<PAGE>
As filed with the Securities and Exchange Commission on December 22, 1997
_____________________________________________________________________________
Registration No. 333-34581
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
POST-EFFECTIVE AMENDMENT NO. 1 TO
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 Industrial (I.R.S.
jurisdiction of Classification Code Number) Employer
incorporation or Identification
organization) 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
____________________
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. /_/
______________________________________________________________________
<PAGE>
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."
The Partnership Prospectus may be used either in connection with the
issuance of units directly to the owners of the securities and assets of
other businesses or in an underwritten transaction for cash, such cash to
be used in connection with the acquisition of the securities or assets of
other businesses. In the event of an underwritten transaction, a
Prospectus Supplement will be issued in connection therewith.
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>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED DECEMBER 22, 1997
3,000,000 Common Units
Representing Limited Partner Interests
CORNERSTONE PROPANE PARTNERS, L.P.
------------------
This Prospectus relates to up to 3,000,000 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 partner 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.
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.
------------------
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 40, IN EVALUATING AN
INVESTMENT IN THE PARTNERSHIP, INCLUDING, BUT NOT LIMITED TO, THE FOLLOWING:
- -- FUTURE PARTNERSHIP PERFORMANCE WILL DEPEND UPON THE SUCCESS OF THE
PARTNERSHIP IN MAXIMIZING PROFITS FROM PROPANE SALES. PROPANE SALES ARE
AFFECTED BY, AMONG OTHER THINGS, WEATHER PATTERNS, PRODUCT PRICES AND
COMPETITION, INCLUDING COMPETITION FROM OTHER ENERGY SOURCES.
(CONTINUED ON PAGE ii)
------------------
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 December __, 1997 was $____ per Common
Unit.
All expenses of this offering will be paid by the Partnership. Unless
the Common Units offered hereby are being sold in an underwritten offering
(in which event information with respect to such offering will be set forth
in a Prospectus Supplement), 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. and Empire Energy Corporation (formerly
subsidiaries of Northwestern Growth Corporation ("Northwestern Growth")) 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 December __, 1997
<PAGE>
(continued from page i)
* THE MINIMUM QUARTERLY DISTRIBUTION IS NOT GUARANTEED. THE ACTUAL
AMOUNT OF CASH DISTRIBUTIONS WILL DEPEND ON FUTURE PARTNERSHIP
OPERATING PERFORMANCE AND WILL BE AFFECTED BY THE FUNDING OF
RESERVES, OPERATING AND CAPITAL EXPENDITURES AND OTHER MATTERS
WITHIN THE DISCRETION OF THE MANAGING GENERAL PARTNER, AS WELL AS
REQUIRED INTEREST AND PRINCIPAL PAYMENTS ON, AND THE OTHER TERMS
OF, THE PARTNERSHIP'S INDEBTEDNESS. PRO FORMA AVAILABLE CASH FROM
OPERATING SURPLUS (AS DEFINED IN THE GLOSSARY) GENERATED DURING
FISCAL 1997 WOULD HAVE BEEN INSUFFICIENT BY APPROXIMATELY $2.5
MILLION 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, AND WOULD HAVE BEEN INSUFFICIENT BY
APPROXIMATELY $16.8 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 SEPTEMBER 30, 1997, THE PARTNERSHIP'S TOTAL INDEBTEDNESS WAS
APPROXIMATELY $256.2 MILLION, CONSTITUTING APPROXIMATELY 53.0% OF
ITS TOTAL CAPITALIZATION. AS A RESULT, THE PARTNERSHIP HAS
INDEBTEDNESS THAT IS SUBSTANTIAL IN RELATION TO ITS PARTNERS'
CAPITAL. IN ADDITION, THE PARTNERSHIP'S FINANCING AGREEMENTS
CONTAIN RESTRICTIVE COVENANTS THAT WILL LIMIT THE PARTNERSHIP'S
ABILITY TO INCUR ADDITIONAL INDEBTEDNESS AND TO MAKE
DISTRIBUTIONS TO UNITHOLDERS.
* 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
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
(ii)
<PAGE>
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 AS DETERMINED BY THE MANAGING GENERAL PARTNER IN ANY
REASONABLE MANNER IN ITS SOLE DISCRETION. ON A PRO FORMA BASIS,
APPROXIMATELY $48.9 MILLION OF EXPENSES (PRIMARILY WAGES AND
SALARIES) WOULD HAVE BEEN REIMBURSED BY THE PARTNERSHIP TO THE
MANAGING GENERAL PARTNER IN FISCAL 1997 (INCLUDING $30.7 MILLION
ACTUALLY REIMBURSED FOR THE SIX AND ONE-HALF MONTH PERIOD ENDED
JUNE 30, 1997). THE SPECIAL GENERAL PARTNER RECEIVED NO
REIMBURSEMENTS FROM THE PARTNERSHIP IN FISCAL 1997.
* 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.
_______________
(iii)
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . 1
Cornerstone Propane Partners, L.P. . . . . . . . . . . . . . . 1
Summary Pro Forma Financial and Operating Data . . . . . . . . 14
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . 16
Cash Available for Distribution . . . . . . . . . . . . . . . 23
Partnership Structure and Management . . . . . . . . . . . . . 24
The Offering . . . . . . . . . . . . . . . . . . . . . . . . . 27
Summary of Tax Considerations . . . . . . . . . . . . . . . . 36
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Risks Inherent in the Partnership's Business . . . . . . . . . 40
Risks Inherent in an Investment in the Partnership . . . . . 43
Conflicts of Interest and Fiduciary Responsibilities . . . . . 49
Tax Risks . . . . . . . . . . . . . . . . . . . . . . . . . . 53
THE IPO AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . 57
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . 59
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . 59
PRICE RANGE OF COMMON UNITS . . . . . . . . . . . . . . . . . . . . 60
CASH DISTRIBUTION POLICY . . . . . . . . . . . . . . . . . . . . . 61
General . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Quarterly Distributions of Available Cash . . . . . . . . . . 63
Distributions from Operating Surplus during Subordination
Period. . . . . . . . . . . . . . . . . . . . . . . . . . 63
Distributions from Operating Surplus after Subordination
Period. . . . . . . . . . . . . . . . . . . . . . . . . .66
Incentive Distributions--Hypothetical Annualized Yield . . . . 66
Distributions from Capital Surplus . . . . . . . . . . . . . . 68
Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels . . . . . . . . . . . . . . . . . . . 69
Distributions of Cash Upon Liquidation . . . . . . . . . . . . 70
CASH AVAILABLE FOR DISTRIBUTION . . . . . . . . . . . . . . . . . . 72
SELECTED PRO FORMA FINANCIAL AND OPERATING DATA . . . . . . . . . 76
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA . . . . . . . . . 79
The Partnership . . . . . . . . . . . . . . . . . . . . . . . 79
Synergy . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Empire Energy . . . . . . . . . . . . . . . . . . . . . . . . 83
Coast . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . 87
General . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
(iv)
<PAGE>
The Partnership . . . . . . . . . . . . . . . . . . . . . . . 88
Synergy . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Empire Energy . . . . . . . . . . . . . . . . . . . . . . . . 94
Coast . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
BUSINESS AND PROPERTIES . . . . . . . . . . . . . . . . . . . . . . 99
General . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Business Strategy . . . . . . . . . . . . . . . . . . . . . 101
Product . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Competition . . . . . . . . . . . . . . . . . . . . . . . . 104
Operations . . . . . . . . . . . . . . . . . . . . . . . . . 106
Seasonality . . . . . . . . . . . . . . . . . . . . . . . . 106
Sources of Supply . . . . . . . . . . . . . . . . . . . . . 107
Risks of Business. . . . . . . . . . . . . . . . . . . . . . 108
Properties . . . . . . . . . . . . . . . . . . . . . . . . . 108
Trademarks and Tradenames . . . . . . . . . . . . . . . . . 109
Government Regulation . . . . . . . . . . . . . . . . . . . 109
Employees . . . . . . . . . . . . . . . . . . . . . . . . . 109
Litigation and Other Contingencies . . . . . . . . . . . . . 110
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Partnership Management . . . . . . . . . . . . . . . . . . . 111
Directors and Executive Officers of the Managing General
Partner . . . . . . . . . . . . . . . . . . . . . . . . 113
Reimbursement of Expenses of the Managing General Partner
and its Affiliates . . . . . . . . . . . . . . . . . . 115
Executive Compensation . . . . . . . . . . . . . . . . . . . 116
Compensation of Directors . . . . . . . . . . . . . . . . . 120
Compensation Committee Interlocks and Insider
Participation in Compensation Decisions . . . . . . . . . 120
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . 121
Ownership of Partnership Units by the General Partners and
Directors and Executive Officers of the
Managing General Partner. . . . . . . . . . . . . . . . 121
Ownership of NPS Common Stock by Directors and Executive
Officers of the Managing General Partner . . . . . . . 122
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . 123
Rights of the General Partners . . . . . . . . . . . . . . . 123
Contribution, Conveyance and Assumption Agreement . . . . . 123
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES . . . . . . 124
Conflicts of Interest . . . . . . . . . . . . . . . . . . . 124
Fiduciary and Other Duties . . . . . . . . . . . . . . . . . 129
DESCRIPTION OF THE COMMON UNITS . . . . . . . . . . . . . . . . . 132
The Units . . . . . . . . . . . . . . . . . . . . . . . . . 132
Transfer Agent and Registrar . . . . . . . . . . . . . . . 132
Transfer of Common Units . . . . . . . . . . . . . . . . . . 133
THE PARTNERSHIP AGREEMENT . . . . . . . . . . . . . . . . . . . . 135
(v)
<PAGE>
Organization and Duration . . . . . . . . . . . . . . . . . 135
Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . 136
Power of Attorney . . . . . . . . . . . . . . . . . . . . . 136
Capital Contributions . . . . . . . . . . . . . . . . . . . 136
Limited Liability . . . . . . . . . . . . . . . . . . . . . 136
Issuance of Additional Securities . . . . . . . . . . . . . 138
Amendment of Partnership Agreement . . . . . . . . . . . . . 140
Merger, Sale or Other Disposition of Assets . . . . . . . . 142
Termination and Dissolution . . . . . . . . . . . . . . . . 142
Liquidation and Distribution of Proceeds . . . . . . . . . . 143
Withdrawal or Removal of the General Partners . . . . . . . 143
Transfer of General Partners' Interests and Incentive
Distribution Rights . . . . . . . . . . . . . . . . . . 145
Change of Management Provisions . . . . . . . . . . . . . . 146
Limited Call Right . . . . . . . . . . . . . . . . . . . . . 146
Meetings; Voting . . . . . . . . . . . . . . . . . . . . . . 147
Status as Limited Partner or Assignee . . . . . . . . . . . 148
Non-citizen Assignees; Redemption . . . . . . . . . . . . . 149
Indemnification . . . . . . . . . . . . . . . . . . . . . . 149
Books and Reports . . . . . . . . . . . . . . . . . . . . . 150
Right to Inspect Partnership Books and Records . . . . . . . 151
Registration Rights . . . . . . . . . . . . . . . . . . . . 151
UNITS ELIGIBLE FOR FUTURE SALE . . . . . . . . . . . . . . . . . 152
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . 154
TAX CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . 155
Classification of the Partnership. . . . . . . . . . . . . . 155
Tax Rates . . . . . . . . . . . . . . . . . . . . . . . . . 156
Consequences of Exchanging Property for Common Units . . . . 157
Ownership of Units by S Corporations . . . . . . . . . . . . 159
Partnership Status . . . . . . . . . . . . . . . . . . . . . 161
Limited Partner Status . . . . . . . . . . . . . . . . . . . 163
Tax Consequences of Unit Ownership . . . . . . . . . . . . . 164
Allocation of Partnership Income, Gain, Loss and Deduction . 167
Tax Treatment of Operations . . . . . . . . . . . . . . . . 169
Disposition of Common Units . . . . . . . . . . . . . . . . 173
Uniformity of Units . . . . . . . . . . . . . . . . . . . . 177
Administrative Matters . . . . . . . . . . . . . . . . . . . 179
State, Local and Other Tax Considerations . . . . . . . . . 183
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS . . . . . 185
VALIDITY OF THE COMMON UNITS . . . . . . . . . . . . . . . . . . 187
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . 188
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . F-1
(vi)
<PAGE>
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
APPENDIX B . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
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.
(vii)
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE
READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND HISTORICAL
AND PRO FORMA FINANCIAL DATA APPEARING ELSEWHERE IN THIS PROSPECTUS.
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") 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 380,000 residential, commercial, industrial and agricultural
customers from 298 customer service centers in 27 states as of November
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, 1997, the Partnership had combined
retail propane sales of approximately 214 million gallons and pro
forma operating income plus depreciation and amortization ("EBITDA")
of approximately $41.0 million.
The Partnership was formed in 1996 to acquire, own and operate
the propane businesses and assets of Synergy and Empire Energy
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(formerly subsidiaries of Northwestern Growth) 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. The Partnership
commenced operation on December 17, 1996, concurrently with the
closing of the IPO when substantially all of the assets and
liabilities of Synergy, Empire Energy and Coast were contributed to
the Operating Partnership. Information in this Prospectus related to
the pro forma year ended June 30, 1997, reflects a full year of
activity for the three predecessor companies, as if the Partnership
had been in operation on July 1, 1996.
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
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total volume of propane sold by the Partnership and, consequently, the
Partnership's results of operations. See "Risk Factors."
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 continuing to integrate the Combined Operations, implement
entrepreneurially oriented local manager incentive programs, where
appropriate, and 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 concentrates 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
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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 ability to issue additional limited partner interests.
In the first eleven months of calendar 1997, the Partnership acquired
businesses in Arizona, California, Florida, New Hampshire and North
Carolina which added approximately 28,000 customers and annual retail
propane sales of approximately 24 million gallons. The aggregate purchase
price for these acquisitions was approximately $44 million, of which
approximately $30 million was in the form of Common Units (approximately
1.3 million 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
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service center. The Partnership believes it can successfully initiate
these start-up operations in attractive markets by identifying and
hiring local managers with proven propane service experience and
establishing programs that reward service-oriented and profitable
operations and that allow the managers to share in the growth of the
business.
ENHANCE PROFITABILITY OF ITS EXISTING OPERATIONS. The
Partnership believes that it can enhance the profitability of its
customer service centers by integrating the Combined Operations,
reducing inefficiencies in areas where there is a geographic overlap
of services and implementing "best practices" and management incentive
programs throughout the Partnership's operations. 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 Partner-
hip has a national wholesale natural gas liquids supply and logistics
business with sales of approximately 330 million gallons in fiscal
1997. 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.
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GENERAL
The Partnership is principally engaged in (i) the retail
distribution of propane for residential, commercial, industrial,
agricultural and other retail uses, (ii) the wholesale marketing and
distribution of propane and natural gas liquids to the retail propane
industry, the chemical and petrochemical industries and other
commercial and agricultural markets, (iii) the repair and maintenance
of propane heating systems and appliances and (iv) the sale of
propane-related supplies, appliances and other equipment.
Propane, a by-product of natural gas processing and petroleum
refining, is a clean-burning energy source recognized for its
transportability and ease of use relative to alternative stand-alone
energy sources. The retail propane business of the Partnership
consists principally of transporting propane to its retail
distribution outlets and then to tanks located on its customers'
premises. Retail propane use falls into four broad categories:
(i) residential, (ii) industrial and commercial, (iii) agricultural
and (iv) other applications, including motor fuel sales. Residential
customers use propane primarily for space and water heating.
Industrial customers use propane primarily as fuel for forklifts and
stationary engines, to fire furnaces, as a cutting gas, in mining
operations and in other process applications. Commercial customers,
such as restaurants, motels, laundries and commercial buildings, use
propane in a variety of applications, including cooking, heating and
drying. In the agricultural market, propane is primarily used for
tobacco curing, crop drying, poultry brooding and weed control. Other
retail uses include motor fuel for cars and trucks, outdoor cooking
and other recreational purposes, propane resales and sales to state
and local governments. In its wholesale operations, the Partnership
sells propane principally to large industrial customers and other
propane distributors.
The retail propane business is a "margin-based" business in which
gross profits depend on the excess of sales prices over propane supply
costs. Sales of propane to residential and commercial customers,
which account for the vast majority of the Partnership's gross profit,
have provided a relatively stable source of income for the
Partnership. Based on pro forma fiscal 1997 retail propane gallons
sold, the customer base consisted of 55% residential, 26% commercial
and industrial and 19% agricultural and other customers. Sales to
residential customers have generally provided higher gross margins
than other retail propane sales. While commercial propane sales are
generally less profitable than residential retail sales, the
Partnership has traditionally relied on this customer base to provide
a steady, noncyclical source of revenues. No single customer
accounted for more than 1% of total revenues.
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Because a substantial amount of propane is sold for heating
purposes, the severity of winter and resulting residential and
commercial heating usage have an important impact on the Partnership's
earnings. Approximately two-thirds of the Partnership's retail
propane sales usually occur during the six-month heating season from
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. Sales and profits are
subject to variation from month to month and from year to year,
depending on temperature fluctuations.
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.
As of November 30, 1997, the Partnership's retail operations
consisted of 298 customer service centers in 27 states. As of such date,
the Partnership owned a fleet of approximately 50 transport truck
tractors, approximately 60 transport trailers, approximately 940 bobtail
trucks and approximately 900 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
regulations restrict the refilling of a leased tank solely to the
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propane supplier that owns the tank. The inconvenience of switching
tanks minimizes a customer's tendency to switch among suppliers of
propane.
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
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 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 as of the closing of the IPO, 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 -- Liquidity
and Capital Resources -- 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
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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 Partner-
ship . . . . . . . . . . . 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 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
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
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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."
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
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(including the Annual Operating
Performance Incentive Plan, the New
Acquisition Incentive Plan and the
Restricted Unit Plan described
herein), and all other expenses
necessary or appropriate to the
conduct of the business of, and
allocable to, the Partnership. On a
pro forma basis in fiscal 1997, an
aggregate of approximately $48.9
million of expenses (primarily wages
and salaries) would have been
reimbursed by the Partnership to the
Managing General Partner (including
$30.7 million actually reimbursed for
the six and one-half month period
ended June 30, 1997). See "Management
-- Reimbursement of Expenses of the
Managing General Partner and its
Affiliates."
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. See "Management --
Reimbursement of Expenses of the
Managing General Partner and its
Affiliates."
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 are granted rights to
receive authorized but unissued Common
Units with an aggregate value of $12.5
million (determined as of the IPO
closing). As of November 30, 1997, rights
with respect to Common Units with an
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aggregate value of $9.8 million had
been granted 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 are eligible to
receive cash bonuses. See "Management
-- Executive Compensation."
Withdrawal or Removal of
the General Partners . If the Managing General Partner
withdraws in violation of the
Partnership Agreement or is removed by
the Unitholders for Cause, the
successor general partner will have
the option to purchase the general
partner interests of the General
Partners in the Partnership and the
Operating Partnership (and the right
to receive Incentive Distributions)
for a cash payment equal to the fair
market value thereof. If the Managing
General Partner withdraws in
accordance with the Partnership
Agreement or is removed without Cause,
it will have the option to require a
successor general partner to purchase
the general partner interests of the
General Partners in the Partnership
and the Operating Partnership (and the
right to receive Incentive
Distributions) for such price. If the
general partner interests of the
General Partners in the Partnership
and the Operating Partnership (and the
right to receive Incentive
Distributions) are not so purchased by
the successor general partner, such
general partner interests will be
converted into a number of Common
Units equal in value to the fair
market value thereof as determined by
an independent investment banking firm
or other independent experts. The
Special General Partner must withdraw
or be removed as a general partner
upon the withdrawal or removal of the
Managing General Partner. See "The
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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."
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SUMMARY PRO FORMA AND HISTORICAL 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 for the fiscal year ended June 30, 1997 set forth below has
been prepared by combining the historical results of operations of Synergy
for the five and one-half months ended December 16, 1996; Coast for the
four and one-half months ended December 16, 1996; Empire Energy for the
five and one-half months ended December 16, 1996; and the Partnership for
the six and one-half months ended June 30, 1997. The pro forma information
for the three months ended September 30, 1996 set forth below has been
prepared by combining the historical results of operations of Synergy for
the three months ended September 30, 1996; Coast for the three months
ended October 31, 1996; and Empire Energy for the three months ended
September 30, 1996. The financial and operating data for the three months
ended September 30, 1997 are derived from the Partnership's unaudited
consolidated financial statements included elsewhere in this Prospectus
and, in the opinion of management, include all adjustments necessary for a
fair presentation of such information. 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 financial and
operating data for the three month periods ended September 30, 1997 and
1996 are not necessarily indicative of the results of operations for the
full fiscal year. The following information should not be deemed
indicative of future operating results of the Partnership.
<TABLE>
<CAPTION>
PARTNERSHIP PRO FORMA PARTNERSHIP PRO FORMA PARTNERSHIP ACTUAL
FISCAL YEAR ENDED THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
---------------------- ------------------ -----------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER UNIT DATA)
STATEMENT OF OPERATIONS DATA:
Revenues. . . . .. . . . . . . . . $664,197 $141,756 $152,157
Cost of sales . . . . . . . . . . 534,892 117,519 127,855
-------- -------- --------
Gross profit . . . . . . . . . . . . . . 129,305 24,237 24,302
Operating, general and administrative
expenses . . . . . . . . . . . 88,264 20,858 22,602
Depreciation and amortization . . . . . 15,073 3,738 4,592
-------- -------- --------
Operating income (loss). . . . . . . . . 25,968 (359) (2,892)
Interest expense . . . . . . . . . . . . 18,215 4,467 4,782
-------- -------- --------
Net income (loss) before income taxes . . 7,753 (4,826) (7,674)
Income taxes . . . . . . . . . . . . . . 109 25 20
-------- -------- --------
Net income (loss) . . . . . . . . . . . . $ 7,644 $(4,851) $(7,694)
======== ======== ========
- 14 -
<PAGE>
BALANCE SHEET DATA (AS OF SEPTEMBER 30, 1997):
Current assets . . . . . . . . . . . . . $75,117
Total assets . . . . . . . . . . . . . . 548,784
Current liabilities . . . . . . . . . . . 64,188
Long-term debt (including current maturities) 256,165
Partners capital -- General Partners . . 4,628
Partners' capital -- Limited Partners . . 222,178
Capital expenditures (a) . . . . . . . . $ 15,977 $ 3,513 $ 5,994
EBITDA (b) . . . . . . . . . . . . . . . $ 41,041 $ 3,379 $ 1,700
Net income (loss) per Unit (c) . . . . . $ .46 $ (.29) $ (.46)
Retail propane gallons sold . . . . . . . 213,700 38,500 41,300
</TABLE>
_________
(a) 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.
(b) EBITDA consists of net income before depreciation, amortization,
interest and income taxes. EBITDA should not be considered as an
alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow, and it is not a
measure of performance or financial condition under generally
accepted accounting principles, but it provides additional
information for evaluating the Partnership's ability to
distribute the Minimum Quarterly Distribution and to service and
incur indebtedness. 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 (including charges for
interest and income taxes, which are not reflected in EBITDA),
adjusted for noncash charges or income (which are reflected in
EBITDA) and 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.
(c) Net income per Unit is computed by dividing the limited partners'
interest in net income by the weighted average number of Units
outstanding.
- 15 -
<PAGE>
RISK FACTORS
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL
STOCK OF A CORPORATION, ALTHOUGH MANY OF THE BUSINESS RISKS TO WHICH
THE PARTNERSHIP 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.
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 1997, approximately 68.8% of the
Partnership's combined retail propane volume and approximately
90% of the Partnership's pro forma EBITDA were attributable to
sales during the peak heating season. Actual weather conditions
can vary substantially from year to year, significantly affecting
the Partnership's financial performance. Furthermore, variations
in weather in one or more regions in which the Partnership
operates can significantly affect the total volumes sold by the
Partnership and the margins realized on such sales and,
consequently, the Partnership's results of operations.
* The retail propane business is a "margin-based" business in which
gross profits depend on the excess of sales prices over propane
supply costs. Consequently, the Partnership's profitability will
be sensitive to changes in wholesale propane prices. Propane is a
commodity, the market price of which can be subject to volatile
changes in response to changes in supply or other market
conditions. As it may not be possible immediately to pass on to
customers rapid increases in the wholesale cost of propane, such
increases could reduce the Partnership's gross profits.
* The Partnership's profitability is affected by the competition
for customers among all participants in the retail propane
business. Some of the Partnership's competitors are larger or
have greater financial resources than the Partnership. Should a
competitor attempt to increase market share by reducing prices,
the Partnership's financial condition and results of operations
could be materially adversely affected. In addition, propane
competes with other sources of energy, some of which are less
costly for equivalent energy value.
* Acquisitions will be the principal means of growth for the
Partnership, as the retail propane industry is mature and overall
demand for propane is expected to experience limited growth.
- 16 -
<PAGE>
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
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.
- 17 -
<PAGE>
* The amount of pro forma Available Cash from Operating Surplus
generated during fiscal 1997 was approximately $22.3 million
(including approximately $2.9 million of Available Cash from
Operating Surplus of businesses acquired in May and June 1997).
Such amount would have been insufficient by approximately $2.5
million 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, and would have been insufficient by
approximately $16.8 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 pro forma 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 September 30, 1997, the Partnership's total indebtedness was
approximately $256.2 million, constituting approximately 53.0% of
its total capitalization. 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 September 30, 1997 the
Partnership had approximately $150.8 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 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.
- 18 -
<PAGE>
* 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 $48.9 million of
expenses (primarily wages and salaries) would have been
reimbursed by the Partnership to the Managing General Partner in
fiscal 1997 (including $30.7 million actually reimbursed for the
six and one-half month period ended June 30, 1997). 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
2/3% of the outstanding Units (including Units owned by the
Managing General Partner and its affiliates). The ownership of
the Subordinated Units by the Managing General Partner and its
affiliates effectively gives the Managing General Partner the
ability to prevent its removal. The management control exercised
by the Managing General Partner may make it more difficult for
others to control, or influence the activities of, the
Partnership.
* Subject to certain limitations, the Partnership may issue
additional Common Units and other interests in the Partnership,
the effect of which may be to dilute the value of the interests
of the then-existing holders of Common Units in the net assets of
the Partnership, dilute the interests of holders of Common Units
in distributions by the Partnership or to make it more difficult
for a person or group to remove the Managing General Partner or
otherwise change the management of the Partnership.
* The Partnership Agreement contains certain provisions that may
have the effect of discouraging a person or group from attempting
to remove the Managing General Partner or otherwise change the
management of the Partnership. The effect of these provisions may
- 19 -
<PAGE>
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
- 20 -
<PAGE>
effect of enabling the General Partners to receive distributions
on the Subordinated Units or Incentive Distributions or hastening
the expiration of the Subordination Period or the conversion of
Subordinated Units into Common Units.
* The terms of the New Acquisition Incentive Plan (described below
under "Management -- Executive Compensation -- Incentive Plans")
could give the senior executives of the Managing General Partner
an incentive to cause the Partnership to acquire additional
propane operations without regard to whether the operations would
prove beneficial to the Partnership and may present the senior
executives of the Managing General Partner with a conflict of
interest in negotiating the acquisition price on behalf of the
Partnership.
* 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
- 21 -
<PAGE>
amended (the "Code"), or any other matter affecting the
Partnership.
* A Unitholder will be required to pay income taxes on his
allocable share of the Partnership's income, whether or not he
receives cash distributions from the Partnership.
* 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
- 22 -
<PAGE>
business or owns property. The Partnership currently owns
property and conducts business in the following states which
currently impose a personal income tax: Alabama, Arizona, Arkansas,
California, Georgia, Illinois, Indiana, Kentucky, Maryland,
Mississippi, Missouri, New Hampshire, New Jersey, New Mexico, New
York, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee,
Utah, Vermont and Virginia.
See "Risk Factors," "Cash Distribution Policy," "Cash Available
for Distribution," "Conflicts of Interest and Fiduciary
Responsibilities," "The Partnership Agreement" and "Tax
Considerations" for a more detailed description of these and other
risk factors and conflicts of interest that should be considered in
evaluating an investment in the Common Units.
CASH AVAILABLE FOR DISTRIBUTION
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 $39.1 million ($24.0 million for the
Common Units, $14.3 million for the Subordinated Units and $781,000 for
the aggregate 2% general partner interest of the General Partners). The
amount of pro forma Available Cash from Operating Surplus generated during
fiscal 1997 was approximately $22.3 million (including approximately $2.9
million of Available Cash from Operating Surplus of businesses acquired in
May and June, 1997 but not reflecting approximately $3.5 million of
Available Cash from Operating Surplus of businesses acquired subsequent
to June 30, 1997). Such amount would have been insufficient by
approximately $2.5 million 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, and would have been
insufficient by approximately $16.8 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. See "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 1997 set forth above was derived from the Selected Pro Forma
Financial and Operating Data 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 Selected Pro Forma Financial and Operating Data
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 Selected Pro Forma Financial and
Operating Data are based on accrual accounting concepts while
- 23 -
<PAGE>
Operating Surplus is defined in the Partnership Agreement on a cash
accounting basis. As a consequence, the amount of pro forma Available
Cash from Operating Surplus shown above should only be viewed as a
general indication of the amount of Available Cash from Operating
Surplus that might in fact have been generated by the Partnership had
it been formed in earlier periods. Available Cash from Operating
Surplus generated during a specified period refers generally to
(i) all cash receipts of the Partnership from its operations generated
during such period, less (ii) all Partnership operating expenses, debt
service payments (including any increases in reserves therefor but not
including amounts paid from any reduction in reserves, or payments
required in connection with the sale of assets, or any refinancing
with the proceeds of new indebtedness or an equity offering) and
maintenance capital expenditures, in each case during such period. For
a complete definition of Operating Surplus, see the Glossary.
The Partnership 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 -- Liquidity and Capital
Resources --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 and Coast (as well as those businesses that have been acquired
since the IPO). 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
- 24 -
<PAGE>
right to participate in the management or operation of the
Partnership.
Conflicts of interest may arise between the Managing General
Partner and its affiliates, on the one hand, and the Partnership, the
Operating Partnership and the Unitholders, on the other, including
conflicts relating to the compensation of the officers and employees
of the Managing General Partner and the determination of fees and
expenses that are allocable to the Partnership. The Managing General
Partner 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.
- 25 -
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
|-------------------------------------------|
| EFFECTIVE AGGREGATE OWNERSHIP | |---------------------|
| OF THE PARTNERSHIP AND THE | | NORTHWESTERN PUBLIC |
| OPERATING PARTNERSHIP | | SERVICE COMPANY |
| | | ("NPS") |
| Public Unitholders' Common | |---------------------|
| Units.............................61.5% | |
| General Partners Subordinated | 100% |
| Units.............................36.5% | 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 |
| 11,126,552 Common Units | | ("Managing General Partner") | Stock |
|-------------------------| | 5,677,040 Subordinated Units | Ownership |
| |------------------------------|------------------| |
| | | | | |
62.1484% | 31.7096% | | 0.7686% | 82.5% |-----------------------------|
Limited | Limited | | Managing | Common | SYN, INC. ("Synergy" or |
Partnership ------------------| Partner | | General | Stock | "Special General Partner")|
Interest | Interest | | Partner | Ownership | 920,579 Subordinated |
| | | Interest | | Units |
| | | | |-----------------------------|
| | | | 5.1420% 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 |
|--------------------------|
</TABLE>
- 26 -
<PAGE>
THE OFFERING
Securities Offered . . . . . 3,000,000 Common Units to be issued in
connection with business combination
transactions.
Units Outstanding As of the
Date of This Prospectus . . 11,126,552 Common Units and 6,597,619
Subordinated Units, representing an
aggregate 61.5% and 36.5% limited
partner interest in the Partnership,
respectively.
Distributions of Available
Cash . . . . . . . . . . . The Partnership will distribute all of
its Available Cash within 45 days
after the end of each quarter to the
Unitholders of record on the
applicable record date and to the
General Partners. "Available Cash" for
any quarter will consist generally of
all cash on hand at the end of such
quarter, as adjusted for reserves. The
complete definition of Available Cash
is set forth in the Glossary. The
Managing General Partner has broad
discretion in making cash
disbursements and establishing
reserves, thereby affecting the amount
of Available Cash that will be
distributed with respect to any
quarter. In addition, the terms of the
Partnership's indebtedness require
that certain reserves for the payment
of principal and interest be
maintained. See "Risk Factors -- Risks
Inherent in an Investment in the
Partnership -- Cash Distributions Are
Not Guaranteed and May Fluctuate with
Partnership Performance" for a
description of the reserves for the
payment of principal and interest that
the Partnership will be required to
maintain. Available Cash will
generally be distributed 98% to
Unitholders and 2% to the General
Partners, except that if distributions
of Available Cash from Operating
Surplus exceed specified target levels
- 27 -
<PAGE>
("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 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
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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 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 Subordi-
nated 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
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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. 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
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aggregate 2% general partner interest
are referred to herein as the
"Incentive Distributions."
Adjustment of Minimum
Quarterly Distribution
and Target Distribution
Levels . . . . . . . . . . The Minimum Quarterly Distribution and
the Target Distribution Levels are
subject to downward adjustments in the
event that the Unitholders receive
distributions of Available Cash from
Capital Surplus or legislation is
enacted or existing law is modified or
interpreted by the relevant
governmental authority in a manner
that causes the Partnership to be
treated as an association taxable as a
corporation or otherwise taxable as an
entity for federal, state or local
income tax purposes. Distributions of
Available Cash from Capital Surplus
represent a "return of capital" rather
than a "return on capital." 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 its
sole discretion without the approval
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<PAGE>
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 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
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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."
