<PAGE>
750,000 Common Units
Representing Limited Partner Interests
CORNERSTONE PROPANE PARTNERS, L.P.
--------------------
This Prospectus relates to 750,000 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 acquisitions involving the issuance by
the Partnership of Common Units covered by this Prospectus 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 exchange for
businesses, properties or securities in 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 or about
the time of delivery of such Common Units.
The Registration Statement of which this Prospectus is a part also
relates to the offer and sale of Common Units from time to time by persons who
have received Common Units in connection with 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.
--------------------
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK
OF A CORPORATION. PURCHASERS OF COMMON UNITS SHOULD CONSIDER EACH OF THE FACTORS
DESCRIBED UNDER "RISK FACTORS," STARTING ON PAGE 26, IN EVALUATING AN INVESTMENT
IN THE PARTNERSHIP, INCLUDING, BUT NOT LIMITED TO, THE FOLLOWING:
- FUTURE PARTNERSHIP PERFORMANCE WILL DEPEND UPON THE SUCCESS OF THE
PARTNERSHIP IN MAXIMIZING PROFITS FROM PROPANE SALES. PROPANE SALES
ARE AFFECTED BY, AMONG OTHER THINGS, WEATHER PATTERNS, PRODUCT PRICES
AND COMPETITION, INCLUDING COMPETITION FROM OTHER ENERGY
SOURCES.(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 April 16, 1997 was $20 per Common Unit.
All expenses of this offering will be paid by the Partnership. No
underwriting discounts or commissions will be paid in connection with the
issuance of Common Units, although finder's fees may be paid with respect to
specific acquisitions. Any person receiving a finder's fee may be deemed to be
an "underwriter" within the meaning of the Securities Act.
The Partnership will distribute to its partners, on a quarterly basis,
all of its Available Cash, which is generally all cash on hand at the end of a
quarter, as adjusted for reserves. The Managing General Partner has broad
discretion in making cash disbursements and establishing reserves. The
Partnership intends, to the extent there is sufficient Available Cash, to
distribute to each holder of Common Units at least $.54 per Common Unit per
quarter (the "Minimum Quarterly Distribution") or $2.16 per Common Unit on an
annualized basis.
To enhance the Partnership's ability to make the Minimum Quarterly
Distribution on the Common Units during the Subordination Period, which will
generally extend at least through December 31, 2001, each holder of Common Units
will be entitled to receive the Minimum Quarterly Distribution, plus any
arrearages thereon, before any distributions are made on the outstanding
subordinated limited partner interests of the Partnership (the "Subordinated
Units"). Upon expiration of the Subordination Period, all Subordinated Units
will convert into Common Units on a one-for-one basis and will thereafter
participate pro rata with the other Common Units in distributions of Available
Cash. Under certain circumstances, up to 50% of the Subordinated Units may
convert into Common Units prior to the expiration of the Subordination Period.
See "Cash Distribution Policy."
The Common Units offered hereby represent limited partner interests in
the Partnership, which the Partnership believes is the fifth largest retail
marketer of propane in the United States. The Partnership was formed in 1996 to
acquire, own and operate the propane businesses and assets (the "Combined
Operations") of SYN Inc. ("Synergy") and Empire Energy Corporation (formerly
subsidiaries of Northwestern Growth Corporation ("Northwestern Growth")), Myers
Propane Gas Company and CGI Holdings, Inc. The Managing General Partner is
Cornerstone Propane GP, Inc. The Managing General Partner and Northwestern
Growth are subsidiaries of Northwestern Public Service Company ("NPS"), a New
York Stock Exchange-listed energy distribution company.
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 April 16, 1997
(i)
<PAGE>
(CONTINUED FROM PAGE i)
- - THE MINIMUM QUARTERLY DISTRIBUTION IS NOT GUARANTEED. THE ACTUAL AMOUNT OF
CASH DISTRIBUTIONS WILL DEPEND ON FUTURE PARTNERSHIP OPERATING PERFORMANCE
AND WILL BE AFFECTED BY THE FUNDING OF RESERVES, OPERATING AND CAPITAL
EXPENDITURES AND OTHER MATTERS WITHIN THE DISCRETION OF THE MANAGING
GENERAL PARTNER, AS WELL AS REQUIRED INTEREST AND PRINCIPAL PAYMENTS ON,
AND THE OTHER TERMS OF, THE PARTNERSHIP'S INDEBTEDNESS. PRO FORMA AVAILABLE
CASH FROM OPERATING SURPLUS (AS DEFINED IN THE GLOSSARY) GENERATED DURING
FISCAL 1996 WOULD HAVE BEEN SUFFICIENT TO COVER THE MINIMUM QUARTERLY
DISTRIBUTION FOR SUCH FISCAL YEAR ON ALL OF THE COMMON UNITS OUTSTANDING AS
OF THE DATE OF THIS PROSPECTUS AND THE RELATED DISTRIBUTION ON THE GENERAL
PARTNER INTERESTS, BUT WOULD HAVE BEEN INSUFFICIENT BY APPROXIMATELY $10.5
MILLION TO COVER THE MINIMUM QUARTERLY DISTRIBUTION ON ALL THE SUBORDINATED
UNITS OUTSTANDING AS OF THE DATE OF THIS PROSPECTUS AND THE RELATED
DISTRIBUTION ON THE GENERAL PARTNER INTERESTS.
- - THERE CAN BE NO ASSURANCE THAT THE PARTNERSHIP WILL BE ABLE TO INTEGRATE
SUCCESSFULLY THE COMBINED OPERATIONS, ACHIEVE ANTICIPATED COST SAVINGS OR
INSTITUTE THE NECESSARY SYSTEMS AND PROCEDURES TO SUCCESSFULLY MANAGE THE
COMBINED OPERATIONS ON A PROFITABLE BASIS.
- - AT DECEMBER 31, 1996, THE PARTNERSHIP'S TOTAL INDEBTEDNESS AS A PERCENTAGE
OF ITS TOTAL CAPITALIZATION WAS APPROXIMATELY 50.0%. AS A RESULT, THE
PARTNERSHIP HAS INDEBTEDNESS THAT IS SUBSTANTIAL IN RELATION TO ITS
PARTNERS' CAPITAL. HOLDERS OF COMMON UNITS HAVE ONLY LIMITED VOTING RIGHTS,
AND THE MANAGING GENERAL PARTNER MANAGES AND OPERATES THE PARTNERSHIP. THE
MANAGING GENERAL PARTNER MAY NOT BE REMOVED EXCEPT PURSUANT TO THE VOTE OF
THE HOLDERS OF AT LEAST 66 2/3% OF THE OUTSTANDING UNITS (INCLUDING UNITS
OWNED BY THE MANAGING GENERAL PARTNER AND ITS AFFILIATES). THE OWNERSHIP OF
THE SUBORDINATED UNITS BY THE MANAGING GENERAL PARTNER AND ITS AFFILIATES
EFFECTIVELY GIVES THE MANAGING GENERAL PARTNER THE ABILITY TO PREVENT ITS
REMOVAL.
- - CONFLICTS OF INTEREST MAY ARISE BETWEEN THE MANAGING GENERAL PARTNER AND
ITS AFFILIATES, ON THE ONE HAND, AND THE PARTNERSHIP AND THE UNITHOLDERS,
ON THE OTHER. THE PARTNERSHIP AGREEMENT CONTAINS CERTAIN PROVISIONS THAT
LIMIT THE LIABILITY AND REDUCE THE FIDUCIARY DUTIES OF THE MANAGING GENERAL
PARTNER TO THE UNITHOLDERS. HOLDERS OF COMMON UNITS ARE DEEMED TO HAVE
CONSENTED TO CERTAIN ACTIONS AND CONFLICTS OF INTEREST THAT MIGHT OTHERWISE
BE DEEMED A BREACH OF FIDUCIARY OR OTHER DUTIES UNDER APPLICABLE STATE LAW.
THE VALIDITY AND ENFORCEABILITY OF THESE TYPES OF PROVISIONS UNDER DELAWARE
LAW ARE UNCERTAIN. UNDER CERTAIN CIRCUMSTANCES, AFFILIATES OF THE MANAGING
GENERAL PARTNER MAY COMPETE WITH THE PARTNERSHIP.
- - THE ISSUANCE OF THE COMMON UNITS OFFERED HEREBY MIGHT BE DILUTIVE TO
EARNINGS OF THE PARTNERSHIP AND DISTRIBUTIONS TO THE UNITHOLDERS.
- - PRIOR TO MAKING ANY DISTRIBUTION ON THE COMMON UNITS, THE PARTNERSHIP WILL
REIMBURSE THE MANAGING GENERAL PARTNER AND ITS AFFILIATES AT COST FOR ALL
EXPENSES INCURRED ON BEHALF OF THE PARTNERSHIP. ON A PRO FORMA BASIS,
APPROXIMATELY $48.0 MILLION OF EXPENSES (PRIMARILY WAGES AND SALARIES)
WOULD HAVE BEEN REIMBURSED BY THE PARTNERSHIP TO THE MANAGING GENERAL
PARTNER IN FISCAL 1996.
- - THE TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP ARE COMPLEX. THE
AVAILABILITY TO A COMMON UNITHOLDER OF THE FEDERAL INCOME TAX BENEFITS OF
AN INVESTMENT IN THE PARTNERSHIP LARGELY DEPENDS ON THE CLASSIFICATION OF
THE PARTNERSHIP AS A PARTNERSHIP FOR THAT PURPOSE. THE PARTNERSHIP WILL
RELY UPON AN OPINION OF COUNSEL, AND NOT A RULING FROM THE INTERNAL REVENUE
SERVICE, ON THAT ISSUE AND OTHERS RELEVANT TO A COMMON UNITHOLDER.
- - BECAUSE THE RETAIL PROPANE INDUSTRY IS MATURE AND OVERALL DEMAND FOR
PROPANE IS EXPECTED TO EXPERIENCE LIMITED GROWTH IN THE FORESEEABLE FUTURE,
THE PARTNERSHIP WILL DEPEND ON ACQUISITIONS AS THE PRINCIPAL MEANS OF
GROWTH. THERE CAN BE NO ASSURANCE THAT THE PARTNERSHIP WILL BE ABLE TO
COMPLETE FUTURE ACQUISITIONS.
--------------------
(ii)
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Cornerstone Propane Partners, L.P.. . . . . . . . . . . . . . . . . . . 1
Summary Pro Forma Financial and Operating Data. . . . . . . . . . . . . 9
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Cash Available for Distribution . . . . . . . . . . . . . . . . . . . . 15
Partnership Structure and Management. . . . . . . . . . . . . . . . . . 17
The Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Summary of Tax Considerations . . . . . . . . . . . . . . . . . . . . . 23
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Risks Inherent in the Partnership's Business. . . . . . . . . . . . . . 26
Risks Inherent in an Investment in the Partnership. . . . . . . . . . . 28
Conflicts of Interest and Fiduciary Responsibilities. . . . . . . . . . 31
Tax Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
THE IPO AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . 38
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
PRICE RANGE OF COMMON UNITS. . . . . . . . . . . . . . . . . . . . . . . . 40
CASH DISTRIBUTION POLICY . . . . . . . . . . . . . . . . . . . . . . . . . 41
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Quarterly Distributions of Available Cash . . . . . . . . . . . . . . . 42
Distributions from Operating Surplus during Subordination Period. . . . 42
Distributions from Operating Surplus after Subordination Period . . . . 44
Incentive Distributions--Hypothetical Annualized Yield. . . . . . . . . 44
Distributions from Capital Surplus. . . . . . . . . . . . . . . . . . . 45
Adjustment of Minimum Quarterly Distribution and
Target Distribution Levels. . . . . . . . . . . . . . . . . . . . . . . 46
Distributions of Cash Upon Liquidation. . . . . . . . . . . . . . . . . 46
CASH AVAILABLE FOR DISTRIBUTION. . . . . . . . . . . . . . . . . . . . . . 49
SELECTED PRO FORMA FINANCIAL AND OPERATING DATA. . . . . . . . . . . . . . 51
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA . . . . . . . . . . . . . 53
Synergy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Empire Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Coast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Myers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . 59
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
The Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Synergy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Empire Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Coast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Capital Expenditures and Commitments. . . . . . . . . . . . . . . . . . 75
Litigation and Other Contingencies. . . . . . . . . . . . . . . . . . . 75
Effects of Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . 75
BUSINESS AND PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . 77
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Business Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Formation Background. . . . . . . . . . . . . . . . . . . . . . . . . . 79
Industry Background and Competition . . . . . . . . . . . . . . . . . . 79
Products, Services and Marketing. . . . . . . . . . . . . . . . . . . . 81
Propane Supply and Storage. . . . . . . . . . . . . . . . . . . . . . . 82
Pricing Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Billing and Collection Procedures . . . . . . . . . . . . . . . . . . . 83
Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Trademarks and Tradenames . . . . . . . . . . . . . . . . . . . . . . . 84
Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . 84
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Litigation and Other Contingencies. . . . . . . . . . . . . . . . . . . 85
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Partnership Management. . . . . . . . . . . . . . . . . . . . . . . . . 86
(iii)
<PAGE>
Directors and Executive Officers of the Managing General Partner. . . . 86
Reimbursement of Expenses of the Managing General Partner and
its Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . 88
Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . 91
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . 92
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . 93
Rights of the General Partners. . . . . . . . . . . . . . . . . . . . . 93
Contribution, Conveyance and Assumption Agreement . . . . . . . . . . . 93
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES . . . . . . . . . . . 95
Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . 95
Fiduciary and Other Duties. . . . . . . . . . . . . . . . . . . . . . . 98
DESCRIPTION OF THE COMMON UNITS. . . . . . . . . . . . . . . . . . . . . . 100
The Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Transfer Agent and Registrar. . . . . . . . . . . . . . . . . . . . . . 100
Transfer of Common Units. . . . . . . . . . . . . . . . . . . . . . . . 100
THE PARTNERSHIP AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . 102
Organization and Duration . . . . . . . . . . . . . . . . . . . . . . . 102
Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Capital Contributions . . . . . . . . . . . . . . . . . . . . . . . . . 103
Limited Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Issuance of Additional Securities . . . . . . . . . . . . . . . . . . . 103
Amendment of Partnership Agreement. . . . . . . . . . . . . . . . . . . 105
Merger, Sale or Other Disposition of Assets . . . . . . . . . . . . . . 106
Termination and Dissolution . . . . . . . . . . . . . . . . . . . . . . 106
Liquidation and Distribution of Proceeds. . . . . . . . . . . . . . . . 107
Withdrawal or Removal of the General Partners . . . . . . . . . . . . . 107
Transfer of General Partners' Interests and Incentive Distribution
Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
Change of Management Provisions . . . . . . . . . . . . . . . . . . . . 108
Limited Call Right. . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Meetings; Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Status as Limited Partner or Assignee . . . . . . . . . . . . . . . . . 110
Non-citizen Assignees; Redemption . . . . . . . . . . . . . . . . . . . 110
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Books and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Right to Inspect Partnership Books and Records. . . . . . . . . . . . . 111
Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 112
UNITS ELIGIBLE FOR FUTURE SALE . . . . . . . . . . . . . . . . . . . . . . 113
PLAN OF DISTRIBUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . 114
TAX CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Legal Opinions and Advice . . . . . . . . . . . . . . . . . . . . . . . 115
Tax Rates and Changes in Federal Income Tax Laws. . . . . . . . . . . . 116
Consequences of Exchanging Property for Common Units. . . . . . . . . . 116
Ownership of Units by S Corporations. . . . . . . . . . . . . . . . . . 118
Partnership Status. . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Limited Partner Status. . . . . . . . . . . . . . . . . . . . . . . . . 121
Tax Consequences of Unit Ownership. . . . . . . . . . . . . . . . . . . 121
Allocation of Partnership Income, Gain, Loss and Deduction. . . . . . . 123
Tax Treatment of Operations . . . . . . . . . . . . . . . . . . . . . . 124
Disposition of Common Units . . . . . . . . . . . . . . . . . . . . . . 127
Uniformity of Units . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Administrative Matters. . . . . . . . . . . . . . . . . . . . . . . . . 130
State, Local and Other Tax Considerations . . . . . . . . . . . . . . . 133
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS. . . . . . . . . . 134
VALIDITY OF THE COMMON UNITS . . . . . . . . . . . . . . . . . . . . . . . 135
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 136
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . F-1
APPENDIX A--FORM OF APPLICATION FOR TRANSFER OF COMMON UNITS . . . . . . . A-1
APPENDIX B--GLOSSARY OF CERTAIN TERMS. . . . . . . . . . . . . . . . . . . B-1
(iv)
<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 SYNERGY (IN ITS CAPACITY AS THE
SPECIAL GENERAL PARTNER OF THE PARTNERSHIP, THE "SPECIAL GENERAL PARTNER" AND,
TOGETHER WITH THE MANAGING GENERAL PARTNER, THE "GENERAL PARTNERS"), EMPIRE
ENERGY CORPORATION ("EMPIRE ENERGY"), MYERS PROPANE GAS COMPANY ("MYERS") AND
CGI HOLDINGS, INC. ("COAST") AS CONDUCTED PRIOR TO THE IPO ON A PRO FORMA BASIS.
THE COMMON UNITS AND THE SUBORDINATED UNITS ARE COLLECTIVELY REFERRED TO HEREIN
AS THE "UNITS" AND HOLDERS OF THE COMMON UNITS AND SUBORDINATED UNITS ARE
COLLECTIVELY REFERRED TO HEREIN AS "UNITHOLDERS." UNLESS OTHERWISE SPECIFIED,
REFERENCES TO THE PARTNERSHIP IN THIS PROSPECTUS INCLUDE THE OPERATING
PARTNERSHIP AND REFERENCES TO PERCENTAGE OWNERSHIP OF THE PARTNERSHIP REFLECT
THE APPROXIMATE EFFECTIVE OWNERSHIP INTEREST OF THE UNITHOLDERS AND THE GENERAL
PARTNERS IN THE PARTNERSHIP AND THE OPERATING PARTNERSHIP ON A COMBINED BASIS.
FOR EASE OF REFERENCE, A GLOSSARY OF CERTAIN TERMS USED IN THIS PROSPECTUS IS
INCLUDED AS APPENDIX B TO THIS PROSPECTUS. CAPITALIZED TERMS NOT OTHERWISE
DEFINED HEREIN HAVE THE MEANINGS GIVEN IN THE GLOSSARY.
CORNERSTONE PROPANE PARTNERS, L.P.
The Partnership believes that it is the fifth largest retail marketer
of propane in the United States in terms of volume, serving more than 360,000
residential, commercial, industrial and agricultural customers from 311 customer
service centers in 26 states. The Partnership's operations are concentrated in
the east coast, south-central and west coast regions of the United States. For
the fiscal year ended June 30, 1996, the Partnership had combined retail propane
sales of approximately 235 million gallons and pro forma operating income plus
depreciation and amortization ("EBITDA") of approximately $47.0 million. Pro
forma EBITDA would have been approximately $54.9 million if effect were given to
an additional $7.9 million of expense reductions which the Partnership believes
are achievable as a result of the Transactions, but which have not been included
in the pro forma adjustments.
The Partnership was formed in 1996 to acquire, own and operate the
propane businesses and assets of Synergy and Empire Energy (formerly
subsidiaries of Northwestern Growth), Myers and Coast. Northwestern Growth is a
wholly owned subsidiary of NPS, a New York Stock Exchange-listed energy
distribution company. Northwestern Growth was formed in 1994 to pursue and
manage nonutility investments and development activities for NPS, with a primary
focus on growth opportunities in the energy, energy equipment and energy
services industries. To capitalize on the growth and consolidation
opportunities in the propane distribution market, in August 1995, Northwestern
Growth acquired the predecessor of Synergy, then the sixth largest retail
marketer of propane in the United States, in October 1996 it acquired Empire
Energy, then the eighth largest retail marketer of propane in the United States,
and immediately prior to the IPO it acquired Coast, then the 18th largest retail
marketer of propane in the United States. NPS acquired Myers, a smaller retail
marketer of propane, in December 1995.
