in their respective capital accounts and 2%
to the General Partners, until the capital accounts of the Common
Unitholders have been reduced to zero; and
THEREAFTER, 100% to the General Partners.
If the liquidation occurs after the Subordination Period, the
distinction between Common Units and Subordinated Units will
disappear, so that all of paragraph FIRST above will no longer be
applicable.
Any allocation made to the General Partners herein shall be made
to the General Partners pro rata in accordance with their respective
general partner interests. In addition, interim adjustments to
<PAGE> 88
capital accounts will be made at the time the Partnership issues
additional interests in the Partnership or makes distributions of
property. Such adjustments will be based on the fair market value of
the interests or the property distributed and any gain or loss
resulting therefrom will be allocated to the Unitholders and the
General Partners in the same manner as gain or loss is allocated upon
liquidation. In the event that positive interim adjustments are made
to the capital accounts, any subsequent negative adjustments to the
capital accounts resulting from the issuance of additional interests
in the Partnership, distributions of property by the Partnership, or
upon liquidation of the Partnership, will be allocated in a manner
which results, to the extent possible, in the capital account balances
of the General Partners equaling the amount which would have been the
General Partners' capital account balances if no prior positive
adjustments to the capital accounts had been made.
CASH AVAILABLE FOR DISTRIBUTION
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 outstanding as of the date of the
Prospectus and on the aggregate 2% general partner interest of the
General Partners is approximately $37.7 million ($22.7 million for the
Common Units, $14.3 million for the Subordinated Units and $700,000
for the aggregate 2% general partner interest of the General
Partners). The amount of pro forma Available Cash from Operating
Surplus generated during fiscal 1996 was approximately $25.7 million.
Such amount would have been sufficient to cover the full Minimum
Quarterly Distribution for such fiscal year on all of the Common Units
currently outstanding and the related distribution on the general
partner interests, but would have been insufficient by approximately
$12.0 million to cover the Minimum Quarterly Distribution on all
Subordinated Units currently outstanding and the related distribution
on the general partner interests. If effect were given to an
additional $7.9 million of expense reductions which the Partnership
believes are achievable upon consummation of the Transactions, pro
forma Available Cash from Operating Surplus would have been
approximately $33.5 million, which amount would have been insufficient
by approximately $2.7 million to cover the Minimum Quarterly
Distribution for fiscal 1996 on all Subordinated Units and the related
distribution on the general partner interests. See Note 3 to the Pro
Forma Consolidated Financial Statements of Cornerstone Propane
Partners, L.P., footnote (a) to the following table, "Risk Factors-
Risks Inherent in an Investment in the Partnership-Partnership
Profitability Will Depend on Successful Integration of the Combined
Operations" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Pro forma Available Cash from Operating Surplus was calculated as
follows:
<PAGE> 89
<TABLE>
<CAPTION>
PRO FORMA AVAILABLE CASH FROM OPERATING SURPLUS
(IN THOUSANDS)
FISCAL YEAR ENDED
JUNE 30, 1996
-----------------
<S> <C>
Pro forma operating income(a) . . . . . . . . . . . . . . . . . . . . $32,535
Add: Pro forma depreciation and amortization . . . . . . . . . . . . 14,500
-------
Pro forma EBITDA(a)(b) . . . . . . . . . . . . . . . . . . . . . . . 47,035
Less: Pro forma interest expense . . . . . . . . . . . . . . . . . . 17,865
3,500
Pro forma capital expenditures - maintenance(c) . . . . . . . . . . -------
Pro forma Available Cash from Operating Surplus(a)(d) . . . . . . . . $25,670
=======
</TABLE>
___________________
(a) The pro forma amounts of operating income, EBITDA and Available
Cash from Operating Surplus do not reflect certain non-recurring
expenses incurred by Empire Energy of approximately $4.3 million,
propane acquisition and logistics costs savings of approximately
$1.5 million and insurance savings of approximately $2.1 million
that the Partnership believes are achievable as a result of the
Transactions. If effect were given to such anticipated expense
reductions, the following amounts would have been reflected:
Pro forma operating income . . . . . . . . . . . $40,397
Pro forma EBITDA . . . . . . . . . . . . . . . . 54,897
Pro forma Available Cash from Operating Surplus . 33,532
See Note 3 to the Pro Forma Consolidated Financial Statements of
Cornerstone Propane Partners, L.P. and "Risk Factors - Risks
Inherent in an Investment in the Partnership - Partnership
Profitability Will Depend on Successful Integration of the
Combined Operations."
(b) EBITDA is defined as operating income plus depreciation and
amortization. EBITDA should not be considered as an alternative
to net income (as an indicator of operating performance) or as an
alternative to cash flow (as a measure of liquidity or ability to
service debt obligations), and is not a measure of performance or
financial condition under generally accepted accounting
principles, but provides additional information for evaluating
the Partnership's ability to distribute the Minimum Quarterly
Distribution. Cash flows in accordance with generally accepted
accounting principles consist of cash flows from operating,
investing and financing activities. Cash flows from operating
activities reflect net income (loss)(including charges for
interest and income taxes not reflected in EBITDA), adjusted for
(i) all non-cash charges or income (which are reflected in
EBITDA) and (ii) changes in operating assets and liabilities
(which are not reflected in EBITDA). Further, cash flows from
investing and financing activities are not included in EBITDA.
<PAGE> 90
For a discussion of the operating performance and cash flows
provided by (used in) operating, investing and financing
activities of the companies that comprise the Combined
Operations, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(c) Based upon historical maintenance capital expenditures for the
Combined Operations for fiscal 1996.
(d) Available Cash from Operating Surplus generated during a
specified period refers generally to (i) all cash receipts of the
Partnership from its operations generated during such period,
less (ii) all Partnership operating expenses, debt service
payments (including any increases in reserves therefor but not
including amounts paid from any reduction in reserves, or
payments required in connection with the sale of assets, or any
refinancing with the proceeds of new indebtedness or an equity
offering) and maintenance capital expenditures, in each case
during such period. For a complete definition of Operating
Surplus, see the Glossary.
The amount of pro forma Available Cash from Operating Surplus for
fiscal 1996 set forth above was derived from the pro forma financial
statements of the Partnership. The pro forma adjustments are based
upon currently available information and certain estimates and
assumptions. The pro forma financial statements do not purport to
present the results of operations of the Partnership had the
Transactions actually been completed as of the dates indicated.
Furthermore, the pro forma financial statements are based on accrual
accounting concepts while Operating Surplus is defined in the
Partnership Agreement on a cash accounting basis. As a consequence,
the amount of pro forma Available Cash from Operating Surplus shown
above should only be viewed as a general indication of the amount of
Available Cash from Operating Surplus that might in fact have been
generated by the Partnership had it been formed in earlier periods.
<PAGE> 91
RECENT DEVELOPMENTS
On August 4, 1997, the Partnership announced its preliminary
results of operations for the quarter ended June 30, 1997, and the pro
forma results of operations for the fiscal year ended June 30, 1997.
The Partnership's condensed consolidated statements of operations for
the quarter and pro forma years ended June 30, 1997 and 1996, and the
consolidated balance sheet at June 30, 1997 are presented below.
Figures are in thousands of dollars, except per unit and per gallon
data.
<TABLE>
<CAPTION>
CORNERSTONE PROPANE PARTNERS, L.P.
FINANCIAL RESULTS OF OPERATIONS
(UNAUDITED)
QUARTER ENDED JUNE 30, PRO FORMA FISCAL YEAR
(PRO FORMA)(A) ENDED JUNE 30,(A)
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 128,694 $ 143,313 $ 664,197 $ 595,790
Cost of Sales 105,933 119,673 534,892 455,984
Gross Profit 22,761 23,640 129,305 139,806
Operating, SG&A Expenses 22,055 24,576 88,264 92,771
EBITDA (b) 706 ( 936) 41,041 47,035
Depreciation and Amortization 4,125 4,331 15,073 14,500
Net Income (Loss) $ (8,174) (9,856) $ 7,644 $ 14,570
Weighted Average Units
Outstanding 16,531 16,513 16,531 16,513
Net Income (Loss) per Unit $ (.49) $ ( .60) $ .46 $ .88
EBITDA per Unit $ .04 $ ( .06) $ 2.48 $ 2.85
EBITDA per Retail Gallon $ .02 $ ( .03) $ .19 $ .20
Retail Gallons Sold 30,573 33,685 213,700 235,000
</TABLE>
(a) Pro forma results for the year ended June 30, 1996 reflect
certain adjustments as if the Partnership was formed at the
beginning of the period reported.
(b) EBITDA is defined as earnings before interest, income taxes,
depreciation and amortization. EBITDA should not be considered
as an alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations) and it is not
in accordance with nor superior to generally accepted accounting
principles but provides additional information for evaluating the
Partnership's ability to distribute the Minimum Quarterly
Distribution ("MQD").
<PAGE> 92
<TABLE>
<CAPTION>
CORNERSTONE PROPANE PARTNERS, L.P.
BALANCE SHEET AS OF JUNE 30, 1997
(UNAUDITED)
JUNE 30,
1997
--------
<S> <C>
ASSETS
Cash and cash equivalents $ 8,406
Trade receivables 41,924
Inventories 17,338
Prepayments and other current assets 4,393
---------
Total current assets 72,061
---------
Property, plant and equipment, net of
accumulated depreciation 251,943
Excess of Cost over fair value, net 210,234
Other assets, net 15,580
---------
Total assets $ 549,818
---------
LIABILITIES AND PARTNERS' CAPITAL
Current portion of long-term debt $ 5,735
Trade accounts payable 42,334
Accrued liabilities 21,498
---------
Total current liabilities 69,567
---------
Notes payable 220,000
Long-term debt 11,532
Due to related parties 740
Other non-current liabilities 4,050
Partners' Capital 243,929
---------
Total liabilities and partners' capital $ 549,818
</TABLE> ---------
The Partnership's sales for the fourth quarter of fiscal 1997
declined by 10 percent to $128.7 million from a pro forma $143.3 for
the same period last year. EBITDA for the fourth quarter was $700,000
versus a pro forma loss of $900,000 for the same quarter in 1996, a
132 percent increase. Operating expenses were better than the
previous year by 10 percent at $22.1 million, down from a pro forma
$24.6 million in 1996.
<PAGE> 93
The EBITDA for the fourth quarter was better than last year due
primarily to a reduction in operating expenses from 1996, offset to
some extent by a shortfall in retail gallon sales. The retail gallons
sold during the quarter were down by 3.0 million (approximately 9%)
for the fourth quarter of 1996, and down by 21.3 million gallons
(approximately 9%) for the fiscal year ended June 30, 1997. The
shortfall in retail gallon sales was due primarily to mild weather
conditions in most of the markets served by the Partnership during the
third quarter, tighter pre-sale credit standards and a decision to
exit from some low margin markets. The average heating degree days in
the third quarter of fiscal 1997 were 12.7% warmer than normal and
14.4% warmer than last year. Individual markets experienced
temperatures as much as 23% warmer than the thirty year norm and 42%
warmer than last year. Historically, the third fiscal quarter has
accounted for approximately 36% and 47% of the Partnership's retail
sales volume and EBITDA, respectively.
Comparing the actual and pro forma results for the fiscal year
ended June 30, 1997 to the pro forma year ended June 30, 1996, sales
were $664.2 million in fiscal 1997 vs. $595.8 million in fiscal 1996,
an increase of 11 percent. EBITDA for fiscal 1997 was $41.0 million
versus $47.0 million for pro forma fiscal 1996, or a 13 percent
decrease. Fiscal 1997 operating expenses of $88.3 million were better
than pro forma fiscal 1996 operating expenses of $92.8 million, by
$4.5 million (approximately 5%).
The primary reason for the sales increase was the higher cost of
product which was passed along to the customer during the reporting
period. Prices escalated at the winter peak in the mid-continent 151%
over the ten year average. The Partnership was able to manage this
extreme price volatility and increase its fuel margin despite
inheriting a pre-existing supply plan from previous management with
little or no hedged inventories for 90% of the retail gallons sold
during the period. During the 1996-97 heating season, the majority of
the fuel supplies were arranged by the Partnership's predecessors.
The Partnership is 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 - The Partnership - Financing and Sources of
Liquidity."
<PAGE> 94
SELECTED PRO FORMA FINANCIAL AND OPERATING DATA
The following Summary Pro Forma Financial and Operating Data
reflect the consolidated historical operating results of the companies
that comprised the Combined Operations, as adjusted for the
Transactions (through December 16, 1996), and the actual consolidated
operating results of The Partnership (after December 16, 1996) and are
derived from the unaudited Pro Forma Consolidated Financial Statements
of Cornerstone Propane Partners, L.P. included elsewhere in this
Prospectus. For a description of the assumptions used in preparing
the Summary Pro Forma Financial and Operating Data, see "Pro Forma
Consolidated Financial Statements of Cornerstone Propane Partners,
L.P." The pro forma information set forth below has been prepared by
combining the historical results of operations of Synergy for the 10
1/2 months ended June 30, 1996 and for the five and one-half months
ended December 16, 1996; Coast for the fiscal year ended July 31, 1996
and for the four and one-half months ended December 16, 1996; Empire
Energy for the fiscal year ended June 30, 1996 and for the five and
one-half months ended December 16, 1996; Myers for the six and
one-half months ended June 30, 1996 and for the five and one-half
months ended December 16, 1996; and the Partnership for the three and
one-half months ended March 31, 1997. The Partnership believes that
it is reasonable to combine the results of operations of companies
having different fiscal years because each of the fiscal years being
combined includes the same winter heating seasons in which the
majority of the Partnership's revenue and cash flow was generated.
The following information should not be deemed indicative of future
operating results of the Partnership.
<TABLE>
<CAPTION>
PARTNERSHIP PRO FORMA
---------------------------------------------
YEAR ENDED NINE MONTHS ENDED
JUNE 30, 1996 MARCH 31, 1997
-------------------- -----------------------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues . . . . . . . . . . . . . . . . . . . . . $ 595,790 $ 535,503
Gross profit(b) . . . . . . . . . . . . . . . . . . 139,806 (a) 106,544
Depreciation and amortization . . . . . . . . . . . 14,500 10,948
Operating income . . . . . . . . . . . . . . . . . 32,535 (a) 29,387
Interest expense, net . . . . . . . . . . . . . . . 17,865 13,499
Net income . . . . . . . . . . . . . . . . . . . . 14,570 (a) 15,818
Net income per Unit(c) . . . . . . . . . . . . . . .87 (a) .96
OPERATING DATA:
EBITDA(d) . . . . . . . . . . . . . . . . . . . . . $ 47,035 (a) $ 40,335
Capital expenditures(e) . . . . . . . . . . . . . . 53,951 (f) 10,690
Retail propane gallons sold . . . . . . . . . . . . 235,000 183,100
<PAGE> 95
</TABLE>
<TABLE>
<CAPTION>
At March 31, 1997
-----------------
<S> <C>
Balance Sheet Data: (in thousands)
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89,561
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543,559
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,775
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224,135
Partners' capital - General Partners . . . . . . . . . . . . . . . . . . . . . 5,050
Partners' capital - Limited Partners . . . . . . . . . . . . . . . . . . . . . 242,583
</TABLE>
__________________
(a) Pro forma gross profit for the year ended June 30, 1996 does not
reflect propane acquisition and logistics cost savings of
approximately $1.5 million that the Partnership believes are
achievable as a result of the Transactions. The pro forma
amounts of operating income, net income, net income per Unit and
EBITDA for the year ended June 30, 1996 do not reflect certain
non-recurring expenses incurred by Empire Energy of approximately
$4.3 million, propane acquisition and logistics cost savings of
approximately $1.5 million, and insurance savings of
approximately $2.1 million that the Partnership believes are
achievable as a result of the Transactions. If effect were given
to such anticipated expense reductions, the following amounts
would have been reflected:
YEAR ENDED
JUNE 30, 1996
------------
(IN THOUSANDS, EXCEPT
PER UNIT DATA)
Pro forma gross profit . . . . $141,306
Pro forma operating income . . 40,397
Pro forma net income . . . . . 22,432
Pro forma net income per Unit . 1.34
Pro forma EBITDA . . . . . . . 54,897
See Note 3 to the Pro Forma Consolidated Financial Statements of
Cornerstone Propane Partners, L.P. and "Risk Factors - Risks
Inherent in an Investment in the Partnership - Partnership
Profitability Will Depend on Successful Integration of the
Combined Operations."
(b) Gross profit is computed by reducing total revenues by the direct
cost of the products sold.
(c) Net income per Unit is computed by dividing the limited partners'
interest in net income by the weighted average number of Units
outstanding.
<PAGE> 96
(d) EBITDA is defined as operating income plus depreciation and
amortization. EBITDA should not be considered as an alternative
to net income (as an indicator of operating performance) or as an
alternative to cash flow (as a measure of liquidity or ability to
service debt obligations), but provides additional information
for evaluating the Partnership's ability to make the Minimum
Quarterly Distribution. Cash flows in accordance with generally
accepted accounting principles consist of cash flows from
operating, investing and financing activities. Cash flows from
operating activities reflect net income (loss) (including charges
for interest and income taxes not reflected in EBITDA), adjusted
for (i) all non-cash charges or income (which are reflected in
EBITDA) and (ii) changes in operating assets and liabilities
(which are not reflected in EBITDA). Further, cash flows from
investing and financing activities are not included in EBITDA.
(e) The Partnership's capital expenditures fall generally into three
categories: (i) growth capital expenditures, which include
expenditures for the purchase of new propane tanks and other
equipment to facilitate expansion of the Partnership's retail
customer base, (ii) maintenance capital expenditures, which
include expenditures for repairs that extend the life of the
assets and replacement of property, plant and equipment, and
(iii) acquisition capital expenditures.
(f) Approximately $36.0 million relates to the Empire Acquisition of
Certain Synergy Assets.
<PAGE> 97
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
SYNERGY
The financial information below as of June 30, 1996 and for the
10-1/2-month period ended June 30, 1996 is derived from the audited
financial statements of Synergy. The financial information as of
December 31, 1995 and December 16, 1996 and for the 45-day period
ended August 14, 1995 and the seven and one-half months ended
March 31, 1996 is derived from the unaudited consolidated Interim
Financial Statements of Synergy and, in the opinion of management of
Synergy, contains all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of results of
operations and financial condition. On August 15, 1995, Synergy Group
Incorporated ("SGI"), the predecessor of Synergy, was acquired by
Synergy in the Synergy Acquisition. The seven and one-half months
ended March 31, 1996 covers the period from the date of the Synergy
Acquisition to March 31, 1996. The financial information below as of
March 31, 1994 and 1995 is derived from the audited financial
statements of SGI. As discussed elsewhere in this Prospectus, the
comparability of financial matters is affected by the change in
ownership of SGI and the concurrent sale of approximately 25% of the
operations acquired in the Synergy Acquisition to Empire Energy (the
"Empire Acquisition of Certain Synergy Assets"). The Statement of
Operations Data and the Operating Data for the 4-1/2 months ended
August 14, 1995 represent information for the period from the end of
the last fiscal year of SGI until the date of the Synergy Acquisition,
and are presented only to reflect operations of Synergy for a complete
five-year period. The retail propane gallons sold for all periods
presented is derived from the accounting records of Synergy and SGI
and is unaudited. The results for the interim periods are not
indicative of the results that can be expected for a full year. The
Selected Historical Financial and Operating Data below should be read
in conjunction with the financial statements of Synergy and SGI and
with "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Synergy" included elsewhere in this
Prospectus.
<PAGE> 98
<TABLE>
<CAPTION>
SYNERGY GROUP INCORPORATED
--------------------------------------------------- SYNERGY
-------------------------------
FISCAL YEAR ENDED MARCH 31, 4-1/2 10-1/2
---------------------------------------- MONTHS MONTHS 45 DAYS 7-1/2 MONTHS
ENDED ENDED ENDED ENDED
AUGUST 14, JUNE 30, AUGUST 14, MAR. 31,
1992 1993 1994 1995 1995 1996 1995 1996
--------- --------- --------- --------- ---------- --------- ---------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues . . . . . . . . . . . $121,761 $132,855 $133,731 $123,562 $32,179 $96,062 $7,568 77,308
Gross profit (a) . . . . . . . 63,082 65,964 70,233 63,653 16,792 49,875 3,937 40,109
Depreciation and
amortization . . . . . . . . 5,919 5,381 5,170 5,100 1,845 3,329 472 2,697
Operating income (loss) . . . 1,346 (809) 3,609 (2,291) (6,660) 14,520 (167) 13,641
Interest expense . . . . . . . 13,159 13,342 13,126 11,086 3,223 5,584 816 3,918
Provision (benefit)
for income taxes . . . . . . (314) 351 (400) (84) 31 3,675 (373) 3,700
Net income (loss) . . . . . . (11,553) (15,274) (11,615) (13,417) (9,813) 5,261 (610) 6,023
BALANCE SHEET DATA (END
OF PERIOD):
Working capital (deficit) . . $12,433 $(118,238) $(130,211) $(82,143) $(98,045) $24,177 $(98,045) 20,715
Total assets . . . . . . . . . 112,089 112,153 111,914 103,830 96,500 166,762 96,500 175,683
Total debt . . . . . . . . . . 119,543 123,168 122,626 92,717 89,541 79,524 89,541 79,524
Redeemable preferred stock . . - - - - - 55,312 - 55,312
Stockholders' equity (deficit) (28,534) (43,808) (55,424) (15,762) (25,576) (1,899) (25,576) (1,136)
OPERATING DATA:
EBITDA (b) . . . . . . . . . . $7,265 $4,572 $8,779 $2,809 $(4,815) $17,849 $305 16,338
Capital expenditures (c) . . . 1,133 2,504 3,141 3,737 596 8,708 - 4,663
Retail propane gallons sold . 125,946 137,316 137,937 126,205 27,282 92,621 6,952 72,741
</TABLE>
___________________
(a) Gross profit is computed by reducing total revenues by the direct
cost of the products sold.
(b) EBITDA is defined as operating income plus depreciation and
amortization. EBITDA should not be considered as an alternative
to net income (as an indicator of operating performance) or as an
alternative to cash flow (as a measure of liquidity or ability to
service debt obligations), but provides additional information
for evaluating the Partnership's ability to make the Minimum
Quarterly Distribution.
(c) Capital expenditures fall generally into three categories:
(i) growth capital expenditures, which include expenditures for
the purchase of new propane tanks and other equipment to
facilitate expansion of the retail customer base,
(ii) maintenance capital expenditures, which include expenditures
<PAGE> 99
for repair and replacement of property, plant and equipment, and
(iii) acquisition capital expenditures.
EMPIRE ENERGY
The financial information below as of June 30, 1994, 1995 and
1996 and for the years ended June 30, 1994, 1995 and 1996 is derived
from the audited financial statements of Empire Energy. Empire Energy
was formed in June 1994 as a result of a tax-free split-off (the
"Split-Off") from Empire Gas. These financial statements give effect
to the Split-Off as if it occurred on July 1, 1991. The historical
financial and operating data for the nine months ended March 31, 1996,
are derived from the unaudited financial statements included elsewhere
herein and, in the opinion of management of Empire Energy, contain all
adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of results of operations and
financial condition. As discussed elsewhere in this Prospectus, on
August 15, 1995, Empire Energy acquired from Synergy approximately 25%
of the operations of SGI. On August 1, 1996, the principal founding
shareholder of Empire Energy and certain other shareholders sold their
interests in Empire Energy to certain members of management (the
"Management Buy-Out"). On October 7, 1996, Northwestern Growth
purchased 100% of the Empire Energy Common Stock. The results of
operations and other data for the five and one-half months ended
December 16, 1996 are stated on a pro forma basis to combine the one
month ended prior to the Management Buy-Out, the two months ended
prior to the Northwestern Growth acquisition and the two and one-half
months beginning with the Northwestern Growth acquisition. The retail
propane gallons sold for all periods presented is derived from the
accounting records of Empire Energy and is unaudited. The results for
the interim periods are not indicative of the results that can be
expected for a full year. The Selected Historical Financial and
Operating Data below should be read in conjunction with the financial
statements of Empire Energy and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Empire
Energy" included elsewhere in this Prospectus.
<PAGE> 100
<TABLE>
<CAPTION>
EMPIRE ENERGY
--------------------------------------------------------------------------------
NINE MONTHS
FISCAL YEAR ENDED JUNE 30,
ENDED
-----------------------------------------------------------------
MAR. 31,
1992 1993 1994 1995 1996 1996
----------- ----------- ----------- ----------- ---------- ------------
(UNAUDITED)
(in thousands)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . $ 52,682 $ 61,057 $ 60,216 $ 56,689 $ 98,821 $ 88,233
Gross profit (a) . . . . . . . 28,141 31,900 32,187 29,841 48,741 43,715
Depreciation and amortization . 4,143 4,257 4,652 4,322 5,875 4,433
Operating income (loss) . . . . 5,560 8,097 6,015 1,084 9,846 15,604
Interest expense . . . . . . . 310 366 118 39 2,598 1,775
Provision for income taxes . . 2,050 2,900 2,400 600 3,550 5,300
Net income . . . . . . . . . . 2,988 4,726 3,497 445 3,698 8,529
BALANCE SHEET DATA (END OF
PERIOD):
Current assets . . . . . . . . $ 7,374 $ 8,751 $ 9,292 $ 9,615 $ 16,046 $ 21,735
Total assets . . . . . . . . . 59,582 58,584 64,734 69,075 107,102 114,570
Current liabilities . . . . . . 8,742 3,620 2,697 4,277 12,126 14,266
Long-term debt . . . . . . . . 1,738 2,258 135 1,701 25,442 27,416
Stockholders' equity . . . . . 37,888 42,614 46,111 46,535 50,233 55,064
OPERATING DATA:
EBITDA (b) . . . . . . . . . . $ 9,703 $ 12,354 $ 10,667 $ 5,406 $ 15,721 $ 20,037
Capital expenditures (c) . . . 3,169 2,446 4,058 8,365 39,164 38,978
Retail propane gallons sold . . 57,627 66,456 67,286 62,630 104,036 91,508
</TABLE>
__________________
(a) Gross profit is computed by reducing total revenues by the direct
cost of the products sold.
(b) EBITDA is defined as operating income plus depreciation and
amortization. EBITDA should not be considered as an alternative
to net income (as an indicator of operating performance) or as an
alternative to cash flow (as a measure of liquidity or ability to
service debt obligations), but provides additional information
for evaluating the Partnership's ability to make the Minimum
Quarterly Distribution.
(c) Capital expenditures fall generally into three categories:
(i) growth capital expenditures, which include expenditures for
the purchase of new propane tanks and other equipment to
facilitate expansion of the retail customer base,
(ii) maintenance capital expenditures, which include expenditures
<PAGE> 101
for repair and replacement of property, plant and equipment, and
(iii) acquisition capital expenditures.
COAST
The financial information below as of July 31, 1992, 1994, 1995
and 1996 and for the years ended July 31, 1992, 1994, 1995 and 1996 is
derived from the audited financial statements of Coast. The financial
information as of July 31, 1993 and for the year ended July 31, 1993
is derived from the accounting records of Coast and is unaudited.
Historical and operating data for the year ended July 31, 1992 is not
comparable to fiscal 1993, 1994, 1995 and 1996 periods due to the
application of purchase accounting adjustments in connection with the
buyout of Coast Gas Industries, Inc. by Aurora Capital Partners and
Coast, which occurred on March 31, 1993. The data for the eight
months ended March 31, 1996 have been derived from the unaudited
financial statements appearing herein and, in the opinion of the
management of Coast, include all adjustments, consisting only of
normal recurring adjustments necessary for a fair presentation of
results of operations and financial condition. The results for the
interim periods are not indicative of the results that can be expected
for a full year. The Selected Historical Financial and Operating Data
below should be read in conjunction with the financial statements of
Coast and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Coast" included elsewhere in
this Prospectus.
<PAGE> 102
<TABLE>
<CAPTION>
COAST GAS
INDUSTRIES, INC. COAST
---------------- -------------------------------------------------------------
EIGHT
MONTHS
ENDED
FISCAL YEAR FISCAL YEAR ENDED JULY 31, MAR. 31,
ENDED JULY 31, ----------------------------------------------- ---------
1992 1993 1994 1995 1996 1996
---------------- ---------- ---------- ---------- ---------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues . . . . . . . . . . $216,772 $229,860 $242,986 $266,842 $384,354 $271,348
Gross profit (a) . . . . . . 27,375 25,885 28,354 32,304 33,141 24,794
Depreciation and
amortization . . . . . . . 2,882 3,184 3,282 3,785 4,216 2,742
Operating income (loss) . . . 3,620 3,399 3,843 4,535 4,044 5,123
Interest expense . . . . . . 4,291 4,017 4,029 5,120 5,470 3,781
Provision (benefit) for
income taxes . . . . . . . 190 (123) (28) (202) (473) 601
Net income (loss) (b) . . . . (861) (495) (158) (889) (953) 741
BALANCE SHEET DATA (END OF
PERIOD):
Current assets . . . . . . . $ 22,563 $ 21,962 $ 29,150 $33,676 $ 35,297 $ 44,299
Total assets . . . . . . . . 65,644 82,626 93,559 101,545 106,179 115,630
Current liabilities . . . . . 22,643 23,182 31,178 27,605 37,849 42,864
Long-term debt . . . . . . . 28,811 29,241 31,080 46,021 41,801 44,038
Mandatorily redeemable
securities . . . . . . . . 1,800 8,325 8,874 7,781 8,559 8,363
Stockholders' equity . . . . . 4,262 8,368 7,661 7,853 6,098 7,988
OPERATING DATA (UNAUDITED):
EBITDA (c) . . . . . . . . . $ 6,502 $ 6,583 $ 7,125 $8,320 $ 8,260 $ 7,865
Capital expenditures (d) . . 4,590 6,114 4,451 5,581 6,060 5,034
Retail propane gallons sold . 23,495 27,385 30,918 36,569 34,888 26,233
</TABLE>
____________________
(a) Gross profit is computed by reducing total revenues by the direct
cost of the products sold, except for depreciation and
amortization.
(b) Included in the net loss for the year ended July 31, 1995 is an
extraordinary charge to income of $506,000 for the early
retirement of debt, net of the income tax benefit.
(c) EBITDA is defined as operating income plus depreciation and
amortization. EBITDA should not be considered as an alternative
to net income (as an indicator of operating performance) or as an
alternative to cash flow (as a measure of liquidity or ability to
service debt obligations), but provides additional information
for evaluating the Partnership's ability to make the Minimum
Quarterly Distribution.
<PAGE> 103
(d) Capital expenditures fall generally into three categories:
(i) growth capital expenditures, which include expenditures for
the purchase of new propane tanks and other equipment to
facilitate expansion of the retail customer base,
(ii) maintenance capital expenditures, which include expenditures
for repair and replacement of property, plant and equipment, and
(iii) acquisition capital expenditures.
MYERS
Historical financial information for Myers has not been presented
herein based on the Partnership's belief that such information is not
material to the Partnership.
<PAGE> 104
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE HISTORICAL FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE PARTNERSHIP AND ITS PRINCIPAL
PREDECESSOR ENTITIES, SYNERGY, EMPIRE ENERGY AND COAST, SHOULD BE READ
IN CONJUNCTION WITH THE SELECTED PRO FORMA FINANCIAL AND OPERATING
DATA AND NOTES THERETO, THE SELECTED HISTORICAL FINANCIAL AND
OPERATING DATA AND NOTES THERETO AND THE HISTORICAL AND PRO FORMA
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS. NO DISCUSSION OF THE HISTORICAL FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF MYERS HAS BEEN INCLUDED BASED ON THE
PARTNERSHIP'S BELIEF THAT SUCH INFORMATION IS NOT MATERIAL TO THE
PARTNERSHIP.
GENERAL
The Partnership is a Delaware limited partnership formed to own
and operate the propane business and assets of Synergy, Empire Energy,
Myers and Coast. The Partnership believes that it is the fifth
largest retail marketer of propane in the United States, serving more
than 360,000 residential, commercial, industrial and agricultural
customers from 296 customer service centers in 26 states. On a
combined basis, the Partnership's retail propane sales volume was
approximately 242 million, 230 million and 235 million gallons during
fiscal 1994, 1995 and 1996, respectively. On a combined basis in
fiscal 1996, the Partnership also sold approximately 226 million
gallons of propane to wholesale customers.
On a combined basis during fiscal 1996, approximately 57.8% of
the Partnership's retail gallons was sold to residential customers,
25.9% was sold to industrial and commercial customers, 13.1% was sold
to agricultural customers and 3.2% was sold to all other retail users.
Sales to residential customers during that period accounted for
approximately 67.0% of the Partnership's pro forma gross profit on
propane sales, reflecting the higher profitability of this segment of
the business.
The retail distribution business is largely seasonal due to
propane's use as a heating source in residential buildings. During
fiscal 1996, approximately 72.7% of the Partnership's combined retail
propane volume and in excess of 85% of the Partnership's pro forma
EBITDA was attributable to sales during the six-month peak heating
season of October through March. As a result, cash flows from
operations are greatest from November through April when customers pay
for propane purchased during the six-month peak heating season.
Because a substantial portion of the Partnership's propane is
used in the weather-sensitive residential markets, the temperatures
realized in the Partnership's areas of operations, particularly during
the six-month peak heating season, have a significant effect on the
financial performance of the Partnership. In any given area,
<PAGE> 105
warmer-than-normal temperatures will tend to result in reduced propane
use, while sustained colder-than-normal temperatures will tend to
result in greater propane use. Therefore, information on normal
temperatures is used by the Partnership in understanding how
historical results of operations are affected by temperatures that are
colder or warmer than normal and in preparing forecasts of future
operations, which are based on the assumption that normal weather will
prevail in each of the Partnership's regions.
In determining actual and normal weather for a given period of
time, the Partnership compares the actual number of Heating Degree
Days for such period to the average number of Heating Degree Days for
a longer time period assumed to more accurately reflect the average
normal weather, in each case as such information is published by the
National Weather Service Climate Analysis Center, for each measuring
point in each of the Partnership's regions. Synergy and Empire Energy
have historically used the 30-year period from 1961-1990, and Coast
has historically used a 10-year rolling average. The Partnership then
calculates weighted averages, based on retail volumes attributable to
each measuring point, of actual and normal Heating Degree Days within
each region. Based on this information, the Partnership calculates a
ratio of actual Heating Degree Days to normal Heating Degree Days,
first on a regional basis and then on a Partnership-wide basis.
Although the Partnership believes that comparing temperature
information for a given period of time to "normal" temperatures is
helpful for an understanding of the Partnership's results of
operations, when comparing variations in weather to changes in total
revenues or operating profit, attention is drawn to the fact that a
portion of the Partnership's total revenues is not weather-sensitive
and other factors such as price, competition, product supply costs and
customer mix also affect the results of operations. Furthermore,
actual weather conditions in the Partnership's regions can vary
substantially from historical experience.
Gross profit margins are not only affected by weather patterns
but also by changes in customer mix. For example, sales to
residential customers ordinarily generate higher margins than sales to
other customer groups, such as commercial or agricultural customers.
In addition, gross profit margins vary by geographic region.
Accordingly, profit margins could vary significantly from year to year
in a period of identical sales volumes.
The Partnership intends to purchase a portion of its propane
(approximately 50% to 60% of a given typical year's projected propane
needs) pursuant to agreements with terms of less than one year at
market prices. The balance of its propane needs for the year will be
satisfied in the spot market. The Partnership generally does not
enter into supply contracts containing "take or pay" provisions. In
fiscal 1996, the Partnership purchased approximately 12.8% of its
propane supplies from one supplier, and no other single supplier
provided more than 10% of its total propane supply.
<PAGE> 106
The Partnership will engage in hedging of product cost and supply
through common hedging practices. These practices will be monitored
and maintained by management for the Partnership on a daily basis.
Hedging of product cost and supply does not always result in increased
margins and is not considered to be material to operations or
liquidity.
THE PARTNERSHIP
ANALYSIS OF RESULTS OF OPERATIONS
The following discussion compares the actual results of
operations and other data of the Partnership and its subsidiaries for
the three-month period ended March 31, 1997, to the pro forma
three-month period ended March 31, 1996, and the pro forma nine-month
period ended March 31, 1997, to the pro forma nine month period ended
March 31, 1996.
THREE MONTHS ENDED MARCH 31, 1997, COMPARED TO PRO FORMA THREE MONTHS
ENDED MARCH 31, 1996.
VOLUME. During the three months ended March 31, 1997,
Cornerstone sold 75.0 million retail propane gallons, a decrease of
21.1 million gallons or 22.0% from the 96.1 million retail propane
gallons sold during the pro forma three months ended March 31, 1996.
The decrease in retail volume was primarily attributable to national
temperatures that averaged 14% warmer than last year and 13% warmer
than normal in the markets served by Cornerstone. Additionally,
record high costs of propane resulted in customer energy conservation
which adversely impacted sales volume and gross profit. Wholesale
volume sales were 81.4 million gallons and 83.0 million gallons
respectively for the quarter ended March 31, 1997 and 1996.
REVENUES. Revenues increased by $21.9 million or 11.0% to $220.6
million for the three months ended March 31, 1997, as compared to
$198.7 million for the pro forma three months ended March 31,1996.
This increase was attributable to an increase in wholesale revenues of
$36.1 million or 37.3% to $132.9 million for the three months ended
March 31, 1997, as compared to $96.8 million for the pro forma three
months ended March 31, 1996, due primarily to higher product costs and
sales prices. This increase was offset by a reduction in revenues
from the Partnership's retail business. The revenues for the retail
business declined by $14.2 million or 13.9% to $87.6 million for the
three months ended March 31, 1997. as compared to $101.8 million for
the pro forma three months ended March 31, 1996. This decrease was a
result of the reduction in volume described above offset by an
increase in the average sales price per gallon of propane.
COST OF PRODUCT SOLD. Cost of product sold increased by $33.9
million, or 21.4% to $178.0 million for the three months ended March
31, 1997, as compared to $144.1 million for the pro forma three months
ended March 31, 1996. The increase in cost of product sold was
<PAGE> 107
primarily due to increased wholesale business described above combined
with an increase in the wholesale cost of propane, which increased
approximately 48.4% per gallon in the three months ended March 31,
1997, compared to the pro forma same period of the prior year. These
two increases were offset by the reduction in retail volume described
above.
As a percentage of revenues, cost of product sold increased to
80.7% for the three months ended March 31, 1997, as compared to 72.5%
for the pro forma three months ended March 31, 1996.
GROSS PROFIT. Gross profit decreased $12.0 million or 22.0% to
$42.5 million for the three months ended March 31, 1997, as compared
to $54.5 million for the pro forma three months ended March 31, 1996.
Retail per gallon gross margins were slightly better than the same
period last year. The decrease in gross profits were primarily due to
the reduction in retail sales volume discussed above.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating,
general and administrative expense decreased by $3.6 million or 13.2%
to $23.6 million for the three months ended March 31, 1997, as
compared to $27.2 million for the pro forma three months ended March
31, 1996. This decrease was primarily attributable to reductions in
salaries and insurance expense resulting principally from efficiencies
in operations.
As a percentage of revenues, operating, general and
administrative expenses decreased to 10.7% for the three months ended
March 31, 1997, as compared to 13.7% for the pro forma three months
ended March 31, 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
increased $.4 million or 11.8% to $3.8 million for the three months
ended March 31, 1997, as compared to $3.4 million for the pro forma
three months ended March 31, 1996. This increase was primarily due to
the revaluation of assets in purchase accounting resulting from the
purchase of Empire Energy and Coast and to the amortization of
goodwill.
OPERATING INCOME. Operating income decreased $8.9 million, or
37.1% to $15.1 million for the three months ended March 31, 1997, as
compared to $24.0 million for the pro forma three months ended March
31, 1996. This decrease was primarily the result of the decreased
gross profit described above, offset to some extent by the reduced
operating, general and administrative expenses also discussed above.
INTEREST EXPENSE. Interest expense remained at $4.4 million for
both the three months ended March 31, 1997, and the pro forma three
months ended March 31, 1996, since the overall level of borrowings and
interest rates on debt were consistent between periods, although the
type of debt changed in conjunction with the Partnership formation.
<PAGE> 108
NET INCOME. Net income decreased $8.9 million or 45.6% to $10.6
million for the three months ended March 31, 1997, as compared to
$19.5 million for the pro forma three months ended March 31, 1996.
This decrease reflects the decreased operating income discussed above.
EBITDA. Total EBITDA decreased by $8.5 million, or 31.0% to
$18.9 million for the three months ended March 31, 1997, as compared
to $27.4 million for the pro forma three months ended March 31, 1996.
The decrease in EBITDA reflects the decreased operating income
discussed above. As a percentage of revenues, total EBITDA decreased
to 8.6% for the three months ended March 31, 1997, as compared to
13.8% for the pro forma three months ended March 31, 1996. 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 to evaluate the Partnership's ability
to distribute the Minimum Quarterly Distribution.
PRO FORMA NINE MONTHS ENDED MARCH 31, 1997, COMPARED TO PRO FORMA NINE
MONTHS ENDED MARCH 31, 1996.
VOLUME. During the pro forma nine months ended March 31, 1997,
Cornerstone sold 186.2 million retail propane gallons, a decrease of
15.5 million gallons or 7.7% from the 201.7 million retail propane
gallons sold during the pro forma nine months ended March 31, 1996.
The decrease in retail volume was primarily attributable to the
decline in volume of sales in the three months ended March 31, 1997
compared to the three months ended March 31, 1996. Wholesale volume
sales were 266.0 million gallons and 264.3 million gallons for the
nine months ended March 31, 1997 and 1996, respectively.
REVENUES. Revenues increased by $83.0 million or 18.3% to $535.5
million for the pro forma nine months ended March 31,1997, as compared
to $452.5 million for the pro forma nine months ended March 31, 1996.
This increase was primarily attributable to an increase in wholesale
revenues of $91.7 million or 43.0% to $304.7 million for the pro forma
nine months ended March 31, 1997, as compared to $213.0 million for
the pro forma nine months ended March 31, 1996. This increase was
offset by a reduction in revenues from the Partnership's retail
business. The revenues for the retail business declined by $8.7
million or 3.6% to $230.8 million for the pro forma nine months ended
March 31, 1997, as compared to $239.5 million for the pro forma nine
months ended March 31, 1996. This decrease was a result of the
reductions in retail volume described above.
COST OF PRODUCT SOLD. Cost of product sold increased by $92.7
million, or 27.6% to $429.0 million for the pro forma nine months
ended March 31, 1997, as compared to $336.3 million for the pro forma
nine months ended March 31, 1996. The increase in cost of product
sold was primarily due to the increased wholesale revenue described
above offset by the reduction in retail volume described above.
<PAGE> 109
As a percentage of revenues, cost of product sold increased to
80.1% for the pro forma nine months ended March 31, 1997, as compared
to 74.3% for the pro forma nine months ended March 31, 1996.
GROSS PROFIT. Gross profit decreased $9.7 million or 8.3% to
$106.5 million for the pro forma nine months ended March 31, 1997, as
compared to $116.2 million for the pro forma nine months ended March
31, 1996. This decrease was primarily due to the reduction in retail
sales volume discussed above.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating,
general and administrative expense decreased by $2.0 million or 2.9%
to $66.2 million for the pro forma nine months ended March 31, 1997,
as compared to $68.2 million for the pro forma nine months ended March
31, 1996. This decrease was primarily attributable to reductions in
salaries and insurance expense resulting principally from efficiencies
in operations.
As a percentage of revenues, operating, general and
administrative expenses decreased to 12.4% for the pro forma nine
months ended March 31, 1997, as compared to 15.1% for the pro forma
nine months ended March 31, 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
increased $.8 million or 7.8% to $11.0 million for the pro forma nine
months ended March 31, 1997, as compared to $10.2 million for the pro
forma nine months ended March 31, 1996. This increase was primarily
due to the revaluation of assets in purchase accounting resulting from
the purchase of Empire Energy and Coast and to the amortization of
goodwill.
OPERATING INCOME. Operating income decreased $8.4 million, or
22.2% to $29.4 million for the pro forma nine months ended March 31,
1997, as compared to $37.8 million for the pro forma nine months ended
March 31, 1996. This decrease was primarily the result of the
decreased gross profit described above, offset by the reduced
operating, general and administrative expenses also discussed above.
INTEREST EXPENSE. Interest expense increased by $.2 million or
1.5% to $13.5 million for the pro forma nine months ended March 31,
1997, as compared to $13.3 million for the pro forma nine months ended
March 31, 1996. The increase is due to slightly larger borrowings in
the current pro forma period compared to the same period in the prior
year.
NET INCOME. Net income decreased $8.6 million or 35.2% to $15.8
million for the pro forma nine months ended March 31, 1997, as
compared to $24.4 million for the pro forma nine months ended March
31, 1996. This decrease reflects the decreased operating income
discussed above.
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EBITDA. Total EBITDA decreased by $7.7 million, or 16.0% to
$40.3 million for the pro forma nine months ended March 31, 1997, as
compared to $48.0 million for the pro forma nine months ended March
31, 1996. The decrease in EBITDA reflects the decreased operating
income discussed above. As a percentage of revenues, total EBITDA
decreased to 7.5% for the pro forma nine months ended March 31, 1997,
as compared to 10.6% for the pro forma nine months ended March 31,
1996. EBITDA should not be considered as an alternative to net income
(as an indication 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 to evaluate the
Partnership's ability to distribute the Minimum Quarterly
Distribution.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash provided by operating activities during the three and
one-half month period ended March 31, 1997, was $18.1 million. Cash
flow from operations included a net income of $13.9 million and
noncash charges of $4.4 million for the period comprised principally
of depreciation and amortization expense. The impact of working
capital changes decreased cash flow by approximately $.2 million.
Cash used in investment activities for the three and one-half
month period ended March 31, 1997, totaled $1.7 million, which was
principally used for purchases of property and equipment. Cash used
in financing activities was $12.3 million for the three and one-half
month period ended March 31, 1997. This amount reflects net
repayments on the Working Capital Facility.
On December 17, 1996, the Partnership completed its initial
public offering, proceeds from which amounted to $191.8 million.
Concurrently with the IPO, the Operating Partnership issued $220.0
million of Senior Notes and borrowed $12.8 million on its Working
Capital Facility. Also on the IPO date, the Operating Partnership
received cash of $22.4 million from the Predecessor Companies.
Proceeds from the IPO, Senior Notes and the Working Capital
Facility were used to repay liabilities assumed by the Operating
Partnership ($337.6 million), to make distributions to the Special
General Partner to redeem its preferred stock ($61.2 million) and to
provide net worth to the Special General Partner ($15.5 million). The
balance ($10.3 million) was used to pay expense of the partnership
organization and formation.
Financing and Sources of Liquidity
On December 17, 1996, the Operating Partnership issued $220.0
million of Senior Notes with an annual interest rate of 7.53% pursuant
to note purchase agreements with various investors (collectively, the
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"Note Agreement"). The Senior Notes mature on December 30, 2010, and
require semi-annual interest payments commencing December 30, 1996.
The Note Agreement requires that the principal be paid in equal annual
payments of $27.5 million starting December 30, 2003.
The Operating Partnership's obligations under the Note Agreement
are secured, on an equal and ratable basis with its obligations under
the Bank Credit Agreement, by a first priority security interest in
the Operating Partnership's inventory, accounts receivable and certain
customer storage tanks. The Note Agreement contains customary
representations, warranties, events of default and covenants
applicable to the Operating Partnership and its "Restricted
Subsidiaries" (as defined therein), including limitations, among
others, on the ability of the Operating Partnership and its Restricted
Subsidiaries to incur additional indebtedness, create liens, make
investments and loans, enter into mergers consolidations or sales of
all or substantially all assets and make asset sales. Generally, so
long as no default exists or would result, the Operating Partnership
is permitted to make any Restricted Payment (as defined in the Note
Agreement and including distributions to the Partnership) during each
fiscal quarter in an amount not in excess of Available Cash with
respect to the immediately preceding quarter.
Also on the same date, the Operating Partnership entered a bank
credit agreement consisting of a working capital facility (the
"Working Capital Facility") and an acquisition facility (the
"Acquisition Facility"). The Working Capital Facility provides for
revolving borrowings up to $50 million (including a $30 million
sublimit for letters of credit through March 31, 1997, and $20 million
thereafter), and matures on December 31, 1999. The Bank Credit
Agreement provides that there must be no amount outstanding under the
Working Capital Facility (excluding letters of credit) in excess of
$10 million for at least 30 consecutive days during each fiscal year.
No amounts were outstanding under the Working Capital Facility at
March 31, 1997. Issued outstanding letters of credit totaled $7.6
million at March 31, 1997. The Acquisition Facility provides the
Operating Partnership with the ability to borrow up to $75 million to
finance propane business acquisitions. The Acquisition Facility
operates as a revolving facility through December 31, 1999, at which
time any loans then outstanding may be converted to term loans and
will amortize quarterly for a period of four years thereafter. No
amounts were outstanding at March 31, 1997. The Operating
Partnership's obligations under the Bank Credit Agreement are secured
by a security interest in the Operating Partnership's inventory,
accounts receivable and certain customer storage tanks.
Loans under the Bank Credit Agreement bear interest as a per
annum rate equal to either (at the Operating Partnership's option):
(a) the sum (the "Base Rate") of the applicable margin, and the higher
of (i) the agent bank's prime rate and (ii) the federal funds rate
plus one-half of 1% and (b) the sum (the "Eurodollar Rate") of the
applicable margin and rate offered by the agent requirements, if any).
<PAGE> 112
The applicable margin for Base Rate loans varies between 0% and .12%,
and the applicable margin for Eurodollar Rate loans varies between
.25% and .80%, in each case depending upon the Operating Partnership's
ratio of consolidated "Debt" to "Consolidated Cash Flow" (as such
terms are defined in the Bank Credit Agreement). At March 31, 1997,
the applicable Base and Eurodollar Rates were 8.625% and 6.675%,
respectively. In addition, an annual fee is payable quarterly by the
Operating Partnership (whether or not borrowing occur) ranging from
.125% to .325% depending upon the ratio referenced above.
The Bank Credit Agreement contains customary representations,
warranties, events of defaults and covenants including limitations,
among others, on the ability of the Operating Partnership and its
"Restricted Subsidiaries" (as defined therein) to incur or maintain
certain indebtedness or liens, make investments and loans, enter in
mergers, consolidations or sales of all or substantially all of its
assets and make asset sales. Generally, so long as no default exists
or would result, the Operating Partnership is permitted to make any
Restricted Payment (as defined in the Bank Credit Agreement and
including distributions to the Partnership) during each fiscal quarter
in amount not to exceed Available Cash with respect to the
immediately preceding quarter.
In addition, the Bank Credit Agreement provides that: (1) the
Operating Partnership not permit the ratio of its consolidated Debt
(as defined in the Bank Credit Agreement) less cash on hand (in excess
of $1 million up to $10 million) to Consolidated Cash Flow (as defined
in the Bank Credit Agreement) to exceed 5.00:1.00 at any time on or
before June 30, 1998; 4.75:1.00 at any time on or before June 30,
1999; 4.50:1.00 at any time on or before June 30, 2000; and 4.25:1.00
any time thereafter; and (2) the Operating Partnership not permit the
ratio of its Consolidated Cash Flow to consolidated "Interest Expense"
(as defined therein) to be less than 2.00:1.00 prior to December 31,
1997, 2.25:1.00 any time thereafter on or before December 31, 1998 and
2.50:1.00 at any time thereafter.
SYNERGY
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 to the fiscal year ended March 31, 1995, and the fiscal
year ended March 31, 1995 to the fiscal year ended March 31, 1994. As
discussed below, the comparability of financial matters for the
periods is affected by the Synergy Acquisition and the concurrent
Empire Acquisition of Certain Synergy Assets.
TEN AND ONE-HALF MONTHS ENDED JUNE 30, 1996 COMPARED TO FISCAL
YEAR ENDED MARCH 31, 1995
VOLUME. During fiscal 1996, Synergy sold 92.6 million retail
propane gallons, a decrease of 33.6 million gallons, or 26.6%, from
the 126.2 million retail propane gallons sold during fiscal 1995. The
<PAGE> 113
decrease in volume was primarily attributable to the Empire
Acquisition of Certain Synergy Assets, partially offset by the colder
weather during fiscal 1996 in Synergy's marketing areas. The weather
in Synergy's marketing areas was approximately 3.5% colder than normal
for such areas during fiscal 1996, and was warmer than normal for such
areas during fiscal 1995.
REVENUES. Revenues declined by $27.5 million, or 22.2%, to $96.1
million for fiscal 1996, as compared to $123.6 million for fiscal
1995. This decrease was attributable almost entirely to the reduced
sales volume in fiscal 1996 as a result of the Empire Acquisition of
Certain Synergy Assets, partially offset by the colder than normal
weather during fiscal 1996.
COST OF SALES. Cost of product sold decreased by $13.7 million,
or 22.9%, to $46.2 million for fiscal 1996, as compared to $59.9
million for fiscal 1995. The decrease was attributable to the reduced
sales volume in fiscal 1996 resulting from the Empire Acquisition of
Certain Synergy Assets and was partially offset by the colder than
normal weather during fiscal 1996. As a percentage of revenues, cost
of product sold decreased slightly to 48.1% for fiscal 1996, as
compared to 48.5% for fiscal 1995.
GROSS PROFIT. Gross profit decreased by $13.8 million, or 21.7%,
to $49.9 million for fiscal 1996, as compared to $63.7 million for
fiscal 1995. This decrease was due primarily to the Empire
Acquisition of Certain Synergy Assets. Gross profit per retail gallon
(which includes non-propane related sales) increased by $.033 per
gallon, or 6.5%, to $.538 per gallon for fiscal 1996, as compared to
$.505 per gallon for fiscal 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses (which include salaries and commissions and related-party
corporate administration and management fees) decreased by $28.8
million, or 47.4%, to $32.0 million for fiscal 1996, as compared to
$60.8 million for fiscal 1995, due to the Empire Acquisition of
Certain Synergy Assets and the reduction of employee positions,
corporate overhead and related party salaries and expenses. As a
percentage of revenues, general and administrative expenses decreased
to 33.3% for fiscal 1996, as compared to 49.2% for fiscal 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
decreased by $1.8 million, or 35.3%, to $3.3 million for fiscal 1996,
as compared to $5.1 million for fiscal 1995, due to the Empire
Acquisition of Certain Synergy Assets, partially offset by an increase
in depreciation and amortization due to the purchase accounting
adjustment made in connection with the Synergy Acquisition.
OPERATING INCOME. Operating income increased $16.8 million to
$14.5 million for fiscal 1996, as compared to a loss of $2.3 million
for fiscal 1995. This increase was primarily due to the significant
reduction in general and administrative expenses, partially offset by
<PAGE> 114
the effect of the Empire Acquisition of Certain Synergy Assets. As a
percentage of revenues, operating income increased to 15.1% for fiscal
1996, as compared to a loss for fiscal 1995.
INTEREST EXPENSE. Interest expense decreased $5.5 million, or
49.6%, to $5.6 million for fiscal 1996, as compared to $11.1 million
for fiscal 1995, primarily due to the recapitalization of Synergy in
connection with the Synergy Acquisition.
NET INCOME. Synergy had net income of $5.3 million for fiscal
1996, as compared to a net loss of $13.4 million for fiscal 1995. The
increase was primarily the result of the reduction in general and
administrative expenses and interest expense, partially offset by the
effect of the Empire Acquisition of Certain Synergy Assets.
EBITDA. EBITDA increased $15.0 million, or 537.7%, to $17.8
million in fiscal 1996, as compared to $2.8 million for fiscal 1995.
This increase was primarily due to the reduction in general and
administrative expenses and colder than normal weather, and was
partially offset by the effect of the Empire Acquisition of Certain
Synergy Assets. As a percentage of revenues, EBITDA increased to
18.6% for fiscal 1996, as compared to 2.3% for fiscal 1995. EBITDA
should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow
(as a measure of liquidity or ability to service debt obligations),
but provides additional information for evaluating the Partnership's
ability to distribute the Minimum Quarterly Distribution.
FISCAL YEAR ENDED MARCH 31, 1995 COMPARED TO FISCAL YEAR ENDED
MARCH 31, 1994
VOLUME. During fiscal 1995, Synergy sold 126.2 million retail
propane gallons, a decrease of 11.7 million gallons, or 8.5%, from the
137.9 million retail propane gallons sold during fiscal 1994. The
decrease in volume was attributable to unusually warm weather during
fiscal 1995 in Synergy's marketing areas.
REVENUES. Revenues decreased by $10.1 million, or 7.6%, to
$123.6 million for fiscal 1995, as compared to $133.7 million for
fiscal 1994. This decrease was primarily attributable to the warmer
than normal weather in Synergy's marketing areas in fiscal 1995, which
reduced sales volume.
COST OF PRODUCT SOLD. Cost of product sold decreased by $3.6
million, or 5.7%, to $59.9 million for fiscal 1995, as compared to
$63.5 million for fiscal 1994. The decrease was attributable to the
warmer than normal weather and reduced sales volume in fiscal 1995.
As a percentage of revenues, cost of product sold increased to 48.5%
for fiscal 1995, as compared to 47.5% for fiscal 1994.
GROSS PROFIT. Gross profit decreased by $6.5 million, or 9.3%,
to $63.7 million for fiscal 1995, as compared to $70.2 million for
<PAGE> 115
fiscal 1994. This decrease was primarily due to a decrease in sales
volume resulting from the warmer than normal weather in Synergy's
marketing areas and to the lower average gross margin per gallon of
propane. Gross profit per retail gallon (which includes non-propane
related sales) decreased by $.004 per gallon, or .8%, to $.505 per
gallon for fiscal 1995, as compared to $.509 per gallon for fiscal
1994.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses (which include salaries and commissions and related-party
corporate administration and management fees) decreased by $.7
million, or 1.1%, to $60.8 million for fiscal 1995, as compared to
$61.5 million for fiscal 1994, primarily due to a decrease in excise
taxes, penalties and interest related to Synergy's employee benefit
plan of $2.9 million, which was offset by increases in employee
benefits of $.8 million and insurance expense of $1.4 million due to
higher health insurance and legal settlement claims incurred in 1995.
As a percentage of revenues, general and administrative expenses
increased to 49.2% for fiscal 1995, as compared to 46.0% for fiscal
1994.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of
$5.1 million and $5.2 million in fiscal 1995 and 1994, respectively,
were comparable, since an increase in depreciation expense in fiscal
1995 was offset by a decrease in amortization expense in fiscal 1995.
The increase in depreciation was primarily attributable to an increase
in vehicle-related depreciation. The decrease in amortization was
primarily due to decreases in the amortization of deferred financing
costs and acquisition-related costs.
OPERATING INCOME. Operating income decreased by $5.9 million to
a loss of $2.3 million in fiscal 1995, as compared to $3.6 million in
income in fiscal 1994, since the decrease in general and
administrative expenses was more than offset by the sum of (i) the
decrease in gross profit resulting from the lower retail sales volume
and lower average gross margin per gallon of propane and (ii) the
increase in the provision for doubtful accounts.
INTEREST EXPENSE. Interest expense (which includes related-party
interest expense) decreased by $2.0 million, or 15.3%, in fiscal 1995
to $11.1 million, as compared to $13.1 million in fiscal 1994, as a
result of the restructuring of Synergy's outstanding debt, which more
than offset an increase in interest expense related to borrowings
under Synergy's revolving credit facility.