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
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<PAGE>
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
affiliates) and the election of a
successor general partner by the vote
of the holders of not less than a
majority of the outstanding Units. A
meeting of holders of the Common Units
may be called only by the Managing
General Partner or by the holders of
20% or more of the outstanding Common
Units. The ownership of the
Subordinated Units by the Managing
General Partner and its affiliates
effectively gives the Managing General
Partner the ability to prevent its
removal. The Managing General Partner
has agreed not to voluntarily withdraw
as general partner of the Partnership
and the Operating Partnership prior to
December 31, 2006, subject to limited
exceptions, without obtaining the
approval of at least a Unit Majority
and furnishing an Opinion of Counsel
(as defined in the Glossary). The
Special General Partner must withdraw
or be removed as a general partner
upon the withdrawal or removal of the
Managing General Partner. See "The
Partnership Agreement -- Withdrawal or
Removal of the General Partners" and
"-- Meetings; Voting."
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Distributions Upon
Liquidation . . . . . . . . If the Partnership liquidates during the
Subordination Period, under certain
circumstances holders of outstanding
Common Units will be entitled to
receive more per Unit in liquidating
distributions than holders of
outstanding Subordinated Units. The
per Unit difference will be dependent
upon the amount of gain or loss
recognized by the Partnership in
liquidating its assets and will be
limited to the Unrecovered Capital of
a Common Unit and any Common Unit
Arrearages thereon. Under certain
circumstances there may be
insufficient gain for the holders of
Common Units to fully recover all such
amounts, even though there may be cash
available for distribution to holders
of Subordinated Units. Following
conversion of the Subordinated Units
into Common Units, all Units will be
treated the same upon liquidation of
the Partnership. See "Cash
Distribution Policy -- Distributions
of Cash Upon Liquidation."
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"
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SUMMARY OF TAX CONSIDERATIONS
The tax consequences of an investment in the Partnership to a
particular investor will depend in part on the investor's own tax
circumstances. Each prospective investor should consult his own tax
advisor about the United States federal, state and local tax
consequences of an investment in Common Units.
The following is a brief summary of certain expected tax
consequences of acquiring and disposing of Common Units. This
summary reflects 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 discus-
sion in "Tax Considerations."
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
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<PAGE>
the Partnership ending within or with the Unitholder's taxable year
even if cash distributions are not made to him. As a consequence, a
Unitholder's share of taxable income of the Partnership (and possibly
the income tax payable by him with respect to such income) may exceed
the cash actually distributed to him.
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.
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<PAGE>
SECTION 754 ELECTION
The Partnership intends to make the election provided for by
Section 754 of the Code, which will generally result in a Unitholder
being allocated income and deductions calculated by reference to the
portion of his purchase price attributable to each asset of the
Partnership.
DISPOSITION OF COMMON UNITS
A Unitholder who sells Common Units will recognize gain or loss
equal to the difference between the amount realized and the adjusted
tax basis of those Common Units. Thus, distributions of cash from the
Partnership to a Unitholder in excess of the income allocated to him
will, in effect, become taxable income if he sells the Common Units at
a price greater than his adjusted tax basis even if the price is less
than his original cost. A portion of the amount realized (whether or
not representing gain) may be ordinary income.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will likely be
subject to other taxes, such as state and local income taxes,
unincorporated business taxes, and estate, inheritance or intangible taxes
that are imposed by the various jurisdictions in which a Unitholder
resides or in which the Partnership does business or owns property.
Although an analysis of those various taxes is not presented here, each
prospective Unitholder should consider their potential impact on his
investment in the Partnership. The Partnership currently owns property and
conducts business in the following states which currently impose a
personal income tax: Alabama, Arizona, 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.
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<PAGE>
It is the responsibility of each prospective Unitholder to
investigate the legal and tax consequences, under the laws of
pertinent states and localities, of his investment in the Partnership.
Accordingly, each prospective Unitholder should consult, and must
depend upon, his own tax counsel or other advisor with regard to those
matters. Further, it is the responsibility of each Unitholder to file
all U.S. federal, state and local tax returns that may be required of
such Unitholder. Counsel has not rendered an opinion on the 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."
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RISK FACTORS
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL
STOCK OF A CORPORATION, ALTHOUGH MANY OF THE BUSINESS RISKS TO WHICH
THE PARTNERSHIP 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.
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 1997,
approximately 68.8% of the Partnership's combined retail propane
volume and approximately 90% of the Partnership's pro forma EBITDA
were attributable to sales during the peak heating season. Actual
weather conditions can vary substantially from year to year,
significantly affecting the Partnership's financial performance.
Furthermore, variations in weather in one or more regions in which the
Partnership operates can significantly affect the total volume of
propane sold by the Partnership and the margins realized on such sales
and, consequently, the Partnership's results of operations.
Agricultural demand is also affected by weather, as dry weather during
the harvest season reduces demand for propane used in crop drying. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
THE PARTNERSHIP WILL BE SUBJECT TO PRICING AND INVENTORY RISKS
The retail propane business is a "margin-based" business in which
gross profits depend on the excess of sales prices over propane supply
costs. Consequently, the Partnership's profitability will be sensitive
to changes in wholesale propane prices. Propane is a commodity, the
market price of which can be subject to volatile changes in response
to changes in supply or other market conditions. The Partnership will
have no control over these market conditions. Consequently, the unit
price of propane purchased by the Partnership, as well as other
propane marketers, can change rapidly over a short period of time. In
general, product supply contracts permit suppliers to charge posted
prices (plus transportation costs) at the time of delivery or the
current prices established at major delivery points. As it may not be
possible immediately to pass on to customers rapid increases in the
wholesale cost of propane, such increases could reduce the
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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
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
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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
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
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<PAGE>
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,
business and other factors, a number of which are beyond the control
of the Partnership and the Managing General Partner. Because the
Partnership is effectively a holding company for the Operating
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Partnership, distributions by the Partnership are dependent upon
distributions of cash from the Operating Partnership to the
Partnership. 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 $39.1 million ($24.0 million for the Common
Units, $14.3 million for the Subordinated Units and $781,000 for the
aggregate 2% general partner interest). The amount of pro forma Available
Cash from Operating Surplus generated during fiscal 1997 was approximately
$22.3 million (including approximately $2.9 million of Available Cash from
Operating Surplus of businesses acquired in May and June, 1997 but not
reflecting approximately $3.5 million of Available Cash from Operating
Surplus of businesses acquired subsequent to June 30, 1997). Such amount
would have been insufficient by approximately $2.5 million 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, and would have been insufficient by approximately $16.8
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 -- Liquidity and Capital
Resources -- 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 10.5% of the amount of Available Cash
needed to distribute the Minimum Quarterly Distribution for four
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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, 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 52.7% 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 pro forma 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 September 30, 1997, the Partnership's total indebtedness was
approximately $256.2 million, constituting approximately 53.0% of
its total capitalization. As a result, the Partnership is
significantly leveraged and has indebtedness that is substantial in
relation to its partners' capital. As of September 30, 1997, the
Partnership had approximately $100.8 million of unused borrowing
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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 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 -- Liquidity and Capital Resources -- 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 $48.9 million of
expenses (primarily wages and salaries) would have been reimbursed by
the Partnership to the Managing General Partner in fiscal 1997
(including $30.7 million actually reimbursed for the six and one-half
month period ended June 30, 1997). 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
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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
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 (such as the Restricted Unit Plan) 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. Under the
Restricted Unit Plan, the executive officers and directors of the
Managing General Partner are eligible to receive rights which, subject
to vesting, entitle them to receive Common Units. The issuance of
Common Units pursuant to the Restricted Unit Plan may dilute the
interests of holders of Common Units in distributions by the
Partnership. As of November 30, 1997, the Partnership has granted rights
relating to 459,006 Common Units under the Restricted Unit Plan.
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
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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
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. "Cause"" is defined as a court of competent
jurisdiction having entered a final, non-appealable judgment finding
the Managing General Partner liable for actual fraud, gross negligence
or willful wanton misconduct in its capacity as a general partner of
the Partnership. 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."
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THE MANAGING GENERAL PARTNER WILL HAVE A LIMITED CALL RIGHT WITH
RESPECT TO THE LIMITED PARTNER INTERESTS
If at any time less than 20% of the then-issued and outstanding
limited partner interests of any class (including Common Units) are
held by persons other than the Managing General Partner and its
affiliates, the Managing General Partner will have the right, which it
may assign to any of its affiliates or the Partnership, to acquire
all, but not less than all, of the remaining limited partner interests
of such class held by such unaffiliated persons at a price generally
equal to the then-current market price of limited partner interests of
such class. As a consequence, a holder of Common Units may be required
to sell his Common Units at a time when he may not desire to sell them
or at a price that is less than the price he would desire to receive
upon such sale. See "The Partnership Agreement -- Limited Call Right."
UNITHOLDERS MAY NOT HAVE LIMITED LIABILITY IN CERTAIN
CIRCUMSTANCES; LIABILITY FOR RETURN OF CERTAIN DISTRIBUTIONS
The limitations on the liability of holders of limited partner
interests for the obligations of a limited partnership have not been
clearly established in some states. If it were determined that the
Partnership had been conducting business in any state without
compliance with the applicable limited partnership statute, or that
the right or the exercise of the right by the Unitholders as a group
to remove or replace the General Partners, to make certain amendments
to the Partnership Agreement or to take other action pursuant to the
Partnership Agreement constituted participation in the "control" of
the Partnership's business, then the Unitholders could be held liable
in certain circumstances for the Partnership's obligations to the same
extent as a general partner. In addition, under certain circumstances
a Unitholder may be liable to the Partnership for the amount of a
distribution for a period of three years from the date of the
distribution. See "The Partnership Agreement -- Limited Liability" for
a discussion of the limitations on liability and the implications
thereof to a Unitholder.
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
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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
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.
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(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
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
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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
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
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and trustees to the fullest extent permitted by law against
liabilities, costs and expenses incurred by the General Partners or
such other persons, if the General Partners or such persons acted in
good faith and in a manner they reasonably believed to be in, or (in
the case of a person other than a General Partner) not opposed to, the
best interests of the Partnership and, with respect to any criminal
proceedings, had no reasonable cause to believe the conduct was
unlawful.
The provisions of Delaware law that allow the common law
fiduciary duties of a general partner to be modified by a partnership
agreement have not been tested in a court of law, and the Managing
General Partner has not obtained an opinion of counsel covering the
provisions set forth in the Partnership Agreement that purport to
waive or restrict the fiduciary duties of the General Partners that
would be in effect under common law were it not for the Partnership
Agreement. See "Conflicts of Interest and Fiduciary Responsibilities -
- Conflicts of Interest."
TAX RISKS
For a general discussion of the expected federal income tax
consequences of owning and disposing of Common Units, see "Tax
Considerations."
TAX TREATMENT IS DEPENDENT ON PARTNERSHIP STATUS
The availability to a Common Unitholder of the federal income tax
benefits of an investment in the Partnership depends, in large part,
on the classification of the Partnership as a partnership for federal
income tax purposes. Assuming the accuracy of certain factual matters
as to which the General Partners and the Partnership have made
representations, Counsel is of the opinion that, under current law,
the Partnership will be classified as a partnership for federal income
tax purposes. No ruling from the IRS as to classification has been or
is expected to be requested. Instead, the Partnership intends to rely
on such opinion of Counsel (which is not binding on the IRS). One of
the representations of the Partnership on which the opinion of Counsel
is based is that at least 90% of the Partnership's gross income for
each taxable year in the future will be "qualifying income." Whether
the Partnership will continue to be classified as a partnership in
part depends, therefore, on the Partnership's ability to meet this
qualifying income test in the future. See "Tax Considerations --
Partnership Status."
If the Partnership were classified as an association taxable as a
corporation for federal income tax purposes, the Partnership would pay
tax on its income at corporate rates (currently a 35% federal rate),
distributions would generally be taxed again to the Unitholders as
corporate distributions, and no income, gains, losses or deductions
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would flow through to the Unitholders. Because a tax would be imposed
upon the Partnership as an entity, the cash available for distribution
to the holders of Common Units would be substantially reduced.
Treatment of the Partnership as an association taxable as a
corporation or otherwise as a taxable entity would result in a
material reduction in the anticipated cash flow and after-tax return
to the holders of Common Units and thus would likely result in a
substantial reduction in the value of the Common Units. See "Tax
Considerations -- Partnership Status."
There can be no assurance that the law will not be changed so as
to cause the Partnership to be treated as an association taxable as a
corporation for federal income tax purposes or otherwise to be subject
to entity-level taxation. The Partnership Agreement provides that, if
a law is enacted or existing law is modified or interpreted in a
manner that subjects the Partnership to taxation as a corporation or
otherwise subjects the Partnership to entity-level taxation for
federal, state or local income tax purposes, certain provisions of the
Partnership Agreement will be subject to change, including a decrease
in the Minimum Quarterly Distribution and the Target Distribution
Levels to reflect the impact of such law on the Partnership. See "Cash
Distribution Policy -- Adjustment of Minimum Quarterly Distribution
and Target Distribution Levels."
NO IRS RULING WITH RESPECT TO TAX CONSEQUENCES
No ruling has been requested from the IRS with respect to
classification of the Partnership as a partnership for federal income
tax purposes, whether the Partnership's propane operations generate
"qualifying income" under Section 7704 of the Code or any other matter
affecting the Partnership. Accordingly, the IRS may adopt positions
that differ from Counsel's conclusions expressed herein. It may be
necessary to resort to administrative or court proceedings in an
effort to sustain some or all of Counsel's conclusions, and some or
all of such conclusions ultimately may not be sustained. Any such
contest with the IRS may materially and adversely impact the market
for the Common Units and the prices at which Common Units trade. In
addition, the costs of any contest with the IRS will be borne directly
or indirectly by some or all of the Unitholders and the General
Partners.
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, 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
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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 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
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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, Arizona, Arkansas, California, Georgia,
Illinois, Indiana, Kentucky, Maryland, Mississippi, Missouri, New
Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio,
Oklahoma, South Carolina, Tennessee, Utah, Vermont and Virginia. It is
the responsibility of each Unitholder to file all United States federal,
state and local tax returns that may be required of such Unitholder.
Counsel has not rendered an opinion on the state or local tax consequences
of an investment in the Partnership. See "Tax Considerations -- State,
Local and Other Tax Considerations."
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
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<PAGE>
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.
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 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
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<PAGE>
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 as of the closing of the IPO, 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 -- Liquidity and Capital Resources -- Financing and
Sources of Liquidity."
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<PAGE>
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. Such Common Units may be issued directly to the owners of
such businesses, properties or securities or may be issued for cash and
such cash used to acquire such businesses, properties or securities. 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.
In the event Common Units are issued for cash proceeds, pending
their use in connection with business combination transactions, such cash
proceeds may be used to repay short-term borrowings under the Bank Credit
Facility or invested in short-term investments, to the extent permitted
under the Partnership's Partnership Agreement.
CAPITALIZATION
The following table sets forth the capitalization of the
Partnership at September 30, 1997. The table should be read in
conjunction with the historical financial statements and notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------
(IN THOUSANDS OF DOLLARS)
<S> <C>
Short-term indebtedness, including current portion of long-term indebtedness $ 5,010
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251,155
--------
Total indebtedness . . . . . . . . . . . . . . 256,165
--------
Partners' capital:
Common Unitholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,542
Subordinated Unitholders . . . . . . . . . . . . . . . . . . . . . . . . . . 85,636
General Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,628
--------
Total partners' capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 226,806
--------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 482,971
========
</TABLE>
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<PAGE>
PRICE RANGE OF COMMON UNITS
The Common Units are listed and principally traded on the NYSE
under the trading symbol "CNO." The Common Units began trading on the
NYSE on December 12, 1996, three trading days before the assets and
liabilities of the predecessor companies were contributed to the
Partnership in exchange for the proceeds from the IPO and related
transactions. The high and low sales prices for the Common Units, as
reported in the consolidated transaction reporting system, and the
amount of distributions declared with respect to the Common Units, for
each calendar quarter since December 12, 1996, are as follows:
<TABLE>
<CAPTION>
High Low Distributions
---- --- -------------
<S> <C> <C> <C>
1996
----
Fourth Quarter (from December 12, 1996) . . . . . . . . . . . . $21-1/2 $ 21 $ --
1997
----
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 22-3/8 20-7/8 .63 (1)
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 22-1/8 19-3/4 .54
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 23-7/8 21-1/16 .54
Fourth Quarter (through December 19, 1997). . . . . . . . . . . . 23-15/16 22-1/4 (2)
</TABLE>
(1) The distribution of $0.63 per Unit declared for the quarter ended
March 31, 1997, included the 15-day period commencing
December 17, 1996.
(2) 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.
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.
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--Liquidity and Capital Resources --
Financing and Sources of Liquidity."
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<PAGE>
CASH DISTRIBUTION POLICY
GENERAL
The Partnership will distribute to its partners, on a quarterly
basis, all of its Available Cash in the manner described herein.
Available Cash is defined in the Glossary and generally means, with
respect to any quarter of the Partnership, all cash on hand at the end
of such quarter less the amount of cash reserves that is necessary or
appropriate in the reasonable discretion of the Managing General
Partner to (i) provide for the proper conduct of the Partnership's
business, (ii) comply with applicable law or any Partnership debt
instrument or other agreement, or (iii) provide funds for
distributions to Unitholders and the General Partners in respect of
any one or more of the next four quarters.
Cash distributions will be characterized as distributions from
either Operating Surplus or Capital Surplus. This distinction affects
the amounts distributed to Unitholders relative to the General
Partners, and under certain circumstances it determines whether
holders of Subordinated Units receive any distributions. See "--
Quarterly Distributions of Available Cash."
Operating Surplus is defined in the Glossary and refers generally
to (i) the cash balance of the Partnership on the date the Partnership
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
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<PAGE>
such amount (irrespective of its source) will be deemed to be from
Capital Surplus and distributed accordingly.
If Available Cash from Capital Surplus is distributed in respect
of each Common Unit in an aggregate amount per Common Unit equal to
$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.
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<PAGE>
The discussion in the sections below indicates the percentages of
cash distributions required to be made to the General Partners and the
holders of Common Units and the circumstances under which holders of
Subordinated Units are entitled to cash distributions and the amounts
thereof. Distributions and allocations to the General Partners will be
made pro rata in accordance with their respective general partner
interests. For a discussion of Available Cash from Operating Surplus
available for distributions with respect to the Common Units on a pro
forma basis, see "Cash Available for Distribution."
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Partnership will make distributions to its partners with
respect to each quarter of the Partnership prior to its liquidation in
an amount equal to 100% of its Available Cash for such quarter. The
Partnership expects to make distributions of all Available Cash within
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
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<PAGE>
on all of the outstanding Common Units and Subordinated Units during
such periods, (ii) the Adjusted Operating Surplus generated during
each of the three consecutive four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum
Quarterly Distribution on all of the outstanding Common Units and
Subordinated Units and the related distribution on the general partner
interests in the Partnership during such periods, and (iii) there are
no outstanding Common Unit Arrearages.
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
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<PAGE>
increase in working capital borrowings during such period and (b) any
net reduction in cash reserves for Operating Expenditures during such
period not relating to an Operating Expenditure made during such
period; and plus (x) any net decrease in working capital borrowings
during such period and (y) any net increase in cash reserves for
Operating Expenditures during such period required by any debt
instrument for the repayment of principal, interest or premium.
Operating Surplus generated during a period is equal to the difference
between (i) the Operating Surplus determined at the end of such period
and (ii) the Operating Surplus determined at the beginning of such
period.
Distributions by the Partnership of Available Cash from Operating
Surplus with respect to any quarter during the Subordination Period
will be made in the following manner:
FIRST, 98% to the Common Unitholders, pro rata, and 2% to
the General Partners, until there has been distributed in respect
of each outstanding Common Unit an amount equal to the Minimum
Quarterly Distribution for such quarter;
SECOND, 98% to the Common Unitholders, pro rata, and 2% to
the General Partners, until there has been distributed in respect
of each outstanding Common Unit an amount equal to any Common
Unit Arrearages accrued and unpaid with respect to any prior
quarters during the Subordination Period;
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
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<PAGE>
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:
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
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<PAGE>
THEREAFTER, 50% to all Unitholders, pro rata, and 50% to the
General Partners.
The distributions to the General Partners set forth above (other than
in their capacity as holders of the Subordinated Units) that are in
excess of their aggregate 2% general partner interest represent the
Incentive Distributions. The right to receive Incentive Distributions
is not part of the general partner interest and may be transferred
separately from such interests. See "The Partnership Agreement--
Transfer of General Partners' Interests and Incentive Distribution
Rights."
The following table illustrates the percentage allocation of the
additional Available Cash from Operating Surplus between the
Unitholders and the General Partners up to the various Target
Distribution Levels and a hypothetical annualized percentage yield to
be realized by a Unitholder at each Target Distribution Level. For
purposes of the following table, the annualized percentage yield is
calculated on a pretax basis assuming that (i) the Common Unit was
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 Hypothetical Annualized General
Target Amount 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>
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<PAGE>
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
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 -- it is a "return of
capital" rather than a "return on capital." 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).
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<PAGE>
Distributions of Available Cash from Capital Surplus will not
reduce the Minimum Quarterly Distribution or Target Distribution
Levels for the quarter with respect to which they are distributed.
ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION
LEVELS
In addition to reductions of the Minimum Quarterly Distribution
and Target Distribution Levels made upon a distribution of Available
Cash from Capital Surplus, the Minimum Quarterly Distribution, the
Target Distribution Levels, the Unrecovered Capital, the number of
additional Common Units issuable during the Subordination Period
without a Unitholder vote, the number of Common Units issuable upon
conversion of the Subordinated Units and other amounts calculated on a
per Unit basis will be proportionately adjusted upward or downward, as
appropriate, in the event of any combination or subdivision of Common
Units (whether effected by a distribution payable in Common Units or
otherwise), but not by reason of the issuance of additional Common
Units for cash or property. For example, in the event of a two-for-one
split of the Common Units (assuming no prior adjustments), the Minimum
Quarterly Distribution, each of the Target Distribution Levels and the
Unrecovered Capital of the Common Units would each be reduced to 50%
of its initial level.
The Minimum Quarterly Distribution and the Target Distribution
Levels may also be adjusted if legislation is enacted or if existing
law is modified or interpreted by the relevant governmental authority
in a manner that causes the Partnership to become taxable as a
corporation or otherwise subjects the Partnership to taxation as an
entity for federal, state or local income tax purposes. In such event,
the Minimum Quarterly Distribution and the Target Distribution Levels
would be reduced to an amount equal to the product of (i) the Minimum
Quarterly Distribution and each of the Target Distribution Levels,
respectively, multiplied by (ii) one minus the sum of (x) the maximum
effective federal income tax rate to which the Partnership is then
subject as an entity plus (y) any increase that results from such
legislation in the effective overall state and local income tax rate
to which the Partnership is subject as an entity for the taxable year
in which such event occurs (after taking into account the benefit of
any deduction allowable for federal income tax purposes with respect
to the payment of state and local income taxes). For example, assuming
the Partnership was not previously subject to state and local income
tax, if the Partnership were to become taxable as an entity for
federal income tax purposes and the Partnership became subject to a
maximum marginal federal, and effective state and local, income tax
rate of 38%, then the Minimum Quarterly Distribution and the Target
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<PAGE>
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
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
- 70 -
<PAGE>
Quarterly Distribution for the quarter during which liquidation
of the Partnership occurs and (iii) any unpaid Common Unit
Arrearages in respect of such Common Unit;
THIRD, 98% to the holders of Subordinated Units, pro rata,
and 2% to the General Partners, until the capital account for
each Subordinated Unit is equal to the sum of (i) the Unrecovered
Capital in respect of such Subordinated Unit and (ii) the amount
of the Minimum Quarterly Distribution for the quarter during
which the liquidation of the Partnership occurs;
FOURTH, 98% to all Unitholders, pro rata, and 2% to the
General Partners, until there has been allocated under this
paragraph FOURTH an amount per Unit equal to (a) the sum of the
excess of the First Target Distribution per Unit over the Minimum
Quarterly Distribution per Unit for each quarter of the
Partnership's existence, less (b) the cumulative amount per Unit
of any distributions of Available Cash from Operating Surplus in
excess of the Minimum Quarterly Distribution per Unit that were
distributed 98% to the Unitholders, pro rata, and 2% to the
General Partners for each quarter of the Partnership's existence;
FIFTH, 85% to the Unitholders, pro rata, and 15% to the
General Partners, until there has been allocated under this
paragraph FIFTH an amount per Unit equal to (a) the sum of the
excess of the Second Target Distribution per Unit over the First
Target Distribution per Unit for each quarter of the
Partnership's existence, less (b) the cumulative amount per Unit
of any distributions of Available Cash from Operating Surplus in
excess of the First Target Distribution per Unit that were
distributed 85% to the Unitholders, pro rata, and 15% to the
General Partners for each quarter of the Partnership's existence;
SIXTH, 75% to all Unitholders, pro rata, and 25% to the
General Partners, until there has been allocated under this
paragraph SIXTH an amount per Unit equal to (a) the sum of the
excess of the 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
- 71 -
<PAGE>
disappear, so that clauses (ii) and (iii) of paragraph SECOND above
and all of paragraph THIRD above will no longer be applicable.
Upon liquidation of the Partnership, any loss will generally be
allocated to the General Partners and the Unitholders as follows:
FIRST, 98% to holders of Subordinated Units in proportion to
the positive balances in their respective capital accounts and 2%
to the General Partners, until the capital accounts of the
holders of the Subordinated Units have been reduced to zero;
SECOND, 98% to the holders of Common Units in proportion to
the positive balances in their respective capital accounts and 2%
to the General Partners, until the capital accounts of the Common
Unitholders have been reduced to zero; and
THEREAFTER, 100% to the General Partners.
If the liquidation occurs after the Subordination Period, the
distinction between Common Units and Subordinated Units will
disappear, so that all of paragraph FIRST above will no longer be
applicable.
Any allocation made to the General Partners herein shall be made
to the General Partners pro rata in accordance with their respective
general partner interests. In addition, interim adjustments to capital
accounts will be made at the time the Partnership issues additional
interests in the Partnership or makes distributions of property. Such
adjustments will be based on the fair market value of the interests or
the property distributed and any gain or loss resulting therefrom will
be allocated to the Unitholders and the General Partners in the same
manner as gain or loss is allocated upon liquidation. In the event
that positive interim adjustments are made to the capital accounts,
any subsequent negative adjustments to the capital accounts resulting
from the issuance of additional interests in the Partnership,
distributions of property by the Partnership, or upon liquidation of
the Partnership, will be allocated in a manner which results, to the
extent possible, in the capital account balances of the General
Partners equaling the amount which would have been the General
Partners' capital account balances if no prior positive adjustments to
the capital accounts had been made.
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 $39.1 million ($24.0 million for the
Common Units, $14.3 million for the Subordinated Units and $781,000
- 72 -
<PAGE>
for the aggregate 2% general partner interest of the General Partners).
The amount of pro forma Available Cash from Operating Surplus generated
during fiscal 1997 was approximately $22.3 million (including
approximately $2.9 million of Available Cash from Operating Surplus of
businesses acquired in May and June, 1997 but not reflecting approximately
$3.5 million of Available Cash from Operating Surplus of businesses
acquired subsequent to June 30, 1997). Such amount would have been
insufficient by approximately $2.5 million 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, and would have been insufficient by approximately $16.8 million
to cover the Minimum Quarterly Distribution on all Subordinated Units
currently outstanding and the related distribution on the general partner
interests. See "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:
PRO FORMA AVAILABLE CASH FROM OPERATING SURPLUS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Year Ended
June 30, 1997
-----------------
<S> <C>
Pro forma operating income(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,968
Add: Pro forma depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 15,073
--------
Pro forma EBITDA(a)(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,041
Less: Pro forma interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,215
Pro forma capital expenditures -- maintenance(c) . . . . . . . . . . . . . . . . . . . 3,500
--------
Pro forma Available Cash from Operating Surplus before acquisitions (a)(d) . . . . . . . . . . 19,326
Available Cash from Operating Surplus of businesses acquired in May and June, 1997(e). . . 2,951
--------
$22,277
Pro Forma Available Cash from Operating Surplus (a)(d) . . . . . . . . . . . . . . . . . . . . ========
</TABLE>
________
(a) The pro forma amounts of operating income, EBITDA and Available
Cash from Operating Surplus do not reflect (i) savings of certain
non-recurring expenses incurred by Empire Energy, (ii) propane
acquisition and logistics costs savings and (iii) insurance
savings that the Partnership believes are achievable as a result
of the Transactions.
- 73 -
<PAGE>
(b) EBITDA consists of net income before depreciation, amortization,
interest and income taxes. EBITDA should not be considered as an
alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow, and it is not a
measure of performance or financial condition under generally
accepted accounting principles, but it provides additional
information for evaluating the Partnership's ability to
distribute the Minimum Quarterly Distribution and to service and
incur indebtedness. 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 (including charges for
interest and income taxes, which are not reflected in EBITDA),
adjusted for noncash charges or income (which are reflected in
EBITDA) and 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.
(c) Based upon estimated maintenance capital expenditures for fiscal
1998.
(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.
(e) Reflects Available Cash from Operating Surplus of businesses
acquired in May and June, 1997 as if they had been acquired July
1, 1996.
The amount of pro forma Available Cash from Operating Surplus for
fiscal 1997 set forth above was derived from the Selected Pro Forma
Financial and Operating Data of the Partnership. The pro forma
adjustments are based upon currently available information and certain
estimates and assumptions. The Selected Pro Forma Financial and
Operating Data 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 Selected Pro Forma Financial and
Operating Data are based on accrual accounting concepts while
Operating Surplus is defined in the Partnership Agreement on a cash
- 74 -
<PAGE>
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.
- 75 -
<PAGE>
SELECTED PRO FORMA FINANCIAL AND OPERATING DATA
The following Summary Pro Forma Financial and Operating Data
reflect the consolidated historical operating results of the companies
that 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) are
unaudited. The pro forma information for the fiscal year ended
June 30, 1997 set forth below has been prepared by combining the
historical results of operations of Synergy for the five and
one-half months ended December 16, 1996; Coast for the four
and one-half months ended December 16, 1996; Empire Energy for the
five and one-half months ended December 16, 1996; and the Partnership
for the six and one-half months ended June 30, 1997. The pro forma
information for the three months ended September 30, 1996 set forth
below has been prepared by combining the historical results of
operations of Synergy for the three months ended September 30, 1996;
Coast for the three months ended October 31, 1996; and Empire Energy
for the three months ended September 30, 1996. The information for
the three months ended September 30, 1997 is derived from the
Partnership's unaudited consolidated financial statements included
elsewhere in this Prospectus and, in the opinion of management,
includes all adjustments necessary for a fair presentation of such
information. 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 Selected Pro Forma Financial and Operating Data Partnership's
revenue and cash flow was generated. The financial and operating
data for the three month periods ended September 30, 1997 and
1996 are not necessarily indicative of the results of operations
for the full fiscal year. The following information should not be
deemed indicative of future operating results of the Partnership.