The Partnership believes that it is well positioned to compete
successfully in the propane business for the following reasons: (i) management's
experience in generating profitable growth at its customer service centers by
fostering an entrepreneurial approach by local managers; (ii) the Partnership's
large national and geographically diversified operations, which the Partnership
believes reduces the effects of adverse weather conditions in any one region on
EBITDA and allows it to achieve economies of scale; (iii) the significant
proportion of the Partnership's retail sales that is made to residential
customers, which are generally more profitable than sales to other customers;
1
<PAGE>
(iv) management's experience in identifying, evaluating and completing both
small and large acquisitions; (v) the Partnership's substantial national
wholesale supply and logistics business, which provides it with a national
presence and a relatively secure source of propane to support the service goals
of its customer service centers; (vi) the Partnership's centralized
administrative systems that enable local managers to focus on customer service
and growth; and (vii) the Partnership's relationship with Northwestern Growth,
which has proven experience in the energy distribution business and in the
acquisition and growth of propane businesses. Although the Partnership believes
it has a number of competitive strengths, the propane industry is highly
competitive and includes a number of large national firms and regional firms and
several thousand small independent firms. Certain competitors may have greater
financial resources or lower operating costs than the Partnership. Further,
variations in the weather or the economy in one or more regions in which the
Partnership operates can significantly affect the total volume of propane sold
by the Partnership and, consequently, the Partnership's results of operations.
BUSINESS STRATEGY
The principal elements of the Partnership's business strategy are to
(i) extend and refine its existing service orientation, (ii) continue to pursue
balanced growth through small and large acquisitions, internal growth at its
existing customer service centers and start-ups of new customer service centers,
(iii) enhance the profitability of its existing operations by integrating the
Combined Operations, implementing entrepreneurially oriented local manager
incentive programs, where appropriate, and continuing to centralize
administrative systems and (iv) capitalize on the Partnership's national
wholesale supply and logistics business.
FOCUS ON CUSTOMER SERVICE. The Partnership seeks to be recognized
in the marketplace as the most customer service-oriented propane supplier.
Although propane is a commodity product, the Partnership believes that it
will be able to distinguish itself from the competition by providing reliable
and timely delivery of propane at competitive prices. The Partnership
believes that establishing and clearly communicating standards of service and
performance expectations at all levels of the Partnership, and rewarding its
employees accordingly, will enable the Partnership to achieve its service
goals. The Partnership has incentive programs at certain customer service
centers targeted to fostering an entrepreneurial environment at the customer
service center level. These programs provide substantial rewards to local
managers for managing service-oriented and profitable operations. The
Partnership intends to expand such incentive programs to additional customer
service locations, where appropriate.
CONTINUED BALANCED GROWTH. The Partnership intends to continue to
pursue balanced growth through small and large acquisitions, internal growth
at its existing customer service centers and start-ups of new customer
service centers. Acquisitions are expected to be the principal means of
growth for the Partnership, as the retail propane industry is mature and
overall demand for propane is expected to experience limited growth in the
foreseeable future. The Partnership believes that the fragmented nature of
the retail propane industry provides significant opportunities for growth
through strategic acquisitions. Industry sources indicate that there are over
8,000 retail propane operations in the United States, of which the ten
largest account for approximately 33% of industry volumes. The Partnership's
acquisition strategy will concentrate on companies that have one or more of
the following characteristics: (i) locations in areas serviced by the
Partnership that may be combined with existing operations, providing greater
economies of scale at the customer service center level, (ii) a recent record
of growth and a local reputation for quality service, (iii) locations in
areas that are relatively colder and (iv) operations with a relatively high
proportion of sales to the more profitable residential customer segment. As
part of its acquisition program, the Partnership generally expects to retain
the name and identity of the acquired entity, which the Partnership believes
will preserve the goodwill of the acquired business and promote continued
local customer loyalty. The Partnership's ability to make acquisitions is
facilitated by the availability of a $75.0 million acquisition credit
facility and the ability to issue additional limited partner interests. There
can be no assurance, however, that the Partnership will identify attractive
acquisition candidates in the future, that the Partnership will be able to
acquire such businesses on economically acceptable terms, that any
acquisitions will not be dilutive to earnings and distributions to the
Unitholders or that any additional debt incurred to finance an acquisition
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will not affect the ability of the Partnership to make distributions to the
Unitholders. The Partnership is not required under the Partnership Agreement to
seek Unitholder approval of any acquisition.
The Partnership is from time to time engaged in ongoing discussions
with respect to acquisitions, and expects to continue to pursue such acquisition
opportunities actively. As of the date of this Prospectus, the Partnership does
not have any agreements with respect to any material acquisitions but is
involved in ongoing discussions with several companies and is continuing to
assess these and other acquisition opportunities. The Partnership is unable to
predict the size, number or timing of any future acquisitions.
In addition to pursuing growth through acquisitions, the
Partnership continues to focus on internal growth at its existing customer
service centers. The Partnership seeks to achieve internal growth by, among
other things, providing superior service and instituting programs that
encourage employees, existing customers and local real estate agents and
contractors to refer new accounts. This strategy is being implemented
primarily through the Partnership's incentive programs that reward local
managers for managing service-oriented and profitable operations.
In some instances, the Partnership may identify a market that has one
or more of the characteristics that would make it attractive for an acquisition
but in which there are no attractive available acquisition candidates. In
certain of these cases, the Partnership may seek to penetrate the market by
establishing a new customer service center. The Partnership believes it can
successfully initiate these start-up operations in attractive markets by
identifying and hiring local managers with proven propane service experience and
establishing programs that reward service-oriented and profitable operations and
that allow the managers to share in the growth of the business.
ENHANCE PROFITABILITY OF ITS EXISTING OPERATIONS. The Partnership
believes that it can enhance the profitability of its customer service centers
by integrating the Combined Operations, reducing inefficiencies in areas where
there is a geographic overlap of services and implementing "best practices" and
management incentive programs throughout the Partnership's operations. In
integrating the Combined Operations, the Partnership is in the process of
consolidating and centralizing ongoing administrative functions and systems,
which should enable local managers to devote their time to providing customer
service and achieving other performance goals. In addition, the Partnership
believes it can improve efficiencies in areas where there is a geographic
overlap of services provided by customer service centers. The Partnership's
management has identified effective operating programs and strategies used by
one of the constituent companies prior to the IPO but not used by one or more of
the others. The Partnership believes that the implementation of these "best
practices" throughout the Combined Operations will improve customer retention,
foster expansion of its customer base and create operating efficiencies and cost
savings opportunities. Furthermore, the Partnership believes that instituting
management incentive programs, where appropriate, and fostering an
entrepreneurial approach at additional customer service centers will give
managers the incentive to increase such customer service centers' profitability.
CAPITALIZE ON NATIONAL SUPPLY AND LOGISTICS BUSINESS. The Partnership
has a national wholesale propane supply and logistics business with sales of
approximately 226 million gallons in fiscal 1996. The Partnership believes that
this business provides it with a reasonably secure, competitively priced and
efficient supply base to support the service goals of its existing customer
service centers. In addition, the Partnership believes its wholesale and
logistics business positions it well for expansion through acquisitions or
start-up operations in new markets. As part of its wholesale business, the
Partnership also provides product supply and financial and technical assistance
to certain small independent retailers. While these arrangements provide some
economic return to the Partnership, the Partnership believes their greater value
lies in the resulting relationships, which position the Partnership to acquire
such businesses in the event they become available for purchase.
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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.
On a combined basis during fiscal 1996, the Partnership sold
approximately 235 million gallons of propane to retail customers and 226 million
gallons of propane to wholesale customers. Approximately 57.8% of the retail
gallons was sold to residential customers, 25.9% was sold to industrial and
commercial customers, 13.1% was sold to agricultural customers and 3.2% was sold
to all other retail users. Sales to residential customers in fiscal 1996
accounted for approximately 29.5% of total gallons (including wholesale gallons)
sold, but approximately 67.0% of the Partnership's pro forma gross profit from
propane sales. Residential sales have a greater profit margin and a more stable
customer base than other retail markets served by the Partnership. Industrial
and commercial sales accounted for 18.7% of the Partnership's pro forma gross
profit from propane sales for fiscal 1996, agricultural sales accounted for
6.1%, and all other retail sales accounted for 2.8%. Sales to wholesale
customers contributed the remaining 5.4% of pro forma gross profit from propane
sales. No single retail customer accounted for more than 1% of the Partnership's
pro forma revenues during fiscal 1996. During fiscal 1996, approximately 72.7%
of the Partnership's combined retail propane volume and in excess of 85% of the
Partnership's pro forma EBITDA were attributable to sales during the six-month
peak heating season of October through March. The Partnership believes that
sales to the commercial and industrial markets, while affected by economic
patterns, are not as sensitive to variations in weather conditions as are sales
to residential and agricultural markets.
As of March 1, 1997, the Partnership's retail operations consisted of
311 customer service centers in 26 states. As of such date, the Partnership
owned a fleet of 34 transport truck tractors, 63 transport trailers, 915 bobtail
trucks and approximately 1,000 other delivery and service vehicles. In
addition, in its retail operations, the Partnership owns an aggregate of
approximately 21 million gallons of above-ground propane storage capacity at its
customer service centers. In many states, certain fire safety regulations
restrict the refilling of a leased tank solely to the propane supplier that owns
the tank. The inconvenience of switching tanks minimizes a customer's tendency
to switch among suppliers of propane.
The Partnership's wholesale operations engage in the marketing of
propane to independent dealers, major interstate marketers and the chemical and
petrochemical industries. The Partnership participates to a lesser extent in the
marketing of other natural gas liquids, the processing and marketing of natural
gas and the gathering of crude oil. The Partnership either owns or has
contractual rights to use transshipment terminals, rail cars, long-haul tanker
trucks, pipelines and storage capacity. The Partnership believes that its
wholesale marketing and processing activities position
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it to achieve product cost advantages and to avoid shortages during periods of
tight supply to an extent not generally available to other retail propane
distributors.
Propane competes primarily with natural gas, electricity and fuel oil
as an energy source, principally on the basis of price, availability and
portability. Propane is more expensive than natural gas on an equivalent BTU
basis in locations served by natural gas, but serves as a substitute for natural
gas in rural and suburban areas where natural gas is unavailable or portability
of product is required. Propane is generally less expensive to use than
electricity for space heating, water heating, clothes drying and cooking.
Although propane is similar to fuel oil in certain applications and market
demand, propane and fuel oil compete to a lesser extent primarily because of the
cost of converting from one to the other.
THE IPO AND RELATED TRANSACTIONS
On December 17, 1996, the Partnership consummated the IPO, issuing
9,821,000 Common Units (including 1,281,000 Common Units issued pursuant to the
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 a private placement (the "Note Placement").
Immediately prior to the closing of the IPO, Synergy, Empire Energy,
Myers and Coast entered into a series of transactions which resulted in the
Combined Operations being owned by the General Partners. Concurrently with the
IPO closing, the Managing General Partner and the Special General Partner
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 thereafter 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, an aggregate 2%
general partner interest in the Partnership and the right to receive Incentive
Distributions (as defined below).
Concurrently with the closing of the IPO, the Operating Partnership
entered into a $125.0 million bank credit facility (the "Bank Credit Facility"),
which includes a $50.0 million revolving credit facility to be used for working
capital and other general partnership purposes (the "Working Capital Facility"),
and a $75.0 million revolving credit facility (the "Acquisition Facility") to be
used for acquisitions and capital improvements. For additional information
regarding the terms of the Notes and the Bank Credit Facility, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
The Partnership -- Financing and Sources of Liquidity."
DISTRIBUTIONS AND PAYMENTS TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information summarizes the distributions and payments
made and to be made by the Partnership to the General Partners and their
affiliates in connection with the Transactions and the ongoing operations of
the Partnership. Such distributions and payments were determined by and among
affiliated entities and, consequently, were not the result of arm's length
negotiations. See "Conflicts of Interest and Fiduciary Responsibilities."
FORMATION STAGE
The Consideration Paid to the General
Partners and their Affiliates for the
Transfer of the Propane Business of
the Combined Operations to the
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Partnership. . . . . . . . . . . . In exchange for conveying substantially all
of the assets of the Combined Operations to
the Operating Partnership, the General
Partners received 6,597,619 Subordinated
Units, an aggregate 2% general partner
interest in the Partnership and the
Operating Partnership, and all of the
Incentive Distribution Rights, and the
Operating Partnership assumed substantially
all of the liabilities associated with the
Combined Operations. Of the proceeds from
the IPO and the Note Placement,
approximately $59.9 million was used to
repay indebtedness owed by Synergy to NPS
(including a prepayment penalty of
$6.5 million), approximately $81.9 million
was used to repay acquisition financing
incurred by Northwestern Growth principally
in connection with the acquisitions of
Empire Energy and Coast and the purchase of
stock of (and certain rights related to)
Synergy and Myers, and approximately
$76.7 million was distributed to the
Special General Partner and used to redeem
its preferred stock issued in connection
with the August 15, 1995 acquisition of
Synergy's predecessor (the "Synergy
Acquisition") and held by NPS and the
unaffiliated shareholders ($61.2 million)
and provide net worth to the Special
General Partner ($15.5 million). The
shareholders of Coast who became senior
executives of the Managing General Partner
received approximately $9.3 million in
connection with Northwestern Growth's
acquisition of Coast (the "Coast Merger").
The Partnership used the proceeds from the
exercise of the over-allotment option to
pay certain expenses relating to the
Transactions. See "The IPO and Related
Transactions" and "Certain Relationships
and Related Transactions."
OPERATIONAL STAGE
Distributions of Available Cash to
the General Partners . . . . . . Available Cash will generally be
distributed 98% to the Unitholders
(including any distributions to the
General Partners as holders of the
Subordinated Units) and 2% to the
General Partners, except that if
distributions of Available Cash from
Operating Surplus exceed the Target
Distribution Levels (as defined below),
the General Partners will receive a
percentage of such excess distributions
that will increase to up to 50% of the
excess distributions above the highest
Target Distribution Level (such
distributions to the General Partners in
excess of their aggregate 2% general
partner interest being referred to as
the "Incentive Distributions"). See
"Cash Distribution Policy."
Other Payments to the Managing
General Partner and its
Affiliates.. . . . . . . . . . . The Managing General Partner does not
receive a management fee or other
compensation in connection with its
management of the Partnership, but is
reimbursed at cost for all direct and
indirect expenses incurred on behalf of
the Partnership, including the costs of
compensation and employee benefit plans
described herein properly allocable to
the Partnership (including the Annual
Operating Performance Incentive Plan,
the New Acquisition Incentive Plan and
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the Restricted Unit Plan described
herein), and all other expenses
necessary or appropriate to the conduct
of the business of, and allocable to,
the Partnership. On a pro forma basis in
fiscal 1996, an aggregate of
approximately $48.0 million of expenses
(primarily wages and salaries) would
have been reimbursed by the Partnership
to the Managing General Partner.
Affiliates of the Managing General Partner
may provide certain administrative
services for the Managing General
Partner on behalf of the Partnership and
will be reimbursed for all direct and
indirect expenses incurred in connection
therewith. In addition, the Managing
General Partner and its affiliates may
provide additional services to the
Partnership, for which the Partnership
will be charged reasonable fees as
determined by the Managing General
Partner.
The Managing General Partner adopted the
Restricted Unit Plan, which was
effective upon the consummation of the
Transactions, under which certain
officers and directors of the Managing
General Partner have rights to receive
authorized but unissued Common Units
with an aggregate value of $12.5 million
(determined as of the IPO closing). As
of March 31, 1997, restricted Common
Units with an aggregate value of $8.3
million were awarded under the
Restricted Unit Plan. In addition, the
Managing General Partner adopted the
Annual Operating Performance Incentive
Plan and the New Acquisition Incentive
Plan, pursuant to which certain members
of management are eligible to receive
cash bonuses.
Withdrawal or Removal of the
General Partners . . . . . . . . If the Managing General Partner withdraws
in violation of the Partnership
Agreement or is removed by the
Unitholders for Cause, the successor
general partner will have the option to
purchase the general partner interests
of the General Partners in the
Partnership and the Operating
Partnership (and the right to receive
Incentive Distributions) for a cash
payment equal to the fair market value
thereof. If the Managing General Partner
withdraws in accordance with the
Partnership Agreement or is removed
without Cause, it will have the option
to require a successor general partner
to purchase the general partner
interests of the General Partners in the
Partnership and the Operating
Partnership (and the right to receive
Incentive Distributions) for such price.
If the general partner interests of the
General Partners in the Partnership and
the Operating Partnership (and the right
to receive Incentive Distributions) are
not so purchased by the successor
general partner, such general partner
interests will be converted into a
number of Common Units equal in value to
the fair market value thereof as
determined by an independent investment
banking firm or other independent
experts. The Special General Partner
must withdraw or be removed as a general
partner upon the withdrawal or removal
of the Managing General Partner. See
"The Partnership Agreement -- Withdrawal
or Removal of the General Partners."
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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 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, and are derived from
the unaudited Pro Forma Consolidated Financial Statements of Cornerstone
Propane Partners, L.P. included elsewhere in this Prospectus. For a
description of the assumptions used in preparing the Summary Pro Forma
Financial and Operating Data, see "Pro Forma Consolidated Financial
Statements of Cornerstone Propane Partners, L.P." The pro forma information
set forth below has been prepared by combining the historical results of
operations of Synergy for the 10 1/2 months ended June 30, 1996 and for the
five and one-half months ended December 16, 1996; Coast for the fiscal year
ended July 31, 1996 and for the four and one-half months ended December 16,
1996; Empire Energy for the fiscal year ended June 30, 1996 and for the the
five and one-half months ended December 16, 1996; Myers for the six and
one-half months ended June 30, 1996 and for the five and one-half months
ended December 16, 1996; and the Partnership for the fourteen days ended
December 31, 1996. The Partnership believes that it is reasonable to combine
the results of operations of companies having different fiscal years because
each of the fiscal years being combined includes the same winter heating
seasons in which the majority of the Partnership's revenue and cash flow was
generated. The following information should not be deemed indicative of
future operating results of the Partnership.
PARTNERSHIP PRO FORMA
---------------------------------------
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1996 DECEMBER 31, 1996
-------------------- ------------------
(IN THOUSANDS,
EXCEPT PER UNIT DATA)
STATEMENT OF OPERATIONS DATA:
Revenues . . . . . . . . . . . . . . $ 595,790 $314,937
Gross profit(b). . . . . . . . . . . 139,806 (a) 64,028
Depreciation and amortization. . . . 14,500 7,129
Operating income . . . . . . . . . . 32,535 (a) 14,280
Interest expense, net. . . . . . . . 17,865 9,049
Net income . . . . . . . . . . . . . 14,570 (a) 5,181
Net income per Unit(c) . . . . . . . .87 (a) .31
OPERATING DATA:
EBITDA(d). . . . . . . . . . . . . . $ 47,035 (a) $ 21,409
Capital expenditures(e):
Growth and maintenance. . . . . . 9,648 8,656
Acquisition . . . . . . . . . . . 44,303 (f) 3,155
Retail propane gallons sold. . . . . 235,000 109,112
BALANCE SHEET DATA: AT DECEMBER 31, 1996
------------------------
Current assets. . . . . . . . . . . . . . . . . . . . . $ 134,524
Total assets. . . . . . . . . . . . . . . . . . . . . . 582,586
Current liabilities . . . . . . . . . . . . . . . . . . 93,614
Long-term debt. . . . . . . . . . . . . . . . . . . . . 233,193
Partners' capital -- General Partners . . . . . . . . . 4,677
Partners' capital -- Limited Partners . . . . . . . . . 229,186
(FOOTNOTES ON PAGE 10)
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(FOOTNOTES FROM PAGE 9)
_________
(a) Pro forma gross profit for the year ended June 30, 1996 does not
reflect propane acquisition and logistics cost savings of
approximately $1.5 million that the Partnership believes are
achievable as a result of the Transactions. The pro forma amounts of
operating income, net income, net income per Unit and EBITDA for the
year ended June 30, 1996 do not reflect certain non-recurring expenses
incurred by Empire Energy of approximately $4.3 million, propane
acquisition and logistics cost savings of approximately $1.5 million,
and insurance savings of approximately $2.1 million that the
Partnership believes are achievable as a result of the Transactions.
If effect were given to such anticipated expense reductions, the
following amounts would have been reflected:
YEAR ENDED
JUNE 30, 1996
----------------------
(IN THOUSANDS, EXCEPT
PER UNIT DATA)
Pro forma gross profit. . . . . . . . . . . $ 141,306
Pro forma operating income. . . . . . . . . 40,397
Pro forma net income. . . . . . . . . . . . 22,432
Pro forma net income per Unit . . . . . . . 1.34
Pro forma EBITDA. . . . . . . . . . . . . . 54,897
See Note 3 to the Pro Forma Consolidated Financial Statements of
Cornerstone Propane Partners, L.P. and "Risk Factors -- Risks Inherent
in an Investment in the Partnership -- Partnership Profitability Will
Depend on Successful Integration of the Combined Operations."
(b) Gross profit is computed by reducing total revenues by the direct cost
of the products sold.
(c) Net income per Unit is computed by dividing the limited partners'
interest in net income by the weighted average number of Units
outstanding.