NET LOSS. Synergy had a net loss of $13.4 million for fiscal
1995, as compared to a net loss of $11.6 million for fiscal 1994. The
increase in net loss was primarily due to the reduction in gross
profit due to warmer weather, partially offset by the decrease in
general and administrative expenses and interest expense.
<PAGE> 116
EBITDA. EBITDA decreased by $6.0 million, or 68.2%, to $2.8
million for fiscal 1995, as compared to $8.8 million for fiscal 1994.
This decrease was due to unfavorable weather conditions, partially
offset by a decrease in general and administrative expenses. As a
percentage of revenues, EBITDA decreased to 2.3% for fiscal 1995, as
compared to 6.6% for fiscal 1994. EBITDA should not be considered as
an alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations), but provides
additional information for evaluating the Partnership's ability to
distribute the Minimum Quarterly Distribution.
EMPIRE ENERGY
The following discussion compares the results of operations and
other data for Empire Energy for the fiscal year ended June 30, 1996
to the fiscal year ended June 30, 1995, and the fiscal year ended
June 30, 1995 to the fiscal year ended June 30, 1994. 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 in June 1994.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30,
1995
VOLUME. During fiscal 1996, Empire Energy sold 104.0 million
retail propane gallons, an increase of 41.4 million gallons, or 66.1%,
from the 62.6 million retail propane gallons sold during fiscal 1995.
The increase in volume was primarily attributable to the Empire
Acquisition of Certain Synergy Assets and was also attributable to
colder weather during fiscal 1996 in Empire Energy's previously
existing marketing areas.
REVENUES. Revenues increased by $42.1 million, or 74.3%, to
$98.8 million for fiscal 1996, as compared to $56.7 million for fiscal
1995. This increase was attributable almost entirely to the Empire
Acquisition of Certain Synergy Assets and the colder weather in Empire
Energy's marketing areas in fiscal 1996, both of which had the effect
of increasing sales.
COST OF PRODUCT SOLD. Cost of product sold increased by $23.3
million, or 86.9%, to $50.1 million for fiscal 1996, as compared to
$26.8 million for fiscal 1995. The increase was attributable to
increased volumes sold as a result of the Empire Acquisition of
Certain Synergy Assets and the colder weather. As a percentage of
revenues, cost of products sold increased to 50.7% for fiscal 1996, as
compared to 47.3% for fiscal 1995.
GROSS PROFIT. Gross profit increased by $18.9 million, or 63.3%,
to $48.7 million for fiscal 1996, as compared to $29.8 million for
fiscal 1995. This increase was primarily due to the increase in sales
<PAGE> 117
volume resulting from the Empire Acquisition of Certain Synergy Assets
and colder than normal weather. Gross profit per retail gallon (which
includes non-propane related sales) decreased by $.007, or 1.5%, to
$.469 per gallon for fiscal 1996, as compared to $.476 per gallon for
fiscal 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses (which include provision for doubtful accounts) increased by
$8.6 million, or 35.1%, to $33.0 million for fiscal 1996, as compared
to $24.4 million in fiscal 1995, as a result of the Empire Acquisition
of Certain Synergy Assets and the increase in volumes sold due to the
colder weather. As a percentage of revenues, general and
administrative expenses decreased to 33.4% for fiscal 1996, as
compared to 43.1% for fiscal 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
increased by $1.6 million, or 37.2%, to $5.9 million for fiscal 1996,
as compared to $4.3 million for fiscal 1995, primarily due to the
acquisition of assets in connection with the Empire Acquisition of
Certain Synergy Assets.
OPERATING INCOME. Operating income increased by $8.7 million, or
790.9%, to $9.8 million for fiscal 1996, compared to $1.1 million for
fiscal 1995. This increase was primarily the result of the Empire
Acquisition of Certain Synergy Assets, which resulted in significant
operating efficiencies in Empire Energy's existing business, and an
increase in propane sales volumes resulting from the colder winter in
fiscal 1996. As a percentage of revenues, operating income increased
to 9.9% for fiscal 1996, as compared to 1.9% for fiscal 1995.
INTEREST EXPENSE. Interest expense increased to $2.6 million for
fiscal 1996, as compared to $39,000 for fiscal 1995, mainly due to an
increase in borrowings as a result of the Empire Acquisition of
Certain Synergy Assets.
Net Income. Empire Energy had net income of $3.7 million for
fiscal 1996, as compared to net income of $.4 million for fiscal 1995.
The increase was primarily the result of an increase in propane sales
volume resulting from the Empire Acquisition of Certain Synergy Assets
and colder weather in fiscal 1996.
EBITDA. EBITDA increased $10.3 million, or 190.8%, to $15.7
million in fiscal 1996, as compared to $5.4 million for fiscal 1995.
This increase was due to the Empire Acquisition of Certain Synergy
Assets, which resulted in increased volumes and significant operating
efficiencies, and the increase in volumes sold due to the colder
weather conditions. As a percentage of revenues, EBITDA increased to
15.9% for fiscal 1996, as compared to 9.5% for fiscal 1995. EBITDA
should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow
(as a measure of liquidity or ability to service debt obligations),
<PAGE> 118
but provides additional information for evaluating the Partnership's
ability to distribute the Minimum Quarterly Distribution.
FISCAL YEAR ENDED JUNE 30, 1995 COMPARED TO FISCAL YEAR ENDED JUNE 30,
1994
VOLUME. During fiscal 1995, Empire Energy sold 62.6 million
retail propane gallons, a decrease of 4.7 million gallons, or 7.0%,
from the 67.3 million retail propane gallons sold during fiscal 1994.
The decrease in volume was attributable to unusually warmer weather
during fiscal 1995 in Empire Energy's marketing areas.
REVENUES. Revenues decreased by $3.5 million, or 5.8%, to $56.7
million for fiscal 1995, as compared to $60.2 million for fiscal 1994.
This decrease was attributable almost entirely to the warmer than
normal weather in Empire Energy's marketing areas in fiscal 1995,
which reduced sales volume.
COST OF PRODUCT SOLD. Cost of product sold decreased by $1.2
million, or 4.2%, to $26.8 million for fiscal 1995, as compared to
$28.0 million for fiscal 1994. The decrease was attributable to the
warmer weather and decreased sales volumes in fiscal year 1995. As a
percentage of revenues, cost of product sold increased to 47.3% for
fiscal 1995, as compared to 46.5% for fiscal 1994.
GROSS PROFIT. Gross profit decreased by $2.4 million, or 7.3%,
to $29.8 million for fiscal 1995, as compared to $32.2 million for
fiscal 1994. This decrease was primarily due to the decrease in sales
volume resulting from the warmer than normal weather. The decrease in
gross profit attributable to the decrease in gallons sold was
approximately $2.2 million. The remaining decrease was due to the
decrease in gross profit per retail gallon, as well as decreases in
gross profit from other sales. Gross profit per retail gallon (which
includes non-propane related sales) decreased by $.002 per gallon, or
.4%, to $.476 per gallon for fiscal 1995, as compared to $.478 per
gallon for fiscal 1994.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses (which include provision for doubtful accounts) increased by
$2.9 million, or 13.5%, to $24.4 million for fiscal 1995, as compared
to $21.5 million for fiscal 1994. The increase was primarily due to
the partial allocation of officers' salaries and other related
expenses to Empire Gas operations in fiscal 1994, whereas all such
salaries and related expenses were allocated to Empire Energy in
fiscal 1995. As a percentage of revenues, general and administrative
expenses increased to 43.1% for fiscal 1995, as compared to 35.7% for
fiscal 1994.
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.
<PAGE> 119
OPERATING INCOME. Operating income decreased $4.9 million, or
82.0%, to $1.1 million for fiscal 1995, as compared to $6.0 million
for fiscal 1994. This decrease was primarily due to the warmer
weather in fiscal 1995 and the increase in salaries and commissions as
a result of the restructuring due to the Split-Off in June 1994. As a
percentage of revenues, operating income decreased to 1.9% for fiscal
1995, as compared to 10.0% for fiscal 1994.
INTEREST EXPENSE. Interest expense decreased $79,000, or 66.9%,
to $39,000 for fiscal 1995, as compared to $118,000 for fiscal 1994,
mainly due to a decrease in borrowings under Empire Energy's operating
line of credit in fiscal 1995 as a result of the reduction in propane
sales volume.
NET INCOME. Empire Energy had net income of $.4 million for
fiscal 1995, as compared to net income of $3.5 million for fiscal
1994. The decrease was primarily the result of the reduction of sales
volumes due to the warmer weather in fiscal 1995.
EBITDA. EBITDA decreased $5.3 million, or 49.3%, to $5.4 million
for fiscal 1995, as compared to $10.7 million for fiscal 1994. This
decrease was primarily due to the warmer weather in fiscal 1995 and an
increase in general and administrative expenses due to the
restructuring in connection with the Split-Off. As a percentage of
revenues, EBITDA decreased to 9.5% for fiscal 1995, as compared to
17.7% for fiscal 1994. EBITDA should not be considered as an
alternative to net income (as an indicator of operating performance)
or as an alternative to cash flow (as a measure of liquidity or
ability to service debt obligations), but provides additional
information for evaluating the Partnership's ability to distribute the
Minimum Quarterly Distribution.
COAST
The following discussion compares the results of operations and
other data for Coast for the fiscal year ended July 31, 1996 to the
fiscal year ended July 31, 1995, and the fiscal year ended July 31,
1995 to the fiscal year ended July 31, 1994.
FISCAL YEAR ENDED JULY 31, 1996 COMPARED TO FISCAL YEAR ENDED JULY 31,
1995
VOLUME. During fiscal 1996, Coast sold 328.4 million wholesale
propane gallons of natural gas liquids, an increase of 27.0 million
gallons, or 9.0%, from the 301.4 million gallons sold in fiscal 1995.
The increase in volume was primarily attributable to the impact of
colder weather in the wholesale markets served by Coast in the eastern
United States. During fiscal 1996, Coast sold 34.9 million retail
propane gallons, a decrease of 1.7 million gallons, or 4.6%, from the
36.6 million retail propane gallons sold during fiscal 1995. The
decrease in retail volume was primarily attributable to warmer weather
during fiscal 1996 in Coast's retail marketing areas. The weather in
<PAGE> 120
Coast's areas of retail operations during fiscal 1996 was
approximately 16% warmer than normal for such areas. The weather in
Coast's areas of retail operations during fiscal 1995 was
approximately 2% colder than normal for such areas.
REVENUES. Revenues increased by $117.5 million, or 44.0%, to
$384.4 million for fiscal 1996, as compared to $266.8 million for
fiscal 1995. This increase was primarily attributable to increased
wholesale sales from Coast's natural gas marketing efforts that
resulted in an increase of $82.0 million in fiscal 1996. Retail
operating revenues decreased by $.1 million, or .3%, to $38.8 million
for fiscal 1996, as compared to $38.9 million for fiscal 1995. This
decrease was attributable almost entirely to the warmer than normal
weather in Coast's marketing areas in fiscal 1996, which adversely
impacted both sales volumes and revenues.
COST OF PRODUCT SOLD. Cost of product sold increased by $116.7
million, or 49.7%, to $351.2 million for fiscal 1996, as compared to
$234.5 million for fiscal 1995. The increase in cost of product sold
was primarily related to the increase in wholesale sales of natural
gas. Cost of retail product sold, primarily the cost of propane, was
constant in fiscal 1996 and 1995 at $17.4 million. The cost per
gallon of propane for the retail business increased from $.443 in
fiscal 1995 to $.461 in fiscal 1996, reflecting higher national demand
resulting from colder than normal weather in many regions. As a
percentage of revenues, cost of product sold increased to 91.4% for
fiscal 1996, as compared to 87.9% for fiscal 1995.
GROSS PROFIT. Gross profit increased by $.8 million, or 2.6%, to
$33.1 million in fiscal 1996, as compared to $32.3 million for fiscal
1995. This increase was primarily attributable to increased margins
in Coast's wholesale businesses, due to a colder heating season in the
eastern United States, where a majority of Coast's wholesale sales are
currently made. Retail gross profits decreased by $.2 million, or
.8%, to $21.3 million for fiscal 1996, as compared to $21.5 million
for fiscal 1995. This decrease was due primarily to lower sales
volumes as a result of warmer than normal weather in Coast's retail
marketing areas. The decrease in gross profits attributable to the
decrease in gallons sold was approximately $.9 million. Gross profit
per retail gallon increased by $.022, or 3.7%, to $.610 per gallon for
fiscal 1996 from $.588 per gallon for fiscal 1995, due to increased
average propane selling prices.
OPERATING EXPENSES. Operating expenses increased $.8 million, or
4.0%, to $21.0 million in fiscal 1996, as compared to $20.2 million in
fiscal 1995. Most of this increase was related to increases in
Coast's retail operations. Operating expense for the retail business
segment increased by $.3 million, or 2.1%, to $12.1 million in fiscal
1996, as compared to $11.9 million in fiscal 1995. The majority of
this increase was attributable to acquisitions and start-up operations
in fiscal 1996 that experienced higher operating costs that, due to
warmer weather, were not offset by added sales volumes. As a
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percentage of revenues, operating expenses decreased to 5.5% for
fiscal 1996, as compared to 7.6% for fiscal 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses (which include corporate administration expenses) increased
by $.1 million, or 2.4%, to $3.8 million for fiscal 1996, as compared
to $3.7 million for fiscal 1995. The majority of this increase was
attributable to normal salary increases and the addition of one staff
position to assist with future acquisitions. As a percentage of
revenues, general and administrative expenses decreased to 1.0% for
fiscal 1996, as compared to 1.4% for fiscal 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
increased by $.4 million, or 11.4%, to $4.2 million for fiscal 1996,
as compared to $3.8 million for fiscal 1995. This increase was
primarily attributable to the acquisition of North Star Fuel and
Propane, Inc. in fiscal 1996 and the purchase of retail customer
tanks.
OPERATING INCOME. Operating income decreased by $.5 million, or
10.8%, to $4.0 million for fiscal 1996, as compared to $4.5 million
for fiscal 1995. This decrease was primarily due to the decrease in
retail gallons sold because of warmer than normal weather in most of
Coast's retail marketing areas. As a percentage of revenues,
operating income decreased to 1.1% for fiscal 1996, as compared to
1.7% for fiscal 1995.
INTEREST EXPENSE. Interest expense increased by $.4 million, or
6.8%, to $5.5 million in fiscal 1996, as compared to $5.1 million for
fiscal 1995. This increase was primarily due to an increase in
borrowings under Coast's acquisition revolving line of credit in
fiscal 1996 related to the purchase of North Star Fuel and Propane,
Inc.
NET LOSS. Coast had a net loss of $1.0 million for fiscal 1996,
as compared to a net loss of $.4 million for fiscal 1995 before an
extraordinary charge to income for the early retirement of debt (net
of income taxes). The $.6 million greater loss in fiscal 1996
reflects the impact of the significantly warmer than normal weather
and higher interest expenses.
EBITDA. Total EBITDA decreased by $.1 million, or .7%, to
8.2 million for fiscal 1996, as compared to $8.3 million for fiscal
1995. Coast's retail EBITDA decreased by $.4 million, or 4.4%, to
$9.2 million for fiscal 1996, as compared to $9.6 million for fiscal
1995. The warmer than normal weather in Coast's retail marketing
areas in fiscal 1996 more than offset the positive impact of higher
earnings from recent acquisitions and internal customer growth. As a
percentage of revenues, total EBITDA decreased to 2.2% for fiscal
1996, as compared to 3.1% for fiscal 1995. EBITDA should not be
considered as an alternative to net income (as an indicator of
operating performance) or as an alternative to cash flow (as a measure
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of liquidity or ability to service debt obligations), but provides
additional information for evaluating the Partnership's ability to
distribute the Minimum Quarterly Distribution.
FISCAL YEAR ENDED JULY 31, 1995 COMPARED TO FISCAL YEAR ENDED JULY 31,
1994
VOLUME. During fiscal 1995, Coast sold 301.4 million wholesale
propane gallons, a decrease of 73.0 million gallons, or 19.5%, from
the 374.4 million wholesale propane gallons sold for fiscal 1994. The
decrease in wholesale volume was due to warmer than normal weather in
Coast's wholesale marketing areas during fiscal 1995. Retail propane
sales volumes increased by 5.7 million gallons, or 18.3%, to 36.6
million gallons for fiscal 1995, as compared to 30.9 million gallons
for fiscal 1994. The increase in retail volume was primarily
attributable to the consummation of two acquisitions in fiscal 1995,
with annual sales of approximately .9 million gallons, the addition of
new customers from internal growth and colder than normal weather
during fiscal 1995 in Coast's retail marketing areas. The weather in
Coast's areas of retail operations during fiscal 1995 was
approximately 2% colder than normal for such areas. The weather in
Coast's areas of retail operations during fiscal 1994 was
approximately 5% warmer than normal for such areas.
REVENUES. Revenues increased by $23.8 million, or 9.8%, to
$266.8 million for fiscal 1995, as compared to $243.0 million for
fiscal 1994. The increase in sales primarily reflects increased
natural gas liquids sales in Coast's natural gas procurement and
marketing operations. Retail sales revenues increased by $5.8
million, or 17.5%, to $38.9 million for fiscal 1995, as compared to
$33.1 million for fiscal 1994. This increase was primarily
attributable to the addition of new customers from both acquisitions
and internal growth, and weather for fiscal 1995 that was colder than
normal in Coast's retail marketing areas.
COST OF PRODUCT SOLD. Cost of product sold increased by $19.9
million, or 9.3%, to $234.5 million for fiscal 1995, as compared to
$214.6 million for fiscal 1994. This increase primarily reflects the
increase in the cost of wholesale sales. Cost of retail propane sold
increased by $2.1 million, or 13.8%, to $17.4 million for fiscal 1995,
as compared to $15.3 million for fiscal 1994. The increase was
primarily attributable to an increase in retail gallons sold for
fiscal 1995. The cost per gallon of propane for the retail business
decreased from $.458 in fiscal 1994 to $.443 in fiscal 1995,
reflecting lower national demand. As a percentage of revenues, cost
of product sold decreased to 87.9% for fiscal 1995, as compared to
88.3% for fiscal 1994.
GROSS PROFIT. Gross profit increased by $4.0 million, or 13.9%,
to $32.3 million for fiscal 1995, as compared to $28.3 million for
fiscal 1994. Most of the increase in gross profit was attributable to
the retail business, in which gross profit increased by $3.7 million,
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or 20.6%, to $21.5 million for fiscal 1995, as compared to
$17.8 million for fiscal 1994. This increase was primarily due to an
increase in sales volume resulting from acquisitions, internal growth
and colder weather in Coast's retail marketing areas. The increase in
gross profit attributable to an increase in retail gallons sold was
$3.4 million. The remaining increase was due to the increase in the
gross profit per retail gallon, as well as increases in gross profit
from other sales. Gross profit per retail gallon increased by $.011,
or 1.9%, to $.588 per gallon for fiscal 1995, as compared to $.577 per
gallon for fiscal 1994, due to lower product costs on a per-gallon
basis.
OPERATING EXPENSES. Operating expenses increased by $2.5
million, or 13.9%, to $20.2 million for fiscal 1995, as compared to
$17.8 million for fiscal 1994. This increase was primarily related to
Coast's retail operations, where operating expenses increased by $2.0
million, or 19.8%, to $11.9 million for fiscal 1995, as compared to
$9.9 million for fiscal 1994. The majority of this increase was
attributable to acquisitions and internal growth and related customer
service and delivery expenses. As a percentage of revenues, operating
expenses increased to 7.6% for fiscal 1995, as compared to 7.3% for
fiscal 1994.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses (which include corporate administrative expenses) increased
by $.2 million, or 8.2%, to $3.7 million for fiscal 1995, as compared
to $3.5 million for fiscal 1994. This increase was primarily
attributable to increased salaries and employee medical and disability
insurance expenses. As a percentage of revenues, general and
administrative expenses remained relatively constant for fiscal 1995
and 1994.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
increased by $.5 million, or 15.3%, to $3.8 million for fiscal 1995,
as compared with $3.3 million for fiscal 1994, largely as a result of
increased ownership of tanks, trucks and customer lists as a result of
acquisitions and internal growth.
OPERATING INCOME. Operating income increased by $700,000, or
18.0%, to $4.5 million for fiscal 1995, as compared to $3.8 million
for fiscal 1994. The increase was primarily due to increased sales as
a result of acquisitions and internal growth. As a percentage of
revenues, operating income increased to 1.7% for fiscal 1995, as
compared to 1.6% for fiscal 1994.
INTEREST EXPENSE. Interest expense increased by $1.1 million, or
27.1%, to $5.1 million for fiscal 1995, as compared to $4.0 million
for fiscal 1994, primarily due to an increase in borrowings under
Coast's operating line of credit in fiscal 1995 related to
acquisitions and increases in the interest rate on borrowings.
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NET LOSS. Coast had a net loss of $.4 million for fiscal 1995
before an extraordinary charge to income for early retirement of debt
(net of income taxes), as compared to a net loss of $.2 million for
fiscal 1994. The increased loss was primarily due to higher interest
expenses related to increases in the interest rate on borrowings.
EBITDA. EBITDA increased $1.2 million, or 16.8%, to $8.3 million
for fiscal 1995, as compared to $7.1 million for fiscal 1994. This
increase primarily reflects the benefit of colder weather in Coast's
retail marketing areas, partially offset by warmer weather in Coast's
wholesale markets. Coast's retail EBITDA increased by $1.7 million,
or 21.7%, to $9.6 million in fiscal 1995, as compared to $7.9 million
in fiscal 1994. The increase in retail volumes is attributable
primarily to internal growth, acquisitions and favorable weather
conditions. As a percentage of revenues, EBITDA increased to 3.1% for
fiscal 1995, as compared to 2.9% for fiscal 1994. EBITDA should not
be considered as an alternative to net income (as an indicator of
operating performance) or as an alternative to cash flow (as a measure
of liquidity or ability to service debt obligations), but provides
additional information for evaluating the Partnership's ability to
distribute the Minimum Quarterly Distribution.
CAPITAL EXPENDITURES AND COMMITMENTS
The Partnership expects that maintenance capital expenditures on
a pro forma basis for fiscal 1997 of approximately $3.5 million. In
addition, the Partnership intends to continue to pursue growth through
acquisitions, internal growth and start-ups. The Partnership expects
to fund these expenditures from cash flow from operations from
additional borrowing under the Bank Credit Facility and through the
issuance of Common Units.
LITIGATION AND OTHER CONTINGENCIES
For a description of certain litigation and other contingencies
of the Partnership, see "Business and Properties - Litigation and
Other Contingencies."
EFFECTS OF INFLATION
In general, inflation has not had any significant impact on the
Partnership in recent years and changes in propane prices, in
particular, have been dependent on factors generally more significant
than inflation, such as weather and availability of supply. However,
to the extent inflation affects the amounts the Partnership pays for
propane as well as operating and administrative expenses, the
Partnership attempts to limit the effects of inflation by passing on
propane cost increases to customers in the form of higher selling
prices to the extent it can do so, as well as through cost controls
and productivity improvements. As such, inflation has not had a
material adverse effect on the Partnership's profitability, and the
Partnership does not believe normal inflationary pressures will have a
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material adverse effect on future results of operations of the
Partnership.
BUSINESS AND PROPERTIES
GENERAL
The Partnership believes that it is the fifth largest retail
marketer of propane in the United States in terms of volume, serving
more than 360,000 residential, commercial, industrial and agricultural
customers from 296 customer service centers in 26 states. The
Partnership's operations are concentrated in the east coast,
south-central and west coast regions of the United States. For the
fiscal year ended June 30, 1996, the Partnership had combined retail
propane sales of approximately 235 million gallons and pro forma
EBITDA of approximately $47.0 million. Pro forma EBITDA would have
been approximately $54.9 million if effect were given to an additional
$7.9 million of expense reductions which the Partnership believes are
achievable as a result of the Transactions, but which have not been
included in the pro forma adjustments.
The Partnership believes that it is well positioned to compete
successfully in the propane business for the following reasons:
(i) management's experience in generating profitable growth at its
customer service centers by fostering an entrepreneurial approach by
local managers; (ii) the Partnership's large national and
geographically diversified operations, which the Partnership believes
reduces the effects of adverse weather conditions in any one region on
EBITDA and allow it to achieve economies of scale; (iii) the
significant proportion of the Partnership's retail sales that is made
to residential customers, which are generally more profitable than
sales to other customers; (iv) management's experience in identifying,
evaluating and completing both small and large acquisitions; (v) the
Partnership's substantial national wholesale supply and logistics
business, which provides it with a national presence and a relatively
secure source of propane to support the service goals of its customer
service centers; (vi) the Partnership's centralized administrative
systems that enable local managers to focus on customer service and
growth; and (vii) the Partnership's relationship with Northwestern
Growth, which has proven experience in the energy distribution
business and in the acquisition and growth of propane businesses.
Although the Partnership believes it has a number of competitive
strengths, the propane industry is highly competitive and includes a
number of large national firms and regional firms and several thousand
small independent firms. Certain competitors may have greater
financial resources or lower operating costs than the Partnership.
Further, variations in the weather or the economy in one or more
regions in which the Partnership operates can significantly affect the
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total volume of propane sold by the Partnership and, consequently, the
Partnership's results of operations.
BUSINESS STRATEGY
The principal elements of the Partnership's business strategy are
to (i) extend and refine its existing service orientation,
(ii) continue to pursue balanced growth through small and large
acquisitions, internal growth at its existing customer service centers
and start-ups of new customer service centers, (iii) enhance the
profitability of its existing operations by integrating the Combined
Operations, implementing entrepreneurially oriented local manager
incentive programs, where appropriate, and continuing to centralize
administrative systems and (iv) capitalize on the Partnership's
national wholesale supply and logistics business.
FOCUS ON CUSTOMER SERVICE.
The Partnership seeks to be recognized in the marketplace as the
most customer service-oriented propane supplier. Although propane is
a commodity product, the Partnership believes that it is 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 Partnership,
and rewarding its employees accordingly, will enable the Partnership
to achieve its service goals. The Partnership has incentive programs
at certain 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 where appropriate.
CONTINUED BALANCED GROWTH
The Partnership intends to continue to pursue balanced growth
through small and large acquisitions, internal growth at its existing
customer service centers and start-ups of new customer service
centers. Acquisitions will be the principal means of growth for the
Partnership, as the retail propane industry is mature and overall
demand for propane is expected to experience limited growth in the
foreseeable future. The Partnership believes that the fragmented
nature of the retail propane industry provides significant
opportunities for growth through strategic acquisitions. Industry
sources indicate that there are over 8,000 retail propane operations
in the United States, of which the ten largest account for
approximately 33% of industry volumes. The Partnership's acquisition
strategy 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,
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(ii) a recent record of growth and a local reputation for quality
service, (iii) locations in areas that are relatively colder and
(iv) operations with a relatively high proportion of sales to the more
profitable residential customer segment. As part of its acquisition
program, the Partnership generally expects to retain the name and
identity of the acquired entity, which the Partnership believes will
preserve the goodwill of the acquired business and promote continued
local customer loyalty. The Partnership's ability to make
acquisitions is facilitated by the availability of the Acquisition
Facility and the ability to issue additional limited partner
interests. In the first six months of 1997, the Partnership acquired
businesses in California, Florida and New Hampshire which added
approximately 12,000 customers and annual retail propane sales of
approximately 12.5 million gallons. The aggregate purchase price for
these acquisitions was approximately $20.9 million, of which
approximately $14.8 was in the form of Common Units (approximately
700,000 Common Units). There can be no assurance, however, that the
Partnership will continue to 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 an
acquisition will not affect the ability of the Partnership to make
distributions to the Unitholders. The Partnership is not required
under the Partnership Agreement to seek Unitholder approval of any
acquisition.
The Partnership is from time to time engaged in ongoing
discussions with respect to acquisitions, and expects to continue to
pursue such acquisition opportunities actively. As of the date of
this Prospectus, the Partnership does not have any agreements with
respect to any material acquisitions but is involved in ongoing
discussions with several companies and is continuing to assess these
and other acquisition opportunities. The Partnership is unable to
predict the size, number or timing of any future acquisitions.
In addition to pursuing growth through acquisitions, the
Partnership continues to focus on internal growth at its existing
customer service centers. The Partnership seeks 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 is being 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 establishing a new customer
service center. The Partnership believes that it can successfully
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initiate these start-up operations in attractive markets by
identifying and hiring local managers with proven propane service
experience and establishing programs that reward service-oriented and
profitable operations and that allow the managers to share in the
growth of the business.
ENHANCE PROFITABILITY OF ITS EXISTING OPERATIONS.
The Partnership believes that it can enhance the profitability of
its customer service centers by integrating the Combined Operations,
reducing inefficiencies in areas where there is a geographic overlap
of services and implementing "best practices" and management incentive
programs throughout the Partnership's operations. In integrating the
Combined Operations, the Partnership is in the process of
consolidating and centralizing ongoing administrative functions and
systems, which should enable local managers to devote their time to
providing customer service and achieving other performance goals. In
addition, the Partnership believes it can improve efficiencies in
areas where there is a geographic overlap of services provided by
customer service centers. The Partnership's management has identified
effective operating programs and strategies used by one of the
constituent companies prior to the IPO but not used by one or more of
the others. The Partnership believes that the implementation of these
"best practices" throughout the Combined Operations will improve
customer retention, foster expansion of its customer base and create
operating efficiencies and cost savings opportunities. Furthermore,
the Partnership believes that instituting management incentive
programs, where appropriate, and fostering an entrepreneurial approach
at additional customer service centers will give managers the
incentive to increase such customer service centers' profitability.
CAPITALIZE ON NATIONAL SUPPLY AND LOGISTICS BUSINESS.
The Partnership has a national wholesale propane supply and
logistics business with sales of approximately 226 million gallons in
fiscal 1996. The Partnership believes that this business provides it
with a reasonably secure, competitively priced and efficient supply
base to support the service goals of its existing customer service
centers. In addition, the Partnership believes its wholesale and
logistics business positions it well for expansion through
acquisitions or start-up operations in new markets. As part of its
wholesale business, the Partnership also provides product supply and
financial and technical assistance to certain small independent
retailers. While these arrangements provide some economic return to
the Partnership, the Partnership believes their greater value lies in
the resulting relationships, which position the Partnership to acquire
such businesses in the event they become available for purchase.
FORMATION BACKGROUND
Northwestern Growth is a wholly owned subsidiary of NPS, an NYSE-
listed energy distribution company. Northwestern Growth was formed in
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1994 to pursue and manage nonutility investments and development
activities for NPS, with a primary focus on growth opportunities in
the energy, energy equipment and energy services industries.
To capitalize on the growth and consolidation opportunities in
the propane distribution market, in August 1995, Northwestern Growth,
through its subsidiary, Synergy, acquired SGI, then the sixth largest
retail marketer of propane in the United States. SGI had been in the
retail propane distribution business since 1969. At the time of the
acquisition, SGI maintained 152 retail branches serving approximately
200,000 customers in 23 states in the east and south-central regions
of the United States. In conjunction with the acquisition of SGI,
Synergy sold 38 retail propane locations to Empire Energy pursuant to
the Empire Acquisition of Certain Synergy Assets. The transaction
represented a net cash investment by Northwestern Growth of
approximately $105 million, after the sale of such retail outlets.
Following the acquisition of SGI, Northwestern Growth acquired four
smaller propane companies, which had aggregate annual retail propane
sales of approximately four million gallons.
In December 1995, NPS acquired Myers, located in Sandusky, Ohio,
for consideration of approximately $4.8 million. As of the time of
the acquisition, Myers served approximately 5,000 customers within a
radius of approximately 50 miles around Sandusky. Myers had annual
retail propane sales of approximately six million gallons.
In October 1996, Northwestern Growth acquired Empire Energy, then
the eighth largest retail marketer of propane in the United States.
Such transaction involved total consideration of approximately
$120 million. Empire Energy was formed in June 1994 as a result of
the Split-Off from Empire Gas, which was founded in 1963. As a result
of the Split-Off, Empire Energy acquired 133 of the 284 Empire Gas
retail locations. As of September 30, 1996, Empire Energy's
operations consisted of 157 retail locations in 10 states, primarily
in the midwest and southeast regions of the United States, including
the 38 retail propane locations acquired by Empire Energy from Synergy
as described above.
In December 1996, Northwestern Growth acquired Coast, the 18th
largest retail marketer of propane in the United States, with retail
operations primarily concentrated in the west coast region of the
United States. The acquisition was consummated immediately prior to
the consummation of the IPO closing. The Coast Merger involved total
consideration of approximately $97.0 million, subject to working
capital and capital expenditure adjustments.
INDUSTRY BACKGROUND AND COMPETITION
Propane, a by-product of natural gas processing and petroleum
refining, is a clean-burning energy source recognized for its
transportability and ease of use relative to alternative stand-alone
energy sources. The retail propane business of the Partnership
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consists principally of transporting propane to its retail
distribution outlets and then to tanks located on its customers'
premises. Retail propane use falls into four broad categories:
(i) residential, (ii) industrial and commercial, (iii) agricultural
and (iv) other applications, including motor fuel sales. Residential
customers use propane primarily for space and water heating.
Industrial customers use propane primarily as fuel for forklifts and
stationary engines, to fire furnaces, as a cutting gas, in mining
operations and in other process applications. Commercial customers,
such as restaurants, motels, laundries and commercial buildings, use
propane in a variety of applications, including cooking, heating and
drying. In the agricultural market, propane is primarily used for
tobacco curing, crop drying, poultry brooding and weed control. Other
retail uses include motor fuel for cars and trucks, outdoor cooking
and other recreational uses, propane resales and sales to state and
local governments. In its wholesale operations, the Partnership sells
propane principally to large industrial end-users and other propane
distributors.
Propane is extracted from natural gas or oil wellhead gas at
processing plants or separated from crude oil during the refining
process. Propane is normally transported and stored in a liquid state
under moderate pressure or refrigeration for ease of handling in
shipping and distribution. When the pressure is released or the
temperature is increased, it is usable as a flammable gas. Propane is
colorless and odorless; an odorant is added to allow its detection.
Like natural gas, propane is a clean-burning fuel and is considered an
environmentally preferred energy source.
Based upon information provided by the Energy Information
Administration, propane accounts for approximately three to four
percent of household energy consumption in the United States. Propane
competes primarily with natural gas, electricity and fuel oil as an
energy source, principally on the basis of price, availability and
portability. Propane is more expensive than natural gas on an
equivalent BTU basis in locations served by natural gas, but serves as
a substitute for natural gas in rural and suburban areas where natural
gas is unavailable or portability of product is required.
Historically, the expansion of natural gas into traditional propane
markets has been inhibited by the capital costs required to expand
pipeline and retail distribution systems. Although the extension of
natural gas pipelines tends to displace propane 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
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propane distribution business. Competition in the propane industry is
highly fragmented and generally occurs on a local basis with other
large full-service multi-state propane marketers, thousands of smaller
local independent marketers and farm cooperatives. Based on industry
publications, the Partnership believes that the domestic retail market
for propane is approximately 9.2 billion gallons annually, that the 10
largest retailers, including the Partnership, account for
approximately 33% of the total retail sales of propane in the United
States, and that no single marketer has a greater than 10% share of
the total retail market in the United States. Most of the
Partnership's customer service centers compete with five or more
marketers or distributors. Each customer service center operates in
its own competitive environment, because retail marketers tend to
locate in close proximity to customers. The Partnership's customer
service centers generally have an effective marketing radius of
approximately 25 to 50 miles, although in certain rural areas the
marketing radius may be extended by a satellite location.
The ability to compete effectively further depends on the
reliability of service, responsiveness to customers and the ability to
maintain competitive prices. The Partnership also believes that its
service capabilities and customer responsiveness differentiate it from
many of these smaller competitors. The Partnership's employees are on
call 24 hours a day and seven days a week for emergency repairs and
deliveries.
The wholesale propane business is highly competitive. For fiscal
year 1996, the Partnership's wholesale propane operations accounted
for 49% of combined total propane volumes but less than 6% of pro
forma gross profit. The Partnership believes that its wholesale
business provides it with a national presence and a reasonably secure,
efficient supply base, and positions it well for expansion through
acquisitions or start-up operations in new markets.
PRODUCTS, SERVICES AND MARKETING
The Partnership is principally engaged in (i) the retail
distribution of propane for residential, commercial, industrial,
agricultural and other retail uses, (ii) the wholesale marketing and
distribution of propane and natural gas liquids to the retail propane
industry, the chemical and petrochemical industries and other
commercial and agricultural markets, (iii) the repair and maintenance
of propane heating systems and appliances and (iv) the sale of
propane-related supplies, appliances and other equipment.
As of June 30, 1997, the Partnership's retail operations
consisted of 296 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
<PAGE> 132
purposes. During fiscal 1996, approximately 72.7% of the
Partnership's combined retail propane volume and in excess of 85% of
its pro forma EBITDA were attributable to sales during the six-month
heating season of October through March. As a result of this
seasonality, the Partnership's sales and operating profits are
concentrated in its second and third fiscal quarters. Cash flows from
operations, however, are greatest from November through April when
customers pay for propane purchased during the six-month peak season.
To the extent the Managing General Partner deems appropriate, the
Partnership may reserve cash from these periods for distribution to
Unitholders during periods with lower cash flows from operations.
Typically, customer service centers are found in suburban and
rural areas where natural gas is not readily available. Generally,
such locations consist of a one to two acre parcel of land, an office,
a small warehouse and service facility, a dispenser and one or more
18,000 to 30,000 gallon storage tanks. Propane is generally
transported from refineries, pipeline terminals, leased storage
facilities and coastal terminals by rail or truck transports to the
Partnership's customer service centers, where it is unloaded into the
storage tanks. In order to make a retail delivery of propane to a
customer, a bobtail truck is loaded with propane from the storage
tank. Propane is then pumped from the bobtail truck, which generally
holds 2,500 to 3,000 gallons of propane, into a stationary storage
tank on the customer's premises. The capacity of these customer tanks
ranges from approximately 100 gallons to 1,200 gallons, with a typical
tank having a capacity of 100 to 300 gallons in milder climates and
from 500 to 1,000 gallons in colder climates. The Partnership also
delivers propane to retail customers in portable cylinders, which
typically have a capacity of 5 to 35 gallons. When these cylinders
are delivered to customers, empty cylinders are picked up for
refilling at the Partnership's distribution locations or are refilled
in place. The Partnership also delivers propane to certain other bulk
end users of propane in tractor trailers known as transports, which
have an average capacity of approximately 10,500 gallons. End users
receiving transport deliveries include industrial customers,
large-scale heating accounts and large agricultural accounts.
The Partnership encourages its customers to implement a regular
delivery schedule by, in some cases, charging extra for non-scheduled
deliveries. Most of the Partnership's residential customers receive
their propane supply pursuant to an automatic delivery system which
eliminates the customer's need to make an affirmative purchase
decision and allows for more efficient route scheduling and
maximization of volumes delivered. From its customer service
locations, the Partnership also sells, installs and services equipment
related to its propane distribution business, including heating and
cooking appliances.
Retail propane use falls into four broad categories:
(i) residential, (ii) industrial and commercial, (iii) agricultural
and (iv) other applications, including motor fuel sales. On a
<PAGE> 133
combined basis during fiscal 1996, the Partnership sold approximately
235 million gallons of propane to retail customers and 226 million
gallons of propane to wholesale customers. Approximately 57.8% of the
retail gallons was sold to residential customers, 25.9% was sold to
industrial and commercial customers, 13.1% was sold to agricultural
customers, and 3.2% was sold to all other retail users. Sales to
residential customers in fiscal 1996 accounted for 29.5% of total
gallons (including wholesale gallons) sold, but approximately 67.0% of
the Partnership's pro forma gross profit from propane sales.
Residential sales have a greater profit margin and a more stable
customer base than other retail markets served by the Partnership.
Industrial and commercial sales accounted for 18.7% of the
Partnership's pro forma gross profit from propane sales for fiscal
1996, agricultural sales accounted for 6.1% and all other retail sales
accounted for 2.8%. Sales to wholesale customers contributed the
remaining 5.4% of pro forma gross profit from propane sales. No
single retail customer accounted for more than 1% of the Partnership's
pro forma revenues during fiscal 1996.
The propane business is very seasonal, with weather conditions
significantly affecting demand for propane. The Partnership believes
that the geographic diversity of its areas of operations helps to
minimize its exposure to regional weather. Although overall demand
for propane is affected by weather, changes in price and other
factors, the Partnership believes its residential business to be
relatively stable due to the following characteristics:
(i) residential demand for propane has been relatively unaffected by
general economic conditions due to the largely non-discretionary
nature of most propane purchases by the Partnership's residential
customers, (ii) loss of customers to competing energy sources has been
low, (iii) the Partnership's customers tend to remain with the
Partnership due to a regular delivery schedule and the Partnership's
ownership of a substantial percentage of the storage tanks used by its
customers and (iv) the Combined Operations have been able to more than
offset customer losses through internal growth of their customer bases
in existing markets. Since home heating usage is the most sensitive
to temperature, residential customers account for the greatest usage
variation due to weather. Variations in the weather in one or more
regions in which the Partnership operates, however, can significantly
affect the total volumes of propane sold by the Partnership and the
margins realized thereon and, consequently, the Partnership's results
of operations. The Partnership believes that sales to the commercial
and industrial markets, while affected by economic patterns, are not
as sensitive to variations in weather conditions as sales to
residential and agricultural markets.
In addition to its core retail operations, the Partnership is
also engaged in the wholesale marketing of propane to independent
dealers, major interstate marketers and the chemical and petrochemical
industries. The Partnership participates to a lesser extent in the
marketing of other natural gas liquids, the processing and marketing
of natural gas and the gathering of crude oil. The Partnership either
<PAGE> 134
owns or has contractual rights to use transshipment terminals, rail
cars, long-haul tanker trucks, pipelines and storage capacity. The
Partnership believes that its wholesale marketing and processing
activities position it to achieve product cost advantages and to avoid
shortages during periods of tight supply to an extent not generally
available to other retail propane distributors.
PROPANE SUPPLY AND STORAGE
The Partnership's propane supply is purchased from oil companies
and natural gas processors at numerous supply points located in the
United States and Canada. Most of the propane purchased by the
Partnership in fiscal 1996 was purchased pursuant to agreements with
terms of less than one year, but the percentage of contract purchases
may vary from year to year as determined by the Partnership. Supply
contracts generally provide for pricing in accordance with posted
prices at the time of delivery or the current prices established at
major delivery points. Most of these agreements provide maximum and
minimum seasonal purchase guidelines. In addition, the Partnership
makes purchases on the spot market from time to time to take advantage
of favorable pricing. The Partnership receives its supply of propane
predominantly through railroad tank cars and common carrier transport.
Supplies of propane from the Partnership's sources historically
have been readily available. In fiscal 1996, Warren Gas Liquids was
the Partnership's largest supplier providing approximately 12.8% of
the Partnership's total propane supply for its retail and wholesale
operations (excluding propane obtained from the Partnership's natural
gas processing operations). The Partnership believes that if supplies
from Warren Gas Liquids were interrupted, it would be able to secure
adequate propane supplies from other sources without a material
disruption of its operations. Aside from Warren Gas Liquids, no
single supplier provided more than 10% of the Partnership's domestic
propane supply in fiscal 1996. Although no assurance can be given
that supplies of propane will be readily available in the future, the
Partnership expects a sufficient supply to continue to be available.
However, increased demand for propane in periods of severe cold
weather, or otherwise, could cause future propane supply interruptions
or significant volatility in the price of propane.
The market price of propane is subject to volatile changes as a
result of supply or other market conditions over which the Partnership
will have no control. Since it may not be possible to pass rapid
increases in the wholesale cost of propane on to customers
immediately, such increases could reduce the Partnership's gross
profits. Consequently, the Partnership's profitability will be
sensitive to changes in wholesale propane prices. The Partnership
engages in hedging of product cost and supply through common hedging
practices. The Partnership also engages in the trading of propane,
natural gas, crude oil and other commodities in amounts that have not
had and are not expected to have a material effect on the
Partnership's financial condition or results of operations.
<PAGE> 135
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 local market conditions and
product cost within a pre-established gross margin framework developed
jointly by senior management and local service center managers. The
Partnership regularly assesses how each customer service center
manager's pricing policy affects the service center's margins and
discusses alternative pricing strategies to improve margins with the
service center managers. In most situations, the Partnership believes
that its pricing methods 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 statement billing is centralized, allowing the
Partnership to achieve efficiencies and reduce the time spent by local
managers on billing, while customer account and collection
responsibilities are the responsibility of the service centers. 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 June 30, 1997, the Partnership operated bulk storage
facilities with total propane storage capacity of approximately
21 million gallons, all of which was above-ground and all of which was
owned by the Partnership. The Partnership does not own, operate or
lease any underground propane storage facilities (excluding customer
and local distribution tanks) or pipeline transportation assets
(excluding local delivery systems). In addition, as of June 30, 1997,
the Partnership operated 296 customer service centers.
<PAGE> 136
The transportation of propane requires specialized equipment. The
trucks and railroad tank cars utilized for this purpose carry
specialized steel tanks that maintain the propane in a liquefied
state. As of June 30, 1997, the Partnership owned a fleet of 34
transport truck tractors, 63 transport trailers, approximately
900 bobtail trucks and approximately 1,000 other delivery and service
vehicles. As of such date, the Partnership owned, and customers
leased, approximately 268,000 customer storage tanks with typical
capacities of 120 to 1,000 gallons.
The Partnership believes that it has satisfactory title to or
valid rights to use all of its material properties. Some of these
properties are subject to liabilities and leases, liens for taxes not
yet due and payable, and immaterial encumbrances, easements and
restrictions, although the Partnership does not believe that any such
burdens will interfere with the continued use of its properties by the
Partnership to an extent material to its business, taken as a whole.
In addition, the Partnership believes that it has or is in the process
of obtaining all required material approvals, authorizations, orders,
licenses, permits, franchises and consents of, and has obtained or is
in the process of obtaining all required material registrations,
qualifications and filings with, the various state and local
governmental and regulatory authorities which relate to ownership of
the Partnership's properties or the operations of its business.
TRADEMARKS AND TRADENAMES
The Partnership utilizes a variety of trademarks, including
"Synergy Gas" and its related design, which the Partnership owns, and
"Empire Gas" and its related design, which the Partnership has the
right to use, and tradenames, including "Coast Gas." The Partnership
generally expects to retain the names and identities of acquired
entities, which the Partnership believes preserves the goodwill of the
acquired business and promotes continued local customer loyalty. The
Partnership regards its trademarks, tradenames and other proprietary
rights as valuable assets and believes that they have significant
value in the marketing of its products.
GOVERNMENT REGULATION
The Partnership is subject to various federal, state and local
environmental, health and safety laws and regulations. Generally,
these laws impose limitations on the discharge of pollutants and
establish standards for the handling of solid and hazardous wastes.
These laws include the Resource Conservation and Recovery Act
("RCRA"), the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), the Clean Air Act, the Occupational Safety
and Health Act, the Emergency Planning and Community Right-to-Know
Act, the Clean Water Act and comparable state statutes. CERCLA, also
known as the "Superfund" law, imposes joint and several liability
without regard to fault or the legality of the original conduct on
certain classes of persons that are considered to have contributed to
<PAGE> 137
the release or threatened release of a "hazardous substance" into the
environment. Propane is not a hazardous substance within the meaning
of CERCLA. However, automotive waste products, such as waste oil,
generated by the Partnership's truck fleet, as well as "hazardous
substances" disposed of during past operations by third parties on the
Partnership's properties, could subject the Partnership to liability
under CERCLA. Such laws and regulations could result in civil or
criminal penalties in cases of non-compliance or impose liability for
remediation costs. In addition, liquid petroleum products, such as
gasoline and diesel fuel, are handled at some of the Partnership's
properties. Leaks of such materials from underground storage tanks
are regulated pursuant to RCRA and analogous state laws. Most state
laws also require the investigation and, where determined to be
necessary, the remediation of leaks or spills of liquid petroleum
products, whether the leaks or spills emanated from underground
storage tanks or otherwise. Also, third parties may make claims
against owners or operators of properties for personal injuries and
property damage associated with releases of hazardous or toxic
substances.
National Fire Protection Association Pamphlets No. 54 and No. 58,
which establish rules and procedures governing the safe handling of
propane, or comparable regulations, have been adopted as the industry
standard in all of the states in which the Partnership operates. In
some states these laws are administered by state agencies, and in
others they are administered on a municipal level. With respect to
the transportation of propane by truck, the Partnership is subject to
regulations promulgated under the Federal Motor Carrier Safety Act.
These regulations cover the transportation of hazardous materials and
are administered by the United States Department of Transportation.
The Partnership conducts ongoing training programs to help ensure that
its operations are in compliance with applicable regulations. The
Partnership maintains various permits that are necessary to operate
some of its facilities, some of which may be material to its
operations. The Partnership believes that the procedures currently in
effect at all of its facilities for the handling, storage and
distribution of propane and liquid petroleum products are consistent
with industry standards and are in compliance in all material respects
with applicable laws and regulations.
Future developments, such as stricter environmental, health or
safety laws and regulations promulgated thereunder, could affect
Partnership operations. It is not anticipated that the Partnership's
compliance with or liabilities under existing environmental, health
and safety laws and regulations, including CERCLA, will have a
material adverse effect on the Partnership. To the extent that there
are any environmental liabilities unknown to the Partnership or
environmental, health or safety laws or regulations are made more
<PAGE> 138
stringent, there can be no assurance that the Partnership's results of
operations will not be materially and adversely affected.
EMPLOYEES
As of June 30, 1997, the Managing General Partner had 1,938 full
time employees, of whom 141 were general and administrative and 1,797
were operational employees. Twenty-eight of the Managing General
Partner's employees at four customer service centers were represented
by labor unions. The Partnership believes that its relations with its
employees are satisfactory. The Managing General Partner generally
hires seasonal workers to meet peak winter demand.
LITIGATION AND OTHER CONTINGENCIES
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.
MANAGEMENT
PARTNERSHIP MANAGEMENT
The Managing General Partner manages and operates the activities
of the Partnership. Neither the Special General Partner nor the
Unitholders directly or indirectly participate in the management or
operation of the Partnership or have actual or apparent authority to
enter into contracts on behalf of, or to otherwise bind, the
Partnership. Notwithstanding any limitation on their obligations or
duties, the Managing General Partner and the Special General Partner
will be liable, as general partners of the Partnership, for all debts
of the Partnership (to the extent not paid by the Partnership), except
to the extent that indebtedness or other obligations incurred by the
Partnership are made specifically non-recourse to the General
Partners. Whenever possible, the Managing General Partner intends to
make any such indebtedness or other obligations non-recourse to the
General Partners.
In March 1997 the Managing General Partner appointed Paul
Christen and Kurt Katz, who are neither officers or employees of the
General Partners nor directors, officers or employees of any affiliate
<PAGE> 139
of either of the General Partners, to its Board of Directors. Such
directors, along with Richard Hylland, serve on the Audit Committee,
which has the authority to review specific matters as to which the
Board of Directors believes there may be a conflict of interest in
order to determine if the resolution of such conflict proposed by the
Managing General Partner is fair and reasonable to the Partnership.
Any matters approved by the Audit Committee will be conclusively
deemed to be fair and reasonable to the Partnership, approved by all
partners of the Partnership and not a breach by the Managing General
Partner or its Board of Directors of any duties they may owe the
Partnership or the Unitholders. See "Conflicts of Interest and
Fiduciary Responsibilities - Fiduciary and Other Duties." In addition,
the Audit Committee will review the external financial reporting of
the Partnership, will recommend engagement of the Partnership's
independent public accountants and will review the Partnership's
procedures for internal auditing and the adequacy of the Partnership's
internal accounting controls.
The Nominating and Compensation Committee consists of three
numbers, Kurt Katz, Merle Lewis and Paul Christen. The Nominating and
Compensation Committee advises the Board of Directors with respect to
nominations of directors and the salary, compensation and benefits of
directors and officers of the Managing General Partner.
Merle Lewis, Keith Baxter and Richard Hylland serve on the
Executive Committee, which may exercise the powers of the Board of
Directors while the Board of Directors is not in session, subject to
limitations imposed by law and the by-laws of the Managing General
Partner.
As is commonly the case with publicly traded limited
partnerships, the Partnership does not directly employ any of the
persons responsible for managing or operating the Partnership. In
general, the former management of Coast manages and operates 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.
<PAGE> 140
<TABLE>
<CAPTION>
<S> <C> <C>
NAME AGE POSITION WITH MANAGING GENERAL PARTNER
---- --- --------------------------------------
Merle D. Lewis 49 Chairman of the Board of Directors
Richard R. Hylland 36 Vice Chairman of the Board of Directors
Keith G. Baxter 47 President, Chief Executive Officer and Director
Charles J. Kittrell 57 Executive Vice President, Chief Operating Officer and Secretary
Ronald J. Goedde 47 Executive Vice President, Chief Financial Officer and Treasurer
Vincent J. DiCosimo 39 Executive Vice President
Daniel K. Newell 40 Director
Paul Christen 68 Director
Kurt Katz 64 Director
</TABLE>
MERLE D. LEWIS has served as the Chairman of the Board of
Directors for the Managing General Partner since its inception in
1996. He 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 of NPS from 1987
to 1993. Mr. Lewis joined NPS in 1982 and has served as a member of
the board of directors of NPS since 1993. Mr. Lewis is also Chairman
of the Special General Partner and is a member of the board of
directors of Lucht, Inc. (a manufacturer of photographic equipment)
and Northwestern Energy Corporation (a marketer of non-regulated
energy products) ("Northwestern Energy"), a subsidiary of NPS.
RICHARD R. HYLLAND has served as the Vice Chairman of the Board
of Directors of the Managing General Partner since its inception in
1996. He has been the Executive Vice President - Strategic
Development of NPS since November 1995 and has been President and
Chief Operating Officer of Northwestern Growth since September 1994.
Mr. Hylland also served as Vice President - Strategic Development of
NPS from August 1995 to November 1995, Vice President - Corporate
Development of NPS from May 1993 to August 1995 and Vice President -
Finance of NPS from April 1991 to August 1995. Mr. Hylland has served
as a member of the board of directors of NPS since 1995 and also
serves as Vice Chairman of the Special General Partner and as a member
of the boards of directors of Northwestern Growth, Lucht, Inc.,
Franklin Industries (a steel fabricator of highway sign and fence
posts), Northwestern Energy and LodgeNet Entertainment Corporation (a
television-based entertainment and information services company).
KEITH G. BAXTER has served as President, Chief Executive Officer
and a director of the Managing General Partner since its inception in
1996. He was the President, Chief Executive Officer and Chairman of
the Board of Directors of Coast from 1986 until the closing of the
IPO. Prior to joining Coast, Mr. Baxter was Sector Vice President of
Peabody International Corporation (an integrated manufacturing
company).
<PAGE> 141
CHARLES J. KITTRELL has served as the Executive Vice President
and Chief Operating Officer of the Managing General Partner since its
inception in 1996, and as Secretary since January 30, 1997. He was
the Executive Vice President - Chief Operating Officer of Coast from
1986 until the closing of the IPO. Prior to joining Coast,
Mr. Kittrell was Vice President in charge of manufacturing, product
engineering and general operations at five manufacturing and
distribution centers for Peabody Floway Inc. (a pump manufacturing
company), a subsidiary of Peabody International Corporation.
RONALD J. GOEDDE has served as the Executive Vice President,
Chief Financial Officer and Treasurer of the Managing General Partner
since its inception in 1996. He was the Executive Vice President -
Chief Financial Officer of Coast from 1988 until the closing of the
IPO. Prior to joining Coast, Mr. Goedde was the Vice President of
Finance and Controller for Cal Gas Corporation (an integrated propane
company).
VINCENT J. DICOSIMO served as the Senior Vice President of the
Managing General Partner from its inception in 1996 to January 30,
1997 and currently serves as the Executive Vice President of the
Managing General Partner. He was an Executive Vice President of Coast
from 1993 until the closing of the IPO. From 1990 to 1993,
Mr. DiCosimo was a Vice President of Coast. Before joining Coast, Mr.
DiCosimo was Manager of Supply/Distribution for Cal Gas Corporation
from 1981 to 1990 and prior thereto was Senior Financial Analyst with
Unocal Oil & Gas.
DANIEL K. NEWELL has served as a director of the Managing General
Partner since its inception in 1996. He has been the Executive Vice
President of Northwestern Growth since July 1995 and has served as
Vice President - Finance of NPS since July 1995 and Chief Financial
Officer of NPS since May 1996. Prior to joining NPS, Mr. Newell was
Vice President - Finance and Treasurer and a member of the board of
directors of Energy Fuels Corporation (a coal mining company) from
1991 to 1995. Mr. Newell serves as a member of the board of directors
of Northwestern Growth.
PAUL CHRISTEN has served as a director of the Managing General
Partner since March 1997. Mr. Christen has served as the president
and director of First Western Bancorp Inc. since 1965 and has served
as president and a director of PRC, Inc. since 1984.
KURT KATZ has served as a director of the Managing General
Partner since March 1997. Mr. Katz retired as president and chief
operating officer of Peabody International Corporation in 1985 where
he held a variety of positions from 1973 to 1985, and for the last
five years has been active in a number of private ventures. Mr. Katz
is also a director of Polymeric Resources Corp.
<PAGE> 142
REIMBURSEMENT OF EXPENSES OF THE MANAGING GENERAL PARTNER AND ITS
AFFILIATES
The Managing General Partner does 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 are 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 received a combined 2% general
partner interest, the right to receive Incentive Distributions and
6,597,619 Subordinated Units as consideration for their contribution
to the Partnership of their limited partner interests in the Operating
Partnership, which interests were received as consideration for their
contribution of the Combined Operations to the Operating Partnership.
See "The IPO and Related Transactions." The General Partners will be
entitled to distributions on their general partner interests,
Incentive Distributions and distributions on such Subordinated Units
as described under "Cash Distribution Policy."
EXECUTIVE COMPENSATION
The Partnership and the Managing General Partner were formed in
October 1996. Accordingly, the Managing General Partner paid no
compensation to its directors and officers with respect to fiscal
1996, nor did any obligations accrue in respect of management
incentive or retirement benefits for the directors and officers with
respect to such year. Officers and employees of the Managing General
Partner may participate in employee benefit plans and arrangements
sponsored by Northwestern Growth, including plans which may be
established by Northwestern Growth in the future. Under the terms of
the Partnership Agreement, the Partnership is required to reimburse
the Managing General Partner for expenses relating to the operation of
the Partnership, including salaries and bonuses of employees employed
on behalf of the Partnership, as well as the costs of providing
benefits to such persons under employee benefit plans and for the
costs of health and life insurance. See "Certain Relationships and
Related Transactions."
EMPLOYMENT AGREEMENTS, SEVERANCE ARRANGEMENTS
Employment agreements (the "Employment Agreements") between each
of Keith G. Baxter, Charles J. Kittrell, Ronald J. Goedde and Vincent
<PAGE> 143
J. DiCosimo (the "Executives"), and the Managing General Partner,
provide for the employment of the Executives by the Managing General
Partner. The summary of the Employment Agreements which follows does
not purport to be complete and is qualified in its entirety by
reference to the form of Employment Agreement, which has been filed as
an exhibit to the Registration Statement of which this Prospectus is a
part.