<TABLE>
<CAPTION>
PREDECESSORS
--------------------------------------------------
ACQUISITION/
SYNERGY DISPOSITION
PARTNERSHIP (JULY 1, EMPIRE ENERGY COAST (AUG. ADJUSTMENTS PARTNERSHIP
(DECEMBER 17, 1996 TO (JULY 1, 1996 1, 1996 TO (JULY 1, 1996 PRO FORMA
1996 TO JUNE DEC. 16, TO DEC. 16, DEC. 16, TO DECEMBER 16, PRO-FORMA YEAR ENDED
30, 1997) 1996) 1996) 1996) 1996) (a) ADJUSTMENTS JUNE 30, 1997
-------- ----- ----- ----- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS (IN THOUSANDS)
DATA:
Revenues $389,630 $44,066 $43,201 $185,460 $1,840 $ $ 664,197
Cost of sales 315,324 23,322 23,310 173,155 1,339 (1,558) (b) 534,892
------- -------- -------- -------- -------- --------
Gross profit 74,306 20,744 19,891 12,305 501 1,558 129,305
Operating, general and
administrative expenses 50,023 15,071 13,394 10,579 360 (1,163) (c) 88,264
Depreciation and 8,519 1,904 2,930 1,604 71 45 (d) 15,073
amortization -------- -------- -------- -------- ------- ------- --------
Operating income 15,764 3,769 3,567 122 70 2,676 25,968
- 76 -
<PAGE>
Interest expense 9,944 3,311 3,621 2,238 86 (985) (e) 18,215
-------- -------- -------- -------- -------- -------- --------
Net income (loss)
before income taxes 5,820 458 (54) (2,116) (16) 3,661 7,753
Income taxes (benefit) 64 298 32 (748) 7 456 (f) 109
-------- -------- -------- -------- -------- ------ --------
Net income (loss) $5,756 $160 $(86) $(1,368) $(23) $3,205 $7,644
======== ======== ======== ======== ======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
PARTNERSHIP YEAR ENDED
JUNE 30, 1997
--------------------------------
BALANCE SHEET DATA (AS OF JUNE 30, 1997): (IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C>
Current assets . . . . . . . . . . . . . . . . . . . . . $ 70,261
Total assets . . . . . . . . . . . . . . . . . . . . . . 540,993
Current liabilities. . . . . . . . . . . . . . . . . . . 60,742
Long-term debt (including current maturities). . . . . . 237,268
Partners capital--General Partners . . . . . . . . . . . 4,972
Partners' capital--Limited Partners. . . . . . . . . . . 238,957
OPERATING DATA (pro forma):
Capital expenditures (g) $ 15,977
EBITDA (h) . . . . . . . . . . . . . . . . . . . . . . $ 41,041
Net income per Unit (i) . . . . . . . . . . . . . . . . $ .46
Retail propane gallons sold . . . . . . . . . . . . . . 213,700
</TABLE>
<TABLE>
<CAPTION>
PARTNERSHIP
PRO PARTNERSHIP
EMPIRE ACQUISITION/ FORMA ACTUAL
SYNERGY ENERGY COAST DISPOSITION THREE THREE
(JULY 1, (JULY 1, (AUG. 1, ADJUSTMENTS MONTHS MONTHS
1996 TO 1996 TO 1996 TO (JULY 1, 1996 ENDED ENDED
SEPTEMBER SEPTEMBER OCTOBER TO SEPTEMBER PRO-FORMA SEPTEMBER SEPTEMBER
30, 1997) 30, 1996) 31, 1996) 30, 1996)(a) ADJUSTMENTS 30, 1996 30, 1997
--------- --------- --------- ------------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS)
Revenues $17,883 $15,035 $108,175 $663 $ $141,756 $152,157
Cost of sales 8,940 7,910 100,266 403 117,519 127,855
------- ------- -------- ------ -------- --------
Gross profit 8,943 7,125 7,909 260 24,237 24,302
Operating, general and
administrative expenses 7,913 7,008 6,952 (582) (433)(c) 20,858 22,602
Depreciation and amortization 1,000 1,586 1,067 65 20 (d) 3,738 4,592
------- ------- -------- ------ ------- -------- --------
Operating income (loss) 30 (1,469) (110) 777 413 (359) (2,892)
Interest expense 1,665 1,704 1,294 77 (273)(e) 4,467 4,782
------- ------- -------- ------ ------- -------- --------
Net income (loss) before
income taxes (1,635) (3,173) (1,404) 700 686 (4,826) (7,674)
Income taxes (benefit) (550) (1,165) (491) 266 1,965 (f) 25 20
------- ------- -------- ------ ------- -------- --------
Net income (loss) $(1,085) $(2,008) $ (913) $434 $(1,279) $ (4,851) $ (7,694)
======= ======= ======== ====== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
PARTNERSHIP PRO FORMA PARTNERSHIP ACTUAL
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
--------------------- ------------------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C>
BALANCE SHEET DATA (AS OF SEPTEMBER 30, 1997):
Current assets . . . . . . . . . . . . . . . . . . . . $ 75,117
Total assets . . . . . . . . . . . . . . . . . . . . . 548,784
Current liabilities. . . . . . . . . . . . . . . . . . 64,188
Long-term debt (including current maturities). . . . . 256,165
Partners capital - General Partners. . . . . . . . . . 4,628
Partners' capital - Limited Partners . . . . . . . . . 222,178
OPERATING DATA:
Capital expenditures (g) . . . . . . . . . . . . . . . $ 3,513 $ 5,994
EBITDA (h) . . . . . . . . . . . . . . . . . . . . . . $ 3,379 $ 1,700
Net loss per Unit (i). . . . . . . . . . . . . . . . . $ (.29) $ (.46)
Retail propane gallons sold. . . . . . . . . . . . . . 38,500 41,300
</TABLE>
_______________
(a) Reflects the results of Myers Propane Gas Company, a subsidiary
of NPS, and pro forma five and one-half month (or three month)
results of propane operations acquired by Northwestern Growth
subsequent to July 1, 1996, all of which were contributed to
the Operating Partnership as part of the Transactions.
(b) Reflects elimination of last-in, first-out (LIFO) inventory
adjustment as of December 16, 1996, because historically higher
inventory levels as of June 30 fiscal year end would not require
depletion of LIFO layers.
(c) Reflects the full year (or full quarter) effect of operating expense
savings resulting from the consolidation of certain operations
subsequent to December 16, 1996, as well as the elimination of certain
operating and general and administrative expenses associated with
the operation of the Partnership, as follows:
Three
Months
Year Ended Ended
June 30, September 30,
1997 1996
----------- -------------
Eliminated bank and consulting fees $ 149 $ 96
Consolidation of certain retail locations 321 174
Corporate overhead consolidation 693 163
------ -----
$1,163 $ 433
====== =====
(d) Reflects the additional depreciation and amortization expense due
to the increase in property and intangibles that result from
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<PAGE>
applying the purchase method of accounting to the Empire Energy
and Coast acquisitions.
(e) Reflects the following adjustment to interest expense directly
resulting from the Transactions, as follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
June 30, 1997 September 30, 1996
------------- ------------------
<S> <C> <C>
Historical interest expense, net $ 19,114 $4,663
Interest expense from acquisitions 86 77
-------- --------
19,200 4,740
-------- --------
Pro forma interest expense, net applicable to
the Partnership:
$220,000 first mortgage notes at a
rate of 7.53% per annum 16,566 4,142
Interest expense attributable to
working capital facility based on
actual borrowings by the Partnership 380 33
Interest expense attributable to actual
purchase contract obligations assumed
by the Partnership at interest rates
ranging from 5% to 10% 929 161
Debt expense amortization based on
$7,401 debt issuance costs 527 131
Less - actual interest income of the
Partnership for the period from
December 17, 1996 to June 30, 1977 (187) --
-------- --------
Pro forma interest expense, net adjustment 18,215 4,467
-------- --------
$ (985) $ (273)
======== ========
</TABLE>
(f) Reflects the elimination of income tax provision (benefit),
because income taxes are not borne by the Partnership (except for
income taxes applicable to operations conducted by the
Partnership's corporate subsidiary).
(g) 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.
(h) EBITDA consists of net income before depreciation, amortization,
interest and income taxes. EBITDA should not be considered as an
alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow, and it is not a
measure of performance or financial condition under generally
accepted accounting principles, but it provides additional
information for evaluating the Partnership's ability to
distribute the Minimum Quarterly Distribution and to service and
incur indebtedness. 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 (including charges for
interest and income taxes, which are not reflected in EBITDA),
adjusted for noncash charges or income (which are reflected in
EBITDA) and 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.
(i) Net income per Unit is computed by dividing the limited partners'
interest in net income by the weighted average number of Units
outstanding.
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<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
THE PARTNERSHIP
The following table presents selected consolidated operating and
balance sheet data of the Partnership as of September 30, 1997, for
the three months ended September 30, 1997 and for the period from
inception (December 17, 1996) to June 30, 1997. The financial
data of the Partnership as of June 30, 1997, and for the
period from inception (December 17, 1996) to June 30, 1997, were
derived from the Partnership's audited consolidated financial
statements. The information for the three months ended September 30,
1997 is derived from the Partnership's unaudited consolidated
financial statements included elsewhere in this Prospectus and, in
the opinion of management, includes all adjustments necessary for
a fair presentation of such information. The financial data
set forth below should be read in conjunction with the
Partnership's consolidated financial statements, together with
the notes thereto, and the "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- The
Partnership" included elsewhere in this Prospectus. The financial
and operating data for the three month period ended September 30,
1997 are not necessarily indicative of the results of operations
for the full fiscal year.
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(DECEMBER 17, 1996) THREE MONTHS ENDED
TO JUNE 30, 1997 SEPTEMBER 30, 1997
--------------------- ------------------
(IN THOUSANDS, EXCEPT
PER UNIT DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues. . . . . . . . . . . . . . . . . $ 389,630 $152,157
Cost of sales . . . . . . . . . . . . . . 315,324 127,855
-------- --------
Gross profit . . . . . . . . . . . . . . 74,306 24,302
Operating, general and
administrative expenses . . . . . . . . 50,023 22,602
Depreciation and amortization . . . . . . 8,519 4,592
-------- --------
Operating income (loss) . . . . . . . . . 15,764 (2,892)
Interest expense . . . . . . . . . . . . 9,944 4,782
-------- --------
Net income (loss) before income taxes . . 5,820 (7,674)
Income taxes . . . . . . . . . . . . . . 64 20
-------- --------
Net income (loss) . . . . . . . . . . . . $ 5,756 $ (7,694)
======== ========
BALANCE SHEET DATA (AS OF SEPTEMBER 30, 1997):
Current assets . . . . . . . . . . . . . $ 75,117
Total assets . . . . . . . . . . . . . . 548,784
Current liabilities . . . . . . . . . . . 64,188
Long-term debt (including current
maturities) . . . . . . . . . . . . . . . 256,165
Partners' capital--General Partners . . . 4,628
Partners' capital--Limited Partners . . . 222,178
</TABLE>
- 79 -
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
OPERATING DATA:
Capital expenditures (a) . . . . . . . . $ 4,227 $ 5,994
EBITDA (b) . . . . . . . . . . . . . . . $ 24,283 $ 1,700
Net income per unit (c) . . . . . . . . . $ .34 $ (.46)
Retail propane gallons sold . . . . . . . 213,700 41,300
</TABLE>
(a) 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.
(b) EBITDA consists of net income before depreciation, amortization,
interest and income taxes. EBITDA should not be considered as an
alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow, and it is not a
measure of performance or financial condition under generally
accepted accounting principles, but it provides additional
information for evaluating the Partnership's ability to
distribute the Minimum Quarterly Distribution and to service and
incur indebtedness. 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 (including charges for
interest and income taxes, which are not reflected in EBITDA),
adjusted for noncash charges or income (which are reflected in
EBITDA) and 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.
(c) Net income per Unit is computed by dividing the limited partners'
interest in net income by the weighted average number of Units
outstanding.
- 80 -
<PAGE>
SYNERGY
The financial information below as of June 30, 1996 and December
16, 1996, and for the ten and one-half month period ended June 30,
1996 and the five and one-half month period ended December 16, 1996,
is derived from the audited financial statements of Synergy. On
August 15, 1995, Synergy Group Incorporated ("SGI"), the predecessor
of Synergy, was acquired by Synergy in the Synergy Acquisition. The
five and one-half months ended December 16, 1996 covers the period
from the date of the Synergy Acquisition to December 16, 1996. The
financial information below as of September 30, 1996 is unaudited
but, in the opinion of management, includes all adjustments necessary
for a fair presentation of such information. The financial
information below as of March 31, 1993, 1994 and 1995 is derived
from the audited financial statements of SGI. 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 Selected Historical Financial and Operating Data
below should be read in conjunction with the financial statements of
Synergy and SGI and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Synergy" included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SYNERGY GROUP INCORPORATED | Synergy
---------------------------------------------------- | --------------------------------
4-1/2 | 10-1/2
FISCAL YEAR ENDED MARCH 31, MONTHS | MONTHS 5-1/2 MONTHS 3 MONTHS
-------------------------------------- ENDED | ENDED ENDED ENDED
AUGUST 14, | JUNE 30, DEC. 16, SEPT. 30,
1993 1994 1995 1995 | 1996 1996 1996
-------- ------ ------ ---------- | -------- ------------ ---------
|
(UNAUDITED) | (UNAUDITED)
(IN THOUSANDS) |
<S> <C> <C> <C> <C> | <C> <C> <C>
STATEMENT OF OPERATIONS DATA: |
Operating revenue . . . . . . $132,855 $133,731 $123,562 $32,179 | $96,062 $ 44,066 $ 17,883
Cost of product sold . . . . 66,891 63,498 59,909 15,387 | 46,187 23,322 8,940
Gross profit . . . . . . . . 65,964 70,233 63,653 16,792 | 49,875 20,744 8,943
Depreciation and amortization 5,381 5,170 5,100 1,845 | 3,329 1,904 1,000
Operating income (loss) . . . (809) 3,609 (2,291) (6,600) | 14,520 3,769 30
Interest expense . . . . . . 13,342 13,126 11,086 3,223 | 5,584 3,311 1,665
Provision (benefit) for |
income taxes . . . . . . . . 351 (400) (84) 31 | 3,675 298 (550)
Net income (loss) . . . . . . (15,274) (11,615) (13,417) (9,813) | 5,261 160 (1,085)
- 81 -
<PAGE>
|
BALANCE SHEET DATA (END OF PERIOD): |
Current assets . . . . . . . $ 30,903 $ 31,149 $ 27,542 $ 21,501 | $ 59,027 $ 21,271 $ 60,112
Total assets . . . . . . . . 112,153 111,914 103,830 96,500 | 166,762 174,140 170,042
Total debt . . . . . . . . . 123,168 122,626 92,717 89,541 | 79,524 84,585 81,151
Redeemable preferred stock . -- -- -- -- | 55,312 55,312 55,312
Stockholders' deficit . . . . (43,808) (55,424) (15,762) (25,576) | (1,899) (5,617) (5,057)
|
OPERATING DATA: |
EBITDA (a) . . . . . . . . . $4,572 $8,779 $2,809 $(4,815) | $17,849 $ 5,673 $ 1,030
Capital expenditures (b) . . $2,504 $3,141 $3,737 $ 596 | $ 8,708 $ 3,751 $ 1,571
Retail propane gallons sold . 137,316 137,937 126,205 27,282 | 92,621 39,468 16,428
_________
</TABLE>
(a) EBITDA consists of net income before depreciation, amortization,
interest and income taxes. EBITDA should not be considered as an
alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow, and it is not a
measure of performance or financial condition under generally
accepted accounting principles, but it provides additional
information for evaluating the Partnership's ability to
distribute the Minimum Quarterly Distribution and to service and
incur indebtedness. 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 (including charges for
interest and income taxes, which are not reflected in EBITDA),
adjusted for noncash charges or income (which are reflected in
EBITDA) and 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.
(b) 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.
- 82 -
<PAGE>
Empire Energy
The financial information below as of June 30, 1994, 1995 and
1996 and December 16, 1996, and for the years ended June 30, 1994,
1995 and 1996 and the five and one-half month period ended December
16, 1996, is derived from the audited financial statements of Empire
Energy. The financial information below as of September 30, 1996 is
unaudited but, in the opinion of management, includes all adjustments
necessary for a fair presentation of such information. Empire Energy
was formed in June 1994 as a result of a tax-free split-off (the
"Split-Off") from Empire Gas Corporation. These financial statements
give effect to the Split-Off as if it occurred on July 1, 1992. 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 Selected
Historical Financial and Operating Data below should be read in
conjunction with the financial statements of Empire Energy and with
"Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Empire Energy" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Empire Energy
------------------------------------------------------------------------------------------
5-1/2 Months 3 Months
Fiscal Year Ended June 30
Ended Ended
------------------------------------------------------------------
Dec. 16, Sept. 30,
1993 1994 1995 1996 1996 1996
--------------- ------------ --------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Statement of Operations
Data: (in thousands)
Revenues . . . . . . . . $61,057 $60,216 $56,689 $98,821 $43,201 $ 15,035
Cost of product sold . . 29,157 28,029 26,848 50,080 23,310 7,910
Gross profit(a) . . . . . 31,900 32,187 29,841 48,741 19,891 7,125
Depreciation and amortization 4,257 4,652 4,322 5,875 2,929 1,586
Operating income (loss) . 8,097 6,015 1,084 9,846 3,567 (1,469)
Interest expense . . . . 366 118 39 2,598 3,621 1,704
Provision (benefit) for
income taxes . . . . . . 2,900 2,400 600 3,550 32 (1,165)
Net income (loss) . . . . 4,726 3,497 445 3,698 (86) (2,008)
- 83 -
<PAGE>
BALANCE SHEET DATA (END OF PERIOD):
Current assets . . . . . $8,751 $9,292 $9,615 $16,046 $27,491 $ 21,392
Total assets . . . . . . 58,584 64,734 69,075 107,102 183,046 144,122
Current liabilities . . . 3,620 2,697 4,277 12,126 11,210 13,396
Long-term debt . . . . . 2,258 135 1,701 25,442 111,853 98,882
Stockholders' equity . . 42,614 46,111 46,535 50,233 15,922 1,588
OPERATING DATA:
EBITDA (a) . . . . . . . $12,354 $10,667 $5,406 $15,721 $6,496 $ 117
Capital expenditures (b) $ 2,446 $ 4,058 $8,365 $39,164 $2,823 $1,348
Retail propane gallons sold 66,456 67,286 62,630 104,036 40,847 15,773
</TABLE>
_________
(a) EBITDA consists of net income before depreciation, amortization,
interest and income taxes. EBITDA should not be considered as an
alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow, and it is not a
measure of performance or financial condition under generally
accepted accounting principles, but it provides additional
information for evaluating the Partnership's ability to
distribute the Minimum Quarterly Distribution and to service and
incur indebtedness. 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 (including charges for
interest and income taxes, which are not reflected in EBITDA),
adjusted for noncash charges or income (which are reflected in
EBITDA) and 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.
(b) 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.
COAST
The financial information below as of July 31, 1994, 1995 and
1996 and as of December 16, 1996 and for the years ended July 31,
1994, 1995 and 1996 and for the four and one-half months ended
December 16, 1996 is derived from the audited financial statements of
Coast. The financial information below as of October 31, 1996 is
unaudited but, in the opinion of management, includes all adjustments
necessary for a fair presentation of such information. The financial
information as of July 31, 1993 and for the year ended July 31, 1993
is derived from the accounting records of Coast
- 84 -
<PAGE>
and is unaudited. The Selected Historical Financial and Operating
Data below should be read in conjunction with the financial statements
of Coast and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Coast" included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
COAST
--------------------------------------------------------------------------------------
4-1/2 MONTHS 3 MONTHS
FISCAL YEAR ENDED JULY 31, ENDED ENDED
------------------------------------------------ DEC. 16, OCT. 31,
1993 1994 1995 1996 1996 1996
----------- ------------ ------------ -------- ------------- --------
(UNAUDITED) (IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues . . . . . . . . . . . . $229,860 $242,986 $266,842 $384,354 $185,460 $108,175
Cost of product sold . . . . . . 203,975 214,632 234,538 351,213 173,155 100,266
Gross profit . . . . . . . . . . 25,885 28,354 32,304 33,141 12,305 7,909
Depreciation and amortization . . 3,184 3,282 3,785 4,216 1,604 1,067
Operating income (loss) . . . . . 3,399 3,843 4,535 4,044 122 (110)
Interest expense . . . . . . . . 4,017 4,029 5,120 5,470 2,238 1,294
Benefit for income taxes . . . . (123) (28) (202) (473) (748) (491)
Net loss (a) . . . . . . . . . . (495) (158) (889) (953) (1,368) (913)
BALANCE SHEET DATA (END OF PERIOD):
Current assets . . . . . . . . . $ 21,962 $ 29,150 $ 33,676 $ 35,297 $ 49,392 $ 35,071
Total assets . . . . . . . . . . 82,626 93,559 101,545 106,179 119,066 105,574
Current liabilities . . . . . . . 23,182 31,178 27,605 37,849 48,254 35,361
Long-term debt . . . . . . . . . 29,241 31,080 46,021 41,801 46,245 45,069
Mandatorily redeemable securities 8,325 8,874 7,781 8,559 8,675 8,675
Stockholders' equity . . . . . . 8,368 7,661 7,853 6,098 4,614 5,069
OPERATING DATA (UNAUDITED):
EBITDA (b) . . . . . . . . . . . $ 6,583 $ 7,125 $ 8,320 $ 8,260 $ 1,726 $ 957
Capital expenditures (c) . . . . $ 6,114 $ 4,451 $ 5,581 $ 6,060 $ 1,503 $ 594
Retail propane gallons sold . . . 27,385 30,918 36,569 34,888 13,380 7,013
_________
</TABLE>
(a) 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.
- 85 -
<PAGE>
(b) EBITDA consists of net income before depreciation, amortization,
interest and income taxes. EBITDA should not be considered as an
alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow, and it is not a
measure of performance or financial condition under generally
accepted accounting principles, but it provides additional
information for evaluating the Partnership's ability to
distribute the Minimum Quarterly Distribution and to service and
incur indebtedness. 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 (including charges for
interest and income taxes, which are not reflected in EBITDA),
adjusted for noncash charges or income (which are reflected in
EBITDA) and 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.
(c) Capital expenditures fall generally into three categories:
(i) growth capital expenditures, which include expenditures for
the purchase of new propane tanks and other equipment to
facilitate expansion of the retail customer base,
(ii) maintenance capital expenditures, which include expenditures
for repair and replacement of property, plant and equipment, and
(iii) acquisition capital expenditures.
- 86 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE HISTORICAL FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE PARTNERSHIP AND ITS PRINCIPAL
PREDECESSOR ENTITIES, SYNERGY, EMPIRE ENERGY AND COAST, SHOULD BE READ
IN CONJUNCTION WITH THE SELECTED PRO FORMA FINANCIAL AND OPERATING
DATA AND NOTES THERETO, THE SELECTED HISTORICAL FINANCIAL AND
OPERATING DATA AND NOTES THERETO AND THE HISTORICAL FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
GENERAL
The Partnership is a Delaware limited partnership formed to own
and operate the propane business and assets of Synergy, Empire Energy
and Coast. The Partnership believes that it is the fifth largest
retail marketer of propane in the United States, serving more than
380,000 residential, commercial, industrial and agricultural customers
from 298 customer service centers in 27 states. On a combined basis,
the Partnership's retail propane sales volume was approximately 230
million, 235 million and 214 million gallons during fiscal 1995, 1996
and 1997, respectively. On a combined basis in fiscal 1996 and 1997,
the Partnership also sold approximately 328 and 330 million gallons of
natural gas liquids to wholesale customers.
Because a substantial portion of the Partnership's propane is
used in the weather-sensitive residential markets, the temperatures
realized in the Partnership's areas of operations, particularly during
the six-month peak heating season, have a significant effect on the
financial performance of the Partnership. In any given area,
warmer-than-normal temperatures will tend to result in reduced propane
use, while sustained colder-than-normal temperatures will tend to
result in greater propane use. Therefore, information on normal
temperatures is used by the Partnership in understanding how
historical results of operations are affected by temperatures that are
colder or warmer than normal and in preparing forecasts of future
operations, which are based on the assumption that normal weather will
prevail in each of the Partnership's regions.
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,
- 87 -
<PAGE>
profit margins could vary significantly from year to year in a period
of identical sales volumes.
THE PARTNERSHIP
ANALYSIS OF RESULTS OF OPERATIONS
The following discussion compares the results of operations and other
data of the Partnership for the three months ended September 30, 1997 to
the pro forma three months ended September 30, 1996 and for the pro forma
year ended June 30, 1997 to the pro forma year ended June 30, 1996. Note
all pro forma information has been prepared assuming that the Partnership
had been in existence at the beginning of the periods presented. All
references to periods prior to December 17, 1996 (the date the Partnership
commenced operations) refer to pro forma amounts determined by combining
the financial information of the predecessor companies.
THREE MONTHS ENDED SEPTEMBER 30, 1997 1996
THOUSANDS OF DOLLARS (UNAUDITED) (ACTUAL) (PRO FORMA)
------------------------------------- ---- ----
Revenues $152,157 $141,756
Cost of sales 127,855 117,519
-------- --------
Gross profit $ 24,302 $ 24,237
======== ========
VOLUME. During the three months ended September 30, 1997, the
Partnership sold 41.3 million retail propane gallons, an increase
of 2.8 million gallons or 7.3% from the 38.5 million retail propane
gallons sold during the pro forma three months ended September 30,
1996. Wholesale volumes were 140.9 million gallons and 109.1 million
gallons, respectively, for the quarters ended September 30, 1997
and 1996, which represents an increase of 31.8 million gallons or
29.2%. A majority of the increase in retail volume- approximately
79%, or 2.2 million gallons- is attributable to the addition of
retail customer service centers obtained through the acquisition
of new propane businesses since December 17, 1996.
The average heating degree days, in the markets served by the
Partnership, for the first fiscal quarter of 1998 was approximately
36% warmer than normal and approximately 25% warmer than last year,
respectively. These milder temperatures, while not in the peak of
the heating season, adversely affected the Partnership's residential
sales volume. The first fiscal quarter historically accounts for
approximately 17% and 7% of the Partnership's retail sales volume
and EBITDA, respectively.
REVENUES. Revenues increased by $10.4 million or 7.3% to
$152.2 million for the three months ended September 30, 1997, as
compared to $141.8 million for the pro forma three months ended
September 30, 1996. This increase was attributable to an increase
in wholesale revenues of $10.5 million or 7.4% to $110.3 million
for the three months ended September 30, 1997, as compared to
$99.8 million for the pro forma three months ended September 30,
1996. This increase was due primarily to the increase in
wholesale volume mentioned above. The revenues for the retail
business also increased by $.4 million or 9.6% to $41.7 million
for the three months ended September 30, 1997, as compared to
$41.3 million for the pro forma three months ended September 30,
1996. This increase was a result of the increase in volume
described above offset by a decrease in the average sales
price per gallon of propane.
COST OF PRODUCT SOLD. Cost of product sold increased by
$10.4 million or 8.9% to $127.9 million for the three months ended
September 30, 1997, as compared to $117.5 million for the pro
forma three months ended September 30, 1996. The increase in
cost of product sold was primarily due to the increased sales
volume described above. As a percentage of revenues, cost of
product sold increased to 84.0% for the three months ended
September 30, 1997, as compared to 82.9% for the pro forma three
months ended September 30, 1996.
GROSS PROFIT. Gross profit of $24.3 million for the three
months ended September 30, 1997, is consistent with the gross profit
of $24.2 million for the pro forma three months ended September 30,
1996. Retail per gallon margins for the three months ended
September 30, 1997 were slightly lower than for the pro forma
period. This is partially attributable to the fact that the pro
forma three months ended September 30, 1996, includes the results
of operations for Coast from August 1, 1996 to October 31, 1996.
More heating degree days were recorded for October 1996 than for
July 1997 in the markets served by Coast, causing the pro forma
per gallon margins to be higher. As a percentage of revenues,
gross profit decreased to 16.0% for the three months ended
September 30, 1997, as compared to 17.1% for the pro forma
three months ended September 30, 1996. Gross profit from propane
businesses acquired since December 17, 1996 was $.8 million for
the three months ended September 30, 1997.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating,
general and administrative expenses increased by $1.7 million or
8.1% to $22.6 million for the three months ended September 30,
1997, as compared to the pro forma three months ended September 30,
1996. Approximately $1.2 million, or 71%, of this increase was
attributable to increases in salaries and other operating expenses
resulting from the acquisitions of new businesses and the
correspondingly increased sales volumes discussed above. As a
percentage of revenues, operating, general and administrative
expenses remained consistent at 14.8% for the three months ended
September 30, 1997, as compared to 14.7% for the pro forma three
months ended September 30, 1996.
The Partnership utilizes software and related technologies
throughout its businesses that will be affected by the date change in
the year 2000. An internal study is currently under way to determine
the full scope and related costs to insure that the Partnership's
systems continue to meet its internal needs and those of its
customers. The Partnership will begin to incur expenses in 1998
to resolve this issue. These expenses may continue through the
year 1999.
PRO FORMA FISCAL YEARS ENDED JUNE 30,
THOUSANDS OF DOLLARS (UNAUDITED) 1997 1996
------------------------------------- ---- ----
Revenues $664,197 $595,790
Cost of sales 534,892 455,984
-------- --------
Gross profit $129,305 $139,806
======= =======
VOLUME. During the year ended June 30, 1997, the Partnership
sold 213.7 million retail propane gallons, a decrease of 21.3 million
gallons or 9.1% from the 235.0 million retail propane gallons sold
during the year ended June 30, 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. The decline in retail volume was primarily
attributed to national temperatures that averaged 14% warmer than
last year and 13% warmer in the markets served by the Partnership.
Wholesale sales volumes were 330.1 million gallons and 328.3 million
gallons for the years ended June 30, 1997 and 1996, respectively.
- 88 -
<PAGE>
REVENUES. Revenues increased by $68.4 million or 11.5% to
$664.2 million for the year ended June 30, 1997, as compared to
$595.8 million for the year ended June 30, 1996. This increase was
attributable to an increase in wholesale revenues of $84.5 million or
26.7% to $400.7 million for the year ended June 30, 1997, as compared
to $316.2 million for the year ended June 30, 1996, due primarily to higher
product costs and sales prices. Revenues for the retail business
declined by $16.1 million or 5.8% to $263.5 million for the year ended
June 30, 1997, as compared to $279.6 million for the year ended June
30, 1996. This decrease was due to the decline in retail sales volume
described above.
COST OF PRODUCT SOLD. Cost of product sold increased by
$78.9 million, or 17.3% to $534.9 million for the year ended June 30,
1997, as compared to $456.0 million for the year ended June 30, 1996.
The increase in cost of product sold was primarily due to the
higher product costs described above. As a percentage of revenues,
cost of product sold increased to 80.5% for the year ended June 30,
1997, as compared to 76.5% for the year ended June 30, 1996.
GROSS PROFIT. Gross profit decreased $10.5 million or 7.5% to
$129.3 million for the year ended June 30, 1997, as compared to
$139.8 million for the year ended June 30, 1996, primarily due to
the reduction in retail sales volume and higher product costs as
discussed above.
RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 128,
"Earnings per Share" ("Statement No. 128"), issued in February 1997
and effective for fiscal years ending after December 15, 1997,
establishes and simplifies standards for computing and presenting
earnings per share. Implementation of Statement No. 128 will not
have a material impact on the Partnership's computation or
presentation of earnings per unit, as the Partnership's common
stock equivalents have had no material effect on earnings per
unit amounts.
Financial Accounting Standards Board Statement No. 130,
"Reporting Comprehensive Income", issued in June 1997 and
effective for fiscal years beginning after December 15, 1997,
establishes standards for reporting and display of the total of
net income and the components of all other nonowner changes in
partners' capital, or comprehensive income, either below net
income (loss) or within the statement of partners' capital. The
Partnership has had no significant items of other comprehensive
income.
- 89 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS. Cash used in operating activities during the
three-month period ended September 30, 1997 was $4.0 million. Cash
flow from operations included a net loss of $7.7 million and
non-cash charges of $4.6 million for depreciation and amortization
expense. The impact of working capital changes decreased cash flow
by approximately $.9 million.
Cash used in investment activities for the three-month period
ended September 30, 1997 totaled $6.0 million, which was principally
used for purchases of property and equipment. Cash provided by
financing activities was $10.2 million for the three months ended
September 30, 1997, which principally reflects additional borrowings
on the working capital facility, net of a distribution to Unitholders
of $9.4 million.
Cash provided by operating activities during the period from
December 17, 1996 to June 30, 1997, was $11.2 million. Cash flow from
operations included net income of $5.8 million and noncash charges
of $8.5 million for the period, comprised principally of depreciation
and amortization expense. The impact of working capital changes
decreased cash flow by approximately $3.1 million.
Cash used in investment activities for the period from December
17, 1996 to June 30, 1997, totaled $3.8 million, which was principally
used for acquisitions and purchases of property and equipment. Cash
used in financing activities was $18 million for the period from
December 17, 1996, to June 30, 1997. This amount reflects net
repayments on the Working Capital Facility and the payment of
partnership distributions.
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 Partnership's Special
General Partner to redeem its preferred stock ($61.2 million), to
provide net worth to the Special General Partner ($15.5 million) and
to pay expenses of the partnership organization and formation ($13.7
million).
- 90 -
<PAGE>
Concurrently with consummation of the IPO, the Partnership and
the Operating Partnership issued the entire general partner interest
and 6,597,619 Subordinated Units to the General partners in exchange
for their contribution to the Operating Partnership of all of the
assets of the Combined Operations, and the Operating Partnership
assumed substantially all the liabilities of the Combined Operations.
The general partner interests and the Subordinated Units were valued
at the approximate net book value of the assets contributed to the
Operating Partnership, which did not exceed the fair market value of
such assets, net of liabilities assumed.
FINANCING AND SOURCES OF LIQUIDITY. On December 17, 1996, the
Operating Partnership issued $220.0 million of Senior Notes with a
fixed 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 $27.5 million starting December 30, 2003. Also on the same
date, the Operating Partnership entered into 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
$50.0 million (including a $30.0 million sublimit for letters of
credit through March 31, 1997, and $20.0 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 $10.0 million for at least
30 consecutive days during each fiscal year. At June 30, 1997, $4.6
million was outstanding under the Working Capital Facility. Issued
outstanding letters of credit totaled $7.6 million at June 30, 1997.
The Acquisition Facility provides the Operating Partnership with the
ability to borrow up to $75.0 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
June 30, 1997. Loans under the Bank Credit Agreement bear interest at
variable base or Eurodollar rates. At June 30, 1997, the applicable
base and Eurodollar rates were 8.625% and 5.938%, 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 Operating Partnership's obligations under the Note and Bank
Credit Agreements are secured by a security interest in the Operating
Partnership's inventory, accounts receivable and certain customer
storage tanks. The Note and Bank Credit Agreements contain various
terms and covenants including financial ratio covenants with respect
to debt and interest coverage and limitations, among others, on the
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ability of the Operating Partnership and its subsidiary 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 Partnership is permitted to make
distributions during each fiscal quarter in an amount not in excess of
Available Cash with respect to the immediately preceding quarter. The
Operating Partnership was in compliance with all terms and covenants
at September 30, 1997.
INFLATION AND ECONOMIC TRENDS. Although its operations are
affected by general economic trends, the Partnership does not believe
that inflation had had a material effect on the results of its
operations during the past three years.
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. 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
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
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of product sold decreased slightly to 48.1% for fiscal 1996, as
compared to 48.5% for fiscal 1995.