(d) EBITDA is defined as operating income plus depreciation and
amortization. EBITDA should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative
to cash flow (as a measure of liquidity or ability to service debt
obligations), but provides additional information for evaluating the
Partnership's ability to make the Minimum Quarterly Distribution. Cash
flows in accordance with generally accepted accounting principles
consist of cash flows from operating, investing and financing
activities. Cash flows from operating activities reflect net income
(loss) (including charges for interest and income taxes not reflected
in EBITDA), adjusted for (i) all non-cash charges or income (which are
reflected in EBITDA) and (ii) changes in operating assets and
liabilities (which are not reflected in EBITDA). Further, cash flows
from investing and financing activities are not included in EBITDA.
(e) The Partnership's capital expenditures fall generally into three
categories: (i) growth capital expenditures, which include
expenditures for the purchase of new propane tanks and other equipment
to facilitate expansion of the Partnership's retail customer base,
(ii) maintenance capital expenditures, which include expenditures for
repairs that extend the life of the assets and replacement of
property, plant and equipment, and (iii) acquisition capital
expenditures.
(f) Approximately $36.0 million relates to the Empire Acquisition of
Certain Synergy Assets.
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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. ALL
STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS
PROSPECTUS, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE
PARTNERSHIP'S BUSINESS STRATEGY, PLANS AND OBJECTIVES OF MANAGEMENT OF THE
PARTNERSHIP FOR FUTURE OPERATIONS AND THE STATEMENTS UNDER "-- CASH AVAILABLE
FOR DISTRIBUTION" AND "CASH AVAILABLE FOR DISTRIBUTION," ARE FORWARD-LOOKING
STATEMENTS. ALTHOUGH THE PARTNERSHIP BELIEVES THAT THE EXPECTATIONS REFLECTED IN
SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT
SUCH EXPECTATIONS WILL PROVE TO BE CORRECT. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE PARTNERSHIP'S EXPECTATIONS ARE
DISCLOSED BELOW, UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
- Weather conditions have a significant impact on the demand for propane
for both heating and agricultural purposes. Many customers of the
Partnership rely heavily on propane as a heating fuel. Accordingly,
the volume of retail propane sold is highest during the six-month peak
heating season of October through March and is directly affected by
the severity of the winter weather. During fiscal 1996, approximately
72.7% of the Partnership's combined retail propane volume and in
excess of 85% of the Partnership's pro forma EBITDA were attributable
to sales during the peak heating season. Actual weather conditions can
vary substantially from year to year, significantly affecting the
Partnership's financial performance. Furthermore, variations in
weather in one or more regions in which the Partnership operates can
significantly affect the total volumes sold by the Partnership and the
margins realized on such sales and, consequently, the Partnership's
results of operations.
- The retail propane business is a "margin-based" business in which
gross profits depend on the excess of sales prices over propane supply
costs. Consequently, the Partnership's profitability will be sensitive
to changes in wholesale propane prices. Propane is a commodity, the
market price of which can be subject to volatile changes in response
to changes in supply or other market conditions. As it may not be
possible immediately to pass on to customers rapid increases in the
wholesale cost of propane, such increases could reduce the
Partnership's gross profits.
- The Partnership's profitability is affected by the competition for
customers among all participants in the retail propane business. Some
of the Partnership's competitors are larger or have greater financial
resources than the Partnership. Should a competitor attempt to
increase market share by reducing prices, the Partnership's financial
condition and results of operations could be materially adversely
affected. In addition, propane competes with other sources of energy,
some of which are less costly for equivalent energy value.
- Acquisitions will be the principal means of growth for the
Partnership, as the retail propane industry is mature and overall
demand for propane is expected to experience limited growth. There can
be no assurance, however, that the Partnership will identify
attractive acquisition candidates in the future, that the Partnership
will be able to acquire such businesses on economically acceptable
terms, that any acquisitions will not be dilutive to earnings and
distributions to the Unitholders or that any additional debt incurred
to finance acquisitions will not affect the ability of the Partnership
to make distributions to the Unitholders.
- The Partnership's operations are subject to all operating hazards and
risks normally incidental to handling, storing and delivering
combustible liquids such as propane. As a result, 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
11
<PAGE>
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.
- The amount of pro forma Available Cash from Operating Surplus
generated during fiscal 1996 was approximately $25.7 million. Such
amount would have been sufficient to cover the Minimum Quarterly
Distribution for such fiscal year on all of the Common Units
outstanding as of the date of this Prospectus and the related
distribution on the aggregate 2% general partner interests, but would
have been insufficient by approximately $10.5 million to cover the
Minimum Quarterly Distribution on all the Subordinated Units
outstanding as of the date of this Prospectus and the related
distribution on the general partner interests.
- There can be no assurance that the Partnership will be able to
integrate successfully the Combined Operations, achieve anticipated
cost savings or institute the necessary systems and procedures to
successfully manage the combined enterprise on a profitable basis. The
Partnership is managed by the senior executives who previously managed
Coast. Such executives were not involved with the operations of
either Synergy or Empire Energy. The historical financial results of
the companies that comprise the Combined Operations only cover periods
when the Combined Operations were not under common control and
management and, therefore, may not be indicative of the Partnership's
future financial and operating results. The inability of the
Partnership to integrate successfully the Combined Operations could
have a material adverse effect on the Partnership's business,
financial condition and results of operations.
- At December 31, 1996, the Partnership's total indebtedness as a
percentage of its total capitalization was approximately 50.0%. As a
result, the Partnership is significantly leveraged and has
indebtedness that is substantial in relation to its partners' capital.
The Partnership's leverage may adversely affect the ability of the
Partnership to finance its future operations and capital needs, limit
its ability to pursue acquisitions and other business opportunities
and make its results of operations more susceptible to adverse
economic or operating conditions. In addition, as of March 31, 1997
the Partnership had approximately $125.0 million of unused borrowing
capacity under the Bank Credit Facility. Future borrowings could
result in a significant increase in the Partnership's leverage. The
Notes and the Bank Credit Facility contain restrictive covenants that
will limit the ability of the Partnership to incur additional
indebtedness and 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.
12
<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 $48.0 million of expenses (primarily wages and
salaries) would have been reimbursed by the Partnership to the
Managing General Partner in fiscal 1996. In addition, the Managing
General Partner and its affiliates may provide services to the
Partnership for which the Partnership will be charged reasonable fees
as determined by the Managing General Partner. The reimbursement of
such expenses and the payment of any such fees could adversely affect
the ability of the Partnership to make distributions.
- The Managing General Partner manages and operates the Partnership.
Holders of Common Units have no right to elect the Managing General
Partner on an annual or other continuing basis, and have only limited
voting rights on matters affecting the Partnership's business. The
Managing General Partner may not be removed except pursuant to the
vote of the holders of at least 66 2/3% of the outstanding Units
(including Units owned by the Managing General Partner and its
affiliates). The ownership of the Subordinated Units by the Managing
General Partner and its affiliates effectively gives the Managing
General Partner the ability to prevent its removal. The management
control exercised by the Managing General Partner may make it more
difficult for others to control, or influence the activities of, the
Partnership.
- Subject to certain limitations, the Partnership may issue additional
Common Units and other interests in the Partnership, the effect of
which may be to dilute the value of the interests of the then-existing
holders of Common Units in the net assets of the Partnership, dilute
the interests of holders of Common Units in distributions by the
Partnership or to make it more difficult for a person or group to
remove the Managing General Partner or otherwise change the management
of the Partnership.
- The Partnership Agreement contains certain provisions that may have
the effect of discouraging a person or group from attempting to remove
the Managing General Partner or otherwise change the management of the
Partnership. The effect of these provisions may be to diminish the
price at which the Common Units 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.
13
<PAGE>
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
- The Managing General Partner and its affiliates may have conflicts of
interest with the Partnership and its limited partners. The
Partnership Agreement contains certain provisions that limit the
liability and reduce the fiduciary duties of the Managing General
Partner to the Unitholders, as well as provisions that may restrict
the remedies available to Unitholders for actions that might, without
such limitations, constitute breaches of fiduciary duty. Holders of
Common Units are deemed to have consented to certain actions and
conflicts of interest that might otherwise be deemed a breach of
fiduciary or other duties under applicable state law. The validity and
enforceability of these types of provisions under Delaware law are
uncertain.
- Decisions of the Managing General Partner with respect to the amount
and timing of cash expenditures, borrowings, issuances of additional
Units and reserves in any quarter will affect whether or the extent to
which there is sufficient Available Cash from Operating Surplus to
meet the Minimum Quarterly Distribution and Target Distribution Levels
on all Units in a given quarter. In addition, actions by the Managing
General Partner may have the effect of enabling the General Partners
to receive distributions on the Subordinated Units or Incentive
Distributions or hastening the expiration of the Subordination Period
or the conversion of Subordinated Units into Common Units.
- The terms of the New Acquisition Incentive Plan (described below under
"Management -- Executive Compensation -- Incentive Plans") could give
the senior executives of the Managing General Partner an incentive to
cause the Partnership to acquire additional propane operations without
regard to whether the operations would prove beneficial to the
Partnership and may present the senior executives of the Managing
General Partner with a conflict of interest in negotiating the
acquisition price on behalf of the Partnership.
- 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, Andrews & Kurth L.L.P., special counsel to the
General Partners and the Partnership, is of the opinion that, under
current law, the Partnership will be classified as a partnership for
federal income tax purposes.
- No ruling has been requested from the Internal Revenue Service (the
"IRS") with respect to classification of the Partnership as a
partnership for federal income tax purposes, whether the Partnership's
propane operations generate "qualifying income" under Section 7704 of
the Internal Revenue Code of 1986, as amended (the "Code"), or any
other matter affecting the Partnership.
- A Unitholder will be required to pay income taxes on his allocable
share of the Partnership's income, whether or not he receives cash
distributions from the Partnership.
14
<PAGE>
- Investment in Common Units by certain tax-exempt entities, regulated
investment companies and foreign persons raises issues unique to such
persons. For example, virtually all of the taxable income derived by
most organizations exempt from federal income tax (including
individual retirement accounts ("IRAs") and other retirement plans)
from the ownership of a Common Unit will be unrelated business taxable
income and thus will be taxable to such a Unitholder.
- In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), any losses generated by
the Partnership will generally only be available to offset future
income generated by the Partnership and cannot be used to offset
income from other activities, including other passive activities or
investments. Passive losses which are not deductible because they
exceed the Unitholder's income generated by the Partnership may be
deducted in full when the Unitholder disposes of his entire investment
in the Partnership in a fully taxable transaction to an unrelated
party.
- The Partnership has registered with the Secretary of the Treasury as a
"tax shelter." No assurance can be given that the Partnership will not
be audited by the IRS or that tax adjustments will not be made. Any
adjustments in the Partnership's tax returns will lead to adjustments
in the Unitholders' tax returns and may lead to audits of the
Unitholders' tax returns and adjustments of items unrelated to the
Partnership.
- The Partnership will adopt certain depreciation and amortization
conventions that do not conform with all aspects of certain proposed
and final Treasury regulations. A successful challenge to those
conventions by the IRS could adversely affect the amount of tax
benefits available to a purchaser of Common Units or could affect the
timing of such tax benefits or the amount of gain from the sale of
Units and could have a negative impact on the value of the Common
Units or result in audit adjustments to the tax returns of
Unitholders.
- A Unitholder will likely be required to file state and local income
tax returns and pay state and local income taxes in some or all of the
various jurisdictions in which the Partnership does business or owns
property. The Partnership currently owns property and conducts
business in the following states which currently impose a personal
income tax: Alabama, Arkansas, California, Georgia, Illinois, Indiana,
Kentucky, Maryland, Mississippi, Missouri, New Hampshire, New Jersey,
New Mexico, New York, North Carolina, Ohio, Oklahoma, South Carolina,
Tennessee, Utah, Vermont and Virginia.
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 $36.2 million ($21.2 million for the Common Units, $14.3 million
for the Subordinated Units and $.7 million for the aggregate 2% general partner
interest of the General Partners). The amount of pro forma Available Cash from
Operating Surplus generated during fiscal 1996 was approximately $25.7 million.
Such amount would have been sufficient to cover the Minimum Quarterly
Distribution for such fiscal year on all of the Common Units currently
outstanding and the related distribution on the general partner interests, but
would have been insufficient by approximately $10.5 million to cover the Minimum
Quarterly Distribution for such fiscal year on all Subordinated Units currently
outstanding and the related distribution on the general partner interests. If
effect were given to an additional $7.9 million of expense reductions which the
Partnership believes are achievable as a result of the Transactions, pro forma
Available Cash from Operating Surplus would have been approximately $33.5
million, which amount would have been insufficient by approximately $2.7 million
to cover the Minimum Quarterly Distribution for fiscal 1996 on all Subordinated
Units and the related distribution on the general partner interests. See Note 3
to the Pro Forma Consolidated
15
<PAGE>
Financial Statements of Cornerstone Propane Partners, L.P., "Risk Factors --
Risks Inherent in an Investment in the Partnership -- Partnership Profitability
Will Depend on Successful Integration of the Combined Operations" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The amount of pro forma Available Cash from Operating Surplus for
fiscal 1996 set forth above was derived from the pro forma financial statements
of the Partnership in the manner set forth in "Cash Available for Distribution."
The pro forma adjustments are based upon currently available information and
certain estimates and assumptions. The pro forma financial statements do not
purport to present the results of operations of the Partnership had the
Transactions referred to therein actually been completed as of the dates
indicated. Furthermore, the pro forma financial statements are based on accrual
accounting concepts while Operating Surplus is defined in the Partnership
Agreement on a cash accounting basis. As a consequence, the amount of pro forma
Available Cash from Operating Surplus shown above should only be viewed as a
general indication of the amount of Available Cash from Operating Surplus that
might in fact have been generated by the Partnership had it been formed in
earlier periods. Available Cash from Operating Surplus generated during a
specified period refers generally to (i) all cash receipts of the Partnership
from its operations generated during such period, less (ii) all Partnership
operating expenses, debt service payments (including any increases in reserves
therefor but not including amounts paid from any reduction in reserves, or
payments required in connection with the sale of assets, or any refinancing with
the proceeds of new indebtedness or an equity offering) and maintenance capital
expenditures, in each case during such period. For a complete definition of
Operating Surplus, see the Glossary.
The Partnership is required to establish reserves for the future
payment of principal and interest on the Notes and the indebtedness under the
Bank Credit Facility. There are other provisions in such agreements which will,
under certain circumstances, restrict the Partnership's ability to make
distributions to its partners. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- The Partnership -- Financing
and Sources of Liquidity."
16
<PAGE>
PARTNERSHIP STRUCTURE AND MANAGEMENT
The Partnership conducts, in substantially every respect, the propane
businesses that were formerly conducted by Synergy, Empire Energy, Myers and
Coast. The operations of the Partnership are conducted through, and the
operating assets are owned by, the Operating Partnership, a Delaware limited
partnership, and any other subsidiary operating partnerships and corporations.
The Partnership owns a 98.9899% limited partner interest in the Operating
Partnership. The General Partners are also the general partners of the Operating
Partnership, with an aggregate 1.0101% general partner interest in the Operating
Partnership. The General Partners therefore own an aggregate 2% general partner
interest in the Partnership and the Operating Partnership on a combined basis.
The senior executives who managed Coast prior to the IPO manage and
operate the Partnership's business as the senior executives of the Managing
General Partner. The Managing General Partner and its affiliates do not receive
any management fee or other compensation in connection with its management of
the Partnership, but are reimbursed at cost for all direct and indirect expenses
incurred on behalf of the Partnership and all other necessary or appropriate
expenses allocable to the Partnership or otherwise reasonably incurred by the
Managing General Partner or its affiliates in connection with the operation of
the Partnership's business. The Special General Partner has no duty or right to
participate in the management or operation of the Partnership.
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 immediately after giving effect to the
sale of all of the Common Units offered hereby. 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.
<TABLE>
<CAPTION>
<S> <C> <C>
| ------------------------------------------------|
| |
| EFFECTIVE AGGREGATE OWNERSHIP |
| OF THE PARTNERSHIP AND THE |
| OPERATING PARTNERSHIP |
| | |----------------------------|
| | | NORTHWESTERN PUBLIC |
| | | SERVICE COMPANY |
| Public Unitholders' Common | | ("NPS") |
| Units.............................. 60.3% | | |
| General Partners' Subordinated | |----------------------------|
| Units.............................. 37.7% | 100% |
| General Partners' Combined General | Ownership |
| Partner Interest................... 2.0% | |
| | |----------------------------|
| ------------------------------------------------| | NORTHWESTERN GROWTH |
| CORPORATION | |-------------------------|
| ("Northwestern Growth") | | UNAFFILIATED |
| | | SHAREHOLDERS |
|----------------------------| | |
100% | |-------------------------|
Ownership | |
| |
| |
|--------------------------| |---------------------------------| |
| | | CORNERSTONE PROPANE GP, INC. | 17.5% |
| PUBLIC UNITHOLDERS | | ("Managing General Partner") | Common |
| 10,571,000 Common Units | | 5,677,040 Subordinated Units | Stock |
| | | | Ownership |
|--------------------------| |---------------------------------|----------| |
| | | | | |
60.9559% | 32.7357% | | 0.7686% | 82.5% |---------------------------|
Limited | Limited | | Managing | Common | SYN INC. ("SYNERGY" or |
Partner -----------------------| Partner | | General | Stock |"Special General Partner") |
Interest | Interest | | Partner | Ownership | 920,579 Subordinated |
| | | Interest | | Units |
| | | | | |
| | | | |---------------------------|
| | | | 5.3084% Limited | |0.2314% |
| | | | Partner Interest | |Special |
| | | | | |General |
|--------------------------------------------------| | | |Partner |
| |----)----------------------| |Interest |
| CORNERSTONE PROPANE PARTNERS, L.P. | ( | |
| ("Partnership") |----)-------------------------| |
| | | |
|--------------------------------------------------| | |
| | |
| | |
| | |
98.9899% | | |
Limited Partner | |0.7764% |
Interest | |Managing |
| |General |
| |Partner |
| |Interest |
|---------------------------------------| | |0.2337%
| | | |Special
| CORNERSTONE PROPANE, L.P. |----------| |General
| ("Operating Partnership") | |Partner
| |----------------------------------------------|Interest
|---------------------------------------|
|
100% |
Ownership |
|
|------------------------------------------------|
| CORNERSTONE SALES & SERVICE |
| CORPORATION |
|------------------------------------------------|
</TABLE>
17
<PAGE>
THE OFFERING
FORMATION STAGE
Securities Offered . . . . . . . . 750,000 Common Units to be issued in
connection with the acquisition of
businesses, properties or securities in
business combinations.
Units to be Outstanding After This
Offering . . . . . . . . . . . . . 10,571,000 Common Units and 6,597,619
Subordinated Units, representing an
aggregate 60.3% and 37.7% limited
partner interest in the Partnership,
respectively.
Distributions of Available Cash. . The Partnership will distribute all of its
Available Cash within 45 days after the
end of each quarter to the Unitholders
of record on the applicable record date
and to the General Partners. "Available
Cash" for any quarter will consist
generally of all cash on hand at the end
of such quarter, as adjusted for
reserves. The complete definition of
Available Cash is set forth in the
Glossary. The Managing General Partner
has broad discretion in making cash
disbursements and establishing reserves,
thereby affecting the amount of
Available Cash that will be distributed
with respect to any quarter. In
addition, the terms of the Partnership's
indebtedness require that certain
reserves for the payment of principal
and interest be maintained. See "Risk
Factors -- Risks Inherent in an
Investment in the Partnership -- Cash
Distributions Are Not Guaranteed and May
Fluctuate with Partnership Performance"
for a description of the reserves for
the payment of principal and interest
that the Partnership will be required to
maintain. Available Cash will generally
be distributed 98% to Unitholders and 2%
to the General Partners, except that if
distributions of Available Cash from
Operating Surplus exceed specified
target levels ("Target Distribution
Levels") in excess of the Minimum
Quarterly Distribution, the General
Partners will receive a percentage of
such excess distributions that will
increase to up to 50% of the excess
distributions above the highest Target
Distribution Level. See "Cash
Distribution Policy -- Incentive
Distributions -- Hypothetical Annualized
Yield."
Distributions to Common and
Subordinated Unitholders . . . . The Partnership intends, to the extent
there is sufficient Available Cash from
Operating Surplus, to distribute to each
holder of Common Units at least the
Minimum Quarterly Distribution of $.54
per Common Unit per quarter. The Minimum
Quarterly Distribution is not guaranteed
and is subject to adjustment as
described under "Cash Distribution
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
18
<PAGE>
Arrearages"), and the General Partners
will have the right to receive the
related distribution on the general
partner interests, before any
distribution of Available Cash from
Operating Surplus is made to the
Subordinated Unitholders. This
subordination feature will enhance the
Partnership's ability to distribute the
Minimum Quarterly Distribution on the
Common Units during the Subordination
Period. Subordinated Units will not
accrue distribution arrearages. Upon
expiration of the Subordination Period,
Common Units will no longer accrue
distribution arrearages. See "Cash
Distribution Policy."