Pursuant to the Employment Agreements, Messrs. Baxter, Kittrell,
Goedde and DiCosimo serve as President and Chief Executive Officer,
Executive Vice President and Chief Operating Officer, Executive Vice
President and Chief Financial Officer, and Senior Vice President,
respectively, of the Managing General Partner. Each of the Employment
Agreements has a term of three years from the closing of the
Transactions, unless sooner terminated as provided in the Employment
Agreements. The Employment Agreements provide for an annual base
salary of $200,000, $160,000, $150,000 and $150,000 for each of
Messrs. Baxter, Kittrell, Goedde and DiCosimo, respectively, subject
to such increases as the Board of Directors of the Managing General
Partner may authorize from time to time, plus a fee for each of the
Executives of approximately $135,000, $65,000, $40,000 and $25,000,
respectively, per year for three years related to the acquisition of
Empire Energy and Coast by Northwestern Growth (the "Management Fee").
In addition, the Managing General Partner pays for a $725,000 life
insurance policy for Mr. Baxter and $410,000 life insurance policies
for each of Messrs. Kittrell, Goedde and DiCosimo. Each of the
Executives will participate in the Annual Operating Performance
Incentive Plan of the Managing General Partner and Messrs. Baxter,
Kittrell and Goedde will participate in the New Acquisition Incentive
Plan of the Managing General Partner (together with the Annual
Operating Performance Incentive Plan, the "Plans,") as described
below. The Executives will also be entitled to participate in such
other benefit plans and programs as the Managing General Partner may
provide for its employees in general (the "Other Benefit Plans").
The Employment Agreements provide that in the event an
Executive's employment is terminated without "cause" (as defined in
the Employment Agreements) or if the Executive terminates his
employment due to a "Fundamental Change" (as defined below), such
Executive will be entitled to receive a severance payment in an amount
equal to his total compensation for the remainder of the employment
term under the Employment Agreement and will receive benefits under
the Other Benefit Plans for a period of 12 months after termination.
In the event of termination due to disability, the Executive will be
entitled to his base salary, his Management Fee and benefits under the
Plans and the Other Benefit Plans for 12 months. In the event of
termination due to death, benefits under the Other Benefit Plans will
be continued for the Executive's dependents for 12 months. In the
event the Executive's employment is terminated for "cause," the
Executive will receive accrued salary and benefits (including his
Management Fee and benefits under the Plans) up to the date of
termination and, if the Managing General Partner does not waive the
<PAGE> 144
Executive's covenant not to compete, benefits under the Other Benefit
Plans for 12 months.
A Fundamental Change is defined in the Employment Agreements to
have occurred (i) if the Executive's duties, authority,
responsibilities and/or compensation is reduced without performance or
market-related justification; (ii) if the Executive's primary office
is moved more than 50 miles from Watsonville, California (or, with
respect to Mr. DiCosimo, Houston, Texas) without his consent; (iii) if
the Partnership disposes of business and assets which reduce the
annual EBITDA of the Partnership below 70% of the annual EBITDA level
existing at the time employment commenced; or (iv) if securities
representing 10% of the voting power in elections of directors of NPS
become beneficially owned by any party or group or other prescribed
events occur constituting a change of control of NPS.
In addition, each Employment Agreement contains non-competition
and confidentiality provisions.
INCENTIVE PLANS
The Managing General Partner adopted the Annual Operating
Performance Incentive Plan, which was effective upon consummation of
the Transactions. The Annual Operating Performance Incentive Plan
provides that annual incentive bonuses be paid to participants in the
plan (who will be determined by the Board of Directors of the Managing
General Partner from time to time and who will include the Executives)
based on a percentage of annual salary plus his Management Fee for
performance up to budgeted levels of net income and EBITDA. Such
bonuses will range from zero for performance at 10% below budget to
50% for performance at budget. In addition, in the event of EBITDA
performance over budgeted amounts, there will be established a bonus
pool equal to 10% of the excess of EBITDA over budget, which will be
divided among Messrs. Baxter, Kittrell and Goedde and any other
participants that the Board of Directors of the Managing General
Partner may determine. The period covered by the plan upon the
closing of the Transactions and ends on the fifth anniversary thereof.
The Managing General Partner adopted the New Acquisition
Incentive Plan, which was effective upon consummation of the
Transactions. The New Acquisition Incentive Plan provides for bonuses
to participants in the plan (who will be determined by the Board of
Directors of the Managing General Partner from time to time and who
will include the Executives) for adding new businesses to the
Partnership's propane operations, in an aggregate amount equal to 4%
of the gross acquisition purchase price, spread among the participants
in the plan based on their relative salaries. The transactions
covered by the Plan will include those occurring after the closing of
the Coast Merger (excluding that transaction) and will end on the
fifth anniversary thereof. Awards under this program will be payable
<PAGE> 145
in cash 90 days after the close of the particular acquisition
transaction.
RESTRICTED UNIT PLAN
The Managing General Partner adopted the Restricted Unit Plan for
executives, officers and directors of the Managing General Partner
which was 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 (determined as of the closing
of the IPO) were 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") were allocated to the Executives upon
the consummation of the Transactions, subject to the vesting
conditions described below and subject to other customary terms and
conditions, as follows: (i) rights to receive Common Units with an
aggregate value of $2.8 million were allocated to Mr. Baxter,
(ii) rights to receive Common Units with an aggregate value of $1.6
million were allocated to Mr. Kittrell, (iii) rights to receive Common
Units with an aggregate value of $1.6 million were allocated to Mr.
Goedde and (iv) rights to receive Common Units with an aggregate value
of $1.0 million were allocated to Mr. DiCosimo. Rights to receive
Common Units with an aggregate value of $900,000 were allocated among
the three initial non-officer members of the Board of Directors of the
Managing General Partner as follows: (i) rights to receive Common
Units with an aggregate value of $400,000 were allocated to Mr. Lewis
as Chairman of the Board; (ii) rights to receive Common Units with an
aggregate value of $300,000 were allocated to Mr. Hylland as Vice
Chairman; and (iii) rights to receive Common Units with an aggregate
value of $200,000 were allocated to Mr. Newell. Rights to receive
Common Units with an aggregate value of $200,000 were allocated to
each of Mr. Christen and Mr. Katz upon their election to the Board of
Directors. A total of nine individuals are currently eligible to
receive awards under the Restricted Unit Plan.
The right to receive the remaining $4.2 million of Common Units
initially available under the Restricted Unit Plan will be reserved
and allocated to future directors and may be allocated or issued in
the future to officers on such terms and conditions (including vesting
conditions) as are described below or as the Board of Directors of the
Managing General Partner, or a compensation committee thereof, shall
determine. Each additional director appointed or elected will receive
rights to receive Common Units with a value of $200,000 on the same
terms and conditions as those granted to the current directors.
The Initial Units will be subject to a bifurcated vesting
procedure such that (i) 25% of the Initial Units will vest over time,
<PAGE> 146
with one-third of such units vesting at the end of each of the third,
fifth and seventh anniversaries of the consummation of the
Transactions, and (ii) the remaining 75% of the Initial Units will
vest automatically upon, and in the same proportions as, the
conversion of the Subordinated Units to Common Units. See "Cash
Distribution Policy - Distributions from Operating Surplus during
Subordination Period." If a grantee's employment is terminated
without "cause" (as defined in the Restricted Unit Plan) or a grantee
resigns with "good reason" (as defined in the Restricted Unit Plan),
the grantee's rights to receive Common Units which vest over time will
immediately vest. In the event of a "change of control" of the
Partnership (as defined in the Restricted Unit Plan), all rights to
acquire Common Units pursuant to the Restricted Unit Plan will
immediately vest.
Upon "vesting" in accordance with the terms and conditions of the
Restricted Unit Plan, Common Units allocated to a plan participant
will be issued to such participant. Until such allocated, but
unissued, Common Units have vested and have been issued to a
participant, such participant shall not be entitled to any
distributions or allocations of income or loss and shall not have any
voting or other rights in respect of such Common Units.
The issuance of the Common Units pursuant to the Restricted Unit
Plan is intended to serve as a means of incentive compensation for
performance. Therefore, no consideration will be payable by the plan
participants upon vesting and issuance of the Common Units.
COMPENSATION OF DIRECTORS
The Managing General Partner currently pays no additional
remuneration to its employees who also serve as directors. In
addition to permitting its non-officer directors to participate in the
benefit plans described above, Mr. Lewis is compensated $50,000
annually as Chairman of the Board and each of its other non-employee
directors is 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.
<PAGE> 147
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF PARTNERSHIP UNITS BY THE GENERAL PARTNERS AND DIRECTORS
AND EXECUTIVE OFFICERS OF THE MANAGING GENERAL PARTNER
The table below sets forth, as of June 30, 1997 the beneficial
ownership of Units by each person known to the Managing General
Partner to be the beneficial owner of more than 5% of any class of
Units of the Partnership, each director and 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. The
Common Units are traded on the NYSE.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of
Beneficial Owner Class of Units Beneficial Ownership Class
-------------------------------------------- ---------------- -------------------- -------------
<S> <C> <C> <C>
Managing General Partner (1) . . . . . . . . Subordinated 5,677,040 (3) 86.0%
Special General Partner (2) . . . . . . . . . Subordinated 920,579 (3) 14.0%
Merle D. Lewis . . . . . . . . . . . . . . . Common 3,000 (3) *
Richard R. Hylland . . . . . . . . . . . . . Common - (3) *
Keith G. Baxter . . . . . . . . . . . . . . . Common 23,810 (3) *
Charles J. Kittrell . . . . . . . . . . . . . Common 9,524 (3) *
Ronald J. Goedde . . . . . . . . . . . . . . Common 9,524 (3) *
Vincent J. DiCosimo . . . . . . . . . . . . . Common 2,500 (3) *
Daniel K. Newell . . . . . . . . . . . . . . Common 1,000 (3) *
Paul Christen . . . . . . . . . . . . . . . . Common - (3) *
Kurt Katz . . . . . . . . . . . . . . . . . . Common 25,000 (3) *
All directors and executive officers as a
group (9 persons) . . . . . . . . . . . . . 74,358 *
</TABLE>
___________________________
*Less than 1%
(1) The business address of the Managing General Partner is 432
Westridge Drive, Watsonville, California 95076.
(2) The business address of the Special General Partner is 33 Third
Street S.E., Huron, South Dakota 57350.
<PAGE> 148
(3) Excludes Common Units awarded under the Restricted Unit Plan as
follows: Merle D. Lewis - 19,048 Common Units; Richard R. Hylland -
14,286 Common Units; Keith G. Baxter - 157,143 Common Units; Charles
J. Kittrell - 76,190 Common Units; Ronald J. Goedde - 76,190 Common
Units; Vincent J. DiCosimo - 47,619 Common Units; Daniel K. Newell -
9,524 Common Units; Paul Christen - 8,889 Common Units; Kurt Katz -
9,302 Common Units: and all directors and officers as a group -
418,191 Common Units.
OWNERSHIP OF NPS COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS OF
THE MANAGING GENERAL PARTNER
The table below sets forth, as of August 20, 1997, the
beneficial ownership of the common stock, par value $1.75 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.
AMOUNT AND NATURE
NAME OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1)
------------------------ ---------------------------
Merle D. Lewis (2) . . . . . . . . 37,529
Richard R. Hylland (3) . . . . . . 9,628
Keith G. Baxter . . . . . . . . . . 5,812
Charles J. Kittrell . . . . . . . . -
Ronald J. Goedde . . . . . . . . . -
Vincent J. DiCosimo . . . . . . . . -
Daniel K. Newell (4) . . . . . . . 2,529
Paul Christen . . . . . . . . . . . -
Kurt Katz . . . . . . . . . . . . . -
All directors and executive officers
as a group (9 persons) . . . . 55,498
_________
(1) The nature of beneficial ownership is sole voting and dispositive
power, unless otherwise noted.
(2) Includes 9,746 shares held jointly with spouse, 4,187 shares held
in IRA by spouse and 161 shares held by daughter.
(3) Includes 679 shares held in custodial accounts for Mr. Hylland's
children and 1,702 shares held by Mr. Hylland's spouse.
(4) Includes 281 shares held jointly with spouse.
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
<PAGE> 149
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
As of the date of this Prospectus, the General Partners own all
of the Subordinated Units, representing an aggregate 37.8% limited
partner interest in the Partnership. Through the Managing General
Partner's ability, as managing general partner, to manage and operate
the Partnership and the ownership of all of the outstanding
Subordinated Units by the General Partners (effectively giving the
General Partners the ability to veto certain actions of the
Partnership), the General Partners will have the ability to control
the management of the Partnership.
CONTRIBUTION, CONVEYANCE AND ASSUMPTION AGREEMENT
In connection with the Transactions, the Partnership, the
Operating Partnership, the Managing General Partner, Northwestern
Growth and certain other parties entered into the Contribution,
Conveyance and Assumption Agreement (the "Contribution Agreement"),
which generally governed the Transactions, including the asset
transfer to and the assumption of liabilities by the Operating
Partnership, and the application of the proceeds of the IPO. The
Contribution Agreement was not the result of arm's-length
negotiations, and there can be no assurance that it, or that any of
the transactions provided for therein, were effected on terms at least
as favorable to the parties to such agreement as could have been
obtained from unaffiliated third parties. All of the transaction
expenses incurred in connection with the Transactions, including the
expenses associated with transferring assets into the Operating
Partnership, were paid from the proceeds of the IPO. For additional
information, see "Prospectus Summary-Cornerstone Propane Partners,
L.P.-Distributions and Payments to the General Partners and their
Affiliates-Formation Stage."
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
CONFLICTS OF INTEREST
Certain conflicts of interest exist and may arise in the future
as a result of the relationships between the General Partners and
their stockholders, on the one hand, and the Partnership and its
limited partners, on the other hand. The directors and officers of
the Managing General Partner have fiduciary duties to manage the
Managing General Partner, including its investments in its
subsidiaries and affiliates, in a manner beneficial to its
stockholder. At the same time, the Managing General Partner has a
fiduciary duty to manage the Partnership in a manner beneficial to the
<PAGE> 150
Partnership and the Unitholders. The Partnership Agreement contains
provisions that allow the Managing General Partner to take into
account the interests of parties in addition to the Partnership in
resolving conflicts of interest, thereby limiting its fiduciary duty
to the Unitholders, as well as provisions that may restrict the
remedies available to Unitholders for actions taken that might,
without such limitations, constitute breaches of fiduciary duty. The
duty of the directors and officers of the Managing General Partner to
its stockholder may, therefore, come into conflict with the duties of
the Managing General Partner to the Partnership and the Unitholders.
The Audit Committee of the Board of Directors of the Managing General
Partner will, at the request of the Managing General Partner, review
conflicts of interest that may arise between the Managing General
Partner or its affiliates, on the one hand, and the Partnership, on
the other. See "Management-Partnership Management" and "-Fiduciary
and Other Duties."
The fiduciary obligations of general partners is a developing
area of law. The provisions of the Delaware Act that allow the
fiduciary duties of a general partner to be waived or restricted by a
partnership agreement have not been resolved in a court of law, and
the Managing General Partner has not obtained an opinion of counsel
covering the provisions set forth in the Partnership Agreement that
purport to waive or restrict fiduciary duties of the Managing General
Partner. Unitholders should consult their own legal counsel
concerning the fiduciary responsibilities of the Managing General
Partner and its officers and directors and the remedies available to
the Unitholders.
Conflicts of interest could arise with respect to the situations
described below, among others:
COMMON UNITHOLDERS HAVE NO RIGHT TO ENFORCE OBLIGATIONS OF THE
MANAGING GENERAL PARTNER AND ITS AFFILIATES UNDER AGREEMENTS WITH
THE PARTNERSHIP
The agreements between the Partnership and the Managing General
Partner do not grant to the Unitholders, separate and apart from the
Partnership, the right to enforce the obligations of the Managing
General Partner and its affiliates in favor of the Partnership.
Therefore, the Partnership will be primarily responsible for enforcing
such obligations.
CONTRACTS BETWEEN THE PARTNERSHIP, ON THE ONE HAND, AND THE
MANAGING GENERAL PARTNER AND ITS AFFILIATES, ON THE OTHER, WILL
NOT BE THE RESULT OF ARM'S-LENGTH NEGOTIATIONS
Under the terms of the Partnership Agreement, the Managing
General Partner is not restricted from paying the Managing General
Partner or its affiliates for any services rendered (provided such
services are rendered on terms fair and reasonable to the Partnership)
or entering into additional contractual arrangements with any of them
<PAGE> 151
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 closing
of IPO 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 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 is there any
obligation of the Managing General Partner and its affiliates to enter
into any such contracts.
CERTAIN ACTIONS TAKEN BY THE MANAGING GENERAL PARTNER MAY AFFECT
THE AMOUNT OF CASH AVAILABLE FOR DISTRIBUTION TO UNITHOLDERS OR
ACCELERATE THE CONVERSION OF SUBORDINATED UNITS
Decisions of the Managing General Partner with respect to the
amount and timing of cash expenditures, participation in capital
expansions and acquisitions, borrowings, issuances of additional
partnership interests and reserves in any quarter will affect whether,
or the extent to which, there is sufficient Available Cash from
Operating Surplus to meet the Minimum Quarterly Distribution and
Target Distributions Levels on all Units in such quarter or in
subsequent quarters. The Partnership Agreement provides that any
borrowings by the Partnership or the approval thereof by the Managing
General Partner shall not constitute a breach of any duty owed by the
Managing General Partner to the Partnership or the Unitholders,
including borrowings that have the purpose or effect, directly or
indirectly, of enabling the General Partners to receive distributions
on the Subordinated Units or the Incentive Distributions or hasten the
expiration of the Subordination Period or the conversion of the
Subordinated Units into Common Units. The Partnership Agreement
provides that the Partnership and the Operating Partnership may borrow
funds from the General Partners and their affiliates. The General
Partners and their affiliates may not borrow funds from the
Partnership or the Operating Partnership. Furthermore, any actions
taken by the Managing General Partner consistent with the standards of
reasonable discretion set forth in the definitions of Available Cash,
Operating Surplus and Capital Surplus will be deemed not to constitute
a breach of any duty of the Managing General Partner to the
Partnership or the Unitholders.
<PAGE> 152
THE PARTNERSHIP REIMBURSES THE MANAGING GENERAL PARTNER AND ITS
AFFILIATES FOR CERTAIN EXPENSES
Under the terms of the Partnership Agreement, the Managing
General Partner and its affiliates are reimbursed by the Partnership
for certain expenses incurred on behalf of the Partnership, including
costs incurred in providing corporate staff and support services to
the Partnership. The Partnership Agreement provides that the Managing
General Partner will determine the expenses that are allocable to the
Partnership in any reasonable manner determined by the Managing
General Partner in its sole discretion. See "Management -
Reimbursement of Expenses of the Managing General Partner and its
Affiliates."
THE MANAGING GENERAL PARTNER INTENDS TO LIMIT ITS LIABILITY WITH
RESPECT TO THE PARTNERSHIP'S OBLIGATIONS
Whenever possible, the Managing General Partner intends to limit
the Partnership's liability under contractual arrangements to all or
particular assets of the Partnership, with the other party thereto
having no recourse against the General Partners or their assets. The
Partnership Agreement provides that any action by the Managing General
Partner in so limiting the liability of the General Partners or that
of the Partnership will not be deemed to be a breach of the Managing
General Partner's fiduciary duties, even if the Partnership could have
obtained more favorable terms without such limitation on liability.
THE NEW ACQUISITION INCENTIVE PLAN MAY GIVE MANAGEMENT INCENTIVES
TO MAKE ACQUISITIONS THAT ARE NOT BENEFICIAL TO THE PARTNERSHIP
The terms of the New Acquisition Incentive Plan (described above
under "Management-Executive Compensation - Incentive Plans") could
give the senior executives of the Managing General Partner an
incentive to cause the Partnership to acquire additional propane
operations without regard to whether the operations would prove
beneficial to the Partnership and may present the senior executives of
the Managing General Partner with a conflict of interest in
negotiating the acquisition price on behalf of the Partnership. Mr.
Baxter, the only participant in the New Acquisition Incentive Plan who
is a member of the Board of Directors of the Managing General Partner,
has agreed that he will not participate in any board deliberations
regarding potential acquisitions subject to the New Acquisition
Incentive Plan. The Partnership believes that the fact that the
ultimate decision regarding acquisitions and their terms will be made
by directors who have no interest in the New Acquisition Incentive
Plan will significantly reduce the potential conflicts resulting from
the structure of the plan.
<PAGE> 153
COMMON UNITS ARE SUBJECT TO THE MANAGING GENERAL PARTNER'S
LIMITED CALL RIGHT
The Managing General Partner may exercise its right to call and
purchase Units as provided in the Partnership Agreement or assign such
right to one of its affiliates or to the Partnership. The Managing
General Partner may use its own discretion, free of fiduciary duty
restrictions, in determining whether to exercise such right. As a
consequence, a Common Unitholder may have his Common Units purchased
from him even though he may not desire to sell them, and the price
paid may be less than the amount the holder would desire to receive
upon sale of his Common Units. For a description of such right, see
"The Partnership Agreement - Limited Call Right."
THE PARTNERSHIP MAY RETAIN SEPARATE COUNSEL FOR ITSELF OR FOR THE
HOLDERS OF COMMON UNITS; ADVISORS RETAINED BY THE PARTNERSHIP
HAVE NOT BEEN RETAINED TO ACT FOR HOLDERS OF COMMON UNITS
The Common Unitholders were not represented by counsel in
connection with the preparation of the Partnership Agreement or other
agreements referred to herein. The attorneys, independent public
accountants and others who have performed services for the Partnership
in connection with the IPO, the Transactions and the offering made
hereby 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.
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,
depending on the nature of such conflict, but it does not intend to do
so in most cases.
THE MANAGING GENERAL PARTNER IS NOT RESTRICTED FROM ENGAGING IN A
TRANSACTION WHICH WOULD TRIGGER CHANGE OF CONTROL PROVISIONS
The Partnership's indebtedness contains provisions relating to
change of control. If such change of control provisions are
triggered, such outstanding indebtedness may become due. There is no
restriction on the ability of the Managing General Partner or
Northwestern Growth to enter into a transaction which would trigger
such change of control provisions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - The
Partnership - Financing and Sources of Liquidity."
<PAGE> 154
THE GENERAL PARTNERS' AFFILIATES MAY COMPETE WITH THE PARTNERSHIP
The Managing General Partner may not engage in any business or
activity or incur any debts or liabilities except in connection with
or incidental to (i) its performance as a general partner of the
Partnership or one or more affiliates of the Partnership, (ii) the
acquiring, owning or disposing of debt or equity securities of the
Partnership or such affiliates, and (iii) permitting its employees to
perform services for its affiliates. Except as limited by the next
paragraph, the Special General Partner and other affiliates of the
Managing General Partner (including NPS and Northwestern Growth) are
not restricted from engaging in any business activities, including
those in competition with the Partnership.
Affiliates of the Managing General Partner may engage in a
business activity that involves the retail sale of propane to end
users in the continental United States only if (i) the Managing
General Partner determines in its reasonable judgment, prior to the
commencement of such activity, that it is not in the best interests of
the Partnership to engage in such activity either (A) because of the
financial commitments or operating characteristics associated with
such activity or (B) because such activity is not consistent with the
business strategy or cannot otherwise be integrated with the
Partnership's operations on a basis beneficial to the Partnership; or
(ii) such activity is being undertaken as provided in a joint venture
agreement or other agreement between the Partnership and an affiliate
of the Managing General Partner and such joint venture or other
agreement was determined at the time it was entered into to be fair to
the Partnership in the reasonable judgment of the Managing General
Partner.
There are no restrictions on the ability of affiliates of the
Managing General Partner to engage in the retail sale of propane
outside the continental United States or in the trading,
transportation, storage and wholesale distribution of propane. The
Partnership Agreement expressly provides that if the Managing General
Partner or its affiliates act in accordance with the foregoing, it
shall not constitute a breach of the Managing General Partner's
fiduciary duties to the Partnership or the Unitholders if the Managing
General Partner or its affiliates engage in direct competition with
the Partnership.
THE PARTNERSHIP AGREEMENT PERMITS THE PARTNERSHIP TO ENGAGE IN
ROLL-UP TRANSACTIONS
The Partnership Agreement does not prohibit the Partnership from
engaging in roll-up transactions. Were the Managing General Partner
to cause the Partnership to engage in a roll-up transaction, there
could be no assurance that such a transaction would not have a
<PAGE> 155
material adverse effect on a Unitholder's investment in the
Partnership.
FIDUCIARY AND OTHER DUTIES
The General Partners will be accountable to the Partnership and
the Unitholders as fiduciaries. Consequently, the Managing General
Partner must exercise good faith and integrity in handling the assets
and affairs of the Partnership. In contrast to the relatively
well-developed law concerning fiduciary duties owed by officers and
directors to the shareholders of a corporation, the law concerning the
duties owed by general partners to other partners and to partnerships
is relatively undeveloped. Neither the Delaware Revised Uniform
Limited Partnership Act (the "Delaware Act") nor case law defines with
particularity the fiduciary duties owed by general partners to limited
partners or a limited partnership, but the Delaware Act provides that
Delaware limited partnerships may, in their partnership agreements,
restrict or expand the fiduciary duties that might otherwise be
applied by a court in analyzing the standard of duty owed by general
partners to limited partners and the partnership.
Fiduciary duties are generally considered to include an
obligation to act with the highest good faith, fairness and loyalty.
Such duty of loyalty, in the absence of a provision in a partnership
agreement providing otherwise, would generally prohibit a general
partner of a Delaware limited partnership from taking any action or
engaging in any transaction as to which it has a conflict of interest.
In order to induce the Managing General Partner to manage the business
of the Partnership, the Partnership Agreement, as permitted by the
Delaware Act, contains various provisions intended to have the effect
of restricting the fiduciary duties that might otherwise be owed by
the Managing General Partner to the Partnership and its partners and
waiving or consenting to conduct by the Managing General Partner and
its affiliates that might otherwise raise issues as to compliance with
fiduciary duties or applicable law.
The Partnership Agreement provides that in order to become a
limited partner of the Partnership, a holder of Common Units is
required to agree to be bound by the provisions thereof, including the
provisions discussed above. This is in accordance with the policy of
the Delaware Act favoring the principle of freedom of contract and the
enforceability of partnership agreements. The Delaware Act also
provides that a partnership agreement is not unenforceable by reason
of its not having been signed by a person being admitted as a limited
partner or becoming an assignee in accordance with the terms thereof.
The Partnership Agreement provides that whenever a conflict
arises between the General Partners or their affiliates, on the one
hand, and the Partnership or any other partner, on the other, the
Managing General Partner shall resolve such conflict. The Managing
General Partner in general shall not be in breach of its obligations
under the Partnership Agreement or its duties to the Partnership or
<PAGE> 156
the Unitholders if the resolution of such conflict is fair and
reasonable to the Partnership, and any resolution shall conclusively
be deemed to be fair and reasonable to the Partnership if such
resolution is (i) approved by the Audit Committee (although no party
is obligated to seek such approval and the Managing General Partner
may adopt a resolution or course of action that has not received such
approval), (ii) on terms no less favorable to the Partnership than
those generally being provided to or available from unrelated third
parties or (iii) fair to the Partnership, taking into account the
totality of the relationships between the parties involved (including
other transactions that may be particularly favorable or advantageous
to the Partnership). In resolving such conflict, the Managing General
Partner may (unless the resolution is specifically provided for in the
Partnership Agreement) consider the relative interests of the parties
involved in such conflict or affected by such action, any customary or
accepted industry practices or historical dealings with a particular
person or entity and, if applicable, generally accepted accounting
practices or principles and such other factors as its deems relevant.
Thus, unlike the strict duty of a fiduciary who must act solely in the
best interests of his beneficiary, the Partnership Agreement permits
the Managing General Partner to consider the interests of all parties
to a conflict of interest, including the interests of the General
Partners. In connection with the resolution of any conflict that
arises, unless the Managing General Partner has acted in bad faith,
the action taken by the Managing General Partner shall not constitute
a breach of the Partnership Agreement, any other agreement or any
standard of care or duty imposed by the Delaware Act or other
applicable law. The Partnership also provides that in certain
circumstances the Managing General Partner may act in its sole
discretion, in good faith or pursuant to other appropriate standards.
The Delaware Act provides that a limited partner may institute
legal action on behalf of the partnership (a partnership derivative
action) to recover damages from a third party where the general
partner has refused to institute the action or where an effort to
cause the general partner to do so is not likely to succeed. In
addition, the statutory or case law of certain jurisdictions may
permit a limited partner to institute legal action on behalf of
himself and all other similarly situated limited partners (a class
action) to recover damages from a general partner for violations of
its fiduciary duties to the limited partners.
The Partnership Agreement also provides that any standard of care
and duty imposed thereby or under the Delaware Act or any applicable
law, rule or regulation will be modified, waived or limited, to the
extent permitted by law, as required to permit the Managing General
Partner and its officers and directors to act under the Partnership
Agreement or any other agreement contemplated therein and to make any
decisions pursuant to the authority prescribed in the Partnership
Agreement, so long as such action is reasonably believed by the
Managing General Partner to be in, or not inconsistent with, the best
interests of the Partnership. Further, the Partnership Agreement
<PAGE> 157
provides that the General Partners and their officers and directors
will not be liable for monetary damages to the Partnership, the
limited partners or assignees for errors of judgment or for any acts
or omissions if the Managing General Partner and such other persons
acted in good faith.
In addition, under the terms of the Partnership Agreement, the
Partnership is required to indemnify the General Partners and their
officers, directors, employees, affiliates, partners, members, agents
and trustees, to the fullest extent permitted by law, against
liabilities, costs and expenses incurred by the General Partners or
such other persons, if the General Partners or such persons acted in
good faith and in a manner they reasonably believed to be in, or not
opposed to, the best interests of the Partnership and, with respect to
any criminal proceedings, had no reasonable cause to believe their
conduct was unlawful. See "The Partnership Agreement -
Indemnification." Thus, the General Partners could be indemnified for
their negligent acts if they meet such requirements concerning good
faith and the best interests of the Partnership.
DESCRIPTION OF THE COMMON UNITS
The Common Units are registered under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and the Partnership is
subject to the reporting and certain other requirements of the
Exchange Act. The Partnership is required to file periodic reports
containing financial and other information with the Commission.
Persons acquiring 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 A to this Prospectus, before the acquisition 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 acquiror 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 to 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
<PAGE> 158
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
Continental Stock Transfer & Trust Company serves as registrar
and transfer agent (the "Transfer Agent") for the Common Units and
receives 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 has agreed to 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.
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.
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 or acquire Common Units directly from the
Partnership 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 A 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
<PAGE> 159
into the Partnership as a substituted limited partner,
(ii) automatically requests admission as a substituted limited partner
in the Partnership, (iii) agrees to be bound by the terms and
conditions of, and executes, the Partnership Agreement,
(iv) represents that such transferee has the capacity, power and
authority to enter into the Partnership Agreement, (v) grants powers
of attorney to officers of the Managing General Partner and any
liquidator of the Partnership as specified in the Partnership
Agreement, and (vi) makes the consents and waivers contained in the
Partnership Agreement. An assignee will become a substituted limited
partner of the Partnership in respect of the transferred Common Units
upon the consent of the Managing General Partner and the recordation
of the name of the assignee on the books and records of the
Partnership. Such consent may be withheld in the sole discretion of
the Managing General Partner.
Common Units are securities and are transferable according to the
laws governing transfer of securities. In addition to other rights
acquired upon transfer, the transferor gives the transferee the right
to request admission as a substituted limited partner in the
Partnership in respect of the transferred Common Units. A person
acquiring 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 person
acquiring Common Units who does not execute and deliver a Transfer
Application will not receive cash distributions or federal income tax
allocations unless the Common Units are held in a nominee or "street
name" account and the nominee or broker has executed and delivered a
Transfer Application with respect to such Common Units, and may not
receive certain federal income tax information or reports furnished to
record holders of Common Units. The transferor of Common Units will
have a duty to provide such transferee with all information that may
be necessary to obtain registration of the transfer of the Common
Units, but a transferee agrees, by acceptance of the certificate
representing Common Units, that the transferor will not have a duty to
insure the execution of the Transfer Application by the transferee and
will have no liability or responsibility if such transferee neglects
to or chooses not to execute and forward the Transfer Application to
the Transfer Agent. See "The Partnership Agreement - Status as
Limited Partner or Assignee."
THE PARTNERSHIP AGREEMENT
The following paragraphs are a summary of the material provisions
of the Partnership Agreement. The Partnership Agreement for the
Partnership and the Partnership Agreement for the Operating
Partnership (the "Operating Partnership Agreement") are exhibits to
the Registration Statement of which this Prospectus constitutes a
part. The Partnership will provide prospective investors with a copy
of the Partnership Agreement and the Operating Partnership Agreement
<PAGE> 160
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 is the
sole limited partner of the Operating Partnership, which owns, manages
and operates the Partnership's business. The General Partners serve
as the general partners of the Partnership and of the Operating
Partnership, owning an aggregate 2% general partner interest in the
Partnership and the Operating Partnership on a combined basis. The
Managing General Partner manages and operates the Partnership, and the
Special General Partner has no duty or right to participate in the
management or operation of the Partnership. Unless the context
otherwise requires, references herein to the "Partnership Agreement"
constitute references to the Partnership Agreement and the Operating
Partnership Agreement, collectively.
Certain provisions of the Partnership Agreement are summarized
elsewhere in this Prospectus under various headings. With regard to
the transfer of Common Units, see "Description of the Common Units -
Transfer of Common Units." With regard to distributions of Available
Cash, see "Cash Distribution Policy." With regard to allocations of
taxable income and taxable loss, see "Tax Considerations." Prospective
investors are urged to review these sections of this Prospectus and
the Partnership Agreement carefully.
ORGANIZATION AND DURATION
The Partnership and the Operating Partnership were organized in
October 1996 and November 1996, respectively, as Delaware limited
partnerships. The General Partners are the general partners of the
Partnership and the Operating Partnership. The General Partners own
an aggregate 2% interest as general partners and the right to receive
Incentive Distributions, and the Unitholders (including the General
Partners as holders of Subordinated Units) 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 the IPO,
(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
<PAGE> 161
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 made to
the Partnership, see "The IPO and Related Transactions." The
Unitholders are not obligated to make additional capital contributions
to the Partnership, except as described below under "- Limited
Liability."
LIMITED LIABILITY
Assuming that a Limited Partner does not participate in the
control of the business of the Partnership within the meaning of the
Delaware Act and that he otherwise acts in conformity with the
provisions of the Partnership Agreement, his liability under the
Delaware Act will be limited, subject to certain possible exceptions,
to the amount of capital he is obligated to contribute to the
Partnership in respect of his Common Units plus his share of any
undistributed profits and assets of the Partnership. If it were
determined, however, that the right or exercise of the right by the
Limited Partners as a group to remove or replace the General Partners,
to approve certain amendments to the Partnership Agreement or to take
other action pursuant to the Partnership Agreement constituted
"participation in the control" of the Partnership's business for the
purposes of the Delaware Act, then a Limited Partner 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.
<PAGE> 162
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 Operating Partnership currently conducts 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.
<PAGE> 163
ISSUANCE OF ADDITIONAL SECURITIES
The Partnership Agreement authorizes the Partnership to issue an
unlimited number of additional limited partner interests and other
equity securities of the Partnership for such consideration and on
such terms and conditions as are established by the Managing General
Partner in its sole discretion without the approval of any limited
partners; provided that, during the Subordination Period, except as
provided in clauses (i) and (ii) below, the Partnership may not issue
equity securities of the Partnership ranking prior or senior to the
Common Units or an aggregate of more than 4,270,000 additional Common
Units (excluding Common Units issued upon conversion of Subordinated
Units, upon conversion of the general partner interests and Incentive
Distribution Rights as a result of a withdrawal of a General Partner,
and pursuant to the employee benefit plans of the Managing General
Partner, the Partnership or other members of the Partnership Group and
subject to adjustment in the event of a combination or subdivision of
Common Units) or an equivalent number of securities ranking on a
parity with the Common Units without the approval of the holders of at
least a Unit Majority. During the Subordination Period, the
Partnership may also issue an unlimited number of additional Common
Units or parity securities without the approval of the Unitholders (i)
if such issuance occurs (A) in connection with an Acquisition or a
Capital Improvement or (B) within 365 days of, and the net proceeds
from such issuance are used to repay debt incurred in connection with,
an Acquisition or a Capital Improvement, in each case where such
Acquisition or Capital Improvement involves assets that, if acquired
by the Partnership as of the date that is one year prior to the first
day of the quarter in which such transaction is to be effected, would
have resulted in an increase in (1) the amount of Adjusted Operating
Surplus generated by the Partnership on a per-Unit basis (for all
outstanding Units) with respect to each of the four most recently
completed quarters (on a pro forma basis) as compared to (2) the
actual amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all outstanding Units) (excluding
Adjusted Operating Surplus attributable to the Acquisition or Capital
Improvement) with respect to each of such four most recently completed
quarters (provided that if the issuance of Units with respect to an
Acquisition or Capital Improvement occurs within the first four full
quarters after the closing of the IPO, 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 the IPO for which actual results of operations are
available, based on the actual Adjusted Operating Surplus of the
Partnership generated with respect to such quarter and (B) for each
other quarter, on a pro forma basis not inconsistent with the
procedures, as applicable, set forth in "Cash Available for
Distribution" (which Units may include all or a portion of the Common
Units offered hereby); or (ii) if the proceeds from such issuance are
used exclusively to repay up to $75.0 million in indebtedness of a
member of the Partnership Group, in each case only where the aggregate
amount of distributions that would have been paid with respect to such
<PAGE> 164
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, the General
Partners will be required to make additional capital contributions to
the extent necessary to maintain their 2% general partner interest in
the Partnership and the 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 do not have
preemptive rights to acquire additional Common Units or other
partnership interests that may be issued by the Partnership.
AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed only by
or with the consent of the Managing General Partner, which consent may
be given or withheld in its sole discretion. In order to adopt a
proposed amendment (other than certain amendments discussed below),
the Managing General Partner is required to seek written approval of
the holders of the number of Units required to approve such amendment
or call a meeting of the Limited Partners to consider and vote upon
the proposed amendment, except as described below. Proposed
amendments (unless otherwise specified) must be approved by holders of
a Unit Majority, except that no amendment may be made which would
(i) enlarge the obligations of any Limited Partner without its
consent, unless approved by at least a majority of the type or class
of Units so affected, (ii) enlarge the obligations of, restrict in any
way any action by or rights of, or reduce in any way the amounts
distributable, reimbursable or otherwise payable by the Partnership to
the Managing General Partner or any of its affiliates without its
<PAGE> 165
consent, which may be given or withheld in its sole discretion,
(iii) change the term of the Partnership, (iv) provide that the
Partnership is not dissolved upon the expiration of its term or upon
an election to dissolve the Partnership by the Managing General
Partner that is approved by holders of a Unit Majority or (v) give any
person the right to dissolve the Partnership other than the Managing
General Partner's right to dissolve the Partnership with the approval
of holders of a Unit Majority.
The Managing General Partner may generally make amendments to the
Partnership Agreement without the approval of any Partner or assignee
to reflect (i) a change in the name of the Partnership, the location
of the principal place of business of the Partnership, the registered
agent or the registered office of the Partnership, (ii) admission,
substitution, withdrawal or removal of partners in accordance with the
Partnership Agreement, (iii) a change that, in the discretion of the
Managing General Partner, is necessary or advisable to qualify or
continue the qualification of the Partnership as a limited partnership
or a partnership in which the Limited Partners have limited liability
under the laws of any state or to ensure that neither the Partnership
nor the Operating Partnership will be treated as an association
taxable as a corporation or otherwise taxed as an entity for federal
income tax purposes, (iv) an amendment that is necessary, in the
opinion of counsel to the Partnership, to prevent the Partnership, or
the General Partners or their directors, officers, agents or trustees,
from in any manner being subjected to the provisions of the Investment
Company Act of 1940, as amended, the Investment Advisors Act of 1940,
as amended, or "plan asset" regulations adopted under the Employee
Retirement Income Security Act of 1974, as amended, whether or not
substantially similar to plan asset regulations currently applied or
proposed, (v) subject to the limitations on the issuance of additional
Common Units or other limited or general partner interests described
above, an amendment that in the discretion of the Managing General
Partner is necessary or advisable in connection with the authorization
of additional limited or general partner interests, (vi) any amendment
expressly permitted in the Partnership Agreement to be made by the
Managing General Partner acting alone, (vii) an amendment effected,
necessitated or contemplated by a merger agreement that has been
approved pursuant to the terms of the Partnership Agreement,
(viii) any amendment that, in the discretion of the Managing General
Partner, is necessary or advisable in connection with the formation by
the Partnership of, or its investment in, any corporation, partnership
or other entity (other than the Operating Partnership) as otherwise
permitted by the Partnership Agreement, (ix) a change in the fiscal
year and/or taxable year of the Partnership and changes related
thereto, and (x) any other amendments substantially similar to any of
the foregoing.
In addition to the Managing General Partner's right to amend the
Partnership Agreement as described above, the Managing General Partner
may make amendments to the Partnership Agreement without the approval
of any Partner or assignee if such amendments, in the discretion of
<PAGE> 166
the Managing General Partner, (i) do not adversely affect the Limited
Partners in any material respect, (ii) are necessary or advisable to
satisfy any requirements, conditions or guidelines contained in any
opinion, directive, order, ruling or regulation of any federal or
state agency or judicial authority or contained in any federal or
state statute, (iii) are necessary or advisable to facilitate the
trading of the Common Units (including the division of any class or
classes of outstanding Partnership Securities into different classes
to facilitate uniformity of tax consequences within such classes of
Partnership Securities) or to comply with any rule, regulation,
guideline or requirement of any securities exchange on which the
Common Units are or will be listed for trading, compliance with any of
which the Managing General Partner deems to be in the best interests
of the Partnership and the Limited Partners, (iv) are necessary or
advisable in connection with any action taken by the Managing General
Partner relating to splits or combinations of Units pursuant to the
provisions of the Partnership Agreement or (v) are required to effect
the intent expressed in this Prospectus or the intent of the
Partnership Agreement or contemplated by the Partnership Agreement.
The Managing General Partner will not be required to obtain an
Opinion of Counsel (as defined below) in the event of the amendments
described in the two immediately preceding paragraphs. No other
amendments to the Partnership Agreement will become effective without
the approval of holders of at least 90% of the Units unless the
Partnership obtains an Opinion of Counsel to the effect that such
amendment will not affect the limited liability under applicable law
of any limited partner in the Partnership or the limited partner of
the Operating Partnership.
Any amendment that would have a material adverse effect on the
rights or preferences of any type or class of outstanding Units in
relation to other classes of Units will require the approval of at
least a majority of the type or class of Units so affected. Any
amendment that reduces the voting percentage required to take any
action is required to be approved by the affirmative vote of limited
partners constituting not less than the voting requirement sought to
be reduced.
MERGER, SALE OR OTHER DISPOSITION OF ASSETS
The Managing General Partner is generally prohibited, without the
prior approval of holders of a Unit Majority, from causing the
Partnership to, among other things, sell, exchange or otherwise
dispose of all or substantially all of its assets in a single
transaction or a series of related transactions (including by way of
merger, consolidation or other combination) or approving on behalf of
the Partnership the sale, exchange or other disposition of all or
substantially all of the assets of the Operating Partnership; provided
that the Managing General Partner may mortgage, pledge, hypothecate or
grant a security interest in all or substantially all of the
Partnership's assets without such approval. The Managing General
<PAGE> 167
Partner may also sell all or substantially all of the Partnership's
assets pursuant to a foreclosure or other realization upon the
foregoing encumbrances without such approval. Furthermore, provided
that certain conditions are satisfied, the Managing General Partner
may merge the Partnership or any member of the Partnership Group into,
or convey some or all of the Partnership Group's assets to, a newly
formed entity if the sole purpose of such merger or conveyance is to
effect a mere change in the legal form of the Partnership into another
limited liability entity. The Unitholders are not entitled to
dissenters' rights of appraisal under the Partnership Agreement or
applicable Delaware law in the event of a merger or consolidation of
the Partnership, a sale of substantially all of the Partnership's
assets or any other transaction or event.
TERMINATION AND DISSOLUTION
The Partnership will continue until December 31, 2086, unless
sooner terminated pursuant to the Partnership Agreement. The
Partnership will be dissolved upon (i) the election of the Managing
General Partner to dissolve the Partnership, if approved by the
holders of a Unit Majority, (ii) the sale, exchange or other
disposition of all or substantially all of the assets and properties
of the Partnership and the Operating Partnership, (iii) the entry of a
decree of judicial dissolution of the Partnership or (iv) the
withdrawal or removal of the Managing General Partner or any other
event that results in its ceasing to be the Managing General Partner
(other than by reason of a transfer of its general partner interest in
accordance with the Partnership Agreement or withdrawal or removal
following approval and admission of a successor). Upon a dissolution
pursuant to clause (iv), the holders of a Unit Majority may also
elect, within certain time limitations, to reconstitute the
Partnership and continue its business on the same terms and conditions
set forth in the Partnership Agreement by forming a new limited
partnership on terms identical to those set forth in the Partnership
Agreement and having as general partner an entity approved by the
holders of a Unit Majority subject to receipt by the Partnership of an
opinion of counsel to the effect that (x) such action would not result
in the loss of limited liability of any Limited Partner and
(y) neither the Partnership, the reconstituted limited partnership nor
the Operating Partnership would be treated as an association taxable
as a corporation or otherwise be taxable as an entity for federal
income tax purposes upon the exercise of such right to continue
(hereinafter, an "Opinion of Counsel").
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon dissolution of the Partnership, unless the Partnership is
reconstituted and continued as a new limited partnership, the person
authorized to wind up the affairs of the Partnership (the
"Liquidator") will, acting with all of the powers of the Managing
General Partner that such Liquidator deems necessary or desirable in
its good faith judgment in connection therewith, liquidate the
<PAGE> 168
Partnership's assets and apply the proceeds of the liquidation as
provided in "Cash Distribution Policy - Distributions of Cash Upon
Liquidation." Under certain circumstances and subject to certain
limitations, the Liquidator may defer liquidation or distribution of
the Partnership's assets for a reasonable period of time or distribute
assets to partners in kind if it determines that a sale would be
impractical or would cause undue loss to the partners.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNERS
The Managing General Partner has agreed not to withdraw
voluntarily as a general partner of the Partnership and the Operating
Partnership prior to December 31, 2006 (with limited exceptions
described below), without obtaining the approval of the holders of a
Unit Majority and furnishing an Opinion of Counsel. On or after
December 31, 2006, the Managing General Partner may withdraw as the
Managing General Partner (without first obtaining approval from any
Unitholder) by giving 90 days' written notice, and such withdrawal
will not constitute a violation of the Partnership Agreement.
Notwithstanding the foregoing, the Managing General Partner may
withdraw without Unitholder approval upon 90 days' notice to the
Limited Partners if at least 50% of the outstanding Common Units are
held or controlled by one person and its affiliates (other than the
Managing General Partner and its affiliates). In addition, the
Partnership Agreement permits the General Partners (in certain limited
instances) to sell or otherwise transfer all of their general partner
interests in the Partnership without the approval of the Unitholders.
See "- Transfer of General Partners' Interests."
Upon the withdrawal of the Managing General Partner under any
circumstances (other than as a result of a transfer by the Managing
General Partner of all or a part of its general partner interests in
the Partnership), the holders of a Unit Majority may select a
successor to such withdrawing Managing General Partner. If such a
successor is not elected, or is elected but an Opinion of Counsel
cannot be obtained, the Partnership will be dissolved, wound up and
liquidated, unless within 180 days after such withdrawal the holders
of a Unit Majority agree in writing to continue the business of the
Partnership and to appoint a successor Managing General Partner. See
"- Termination and Dissolution."
The Managing General Partner may not be removed unless such
removal is approved by the vote of the holders of not less than
66-2/3% of the outstanding Units (including Units held by the General
Partners and their affiliates) and the Partnership receives an Opinion
of Counsel. The ownership of the Subordinated Units by the Managing
General Partner and its affiliates effectively gives the Managing
General Partner the ability to prevent its removal. Any such removal
is also subject to the approval of a successor general partner by the
vote of the holders of not less than a Unit Majority. The Partnership
Agreement also provides that if the Managing General Partner is
removed as general partner of the Partnership under circumstances
<PAGE> 169
where Cause does not exist and Units held by the General Partners and
their affiliates are not voted in favor of such removal (i) the
Subordination Period will end and all outstanding Subordinated Units
will immediately convert into Common Units on a one-for-one basis,
(ii) any existing Common Unit Arrearages will be extinguished and
(iii) the General Partners will have the right to convert their
partner interests (and all the Incentive Distribution Rights) into
Common Units or to receive cash in exchange for such interests.
Withdrawal or removal of the Managing General Partner as a
general partner of the Partnership also constitutes withdrawal or
removal, as the case may be, of the Managing General Partner as a
general partner of the Operating Partnership. Any withdrawal or
removal of the Managing General Partner will result in the
simultaneous withdrawal or removal of the Special General Partner from
the Partnership and the Operating Partnership.
In the event of removal of the General Partners under
circumstances where Cause exists or withdrawal of the General Partners
where such withdrawal violates the Partnership Agreement, a successor
general partner will have the option to purchase the general partner
interests and Incentive Distribution Rights of the departing General
Partners (the "Departing Partners") in the Partnership and the
Operating Partnership for a cash payment equal to the fair market
value of such interests. Under all other circumstances where the
General Partners withdraw or are removed by the Limited Partners, the
Departing Partners will have the option to require the successor
general partner to purchase such general partner interest of the
Departing Partners and their Incentive Distribution Rights for such
amount. In each case, such fair market value will be determined by
agreement between the Departing Partners and the successor general
partner, or if no agreement is reached, by an independent investment
banking firm or other independent expert selected by the Departing
Partners and the successor general partner (or if no expert can be
agreed upon, by an expert chosen by agreement of the experts selected
by each of them). In addition, the Partnership will be required to
reimburse the Departing Partners for all amounts due the Departing
Partners, including, without limitation, all employee-related
liabilities, including severance liabilities, incurred in connection
with the termination of any employees employed by the Departing
Partners for the benefit of the Partnership.
If the above-described option is not exercised by either the
Departing Partners or the successor general partner, as applicable,
the Departing Partners' general partner interests in the Partnership
and the Operating Partnership and their Incentive Distribution Rights
will be converted into Common Units equal to the fair market value of
such interests as determined by an investment banking firm or other
independent expert selected in the manner described in the preceding
paragraph.
<PAGE> 170
TRANSFER OF GENERAL PARTNERS' INTERESTS AND INCENTIVE DISTRIBUTION
RIGHTS
Except for a transfer by a General Partner of all, but not less
than all, of its general partner interest in the Partnership and the
Operating Partnership to (a) an affiliate of such General Partner or
(b) another person in connection with the merger or consolidation of
such General Partner with or into another person or the transfer by
such General Partner of all or substantially all of its assets to
another person, such General Partner may not transfer all or any part
of its general partner interest in the Partnership and the Operating
Partnership to another person prior to December 31, 2006, without the
approval of the holders of at least a Unit Majority; provided that, in
each case, such transferee assumes the rights and duties of such
General Partner to whose interest such transferee has succeeded,
agrees to be bound by the provisions of the Partnership Agreement,
furnishes an Opinion of Counsel and agrees to acquire all (or the
appropriate portion thereof, as applicable) of such General Partner's
interest in the Operating Partnership and agrees to be bound by the
provisions of the Operating Partnership Agreement. The Special
General Partner cannot transfer its general partner interest in the
Partnership and the Operating Partnership without the approval of the
Managing General Partner. The General Partners shall have the right
at any time, however, to transfer their Subordinated Units to one or
more persons without Unitholder approval. At any time, the
stockholders of the General Partners may sell or transfer all or part
of their interest in the General Partners to an affiliate or a third
party without the approval of the Unitholders. Each General Partner
or its affiliates or a subsequent holder may transfer its Incentive
Distribution Rights to another person in connection with its merger or
consolidation with or into, or sale of all or substantially all of its
assets to, such person without the prior approval of the Unitholders.
Holders of Incentive Distribution Rights may also transfer such rights
to their affiliates without the prior approval of the Unitholders.
Prior to December 31, 2006, other transfers of the Incentive
Distribution Rights will require the affirmative vote of holders of at
least a Unit Majority. On or after December 31, 2006, the Incentive
Distribution Rights will be freely transferable.
CHANGE OF MANAGEMENT PROVISIONS
The Partnership Agreement contains certain provisions that are
intended to discourage a person or group from attempting to remove the
Managing General Partner as general partner of the Partnership or
otherwise change the management of the Partnership. If any person or
group other than the Managing General Partner and its affiliates
acquires beneficial ownership of 20% or more of any class of Units,
such person or group loses voting rights with respect to all of its
Units. The Partnership Agreement also provides that if the Managing
General Partner is removed as a general partner of the Partnership
under circumstances where Cause does not exist and Units held by the
General Partners and their affiliates are not voted in favor of such
<PAGE> 171
removal, (i) the Subordination Period will end and all outstanding
Subordinated Units will immediately convert into Common Units on a
one-for-one basis, (ii) any existing Common Unit Arrearages will be
extinguished and (iii) the General Partners will have the right to
convert their partner interests (and all of their Incentive
Distribution Rights) into Common Units or to receive cash in exchange
for such interests.
LIMITED CALL RIGHT
If at any time not more than 20% of the then-issued and
outstanding limited partner interests of any class (including Common
Units) are held by persons other than the Managing General Partner and
its affiliates, the Managing General Partner will have the right,
which it may assign in whole or in part to any of its affiliates or to
the Partnership, to acquire all, but not less than all, of the
remaining limited partner interests of such class held by such
unaffiliated persons as of a record date to be selected by the
Managing General Partner, on at least 10 but not more than 60 days'
notice. The purchase price in the event of such a purchase shall be
the greater of (i) the highest price paid by the Managing General
Partner or any of its affiliates for any limited partner interests of
such class purchased within the 90 days preceding the date on which
the Managing General Partner first mails notice of its election to
purchase such limited partner interests, and (ii) the Current Market
Price as of the date three days prior to the date such notice is
mailed. As a consequence of the Managing General Partner's right to
purchase outstanding limited partner interests, a holder of limited
partner interests may have his limited partner interests purchased
even though he may not desire to sell them, or the price paid may be
less than the amount the holder would desire to receive upon the sale
of his limited partner interests. The tax consequences to a
Unitholder of the exercise of this call right are the same as a sale
by such Unitholder of his Common Units in the market. See "Tax
Considerations - Disposition of Common Units."
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
<PAGE> 172
Partner on behalf of Non-citizen Assignees (as defined below), the
Managing General Partner shall distribute the votes in respect of such
Common Units in the same ratios as the votes of partners in respect of
other Units are cast).
The Managing General Partner does not anticipate that any meeting
of Unitholders will be called in the foreseeable future. Any action
that is required or permitted to be taken by the Unitholders may be
taken either at a meeting of the Unitholders or without a meeting if
consents in writing setting forth the action so taken are signed by
holders of such number of Units as would be necessary to authorize or
take such action at a meeting of all of the Unitholders. Meetings of
the Unitholders of the Partnership may be called by the Managing
General Partner or by Unitholders owning at least 20% of the
outstanding Units of the class for which a meeting is proposed.
Unitholders may vote either in person or by proxy at meetings. The
holders of a majority of the outstanding Units of the class or classes
for which a meeting has been called represented in person or by proxy
shall constitute a quorum at a meeting of Unitholders of such class or
classes, unless any such action by the Unitholders requires approval
by holders of a greater percentage of such Units, in which case the
quorum shall be such greater percentage.
Each record holder of a Unit has a vote according to his
percentage interest in the Partnership, although additional limited
partner interests having special voting rights could be issued by the
Partnership. See "- Issuance of Additional Securities." However, if
at any time any person or group (other than the Managing General
Partner and its affiliates) acquires, in the aggregate, beneficial
ownership of 20% or more of any class of Units then outstanding, such
person or group will lose voting rights with respect to all of its
Units and such Units may not be voted on any matter and will not be
considered to be outstanding when sending notices of a meeting of
Unitholders, calculating required votes, determining the presence of a
quorum or for other similar Partnership purposes. The Partnership
Agreement provides that Common Units held in nominee or street name
account will be voted by the broker (or other nominee) pursuant to the
instruction of the beneficial owner unless the arrangement between the
beneficial owner and his nominee provides otherwise. Except as
otherwise provided in the Partnership Agreement, Subordinated Units
will vote together with Common Units as a single class.
Any notice, demand, request, report or proxy material required or
permitted to be given or made to record holders of Common Units
(whether or not such record holder has been admitted as a limited
partner) under the terms of the Partnership Agreement will be
delivered to the record holder by the Partnership or by the Transfer
Agent at the request of the Partnership.
<PAGE> 173
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
Managing General Partner, create a substantial risk of cancellation or
forfeiture of any property in which the Partnership has an interest
because of the nationality, citizenship or other related status of any
Limited Partner or assignee, the Partnership may redeem the Units held
by such Limited Partner or assignee at their Current Market Price (as
defined in the Glossary). In order to avoid any such cancellation or
forfeiture, the Managing General Partner may require each Limited
Partner or assignee to furnish information about his nationality,
citizenship or related status. If a Limited Partner or assignee fails
to furnish information about such nationality, citizenship or other
related status within 30 days after a request for such information or
the Managing General Partner determines after receipt of such
information that the Limited Partner or assignee is not an eligible
citizen, such Limited Partner or assignee may be treated as a
non-citizen assignee ("Non-citizen Assignee"). In addition to other
limitations on the rights of an assignee who is not a substituted
Limited Partner, a Non-citizen Assignee does not have the right to
direct the voting of his Units and may not receive distributions in
kind upon liquidation of the Partnership.
INDEMNIFICATION
The Partnership Agreement provides that the Partnership will
indemnify the General Partners, any Departing Partner, any Person who
is or was an affiliate of a General Partner or any Departing Partner,
any Person who is or was a member, partner, officer, director,
<PAGE> 174
employee, agent or trustee of a General Partner or any Departing
Partner or any affiliate of a General Partner or any Departing
Partner, or any Person who is or was serving at the request of a
General Partner or any Departing Partner or any affiliate of any such
person, any affiliate of a General Partner or any Departing Partner as
an officer, director, employee, member, partner, agent, fiduciary or
trustee of another Person ("Indemnitees"), to the fullest extent
permitted by law, from and against any and all losses, claims,
damages, liabilities (joint or several), expenses (including, without
limitation, legal fees and expenses), judgments, fines, penalties,
interest, settlements and other amounts arising from any and all
claims, demands, actions, suits or proceedings, whether civil,
criminal, administrative or investigative, in which any Indemnitee may
be involved, or is threatened to be involved, as a party or otherwise,
by reason of its status as an Indemnitee; provided that in each case
the Indemnitee acted in good faith and in a manner that such
Indemnitee reasonably believed to be in or not opposed to the best
interests of the Partnership and, with respect to any criminal
proceeding, had no reasonable cause to believe its conduct was
unlawful. Any indemnification under these provisions will be only out
of the assets of the Partnership, and the General Partners shall not
be personally liable for, or have any obligation to contribute or loan
funds or assets to the Partnership to enable it to effectuate, such
indemnification. The Partnership is authorized to purchase (or to
reimburse the General Partners or their affiliates for the cost of)
insurance against liabilities asserted against and expenses incurred
by such persons in connection with the Partnership's activities,
regardless of whether the Partnership would have the power to
indemnify such person against such liabilities under the provisions
described above.
BOOKS AND REPORTS
The Managing General Partner is required to keep appropriate
books of the business of the Partnership at the principal offices of
the Partnership. The books will be maintained for both tax and
financial reporting purposes on an accrual basis. For tax purposes,
the fiscal year of the Partnership is the calendar year. For
financial reporting purposes, however, the fiscal year of the
Partnership is a fiscal year ending on June 30.