GROSS PROFIT. Gross profit decreased by $13.8 million, or
21.7%, to $49.9 million for fiscal 1996, as compared to $63.7 million
for fiscal 1995. This decrease was due primarily to the Empire
Acquisition of Certain Synergy Assets. Gross profit per retail gallon
(which includes non-propane related sales) increased by $.033 per
gallon, or 6.5%, to $.538 per gallon for fiscal 1996, as compared to
$.505 per gallon for fiscal 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses (which include salaries and commissions and related-party
corporate administration and management fees) decreased by $28.8
million, or 47.4%, to $32.0 million for fiscal 1996, as compared to
$60.8 million for fiscal 1995, due to the Empire Acquisition of
Certain Synergy Assets and the reduction of employee positions,
corporate overhead and related party salaries and expenses. As a
percentage of revenues, general and administrative expenses decreased
to 33.3% for fiscal 1996, as compared to 49.2% for fiscal 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
decreased by $1.8 million, or 35.3%, to $3.3 million for fiscal 1996,
as compared to $5.1 million for fiscal 1995, due to the Empire
Acquisition of Certain Synergy Assets, partially offset by an increase
in depreciation and amortization due to the purchase accounting
adjustment made in connection with the Synergy Acquisition.
OPERATING INCOME. Operating income increased $16.8 million to
$14.5 million for fiscal 1996, as compared to a loss of $2.3 million
for fiscal 1995. This increase was primarily due to the significant
reduction in general and administrative expenses, partially offset by
the effect of the Empire Acquisition of Certain Synergy Assets. As a
percentage of revenues, operating income increased to 15.1% for fiscal
1996, as compared to a loss for fiscal 1995.
INTEREST EXPENSE. Interest expense decreased $5.5 million, or
49.6%, to $5.6 million for fiscal 1996, as compared to $11.1 million
for fiscal 1995, primarily due to the recapitalization of Synergy in
connection with the Synergy Acquisition.
NET INCOME. Synergy had net income of $5.3 million for fiscal
1996, as compared to a net loss of $13.4 million for fiscal 1995. The
increase was primarily the result of the reduction in general and
administrative expenses and interest expense, partially offset by the
effect of the Empire Acquisition of Certain Synergy Assets.
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
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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.
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. 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.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30,
1995
VOLUME. During fiscal 1996, Empire Energy sold 104.0 million
retail propane gallons, an increase of 41.4 million gallons, or 66.1%,
from the 62.6 million retail propane gallons sold during fiscal 1995.
The increase in volume was primarily attributable to the Empire
Acquisition of Certain Synergy Assets and was also attributable to
colder weather during fiscal 1996 in Empire Energy's previously
existing marketing areas.
REVENUES. Revenues increased by $42.1 million, or 74.3%, to
$98.8 million for fiscal 1996, as compared to $56.7 million for fiscal
1995. This increase was attributable almost entirely to the Empire
Acquisition of Certain Synergy Assets and the colder weather in Empire
Energy's marketing areas in fiscal 1996, both of which had the effect
of increasing sales.
COST OF PRODUCT SOLD. Cost of product sold increased by $23.3
million, or 86.9%, to $50.1 million for fiscal 1996, as compared to
$26.8 million for fiscal 1995. The increase was attributable to
increased volumes sold as a result of the Empire Acquisition of
Certain Synergy Assets and the colder weather. As a percentage of
revenues, cost of products sold increased to 50.7% for fiscal 1996, as
compared to 47.3% for fiscal 1995.
GROSS PROFIT. Gross profit increased by $18.9 million, or 63.3%,
to $48.7 million for fiscal 1996, as compared to $29.8 million for
fiscal 1995. This increase was primarily due to the increase in sales
volume resulting from the Empire Acquisition of Certain Synergy Assets
and colder than normal weather. Gross profit per retail gallon (which
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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),
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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.
FISCAL YEAR ENDED JULY 31, 1996 COMPARED TO FISCAL YEAR ENDED JULY 31,
1995
VOLUME. During fiscal 1996, Coast sold 328.4 million wholesale
propane gallons of natural gas liquids, an increase of 27.0 million
gallons, or 9.0%, from the 301.4 million gallons sold in fiscal 1995.
The increase in volume was primarily attributable to the impact of
colder weather in the wholesale markets served by Coast in the eastern
United States. During fiscal 1996, Coast sold 34.9 million retail
propane gallons, a decrease of 1.7 million gallons, or 4.6%, from
the 36.6 million retail propane gallons sold during fiscal 1995. The
decrease in retail volume was primarily attributable to warmer weather
during fiscal 1996 in Coast's retail marketing areas. The weather in
Coast's areas of retail operations during fiscal 1996 was
approximately 16% warmer than normal for such areas. The weather in
Coast's areas of retail operations during fiscal 1995 was
approximately 2% colder than normal for such areas.
REVENUES. Revenues increased by $117.5 million, or 44.0%, to
$384.4 million for fiscal 1996, as compared to $266.8 million for
fiscal 1995. This increase was primarily attributable to increased
wholesale sales from Coast's natural gas marketing efforts that
resulted in an increase of $82.0 million in fiscal 1996. Retail
operating revenues decreased by $.1 million, or .3%, to $38.8 million
for fiscal 1996, as compared to $38.9 million for fiscal 1995. This
decrease was attributable almost entirely to the warmer than normal
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.
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GROSS PROFIT. Gross profit increased by $.8 million, or 2.6%, to
$33.1 million in fiscal 1996, as compared to $32.3 million for fiscal
1995. This increase was primarily attributable to increased margins in
Coast's wholesale businesses, due to a colder heating season in the
eastern United States, where a majority of Coast's wholesale sales are
currently made. Retail gross profits decreased by $.2 million, or .8%,
to $21.3 million for fiscal 1996, as compared to $21.5 million for
fiscal 1995. This decrease was due primarily to lower sales volumes as
a result of warmer than normal weather in Coast's retail marketing
areas. The decrease in gross profits attributable to the decrease in
gallons sold was approximately $.9 million. Gross profit per retail
gallon increased by $.022, or 3.7%, to $.610 per gallon for fiscal
1996 from $.588 per gallon for fiscal 1995, due to increased average
propane selling prices.
OPERATING EXPENSES. Operating expenses increased $.8 million, or
4.0%, to $21.0 million in fiscal 1996, as compared to $20.2 million in
fiscal 1995. Most of this increase was related to increases in Coast's
retail operations. Operating expense for the retail business segment
increased by $.3 million, or 2.1%, to $12.1 million in fiscal 1996, as
compared to $11.9 million in fiscal 1995. The majority of this
increase was attributable to acquisitions and start-up operations in
fiscal 1996 that experienced higher operating costs that, due to
warmer weather, were not offset by added sales volumes. As a
percentage of revenues, operating expenses decreased to 5.5% for
fiscal 1996, as compared to 7.6% for fiscal 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses (which include corporate administration expenses) increased
by $.1 million, or 2.4%, to $3.8 million for fiscal 1996, as compared
to $3.7 million for fiscal 1995. The majority of this increase was
attributable to normal salary increases and the addition of one staff
position to assist with future acquisitions. As a percentage of
revenues, general and administrative expenses decreased to 1.0% for
fiscal 1996, as compared to 1.4% for fiscal 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
increased by $.4 million, or 11.4%, to $4.2 million for fiscal 1996,
as compared to $3.8 million for fiscal 1995. This increase was
primarily attributable to the acquisition of North Star Fuel and
Propane, Inc. in fiscal 1996 and the purchase of retail customer
tanks.
OPERATING INCOME. Operating income decreased by $.5 million, or
10.8%, to $4.0 million for fiscal 1996, as compared to $4.5 million
for fiscal 1995. This decrease was primarily due to the decrease in
retail gallons sold because of warmer than normal weather in most of
Coast's retail marketing areas. As a percentage of revenues, operating
income decreased to 1.1% for fiscal 1996, as compared to 1.7% for
fiscal 1995.
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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 of
liquidity or ability to service debt obligations), but provides
additional information for evaluating the Partnership's ability to
distribute the Minimum Quarterly Distribution.
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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
380,000 residential, commercial, industrial and agricultural customers
from 298 customer service centers in 27 states as of November 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, 1997, the Partnership had combined retail propane
sales of approximately 214 million gallons and pro forma EBITDA of
approximately $41.0 million. The combined sales and pro forma EBITDA do
not reflect (i) the savings of certain non-recurring expenses incurred by
Empire Energy, (ii) propane acquisition and logistics costs savings and
(iii) insurance savings that the Partnership believes are achievable as a
result of the Transactions. Such amounts also do not reflect sales and
EBITDA of businesses acquired by the Partnership in late June 1997.
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) 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 and, in October 1996, it
acquired Empire Energy, then the eighth largest retail marketer of
propane in the United States. Immediately prior to the IPO,
Northwestern Growth acquired Coast, then the 18th largest retail
marketer of propane in the United States. The Partnership commenced
operation on December 17, 1996, concurrently with the closing of the
IPO when substantially all of the assets and liabilities of Synergy,
Empire Energy and Coast were contributed to the Operating Partnership.
Information in this Prospectus related to the pro forma year ended
June 30, 1997, reflects a full year of activity for the three
predecessor companies, as if the Partnership had been in operation on
July 1, 1996.
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
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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
total volume of propane sold by the Partnership and, consequently, the
Partnership's results of operations.
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, natural gas liquids and crude oil 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.
The retail propane business is a "margin-based" business in which
gross profits depend on the excess of sales prices over propane supply
costs. Sales of propane to residential and commercial customers,
which account for the vast majority of the Partnership's revenue, have
provided a relatively stable source of revenue for the Partnership.
Based on pro forma fiscal 1997 retail propane gallons sold, the
customer base consisted of 55% residential, 26% commercial and
industrial and 19% agricultural and other customers. Sales to
residential customers have generally provided higher gross margins
than other retail propane sales. While commercial propane sales are
generally less profitable than residential retail sales, the
Partnership has traditionally relied on this customer base to provide
a steady, noncyclical source of revenues. No single customer
accounted for more than 1% of total revenues.
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
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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.
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
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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 the Acquisition Facility and the ability to issue
additional limited partner interests. In the first eleven months of
calendar 1997, the Partnership acquired businesses in Arizona, California,
Florida, New Hampshire and North Carolina which added approximately 28,000
customers and annual retail propane sales of approximately 24 million
gallons. The aggregate purchase price for these acquisitions was
approximately $44 million, of which approximately $30 million was in the
form of Common Units (approximately 1.3 million 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
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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
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 natural gas liquids
supply and logistics business with sales of approximately 328 million
and 330 million gallons in pro forma fiscal 1996 and 1997,
respectively. 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
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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.
PRODUCT
Propane, a by-product of natural gas processing and petroleum
refining, is a clean-burning energy source recognized for its
transportability and ease of use relative to alternative stand-alone
energy sources. The retail propane business of the Partnership
consists principally of transporting propane to its retail
distribution outlets and then to tanks located on its customers'
premises. Retail propane use falls into four broad categories:
(i) residential, (ii) industrial and commercial, (iii) agricultural
and (iv) other applications, including motor fuel sales. Residential
customers use propane primarily for space and water heating.
Industrial customers use propane primarily as fuel for forklifts and
stationary engines, to fire furnaces, as a cutting gas, in mining
operations and in other process applications. Commercial customers,
such as restaurants, motels, laundries and commercial buildings, use
propane in a variety of applications, including cooking, heating and
drying. In the agricultural market, propane is primarily used for
tobacco curing, crop drying, poultry brooding and weed control. Other
retail uses include motor fuel for cars and trucks, outdoor cooking
and other recreational uses, propane resales and sales to state and
local governments. In its wholesale operations, the Partnership sells
propane principally to large industrial end-users and other propane
distributors.
Propane is extracted from natural gas or oil wellhead gas at
processing plants or separated from crude oil during the refining
process. Propane is normally transported and stored in a liquid state
under moderate pressure or refrigeration for ease of handling in
shipping and distribution. When the pressure is released or the
temperature is increased, it is usable as a flammable gas. Propane is
colorless and odorless; an odorant is added to allow its detection.
Like natural gas, propane is a clean-burning fuel and is considered an
environmentally preferred energy source.
COMPETITION
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
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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
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 1997, 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
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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.
OPERATIONS
The Partnership has organized its operations in a manner that the
Partnership believes enables it to provide excellent service to its
customers and to achieve maximum operating efficiencies. The
Partnership's retail propane distribution business is organized into
regions. Each region is supervised by Divisional Vice Presidents, or
Managers. Personnel located at the retail service centers in the
various regions are primarily responsible for customer service and
sales.
A number of functions are centralized at the Partnership's
corporate headquarters in order to achieve certain operating
efficiencies as well as to enable the personnel located in the retail
service centers to focus on customer service and sales. The corporate
headquarters and the retail service centers are linked via a computer
system. Each of the Partnership's primary retail service centers is
equipped with a computer connected to the central management
information system in the Partnership's corporate headquarters. This
computer network system provides retail company personnel with
accurate and timely information on pricing, inventory and customer
accounts. In addition, this system enables management to monitor
pricing, sales, delivery and the general operations of its numerous
retail service centers and to plan accordingly to improve the
operations of the Partnership. The Partnership makes centralized
purchases of propane through its corporate headquarters for resale to
the retail service centers enabling the Partnership to achieve certain
advantages, including price advantages, because of its status as a
large volume buyer. The functions of cash management, accounting,
taxes, payroll, permits, licensing, asset control, employee benefits,
human resources, and strategic planning are also performed on a
centralized basis.
SEASONALITY
Because a substantial amount of propane is sold for heating
purposes, the severity of winter and resulting residential and
commercial heating usage have an important impact on the Partnership's
earnings. Approximately two-thirds of the Partnership's retail
propane sales usually occur during the six-month heating season from
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
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reserve cash from these periods for distribution to Unitholders during
periods with lower cash flows from operations. Sales and profits are
subject to variation from month to month and from year to year,
depending on temperature fluctuations.
SOURCES OF SUPPLY
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. During the six and one-half month period
ended June 30, 1997, approximately 99% of the Partnership's purchases
of its propane supply 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 the six and one-half month period
ended June 30, 1997, 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 the six
and one-half month period ended June 30, 1997. 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 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.
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
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increases in the wholesale cost of propane on to customers
immediately, such increases could reduce the Partnership's gross
profits. Consequently, the Partnership's profitability will be
sensitive to changes in wholesale propane prices. The Partnership
engages in hedging of product cost and supply through common hedging
practices. The Partnership also engages in the trading of propane,
natural gas, crude oil and other commodities in amounts that have not
had and are not expected to have a material effect on the
Partnership's financial condition or results of operations.
The Partnership has from time to time leased space in storage
facilities to take advantage of supply purchasing opportunities as
they have occurred, and the Partnership believes that it will have
adequate third party storage to take advantage of such opportunities
in the future. Access to storage facilities will allow the
Partnership, to the extent it may deem it desirable, to buy and store
large quantities of propane during periods of low demand, which
generally occur during the summer months, thereby helping to ensure a
more secure supply of propane uring periods of intense demand or price
instability.
RISKS OF BUSINESS
The Partnership's propane operations are subject to all the
operating hazards and risks normally incident to handling, storing and
transporting combustible liquids, such as the risk of personal injury
and property damages caused by accident or fire.
Effective December 17, 1996, the Partnership's comprehensive
general and excess liability policy provides for losses of up to $96.0
million with a $50,000 self-insured retention.
PROPERTIES
As of November 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 November 30, 1997,
the Partnership operated 298 customer service centers.
The transportation of propane requires specialized equipment. The
trucks and railroad tank cars utilized for this purpose carry specialized
steel tanks that maintain the propane in a liquefied state. As of November
30, 1997, the Partnership owned a fleet of approximately 50 transport
truck tractors, approximately 60 transport trailers, approximately 940
bobtail trucks and approximately 900 other delivery and service vehicles.
As of such date, the Partnership owned, and customers
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leased, approximately 278,000 customer storage tanks with typical
capacities of 120 to 1,000 gallons.
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's operations are subject to various federal,
state and local laws governing the transportation, storage and
distribution of propane, occupational health and safety, and other
matters. All states in which the Partnership operates have adopted
fire safety codes that regulate the storage and distribution of
propane. In some states these laws are administered by state
agencies, and in others they are administered on a municipal level.
Certain municipalities prohibit the below ground installation of
propane furnaces and appliances, and certain states are considering
the adoption of similar regulations. The Partnership cannot predict
the extent to which any such regulations might affect the Partnership,
but does not believe that any such effect would be material. It is
not anticipated that the Partnership will be required to expend
material amounts by reason of environmental and safety laws and
regulations, but inasmuch as such laws and regulations are constantly
being changed, the Partnership is unable to predict the ultimate cost
to the Partnership of complying with environmental and safety laws and
regulations.
The Partnership currently meets and exceeds federal regulations
requiring that all persons employed in the handling of propane gas be
trained in proper handling and operating procedures. All employees
have participated or will participate within 90 days of their
employment date, in hazardous materials training. The Partnership has
established ongoing training programs in all phases of product
knowledge and safety including participation in the National Propane
Gas Association's ("NPGA") Certified Employee Training Program.
EMPLOYEES
The Partnership has no employees. The Managing General Partner
conducts, directs and manages all activities of the Partnership. All
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references to Partnership management relate to the Managing General
Partner which has no activities except managing the Partnership.
As of November 30, 1997, the Managing General Partner had 2,120 full
time employees, of whom 144 were general and administrative and 1,976 were
operational employees. Approximately 30 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.
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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 to its Board of Directors. Neither Mr. Katz
nor Mr. Christen is an officer or employee of the General Partners nor
a director, officer or employee of any affiliate of either of the
General Partners, however Mr. Katz served as a director of Coast when
the current executive officers of the Managing General Partner were
officers of that company. 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
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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.
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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.
NAME AGE POSITION WITH MANAGING GENERAL PARTNER
---- --- --------------------------------------
Merle D. Lewis 50 Chairman of the Board of Directors
Richard R. Hylland 37 Vice Chairman of the Board of Directors
Keith G. Baxter 48 President, Chief Executive Officer and Director
Charles J. Kittrell 58 Executive Vice President, Chief Operating OfficeR
and Secretary
Ronald J. Goedde 48 Executive Vice President, Chief Financial Officer
and Treasurer
Vincent J. DiCosimo 40 Executive Vice President
Paul Christen 68 Director
Kurt Katz 64 Director
Daniel K. Newell 41 Director
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
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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).
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.
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.
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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.
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
(including the Special General Partner) 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
$48.9 million of expenses (primarily wages and salaries) would have
been reimbursed by the Partnership to the Managing General Partner in
fiscal 1997 (including $30.7 million actually reimbursed for the six
and one-half month period ended June 30, 1997). The Special General
Partner received no reimbursements from the Partnership in fiscal
1997. 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."
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EXECUTIVE COMPENSATION
The following table provides compensation information from
commencement of operations on December 17, 1996 to June 30, 1997, for
the Chief Executive Officer and for each of the four other most highly
compensated executive officers of the Managing General Partner whose
total compensation exceeded $100,000 for the most recent fiscal
period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------------
NAME AND OTHER ANNUAL RESTRICTED UNIT ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) COMP(2) AWARDS(3) COMP(4)
------------------ ---- ------ -------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Keith G. Baxter, 1997 $108,333 $ 25,000 $124,469 $2,800,000 $3,683
Chief Executive Officer
Robert Wooldridge, 1997 108,333 30,000 - - 0
Vice President
Charles J. Kittrell, 1997 88,125 15,000 67,313 1,600,000 4,256
Chief Operating Officer
Ronald J. Goedde, 1997 79,792 15,000 51,094 1,600,000 2,998
Chief Financial Officer
Vincent J. DiCosimo, 1997 81,250 175,000 21,667 1,000,000 2,333
Senior Vice President
</TABLE>
(1) Reflects (a) a one-time special consolidating bonus awarded to
Messrs. Baxter, Kittrell and Goedde, (b) an annual incentive
bonus payable to Mr. Wooldridge pursuant to his employment
agreement and (c) the bonus payable to Mr. Di Cosimo under the
Coast Energy Group Bonus Plan. No bonus was paid under the
Annual Operating Performance Incentive Plan with respect to the
fiscal period ended June 30, 1997. See "Incentive Plans."
(2) Reflects (a) the Management Fees payable to Messrs. Baxter,
Kittrell, Goedde and Di Cosimo in connection with the acquisition
of Empire Energy and Coast by Northwestern Growth and (b) amounts
awarded under the New Acquisition Incentive Plan for Messrs.
Baxter, Kittrell and Goedde. See "Employment Agreements,
Severance Arrangements" and "Incentive Plans."
(3) The total number of restricted Common Units and their aggregate
market value as of June 30, 1997 were: Mr. Baxter, 133,333
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Common Units valued at $2,899,993; Mr. Kittrell, 76,190 Common
Units valued at $1,657,133; Mr. Goedde, 76,190 Common Units
valued at $1,657,133; and Mr. Di Cosimo, 47,619 Common Units
valued at $1,035,713. There were no payouts under the Restricted
Unit Plan during the fiscal period ended June 30, 1997.
(4) The "All Other Compensation" category reflects the Managing
General Partner's matching contributions to its 401(k) Plan in
the amount of $2,058 for each of Messrs. Baxter, Kittrell, Goedde
and DiCosimo and payments for life and disability insurance.
EMPLOYMENT AGREEMENTS, SEVERANCE ARRANGEMENTS
Employment agreements (the "Employment Agreements") between each
of Keith G. Baxter, Charles J. Kittrell, Ronald J. Goedde and Vincent
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").
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<PAGE>
The Employment Agreements provide that in the event an
Executive's employment is terminated without "cause" (as defined in
the Employment Agreements) or if the Executive terminates his
employment due to a "Fundamental Change" (as defined below), such
Executive will be entitled to receive a severance payment in an amount
equal to his total compensation for the remainder of the employment
term under the Employment Agreement and will receive benefits under
the Other Benefit Plans for a period of 12 months after termination.
In the event of termination due to disability, the Executive will be
entitled to his base salary, his Management Fee and benefits under the
Plans and the Other Benefit Plans for 12 months. In the event of
termination due to death, benefits under the Other Benefit Plans will
be continued for the Executive's dependents for 12 months. In the
event the Executive's employment is terminated for "cause," the
Executive will receive accrued salary and benefits (including his
Management Fee and benefits under the Plans) up to the date of
termination and, if the Managing General Partner does not waive the
Executive's covenant not to compete, benefits under the Other Benefit
Plans for 12 months.
A Fundamental Change is defined in the Employment Agreements to
have occurred (i) if the Executive's duties, authority,
responsibilities and/or compensation is reduced without performance or
market-related justification; (ii) if the Executive's primary office
is moved more than 50 miles from Watsonville, California (or, with
respect to Mr. DiCosimo, Houston, Texas) without his consent; (iii) if
the Partnership disposes of business and assets which reduce the
annual EBITDA of the Partnership below 70% of the annual EBITDA level
existing at the time employment commenced; or (iv) if securities
representing 10% of the voting power in elections of directors of NPS
become beneficially owned by any party or group or other prescribed
events occur constituting a change of control of NPS.
In addition, each Employment Agreement contains non-competition
and confidentiality provisions.
INCENTIVE PLANS
The Managing General Partner has adopted the Annual Operating
Performance Incentive Plan, which provides for the payment of annual
incentive 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) equal to a percentage of
annual salary (plus, in the case of the Executives, his Management
Fee) based on the Partnership's performance compared 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 EBITDA exceeds 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
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Goedde and any other participants that the Board of Directors of the
Managing General Partner may determine. The period covered by the
plan began December 16, 1996 and ends on the fifth anniversary
thereof.
The Managing General Partner has also adopted the New Acquisition
Incentive Plan, which 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.
The bonuses will be an amount equal to 4% of the gross acquisition
purchase price, allocated among the participants in the plan based on
their relative salaries. The transactions covered by the plan will
include those occurring on or after December 17, 1997 through the
fifth anniversary thereof. Awards under this program will be payable
in cash 90 days after the close of the particular acquisition
transaction.
RESTRICTED UNIT PLAN
The following table sets forth the restricted unit grants made
under the Restricted Unit Plan to the named executive officers of the
Managing General Partner during the fiscal period ended June 30, 1997.
<TABLE>
<CAPTION>
Number of Shares, Units or Other Performance or Other Period Until
Name Rights (1) Maturation or Payout
-------------------------- ----------------------------------------------- --------------------------------
<S> <C> <C>
Keith G. Baxter 133,333 Common Units (2)
Robert Wooldridge 0 -
Charles J. Kittrell 76,190 Common Units (2)
Ronald J. Goedde 76,190 Common Units (2)
Vincent J. DiCosimo 47,619 Common Units (2)
</TABLE>
(1) Granted on December 17, 1996 upon consummation of the IPO.
(2) Restricted units are subject to a bifurcated vesting procedure
such that (a) 25% of a participant's restricted units will vest
over time, with one-third vesting on the third, fifth and seventh
anniversaries of the date of grant and (b) the remaining 75% of a
participant's restricted units will vest automatically upon, and
in the same proportions as, the conversion of the Subordinated
units to Common Units. See Note 4 to the Partnership's
Consolidated Financial Statements included elsewhere in this
Prospectus. If a participant's employment is terminated without
"cause" (as defined in the Restricted Unit Plan) or a participant
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resigns with "good reason" (as defined in the Restricted Unit
Plan), the participant'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 receive Common Units pursuant to the
Restricted Unit Plan will immediately vest. Until rights to
receive Common Units have vested, the Common Units to which they
relate are not issued, and the participant is not entitled to any
distributions or allocations of income or loss, and has no voting
or other rights, with respect to such 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, the Chairman of the Board receives $50,000 annually, and
each of its other non-employee directors receives $15,000 annually, plus
$1,000 per Board meeting attended and $500 per committee meeting attended.
All expenses associated with compensation of directors are reimbursed to
the Managing General Partner by the Partnership.
In connection with the consummation of the IPO, the three initial
nonemployee directors of the Managing General Partner received rights
with respect to restricted units, as follows: Mr. Lewis, 19,048
Common Units valued at $400,000; Mr. Hylland, 14,286 Common Units
valued at $300,000; and Mr. Newell, 9,524 Common Units valued at
$200,000. In addition, under the Restricted Unit Plan, upon his or
her election to the Board of Directors of the Managing General
Partner, each nonemployee director receives rights with respect to
restricted units having an aggregate value of $200,000. The
directors' restricted units vest in accordance with the same procedure
as is described in note 2 to the table under "Executive Compensation--
Restricted Unit Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN
COMPENSATION DECISIONS
The Nominating and Compensation Committee of the Board of
Directors of the Managing General Partner is comprised of Messrs.
Lewis, Christen and Katz. None of these persons is an officer,
employee or former employee of the Managing General Partner, the
Partnership or any of their subsidiaries, however, Mr. Katz served as
a director of Coast when the current executive officers of the
Managing General Partner were officers of that company.
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<PAGE>
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 September 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) . . . . . Common 74,358 (3) *
</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.
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<PAGE>
(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 - 133,333 Common Units;
Charles J. Kittrell - 76,190 Common Units; Ronald J. Goedde -
76,190 Common Units; Vincent J. Di Cosimo - 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 - 394,381 Common Units.
OWNERSHIP OF NPS COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS OF
THE MANAGING GENERAL PARTNER
The table below sets forth, as of September 30, 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
OF BENEFICIAL
NAME OF BENEFICIAL OWNER OWNERSHIP (1)
----------------------- ----------------
Merle D. Lewis (2) . . . . . . . . . . . . . 39,084
Richard R. Hylland (3) . . . . . . . . . . . 10,833
Keith G. Baxter . . . . . . . . . . . . . . . 5,882
Charles J. Kittrell . . . . . . . . . . . . . --
Ronald J. Goedde . . . . . . . . . . . . . . --
Vincent J. DiCosimo . . . . . . . . . . . . . --
Daniel K. Newell (4) . . . . . . . . . . . . 3,654
Paul Christen . . . . . . . . . . . . . . . . --
Kurt Katz . . . . . . . . . . . . . . . . . . --
All directors and executive officers as a
group (9 persons) . . . . . . . . . . . 59,453
_________
(1) The nature of beneficial ownership is sole voting and dispositive
power, unless otherwise noted.
(2) Includes 10,384 shares held jointly with spouse, 4,187 shares
held in IRA by spouse and 162 shares held by daughter.
(3) Includes 688 shares held in custodial accounts for Mr. Hylland's
children and 2,465 shares held by Mr. Hylland's spouse.
(4) Includes 348 shares held jointly with spouse.
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<PAGE>
The Managing General Partner is a wholly owned subsidiary of
Northwestern Growth, which in turn is a wholly owned subsidiary of
NPS. No directors or officers of the Managing General Partner or
Northwestern Growth own any shares of common stock of the Managing
General Partner or Northwestern Growth.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RIGHTS OF THE GENERAL PARTNERS
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.
The Managing General Partner is a wholly-owned subsidiary, and
the Special General Partner is a majority-owned subsidiary, of NPS.
Mr. Lewis serves as the Chairman of the Board, and Messrs. Hylland and
Newell are executive officers, of NPS.
The Managing General Partner does not receive any management fee
or other compensation in connection with its management of the
Partnership, but it 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 properly
allocable to the Partnership. The Partnership's Partnership Agreement
provides that the Managing General Partner will determine the expenses
that are allocable to the Partnership in any reasonable manner.
In addition, the General Partners are entitled to receive
distributions on their general partner interests, certain incentive
distributions and distributions on their Subordinated Units.
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
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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 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. The Partnership
Agreement provides that the Managing General Partner may adopt a
resolution or course of action that has not been approved by a
majority of the members of the Audit Committee. 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
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<PAGE>
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
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.
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<PAGE>
CERTAIN ACTIONS TAKEN BY THE MANAGING GENERAL PARTNER MAY AFFECT
THE AMOUNT OF CASH AVAILABLE FOR DISTRIBUTION TO UNITHOLDERS OR
ACCELERATE THE CONVERSION OF SUBORDINATED UNITS
Decisions of the Managing General Partner with respect to the
amount and timing of cash expenditures, participation in capital
expansions and acquisitions, borrowings, issuances of additional
partnership interests and reserves in any quarter will affect whether,
or the extent to which, there is sufficient Available Cash from
Operating Surplus to meet the Minimum Quarterly Distribution and
Target Distributions Levels on all Units in such quarter or in
subsequent quarters. The Partnership Agreement provides that any
borrowings by the Partnership or the approval thereof by the Managing
General Partner shall not constitute a breach of any duty owed by the
Managing General Partner to the Partnership or the Unitholders,
including borrowings that have the purpose or effect, directly or
indirectly, of enabling the General Partners to receive distributions
on the Subordinated Units or the Incentive Distributions or hasten the
expiration of the Subordination Period or the conversion of the
Subordinated Units into Common Units. The Partnership Agreement
provides that the Partnership and the Operating Partnership may borrow
funds from the General Partners and their affiliates. The General
Partners and their affiliates may not borrow funds from the
Partnership or the Operating Partnership. Furthermore, any actions
taken by the Managing General Partner consistent with the standards of
reasonable discretion set forth in the definitions of Available Cash,
Operating Surplus and Capital Surplus will be deemed not to constitute
a breach of any duty of the Managing General Partner to the
Partnership or the Unitholders.
THE PARTNERSHIP 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
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<PAGE>
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.
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
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<PAGE>
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 -- Liquidity
and Capital Resources -- Financing and Sources of Liquidity."
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
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Partnership's operations on a basis beneficial to the Partnership; or
(ii) such activity is being undertaken as provided in a joint venture
agreement or other agreement between the Partnership and an affiliate
of the Managing General Partner and such joint venture or other
agreement was determined at the time it was entered into to be fair to
the Partnership in the reasonable judgment of the Managing General
Partner.
There are no restrictions on the ability of affiliates of the
Managing General Partner to engage in the retail sale of propane
outside the continental United States or in the trading,
transportation, storage and wholesale distribution of propane. The
Partnership Agreement expressly provides that if the Managing General
Partner or its affiliates act in accordance with the foregoing, it
shall not constitute a breach of the Managing General Partner's
fiduciary duties to the Partnership or the Unitholders if the Managing
General Partner or its affiliates engage in direct competition with
the Partnership.
THE PARTNERSHIP AGREEMENT PERMITS THE PARTNERSHIP TO ENGAGE IN
ROLL-UP TRANSACTIONS
The Partnership Agreement does not prohibit the Partnership from
engaging in roll-up transactions. Were the Managing General Partner to
cause the Partnership to engage in a roll-up transaction, there could
be no assurance that such a transaction would not have a material
adverse effect on a Unitholder's investment in the Partnership.
FIDUCIARY AND OTHER DUTIES
The General Partners will be accountable to the Partnership and
the Unitholders as fiduciaries. Consequently, the Managing General
Partner must exercise due care, 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 due care and the highest good faith, fairness
and loyalty. Such duty of loyalty, in the absence of a provision in a
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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
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
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Partners. In connection with the resolution of any conflict that
arises, unless the Managing General Partner has acted in bad faith,
the action taken by the Managing General Partner shall not constitute
a breach of the Partnership Agreement, any other agreement or any
standard of care or duty imposed by the Delaware Act or other
applicable law. The Partnership also provides that in certain
circumstances the Managing General Partner may act in its sole
discretion, in good faith or pursuant to other appropriate standards.
The Delaware Act provides that a limited partner may institute
legal action on behalf of the partnership (a partnership derivative
action) to recover damages from a third party where the general
partner has refused to institute the action or where an effort to
cause the general partner to do so is not likely to succeed. In
addition, the statutory or case law of certain jurisdictions may
permit a limited partner to institute legal action on behalf of
himself and all other similarly situated limited partners (a class
action) to recover damages from a general partner for violations of
its fiduciary duties to the limited partners.