Subordination Period . . . . . . . The Subordination Period will generally
extend until the first day of any
quarter beginning after December 31,
2001 in respect of which
(i) distributions of Available Cash from
Operating Surplus on the Common Units
and the Subordinated Units with respect
to each of the three consecutive
four-quarter periods immediately
preceding such date equaled or exceeded
the sum of the Minimum Quarterly
Distribution on all of the outstanding
Common Units and Subordinated Units
during such periods, (ii) the Adjusted
Operating Surplus generated during each
of the three consecutive four-quarter
periods immediately preceding such date
equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of
the outstanding Common Units and
Subordinated Units and the related
distribution on the general partner
interests in the Partnership during such
periods, and (iii) there are no
outstanding Common Unit Arrearages. Upon
expiration of the Subordination Period,
all remaining Subordinated Units will
convert into Common Units on a
one-for-one basis and will thereafter
participate pro rata with the other
Common Units in distributions of
Available Cash.
Early Conversion of Subordinated
Units. . . . . . . . . . . . . . . A portion of the Subordinated Units will
convert into Common Units on the first
day after the record date established
for the distribution in respect of any
quarter ending on or after
(a) December 31, 1999 (with respect to
one-quarter of the Subordinated Units)
and (b) December 31, 2000 (with respect
to one-quarter of the Subordinated
Units), in respect of which
(i) distributions of Available Cash from
Operating Surplus on the Common Units
and the Subordinated Units with respect
to each of the three consecutive
four-quarter periods immediately
preceding such date equaled or exceeded
the sum of the Minimum Quarterly
Distribution on all of the outstanding
Common Units and Subordinated Units
during such periods, (ii) the Adjusted
Operating Surplus generated during each
of the two consecutive four-quarter
periods immediately preceding such date
equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of
the outstanding Common Units and
Subordinated Units 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
19
<PAGE>
of the first one-quarter of Subordinated
Units. See "Cash Distribution Policy --
Distributions from Operating Surplus
during Subordination Period."
Incentive Distributions. . . . . . If quarterly distributions of Available
Cash exceed the Target Distribution
Levels, the General Partners will
receive distributions which are
generally equal to 15%, then 25% and
then 50% of the distributions of
Available Cash that exceed such Target
Distribution Levels. The Target
Distribution Levels are based on the
amounts of Available Cash from Operating
Surplus distributed with respect to a
given quarter that exceed distributions
made with respect to the Minimum
Quarterly Distribution and Common Unit
Arrearages, if any. See "Cash
Distribution Policy -- Incentive
Distributions --Hypothetical Annualized
Yield." The distributions to the
General Partners described above that
are in excess of their aggregate 2%
general partner interest are referred to
herein as the "Incentive Distributions."
Adjustment of Minimum Quarterly
Distribution and Target
Distribution Levels. . . . . . . The Minimum Quarterly Distribution and the
Target Distribution Levels are subject
to downward adjustments in the event
that the Unitholders receive
distributions of Available Cash from
Capital Surplus or legislation is
enacted or existing law is modified or
interpreted by the relevant governmental
authority in a manner that causes the
Partnership to be treated as an
association taxable as a corporation or
otherwise taxable as an entity for
federal, state or local income tax
purposes. If, as a result of
distributions of Available Cash from
Capital Surplus, the Unitholders receive
a full return of the initial public
offering price of the Common Units and
any unpaid Common Unit Arrearages, the
distributions of Available Cash payable
to the General Partners and their
affiliates will increase to 50% of all
amounts distributed thereafter. See
"Cash Distribution Policy -- General,"
"-- Distributions from Capital Surplus"
and "-- Adjustment of Minimum Quarterly
Distribution and Target Distribution
Levels."
Partnership's Ability to Issue
Additional Units . . . . . . . . The Partnership Agreement generally
authorizes the Partnership to issue an
unlimited number of additional limited
partner interests and other equity
securities of the Partnership for such
consideration and on such terms and
conditions as shall be established by
the Managing General Partner in its sole
discretion without the approval of the
Unitholders. During the Subordination
Period, however, the Partnership may not
issue equity securities ranking prior or
senior to the Common Units or an
aggregate of more than 4,270,000 Common
Units (excluding Common Units issued
upon conversion of Subordinated Units,
pursuant to employee benefit plans or in
connection with certain acquisitions
(such as all or a portion of the 750,000
Common Units offered hereby) or capital
improvements or
20
<PAGE>
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 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 Units or to
receive cash in exchange for such
interests. These provisions are intended
to discourage a person or group from
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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."
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. The following discussion, insofar as it
relates to United States federal income tax laws, is based in part upon the
opinion of Andrews & Kurth L.L.P., special counsel to the General Partners and
the Partnership ("Counsel"), described in "Tax Considerations." This summary is
qualified by the discussion in "Tax Considerations," particularly the
qualifications on the opinions of Counsel described therein.
PARTNERSHIP STATUS
In the opinion of Counsel, the Partnership will be classified for federal
income tax purposes as a partnership, and the beneficial owners of Common Units
will generally be considered partners in the Partnership. Accordingly, the
Partnership will pay no federal income taxes, and a holder of Common Units will
be required to report in his federal income tax return his share of the
Partnership's income, gains, losses and deductions. In general, cash
distributions to a holder of Common Units will be taxable only if, and to the
extent that, they exceed the tax basis in his Common Units.
PARTNERSHIP ALLOCATIONS
In general, income and loss of the Partnership will be allocated to the
General Partners and the Unitholders for each taxable year in accordance with
their respective percentage interests in the Partnership, as determined annually
and prorated on a monthly basis and subsequently apportioned among the General
Partners and the Unitholders of record as of the opening of the first business
day of the month to which they relate, even though Unitholders may dispose of
their Units during the month in question. As described in greater detail in
"Consequences of Exchanging Property for Common Units," however, a Unitholder
acquiring Units in exchange for a conveyance of assets to the Partnership will
be required to take into account certain special allocations of income and loss
for federal income tax purposes related to the conveyed assets. At any time that
distributions are made on the Common Units and not on the Subordinated Units, or
that Incentive Distributions are made to the General Partners, gross income will
be allocated to the recipients to the extent of such distribution. A Unitholder
will be required to take into account, in determining his federal income tax
liability, his share of income generated by the Partnership for each taxable
year of the Partnership ending within or with the Unitholder's taxable year even
if cash distributions are not made to him. As a consequence, a 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."
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BASIS OF COMMON UNITS
A person who contributes property (including stock) to the Partnership in
exchange for Common Units will generally have an initial tax basis for his
Common Units equal to the tax basis of the property contributed to the
Partnership in exchange for Common Units. The tax basis for a Common Unit will
be increased by the Unitholder's share of Partnership income and his share of
increases in Partnership debt. The basis for a Common Unit will be decreased
(but not below zero) by distributions from the Partnership (including deemed
distributions resulting from the assumption of indebtedness by the Partnership),
by the Unitholder's share of Partnership losses, by his share of decreases in
Partnership debt and by the Unitholder's share of expenditures of the
Partnership that are not deductible in computing the taxable income and are not
required to be capitalized.
LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), any Partnership losses will only be
available to offset future income generated by the Partnership and cannot be
used to offset income from other activities, including passive activities or
investments. Any losses unused by virtue of the passive loss rules may be fully
deducted when the Unitholder disposes of all of his Common Units in a taxable
transaction with an unrelated party.
SECTION 754 ELECTION
The Partnership intends to make the election provided for by Section 754 of
the Code, which will generally result in a Unitholder being allocated income and
deductions calculated by reference to the portion of his purchase price
attributable to each asset of the Partnership.
DISPOSITION OF COMMON UNITS
A Unitholder who sells Common Units will recognize gain or loss equal to
the difference between the amount realized and the adjusted tax basis of those
Common Units. Thus, distributions of cash from the Partnership to a Unitholder
in excess of the income allocated to him will, in effect, become taxable income
if he sells the Common Units at a price greater than his adjusted tax basis even
if the price is less than his original cost. A portion of the amount realized
(whether or not representing gain) may be ordinary income.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will likely be subject to
other taxes, such as state and local income taxes, unincorporated business
taxes, and estate, inheritance or intangible taxes that are imposed by the
various jurisdictions in which a Unitholder resides or in which the Partnership
does business or owns property. Although an analysis of those various taxes is
not presented here, each prospective Unitholder should consider their potential
impact on his investment in the Partnership. The Partnership currently owns
property and conducts business in the following states which currently impose a
personal income tax: Alabama, Arkansas, California, Georgia, Illinois, Indiana,
Kentucky, Maryland, Mississippi, Missouri, New Hampshire, New Jersey, New
Mexico, New York, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee,
Utah, Vermont and Virginia. In certain states, tax losses may not produce a tax
benefit in the year incurred (if, for example, the Partnership has no income
from sources within that state) and also may not be available to offset income
in subsequent taxable years. Some of the states may require the Partnership, or
the Partnership may elect, to withhold a percentage of income from amounts to be
distributed to a Unitholder. Withholding, the amount of which may be more or
less than a particular Unitholder's income tax liability owed to the state, may
not relieve the nonresident Unitholder from the obligation to file an income tax
return. Amounts withheld may be treated as if distributed to Unitholders for
purposes of determining the amounts distributed by the Partnership. Based on
current law and its estimate of future Partnership operations, the Partnership
anticipates that any amounts required to be withheld will not be material.
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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 a Common Unit and
thus will be required to file federal income tax returns and to pay tax on such
Unitholder's share of Partnership taxable income. Furthermore, distributions to
foreign Unitholders will be subject to federal income tax withholding. See "Tax
Considerations -- Uniformity of Units -- Tax-Exempt Organizations and Certain
Other Investors."
TAX SHELTER REGISTRATION
The Code generally requires that "tax shelters" be registered with the
Secretary of the Treasury. It is arguable that the Partnership is not subject
to this registration requirement. Nevertheless, the Partnership has
registered as a tax shelter (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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<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. ALL
STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS
PROSPECTUS, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE
PARTNERSHIP'S BUSINESS STRATEGY, PLANS AND OBJECTIVES OF MANAGEMENT OF THE
PARTNERSHIP FOR FUTURE OPERATIONS AND STATEMENTS UNDER "PROSPECTUS SUMMARY --
CASH AVAILABLE FOR DISTRIBUTION" AND "CASH AVAILABLE FOR DISTRIBUTION," ARE
FORWARD-LOOKING STATEMENTS. ALTHOUGH THE PARTNERSHIP BELIEVES THAT THE
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN
GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO BE CORRECT. IMPORTANT
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
PARTNERSHIP'S EXPECTATIONS ARE DISCLOSED BELOW AND ELSEWHERE IN THIS PROSPECTUS.
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
WEATHER CONDITIONS AFFECT THE DEMAND FOR PROPANE
Weather conditions have a significant impact on the demand for propane for
both heating and agricultural purposes. Many customers of the Partnership rely
heavily on propane as a heating fuel. Accordingly, the volume of retail propane
sold is highest during the six-month peak heating season of October through
March and is directly affected by the severity of the winter weather. During
fiscal 1996, approximately 72.7% of the Partnership's combined retail propane
volume and in excess of 85% of the Partnership's pro forma EBITDA were
attributable to sales during the peak heating season. Actual weather conditions
can vary substantially from year to year, significantly affecting the
Partnership's financial performance. Furthermore, variations in weather in one
or more regions in which the Partnership operates can significantly affect the
total volume of propane sold by the Partnership and the margins realized on such
sales and, consequently, the Partnership's results of operations. Agricultural
demand is also affected by weather, as dry weather during the harvest season
reduces demand for propane used in crop drying. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
THE PARTNERSHIP WILL BE SUBJECT TO PRICING AND INVENTORY RISKS
The retail propane business is a "margin-based" business in which gross
profits depend on the excess of sales prices over propane supply costs.
Consequently, the Partnership's profitability will be sensitive to changes in
wholesale propane prices. Propane is a commodity, the market price of which can
be subject to volatile changes in response to changes in supply or other market
conditions. The Partnership will have no control over these market conditions.
Consequently, the unit price of propane purchased by the Partnership, as well as
other propane marketers, can change rapidly over a short period of time. In
general, product supply contracts permit suppliers to charge posted prices (plus
transportation costs) at the time of delivery or the current prices established
at major delivery points. As it may not be possible immediately to pass on to
customers rapid increases in the wholesale cost of propane, such increases could
reduce the Partnership's gross profits. See "-- The Retail Propane Business Is
Highly Competitive."
Propane is available from numerous sources, including integrated international
oil companies, independent refiners and independent wholesalers. The Partnership
purchases propane from a variety of suppliers pursuant to supply contracts or on
the spot market. To the extent that the Partnership purchases propane from
foreign (including Canadian) sources, its propane business will be subject to
risks of disruption in foreign supply. The Partnership generally attempts to
minimize inventory risk by purchasing propane on a short-term basis. However,
the Partnership may purchase large volumes of propane during periods of low
demand, which generally occur during the summer months, at the then current
market price. Because of the potential volatility of propane prices, if the
Partnership makes such purchases, the market price for propane could fall below
the price at which the Partnership made the purchases, thereby 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."
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THE RETAIL PROPANE BUSINESS IS HIGHLY COMPETITIVE
The Partnership's profitability is affected by the competition for
customers among all participants in the retail propane business. The Partnership
competes with other distributors of propane, including a number of large
national and regional firms and several thousand small independent firms. Some
of these competitors are larger or have greater financial resources than the
Partnership. Should a competitor attempt to increase market share by reducing
prices, the Partnership's financial condition and results of operations could be
materially adversely affected. Generally, warmer-than-normal weather further
intensifies competition. The Partnership believes that its ability to compete
effectively depends on the reliability of its service, its responsiveness to
customers and its ability to maintain competitive retail prices.
THE RETAIL PROPANE BUSINESS FACES COMPETITION FROM ALTERNATIVE ENERGY
SOURCES
Propane competes with other sources of energy, some of which are less
costly for equivalent energy value. The Partnership competes for customers
against suppliers of electricity, natural gas and fuel oil. Electricity is a
major competitor of propane, but propane generally enjoys a competitive price
advantage over electricity. Except for certain industrial and commercial
applications, propane is generally not competitive with natural gas in areas
where natural gas pipelines already exist because natural gas is a significantly
less expensive source of energy than propane. The gradual expansion of the
nation's natural gas distribution systems has resulted in the availability of
natural gas in many areas that previously depended upon propane. Although
propane is similar to fuel oil in certain applications and market demand,
propane and fuel oil compete to a lesser extent primarily because of the cost of
converting from one to the other. The Partnership cannot predict the effect that
the development of alternative energy sources might have on its operations.
THE PARTNERSHIP MAY NOT BE SUCCESSFUL IN GROWING THROUGH ACQUISITIONS
The retail propane industry is mature, and the Partnership foresees only
limited growth in total retail demand for propane. Moreover, as a result of
long-standing customer relationships that are typical in the retail home propane
industry, the inconvenience of switching tanks and suppliers and propane's
higher cost as compared to certain other energy sources, such as natural gas,
the Partnership may experience difficulty in acquiring new retail customers,
other than through acquisitions. Therefore, while the Partnership's business
strategy includes internal growth and start-ups of new customer service
locations, the ability of the Partnership's propane business to grow will depend
principally upon its ability to acquire other retail propane distributors. There
can be no assurance that the Partnership will identify attractive acquisition
candidates in the future, that the Partnership will be able to acquire such
businesses on economically acceptable terms, that any acquisitions will not be
dilutive to earnings and distributions to the Unitholders or that any
additional debt incurred to finance acquisitions will not affect the ability of
the Partnership to make distributions to the Unitholders. The Partnership is not
required under the Partnership Agreement to seek Unitholder approval of any
acquisition. The Partnership is subject to certain covenants in agreements
governing its indebtedness that restrict the Partnership's ability to incur
indebtedness to finance acquisitions. In addition, to the extent that warm
weather adversely affects the Partnership's operating and financial results, the
Partnership's access to capital and its acquisition activities may be limited.
THE PARTNERSHIP IS SUBJECT TO OPERATING AND LITIGATION RISKS WHICH MAY NOT
BE COVERED BY INSURANCE
The Partnership's operations are subject to all operating hazards and risks
normally incidental to handling, storing and delivering combustible liquids such
as propane. As a result, 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.
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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. 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 $36.2
million ($21.2 million for the Common Units, $14.3 million for the Subordinated
Units and $.7 million for the aggregate 2% general partner interest). The amount
of pro forma Available Cash from Operating Surplus generated during fiscal 1996
was approximately $25.7 million. Such amount would have been sufficient to cover
the Minimum Quarterly Distribution for such fiscal year on all of the Common
Units currently outstanding and the related distribution on the general partner
interests, but would have been insufficient by approximately $10.5 million to
cover the Minimum Quarterly Distribution on all Subordinated Units and the
related distribution on the general partner interests. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." For
the calculation of pro forma Available Cash from Operating Surplus, see "Cash
Available for Distribution."
The Partnership Agreement gives the Managing General Partner broad
discretion in establishing reserves for the proper conduct of the
Partnership's business that will affect the amount of Available Cash. Because
the business of the Partnership is seasonal, the Managing General Partner
will make additions to reserves during certain quarters in order to fund
operating expenses, interest payments and cash distributions to partners with
respect to other quarters. In addition, the Partnership is required to
establish reserves in respect of future payments of principal and interest on
the Notes and, in certain instances, in respect of future payments of
principal and interest under the Bank Credit Facility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- -- The Partnership -- Financing and Sources of Liquidity." The Partnership
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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 11.4% of the amount of
Available Cash needed to distribute the Minimum Quarterly Distribution for four
quarters on the Common Units and the Subordinated Units 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 57.0% of the amount of
Available Cash needed to distribute the Minimum Quarterly Distribution for four
quarters on the Common Units and the Subordinated Units 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. Such executives were not
involved with the operations of either Synergy or Empire Energy. The historical
financial results of the companies that comprised the Combined Operations only
cover periods when such companies were not under common control and management
and, therefore, may not be indicative of the Partnership's future financial and
operating results. The inability of the Partnership to integrate successfully
the Combined Operations could have a material adverse effect on the
Partnership's business, financial condition and results of operations.
THE PARTNERSHIP'S INDEBTEDNESS MAY LIMIT THE PARTNERSHIP'S ABILITY TO MAKE
DISTRIBUTIONS AND MAY AFFECT ITS OPERATIONS
At December 31, 1996, the Partnership's total indebtedness as a percentage
of its total capitalization was approximately 50.0%. As a result, the
Partnership is significantly leveraged and has indebtedness that is substantial
in relation to its partners' capital. As of March 31, 1997, the Partnership had
$125.0 million of unused borrowing capacity under the Bank Credit Facility.
Future borrowings could result in a significant increase in the Partnership's
leverage. The ability of the Partnership to make principal and interest payments
depends on future performance, which performance is subject to many factors, a
number of which will be outside the Partnership's control. The Notes and the
Bank Credit Facility contain provisions relating to change of control. If such
change of control provisions are triggered, such outstanding indebtedness may
become due. In such event, there is no assurance that the Partnership would be
able to pay the indebtedness. There is no restriction on the ability of the
Managing General Partner or Northwestern Growth to enter into a transaction
which would trigger such change of control provisions. The Notes and the Bank
Credit Facility contain restrictive covenants that limit the ability of the
Operating Partnership to distribute cash and to incur additional indebtedness.
The payment of principal and interest on such indebtedness and the reserves
required by the terms of the Partnership's indebtedness for the future payment
thereof will reduce the cash available to make distributions on the Units. The
Partnership's leverage may adversely affect the ability of the Partnership to
finance its future operations and capital needs, limit its ability to pursue
acquisitions and other business opportunities and make its results of operations
more susceptible to adverse economic or operating conditions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
The Partnership -- Financing and Sources of Liquidity."
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COST REIMBURSEMENTS AND FEES DUE TO THE MANAGING GENERAL PARTNER MAY BE
SUBSTANTIAL
Prior to making any distribution on the Common Units, the Partnership will
reimburse the Managing General Partner and its affiliates at cost for all
expenses incurred on behalf of the Partnership. On a pro forma basis,
approximately $48.0 million of expenses (primarily wages and salaries) would
have been reimbursed by the Partnership to the Managing General Partner in
fiscal 1996. In addition, the Managing General Partner and its affiliates may
provide services to the Partnership for which the Partnership will be charged
reasonable fees as determined by the Managing General Partner. The reimbursement
of such expenses and the payment of any such fees could adversely affect the
ability of the Partnership to make distributions.