As soon as practicable, but in no event later than 120 days after
the close of each fiscal year, the Managing General Partner will
furnish or make available to each record holder of Units (as of a
record date selected by the Managing General Partner) an annual report
containing audited financial statements of the Partnership for the
past fiscal year, prepared in accordance with generally accepted
accounting principles. As soon as practicable, but in no event later
than 90 days after the close of each quarter (except the last quarter
of each fiscal year), the Managing General Partner will furnish or
make available to each record holder of Units (as of a record date
selected by the Managing General Partner) a report containing
<PAGE> 175
unaudited financial statements of the Partnership with respect to such
quarter and such other information as may be required by law.
The Partnership will furnish each record holder of a Unit
information reasonably required for tax reporting purposes within 90
days after the close of each calendar year. Such information is
expected to be furnished in summary form so that certain complex
calculations normally required of partners can be avoided. The
Partnership's ability to furnish such summary information to
Unitholders will depend on the cooperation of such Unitholders in
supplying certain information to the Partnership. Every Unitholder
(without regard to whether he supplies such information to the
Partnership) will receive information to assist him in determining his
federal and state tax liability and filing his federal and state
income tax returns.
RIGHT TO INSPECT PARTNERSHIP BOOKS AND RECORDS
The Partnership Agreement provides that a Limited Partner can for
a purpose reasonably related to such Limited Partner's interest as a
limited partner, upon reasonable demand and at his own expense, have
furnished to him (i) a current list of the name and last known address
of each partner, (ii) a copy of the Partnership's tax returns, (iii)
information as to the amount of cash, and a description and statement
of the agreed value of any other property or services, contributed or
to be contributed by each partner and the date on which each became a
partner, (iv) copies of the Partnership Agreement, the certificate of
limited partnership of the Partnership, amendments thereto and powers
of attorney pursuant to which the same have been executed,
(v) information regarding the status of the Partnership's business and
financial condition, and (vi) such other information regarding the
affairs of the Partnership as is just and reasonable. The Partnership
may, and intends to, keep confidential from the Limited Partners trade
secrets or other information the disclosure of which the Partnership
believes in good faith is not in the best interests of the Partnership
or which the Partnership is required by law or by agreements with
third parties to keep confidential.
REGISTRATION RIGHTS
Pursuant to the terms of the Partnership Agreement and subject to
certain limitations described therein, the Partnership has agreed to
register for resale under the Securities Act and applicable state
securities laws any Common Units or other securities of the
Partnership (including Subordinated Units) proposed to be sold by the
General Partners or any of their affiliates if an exemption from such
registration requirements is not otherwise available for such proposed
transaction. The Partnership is obligated to pay all expenses
incidental to such registration, excluding underwriting discounts and
commissions. See "Units Eligible for Future Sale."
<PAGE> 176
UNITS ELIGIBLE FOR FUTURE SALE
The General Partners holds an aggregate of 6,597,619 Subordinated
Units (all of which will convert into Common Units at the end of the
Subordination Period and some of which may convert earlier). See
"Cash Distribution Policy - Distributions from Operating Surplus
during Subordination Period." The sale of these Units could have an
adverse impact on the price of the Common Units or on any trading
market that may develop. For a discussion of the transactions whereby
the General Partners acquired the Subordinated Units in connection
with the organization of the Partnership, see "The IPO and Related
Transactions."
The Common Units offered hereby will generally be freely
transferable without restriction or further registration under the
Securities Act, except that any Common Units owned by an "affiliate"
of the Partnership (as that term is defined in the rules and
regulations under the Securities Act) may not be resold publicly
except in compliance with the registration requirements of the
Securities Act or pursuant to an exemption therefrom under Rule 144
thereunder ("Rule 144") or otherwise. Rule 144 permits securities
acquired by an affiliate of the issuer in a public offering to be sold
into the market in an amount that does not exceed, during any
three-month period, the greater of (i) 1% of the total number of such
securities outstanding or (ii) the average weekly reported trading
volume of the Common Units for the four calendar weeks prior to such
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Partnership. A person who is not deemed to have
been an affiliate of the Partnership at any time during the three
months preceding a sale, and who has beneficially owned his Common
Units for at least two years, would be entitled to sell such Common
Units under Rule 144 without regard to the public information
requirements, volume limitations, manner of sale provisions or notice
requirements of Rule 144.
Prior to the end of the Subordination Period, the Partnership may
not issue equity securities of the Partnership ranking prior or senior
to the Common Units or an aggregate of more than 4,270,000 additional
Common Units (excluding Common Units issued upon conversion of
Subordinated Units, pursuant to the employee benefit plans of the
Managing General Partner, the Partnership or other members of the
Partnership Group, or in connection with certain acquisitions (which
Units may include all or a portion of the 1,000,000 Common Units
offered hereby) or capital improvements or the repayment of certain
indebtedness and subject to adjustment in the event of a combination
or subdivision of the Common Units), or an equivalent amount of
securities ranking on a parity with the Common Units, without the
approval of the holders of at least a Unit Majority. The Partnership
Agreement provides that, after the Subordination Period, the
Partnership may issue an unlimited number of limited partner interests
of any type without a vote of the Unitholders. The Partnership
<PAGE> 177
Agreement does not impose any restriction on the Partnership's ability
to issue equity securities ranking junior to the Common Units at any
time. Any issuance of additional Common Units or certain other equity
securities would result in a corresponding decrease in the
proportionate ownership interest in the Partnership represented by,
and could adversely affect the cash distributions to and market price
of, Common Units then outstanding. See "The Partnership Agreement -
Issuance of Additional Securities."
Authorized but unissued Common Units with an aggregate value of
$12.5 million (valued at the initial offering price in the IPO) are
available for issuance to executives, officers and directors of the
Managing General Partner pursuant to the Restricted Unit Plan. Common
Units will be issued upon vesting in accordance with the terms and
conditions of the Restricted Unit Plan. Common Units with an
aggregate value of $8.3 million have been allocated and the remaining
Common Units available under the Restricted Unit Plan may be allocated
or issued in the future to such participants, and subject to such
terms and conditions, as the Board of Directors of the Managing
General Partner, or a committee thereof, shall determine. See
"Management-Executive Compensation-Restricted Unit Plan.
Pursuant to the Partnership Agreement, the General Partners and
their affiliates will have the right, upon the terms and subject to
the conditions therein, to cause the Partnership to register under the
Securities Act and state laws the offer and sale of any Units or other
Partnership Securities that they hold. Subject to the terms and
conditions of the Partnership Agreement, such registration rights
allow the General Partners and their affiliates or their assignees
holding any Units to require registration of any such Units and to
include any such Units in a registration by the Partnership of other
Units, including Units offered by the Partnership or by any
Unitholder. Such registration rights will continue in effect for two
years following any withdrawal or removal of the Managing General
Partner as a general partner of the Partnership. In connection with
any such registration, the Partnership will indemnify each Unitholder
participating in such registration and its officers, directors and
controlling persons from and against any liabilities under the
Securities Act or any state securities laws arising from the
registration statement or 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.
PLAN OF DISTRIBUTION
This Prospectus may be used by the Partnership for the offer and
sale of up to 1,000,000 Common Units from time to time in connection
with the acquisition of other businesses, properties or securities in
business combination transactions. The consideration offered by the
Partnership in such acquisitions, in addition to any Common Units
offered by this Prospectus, may include assets, debt or other
<PAGE> 178
securities (which may be convertible into Common Units covered by this
Prospectus), or assumption by the Partnership of liabilities of the
business being acquired, or a combination thereof. The terms of
acquisitions are typically determined by negotiations between the
Partnership and the owners of the businesses, properties or securities
to be acquired, with the Partnership taking into account the quality
of management, the past and potential earning power and growth of the
businesses, properties or securities to be acquired, and other
relevant factors. Common Units issued to the owners of the
businesses, properties or securities to be acquired are generally
valued at a price reasonably related to the market value of the Common
Units either at the time the terms of the acquisition are tentatively
agreed upon or at or about the time or times of delivery of the Common
Units.
TAX CONSIDERATIONS
This section is a summary of material tax considerations that may
be relevant to prospective Unitholders and, to the extent set forth
below under "-Legal Opinions and Advice," expresses the opinion of
Schiff Hardin & Waite, counsel to the General Partners and the
Partnership ("Counsel"), insofar as it relates to matters of law and
legal conclusions. This section is based upon current provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), existing
and proposed regulations thereunder and current administrative rulings
and court decisions including modifications made by the Taxpayer
Relief Act of 1997 (the "Act"), all of which are subject to change.
Subsequent changes in such authorities may cause the tax consequences
to vary substantially from the consequences described below. Unless
the context otherwise requires, references in this section to the
Partnership are references to both the Partnership and the Operating
Partnership.
No attempt has been made in the following discussion to comment
on all federal income tax matters affecting the Partnership or the
Unitholders. Moreover, the discussion focuses on Unitholders who are
individual citizens or residents of the United States and has only
limited application to corporations, estates, trusts, non-resident
aliens or other Unitholders subject to specialized tax treatment (such
as tax-exempt institutions, foreign persons, individual retirement
accounts, REITs or mutual funds). Accordingly, each prospective
Unitholder should consult, and should depend on, his own tax advisor
in analyzing the federal, state, local and foreign tax consequences
peculiar to him of the ownership or disposition of Common Units.
LEGAL OPINIONS AND ADVICE
Counsel is of the opinion that, based on the representations and
subject to the qualifications set forth in the detailed discussion
that follows, for federal income tax purposes (i) the Partnership and
the Operating Partnership will each be treated as a partnership, and
<PAGE> 179
(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
acquisition, ownership and disposition of Common Units and, insofar as
it relates to matters of law and legal conclusions, addresses the
material tax consequences to Unitholders who are individual citizens
or residents of the United States.
No ruling has been or will be requested from the Internal Revenue
Service (the "IRS") with respect to classification of the Partnership
as a partnership for federal income tax purposes, whether the
Partnership's propane operations generate "qualifying income" under
Section 7704 of the Code or any other matter affecting the Partnership
or prospective Unitholders. An opinion of counsel represents only
that counsel's best legal judgment and does not bind the IRS or the
courts. Thus, no assurance can be provided that the opinions and
statements set forth herein would be sustained by a court if contested
by the IRS. Any such contest with the IRS may materially and
adversely impact the market for the Common Units and the prices at
which Common Units trade. In addition, the costs of any contest with
the IRS will be borne directly or indirectly by the Unitholders and
the General Partners. Furthermore, no assurance can be given that the
treatment of the Partnership or an investment therein will not be
significantly modified by future legislative or administrative changes
or court decisions. Any such modification may or may not be
retroactively applied.
For the reasons hereinafter described, Counsel has not rendered
an opinion with respect to the following specific federal income tax
issues: (i) the treatment of a Unitholder whose Common Units are
loaned to a short seller to cover a short sale of Common Units (see "-
Tax Treatment of Operations - Treatment of Short Sales"), (ii) whether
a Unitholder acquiring Common Units in separate transactions must
maintain a single aggregate adjusted tax basis in his Common Units
(see "- Disposition of Common Units - Recognition of Gain or Loss"),
(iii) whether the Partnership's monthly convention for allocating
taxable income and losses is permitted by existing Treasury
Regulations (see "- Disposition of Common Units - Allocations Between
Transferors and Transferees"), (iv) whether the Partnership's
convention for allocating recapture income and allocating all items of
income, gain, loss, deduction and credit for the period ending
December 31, 1996 to the General Partners will be recognized for
federal income tax purposes (see "- Allocation of Partnership Income,
Gain, Loss and Deduction"), and (v) whether the Partnership's method
<PAGE> 180
for depreciating Section 743 adjustments will be recognized for
federal income tax purposes (see "- Tax Treatment of Operations -
Section 754 Election").
TAX RATES
The top marginal income tax rate for individuals is 36% subject
to a 10% surtax on individuals with taxable income in excess of
$271,050 per year. The surtax is computed by applying a 39.6% rate to
taxable income in excess of the threshold. Long-term capital gains
recognized after July 28, 1997 on marketable securities such as Common
Units will be taxed at a maximum rate of 20% for individuals if the
individual's holding period is more than 18 months and a maximum rate
of 28% if the holding period is more than one year, but not more than
18 months.
CONSEQUENCES OF EXCHANGING PROPERTY FOR COMMON UNITS
RECOGNITION OF GAIN OR LOSS
In general, no gain or loss will be recognized for federal income
tax purposes by the Partnership or by a person (including any
individual, partnership, S corporation or corporation taxed under
Subchapter C of the Code) contributing property (including stock) to
the Partnership in exchange for Common Units. If the Partnership
assumes liabilities or takes assets subject to liabilities in
connection with a contribution of assets in exchange for Common Units,
however, the application of either one or both of two federal income
tax rules may result in the recognition of taxable gain by the
contributing person.
The first of these rules is the "disguised sale rule." Under the
disguised sale rule, if the Partnership assumes or takes property
subject to a liability of the contributing person other than a
"qualified liability," the Partnership is treated as transferring
taxable consideration to the contributing person to the extent that
the amount of the liability exceeds the contributing person's share of
that liability immediately after the Partnership assumes or takes
subject to the liability. For this purpose, a qualified liability
includes: (a) a liability that was incurred by the partner more than
two years prior to the earlier of the date the partner agrees in
writing to transfer the property or the date the partner transfers the
property to the Partnership and that has encumbered the transferred
property throughout that two-year period; (b) a liability that was not
incurred in anticipation of the transfer of the property to the
Partnership, but that was incurred by the partner within the two-year
period prior to the earlier of the date the partner agrees in writing
to transfer the property or the date the partner transfers the
property to the Partnership and that has encumbered the transferred
property since it was incurred; (c) a liability that is allocable
under the rules of Treasury Regulation Section 1.163-8T to capital
expenditures with respect to the property; or (d) a liability that was
<PAGE> 181
incurred in the ordinary course of the trade or business in which
property transferred to the Partnership was used or held but only if
all the assets related to that trade or business are transferred other
than assets that are not material to a continuation of the trade or
business. Assuming that any such liabilities are nonrecourse in
nature (no partner of the Partnership has any liability for failure to
pay), a contributing person's "share" of the liabilities will
generally equal his Percentage Interest in the Partnership multiplied
by the amount of such liabilities.
If the disguised sale rule applies to a contribution of assets in
exchange for Common Units, the person contributing assets will
recognize taxable gain in an amount equal to the amount of taxable
consideration determined as described above, minus a proportionate
share of the tax basis in the contributed assets.
The second rule under which a person contributing assets in
exchange for Common Units could recognize taxable gain is the
"distribution in excess of basis rule." Under this rule, a person
contributing assets to the Partnership will recognize gain if, and to
the extent that, the difference between the amount of such liabilities
and the contributing person's share of those liabilities (determined
under the principles of Section 752 of the Code) immediately following
the transfer of assets to the Partnership exceeds the tax basis of the
assets contributed.
Any such gain may be taxed as ordinary income or capital gains.
See "Disposition of Common Units" below.
ALLOCATIONS OF INCOME, DEPRECIATION AND AMORTIZATION
As required by Section 704(c) of the Code, certain items of
Partnership income, deduction, gain and loss will be specially
allocated to account for the difference between the tax basis and fair
market value of property contributed to the Partnership in exchange
for Common Units ("Contributed Property") (any excess of the fair
market value over the tax basis of Contributed Property is referred to
herein as "built-in gain"; any excess of the tax basis over fair
market value is referred to as "built-in loss"). These allocations
are designed to insure that a person contributing property to the
Partnership will recognize the federal income tax consequences
associated with any built-in gain or built-in loss. In general, a
partner contributing assets with a built-in gain will not recognize
taxable gain upon the contribution of those assets in exchange for
Common Units. See "Recognition of Gain or Loss" above. However, such
built-in gain will be recognized over the period of time during which
the Partnership claims depreciation or amortization deductions with
respect to the Contributed Property, or when the Contributed Property
is disposed of by the Partnership.
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BASIS OF COMMON UNITS
A person who contributes property (including stock) to the
Partnership in exchange for Common Units will generally have an
initial tax basis for his Common Units equal to the tax basis of the
property contributed to the Partnership in exchange for Common Units
plus any gain recognized on the contribution. The tax basis for a
Common Unit will be increased by the Unitholder's share of Partnership
income and his share of increases in Partnership debt. The basis for
a Common Unit will be decreased (but not below zero) by distributions
from the Partnership (including deemed distributions resulting from
the assumption of indebtedness by the Partnership), by the
Unitholder's share of Partnership losses, by his share of decreases in
Partnership debt and by the Unitholder's share of expenditures of the
Partnership that are not deductible in computing its taxable income
and are not required to be capitalized.
OWNERSHIP OF UNITS BY S CORPORATIONS
Section 1362(b) of the Code provides that certain small business
corporations may elect to be treated as an "S corporation." In order
to elect S corporation status, a corporation must not: (a) have more
than 75 shareholders (a husband and wife are treated as one
shareholder); (b) have as a shareholder a person (other than an estate
and other than certain trusts) who is not an individual; (c) have a
nonresident alien as a shareholder; and (d) have more than one class
of stock. All of the shareholders of a corporation must elect for the
corporation to be treated as an S corporation. The election is made
by filing Form 2553, which must be filed on or before the 15th day of
the third month of a taxable year in order for the election to be
effective for that taxable year. (A corporation that has not elected
S corporation status is referred to as a "C corporation").
In general, an S corporation is not subject to tax on its income.
Instead, each shareholder takes into account his pro rata share of the
corporation's items of income (including tax-exempt income), loss,
deduction or credit. The character of any item included in a
shareholder's pro rata share is determined as if such item were
realized or incurred directly by the shareholder. Thus, an S
corporation that exchanges its assets for Common Units will not
generally pay tax on its distributive share of partnership income.
Instead, such income will be taxed as if the Common Units were held
directly by the shareholders of the S corporation.
Distributions made by an S corporation are generally nontaxable
to the extent they are made out of the corporation's "accumulated
adjustments account," which represents the undistributed income of the
corporation accumulated subsequent to the effective date of its S
election. Distributions in excess of the accumulated adjustments
account are treated as taxable dividends to the extent that the
corporation has "subchapter C earnings and profits," which includes
any earnings and profits accumulated by a corporation prior to the
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date an S corporation election is effective, reduced by any
distributions that are treated as having been made out of subchapter C
earnings and profits. Distributions in excess of the accumulated
adjustments account and subchapter earnings a profits are treated as a
return of capital to the extent of a shareholder's basis in his stock,
and are treated as gain from the sale or exchange of property to the
extent in excess of such basis.
A corporation that operates as a C corporation and subsequently
makes an election to be treated as an S corporation may be subject to
tax on the excess of the aggregate fair market value of its assets
over the aggregate adjusted tax basis of its assets as of the first
day it is treated as an S corporation (any such excess is referred to
as "net unrealized built-in gain"). This tax is not immediately
imposed at the time of conversion to S corporation status. Instead,
if a C corporation converts to S corporation status, it will be
subject to tax on its net unrealized built-in gain if and to the
extent that is has a net recognized built-in gain at any time during
the next ten years. If an S corporation is subject to tax on built-in
gain, the gain is recognized and taxed to the corporation at the
highest corporate tax rate, and is then passed through (after
reduction for corporate taxes paid) and taxed to the shareholder. A
corporation's net recognized built-in gain for any tax year is the
lesser of the net amount of the corporation's recognized built-in
gains and recognized built-in losses for the tax year or what the
corporation's taxable income would have been for the year had it been
a C corporation.
Recognized built-in gain is defined as any gain recognized during
the recognition period (the 10 year period beginning with the first
day as an S corporation) on the disposition of any asset except to the
extent that the corporation can establish that the asset was not held
by the corporation on its first day as an S corporation or that the
gain recognized exceeds the excess of the fair market value of the
asset as of the first day the corporation was an S corporation over
the adjusted basis of the asset on that date. Similarly, the term
recognized built-in loss means any loss recognized during the
recognition period on the disposition of any asset to the extent that
the S corporation establishes that the asset was held at the beginning
of its first day as an S corporation and that the loss does not exceed
the excess of the adjusted basis of the asset as of the corporation's
first day as an S corporation over the fair market value of the asset
as of that date.
For example, assume that a corporation elects to be treated as an
S corporation on January 1, 1994, and that it has a net unrealized
built-in gain of $500,000. On January 1, 1994, it has a piece of
equipment with a fair market value of $1 million and a tax basis of
$800,000. If the company sold this asset in 1996 and had a tax gain
of $300,000, the recognized built-in gain would be $200,000. Assuming
the company had no other recognized built-in gains or recognized
built-in losses for that tax year and that its taxable income had it
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been a C corporation would have been greater than $200,000, a
corporate tax would be assessed on gain of $200,000.
Under the rules relating to taxation of an S corporation's built-
in gains, if an S corporation owns a partnership interest on the first
day of its first taxable year as an S corporation, or transfers
property which it held on the first day of its first taxable year as
an S corporation to a partnership during the recognition period, a
disposition of the partnership interest during the recognition period
may result in recognized built-in gain, taxable as described above.
Thus, an S corporation receiving Common Units in exchange for its
assets could be taxable on a sale or other disposition of those Common
Units within the recognition period. In addition, sales or other
dispositions of assets (including inventory), by the Partnership,
which were contributed by an S corporation in exchange for Common
Units could result in the recognition of taxable built-in gain by the
S corporation.
A C corporation electing S corporation status will be immediately
taxable to the extent of any "LIFO recapture amount." LIFO recapture
amount is defined as the amount by which inventory of the C
corporation maintained on a LIFO basis has a tax basis which is less
than the tax basis the inventory would have had the corporation
maintained its inventory using the FIFO method.
Prospective Unitholders should also note that additional
proposals have been made which would alter the rules described above,
generally requiring the immediate recognition of corporate and
shareholder level taxable gain upon the conversion of a large C
corporation to S corporation status.
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal
income tax liability. Instead, each partner is required to take into
account his allocable share of items of income, gain, loss and
deduction of the partnership in computing his federal income tax
liability, regardless of whether cash distributions are made.
Distributions by a partnership to a partner are generally not taxable
unless the amount of any cash distributed is in excess of the
partner's adjusted basis in his partnership interest.
No ruling has been or will be sought from the IRS as to the
status of the Partnership or the Operating Partnership as a
partnership for federal income tax purposes. Instead the Partnership
has relied on the opinion of Counsel that, based upon the Code, the
regulations thereunder, published revenue rulings and court decisions,
the Partnership and the Operating Partnership will each be classified
as a partnership for federal income tax purposes.
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In rendering its opinion, Counsel has relied on certain factual
representations made by the Partnership and the General Partners.
Such factual matters are as follows:
(a) With respect to the Partnership and the Operating
Partnership, the General Partners, at all times while acting as
general partners of the Partnership and the Operating Partnership
(since the IPO), have had and will have combined net worth,
computed on a fair market value basis, excluding their interests
in the Partnership and in the Operating Partnership and any notes
or receivables due from the Partnership or the Operating
Partnership, of not less than $15 million;
(b) The Partnership has been and 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 has been and 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 have and will, at all times, act
independently of the limited partners (other than the limited
partner interest held by the General Partners);
(e) For each taxable year of the Partnership's existence,
less than 10% of the gross income of the Partnership has been and
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; and
(f) None of the Partnership, the Operating Partnership, or
any subsidiary partnership will elect to be treated as an
association or corporation.
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
<PAGE> 186
marketing of crude oil, natural gas, and products thereof, including
the retail and wholesale marketing of propane and the transportation
of propane and natural gas liquids. Based upon the representations of
the Partnership and the General Partners and a review of the
applicable legal authorities, Counsel is of the opinion that at least
90% of the Partnership's gross income will constitute qualifying
income. The Partnership estimates that less than 7% of its gross
income for each taxable year will not constitute qualifying income.
If the Partnership fails to meet the Qualifying Income Exception
(other than a failure which is determined by the IRS to be inadvertent
and which is cured within a reasonable time after discovery), the
Partnership will be treated as if it had transferred all of its assets
(subject to liabilities) to a newly formed corporation (on the first
day of the year in which it fails to meet the Qualifying Income
Exception) in return for stock in that corporation, and then
distributed that stock to the partners in liquidation of their
interests in the Partnership. This contribution and liquidation
should be tax-free to Unitholders and the Partnership, so long as the
Partnership, at that time, does not have liabilities in excess of the
tax basis of its assets. Thereafter, the Partnership would be treated
as a corporation for federal income tax purposes.
If the Partnership or the Operating Partnership were treated as
an association taxable as a corporation in any taxable year, either as
a result of a failure to meet the Qualifying Income Exception or
otherwise, its items of income, gain, loss and deduction would be
reflected only on its tax return rather than being passed through to
the Unitholders, and its net income would be taxed to the Partnership
or the Operating Partnership at corporate rates. In addition, any
distribution made to a Unitholder would be treated as either taxable
dividend income (to the extent of the Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and
profits) a nontaxable return of capital (to the extent of the
Unitholder's tax basis in his Common Units) or taxable capital gain
(after the Unitholder's tax basis in the 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
<PAGE> 187
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, but who fail to do so, Counsel's opinion does not extend
to them. 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 any cash distributions are
received by such Unitholder. Consequently, a Unitholder may be
allocated income from the Partnership even if he has not received a
cash distribution. Each Unitholder will be required to include in
income his allocable share of Partnership income, gain, loss and
deduction for the taxable year of the Partnership ending with or
within the taxable year of the Unitholder.
TREATMENT OF PARTNERSHIP DISTRIBUTIONS
Distributions by the Partnership to a Unitholder generally will
not be taxable to the Unitholder for federal income tax purposes to
the extent of his tax basis in his Common Units immediately before the
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distribution. Cash distributions in excess of a Unitholder's tax
basis generally will be considered to be gain from the sale or
exchange of the Common Units, taxable in accordance with the rules
described under "- Disposition of Common Units" below. Any reduction
in a Unitholder's share of the Partnership's liabilities for which no
partner, including the General Partners, bears the economic risk of
loss ("nonrecourse liabilities") will be treated as a distribution of
cash to that Unitholder. To the extent that Partnership distributions
cause a Unitholder's "at risk" amount to be less than zero at the end
of any taxable year, he must recapture any losses deducted in previous
years. See "- Limitations on Deductibility of Partnership Losses."
A decrease in a Unitholder's percentage interest in the
Partnership because of the issuance by the Partnership of additional
Common Units will decrease such Unitholder's share of nonrecourse
liabilities of the Partnership, and thus will result in a
corresponding deemed distribution of cash. A non-pro rata
distribution of money or property may result in ordinary income to a
Unitholder, regardless of his tax basis in his Common Units, if such
distribution reduces the Unitholder's share of the Partnership's
"unrealized receivables" (including depreciation recapture) and/or
substantially appreciated "inventory items" (both as defined in
Section 751 of the Code) (collectively, "Section 751 Assets"). To
that extent, the Unitholder will be treated as having been distributed
his proportionate share of the Section 751 Assets and having exchanged
such assets with the Partnership in return for the non-pro rata
portion of the actual distribution made to him. This latter deemed
exchange will generally result in the Unitholder's realization of
ordinary income under Section 751(b) of the Code. Such income will
equal the excess of (1) the non-pro rata portion of such distribution
over (2) the Unitholder's tax basis for the share of such Section 751
Assets deemed relinquished in the exchange.
LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES
The deduction by a Unitholder of his share of Partnership losses
will be limited to the tax basis in his Units and, in the case of an
individual Unitholder or a corporate Unitholder (if more than 50% of
the value of its stock is owned directly or indirectly by five or
fewer individuals or certain tax-exempt organizations), to the amount
for which the Unitholder is considered to be "at risk" with respect to
the Partnership's activities, if that is less than the Unitholder's
tax basis. A Unitholder must recapture losses deducted in previous
years to the extent that Partnership distributions cause the
Unitholder's at risk amount to be less than zero at the end of any
taxable year. Losses disallowed to a Unitholder or recaptured as a
result of these limitations will carry forward and will be allowable
to the extent that the Unitholder's tax basis or at risk amount
(whichever is the limiting factor) is subsequently increased. Upon
the taxable disposition of a Unit, any gain recognized by a Unitholder
can be offset by losses that were previously suspended by the at risk
limitation but may not be offset by losses suspended by the basis
<PAGE> 189
limitation. Any excess loss (above such gain) previously suspended by
the at risk or basis limitations is no longer utilizable.
In general, a Unitholder will be at risk to the extent of the tax
basis of his Units, excluding any portion of that basis attributable
to his share of Partnership nonrecourse liabilities, reduced by any
amount of money the Unitholder borrows to acquire or hold his Units if
the lender of such borrowed funds owns an interest in the Partnership,
is related to such a person or can look only to Units for repayment.
A Unitholder's at risk amount will increase or decrease as the tax
basis of the Unitholder's Units increases or decreases (other than tax
basis increases or decreases attributable to increases or decreases in
his share of Partnership nonrecourse liabilities).
The passive loss limitations generally provide that individuals,
estates, trusts and certain closely-held corporations and personal
service corporations can deduct losses from passive activities
(generally, activities in which the taxpayer does not materially
participate) only to the extent of the taxpayer's income from those
passive activities. The passive loss limitations are applied
separately with respect to each publicly-traded partnership such as
the 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
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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. At any time that distributions are made
to the Common Units and not to the Subordinated Units, or that
Incentive Distributions are made to the General Partners, gross income
will be allocated to the recipients to the extent of such
distribution. If the Partnership has a net loss, items of income,
gain, loss and deduction will generally be allocated first, to the
General Partners and the Unitholders in accordance with their
respective Percentage Interests to the extent of their positive
capital accounts (as maintained under the Partnership Agreement) and,
second, to the General Partners.
As required by Section 704(c) of the Code and as permitted by
Regulations thereunder, certain items of Partnership income,
deduction, gain and loss will be allocated to account for the
difference between the tax basis and fair market value of property
contributed to the Partnership by each of the General Partners or any
other person contributing property to the Partnership ("Contributed
Property"). Under the Code, the partners in a partnership cannot be
allocated more depletion, depreciation, gain or loss than the total
amount of any such item recognized by that partnership in a particular
taxable period (the "ceiling limitation"). To the extent the ceiling
limitation is or becomes applicable, the Partnership Agreement
requires that certain items of income and deduction be allocated in a
way designed to effectively "cure" this problem and eliminate the
impact of the ceiling limitation. Regulations under Section 704(c) of
the Code permit a partnership to make reasonable allocations to reduce
or eliminate such differences. The effect of these allocations will
be to cause a property contributor to recognize any built-in tax gain
(or loss) over the period of time during which the Partnership claims
depreciation or amortization deductions with respect to the
contributed property, or when such property is disposed of. In
addition, certain items of recapture income will be allocated to the
extent possible to the partner allocated the deduction giving rise to
the treatment of such gain as recapture income in order to minimize
the recognition of ordinary income by some Unitholders, but these
<PAGE> 191
allocations may not be respected under current law. Under recently
proposed regulations, which are not yet effective, the allocation of
depreciation recapture should be respected. If these allocations of
recapture income are not respected, the amount of the income or gain
allocated to a Unitholder will not change but instead a change in the
character of the income allocated to a Unitholder would result.
Finally, although the Partnership does not expect that its operations
will result in the creation of negative capital accounts, if negative
capital accounts nevertheless result, items of Partnership income and
gain will be allocated in an amount and manner sufficient to eliminate
the negative balance as quickly as possible.
Regulations provide that an allocation of items of partnership
income, gain, loss or deduction, other than an allocation required by
Section 704(c) of the Code to eliminate the disparity between a
partner's "book" capital account (credited with the fair market value
of Contributed Property) and "tax" capital account (credited with the
tax basis of Contributed Property) (the "Book-Tax Disparity"), will
generally be given effect for federal income tax purposes in
determining a partner's distributive share of an item of income, gain,
loss or deduction only if the allocation has substantial economic
effect. In any other case, a partner's distributive share of an item
will be determined on the basis of the partner's interest in the
partnership, which will be determined by taking into account all the
facts and circumstances, including the partner's relative
contributions to the partnership, the interests of the partners in
economic profits and losses, the interest of the partners in cash flow
and other nonliquidating distributions and rights of the partners to
distributions of capital upon liquidation.
Counsel is of the opinion that, with the exception of the
allocations of recapture income and allocations of all items of
income, gain, loss, deduction or credit to the General Partners for
the taxable period ending on December 31, 1996 discussed above,
allocations under the Partnership Agreement will be given effect for
federal income tax purposes in determining a partner's distributive
share of an item of income, gain, loss or deduction. There are,
however, uncertainties in the Treasury Regulations relating to
allocations of Partnership income, and investors should be aware that
the allocations of recapture income and allocations of all items of
income, gain, loss, deduction or credit to the General Partners for
the taxable period ending on December 31, 1996 in the Partnership
Agreement may be successfully challenged by the IRS.
TAX TREATMENT OF OPERATIONS
ACCOUNTING METHOD AND TAXABLE YEAR
The Partnership uses the year ending December 31 as its taxable
year and has adopted 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
<PAGE> 192
deduction for the taxable year of the Partnership ending within or
with the taxable year of the Unitholder. In addition, a Unitholder
who has a taxable year ending on a date other than December 31 and who
disposes of all of his Units following the close of the Partnership's
taxable year but before the close of his taxable year must include his
allocable share of Partnership income, gain, loss and deduction in
income for his taxable year with the result that he will be required
to report in income for his taxable year his distributive share of
more than one year of Partnership income, gain, loss and deduction.
See "- Disposition of Common Units - Allocations Between Transferors
and Transferees."
INITIAL TAX BASIS, DEPRECIATION AND AMORTIZATION
The tax basis of the assets of the Partnership will be used for
purposes of computing depreciation and cost recovery deductions and,
ultimately, gain or loss on the disposition of such assets. The
Partnership assets will initially have an aggregate tax basis equal to
the tax basis of the assets in the possession of the General Partners
or other contributor immediately prior to their contributions to the
Partnership plus the amount of gain, if any, recognized by the General
Partners or other contributor in connection with their contribution to
the Partnership. The federal income tax burden associated with the
difference between the fair market value of property contributed to
the Partnership and the tax basis established for such property will
be borne by the contributor of such property. See "- Allocation of
Partnership Income, Gain, Loss and Deduction."
To the extent allowable, the Partnership may elect to use the
depreciation and cost recovery methods that will result in the largest
depreciation deductions in the early years of the Partnership. The
Partnership will not be entitled to any amortization deductions with
respect to goodwill conveyed to the Partnership on formation.
Property subsequently acquired or constructed by the Partnership may
be depreciated using accelerated methods permitted by the Code.
If the Partnership disposes of depreciable property by sale,
foreclosure, or otherwise, all or a portion of any gain (determined by
reference to the amount of depreciation previously deducted and the
nature of the property) may be subject to the recapture rules and
taxed as ordinary income rather than capital gain. Similarly, a
partner who has taken cost recovery or depreciation deductions with
respect to property owned by the Partnership may be required to
recapture such deductions as ordinary income upon a sale of his
interest in the Partnership. See "- Allocation of Partnership Income,
Gain, Loss and Deduction" and "- Disposition of Common Units -
Recognition of Gain or Loss."
Costs incurred in organizing the Partnership may be amortized
over any period selected by the Partnership not shorter than 60
months. The costs incurred in promoting the issuance of Units (i.e.
syndication expenses) must be capitalized and cannot be deducted
<PAGE> 193
currently, ratably or upon termination of the Partnership. There are
uncertainties regarding the classification of costs as organization
expenses, which may be amortized, and as syndication expenses, which
may not be amortized. Under recently adopted regulations, the
underwriting discounts and commissions would be treated as a
syndication cost.
SECTION 754 ELECTION
The Partnership intends to make the election permitted by Section
754 of the Code. That election is irrevocable without the consent of
the IRS. The election generally permits the Partnership to adjust a
Common Unit purchaser's tax basis in the Partnership's assets ("inside
basis") pursuant to Section 743(b) of the Code to reflect his purchase
price. The Section 743(b) adjustment belongs to the purchaser and not
to other partners. (For purposes of this discussion, a partner's
inside basis in the Partnership's assets will be considered to have
two components: (1) his share of the Partnership's tax basis in such
assets ("Common Basis") and (2) his Section 743(b) adjustment to that
basis.)
Proposed Treasury Regulation Section 1.168-2(n) generally
requires the Section 743(b) adjustment attributable to recovery
property to be depreciated as if the total amount of such adjustment
were attributable to newly-acquired recovery property placed in
service when the purchaser acquires the Unit. Similarly, newly issued
proposed Treasury regulations promulgated under Section 197 indicate
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 Section 197
proposed Treasury regulations. 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
<PAGE> 194
non-amortizable to the extent attributable to property the Common
Basis of which is not amortizable, despite its inconsistency with
Proposed Treasury Regulation Section 1.168-2(n), Treasury Regulation
Section 1.167(c)-1(a)(6) (neither of which is expected to directly
apply to a material portion of the Partnership's assets) or the
Section 197 proposed Treasury regulations. To the extent such
Section 743(b) adjustment is attributable to appreciation in value in
excess of the unamortized Book-Tax Disparity, the Partnership will
apply the rules described in the Regulations and legislative history.
If the Partnership determines that such position cannot reasonably be
taken, the Partnership may adopt a depreciation or amortization
convention under which all purchasers acquiring Units in the same
month would receive depreciation or amortization, whether attributable
to Common Basis or Section 743(b) adjustment, based upon the same
applicable rate as if they had purchased a direct interest in the
Partnership's assets. Such an aggregate approach may result in lower
annual depreciation or amortization deductions than would otherwise be
allowable to certain Unitholders. See "- Uniformity of Units."
The allocation of the Section 743(b) adjustment must be made in
accordance with the Code. The IRS may seek to reallocate some or all
of any Section 743(b) adjustment not so allocated by the Partnership
to goodwill which, as an intangible asset, would be amortizable over a
longer period of time than the Partnership's tangible assets.
A Section 754 election is advantageous if the transferee's tax
basis in his Units is higher than such Units' share of the aggregate
tax basis to the Partnership of the Partnership's assets immediately
prior to the transfer. In such a case, as a result of the election,
the transferee would have a higher tax basis in his share of the
Partnership's assets for purposes of calculating, among other items,
his depreciation and depletion deductions and his share of any gain or
loss on a sale of the Partnership's assets. Conversely, a Section 754
election is disadvantageous if the transferee's tax basis in such
Units is lower than such Unit's share of the aggregate tax basis of
the Partnership's assets immediately prior to the transfer. Thus, the
fair market value of the Units may be affected either favorably or
adversely by the election.
The calculations involved in the Section 754 election are complex
and will be made by the Partnership on the basis of certain
assumptions as to the value of Partnership assets and other matters.
There is no assurance that the determinations made by the Partnership
will not be successfully challenged by the IRS 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.
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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 non-corporate taxpayers is 26% on the first $175,000 of
alternative minimum taxable income in excess of the exemption amount
and 28% on any additional alternative minimum taxable income.
Prospective Unitholders should consult with their tax advisors as to
the impact of an investment in Units on their liability for the
alternative minimum tax.
VALUATION OF PARTNERSHIP PROPERTY AND BASIS OF PROPERTIES
The federal income tax consequences of the acquisition, ownership
and disposition of Units will depend in part on estimates by the
Partnership of the relative fair market values, and determinations of
the initial tax bases, of the assets of the Partnership. Although the
Partnership may from time to time consult with professional appraisers
with respect to valuation matters, many of the relative fair market
value estimates will be made by the Partnership. These estimates and
determinations of basis are subject to challenge and will not be
binding on the IRS or the courts. If the estimates of fair market
value or determinations of basis are subsequently found to be
incorrect, the character and amount of items of income, gain, loss or
deductions previously reported by Unitholders might change, and
Unitholders might be required to adjust their tax liability for prior
years.
TREATMENT OF SHORT SALES
A Unitholder whose Units are loaned to a "short seller" to cover
a short sale of Units may be considered as having disposed of
ownership of those Units. If so, he would no longer be a partner with
respect to those Units during the period of the loan and may recognize
gain or loss from the disposition. As a result, during this period,
any Partnership income, gain, deduction or loss with respect to those
Units would not be reportable by the Unitholder, any cash
distributions received by the Unitholder with respect to those Units
would be fully taxable and all of such distributions would appear to
be treated as ordinary income. Unitholders desiring to assure their
status as partners and avoid the risk of gain recognition should
modify any applicable brokerage account agreements to prohibit their
brokers from borrowing their Units.
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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.
Under the Act, a taxpayer is treated as having sold an
"appreciated" partnership interest (one in which gain would be
recognized if such interest were sold) if such taxpayer or related
persons entered into one or more positions with respect to the same or
substantially identical property which, for some period, substantially
eliminated both the risk of loss and opportunity for gain on the
appreciated financial position (including selling "short against the
box" transactions). Unitholders should consult with their tax
advisers in the event they are considering entering into a short sale
transaction or any other risk arbitrage transaction involving their
Common Units.
Prior Partnership distributions in excess of cumulative net
taxable income in respect of a Common Unit which decreased a
Unitholder's tax basis in such Common Unit will, in effect, become
taxable income if the Common Unit is sold at a price greater than the
Unitholder's tax basis in such Common Unit, even if the price is less
than his original cost.
Should the IRS successfully contest the convention used by the
Partnership to amortize only a portion of the Section 743(b)
adjustment (described under "- Tax Treatment of Operations -
Section 754 Election") attributable to an amortizable Section 197
intangible after a sale by the General Partners of Units, a Unitholder
could realize additional gain from the sale of Units than had such
convention been respected. In that case, the Unitholder may have been
entitled to additional deductions against income in prior years but
may be unable to claim them, with the result to him of greater overall
taxable income than appropriate. Counsel is unable to opine as to the
validity of the convention but believes such a contest by the IRS to
be unlikely because a successful contest could result in substantial
additional deductions to other Unitholders.
Gain or loss recognized by a Unitholder (other than a "dealer" in
Common 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, with
the tax rate on a long-term capital gain depending upon whether the
Unitholder held Common Units for more than 18 months. A portion of
<PAGE> 197
this gain or loss (which could be substantial), however, will be
separately computed and taxed as ordinary income or loss under Section
751 of the Code to the extent attributable to assets giving rise to
depreciation recapture or other "unrealized receivables" or to
"substantially appreciated inventory" owned by the Partnership. The
term "unrealized receivables" includes potential recapture items,
including depreciation recapture. Inventory is considered to be
"substantially appreciated" if its value exceeds 120% of its adjusted
basis to the Partnership. Ordinary income attributable to unrealized
receivables, substantially appreciated inventory and depreciation
recapture may exceed net taxable gain realized upon the sale of the
Unit and may be recognized even if there is a net taxable loss
realized on the sale of the Unit. Thus, a Unitholder may recognize
both ordinary income and a capital loss upon a disposition of Units.
Net capital loss may offset no more than $3,000 of ordinary income in
the case of individuals and may only be used to offset capital gain in
the case of corporations.
The IRS has ruled that a partner who acquires interests in a
Partnership in separate transactions must combine those interests and
maintain a single adjusted tax basis. Upon a sale or other
disposition of less than all of such interests, a portion of that tax
basis must be allocated to the interests sold using an "equitable
apportionment" method. The ruling is unclear as to how the holding
period of these interests is determined once they are combined. If
this ruling is applicable to the holders of Common Units, a Common
Unitholder will be unable to select high or low basis Common Units to
sell as would be the case with corporate stock. It is not clear
whether the ruling applies to the Partnership, because, similar to
corporate stock, interests in the Partnership are evidenced by
separate certificates. Accordingly, Counsel is unable to opine as to
the effect such ruling will have on the Unitholders. 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.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES
In general, the Partnership's taxable income and losses will be
determined annually, will be prorated on a monthly basis and will be
subsequently apportioned among the Unitholders in proportion to the
number of Units owned by each of them as of the opening of the NYSE on
the first business day of the month (the "Allocation Date"). However,
gain or loss realized on a sale or other disposition of Partnership
assets other than in the ordinary course of business will be allocated
among the Unitholders on the Allocation Date in the month in which
that gain or loss is recognized. As a result, a Unitholder
transferring 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
<PAGE> 198
validity of this method of allocating income and deductions between
the transferors and the transferees of Units. If this method is not
allowed under the Treasury Regulations (or only applies to transfers
of less than all of the Unitholder's interest), taxable income or
losses of the Partnership might be reallocated among the Unitholders.
The Partnership is authorized to revise its method of allocation
between transferors and transferees (as well as among partners whose
interests otherwise vary during a taxable period) to conform to a
method permitted under future Treasury Regulations.
A Unitholder who owns Units at any time during a quarter and who
disposes of such Units prior to the record date set for a cash
distribution with respect to such quarter will be allocated items of
Partnership income, gain, loss and deductions attributable to such
quarter but will not be entitled to receive that cash distribution.
NOTIFICATION REQUIREMENTS
A Unitholder who sells or exchanges Units is required to notify
the Partnership in writing of that sale or exchange within 30 days
after the sale or exchange and in any event by no later than
January 15 of the year following the calendar year in which the sale
or exchange occurred. The Partnership is required to notify the IRS
of that transaction and to furnish certain information to the
transferor and transferee. However, these reporting requirements do
not apply with respect to a sale by an individual who is a citizen of
the United States and who effects the sale or exchange through a
broker. Additionally, a transferor and a transferee of a Unit will be
required to furnish statements to the IRS, filed with their income tax
returns for the taxable year in which the sale or exchange occurred,
that set forth the amount of the consideration received for the Unit
that is allocated to goodwill or going concern value of the
Partnership. Failure to satisfy these reporting obligations may lead
to the imposition of substantial penalties.
CONSTRUCTIVE TERMINATION
The Partnership and the Operating Partnership will be considered
to have been terminated if there is a sale or exchange of 50% or more
of the total interests in Partnership capital and profits within a
12-month period. A termination results in the closing of a
Partnership's taxable year for all partners and the Partnership's
assets are regarded as having been distributed to the partners and
reconveyed to the Partnership, which is then treated as a new
partnership. However, under new proposed regulations which are not
yet effective, the Partnership will be deemed to have conveyed all its
assets and liabilities to a newly formed partnership in exchange for
all the interests in such partnership and then the Partnership will be
deemed to have liquidated and to have distributed to its partners the
interests in this newly formed partnership. A termination of the
Partnership will cause a termination of the Operating Partnership and
any Subsidiary Partnership. Such a termination could also result in
<PAGE> 199
penalties or loss of tax basis adjustments under Section 754 of the
Code if the Partnership were unable to determine that the termination
had occurred. (Under the 1995 Proposed Legislation, termination of a
large partnership, such as the Partnership, would not occur by reason
of the sale or exchange of interests in the partnership.)
In the case of a Unitholder reporting on a taxable year other
than a fiscal year ending December 31, the closing of the tax year of
the Partnership may result in more than 12 months' taxable income or
loss of the Partnership being includable in his taxable income for the
year of termination. In addition, each Unitholder will realize
taxable gain to the extent that any money deemed as a result of the
termination to have been distributed to him exceeds the adjusted tax
basis of his Units. New tax elections required to be made by the
Partnership, including a new election under Section 754 of the Code,
must be made subsequent to a constructive termination. A termination
could also result in a deferral of Partnership deductions for
depreciation. Finally, a termination might either accelerate the
application of, or subject the Partnership to, any tax legislation
enacted prior to the termination.
ENTITY-LEVEL COLLECTIONS
If the Partnership is required or elects under applicable law to
pay any federal, state or local income tax on behalf of any Unitholder
or any General Partner or any former Unitholder, the Partnership is
authorized to pay those taxes from Partnership funds. Such payment,
if made, will be treated as a distribution of cash to the partner on
whose behalf the payment was made. If the payment is made on behalf
of a person whose identity cannot be determined, the Partnership is
authorized to treat the payment as a distribution to current
Unitholders. The Partnership is authorized to amend the Partnership
Agreement in the manner necessary to maintain uniformity of intrinsic
tax characteristics of Units and to adjust subsequent distributions,
so that after giving effect to such distributions, the priority and
characterization of distributions otherwise applicable under the
Partnership Agreement is maintained as nearly as is practicable.
Payments by the Partnership as described above could give rise to an
overpayment of tax on behalf of an individual partner in which event
the partner could file a claim for credit or refund.
UNIFORMITY OF UNITS
Because the Partnership cannot match transferors and transferees
of Units, uniformity of the economic and tax characteristics of the
Units to a purchaser of such Units must be maintained. In the absence
of uniformity, compliance with a number of federal income tax
requirements, both statutory and regulatory, could be substantially
diminished. A lack of uniformity can result from a literal
application of Proposed Treasury Regulation Section 1.168-2(n) and
Treasury Regulation Section 1.167(c)-1(a)(6) proposed Treasury
regulations recently promulgated under Section 197. Any
<PAGE> 200
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 proposed Treasury regulations recently promulgated under
Section 197. See "- Tax Treatment of Operations - Section 754
Election." To the extent such Section 743(b) adjustment is
attributable to appreciation in value in excess of the unamortized
Book-Tax Disparity, the Partnership will apply the rules described in
the Regulations and legislative history. If the Partnership
determines that such a position cannot reasonably be taken, the
Partnership may adopt a depreciation and amortization convention under
which all purchasers acquiring Units in the same month would receive
depreciation and amortization deductions, whether attributable to
Common Basis or Section 743(b) basis, based upon the same applicable
rate as if they had purchased a direct interest in the Partnership's
property. If such an aggregate approach is adopted, it may result in
lower annual depreciation and amortization deductions than would
otherwise be allowable to certain Unitholders and risk the loss of
depreciation and amortization deductions not taken in the year that
such deductions are otherwise allowable. This convention will not be
adopted if the Partnership determines that the loss of depreciation
and amortization deductions will have a material adverse effect on the
Unitholders. If the Partnership chooses not to utilize this aggregate
method, the Partnership may use any other reasonable depreciation and
amortization convention to preserve the uniformity of the intrinsic
tax characteristics of any Units that would not have a material
adverse effect on the Unitholders. The IRS may challenge any method
of depreciating the Section 743(b) adjustment described in this
paragraph. If such a challenge were sustained, the uniformity of
Units might be affected, and the gain from the sale of Units might be
increased without the benefit of additional deductions. See "-
Disposition of Common Units - Recognition of Gain or Loss."
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
<PAGE> 201
accounts ("IRAs") and other retirement plans) are subject to federal
income tax on unrelated business taxable income. Virtually all of the
taxable income derived by such an organization from the ownership of a
Unit will be unrelated business taxable income and thus will be
taxable to such a Unitholder.
A regulated investment company or "mutual fund" is required to
derive 90% or more of its gross income from interest, dividends, gains
from the sale of stocks or securities or foreign currency or certain
related sources. It is not anticipated that any significant amount of
the Partnership's gross income will include that type of income.
Non-resident aliens and foreign corporations, trusts or estates
which hold Units will be considered to be engaged in business in the
United States on account of ownership of Units. As a consequence they
will be required to file federal tax returns in respect of their share
of Partnership income, gain, loss or deduction and pay federal income
tax at regular rates on any net income or gain. Generally, a
Partnership is required to pay a withholding tax on the portion of the
Partnership's income which is effectively connected with the conduct
of a United States trade or business and which is allocable to the
foreign partners, regardless of whether any actual distributions have
been made to such partners. However, under rules applicable to
publicly-traded partnerships, the Partnership will withhold (currently
at the rate of 39.6%) on actual cash distributions made quarterly to
foreign Unitholders. Each foreign Unitholder must obtain a taxpayer
identification number from the IRS and submit that number to the
Transfer Agent of the Partnership on a Form W-8 in order to obtain
credit for the taxes withheld. A change in applicable law may require
the Partnership to change these procedures.
Because a foreign corporation which owns Units will be treated as
engaged in a United States trade or business, such a corporation may
be subject to United States branch profits tax at a rate of 30%, in
addition to regular federal income tax, on its allocable share of the
Partnership's income and gain (as adjusted for changes in the foreign
corporation's "U.S. net equity") which are effectively connected with
the conduct of a United States trade or business. That tax may be
reduced or eliminated by an income tax treaty between the United
States and the country with respect to which the foreign corporate
Unitholder is a "qualified resident." In addition, such a Unitholder
is subject to special information reporting requirements under Section
6038C of the Code.
Under a ruling of the IRS a foreign Unitholder who sells or
otherwise disposes of a Unit will be subject to federal income tax on
gain realized on the disposition of such Unit to the extent that such
gain is effectively connected with a United States trade or business
of the foreign Unitholder. Apart from the ruling, a foreign
Unitholder will not be taxed upon the disposition of a Unit if that
foreign Unitholder has held less than 5% in value of the Units during
the five-year period ending on the date of the disposition and if the
<PAGE> 202
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 (75 days for taxable years of the Partnership beginning after
December 31, 1997) 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 review (by which
all the Unitholders are bound) of a final partnership administrative
adjustment and, if the Tax Matters Partner fails to seek judicial
<PAGE> 203
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. Partners in electing
large partnerships would be required to treat all Partnership items in
a manner consistent with the Partnership return. The Partnership will
elect to be treated as an electing large partnership.
Under the reporting provisions of the Act, each partner of an
electing large partnership will 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 Act also makes a number of changes to the tax compliance and
administrative rules relating to partnerships. One provision requires
that each partner in an electing large partnership, such as the
Partnership, take into account his share of any adjustments to
partnership items in the year such adjustments are made.
Alternatively, under the Act, an electing large partnership can elect
to or, in some circumstances, can be required to directly pay the tax
resulting from any such adjustments. Moreover, a partnership (and not
its partners) is liable for any interest and penalties that result
from a partnership adjustment. 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
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name, address and taxpayer identification number of the beneficial
owner and the nominee; (b) whether the beneficial owner is (i) a
person that is not a United States person, (ii) a foreign government,
an international organization or any wholly-owned agency or
instrumentality of either of the foregoing, or (iii) a tax-exempt
entity; (c) the amount and description of Units held, acquired or
transferred for the beneficial owner; and (d) certain information
including the dates of acquisitions and transfers, means of
acquisitions and transfers, and acquisition cost for purchases, as
well as the amount of net proceeds from sales. Brokers and financial
institutions are required to furnish additional information, including
whether they are United States persons and certain information on
Units they acquire, hold or transfer for their own account. A penalty
of $50 per failure (up to a maximum of $100,000 per calendar year) is
imposed by the Code for failure to report such information to the
Partnership. The nominee is required to supply the beneficial owner
of the Units with the information furnished to the Partnership.
REGISTRATION AS A TAX SHELTER
The Code requires that "tax shelters" be registered with the
Secretary of the Treasury. The temporary Treasury Regulations
interpreting the tax shelter registration provisions of the Code are
extremely broad. It is arguable that the Partnership is not subject
to the registration requirement on the basis that it will not
constitute a tax shelter. However, the Managing General Partner, as a
principal organizer of the Partnership, has registered the Partnership
as a tax shelter (I.D. No. 97071000067) with the Secretary of the
Treasury in the absence of assurance that the Partnership will not be
subject to tax shelter registration and in light of the substantial
penalties which might be imposed if registration is required and not
undertaken. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE
THAT AN INVESTMENT IN THE PARTNERSHIP OR THE CLAIMED TAX BENEFITS HAVE
BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS. The Partnership must
furnish the registration number to the Unitholders, and a Unitholder
who sells or otherwise transfers a Unit in a subsequent transaction
must furnish the registration number to the transferee. The penalty
for failure of the transferor of a Unit to furnish the registration
number to the transferee is $100 for each such failure. The
Unitholders must disclose the tax shelter registration number of the
Partnership on Form 8271 to be attached to the tax return on which any
deduction, loss or other benefit generated by the Partnership is
claimed or income of the Partnership is included. A Unitholder who
fails to disclose the tax shelter registration number on his return,
without reasonable cause for that failure, will be subject to a $250
penalty for each failure. Any penalties discussed herein are not
deductible for federal income tax purposes.
ACCURACY-RELATED PENALTIES
An additional tax equal to 20% of the amount of any portion of an
underpayment of tax which is attributable to one or more of certain
<PAGE> 205
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 analysis of those various
taxes is not presented here, each prospective Unitholder should
consider their potential impact on his investment in the Partnership.
The Partnership will initially own property and conduct business in
the following states which currently impose a personal income tax:
Alabama, Arkansas, California, Georgia, Illinois, Indiana, Kentucky,
Maryland, Mississippi, Missouri, New Hampshire, New Jersey, New
Mexico, New York, North Carolina, Ohio, Oklahoma, South Carolina,
Tennessee, Utah, Vermont and Virginia. A Unitholder will be required
to file state income tax returns and to pay state income taxes in some
or all of these states and may be subject to penalties for failure to
<PAGE> 206
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.
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS
An investment in the Partnership by an employee benefit plan is
subject to certain additional considerations because the investments
of such plans are subject to the fiduciary responsibility and
prohibited transaction provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and restrictions imposed
by Section 4975 of the Code. As used herein, the term "employee
benefit plan" includes, but is not limited to, qualified pension,
profit-sharing and stock bonus plans, Keogh plans, simplified employee
pension plans and tax deferred annuities or IRAs established or
maintained by an employer or employee organization. Among other
things, consideration should be given to (a) whether such investment
is prudent under Section 404(a)(1)(B) of ERISA; (b) whether in making
such investment, such plan will satisfy the diversification
requirement of Section 404(a)(1)(C) of ERISA; and (c) whether such
investment will result in recognition of unrelated business taxable
income by such plan and, if so, the potential after-tax investment
return. See "Tax Considerations - Uniformity of Units - Tax-Exempt
Organizations and Certain Other Investors." The person with investment
discretion with respect to the assets of an employee benefit plan (a
"fiduciary") should determine whether an investment in the Partnership
is authorized by the appropriate governing instrument and is a proper
investment for such plan.
<PAGE> 207
Section 406 of ERISA and Section 4975 of the Code (which also
applies to IRAs that are not considered part of an employee benefit
plan) prohibit an employee benefit plan from engaging in certain
transactions involving "plan assets" with parties that are "parties in
interest" under ERISA or "disqualified persons" under the Code with
respect to the plan.
In addition to considering whether the purchase of Common Units
is a prohibited transaction, a fiduciary of an employee benefit plan
should consider whether such plan will, by investing in the
Partnership, be deemed to own an undivided interest in the assets of
the Partnership, with the result that the Managing General Partner
also would be a fiduciary of such plan and the operations of the
Partnership would be subject to the regulatory restrictions of ERISA,
including its prohibited transaction rules, as well as the prohibited
transaction rules of the Code.
The Department of Labor regulations provide guidance with respect
to whether the assets of an entity in which employee benefit plans
acquire equity interests would be deemed "plan assets" under certain
circumstances. Pursuant to these regulations, an entity's assets
would not be considered to be "plan assets" if, among other things,
(a) the equity interest acquired by employee benefit plans are
publicly offered securities - i.e., the equity interests are widely
held by 100 or more investors independent of the issuer and each
other, freely transferable and registered pursuant to certain
provisions of the federal securities laws, (b) the entity is an
"operating company" - i.e., it is primarily engaged in the production
or sale of a product or service other than the investment of capital
either directly or through a majority owned subsidiary or
subsidiaries, or (c) there is no significant investment by benefit
plan investors, which is defined to mean that less than 25% of the
value of each class of equity interest (disregarding certain interests
held by the Managing General Partner, its affiliates, and certain
other persons) is held by the employee benefit plans referred to
above, IRAs and other employee benefit plans not subject to ERISA
(such as governmental plans). The Partnership's assets should not be
considered "plan assets" under these regulations because it is
expected that the investment will satisfy the requirements in (a) and
(b) above and may also satisfy the requirements in (c).