The Partnership Agreement also provides that any standard of care
and duty imposed thereby or under the Delaware Act or any applicable
law, rule or regulation will be modified, waived or limited, to the
extent permitted by law, as required to permit the Managing General
Partner and its officers and directors to act under the Partnership
Agreement or any other agreement contemplated therein and to make any
decisions pursuant to the authority prescribed in the Partnership
Agreement, so long as such action is reasonably believed by the
Managing General Partner to be in, or not inconsistent with, the best
interests of the Partnership. Further, the Partnership Agreement
provides that the General Partners and their officers and directors
will not be liable for monetary damages to the Partnership, the
limited partners or assignees for errors of judgment or for any acts
or omissions if the Managing General Partner and such other persons
acted in good faith.
In addition, under the terms of the Partnership Agreement, the
Partnership is required to indemnify the General Partners and their
officers, directors, employees, affiliates, partners, members, agents
and trustees, to the fullest extent permitted by law, against
liabilities, costs and expenses incurred by the General Partners or
such other persons, if the General Partners or such persons acted in
good faith and in a manner they reasonably believed to be in, or not
opposed to, the best interests of the Partnership and, with respect to
any criminal proceedings, had no reasonable cause to believe their
conduct was unlawful. See "The Partnership Agreement --
Indemnification." Thus, the General Partners could be indemnified for
their negligent acts if they meet such requirements concerning good
faith and the best interests of the Partnership.
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DESCRIPTION OF THE COMMON UNITS
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. 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. For a
description of the relative rights and preferences of holders of
Common Units and Subordinated Units in and to Partnership
distributions, together with a description of the circumstances under
which Subordinated Units may convert into Common Units, see "Cash
Distribution Policy." For a description of the rights and privileges
of limited partners under the Partnership Agreement, see "The
Partnership Agreement."
TRANSFER AGENT AND REGISTRAR
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
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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
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
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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."
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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
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,
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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
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
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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.
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
27 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
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state without compliance with the applicable limited partnership
statute, or that the right or exercise of the right by the Limited
Partners as a group to remove or replace the General Partners, to
approve certain amendments to the Partnership Agreement, or to take
other action pursuant to the Partnership Agreement constituted
"participation in the control" of the Partnership's business for the
purposes of the statutes of any relevant jurisdiction, then the
Limited Partners could be held personally liable for the Partnership's
obligations under the law of such jurisdiction to the same extent as
the General Partners under certain circumstances. The Partnership will
operate in such manner as the Managing General Partner deems
reasonable and necessary or appropriate to preserve the limited
liability of the Limited Partners.
ISSUANCE OF ADDITIONAL SECURITIES
The Partnership Agreement authorizes the Partnership to issue an
unlimited number of additional limited partner interests and other
equity securities of the Partnership for such consideration and on
such terms and conditions as are established by the Managing General
Partner in its sole discretion without the approval of any limited
partners; provided that, during the Subordination Period, except as
provided in clauses (i) and (ii) below, the Partnership may not issue
equity securities of the Partnership ranking prior 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
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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
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.
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AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed only by
or with the consent of the Managing General Partner, which consent may
be given or withheld in its sole discretion. In order to adopt a
proposed amendment (other than certain amendments discussed below),
the Managing General Partner is required to seek written approval of
the holders of the number of Units required to approve such amendment
or call a meeting of the Limited Partners to consider and vote upon
the proposed amendment, except as described below. Proposed amendments
(unless otherwise specified) must be approved by holders of a Unit
Majority, except that no amendment may be made which would (i) enlarge
the obligations of any Limited Partner without its consent, unless
approved by at least a majority of the type or class of Units so
affected, (ii) enlarge the obligations of, restrict in any way any
action by or rights of, or reduce in any way the amounts
distributable, reimbursable or otherwise payable by the Partnership to
the Managing General Partner or any of its affiliates without its
consent, which may be given or withheld in its sole discretion,
(iii) change the term of the Partnership, (iv) provide that the
Partnership is not dissolved upon the expiration of its term or upon
an election to dissolve the Partnership by the Managing General
Partner that is approved by holders of a Unit Majority or (v) give any
person the right to dissolve the Partnership other than the Managing
General Partner's right to dissolve the Partnership with the approval
of holders of a Unit Majority.
The Managing General Partner may generally make amendments to the
Partnership Agreement without the approval of any Partner or assignee
to reflect (i) a change in the name of the Partnership, the location
of the principal place of business of the Partnership, the registered
agent or the registered office of the Partnership, (ii) admission,
substitution, withdrawal or removal of partners in accordance with the
Partnership Agreement, (iii) a change that, in the discretion of the
Managing General Partner, is necessary or advisable to qualify or
continue the qualification of the Partnership as a limited partnership
or a partnership in which the Limited Partners have limited liability
under the laws of any state or to ensure that neither the Partnership
nor the Operating Partnership will be treated as an association
taxable as a corporation or otherwise taxed as an entity for federal
income tax purposes, (iv) an amendment that is necessary, in the
opinion of counsel to the Partnership, to prevent the Partnership, or
the General Partners or their directors, officers, agents or trustees,
from in any manner being subjected to the provisions of the Investment
Company Act of 1940, as amended, the Investment Advisors Act of 1940,
as amended, or "plan asset" regulations adopted under the Employee
Retirement Income Security Act of 1974, as amended, whether or not
substantially similar to plan asset regulations currently applied or
proposed, (v) subject to the limitations on the issuance of additional
Common Units or other limited or general partner interests described
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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
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.
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Any amendment that would have a material adverse effect on the
rights or preferences of any type or class of outstanding Units in
relation to other classes of Units will require the approval of at
least a majority of the type or class of Units so affected. Any
amendment that reduces the voting percentage required to take any
action is required to be approved by the affirmative vote of limited
partners constituting not less than the voting requirement sought to
be reduced.
MERGER, SALE OR OTHER DISPOSITION OF ASSETS
The Managing General Partner is generally prohibited, without the
prior approval of holders of a Unit Majority, from causing the
Partnership to, among other things, sell, exchange or otherwise
dispose of all or substantially all of its assets in a single
transaction or a series of related transactions (including by way of
merger, consolidation or other combination) or approving on behalf of
the Partnership the sale, exchange or other disposition of all or
substantially all of the assets of the Operating Partnership; provided
that the Managing General Partner may mortgage, pledge, hypothecate or
grant a security interest in all or substantially all of the
Partnership's assets without such approval. The Managing General
Partner may also sell all or substantially all of the Partnership's
assets pursuant to a foreclosure or other realization upon the
foregoing encumbrances without such approval. Furthermore, provided
that certain conditions are satisfied, the Managing General Partner
may merge the Partnership or any member of the Partnership Group into,
or convey some or all of the Partnership Group's assets to, a newly
formed entity if the sole purpose of such merger or conveyance is to
effect a mere change in the legal form of the Partnership into another
limited liability entity. The Unitholders are not entitled to
dissenters' rights of appraisal under the Partnership Agreement or
applicable Delaware law in the event of a merger or consolidation of
the Partnership, a sale of substantially all of the Partnership's
assets or any other transaction or event.
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
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following approval and admission of a successor). Upon a dissolution
pursuant to clause (iv), the holders of a Unit Majority may also
elect, within certain time limitations, to reconstitute the
Partnership and continue its business on the same terms and conditions
set forth in the Partnership Agreement by forming a new limited
partnership on terms identical to those set forth in the Partnership
Agreement and having as general partner an entity approved by the
holders of a Unit Majority subject to receipt by the Partnership of an
opinion of counsel to the effect that (x) such action would not result
in the loss of limited liability of any Limited Partner and
(y) neither the Partnership, the reconstituted limited partnership nor
the Operating Partnership would be treated as an association taxable
as a corporation or otherwise be taxable as an entity for federal
income tax purposes upon the exercise of such right to continue
(hereinafter, an "Opinion of Counsel").
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon dissolution of the Partnership, unless the Partnership is
reconstituted and continued as a new limited partnership, the person
authorized to wind up the affairs of the Partnership (the
"Liquidator") will, acting with all of the powers of the Managing
General Partner that such Liquidator deems necessary or desirable in
its good faith judgment in connection therewith, liquidate the
Partnership's assets and apply the proceeds of the liquidation as
provided in "Cash Distribution Policy -- Distributions of Cash Upon
Liquidation." Under certain circumstances and subject to certain
limitations, the Liquidator may defer liquidation or distribution of
the Partnership's assets for a reasonable period of time or distribute
assets to partners in kind if it determines that a sale would be
impractical or would cause undue loss to the partners.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNERS
The Managing General Partner has agreed not to withdraw
voluntarily as a general partner of the Partnership and the Operating
Partnership prior to December 31, 2006 (with limited exceptions
described below), without obtaining the approval of the holders of a
Unit Majority and furnishing an Opinion of Counsel. On or after
December 31, 2006, the Managing General Partner may withdraw as the
Managing General Partner (without first obtaining approval from any
Unitholder) by giving 90 days' written notice, and such withdrawal
will not constitute a violation of the Partnership Agreement.
Notwithstanding the foregoing, the Managing General Partner may
withdraw without Unitholder approval upon 90 days' notice to the
Limited Partners if at least 50% of the outstanding Common Units are
held or controlled by one person and its affiliates (other than the
Managing General Partner and its affiliates). In addition, the
Partnership Agreement permits the General Partners (in certain limited
instances) to sell or otherwise transfer all of their general partner
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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
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
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value of such interests. Under all other circumstances where the
General Partners withdraw or are removed by the Limited Partners, the
Departing Partners will have the option to require the successor
general partner to purchase such general partner interest of the
Departing Partners and their Incentive Distribution Rights for such
amount. In each case, such fair market value will be determined by
agreement between the Departing Partners and the successor general
partner, or if no agreement is reached, by an independent investment
banking firm or other independent expert selected by the Departing
Partners and the successor general partner (or if no expert can be
agreed upon, by an expert chosen by agreement of the experts selected
by each of them). In addition, the Partnership will be required to
reimburse the Departing Partners for all amounts due the Departing
Partners, including, without limitation, all employee-related
liabilities, including severance liabilities, incurred in connection
with the termination of any employees employed by the Departing
Partners for the benefit of the Partnership.
If the above-described option is not exercised by either the
Departing Partners or the successor general partner, as applicable,
the Departing Partners' general partner interests in the Partnership
and the Operating Partnership and their Incentive Distribution Rights
will be converted into Common Units equal to the fair market value of
such interests as determined by an investment banking firm or other
independent expert selected in the manner described in the preceding
paragraph.
TRANSFER OF GENERAL PARTNERS' INTERESTS AND INCENTIVE DISTRIBUTION
RIGHTS
Except for a transfer by a General Partner of all, but not less
than all, of its general partner interest in the Partnership and the
Operating Partnership to (a) an affiliate of such General Partner or
(b) another person in connection with the merger or consolidation of
such General Partner with or into another person or the transfer by
such General Partner of all or substantially all of its assets to
another person, such General Partner may not transfer all or any part
of its general partner interest in the Partnership and the Operating
Partnership to another person prior to December 31, 2006, without the
approval of the holders of at least a Unit Majority; provided that, in
each case, such transferee assumes the rights and duties of such
General Partner to whose interest such transferee has succeeded,
agrees to be bound by the 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
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any time, however, to transfer their Subordinated Units to one or more
persons without Unitholder approval. At any time, the stockholders of
the General Partners may sell or transfer all or part of their
interest in the General Partners to an affiliate or a third party
without the approval of the Unitholders. Each General Partner or its
affiliates or a subsequent holder may transfer its Incentive
Distribution Rights to another person in connection with its merger or
consolidation with or into, or sale of all or substantially all of its
assets to, such person without the prior approval of the Unitholders.
Holders of Incentive Distribution Rights may also transfer such rights
to their affiliates without the prior approval of the Unitholders.
Prior to December 31, 2006, other transfers of the Incentive
Distribution Rights will require the affirmative vote of holders of at
least a Unit Majority. On or after December 31, 2006, the Incentive
Distribution Rights will be freely transferable.
CHANGE OF MANAGEMENT PROVISIONS
The Partnership Agreement contains certain provisions that are
intended to discourage a person or group from attempting to remove the
Managing General Partner as general partner of the Partnership or
otherwise change the management of the Partnership. If any person or
group other than the Managing General Partner and its affiliates
acquires beneficial ownership of 20% or more of any class of Units,
such person or group loses voting rights with respect to all of its
Units. The Partnership Agreement also provides that if the Managing
General Partner is removed as a general partner of the Partnership
under circumstances where Cause does not exist and Units held by the
General Partners and their affiliates are not voted in favor of such
removal, (i) the Subordination Period will end and all outstanding
Subordinated Units will immediately convert into Common Units on a
one-for-one basis, (ii) any existing Common Unit Arrearages will be
extinguished and (iii) the General Partners will have the right to
convert their partner interests (and all of their Incentive
Distribution Rights) into Common Units or to receive cash in exchange
for such interests.
LIMITED CALL RIGHT
If at any time not more than 20% of the then-issued and
outstanding limited partner interests of any class (including Common
Units) are held by persons other than the Managing General Partner and
its affiliates, the Managing General Partner will have the right,
which it may assign in whole or in part to any of its affiliates or to
the Partnership, to acquire all, but not less than all, of the
remaining limited partner interests of such class held by such
unaffiliated persons as of a record date to be selected by the
Managing General Partner, on at least 10 but not more than 60 days'
notice. The purchase price in the event of such a purchase shall be
the greater of (i) the highest price paid by the Managing General
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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
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
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classes, unless any such action by the Unitholders requires approval
by holders of a greater percentage of such Units, in which case the
quorum shall be such greater percentage.
Each record holder of a Unit has a vote according to his
percentage interest in the Partnership, although additional limited
partner interests having special voting rights could be issued by the
Partnership. See "-- Issuance of Additional Securities." However, if
at any time any person or group (other than the Managing General
Partner and its affiliates) acquires, in the aggregate, beneficial
ownership of 20% or more of any class of Units then outstanding, such
person or group will lose voting rights with respect to all of its
Units and such Units may not be voted on any matter and will not be
considered to be outstanding when sending notices of a meeting of
Unitholders, calculating required votes, determining the presence of a
quorum or for other similar Partnership purposes. The Partnership
Agreement provides that Common Units held in nominee or street name
account will be voted by the broker (or other nominee) pursuant to the
instruction of the beneficial owner unless the arrangement between the
beneficial owner and his nominee provides otherwise. Except as
otherwise provided in the Partnership Agreement, Subordinated Units
will vote together with Common Units as a single class.
Any notice, demand, request, report or proxy material required or
permitted to be given or made to record holders of Common Units
(whether or not such record holder has been admitted as a limited
partner) under the terms of the Partnership Agreement will be
delivered to the record holder by the Partnership or by the Transfer
Agent at the request of the Partnership.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described above under "-- Limited Liability," the
Common Units will be fully paid, and Unitholders will not be required
to make additional contributions to the Partnership.
An assignee of a Common Unit, subsequent to executing and
delivering a Transfer Application, but pending its admission as a
substituted Limited Partner in the Partnership, is entitled to an
interest in the Partnership equivalent to that of a Limited Partner
with respect to the right to share in allocations and distributions
from the Partnership, including liquidating distributions. The
Managing General Partner will 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
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record holders of Common Units. See "Description of the Common Units -
- Transfer of Common Units."
NON-CITIZEN ASSIGNEES; REDEMPTION
If the Partnership is or becomes subject to federal, state or
local laws or regulations that, in the reasonable determination of the
Managing General Partner, create a substantial risk of cancellation or
forfeiture of any property in which the Partnership has an interest
because of the nationality, citizenship or other related status of any
Limited Partner or assignee, the Partnership may redeem the Units held
by such Limited Partner or assignee at their Current Market Price (as
defined in the Glossary). In order to avoid any such cancellation or
forfeiture, the Managing General Partner may require each Limited
Partner or assignee to furnish information about his nationality,
citizenship or related status. If a Limited Partner or assignee fails
to furnish information about such nationality, citizenship or other
related status within 30 days after a request for such information or
the Managing General Partner determines after receipt of such
information that the Limited Partner or assignee is not an eligible
citizen, such Limited Partner or assignee may be treated as a
non-citizen assignee ("Non-citizen Assignee"). In addition to other
limitations on the rights of an assignee who is not a substituted
Limited Partner, a Non-citizen Assignee does not have the right to
direct the voting of his Units and may not receive distributions in
kind upon liquidation of the Partnership.
INDEMNIFICATION
The Partnership Agreement provides that the Partnership will
indemnify the General Partners, any Departing Partner, any Person who
is or was an affiliate of a General Partner or any Departing Partner,
any Person who is or was a member, partner, officer, director,
employee, agent or trustee of a General Partner or any Departing
Partner or any affiliate of a General Partner or any Departing
Partner, or any Person who is or was serving at the request of a
General Partner or any Departing Partner or any affiliate of any such
person, any affiliate of a General Partner or any Departing Partner as
an officer, director, employee, member, partner, agent, fiduciary or
trustee of another Person ("Indemnitees"), to the fullest extent
permitted by law, from and against any and all losses, claims,
damages, liabilities (joint or several), expenses (including, without
limitation, legal fees and expenses), judgments, fines, penalties,
interest, settlements and other amounts arising from any and all
claims, demands, actions, suits or proceedings, whether civil,
criminal, administrative or investigative, in which any Indemnitee may
be involved, or is threatened to be involved, as a party or otherwise,
by reason of its status as an Indemnitee; provided that in each case
the Indemnitee acted in good faith and in a manner that such
Indemnitee reasonably believed to be in or not opposed to the best
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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
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
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federal and state tax liability and filing his federal and state
income tax returns.
RIGHT TO INSPECT PARTNERSHIP BOOKS AND RECORDS
The Partnership Agreement provides that a Limited Partner can for
a purpose reasonably related to such Limited Partner's interest as a
limited partner, upon reasonable demand and at his own expense, have
furnished to him (i) a current list of the name and last known address
of each partner, (ii) a copy of the Partnership's tax returns, (iii)
information as to the amount of cash, and a description and statement
of the agreed value of any other property or services, contributed or
to be contributed by each partner and the date on which each became a
partner, (iv) copies of the Partnership Agreement, the certificate of
limited partnership of the Partnership, amendments thereto and powers
of attorney pursuant to which the same have been executed,
(v) information regarding the status of the Partnership's business and
financial condition, and (vi) such other information regarding the
affairs of the Partnership as is just and reasonable. The Partnership
may, and intends to, keep confidential from the Limited Partners trade
secrets or other information the disclosure of which the Partnership
believes in good faith is not in the best interests of the Partnership
or which the Partnership is required by law or by agreements with
third parties to keep confidential.
REGISTRATION RIGHTS
Pursuant to the terms of the Partnership Agreement and subject to
certain limitations described therein, the Partnership has agreed to
register for resale under the Securities Act and applicable state
securities laws any Common Units or other securities of the
Partnership (including Subordinated Units) proposed to be sold by the
General Partners or any of their affiliates if an exemption from such
registration requirements is not otherwise available for such proposed
transaction. The Partnership is obligated to pay all expenses
incidental to such registration, excluding underwriting discounts and
commissions. See "Units Eligible for Future Sale."
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UNITS ELIGIBLE FOR FUTURE SALE
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 issued to an "affiliate"
(as that term is defined in the under the Securities Act) of a company
being acquired by the Partnership (or by an affiliate of the
Partnership) in a transaction subject to Rule 145 under the Securities
Act may not be resold unless such sale is registered under the
Securities Act or made pursuant to an exemption from such registration
requirements, including the exemption provided in Rule 145. Rule 145
generally applies to mergers, sales of assets and similar business
combination transactions subject to the approval of the shareholders
of the company being acquired. Rule 145 permits an affiliate of the
company being acquired to sell Common Units acquired in the business
combination transaction up to an amount that does not exceed, during
any three-month period, the greater of (i) 1% of the total number of
Common Units outstanding or (ii) the average weekly reported trading
volume of the Common Units for the four calendar weeks prior to the
sale. Sales under Rule 145 are also subject to certain manner of sale
provisions and the availability of current public information about
the Partnership. After one year has elapsed since the date Common
Units were acquired, a person subject to the limitations of Rule 145
who is not an affiliate of the Partnership may sell the Common Units
without regard to the volume or manner of sale limitations of Rule
145.
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 3,000,000 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
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approval of the holders of at least a Unit Majority. The Partnership
Agreement provides that, after the Subordination Period, the
Partnership may issue an unlimited number of limited partner interests
of any type without a vote of the Unitholders. The Partnership
Agreement does not impose any restriction on the Partnership's ability
to issue equity securities ranking junior to the Common Units at any
time. Any issuance of additional Common Units or certain other equity
securities would result in a corresponding decrease in the
proportionate ownership interest in the Partnership represented by,
and could adversely affect the cash distributions to and market price
of, Common Units then outstanding. See "The Partnership Agreement --
Issuance of Additional Securities."
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 $9.8 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.
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PLAN OF DISTRIBUTION
This Prospectus may be used by the Partnership for the offer and sale
of up to 3,000,000 Common Units from time to time in connection with the
acquisition of other businesses, properties or securities in business
combination transactions. Such Common Units may be issued directly to the
owners of such businesses, properties or securities or may be issued for
cash, including pursuant to underwritten offerings, and such cash used to
acquire such businesses, properties or securities. In the event Common
Units are sold through an underwritten offering, information regarding such
offering will be set forth in a Prospectus Supplement. 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 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.
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TAX CONSIDERATIONS
The following section describes the material United States tax
considerations that may be relevant to prospective Unitholders. The
statements of law or legal conclusion set forth in this section
constitute the opinion of Schiff Hardin & Waite, counsel to the
General Partners and the Partnership ("Counsel"). 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 at any time. Such changes, which may
be applied retroactively, 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.
This section only addresses the tax consequences to
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). This
section does not address all tax consequences that may be applicable
to a Unitholder. 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.
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
for depreciating Section 743 adjustments will be recognized for
federal income tax purposes (see "- Tax Treatment of Operations --
Section 754 Election").
An opinion of counsel represents only that counsel's best
legal judgment and does not bind the Internal Revenue Service (the
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"IRS") or the courts. No ruling has been or will be 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 or prospective Unitholders. Thus, no assurance can be
provided that the opinions 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.
CLASSIFICATION OF THE PARTNERSHIP
Based on the representations and subject to the qualifications
set forth in the detailed discussion that follows, for federal income
tax purposes (i) the Partnership and the Operating Partnership will
each be treated as a partnership, and (ii) owners of Common Units
(with certain exceptions, as described in "- Limited Partner Status"
below) will be treated as partners of the Partnership (but not the
Operating Partnership).
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.
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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
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.
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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.
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
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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
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.
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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
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
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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.
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
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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
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
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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
who have the capacity to exercise substantial dominion and control
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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
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the extent of his tax basis in his Common Units immediately before the
distribution. Cash distributions in excess of a Unitholder's tax basis
generally will be considered to be gain from the sale or exchange of
the Common Units, taxable in accordance with the rules described under
"-- Disposition of Common Units" below. Any reduction in a
Unitholder's share of the Partnership's liabilities 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
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be offset by losses that were previously suspended by the at risk
limitation but may not be offset by losses suspended by the basis
limitation. Any excess loss (above such gain) previously suspended by
the at risk or basis limitations is no longer utilizable.
In general, a Unitholder will be at risk to the extent of the tax
basis of his Units, excluding any portion of that basis attributable
to his share of Partnership nonrecourse liabilities, reduced by any
amount of money the Unitholder borrows to acquire or hold his Units if
the lender of such borrowed funds owns an interest in the Partnership,
is related to such a person or can look only to Units for repayment. A
Unitholder's at risk amount will increase or decrease as the tax basis
of the Unitholder's Units increases or decreases (other than tax basis
increases or decreases attributable to increases or decreases in his
share of Partnership nonrecourse liabilities).
The passive loss limitations generally provide that individuals,
estates, trusts and certain closely-held corporations and personal
service corporations can deduct losses from passive activities
(generally, activities in which the taxpayer does not materially
participate) only to the extent of the taxpayer's income from those
passive activities. The passive loss limitations are applied
separately with respect to each publicly-traded partnership 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
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income for this purpose. In addition, the Unitholder's share of the
Partnership's portfolio income will be treated as investment income.
Investment interest expense includes (i) interest on indebtedness
properly allocable to property held for investment, (ii) the
Partnership's interest expense attributed to portfolio income, and
(iii) the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to portfolio
income. The computation of a Unitholder's investment interest expense
will take into account interest on any margin account borrowing or
other loan incurred to purchase or carry a Unit. Net investment income
includes gross income from property held for investment and amounts
treated as portfolio income pursuant to the passive loss rules less
deductible expenses (other than interest) directly connected with the
production of investment income, but generally does not include gains
attributable to the disposition of property held for investment.
ALLOCATION OF PARTNERSHIP INCOME, GAIN, LOSS AND DEDUCTION
In general, if the Partnership has a net profit, items of income,
gain, loss and deduction will be allocated among the General Partners
and the Unitholders in accordance with their respective percentage
interests in the Partnership. 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
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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
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.
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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
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
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respect to property owned by the Partnership may be required to
recapture such deductions as ordinary income upon a sale of his
interest in the Partnership. See "-- Allocation of Partnership Income,
Gain, Loss and Deduction" and "-- Disposition of Common Units --
Recognition of Gain or Loss."
Costs incurred in organizing the Partnership may be amortized
over any period selected by the Partnership not shorter than 60
months. The costs incurred in promoting the issuance of Units (i.e.
syndication expenses) must be capitalized and cannot be deducted
currently, ratably or upon termination of the Partnership. There are
uncertainties regarding the classification of costs as organization
expenses, which may be amortized, and as syndication expenses, which
may not be amortized. Under recently adopted regulations, the
underwriting discounts and commissions would be treated as a
syndication cost.
SECTION 754 ELECTION
The Partnership intends to make the election permitted by Section
754 of the Code. That election is irrevocable without the consent of
the IRS. The election 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
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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
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.
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The calculations involved in the Section 754 election are complex
and will be made by the Partnership on the basis of certain
assumptions as to the value of Partnership assets and other matters.
There is no assurance that the determinations made by the Partnership
will not be successfully challenged by the IRS and that the deductions
resulting from them will not be reduced or disallowed altogether.
Should the IRS require a different basis adjustment to be made, and
should, in the Partnership's opinion, the expense of compliance exceed
the benefit of the election, the Partnership may seek permission from
the IRS to revoke the Section 754 election for the Partnership. If
such permission is granted, a subsequent purchaser of Units may be
allocated more income than he would have been allocated had the
election not been revoked.
ALTERNATIVE MINIMUM TAX
Each Unitholder will be required to take into account his
distributive share of any items of Partnership income, gain, deduction
or loss for purposes of the alternative minimum tax.
A Unitholder's alternative minimum taxable income derived from
the Partnership may be higher than his share of Partnership net income
because the Partnership may use accelerated methods of depreciation
for purposes of computing federal taxable income or loss. The minimum
tax rate for 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.
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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.
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.
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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 cacpital gain depending upon whether the
Unitholder held Common Units for more than 18 months. A portion of
this gain or loss (which could be substantial), however, will be
separately computed and taxed as ordinary income or loss under Section
751 of the Code to the extent attributable to assets giving rise to
depreciation recapture or other "unrealized receivables" or to
"substantially appreciated inventory" owned by the Partnership. The
term "unrealized receivables" includes potential recapture items,
including depreciation recapture. Inventory is considered to be
"substantially appreciated" if its value exceeds 120% of its adjusted
basis to the Partnership. Ordinary income attributable to unrealized
receivables, substantially appreciated inventory and depreciation
recapture may exceed net taxable gain realized upon the sale of the
Unit and may be recognized even if there is a net taxable loss
realized on the sale of the Unit. Thus, a Unitholder may recognize
both ordinary income and a capital loss upon a disposition of Units.
Net capital loss may offset no more than $3,000 of ordinary income in
the case of individuals and may only be used to offset capital gain in
the case of corporations.
The IRS has ruled that a partner who acquires interests in a
Partnership in separate transactions must combine those interests and
maintain a single adjusted tax basis. Upon a sale or other disposition
of less than all of such interests, a portion of that tax basis must
be allocated to the interests sold using an "equitable apportionment"
method. The ruling is unclear as to how the holding period of these
interests is determined once they are combined. If this ruling is
applicable to the holders of Common Units, a Common Unitholder will be
unable to select high or low basis Common Units to sell as would be
the case with corporate stock. It is not clear whether the ruling
applies to the Partnership, because, similar to corporate stock,
interests in the Partnership are evidenced by separate certificates.
Accordingly, Counsel is unable to opine as to the effect such ruling
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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
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
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for the taxable year in which the sale or exchange occurred, that set
forth the amount of the consideration received for the Unit that is
allocated to goodwill or going concern value of the Partnership.
Failure to satisfy these reporting obligations may lead to the
imposition of substantial penalties.
CONSTRUCTIVE TERMINATION
The Partnership and the Operating Partnership will be considered
to have been terminated if there is a sale or exchange of 50% or more
of the total interests in Partnership capital and profits within a
12-month period. A termination results in the closing of a
Partnership's taxable year for all partners and the Partnership's
assets are regarded as having been distributed to the partners and
reconveyed to the Partnership, which is then treated as a new
partnership. However, under new proposed regulations which are not yet
effective, the Partnership will be deemed to have conveyed all its
assets and liabilities to a newly formed partnership in exchange for
all the interests in such partnership and then the Partnership will be
deemed to have liquidated and to have distributed to its partners the
interests in this newly formed partnership. A termination of the
Partnership will cause a termination of the Operating Partnership and
any Subsidiary Partnership. Such a termination could also result in
penalties or loss of tax basis adjustments under Section 754 of the
Code if the Partnership were unable to determine that the termination
had occurred.
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
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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 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
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rate as if they had purchased a direct interest in the Partnership's
property. If such an aggregate approach is adopted, it may result in
lower annual depreciation and amortization deductions than would
otherwise be allowable to certain Unitholders and risk the loss of
depreciation and amortization deductions not taken in the year that
such deductions are otherwise allowable. This convention will not be
adopted if the Partnership determines that the loss of depreciation
and amortization deductions will have a material adverse effect on the
Unitholders. If the Partnership chooses not to utilize this aggregate
method, the Partnership may use any other reasonable depreciation and
amortization convention to preserve the uniformity of the intrinsic
tax characteristics of any Units that would not have a material
adverse effect on the Unitholders. The IRS may challenge any method of
depreciating the Section 743(b) adjustment described in this
paragraph. If such a challenge were sustained, the uniformity of Units
might be affected, and the gain from the sale of Units might be
increased without the benefit of additional deductions. See "--
Disposition of Common Units -- Recognition of Gain or Loss."
TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Ownership of Units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign
persons and regulated investment companies raises issues unique to
such persons and, as described below, may have substantially adverse
tax consequences. Employee benefit plans and most other organizations
exempt from federal income tax (including individual retirement
accounts ("IRAs") and other retirement plans) are subject to federal
income tax on unrelated business taxable income. Virtually all of the
taxable income derived by such an organization from the ownership of a
Unit will be unrelated business taxable income and thus will be
taxable to such a Unitholder.
A regulated investment company or "mutual fund" is required to
derive 90% or more of its gross income from interest, dividends, gains
from the sale of stocks or securities or foreign currency or certain
related sources. It is not anticipated that any significant amount of
the Partnership's gross income will include that type of income.
Non-resident aliens and foreign corporations, trusts or estates
which hold Units will be considered to be engaged in business in the
United States on account of ownership of Units. As a consequence they
will be required to file federal tax returns in respect of their share
of Partnership income, gain, loss or deduction and pay federal income
tax at regular rates on any net income or gain. Generally, a
Partnership is required to pay a withholding tax on the portion of the
Partnership's income which is effectively connected with the conduct
of a United States trade or business and which is allocable to the
foreign partners, regardless of whether any actual distributions have
been made to such partners. However, under rules applicable to
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publicly-traded partnerships, the Partnership will withhold (currently
at the rate of 39.6%) on actual cash distributions made quarterly to
foreign Unitholders. Each foreign Unitholder must obtain a taxpayer
identification number from the IRS and submit that number to the
Transfer Agent of the Partnership on a Form W-8 in order to obtain
credit for the taxes withheld. A change in applicable law may require
the Partnership to change these procedures.
Because a foreign corporation which owns Units will be treated as
engaged in a United States trade or business, such a corporation may
be subject to United States branch profits tax at a rate of 30%, in
addition to regular federal income tax, on its allocable share of the
Partnership's income and gain (as adjusted for changes in the foreign
corporation's "U.S. net equity") which are effectively connected with
the conduct of a United States trade or business. That tax may be
reduced or eliminated by an income tax treaty between the United
States and the country with respect to which the foreign corporate
Unitholder is a "qualified resident." In addition, such a Unitholder
is subject to special information reporting requirements under Section
6038C of the Code.
Under a ruling of the IRS a foreign Unitholder who sells or
otherwise disposes of a Unit will be subject to federal income tax on
gain realized on the disposition of such Unit to the extent that such
gain is effectively connected with a United States trade or business
of the foreign Unitholder. Apart from the ruling, a foreign Unitholder
will not be taxed upon the disposition of a Unit if that foreign
Unitholder has held less than 5% in value of the Units during the
five-year period ending on the date of the disposition and if the
Units are regularly traded on an established securities market at the
time of the disposition.
ADMINISTRATIVE MATTERS
PARTNERSHIP INFORMATION RETURNS AND AUDIT PROCEDURES
The Partnership intends to furnish to each Unitholder, within 90
days (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
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not successfully contend in court that such accounting and reporting
conventions are impermissible. Any such challenge by the IRS could
negatively affect the value of the Units.