UNITHOLDERS HAVE CERTAIN LIMITS ON THEIR VOTING RIGHTS; THE MANAGING
GENERAL PARTNER MANAGES AND OPERATES THE PARTNERSHIP
The Managing General Partner manages and operates the Partnership. Unlike
the holders of common stock in a corporation, holders of Common Units have only
limited voting rights on matters affecting the Partnership's business. Holders
of Common Units have no right to elect the Managing General Partner on an annual
or other continuing basis, and the Managing General Partner may not be removed
except pursuant to the vote of the holders of at least 66 2/3% of the
outstanding Units (including Units owned by the General Partners and their
affiliates) and upon the election of a successor general partner by the vote of
the holders of not less than a majority of the Outstanding Units. The ownership
of the Subordinated Units by the Managing General Partner and its affiliates
effectively gives the Managing General Partner the ability to prevent its
removal. As a result, holders of Common Units will have limited influence on
matters affecting the operation of the Partnership, and third parties may find
it difficult to attempt to gain control, or influence the activities, of the
Partnership. See "The Partnership Agreement."
THE PARTNERSHIP MAY ISSUE ADDITIONAL COMMON UNITS THEREBY DILUTING EXISTING
UNITHOLDERS' INTERESTS
The Partnership has the authority under the Partnership Agreement to issue
an unlimited number of additional Common Units or other equity securities for
such consideration and on such terms and conditions as are established by the
Managing General Partner, in its sole discretion without the approval of the
Unitholders. During the Subordination Period, however, the Partnership may not
issue equity securities ranking prior or senior to the Common Units or an
aggregate of more than 4,270,000 additional Common Units (excluding Common Units
issued upon conversion of Subordinated Units, pursuant to employee benefit plans
or in connection with certain acquisitions (such as all or a porion of the
750,000 Common Units offered hereby) or capital improvements or the repayment of
certain indebtedness) or an equivalent number of securities ranking on a parity
with the Common Units without the approval of holders of a Unit Majority. After
the end of the Subordination Period, the Partnership may issue an unlimited
number of limited partner interests of any type without the approval of the
Unitholders. The Partnership Agreement does not give the holders of Common Units
the right to approve the issuance by the Partnership of equity securities
ranking junior to the Common Units at any time. Based on the circumstances of
each case, the issuance of additional Common Units or securities ranking on a
parity with the Common Units may dilute the value of the interests of the
then-existing holders of Common Units in the net assets of the Partnership,
dilute the interests of holders of Common Units in distributions by the
Partnership or make it more difficult for a person or group to remove the
Managing General Partner or otherwise change the management of the Partnership.
If some or all of the Subordinated Units are converted into Common Units,
the amount of Available Cash necessary to pay the Minimum Quarterly Distribution
with respect to all of the Common Units would be increased proportionately,
thereby resulting in a dilution of the interests of existing Common Unitholders
in distributions by the Partnership.
CHANGE OF MANAGEMENT PROVISIONS
The ownership of Subordinated Units by the Managing General Partner and its
affiliates effectively preclude the removal of the Managing General Partner
without its consent. In addition, the Partnership Agreement contains certain
provisions that may have the effect of discouraging a person or group from
attempting to remove the Managing General Partner of the Partnership or
otherwise change the management of the Partnership. If the Managing General
Partner is removed as general partner of the Partnership under circumstances
where Cause does not exist and Units held by the Managing General
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Partner and its affiliates are not voted in favor of such removal, (i) the
Subordination Period will end and all outstanding Subordinated Units will
immediately convert into Common Units on a one-for-one basis, (ii) any
existing Common Unit Arrearages will be extinguished and (iii) the General
Partners will have the right to convert their general partner interests (and
their rights to receive Incentive Distributions) into Common Units or to
receive cash in exchange for such interests. Further, if any person or group
(other than the Managing General Partner or its affiliates) acquires
beneficial ownership of 20% or more of any class of Units then outstanding,
such person or group will lose voting rights with respect to all of its
Units. In addition, the Partnership has substantial latitude in issuing
equity securities without Unitholder approval. The Partnership Agreement also
contains provisions limiting the ability of Unitholders to call meetings of
Unitholders or to acquire information about the Partnership's operations as
well as other provisions limiting the Unitholders' ability to influence the
manner or direction of management. The effect of these provisions may be to
diminish the price at which the Common Units trade under certain
circumstances. See "The Partnership Agreement -- Withdrawal or Removal of the
General Partners."
THE MANAGING GENERAL PARTNER WILL HAVE A LIMITED CALL RIGHT WITH RESPECT TO
THE LIMITED PARTNER INTERESTS
If at any time less than 20% of the then-issued and outstanding limited
partner interests of any class (including Common Units) are held by persons
other than the Managing General Partner and its affiliates, the Managing General
Partner will have the right, which it may assign to any of its affiliates or the
Partnership, to acquire all, but not less than all, of the remaining limited
partner interests of such class held by such unaffiliated persons at a price
generally equal to the then-current market price of limited partner interests of
such class. As a consequence, a holder of Common Units may be required to sell
his Common Units at a time when he may not desire to sell them or at a price
that is less than the price he would desire to receive upon such sale. See "The
Partnership Agreement -- Limited Call Right."
UNITHOLDERS MAY NOT HAVE LIMITED LIABILITY IN CERTAIN CIRCUMSTANCES;
LIABILITY FOR RETURN OF CERTAIN DISTRIBUTIONS
The limitations on the liability of holders of limited partner interests
for the obligations of a limited partnership have not been clearly established
in some states. If it were determined that the Partnership had been conducting
business in any state without compliance with the applicable limited partnership
statute, or that the right or the exercise of the right by the Unitholders as a
group to remove or replace the General Partners, to make certain amendments to
the Partnership Agreement or to take other action pursuant to the Partnership
Agreement constituted participation in the "control" of the Partnership's
business, then the Unitholders could be held liable in certain circumstances for
the Partnership's obligations to the same extent as a general partner. In
addition, under certain circumstances a Unitholder may be liable to the
Partnership for the amount of a distribution for a period of three years from
the date of the distribution. See "The Partnership Agreement -- Limited
Liability" for a discussion of the limitations on liability and the implications
thereof to a Unitholder.
HOLDERS OF COMMON UNITS HAVE NOT BEEN REPRESENTED BY COUNSEL
The holders of the Common Units were not represented by counsel in
connection with the preparation of the Partnership Agreement or the other
agreements referred to herein.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Conflicts of interest could arise as a result of the relationships between
the Partnership, on the one hand, and the General Partners and their affiliates,
on the other. The directors and officers of the Managing General Partner have
fiduciary duties to manage the Managing General Partner in a manner beneficial
to its stockholder. At the same time, the Managing General Partner has fiduciary
duties to manage the Partnership in a manner beneficial to the Partnership and
the Unitholders. The duties of the Managing General Partner, as managing general
partner, to the Partnership and the Unitholders, therefore, may come into
conflict with the duties of management of the Managing General Partner to its
stockholder.
Conflicts of interest might arise with respect to the following matters,
among others:
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(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.
(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
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was entered into to be fair to the Partnership in the reasonable judgment
of the Managing General Partner. See "Conflicts of Interest and Fiduciary
Responsibilities -- Conflicts of Interest -- The General Partners'
Affiliates May Compete with the Partnership." In addition, affiliates of
the Managing General Partner (including the Special General Partner) may
compete with the Partnership in businesses other than the retail sale of
propane in the continental United States. There can be no assurance that
there will not be competition between the Partnership and affiliates of the
Managing General Partner in the future.
(x) The Partnership Agreement does not prohibit the Partnership from
engaging in roll-up transactions. Were the Managing General Partner to
cause the Partnership to engage in a roll-up transaction, there could be no
assurance that such a transaction would not have a material adverse effect
on a Unitholder's investment in the Partnership.
Unless provided for otherwise in the partnership agreement, Delaware law
generally requires a general partner of a Delaware limited partnership to adhere
to fiduciary duty standards under which it owes its limited partners the highest
duties of good faith, fairness and loyalty and which generally prohibit such
general partner from taking any action or engaging in any transaction as to
which it has a conflict of interest. The Partnership Agreement expressly permits
the Managing General Partner to resolve conflicts of interest between itself or
its affiliates, on the one hand, and the Partnership or the Unitholders, on the
other, and to consider, in resolving such conflicts of interest, the interests
of other parties in addition to the interests of the Unitholders. In addition,
the Partnership Agreement provides that a purchaser of Common Units is deemed to
have consented to certain conflicts of interest and actions of the Managing
General Partner and its affiliates that might otherwise be prohibited, including
those described in clauses (i)-(x) above, and to have agreed that such conflicts
of interest and actions do not constitute a breach by the Managing General
Partner of any duty stated or implied by law or equity. The Managing General
Partner will not be in breach of its obligations under the Partnership Agreement
or its duties to the Partnership or the Unitholders if the resolution of such
conflict is fair and reasonable to the Partnership. The latitude given in the
Partnership Agreement to the Managing General Partner in resolving conflicts of
interest may significantly limit the ability of a Unitholder to challenge what
might otherwise be a breach of fiduciary duty.
The Partnership Agreement expressly limits the liability of the General
Partners by providing that the General Partners, their affiliates and their
officers and directors will not be liable for monetary damages to the
Partnership, the limited partners or assignees for errors of judgment or for any
acts or omissions if the General Partners and such other persons acted in good
faith. In addition, the Partnership is required to indemnify the General
Partners, their affiliates and their respective officers, directors, employees,
agents and trustees to the fullest extent permitted by law against liabilities,
costs and expenses incurred by the General Partners or such other persons, if
the General Partners or such persons acted in good faith and in a manner they
reasonably believed to be in, or (in the case of a person other than a General
Partner) not opposed to, the best interests of the Partnership and, with respect
to any criminal proceedings, had no reasonable cause to believe the conduct was
unlawful.
The provisions of Delaware law that allow the common law fiduciary duties
of a general partner to be modified by a partnership agreement have not been
tested in a court of law, and the Managing General Partner has not obtained an
opinion of counsel covering the provisions set forth in the Partnership
Agreement that purport to waive or restrict the fiduciary duties of the General
Partners that would be in effect under common law were it not for the
Partnership Agreement. See "Conflicts of Interest and Fiduciary Responsibilities
- -- Conflicts of Interest."
TAX RISKS
For a general discussion of the expected federal income tax consequences of
owning and disposing of Common Units, see "Tax Considerations."
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TAX TREATMENT IS DEPENDENT ON PARTNERSHIP STATUS
The availability to a Common Unitholder of the federal income tax benefits
of an investment in the Partnership depends, in large part, on the
classification of the Partnership as a partnership for federal income tax
purposes. Assuming the accuracy of certain factual matters as to which the
General Partners and the Partnership have made representations, Counsel is of
the opinion that, under current law, the Partnership will be classified as a
partnership for federal income tax purposes. No ruling from the IRS as to
classification has been or is expected to be requested. Instead, the Partnership
intends to rely on such opinion of Counsel (which is not binding on the IRS).
One of the representations of the Partnership on which the opinion of Counsel is
based is that at least 90% of the Partnership's gross income for each taxable
year in the future will be "qualifying income." Whether the Partnership will
continue to be classified as a partnership in part depends, therefore, on the
Partnership's ability to meet this qualifying income test in the future. See
"Tax Considerations -- Partnership Status."
If the Partnership were classified as an association taxable as a
corporation for federal income tax purposes, the Partnership would pay tax on
its income at corporate rates (currently a 35% federal rate), distributions
would generally be taxed again to the Unitholders as corporate distributions,
and no income, gains, losses or deductions would flow through to the
Unitholders. Because a tax would be imposed upon the Partnership as an entity,
the cash available for distribution to the holders of Common Units would be
substantially reduced. Treatment of the Partnership as an association taxable as
a corporation or otherwise 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, S corporation or corporation taxed under Subchapter S of the Code)
contributing property (including stock) to the Partnership in exchange for
Common Units. If the Partnership assumes liabilities in connection with a
contribution of assets in exchange for Common Units, however, taxable gain may
be recognized by the contributing person in certain circumstances.
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TAX LIABILITY EXCEEDING CASH DISTRIBUTIONS
A Unitholder will be required to pay federal income taxes and, in certain
cases, state and local income taxes on his allocable share of the Partnership's
income, whether or not he receives cash distributions from the Partnership.
There is no assurance that a Unitholder will receive cash distributions equal to
his allocable share of taxable income from the Partnership or even the tax
liability to him resulting from that income. Further, a holder of Common Units
may incur a tax liability, in excess of the amount of cash received, upon the
sale of his Common Units. See "Tax Considerations -- Tax Consequences of Unit
Ownership" and "-- Disposition of Common Units."
OWNERSHIP OF COMMON UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER
INVESTORS
Investment in Common Units by certain tax-exempt entities, regulated
investment companies and foreign persons raises issues unique to such persons.
For example, virtually all of the taxable income derived by most organizations
exempt from federal income tax (including IRAs and other retirement plans) from
the ownership of a Common Unit will be unrelated business taxable income and
thus will be taxable to such a Unitholder. See "Tax Considerations -- Uniformity
of Units -- Tax-Exempt Organizations and Certain Other Investors."
DEDUCTIBILITY OF LOSSES
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), losses generated by the Partnership
will only be available to offset future income generated by the Partnership and
cannot be used to offset income from other activities, including passive
activities or investments. Passive losses which are not deductible because they
exceed the Unitholder's income generated by the Partnership may be deducted in
full when the Unitholder disposes of his entire investment in the Partnership in
a fully taxable transaction to an unrelated party. Net passive income from the
Partnership may be offset by unused Partnership losses carried over from prior
years, but not by losses from other passive activities, including losses from
other publicly traded partnerships. See "Tax Considerations -- Tax Consequences
of Unit Ownership -- Limitations on Deductibility of Partnership Losses."
TAX SHELTER REGISTRATION; POTENTIAL IRS AUDIT
The Partnership has registered with the Secretary of the Treasury as a "tax
shelter." No assurance can be given that the Partnership will not be audited by
the IRS or that tax adjustments will not be made. The rights of a Unitholder
owning less than a 1% profits interest in the Partnership to participate in the
income tax audit process are very limited. Further, any adjustments in the
Partnership's tax returns will lead to adjustments in the Unitholders' tax
returns and may lead to audits of Unitholders' tax returns and adjustments of
items unrelated to the Partnership. Each Unitholder would bear the cost of any
expenses incurred in connection with an examination of such Unitholder's
personal tax return.
UNIFORMITY OF COMMON UNITS AND NONCONFORMING DEPRECIATION CONVENTIONS
Because the Partnership cannot match transferors and transferees of Common
Units, uniformity of the economic and tax characteristics of the Common Units to
a purchaser of Common Units must be maintained. To maintain uniformity and for
other reasons, the Partnership will adopt certain depreciation and amortization
conventions that do not conform with all aspects of certain proposed and final
Treasury Regulations. A successful challenge to those conventions by the IRS
could adversely affect the amount of tax benefits available to a purchaser of
Common Units and could have a negative impact on the value of the Common Units.
See "Tax Considerations -- Uniformity of Units."
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will likely be subject to
other taxes, such as state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which the Partnership does business or owns property. A
Unitholder will likely be required to file state and local income tax returns
and pay state and local income taxes in some or all of the various jurisdictions
in which the Partnership does business or owns
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property and may be subject to penalties for failure to comply with those
requirements. The Partnership currently owns property and conducts business in
the following states which currently impose a personal income tax: Alabama,
Arkansas, California, Georgia, Illinois, Indiana, Kentucky, Maryland,
Mississippi, Missouri, New Hampshire, New Jersey, New Mexico, New York,
North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Utah, Vermont and
Virginia. It is the responsibility of each Unitholder to file all
United States federal, state and local tax returns that may be required of such
Unitholder. Counsel has not rendered an opinion on the state or local tax
consequences of an investment in the Partnership. See "Tax Considerations --
State, Local and Other Tax Considerations."
PROPOSED CHANGES IN FEDERAL INCOME TAX LAWS
Legislation passed by Congress in 1995 (the "1995 Proposed Legislation")
but vetoed by President Clinton would have altered the tax reporting procedures
and the deficiency collection procedures applicable to large partnerships such
as the Partnership (generally defined as electing partnerships with more than
100 partners) and would have made certain additional changes to the treatment of
large partnerships. That legislation was generally intended to simplify the
administration of the tax reporting and deficiency collection rules governing
large partnerships. See "Tax Considerations--Tax Consequences of Unit
Ownership."
The Revenue Reconciliation Act of 1996 that was considered but not passed by
Congress would have affected the taxation of certain financial products,
including partnership interests. One proposal would treat a taxpayer as having
sold an "appreciated" partnership interest (one in which gain would be
recognized if such interest were sold) if the taxpayer or related persons
entered into one or more positions with respect to the same or substantially
identical property which, for some period, substantially eliminated both the
risk of loss and opportunity for gain on the appreciated financial position
(including selling "short against the box" transactions). See "Tax
Considerations--Disposition of Common Units."
President Clinton has proposed legislation in connection with his budget
for fiscal year 1998 (the "Budget Proposal") which would require taxpayers,
including Unitholders, to use the average cost basis for securities sold and
require the recognition of gain or loss on constructive sale transactions such
as "short against the box" transactions. Similar proposals were made by the
Clinton administration in 1996.
As of the date of this Prospectus, it is not possible to predict whether
any of the changes which were set forth in the 1995 Proposed Legislation, the
Revenue Reconciliation Act of 1996, the Budget Proposal or any other changes in
the federal income tax laws that would impact the Partnership and the holders of
Common Units will ultimately be enacted or, if enacted, what form they will
take, what the effective dates will be and what, if any, transition rules will
be provided.
DISPOSITION OF COMMON UNITS
A Unitholder who sells Common Units will recognize gain or loss equal to
the difference between the amount realized (including his share of Partnership
nonrecourse liabilities) and his adjusted tax basis in such Common Units. Thus,
prior Partnership distributions in excess of cumulative net taxable income in
respect of a Common Unit which decreased a Unitholder's tax basis in such Common
Unit will, in effect, become taxable income if the Common Unit is sold at a
price greater than the Unitholder's tax basis in such Common Units, even if the
price is less than his original cost. A portion of the amount realized (whether
or not representing gain) may be ordinary income. Furthermore, should the IRS
successfully contest certain conventions to be used by the Partnership, a
Unitholder could realize more gain on the sale of Units than would be the case
under such conventions without the benefit of decreased income in prior years.
PARTNERSHIP TAX INFORMATION AND AUDITS
The Partnership will furnish each holder of Common Units with a Schedule
K-1 that sets forth his allocable share of income, gains, losses and deductions.
In preparing these schedules, the Partnership will use various accounting and
reporting conventions and adopt various depreciation and amortization methods.
There is no assurance that these schedules will yield a result that conforms to
statutory or regulatory requirements or to administrative pronouncements of the
IRS. Further, the
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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.
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THE IPO AND RELATED TRANSACTIONS
On December 17, 1996, the Partnership consummated the IPO, issuing
9,821,000 Common Units (including 1,281,000 Common Units issued pursuant to the
underwriters over-allotment option that was exercised in full), and received
gross proceeds of $206.2 million. In addition, the Operating Partnership issued
$220.0 million aggregate principal amount of Notes to certain institutional
investors in the Note Placement.
Immediately prior to the closing of the IPO, Synergy, Empire Energy, Myers,
and Coast entered into a series of transactions which resulted in the Combined
Operations being owned by the General Partners. Concurrently with the IPO
closing, the Managing General Partner and the Special General Partner
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 thereafter contributed the portion of the
Combined Operations utilized in the parts and appliance sales and service
businesses to its corporate subsidiary. As a result of such transactions, the
General Partners own an aggregate of 6,597,619 Subordinated Units, representing
an aggregate 39.4% limited partner interest in the Partnership, an aggregate 2%
general partner interest in the Partnership and the right to receive Incentive
Distributions.
Concurrently with the closing of the IPO, the Operating Partnership entered
into the Bank Credit Facility, which included the $50.0 million Working Capital
Facility to be used for working capital and other general partnership purposes,
and the $75.0 million Acquisition Facility to be used for acquisitions and
capital improvements. For additional information regarding the terms of the
Notes and the Bank Credit Facility, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- The Partnership -- Financing
and Sources of Liquidity."