Plan fiduciaries contemplating a purchase of Common Units should
consult with their own counsel regarding the consequences under ERISA
and the Code in light of the serious penalties imposed on persons who
engage in prohibited transactions or other violations.
VALIDITY OF THE COMMON UNITS
The validity of the Common Units will be passed upon for the
Partnership by Schiff Hardin & Waite, Chicago, Illinois.
<PAGE> 208
EXPERTS
The audited financial statements of Cornerstone Propane GP, Inc.
and of Cornerstone Propane Partners, L.P. have been audited and the
pro forma consolidated financial statements of Cornerstone Propane
Partners, L.P. included in this Prospectus, to the extent indicated in
their reports, have been examined by Arthur Andersen LLP, independent
public accountants, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The audited financial statements included in this Prospectus for
Empire Energy Corporation, to the extent and for the periods indicated
in their report, have been audited by Baird, Kurtz & Dobson,
independent public accountants, and are included herein in reliance
upon the report of said firm given upon its authority as experts in
giving such report.
The audited financial statements included in this Prospectus for
SYN Inc., to the extent and for the periods indicated in the report,
have been audited by Arthur Andersen LLP, independent public
accountants, and are included herein in reliance upon the authority of
said firm as experts in giving said report.
The CGI Holdings, Inc. financial statements as of July 31, 1996
and 1995 and for each of the three years in the period ended July 31,
1996 included in this Prospectus have been so included in reliance on
the report of Price Waterhouse LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The audited financial statements included in this Prospectus for
Synergy Group Incorporated, to the extent and for the periods
indicated in their report, have been audited by Baird, Kurtz & Dobson,
independent public accountants, and are included herein in reliance
upon the report of said firm given upon its authority as experts in
giving such report.
AVAILABLE INFORMATION
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
<PAGE> 209
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 Partnership is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and in accordance therewith files reports and other information with
the Commission. Such reports and information, and the Registration
Statement and the exhibits and schedules thereto, filed with the
Commission by the Partnership may be inspected and copied at the
public reference facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at 7 World Trade Center,
Suite 1300, New York, New York 10048 and 500 West Madison Street,
Chicago, Illinois 60661. Copies of such material can also be
obtained upon written request from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates or from the Commission's Web site on
the Internet at http://www.sec.gov. Reports and other information
concerning the Partnership may be inspected at the principal office of
the NYSE at 20 Broad Street, New York, New York 10005.
<PAGE> 210
CORNERSTONE PROPANE PARTNERS, L.P.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF CORNERSTONE PROPANE PARTNERS, L.P.
Introduction............................................................................................. F-3
Pro Forma Consolidated Statements of Operations for the periods July 1, 1996 to March 31, 1997, July 1,
1995 to March 31, 1996, January 1, 1997 to March 31, 1997 and January 1, 1996 to March 31,
1996................................................................................................... F-4
Notes to Pro Forma Consolidated Statements of Operations................................................. F-5
Report of Independent Public Accountants................................................................. F-7
Pro Forma Consolidated Statement of Operations for the Period Ended June 30, 1996........................ F-8
Notes to Pro Forma Consolidated Financial Statements..................................................... F-9
CORNERSTONE PROPANE PARTNERS, L.P.
Consolidated Balance Sheet as of March 31, 1997.......................................................... F-13
Consolidated Statement of Operations from Commencement of Operations (on December 17, 1996) to March
31, 1997 and for the Three Months Ended March 31, 1996................................................. F-14
Consolidated Statement of Cash Flows from Commencement of Operations (on December 17, 1996) to March
31, 1997............................................................................................... F-15
Consolidated Statement of Partners' Capital from Commencement of Operations (on December 17, 1996) to
March 31, 1997......................................................................................... F-16
Notes to Consolidated Financial Statements............................................................... F-17
EMPIRE ENERGY CORPORATION CONSOLIDATED FINANCIAL STATEMENTS
Independent Accountants' Report.......................................................................... F-25
PREDECESSOR COMPANY:
Consolidated Balance Sheets dated June 30, 1995 and 1996................................................. F-26
Consolidated Statements of Income for the Years Ended June 30, 1994, 1995, and 1996, for the Three Months
Ended September 30, 1995, and for the One Month Ended July 31, 1996.................................... F-27
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1994, 1995 and 1996 and for
the One Month Ended July 31, 1996...................................................................... F-28
Consolidated Statements of Cash Flows for the Years Ended June 30, 1994, 1995, and 1996, for the Three
Months Ended September 30, 1995, and for the One Month Ended July 31, 1996............................. F-29
Notes to Consolidated Financial Statements............................................................... F-30
NEW BASIS (UNAUDITED):
Consolidated Balance Sheet dated September 30, 1996...................................................... F-40
Consolidated Statement of Operations for the Two Months Ended September 30, 1996......................... F-41
Consolidated Statement of Cash Flows for the Two Months Ended September 30, 1996......................... F-42
Consolidated Statement of Stockholders' Equity for the Two Months Ended September 30, 1996............... F-43
Notes to Consolidated Financial Statements dated September 30, 1996...................................... F-44
Consolidated Statements of Operations for the periods July 1, 1996 to December 16, 1996, July 1, 1995 to
March 31, 1996, and January 1, 1996 to March 31, 1996.................................................. F-50
Consolidated Statements of Cash Flows for the periods July 1, 1996 to December 16, 1996 and July 1, 1995
to March 31, 1996...................................................................................... F-51
Notes to Consolidated Statements......................................................................... F-52
</TABLE>
F-1
<PAGE> 211
CORNERSTONE PROPANE PARTNERS, L.P.
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
CGI HOLDINGS, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................................................................ F-56
Consolidated Balance Sheets at July 31, 1996 and 1995 and October 31, 1996 (unaudited)................... F-57
Consolidated Statements of Operations for the Years Ended July 31, 1996, 1995, and 1994 and for the Three
Months Ended October 31, 1996 and 1995 (unaudited)..................................................... F-59
Consolidated Statements of Stockholders' Equity for the Three Years Ended July 31, 1996, 1995, and 1994
and for the Three Months Ended October 31, 1996 (unaudited)............................................ F-60
Consolidated Statements of Cash Flows for the Three Years Ended July 31, 1996, 1995, and 1994 and for the
Three Months Ended October 31, 1996 and 1995 (unaudited)............................................... F-61
Notes to Consolidated Financial Statements............................................................... F-62
Consolidated Statements of Operations for the periods August 1, 1996 to December 16, 1996, August 1, 1995
to March 31, 1996, and November 1, 1995 to March 31, 1996 (unaudited).................................. F-74
Consolidated Statements of Cash Flows for the periods August 1, 1996 to December 16, 1996 and August 1,
1995 to March 31, 1996 (unaudited)..................................................................... F-75
Notes to Consolidated Financial Statements (unaudited)................................................... F-76
SYN INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants................................................................. F-78
Consolidated Balance Sheets dated June 30, 1996 and September 30, 1996................................... F-79
Consolidated Statements of Income for the Period from Inception (August 15, 1995) through June 30, 1996,
for the 46 Days Ended September 30, 1995, and for the Three Months Ended September 30, 1996............ F-80
Consolidated Statements of Stockholders' Equity for the Period from Inception (August 15, 1995) through
September 30, 1996..................................................................................... F-81
Consolidated Statements of Cash Flows for the Period from Inception (August 15, 1995) through June 30,
1996, for the 46 Days Ended September 30, 1995, and for the Three Months Ended September 30, 1996...... F-82
Notes to Consolidated Financial Statements............................................................... F-83
Consolidated Statements of Operations for the periods July 1, 1996 to December 16, 1996, August 15, 1995
to March 31, 1996, July 1, 1995 to August 14, 1995 and October 1, 1995 to March 31, 1996............... F-90
Consolidated Statements of Cash Flows for the the periods July 1, 1996 to December 16, 1996, August 15,
1995 to December 31, 1995, and July 1, 1995 to August 14, 1995......................................... F-91
Notes to Consolidated Financial Statements............................................................... F-92
SYNERGY GROUP INCORPORATED CONSOLIDATED FINANCIAL STATEMENTS
Independent Accountants' Report.......................................................................... F-94
Consolidated Balance Sheet dated August 14, 1995......................................................... F-95
Consolidated Statements of Operations for the Years Ended March 31, 1994 and 1995 and for the Four and
One-Half Months Ended August 14, 1995.................................................................. F-96
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended March 31, 1994 and 1995 and
for the Four and One-Half Months Ended August 14, 1995................................................. F-97
Consolidated Statements of Cash Flows for the Years Ended March 31, 1994 and 1995 and for the Four and
One-Half Months Ended August 14, 1995.................................................................. F-98
Notes to Consolidated Financial Statements............................................................... F-99
</TABLE>
F-2
<PAGE> 212
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED FINANCIAL
STATEMENTS OF
CORNERSTONE PROPANE PARTNERS, L.P.
The pro forma consolidated statements of operations and consolidated
financial statements of Cornerstone Propane Partners, L.P. (the "Partnership")
are based upon the historical consolidated financial statements of SYN Inc.
("Synergy"), Empire Energy Corporation ("Empire Energy") and CGI Holdings, Inc.
("Coast") appearing elsewhere herein. The pro forma consolidated statements of
operations and consolidated financial statements were prepared to reflect the
formation of the Partnership to own and operate the propane business and
operations of Synergy, Empire Energy, Coast and Myers Propane Gas Company
("Myers"). Historical financial statements of Myers have not been included based
on the Partnership's belief that the inclusion of Myers does not have a material
effect on the pro forma consolidated financial statements of the Partnership.
Cornerstone Propane GP, Inc. serves 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 statements of operations and consolidated
financial statements do not purport to present the financial position or results
of operations of the Partnership had the transactions effected at the closing of
the Partnership's initial public offering through underwriters of 9,821,000
Common Units on December 17, 1996 (the "IPO") actually been completed as of the
dates indicated. In addition, the pro forma consolidated statements of
operations and 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> 213
CORNERSTONE PROPANE PARTNERS, L.P.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 1, 1996 JULY 1, 1995 JANUARY 1, 1997 JANUARY 1, 1996
TO TO TO TO
MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1996
-------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUE............................. $ 535,503 $ 452,477 $ 220,566 $ 198,690
COST OF SALES....................... 428,959 336,311 178,050 144,149
-------- -------- -------- --------
GROSS PROFIT........................ 106,544 116,166 42,516 54,541
-------- -------- -------- --------
EXPENSES
Operating, general and
administrative................. 66,209 68,195 23,590 22,143
Depreciation and amortization..... 10,948 10,169 3,819 3,417
-------- -------- -------- --------
OPERATING INCOME.................... 29,387 37,802 15,107 23,981
INTEREST EXPENSE, NET............... (13,499) (13,301) 4,450 (4,392)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES.......... 15,888 24,501 10,657 19,589
INCOME TAXES........................ 70 75 20 25
-------- -------- -------- --------
NET INCOME.......................... $ 15,818 $ 24,426 $ 10,637 $ 19,564
======== ======== ======== ========
General partners' interest in net
income............................ $ 413 $ 489 $ 213 $ 391
-------- -------- -------- --------
Limited partner's interest in net
income............................ $ 15,405 $ 23,937 $ 10,424 $ 19,173
-------- -------- -------- --------
Net income per Unit................. $ 0.97 $ 1.48 $ .65 $ 1.18
-------- -------- -------- --------
Weighted average number of Units
outstanding....................... 16,513 16,513 16,513 16,513
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 214
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
MARCH 31, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited pro forma consolidated statements of operations for the three
month period ended March 31, 1996 and the nine month periods ended March 31,
1997 and 1996 were derived from the historical statements of operations of
Empire Energy Corporation for the periods January 1 through March 31, 1996,
July 1 through December 16, 1996 and July 1 through March 31, 1996; of SYN Inc.
and Myers Propane Gas Company ("Myers") for the periods January 1 through March
31, July 1 through December 16, 1996 and August 15, 1995 to March 31, 1996; of
Synergy Group Incorporated for the period July 1, 1995 to August 14, 1995; of
CGI Holdings, Inc. for the periods February 1 through March 31, 1996, August 1,
1995 through March 31, 1996 and August 1 through December 16, 1996; and the
consolidated statement of operations of the Partnership from December 17, 1996
through March 31, 1997. Historical financial statements of Myers have not been
separately presented based on the Partnership's belief that the separate
inclusion of Myers does not have a material effect on the pro forma consolidated
financial statements of the Partnership. The pro forma consolidated
statements of operations were prepared to reflect the effects of the IPO as if
it had been completed in its entirety as of the beginning of the periods
presented. However, these statements do not purport to present the results of
operations of the Partnership had the IPO actually been completed as of the
beginning of the periods presented. In addition, the pro forma consolidated
statements of operations are not necessarily indicative of the results of future
operations of the Partnership and should therefore be read in conjunction with
the historical consolidated financial statements of the Predecessor Companies
and the Partnership appearing elsewhere in this Registration Statement.
2. PRO FORMA ADJUSTMENTS
Significant pro forma adjustments reflected in the pro forma consolidated
statements of operations include the following:
Adjustments to reflect the full period effect of operating expense savings
resulting from the consolidation of certain operations that occurred subsequent
to July 1, 1995, as well as the elimination of certain operating and general
administrative expenses associated with the operation of the Partnership.
Operating expense adjustments for retail overlap consolidations were $535 and
$175 for the nine and three months ended March 31, 1996, respectively. General
and administrative adjustments relating to corporate overhead consolidation,
the elimination of bank and consulting fees and the estimated incremental
general and administrative cost associated with the Partnership were $416
for each of the nine month periods ended March 31, 1997 and 1996 and for the
three month period ended March 31, 1996. The pro forma adjustments do not
include any amount for the incentive compensation that might be paid to key
employees.
Adjustments to reflect 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.
Depreciation and amortization adjustments were $60 for each of the nine month
periods ended March 31, 1997 and 1996, and $20 for the three month period ended
March 31, 1996.
F-5
<PAGE> 215
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
DECEMBER 31, 1996
(UNAUDITED)
Adjustments to reflect interest expense applicable to the Partnership.
Interest expense adjustments relating to expense for the $220,000 senior notes
at a rate of 7.53% per annum, expense attributable to the working capital
facility based on an average outstanding principal balance of $120 at 6.5% per
annum, expense attributable to debt assumed based on an average outstanding
principal balance of $7,000 at 8.5% per annum and debt expense amortization
based on $5,500 estimated debt issuance costs were $270 for each for the nine
month periods ended March 31, 1997 and 1996 and $90 for the three month period
ended March 31, 1996.
Adjustments to reflect the elimination of income tax related accounts
because income taxes will not be borne by the Partnership, except for income
taxes applicable to operations to be conducted by the Partnership's wholly owned
corporate subsidiary.
Net income per limited partner 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 weighted average number of Units outstanding
(which includes equivalent units issued under the restricted unit plan) 16,513
were assumed to have been outstanding the entire period.
F-6
<PAGE> 216
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cornerstone Propane Partners, L.P.:
We have examined the pro forma adjustments reflecting the transactions
described in the notes to the pro forma consolidated financial statements and
the application of those adjustments to the historical amounts in the
accompanying pro forma consolidated statement of operations of Cornerstone
Propane Partners, L.P. (a Delaware limited partnership) for the year ended June
30, 1996. The historical amounts in the accompanying statements are derived from
the historical financial statements of SYN Inc., which were audited by us, and
the historical financial statements of Empire Energy Corporation and CGI
Holdings, Inc., which were audited by other accountants, appearing elsewhere
herein. The historical amounts related to Myers Propane Gas Company were derived
from the unaudited historical financial statements of Myers Propane Gas Company.
The pro forma adjustments are based upon management's assumptions described in
the notes to the pro forma consolidated financial statements. Our examination
was made in accordance with standards established by the American Institute of
Certified Public Accountants and, accordingly, included such procedures as we
considered necessary in the circumstances.
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 statement of operations is 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 statement of operations,
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
December 4, 1996
F-7
<PAGE> 217
CORNERSTONE PROPANE PARTNERS, L.P.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
EMPIRE
ENERGY ACQUISITION PRO FORMA PARTNERSHIP
SYNERGY HISTORICAL COAST MYERS DISPOSITION ADJUSTMENTS PRO FORMA
------- ---------- ----- ----- ----------- ----------- -----------
(A) (B) (C) (D)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE....................... $106,121 $98,821 $384,961 $4,725 $1,162 $ -- $595,790
COST OF SALES................. 51,112 50,080 351,549 2,767 476 -- 455,984
-------- ---------- -------- ------ ----------- ----------- -----------
GROSS PROFIT.................. 55,009 48,741 33,412 1,958 686 -- 139,806
-------- ---------- -------- ------ ----------- ----------- -----------
EXPENSES
Operating................... 32,559 24,766 20,768 902 312 (700)(E) 78,607
General and
administrative............ 3,750 8,254 3,835 -- -- (1,675)(E) 14,164
Depreciation and
amortization.............. 3,973 5,875 4,268 184 122 78(F) 14,500
-------- ---------- -------- ------ ----------- ----------- -----------
40,282 38,895 28,871 1,086 434 (2,297) 107,271
-------- ---------- -------- ------ ----------- ----------- -----------
OPERATING INCOME.............. 14,727 9,846 4,541 872 252 2,297 32,535
INTEREST EXPENSE, NET......... 6,682 2,598 5,550 175 133 2,727(G) 17,865
-------- ---------- -------- ------ ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME
TAXES........................ 8,045 7,248 (1,009) 697 119 (430) 14,670
INCOME TAX PROVISION
(BENEFIT).................... 3,336 3,550 (314) 265 42 (6,779)(H) 100
-------- ---------- -------- ------ ----------- ----------- -----------
NET INCOME (LOSS)............. $ 4,709 $ 3,698 $ (695) $ 432 $ 77 $ 6,349 $ 14,570
======== ========== ======== ====== =========== ===========
General partners' interest in
net income................... 291
-----------
Limited partner's interest in
net income................... $ 14,279
-----------
Net income per unit........... $ .88(I)
===========
Weighted average number of
Units outstanding............ 16,513
===========
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-8
<PAGE> 218
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
1. BASIS OF PRESENTATION:
The pro forma adjustments described in Note 4 below have been prepared as if
the Transactions effected at the closing of the IPO and the related Transactions
had taken place on June 30, 1996 with respect to balance sheet information and
at the beginning of the respective periods with respect to statement of
operations. The adjustments are based upon currently available information and
certain estimates and assumptions, and therefore the actual adjustments made to
effect the Transactions will differ from the pro forma adjustments. However,
management believes that the assumptions provide a reasonable basis for
presenting the significant effects of the Transactions as contemplated and that
the pro forma adjustments give appropriate effect to these assumptions and are
properly applied in the pro forma financial information. Capitalized terms used
herein and not otherwise defined have the meaning set forth in the Prospectus.
2. THE TRANSACTIONS:
Concurrently with the closing of the initial public offering of 9,821,000
Common Units on December 17, 1996 (the "Offering") 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")
contributed, or caused to be contributed, the operations (the "Combined
Operations") of Synergy, Empire Energy Corporation ("Empire Energy")
(subsidiaries of Northwestern Growth Corporation ("Northwestern Growth")), Myers
Propane Gas Company ("Myers") and CGI Holdings, Inc. ("Coast") to Cornerstone
Propane, L.P. (the "Operating Partnership") in exchange for all the interests in
the Operating Partnership, and the Operating Partnership assumed substantially
all of the liabilities associated with the Combined Operations. Immediately
thereafter, all of the limited partner interests in the Operating Partnership
were conveyed to the Partnership in exchange for interests in the Partnership.
As a result of such transactions, the Managing General Partner and the Special
General Partner own an aggregate 39.4% limited partner interest in the
Partnership and an aggregate 2% general partner interest in the Partnership and
the Operating Partnership (including the right to receive incentive
distributions).
3. OTHER EXPENSE REDUCTIONS:
The pro forma adjustments for the year ended June 30, 1996 exclude certain
non-recurring expenses incurred by Empire Energy of approximately $4.3 million,
propane acquisition and logistics cost savings associated with the integration
of the Coast wholesale operations with the Combined Operations of approximately
$1.5 million, and insurance savings of approximately $2.1 million, which the
Partnership believes are achievable as a result of the Transactions. These
expense reductions are not reflected in the accompanying pro forma statements of
operations. If effect were given to these anticipated expense reductions, the
following amounts would have resulted:
YEAR ENDED
JUNE 30, 1996
-------------
Pro forma operating income...................................... $ 40,397
Pro forma net income............................................ $ 22,432
Pro forma net income per Unit................................... $ 1.34
There can be no assurance that the Partnership will be able to integrate
successfully the Combined Operations, achieve anticipated cost savings or
institute the necessary systems and procedures to successfully manage the
Combined Operations on a profitable basis. The Partnership was recently formed
and has conducted no operations and generated no revenues to date.
F-9
<PAGE> 219
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
4. PRO FORMA ADJUSTMENTS:
A. Reflects the results of operations for the pre-acquisition period July 1,
1995 to August 14, 1995 for Synergy and the pro forma full year results of
propane operations acquired by Synergy subsequent to July 1, 1995.
<TABLE>
<CAPTION>
ADJUST
HISTORICAL ACQUISITION/
SYNERGY TO FULL DISPOSITION
HISTORICAL YEAR ADJUSTMENTS SYNERGY
---------- ---------- ------------- -------
<S> <C> <C> <C> <C>
REVENUE..................................... $ 96,062 $ 7,568 $ 2,491 $ 106,121
COST OF SALES............................... 46,187 3,631 1,294 51,112
----------- ----------- ------ ----------
GROSS PROFIT................................ 49,875 3,937 1,197 55,009
----------- ----------- ------ ----------
EXPENSES
Operating................................. 28,745 3,163 651 32,559
General and administrative................ 3,281 469 -- 3,750
Depreciation and amortization............. 3,329 472 172 3,973
----------- ----------- ------ ----------
35,355 4,104 823 40,282
----------- ----------- ------ ----------
OPERATING INCOME (LOSS)..................... 14,520 (167) 374 14,727
INTEREST EXPENSE, NET....................... 5,584 816 282 6,682
----------- ----------- ------ ----------
INCOME (LOSS) BEFORE INCOME TAXES........... 8,936 (983) 92 8,045
INCOME TAX PROVISON (BENEFIT)............... 3,675 (373) 34 3,336
----------- ----------- ------ ----------
NET INCOME (LOSS)........................... $ 5,261 $ (610) $ 58 $ 4,709
=========== =========== ====== ==========
</TABLE>
B. Reflects the pro forma full year results of propane operations acquired by
Coast subsequent to August 1, 1995. Also reflects the elimination of results
of discontinued operations subsequent to August 1, 1995.
<TABLE>
<CAPTION>
ACQUISITION/
COAST DISPOSITION
HISTORICAL ADJUSTMENT COAST
---------- ------------- -----
<S> <C> <C> <C>
REVENUE.................................................. $ 384,354 $ 607 $ 384,961
COST OF SALES............................................ 351,213 336 351,549
---------- ----- ----------
GROSS PROFIT............................................. 33,141 271 33,412
EXPENSES
Operating.............................................. 21,046 (278) 20,768
General and administrative............................. 3,835 -- 3,835
Depreciation and amortization.......................... 4,216 52 4,268
---------- ----- ----------
29,097 (226) 28,871
---------- ----- ----------
OPERATING INCOME......................................... 4,044 497 4,541
INTEREST EXPENSE, NET.................................... 5,470 80 5,550
---------- ----- ----------
INCOME (LOSS) BEFORE INCOME TAXES........................ (1,426) 417 (1,009)
INCOME TAX PROVISION (BENEFIT)........................... (473) 159 (314)
---------- ----- ----------
NET INCOME (LOSS)........................................ $ (953) $ 258 $ (695)
========== ===== ==========
</TABLE>
F-10
<PAGE> 220
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
4. PRO FORMA ADJUSTMENTS: (CONTINUED)
C. Reflects the results of operations for the pre-acquisition period July 1,
1995 to December 6, 1995 for Myers.
<TABLE>
<CAPTION>
ADJUST
HISTORICAL
MYERS TO FULL
HISTORICAL YEAR MYERS
---------- ----------- -----
<S> <C> <C> <C>
REVENUE..................................... $ 3,178 $ 1,547 $ 4,725
COST OF SALES............................... 1,842 925 2,767
----------- ----------- ---------
GROSS PROFIT................................ 1,336 622 1,958
EXPENSES
Operating................................. 554 348 902
General and Administrative................ -- -- --
Depreciation and amortization............. 103 81 184
----------- ----------- ---------
657 429 1,086
----------- ----------- ---------
OPERATING INCOME............................ 679 193 872
INTEREST EXPENSE, NET....................... 101 74 175
----------- ----------- ---------
INCOME (LOSS) BEFORE INCOME TAXES........... 578 119 697
INCOME TAX PROVISION........................ 220 45 265
----------- ----------- ---------
NET INCOME.................................. $ 358 $ 74 $ 432
=========== =========== =========
- ---------
</TABLE>
D. Reflects the pro forma full year results of propane operations acquired by
Northwestern Growth subsequent to July 1, 1995.
E. Reflects the full period effect of operating expense savings resulting from
the consolidation of certain operations that occurred subsequent to July 1,
1995, as well as the estimated elimination of certain operating and general
and administrative expenses associated with the operation of the
Partnership, as follows:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1996
-----------
<S> <C>
Operating:
- ---------
Retail overlap consolidations................................................................. $ 700
===========
General and Administrative:
- --------------------------
Corporate overhead consolidation.............................................................. $ 2,100
Eliminated bank and consulting fees........................................................... 325
Estimated incremental general and administrative cost associated with the partnership......... (750)
-----------
$ 1,675
===========
</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.
F-11
<PAGE> 221
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
4. PRO FORMA ADJUSTMENTS: (CONTINUED)
F. 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.
G. Reflects the following adjustment to interest expense from the Transactions:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1996
-------------
<S> <C>
Historical interest expense.............................................................. $ 13,753
Pro forma interest expense from adjustment to full year.................................. 890
Pro forma interest expense from acquisitions............................................. 495
-------------
$ 15,138
-------------
Pro forma interest expense applicable to the Partnership:
$220,000 first mortgage notes at a rate of 7.53% per annum............................. $ 16,566
Interest expense attributable to working capital facility based on an average
outstanding principal balance of $2,000 at 6.50% per annum........................... 130
Interest expense attributable to debt assumed based on an average outstanding principal
balance of $9,500 at 8.50% per annum................................................. 808
Debt expense amortization based on $5,050 estimated debt issuance costs................ 361
-------------
$ 17,865
=============
Pro forma interest expense adjustment.................................................... $ 2,727
=============
</TABLE>
H. Reflects the elimination of income tax related accounts because income taxes
will not be borne by the Partnership, except for income taxes applicable to
operations to be conducted by the Partnership's wholly owned corporate
subsidiary.
I. Net income (loss) per Unit is determined by dividing the net income (loss)
that would be allocated to the Unitholders, which is 98% of net income
(loss), by the number of units outstanding. The number of units outstanding,
16,419, were assumed to have been outstanding the entire period.
F-12
<PAGE> 222
CORNERSTONE PROPANE PARTNERS, L.P.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1997
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................................................... $ 23,115
Trade receivables, net............................................................................ 40,557
Inventories....................................................................................... 19,539
Prepayments and other current assets.............................................................. 6,350
------------
Total current assets............................................................................ 89,561
------------
Property, plant and equipment, net of accumulated depreciation of $3,274.......................... 240,550
Excess of cost over fair value, net............................................................... 201,876
Other assets, net................................................................................. 11,572
------------
Total assets.................................................................................... $ 543,559
============
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current portion of long-term debt................................................................. $ 5,406
Trade accounts payable............................................................................ 33,444
Accrued liabilities............................................................................... 15,925
------------
Total current liabilities....................................................................... 54,775
------------
Long-term debt.................................................................................... 224,135
Notes payable related party....................................................................... 2,353
Other non-current liabilities..................................................................... 14,663
------------
Total liabilities............................................................................... 295,926
------------
COMMITMENTS AND CONTINGENCIES (Note 6)
PARTNERS' CAPITAL
Common unitholders................................................................................ 143,232
Subordinated unitholders.......................................................................... 99,351
General partners.................................................................................. 5,050
------------
Total partners' capital......................................................................... 247,633
------------
Total liabilities and partners' capital......................................................... $ 543,559
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE> 223
CORNERSTONE PROPANE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FROM COMMENCEMENT
OF OPERATIONS
THREE MONTHS (ON DECEMBER 17,
ENDED 1996)
MARCH 31, 1997 MARCH 31, 1997
-------------- ---------------------
<S> <C> <C>
REVENUE....................................................................... $220,566 $260,936
COST OF SALES................................................................. 178,050 209,391
-------- --------
GROSS PROFIT.................................................................. 42,516 51,545
--------
EXPENSES
Operating, general and administrative....................................... 23,590 27,968
Depreciation and amortization............................................... 3,819 4,394
------ --------
24,409 32,362
------ --------
OPERATING INCOME.............................................................. 15,107 19,183
INTEREST EXPENSE.............................................................. (4,450) (5,228)
------- --------
INCOME BEFORE INCOME TAXES.................................................... 10,657 13,955
INCOME TAXES.................................................................. 20 25
------- --------
NET INCOME.................................................................... $10,637 $ 13,930
======= ========
General partners' interest in net income...................................... $ 213 $ 376
======= ========
Limited partner's interest in net income...................................... $10,424 $ 13,544
======= ========
Net income per Unit........................................................... $ 0.65 $ 0.85
======= ========
Weighted average number of Units outstanding.................................. 16,513 16,513
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
<PAGE> 224
CORNERSTONE PROPANE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FROM COMMENCEMENT OF
OPERATIONS
(ON DECEMBER 17,
1996)
TO MARCH 31, 1997
---------------------
<S> <C>
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES:
Net income............................................................................... $ 13,930
Adjustments to reconcile net income to net cash provided by (used for) operating
activities:
Depreciation and amortization.......................................................... 4,394
Loss on sale of assets ................................................................ 26
Changes in assets and liabilities, net of acquisitions:
Trade receivables.................................................................... 37,922
Inventories.......................................................................... 6,754
Prepayments and other current assets................................................. (3,583)
Trade accounts payable............................................................... (46,923)
Accrued expenses..................................................................... 5,576
----------
Net cash provided by operating activities.......................................... 18,096
----------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES:
Proceeds from sale of assets............................................................. 365
Expenditures for property, plant and equipment........................................... (2,075)
Net cash used for investing activities............................................. (1,710)
----------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES:
Net repayments on Working Capital Facility............................................... (12,800)
Additional borrowings on mortgages....................................................... 1,141
Payments on mortgages.................................................................... (683)
----------
Net cash used for financing activities............................................. (12,342)
----------
PARTNERSHIP FORMATION TRANSACTIONS:
Net proceeds from issuance of Common and Subordinated Units.............................. 191,804
Borrowings on Working Capital Facility................................................... 12,800
Issuance of long-term debt............................................................... 220,000
Cash transfers from Predecessor Companies................................................ 22,418
Repayment of long-term debt and related interest......................................... (337,631)
Distribution to Special General Partner for the redemption of preferred stock............ (61,196)
Distribution to Special General Partner.................................................. (15,500)
Other fees and expenses.................................................................. (13,626)
----------
Net cash provided by partnership formation transactions............................ 19,069
----------
Increase in cash and cash equivalents......................................................... $ 23,113
==========
CASH AND CASH EQUIVALENTS:
End of period............................................................................ $ 23,115
Beginning of period...................................................................... 2
----------
Increase........................................................................... $ 23,113
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
<PAGE> 225
CORNERSTONE PROPANE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF
LIMITED PARTNER UNITS TOTAL
------------------------ GENERAL PARTNERS'
COMMON SUBORDINATED COMMON SUBORDINATED PARTNERS CAPITAL
---------- ------------ ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at Commencement of Operations
(on December 17, 1996)............. -- -- $ -- $ -- $ -- $ --
Contributions of net assets of
predecessor companies and issuance
of Common Units.................... 9,821,000 6,597,619 136,997 92,032 -- 229,029
Issuance of 2% interest for general
partners contribution.............. -- -- -- -- 4,674 4,674
Net income........................... -- -- 6,235 7,319 376 13,930
---------- ------------ ---------- ------------ ----------- ----------
Balance March 31, 1997............... 9,821,000 6,597,619 $ 143,232 $ 99,351 $ 5,050 $ 247,633
========== ============ ========== ============ =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE> 226
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
(UNAUDITED)
1. PARTNERSHIP ORGANIZATION AND FORMATION
Cornerstone Propane Partners, L.P. ("Cornerstone Partners") was formed on
October 7, 1996 as a Delaware limited partnership. Cornerstone Partners and its
subsidiary Cornerstone Propane, L.P., a Delaware limited partnership (the
"Operating Partnership"), were formed to acquire, own and operate substantially
all of the propane businesses and assets of SYN Inc. and its subsidiaries
("Synergy"), Empire Energy Corporation and its subsidiaries ("Empire"), Myers
Propane Gas Company ("Myers") and CGI Holdings, Inc. and its subsidiaries
("Coast"). The principal predecessor entities, Synergy, Empire and Coast are
collectively referred to herein as the "Predecessor Companies." The consolidated
financial statements include the accounts of Cornerstone Partners, the Operating
Partnership and its corporate subsidiary Cornerstone Sales & Service
Corporation, a Delaware corporation, collectively referred to herein as the
Partnership. The Operating Partnership is, and the Predecessor Companies were,
principally engaged in (i) the retail marketing and 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. Pursuant to a Contribution, Conveyance and
Assumption Agreement dated as of December 17, 1996, substantially all of the
assets and liabilities of the Predecessor Companies were contributed to the
Operating Partnership (the "Conveyance"). As a result of the Conveyance,
Cornerstone Propane GP, Inc., a Delaware corporation and the managing general
partner of Cornerstone Partners (the "Managing General Partner") and SYN Inc., a
Delaware corporation and the special general partner (the "Special General
Partner") received all of the interests in the Operating Partnership, and the
Operating Partnership received substantially all of the assets and assumed
substantially all of the liabilities of the Predecessor Companies. Immediately
after the Conveyance, and in accordance with the Amended and Restated Agreement
of Limited Partnership of Cornerstone Partners (the "Partnership Agreement"),
the Managing General Partner and the Special General Partner conveyed their
limited partner interests in the Operating Partnership to Cornerstone Partners
in exchange for a 2% general partner interest in Cornerstone Partners and the
Operating Partnership.
Following these transactions, on December 17, 1996, Cornerstone Partners
completed its initial public offering through underwriters of 9,821,000 Common
Units (the "IPO") at a price to the public of $21.00 a unit. The proceeds of
approximately $191,804 from the IPO, the proceeds from the issuance of $220,000
aggregate principal amount of the Operating Partnership's 7.53% senior notes,
and $12,800 borrowings under the Working Capital Facility (as described in Note
3) were used to repay $414,327 in liabilities assumed by the Operating
Partnership (including $141,799 paid to affilaites of the Managing General
Partner) that were in large part incurred in connection with the transactions
entered into prior to the offering. A portion of the funds were distributed to
the Special General Partner to redeem its preferred stock ($61,196) and to
provide net worth to the Special General Partner ($15,500). The balance
($10,277) was used to pay expenses.
Partners' capital of limited partners consists of 9,821,000 Common Units and
6,597,619 Subordinated Units, representing an aggregate 58.6% and 39.4% limited
partner interest in Cornerstone Partners, respectively. Partners' capital of
general partners consists of a 2% interest in the Partnership. In accordance
with the Offering Prospectus, 100% of the income for the fouteen day period
ended December 31, 1996 was allocated to the Subordinated Unit holders and the
General Partners. No income from this period was allocated to the Common Unit
holders.
F-17
<PAGE> 227
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
(UNAUDITED)
During the Subordination Period (see Note 5), the Partnership may issue up
to 4,270,000 additional Parity Units (generally defined as Common Units and all
other Units having rights to distribution or in liquidation ranking on a parity
with the Common Units), excluding Common Units issued in connection with (i)
employee benefit plans and (ii) the conversion of Subordinated Units into Common
Units, without the approval of a majority of the Unitholders (see Note 5). The
Partnership may issue an unlimited number of additional Parity Units without
Unitholder approval if such issuance occurs in connection with acquisitions,
including, in certain circumstances, the repayment of debt incurred in
connection with an acquisition. In addition, under certain conditions the
Partnership may issue without Unitholder approval an unlimited number of parity
securities for the repayment of up to $75,000 of long-term indebtedness of the
Partnership. After the Subordination Period, the Managing General Partner may
cause 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 General Partner
in its sole discretion.
Cornerstone Partners and the Operating Partnership have no employees. The
Managing General Partner conducts, directs and manages all activities of
Cornerstone Partners and the Operating Partnership and is reimbursed on a
monthly basis for all direct and indirect expenses it incurs on their behalf.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. The Partnership is the fifth largest retail marketer
of propane in the United States in terms of volume, serving more than 360,000
residential, commercial, industrial and agricultural customers from 306 customer
service centers in 26 states. The Partnership was recently formed to own and
operate the propane business and assets of Synergy, Empire, Myers and Coast. The
Partnership's operations are concentrated in the east coast, south-central and
west coast regions of the United States.
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of the Predecessor Companies and Myers. Historical financial statements
of Myers have not been separately presented based on the Partnership's belief
that the separate inclusion of Myers does not have a material effect on the
consolidated financial statements of the Partnership. The acquisitions of the
Predecessor Companies are accounted for as purchase business combinations based
on management's best estimate. All purchase price allocations for the
acquisition of the Predecessor Companies are preliminary in nature and are
subject to change within the twelve months following the acquisitions based on
refinements as actual data becomes available. All significant inter-company
transactions and accounts have been eliminated. The accompanying consolidated
financial statements are unaudited and have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission. They include
all adjustments which the Partnership considers necessary for a fair statement
of the results for the interim periods presented. Such adjustments consisted
only of normal recurring items unless otherwise disclosed. Due to the seasonal
nature of the Partnership's propane business, the results of operations for
interim periods are not necessarily indicative of the results to be expected for
a full year.
FISCAL YEAR. The Partnership's fiscal year is July 1 to June 30.
Previously, Coast's fiscal year began on August 1 and ended on July 31, while
Empire's, Synergy's and Myers' fiscal years began on July 1 and ended on June
30. Because the Partnership commenced operations upon completion of the IPO, the
accompanying consolidated statements of operations, cash flows and partners'
capital are for the period from commencement of operations on December 17, 1996
to March 31, 1997.
F-18
<PAGE> 228
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
(UNAUDITED)
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.
FUTURES CONTRACTS. The Partnership 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
March 31, 1997 are not material.
ACCOUNTS RECEIVABLE. The outstanding balance is stated net of allowance of
doubtful accounts of $5,406 at March 31, 1997.
REVENUE RECOGNITION. Sales of natural gas, crude oil, natural gas liquids
and LPG and the related cost of product are recognized upon delivery of the
product.
INVENTORIES. Inventories are stated at the lower of cost or market. The
cost of natural gas, crude oil, natural gas liquids and LPG is determined using
the first-in, first-out (FIFO) method. The cost of gas distribution parts,
appliances and equipment is determined using the weighted average method. The
major components of inventory consist of the following:
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------
(UNAUDITED)
<S> <C>
LPG and Other.............................................................. $ 10,707
Parts and Fittings......................................................... 8,832
-------
$ 19,539
=======
</TABLE>
PROPERTY, PLANT AND EQUIPMENT. Property, plant 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 to 33
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. When
property, plant 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.
EXCESS OF COST OVER FAIR VALUE 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 $203,376 and $1,500
respectively, at March 31, 1997.
F-19
<PAGE> 229
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
(UNAUDITED)
It is the Partnership's policy to review intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. If such a review should indicate that the
carrying amount of intangible assets is not recoverable, it is the Partnership's
policy to reduce the carrying amount of such assets to fair value.
INCOME TAXES. Neither Cornerstone Partners nor the Operating Partnership
are directly subject to federal and state income taxes. Instead, taxable income
or loss is allocated to the individual partners. As a result, no recognition of
income tax expense has been reflected in the Partnership's consolidated
financial statements relating to the earnings of Cornerstone Partners or the
Operating Partnership. The Partnership has one subsidiary which operates in
corporate form and is subject to federal and state income taxes. Accordingly,
the Partnership's consolidated financial statements reflect income tax expense
related to the subsidiary's earnings.
NET INCOME PER UNIT. Net income per Unit is computed by dividing net
income, after deducting the General Partners' 2% interest, by the weighted
average number of outstanding Common and Subordinated Units.
UNIT-BASED COMPENSATION. The Partnership accounts for unit-based
compensation as (a) deferred compensation for time-vesting units and (b)
contingent consideration for performance-vesting units. Compensation expense for
the time-vesting units is recognized over the vesting period. Compensation
expense for the performance-vesting units is recognized when the units become
issuable. Time vesting units are considered Common Unit equivalents for the
purpose of computing primary earnings per unit. Performance-vesting units are
considered for the purpose of computing fully diluted earnings per unit.
3. CREDIT FACILITIES
Concurrently with the IPO, the Operating Partnership entered into a credit
agreement (the "Bank Credit Agreement") which consists of a Working Capital
Facility and an Acquisition Facility.
The Working Capital Facility provides for borrowings up to $50,000
(including a $30,000 sublimit for letters of credit through March 31, 1997 and
$20,000 thereafter), and matures on December 31, 1999. The Bank Credit Agreement
provides that there must be no amount outstanding under the Working Capital
Facility (excluding letters of credit) in excess of $10,000 for at least 30
consecutive days during each fiscal year. There were no borrowings under the
Working Capital Facility at March 31, 1997. Outstanding letters of credit
totaled $7,600 at March 31, 1997.
The Acquisition Facility provides the Operating Partnership with the ability
to borrow up to $75,000 to finance propane business acquisitions. The
Acquisition Facility operates as a revolving facility through December 31, 1999,
at which time any loans then outstanding may be converted to term loans and be
amortized quarterly for a period of four years thereafter. No amounts were
outstanding at March 31, 1997.
The Operating Partnership's obligations under the Bank Credit Agreement are
secured, on an equal and ratable basis, with its obligations under the Note
Agreement (see Note 4), by a first priority security interest in the Operating
Partnership's inventory, accounts receivable and certain customer storage tanks.
Loans under the Bank Credit Agreement bear interest at a per annum rate equal to
either (at the Operating Partnership's option): (a) the sum (the "Base Rate") of
the applicable margin, and the higher of (i) the agent bank's prime rate and
F-20
<PAGE> 230
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
(UNAUDITED)
(ii) the federal funds rate plus 1/2 of 1%, and (b) the sum (the "Eurodollar
Rate") of the applicable margin and the rate offered by the agent bank to
major banks in the offshore dollar market (as adjusted for applicable reserve
requirements, if any). The applicable margin for Base Rate loans varies between
0% and .12%, and the applicable margin for Eurodollar Rate loans varies between
.25% and .80%, in each case depending upon the Operating Partnership's ratio of
consolidated "Debt" to "Consolidated Cash Flow" (as such terms are defined in
the Bank Credit Agreement). At March 31, 1997, the applicable Base and
Eurodollar Rates were 8.625% and 6.675%, respectively. In addition, an annual
fee is payable quarterly by the Operating Partnership (whether or not borrowings
occur) ranging from .125% to .325% depending upon the ratio referenced above.
The Bank Credit Agreement contains customary representations, warranties,
events of defaults and covenants including limitations, among others, on the
ability of the Operating Partnership and its "Restricted Subsidiaries" (as
defined therein) to incur or maintain certain indebtedness or liens, make
investments and loans, enter into mergers, consolidations or sales of all or
substantially all of its assets and make assets sales. Generally, so long as no
default exists or would result, the Operating Partnership is permitted to make
any Restricted Payment (as defined in the Bank Credit Agreement and including
distributions to the Partnership) during each fiscal quarter in amount not to
exceed Available Cash with respect to the immediately preceding quarter.
In addition, the Bank Credit Agreement provides that: (1) the Operating
Partnership not permit the ratio of its consolidated Debt (as defined in the
Bank Credit Agreement) less cash on hand (in excess of $1,000 up to $10,000) to
Consolidated Cash Flow (as defined in the Bank Credit Agreement) to exceed
4.75:1.00 at any time on or before December 31, 1997, 4.50:1.00 at any time on
or before December 31, 1998 and 4.25:1.00 at any time thereafter; and (2) the
Operating Partnership not permit the ratio of its Consolidated Cash Flow to
consolidated "Interest Expense" (as defined therein) to be less than 2.00:1.00
prior to December 31, 1997, 2.25:1.00 any time thereafter on or before December
31, 1998 and 2.50:1.00 at any time thereafter.
4. LONG-TERM DEBT
On the IPO date, the Operating Partnership issued $220,000 of Senior Notes
with an annual interest rate of 7.53% pursuant to note purchase agreements with
various investors (collectively, the "Note Agreement"). The Senior Notes mature
on December 30, 2010, and require semi-annual interest payments commencing
December 30, 1996. The Note Agreement requires that the principal be paid in
equal annual payments of $27,500 starting December 30, 2003.
The Operating Partnership's obligations under the Note Agreement are
secured, on an equal and ratable basis with its obligations under the Bank
Credit Agreement, by a first priority security interest in the Operating
Partnership's inventory, accounts receivable and certain customer storage tanks.
The Note Agreement contains customary representations, warranties, events of
defaults and covenants applicable to the Operating Partnership and its
"Restricted Subsidiaries" (as defined therein), including limitations, among
others, on the ability of the Operating Partnership and its Restricted
Subsidiaries to incur additional indebtedness, create liens, make investments
and loans, enter into mergers, consolidations or sales of all or substantially
all assets and make asset sales. Generally, so long as no default exists or
would result, the Operating Partnership is permitted to make any Restricted
Payment (as defined in the Note Agreement and including distributions to the
F-21
<PAGE> 231
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
(UNAUDITED)
Partnership) during each fiscal quarter in amount not in excess of Available
Cash (see Note 5) with respect to the immediately preceding quarter.
5. QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Partnership will make distributions to its partners with respect to each
fiscal quarter of the Partnership approximately 45 days after the end of each
fiscal quarter in an aggregate amount equal to its Available Cash for such
quarter. Available Cash generally means, with respect to any fiscal quarter of
the Partnership, all cash on hand at the end of such quarter less the amount of
cash reserves established by the Managing General Partner in its reasonable
discretion for future cash requirements. These reserves are retained to provide
for the proper conduct of the Partnership's business, the payment of debt
principal and interest and to provide funds for distribution during the next
four quarters. The Partnership expects to make a distribution with respect to
the fiscal quarter ending March 31, 1997 to holders of record on the applicable
record date.
Distributions by the Partnership in an amount equal to 100% of its Available
Cash will generally be made 98% to all Unitholders 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. With respect to
each quarter during the Subordination Period (defined below), to the extent
there is sufficient Available Cash, the holders of Common Units have the right
to receive the Minimum Quarterly Distribution, plus any arrearages on the
Minimum Quarterly Distribution ("Common Unit Arrearages"), prior to the
distribution of Available Cash to holders of Subordinated Units. 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.
The Subordination Period will generally extend to the first day of any
quarter beginning after December 31, 2001 in respect of which (i) distributions
of Available Cash from Operating Surplus (generally defined as $25,000 plus
$22,000 cash on hand as of December 17, 1996 plus all operating cash receipts
less operating cash expenditures, debt service payments, maintenance capital
expenditures and cash reserves) 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 (generally defined as
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) 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
F-22
<PAGE> 232
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
(UNAUDITED)
the general partner interests in the Partnership during such periods, and (iii)
there are no outstanding Common Unit Arrearages. For the period commencing
December 17, 1996 and ending March 31, 1997, the Partnership declared a Minimum
Quarterly Distribution of $.63 per Common and Subordinated Unit amounting to
approximately $10.6 million.
6. COMMITMENTS AND CONTINGENCIES
The Partnership has succeeded to obligations of the self insurance programs
maintained by Empire and Synergy for any incidents occurring prior to December
17, 1996. The companies' insurance programs provided coverage for comprehensive
general liability and vehicle liability for catastrophic exposures as well as
those risks required to be insured by law or contract. The companies retained a
significant portion of certain expected losses related primarily to
comprehensive general liability and vehicle liability. Provisions for
self-insured losses were recorded based upon the companies' estimates of the
aggregate self-insured liability for claims incurred, and totaled $1,365 on
March 31, 1997.
The Partnership leases certain property, plant and equipment for various
periods under noncancelable leases, including an office space agreement with the
previous owner of Empire for $175 each year over a period of ten years. The
annual rental payments may increase to $250, depending on certain circumstances
occurring after two years.
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 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.
The Managing General Partner and its affiliates performing services for the
Partnership are entitled to reimbursement for all expenses incurred on behalf
of the Partnership, including the cost of compensation properly allocable to
the Partnership, and all other expenses necessary or appropriate to the conduct
of the business of, and allocable to, the Partnership. These costs, which
totaled $17,400 for the period December 17, 1996, to March 31, 1997, include
employee compensation and benefit expenses of employees of the Managing General
Partner and its affiliates.
7. RESTRICTED UNIT PLAN
The Partnership adopted the 1996 Restricted Unit Award Plan (the "Restricted
Unit Plan") which authorizes the issuance of Common Units with an aggregate
value of $12,500 (595,238 Common Units valued at the initial public offering
price of $21.00 per Unit) to executives, managers and elected supervisors of the
Partnership. Units issued under the Restricted Unit Plan are subject to a
bifurcated vesting procedure such that (a) 25% of the issued 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 issuance date, and (b) the remaining 75%
of the Units will vest automatically upon, and in the same proportions as, the
conversion of Subordinated Units to Common Units. Restricted Unit Plan
participants are not eligible to receive quarterly distributions or vote their
respective Units until vested. Restrictions generally limit the sale or transfer
of the Units during the restricted periods. The value of the restricted Unit is
established by the market price of the Common Unit at the date of grant.
As of and for the three and one-half month period ended March 31, 1997,
a total of 376,190 restricted Common Units were awarded. For the three and
one-half month period ended March 31, 1997, the Partnership recorded $20 of
compensation expense.
F-23
<PAGE> 233
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
(UNAUDITED)
8. PARTNERS' CAPITAL
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 sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units and
the related distribution on the general partner interests in the Partnership
during such periods, and (iii) there are no outstanding Common Unit Arrearages;
provided, however that the early conversion of the second one-quarter of
Subordinated Units may not occur until at least one year following the early
conversion of the first one-quarter of Subordinated Units.
Upon expiration of the Subordination Period, all remaining Subordinated
Units will convert into Common Units on a one-for-one basis and will thereafter
participate pro rata with the other Common Units in distributions of Available
Cash.
9. Subsequent Event
Effective April 16, 1997, the Partnership registered 750,000 additional
units which are available to be used for future acquisitions. On April 24,
1997 Cornerstone consummated the acquisition of substantially all of the assets
of American Propane, Inc. The total consideration paid for this acquisition was
approximately $2.4 million, of which $1.9 million was in the form of
Cornerstone Common Units.
F-24
<PAGE> 234
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-25
<PAGE> 235
EMPIRE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, JUNE
30,
1995 1996
-----------
- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash....................................................................................... $ -- $ 2,064
Trade receivables, less allowance for doubtful accounts; 1995 -- $905 and 1996 -- $1,262... 3,302 5,724
Inventories................................................................................ 4,831 6,702
Prepaid expenses........................................................................... 103 103
Refundable income taxes.................................................................... 727 457
Deferred income taxes...................................................................... 652 996
----------- ---------
Total Current Assets..................................................................... 9,615 16,046
----------- ---------
DUE FROM SYN INC............................................................................. -- 7,978
----------- ---------
PROPERTY AND EQUIPMENT, At Cost:
Land and buildings......................................................................... 7,329 8,903
Storage and consumer service facilities.................................................... 56,827 80,615
Transportation, office and other equipment................................................. 16,804 18,702
----------- ---------
80,960 108,220
Less accumulated depreciation.............................................................. (25,037) (28,686)
----------- ---------
55,923 79,534
----------- ---------
OTHER ASSETS:
Excess of cost over fair value of net assets acquired, at amortized cost................... 3,285 3,033
Other...................................................................................... 252 511
----------- ---------
3,537 3,544
----------- ---------
$ 69,075 $107,102
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks in process of collection............................................................ $ 158 $ --
Current maturities of long-term debt....................................................... 163 6,019
Accounts payable........................................................................... 2,048 3,368
Accrued salaries........................................................................... 767 1,063
Accrued expenses........................................................................... 1,141 1,676
----------- ---------
Total Current Liabilities................................................................ 4,277 12,126
----------- ---------
LONG-TERM DEBT............................................................................... 1,701 25,442
----------- ---------
DEFERRED INCOME TAXES........................................................................ 15,458 16,877
----------- ---------
ACCRUED SELF-INSURANCE LIABILITY 1,104 2,424
----------- ---------
STOCKHOLDERS' EQUITY:
Common stock; $.001 par value; authorized 17,500,000 shares; issued at June 30, 1995 and
1996 -- 12,004,430 shares................................................................ 12 12
Additional paid-in capital................................................................. 46,099 46,099
Retained earnings.......................................................................... 445 4,143
----------- ---------
46,556 50,254
Treasury stock, at cost -- 3,000 shares.................................................... (21) (21)
----------- ---------
46,535 50,233
----------- ---------
$ 69,075 $107,102
=========== =========
- ---------
</TABLE>
See Notes to Consolidated Financial Statements
F-26
<PAGE> 236
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
AND THREE MONTHS ENDED SEPTEMBER 30, 1995
AND THE ONE MONTH ENDED JULY 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ONE MONTH
ENDED ENDED JULY
SEPTEMBER 30, 31, 1996
1994 1995 1996 1995 -----------
--------- --------- --------- ------------- (UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE................................... $ 60,216 $ 56,689 $ 98,821 $ 12,223 $ 2,596
COST OF PRODUCT SOLD................................ 28,029 26,848 50,080 6,128 1,439
--------- --------- --------- ------------- -----------
GROSS PROFIT........................................ 32,187 29,841 48,741 6,095 1,157
--------- --------- --------- ------------- -----------
OPERATING COSTS AND EXPENSES:
Provision for doubtful accounts................... 537 983 1,450 222 40
General and administrative........................ 20,983 23,452 31,570 5,849 2,440
Depreciation and amortization..................... 4,652 4,322 5,875 1,288 499
--------- --------- --------- ------------- -----------
26,172 28,757 38,895 7,359 2,979
--------- --------- --------- ------------- -----------
OPERATING INCOME (LOSS)............................. 6,015 1,084 9,846 (1,264) (1,822)
INTEREST EXPENSE (Net).............................. 118 39 2,598 376 217
--------- --------- --------- ------------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................... 5,897 1,045 7,248 (1,640) (2,039)
PROVISION (CREDIT) FOR INCOME TAXES................. 2,400 600 3,550 (550) (765)
--------- --------- --------- ------------- -----------
NET INCOME (LOSS)................................... $ 3,497 $ 445 $ 3,698 $ (1,090) $ (1,274)
========= ========= ========= ============= ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-27
<PAGE> 237
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
AND ONE MONTH ENDED JULY 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK STOCK EARNINGS STOCK EQUITY
------------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1993................................ $ -- $ -- $ 42,614 $ -- $ 42,614
NET INCOME............................................ -- -- 3,497 -- 3,497
EFFECT OF CORPORATE RESTRUCTURING..................... 12 46,099 (46,111) -- --
--- ----------- ---------- --- ------------
BALANCE, JUNE 30, 1994................................ 12 46,099 -- -- 46,111
PURCHASE OF TREASURY STOCK............................ -- -- -- (21) (21)
NET INCOME............................................ -- -- 445 -- 445
--- ----------- ---------- --- ------------
BALANCE, JUNE 30, 1995................................ 12 46,099 445 (21) 46,535
NET INCOME............................................ -- -- 3,698 -- 3,698
--- ----------- ---------- --- ------------
BALANCE, JUNE 30, 1996................................ $ 12 $ 46,099 $ 4,143 $ (21) $ 50,233
NET INCOME (LOSS) (UNAUDITED)......................... -- -- (1,274) -- (1,274)
--- ----------- ---------- --- ------------
BALANCE, JULY 31, 1996 (UNAUDITED).................... $ 12 $ 46,099 $ 2,869 $ (21) $ 48,959
=== =========== ========== === ============
- ------------
</TABLE>
See Notes to Consolidated Financial Statements
F-28
<PAGE> 238
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
AND THREE MONTHS ENDED SEPTEMBER 30, 1995
AND ONE MONTH ENDED JULY 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED ONE MONTH
SEPTEMBER 30, ENDED JULY
1994 1995 1996 1995 31, 1996
--------- --------- ---------- ------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 3,497 $ 445 $ 3,698 $ (1,090) $ (1,274)
Items not requiring (providing) cash:
Depreciation.................................. 4,336 4,084 5,593 1,231 474
Amortization.................................. 316 238 282 57 24
Gain on sale of assets........................ (31) (145) (67) (6) 8
Deferred income taxes......................... (849) 194 1,075 (207) --
Changes in:
Trade receivables............................... (522) 388 (1,799) (2,949) 222
Inventories..................................... 952 (985) (348) (5,739) (340)
Accounts payable................................ (821) 1,444 1,301 1,789 335
Accrued expenses and self insurance............. 229 325 2,124 1,303 (5)
Prepaid expenses and other...................... (7) 72 (279) (965) (99)
Income taxes payable (refundable)............... (53) (702) 270 261 (768)
--------- --------- ---------- ------------- -----------
Net cash provided by (used in) operating
activities.................................. 7,047 5,358 11,850 (6,315) (1,423)
--------- --------- ---------- ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets...................... 125 295 162 14 14
Purchases of property and equipment............... (4,058) (8,365) (3,184) (405) (487)
Purchase of assets from SYN Inc................... -- -- (35,980) (35,980) --
--------- --------- ---------- ------------- -----------
Net cash used in investing activities......... (3,933) (8,070) (39,002) (36,371) (473)
--------- --------- ---------- ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in credit facilities.......... (2,051) 1,600 (5,500) 7,900 --
Principal payments on purchase obligations........ (109) (132) (126) (30) (15)
Checks in process of collection................... -- 158 (158) (158) --
Purchase of treasury stock........................ -- (21) -- -- --
Proceeds from acquisition credit facility......... -- -- 35,000 35,000 --
--------- --------- ---------- ------------- -----------
Net cash provided by (used in) financing
activities.................................. (2,160) 1,605 29,216 42,712 (15)
--------- --------- ---------- ------------- -----------
INCREASE (DECREASE) IN CASH......................... 954 (1,107) 2,064 26 (1,911)
CASH, BEGINNING OF PERIOD........................... 153 1,107 0 0 2,064
--------- --------- ---------- ------------- -----------
CASH, END OF PERIOD................................. $ 1,107 $ 0 $ 2,064 $ 26 153
========= ========= ========== ============= ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-29
<PAGE> 239
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Company for the periods ended
September 30, 1995 and July 31, 1996 are unaudited. In the opinion of
management, these unaudited statements include all adjustments, all of which are
of a normal recurring nature, which are necessary to a fair presentation of
results of operations and cash flows for the period.
Due to the seasonal nature of the Company's propane business, the results of
operations for the interim periods are not necessarily indicative of results to
be expected for a full year.