The federal income tax information returns filed by the
Partnership may be audited by the IRS. Adjustments resulting from any
such audit may require each Unitholder to adjust a prior year's tax
liability, and possibly may result in an audit of the Unitholder's own
return. Any audit of a Unitholder's return could result in adjustments
of non-Partnership as well as Partnership items.
Partnerships generally are treated as separate entities for
purposes of federal tax audits, judicial review of administrative
adjustments by the IRS and tax settlement proceedings. The tax
treatment of partnership items of income, gain, loss and deduction are
determined in a partnership proceeding rather than in separate
proceedings with the partners. The Code provides for one partner to be
designated as the "Tax Matters Partner" for these purposes. The
Partnership Agreement appoints the Managing General Partner as the Tax
Matters Partner of the Partnership.
The Tax Matters Partner will make certain elections on behalf of
the Partnership and Unitholders and can extend the statute of
limitations for assessment of tax deficiencies against Unitholders
with respect to Partnership items. The Tax Matters Partner may bind a
Unitholder with less than a 1% profits interest in the Partnership to
a settlement with the IRS unless that Unitholder elects, by filing a
statement with the IRS, not to give such authority to the Tax Matters
Partner. The Tax Matters Partner may seek judicial review (by which
all the Unitholders are bound) of a final partnership administrative
adjustment and, if the Tax Matters Partner fails to seek judicial
review, such review may be sought by any Unitholder having at least a
1% interest in the profits of the Partnership and by the Unitholders
having in the aggregate at least a 5% profits interest. However, only
one action for judicial review will go forward, and each Unitholder
with an interest in the outcome may participate.
A Unitholder must file a statement with the IRS identifying the
treatment of any item on his federal income tax return that is not
consistent with the treatment of the item on the Partnership's return.
Intentional or negligent disregard of the consistency requirement may
subject a Unitholder to substantial penalties. 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;
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<PAGE>
(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.
NOMINEE REPORTING
Persons who hold an interest in the Partnership as a nominee for
another person are required to furnish to the Partnership (a) the
name, address and taxpayer identification number of the beneficial
owner and the nominee; (b) whether the beneficial owner is (i) a
person that is not a United States person, (ii) a foreign government,
an international organization or any wholly-owned agency or
instrumentality of either of the foregoing, or (iii) a tax-exempt
entity; (c) the amount and description of Units held, acquired or
transferred for the beneficial owner; and (d) certain information
including the dates of acquisitions and transfers, means of
acquisitions and transfers, and acquisition cost for purchases, as
well as the amount of net proceeds from sales. Brokers and financial
institutions are required to furnish additional information, including
whether they are United States persons and certain information on
Units they acquire, hold or transfer for their own account. A penalty
of $50 per failure (up to a maximum of $100,000 per calendar year) is
imposed by the Code for failure to report such information to the
Partnership. The nominee is required to supply the beneficial owner of
the Units with the information furnished to the Partnership.
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<PAGE>
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
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
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<PAGE>
"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 currently owns property
and conducts business in the following states which currently impose a
personal income tax: Alabama, Arizona, Arkansas, California, Georgia,
Illinois, Indiana, Kentucky, Maryland, Mississippi, Missouri, New Hampshire,
New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, South
Carolina, Tennessee, Utah, Vermont and Virginia. A Unitholder will be
required to file state income tax returns and to pay state income taxes in
some or all of these states and may be subject to penalties for failure to
comply with those requirements. In certain states, tax losses may not produce
a tax benefit in the year incurred (if, for example, the Partnership has no
income from sources within that state) and also may not be available to
offset income in subsequent taxable years. Some of the states may require the
Partnership, or the Partnership may elect, to withhold a percentage of income
from amounts to be distributed to a Unitholder who is not a resident of the
state. Withholding, the amount of which may be greater or less than a
particular Unitholder's income tax liability to the state, generally does not
relieve the non-resident Unitholder from the obligation to file an income tax
return. Amounts withheld may be treated as if distributed to Unitholders for
purposes of determining the amounts distributed by the Partnership. See "--
Disposition of Common Units -- Entity-Level Collections." Based on current
law and its estimate of future
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<PAGE>
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.
- 184 -
<PAGE>
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS
An investment in the Partnership by an employee benefit plan is
subject to certain additional considerations because the investments
of such plans are subject to the fiduciary responsibility and
prohibited transaction provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and restrictions imposed
by Section 4975 of the Code. As used herein, the term "employee
benefit plan" includes, but is not limited to, qualified pension,
profit-sharing and stock bonus plans, Keogh plans, simplified employee
pension plans and tax deferred annuities or IRAs established or
maintained by an employer or employee organization. Among other
things, consideration should be given to (a) whether such investment
is prudent under Section 404(a)(1)(B) of ERISA; (b) whether in making
such investment, such plan will satisfy the diversification
requirement of Section 404(a)(1)(C) of ERISA; and (c) whether such
investment will result in recognition of unrelated business taxable
income by such plan and, if so, the potential after-tax investment
return. See "Tax Considerations -- Uniformity of Units -- Tax-Exempt
Organizations and Certain Other Investors." The person with investment
discretion with respect to the assets of an employee benefit plan (a
"fiduciary") should determine whether an investment in the Partnership
is authorized by the appropriate governing instrument and is a proper
investment for such plan.
Section 406 of ERISA and Section 4975 of the Code (which also
applies to IRAs that are not considered part of an employee benefit
plan) prohibit an employee benefit plan from engaging in certain
transactions involving "plan assets" with parties that are "parties in
interest" under ERISA or "disqualified persons" under the Code with
respect to the plan.
In addition to considering whether the purchase of Common Units
is a prohibited transaction, a fiduciary of an employee benefit plan
should consider whether such plan will, by investing in the
Partnership, be deemed to own an undivided interest in the assets of
the Partnership, with the result that the Managing General Partner
also would be a fiduciary of such plan and the operations of the
Partnership would be subject to the regulatory restrictions of ERISA,
including its prohibited transaction rules, as well as the prohibited
transaction rules of the Code.
The Department of Labor regulations provide guidance with respect
to whether the assets of an entity in which employee benefit plans
acquire equity interests would be deemed "plan assets" under certain
circumstances. Pursuant to these regulations, an entity's assets would
not be considered to be "plan assets" if, among other things, (a) the
equity interest acquired by employee benefit plans are publicly
offered securities -- i.e., the equity interests are widely held by
100 or more investors independent of the issuer and each other, freely
- 185 -
<PAGE>
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.
- 186 -
<PAGE>
VALIDITY OF THE COMMON UNITS
The validity of the Common Units has been passed upon for the
Partnership by Schiff Hardin & Waite, Chicago, Illinois.
EXPERTS
The audited financial statements of Cornerstone Propane Partners,
L.P. included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, 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 of SYN Inc. included in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, 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 for each of the two years in the period ended July 31, 1996, and
for the four and one-half months ended December 16, 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.
- 187 -
<PAGE>
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
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.
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<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
INDEX TO FINANCIAL STATEMENTS
CORNERSTONE PROPANE PARTNERS, L.P. Page
----
Report of Independent Public Accountants . . . . . . . . . . . . F-3
Consolidated Balance Sheet as of June 30, 1997 and September 30,
1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statement of Income for the six and one-half
month period ended June 30, 1997 and the three months
ended September 30, 1997 (unaudited) . . . . . . . . . . . . . F-5
Consolidated Statement of Cash Flows for the six and
one-half month period ended June 30, 1997 and the
three months ended September 30, 1997 (unaudited). . . . . . . F-6
Consolidated Statement of Partners' Capital for the six
and one-half month period ended June 30, 1997 and the
three months ended September 30, 1997 (unaudited). . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . F-8
EMPIRE ENERGY CORPORATION
Independent Accountants' Report . . . . . . . . . . . . . . . . . F-18
Consolidated Balance Sheet as of June 30, 1996 . . . . . . . . . F-19
Consolidated Statements of Operations for the Two and
One-Half Months Ended December 16, 1996, the Two
Months Ended September 30, 1996, the Month Ended
July 31, 1996 and the Years Ended June 30, 1996 and
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-21
Consolidated Statements of Stockholders' Equity for the
Two and One-Half Months Ended December 16, 1996, the
Two Months Ended September 30, 1996, the Month Ended
July 31, 1996 and the Years Ended June 30, 1996 and
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-22
Consolidated Statements of Cash Flows for the Two and
One-Half Months Ended December 16, 1996, the Two
Months Ended September 30, 1996, the Month Ended
July 31, 1996 and the Years Ended June 30, 1996 and
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-23
Notes to Consolidated Financial Statements . . . . . . . . . . . F-25
CGI HOLDINGS, INC.
Report of Independent Accountants . . . . . . . . . . . . . . . . F-36
Consolidated Balance Sheet as of July 31, 1996 . . . . . . . . . F-37
Consolidated Statements of Operations for the Four and One-Half
Month Period Ended December 16, 1996, the Years Ended
July 31, 1996 and 1995 and the Three Months Ended
October 31, 1996 (unaudited) . . . . . . . . . . . . . . . . . F-39
Consolidated Statements of Stockholders' Equity for the Four
and One-Half Month Period Ended December 16, 1996 and the
Years Ended July 31, 1996 and 1995 . . . . . . . . . . . . . . F-40
Consolidated Statements of Cash Flows for the Four and One-Half
Month Period Ended December 16, 1996, the Years Ended
July 31, 1996 and 1995 and the Three Months Ended
October 31, 1996 (unaudited) . . . . . . . . . . . . . . . . . F-41
Notes to Consolidated Financial Statements . . . . . . . . . . . F-43
F-1
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
INDEX TO FINANCIAL STATEMENTS (continued)
SYN, INC.
Report of Independent Public Accountants . . . . . . . . . . . . F-57
Consolidated Balance Sheet as of June 30, 1996 . . . . . . . . . F-58
Consolidated Statements of Operations for the period ended
June 30, 1996, the period Ended December 16, 1996 and
the Three Months Ended September 30, 1996 (unaudited). . . . . F-60
Consolidated Statements of Stockholders' Equity for the
period ended June 30, 1996 and the period Ended
December 16, 1996. . . . . . . . . . . . . . . . . . . . . . . F-61
Consolidated Statements of Cash Flows for the period ended
June 30, 1996, the period Ended December 16, 1996 and the
Three Months ended September 30, 1996 (unaudited). . . . . . . F-62
Notes to Consolidated Financial Statements . . . . . . . . . . . F-64
SYNERGY GROUP INCORPORATED
Independent Accountants Report . . . . . . . . . . . . . . . . . F-72
Consolidated Statements of Operations for the period ended
August 14, 1995, and the Year Ended March 31, 1995 . . . . . . F-73
Consolidated Statements of Stockholders' Equity (Deficit) for
the period ended August 14, 1995, and the Year Ended
March 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . F-74
Consolidated Statements of Cash Flows for the period ended
August 14, 1995, and the Year Ended March 31, 1995 . . . . . . F-75
Notes to Consolidated Financial Statements . . . . . . . . . . . F-76
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cornerstone Propane Partners, L.P.
We have audited the accompanying consolidated balance sheet of CORNERSTONE
PROPANE PARTNERS, L.P., (A DELAWARE LIMITED PARTNERSHIP) AND SUBSIDIARY as
of June 30, 1997, and the related consolidated statements of income, cash
flows and partners' capital for the period from commencement of operations
(December 17, 1996) to June 30, 1997. These financial statements are the
responsibility of the partnership's management. Our responsibility is to
express an opinion on these financial statements based on our 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 Cornerstone Propane
Partners, L.P. and Subsidiary as of June 30, 1997, and the results of their
operations and their cash flows for the period from commencement of
operations (December 17, 1996) to June 30, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
August 4, 1997
F-3
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except unit data)
<TABLE>
<CAPTION>
June 30, September 30,
1997 1997
ASSETS ---------- -------------
<S> <C> <C> (unaudited)
Current Assets:
Cash and cash equivalents $ 8,406 $ 8,593
Trade receivables, net 41,924 46,391
Inventories 15,538 15,908
Prepaid expenses and other current assets 4,393 4,225
---------- ------------
Total current assets 70,261 75,117
Property, plant and equipment, net 247,943 250,300
Goodwill and other intangible assets, net 221,748 220,963
Other assets 1,041 2,404
---------- ------------
Total assets $540,993 548,784
========== ============
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Current Liabilities:
Current portion of long-term debt $ 5,736 $ 5,010
Trade accounts payable 42,334 42,351
Accrued expenses 12,672 16,827
---------- ------------
Total current liabilities 60,742 64,188
Long-term debt 231,532 251,155
Due to related party 740 740
Other noncurrent liabilities 4,050 5,895
---------- ------------
Total liabilities 297,064 321,978
---------- ------------
Commitments and contingencies
Partners' Capital:
Common unitholders, 10,512,805 units issued
and outstanding 146,851 136,542
Subordinated unitholders, 6,597,619 units issued
and outstanding 92,106 85,636
General partners 4,972 4,628
---------- ------------
Total partners' capital 243,929 226,806
---------- ------------
Total liabilities and partners' capital $ 540,993 $ 548,784
========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per unit data)
<TABLE>
<CAPTION>
From Commencement
of Operations Three Months
on December 17, 1996 Ended September
to June 30, 1997 30, 1997
-------------------- ---------------------
<S> <C> <C> (unaudited)
Revenues $389,630 $152,157
Cost of sales 315,324 127,855
-------- ---------
Gross profit 74,306 24,302
-------- ---------
Expenses
Operating, general and administrative 50,023 22,602
Depreciation and amortization 8,519 4,592
-------- ---------
58,542 27,194
-------- ---------
Operating income (loss) 15,764 (2,892)
Interest expense 9,944 4,782
-------- ---------
Net income (loss) before provision for
income taxes 5,820 (7,674)
Provision for income taxes 64 20
-------- ---------
Net income $ 5,756 (7,694)
======== =========
General partners' interest in net income (loss) $ 212 (155)
=========
Limited partners' interest in net income (loss) $ 5,544 (7,539)
======== =========
Net income (loss) per unit $ 0.34 (.46)
======== =========
Weighted average number of units outstanding 16,531 16,712
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
From Commencement
of Operations Three Months
on December 17, 1996 Ended
to June 30, 1997 September 30, 1997
--------------------- ----------------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,756 (7,694)
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 8,519 4,592
Changes in assets and liabilities, net of
effect of acquisitions and dispositions:
Trade receivables 37,100 (4,467)
Inventories 11,020 (370)
Prepaid expenses and other current assets (734) 268
Trade accounts payable (40,335) 17
Accrued expenses, other assets and other
noncurrent liabilities (10,175) 3,641
-------- ----------
Net cash provided by operating activities 11,151 (4,013)
-------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 473 --
Expenditures for property, plant and equipment (2,427) (4,522)
Acquisitions, net of cash received (1,800) (1,472)
-------- ----------
Net cash used in investing activities (3,754) (5,994)
-------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on Working Capital Facility 4,600 19,600
Payments on Working Capital Facility (12,800) --
Borrowings on purchase obligations 2,083 553
Payments on purchase obligations (1,284) (530)
Partnership distributions (10,614) (9,429)
-------- -----------
Net cash used in financing activities (18,015) 10,194
-------- -----------
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 (13,673) --
--------- -----------
Net cash provided by partnership
formation transactions 19,022 --
--------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 8,404 187
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2 8,406
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,406 8,593
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(Dollars in thousands, except unit data)
Number of Units
-------------------- Total
Subor Subor General Partners'
Common dinated Common dinated Partner Capital
------ ---------- ------ ------- -------- --------
Balance,
Commencement of
Operations on
December 17, 1996 - - $ - $ - $ - $ -
Contribution 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
Common units
in connection
with acquisitions 691,805 - 14,784 - - 14,784
Issuance of 2%
interest for
general partner
contribution - - - - 4,674 4,674
Additional general
partner contribution
in connection
with acquisitions - - - - 300 300
Quarterly distribution - - (6,244) (4,156) (214) (10,614)
Net income - - 1,314 4,230 212 5,756
--------- --------- -------- ------- ------ --------
Balance,
June 30, 1997 10,512,805 6,597,619 146,851 92,106 4,972 243,929
Quarterly
Distribution
(unaudited) - - (5,677) (3,563) (189) (9,429)
Net loss
(unaudited) - - (4,632) (2,907) (155) (7,694)
--------- --------- -------- ------- ------ --------
Balance,
September 30,
1997 10,512,805 6,597,619 $136,542 $85,636 $4,628 $226,806
(unaudited) ========== ========= ======== ======= ====== ========
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except unit data)
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") 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
(a) the retail marketing and distribution of propane for residential,
commercial, industrial, agricultural and other retail uses; (b) the
wholesale marketing and distribution of propane and natural gas liquids and
crude oil to the retail propane industry, the chemical and petrochemical
industries and other commercial and agricultural markets; (c) the repair
and maintenance of propane heating systems and appliances and; (d) the sale
of propane-related supplies, appliances and other equipment. The
Partnership entities commenced operations on December 17, 1996, pursuant to
a Contribution, Conveyance and Assumption Agreement dated as of the same
date, wherein 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 and the Operating Partnership (the "Managing General
Partner"), and SYN Inc., a Delaware corporation and the special general
partner of Cornerstone Partners and the Operating Partnership (the "Special
General Partner"), received all interests in the Operating Partnership, and
the Operating Partnership received substantially all assets and assumed
substantially all 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% 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 net 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
$337,631 in liabilities assumed by the Operating Partnership (including
$141,799 paid to affiliates of the Managing General Partner) that were in
large part incurred in connection with the transactions entered into prior
F-8
<PAGE>
to the IPO. A portion of the funds was distributed to the Special General
Partner to redeem its preferred stock ($61,196), to provide net worth to
the Special General Partner ($15,500) and to pay expenses of the
Partnership organization and formation ($13,673).
Partners' capital of limited partners immediately after the IPO
consisted 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.
During the Subordination Period (as described in Note 4), 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 (a) employee benefit plans and (b)
the conversion of Subordinated Units into Common Units, without the
approval of a majority of the Unitholders. 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 million 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 Managing General Partner at its sole discretion.
Effective April 16, 1997, the Partnership registered 750,000
additional Common Units to be used for future acquisitions. The
Partnership consummated several acquisitions during the quarter ended June
30, 1997. The total consideration for these acquisitions was approximately
$20.5 million of which approximately $14.8 million was in the form of
Common Units (approximately 692,000 Common Units) with the remainder paid
primarily with the issuance of debt. All acquisitions have been accounted
for using the purchase method of accounting and had no significant effect
on operating results for the period ended June 30, 1997.
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 incurred on their
behalf.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------
Nature of Operations. The Partnership believes 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
was formed to own and operate the propane business and assets of Synergy,
Empire and Coast. The Partnership's operations are concentrated in the
east coast, south-central and west coast regions of the United States.
F-9
<PAGE>
Basis of Presentation. The consolidated financial statements include the
accounts of the Partnership and its Subsidiary following the date of
acquisition. The acquisitions of the Predecessor Companies have been
accounted for as purchase business combinations based on the fair value of
the net assets acquired. 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
intercompany transactions and accounts have been eliminated.
Fiscal Year. The Partnership's fiscal year is July 1 to June 30. Because
the Partnership commenced operations upon completion of the IPO, the
accompanying consolidated statements of income, cash flows and partners'
capital are for the period from commencement of operations on December 17,
1996 to June 30, 1997.
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.
Financial Instruments. The carrying amounts reported in the consolidated
balance sheet for cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the immediate or short-
term maturity of these financial instruments. Based on the borrowing rates
currently available to the Partnership for bank loans with similar terms
and average maturities, the fair value of long-term debt was substantially
the same as its carrying value.
The Partnership routinely uses commodity futures contracts to reduce
the risk of future price fluctuations for natural gas and liquified
petroleum gas (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. Net realized gains and losses for the current fiscal year and
unrealized gains, losses on outstanding positions and open positions as of
June 30, 1997, were not material.
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.
Cash and Cash Equivalents. The Partnership considers all liquid investments
with original maturities of three months or less to be cash equivalents.
Cash equivalents consisted primarily of certificates of deposit.
Accounts Receivable. The outstanding balance is stated net of allowance of
doubtful accounts of $3,083 and $3,332 at June 30, 1997 and September 30,
1997.
F-10
<PAGE>
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 consisted of the following:
June 30, 1997 September 30, 1997
------------- -------------------
LPG and other $ 7,122 $ 6,841
Appliances 3,846 4,666
Parts and fittings 4,570 4,401
------------- --------------------
$ 15,538 $ 15,908
============= ====================
Property, Plant and Equipment. Property, plant and equipment are stated at
cost of acquisition, primarily based upon estimates of fair value at the date
of the IPO. 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. Property, plant and equipment consisted of the following:
June 30, 1997 September 30, 1997
------------- -------------------
Land $ 8,388 $ 10,940
Buildings and improvements 11,256 11,196
Storage and consumer tanks 206,014 208,032
Other equipment 27,843 28,381
------------- -------------------
253,501 258,549
Accumulated depreciation 5,558 8,249
------------- -------------------
$ 247,943 $ 250,300
============= ===================
Goodwill and Other Intangible Assets. The excess of acquisition cost over
the estimated fair market value of identifiable net assets of acquired
businesses (goodwill) is being amortized on a straight-line basis over 40
years. Noncompete agreements are amortized over the term of the agreement.
Financing costs are amortized over the term of the Senior Notes. Goodwill
and other intangible assets consisted of the following:
June 30, 1997 September 30, 1997
------------- -------------------
Goodwill $ 213,092 $ 215,728
Noncompete agreements 4,398 4,567
Financing costs 7,116 7,125
------------- -------------------
224,606 227,420
Accumulated amortization 2,858 6,457
------------- -------------------
$ 221,748 $ 220,963
============= ====================
F-11
<PAGE>
It is the Partnership's policy to review long-lived assets including
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
is directly subject to federal and state income taxes. Instead, taxable
income or loss is allocated to the individual partners. As a result, no
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 Operating 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
earnings for financial statement purposes may differ significantly from
taxable income reportable to Unitholders as a result of differences between
the tax basis and financial reporting basis of assets and liabilities and
the taxable income allocation requirements under the Partnership agreement.
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. In accordance
with the IPO Prospectus, 100% of the income for the 14-day period ended
December 31, 1996, was allocated to the Subordinated Unitholders and the
General Partners.
Unit-Based Compensation. The Partnership accounts for unit-based
compensation (see Note 6) 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. The Partnership has
adopted Financial Accounting Standards Board (FASB) Statement No. 123,
"Accounting for Stock-Based Compensation" for disclosure purposes only.
Pro forma disclosures of net income and net income per unit as if the fair
value based method of accounting for stock options under FASB Statement No.
123 had been applied would not have changed net income and net income per
unit.
Recently Issued Accounting Standards - FASB Statement No. 128, "Earnings
per Share" ("Statement No. 128), issued in February 1997 and effective for
fiscal years ending after December 15, 1997, establishes and simplifies
standards for computing and presenting earnings per share. Implementation
of Statement No. 128 will not have a material impact on the Partnership's
computation or presentation of earnings per unit, as the Partnership's
common unit equivalents have had no material effect on earnings per unit
amounts.
FASB Statement No. 130, "Reporting Comprehensive Income," issued in
June 1997 and effective for fiscal years beginning after December 15, 1997,
established standards for reporting and display of the total of net income
F-12
<PAGE>
and all other nonowner changes in partners' capital, or comprehensive
income, either below net income (loss) in the statement of operations, in a
separate statement of comprehensive income (loss) or within the statement
of partners' capital. The Partnership has had no significant items of
other comprehensive income.
3. LONG-TERM DEBT
---------------
Long-term debt consisted of the following:
June 30, 1997 September 30, 1997
------------- -------------------
Working Capital Facility $ 4,600 $ 24,200
Senior Notes 220,000 220,000
Purchase contract obligations 12,668 11,965
------------ -------------------
237,268 256,165
Less current maturities 5,736 5,010
------------ -------------------
$ 231,532 $ 251,155
============ ===================
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 revolving 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 less than $10,000
outstanding under the Working Capital Facility (excluding letters of
credit) for at least 30 consecutive days during each fiscal year.
Outstanding letters of credit totaled $7,600 at June 30, 1997 and $19,750
at September 30, 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 June 30, 1997 and September 30, 1997.
The Operating Partnership's obligations under the Bank Credit Agreement
are secured, on an equal and ratable basis, with its obligations under the
Senior Note Agreement, 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 variable base
or Eurodollar rates. At June 30, 1997, the applicable base and Eurodollar
rates were 8.625% and 5.938%, 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 various financial ratios.
The weighted-average interest rate for the period ended June 30, 1997, was
8.494% per annum and 7.7645% per annum for the three months ended September
30, 1997.
The Bank Credit Agreement contains various terms and covenants,
including financial ratio covenants with respect to debt and interest
coverage, and limitations, among others, on the ability of the Operating
Partnership to incur or maintain certain indebtedness or liens, make
investments and loans, enter into mergers, consolidations or sales of all
F-13
<PAGE>
or substantially all of its assets and make asset sales. The Operating
Partnership was in compliance with all terms and covenants at June 30,
1997 and September 30, 1997.
On the IPO date, the Operating Partnership issued $220,000 of Senior
Notes with a fixed 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 each December 30 and June 30. The Note Agreement
requires that the principal be paid in equal annual payments of $27,500
starting December 30, 2003.
Purchase contract obligations arise from the purchase of operating
businesses and are collateralized by the equipment and real estate acquired
in the respective acquisitions. At June 30, 1997 and September 30, 1997,
those obligations carried interest rates ranging from 5.0% to 10.0% per annum
and were due periodically through 2007.
Aggregate annual maturities of the long-term debt outstanding at June
30, 1997, are:
1998 $ 5,736
1999 1,557
2000 6,478
2001 1,092
2002 641
Thereafter 221,764
----------
$ 237,268
==========
4. DISTRIBUTIONS OF AVAILABLE CASH
-------------------------------
The Partnership will make distributions to its partners with respect
to each fiscal quarter of the Partnership within 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 will distribute 100% of its Available Cash (98% to all
Unitholders and 2% to the General Partners) until the Minimum Quarterly
Distribution ($.54 per unit) for such quarter has been met. 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, prior to the
distribution of Available Cash to holders of Subordinated Units. For the
period commencing December 17, 1996, and ending March 31, 1997, the
Partnership paid a Minimum Quarterly Distribution of $.63 per Common and
Subordinated Unit amounting to approximately $10,614. Subsequent to June
30, 1997, the Partnership declared a Minimum Quarterly Distribution, for
the period from April 1, 1997, to June 30, 1997, of $.54 per Common and
Subordinated Unit totaling approximately $9,429. Subsequent to September 30,
1997, the Partnership declared a Minimum Quarterly Distribution for the three
months ended September 30, 1997 of $.54 per Common and Subordinated Unit
totaling approximately $9,429.
F-14
<PAGE>
The Subordination Period will generally extend to the first day of any
quarter beginning after December 31, 2001, in which (a) distributions from
Operating Surplus (as defined in the Partnership Agreement) 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 Minimum Quarterly Distribution on all of the outstanding
Common and Subordinated Units during such periods, (b) the Adjusted
Operating Surplus (as defined in the Partnership Agreement) generated
during each of the three consecutive four-quarter periods immediately
preceding such date equaled or exceeded the Minimum Quarterly Distribution
on all of the outstanding Common and Subordinated Units plus the related
distribution on the General Partner interests in the Partnership during
such periods, and (c) there were no outstanding Common Unit Arrearages.
5. 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. These 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. These companies retained a significant portion of certain
expected losses related primarily to comprehensive general liability and
vehicle liability. Estimated liabilities for self-insured losses were
recorded based upon the predecessor companies' and the Partnerships'
estimates of the aggregate self-insured liability for claims incurred.
A number of personal injury, property damage and product liability
suits are pending or threatened against the Partnership. 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. In certain cases, 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 $30,702 and $14,471 for the period from December 17,
1996, to June 30, 1997 and the three months ended September 30, 1997, include
employee compensation and benefit expenses of employees of the Managing
General Partner and its affiliates.
6. 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
Partnerships IPO trading price as of December 12, 1996, of $21.00 per Unit)
F-15
<PAGE>
to executives, directors, managers and selected supervisors of the
Partnership. Awards under the Restricted Unit Plan are subject to a
bifurcated vesting procedure such that (a) 25% of the awarded 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 period
from December 17, 1996 to June 30, 1997, a value of $8,300 of restricted
Common Units were awarded.
7. 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.
8. EMPLOYEE BENEFIT PLAN
---------------------
The Partnership established a defined contribution 401(k) retirement
plan available to substantially all employees. Employees who elect to
participate may contribute a percentage of their salaries to the plan. The
Partnership may make contributions to the plan at the discretion of the
Board of Directors of the Managing General Partner. Contributions to the
plan were not material for the period ended June 30, 1997 and the three
months ended September 30, 1997.
F-16
<PAGE>
9. OPERATING LEASES
----------------
The Partnership leases retail sales offices and administrative office
space under noncancelable operating leases expiring at various times
through 2006. These leases generally contain renewal options and require
the Partnership to pay all executory costs (property taxes, maintenance and
insurance). Lease expense for the period ended June 30, 1997, was $2,490.
Future minimum lease payments at June 30, 1997, were:
1998 $ 4,062
1999 3,899
2000 3,851
2001 3,799
2002 3,771
Thereafter 3,284
10. ADDITIONAL CASH FLOW INFORMATION
--------------------------------
<TABLE>
<CAPTION>
Period from
December 17, 1996 Three Months Ended
to June 30, 1997 September 30, 1997
----------------- -------------------
<S> <C> <C>
Noncash Transactions
Assets acquired in exchange for Common Units $14,784 --
Assets acquired in exchange for current
liabilities assumed $ 2,283 --
Assets acquired in exchange for long-term
debt assumed or issued $ 1,244 --
Cash Payment Information
Cash paid for interest $ 9,942 $944
</TABLE>
11. QUARTERLY DATA (UNAUDITED)
--------------------------
<TABLE>
<CAPTION>
December 17, 1996 to Quarter Ended
December 31, 1996 March 31, 1997 June 30, 1997 September 30, 1997
-------------------- ------------- ------------ -------------------
<S> <C> <C> <C> <C>
Revenues $40,370 $220,566 $128,694 $152,157
Operating income
(loss) 4,076 15,107 (3,419) (2,892)
Net income (loss) 3,293 10,637 (8,174) (7,694)
Net income (loss)
per unit .20 .63 (.49) (.46)
</TABLE>
F-17
<PAGE>
Independent Accountants' Report
--------------------------------
Board of Directors and Stockholders
Empire Energy Corporation
Lebanon, Missouri
We have audited the accompanying consolidated balance sheet as of June
30, 1996, and the consolidated statements of operations, stockholders'
equity and cash flows of EMPIRE ENERGY CORPORATION for the years ended
June 30, 1995 and 1996, the one month ended July 31, 1996, the two months
ended September 30, 1996 and the two and one-half months ended December
16, 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, 1996, and the results of its
operations and its cash flows for each of the periods ended June 30, 1995
and 1996, July 31, 1996, September 30, 1996, and December 16, 1996, in
conformity with generally accepted accounting principles.