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USE OF PROCEEDS
All of the Common Units offered hereby may be issued from time to time by
the Partnership in connection with the Partnership's acquisition of other
businesses, properties or securities in business combination transactions. See
"Plan of Distribution." The Partnership is from time to time engaged in ongoing
discussions with respect to acquisitions, and expects to continue to pursue such
acquisition opportunities actively. As of the date of this Prospectus, the
Partnership does not have any agreements with respect to any material
acquisitions but is involved in ongoing discussions with several companies and
is continuing to assess these and other acquisition opportunities.
CAPITALIZATION
The following table sets forth the capitalization of the Partnership at
December 31, 1996. The table should be read in conjunction with the historical
financial statements and notes thereto included elsewhere in this Prospectus.
DECEMBER 31, 1996
---------------------------
PARTNERSHIP
HISTORICAL
---------------------------
(IN THOUSANDS OF DOLLARS)
Short-term indebtedness, including current
portion of long-term indebtedness. . . . . . . $ 674
Long-term debt . . . . . . . . . . . . . . . . . 232,519
Total indebtedness . . . . . . . . . . . . . . . 233,193
Partners' capital:
Common Unitholders . . . . . . . . . . . . . . . 137,090
Subordinated Unitholders . . . . . . . . . . . . 92,096
General Partners . . . . . . . . . . . . . . . . 4,677
Total partners' capital. . . . . . . . . . . . . 233,863
Total capitalization . . . . . . . . . . . . . . 466,382
---------------------------
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PRICE RANGE OF COMMON UNITS
The Common Units began trading on the NYSE on December 12, 1996 under the
trading symbol "CNO." Trading price data as reported by the NYSE for each of
the quarters indicated are as follows:
High Low
---- ---
1996
Fourth Quarter (from December 12, 1996) . . . . $ 21 1/2 $ 21
1997
First Quarter. . . . . . . . . . . . . . . . . . 22 3/8 20 7/8
Second Quarter (through April 16, 1997). . . . . 21 7/8 19 3/4
For a recent sale price of the Common Units, please see the cover page of
this Prospectus. The Common Units were held by more than 12,000 holders as of
March 31, 1997.
The Partnership expects to make distributions of all Available Cash within
approximately 45 days after the end of each of quarter, commencing with the
quarter ended March 31, 1997, to holders of record on the applicable record
date.
For a description of certain limitations on the Partnership's ability to
make distributions to its partners, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--The Partnership--Financing and
Sources of Liquidity."
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CASH DISTRIBUTION POLICY
General
The Partnership will distribute to its partners, on a quarterly basis, all
of its Available Cash in the manner described herein. Available Cash is defined
in the Glossary and generally means, with respect to any quarter of the
Partnership, all cash on hand at the end of such quarter less the amount of cash
reserves that is necessary or appropriate in the reasonable discretion of the
Managing General Partner to (i) provide for the proper conduct of the
Partnership's business, (ii) comply with applicable law or any Partnership debt
instrument or other agreement, or (iii) provide funds for distributions to
Unitholders and the General Partners in respect of any one or more of the next
four quarters.
Cash distributions will be characterized as distributions from either
Operating Surplus or Capital Surplus. This distinction affects the amounts
distributed to Unitholders relative to the General Partners, and under certain
circumstances it determines whether holders of Subordinated Units receive any
distributions. See "-- Quarterly Distributions of Available Cash."
Operating Surplus is defined in the Glossary and refers generally to
(i) the cash balance of the Partnership on the date the Partnership commenced
operations, plus $25.0 million, plus all cash receipts of the Partnership from
its operations since the closing of the Transactions, less (ii) all Partnership
operating expenses, debt service payments (including reserves therefor but not
including payments required in connection with the sale of assets or any
refinancing with the proceeds of new indebtedness or an equity offering),
maintenance capital expenditures and reserves established for future Partnership
operations, in each case since the closing of the Transactions.
Capital Surplus is also defined in the Glossary and will generally be
generated only by borrowings (other than for working capital purposes), sales of
debt and equity securities and sales or other dispositions of assets for cash
(other than inventory, accounts receivable and other assets all as disposed of
in the ordinary course of business).
To avoid the difficulty of trying to determine whether Available Cash
distributed by the Partnership is from Operating Surplus or from Capital
Surplus, all Available Cash distributed by the Partnership from any source will
be treated as distributed from Operating Surplus until the sum of all Available
Cash distributed since the commencement of the Partnership equals the Operating
Surplus as of the end of the quarter prior to such distribution. Any Available
Cash in excess of such amount (irrespective of its source) will be deemed to be
from Capital Surplus and distributed accordingly.
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.
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Subject to the limitations described under "The Partnership Agreement --
Issuance of Additional Securities," the Partnership has the authority to issue
additional Common Units or other equity securities of the Partnership for such
consideration and on such terms and conditions as are established by the
Managing General Partner in its sole discretion and without the approval of the
Unitholders. It is possible that the Partnership will fund acquisitions of other
propane businesses through the issuance of additional Common Units or other
equity securities of the Partnership. Holders of any additional Common Units
issued by the Partnership will be entitled to share equally with the
then-existing holders of Common Units in distributions of Available Cash by the
Partnership. In addition, the issuance of additional Partnership Interests may
dilute the value of the interests of the then-existing holders of Common Units
in the net assets of the Partnership. The General Partners will be required to
make an additional capital contribution to the Partnership or the Operating
Partnership in connection with the issuance of additional Partnership Interests.
The discussion in the sections below indicates the percentages of cash
distributions required to be made to the General Partners and the holders of
Common Units and the circumstances under which holders of Subordinated Units are
entitled to cash distributions and the amounts thereof. Distributions and
allocations to the General Partners will be made pro rata in accordance with
their respective general partner interests. For a discussion of Available Cash
from Operating Surplus available for distributions with respect to the Common
Units on a pro forma basis, see "Cash Available for Distribution."
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Partnership will make distributions to its partners with respect to
each quarter of the Partnership prior to its liquidation in an amount equal to
100% of its Available Cash for such quarter. The Partnership expects to make
distributions of all Available Cash within approximately 45 days after the end
of each quarter, commencing with the quarter ended March 31, 1997, to holders of
record on the applicable record date. The Minimum Quarterly Distribution and
the Target Distribution Levels are also subject to certain other adjustments as
described below under "-- Distributions from Capital Surplus" and "-- Adjustment
of Minimum Quarterly Distribution and Target Distribution Levels."
With respect to each quarter during the Subordination Period, to the extent
there is sufficient Available Cash, the holders of Common Units will have the
right to receive the Minimum Quarterly Distribution, plus any Common Unit
Arrearages, prior to any distribution of Available Cash to the holders of
Subordinated Units. This subordination feature will enhance the Partnership's
ability to distribute the Minimum Quarterly Distribution on the Common Units
during the Subordination Period. There is no guarantee, however, that the
Minimum Quarterly Distribution will be made on the Common Units. Upon expiration
of the Subordination Period, all Subordinated Units will be converted on a
one-for-one basis into Common Units and will participate pro rata with all other
Common Units in future distributions of Available Cash. Under certain
circumstances, up to 3,298,810 Subordinated Units may convert into Common Units
prior to the expiration of the Subordination Period. Common Units will not
accrue arrearages with respect to distributions for any quarter after the
Subordination Period and Subordinated Units will not accrue any arrearages with
respect to distributions for any quarter.
DISTRIBUTIONS FROM OPERATING SURPLUS DURING SUBORDINATION PERIOD
The Subordination Period will generally extend until the first day of any
quarter beginning after December 31, 2001 in respect of which (i) distributions
of Available Cash from Operating Surplus on the Common Units and the
Subordinated Units with respect to each of the three consecutive four-quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the outstanding Common Units and
Subordinated Units during such periods, (ii) the Adjusted Operating Surplus
generated during each of the three consecutive four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units and
the related distribution on the general partner 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
42
<PAGE>
which (i) distributions of Available Cash from Operating Surplus on the Common
Units and the Subordinated Units with respect to each of the three consecutive
four-quarter periods immediately preceding such date equaled or exceeded the sum
of the Minimum Quarterly Distribution on all of the outstanding Common Units and
Subordinated Units during such periods, (ii) the Adjusted Operating Surplus
generated during each of the two consecutive four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units and
the related distribution on the general partner interests in the Partnership
during such periods, and (iii) there are no outstanding Common Unit Arrearages;
provided, however, that the early conversion of the second one-quarter of
Subordinated Units may not occur until at least one year following the early
conversion of the first one-quarter of Subordinated Units.
Upon expiration of the Subordination Period, all remaining Subordinated
Units will convert into Common Units on a one-for-one basis and will thereafter
participate, pro rata, with the other Common Units in distributions of Available
Cash. In addition, if the Managing General Partner is removed as managing
general partner of the Partnership under circumstances where Cause does not
exist and Units held by the Managing General Partner and its affiliates are not
voted in favor of such removal, (i) the Subordination Period will end and all
outstanding Subordinated Units will immediately convert into Common Units on a
one-for-one basis, (ii) any existing Common Unit Arrearages will be extinguished
and (iii) the General Partners will have the right to convert their general
partner interests (and the rights of each of them to receive Incentive
Distributions) into Common Units or to receive cash in exchange for such
interests.
"Adjusted Operating Surplus" for any period generally means Operating
Surplus generated during such period, less (a) any net increase in working
capital borrowings during such period and (b) any net reduction in cash reserves
for Operating Expenditures during such period not relating to an Operating
Expenditure made during such period; and plus (x) any net decrease in working
capital borrowings during such period and (y) any net increase in cash reserves
for Operating Expenditures during such period required by any debt instrument
for the repayment of principal, interest or premium. Operating Surplus generated
during a period is equal to the difference between (i) the Operating Surplus
determined at the end of such period and (ii) the Operating Surplus determined
at the beginning of such period.
Distributions by the Partnership of Available Cash from Operating Surplus
with respect to any quarter during the Subordination Period will be made in the
following manner:
FIRST, 98% to the Common Unitholders, pro rata, and 2% to the General
Partners, until there has been distributed in respect of each outstanding
Common Unit an amount equal to the Minimum Quarterly Distribution for such
quarter;
SECOND, 98% to the Common Unitholders, pro rata, and 2% to the General
Partners, until there has been distributed in respect of each outstanding
Common Unit an amount equal to any Common Unit Arrearages accrued and
unpaid with respect to any prior quarters during the Subordination Period;
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
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<PAGE>
Common Unit, the term "Common Unit Arrearages" refers to the amount by which the
Minimum Quarterly Distribution in any quarter during the Subordination Period
exceeds the distribution of Available Cash from Operating Surplus actually made
for such quarter on a Common Unit, cumulative for such quarter and all prior
quarters during the Subordination Period. Common Unit Arrearages will not accrue
interest.
DISTRIBUTIONS FROM OPERATING SURPLUS AFTER SUBORDINATION PERIOD
Distributions by the Partnership of Available Cash from Operating Surplus
with respect to any quarter after the Subordination Period will be made in the
following manner:
FIRST, 98% to all Unitholders, pro rata, and 2% to the General
Partners, until there has been distributed in respect of each Unit an
amount equal to the Minimum Quarterly Distribution for such quarter; and
THEREAFTER, in the manner described in "-- Incentive Distributions --
Hypothetical Annualized Yield" below.
INCENTIVE DISTRIBUTIONS--HYPOTHETICAL ANNUALIZED YIELD
For any quarter for which Available Cash from Operating Surplus is
distributed to the Common and Subordinated Unitholders in an amount equal to the
Minimum Quarterly Distribution on all Units and to the Common Unitholders in an
amount equal to any unpaid Common Unit Arrearages, then any additional Available
Cash from Operating Surplus in respect of such quarter will be distributed among
the Unitholders and the General Partners in the following manner:
FIRST, 98% to all Unitholders, pro rata, and 2% to the General
Partners, until the Unitholders have received (in addition to any
distributions to Common Unitholders to eliminate Common Unit Arrearages) a
total of $0.594 for such quarter in respect of each outstanding Unit (the
"First Target Distribution");
SECOND, 85% to all Unitholders, pro rata, and 15% to the General
Partners, until the Unitholders have received (in addition to any
distributions to Common Unitholders to eliminate Common Unit Arrearages) a
total of $0.700 for such quarter in respect of each outstanding Unit (the
"Second Target Distribution");
THIRD, 75% to all Unitholders, pro rata, and 25% to the General
Partners, until the Unitholders have received (in addition to any
distributions to Common Unitholders to eliminate Common Unit Arrearages) a
total of $0.900 for such quarter in respect of each outstanding Unit (the
"Third Target Distribution"); and
THEREAFTER, 50% to all Unitholders, pro rata, and 50% to the General
Partners.
The distributions to the General Partners set forth above (other than in their
capacity as holders of the Subordinated Units) that are in excess of their
aggregate 2% general partner interest represent the Incentive Distributions. The
right to receive Incentive Distributions is not part of the general partner
interest and may be transferred separately from such interests. See "The
Partnership Agreement--Transfer of General Partners' Interests and Incentive
Distribution Rights."
The following table illustrates the percentage allocation of the additional
Available Cash from Operating Surplus between the Unitholders and the General
Partners up to the various Target Distribution Levels and a hypothetical
annualized percentage yield to be realized by a Unitholder at each Target
Distribution Level. For purposes of the following table, the annualized
percentage yield is calculated on a pretax basis assuming that (i) the Common
Unit was purchased at an amount equal to the initial public offering price of
$21.00 per Common Unit and (ii) the Partnership distributed each quarter during
the first year following the investment the amount set forth under the column
"Total Quarterly Distribution Target Amount." The calculations are also based on
the assumption that the quarterly distribution amounts shown do not include any
Common Unit Arrearages. The amounts set forth under "Marginal Percentage
Interest in Distributions" are the percentage interests of the General Partners
and the Unitholders in any Available Cash from Operating Surplus distributed up
to and including the corresponding amount in the column "Total Quarterly
Distribution Target Amount," until Available Cash distributed reaches
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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
TOTAL QUARTERLY HYPOTHETICAL INTEREST IN DISTRIBUTIONS
-------------------------
DISTRIBUTION 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>
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 IPO, Available Cash from Capital Surplus
in an aggregate amount per Common Unit equal to the Initial Unit Price;
SECOND, 98% to the holders of Common Units, pro rata, and 2% to the
General Partners, until the Partnership has distributed, in respect of each
outstanding Common Unit, Available Cash from Capital Surplus in an
aggregate amount equal to any unpaid Common Unit Arrearages with respect to
such Common Unit; and
THEREAFTER, all distributions of Available Cash from Capital Surplus
will be distributed as if they were from Operating Surplus.
As a distribution of Available Cash from Capital Surplus is made, it is
treated as if it were a repayment of the Initial Unit Price. To reflect such
repayment, the Minimum Quarterly Distribution and the Target Distribution Levels
will be adjusted downward by multiplying each such amount by a fraction, the
numerator of which is the Unrecovered Capital of the Common Units immediately
after giving effect to such repayment and the denominator of which is the
Unrecovered Capital of the Common Units immediately prior to such repayment.
This adjustment to the Minimum Quarterly Distribution may make it more likely
that Subordinated Units will be converted into Common Units (whether pursuant to
the termination of the Subordination Period or to the provisions permitting
early conversion of some Subordinated Units) and may accelerate the dates at
which such conversions occur.
When "payback" of the Initial Unit Price has occurred, i.e., when the
Unrecovered Capital of the Common Units is zero (and any accrued Common Unit
Arrearages have been paid), then in effect the Minimum Quarterly Distribution
and each of the Target Distribution Levels will have been reduced to zero for
subsequent quarters. Thereafter, all distributions of Available Cash from all
sources will be treated as if they were from Operating Surplus. Because the
Minimum Quarterly Distribution and the Target Distribution Levels will have been
reduced to zero, the General Partners will be entitled thereafter to receive 50%
of all distributions of Available Cash in their capacities as General Partners
and as holders of the Incentive Distribution Rights (in addition to any
distributions to which they may be entitled as holders of Units).
Distributions of Available Cash from Capital Surplus will not reduce the
Minimum Quarterly Distribution or Target Distribution Levels for the quarter
with respect to which they are distributed.
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ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
In addition to reductions of the Minimum Quarterly Distribution and Target
Distribution Levels made upon a distribution of Available Cash from Capital
Surplus, the Minimum Quarterly Distribution, the Target Distribution Levels, the
Unrecovered Capital, the number of additional Common Units issuable during the
Subordination Period without a Unitholder vote, the number of Common Units
issuable upon conversion of the Subordinated Units and other amounts calculated
on a per Unit basis will be proportionately adjusted upward or downward, as
appropriate, in the event of any combination or subdivision of Common Units
(whether effected by a distribution payable in Common Units or otherwise), but
not by reason of the issuance of additional Common Units for cash or property.
For example, in the event of a two-for-one split of the Common Units (assuming
no prior adjustments), the Minimum Quarterly Distribution, each of the Target
Distribution Levels and the Unrecovered Capital of the Common Units would each
be reduced to 50% of its initial level.
The Minimum Quarterly Distribution and the Target Distribution Levels may
also be adjusted if legislation is enacted or if existing law is modified or
interpreted by the relevant governmental authority in a manner that causes the
Partnership to become taxable as a corporation or otherwise subjects the
Partnership to taxation as an entity for federal, state or local income tax
purposes. In such event, the Minimum Quarterly Distribution and the Target
Distribution Levels would be reduced to an amount equal to the product of
(i) the Minimum Quarterly Distribution and each of the Target Distribution
Levels, respectively, multiplied by (ii) one minus the sum of (x) the maximum
effective federal income tax rate to which the Partnership is then subject as an
entity plus (y) any increase that results from such legislation in the effective
overall state and local income tax rate to which the Partnership is subject as
an entity for the taxable year in which such event occurs (after taking into
account the benefit of any deduction allowable for federal income tax purposes
with respect to the payment of state and local income taxes). For example,
assuming the Partnership was not previously subject to state and local income
tax, if the Partnership were to become taxable as an entity for federal income
tax purposes and the Partnership became subject to a maximum marginal federal,
and effective state and local, income tax rate of 38%, then the Minimum
Quarterly Distribution and the Target Distribution Levels would each be reduced
to 62% of the amount thereof immediately prior to such adjustment.
DISTRIBUTIONS OF CASH UPON LIQUIDATION
Following the commencement of the dissolution and liquidation of the
Partnership, assets will be sold or otherwise disposed of from time to time and
the partners' capital account balances will be adjusted to reflect any resulting
gain or loss. The proceeds of such liquidation will, first, be applied to the
payment of creditors of the Partnership in the order of priority provided in the
Partnership Agreement and by law and, thereafter, be distributed to the
Unitholders and the General Partners in accordance with their respective capital
account balances as so adjusted.
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;
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SECOND, 98% to the holders of Common Units, pro rata, and 2% to the
General Partners, until the capital account for each Common Unit is equal
to the sum of (i) the Unrecovered Capital in respect of such Common Unit,
(ii) the amount of the Minimum Quarterly Distribution for the quarter
during which liquidation of the Partnership occurs and (iii) any unpaid
Common Unit Arrearages in respect of such Common Unit;
THIRD, 98% to the holders of Subordinated Units, pro rata, and 2% to
the General Partners, until the capital account for each Subordinated Unit
is equal to the sum of (i) the Unrecovered Capital in respect of such
Subordinated Unit and (ii) the amount of the Minimum Quarterly Distribution
for the quarter during which the liquidation of the Partnership occurs;
FOURTH, 98% to all Unitholders, pro rata, and 2% to the General
Partners, until there has been allocated under this paragraph FOURTH an
amount per Unit equal to (a) the sum of the excess of the First Target
Distribution per Unit over the Minimum Quarterly Distribution per Unit for
each quarter of the Partnership's existence, less (b) the cumulative amount
per Unit of any distributions of Available Cash from Operating Surplus in
excess of the Minimum Quarterly Distribution per Unit that were distributed
98% to the Unitholders, pro rata, and 2% to the General Partners for each
quarter of the Partnership's existence;
FIFTH, 85% to the Unitholders, pro rata, and 15% to the General
Partners, until there has been allocated under this paragraph FIFTH an
amount per Unit equal to (a) the sum of the excess of the Second
Target Distribution per Unit over the First Target Distribution per
Unit for each quarter of the Partnership's existence, less (b) the
cumulative amount per Unit of any distributions of Available Cash from
Operating Surplus in excess of the First Target Distribution per Unit
that were distributed 85% to the Unitholders, pro rata, and 15% to the
General Partners for each quarter of the Partnership's existence;
SIXTH, 75% to all Unitholders, pro rata, and 25% to the General
Partners, until there has been allocated under this paragraph SIXTH an
amount per Unit equal to (a) the sum of the excess of the Third Target
Distribution per Unit over the Second Target Distribution per Unit for each
quarter of the Partnership's existence, less (b) the cumulative amount per
Unit of any distributions of Available Cash from Operating Surplus in
excess of the Second Target Distribution per Unit that were distributed 75%
to the Unitholders, pro rata, and 25% to the General Partners for each
quarter of the Partnership's existence; and
THEREAFTER, 50% to all Unitholders, pro rata, and 50% to the General
Partners.