NATURE OF OPERATIONS
The Company's principal operations are the retail sale of LP gas. Most of
the Company's customers are owners of residential single or multi-family
dwellings who make periodic purchases on credit. Such customers are located in
the Southeast and Midwest regions of the United States. At June 30, 1994, the
Company was separated from Empire Gas Corporation (Empire Gas). The financial
statements for the year ended June 30, 1994 reflect the operations of the
subsidiaries of Empire Gas which the Company received in the restructuring
transaction. In addition to the direct operations of the subsidiaries, 47.7% of
Empire Gas corporate overhead for the year ended June 30, 1994 has been
allocated to Empire Energy. This percentage of overhead is considered reasonable
by management as it reflects the percentage of earnings before interest,
depreciation and income taxes of the subsidiaries received by the Company. See
Note 2 for a description of the restructuring transaction.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Empire Energy
Corporation and its subsidiaries. All significant intercompany balances have
been eliminated in consolidation.
REVENUE RECOGNITION POLICY
Sales and related cost of product sold are recognized upon delivery of the
product or service.
F-30
<PAGE> 240
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the first-in, first-out method for retail operations and specific identification
method for wholesale operations. The inventories consist of the following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Gas and other petroleum products........................................... $ 1,679 $ 2,727
Gas distribution parts, appliances and equipment........................... 3,152 3,975
--------- ---------
$ 4,831 $ 6,702
========= =========
</TABLE>
PROPERTY AND EQUIPMENT
Depreciation is provided on all property and equipment on the straight-line
method over estimated useful lives of 5 to 33 years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 1996, the Company's only financial instruments are cash,
long-term debt and related accrued interest for which their carrying amounts
approximate fair value.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
AMORTIZATION
The excess of cost over fair value of net assets acquired (originally
$4,850,000) is being amortized on the straight-line basis over 20 years.
NOTE 2: RESTRUCTURING TRANSACTION
On June 30, 1994, the Company was separated from Empire Gas in an exchange
of the majority ownership of Empire Gas for all of the shares of the Company (a
subsidiary of Empire Gas) (the "Split-off Transaction"). The Company received
locations principally in the Southeast plus certain home office assets and
liabilities.
In connection with this transaction, the principal shareholder of Empire Gas
terminated his employment with Empire Gas as well as terminated certain lease
and use agreements. This shareholder was the principal shareholder and chairman
of the board of the Company prior to the management buy out (See Note 3).
F-31
<PAGE> 241
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: MANAGEMENT BUY OUT
Prior to year end, professional and other fees amounting to $1,926,000 were
incurred in connection with an effort to sell the Company and are included in
general and administrative expense during the year ended June 30, 1996. The
Company abandoned these efforts.
On August 1, 1996, subsequent to year end, the principal shareholder of the
Company since its inception and certain other shareholders sold their interests
in the Company to a new entity formed by certain members of management of the
Company.
In connection with this transaction, the principal shareholder of the
Company terminated employment with the Company as well as terminated certain
lease and use agreements. The new entity is principally owned by the son of the
former principal shareholder. All references in these financial statements to
the principal shareholder relate to the former principal shareholder.
The new entity paid approximately $59,000,000 cash, and distributed certain
home office assets and a portion of the SYN Inc. receivable in exchange for the
shares of Company stock purchased. In addition to the above consideration, the
new entity issued a $5,000,000 note payable to the principal shareholder. The
amount paid to the selling shareholders was financed with proceeds from a new
credit agreement with the Company's current lender.
The new credit facility provides for a $42,000,000 term loan, a $52,000,000
second term loan, a $20,000,000 working capital facility and a $10,000,000
acquisition credit facility. The new credit facility includes working capital,
capital expenditures, cash flow and net worth requirements as well as dividend
restrictions. The principal payment requirements on the two term loans will be
$3,400,000 in the year ended June 30, 1997.
NOTE 4: SYNERGY ACQUISITION
On August 15, 1995, the Company acquired the assets of 38 retail locations
previously operated by Synergy Group, Inc. These locations were purchased from
SYN Inc., a company formed for the purpose of acquiring Synergy Group
Incorporated. SYN Inc. is majority owned by Northwestern Growth Corporation, a
wholly-owned subsidiary of Northwestern Public Service Company, and minority
owned and managed by Empire Gas. The purchase price of the 38 retail locations
was approximately $38 million. The total consideration for the purchase was
approximately $36 million in cash financed by the new acquisition credit
facility (see Note 6) plus the assets of nine retail locations principally in
Mississippi valued at approximately $2 million. The results of operations for
the period after August 15, 1995, of the Synergy locations are included in the
financial statements for the period ended June 30, 1996. The purchase price of
the Synergy assets has been allocated as follows (In Thousands):
<TABLE>
<S> <C>
Current Assets..................................................... $ 2,499
Property and Equipment............................................. 27,435
Due from SYN Inc................................................... 7,978
---------
$ 37,912
=========
</TABLE>
Unaudited pro forma operations assuming the acquisition was made at the
beginning of the year ended June 30, 1994 and 1995, are presented below. Pro
forma results for the year ended June 30, 1996,
F-32
<PAGE> 242
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: SYNERGY ACQUISITION (CONTINUED)
are not presented since they would not differ materially from the audited
results of operations presented in the statement of income.
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Operating revenue..................................... $ 88,620 $ 82,222
Cost of product sold.................................. 42,589 40,724
--------- ---------
Gross profit.......................................... $ 46,031 $ 41,498
========= =========
</TABLE>
The purchase price of the assets acquired from SYN Inc. is subject to
adjustment based on the amount of working capital acquired by the Company. A
receivable has been recorded in the amount of $3,978,000, which reflects the
reduction in purchase price of the assets based on the amount of working capital
acquired. On August 1, 1996, this receivable was assigned to the former
principal shareholder in connection with the management buy out.
The purchase price of the assets acquired from SYN Inc. is also subject to
adjustment based on the value of consumer tanks which cannot be located within a
specified period of time. The Company has made a claim to SYN Inc. for
approximately $4,000,000 which represents the value of unlocated tanks at June
30, 1996. A receivable for these tanks has been recorded on the balance sheet at
June 30, 1996. On August 1, 1996, one-half of this receivable was assigned to
the former principal shareholder in connection with the management buy out.
These amounts receivable in connection with the purchase from SYN Inc. are
management's best estimate of amounts which will be ultimately collected.
However, the parties are still negotiating final settlement, and the final
amounts received could differ materially.
NOTE 5: RELATED-PARTY TRANSACTIONS
The Company provides data processing, office rent and other clerical
services to two corporations owned by officers and shareholders of the Company
and is reimbursed $5,000 per month for these services.
The Company leases a jet aircraft and an airport hangar from a corporation
owned by the principal shareholder of the Company. The lease requires annual
rent payments of $100,000 beginning July 1, 1994. In addition to direct lease
payments, the Company is also responsible for the operating costs of the
aircraft and the hangar. The lease agreement was terminated August 1, 1996, in
connection with the management buy out.
The Company has an agreement with a corporation owned by the principal
shareholder of the Company which provides the Company the right to use business
guest facilities. The agreement requires annual payments of $250,000 beginning
July 1, 1994. In addition to direct payments, the Company is also responsible
for providing vehicles and personnel to serve as security for the facilities.
This agreement was terminated August 1, 1996, in connection with the management
buy out.
The Company leases the corporate home office, land, buildings and certain
equipment from a corporation owned principally by the principal shareholder. The
lease requires annual payments of $200,000 beginning July 1, 1994. The lease was
terminated August 1, 1996, in connection with the management buy out.
F-33
<PAGE> 243
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: RELATED-PARTY TRANSACTIONS (CONTINUED)
The Company leases a lodge from a corporation owned by the principal
shareholder of the Company. The lease requires annual rent payments of $120,000
beginning July 1, 1994. The lease was terminated August 1, 1996, in connection
with the management buy out.
On August 1, 1996, the Company entered into a new lease agreement with
entities controlled by the former principal shareholder. The new lease agreement
provides for the payment of $600,000 per year for the corporate home office,
land, buildings and certain equipment, the use of the airport hangar and the
right to use land underlying the Company's warehouse facility. The agreement
expires June 30, 2005.
A subsidiary of the Company has entered into a seven-year services agreement
with Empire Gas to provide data processing and management information services
beginning July 1, 1994. The services agreement provides for payments by Empire
Gas to be based on an allocation of the subsidiary's actual costs based on the
gallons of LP gas sold by Empire Gas as a percentage of the gallons of LP gas
sold by the Company and Empire Gas combined. For the years ended June 30, 1995,
and June 30, 1996, total amounts received related to this services agreement
were $1.1 million and $713,000, respectively. Such amounts have been netted
against related general and administrative expenses in the accompanying
statements of income.
NOTE 6: LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit facility (A)......................................... $ 1,600 $ --
Acquisition credit facility (B)....................................... -- 31,100
Purchase contract obligations (C)..................................... 264 361
--------- ---------
1,864 31,461
Less current maturities............................................... 163 6,019
--------- ---------
$ 1,701 $ 25,442
========= =========
</TABLE>
(A) On September 30, 1994, the Company entered into an agreement with a lender
to provide a revolving credit facility. The facility provides for borrowings
up to $20 million, bears interest at either 1/2% over the lender's prime
rate or 1 1/8% over the Eurodollar rate and matures June 30, 2000. The
facility includes working capital, capital expenditure, cash flow and net
worth requirements as well as dividend restrictions which limit the payment
of cash dividends to 50% of the preceding year's net income. The Company's
unused revolving credit line at June 30, 1996, amounted to $18,148,000 after
considering $1,852,000 of letters of credit. The credit facility was
terminated August 1, 1996, in connection with the management buy out.
(B) On August 15, 1995, the Company modified the above agreement to include a
$35 million acquisition credit facility which was used for the purchase of
assets from SYN Inc. The acquisition credit facility bears interest at
either 1/2% over the lender's prime rate or 1 1/8% over the Eurodollar rate
and matures June 30, 2000. The acquisition credit facility requires
quarterly principal payments of $1,944,000. This credit facility was
terminated August 1, 1996, in connection with the management buy out.
(C) Purchase contract obligations arise from the purchase of operating
businesses and are collateralized by the equipment and real estate acquired
in the respective acquisitions. The Company has also
F-34
<PAGE> 244
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: LONG-TERM DEBT (CONTINUED)
entered into purchase contract obligations for equipment used in
administrative activities. At June 30, 1996, these obligations carried
interest rates ranging from 7% to 10% and are due periodically through 2001.
Based on the borrowing rates currently available to the Corporation from
bank loans with similar terms and average maturities, the estimated fair
value of long-term debt approximates its carrying value at June 30, 1995,
and June 30, 1996, respectively.
Aggregate annual maturities (in thousands) of the long-term debt outstanding
at June 30, 1996, are:
<TABLE>
<S> <C>
1997............................................... $ 6,019
1998............................................... 7,854
1999............................................... 7,807
2000............................................... 7,819
2001............................................... 1,962
---------
$ 31,461
=========
</TABLE>
NOTE 7: INCOME TAXES
The provision for income taxes includes these components (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Taxes currently payable...................................................... $ 3,249 $ 406 $ 2,475
Deferred income taxes........................................................ (849) 194 1,075
--------- --------- ---------
$ 2,400 $ 600 $ 3,550
========= ========= =========
</TABLE>
The tax effects of temporary differences related to deferred taxes shown on
the balance sheets were (in thousands):
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Deferred Tax Assets
- -------------------
Allowance for doubtful accounts............................................. $ 335 $ 468
Accounts receivable advance collections..................................... 140 246
Self-insurance liabilities and contingencies................................ 480 1,229
Accrued expenses............................................................ 44 81
Alternative minimum tax credit carryover.................................... 39 --
---------- ----------
1,038 2,024
---------- ----------
Deferred Tax Liability
- ----------------------
Accumulated depreciation.................................................... (15,844) (17,205)
Change in estimated taxes................................................... -- (700)
---------- ----------
(15,844) (17,905)
---------- ----------
Net deferred tax liability.............................................. $ (14,806) $ (15,881)
========== ==========
</TABLE>
F-35
<PAGE> 245
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: INCOME TAXES (CONTINUED)
The above net deferred tax liability is presented on the balance sheets as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Deferred tax asset - current.................................................... $ 652 $ 996
Deferred tax liability - long-term.............................................. (15,458) (16,877)
---------- ----------
Net deferred tax liability.............................................. $ (14,806) $ (15,881)
========== ==========
</TABLE>
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Computed at the statutory rate (34%)......................................... $ 2,005 $ 355 $ 2,464
Increase resulting from:
Amortization of excess of cost over fair value of net assets acquired........ 107 77 79
State income taxes - net of federal tax benefit.............................. 258 116 248
Change in estimated taxes.................................................... -- -- 700
Other........................................................................ 30 52 59
--------- --------- ---------
Actual tax provision......................................................... $ 2,400 $ 600 $ 3,550
========= ========= =========
</TABLE>
NOTE 8: SELF-INSURANCE AND RELATED CONTINGENCIES
Under the Company's current insurance program, coverage for comprehensive
general liability and vehicle liability is obtained for catastrophic exposures
as well as those risks required to be insured by law or contract. The Company
retains a significant portion of certain expected losses related primarily to
comprehensive general liability and vehicle liability. Under these current
insurance programs, the Company self insures the first $1 million of coverage
(per incident) on general liability and on vehicle liability. In addition, the
Company has a $100,000 deductible for each and every liability claim. The
Company obtains excess coverage from carriers for these programs on claims-made
basis policies. The excess coverage for comprehensive general liability provides
a loss limitation that limits the Company's aggregate of self-insured losses to
$1.5 million per policy period.
The Company self insures the first $250,000 of workers' compensation
coverage (per incident). The Company purchased excess coverage from carriers for
workers' compensation claims in excess of the self-insured coverage. Provisions
for losses expected under this program are recorded based upon the Company's
estimates of the aggregate liability for claims incurred. The Company provided
letters of credit aggregating approximately $1,852,000 in connection with this
program.
Provisions for self-insured losses are recorded based upon the Company's
estimates of the aggregate self-insured liability for claims incurred. At June
30, 1995 and 1996, the self-insurance liability and general, vehicle and
workers' compensation liabilities accrued in the balance sheets totaled
$1,604,000 and $3,174,000, respectively.
The accrued liability includes $500,000 for incurred but not reported claims
for both June 30, 1995 and 1996. The current portion of the liability of
$500,000 and $750,000 at June 30, 1995 and 1996, respectively, is included in
accrued expenses in the consolidated balance sheets. The noncurrent portion is
included in accrued self-insurance liability.
F-36
<PAGE> 246
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: SELF-INSURANCE AND RELATED CONTINGENCIES (CONTINUED)
The Company currently self insures health benefits provided to the employees
of the Company and its subsidiaries. Provisions for losses expected under this
program are recorded based upon the Company's estimate of the aggregate
liability for claims incurred. At June 30, 1995 and 1996, the self-insurance
health benefit liability accrued in the balance sheets totalled $122,000 and
$150,000, respectively. The accrued liability includes $6,000 and $35,000 for
incurred but not reported claims for June 30, 1995 and 1996, respectively.
In conjunction with the restructuring that occurred in June 1994 the Company
agreed to indemnify Empire Gas for 47.7% of the self-insured liabilities of
Empire Gas incurred prior to June 30, 1994. The Company has included in its
self-insurance liability its best estimate of the amount it will owe Empire Gas
under this indemnification agreement.
The Company and its subsidiaries are presently defendants in various
lawsuits related to the self-insurance program and other business-related
lawsuits which are not expected to have a material, adverse effect on the
Company's financial position or results of operations.
NOTE 9: INCOME TAX AUDITS
The State of Missouri has assessed Empire Gas approximately $1,400,000 for
additional state income tax for the years ended June 30, 1992 and 1993. An
amount approximating one-half of the above assessment could be at issue for the
year ended June 30, 1994. Empire Gas and Empire Energy have protested these
assessments and are currently waiting for a response from the Missouri
Department of Revenue. It is likely that this matter will have to be settled in
litigation. Empire Gas and Empire Energy believe that they have a strong
position on this matter and intend to vigorously contest the assessment. It is
not possible at this time to conclude on the outcome of this matter.
The Internal Revenue Service has begun a federal income tax audit of Empire
Gas for the year ended June 30, 1994. While the audit is still in process, the
audit has principally focused on the deductibility of certain professional fees
and travel and entertainment expenses as well as on the tax-free treatment of
the Split-off Transaction.
As a former member of the Empire Gas controlled group and in connection with
a tax indemnity agreement with Empire Gas, the Company agreed to indemnify 47.7%
of the total liabilities related to these tax audits of the years ended June 30,
1994, and prior thereto.
The Split-off Transaction was structured with the intent of qualifying for
tax-free treatment under Section 355 of the Internal Revenue Code and the
Company, and Empire Gas, obtained a private letter ruling (the "Letter Ruling")
from the Internal Revenue Service confirming such treatment, subject to certain
representations and conditions specified in the Letter Ruling. The Internal
Revenue Service is currently conducting an audit of Empire Gas for the year in
which the Split-off Transaction occurred. If the Internal Revenue Service were
to reverse the position it took in the Letter Ruling and prevail on a challenge
to the tax-free treatment of the Split-off Transaction, the Company would be
liable for a portion of any taxes, interest and penalties due, both as a former
member of the Empire Gas controlled group and under a tax indemnity agreement
with Empire Gas that was executed in connection with the Split-off Transaction.
The Company's liability in such circumstances could exceed the percentage under
the tax indemnity agreement if Empire Gas were unable to fund its percentage
share under that agreement. If the Company were held liable for any taxes,
interest or penalties in connection with the above Split-off
F-37
<PAGE> 247
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: INCOME TAX AUDITS (CONTINUED)
Transaction, the amount of this liability could be substantial and could
adversely affect the Company's financial position and results of operations.
The Company and its subsidiaries are presently included in various state tax
audits which are not expected to have a material, adverse effect on the
Company's financial position or results of operation.
NOTE 10: STOCK OPTIONS
The Company's current stock options provide for a fixed option price of
$7.00 per share for options granted to officers and key employees. Options
granted are exercisable beginning one year after the date of grant at the rate
of 20% per year and expire six years after the date of grant. Option activity
for each period was:
<TABLE>
<CAPTION>
1995 1996
--------------------- ---------------------
SHARES PRICE SHARES PRICE
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Beginning options outstanding................................ 0 $ 0 1,145,000 $ 7.00
Options granted............................................ 1,170,000 7.00 25,000 7.00
Options canceled........................................... (25,000) 7.00 (50,000) 7.00
---------- --------- ---------- ---------
Ending options outstanding................................... 1,145,000 7.00 1,120,000 7.00
========== ========= ========== =========
</TABLE>
On August 1, 1996, in connection with the management buy out, 150,000
options of the selling shareholders were cancelled.
NOTE 11: ADDITIONAL CASH FLOW INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ONE MONTH
ENDED ENDED
SEPTEMBER 30, 1995 JULY 31, 1996
1994 1995 1996 ------------------- ---------------
--------- --------- --------- (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NONCASH INVESTING AND FINANCING
ACTIVITIES
Purchase contract obligations
incurred............................ $ -- $ 172 $ 222 $ -- $ --
ADDITIONAL CASH PAYMENT INFORMATION
Interest paid......................... $ 155 $ 64 $ 2,432 $ 8 $ 106
Income taxes paid (refunded).......... $ 3,302 $ 1,108 $ 2,995 $ (604) $ --
</TABLE>
NOTE 12: FUTURE ACCOUNTING PRONOUNCEMENTS
IMPACT OF SFAS NO. 121
In 1995 the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for the Impairment of Long-Lived Assets to be Disposed
of." The Company must adopt this standard effective July 1, 1996. The Company
does not expect that the adoption of this standard will have a material impact
on its financial position or results of operations.
F-38
<PAGE> 248
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
DEPENDENCE ON PRINCIPAL SUPPLIERS
Three suppliers, Conoco, Phillips and Texaco, account for approximately 50%
of Empire Energy's volume of propane purchases.
Although the Company believes that alternative sources of propane are
readily available, in the event that the Company is unable to purchase propane
from one of these three suppliers, the failure to obtain alternate sources of
supply at competitive prices and on a timely basis would have a material,
adverse effect on the Company.
ESTIMATES
Significant estimates related to self-insurance, litigation, collectibility
of receivables and income tax assessments are discussed in Notes 4, 8, and 9.
Actual losses related to these items could vary materially from amounts
reflected in the financial statements.
NOTE 14: SUBSEQUENT EVENTS
On October 7, 1996, the new ownership of the Company pursuant to the
management buy out sold 100% of Company common stock to Northwestern Growth
Corporation.
F-39
<PAGE> 249
EMPIRE ENERGY CORPORATION
(NEW BASIS)
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................................ $ --
Trade receivables, less allowance for doubtful accounts of $1,536............... 7,987
Inventories..................................................................... 10,938
Prepaid expenses................................................................ 350
Refundable income taxes......................................................... 1,016
Deferred income taxes........................................................... 1,101
---------
Total Current Assets.......................................................... 21,392
---------
DUE FROM SYN INC.................................................................. 2,000
---------
PROPERTY AND EQUIPMENT, At Cost:
Land and buildings.............................................................. 5,738
Storage and consumer service facilities......................................... 93,271
Transportation, office and other equipment...................................... 10,838
---------
109,847
Less accumulated depreciation................................................... (887)
---------
108,960
---------
OTHER ASSETS:
Excess of cost over fair value of net assets acquired, at amortized cost........ 8,112
Other........................................................................... 224
Debt acquisition costs.......................................................... 3,434
---------
11,770
---------
$ 144,122
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks in process of collection................................................. $ 37
Current maturities of long-term debt............................................ 5,229
Accounts payable................................................................ 3,986
Accrued salaries................................................................ 594
Accrued expenses................................................................ 3,550
---------
Total Current Liabilities..................................................... 13,396
---------
LONG-TERM DEBT.................................................................... 93,882
---------
NOTE PAYABLE -- RELATED PARTY..................................................... 5,000
---------
DEFERRED INCOME TAXES............................................................. 28,078
---------
ACCRUED SELF-INSURANCE LIABILITY.................................................. 2,178
---------
STOCKHOLDERS' EQUITY:
Common stock; $.001 par value; authorized 17,500,000 shares; issued 879,346
shares........................................................................ 1
Additional paid-in capital...................................................... 2,321
Retained earnings (deficit)..................................................... (734)
---------
1,588
---------
$ 144,122
=========
</TABLE>
See Notes to Consolidated Financial Statements
F-40
<PAGE> 250
EMPIRE ENERGY CORPORATION
(NEW BASIS)
CONSOLIDATED STATEMENT OF OPERATIONS
TWO MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING REVENUE.................................................................. $ 12,439
COST OF PRODUCT SOLD............................................................... 6,471
---------
GROSS PROFIT....................................................................... 5,968
---------
OPERATING COSTS AND EXPENSES:
Provision for doubtful accounts.................................................. 234
General and administrative....................................................... 4,294
Depreciation and amortization.................................................... 1,087
---------
5,615
---------
OPERATING INCOME................................................................... 353
INTEREST EXPENSE, Net.............................................................. 1,487
---------
LOSS BEFORE INCOME TAXES........................................................... (1,134)
CREDIT FOR INCOME TAXES............................................................ (400)
---------
NET LOSS........................................................................... $ (734)
=========
</TABLE>
See Notes to Consolidated Financial Statements
F-41
<PAGE> 251
EMPIRE ENERGY CORPORATION
(NEW BASIS)
CONSOLIDATED STATEMENT OF CASH FLOWS
TWO MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................................... $ (734)
Items not requiring (providing) cash:
Depreciation................................................................... 1,002
Amortization................................................................... 85
Gain on sale of assets......................................................... (4)
Changes in:
Trade receivables.............................................................. (2,485)
Inventories.................................................................... (3,896)
Accounts payable............................................................... 283
Accrued expenses and self insurance............................................ 1,164
Prepaid expenses and other..................................................... (536)
Income taxes refundable........................................................ 209
---------
Net cash used in operating activities........................................ (4,912)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets..................................................... 18
Purchases of property and equipment.............................................. (861)
---------
Net cash used in investing activities........................................ (843)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in credit facilities.................................................... 4,800
Principal payments on purchase obligations....................................... (35)
Checks in process of collection.................................................. 37
Proceeds from management buy out loan............................................ 94,000
Repayment of acquisition credit facility......................................... (31,100)
Purchase of company stock in management buy out.................................. (59,000)
Payment of debt acquisition costs................................................ (3,100)
---------
Net cash provided by financing activities.................................... 5,602
---------
DECREASE IN CASH................................................................... (153)
CASH, BEGINNING OF PERIOD.......................................................... 153
---------
CASH, END OF PERIOD................................................................ $ -0-
=========
</TABLE>
See Notes to Consolidated Financial Statements
F-42
<PAGE> 252
EMPIRE ENERGY CORPORATION
(NEW BASIS)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
TWO MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
TOTAL
COMMON PAID-IN EARNINGS TREASURY STOCKHOLDERS'
STOCK STOCK (DEFICIT) STOCK EQUITY
------------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, AUGUST 1, 1996......................... $ 12 $ 46,099 $ 2,869 $ (21) $ 48,959
PURCHASE OF COMPANY STOCK....................... (11) (70,744) -- -- (70,755)
EFFECT OF PURCHASE ACCOUNTING................... -- 26,966 (2,869) 21 24,118
NET LOSS......................................... -- -- (734) -- (734)
--- ----------- ---------- --- ------------
BALANCE, SEPTEMBER 30, 1996...................... $ 1 $ 2,321 $ (734) $ -- $ 1,588
=== =========== ========== === ============
</TABLE>
See Notes to Consolidated Financial Statements
F-43
<PAGE> 253
EMPIRE ENERGY CORPORATION
(NEW BASIS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Company for the period ended
September 30, 1996, are unaudited. In the opinion of management, these unaudited
statements include all adjustments, all of which are of normal recurring nature,
which are necessary to a fair presentation of results of operations and cash
flows for the period. Due to the seasonal nature of the Company's propane
business, the results of operations for the interim periods are not necessarily
indicative of results to be expected for a full year.
NATURE OF OPERATIONS
The Company's principal operations are the retail sale of LP gas. Most of
the Company's customers are owners of residential single or multi-family
dwellings who make periodic purchases on credit. Such customers are located in
the southeast and midwest regions of the United States. On August 1, 1996,
members of management of Empire Energy purchased the ownership of Empire Energy
from the principal shareholder and certain other shareholders. (See Note 2)
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Empire Energy
and its subsidiaries. All significant intercompany balances have been eliminated
in consolidation.
REVENUE RECOGNITION POLICY
Sales and related cost of product sold are recognized upon delivery of the
product or service.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the first-in, first-out method for retail operations and specific identification
method for wholesale operations. The inventories consist of the following:
<TABLE>
<S> <C>
Gas and other petroleum products................................... $ 7,146
Gas distribution parts, appliances and equipment................... 3,792
---------
$ 10,938
=========
</TABLE>
F-44
<PAGE> 254
EMPIRE ENERGY CORPORATION
(NEW BASIS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FUTURES CONTRACTS
The Company uses commodity futures contracts to reduce the risk of future
price fluctuations for LPG inventories and contracts. Gains and losses on
futures contracts purchased as hedges are deferred and recognized in cost of
sales as a component of the product cost for the related hedged transaction. In
the statement of cash flows, cash flows from qualifying hedges are classified in
the same category as the cash flows of the items being hedged. Net realized
gains and losses for the current period and unrealized gains and losses on open
positions as of September 30, 1996, are not material.
PROPERTY AND EQUIPMENT
Depreciation is provided on all property and equipment on the straight-line
method over estimated useful lives of five to 40 years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At September 30, 1996, the Company's only financial instruments are cash,
long-term debt and related accrued interest for which their carrying amounts
approximate fair value.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
AMORTIZATION
The excess of cost over fair value of net assets acquired (originally
$8,150,000) is being amortized on the straight-line basis over 40 years.
NOTE 2: MANAGEMENT BUY OUT
On August 1, 1996, members of management of Empire Energy purchased the
ownership (92.7% of the Common Stock) of Empire Energy from the principal
shareholder and certain other shareholders.
In connection with this transaction, the principal shareholder of Empire
Energy terminated employment with the Company as well as terminated certain
lease and use agreements. The new entity is principally owned (71.3% of the
Common Stock) by the son of the former principal shareholder.
The new entity paid approximately $59,000,000 cash, distributed certain home
office assets and a portion of the SYN Inc. receivable in exchange for the
shares of Company stock purchased. In addition to the above consideration, the
new entity issued a $5,000,000 note payable to the principal shareholder. The
amount paid to the selling shareholders was financed with proceeds from a new
credit agreement with the Company's current lender.
F-45
<PAGE> 255
EMPIRE ENERGY CORPORATION
(NEW BASIS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 2: MANAGEMENT BUY OUT (CONTINUED)
Because of the change in control of the Company, the balance sheet accounts
were adjusted at the acquisition date to reflect new bases determined using the
principles of purchase accounting. Stockholders' equity was adjusted to the cost
of the investors' interest in Empire Energy of $2,322,000. The principal effects
of the purchase accounting adjustments were to increase the book value of
equipment (principally storage tanks) by $30,367,000, accrue additional deferred
income tax liabilities of $11,096,000, record the excess of cost over fair value
of assets acquired of $5,129,000 and write off unamortized debt acquisition
costs of $282,000.
NOTE 3: LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
--------------
(IN THOUSANDS)
<S> <C>
Tranche A term note (A)....................................................... $ 42,000
Tranche B term note (A)....................................................... 52,000
Revolving credit facility (A)................................................. 4,800
Note payable to former owner (B).............................................. 5,000
Purchase contract obligations (C)............................................. 311
-------
104,111
Less current maturities....................................................... 5,229
-------
$ 98,882
=======
</TABLE>
(A) On August 1, 1996, in conjunction with the management buy-out, the Company
entered into an agreement with a lender to provide a $42 million term note
maturing December 31, 2002, a $52 million term note maturing December 31,
2006, a $20 million revolving working capital credit facility maturing June
30, 2001 and a $10 million acquisition credit facility maturing June 30,
2001. The Company has the choice of keeping the borrowings at prime or
transferring the loans to Eurodollar. Amounts at prime on these notes bear
interest at the Bank of Boston daily rate or 1/2% over the Federal Funds
Rate. Amounts at Eurodollar on these notes bear interest at the Eurodollar
rate plus an applicable margin which is dependent on a ratio of debt
(excluding note payable to former principal shareholder and purchase
contract obligations) to earnings before depreciation, interest and income
taxes. The facility includes working capital, capital expenditure, cash flow
and net worth requirements as well as dividend restrictions.
(B) On August 1, 1996, in conjunction with the management buy-out, the Company
entered into a $5 million subordinated promissory note with the former
principal shareholder of the Company. The note bears interest at 8% and
matures August 1, 2007.
(C) Purchase contract obligations arise from the purchase of operating
businesses and are collateralized by the equipment and real estate acquired
in the respective acquisitions. The Company has also entered into purchase
contract obligations for equipment used in administrative activities. At
June 30,
F-46
<PAGE> 256
EMPIRE ENERGY CORPORATION
(NEW BASIS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 3: LONG-TERM DEBT (CONTINUED)
1996, these obligations carried interest rates ranging from 7% to 10% and
were due periodically through 2001.
Aggregate annual maturities (in thousands) of the long-term debt outstanding
at September 30, 1996, are:
<TABLE>
<S> <C>
1997...................................................................... $ 5,229
1998...................................................................... 6,837
1999...................................................................... 7,370
2000...................................................................... 8,123
2001...................................................................... 8,751
Thereafter................................................................ 67,801
---------
$ 104,111
=========
</TABLE>
NOTE 4: INCOME TAXES
The tax effects of temporary differences related to deferred taxes shown on
the balance sheet were (in thousands):
<TABLE>
<S> <C>
Deferred Tax Assets
- -------------------
Allowance for doubtful accounts....................................... $ 584
Accounts receivable advance collections............................... 281
Self-insurance liabilities and contingencies.......................... 1,046
Accrued expenses...................................................... 82
Net operating loss.................................................... 342
---------
2,335
Deferred Tax Liability
- ----------------------
Accumulated depreciation.............................................. (29,312)
---------
Net deferred tax liability.......................................... $ (26,977)
=========
</TABLE>
The above net deferred tax liability is presented on the balance sheet as
follows (in thousands):
<TABLE>
<S> <C>
Deferred tax asset - current.............................................. $ 1,101
Deferred tax liability - long-term........................................ (28,078)
---------
Net deferred tax liability............................................ $ (26,977)
=========
</TABLE>
F-47
<PAGE> 257
EMPIRE ENERGY CORPORATION
(NEW BASIS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 4: INCOME TAXES (CONTINUED)
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below (in thousands):
<TABLE>
<S> <C>
Computed at the statutory rate (34%)...................................... $ (352)
Increase resulting from:
Amortization of excess of cost over fair value of net assets acquired... 33
State income taxes - net of federal tax benefit......................... (44)
Other................................................................... (37)
---------
Actual tax credit......................................................... $ (400)
=========
</TABLE>
NOTE 5: SELF-INSURANCE AND RELATED CONTINGENCIES
The Company self-insures its general and vehicle liability and worker's
compensation. For details of the self insurance program, see Note 8 of the June
30, 1996, financial statements.
NOTE 6: INCOME TAX AUDITS
The Company and its subsidiaries are presently included in various state tax
audits. For details of the state tax audits, see Note 9 of the June 30, 1996,
financial statements.
NOTE 7: STOCK OPTIONS
The Company's current stock options provide for a fixed option price of
$7.00 per share for options granted to officers and key employees. Options
granted are exercisable beginning one year after the date of grant at the rate
of 20% per year and expire six years after the date of grant. The Company has
945,000 shares of stock under option as of September 30, 1996. During the
two-month period ended September 30, 1996, 25,000 shares of stock under option
were canceled.
NOTE 8: ADDITIONAL CASH FLOW INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
TWO MONTHS ENDED
SEPTEMBER 30, 1996
------------------
<S> <C>
ADDITIONAL CASH PAYMENT INFORMATION
Interest paid..................................................................... $ 804
Income taxes paid................................................................. $ (609)
NONCASH INVESTING AND FINANCING ACTIVITIES
Nonmonetary assets distributed to former principal shareholders................... $ 6,755
Note payable issued to former principal shareholder............................... $ 5,000
</TABLE>
F-48
<PAGE> 258
EMPIRE ENERGY CORPORATION
(NEW BASIS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 9: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
DEPENDENCE ON PRINCIPAL SUPPLIERS
Three suppliers, Conoco, Phillips and Texaco, account for approximately 50%
of Empire Energy's annual volume of propane purchases.
Although the Company believes that alternative sources of propane are
readily available, in the event that the Company is unable to purchase propane
from one of these three suppliers, the failure to obtain alternate sources of
supply at competitive prices and on a timely basis would have a material adverse
effect on the Company.
ESTIMATES
Significant estimates related to self-insurance and litigation (Note 5),
collectibility of receivables and income tax assessments (Note 6) are discussed
in the financial statements. Actual losses related to these items could vary
materially from amounts reflected in the financial statements.
NOTE 10: SUBSEQUENT EVENTS
On October 7, 1996, 100% of the Company stock was sold to Northwestern
Growth Corporation.
F-49
<PAGE> 259
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE PERIOD
PERIOD PERIOD FROM JANUARY
FROM JULY 1, FROM JULY 1, 1,
1996 TO 1995 TO 1996 TO
DECEMBER 16, MARCH 31, MARCH 31,
1996 1996 1996
------------- ------------- --------------
<S> <C> <C> <C>
OPERATING REVENUE................................ $ 43,201 $ 88,233 $ 44,198
COST OF PRODUCT SOLD............................. 23,310 44,518 23,311
------------- ------------- -------
GROSS PROFIT..................................... 19,891 43,715 20,887
OPERATING COSTS AND EXPENSES:
Provision for doubtful accounts................ 710 1,024 249
General and administrative..................... 12,685 22,654 8,885
Depreciation and amortization.................. 2,929 4,433 1,707
------------- ------------- -------
OPERATING INCOME................................. 3,567 15,604 10,046
INTEREST EXPENSE (NET)........................... 3,621 1,775 663
------------- ------------- -------
INCOME (LOSS) BEFORE INCOME
TAXES.......................................... (54) 13,829 9,383
PROVISION FOR INCOME TAXES....................... 32 5,300 3,400
------------- ------------- -------
NET INCOME (LOSS)................................ $ (86) $ 8,529 $ 5,983
============= ============= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-50
<PAGE> 260
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FROM FROM
JULY 1, 1996 TO JULY 1, 1995 TO
DECEMBER 16, 1996 MARCH 31, 1996
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................... $ (86) $ 8,529
Items not requiring (providing) cash
Depreciation.......................................................... 2,671 4,201
Amortization.......................................................... 258 232
Gain on sale of assets................................................ 4 (20)
Deferred income taxes................................................. (126) 441
Changes in--
Trade receivables..................................................... (8,352) (9,884)
Inventories........................................................... (4,383) (717)
Accounts payable...................................................... 1,616 590
Accrued expenses and self insurance................................... 3,273 2,902
Prepaid expenses and other............................................ (2,313) (891)
Due from SYN Inc...................................................... (1,863) --
Income taxes payable.................................................. 457 2,662
-------- --------
Net cash provided by (used in) operating activities................. (8,844) (8,045)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of assets........................................ 57 76
Purchases of property and equipment..................................... (2,823) (2,998)
Purchase of assets from SYN Inc......................................... -- (35,980)
Capitalized costs....................................................... (242) --
-------- --------
Net cash used in investing activities............................... (3,008) (38,902)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in credit facilities................................ 9,606 (3,600)
Principal payments on purchase obligations.............................. (114) (98)
Checks in process of collection......................................... -- (158)
Proceeds from management buyout loan.................................... 94,000 --
Purchase of company stock in management buyout.......................... (59,000) --
Payment of debt acquisition costs....................................... (3,100) --
Proceeds from (repayments of) acquisition credit facility............... (31,100) 35,000
-------- --------
Net cash provided by financing activities........................... 10,292 31,144
-------- --------
Increase (decrease) in cash......................................... (1,560) 287
CASH:
Beginning of period..................................................... 2,064 --
-------- --------
End of period........................................................... $ 504 $ 287
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-51
<PAGE> 261
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIVE AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
NINE MONTHS ENDED MARCH 31, 1996
AND
THREE MONTHS ENDED MARCH 31, 1996,
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly Empire
Energy Corporation's ("Empire Energy") consolidated results of operations and
cash flows for the periods ended December 16, 1996, and March 31, 1996. All
such adjustments are of a normal recurring nature.
The accounting policies followed by Empire Energy are set forth in Note 1 to
Empire Energy's audited consolidated financial statements as of June 30, 1996,
included herein. Other disclosures required by generally accepted accounting
principles are not included herein but are included in the notes to the June 30,
1996, audited statements previously mentioned.
The results of operations for the two and one-half month and five and
one-half month periods ended December 16, 1996, are not necessarily indicative
of the results to be expected for the full year due to the seasonal nature of
Empire Energy's business.
2. COMPANY FORMATION
On August 1, 1996, members of management of Empire Energy purchased the
ownership (92.7% of the common stock) of Empire Energy from the principal
shareholder and certain other shareholders. Because of the change in control of
Empire Energy, the balance sheet accounts were adjusted at the acquisition date
to reflect new bases using the principles of purchase accounting.
In connection with this transaction, the principal shareholder of Empire
Energy terminated employment as well as certain lease and use agreements. The
new entity was principally owned (71.3% of the common stock) by the son of the
former principal shareholder.
On October 7, 1996, Northwestern Growth Corporation purchased 100% of the
Empire Energy common stock. See Note 2 to Pro Forma Consolidated Financial
Information for Cornerstone Propane Partners, L.P. included herein. This
purchase also resulted in a change of control and purchase accounting
adjustments were reflected in the balance sheet as of the acquisition date.
F-52
<PAGE> 262
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIVE AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
NINE MONTHS ENDED MARCH 31, 1996
AND
THREE MONTHS ENDED MARCH 31, 1996,
(DOLLARS IN THOUSANDS)
(UNAUDITED)
2. COMPANY FORMATION (CONTINUED)
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWO MONTHS
ONE MONTH ENDED TWO AND ONE- FIVE AND ONE-
ENDED JULY SEPTEMBER 30, HALF MONTHS ENDED HALF MONTHS ENDED
31, 1996 1996 DECEMBER 16, 1996 DECEMBER 16, 1996
----------- ------------- ------------------- -------------------
<S> <C> <C> <C> <C>
OPERATING REVENUE............................ 2,596 12,439 28,166 43,201
COST OF PRODUCT SOLD......................... 1,439 6,471 15,400 23,310
----------- ------ ------ ------
GROSS PROFIT................................. 1,157 5,968 12,766 19,891
OPERATING COSTS AND EXPENSES:
Provision for doubtful accounts............ 40 234 436 710
General and administrative................. 2,441 4,294 5,950 12,685
Depreciation and amortization.............. 498 1,087 1,344 2,929
----------- ------ ------ ------
OPERATING INCOME (LOSS)...................... (1,822) 353 5,036 3,567
INTEREST EXPENSE (NET)....................... 217 1,487 1,917 3,621
----------- ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES............ (2,039) (1,134) 3,119 (54)
PROVISION (CREDIT) FOR INCOME TAXES.......... (765) (400) 1,197 32
----------- ------ ------ ------
NET INCOME (LOSS)............................ (1,274) (734) 1,922 (86)
=========== ====== ====== ======
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
Empire Energy reports the following contingencies. Except as noted, there
have been no significant changes in these items since reported in Empire
Energy's audited consolidated balance sheet as of June 30, 1996.
Under Empire Energy'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. Empire Energy
retains a significant portion of certain expected losses related primarily to
comprehensive general liability and vehicle liability. Under these current
insurance programs, Empire Energy self insures the first $1 million of coverage
(per incident) on general liability and on vehicle liability. In addition,
Empire Energy has a $100 deductible for each and every liability claim. Empire
F-53
<PAGE> 263
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIVE AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
NINE MONTHS ENDED MARCH 31, 1996
AND
THREE MONTHS ENDED MARCH 31, 1996,
(DOLLARS IN THOUSANDS)
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Energy 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 Empire Energy's aggregate of self-insured losses
to $1.5 million per policy period. Provisions for self-insured losses are
recorded based upon Empire Energy's estimates of the aggregate self-insured
liability for claims incurred.
Empire Energy self insures the first $250 of workers' compensation coverage
(per incident). Empire Energy 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 Empire Energy's
estimates of the aggregate liability for claims incurred.
Empire Energy currently self insures health benefits provided to the
employees of Empire Energy and its subsidiaries. Provisions for losses expected
under this program are recorded based upon Empire Energy's estimate of the
aggregate liability for claims incurred.
In conjunction with the restructuring that occurred in June 1994 (the "Split
Off Transaction") Empire Energy agreed to indemnify Empire Gas for 47.7% of the
self-insured liabilities of Empire Gas incurred prior to June 30, 1994. Empire
Energy has included in its self-insurance liability its best estimate of the
amount it will owe Empire Gas under this indemnification agreement.
Empire Energy 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 Empire Energy's financial
position or results of operations.
The state of Missouri has assessed Empire Gas approximately $1,400 for
additional state income tax for the years ended June 30, 1992 and 1993. An
amount approximating one-half of the above assessment could be at issue for the
year ended June 30, 1994. Empire Gas and Empire Energy have protested these
assessments and are currently waiting for a response from the Missouri
Department of Revenue. It is likely that this matter will have to be settled in
litigation. Empire Gas and Empire Energy believe that they have a strong
position on this matter and intend to vigorously contest the assessment. It is
not possible at this time to conclude on the outcome of this matter.
The Internal Revenue Service has begun a federal income tax audit of Empire
Gas for the year ended June 30, 1994. While the audit is still in process, the
audit has principally focused on the deductibility of certain professional fees
and travel and entertainment expenses as well as on the tax-free treatment of
the Split-Off Transaction.
As a former member of the Empire Gas controlled group and in connection with
a tax indemnity agreement with Empire Gas, Empire Energy agreed to indemnify
47.7% of the total liabilities related to these tax audits of the years ended
June 30, 1994, and prior thereto.
The Split-Off Transaction was structured with the intent of qualifying for
tax-free treatment under Section 355 of the Internal Revenue Code and Empire
Energy, and Empire Gas, obtained a private letter
F-54
<PAGE> 264
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIVE AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
NINE MONTHS ENDED MARCH 31, 1996
AND
THREE MONTHS ENDED MARCH 31, 1996,
(DOLLARS IN THOUSANDS)
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, Empire Energy 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. Empire Energy'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
Empire Energy 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 affect Empire Energy's financial
position and results of operations.
Empire Energy are presently included in various state tax audits which are
not expected to have a material, adverse effect on Empire Energy's financial
position or results of operations.
4. SUBSEQUENT EVENTS
On December 17, 1996, substantially all of the assets and liabilities of
Empire Energy were contributed to Cornerstone Propane, L.P., a Delaware limited
partnership, a subsidiary of Cornerstone Propane Partners, L.P. Following this
transaction, on December 17, 1996, Cornerstone Propane Partners, L.P. completed
its initial public offering (see Note 1 to the consolidated financial statements
of Cornerstone Propane Partners, L.P., included herein).
F-55
<PAGE> 265
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-56
<PAGE> 266
CGI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JULY 31,
OCTOBER 31, ----------------------
1996 1996 1995
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 4,753 $ 1,519 $ 4,423
Accounts and notes receivable............................................. 21,443 23,664 20,817
Inventories............................................................... 6,751 7,316 5,870
Prepaid expenses and deposits............................................. 1,322 1,996 1,586
Deferred income tax benefit............................................... 802 802 980
----------- ---------- ----------
Total current assets.................................................... 35,071 35,297 33,676
----------- ---------- ----------
Property and equipment, at cost less accumulated depreciation............... 51,435 51,495 50,860
Cost in excess of net assets acquired, net of amortization.................. 11,761 11,844 9,447
Notes receivable............................................................ 1,380 1,357 1,108
Deferred charges and other assets........................................... 5,927 6,186 6,454
----------- ---------- ----------
$ 105,574 $ 106,179 $ 101,545
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE> 267
CGI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
LIABILITIES, MANDATORILY REDEEMABLE SECURITIES
AND STOCKHOLDERS' EQUITY
JULY 31,
OCTOBER 31, --------------------
1996 1996 1995
----------- --------- ---------
(UNAUDITED)
CURRENT LIABILITIES:
<S> <C> <C> <C>
Accounts payable........................................... $ 27,364 $ 30,824 $ 21,248
Accrued liabilities........................................ 3,777 3,101 3,210
Current maturities of long-term debt and capital lease
obligations.............................................. 4,220 3,924 3,147
----------- --------- ---------
Total current liabilities................................ 35,361 37,849 27,605
----------- --------- ---------
Long-term debt and capital lease obligations................. 45,069 41,801 46,021
Deferred income taxes........................................ 10,305 10,777 11,471
Other liabilities............................................ 1,095 1,095 814
Commitments and contingencies (Note 9)
MANDATORILY REDEEMABLE SECURITIES:
Redeemable exchangeable preferred stock:
10% cumulative, $0.01 par value, 62,500 shares
authorized, issued and outstanding; at redemption
value.................................................. 8,675 8,559 7,781
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value, 6,515,000 shares authorized;
4,312,247 issued and outstanding (1995 - 4,316,457
shares):
Class A voting common stock, $0.01 par value, 3,000,000
shares authorized; 2,789,784 issued and outstanding.... 28 28 28
Class B voting common stock, $0.01 par value, 200,000
shares authorized; 149,485 issued and outstanding...... 1 1 1
Class C voting common stock, $0.01 par value, 3,000,000
shares authorized; 1,343,831 issued and outstanding
(1995 -- 1,348,041 shares)............................. 13 13 13
Class D non-voting common stock, $0.01 par value, 250,000
shares authorized; 29,147 issued and outstanding....... -- -- --
Warrants outstanding..................................... 2,134 2,134 2,134
Additional paid-in capital................................. 8,945 8,945 8,969
Accumulated deficit........................................ (6,052) (5,023) (3,292)
----------- --------- ---------
Total stockholders' equity............................... 5,069 6,098 7,853
----------- --------- ---------
$ 105,574 $ 106,179 $ 101,545
=========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE> 268
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
OCTOBER 31, FISCAL YEAR ENDED JULY 31,
---------------------- ----------------------------------
1996 1995 1996 1995 1994
----------- --------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales and other revenue.............................. $ 108,175 $ 84,070 $ 384,354 $ 266,842 $ 242,986
Costs and expenses:
Cost of sales, except for depreciation and
amortization..................................... 100,266 77,837 351,213 234,538 214,632
Operating expenses................................. 5,201 4,973 21,046 20,239 17,767
Sale of partnership interest....................... 660 -- -- -- --
General and administrative expenses................ 1,091 926 3,835 3,745 3,462
Depreciation and amortization...................... 1,067 983 4,216 3,785 3,282
Interest expense................................... 1,294 1,385 5,470 5,120 4,029
----------- --------- ---------- ---------- ----------
Loss before income taxes and extraordinary charge.... (1,404) (2,034) (1,426) (585) (186)
Income tax benefit................................... (491) (671) (473) (202) (28)
----------- --------- ---------- ---------- ----------
Loss before extraordinary charge..................... (913) (1,363) (953) (383) (158)
Extraordinary charge for early retirement of debt,
net of income tax benefit.......................... -- -- -- (506) --
----------- --------- ---------- ---------- ----------
Net loss............................................. $ (913) $ (1,363) $ (953) $ (889) $ (158)
=========== ========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE> 269
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK WARRANTS CAPITAL DEFICIT
--------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at July 31, 1993.......................................... $ 42 $ -- $ 9,969 $ (990)
Net loss.......................................................... -- -- -- (158)
Accrued dividends on redeemable and exchangeable preferred
stock........................................................... -- -- -- (548)
--------- ---------- ----------- ------------
Balance at July 31, 1994.......................................... 42 -- 9,969 (1,696)
Net loss.......................................................... -- -- -- (889)
Issuance of warrants.............................................. -- 2,134 -- --
Repurchase of common stock........................................ -- -- (1,000) --
Accrued dividends on redeemable and exchangeable preferred
stock........................................................... -- -- -- (707)
--------- ----------- ----------- ------------
Balance at July 31, 1995.......................................... 42 2,134 8,969 (3,292)
Net loss.......................................................... -- -- -- (953)
Repurchase of common stock........................................ -- -- (24) --
Accrued dividends on redeemable and exchangeable preferred
stock........................................................... -- -- -- (778)
--------- ---------- ----------- ------------
Balance at July 31, 1996.......................................... 42 2,134 8,945 (5,023)
Net loss (unaudited).............................................. -- -- -- (913)
Accrued dividends on redeemable and exchangeable preferred stock
(unaudited)..................................................... -- -- -- (116)
--------- ---------- ----------- ------------
Balance at October 31, 1996 (unaudited)........................... $ 42 $ 2,134 $ 8,945 $ (6,052)
========= ========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE> 270
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
OCTOBER 31, FISCAL YEAR ENDED JULY 31,
-------------------- -------------------------------
1996 1995 1996 1995 1994
--------- -------- --------- --------- ---------
(UNAUDITED)
<S. <C> <C> <C> <C> <C>
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES:
Net loss....................................................... $ (913) $ (1,363) $ (953) $ (889) $ (158)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization................................ 1,067 983 4,216 3,785 3,282
Deferred income taxes........................................ (472) (672) (516) (488) (66)
Extraordinary charge to earnings............................. -- -- -- 506 --
Sale of partnership interest................................. 202 -- -- -- --
Changes in assets and liabilities net of acquisitions:
Accounts and notes receivable.............................. 2,198 (3,958) (2,950) (2,700) (5,122)
Inventories................................................ 565 (2,329) (1,511) (617) (1,121)
Prepaid expenses and deposits.............................. 472 (599) (410) 1,451 (1,307)
Other assets............................................... (91) 75 (193) (495) --
Accounts payable........................................... (3,460) 5,838 9,327 (3,897) 8,103
Accrued liabilities........................................ 676 (555) 172 (1,630) 434
--------- --------- --------- --------- -------
244 (2,580) 7,182 (4,974) 4,045
--------- --------- --------- --------- -------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES:
Payments for acquisitions of retail outlets.................... -- (3,000) (3,000) (1,091) (1,030)
Proceeds from sale of property and equipment................... 20 140 415 878 239
Purchases of and investments in property and equipment......... (594) (495) (3,060) (4,490) (3,421)
Other, net..................................................... -- -- -- -- (890)
--------- --------- --------- --------- -------
(574) (3,355) (5,645) (4,703) (5,102)
--------- --------- --------- --------- -------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES:
Repurchase of common stock..................................... -- -- (24) (1,000) --
Prepayment of long-term debt................................... -- -- -- (26,940) --
Net proceeds from issuance of long-term debt................... -- -- -- 28,111 --
Proceeds from issuance of senior subordinated debt............. -- -- -- 13,073 --
Repayment of long-term debt.................................... (562) (312) (1,250) (1,000) (850)
Borrowings on capital leases and other term loans.............. -- 871 1,248 2,263 1,113
Repayment of other notes payable............................... (104) (78) (561) (739) (741)
Principal payments under capital lease obligations............. (345) (329) (1,579) (2,929) (1,607)
Borrowings (repayments) under acquisition line................. 4,575 5,145 (2,275) 1,054 3,041
--------- --------- --------- --------- -------
3,564 5,297 (4,441) 11,893 956
--------- --------- --------- --------- -------
Net (decrease) increase in cash................................ 3,234 (638) (2,904) 2,216 (101)
Cash balance, beginning of year................................ 1,519 4,423 4,423 2,207 2,308
--------- --------- --------- --------- -------
Cash balance, end of year...................................... $ 4,753 $ 3,785 $ 1,519 $ 4,423 $ 2,207
========= ========= ========= ========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE> 271
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Pursuant to a Stock Purchase Agreement dated March 31, 1993, by and among
CGI Holdings, Inc., a Delaware corporation (the "Company") formed to effect this
transaction and a major shareholder of Coast Gas Industries ("Industries"), the
Company acquired all of the outstanding stock of Industries (the "Buyout"). The
financial statements of the Company for each of the three years ended July 31,
1996 are presented on the Company's basis of accounting giving effect to the
Stock Purchase Agreement.
The Company engages in the sale and distribution of natural gas, crude oil,
natural gas liquids, liquefied petroleum gas ("LPG"), LPG storage and
transportation equipment through its wholly-owned subsidiary, Coast Gas, Inc.
Its operations consist primarily of the sale, transportation and storage of LPG
to wholesale and retail customers; the sale of LPG storage equipment; and the
leasing of LPG storage and transportation equipment under monthly operating
leases. Sales are made to approximately 75,000 customers in seven states,
primarily in the western regions of the United States.
In connection with the Stock Purchase Agreement, the Company pays a monthly
fee to Aurora Capital Partners ("Aurora"), an investor in the Company, for
management services provided. Payments for each of the years ended July 31,
1996, 1995 and 1994 amounted to $250,000.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Coast Gas, Inc., and its wholly-owned
subsidiary Coast Energy Group, Inc. ("CEG"). In 1989 the Company formed CEG,
headquartered in Houston, Texas, to conduct its wholesale procurement and
distribution operations. All significant intercompany transactions have been
eliminated in consolidation.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1994 consolidated
financial statements to conform to the 1996 presentation. In addition, the
Company changed its method of accounting to gross-up in the consolidated
statement of operations sales and the cost of those sales related to certain
bulk purchases and resales of natural gas, crude oil and certain propane
transactions which resulted in reporting sales and cost of sales of $136.2
million and $124.8 million for the years ended July 31, 1995 and 1994,
respectively. This reclassification had no effect on net income for any period.
The Company believes that this presentation better reflects the activities of
its wholesale operations.
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements of the Company as of October 31, 1996
and 1995 are unaudited. In the opinion of the Company's management, the interim
data include all adjustments necessary for a fair statement of the results for
the interim periods. These adjustments were of a normal recurring nature, except
as disclosed in Note 11.
The results of operations for the interim periods are not necessarily
indicative of future financial results.
REVENUE RECOGNITION
Sales of natural gas, crude oil, natural gas liquids and LPG are recognized
when delivered to the customer.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-62
<PAGE> 272
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
The Company offers credit terms on sales to its retail and wholesale customers.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The Company
maintains an allowance for uncollectible accounts receivable based upon the
expected collectibility of all accounts receivable.
CASH FLOWS
For purposes of the comparative statements of cash flows, the Company
considers all highly liquid investments having original maturities of three
months or less to be cash equivalents. The carrying amount of cash, cash
equivalents and short-term debt approximates fair market value due to the short
maturity of these instruments.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of LPG is
determined using the last-in, first-out (LIFO) method. The LIFO reserve was $0.9
million and $0.1 million at July 31, 1996 and 1995, respectively. The cost of
parts and fittings is determined using the first-in, first-out (FIFO) method.
The major components of inventory consist of the following (in thousands of
dollars):
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31
1996 --------------------
(UNAUDITED) 1996 1995
--------------- --------- ---------
<S> <C> <C> <C>
LPG............................................... $ 5,890 $ 6,474 $ 5,085
Parts and fittings................................ 861 842 785
------ --------- ---------
$ 6,751 $ 7,316 $ 5,870
====== ========= =========
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets as
follows: buildings and improvements, 25 years; LPG storage and rental tanks, 40
to 50 years; and office furniture, equipment and tank installation costs, 5 to
10 years. Leasehold improvements are amortized over the shorter of the estimated
useful life or the lease term. Depreciation of equipment acquired under capital
leases of $132,000, $160,000 and $120,000 for the years ended July 31, 1996,
1995 and 1994, respectively, is included in depreciation and amortization
expense.
When property or equipment is retired or otherwise disposed, the cost and
related accumulated depreciation is removed from the accounts, and the resulting
gain or loss is credited or charged to operations. Maintenance and repairs are
charged to earnings, while replacements and betterments that extend estimated
useful lives are capitalized.
A majority of the LPG rental and storage tanks are leased to customers on a
month-to-month basis under operating lease agreements. Tank rental income of
approximately $2.3 million, $2.2 million and $2.3 million, for the years ended
July 31, 1996, 1995 and 1994, respectively, is included in sales and other
revenue. Direct costs associated with the installation of LPG storage tanks
leased to customers are capitalized and amortized over the estimated average
customer retention term.
F-63
<PAGE> 273
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST IN EXCESS OF NET ASSETS ACQUIRED
The excess of acquisition cost over the estimated fair market value of
identifiable net assets of acquired businesses is amortized on a straight-line
basis over forty years. The related costs and accumulated amortization were
$12.8 million and $0.9 million at July 31, 1996 and $10.0 million and $0.6
million at July 31, 1995, respectively.
It is the Company's policy to review intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. If such a review should indicate that the
carrying amount of intangible assets is not recoverable, it is the Company's
policy to reduce the carrying amount of such assets to fair value.
DEFERRED CHARGES AND OTHER ASSETS
Deferred charges consist primarily of deferred debt issuance costs and
capitalized non-compete covenant agreement costs. Deferred debt issuance costs
are amortized using the bonds outstanding method over the life of the related
loans, other deferred charges are amortized on a straight-line basis over
varying lives, ranging from five to seven years. Total deferred charges and the
related accumulated amortization were $6.2 million and $3.0 million as of July
31, 1996 and $5.5 million and $1.9 million as of July 31, 1995, respectively.
Included in these amounts are unamortized debt issuance costs associated with
the bank borrowings of $1.6 million and $1.9 million at July 31, 1996 and 1995,
respectively.