BAIRD KURTZ & DOBSON
Springfield, Missouri
August 4, 1997
F-18
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(Dollars In Thousands, Except Per Share Amounts)
ASSETS
--------
CURRENT ASSETS:
Cash $ 2,064
Trade receivables, less allowance for doubtful
accounts: 1996 - $1,262 5,724
Inventories 6,702
Prepaid expenses 103
Refundable income taxes 457
Deferred income taxes 996
-------------
Total Current Assets 16,046
-------------
DUE FROM SYN INC. 7,978
-------------
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 8,903
Storage and consumer service facilities 80,615
Transportation, office and other equipment 18,702
-------------
108,220
Less Accumulated depreciation (28,686)
-------------
79,534
-------------
OTHER ASSETS:
Excess of cost over fair value of net assets acquired,
at amortized cost 3,033
Other 511
-------------
3,544
-------------
$107,102
=============
See Notes to Consolidated Financial Statements
F-19
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(Dollars In Thousands, Except Per Share Amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 6,019
Accounts payable 3,368
Accrued salaries 1,063
Accrued expenses 1,676
-------------
Total Current Liabilities 12,126
-------------
LONG-TERM DEBT 25,442
-------------
DEFERRED INCOME TAXES 16,877
-------------
ACCRUED SELF-INSURANCE LIABILITY 2,424
-------------
STOCKHOLDERS' EQUITY:
Common stock; $0.001 par value; authorized
17,500,000 shares, issued at June 30, 1996 -
12,004,430 shares 12
Additional paid-in capital 46,099
Retained earnings 4,143
-------------
50,254
Treasury stock, at cost - 3,000 shares (21)
-------------
50,233
-------------
$ 107,102
=============
See Notes to Consolidated Financial Statements
F-20
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
THE TWO MONTHS ENDED SEPTEMBER 30, 1996,
THE MONTH ENDED JULY 31, 1996 AND
THE YEARS ENDED JUNE 30, 1996 AND 1995
(In Thousands)
For the Periods Ended
----------------------------------------------------
Oct 1, Aug 1, July 1, Fiscal
1996 to 1996 to 1996 to Year Ended
Dec 16, Sept 30, July 31, June 30,
1996 1996 1996 1996 1995
------- ------- ------- ------- -------
REVENUES $28,166 $12,439 $ 2,596 $98,821 $56,689
COST OF SALES 15,400 6,471 1,439 50,080 26,848
------- ------- ------- ------- -------
GROSS PROFIT 12,766 5,968 1,157 48,741 29,841
------- ------- ------- ------- -------
EXPENSES
Operating, general and
administrative 6,386 4,528 2,480 33,020 24,435
Depreciation and
amortization 1,344 1,087 499 5,875 4,322
------- ------- ------- ------- -------
7,730 5,615 2,979 38,895 28,757
------- ------- ------- ------- -------
OPERATING INCOME 5,036 353 (1,822) 9,846 1,084
INTEREST EXPENSE,
NET 1,917 1,487 217 2,598 39
------- ------- ------- ------- -------
INCOME (LOSS)
BEFORE INCOME
TAXES 3,119 (1,134) (2,039) 7,248 1,045
INCOME TAX
PROVISION
(BENEFIT) 1,197 (400) (765) 3,550 600
------- ------- ------- ------- -------
NET INCOME(LOSS) $ 1,922 $ (734) $(1,274) $3,698 $ 455
======= ======= ======= ======= =======
See Notes to Consolidated Financial Statements
F-21
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
THE TWO MONTHS ENDED SEPTEMBER 30, 1996,
THE MONTH ENDED JULY 31, 1996 AND
THE YEARS ENDED JUNE 30, 1996 AND 1995
(In Thousands)
Additional Total
Common Paid-in Retained Treasury Stockholders'
Stock Stock Earnings Stock Equity
------- -------- ------- ------- ----------
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 Loss - - (1,274) - (1,274)
------- -------- ------- ------- ----------
Balance, July 31,
1996 12 46,099 2,869 (21) 48,959
Purchase of Company
Stock (1) (70,744) - - (70,755)
Effect of Purchase
Accounting - 26,966 (2,869) 21 24,118
Net Loss - - (734) - (734)
------- -------- ------- ------- ----------
Balance, Sept. 30,
1996 1 2,321 (734) - 1,588
Purchase of Company
Stock (1) (13,999) - - (14,000)
Effect of Purchase
Accounting 1 25,677 734 - 26,412
Net Income - - 1,922 - 1,922
------- -------- ------- ------- ----------
Balance, Dec 16,
1996 $ 1 $ 13,999 $ 1,922 $ - $ 15,922
======= ======== ======= ======= ==========
See Notes to Consolidated Financial Statements
F-22
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
THE TWO MONTHS ENDED SEPTEMBER 30, 1996,
THE MONTH ENDED JULY 31, 1996 AND
THE YEARS ENDED JUNE 30, 1996 AND 1995
(In Thousands)
Oct 1, Aug 1, July 1, Fiscal
1996 to 1996 to 1996 to Year Ended
Dec 16, Sept 30, July 31, June 30,
1996 1996 1996 1996 1995
------- -------- -------- ------- -------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $ 1,922 $ (734) $(1,274) $ 3,698 $ 445
Items not requiring
(providing) cash:
Depreciation 1,195 1,002 474 5,593 4,084
(Gain)loss on
sale of assets - (4) 8 (67) (145)
Amortization 149 85 25 282 238
Deferred income
taxes (126) - - 1,075 194
Changes in:
Trade receivables (6,089) (2,485) 222 (1,799) 388
Inventories (147) (3,896) (340) (348) (985)
Accounts payable 998 283 335 1,301 1,444
Accrued expenses and
self insurance 2,114 1,164 (5) 2,124 325
Income taxes payable
(refundable) 1,016 209 (768) 270 (702)
Due from SYN Inc. (1,863) - - - -
Prepaid expenses
and other (1,678) (536) (100) (279) 72
------- -------- -------- ------- -------
Net cash provided
by (used in)
operating
activities (2,509) (4,912) (1,423) 11,850 5,358
------- -------- -------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from sale
of assets 25 18 14 162 295
Purchases of property
and equipment (1,475) (861) (487) (3,184) (8,365)
Capitalized costs (242) - - - -
Purchase of assets
from SYN Inc. - - - (35,980) -
------- -------- -------- ------- -------
Net cash used
in investing
activities (1,692) (843) (473) (39,002) (8,070)
------- -------- -------- ------- -------
See Notes to Consolidated Financial Statements
F-23
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
THE TWO MONTHS ENDED SEPTEMBER 30, 1996,
THE MONTH ENDED JULY 31, 1996 AND
THE YEARS ENDED JUNE 30, 1996 AND 1995
(In Thousands)
Oct 1, Aug 1, July 1, Fiscal
1996 to 1996 to 1996 to Year Ended
Dec 16, Sept 30, July 31, June 30,
1996 1996 1996 1996 1995
------- -------- -------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES
Increase (decrease) in
credit facilities $ 4,806 $ 4,800 $ - $(5,500) $ 1,600
Principal payments on
purchase obligations (64) (35) (15) (126) (132)
Checks in process
of collection (37) 37 - (158) 158
Purchase of treasury
stock - - - - (21)
Proceeds from (repayments
of) acquisition
credit facility - (31,100) - 35,000 -
Proceeds from
management buy
out loan - 94,000 - - -
Purchase of company
stock in management
buy out - (59,000) - - -
Payment of debt
acquisition costs - (3,100) - -
------- -------- -------- ------- -------
Net cash provided by
used in) financing
activities 4,705 5,602 (15) 29,216 1,605
------- -------- -------- ------- --------
INCREASE(DECREASE)
IN CASH 504 (153) (1,911) 2,064 (1,107)
CASH, BEGINNING
OF PERIOD - 153 2,064 0 1,107
------- -------- -------- ------- --------
CASH, END OF PERIOD $ 504 $ 0 $ 153 $ 2,064 $ 0
======= ======== ======== ======= ========
See Notes to Consolidated Financial Statements
F-24
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The consolidated financial statements for the periods ended July 31,
1996, September 30, 1996, and December 16, 1996, are presented because of
the changes in control described in Note 2. Due to the seasonal nature of
the propane business, the results of operations for these 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.
Estimates
- ---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Empire
Energy Corporation and its subsidiaries. All significant intercompany
balances have been eliminated in consolidation.
Revenue Recognition Policy
- --------------------------
Sales and related cost of product sold are recognized upon delivery of
the product or service.
Inventories
- -----------
Inventories are valued at the lower of cost or market. Cost is
determined by the first-in, first-out method for retail operations and
specific identification method for wholesale operations. The inventories
at June 30, 1996, consist of the following:
Gas and other petroleum products $ 2,727
Gas distribution parts, appliances and equipment 3,975
----------
$ 6,702
===========
F-25
<PAGE>
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 and unrealized gains and
losses on open positions are not material.
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: CHANGES OF CONTROL
On June 30, 1994, the Company was separated from Empire Gas
Corporation (subsequently All Star Gas referred to hereafter as 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 Company received
locations principally in the Southeast plus certain home office assets and
liabilities.
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.
On August 1, 1996, the principal shareholder of the Company since its
inception and certain other shareholders sold their interest in the Company
to a new entity formed by the remaining shareholders of the Company
(Management Buy Out).
F-26
<PAGE>
NOTE 2: CHANGES OF CONTROL (Continued)
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 was 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.
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.
On October 7, 1996, the new ownership of the Company pursuant to the
Management Buy Out sold 100% of Company common stock for approximately
$14,000,000 cash to Northwestern Growth Corporation (NGC).
Because of the changes in control of the Company, the balance sheet
accounts were adjusted at August 1, 1996 and October 7, 1996, to reflect
new bases determined using the principles of purchase accounting.
NOTE 3: 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 5) 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 accompanying
financial statements. The purchase price of the Synergy assets has been
allocated as follows (In Thousands):
Current assets $ 2,499
Property and equipment 27,435
Due from SYN Inc. 7,978
-----------
$ 37,912
===========
F-27
<PAGE>
NOTE 3: SYNERGY ACQUISITION (Continued)
Unaudited pro forma operations assuming the acquisition was made at
the beginning of the year ended June 30, 1995, is presented below. Pro
forma results for the year ended June 30, 1996, are not presented since
they would not differ materially from the audited results of operations
presented in the statement of income.
1995
(In Thousands)
Operating revenue $ 82,222
Cost of product sold 40,724
-------------
Gross profit $ 41,498
=============
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.
In connection with the October 7, 1996, acquisition of the Company's
stock by NGC, the SYN Inc. receivable was paid in full and assumed by NGC.
NOTE 4: 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. 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. In addition to direct payments, the Company is also responsible
for providing vehicles and personnel to serve as security for the
F-28
<PAGE>
NOTE 4: RELATED-PARTY TRANSACTIONS (Continued)
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. The lease
was terminated August 1, 1996, in connection with the management buy out.
The Company leases a lodge from a corporation owned by the principal
shareholder of the Company. The lease requires annual rent payments of
$120,000. 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. This lease was assumed by Cornerstone on December 17, 1996.
A subsidiary of the Company 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. For the month ended July 31, 1996, the two months
ended September 30, 1996, and the two and one-half months ended December
16, 1996, amounts were $88,000, $195,000 and $173,000, respectively. Such
amounts have been netted against related general and administrative
expenses in the accompanying statements of operations. This services
agreement was assumed by Cornerstone on December 17, 1996.
NOTE 5: LONG-TERM DEBT
Long-term debt at June 30, 1996, consists of the following:
(In Thousands)
Revolving credit facility (A) $ -
Acquisition credit facility (B) 31,100
Purchase contract obligations (C) 361
-------------
31,461
Less current maturities 6,019
-------------
$ 25,442
=============
(A) The Company has 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
F-29
<PAGE>
NOTE 5: LONG-TERM DEBT (Continued)
11/8% 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 11/8% over
the Eurodollar rate. The acquisition credit facility requires
quarterly principal payments of $1,944,000. This credit facility was
terminated August 1, 1996, in connection with the management buy out.
(C) Purchase contract obligations arise from the purchase of operating
businesses and are collateralized by the equipment and real estate
acquired in the respective acquisitions. The Company has also entered
into purchase contract obligations for equipment used in
administrative activities. At June 30, 1996, these obligations
carried interest rates ranging from 7% to 10% and are due periodically
through 2001.
(D) On August 1, 1996, in conjunction with the management buyout, 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 expenditures,
cash flow and net worth requirements as well as dividend restrictions.
This credit facility was terminated December 16, 1996, in connection
with the public offering.
(E) On August 1, 1996, in conjunction with the management buyout, the
Company entered into a $5 million subordinated promissory note bearing
interest at 8% with the former principal shareholder of the Company.
On October 7, 1996, this note was paid by NGC.
F-30
<PAGE>
NOTE 6: INCOME TAXES
The provision (credit) for income taxes includes these components (in
thousands):
Two and Two One
One-Half Months Month
Months Ended Ended Ended Year Ended
December 16, Sept 30 July 31 June 30, June 30,
1996 1996 1996 1996 1995
--------- -------- ------- ------- ----------
Taxes currently
payable
(refundable) $1,323 $ (400) $ (765) $ 2,475 $ 406
Deferred income
taxes (126) - - 1,075 194
--------- -------- ------- ------- ----------
$1,197 $ (400) $ (765) $ 3,550 $ 600
========= ======== ======= ======= ==========
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below (in thousands):
Two and Two One
One-Half Months Month
Months Ended Ended Ended Year Ended
December 16, Sept 30 July 31 June 30, June 30,
1996 1996 1996 1996 1995
--------- -------- ------- ------- ----------
Computed at the
statutory rate
(34%) $1,060 $ (386) $ (693) $ 2,464 $ 355
Increase resulting from:
Amortization of
excess of cost
over fair value
of net assets
acquired 196 33 17 79 77
State income taxes
net of federal
tax benefit 102 (54) (100) 248 116
Change in estimated
taxes 700 -
Other (161) 7 11 59 52
--------- -------- ------- ------- ----------
Actual tax
provision $ 1,197 $ (400) $ (765) $ 3,550 $ 600
--------- -------- ------- ------- ----------
F-31
<PAGE>
NOTE 7: SELF-INSURANCE AND RELATED CONTINGENCIES
Under the Company's 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 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 were 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.
The Company self-insures health benefits provided to the employees of
the Company and its subsidiaries. Provisions for losses expected under
this program are recorded based upon the Company's estimate of the
aggregate liability for claims incurred.
In conjunction with the restructuring that occurred in June 1994, 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
includes in its self-insurance liability its best estimate of the amount it
will owe Empire Gas under the 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. All liabilities
related to the insurance program and other business-related lawsuits were
assumed by Cornerstone on December 17, 1996.
NOTE 8: 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
F-32
<PAGE>
NOTE 8: INCOME TAX AUDITS (Continued)
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 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.
The Company's Federal Income Tax Returns have been audited through the
year ended June 30, 1994, and all income taxes due have either been accrued
or paid.
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.
NOTE 9: STOCK OPTIONS
The Company's 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:
Stock options outstanding July 1, 1994 0
Options granted 1,170,000
Options canceled (25,000)
---------
Stock options outstanding June 30, 1995 1,145,000
Options granted 25,000
Options cancelled (50,000)
---------
Stock options outstanding June 30, 1996 1,120,000
Options cancelled (150,000)
Options exercised (970,000)
---------
Stock options outstanding December 16, 1996 0
=========
F-33
<PAGE>
NOTE 10: ADDITIONAL CASH FLOW INFORMATION (In Thousands)
Two and Two One
One-Half Months Month
Months Ended Ended Ended Year Ended
December 16, Sept 30 July 31 June 30, June 30,
1996 1996 1996 1996 1995
--------- -------- ------- ------- ----------
Noncash Investing
and Financing
Activities
- -----------------
Purchase contract
obligations
incurred $ - $ - $ - $ 222 $ 172
Nonmonetary assets
distributed to
former principal
shareholder - 6,755 - - -
Note payable issued
to former principal
shareholder - 5,000 - - -
Additional Cash
Payment Information
- --------------------
Interest paid - 804 106 2,432 64
Income taxes paid
(refunded) - (609) - 2,995 1,108
NOTE 11: 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 3, 7 and 8. Actual losses related to these items could vary
materially from amounts reflected in the financial statements.
F-34
<PAGE>
NOTE 12: SUBSEQUENT EVENT
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 June 30, 1997, included in this form 10-K.)
F-35
<PAGE>
Report of Independent Accountants
----------------------------------
To the Board of Directors and Stockholders of
CGI Holdings, Inc.
In our opinion, the accompanying consolidated balance sheet 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 the
results of their operations and their cash flows for the four and one-half
month period ended December 16, 1996 and for each of the two 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
August 8, 1997
F-36
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
JULY 31, 1996
(Dollars in Thousands)
ASSETS
-------
CURRENT ASSETS:
Cash and cash equivalents $ 1,519
Accounts and notes receivable 23,664
Inventories 7,316
Prepaid expenses and deposits 1,996
Deferred income tax benefit 802
------------
Total current assets 35,297
------------
Property and equipment, at cost less accumulated
depreciation 51,495
Cost in excess of net assets acquired, net of
amortization 11,844
Notes receivable 1,357
Deferred charges and other assets 6,186
------------
$ 106,179
============
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
JULY 31, 1996
(Dollars in Thousands)
LIABILITIES, MANDATORILY REDEEMABLE
SECURITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 30,824
Accrued liabilities 3,101
Current maturities of long-term debt and capital lease
obligations 3,924
------------
Total current liabilities 37,849
------------
Long-term debt and capital lease obligations 41,801
Deferred income taxes 10,777
Other liabilities 1,095
Commitments and contingencies (Note 9)
MANDATORILY REDEEMABLE SECURITIES:
Redeemable exchangeable preferred stock:
10% cumulative, $0.01 par value, 62,500 shares authorized,
issued and outstanding; at redemption value 8,559
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value, 6,515,000 shares authorized;
4,312,247 issued and outstanding:
Class A voting common stock, $0.01 par value, 3,000,000
shares authorized; 2,789,784 issued and outstanding 28
Class B voting common stock, $0.01 par value, 200,000
shares authorized; 149,485 issued and outstanding 1
Class C voting common stock, $0.01 par value, 3,000,000
shares authorized; 1,343,831 issued and outstanding 13
Class D non-voting common stock, $0.01 par value, 250,000
shares authorized; 29,147 issued and outstanding --
Warrants outstanding 2,134
Additional paid-in capital 8,945
Accumulated deficit (5,023)
------------
Total stockholders' equity 6,098
------------
$ 106,179
============
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
CGI HOLDINGS, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three
August 1, Months
1996 to Fiscal Year Ended July 31, Ended
December 16, ------------------------- October 31,
1996 1996 1995 1996
-------- -------- -------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Sales and other revenue $185,460 $384,354 $266,842 $108,175
Costs and expenses:
Cost of sales, except for
depreciation and amortization 173,155 351,213 234,538 100,266
Operating expenses 8,181 21,046 20,239 5,201
Sale of partnership interest 660 - - 660
General and administrative
expenses 1,738 3,835 3,745 1,091
Depreciation and amortization 1,604 4,216 3,785 1,067
Interest expense 2,238 5,470 5,120 1,294
-------- -------- -------- -----------
Loss before income taxes and
extraordinary charge (2,116) (1,426) (585) (1,404)
Income tax benefit (748) (473) (202) (491)
--------- -------- --------- -----------
Loss before extraordinary charge (1,368) (953) (383) (913)
Extraordinary charge for early
retirement of debt, net of
income tax benefit - - (506) -
--------- -------- --------- -----------
Net loss $ (1,368) $ (953) $ (889) $ (913)
========= ======== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
Additional
Common Paid-In Accumulated
Stock Warrants Capital Deficit
-------- ------- --------- ----------
Balance at August 1, 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 - - - (1,368)
Accrued dividends on redeemable
and exchangeable preferred
stock - - - (116)
-------- ------- --------- ----------
Balance at December
16, 1996 $ 42 $2,134 $ 8,945 $ (6,507)
======== ======= ========= ==========
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
<TABLE>
<CAPTION>
August 1, Three Months
1996 to Fiscal Year Ended July 31, Ended
December 16, ------------------------- October 31,
1996 1996 1995 1996
---------- --------- --------- ------------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM (USED FOR)
OPERATING ACTIVITIES:
Net loss $ (1,368) $ (953) $ (889) $ (913)
Adjustments to reconcile net
loss to net cash from (used
for) operating activities:
Depreciation and amortization 1,604 4,216 3,785 1,067
Deferred income taxes (732) (516) (488) (472)
Extraordinary charge to
earnings - - 506
Sale of partnership interest 202 - - 202
Changes in assets and liabilities
net of acquisitions:
Accounts and notes
receivable (11,532) (2,950) (2,700) 2,198
Inventories 4,257 (1,511) (617) 565
Prepaid expenses and
deposits (729) (410) 1,451 472
Other assets (154) (193) (495) (91)
Accounts payable 11,082 9,327 (3,897) (3,460)
Accrued liabilities (1,007) 172 (1,630) 676
---------- --------- --------- ------------
1,623 7,182 (4,974) 244
---------- --------- --------- ------------
CASH FLOWS FROM (USED FOR)
INVESTING ACTIVITIES:
Payments for acquisitions of
retail outlets - (3,000) (1,091)
Proceeds from sale of property
and equipment 57 415 878 20
Purchases of and investments
in property and equipment (1,503) (3,060) (4,490) (594)
---------- --------- --------- ------------
(1,446) (5,645) (4,703) (574)
---------- --------- --------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-41
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
<TABLE>
<CAPTION>
August 1, Three Months
1996 to Fiscal Year Ended July 31, Ended
December 16, ------------------------- October 31,
1996 1996 1995 1996
---------- --------- --------- ------------
(unaudited)
<S> <C> <C> <C> <C>
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) (1,250) (1,000) (562)
Borrowings on capital leases
and other term loans - 1,248 2,263
Repayment of other notes payable (252) (561) (739) (104)
Principal payments under capital
lease obligations (506) (1,579) (2,929) (345)
Borrowings (repayments) under
acquisition line 5,999 (2,275) 1,054 4,575
---------- --------- --------- ------------
4,679 (4,441) 11,893 3,564
---------- --------- --------- ------------
Net (decrease)increase in cash 4,856 (2,904) 2,216 3,234
Cash balance, beginning of period 1,519 4,423 2,207 1,519
---------- --------- --------- ------------
Cash balance, end of period $ 6,375 $ 1,519 $ 4,423 $ 4,753
========== ========= ========= ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-42
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 accompanying financial statements 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 77,000
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 the four and one-
half month period ended December 16, 1996 were $101,625. Payments for each
of the years ended July 31, 1996 and 1995 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.
Interim Financial Statements
- ----------------------------
The consolidated financial statements of operations and cash flows of
the Company for the three month period ended October 31, 1996 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
period. These adjustments were of a normal recurring nature, except as
discussed in Note 2.
The results of operations for the interim period 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 reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-43
<PAGE>
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. At July 31, 1996
the excess of LIFO cost over replacement cost was $.9 million. The cost of
parts and fittings is determined using the first-in, first-out (FIFO)
method.
During the four and one-half months ended December 16, 1996, inventory
quantities were reduced. This reduction resulted in a liquidation of LIFO
inventory quantities carried at lower costs prevailing in prior years as
compared with the cost of purchases for the four and one-half month period
ended December 16, 1996, the effect of which decreased cost of goods sold
by approximately $.2 million and increased net income by approximately $.1
million.
The major components of inventory as of July 31, 1996, consist of the
following (in thousands of dollars):
LPG $ 6,474
Parts and fittings 842
--------
$ 7,316
========
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 $54,500,
$132,000 and $160,000 for the four and one-half month period ended December
16, 1996 and for the years ended July 31, 1996 and 1995, respectively, is
included in depreciation and amortization expense.
F-44
<PAGE>
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 $.9 million, $2.3 million and $2.2 million for the
four and one-half month period ended December 16, 1996 and for the years
ended July 31, 1996 and 1995, respectively, is included in sales and other
revenue. Direct costs associated with the installation of LPG storage tanks
leased to customers are capitalized and amortized over the estimated
average customer retention term.
Cost in Excess of Net Assets Acquired
- -------------------------------------
The excess of acquisition cost over the estimated fair market value of
identifiable net assets of acquired businesses is amortized on a straight-
line basis over forty years. The related costs and accumulated amortization
were $12.8 million and $0.9 million at July 31, 1996.
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. Included in these amounts are unamortized
debt issuance costs associated with the bank borrowings of $1.6 million at
July 31, 1996.
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.
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
F-45
<PAGE>
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 four and one-
half month period ended December 16, 1996 and for each of the two years
ended July 31, 1996 and 1995 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
- -------------------------------
On August 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS No.
121"). This statement requires impairment losses to be recorded on long-
lived assets used in operations and certain identifiable intangible assets
when indications of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amount. Adoption of SFAS No. 121 did not have a material impact
on the financial statements.
Accounting for Stock Based Compensation
- ---------------------------------------
The Company applies APB Opinion 25 and related interpretations in
accounting for the stock options and stock appreciation rights. Had
compensation cost for the Company's options and stock appreciation rights
been determined based on the fair market value at the grant date of these
awards consistent with the methodology described by SFAS 123 "Accounting
for Stock-Based Compensation" the effect on the Company's net income would
not have been material. SFAS No. 123 does not apply to awards granted
prior to July 31, 1995.
NOTE 2: ACCOUNTS AND NOTES RECEIVABLE AND OTHER ASSETS
Accounts and notes receivable as of July 31, 1996 consist of the following
(in thousands of dollars):
Accounts receivable from customers $ 23,814
Allowance for doubtful accounts (367)
Notes receivable from customers 753
Notes and accounts receivable from employees 821
----------
Total accounts and notes receivable 25,021
Less: non-current portion 1,357
----------
Current notes and accounts receivable $ 23,664
==========
F-46
<PAGE>
NOTE 2: ACCOUNTS AND NOTES RECEIVABLE AND OTHER ASSETS (Continued)
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 at July 31, 1996. 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. In
conjunction with the purchase of the Company (see Note 12), the balance of
accounts and notes receivable due from employees was either repaid or
forgiven.
The Company, through its wholly-owned subsidiary Coast Gas, Inc.,
holds a 50% limited interest in Coast Energy Investments, Inc., a limited
partnership. The partnership was established to facilitate the formation
of a trading fund and is accounted for under the equity method. Coast Gas,
Inc. receives a management fee. For the year ended July 31, 1996, the
investment in the partnership amounted to $122,000. In addition, at July
31, 1996, Coast Gas, Inc. recorded a management fee receivable of $93,000.
Effective October 1, 1996, the Company terminated its participation
and interest in Coast Energy Investments, Inc. 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 pretax 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, noncompete agreements and other related expenes.
Beginning on December 12, 1996, insurance coverage for CGI Holdings,
Inc. was provided by Cornerstone Propane Partners, L.P. (see Note 12). The
coverage maintained was consistent with the coverage previously held by the
Company.
NOTE 3: PROPERTY AND EQUIPMENT
Property and equipment as of July 31, 1996, consists of the following
(in thousands of dollars):
Land $ 2,312
Buildings and improvements 4,600
LPG rental and storage tanks 44,690
Equipment and office furnishings 6,447
---------
58,049
Less accumulated depreciation and
amortization 6,554
---------
$ 51,495
=========
F-47
<PAGE>
NOTE 3: PROPERTY AND EQUIPMENT (Continued)
At July 31, 1996, LPG rental and storage tanks include $7.3 million
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 four and one-half month period ended
December 16, 1996 and for the years ended July 31, 1996 and 1995, totaled
$1.0 million, $2.4 million and $2.2 million, respectively.
NOTE 4: LONG-TERM DEBT
Long-term debt as of July 31, 1996, consists of the following (in
thousands of dollars):
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
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
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
Other notes payable with periodic payments
through 2002, interest rates ranging
from 8.0% to 12.0% 2,232
--------
41,372
Less current maturities 2,562
--------
$38,810
========
During the year ended July 31, 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.
F-48
<PAGE>
NOTE 4: LONG-TERM DEBT (Continued)
The terms of the Credit Agreement were amended during the year ended
July 31, 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 $0, $3.0 million and $1.1 million for the four
and one-half month period ended December 16, 1996 and 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 four and one-half month period ended
December 16, 1996 was $1.6 million of which interest paid on bank long-term
and subordinated debt totaled $1.4 million. Total interest paid during the
three month period ended October 31, 1996 was $1.3 million. Total interest
paid during the years ended July 31, 1996 and 1995 was $5.4 million and $4.9
million, respectively, of which interest paid on bank long-term and
subordinated debt totaled $4.4 million and $4.0 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 $25.0 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-49
<PAGE>
NOTE 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
amount per share at July 31, 1996 was $136.94. 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 were accrued
after September 9, 1996. Accrued dividends were $2.4 million and $2.3 million
at October 31, 1996 and July 31, 1996, respectively, and have been recorded
as a charge to accumulated deficit.
NOTE 6: INCOME TAXES
The income tax provision for the four and one-half month period ended
December 16, 1996 and for the years ended July 31, 1996 and 1995 are
summarized as follows (in thousands of dollars):
July 31,
December 16, ------------------
1996 1996 1995
-------------- -------- --------
Current provision:
Federal $ - $ - $ -
State - 25 7
-------------- -------- --------
- 25 7
-------------- -------- --------
Deferred provision (benefit):
Federal (632) (428) (176)
State (116) (70) (33)
-------------- -------- --------
(748) (498) (209)
-------------- -------- --------
$ (748) $ (473) $ (202)
============== ======== ========
F-50
<PAGE>
NOTE 6: INCOME TAXES (Continued)
The significant components of temporary differences which give rise to
deferred tax assets (liabilities) as of July 31, 1996 are as follows (in
thousands of dollars):
Accruals, reserves and other $ 1,178
Federal NOLs 6,833
State NOLs 220
---------
Deferred tax assets 8,231
---------
Accumulated depreciation (13,385)
PP&E book/tax basis difference (1,793)
Capitalized tank installation costs (1,607)
LIFO inventory basis (245)
Other (1,176)
---------
Deferred tax liabilities (18,206)
---------
Net deferred tax liabilities $ (9,975)
=========
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 four and one-half month period ended
December 16, 1996 and for the years ended July 31, 1996 and 1995 is as
follows:
July 31,
December 16, ----------------
1996 1996 1995
----------- ------ ------
Federal statutory rate (34)% (34)% (34)%
Amortization of cost in
excess of assets acquired 2 7 6
State franchise taxes, net
of federal income tax benefit (5) 2 2
Prior year tax adjustments - (5) -
Extraordinary loss - - (9)
Other, net 2 (3) -
----------- ------- ------
(35)% (33)% (35)%
=========== ======= =======
Tax payments during the four and one-half month period ended December
16, 1996 and for the years ended July 31, 1996 and 1995 were minimal due to
the Company's tax loss position. Payments were solely for state income
taxes in various states.
F-51
<PAGE>
NOTE 6: INCOME TAXES (Continued)
As of July 31, 1996, 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.
On December 17, 1996, a more than 50% ownership change occurred (see
Note 12). As a result, utilization of net operating losses incurred before
that date will be subject to an annual limitation. Management believes the
net operating losses will be fully utilizable.
NOTE 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 $403,000, $204,000 and
$135,000 for the four and one-half month period ended December 16, 1996 and
for the years ended July 31, 1996 and 1995, 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 four and one-half month period ended
December 16, 1996 and for the years ended July 31, 1996 and 1995, totaled
$.9 million, $2.5 million and $2.4 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
noncancelable lease term.
F-52
<PAGE>
NOTE 7: LEASES (Continued)
As of July 31, 1996, future minimum lease commitments under
noncancelable leases, with terms in excess of one year were as follows:
Operating Capital
--------- -------
(In Thousands)
Years Ended July 31,
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
========
Total assets acquired under capital leases totaled $0, $1.2 million
and $2.2 million for the four and one-half months ended December 16, 1996
and for the years ended July 31, 1996 and 1995, 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 four and one-half month
period ended December 16, 1996 and for the years ended July 31, 1996 and
1995, totaled $119,000, $344,000 and $406,000, respectively. The original
lease term of five years, which expired in 1995, was extended for five
years and has various renewal and purchase options available to Coast Gas,
Inc. through January 31, 2014.
Coast Gas, Inc. subleases some of its LPG storage tanks and vehicles
to other propane distributors under non-cancelable operating lease
agreements. The lease terms are generally for one year with automatic
renewal provisions. Additionally, these distributors may purchase the LPG
storage tanks under lease, at the greater of original cost or current list
price. Sublease income totaled $96,000, $270,000 and $390,000 for the four
and one-half month period ended December 16, 1996 and for the years ended
July 31, 1996 and 1995, respectively.
NOTE 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,
F-53
<PAGE>
NOTE 8: STOCKHOLDERS' EQUITY (Continued)
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
the year ended July 31, 1996, or for the four and one-half month period
ended December 16, 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 exercisable 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 exercisable 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 as follows:
F-54
<PAGE>
NOTE 8: STOCKHOLDERS' EQUITY (Continued)
Options Per Share Range
----------- -------------------------
Outstanding at August 1, 1994 132,031 $ 0.01 $ 9.11
Granted 42,942 .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
Granted -
Exercised -
Canceled -
-----------
Outstanding at December 16, 1996 174,973 $ 0.01 $ 9.13
Available for grant at
December 16, 1996 27
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 $45,000 and $120,000 was recorded for the four and one-
half month period ended December 16, 1996 and for the year ended July 31,
1996, respectively.
NOTE 9: COMMITMENTS AND CONTINGENCIES
The Company has contracts with various suppliers to purchase a portion
of its supply needs of LPG for future deliveries with terms ranging from
one to twelve months. The contracted quantities are not significant with
respect to the Company's anticipated total sales requirements and will
generally be acquired at prevailing market prices at the time of shipment.
Outstanding letters of credit issued in conjunction with product supply
contracts are a normal business requirement. There were no outstanding
letters of credit issued on behalf of the Company as of July 31, 1996,
other than the $11.3 million drawn against the credit guidance line (see
Note 4).
The Company is engaged in certain legal actions related to the normal
conduct of business. In the opinion of management, any possible liability
arising from such actions will be adequately covered by insurance or will
not have a material adverse effect on the Company's financial position or
results of operations.
F-55
<PAGE>
NOTE 10: BUSINESS ACQUISITIONS
During the year ended July 31, 1996, Coast Gas, Inc. acquired one
retail outlet in a transaction accounted for using the purchase method of
accounting. The cost of the acquired company totaled $4.0 million,
including $1.0 million of seller notes and other liabilities and $3.0 from
the increase in the Company's Working Capital/Acquisition bank line.
Goodwill resulting from the acquisition totaled $2.8 million. Revenues of
the acquired company for the year ended July 31, 1996, subsequent to the
dates of acquisition and included in the Company's consolidated sales
totaled $1.9 million.
During the year ended July 31, 1995, Coast Gas, Inc. acquired three
retail outlets in transactions accounted for using the purchase method of
accounting. The cost of the acquired companies totaled $1.8 million
(including $0.7 million of seller notes). Goodwill resulting from these
acquisitions totaled $0.3 million. Revenues of the acquired companies for
the year ended July 31, 1995, subsequent to the dates of acquisition and
included in the Company's consolidated sales totaled $0.7 million.
NOTE 11: STOCK PURCHASE AND MERGER AGREEMENT
Effective September 9, 1996, 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. Subsequent to
December 16, 1996, the common stock of the company was purchased as
described in Note 12.
NOTE 12: SUBSEQUENT EVENT
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 June 30, 1997, included in this registration statement.)