If the liquidation occurs after the Subordination Period, the distinction
between Common Units and Subordinated Units will disappear, so that clauses
(ii) and (iii) of paragraph SECOND above and all of paragraph THIRD above will
no longer be applicable.
Upon liquidation of the Partnership, any loss will generally be allocated
to the General Partners and the Unitholders as follows:
FIRST, 98% to holders of Subordinated Units in proportion to the
positive balances in their respective capital accounts and 2% to the
General Partners, until the capital accounts of the holders of the
Subordinated Units have been reduced to zero;
SECOND, 98% to the holders of Common Units in proportion to the
positive balances in their respective capital accounts and 2% to the
General Partners, until the capital accounts of the Common Unitholders have
been reduced to zero; and
THEREAFTER, 100% to the General Partners.
If the liquidation occurs after the Subordination Period, the distinction
between Common Units and Subordinated Units will disappear, so that all of
paragraph FIRST above will no longer be applicable.
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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.
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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
$36.2 million ($21.2 million for the Common Units, $14.3 million for the
Subordinated Units and $.7 million for the aggregate 2% general partner interest
of the General Partners). The amount of pro forma Available Cash from Operating
Surplus generated during fiscal 1996 was approximately $25.7 million. Such
amount would have been sufficient to cover the full Minimum Quarterly
Distribution for such fiscal year on all of the Common Units currently
outstanding and the related distribution on the general partner interests, but
would have been insufficient by approximately $10.5 million to cover the
Minimum Quarterly Distribution on all Subordinated Units currently outstanding
and the related distribution on the general partner interests. If effect were
given to an additional $7.9 million of expense reductions which the Partnership
believes are achievable upon consummation of the Transactions, pro forma
Available Cash from Operating Surplus would have been approximately $33.5
million, which amount would have been insufficient by approximately $2.7 million
to cover the Minimum Quarterly Distribution for fiscal 1996 on all Subordinated
Units and the related distribution on the general partner interests. See Note 3
to the Pro Forma Consolidated Financial Statements of Cornerstone Propane
Partners, L.P., footnote (a) to the following table, "Risk Factors--Risks
Inherent in an Investment in the Partnership--Partnership Profitability Will
Depend on Successful Integration of the Combined Operations" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Pro forma Available Cash from Operating Surplus was calculated as follows:
PRO FORMA AVAILABLE CASH FROM OPERATING SURPLUS
(In thousands)
FISCAL
YEAR ENDED
JUNE 30, 1996
--------------
Pro forma operating income(a).................................. $32,535
Add: Pro forma depreciation and amortization................... 14,500
--------------
Pro forma EBITDA(a)(b)......................................... 47,035
Less: Pro forma interest expense............................... 17,865
Pro forma capital expenditures -- maintenance(c)............ 3,500
--------------
Pro forma Available Cash from Operating Surplus(a)(d).......... $25,670
--------------
--------------
- -----------------
(a) The pro forma amounts of operating income, EBITDA and Available Cash
from Operating Surplus do not reflect certain non-recurring expenses
incurred by Empire Energy of approximately $4.3 million, propane
acquisition and logistics costs savings of approximately $1.5 million
and insurance savings of approximately $2.1 million that the
Partnership believes are achievable as a result of the Transactions.
If effect were given to such anticipated expense reductions, the
following amounts would have been reflected:
Pro forma operating income............................ $40,397
Pro forma EBITDA...................................... 54,897
Pro forma Available Cash from Operating Surplus....... 33,532
See Note 3 to the Pro Forma Consolidated Financial Statements of
Cornerstone Propane Partners, L.P. and "Risk Factors -- Risks Inherent
in an Investment in the Partnership -- Partnership Profitability Will
Depend on Successful Integration of the Combined Operations."
49
<PAGE>
(b) EBITDA is defined as operating income plus depreciation and
amortization. EBITDA should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative
to cash flow (as a measure of liquidity or ability to service debt
obligations), and is not a measure of performance or financial
condition under generally accepted accounting principles, but provides
additional information for evaluating the Partnership's ability to
distribute the Minimum Quarterly Distribution. Cash flows in
accordance with generally accepted accounting principles consist of
cash flows from operating, investing and financing activities. Cash
flows from operating activities reflect net income (loss)(including
charges for interest and income taxes not reflected in EBITDA),
adjusted for (i) all non-cash charges or income (which are reflected
in EBITDA) and (ii) changes in operating assets and liabilities (which
are not reflected in EBITDA). Further, cash flows from investing and
financing activities are not included in EBITDA. For a discussion of
the operating performance and cash flows provided by (used in)
operating, investing and financing activities of the companies that
comprise the Combined Operations, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(c) Based upon historical maintenance capital expenditures for the
Combined Operations for fiscal 1996.
(d) Available Cash from Operating Surplus generated during a specified
period refers generally to (i) all cash receipts of the Partnership
from its operations generated during such period, less (ii) all
Partnership operating expenses, debt service payments (including any
increases in reserves therefor but not including amounts paid from any
reduction in reserves, or payments required in connection with the
sale of assets, or any refinancing with the proceeds of new
indebtedness or an equity offering) and maintenance capital
expenditures, in each case during such period. For a complete
definition of Operating Surplus, see the Glossary.
The amount of pro forma Available Cash from Operating Surplus for
fiscal 1996 set forth above was derived from the pro forma financial statements
of the Partnership. The pro forma adjustments are based upon currently available
information and certain estimates and assumptions. The pro forma financial
statements do not purport to present the results of operations of the
Partnership had the Transactions actually been completed as of the dates
indicated. Furthermore, the pro forma financial statements are based on accrual
accounting concepts while Operating Surplus is defined in the Partnership
Agreement on a cash accounting basis. As a consequence, the amount of pro forma
Available Cash from Operating Surplus shown above should only be viewed as a
general indication of the amount of Available Cash from Operating Surplus that
might in fact have been generated by the Partnership had it been formed in
earlier periods.
The Partnership is required to establish reserves for the future
payment of principal and interest on the Notes and the indebtedness under the
Bank Credit Facility. There are other provisions in such agreements which will,
under certain circumstances, restrict the Partnership's ability to make
distributions to its partners. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- The Partnership -- Financing
and Sources of Liquidity."
50
<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, and are derived from the
unaudited Pro Forma Consolidated Financial Statements of Cornerstone Propane
Partners, L.P. included elsewhere in this Prospectus. For a description of the
assumptions used in preparing the Summary Pro Forma Financial and Operating
Data, see "Pro Forma Consolidated Financial Statements of Cornerstone Propane
Partners, L.P." The pro forma information set forth below has been prepared by
combining the historical results of operations of Synergy for the 10 1/2 months
ended June 30, 1996 and for the five and one-half months ended December 16,
1996; Coast for the fiscal year ended July 31, 1996 and for the four and one-
half months ended December 16, 1996; Empire Energy for the fiscal year ended
June 30, 1996 and for the five and one-half months ended December 16, 1996;
Myers for the six and one-half months ended June 30, 1996 and for the five and
one-half months ended December 16, 1996; and the Partnership for the fourteen
days ended December 31, 1996. The Partnership believes that it is reasonable to
combine the results of operations of companies having different fiscal years
because each of the fiscal years being combined includes the same winter heating
seasons in which the majority of the Partnership's revenue and cash flow was
generated. The following information should not be deemed indicative of future
operating results of the Partnership.
PARTNERSHIP PRO FORMA
------------------------------------
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1996 DECEMBER 31, 1996
---------------- -------------------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ 595,790 $314,937
Gross profit(b).......................... 139,806(a) 64,028
Depreciation and amortization............ 14,500 7,129
Operating income......................... 32,535(a) 14,280
Interest expense, net.................... 17,865 9,049
Net income............................... 14,570(a) 5,181
Net income per Unit(c)................... .87(a) .31
OPERATING DATA:
EBITDA(d)................................ $ 47,035(a) $ 21,409
Capital expenditures(e):
Growth and maintenance................. 9,648 8,656
Acquisition............................ 44,303(f) 3,155
Retail propane gallons sold.............. 235,000 109,112
AT DECEMBER 31, 1996
BALANCE SHEET DATA: --------------------
Current assets....................................... $ 134,524
Total assets......................................... 582,586
Current liabilities.................................. 93,614
Long-term debt....................................... 233,193
Partners' capital -- General Partners................ 4,677
Partners' capital -- Limited Partners................ 229,186
- ---------------
(a) Pro forma gross profit for the year ended June 30, 1996 does not reflect
propane acquisition and logistics cost savings of approximately $1.5
million that the Partnership believes are achievable as a result of the
Transactions. The pro forma amounts of operating income, net income, net
income per Unit and EBITDA for the year ended June 30, 1996 do not reflect
certain non-recurring expenses incurred by Empire Energy of approximately
$4.3 million, propane acquisition and logistics cost savings of
approximately $1.5 million, and insurance savings of approximately $2.1
million that the Partnership believes are achievable
51
<PAGE>
as a result of the Transactions. If effect were given to such anticipated
expense reductions, the following amounts would have been reflected:
YEAR ENDED
JUNE 30, 1996
-------------
(IN THOUSANDS, EXCEPT
PER UNIT DATA)
Pro forma gross profit.......... $141,306
Pro forma operating income...... 40,397
Pro forma net income............ 22,432
Pro forma net income per Unit... 1.34
Pro forma EBITDA................ 54,897
See Note 3 to the Pro Forma Consolidated Financial Statements of Cornerstone
Propane Partners, L.P. and "Risk Factors -- Risks Inherent in an Investment in
the Partnership -- Partnership Profitability Will Depend on Successful
Integration of the Combined Operations."
(b) Gross profit is computed by reducing total revenues by the direct cost of
the products sold.
(c) Net income per Unit is computed by dividing the limited partners' interest
in net income by the weighted average number of Units outstanding.
(d) EBITDA is defined as operating income plus depreciation and amortization.
EBITDA should not be considered as an alternative to net income (as an indicator
of operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations), but provides additional
information for evaluating the Partnership's ability to make the Minimum
Quarterly Distribution. Cash flows in accordance with generally accepted
accounting principles consist of cash flows from operating, investing and
financing activities. Cash flows from operating activities reflect net income
(loss) (including charges for interest and income taxes not reflected in
EBITDA), adjusted for (i) all non-cash charges or income (which are reflected in
EBITDA) and (ii) changes in operating assets and liabilities (which are not
reflected in EBITDA). Further, cash flows from investing and financing
activities are not included in EBITDA.
(e) The Partnership's capital expenditures fall generally into three
categories: (i) growth capital expenditures, which include expenditures for the
purchase of new propane tanks and other equipment to facilitate expansion of the
Partnership's retail customer base, (ii) maintenance capital expenditures, which
include expenditures for repairs that extend the life of the assets and
replacement of property, plant and equipment, and (iii) acquisition capital
expenditures.
(f) Approximately $36.0 million relates to the Empire Acquisition of Certain
Synergy Assets.
52
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
SYNERGY
The financial information below as of June 30, 1996 and for the
10 1/2-month period ended June 30, 1996 is derived from the audited financial
statements of Synergy. The financial information as of December 31, 1995 and
December 16, 1996 and for the 45-day period ended August 14, 1995, the four
and one-half months ended December 31, 1995 and the five and one-half months
ended December 16, 1996 is derived from the unaudited consolidated Interim
Financial Statements of Synergy and, in the opinion of management of Synergy,
contains all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of results of operations and financial
condition. On August 15, 1995, Synergy Group Incorporated ("SGI"), the
predecessor of Synergy, was acquired by Synergy in the Synergy Acquisition.
The four and one-half months ended December 31, 1995 covers the period from
the date of the Synergy Acquisition to December 31, 1995. The financial
information below as of March 31, 1994 and 1995 is derived from the audited
financial statements of SGI. As discussed elsewhere in this Prospectus, the
comparability of financial matters is affected by the change in ownership of
SGI and the concurrent sale of approximately 25% of the operations acquired
in the Synergy Acquisition to Empire Energy (the "Empire Acquisition of
Certain Synergy Assets"). The Statement of Operations Data and the Operating
Data for the 4 1/2 months ended August 14, 1995 represent information for the
period from the end of the last fiscal year of SGI until the date of the
Synergy Acquisition, and are presented only to reflect operations of Synergy
for a complete five-year period. The retail propane gallons sold for all
periods presented is derived from the accounting records of Synergy and SGI
and is unaudited. The results for the interim periods are not indicative of
the results that can be expected for a full year. The Selected Historical
Financial and Operating Data below should be read in conjunction with the
financial statements of Synergy and SGI and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Synergy"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SYNERGY GROUP INCORPORATED SYNERGY
------------------------------------------------------ ---------------------------------------
4 1/2 10 1/2 4 1/2 5 1/2
FISCAL YEAR ENDED MARCH 31, MONTHS MONTHS 45 DAYS MONTHS MONTHS
------------------------------------------- ENDED ENDED ENDED ENDED ENDED
AUGUST 14, JUNE 30, AUGUST 14, DEC. 31, DEC. 16,
1992 1993 1994 1995 1995 1996 1995 1995 1996
-------- --------- --------- -------- ---------- -------- ---------- --------- --------
(UNAUDITED) (UNAUDITED)(UNAUDITED)
(IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . $121,761 $ 132,855 $ 133,731 $123,562 $ 32,179 $ 96,062 $ 7,568 $ 38,589 $44,066
Gross profit (a) . . . . . . . . 63,082 65,964 70,233 63,653 16,792 49,875 3,937 20,214 20,744
Depreciation and amortization. . 5,919 5,381 5,170 5,100 1,845 3,329 472 1,728 1,904
Operating income (loss). . . . . 1,346 (809) 3,609 (2,291) (6,660) 14,520 (167) 5,307 3,769
Interest expense . . . . . . . . 13,159 13,342 13,126 11,086 3,223 5,584 816 2,347 3,311
Provision (benefit) for
income taxes . . . . . . . . . (314) 351 (400) (84) 31 3,675 (373) 1,350 298
Net income (loss). . . . . . . . (11,553) (15,274) (11,615) (13,417) (9,813) 5,261 (610) 1,610 160
BALANCE SHEET DATA (END
OF PERIOD):. . . . . . . . . .
Working capital (deficit). . . . $ 12,433 $(118,238) $(130,211) $(82,143) $(98,045) $ 24,177 $(98,045) $ 10,751 $12,132
Total assets . . . . . . . . . . 112,089 112,153 111,914 103,830 96,500 166,762 96,500 170,609 174,140
Total debt . . . . . . . . . . . 119,543 123,168 122,626 92,717 89,541 79,524 89,541 76,020 84,584
Redeemable preferred stock . . . -- -- -- -- -- 55,312 -- -- 55,312
Stockholders' equity (deficit) . (28,534) (43,808) (55,424) (15,762) (25,576) (1,899) (25,576) 53,996 49,695
OPERATING DATA:
EBITDA (b) . . . . . . . . . . . $ 7,265 $ 4,572 $ 8,779 $ 2,809 $ (4,815) $ 17,849 $ 305 $ 7,035 $ 5,673
Capital expenditures (c) . . . . 1,133 2,504 3,141 3,737 596 8,708 -- 4,497 4,709
Retail propane gallons sold. . . 125,946 137,316 137,937 126,205 27,282 92,621 6,952 35,443 39,468
</TABLE>
53
<PAGE>
- -------------
(a) Gross profit is computed by reducing total revenues by the direct cost of
the products sold.
(b) EBITDA is defined as operating income plus depreciation and amortization.
EBITDA should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations), but provides
additional information for evaluating the Partnership's ability to make the
Minimum Quarterly Distribution.
(c) Capital expenditures fall generally into three categories: (i) growth
capital expenditures, which include expenditures for the purchase of new
propane tanks and other equipment to facilitate expansion of the retail
customer base, (ii) maintenance capital expenditures, which include
expenditures for repair and replacement of property, plant and equipment,
and (iii) acquisition capital expenditures.
54
<PAGE>
EMPIRE ENERGY
The financial information below as of June 30, 1994, 1995 and 1996 and
for the years ended June 30, 1994, 1995 and 1996 is derived from the audited
financial statements of Empire Energy. Empire Energy was formed in June 1994
as a result of a tax-free split-off (the Split-Off) from Empire Gas. These
financial statements give effect to the Split-Off as if it occurred on July
1, 1991. The historical financial and operating data for the six months ended
December 31, 1995, and the five and one-half months ended December 16, 1996
are derived from the unaudited financial statements included elsewhere herein
and, in the opinion of management of Empire Energy, contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of results of operations and financial condition. As discussed
elsewhere in this Prospectus, on August 15, 1995, Empire Energy acquired from
Synergy approximately 25% of the operations of SGI. On August 1, 1996, the
principal founding shareholder of Empire Energy and certain other
shareholders sold their interests in Empire Energy to certain members of
management. On October 7, 1996, Northwestern Growth purchased 100% of the
Empire Energy common stock. The results of operations and other data for the
five and one-half months ended December 16, 1996 are stated on a pro forma
basis to combine the one month ended prior to the Management Buy-Out, the two
months ended prior to the Northwestern Growth acquisition and the two and
one-half months beginning with the Northwestern Growth acquisition. The
retail propane gallons sold for all periods presented is derived from the
accounting records of Empire Energy and is unaudited. The results for the
interim periods are not indicative of the results that can be expected for a
full year. The Selected Historical Financial and Operating Data below should
be read in conjunction with the financial statements of Empire Energy and
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Empire Energy" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
EMPIRE ENERGY
- -----------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30, SIX MONTHS 5 1/2 MONTHS
-------------------------------------------------------- ENDED ENDED
DEC. 31, DEC. 16,
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- --------- ------------ ------------
(unaudited) (unaudited)
(in thousands)
Statement of Operations
<S> <C> <C> <C> <C> <C> <C> <C>
DATA:
Revenues . . . . . . . . . . $ 52,682 $ 61,057 $ 60,216 $ 56,689 $ 98,821 $ 44,035 $ 43,201
Gross profit (a) . . . . . . 28,141 31,900 32,187 29,841 48,741 22,828 19,891
Depreciation and
amortization . . . . . . . 4,143 4,257 4,652 4,322 5,875 2,726 2,929
Operating income (loss). . . 5,560 8,097 6,015 1,084 9,846 5,558 3,567
Interest expense . . . . . . 310 366 118 39 2,598 1,112 3,621
Provision for income taxes
(credit) . . . . . . . . . 2,050 2,900 2,400 600 3,550 1,900 32
Net income (loss). . . . . . 2,988 4,726 3,497 445 3,698 2,546 (86)
BALANCE SHEET DATA (END OF
PERIOD):
Current assets . . . . . . . $ 7,374 $ 8,751 $ 9,292 $ 9,615 $ 16,046 $ 33,102 $ 27,491
Total assets . . . . . . . . 59,582 58,584 64,734 69,075 107,102 123,540 183,046
Current liabilities. . . . . 8,742 3,620 2,697 4,277 12,126 17,344 11,210
Long-term debt . . . . . . . 1,738 2,258 135 1,701 25,442 44,713 111,853
Stockholders' equity . . . . 37,888 42,614 46,111 46,535 50,233 49,513 15,922
OPERATING DATA:
EBITDA (b) . . . . . . . . . $ 9,703 $ 12,354 $ 10,667 $ 5,406 $ 15,721 $ 8,284 $ 6,496
Capital expenditures (c) . . 3,169 2,446 4,058 8,365 39,164 39,090 2,823
Retail propane gallons sold. 57,627 66,456 67,286 62,630 104,036 49,203 40,847
</TABLE>
- -------------
(a) Gross profit is computed by reducing total revenues by the direct cost of
the products sold.
(b) EBITDA is defined as operating income plus depreciation and amortization.
EBITDA should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations), but provides
additional information for evaluating the Partnership's ability to make the
Minimum Quarterly Distribution.
55
<PAGE>
(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.