Other assets include customer lists purchased in business acquisitions that
are amortized on a straight-line basis over a ten year life. The total cost of
customer lists and the related accumulated amortization were $2.6 million and
$1.0 million at July 31, 1996 and $2.2 million and $0.6 million at July 31,
1995, respectively.
FUTURES CONTRACTS
The Company routinely uses commodity futures contracts to reduce the risk of
future price fluctuations for natural gas and LPG inventories and contracts.
Gains and losses on futures contracts purchased as hedges are deferred and
recognized in cost of sales as a component of the product cost for the related
hedged transaction. In the statement of cash flows, cash flows from qualifying
hedges are classified in the same category as the cash flows from the items
being hedged. Contracts which do not qualify as hedges are marked to market,
with the resulting gains and losses charged to current operations. Net realized
gains and losses for the current fiscal year and unrealized gains, losses on
outstanding positions and open positions as of July 31, 1996 are not material.
INTEREST RATE SWAP AGREEMENT
Interest rate differentials to be paid or received under interest rate swap
agreements are accrued and recognized over the life of the agreements. Interest
payable or receivable under these interest rate swap agreements is recognized in
the periods when market rates exceed contract limits as an increase or reduction
in interest expense. Interest rate swap agreements held by the Company expired
during fiscal 1996.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121").
This statement requires companies to investigate potential impairments of
long-lived assets, including identifiable intangibles and goodwill, if there is
evidence that events or changes in circumstances have made recovery of an
asset's carrying value unlikely. The statement is effective for the
F-64
<PAGE> 274
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company in fiscal 1997. SFAS 121 also requires companies to measure potential
impairments to carrying value at the lowest level of identifiable cash flows,
and to record impairment losses to the extent that the undiscounted cash flows
exceed the carrying amount of the asset. The Company does not expect the
adoption of SFAS 121 to have a material effect on the Company's financial
position or operating results.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This statement establishes a fair value-based method
of accounting for stock-based compensation plans. It also encourages entities to
adopt that method in place of the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," for all arrangements
under which employees receive shares of stock or other equity instruments of the
employer or the employer incurs liabilities to employees in amounts based upon
the price of its stock. The Company is required to adopt this statement in
fiscal 1997. The adoption of this statement is not expected to have a material
impact on the Company's financial position or operating results. The Company
currently accounts for stock based compensation in accordance with Accounting
Principles Board Opinion No. 25.
2. ACCOUNTS AND NOTES RECEIVABLE AND OTHER ASSETS
Accounts and notes receivable as of July 31, 1996 and 1995 consist of the
following (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Accounts receivable from customers................................................ $ 23,814 $ 21,064
Allowance for doubtful accounts................................................... (367) (421)
Notes receivable from customers................................................... 753 397
Notes and accounts receivable from employees...................................... 821 885
--------- ---------
Total accounts and notes receivable............................................... 25,021 21,925
Less: non-current portion......................................................... 1,357 1,108
--------- ---------
Current notes and accounts receivable............................................. $ 23,664 $ 20,817
========= =========
</TABLE>
Notes receivable arise in the ordinary course of business from the sale of
LPG storage and transportation equipment. Terms are generally from one to five
years, with interest rates ranging from 12.0% to 13.0%.
The Company has accounts and notes receivable due from employees totaling
$821,000 and $885,000 at July 31, 1996 and 1995, respectively. The notes
primarily relate to employee stock purchase loans and employee housing
assistance programs. The terms of the employee stock purchase loans require
interest payments of 6.0% per annum on the outstanding principal balance and
that all outstanding principal and interest be paid by October 31, 1997. Under
the employee housing assistance program, the Company is a guarantor on primary
residential notes issued in conjunction with the Company's relocation program
for a fixed term of seven years through October 1997, after which the employee
will refinance and the Company's guarantee will be eliminated.
The Company, through its wholly-owned subsidiary Coast Gas, Inc., holds a
50% limited interest in Coast Energy Investments, Inc., a limited partnership.
The partnership was established to facilitate the formation of a trading fund
and is accounted for under the equity method. Coast Gas, Inc. receives a
F-65
<PAGE> 275
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. ACCOUNTS AND NOTES RECEIVABLE AND OTHER ASSETS (CONTINUED)
management fee. For the years ended July 31, 1996 and 1995, the investment in
the partnership amounted to $122,000 and $124,000, respectively. In addition, at
July 31, 1996, Coast Gas, Inc. recorded a management fee receivable of $93,000
(see Note 11).
3. PROPERTY AND EQUIPMENT
Property and equipment as of July 31, 1996 and 1995 consists of the
following (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Land.............................................................................. $ 2,312 $ 2,212
Buildings and improvements........................................................ 4,600 4,513
LPG rental and storage tanks...................................................... 44,690 42,550
Equipment and office furnishings.................................................. 6,447 5,989
--------- ---------
58,049 55,264
Less accumulated depreciation and amortization.................................... 6,554 4,404
--------- ---------
$ 51,495 $ 50,860
========= =========
</TABLE>
At July 31, 1996 and 1995, LPG rental and storage tanks include $7.3 million
and $8.2 million, respectively, for tanks acquired under capital leases. Tanks
acquired under capital leases are pledged as collateral under the capital lease
agreements. All assets of the Company are pledged as collateral for the
Company's long-term debt under the provisions of the Credit Agreement (see Note
4).
Depreciation expense for the years ended July 31, 1996, 1995 and 1994
totaled $2.4 million, $2.2 million and $2.1 million, respectively.
4. LONG-TERM DEBT
Long-term debt as of July 31, 1996 and 1995 consists of the following (in
thousands of dollars):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Revolving loan, variable interest at prime plus 1.50%, due in monthly installments
of interest only until September 14, 2000, secured by all assets of the
Company......................................................................... $ 13,080 $ 15,355
Term loan, variable interest at prime plus 1.50%, due in quarterly installments
through July 31, 2000, secured by all assets of the Company..................... 12,750 14,000
Senior subordinated notes, fixed interest rate of 12.50%, due in equal annual
installments of $5.0 million, commencing September 15, 2002.The senior
subordinated notes are unsecured obligations of the Company with quarterly
interest payments over the life of the loan..................................... 13,310 13,073
Other notes payable with periodic payments through 2002, interest rates ranging
from 8.0% to 12.0%.............................................................. 2,232 2,212
--------- ---------
41,372 44,640
Less current maturities........................................................... 2,562 1,831
--------- ---------
$ 38,810 $ 42,809
========= =========
</TABLE>
F-66
<PAGE> 276
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
In fiscal 1995, Coast Gas, Inc. entered into a Credit Agreement (the "Credit
Agreement") with Bank of America, which provided financing of up to $35.0
million, consisting of $15.0 million in term debt and a $20.0 million revolving
credit facility. The revolving and term loans, at the election of Coast Gas,
Inc., bear interest at the Bank of America prime rate plus 1.50% or Libor plus
2.75% per annum. Concurrently, Coast Gas, Inc. issued $15.0 million in senior
subordinated notes with a fixed interest rate of 12.50% per annum. The proceeds
of the subordinated notes and a portion of the proceeds available under the
Credit Agreement were used to repay the notes to Heller Financial, Inc.
("Heller"). The balance of the funds available under the Credit Agreement
("Working Capital Line") will be used for general corporate purposes and to
finance future acquisitions.
The terms of the Credit Agreement were amended in fiscal 1996 to increase
the Working Capital line by an additional $3.0 million. An additional provision
of the amendment requires that the maximum amount of the facility is fixed at
$23.0 million until May 1, 1997, at which point it begins decreasing annually to
$16.0 million by May 1, 2000 and matures on September 14, 2000. Advances against
the line used to finance acquisitions were $3.0 million and $1.1 million for the
years ended July 31, 1996 and 1995, respectively.
The terms of the Credit Agreement contain restrictions on the issuance of
new debt or liens, the purchase or sale of assets not in the ordinary course of
business and the declaration and payment of dividends, and requires that Coast
Gas, Inc. maintain specified levels of fixed charge and interest payment
coverage ratios. The Credit Agreement also provides for prepayment of excess
funds in the event of sales of pledged assets if such funds are not reinvested
in like kind assets. The Credit Agreement provides for an unused commitment fee
of .5% on funds not drawn against the revolving line.
Total interest paid during the three month periods ended October 31, 1996
and 1995 was $1.3 million and $1.4 million, respectively. Total interest paid
during the years ended July 31, 1996, 1995 and 1994 was $5.4 million, $4.9
million, and $3.8 million, respectively, of which interest paid on bank
long-term and subordinated debt totaled $4.4 million, $4.0 million and $2.5
million, respectively.
Annual maturities of revolving, term and other long-term debt through July
31, 2001 are as follows: 1997 - $2.9 million; 1998 - $3.5 million; 1999 - $3.9
million; 2000 - $4.4 million; 2001 - $13.3 million; and thereafter - $15.1
million. The subordinated notes amortize $5.0 million per annum commencing in
fiscal 2003.
For the year ended July 31, 1995, the Company recorded an extraordinary
charge of $506,000 (net of $337,000 tax benefit) for the write-off of deferred
debt issuance costs upon the early extinguishment of the Heller debt. Debt
issuance costs associated with the new subordinated, revolving and term bank
debt totaling $2.2 million are being amortized using the bonds outstanding
method over the life of the related loans.
The carrying value of the Company's long-term debt approximates fair value,
in that most of the long-term debt is at floating market rates, or incurred at
rates that are not materially different from those current at July 31, 1996.
The Company has a Continuing Letter of Credit Agreement with Banque Paribas
to provide a $20.0 million credit guidance line for the operations of Coast
Energy Group, Inc., the Company's wholly owned subsidiary. The agreement
provides for a compensating balance of $1.3 million, and grants Banque Paribas a
security interest in certain pledged accounts receivable of CEG. At July 31,
1996, outstanding letters of credit drawn against this line amounted to $11.3
million.
F-67
<PAGE> 277
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. MANDATORILY REDEEMABLE SECURITIES
The Company has outstanding 62,500 shares of cumulative redeemable,
exchangeable preferred stock, with par value of $0.01 and stated value of $100.
Cumulative dividends of 10% are payable annually. Payment of dividends is
restricted under the terms of the Credit Agreement with Coast Gas, Inc. (see
Note 4). Each share of preferred stock may be redeemed at a price equal to
stated value per share plus accrued and unpaid dividends. The redemption amounts
per share at October 31, 1996, July 31, 1996 and 1995 were $138.80, $136.94 and
$124.50, respectively. The stock is also exchangeable, at the option of the
Company, for Coast Gas, Inc.'s subordinated exchange debentures due September
15, 2002 (see Note 4). The stock shall, with respect to dividend rights and
rights on liquidation, winding up and dissolution, rank senior to all classes of
common stock. The Company shall redeem the stock in full at the earliest of
twelve consecutive years of unpaid dividends, sale or disposal of substantially
all the assets of the Company or merger of the Company, subject to certain
conditions. No dividends have been declared or paid since April 1, 1993.
Pursuant to the Stock Purchase and Merger Agreement (see Note 11), no dividends
can be accrued after September 9, 1996. Accrued dividends were $2.4 million and
$1.7 million at October 31, 1996 and 1995, respectively, and $2.3 million, $1.5
million and $0.8 million at July 31, 1996, 1995 and 1994, respectively, and have
been recorded as a charge to accumulated deficit.
6. INCOME TAXES
The income tax provision for the years ended July 31, 1996, 1995 and 1994
are summarized as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current provision:
Federal.................................................................... $ -- $ -- $ --
State...................................................................... 25 7 38
--------- --------- ---------
25 7 38
--------- --------- ---------
Deferred provison (benefit):
Federal.................................................................... (428) (176) (48)
State...................................................................... (70) (33) (18)
--------- --------- ---------
(498) (209) (66)
--------- --------- ---------
$ (473) $ (202) $ (28)
========= ========= =========
</TABLE>
F-68
<PAGE> 278
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. INCOME TAXES (CONTINUED)
The significant components of temporary differences which give rise to
deferred tax assets (liabilities) as of July 31, 1996 and 1995 are as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Accruals, reserves and other..................................................... $ 1,178 $ 1,365
Federal NOLs..................................................................... 6,833 5,875
State NOLs....................................................................... 220 234
--------- ----------
Deferred tax assets............................................................ 8,231 7,474
--------- ----------
Accumulated depreciation......................................................... (13,385) (13,167)
PP&E book/tax basis difference................................................... (1,793) (1,793)
Capitalized tank installation costs.............................................. (1,607) (1,456)
LIFO inventory basis............................................................. (245) (245)
Other............................................................................ (1,176) (1,304)
--------- ----------
Deferred tax liabilities....................................................... (18,206) (17,965)
--------- ----------
Net deferred tax liabilities..................................................... $ (9,975) $ (10,491)
========= ==========
</TABLE>
A reconciliation of the Company's income tax provision computed at the
United States federal statutory rate to the effective rate for the recorded
provision for income taxes for the years ended July 31, 1996, 1995 and 1994 is
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate..................................................... (34%) (34%) (34%)
Amortization of cost in excess of assets acquired.......................... 7% 6% 8%
State franchise taxes, net of federal income tax benefit................... 2% 2% 11%
Prior year tax adjustments................................................. (5%) -- --
Extraordinary loss......................................................... -- (9%) --
Other, net................................................................. (3%) -- --
--------- --------- ---------
(33%) (35%) (15%)
========= ========= =========
</TABLE>
Tax payments during the year ended July 31, 1996, 1995 and 1994 were minimal
due to the Company's tax loss position. Payments were solely for state income
taxes in various states.
The Company has a federal and state net operating loss carryforward of
approximately $20.0 million and $2.3 million, respectively, available to reduce
future payments of income tax liabilities. The tax benefits of these NOLs are
reflected in the accompanying table of deferred tax assets and liabilities. If
not used, carryforwards expire during the period from 2006 to 2011.
Under the provisions of Internal Revenue Code Section 382, the annual
utilization of the Company's net operating loss carryforwards may be limited
under certain circumstances. Events which may affect utilization include, but
are not limited to, cumulative stock ownership changes of more than 50% over a
three-year period. An ownership change occurred effective March 31, 1993, due to
cumulative changes in the Company's ownership. The annual and cumulative limits
on the utilization of net operating losses incurred prior to March 31, 1993 are
approximately $1.6 million and $5.5 million, respectively.
F-69
<PAGE> 279
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. LEASES
Coast Gas, Inc. leases rental tanks and vehicles from a former owner of the
Company on a month-to-month operating lease. The lease provides for cancellation
within 90 days, and includes a lease purchase option at the greater of the
original cost or current list price. Coast Gas, Inc. also leases real estate,
LPG storage tanks, and office equipment from certain of its current directors,
officers and employees under operating and capital lease agreements.
Rental payments under such leases totaled $204,000, $135,000 and $161,000
for the years ended July 31, 1996, 1995 and 1994, respectively.
Coast Gas, Inc. generally leases vehicles, computer equipment, office
equipment and real property under operating lease agreements. The typical
equipment lease term is four to six years. Real property leases generally have
terms in excess of ten years with renewal options. Rent expense under all
operating lease agreements for the years ended July 31, 1996, 1995 and 1994
totaled $2.5 million, $2.4 million and $1.9 million, respectively.
Capital leases consist primarily of financing agreements for the acquisition
of LPG storage tanks with terms ranging from five to seven years. These leases
provide fixed price purchase options at the end of the non-cancelable lease
term. As of July 31, 1996, future minimum lease commitments under non-cancelable
leases, with terms in excess of one year were as follows:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31, OPERATING CAPITAL
- ------------------- --------- -------
(IN THOUSANDS)
<S> <C> <C>
1997.............................................................. $ 2,020 $ 1,624
1998.............................................................. 1,495 1,336
1999.............................................................. 991 1,150
2000.............................................................. 753 885
2001.............................................................. 679 113
----------- ---------
Total minimum lease payments........................................... $ 5,938 $ 5,108
===========
Less amounts representing interest..................................... 755
---------
Present value of future minimum lease payments......................... 4,353
Less amounts due within one year....................................... 1,362
---------
$ 2,991
=========
</TABLE>
Total assets acquired under capital leases totaled $1.2 million, $2.2
million and $1.5 million for the years ended July 31, 1996, 1995 and 1994,
respectively.
In addition to these minimum lease rentals, Coast Gas, Inc. has an agreement
to lease the assets of a retail LPG distributor at a fixed percentage of the
gross profits generated by the business. Contingent lease rents paid under this
lease agreement for the years ended July 31, 1996, 1995 and 1994 totaled
$344,000, $406,000 and $394,000, respectively. The original lease term of five
years, which expired in 1995, was extended for five years and has various
renewal and purchase options available to Coast Gas, Inc. through January 31,
2014.
Coast Gas, Inc. subleases some of its LPG storage tanks and vehicles to
other propane distributors under non-cancelable operating lease agreements. The
lease terms are generally for one year with automatic renewal provisions.
Additionally, these distributors may purchase the LPG storage tanks under
F-70
<PAGE> 280
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. LEASES (CONTINUED)
lease, at the greater of original cost or current list price. Sublease income
totaled $270,000, $390,000 and $494,000 for the years ended July 31, 1996, 1995
and 1994, respectively.
8. STOCKHOLDERS' EQUITY
EMPLOYEE BENEFIT PLANS
The Company has a 401(k) employee benefit plan. All full-time employees who
have completed one year of service and are twenty-one years of age or older are
eligible to participate. Under the plan provisions, participants are allowed to
make monthly contributions on a tax deferred basis subject to the limitations of
the plan. In addition, the Company will contribute a discretionary matching
contribution based upon participant contributions. Employees are 100% vested for
all contributions. The plan is managed by a trustee, and is fully funded.
In 1990 the Company established a discretionary profit-sharing plan for the
benefit of all eligible full time employees. Contributions are made annually at
the sole discretion of the Board of Directors. Participant benefits vest and are
paid annually over a five year period. Unvested contributions are forfeited upon
termination of employment, and are allocated to the remaining plan participants.
Contributions are unfunded until the time of payment. At July 31, 1995, the
Company had accrued $76,000 for the profit sharing plan. No additional amounts
were accrued for fiscal year 1996.
Additionally, the Company provides certain health and life insurance
benefits to all eligible full time employees. Expenses are recorded based upon
actual paid claims and expected liabilities for incurred but not reported claims
at year end.
WARRANTS
In conjunction with the refinancing in fiscal 1995, the Company repurchased
175,438 shares of common stock from officers of the Company for $1.0 million.
Warrants in the Company were issued to senior subordinated note holders which
have been assigned an estimated fair value of $2.1 million, to be amortized over
the life of the credit agreement using the bonds outstanding method. The
warrants include 175,438 Series A Warrants with an exercise price of $2.85 and
287,228 Series B Warrants with an exercise price of $0.01. The warrants are
exerciseable at the earliest of a sale, acquisition or initial public offering,
subject to certain conditions, or September 15, 1997 into shares of the
Company's Class D non-voting common stock. The warrants issued to Heller under
the previous debt agreement were returned unexercised.
OPTIONS
The Company has a 1987 stock plan available to grant incentive and
non-qualified stock options to officers and other employees. The plan provides
for the granting of a maximum of 175,000 options to purchase common shares of
the Company. The option price per share may not be less than the fair market
value of a share on the date the option is granted and the maximum term of the
option may not exceed 10 years. Options granted vest over a period of four years
from the date of grant. Granting of options under this plan will expire on the
10th anniversary of the plan. Pursuant to the Merger Agreement (see Note 11),
each outstanding option shall be converted into the right to receive cash
whether or not such option is
F-71
<PAGE> 281
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
exerciseable in full. Compensation expense related to the granting of options
amounted to $21,000 for the year ended July 31, 1995. Information regarding the
Company's stock option plan is summarized below:
<TABLE>
<CAPTION>
PER SHARE
OPTIONS RANGE
--------- --------------
<S> <C> <C>
Outstanding at August 1, 1993................................................ 132,031 $ 0.01 - $9.11
Granted.................................................................... --
Exercised.................................................................. --
Canceled................................................................... --
---------
Outstanding at July 31, 1994................................................. 132,031 $ 0.01 - $9.11
Granted.................................................................... 42,942 $ 0.10 - $9.13
Exercised.................................................................. --
Canceled................................................................... --
---------
Outstanding at July 31, 1995................................................. 174,973 $ 0.01 - $9.13
Granted.................................................................... --
Exercised.................................................................. --
Canceled................................................................... --
---------
Outstanding at July 31, 1996................................................. 174,973 $ 0.01 - $9.13
Available for grant at July 31, 1996......................................... 27
</TABLE>
During 1996, the Company adopted a Stock Appreciation Rights (SARs) plan.
The Company granted 500,000 SARs, which are to vest over a five-year period, at
a per share value of $1.20. Compensation expense related to the grant of SARs of
$120,000 was recorded in 1996.
9. COMMITMENTS AND CONTINGENCIES
The Company has contracts with various suppliers to purchase a portion of
its supply needs of LPG for future deliveries with terms ranging from one to
twelve months. The contracted quantities are not significant with respect to the
Company's anticipated total sales requirements and will generally be acquired at
prevailing market prices at the time of shipment. Outstanding letters of credit
issued in conjunction with product supply contracts are a normal business
requirement. There were no outstanding letters of credit issued on behalf of the
Company as of October 31, 1996 or July 31, 1996 other than the $14.0 million and
$11.3 million, respectively, drawn against the credit guidance line (see Note
4).
The Company is engaged in certain legal actions related to the normal
conduct of business. In the opinion of management, any possible liability
arising from such actions will be adequately covered by insurance or will not
have a material adverse effect on the Company's financial position or results of
operations.
10. BUSINESS ACQUISITIONS
During the year ended July 31, 1996, Coast Gas, Inc. acquired one retail
outlet in a transaction accounted for using the purchase method of accounting.
The cost of the acquired company totaled $4.0 million, including $1.0 million of
seller notes and other liabilities and $3.0 from the increase in the Company's
Working Capital/Acquisition bank line. Goodwill resulting from the acquisition
totaled $2.8 million. Revenues of the acquired company for the year ended July
31, 1996, subsequent to the dates of acquisition and included in the Company's
consolidated sales totaled $1.9 million.
F-72
<PAGE> 282
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. BUSINESS ACQUISITIONS (CONTINUED)
During the year ended July 31, 1995, Coast Gas, Inc. acquired three retail
outlets in transactions accounted for using the purchase method of accounting.
The cost of the acquired companies totaled $1.8 million (including $0.7 million
of seller notes). Goodwill resulting from these acquisitions totaled $0.3
million. Revenues of the acquired companies for the year ended July 31, 1995,
subsequent to the dates of acquisition and included in the Company's
consolidated sales totaled $0.7 million.
During the year ended July 31, 1994, Coast Gas, Inc. acquired two retail
outlets in transactions accounted for using the purchase method of accounting.
The cost of the acquired companies totaled $2.0 million (including $1.0 million
of seller notes and other liabilities). Goodwill resulting from these
acquisitions totaled $0.2 million. Revenues of the acquired companies for the
year ended July 31, 1994, subsequent to the dates of acquisition, included in
the Company's consolidated sales totaled $1.2 million.
11. SUBSEQUENT EVENTS
STOCK PURCHASE AND MERGER AGREEMENT
Effective September 9, 1996, subsequent to the fiscal year end, the Company
and the preferred shareholders of the Company entered into a Stock Purchase and
Merger Agreement (the "Merger Agreement") for the sale of the preferred stock of
the Company for $8.7 million. The terms of the Agreement also provided an option
to the buyer of the preferred stock to acquire all of the outstanding common
stock of the Company, for a period of one year from the date of the sale of the
preferred stock. Additionally, the shareholders of the Company have an option to
put the common stock of the Company to the buyer of the preferred stock on April
30, 1997, if the buyer has not previously exercised the option to acquire the
common stock.
SALE OF PARTNERSHIP INTEREST
Effective October 1, 1996, the Company terminated its participation and
interest in Coast Energy Investments, Inc., a limited partnership in which Coast
Energy Group, Inc. was a 50% limited partner. The original partnership agreement
provided for a minimum investment term through December 1997. The termination
resulted in the sale of the Company's partnership interest to its 50% partner
and an employee of the partnership. The Company recorded a net loss on the
disposition of the partnership interest of $660,000. This amount consisted of a
$202,000 loss on the partnership investment and $458,000 of termination costs
consisting of salary, consulting, non-compete agreements and other related
expenses.
F-73
<PAGE> 283
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
AUGUST 1, 1996 TO AUGUST 1, 1995 TO JANUARY 1, 1996 TO
DECEMBER 16, 1996 MARCH 31, 1996 MARCH 31, 1996
----------------- ----------------- --------------------
<S> <C> <C> <C>
Sales and other revenue.......... $ 185,460 $ 271,348 $ 112,244
Costs and expenses:
Cost of sales, except for
depreciation and
amortization................. 173,155 246,554 100,074
Operating expenses............. 8,181 16,929(1) 7,317(1)
Sale of partnership interest... 660 -- --
General and administrative
expenses..................... 1,738 -- --
Depreciation and
amortization................. 1,604 2,742 1,071
Interest expense............... 2,238 3,781 1,417
-------- -------- -------
Income (loss) before income
taxes.......................... (2,116) 1,342 2,365
Income tax (provision) benefit... 748 (601) (1,130)
-------- -------- -------
Net income (loss)................ $ (1,368) $ 741 $ 1,235
======== ======== =======
</TABLE>
(1) Includes general and administrative expenses, the components of which
are not individually significant.
The accompanying notes are an integral part of these consolidated financial
statements.
F-74
<PAGE> 284
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
AUGUST 1, 1996 AUGUST 1, 1995
TO TO
DECEMBER 16, 1996 MARCH 31, 1996
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES:
Net loss................................................................. $ (1,368) $ 741
Adjustments to reconcile net loss to net cash used
for operating activities
Depreciation and amortization.......................................... 1,604 2,742
Deferred income taxes.................................................. (732) --
Sale of partnership interest........................................... 202 --
Changes in assets and liabilities, net of acquisitions:
Accounts and notes receivable.......................................... (11,532) (8,163)
Inventories............................................................ 4,257 1,673
Prepaid expenses and deposits.......................................... (729) (303)
Other assets........................................................... (154) (29)
Accounts payable....................................................... 11,082 14,185
Accrued liabilities.................................................... (1,007) 370
------- --------
1,623 11,216
------- --------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES
Payments for acquisitions of retail outlets.............................. -- (3,000)
Proceeds from sale of property and equipment............................. 57 (20)
Purchases of and investments in property and equipment................... (1,503) (2,034)
------- --------
(1,446) (5,054)
------- --------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES:
Repurchase of common stock............................................... -- (24)
Repayments of long-term debt............................................. (562) (312)
Borrowings on capital leases and other term loans........................ -- 647
Repayment of other notes payable......................................... (252) (760)
Principal payments under capital lease obligations....................... (506) (455)
Borrowings (repayments) under acquisition line........................... 5,999 (1,530)
------- --------
4,679 (2,434)
------- --------
Net (decrease) increase in cash.......................................... 4,856 3,728
Cash and cash equivalents, beginning of period........................... 1,519 4,423
------- --------
Cash and cash equivalents, end of period................................. $ 6,375 $ 8,151
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-75
<PAGE> 285
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
In Management's opinion, the unaudited interim statements of operations and
cash flows for CGI Holdings, Inc. reflect all adjustments which are necessary
for a fair statement of its operations and cash flows for the interim periods
presented.
Such adjustments consisted only of normal recurring items unless otherwise
disclosed. Certain notes and other information have been condensed or omitted
from these interim financial statements. These financial statements should be
read in conjunction with the Company's financial statements appearing elsewhere
herein. Due to the seasonal nature of the Company's propane business, the
results of operations for interim periods are not necessarily indicative of the
results to be expected for a full year.
2. 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 December 16, 1996 other than $24.9 million drawn against its
credit guidance line.
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.
3. BUSINESS ACQUISITIONS
During the quarter ended October 31, 1995, 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 million from the
increase in the Company's Working Capital/Acquisition bank line. Goodwill
resulting from the acquisition totaled $2.8 million.
4. SALE OF PARTNERSHIP INTEREST
Effective October 1, 1996, the Company terminated its participation and
interest in Coast Energy Investments, Inc., a limited partnership in which Coast
Energy Group, Inc. was a 50% limited partner. The original partnership agreement
provided for a minimum investment term through December 1997. The termination
resulted in the sale of the Company's partnership interest to its 50% partner
and an employee of the partnership. The Company recorded a net loss on the
disposition of the partnership interest of $660,000. This amount consisted of a
$202,000 loss on the partnership investment and $458,000 of termination costs
consisting of salary, consulting, non-compete agreements and other related
expenses.
F-76
<PAGE> 286
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. SUBSEQUENT EVENTS
On December 17, 1996, substantially all of the assets and liabilities of the
Company were contributed to Cornerstone Propane, L.P., a Delaware limited
partnership, a subsidiary of Cornerstone Propane Partners, L.P. Following this
transaction, on December 17, 1996, Cornerstone Propane Partners, L.P. completed
its initial public offering (see Note 1 to the consolidated financial statements
of Cornerstone Propane Partners, L.P., for the period ended December 31, 1996
included herein).
F-77
<PAGE> 287
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SYN Inc.:
We have audited the accompanying consolidated balance sheet of SYN Inc. (a
Delaware corporation and 52.5% owned subsidiary of Northwestern Public Service
Company) and Subsidiaries as of June 30, 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for the period from
inception (August 15, 1995) through June 30, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SYN Inc. and Subsidiaries as
of June 30, 1996, and the results of their operations and their cash flows for
the period from inception (August 15, 1995) through June 30, 1996 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
August 9, 1996 (except with respect
to the matter discussed in Note 9 as to
which the date is September 28, 1996)
F-78
<PAGE> 288
SYN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1996
-------- -------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash..................................................................................... $ 14 $ 1,444
Trade receivables, less allowance for doubtful accounts of $1,505 and $1,475,
respectively........................................................................... 9,195 7,791
Inventories.............................................................................. 7,447 8,165
Prepaid expenses and other............................................................... 678 1,019
Deferred income tax benefit.............................................................. 3,727 3,727
Due from Former Stockholders............................................................. 37,966 37,966
--------- -------------
Total current assets................................................................... 59,027 60,112
--------- -------------
PROPERTY AND EQUIPMENT:
Land and buildings....................................................................... 6,420 6,644
Storage and consumer service facilities.................................................. 52,953 54,036
Transportation, office and other equipment............................................... 11,910 12,510
Less--Accumulated depreciation........................................................... (2,592) (3,297)
--------- -------------
Total property and equipment........................................................... 68,691 69,893
--------- -------------
OTHER ASSETS:
Investments and restricted cash deposits................................................. 3,025 3,048
Deferred income tax benefit.............................................................. 4,849 5,400
Intangible assets, primarily the excess of cost over fair value of net assets acquired,
net of accumulated amortization........................................................ 30,943 31,381
Other.................................................................................... 227 208
--------- -------------
Total other assets..................................................................... 39,044 40,037
--------- -------------
$ 166,762 $ 170,042
========= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt..................................................... $ 1,025 $ 2,630
Accounts payable......................................................................... 1,604 6,270
Accrued expenses......................................................................... 2,915 2,999
Acquisition related liabilities.......................................................... 29,306 29,367
--------- -------------
Total current liabilities.............................................................. 34,850 41,266
LONG-TERM DEBT............................................................................. 25,687 25,709
NOTE PAYABLE--RELATED PARTY................................................................ 52,812 52,812
--------- -------------
Total liabilities...................................................................... 113,349 119,787
--------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Cumulative preferred stock, $.01 par value; 70,500 shares authorized; 55,312 shares,
issued and outstanding, at stated value of $1,000 per share............................ 55,312 55,312
Common stock; $0.01 par value; 100,000 shares authorized, issued and outstanding......... 1 1
Additional paid-in capital............................................................... 99 99
Accumulated deficit...................................................................... (1,999) (5,157)
--------- -------------
Total stockholders' equity............................................................. 53,413 50,255
--------- -------------
$ 166,762 $ 170,042
========= =============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-79
<PAGE> 289
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION FOR THE 46 FOR THE 3
(AUGUST 15, DAYS ENDED MONTHS ENDED
1995) THROUGH SEPTEMBER 30, SEPTEMBER 30,
JUNE 30, 1996 1995 1996
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES:
Propane sales................................................... $ 81,706 $ 8,584 $ 15,026
Appliance and parts sales....................................... 5,546 773 776
Other........................................................... 8,810 1,208 2,081
------- ------- -------
Total revenues................................................ 96,062 10,565 17,883
COST OF PRODUCT SOLD.............................................. 46,187 5,582 8,940
------- ------- -------
Gross profit.................................................. 49,875 4,983 8,943
------- ------- -------
OPERATING EXPENSES:
Salaries and commissions........................................ 14,520 1,662 3,865
General and administrative...................................... 14,225 1,333 3,083
Depreciation and amortization................................... 3,329 511 1,000
Related-party corporate administration and management fees...... 3,281 468 965
------- ------- -------
Total operating expenses...................................... 35,355 3,974 8,913
------- ------- -------
Operating income.............................................. 14,520 1,009 30
INTEREST EXPENSE, including $4,388, $589 and $1,204, respectively
to related party................................................ 5,584 589 1,665
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES................................. 8,936 420 (1,635)
PROVISION (BENEFIT) FOR INCOME TAXES.............................. 3,675 88 (550)
------- ------- -------
Net income (loss)............................................. 5,261 332 (1,085)
DIVIDENDS ON CUMULATIVE PREFERRED STOCK........................... (7,260) -- (2,073)
------- ------- -------
Net income (loss) applicable to common stockholders........... $ (1,999) $ 332 $ (3,158)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-80
<PAGE> 290
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------
PREFERRED STOCK
------------------- ADDITIONAL ACCUMU- TOTAL
PAID-IN LATED STOCKHOLDER'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- ------- -------- ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT INCEPTION, August 15, 1995... -- $ -- -- $ -- $ -- $ -- $ --
Common stock issued................... -- -- 100,000 1 99 -- 100
Preferred stock issued................ 55,312 55,312 -- -- -- -- 55,312
Dividends on preferred stock,
$131.25 pershare.................... -- -- -- -- -- (7,260) (7,260)
Net income............................ -- -- -- -- -- 5,261 5,261
------ ------- ------- --- --- --------- --------
BALANCE, June 30, 1996.................. 55,312 $55,312 100,000 $ 1 $ 99 $ (1,999) $ 53,413
Dividends on preferred stock,
$37.48 per share (unaudited)......... -- -- -- -- -- (2,073) (2,073)
Net loss (unaudited)................... -- -- -- -- -- (1,085) (1,085)
------ ------- ------- --- --- --------- --------
BALANCE, September 30, 1996 (unaudited). 55,312 $55,312 100,000 $ 1 $ 99 $ (5,157) $ 50,255
======= ======= ========= === ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-81
<PAGE> 291
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION FOR THE 3
(AUGUST 15, FOR THE 46 DAYS MONTHS ENDED
1995) THROUGH ENDED SEPTEMBER SEPTEMBER 30,
JUNE 30, 1996 30, 1995 1996
-------------- --------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................................... $ 5,261 $ 332 $ (1,085)
Items not requiring (providing) cash
Depreciation and amortization................................. 3,329 511 1,000
Deferred income taxes......................................... 3,624 518 (550)
Changes in operating items
Trade receivables............................................. (1,247) (1,388) 1,270
Inventories................................................... 704 495 (1,253)
Prepaid expenses and other.................................... 189 (731) (311)
Accounts payable.............................................. (5,571) 658 4,665
Accrued expenses.............................................. (3,423) (3,418) 206
-------------- --------------- -------------
Net cash provided by (used in) operating activities......... 2,866 (3,023) 3,942
-------------- --------------- -------------
INVESTING ACTIVITIES:
Acquisition of assets of Synergy Group Incorporated............. (150,922) (143,436) --
Proceeds from the sale of certain Synergy Group Incorporated
assets to Empire Energy Corporation........................... 35,980 35,980 --
Purchases of property and equipment............................. (9,182) (3,802) (1,571)
Proceeds from sale of assets.................................... 474 -- 973
Change in investments and restricted cash deposits.............. 70 (330) --
-------------- --------------- -------------
Net cash used in investing activities....................... (123,580) (111,588) (598)
-------------- --------------- -------------
FINANCING ACTIVITIES:
Increase in credit facility..................................... -- 8,916 90
Borrowing under long-term debt agreements....................... 23,910 -- --
Proceeds from issuance of common stock.......................... 100 100 --
Proceeds from issuance of preferred stock....................... 52,812 52,812 --
Proceeds from issuance of note payable--related party........... 52,812 52,812 --
Borrowings from related party................................... 36,458 36,458 90
Repayments to related party..................................... (36,458) (36,458) --
Payment on long-term debt....................................... (1,834) (1) (21)
Preferred stock dividends paid.................................. (7,072) -- (2,073)
-------------- --------------- -------------
Net cash provided by financing activities................... 120,728 114,639 (1,914)
-------------- --------------- -------------
Increase in cash............................................ 14 28 1,430
CASH:
Beginning of period............................................. -- -- 14
-------------- --------------- -------------
End of period................................................... $ 14 $ 28 $ 1,444
============== =============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-82
<PAGE> 292
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
SYN Inc. (Synergy) is engaged in the retail sale of liquid propane gas
primarily in the southern, midwest and eastern regions of the United States.
Most of Synergy's customers use propane for residential home heating and make
periodic purchases with cash or on credit. Synergy was formed to acquire Synergy
Group Incorporated (SGI).
SYNERGY ACQUISITION
On August 15, 1995, Synergy completed its acquisition of SGI, a retail
distributor of propane with 152 locations. In conjunction with the acquisition,
the Company sold certain retail locations to Empire Energy Corporation (Empire
Energy) for approximately $36 million in cash and the assets of nine retail
locations valued at $2 million. There was no gain or loss recognized on this
sale.
The total net purchase price paid by Synergy for the acquisition of SGI
consisted of $105.6 million in cash (which was provided by proceeds from the
issuance of $52.8 million of preferred stock and the issuance of $52.8 million
of debt), $1.25 million in long-term debt and the assumption of certain
liabilities. The acquisition was accounted for under the purchase method of
accounting with all tangible assets and liabilities acquired recorded at fair
value at date of acquisition and the cost in excess of such fair value of $32.5
million recorded as an intangible asset.
The purchase price is subject to adjustment based on the amount of working
capital acquired by Synergy. Synergy has made a claim against the former owners
of SGI (the Former Stockholders) for a working capital adjustment and has
recorded a receivable of $26.7 million, which reflects the reduction in purchase
price of the assets based on the amount of working capital acquired. The
purchase price is also subject to adjustment based on the value of customer
tanks which cannot be located within a specified period of time. Synergy has
made a claim against the Former Stockholders for the value of unlocated tanks
and has recorded a receivable for $11.3 million related to this claim.
These amounts receivable in connection with the acquisition of SGI are
management's best estimate of the amounts which will ultimately be due from the
Former Stockholders. However, the parties continue to negotiate final settlement
and the Former Stockholders have objected to a number of the claims made by
Synergy. An adjustment of the consideration paid for SGI could also result in an
adjustment in the amount of consideration received from Empire Energy.
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements of Synergy as of September 30, 1995
and 1996 have not been audited by independent public accountants. In the opinion
of Synergy's management, the interim data include all adjustments necessary for
a fair statement of the results for the interim periods. These adjustments were
of a normal recurring nature, except as disclosed in Note 9.
Due to the seasonal nature of Synergy's propane business, the results of
operations for the interim periods are not necessarily indicative of results to
be expected for a full year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Synergy and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
F-83
<PAGE> 293
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
statements and the reported amounts of revenues and expenses during the period.
Significant estimates related to self-insurance, litigation, collectibility of
receivables and income tax assessments are discussed in Notes 6 and 7. Actual
results could differ from those estimates.
DEPENDENCE ON PRINCIPAL SUPPLIER
Synergy obtains management services and all of its propane supplies through
Empire Gas Corporation (Empire Gas) which sells such propane to Synergy at cost.
Although Synergy believes that alternative sources of propane are readily
available, in the event that Empire Gas ceases to supply propane to Synergy or
has to obtain propane from alternate suppliers, the failure to obtain such
alternate sources of supply at competitive prices and on a timely basis may have
a material adverse effect on Synergy.
REVENUE RECOGNITION POLICY
Revenue from propane sales and the related cost of product sold are
recognized upon delivery of the product.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the first-in, first-out method for retail operations inventory and by the
specific identification method for wholesale operations inventory. The
inventories were as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1996
----------- -------------
(UNAUDITED)
<S> <C> <C>
Gas and other petroleum products..................................... $ 4,058 $ 5,041
Gas distribution parts, appliances and equipment..................... 4,034 3,449
Obsolescence reserve................................................. (645) (325)
----------- ------
$ 7,447 $ 8,165
=========== =========
</TABLE>
PROPERTY AND EQUIPMENT
For financial reporting purposes, property and equipment are stated at
acquisition cost. Repairs and maintenance costs which do not significantly
extend the useful lives of the respective assets are charged to operations as
incurred. Depreciation is computed using the straight-line method over the
following estimated useful lives of the assets:
<TABLE>
<S> <C>
Buildings......................................... 40 years
Storage and consumer service facilities........... 35-40 years
Transportation, office and other equipment........ 5-10 years
</TABLE>
INTANGIBLE ASSETS
The excess of cost over the fair value of the net acquired assets of SGI has
been recorded as an intangible asset and is being amortized on a straight-line
basis over 40 years. Costs related to arranging the debt financing for the
acquisition of SGI have been capitalized and are being amortized on a
straight-line basis over the two-year term of the debt. Intangible assets are
reflected net of accumulated amortization of $737,000 in the June 30, 1996
consolidated balance sheet.
F-84
<PAGE> 294
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred asset will not be realized.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121), which
established new standards for accounting for the impairment of long-lived
assets. The statement will be effective for Synergy in fiscal 1997, and, while
Synergy has not performed a detailed analysis of the impact of SFAS 121,
management does not expect that its initial adoption will have a material effect
on Synergy's financial position or results of operations.
2. RELATED-PARTY TRANSACTIONS:
Synergy entered into a Management Service Agreement with Empire Gas, a 30%
common stockholder of Synergy, under which Empire Gas provides all management
services to Synergy for payment of an annual overhead reimbursement of $3.25
million, and a management fee of $500,000 plus a performance-based payment for
certain operating results.
During 1996, Synergy purchased $42 million of liquid propane gas from Empire
Gas and accounts payable at June 30, 1996 includes $116,000 due to Empire Gas
resulting from the purchase of inventory.
The related party note payable represents borrowings by Synergy from
Northwestern Public Service Company (the parent corporation of the controlling
stockholder of Synergy). This note is subordinate to Synergy's other long-term
debt under its working capital facility (see Note 3), matures August 15, 2005,
bears interest at 9.12% and is subject to a prepayment premium.
Synergy transferred real and personal property of three retail locations
valued at $1,615,000 to Empire Gas in exchange for four Empire Gas retail
locations valued at approximately $1,713,000, with the difference of $98,000
paid to Empire Gas in cash.
Synergy paid $6,343,000 in 1996 to the controlling stockholder of Synergy
and $1,103,000 to Empire Gas for reimbursement of costs incurred relating to the
acquisition of SGI.
During 1996, Synergy leased, under operating leases, transportation
equipment to Propane Resources Transportation, Inc. (PRT) in which Synergy owns
a 15% common stock interest. Synergy received $274,000 in lease income during
1996 from these leases.
F-85
<PAGE> 295
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1996
--------- -------------
(UNAUDITED)
<S> <C> <C>
Working capital facility............................................ $ 23,910 $ 24,000
Note payable to Former Stockholders, 9 1/2% payable in three
equal annual installments through August 15, 1998................. 1,250 1,250
Other, interest at 7.5% to 11.6%, due through 2001,
collateralized by certain equipment and materials................. 1,552 3,089
--------- -------------
26,712 28,339
Less--Current maturities............................................ 1,025 2,630
--------- -------------
$ 25,687 $ 25,709
========= =============
</TABLE>
On December 28, 1995, Synergy entered into a working capital facility
agreement with the First National Bank of Boston providing for borrowings of up
to $25 million, interest at either the Eurodollar rate plus 2% or the prime rate
plus 3/4% (an average of 7.5% at June 30, 1996), and maturing December 31, 1997.
Synergy is required to comply with certain financial covenants including
compliance with restrictions upon other indebtedness and dividend distributions.
Borrowings under the agreement are collateralized by all receivables, inventory,
and property and equipment of Synergy.
Based on the borrowing rates currently available to Synergy from bank loans
with similar terms and average maturities, the fair value of long-term debt
approximates carrying value.
Aggregate annual maturities of the long-term debt outstanding at June 30,
1996, are as follows (in thousands):
<TABLE>
<S> <C>
1997.............................................. $ 1,025
1998.............................................. 24,603
1999.............................................. 680
2000.............................................. 204
2001.............................................. 200
-------
$26,712
=======
</TABLE>
4. OPERATING LEASES:
Synergy leases retail location sales offices under noncancelable operating
leases expiring at various times through 2006. These leases generally contain
renewal options and require Synergy to pay all executory costs (property taxes,
maintenance and insurance).
F-86
<PAGE> 296
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. OPERATING LEASES: (CONTINUED)
Future minimum lease payments (in thousands) at June 30, 1996, were:
<TABLE>
<S> <C>
1997.............................................. $ 598
1998.............................................. 310
1999.............................................. 206
2000.............................................. 41
2001.............................................. 19
Thereafter........................................ 53
-------
$ 1,227
=======
</TABLE>
Lease expense during 1996 was approximately $600,000.
5. INCOME TAXES:
The provision for income taxes includes the following components (in
thousands):
<TABLE>
<S> <C>
Taxes currently payable........................... $ 51
Deferred income taxes............................. 3,624
------
$3,675
======
</TABLE>
A reconciliation of income tax expense at the statutory rate to the actual
income tax expense is as follows (in thousands):
<TABLE>
<S> <C>
Taxes computed at statutory rate (34%)............ $3,038
Amortization of excess of cost over fair value of
net assets acquired............................. 157
State income taxes, net of federal tax benefit.... 378
Other............................................. 102
------
Actual tax provision.............................. $3,675
======
</TABLE>
The tax effects of temporary differences which relate to deferred taxes
reflected on the balance sheet were as follows (in thousands):
<TABLE>
<S> <C>
Current deferred tax assets:
Allowance for doubtful accounts................. $ 2,302
Self-insurance liabilities...................... 1,005
Inventory costs and reserves capitalized for tax
purposes...................................... 420
--------
Net current deferred income tax asset......... $ 3,727
========
Long-term deferred tax assets:
Net operating loss carryforward................. $ 7,596
Alternative minimum tax carryover............... 910
Deferred tax liability related to accelerated
depreciation.................................. (3,657)
--------
Net long-term deferred income tax asset....... $ 4,849
========
</TABLE>
At June 30, 1996, Synergy had approximately $20 million of net operating
loss carryforwards for tax reporting purposes expiring in varying amounts from
2007 through 2010. These net operating loss
F-87
<PAGE> 297
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. INCOME TAXES: (CONTINUED)
carryforwards have been reflected in the financial statements as deferred income
tax assets at June 30, 1996 and are subject to certain limitations on
utilization under provisions of the Internal Revenue Code.
6. COMMITMENTS AND CONTINGENCIES:
SELF-INSURANCE
Synergy obtains insurance coverage for catastrophic exposures related to
comprehensive general liability, vehicle liability and workers' compensation, as
well as those risks required to be insured by law or contract. Synergy
self-insures the first $250,000 of coverage per incident and obtains excess
coverage from carriers for these programs.
Provisions for self-insured losses are recorded based upon Synergy's
estimates of the aggregate self-insured liability for claims incurred. Synergy
has provided letters of credit aggregating approximately $2.875 million in
connection with these programs.
Synergy self-insures for health benefits provided to its employees.
Provisions for losses expected under this program are recorded based upon
Synergy's estimate of the aggregate liability for claims incurred.
CONTINGENCIES
Synergy and the acquired operations of SGI are presently involved in various
federal and state tax audits and are also defendants in other business-related
lawsuits which are not expected to have a material adverse effect on Synergy's
financial position or results of operations.
In conjunction with the acquisition of SGI, the Former Stockholders of SGI
are contractually liable for all insurance claims and tax liabilities that
relate to periods prior to the acquisition date. Funds have been placed in
escrow accounts to provide for payment of these liabilities. In the event that
the escrow amount is insufficient to settle these liabilities, Synergy could be
obligated to fund any additional amounts due and would have to seek
reimbursement from the Former Stockholders for such amounts. Synergy has
recorded its best estimates of the ultimate liabilities expected to arise from
these matters and has made claims against the Former Stockholders for
reimbursement (see Note 1).
7. EMPLOYEE BENEFIT PLAN:
Synergy succeeded to the SGI-sponsored defined contribution retirement plan
covering substantially all salaried employees. Employees who elect to
participate may contribute a percentage of their salaries to the plan and
Synergy at its discretion may match a portion of the employee contribution.
Synergy may also make profit-sharing contributions to the plan at the discretion
of its Board of Directors. Synergy made no profit-sharing contributions to the
plan in 1996.
The plan is currently under audit by the U.S. Department of Labor (DOL),
which has alleged that the plan violated certain sections of the Employee
Retirement Income Security Act of 1974. However, the DOL has advised that it is
not contemplating current action regarding these violations. The DOL audit is
continuing and the outcome cannot be determined at this time. In the event the
Former Stockholders are unable to satisfy any liabilities resulting from the
above examination, Synergy could be obligated to fund these liabilities and seek
reimbursement from the Former Stockholders. Synergy has recorded its best
estimates of the ultimate liabilities expected to arise from these matters and
has made claims against the Former Stockholders for reimbursement (see Note 1).
F-88
<PAGE> 298
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. ADDITIONAL CASH FLOW INFORMATION (IN THOUSANDS):
<TABLE>
<S> <C>
Assets acquired through issuance of:
Long-term debt.................................. $2,250
======
Preferred stock................................. $2,500
======
</TABLE>
ADDITIONAL CASH PAYMENT INFORMATION
<TABLE>
<S> <C>
Interest paid..................................... $5,535
======
Income taxes paid................................. $2,284
======
</TABLE>
9. SUBSEQUENT EVENT:
Synergy and its controlling stockholder have negotiated an agreement with
Empire Gas to, among other items, terminate the Empire Gas management agreement
and to have the controlling stockholder acquire the 30% common stock interest in
Synergy owned by Empire Gas. The range of total consideration to be paid for
these transactions is subject to certain future events, but will be funded
solely by Synergy's controlling stockholder which is also in the process of
arranging for alternative management services. Synergy does not expect that this
ownership and managerial change will have a significant effect on its operations
or financial position.
F-89
<PAGE> 299
SYN INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR PERIOD FROM FOR PERIOD FROM FOR PERIOD FROM FOR PERIOD FROM
JULY 1, 1996 AUGUST 15, 1995 JULY 1, 1995 JANUARY 1, 1996
TO TO TO TO
DECEMBER 16, MARCH 31, AUGUST 14, MARCH 31,
1996 1996 1995 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES.............................. 44,066 77,308 7,568 38,719
COST OF PRODUCT SOLD.................. 23,322 37,199 3,631 18,824
------- ------- ------- -------
Gross profit........................ 20,744 40,109 3,937 19,895
OPERATING EXPENSES:
Salaries and commissions............ 7,252 10,864 -- 4,552
General and administrative.......... 6,151 10,563 3,632 5,102
Depreciation and amortization....... 1,904 2,697 472 969
Related-party corporate
administration and management
fees.............................. 1,668 2,344 -- 938
------- ------- ------- -------
Total operating expenses.......... 16,975 26,468 4,104 11,561
------- ------- ------- -------
Operating income (loss)........... 3,769 13,641 (167) 8,334
INTEREST EXPENSE, including $2,214,
$3,440, $0, and $1,212 to
related party....................... 3,311 3,918 816 1,571
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES..... 458 9,723 (983) 6,763
PROVISION (BENEFIT) FOR INCOME
TAXES............................... 298 3,700 (373) 2,350
------- ------- ------- -------
Net income (loss)................. 160 6,023 (610) 4,413
DIVIDENDS ON CUMULATIVE PREFERRED
STOCK............................... (3,878) (5,185) -- (2,074)
------- ------- ------- -------
Net income (loss) applicable
to common stockholders.......... $ (3,718) $ 838 $ (610) $ 2,339
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-90
<PAGE> 300
SYN INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE PERIOD FROM JULY 1,1995
FOR THE PERIOD FROM FROM AUGUST 15, TO AUGUST 14, 1995
JULY 1, 1996 TO 1995 TO MARCH (PREDECESSOR
DECEMBER 16, 1996 31, 1996 BASIS)
------------------- ------------------ ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................ $ 160 $ 6,023 (610)
Items not requiring (providing) cash
Depreciation and amortization.......................... 1,904 2,699 472
Gain on sale of assets................................. 233 (263) --
Deferred income taxes.................................. 298 5,458 --
Changes in operating items
Trade receivables...................................... (1,991) (7,151) 4,897
Inventories............................................ (1,873) 1,053 1,244
Prepaid expenses and other............................. (569) (240) 345
Accounts payable....................................... 2,549 (4,982) (1,864)
Accrued expenses....................................... 3,602 (1,970) --
------- ---------- -------
Net cash provided by operating activities............ 4,313 627 4,484
------- ---------- -------
INVESTING ACTIVITIES:
Acquisition of assets of Synergy Group Incorporated...... -- (150,922) --
Proceeds from the sale of certain Synergy Group
Incorporated assets to Empire Energy Corporation....... -- 35,980 --
Sale of assets........................................... 129 164 1,880
Disposals of Companies................................... 829 -- --
Purchases of property and equipment...................... (4,240) (4,663) --
Acquisition of Companies................................. (469) -- --
Change in investments and restricted cash deposits....... -- (270) --
------- ---------- -------
Net cash provided by (used in) investing
activities......................................... (3,751) (119,711) 1,880
------- ---------- -------
FINANCING ACTIVITIES:
Increase in credit facility.............................. 3,835 23,323 (6,965)
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................................ (242) (4,778) --
Preferred stock dividends paid........................... (3,878) (5,185) --
------- ---------- -------
Net cash provided by (used in) financing activities.... (285) 119,084 (6,965)
------- ---------- -------
Increase (decrease) in cash............................ 277 -- (601)
CASH:
Beginning of period...................................... 14 -- 5,323
------- ---------- -------
End of period............................................ $ 291 $ -- $ 4,722
======= ========== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-91
<PAGE> 301
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIVE AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
SEVEN AND ONE-HALF MONTHS ENDED MARCH 31, 1996,
ONE AND ONE-HALF MONTHS ENDED AUGUST 14, 1995 (PREDECESSOR)
AND
THREE MONTHS ENDED MARCH 31, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly SYN
Inc. and its subsidiaries ("Synergy") consolidated results of operations and
cash flows for the periods ended December 16, 1996, and March 31, 1996. All
such adjustments are of a normal recurring nature.
Synergy completed its acquisition of Synergy Group Incorporated ("SGI") on
August 14, 1995. The unaudited consolidated statement of operations and of cash
flows for the period ended August 14, 1995 are presented as a predecessor entity
of Synergy and contain all adjustments necessary to present fairly SGI
consolidated results of operations and cash flows for the period then ended.
The accounting policies followed by Synergy are set forth in Note 1 to
Synergy's audited consolidated financial statements as of June 30, 1996,
included herein. Other disclosures required by generally accepted accounting
principles are not included herein but are included in the notes to the June 30,
1996, audited statements previously mentioned.
The results of operations for the two and one-half month and five and
one-half month periods ended December 16, 1996, are not necessarily indicative
of the results to be expected for the full year due to the seasonal nature of
Synergy's business.
2. COMMITMENTS AND CONTINGENCIES
Synergy obtains insurance coverage for catastrophic exposures related to
comprehensive general liability, vehicle liability and workers' compensation, as
well as those risks required to be insured by law or contract. Synergy
self-insures the first $250 of coverage per incident and obtains excess coverage
from carriers for these programs.
Provisions for self-insured losses are recorded based upon Synergy's
estimates of the aggregate self-insured liability for claims incurred.
Synergy self-insures for health benefits provided to its employees.
Provisions for losses expected under this program are recorded based upon
Synergy's estimate of the aggregate liability for claims incurred.
Synergy and the acquired operations of SGI are presently involved in various
federal and state tax audits and are also defendants in other business-related
lawsuits which are not expected to have a material adverse effect on Synergy's
financial position or results of operations.
In conjunction with the acquisition of SGI, the former stockholders of SGI
are contractually liable for all insurance claims and tax liabilities that
relate to periods prior to the acquisition date. Funds have been placed in
escrow accounts to provide for payment of these liabilities. In the event that
the escrow amount is insufficient to settle these liabilities, Synergy could be
obligated to fund any additional amounts due and would have to seek
reimbursement form the former stockholders for such amounts. Synergy has
recorded
F-92
<PAGE> 302
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIVE AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
SEVEN AND ONE-HALF MONTHS ENDED MARCH 31, 1996,
ONE AND ONE-HALF MONTHS ENDED AUGUST 14, 1995 (PREDECESSOR)
AND
THREE MONTHS ENDED MARCH 31, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
2. COMMITMENTS AND CONTINGENCIES (CONTINUED)
its best estimates of the ultimate liabilities expected to arise from these
matters and has made claims against the former stockholders for reimbursement.
3. SUBSEQUENT EVENTS
On December 17, 1996, substantially all of the assets and liabilities of
Synergy were contributed to Cornerstone Propane, L.P., a Delaware limited
partnership, a subsidiary of Cornerstone Propane Partners, L.P. Following this
transaction, on December 17, 1996, Cornerstone Propane Partners L.P. completed
its initial public offering (see Note 1 to the consolidated financial statements
of Cornerstone Propane Partners, L.P., included herein).
F-93
<PAGE> 303
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
Northwestern Growth Corporation
Huron, South Dakota
We have audited the accompanying consolidated balance sheet of SYNERGY GROUP
INCORPORATED as of August 14, 1995 and the related consolidated statements of
operations, changes in stockholders' equity (deficit) and cash flows for each of
the years ended March 31, 1994 and 1995, and the period ended August 14, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SYNERGY
GROUP INCORPORATED as of August 14, 1995 and the results of its operations and
its cash flows for each of the years ended March 31, 1994 and 1995, and the
period ended August 14, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 13, in 1995 the Company restated prior years' financial
statements for changes in previously reported accrued liabilities.