F-56
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SYN Inc.:
We have audited the accompanying consolidated balance sheet of SYN Inc. (a
Delaware corporation and 52.5% owned subsidiary of Northwestern Public
Service Company) and Subsidiaries as of June 30, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows
for the period from inception (August 15, 1995) to June 30, 1996, and for
the period from July 1, 1996 to December 16, 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 audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 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) to June
30, 1996 and for the period from July 1, 1996 to December 16, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
August 4, 1997
F-57
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(Dollars in Thousands, Except Per Share Amounts)
ASSETS
-------
CURRENT ASSETS
Cash $ 14
Trade receivables, less allowance for doubtful
accounts of $1,505 9,195
Inventories 7,447
Prepaid expenses 678
Deferred income tax benefit 3,727
Due from former stockholders 37,966
-------------
Total current assets 59,027
-------------
PROPERTY AND EQUIPMENT
Land and buildings 6,420
Storage and consumer service facilities 52,953
Transportation, office and other equipment 11,910
Less accumulated depreciation (2,592)
-------------
Total property and equipment 68,691
-------------
OTHER ASSETS
Investments and restricted cash deposits 3,025
Deferred income tax benefit 4,849
Intangible assets, primarily the excess of cost
over fair value of net assets acquired, net of
accumulated amortization 30,943
Other 227
-------------
Total other assets 39,044
-------------
$ 166,762
=============
The accompanying notes are an integral part of this balance sheet.
F-58
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(Dollars In Thousands, Except Per Share Amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,025
Accounts payable 1,604
Accrued expenses 2,915
Acquisition related liabilities 29,306
-------------
Total current liabilities 34,850
LONG-TERM DEBT 25,687
NOTE PAYABLE - RELATED PARTY 52,812
-------------
Total liabilities 113,349
-------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Cumulative preferred stock, $.01 par value;
70,500 shares authorized; 55,312 shares, issued
and outstanding, at stated value of $1,00 per share $ 55,312
Common stock; $0.01 par value; authorized 100,000
shares, issued and outstanding 1
Additional paid-in capital 99
Accumulated deficit (1,999)
-------------
Total stockholders' equity 53,413
-------------
$ 166,762
=============
The accompanying notes are an integral part of this balance sheet.
F-59
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
For the Period
from Inception For the Period For the
August 15, 1995 July 1, 1996 Three
to to Months
June 30, December 16, Ended
1996 1996 September 30, 1996
-------------- -------------- ------------------
(unaudited)
<S> <C> <C> <C>
REVENUES $ 96,092 $ 44,066 $ 17,883
COST OF PRODUCT SOLD 46,187 23,322 8,940
-------------- -------------- ------------------
GROSS PROFIT 49,875 20,744 8,943
-------------- -------------- ------------------
OPERATING EXPENSES
Salaries and commissions 14,520 7,252 3,865
General and administrative 14,225 6,151 3,083
Depreciation and amortization 3,329 1,904 1,000
Related-party corporate administration
and management fees 3,281 1,668 965
-------------- -------------- ------------------
Total operating expenses 35,355 16,975 8,913
-------------- -------------- ------------------
OPERATING INCOME 14,520 3,769 30
INTEREST EXPENSE, including $4,388, $2,214 and
$1,204, respectively to related party 5,584 3,311 1,665
-------------- -------------- ------------------
INCOME (LOSS) BEFORE INCOME TAXES 8,936 458 (1,635)
PROVISION (BENEFIT) FOR INCOME TAXES 3,675 298 (550)
-------------- -------------- ------------------
NET INCOME (LOSS) 5,261 160 (1,085)
DIVIDENDS ON CUMULATIVE PREFERRED STOCK (7,260) (3,878) (2,073)
-------------- -------------- ------------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (1,999) $ (3,718) $ (3,158)
============== ============== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands, Except Share Amounts)
Common Stock
---------------------- Total
Preferred Stock Addtl. Accum- Stock-
-------------- Paid-In ulated holder's
Shares Amount Shares Amount Capital Deficit Equity
------ ------ ------ ------ ------- ------- -------
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 per share - - - - - (7,260) (7,260)
Net income - - - - - 5,261 5,261
------ ------ ------ ------ ------- ------- -------
BALANCE, 55,312 55,312 100,000 1 99 (1,999) 53,413
JUNE 30, 1996
Dividends on
preferred stock,
$70.11 per share - - - - - (3,878) (3,878)
Net income - - - - - 160 160
------ ------ ------ ------ ------- ------- -------
BALANCE,
DECEMBER 16,
1996 55,312 $55,312 100,000 $ 1 $ 99 $(5,717) $49,695
====== ====== ======= ====== ======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the period
For the period from Inception
July 1, 1996 August 15, 1995
to to Three Months
December 16, June 30, Ended
1996 1996 September 30, 1996
-------------- ------------- ------------------
(unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 160 $ 5,261 $(1,085)
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation and amortization 1,904 3,329 1,000
Gain on sale of assets 233 - -
Deferred income tax benefit 298 3,624 (550)
Changes in assets and liabilities,
net of effect of acquisitions
Trade receivables (1,991) (1,247) 1,270
Inventories (1,873) 704 (1,253)
Prepaid expenses (569) 189 (311)
Accounts payable 2,549 (5,571) 4,665
Accrued expenses 3,602 (3,423) 206
-------------- ------------- ------------------
Net cash provided by
operating activities 4,313 2,866 3,942
-------------- ------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of assets of Synergy
Group Incorporated - (150,922) -
Proceeds from the sale of certain
Synergy Group Inc assets to Empire
Energy Corporation - 35,980 -
Expenditures for property and equipment (4,240) (9,182) (1,571)
Proceeds from sale of assets 129 474 973
Proceeds from disposal of companies 829 - -
Acquisitions, net of cash received (469) - -
Decrease in investments and restricted
cash deposits - 70 -
-------------- ------------- ------------------
Net cash used in investing activities (3,751) (123,580) (598)
-------------- ------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on credit facility 20,367 - 90
Payments on credit facility (16,532) - -
Borrowing under long-term debt
agreements - 23,910 -
Proceeds from issuance of common stock - 100 -
F-62
<PAGE>
Proceeds from issuance of preferred
stock - 52,812 -
Proceeds from issuance of note payable-
related party - 52,812 -
Borrowings from related party - 36,458 90
Repayments to related party - (36,458) -
Payment on long-term debt agreements (242) (1,834) (21)
Preferred stock dividends paid (3,878) (7,072) (2,073)
-------------- ------------- ------------------
Net cash provided by (used in)
financing activities (285) 120,728 (1,914)
-------------- ------------- ------------------
INCREASE IN CASH 277 14 1,430
CASH, BEGINNING OF PERIOD 14 - 14
-------------- ------------- ------------------
CASH, END OF PERIOD $ 291 $ 14 $ 1,444
============== ============= ==================
</TABLE>
The accompanying notes are an integral part of these financial statements
F-63
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 acquired the common stock of SGI, a retail
distributor of propane with 152 locations, for approximately $151 million.
In conjunction with the acquisition, Synergy sold 38 of the retail
locations to Empire Energy Corporation (Empire Energy) for approximately
$36 million 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. Subsequent to June 30, 1996 a
settlement has been reached with the former owners of SGI (the Former
Stockholders) for a reduction in the purchase price of $5 million as an
adjustment of working capital.
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.
F-64
<PAGE>
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 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.
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 at June 30, 1996, were as follows (in
thousands):
Gas and other petroleum products $ 4,058
Gas distribution parts, appliances and equipment 4,034
Obsolescence reserve (645)
---------
$ 7,447
=========
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:
Buildings 40 years
Storage and consumer service facilities 35-40 years
Transportation, office and other equipment 5-10 years
F-65
<PAGE>
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
It is Synergy's policy to review long-lived assets including
intangible assets 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 Synergy's policy to reduce the carrying amount of such
assets to 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 asset will not be
realized.
NOTE 2: RELATED-PARTY TRANSACTIONS
Synergy entered into a Management Service Agreement with Empire Gas
Corporation (subsequently All Star Gas referred to hereafter as 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. Amounts paid at
June 30, 1996, and December 16, 1996, were $3.28 million and $1.73 million,
respectively.
During the period ended December 16, 1996, and the period ended June
30, 1996, Synergy purchased $20.5 and $42 million, respectively, 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 NPS). 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. On December 1, 1996, NPS purchased Empire Gas common
stock of Synergy and Synergy terminated the Management Service Agreement
with Empire Gas.
F-66
<PAGE>
NOTE 2: RELATED-PARTY TRANSACTIONS (Continued)
During the period ended June 30, 1996, 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, the value difference of $98,000 paid to Empire
Gas in cash.
Synergy paid $6,343,000 during the period ended June 30, 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 the period ended June 30, 1996, Synergy leased, under operating
leases, transportation equipment to Propane Resources Transportation, Inc.
in which Synergy owns a 15% common stock interest. Synergy received
$274,000 in lease income during the period ended June 30, 1996, from these
leases.
NOTE 3: LONG-TERM DEBT
Long-term debt at June 30, 1996, consists of the following (in
thousands):
Working capital facility $ 23,910
Note payable to Former Stockholders, 9 1/2% payable
in three equal annual installments through
August 15, 1998 1,250
Other, interest at 7.5% to 11.6%, due through 2001,
collateralized by certain equipment and materials 1,552
----------
26,712
Less - current maturities 1,025
----------
$ 25,687
==========
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 8.6% at
December 16, 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.
Aggregate annual maturities of the long-term debt outstanding at June
30, 1996, are as follows (in thousands):
1997 $ 1,025
1998 24,603
1999 680
2000 204
2001 200
-----------
$ 26,712
===========
F-67
<PAGE>
NOTE 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).
Future minimum lease payments (in thousands) at June 30, 1996, were:
1997 $ 598
1998 310
1999 206
2000 41
2001 19
Thereafter 53
----------
$ 1,227
==========
Lease expense during the five and one-half months ended December 16,
1996, and the period ended June 30, 1996, was approximately $320,000 and
$600,000, respectively.
NOTE 5: INCOME TAXES
The provision for income taxes includes the following components (in
thousands):
For the
Period
For the from
Period Inception
July 1, (August 15,
1996 1995)
to to
December 16, June 30,
1996 1996
----------- ------------
Taxes currently payable $ - $ 51
Deferred income taxes 298 3,624
----------- ------------
$ 298 $ 3,675
=========== ============
F-68
<PAGE>
NOTE 5: INCOME TAXES (Continued)
A reconciliation of income tax expense at the statutory rate to the
actual income tax expense is as follows (in thousands):
For the
Period
For the from
Period Inception
July 1, (August 15,
1996 1995)
to to
December 16, June 30,
1996 1996
----------- ------------
Taxes computed at staturory rate(34%) $ 156 $ 3,038
Amortization of excess of cost over fair
value of net assets acquired 126 157
State income taxes, net of federal
tax benefit 18 378
Other (2) 102
----------- ------------
Actual tax provision $ 298 $ 3,675
=========== ============
The tax effects of temporary differences which relate to deferred
taxes reflected on the balance sheet at June 30, 1996, were as follows (in
thousands):
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
=========
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 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.
F-69
<PAGE>
NOTE 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).
NOTE 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 during the period July 1, 1996 to December 16,
1996, and the period from inception (August 15, 1995) to June 30, 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
F-70
<PAGE>
NOTE 7: EMPLOYEE BENEFIT PLAN (Continued)
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).
NOTE 8: ADDITIONAL CASH FLOW INFORMATION (In Thousands)
For the
Period
from For the
Inception Period
(August 15, July 1,
1995) 1996
to to
June 30, December 16,
1996 1996
------------ -----------
Assets acquired through issuance of:
Long-term debt $ 2,250 $ 1,468
Preferred stock 2,500 -
Additional cash payment information:
Interest paid 5,535 3,339
Income taxes paid 2,284 190
NOTE 9: SUBSEQUENT EVENT
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. for
the period ended June 30, 1997, included in this form 10-K.)
F-71
<PAGE>
Independent Accountants' Report
Board of Directors and Stockholders
Northwestern Growth Corporation
Huron, South Dakota
We have audited the accompanying consolidated statements of
operations, changes in stockholders' equity (deficit) and cash flows of
SYNERGY GROUP INCORPORATED for the year ended March 31, 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 results of operations
and cash flows of SYNERGY GROUP INCORPORATED for the year ended March 31,
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-72
<PAGE>
SYNERGY GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995 AND
THE YEAR ENDED MARCH 31, 1995
(In Thousands)
For the
Four and
One-Half For the
Months Year
Ended Ended
August 14 March 31
1995 1995
--------- ---------
OPERATING REVENUE $ 32,179 $ 123,562
COST OF PRODUCT SOLD 15,387 59,909
--------- ---------
GROSS PROFIT 16,792 63,653
--------- ---------
OPERATING COSTS AND EXPENSES
Provisions for doubtful accounts 926 3,786
General and administrative 20,681 57,058
Depreciation and amortization 1,845 5,100
--------- ---------
Total Operating Expenses 23,452 65,944
--------- ---------
Operating loss (6,600) (2,291)
--------- ---------
OTHER INCOME (EXPENSE)
Interest expense (2,436) (8,385)
Related-party interest expense (787) (2,701)
Debt restructuring costs - (350)
Other income 101 226
--------- ---------
(3,122) (11,210)
--------- ---------
LOSS BEFORE INCOME TAXES (9,782) (13,501)
PROVISION(CREDIT) FOR INCOME TAXES 31 (84)
---------- ----------
NET LOSS $ (9,813) $ (13,417)
========== ==========
See Notes to Consolidated Financial Statements
F-73
<PAGE>
SYNERGY GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995 AND
THE YEAR ENDED MARCH 31, 1995
(Dollars in Thousands)
Stock
SeriesA SeriesB ClassA ClassB Addtl Retained holder'
Prfrd Prfrd Common Common Paid-in Earnings Equity
Stock Stock Stock Stock Capital(Deficit)(Deficit)
------ ------ ------ ------ ------- -------- -------
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)
====== ======= ====== ====== ======= ======== =======
See Notes to Consolidated Financial Statements
F-74
<PAGE>
SYNERGY GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995 AND
THE YEAR ENDED MARCH 31, 1995
(In Thousands)
For the
Four and
One-Half For the
Months Year
Ended Ended
August 14, March 31,
1995 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (9,813) $ (13,417)
Items not requiring (providing) cash:
Depreciation 1,770 5,014
Amortization 75 86
Gain on sale of assets (61) (237)
Deferred income taxes - (125)
Changes in:
Trade receivables 5,139 2,486
Inventories 1,251 (814)
Accounts payable and accured expenses 3,591 2,481
Prepaid expenses and other 764 (902)
--------- ----------
Net cash provided by (used in)
operating activities 2,716 (5,068)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets 104 404
Purchase of property and equipment (596) (3,737)
Change in restricted cash deposits (615) 3,181
--------- ----------
Net cash used in investing activities (1,107) (152)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (108) (260)
Increase(decrease) in credit facilities (1,000) 3,100
--------- ----------
Net cash provided by (used in)
financing activities (1,108) 2,840
--------- ----------
INCREASE(DECREASE) IN CASH 501 (2,380)
CASH, BEGINNING OF PERIOD 1,246 3,626
--------- ----------
CASH, END OF PERIOD $ 1,747 $ 1,246
========= ==========
See Notes to Consolidated Financial Statements
F-75
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995 AND
THE YEAR ENDED MARCH 31, 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 South-central 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.
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
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.
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.
F-76
<PAGE>
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
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.
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).
Debt restructuring costs, principally legal fees and banking fees,
incurred in connection with the restructuring, amounting to $350,000 for
the year ended March 31, 1995, have been expensed.
F-77
<PAGE>
NOTE 4: NOTES PAYABLE
Long-term debt consists of the following:
August 14, March 31,
1995 1995
--------- ---------
(In Thousands)
11 5/8% Senior subordinated
notes due 1997 (A) $ 1,700 $ 1,700
Increasing rate senior secured
notes due 2000 (A) 65,054 65,054
Revolving credit facility (B) 22,100 23,100
Purchase contract obligations (C) 687 795
--------- ---------
89,541 90,649
Less current maturities 89,104 90,087
--------- ---------
$ 437 $ 562
========= =========
(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.
(C) 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.
F-78
<PAGE>
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:
1996 $ 907
1997 971
1998 402
1999 238
2000 191
---------
$ 2,709
=========
Rent charged to operations including rental expense to related parties
(see Note 6) for the year ended March 31, 1995, and the period ended August
14, 1995, aggregated $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.
The Company leases certain property and equipment from related parties
under operating lease agreements. Rental expense for the year ended March
31, 1995, and the period ended August 14, 1995, was $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 year ended March 31, 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 $2,701,000 and $787,000,
respectively.
NOTE 7: INCOME TAXES
The provision for income taxes includes these components (in
thousands):
August 14, March 31,
1995 1995
--------- ---------
(In Thousands)
Taxes currently payable $ 31 $ 41
Deferred income taxes - (125)
--------- ---------
$ 31 $ (84)
========= ==========
F-79
<PAGE>
NOTE 7: INCOME TAXES (Continued)
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
August 14, March 31,
1995 1995
--------- ---------
(In Thousands)
Computed at the statutory rate (34%) $ (3,326) $ (2,518)
Increase (decrease) resulting from:
Amortization of excess cost over fair
value of net assets acquired 9 27
Interest expense transferred to
paid-in capital - 1,916
State income taxes-net of federal
tax benefit 31 -
Change in deferred tax asset
valuation allowance 3,310 576
Other 7 (85)
--------- ---------
Actual tax provision $ 31 $ (84)
========= =========
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 year ended March 31, 1995, and $37,000 for the period ended
August 14, 1995.
The plan is currently under audit by the U.S. Department of Labor
(DOL), which has notified the Company that the prior Plan Trustees engaged
in prohibited transactions. The DOL audit is continuing and the outcome
cannot be determined at this time. In addition, the Internal Revenue
Service has been notified of prohibited transactions. The Company believes
that it may be subject to excise taxes, penalties and interest in
connection with these prohibited transactions and has recorded its best
estimates of the potential liabilities expected to arise from these matters
(see Note 13).
NOTE 9: SELF-INSURANCE AND LITIGATION CONTINGENCIES
Under the Company's insurance program, coverage for comprehensive
general liability, workers' compensation and vehicle liability was obtained
for catastrophic exposures as well as those risks required to be insured by
law or contract. The Company retains a significant portion of certain
expected losses 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 self-insures health benefits
provided to employees of the Company and its subsidiaries.
F-80
<PAGE>
NOTE 9: SELF-INSURANCE AND LITIGATION CONTINGENCIES (Continued)
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
August 14, March 31,
1995 1995
--------- ---------
(In Thousands)
Additional Cash Payment Information
- -----------------------------------
Interest paid $ 1,146 $ 11,877
Income taxes paid 15 41
Noncash Investing and Financing Activities
- ------------------------------------------
Purchase contract obligation incurred - 129
Long-term debt converted to
preferred stock - 41,700
Accrued interest coverted 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
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.
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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 year 1995 has 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, 1995,
net income by $794,000.
Fiscal year 1995 has also 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.
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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 of
commissions, if any Assignee
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Type of Entity (check one):
/_/ Individual /_/ Partnership /_/ Corporation
/_/ Trust /_/ Other (specify)
Nationality (check
one):
/_/ U.S. Citizen, Resident or Domestic
Entity
/_/ Foreign /_/ Non-resident
Corporation Alien
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
__________________________________________________________.
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3. The interestholder's office address and place of
incorporation (if applicable) is
_______________________________________.
The interestholder agrees to notify the Partnership within sixty
(60) days of the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be
disclosed to the Internal Revenue Service by the Partnership and that
any false statement contained herein could be punishable by fine,
imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true,
correct and complete and, if applicable, I further declare that I have
authority to sign this document on behalf of
______________________
Name of Interestholder
______________________
Signature and Date
______________________
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company,
clearing corporation, other nominee holder or an agent of any of the
foregoing, and is holding for the account of any other person, this
application should be completed by an officer thereof or, in the case
of a broker or dealer, by a registered representative who is a member
of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc., or, in the case of
any other nominee holder, a person performing a similar function. If
the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing,
the above certification as to any person for whom the Assignee will
hold the Common Units shall be made to the best of the Assignee's
knowledge.
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APPENDIX B
GLOSSARY OF CERTAIN TERMS
ACQUISITION: Any transaction in which any member of the Partnership
Group acquires (through an asset acquisition, merger, stock
acquisition or other form of investment) control over all or a portion
of the assets, properties or business of another person for the
purpose of increasing the operating capacity or revenues of the
Partnership Group from the operating capacity or revenues of the
Partnership Group existing immediately prior to such transaction.
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
additional cash and cash equivalents of the Partnership Group on
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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
facilities, appliance showrooms, training facilities and related
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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 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
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operations of Synergy, Empire Energy 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
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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.
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INITIAL UNITS: The Common Units with an aggregate value of $7.0
million which were allocated to selected executives upon the
consummation of the Transactions, subject to certain vesting
conditions, under the Restricted Unit Plan.
INTERIM CAPITAL TRANSACTIONS: (a) Borrowings, refinancings and
refundings of indebtedness and sales of debt securities (other than
for working capital purposes and other than for items purchased on
open account in the ordinary course of business) by any member of the
Partnership Group, (b) sales of equity interests (including the Common
Units sold to the Underwriters pursuant to the exercise of their
over-allotment option) by any member of the Partnership Group and
(c) sales or other voluntary or involuntary dispositions of any assets
of any member of the Partnership Group (other than (i) sales or other
dispositions of inventory in the ordinary course of business,
(ii) sales or other dispositions of other current assets, including,
without limitation, receivables and accounts, in the ordinary course
of business and (iii) sales or other dispositions of assets as a part
of normal retirements or replacements), in each case prior to the
commencement of the dissolution and liquidation of the Partnership.
IRA: Individual retirement account.
IRS: Internal Revenue Service.
MANAGEMENT BUY-OUT: The August 1, 1996 sale by the principal founding
shareholder of Empire Energy and certain other shareholders of their
interests in Empire Energy to certain members of management of Empire
Energy.
MANAGEMENT FEE: A fee for each of the Executives relating to the
acquisition of Empire Energy and Coast by Northwestern Growth.
MANAGING GENERAL PARTNER: Cornerstone Propane GP, Inc., a 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."
NEW ACQUISITION INCENTIVE PLAN: The plan providing bonuses to
participants in the plan (who will be determined by the Board of
Directors of the Managing General Partner and will include the
Executives) for adding new businesses to the Partnership's propane
operations, based upon 4% of the gross acquisition price, spread among
the participants in the plan based on their relative salaries.
NON-CITIZEN ASSIGNEE: A Limited Partner or assignee who (i) fails to
furnish information about nationality, citizenship, residency or other
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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
December 17, 1996 (which has been filed as an exhibit to the
registration statement of which this Prospectus is a part).
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OPERATING SURPLUS: As to any period prior to liquidation, on a
cumulative basis and without duplication:
(a) the sum of (i) $25 million plus all cash and cash
equivalents of the Partnership Group on hand as of the close of
business on the Closing Date, (ii) all cash receipts of the
Partnership Group for the period beginning on the Closing Date
and ending with the last day of such period, other than cash
receipts from Interim Capital Transactions and (iii) all cash
receipts of the Partnership Group after the end of such period
but on or before the date of determination of Operating Surplus
with respect to such period resulting from borrowings for working
capital purposes, less
(b) the sum of (i) Operating Expenditures for the period
beginning on the Closing Date and ending with the last day of
such period and (ii) the amount of cash reserves that is
necessary or advisable in the reasonable discretion of the
Managing General Partner to provide funds for future Operating
Expenditures, provided however, that disbursements made
(including contributions to a member of the Partnership Group or
disbursements on behalf of a member of the Partnership Group) or
cash reserves established, increased or reduced after the end of
such period but on or before the date of determination of
Available Cash with respect to such period shall be deemed to
have been made, established, increased or reduced for purposes of
determining Operating Surplus, within such period if the Managing
General Partner so determines. Notwithstanding the foregoing,
"Operating Surplus" with respect to the quarter in which the
liquidation occurs and any subsequent quarter shall equal zero.
OPINION OF COUNSEL: A written opinion of counsel, acceptable to the
Managing General Partner in its reasonable discretion, to the effect
that the taking of a particular action will not result in the loss of
the limited liability of the limited partners of the Partnership or
cause the Partnership to be treated as an association taxable as a
corporation or otherwise taxed as an entity for federal income tax
purposes.
PARTNERSHIP: Cornerstone Propane Partners, L.P., a Delaware limited
partnership, and any successors thereto.
PARTNERSHIP AGREEMENT: The Amended and Restated Agreement of Limited
Partnership of the Partnership 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 references to the
Partnership Agreement of the Partnership and to the Operating
Partnership Agreement, collectively.
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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. 333-34581), 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
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
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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.
SYNERGY: SYN Inc., a Delaware corporation and majority-owned
subsidiary of Northwestern Growth.
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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.
B-11
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
[ALTERNATE PAGE FOR SELLING UNITHOLDERS PROSPECTUS]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED DECEMBER 22, 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 3,000,000 Common Units in connection with its
acquisition of the securities and assets of other businesses.
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
<PAGE>
the Unitholders' tax returns and adjustments of items unrelated to the
Partnership.
____________________
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 40 IN EVALUATING AN INVESTMENT IN THE PARTNERSHIP, INCLUDING, BUT
NOT LIMITED TO, THE FOLLOWING:
* FUTURE PARTNERSHIP PERFORMANCE WILL DEPEND UPON THE SUCCESS OF
THE PARTNERSHIP IN MAXIMIZING PROFITS FROM PROPANE SALES. PROPANE
SALES ARE AFFECTED BY, AMONG OTHER THINGS, WEATHER PATTERNS,
PRODUCT PRICES AND COMPETITION, INCLUDING COMPETITION FROM OTHER
ENERGY SOURCES.
(continued on page ii)
____________________
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 December __, 1997 was _____ per Common
Unit.
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
<PAGE>
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")) 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 , 199_
<PAGE>
[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
<PAGE>
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
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>
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 $ 21,250
Legal fees and expenses . . . . . . . . . . . . . . 25,000
Accounting fees and expenses . . . . . . . . . . . 20,000
Miscellaneous expenses . . . . . . . . . . . . . . 3,750
--------
Total . . . . . . . . . . . . . . . . . . . . . $ 70,000
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 general partner interests and 6,597,619 Subordinated Units to
the General Partners in exchange for property contributed to the
Partnership. The general partner interests and Subordinated Units
were valued at the net book value of the property contributed, which
did not exceed the fair market value of such property, net of related
liabilities assumed. The section of the Prospectus entitled "The IPO
and Related Transactions" is incorporated herein by reference.
The sale of the general partner interests and Subordinated Units
was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof. Such securities, which are of different classes
than the Common Units sold to the public, were offered only to the
General Partners (both of which are subsidiaries of Northwestern
Public Service Company), and the General Partners acquired such
securities without a view to their further distribution.
II-1
<PAGE>
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
(incorporated by reference to Exhibit 3.1 to
the Partnership's Current Report on Form 8-K
dated April 14, 1997 (the "Form 8-K").
3.2 -- Amended and Restated Agreement of Limited
Partnership of Cornerstone Propane, L.P. dated
as of December 17, 1996 (incorporated by
reference to Exhibit 3.2 to the Form 8-K).
*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 dated December 17, 1996, among
Cornerstone Propane, L.P., various financial
institutions and Bank of America National Trust
and Savings Association, as agent
(incorporated by reference to Exhibit 10.1 to
the Form 8-K).
10.2 -- Note Purchase Agreement dated December 17,
1996, among Cornerstone Propane, L.P. and
certain investors (incorporated by reference to
Exhibit 10.2 to the Form 8-K).
10.3 -- Contribution, Conveyance and Assumption
Agreement dated as of December 17, 1996, among
Cornerstone Propane Partners, L.P., Cornerstone
Propane, L.P., Cornerstone Propane GP, Inc.,
Empire Energy SC Corporation and SYN Inc.
(incorporated by reference to Exhibit 10.3 to
the Form 8-K).
10.4 -- 1996 Cornerstone Propane Partners, L.P.
Restricted Unit Plan (incorporated by reference
to Exhibit 10.4 to the Form 8-K).
10.5 -- Form of Amended and Restated Employment
Agreements for Messrs. Baxter, Kittrell, Goedde
and DiCosimo (incorporated by reference to
Exhibit 10.5 to the Form 8-K).
II-2
<PAGE>
10.6 - Amendment to No. 1 to Credit Agreement
(incorporated by reference to Exhibit 10.6 to
the Partnership's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997 (the
"Form 10-K")).
10.7 - Amendment to No. 2 to Credit Agreement
(incorporated by reference to Exhibit 10.7 to
the Form 10-K).
*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 Schiff Hardin & Waite (included in
Exhibit 5.1 and 8.1)
24.1 -- Powers of Attorney (included on signature page)
________________
* Previously filed.
** Filed herewith.
b. Financial Statement Schedules.
All Financial statement schedules are omitted because the
information is not required, is not material or is otherwise included
in the financial statements or related notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(a) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(b) to reflect in the prospectus any facts or events
arising after the effective date of the Registration
Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low or
II-3
<PAGE>
high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
Registration Statement; and
(c) to include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended (the "Securities Act"), each post-
effective amendment 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.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefor,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer 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.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this Amendment to this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Watsonville, State of
California, on December 21, 1997.
CORNERSTONE PROPANE PARTNERS, L.P.
By: Cornerstone Propane GP, Inc., General Partner
By: /s/ Keith G. Baxter
-----------------------------------
Name: Keith G. Baxter
Title: President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS
AMENDED, THIS AMENDMENT TO THIS REGISTRATION STATEMENT HAS BEEN SIGNED
BY THE FOLLOWING PERSONS IN THE CAPACITIES AND DATES INDICATED BELOW.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- -----
<S> <C> <C>
Merle D. Lewis* Chairman of the Board and Director of December 21, 1997
-------------------------------- Cornerstone Propane GP, Inc.
Merle D. Lewis
Richard R. Hylland* Vice Chairman of the Board and Director of December 21, 1997
-------------------------------- Cornerstone Propane GP, inc.
Richard R. Hylland
/s/ Keith G. Baxter President, Chief Executive Officer and December 21, 1997
-------------------------------- Director of Cornerstone Propane GP, Inc.
Keith G. Baxter (Principal Executive Officer)
Ronald J. Goedde* Executive Vice President and Chief Financial December 21, 1997
-------------------------------- Officer of Cornerstone Propane GP, Inc.
Ronald J. Goedde (Principal Financial and Accounting Officer)
Daniel K. Newell* Director of Cornerstone Propane GP, Inc. December 21, 1997
--------------------------------
Daniel K. Newell
Paul Christen* Director of Cornerstone Propane GP, Inc. December 21, 1997
--------------------------------
Paul Christen
II-5
<PAGE>
Kurt Katz* Director of Cornerstone Propane GP, Inc. December 21, 1997
--------------------------------
Kurt Katz
* By /s/ Keith G. Baxter
--------------------
Keith G. Baxter, Attorney-in-fact
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
3.1 -- Amended and Restated Agreement of Limited
Partnership of Cornerstone Propane Partners,
L.P. dated as of December 17, 1996 (incorporated
by reference to Exhibit 3.1 to the Partnership's
Current Report on Form 8-K dated April 14, 1997
(the "Form 8-K").
3.2 -- Amended and Restated Agreement of Limited
Partnership of Cornerstone Propane, L.P. dated as
of December 17, 1996 (incorporated by reference
to Exhibit 3.2 to the Form 8-K).
*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 dated December 17, 1996, among
Cornerstone Propane, L.P., various financial
institutions and Bank of America National Trust
and Savings Association, as agent (incorporated
by reference to Exhibit 10.1 to the Form 8-K).
10.2 -- Note Purchase Agreement dated December 17, 1996,
among Cornerstone Propane, L.P. and certain
investors (incorporated by reference to Exhibit
10.2 to the Form 8-K).
10.3 -- Contribution, Conveyance and Assumption Agreement
dated as of December 17, 1996, among Cornerstone
Propane Partners, L.P., Cornerstone Propane,
L.P., Cornerstone Propane GP, Inc., Empire Energy
SC Corporation and SYN Inc. (incorporated by
reference to Exhibit 10.3 to the Form 8-K).
10.4 -- 1996 Cornerstone Propane Partners, L.P.
Restricted Unit Plan (incorporated by reference
to Exhibit 10.4 to the Form 8-K).
10.5 -- Form of Amended and Restated Employment
Agreements for Messrs. Baxter, Kittrell, Goedde
and DiCosimo (incorporated by reference to
Exhibit 10.5 to the Form 8-K).
10.6 - Amendment to No. 1 to Credit Agreement
(incorporated by reference to Exhibit 10.6 to the
Partnership's Annual Report on Form 10-K for the
fiscal year ended June 30, 1997 (the "Form 10-
K")).
II-7
<PAGE>
10.7 - Amendment to No. 2 to Credit Agreement
(incorporated by reference to Exhibit 10.7 to the
Form 10-K).
*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 Schiff Hardin & Waite (included in
Exhibit 5.1 and 8.1)
24.1 -- Powers of Attorney (included on signature page)
_______________
* Previously filed.
** Filed herewith.
II-8
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our report dated August 4, 1997 on the consolidated
financial statements of Cornerstone Propane Partners, L.P., and to the use of
our report dated August 4, 1997 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,
December 19, 1997
<PAGE>
EXHIBIT 23.2
We hereby consent to the use in the Registration Statement on Form S-1
of our report dated August 4, 1997, 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
December 19, 1997
Springfield, Missouri
<PAGE>
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 Cornerstone Propane Partners, L.P. of
our report dated August 8, 1997 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
December 19, 1997