BAIRD, KURTZ & DOBSON
Springfield, Missouri
October 9, 1996
F-94
<PAGE> 304
SYNERGY GROUP INCORPORATED
CONSOLIDATED BALANCE SHEET
AUGUST 14, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 1,747
Trade receivables, less allowance for doubtful accounts of $5,547................ 9,504
Inventories...................................................................... 9,356
Prepaid expenses................................................................. 894
---------
Total Current Assets........................................................... 21,501
---------
INVESTMENTS:
Restricted cash deposit.......................................................... 3,095
---------
PROPERTY AND EQUIPMENT, At Cost:
Land and buildings............................................................... 8,656
Storage and consumer service facilities.......................................... 84,319
Transportation, office and other equipment....................................... 24,196
---------
117,171
Less accumulated depreciation.................................................... (48,343)
---------
68,828
---------
OTHER ASSETS:
Excess of cost over fair value of net assets acquired, at amortized cost......... 2,929
Other............................................................................ 147
---------
3,076
---------
$ 96,500
=========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt............................................. $ 89,104
Accounts payable................................................................. 4,101
Accrued salaries................................................................. 3,605
Accrued expenses................................................................. 12,808
Accrued interest................................................................. 5,768
Accrued self-insurance liability................................................. 4,160
---------
Total Current Liabilities...................................................... 119,546
---------
LONG-TERM DEBT..................................................................... 437
---------
DEFERRED INCOME TAXES.............................................................. 2,093
---------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, Series A; no par value; authorized
10,000 shares; issued and outstanding 2,500 shares............................. 25,000
Preferred stock, Series B; no par value; authorized
5,000 shares; issued and outstanding 1,670 shares.............................. 16,700
Common stock, Class A; voting; $1 par value; authorized 2,000 shares; issued and
outstanding 405 shares......................................................... 1
Common stock, Class B; non-voting; no par value; authorized 2,000 shares; issued
and outstanding 405 shares..................................................... 40
Additional paid-in capital....................................................... 11,378
Retained earnings (deficit)...................................................... (78,695)
---------
(25,576)
---------
$ 96,500
=========
</TABLE>
See Notes to Consolidated Financial Statements
F-95
<PAGE> 305
SYNERGY GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
4 1/2
YEAR ENDED MARCH 31, MONTHS
---------------------- ENDED
1994 1995 AUGUST 14,
RESTATED RESTATED 1995
---------- ---------- -----------
<S> <C> <C> <C>
OPERATING REVENUE............................................................ $ 133,731 $ 123,562 $ 32,179
COST OF PRODUCT SOLD......................................................... 63,498 59,909 15,387
---------- ---------- -----------
GROSS PROFIT................................................................. 70,233 63,653 16,792
---------- ---------- -----------
OPERATING COSTS AND EXPENSES
Provision for doubtful accounts............................................ 3,052 3,786 926
General and administrative................................................. 58,402 57,058 20,681
Depreciation and amortization.............................................. 5,170 5,100 1,845
---------- ---------- -----------
66,624 65,944 23,452
---------- ---------- -----------
OPERATING INCOME (LOSS)...................................................... 3,609 (2,291) (6,660)
---------- ---------- -----------
OTHER INCOME (EXPENSE)
Interest expense........................................................... (10,079) (8,385) (2,436)
Related-party interest expense............................................. (3,047) (2,701) (787)
Debt restructuring costs................................................... (2,650) (350) --
Other income............................................................... 152 226 101
---------- ---------- -----------
(15,624) (11,210) (3,122)
---------- ---------- -----------
LOSS BEFORE INCOME TAXES..................................................... (12,015) (13,501) (9,782)
PROVISION (CREDIT) FOR INCOME TAXES.......................................... (400) (84) 31
---------- ---------- -----------
NET LOSS..................................................................... $ (11,615) $ (13,417) $ (9,813)
========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-96
<PAGE> 306
SYNERGY GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 1994 AND 1995,
AND THE PERIOD ENDED AUGUST 14, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
SERIES A SERIES B CLASS A CLASS B ADDITIONAL RETAINED STOCKHOLDERS'
PREFERRED PREFERRED COMMON COMMON PAID-IN EARNINGS EQUITY
STOCK STOCK STOCK STOCK CAPITAL (DEFICIT) (DEFICIT)
----------- ----------- ------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
<C>
BALANCE, MARCH 31, 1993, AS
PREVIOUSLY REPORTED............. $ -- $ -- $ 1 $ 40 $ -- $(33,916) $ (33,875)
Adjustments applicable to prior
years........................... (9,934) (9,934)
----------- ----------- --- --- ----------- ----------- -------------
BALANCE, MARCH 31, 1993, AS
RESTATED........................ -- -- 1 40 -- (43,850) (43,809)
NET LOSS......................... (11,615) (11,615)
----------- ----------- --- --- ----------- ----------- -------------
BALANCE, MARCH 31, 1994.......... -- -- 1 40 -- (55,465) (55,424)
Long-term debt converted to
preferred stock................. 25,000 16,700 -- -- -- -- 41,700
Stockholder wages, related-party
rent and accrued interest
converted to additional paid-in
capital net of unamortized debt
costs........................... -- -- -- -- 11,378 -- 11,378
NET LOSS......................... -- -- -- -- -- (13,417) (13,417)
----------- ----------- --- --- ----------- ----------- -------------
BALANCE, MARCH 31, 1995.......... 25,000 16,700 1 40 11,378 (68,882) (15,763)
NET LOSS......................... -- -- -- -- -- (9,813) (9,813)
----------- ----------- --- --- ----------- ----------- -------------
BALANCE, AUGUST 14, 1995......... $ 25,000 $ 16,700 $ 1 $ 40 $ 11,378 $(78,695) $ (25,576)
=========== =========== === === =========== =========== =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-97
<PAGE> 307
SYNERGY GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED 4 1/2
MARCH 31, MONTHS
---------------------- ENDED
1994 1995 AUGUST 14,
RESTATED RESTATED 1995
---------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................................... $ (11,615) $ (13,417) $ (9,813)
Items not requiring (providing) cash:
Depreciation............................................................. 4,611 5,014 1,770
Amortization............................................................. 559 86 75
Gain on sale of assets................................................... (730) (237) (61)
Deferred income taxes.................................................... (428) (125) --
Changes in:
Trade receivables........................................................ 1,612 2,486 5,139
Inventories.............................................................. 43 (814) 1,251
Accounts payable and accrued expenses.................................... 12,346 2,841 3,591
Prepaid expenses and other............................................... 127 (902) 764
---------- ---------- -----------
Net cash provided by (used in) operating activities.................... 6,525 (5,068) 2,716
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets............................................... 1,862 404 104
Purchase of property and equipment......................................... (3,141) (3,737) (596)
Change in restricted cash deposits......................................... (2,581) 3,181 (615)
---------- ---------- -----------
Net cash used in investing activities.................................. (3,860) (152) (1,107)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt................................................. (542) (260) (108)
Increase (decrease) in credit facilities................................... -- 3,100 (1,000)
---------- ---------- -----------
Net cash provided by (used in) financing activities.................... (542) 2,840 (1,108)
---------- ---------- -----------
INCREASE (DECREASE) IN CASH.................................................. 2,123 (2,380) 501
CASH, BEGINNING OF PERIOD.................................................... 1,503 3,626 1,246
---------- ---------- -----------
CASH, END OF PERIOD.......................................................... $ 3,626 $ 1,246 $ 1,747
========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-98
<PAGE> 308
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Synergy Group Incorporated (the Company) is engaged primarily in the retail
sale of liquid propane gas through its branch offices located in the Northeast,
Mid-Atlantic, Southeast and Southcentral regions of the United States. Most of
the Company's customers use propane for residential home heating and make
periodic purchases with cash or on credit.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Synergy Group
Incorporated and its subsidiaries. All significant intercompany balances have
been eliminated in consolidation.
REVENUE RECOGNITION POLICY
Sales and related cost of product sold are recognized upon delivery of the
product or service.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the last-in, first-out (LIFO) method for propane and the first-in, first-out
(FIFO) method for all others. At August 14, 1995, inventories consisted of the
following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Gas and other petroleum products.............................................. $ 5,549
Gas distribution parts, appliances and equipment.............................. 4,651
Obsolescence reserve.......................................................... (772)
LIFO reserve.................................................................. (72)
------
$ 9,356
======
</TABLE>
PROPERTY AND EQUIPMENT
Depreciation is provided on all property and equipment primarily by the
straight-line method over the estimated useful lives of 3 to 30 years.
F-99
<PAGE> 309
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
At August 14, 1995, the Company's only financial instruments are cash,
long-term debt and related accrued interest for which their carrying amounts
approximate fair value.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
AMORTIZATION
The excess of current fair value over cost of net assets acquired is being
amortized on the straight-line basis over 40 years.
CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents. At August 14, 1995, cash
equivalents consisted primarily of overnight investing in commercial paper.
NOTE 2: SALE OF THE COMPANY
On August 15, 1995, the Company was acquired by SYN Inc. which is majority
owned by Northwestern Growth Corporation, a wholly owned subsidiary of
Northwestern Public Service Company. The acquisition cost was approximately $151
million and included the redemption of the Senior Secured Notes at par value and
the repayment of the Company's existing revolving credit facility. As a result
of the above sale the financial statements reflect operations for the four and
one-half month period ended August 14, 1995.
NOTE 3: DEBT RESTRUCTURING
On September 2, 1993, the Company and a committee of holders of the
Company's 11 5/8% Senior Subordinated Notes due 1997 (the 11 5/8% Notes)
announced that they had reached agreement on the major issues to restructure the
Company's outstanding debt and on August 23, 1994, the Company completed the
restructuring. The agreement contemplated that certain related parties to the
Company exchange $41,700,000 in debt for Series A Preferred Stock and Series B
Preferred Stock (the Recapitalization). This amount included $16,700,000 in
90-day unsecured promissory notes and $25,000,000 of 11 5/8% Notes (see Note 4).
The remaining 11 5/8% Notes plus accrued interest through September 14, 1993,
were proposed to be exchanged (the Exchange Offer) for new Increasing Rate
Senior Secured Notes due 2000 (the Senior Secured Notes).
F-100
<PAGE> 310
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 3: DEBT RESTRUCTURING (CONTINUED)
Debt restructuring costs, principally legal fees and banking fees, incurred
in connection with the restructuring, amounting to $2,650,000 and $350,000 for
the years ended March 31, 1994 and 1995, respectively, have been expensed.
NOTE 4: NOTES PAYABLE
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, AUGUST 14,
1994 1995 1995
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
11 5/8% Senior subordinated notes due 1997 (A)................................ $ 85,000 $ 1,700 $ 1,700
Increasing rate senior secured notes due 2000 (A)............................. -- 65,054 65,054
Revolving credit facility (B)................................................. 20,000 23,100 22,100
Unsecured notes payable (C)................................................... 16,700 -- --
Purchase contract obligations (D)............................................. 926 795 687
---------- ----------- -----------
122,626 90,649 89,541
Less current maturities................................................... 122,002 90,087 89,104
---------- ----------- -----------
$ 624 $ 562 $ 437
========== =========== ===========
</TABLE>
(A) On April 2, 1987, the Company sold $85,000,000 of 11 5/8% Notes in a public
offering. On March 15, 1993, September 15, 1993, and March 15, 1994, the
Company failed to make the required $4,941,000 interest payments due on each
of such dates on the 11 5/8% Notes. Under the terms of the Indenture to the
11 5/8% Notes, the failure to pay such interest constituted an Event of
Default.
On August 23, 1994, the Company completed the Exchange Offer and
Recapitalization (see Note 3). The 11 5/8% Notes not tendered in the
Exchange Offer, amounting to $1,700,000, remain outstanding at August 14,
1995.
The Indenture governing the new Senior Secured Notes contains provisions,
among others, that require the Company to maintain certain financial ratios
and limit additional debt, asset dispositions and management salaries. As of
March 31, 1995, the Company was not in compliance with certain financial
covenants. Such noncompliance constitutes an Event of Default.
(B) In August 1989, the Company entered into a revolving credit agreement with a
bank under which the maximum credit line available is $20,000,000. On
September 14, 1990, the bank was repaid by a related party to the Company
and the credit agreement was assigned by the bank to the related party. The
credit agreement contains certain restrictive covenants. Borrowings under
the credit facility are secured by cash, accounts receivable and inventory.
Interest based on the prime rate plus 1 1/2% is payable quarterly. The
amount outstanding under the facility was not repaid by the Company on the
maturity date of April 1, 1993. The failure to repay the facility
constituted an Event of Default. In November 1993 the maximum credit line
available under the facility was increased to $25,000,000 with advances in
excess of $20,000,000 at the discretion of the related party. The maturity
date of the revolving credit agreement was extended to September 30, 1996.
F-101
<PAGE> 311
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 4: NOTES PAYABLE (CONTINUED)
(C) At March 31, 1994, the Company had outstanding borrowings of $16,700,000
from an affiliate evidenced by 90-day unsecured promissory notes. Interest
based on the prime rate plus 2 1/2% was payable at the respective maturity
dates of each note. Since June 1993 neither the principal nor the interest
on $16,700,000 of notes was paid by the Company. On August 23, 1994, in
connection with the Recapitalization, the Company issued 1,670 shares of
Series B Preferred Stock in exchange for the $16,700,000 of 90-day unsecured
notes.
(D) Purchase contract obligations arise from the purchase of operating
businesses or other assets and are collateralized by the respective assets
acquired. At August 14, 1995, these obligations carried interest rates from
8% to 14.5% and are due periodically through 1999.
Aggregate annual maturities of long-term debt at August 14, 1995 are:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996.......................................................................... $ 89,104
1997.......................................................................... 251
1998.......................................................................... 80
1999.......................................................................... 83
2000.......................................................................... 23
-------
$ 89,541
=======
</TABLE>
NOTE 5: OPERATING LEASES
The Company leases certain property and equipment under lease agreements
expiring through 2011. At August 14, 1995, future minimum lease payments under
noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
- ------------------------------------------------------------------------------ ---------------
<S> <C>
1996.......................................................................... $ 907
1997.......................................................................... 971
1998.......................................................................... 402
1999.......................................................................... 238
2000 and thereafter........................................................... 191
------
$ 2,709
======
</TABLE>
Rent charged to operations including rental expense to related parties (see
Note 6) for the years ended March 31, 1994 and 1995, and the period ended August
14, 1995, aggregated $4,303,000, $2,687,000 and $929,000, respectively.
NOTE 6: RELATED PARTY TRANSACTIONS
On March 31, 1995, the stockholders of the Company determined that they
would forego the payment of an aggregate of $4,766,000 of accrued and unpaid
wages due to the stockholders from the Company as of March 31, 1995. The
foregone wages have been recorded as a contribution to additional paid-in
capital.
F-102
<PAGE> 312
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 6: RELATED PARTY TRANSACTIONS (CONTINUED)
The Company leases certain property and equipment from related parties under
operating lease agreements. Rental expense for the years ended March 31, 1994
and 1995, and the period ended August 14, 1995, was $3,276,000, $1,491,000 and
$318,000, respectively. On March 31, 1995, the related parties determined that
they would forego the payment of accrued and unpaid vehicle and equipment
rentals due from the Company as of March 31, 1995, amounting to $1,328,000. The
foregone rent has been recorded as a contribution to additional paid-in capital.
For the years ended March 31, 1994 and 1995, and the period ended August 14,
1995, interest expense related to the Company's revolving credit facility from a
related party (see Note 4) amounted to $3,047,000, $2,701,000 and $787,000,
respectively.
NOTE 7: INCOME TAXES
The provision for income taxes includes these components (in thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, AUGUST 14,
1994 1995 1995
----------- ----------- ------------
<S> <C> <C> <C>
Taxes currently payable............................................. $ 29 $ 41 $ 31
Deferred income taxes............................................... (429) (125) --
----- ----- -----
$ (400) $ (84) $ 31
===== ===== =====
</TABLE>
The tax effects of temporary differences related to deferred taxes shown on
the balance sheets were (in thousands):
<TABLE>
<CAPTION>
AUGUST 14,
1995
-----------
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts......................................................... $ 3,536
Inventory overhead costs capitalized for tax purposes................................... 421
Accrued expenses........................................................................ 1,390
Self-insurance liabilities and contingencies............................................ 4,185
Net operating loss carry-forwards....................................................... 35,948
-----------
45,480
Deferred tax liabilities:
Accumulated depreciation................................................................ (29,913)
-----------
Net deferred tax asset before valuation allowance........................................... $ 15,567
-----------
Valuation allowance:
Beginning balance....................................................................... (14,350)
Increase during the period.............................................................. (3,310)
-----------
Ending balance.......................................................................... (17,660)
-----------
Net deferred tax liability.......................................................... (2,093)
===========
</TABLE>
F-103
<PAGE> 313
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 7: INCOME TAXES (CONTINUED)
The above net deferred tax liability is presented on the balance sheets as
follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 14,
1995
-----------
<S> <C>
Deferred tax liability -- long-term................................................... $ (2,093)
===========
</TABLE>
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
<TABLE>
<CAPTION>
MARCH 31 MARCH 31 AUGUST 14
1994 1995 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed at the statutory rate (34%).......................................... $ (4,085) $ (2,518) $ (3,326)
Increase (decrease) resulting from:
Amortization of excess cost over fair value of net assets acquired.......... 27 27 9
Interest expense transferred to paid-in capital............................. -- 1,916 --
State income taxes--net of federal tax benefit.............................. (69) -- 31
Change in deferred tax asset valuation allowance............................ 4,149 576 3,310
Other....................................................................... (422) (85) 7
----------- ----------- -----------
Actual tax provision.......................................................... $ (400) $ (84) $ 31
=========== =========== ===========
</TABLE>
The Company estimates that as of August 14, 1995, it has available net
operating loss carryforwards of approximately $94.6 million to offset future
taxable income.
NOTE 8: EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution retirement plan covering
substantially all salaried employees. Employees who elect to participate may
contribute a percentage of their salaries to the plan, and the Company at its
discretion may match a portion of the employee contribution. The Company may
also make profit-sharing contributions to the plan at the discretion of its
Board of Directors. Contribution expense amounted to $60,000 for the years ended
March 31, 1995 and 1994, and $37,000 for the period ended August 14, 1995.
The plan is currently under audit by the U.S. Department of Labor (DOL),
which has notified the Company that the prior Plan Trustees engaged in
prohibited transactions. The DOL audit is continuing and the outcome cannot be
determined at this time. In addition, the Internal Revenue Service has been
notified of prohibited transactions. The Company believes that it may be subject
to excise taxes, penalties and interest in connection with these prohibited
transactions and has recorded its best estimates of the potential liabilities
expected to arise from these matters (see Note 13).
NOTE 9: SELF-INSURANCE AND LITIGATION CONTINGENCIES
Under the Company's insurance program, coverage for comprehensive general
liability, workers' compensation and vehicle liability was obtained for
catastrophic exposures as well as those risks required
F-104
<PAGE> 314
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 9: SELF-INSURANCE AND LITIGATION CONTINGENCIES (CONTINUED)
to be insured by law or contract. The Company retains a significant portion of
certain expected losses related primarily to comprehensive general liability.
Under this insurance program, the Company self insures the first $250,000 of
coverage (per incident). The Company obtained excess coverage from carriers for
this program. The Company currently self insures health benefits provided to
employees of the Company and its subsidiaries.
Provisions for losses expected under these programs are recorded based upon
the Company's estimates of the aggregate liability for claims incurred. The
Company provides letters of credit aggregating $2,875,000 in connection with
these programs which are collateralized with restricted cash deposits.
At August 14, 1995, the self-insured liability accrued in the balance sheet
totaled $4,160,000, which includes $500,000 of incurred but not reported claims.
The Company and its subsidiaries are presently defendants in various lawsuits
related to the self-insurance program and other business-related lawsuits which
are not expected to have a material adverse effect on the Company's results of
operations.
NOTE 10: ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 PERIOD
ENDED
-------------------- AUGUST 14,
1994 1995 1995
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ADDITIONAL CASH PAYMENT INFORMATION
Interest paid.............................................. $ 1,873 $ 11,877 $ 1,146
Income taxes paid.......................................... $ 35 $ 41 $ 15
NONCASH INVESTING AND FINANCING ACTIVITIES
Purchase contract obligation incurred...................... $ -- $ 129 $ --
Long-term debt converted to preferred stock................ $ -- $ 41,700 $ --
Accrued interest converted to additional paid-in capital
net of unamortized debt costs............................ $ -- $ 5,284 $ --
Accrued interest converted to long-term debt............... $ -- $ 7,054 $ --
Accrued wages converted to additional paid-in-capital...... $ -- $ 4,766 $ --
Accrued rent converted to additional paid-in capital....... $ -- $ 1,328 $ --
</TABLE>
NOTE 11: FUTURE ACCOUNTING PRONOUNCEMENTS
IMPACT OF SFAS NO. 121
In 1995 the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for the Impairment of Long-Lived Assets to be Disposed
of." The Company must adopt this standard effective April 1, 1996. The Company
does not expect that the adoption of this standard will have a material impact
on its financial position or results of operations.
F-105
<PAGE> 315
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 12: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
DEPENDENCE ON PRINCIPAL SUPPLIERS
Three suppliers, Chevron, Texaco and Powder Horn Petroleum, account for
approximately 55% of the Company's volume of propane purchases. Although the
Company believes that alternative sources of propane are readily available, in
the event that the Company is unable to obtain alternate sources of supply at
competitive prices and on a timely basis, such inability would have a material,
adverse effect on the Company.
ESTIMATES
Significant estimates related to tax liabilities, self-insurance and
litigation are discussed in Notes 8 and 9. Actual losses related to these items
could vary materially from amounts reflected in the financial statements.
NOTE 13: RESTATEMENT OF PRIOR YEARS' FINANCIAL STATEMENTS
Fiscal years 1994 and 1995 have been restated to reflect excise taxes,
penalties and interest related to prohibited transactions involving the employee
benefit plan. This correction decreased previously reported March 31, 1994 and
1995, net income by $3,667,000 and $794,000, respectively.
Fiscal year 1995 has been restated to reflect the conversion of foregone
wages and rents to additional paid-in capital in the amounts of $4,766,000 and
$1,328,000, respectively, resulting in a further reduction in March 31, 1995 net
income of $6,094,000.
In addition, the retained earnings (deficit) as of March 31, 1993 has been
restated for the effect of adjustments related to the allowance for doubtful
accounts, self insurance reserves, accrued vacation pay, reserves for state
taxes and for the effect of the above employee benefit plan. This correction
decreased previously reported retained earnings by $9,934,000.
F-106
<PAGE> 316
APPENDIX A
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: __________________________________
________________________________ ___________________________
Social Security or other Signature of Assignee
identifying number of Assignee
________________________________ ___________________________
Purchase Price including Name and Address
commissions, if any of Assignee
<PAGE> 317
Type of Entity (check one):
/_/ Individual /_/ Partnership /_/ Corporation
/_/ Trust /_/ Other (specify)
Nationality
(check one):
/_/ U.S. Citizen, Resident or Domestic Entity
/_/ Foreign /_/ Non-resident Alien
Corporation
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 _____________________________________.
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
__________________________________________________________.
<PAGE> 318
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.
<PAGE> 319
APPENDIX B
GLOSSARY OF CERTAIN TERMS
1995 PROPOSED LEGISLATION: Legislation passed by Congress in 1995 but
vetoed by President Clinton which would have altered the tax reporting
procedures and the deficiency collection procedures applicable to
electing partnerships with more than 100 partners.
ACQUISITION: Any transaction in which any member of the Partnership
Group acquires (through an asset acquisition, merger, stock
acquisition or other form of investment) control over all or a portion
of the assets, properties or business of another person for the
purpose of increasing the operating capacity or revenues of the
Partnership Group from the operating capacity or revenues of the
Partnership Group existing immediately prior to such transaction.
ACQUISITION FACILITY: A $75.0 million revolving credit facility
entered into by the Operating Partnership to be used for acquisitions
and improvements.
ADJUSTED OPERATING SURPLUS: With respect to any period, Operating
Surplus generated during such period (a) less (i) any net increase in
working capital borrowings during such period and (ii) any net
reduction in cash reserves for Operating Expenditures during such
period not relating to an Operating Expenditure made during such
period, and (b) plus (i) any net decrease in working capital
borrowings during such period and (ii) any net increase in cash
reserves for Operating Expenditures during such period required by any
debt instrument for the repayment of principal, interest or premium.
Adjusted Operating Surplus does not include that portion of Operating
Surplus included in clause (a)(i) of the definition of Operating
Surplus.
ANNUAL OPERATING PERFORMANCE INCENTIVE PLAN: The plan providing that
annual incentive bonuses be paid to participants in the plan (who will
be determined by the Board of Directors of the Managing General
Partner and who will include the Executives) based on a percentage of
annual salary plus certain acquisition management fees related to the
acquisition of Empire Energy and Coast by Northwestern Growth for
performance up to budgeted levels of net income and EBITDA.
AUDIT COMMITTEE: A committee of the board of directors of the
Managing General Partner composed of at least 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
<PAGE> 320
additional cash and cash equivalents of the Partnership Group on
hand on the date of determination of Available Cash with respect
to such quarter resulting from borrowings for working capital
purposes made subsequent to the end of such quarter, less
(b) the amount of any cash reserves that is necessary or
appropriate in the reasonable discretion of the Managing General
Partner to (i) provide for the proper conduct of the business of
the Partnership Group (including reserves for future capital
expenditures and for anticipated future credit needs of the
Partnership Group) subsequent to such quarter, (ii) comply with
applicable law or any loan agreement, security agreement,
mortgage, debt instrument or other agreement or obligation to
which any member of the Partnership Group is a party or by which
it is bound or its assets are subject, or (iii) provide funds for
distributions to Unitholders and the General Partners in respect
of any one or more of the next four quarters; provided, however,
that the Managing General Partner may not establish cash reserves
pursuant to (iii) above if the effect of such reserves would be
that the Partnership is unable to distribute the Minimum
Quarterly Distribution on all Common Units with respect to such
quarter; and, provided further, that disbursements made by a
Group Member or cash reserves established, increased or reduced
after the end of such quarter but on or before the date of
determination of Available Cash with respect to such quarter
shall be deemed to have been made, established, increased or
reduced for purposes of determining Available Cash within such
quarter if the Managing General Partner so determines.
Notwithstanding the foregoing, "Available Cash" with respect to
the quarter in which the liquidation of the Partnership occurs
and any subsequent quarter shall equal zero.
BANK CREDIT FACILITY: The $75.0 million Acquisition Facility and the
$50.0 million Working Capital Facility both entered into by the
Operating Partnership.
CAPITAL ACCOUNT: The capital account maintained for a Partner
pursuant to the Partnership Agreement. The Capital Account of a
Partner in respect of a general partner interest, a Common Unit, a
Subordinated Unit, an Incentive Distribution Right or any other
Partnership Interest shall be the amount which such Capital Account
would be if such general partner interest, Common Unit, Subordinated
Unit, Incentive Distribution Right, or other Partnership Interest were
the only interest in the Partnership held by a Partner from and after
the date on which such general partner interest, Common Unit,
Subordinated Unit, Incentive Distribution Right or other Partnership
Interest was first issued.
CAPITAL IMPROVEMENTS: Any addition or improvement to the capital
assets owned by any member of the Partnership Group or acquisition of
existing or the construction of new capital assets (including retail
distribution outlets, propane tanks, pipeline systems, storage
<PAGE> 321
facilities, appliance showrooms, training facilities and related
assets), made to increase the operating capacity of the Partnership
Group from the operating capacity of the Partnership Group existing
immediately prior to such addition, improvement, acquisition or
construction.
CAPITAL SURPLUS: All Available Cash distributed by the Partnership
from any source will be treated as distributed from Operating Surplus
until the sum of all Available Cash distributed since the commencement
of the Partnership equals the Operating Surplus as of the end of the
quarter prior to such distribution. Any excess Available Cash will be
deemed to be Capital Surplus.
CAUSE: Means a court of competent jurisdiction has entered a final,
non-appealable judgment finding the Managing General Partner liable
for actual fraud, gross negligence or willful or wanton misconduct in
its capacity as a general partner of the Partnership.
CLOSING DATE: The first date on which Common Units were 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.
consummated pursuant to the Stock Purchase and Merger Agreement dated
September 4, 1996, between Northwestern Growth, Coast Acquisition
Corp., Coast and the holders of preferred stock of Coast.
CODE: Internal Revenue Code of 1986, as amended.
COMBINED OPERATIONS: The propane business and assets of Synergy,
Empire Energy, Myers and Coast contributed to the Partnership pursuant
to the Contribution Agreement.
COMMISSION: Securities and Exchange Commission.
COMMON UNIT ARREARAGE: The amount by which the Minimum Quarterly
Distribution in respect of a quarter during the Subordination Period
exceeds the distribution of Available Cash from Operating Surplus
actually made for such quarter on a Common Unit, cumulative for such
quarter and all prior quarters during the Subordination Period.
COMMON UNITS: A Unit representing a fractional part of the
Partnership Interests of all limited partners and assignees and having
the rights and obligations specified with respect to Common Units in
the Partnership Agreement.
CONTRIBUTION AGREEMENT: The Contribution, Conveyance and Assumption
Agreement 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
<PAGE> 322
operations of Synergy, Empire Energy, Myers and Coast were transferred
and the liabilities assumed.
CORNERSTONE: Cornerstone Propane Partners, L.P., a Delaware limited
partnership.
COUNSEL: Schiff Hardin & Waite, special counsel to the General
Partners and the Partnership.
CURRENT MARKET PRICE: With respect to any class of Units listed or
admitted to trading on any national securities exchange as of any
date, the average of the daily Closing Prices (as hereinafter defined)
for the 20 consecutive Trading Days (as hereinafter defined)
immediately prior to such date. "Closing Price" for any day means the
last sale price on such day, regular way, or in case no such sale
takes place on such day, the average of the closing bid and asked
prices on such day, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the principal national
securities exchange (other than the Nasdaq Stock Market) on which the
Units of such class are listed or admitted to trading or, if the Units
of such class are not listed or admitted to trading on any national
securities exchange (other than the Nasdaq Stock Market), the last
quoted price on such day, or, if not so quoted, the average of the
high bid and low asked prices on such day in the over-the-counter
market, as reported by the Nasdaq Stock Market or such other system
then in use, or if on any such day the Units of such class are not
quoted by any such organization, the average of the closing bid and
asked prices on such day as furnished by a professional market maker
making a market in the Units of such class selected by the Managing
General Partner, or if on any such day no market maker is making a
market in the Units of such class, the fair value of such Units on
such day as determined reasonably and in good faith by the Managing
General Partner. "Trading Days" means a day on which the principal
national securities exchange on which Units of any class are listed or
admitted to trading is open for the transaction of business or, if the
Units of a class are not listed or admitted to trading on any national
securities exchange, a day on which banking institutions in New York
City generally are open.
DELAWARE ACT: The Delaware Revised Uniform Limited Partnership Act, 6
Del C. Section 17-101, et seq., as amended, supplemented or restated
from time to time, and any successor to such statute.
DEPARTING PARTNER: A former General Partner, either Managing General
Partner or Special General Partner, from and after the effective date
of any withdrawal or removal of such former General Partner pursuant
to the Partnership Agreement.
EBITDA: Operating income plus depreciation and amortization. As used
in this Prospectus, EBITDA is not intended to be construed as an
alternative to net income as an indicator of operating performance or
<PAGE> 323
as an alternative to cash flow as a measure of liquidity or ability to
service debt obligations.
EMPLOYMENT AGREEMENTS: Employment agreements between the Executives
and the Managing General Partner.
EMPIRE ACQUISITION OF CERTAIN SYNERGY ASSETS: The sale by Synergy to
Empire Energy of approximately 25% of the operations acquired in the
Synergy Acquisition.
EMPIRE ENERGY: Empire Energy Corporation, a Tennessee corporation.
EMPIRE GAS: Empire Gas Corporation, a Missouri corporation, now known
as All Star Gas Corporation.
EXCHANGE ACT: Securities Exchange Act of 1934, as amended.
EXECUTIVES: Messrs. Keith G. Baxter, Charles J. Kittrell, Ronald J.
Goedde and Vincent J. DiCosimo.
GENERAL PARTNERS: The Managing General Partner and the Special
General Partner and their successors and permitted assigns as general
partners of the Partnership and the Operating Partnership.
HEATING DEGREE DAY: Heating Degree Days measure the amount by which
the average of the high and low temperature on a given day is below 65
degrees Fahrenheit. For example, if the high temperature is 60
degrees and the low temperature is 40 degrees for a National Oceanic
and Atmospheric Administration measurement location, the average
temperature is 50 degrees and the number of heating degree days for
that day is 15.
INCENTIVE DISTRIBUTION RIGHT: A non-voting limited partner
Partnership Interest issued to the General Partners in connection with
the transfer of their assets to the Partnership, which Partnership
Interest confers upon the holder thereof only the rights and
obligations specifically provided in the Partnership Agreement with
respect to Incentive Distribution Rights (and no other rights
otherwise available to or other obligations of holders of a
Partnership Interest).
INCENTIVE DISTRIBUTIONS: The distributions of Available Cash from
Operating Surplus initially made to the General Partners that are in
excess of the General Partners' aggregate 2% general partner interest.
INITIAL COMMON UNITS: The Common Units sold in the IPO.
INITIAL UNIT PRICE: $21.00 per Common Unit, the amount per Unit equal
to the initial public offering price of the Common Units in the IPO.
INITIAL UNITS: The Common Units with an aggregate value of $7.0
million which were allocated to selected executives upon the
<PAGE> 324
consummation of the Transactions, subject to certain vesting
conditions, under the Restricted Unit Plan.
INTERIM CAPITAL TRANSACTIONS: (a) Borrowings, refinancings and
refundings of indebtedness and sales of debt securities (other than
for working capital purposes and other than for items purchased on
open account in the ordinary course of business) by any member of the
Partnership Group, (b) sales of equity interests (including the Common
Units sold to the Underwriters pursuant to the exercise of their
over-allotment option) by any member of the Partnership Group and
(c) sales or other voluntary or involuntary dispositions of any assets
of any member of the Partnership Group (other than (i) sales or other
dispositions of inventory in the ordinary course of business,
(ii) sales or other dispositions of other current assets, including,
without limitation, receivables and accounts, in the ordinary course
of business and (iii) sales or other dispositions of assets as a part
of normal retirements or replacements), in each case prior to the
commencement of the dissolution and liquidation of the Partnership.
IRA: Individual retirement account.
IRS: Internal Revenue Service.
MANAGEMENT BUY-OUT: The August 1, 1996 sale by the principal founding
shareholder of Empire Energy and certain other shareholders of their
interests in Empire Energy to certain members of management of Empire
Energy.
MANAGEMENT FEE: A fee for each of the Executives relating to the
acquisition of Empire Energy and Coast by Northwestern Growth.
MANAGING GENERAL PARTNER: Cornerstone Propane GP, Inc., a California
corporation, and its successors, as managing general partner of the
Partnership.
MINIMUM QUARTERLY DISTRIBUTION: $.54 per Unit with respect to each
quarter or $2.16 per Unit on an annualized basis, subject to
adjustment as described in "Cash Distribution Policy - Distributions
from Capital Surplus" and "Cash Distribution Policy - Adjustment of
Minimum Quarterly Distribution and Target Distribution Levels."
MYERS: Myers Propane Gas Company, a Delaware corporation and a
subsidiary of NPS prior to the consummation of the Transactions.
NEW ACQUISITION INCENTIVE PLAN: The plan providing bonuses to
participants in the plan (who will be determined by the Board of
Directors of the Managing General Partner and will include the
Executives) for adding new businesses to the Partnership's propane
operations, based upon 4% of the gross acquisition price, spread among
the participants in the plan based on their relative salaries.
<PAGE> 325
NON-CITIZEN ASSIGNEE: A Limited Partner or assignee who (i) fails to
furnish information about nationality, citizenship, residency or other
related status within 30 days after a request by the Managing General
Partner for such information, or (ii) the Managing General Partner
determines after receipt of such information is not an eligible
citizen.
NORTHWESTERN GROWTH: Northwestern Growth Corporation, a South Dakota
corporation and a wholly owned subsidiary of NPS.
NOTE PLACEMENT: The private placement by the Operating Partnership of
the Notes.
NOTES: The $220.0 million aggregate principal amount of Senior
Secured Notes due 2010 privately placed by the Operating Partnership.
NPS: Northwestern Public Service Company, a Delaware corporation.
NYSE: The New York Stock Exchange, Inc.
OPERATING EXPENDITURES: All Partnership Group expenditures, including
taxes, reimbursements of the General Partners, debt service payments
and capital expenditures, subject to the following:
(a) Payments (including prepayments) of principal and
premium on a debt shall not be an Operating Expenditure if the
payment is (i) required in connection with the sale or other
disposition of assets or (ii) made in connection with the
refinancing or refunding of indebtedness with the proceeds from
new indebtedness or from the sale of equity interests. For
purposes of the foregoing, at the election and in the reasonable
discretion of the Managing General Partner, any payment of
principal or premium shall be deemed to be refunded or refinanced
by any indebtedness incurred or to be incurred by the Partnership
Group within 180 days before or after such payment to the extent
of the principal amount of such indebtedness.
(b) Operating Expenditures shall not include (i) capital
expenditures made for Acquisitions or for Capital Improvements
(as opposed to capital expenditures made to maintain assets),
(ii) payment of transaction expenses relating to Interim Capital
Transactions or (iii) distributions to partners. Where capital
expenditures are made in part for Acquisitions or Capital
Improvements and in part for other purposes, the Managing General
Partner's good faith allocation between the amounts paid for each
shall be conclusive.
OPERATING PARTNERSHIP: Cornerstone Propane, L.P., a Delaware limited
partnership, and any successors thereto.
OPERATING PARTNERSHIP AGREEMENT: The Amended and Restated Agreement
of Limited Partnership of the Operating Partnership dated as of
<PAGE> 326
December 17, 1996 (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.
PARTNERSHIP AGREEMENT: The Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of December 17, 1996, (which
has been filed as an exhibit to the registration statement of which
this Prospectus is a part), as it may be amended, restated or
supplemented from time to time. Unless the context requires
otherwise, references to the Partnership Agreement constitute
<PAGE> 327
references to the Partnership Agreement of the Partnership and to the
Operating Partnership Agreement, collectively.
PARTNERSHIP GROUP: The Partnership, the Operating Partnership and any
subsidiary of either such entity, treated as a single consolidated
entity.
PARTNERSHIP INTEREST: An interest in the Partnership, which shall
include general partner interests, Common Units, Subordinated Units,
Incentive Distribution Rights or other equity securities of the
Partnership, or a combination thereof or interest therein as the case
may be.
PARTNERSHIP SECURITY: Means any class or series of Units, any option,
right, warrant or appreciation rights relating thereto, or any other
type of equity interest that the Partnership may lawfully issue, or
any unsecured or secured debt obligation of the Partnership that is
convertible into any class or series of equity interests of the
Partnership.
PLANS: The New Acquisition Incentive Plan of the Managing General
Partner, together with the Annual Operating Performance Incentive
Plan.
REGISTRATION STATEMENT: The Registration Statement on Form S-1, as
amended (No. 333-______), filed by the Partnership with the
Commission.
RESTRICTED UNIT PLAN: The Cornerstone Propane Partners, L.P. 1996
Restricted Unit Plan.
RULE 144: Rule 144 of the Securities Act.
SECURITIES ACT: The Securities Act of 1933, as amended.
SGI: Synergy Group Incorporated, a Delaware corporation.
SPECIAL GENERAL PARTNER: Synergy and its successors and assigns as
special general partner of the Partnership.
SPLIT-OFF: The tax-free split-off of Empire Energy from Empire Gas in
June 1994.
SUBORDINATED UNIT: A Unit representing a fractional part of the
Partnership Interests of all limited partners and assignees and having
the rights and obligations specified with respect to Subordinated
Units in the Partnership Agreement.
SUBORDINATION PERIOD: The Subordination Period will generally extend
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
<PAGE> 328
the outstanding Common Units and the Subordinated Units with respect
to each of the three consecutive, non-overlapping four-quarter periods
immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the outstanding Common Units
and Subordinated Units during such periods, (ii) the Adjusted
Operating Surplus generated during each of the three consecutive,
non-overlapping four-quarter periods immediately preceding such date
equaled or exceeded the sum of the Minimum Quarterly Distribution on
all of the outstanding Common Units and Subordinated Units, plus the
related distribution on the general partner interests in the
Partnership and in the Operating Partnership during such periods, and
(iii) there are no outstanding Common Unit Arrearages; and (b) the
date on which the Managing General Partner is removed as general
partner of the Partnership upon the requisite vote by holders of
Outstanding Units under circumstances where Cause does not exist and
Units held by the General Partners and their Affiliates are not voted
in favor of such removal. Prior to the end of the Subordination
Period, a portion of the Subordinated Units will convert into Common
Units on a one-for-one basis on the first day after the record date
established by the Managing General Partner for any quarter ending on
or after (a) December 31, 1999 with respect to one-quarter of the
Subordinated Units (1,649,405 Subordinated Units) and (b) December 31,
2000 with respect to an additional one-quarter of the Subordinated
Units (1,649,405 Subordinated Units), on a cumulative basis, in
respect of which (i) distributions of Available Cash from Operating
Surplus on the Common Units and the Subordinated Units with respect to
each of the three consecutive, non-overlapping four-quarter periods
immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the outstanding Common Units
and Subordinated Units during such periods, (ii) the Adjusted
Operating Surplus generated during each of the two consecutive,
non-overlapping four-quarter periods immediately preceding such date
equaled or exceeded the sum of the Minimum Quarterly Distribution on
all of the outstanding Common Units and Subordinated Units and the
related distribution on the general partner interests in the
Partnership and in the Operating Partnership during such periods, and
(iii) there are no outstanding Common Unit Arrearages; provided,
however, that the early conversion of the second quarter of
Subordinated Units may not occur until at least one year following the
early conversion of the first quarter of Subordinated Units. In
addition, if the Managing General Partner is removed as general
partner of the Partnership under circumstances where Cause does not
exist and Units held by the General Partners and their affiliates are
not voted in favor of such removal (i) the Subordination Period will
end and all outstanding Subordinated Units will immediately and
automatically convert into Common Units on a one-for-one basis,
(ii) any existing Common Unit Arrearages will be extinguished and
(iii) the General Partners will have the right to convert their 2%
general partner interests (and all the rights to the Incentive
Distribution) into Common Units or to receive cash in exchange for
such interests.
<PAGE> 329
SYNERGY: SYN Inc., a Delaware corporation and majority-owned
subsidiary of Northwestern Growth.
SYNERGY ACQUISITION: The acquisition of SGI by Synergy on August 15,
1995.
TARGET DISTRIBUTION LEVELS: See "Cash Distribution Policy - Incentive
Distributions - Hypothetical Annualized Yield."
TRANSFER AGENT: Continental Stock Transfer & Trust Company serving as
registrar and transfer agent for the Common Units.
TRANSFER APPLICATION: An application for transfer of Units in the
form set forth on the back of a certificate, substantially in the form
included in this Prospectus as Appendix A, 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 class, and at least a
majority of the outstanding Subordinated Units, voting as a class and,
thereafter, at least a majority of the outstanding Units.
UNITS: The Common Units and the Subordinated Units, collectively, but
not including the right to receive Incentive Distributions.
UNRECOVERED CAPITAL: At any time, the Initial Unit Price, less the
sum of all distributions theretofore made in respect of an Initial
Common Unit constituting Capital Surplus and any distributions of cash
(or the net agreed value of any distributions in kind) in connection
with the dissolution and liquidation of the Partnership theretofore
made in respect of such Unit, adjusted as the Managing General Partner
determines to be appropriate to give effect to any distribution,
subdivision or combination of such Units.
WORKING CAPITAL FACILITY: A $50.0 million revolving credit facility
entered into by the Operating Partnership to be used for working
capital and other Partnership purposes.
<PAGE> 330
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 by 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> 331
[ALTERNATE PAGE FOR SELLING UNITHOLDERS PROSPECTUS]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED _____________, 1997
[___] Common Units
Representing Limited Partner Interests
CORNERSTONE PROPANE PARTNERS, L.P.
This Prospectus, as appropriately amended or supplemented, may be
used from time to time principally by persons who have received Common
Units of Cornerstone Propane Partners L.P. (the "Partnership") in
connection with the acquisition by the Partnership of securities or
assets held by such persons, or their transferees, and who wish to
offer and sell such Common Units in transactions in which they and any
broker-dealer through whom such Common Units are sold may be deemed to
be underwriters within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), as more fully descried herein. The
Partnership will receive none of the proceeds from any such sale. Any
commissions paid or concessions allowed to any broker-dealer, and, if
any broker-dealer purchases such Common Units as principal, any
profits received on the resale of such Common Units, may be deemed to
be underwriting discounts and commissions under the Securities Act.
Printing, certain legal and accounting, filing and other similar
expenses of this offering will be paid by the Partnership. Selling
Unitholders will generally bear all other expenses of this offering,
including brokerage fees and any underwriting discounts or
commissions.
The Registration Statement of which this Prospectus is a part
also relates to the offer and issuance by the Company from time to
time of up to 1,000,000 Common Units in connection with its
acquisition of the securities and assets of other businesses.
___________________
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 26, 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.
____________________
<PAGE> 332
The Common Units are traded on the New York Stock Exchange, Inc.
("NYSE") under the symbol "CNO." Application will be made to list the
Common Units offered hereby on the NYSE. The last reported sale price
of Common Units on the NYSE on August __, 1997 was ____ per Common
Unit.
All expenses of this offering will be paid by the Partnership.
No underwriting discounts or commissions will be paid in connection
with the issuance of Common Units, although finder's fees may be paid
with respect to specific acquisitions. Any person receiving a
finder's fee may be deemed to be an "underwriter" within the meaning
of the Securities Act.
The Partnership will distribute to its partners, on a quarterly
basis, all of its Available Cash, which is generally all cash on hand
at the end of a quarter, as adjusted for reserves. The Managing
General Partner has broad discretion in making cash disbursements and
establishing reserves. The Partnership intends, to the extent there
is sufficient Available Cash, to distribute to each holder of Common
Units at least $.54 per Common Unit per quarter (the "Minimum
Quarterly Distribution") or $2.16 per Common Unit on an annualized
basis.
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 represent limited partner
interests in the Partnership, which the Partnership believes is the
fifth largest retail marketer of propane in the United States. The
Partnership was formed in 1996 to acquire, own and operate the propane
businesses and assets (the "Combined Operations") of SYN Inc.
("Synergy") and Empire Energy Corporation (formerly subsidiaries of
Northwestern Growth Corporation ("Northwestern Growth")), Myers
Propane Gas Company and CGI Holdings, Inc. The Managing General
Partner is Cornerstone Propane GP, Inc. The Managing General Partner
and Northwestern Growth are subsidiaries of Northwestern Public
Service Company ("NPS"), a New York Stock Exchange-listed energy
distribution company.
_________________
<PAGE> 333
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE 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.
The date of this Prospectus is , 1997
<PAGE> 334
[ALTERNATE PAGE FOR SELLING UNITHOLDERS PROSPECTUS]
MANNER OF OFFERING
This Prospectus, as appropriately amended or supplemented, may be
used from time to time principally by persons who have received Common
Units in connection with acquisitions by the Partnership of securities
and assets held by such persons, or their transferees, and who wish to
offer and sell such Common Units (such persons are herein referred to
as "Selling Unitholders") in transactions in which they and any
broker-dealer through whom such Common Units are sold may be deemed to
be Underwriters within the meaning of the Securities Act. The
Partnership will receive none of the proceeds from any such sales.
There presently are no arrangements or understandings, formal or
informal, pertaining to the distribution of the Common Units described
herein. Upon the Partnership being notified by a Selling Unitholder
that any material arrangement has been entered into with a broker-
dealer for the sale of Common Units bought through a block trade,
special offering, exchange distribution or secondary distribution, a
supplemented Prospectus will be filed, pursuant to Rule 424(b) under
the Securities Act, setting forth (i) the name of each Selling
Unitholder and the participating broker-dealer(s), (ii) the number of
Common Units involved, (iii) the price at which the Common Units were
sold, (iv) the commissions paid or the discounts allowed to such
broker-dealer(s), where applicable, (v) that such broker-dealer(s) did
not conduct any investigation to verify the information set out in
this Prospectus and (vi) other facts material to the transaction.
Selling Unitholders may sell the Common Units being offered
hereby from time to time in transactions (which may involve crosses
and block transactions) on the NYSE, in the over-the-counter market,
in negotiated transactions or otherwise, at market prices prevailing
at the time of the sale or at negotiated prices. Selling Unitholders
may sell some or all of the Common Units in transactions involving
broker-dealers, who may act solely as agent and/or may acquire Common
Units as principal. Broker-dealers participating in such transactions
as agent may receive commissions from Selling Unitholders (and, if
they act as agent for the purchaser of such Common Units, from such
purchaser), such commissions may be at negotiated rates where
permissible under such rules. Participating broker-dealers may agree
with Selling Unitholders to sell a specified number of Common Units at
a stipulated price per Common Unit and, to the extent such broker-
dealer is unable to do so acting as an agent for the Selling
Unitholder, to purchase as principal any unsold Common Units at the
price required to fulfill the broker-dealer's commitment to Selling
Unitholder. In addition or alternatively, Common Units may be sold by
Selling Unitholders and/or by or through other broker-dealers in
special offerings, exchange distributions or secondary distributions
pursuant to and in compliance with the governing rules of the NYSE,
and in connection therewith commissions in excess of the customary
commission prescribed by such governing rules may be paid to
participating broker-dealers, or, in the case of certain secondary
<PAGE> 335
distributions, a discount or concession from the offering price may be
allowed to participating broker-dealers in excess of the customary
commission. Broker-dealers who acquire Common Units as principal may
thereafter resell such Common Units from time to time in transactions
(which may involve crosses and block transactions and which may
involve sales to or through other broker-dealers, including
transactions of the nature described in the preceding two sentences)
on the NYSE, in the over-the-counter market, in negotiated
transactions or otherwise, at market prices prevailing at the time of
sale or at negotiated prices, and in connection with such resales may
pay to or receive commissions from the purchaser of such Common Units.
The Partnership may agree to indemnify each Selling Unitholder as
an underwriter under the Securities Act against certain liabilities,
including liabilities arising under the Securities Act. Each Selling
Unitholder may indemnify any broker-dealer that participates in
transactions involving sales of the Common Units against certain
liabilities, including liabilities arising under the Securities Act.
The Selling Unitholders may resell the Common Units offered
hereby only if such securities are qualified for sale under
applicable state securities or "blue sky" laws or exemptions from such
registration and qualification requirements are available.
<PAGE> 336
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 amounts set forth below are estimates.
Securities and Exchange Commission
registration fee . . . . . . . . . . . $ 7,878
Legal fees and expenses . . . . . . . . . 25,000
Accounting fees and expenses . . . . . . 20,000
Miscellaneous expenses . . . . . . . . . 2,122
---------
Total . . . . . . . . . . . . . . . . $ 55,000
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Section of the Prospectus entitled "The Partnership
Agreement Indemnification" is incorporated herein by this reference.
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
In connection with the initial public offering of the
Partnership's Common Units, on December 17, 1996 the Partnership
issued 6,597,619 Subordinated Units to the General Partners in
exchange for property contributed to the Partnership. The section of
the Prospectus entitled "The IPO and Related Transactions" is
incorporated herein by reference.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Exhibits
**3.1 Amended and Restated Agreement of Limited Partnership of
Cornerstone Propane Partners, L.P. dated as of December
17, 1996
<PAGE> 337
**3.2 Amended and Restated Agreement of Limited Partnership of
Cornerstone Propane, L.P. dated as of December 17, 1996
*5.1 Opinion of Schiff Hardin & Waite as to the legality of
the securities being registered
*8.1 Opinion of Schiff Hardin & Waite relating to tax matters
**10.1 Credit Agreement among Cornerstone Propane, L.P. and
certain banks
**10.2 Note Purchase Agreement among Cornerstone Propane, L.P.
and certain investors
**10.3 Contribution, Conveyance and Assumption Agreement, among
Cornerstone Propane Partners, L.P., Cornerstone Propane,
L.P., Cornerstone Propane GP, Inc., and certain other
parties
**10.4 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)
_____________________
* Filed herewith
** Filed with the Partnership's Current Report on Form 8-K dated
April 4, 1997 and hereby incorporated herein by reference.
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
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be
<PAGE> 338
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 of 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.
<PAGE> 339
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 August 28, 1997.
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 conforming 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.
<PAGE> 340
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ____
<S> <C> <C>
/s/ Merle D. Lewis Chairman of the Board and Director of August 28, 1997
Merle D. Lewis Cornerstone Propane GP, Inc.
/s/ Richard R. Hylland Vice Chairman of the Board and Director of August 28, 1997
Richard R. Hylland Cornerstone Propane GP, inc.
/s/ Keith G. Baxter President, Chief Executive Officer and August 28, 1997
Keith G. Baxter Director of Cornerstone Propane GP, Inc.
(Principal Executive Officer)
/s/ Ronald J. Goedde Executive Vice President and Chief Financial August 28, 1997
Ronald J. Goedde Officer of Cornerstone Propane GP, Inc.
(Principal Financial and Accounting Officer)
/s/ Daniel K. Newell Director of Cornerstone Propane GP, Inc. August 28, 1997
Daniel K. Newell
/s/ Paul Christen Director of Cornerstone Propane GP, Inc. August 28, 1997
Paul Christen
/s/ Kurt Katz Director of Cornerstone Propane GP, Inc. August 28, 1997
Kurt Katz
</TABLE>
<PAGE> 341
INDEX TO EXHIBITS
Exhibits
--------
**3.1 Amended and Restated Agreement of Limited Partnership
of Cornerstone Propane Partners, L.P. dated as of
December 17, 1996
**3.2 Amended and Restated Agreement of Limited Partnership
of Cornerstone Propane, L.P.
*5.1 Opinion of Schiff Hardin & Waite as to the legality
of the securities being registered
*8.1 Opinion of Schiff Hardin & Waite relating to tax
matters
**10.1 Credit Agreement among Cornerstone Propane, L.P. and
certain banks
**10.2 Note Purchase Agreement among Cornerstone Propane,
L.P. and certain investors
**10.3 Contribution, Conveyance and Assumption Agreement,
among Cornerstone Propane Partners, L.P., Cornerstone
Propane, L.P., Cornerstone Propane GP, Inc., and
certain other parties
**10.4 1996 Cornerstone Propane Partners, L.P. Restricted
Unit Plan
**10.5 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
<PAGE> 342
*23.3 Consent of Price Waterhouse LLP
*23.4 Consent of Schiff Hardin & Waite (included in Exhibit
5.1 and 8.1)
*24.1 Powers of Attorney (included on signature page)
_____________________
* Filed herewith
** Filed with the Partnership's Current Report on Form 8-K dated
April 4, 1997 and hereby incorporated herein by reference.
[LETTERHEAD OF SCHIFF HARDIN & WAITE]
EXHIBIT 5.1
August 28, 1997
Cornerstone Propane Partners, L.P.
432 Westridge Drive
Watsonville, California 95076
Gentlemen:
We have acted as counsel to Cornerstone Propane Partners, L.P.,
a Delaware limited partnership (the "Partnership"), and Cornerstone
Propane GP, Inc., a California corporation and the managing general
partner of the Partnership, in connection with the registration under the
Securities Act of 1933, as amended, of up to 1,000,000 common units
representing limited partner interests in the Partnership (the "Common
Units") which may be issued from time to time pursuant to the
Partnership's registration statement on Form S-1 being filed with the
Securities and Exchange Commission (the "Registration Statement"). The
Common Units will be issued from time to time in connection with the
Partnership's acquisitions of businesses, assets or securities in
amounts, at prices and on terms to be determined at the time of such
acquisitions.
In connection with the opinions expressed below, we have
examined such statutes, regulations, partnership and corporate records
and documents, certificates of corporate and public officials, and other
instruments as we have deemed necessary or advisable. In such
examination, we have assumed the authenticity of all documents submitted
to us as originals and the conformity with the original documents of all
documents submitted to us as copies. We have also assumed that, at the
time of each issuance, sale and delivery of Common Units, such Common
Units will be issued, sold and delivered in a manner consistent with the
Delaware Revised Uniform Limited Partnership Act (the "Delaware Act") and
the partnership agreement of the Partnership as in effect at such time.
Based on the foregoing and on such legal considerations as we
deem relevant, we are of the opinion that:
1. The Partnership has been duly formed and is validly
existing as a limited partnership under the Delaware Act.
2. When appropriate partnership action has been taken to
authorize the issuance of any Common Units and such Common Units
have been issued and paid for as described in the prospectus
contained in the Registration Statement, as amended or supplemented
(the "Prospectus"), such Common Units will be duly authorized,
validly issued, fully paid and nonassessable, except as such
nonassessability may be affected by the matters described in the
Prospectus under the caption "The Partnership Agreement-Limited
Liability."
<PAGE>
<PAGE> 344
We hereby consent to the use of this opinion as an exhibit to
the Registration Statement and to the reference to our firm under the
caption "Validity of the Common Units" in the Prospectus.
Very truly yours,
SCHIFF HARDIN & WAITE
By: /s/ Robert J. Minkus
---------------------------
Robert J. Minkus
Exhibit 8.1
[LETTERHEAD OF SCHIFF HARDIN & WAITE]
Lawrence H. Jacobson
(312) 258-5580
August 26, 1997
Cornerstone Propane Partners, L.P.
432 Westridge Drive
Watsonville, California 95076
Re: Cornerstone Propane Partners, L.P.
Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We have acted as special tax counsel to Cornerstone Propane
Partners, L.P., a Delaware limited partnership (the "Partnership"), in
connection with the registration under the Securities Act of 1933, as
amended, of up to 1,000,000 common units representing limited partner
interests in the Partnership (the "Common Units") which may be issued
from time to time pursuant to the Partnership's registration statement on
Form S-1 being filed with the Securities and Exchange Commission (the
"Registration Statement"). The Common Units will be issued from time to
time in connection with the Partnership's acquisitions of businesses,
assets or securities in amounts, at prices and on terms to be determined
at the time of such acquisitions.
Assuming the transactions set forth in the operative documents
for the Common Units (which are described in the prospectus contained in
the Registration Statement (the "Prospectus"), as it may be amended or
supplemented), will be performed in accordance with the terms described
therein, we hereby confirm to you our opinion as set forth under the
heading "Tax Considerations" in the Prospectus, subject to the
limitations set forth therein.
Our opinion is based on current provisions of the Internal
Revenue Code of 1986, as amended, the Treasury Regulations promulgated
thereunder, published pronouncements of the Internal Revenue Service and
case law, any of which may be changed at any time with retroactive
effect. Any change in applicable laws or facts and circumstances
surrounding the offering of the Common Units, or any inaccuracy in the
statements, facts, assumptions and representations on which we have
relied, may affect the continuing validity of the opinions set forth
herein. We assume no responsibility to inform you of any such change or
inaccuracy that may occur or come to our attention.
<PAGE> 346
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and the reference to us under the heading "Tax
Considerations" in the Prospectus.
Very truly yours,
SCHIFF HARDIN & WAITE
By: /s/ Lawrence H. Jacobson
-------------------------
Lawrence H. Jacobson
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Cornerstone Propane, L.P., a Delaware limited partnership
Cornerstone Sales & Service Corporation, a Delaware corporation
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our report dated December 4, 1996 on the pro
forma financial statements of Cornerstone Propane Partners, L.P., and to
the use of our report dated August 9, 1996 (except with respect to the
matter discussed in Note 9 of those statements as to which the date is
September 28, 1996) on the consolidated financial statements of SYN Inc.
included herein and to all references to our Firm included in this
registration statement.
/s/ Arthur Andersen LLP
---------------------------
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
August 26, 1997
EXHIBIT 23.2
We hereby consent to the use in the Registration Statement on Form
S-1 of our report dated August 14, 1996, (except with respect to the
matter discussed in Note 14 as to which the date is October 7, 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.
/s/ Baird, Kurtz & Dobson
--------------------------
Baird, Kurtz & Dobson
August 27, 1997
Springfield, Missouri
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectuses
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 Prospectuses. We also consent to the
reference to us under the heading "Experts" in such
Prospectuses.
/s/ Price Waterhouse LLP
-----------------------
PRICE WATERHOUSE LLP
San Francisco, California
August 26, 1997