56
<PAGE>
COAST
The financial information below as of July 31, 1992, 1994, 1995 and 1996
and for the years ended July 31, 1992, 1994, 1995 and 1996 is derived from the
audited financial statements of Coast. The financial information as of July 31,
1993 and for the year ended July 31, 1993 is derived from the accounting records
of Coast and is unaudited. Historical and operating data for the year ended
July 31, 1992 is not comparable to fiscal 1993, 1994, 1995 and 1996 periods due
to the application of purchase accounting adjustments in connection with the
buyout of Coast Gas Industries, Inc. by Aurora Capital Partners and Coast, which
occurred on March 31, 1993. The data for the five months ended December 31, 1995
and the four and one-half months ended December 16, 1996 have been derived from
the unaudited financial statements appearing herein and, in the opinion of the
management of Coast, include all adjustments, consisting only of normal
recurring adjustments (except for the sale of a partnership interest effective
October 1, 1996), necessary for a fair presentation of results of operations and
financial condition. The results for the interim periods are not indicative of
the results that can be expected for a full year. The Selected Historical
Financial and Operating Data below should be read in conjunction with the
financial statements of Coast and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Coast" included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
COAST GAS
INDUSTRIES,
INC. COAST
---------- -------------------------------------------------------------------------
FISCAL FIVE 4 1/2
YEAR MONTHS MONTHS
ENDED FISCAL YEAR ENDED JULY 31, ENDED ENDED
JULY 31, ---------------------------------------------- DEC. 31, DEC. 16,
1992 1993 1994 1995 1996 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues. . . . . . . . . . . . . . $ 216,772 $ 229,860 $ 242,986 $ 266,842 $ 384,354 $ 159,104 $ 182,029
Gross profit (a). . . . . . . . . . 27,375 25,885 28,354 32,304 33,141 12,624 13,924
Depreciation and amortization . . . 2,882 3,184 3,282 3,785 4,216 1,672 1,604
Operating income (loss) . . . . . . 3,620 3,399 3,843 4,535 4,044 1,341 1,741
Interest expense. . . . . . . . . . 4,291 4,017 4,029 5,120 5,470 2,364 2,002
Provision (benefit) for
income taxes . . . . . . . . . . 190 (123) (28) (202) (473) (529) (25)
Net loss (b). . . . . . . . . . . . (861) (495) (158) (889) (953) (494) (236)
BALANCE SHEET DATA (END OF PERIOD):
Current assets. . . . . . . . . . . $ 22,563 $ 21,962 $ 29,150 33,676 $ 35,297 $ 52,409 $ 43,449
Total assets. . . . . . . . . . . . 65,644 82,626 93,559 101,545 106,179 124,162 114,212
Current liabilities . . . . . . . . 22,643 23,182 31,178 27,605 37,849 47,931 41,662
Long-term debt. . . . . . . . . . . 28,811 29,241 31,080 46,021 41,801 48,844 46,142
Mandatorily redeemable securities . 1,800 8,325 8,874 7,781 8,559 8,104 8,769
Stockholders' equity. . . . . . . . 4,262 8,368 7,661 7,853 6,098 7,035 5,862
OPERATING DATA (UNAUDITED):
EBITDA (c). . . . . . . . . . . . . $ 6,502 $ 6,583 $ 7,125 $ 8,320 $ 8,260 $ 3,013 $ 3,345
Capital expenditures (d). . . . . . 4,590 6,114 4,451 5,581 6,060 4,556 1,083
Retail propane gallons sold . . . . 23,495 27,385 30,918 36,569 34,888 13,508 13,380
</TABLE>
- -----------
(a) Gross profit is computed by reducing total revenues by the direct cost of
the products sold, except for depreciation and amortization.
57
<PAGE>
(b) Included in the net loss for the year ended July 31, 1995 is an
extraordinary charge to income of $506,000 for the early retirement of
debt, net of the income tax benefit.
(c) EBITDA is defined as operating income plus depreciation and amortization.
EBITDA should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations), but provides
additional information for evaluating the Partnership's ability to make the
Minimum Quarterly Distribution.
(d) Capital expenditures fall generally into three categories: (i) growth
capital expenditures, which include expenditures for the purchase of new
propane tanks and other equipment to facilitate expansion of the retail
customer base, (ii) maintenance capital expenditures, which include
expenditures for repair and replacement of property, plant and equipment,
and (iii) acquisition capital expenditures.
MYERS
Historical financial information for Myers has not been presented herein
based on the Partnership's belief that such information is not material to the
Partnership.
58
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE HISTORICAL FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE PARTNERSHIP AND ITS PRINCIPAL PREDECESSOR
ENTITIES, SYNERGY, EMPIRE ENERGY AND COAST, SHOULD BE READ IN CONJUNCTION
WITH THE SELECTED PRO FORMA FINANCIAL AND OPERATING DATA AND NOTES THERETO,
THE SELECTED HISTORICAL FINANCIAL AND OPERATING DATA AND NOTES THERETO AND
THE HISTORICAL AND PRO FORMA FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
ELSEWHERE IN THIS PROSPECTUS. NO DISCUSSION OF THE HISTORICAL FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF MYERS HAS BEEN INCLUDED BASED ON THE
PARTNERSHIP'S BELIEF THAT SUCH INFORMATION IS NOT MATERIAL TO THE PARTNERSHIP.
GENERAL
The Partnership is a Delaware limited partnership recently formed to own
and operate the propane business and assets of Synergy, Empire Energy, Myers and
Coast. The Partnership believes that it is the fifth largest retail marketer of
propane in the United States, serving more than 360,000 residential, commercial,
industrial and agricultural customers from 311 customer service centers in 26
states. On a combined basis, the Partnership's retail propane sales volume was
approximately 242 million, 230 million and 235 million gallons during fiscal
1994, 1995 and 1996, respectively. On a combined basis in fiscal 1996, the
Partnership also sold approximately 226 million gallons of propane to wholesale
customers.
On a combined basis during fiscal 1996, approximately 57.8% of the
Partnership's retail gallons was sold to residential customers, 25.9% was
sold to industrial and commercial customers, 13.1% was sold to agricultural
customers and 3.2% was sold to all other retail users. Sales to residential
customers during that period accounted for approximately 67.0% of the
Partnership's pro forma gross profit on propane sales, reflecting the higher
profitability of this segment of the business.
The retail distribution business is largely seasonal due to propane's use
as a heating source in residential buildings. During fiscal 1996,
approximately 72.7% of the Partnership's combined retail propane volume and
in excess of 85% of the Partnership's pro forma EBITDA was attributable to
sales during the six-month peak heating season of October through March. As a
result, cash flows from operations are greatest from November through April
when customers pay for propane purchased during the six-month peak heating
season.
Because a substantial portion of the Partnership's propane is used in the
weather-sensitive residential markets, the temperatures realized in the
Partnership's areas of operations, particularly during the six-month peak
heating season, have a significant effect on the financial performance of the
Partnership. In any given area, warmer-than-normal temperatures will tend to
result in reduced propane use, while sustained colder-than-normal
temperatures will tend to result in greater propane use. Therefore,
information on normal temperatures is used by the Partnership in
understanding how historical results of operations are affected by
temperatures that are colder or warmer than normal and in preparing forecasts
of future operations, which are based on the assumption that normal weather
will prevail in each of the Partnership's regions.
In determining actual and normal weather for a given period of time, the
Partnership compares the actual number of Heating Degree Days for such period
to the average number of Heating Degree Days for a longer time period assumed
to more accurately reflect the average normal weather, in each case as such
information is published by the National Weather Service Climate Analysis
Center, for each measuring point in each of the Partnership's regions.
Synergy and Empire Energy have historically used the 30-year period from
1961-1990, and Coast has historically used a 10-year rolling average. The
Partnership then calculates weighted averages, based on retail volumes
attributable to each measuring point, of actual and normal Heating Degree
Days within each region. Based on this information, the Partnership
calculates a ratio of actual Heating Degree Days to normal Heating Degree
Days, first on a regional basis and then on a Partnership-wide basis.
59
<PAGE>
Although the Partnership believes that comparing temperature information
for a given period of time to "normal" temperatures is helpful for an
understanding of the Partnership's results of operations, when comparing
variations in weather to changes in total revenues or operating profit,
attention is drawn to the fact that a portion of the Partnership's total
revenues is not weather-sensitive and other factors such as price,
competition, product supply costs and customer mix also affect the results of
operations. Furthermore, actual weather conditions in the Partnership's
regions can vary substantially from historical experience.
Gross profit margins are not only affected by weather patterns but also
by changes in customer mix. For example, sales to residential customers
ordinarily generate higher margins than sales to other customer groups, such
as commercial or agricultural customers. In addition, gross profit margins
vary by geographic region. Accordingly, profit margins could vary
significantly from year to year in a period of identical sales volumes.
The Partnership intends to purchase a portion of its propane
(approximately 50% to 60% of a given typical year's projected propane needs)
pursuant to agreements with terms of less than one year at market prices. The
balance of its propane needs for the year will be satisfied in the spot
market. The Partnership generally does not enter into supply contracts
containing "take or pay" provisions. In fiscal 1996, the Partnership
purchased approximately 12.8% of its propane supplies from one supplier, and
no other single supplier provided more than 10% of its total propane supply.
The Partnership will engage in hedging of product cost and supply through
common hedging practices. These practices will be monitored and maintained by
management for the Partnership on a daily basis. Hedging of product cost and
supply does not always result in increased margins.
THE PARTNERSHIP
ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS
During the fourteen-day period from commencement on December 17, 1996 to
December 31, 1996, the Partnership sold 15.4 million retail gallons and 18.6
million wholesale gallons. Retail operating revenues and wholesale revenues were
$17.8 million and $22.6 million, respectively, for the fourteen-day period.
Retail gross profit amounted to $8.0 million and gross profit per retail gallon
was approximately $0.52 per gallon for the fourteen-day period ended December
31, 1996. As a percentage of revenues, operating expenses were 9.4% and general
and administrative expenses were 1.4%. Total EBITDA was $4.7 million and
approximately $0.30 per retail gallon for the fourteen-day period. EBITDA should
not be considered as an alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow (as a measure of liquidity or
ability to service debt obligations), but provides additional information for
evaluating the Partnership's ability to distribute the Minimum Quarterly
Distribution.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash provided by operating activities during the fourteen-day period ended
December 31, 1996 was $4.5 million. Cash flow from operations included a net
income of $3.3 million and non-cash charges of $0.6 million for the period,
comprised principally of depreciation and amortization expense. The impact of
working capital changes increased cash flow by approximately $0.6 million.
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Cash used in investment activities for the fourteen-day period ended
December 31, 1996 totaled $0.5 million, which was principally used for purchases
of property and equipment. Cash used in financing activities was $2.4 million
for the fourteen-day period ended December 17, 1996. This amount reflects net
repayments on the Working Capital Facility.
On December 17, 1996, Cornerstone Propane Partners, L.P. completed its
initial public offering, proceeds from which amounted to $206.2 million.
Concurrently with the IPO, Cornerstone Propane, L.P. (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 ($329.9
million), to make distributions to the Special General Partner to redeem its
preferred stock ($61.2 million) and to provide net worth to the Special
General Partner ($15.5 million). Approximately $25.2 million was used to pay
underwriters' discounts and commissions and expenses of the Partnership
and the balance was retained by the Partnership.
FINANCING AND SOURCES OF LIQUIDITY
On December 17, 1996, the Operating Partnership issued $220.0 million of
Senior Notes with an annual interest rate of 7.53% pursuant to note purchase
agreements with various investors (collectively, the "Note Agreement"). The
Senior Notes mature on December 30, 2010, and require semi-annual interest
payments commencing December 30, 1996. The Note Agreement requires that the
principal be paid in equal annual payments of $27.5 million starting December
30, 2003.
The Operating Partnership's obligations under the Note Agreement are
secured, on an equal and ratable basis with its obligations under the Bank
Credit Agreement, by a first priority security interest in the Operating
Partnership's inventory, accounts receivable and certain customer storage tanks.
The Note Agreement contains customary representations, warranties, events of
defaults and covenants applicable to the Operating Partnership and its
"Restricted Subsidiaries" (as defined therein), including limitations, among
others, on the ability of the Operating Partnership and its Restricted
Subsidiaries to incur additional indebtedness, create liens, make investments
and loans, enter into mergers, consolidations or sales of all or substantially
all assets and make asset sales. Generally, so long as no default exists or
would result, the Operating Partnership is permitted to make any Restricted
Payment (as defined in the Note Agreement and including distributions to the
Partnership) during each fiscal quarter in amount not in excess of Available
Cash with respect to the immediately preceding quarter.
Also on the same date, the Operating Partnership entered a bank credit
agreement consisting of a working capital facility (the "Working Capital
Facility") and an acquisition facility (the "Acquisition Facility"). The Working
Capital Facility provides for borrowings up to $50 million (including a $30
million sublimit for letters of credit through March 31, 1997 and $20 million
thereafter), and matures on December 31, 1999. The Bank Credit Agreement
provides that there must be no amount outstanding under the Working Capital
Facility (excluding letters of credit) in excess of $10 million for at least 30
consecutive days during each fiscal year. Borrowings under the Working Capital
Facility totaled $10.4 million at December 31, 1996. Issued outstanding letters
of credit totaled $18.4 million at December 31, 1996. The Acquisition Facility
provides the Operating Partnership with the ability to borrow up to $75 million
to finance propane business acquisitions. The Acquisition Facility operates as a
revolving facility through December 31, 1999, at which time any loans then
outstanding may be converted to term loans and will amortize quarterly for a
period of four years thereafter. No amounts were outstanding at December 31,
1996. The Operating Partnership's obligations under the Bank Credit Agreement
are secured by a security interest in the Operating Partnership's inventory,
accounts receivable and certain customer storage tanks.
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Loans under the Bank Credit Agreement bear interest as a per annum rate
equal to either (at the Operating Partnership's option): (a) the sum (the "Base
Rate") of the applicable margin, and the higher of (i) the agent bank's prime
rate and (ii) the federal funds rate plus one-half of 1%, and (b) the sum (the
"Eurodollar Rate") of the applicable margin and the rate offered by the agent
bank to major banks in the offshore dollar market (as adjusted for applicable
reserve requirements, if any). The applicable margin for Base Rate loans varies
between 0% and .12%, and the applicable margin for Eurodollar Rate loans varies
between .25% and .80%, in each case depending upon the Operating Partnership's
ratio of consolidated "Debt" to "Consolidated Cash Flow" (as such terms are
defined in the Bank Credit Agreement). At December 31, 1996, the applicable Base
and Eurodollar Rates were 8.275% and 6.2375%, respectively. In addition, an
annual fee is payable quarterly by the Operating Partnership (whether or not
borrowings occur) ranging from .125% to .325% depending upon the ratio
referenced above.
The Bank Credit Agreement contains customary representations, warranties,
events of defaults and covenants including limitations, among others, on the
ability of the Operating Partnership and its "Restricted Subsidiaries" (as
defined therein) to incur or maintain certain indebtedness or liens, make
investments and loans, enter into mergers, consolidations or sales of all or
substantially all of its assets and make assets sales. Generally, so long as no
default exists or would result, the Operating Partnership is permitted to make
any Restricted Payment (as defined in the Bank Credit Agreement and including
distributions to the Partnership) during each fiscal quarter in amount not to
exceed Available Cash with respect to the immediately preceding quarter.
In addition, the Bank Credit Agreement provides that: (1) the Operating
Partnership not permit the ratio of its consolidated Debt (as defined in the
Bank Credit Agreement) less cash on hand (in excess of $1 million up to $10
million) to Consolidated Cash Flow (as defined in the Bank Credit Agreement) to
exceed 4.75:1.00 at any time on or before December 31, 1997, 4.50:1.00 at any
time on or before December 31, 1998 and 4.25:1.00 at any time thereafter; and
(2) the Operating Partnership not permit the ratio of its Consolidated Cash Flow
to consolidated "Interest Expense" (as defined therein) to be less than
2.00:1.00 prior to December 31, 1997, 2.25:1.00 any time thereafter on or before
December 31, 1998 and 2.50:1.00 at any time thereafter.
SYNERGY
ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS
The following discussion compares the results of operations and other
data for Synergy for the five and one-half months ended December 16, 1996 to
the six month period ended December 31, 1995, the ten and one-half month
period ended June 30, 1996 to the fiscal year ended March 31, 1995, and the
fiscal year ended March 31, 1995 to the fiscal year ended March 31, 1994. As
discussed below, the comparability of financial matters for the periods is
affected by the Synergy Acquisition and the concurrent Empire Acquisition of
Certain Synergy Assets.
FIVE AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996 COMPARED TO THE SIX MONTHS
ENDED DECEMBER 31, 1995.
VOLUME. During the five and one-half months ended December 16, 1996,
Synergy sold 39.5 million retail propane gallons, a decrease of 2.9 million
gallons, or 6.8%, compared to 42.4 million retail propane gallons sold during
the six months ended December 31, 1995. The decrease in retail volume was
primarily attributable to the longer sales period in fiscal 1995 offset by
acquisitions and mergers subsequent to December 31, 1995.
REVENUES. Revenues decreased by $2.1 million, or 4.5%, to $44.1 million for
the five and one-half months ended December 16, 1996, as compared to $46.2
million for the six months ended December 31, 1995. This decrease was primarily
attributable to the longer sales period in fiscal 1995 offset by increased
propane sales prices per gallon for the five and one-half months ended December
31, 1996.
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COST OF PRODUCT SOLD. Cost of product sold increased by $1.3 million, or
5.9%, to $23.3 million for the five and one-half months ended December 16,
1996, as compared to $22.0 million for the six months ended December 31,
1995. The increase in cost of product sold was due to a higher wholesale cost
of propane, approximately 26% higher per gallon, partially offset by the
exclusion of cost of products sold during the fourteen-day period ended
December 31, 1996.
GROSS PROFIT. Gross profit decreased $3.4 million, or 14.0%, to $20.7
million for the five and one-half months ended December 16, 1996, as compared to
$24.1 million for the six months ended December 31, 1995. This decrease was
primarily due to the longer sales period in fiscal 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(which include salaries and commissions and related party corporate
administration fees) decreased by $1.7 million, or 10.1%, to $15.1 million for
the five and one-half months ended December 16, 1996, as compared to $16.8
million for the six months ended December 31, 1995. The majority of this
decrease was attributable to the longer sales period in fiscal 1995. As a
percentage of revenues, general and administrative expenses decreased to 34.2%
for the five and one-half months ended December 16, 1996, as compared to 36.4%
for the six months ended December 31, 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased $0.3
million or 13.6% to $1.9 million for the five and one-half months ended December
16, 1996, as compared to $2.2 million for the six months ended December 31,
1995. This decrease was primarily attributable to the longer sales period in
fiscal 1995.
OPERATING INCOME. Operating income decreased $1.3 million, or 25.5%, to
$3.8 million for the five and one-half months ended December 16, 1996, as
compared to $5.1 million in the four and one-half months ended December 31,
1995. This decrease was primarily due to the longer sales period in fiscal 1995.
INTEREST EXPENSE. Interest expense increased by $0.1 million or 3.1% to
$3.3 million for the five and one-half months ended December 16, 1996, as
compared to $3.2 million for the six months ended December 31, 1995. This
increase was primarily due to the longer sales period in fiscal 1995.
NET INCOME. Synergy had a net income of $0.2 million for the five and
one-half months ended December 16, 1996, as compared to a net income of $1.0
million for the six months ended December 31, 1995. This decrease was primarily
attributable to the longer sales period in fiscal 1995.
EBITDA. Total EBITDA decreased by $1.6 million, or 21.9%, to $5.7 million
for the five and one-half months ended December 16, 1996, as compared to $7.3
million for the six months ended December 31, 1995. The decrease in total EBITDA
reflects the effect of having 14 days less EBITDA in December 1996, when the
Company is more profitable. As a percentage of revenues, total EBITDA decreased
to 12.9% for the five and one-half months ended December 16, 1996, as compared
to 15.9% for the six months ended December 31, 1995. EBITDA should not be
considered as an alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow (as a measure of liquidity or
ability to service debt obligations), but provides additional information for
evaluating the Partnership's ability to distribute the Minimum Quarterly
Distribution.
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.
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COST OF SALES. Cost of product sold decreased by $13.7 million, or
22.9%, to $46.2 million for fiscal 1996, as compared to $59.9 million for
fiscal 1995. The decrease was attributable to the reduced sales volume in
fiscal 1996 resulting from the Empire Acquisition of Certain Synergy Assets
and was partially offset by the colder than normal weather during fiscal
1996. As a percentage of revenues, cost of product sold decreased slightly to
48.1% for fiscal 1996, as compared to 48.5% for fiscal 1995.
GROSS PROFIT. Gross profit decreased by $13.8 million, or 21.7%, to
$49.9 million for fiscal 1996, as compared to $63.7 million for fiscal 1995.
This decrease was due primarily to the Empire Acquisition of Certain Synergy
Assets. Gross profit per retail gallon (which includes non-propane related
sales) increased by $.033 per gallon, or 6.5%, to $.538 per gallon for fiscal
1996, as compared to $.505 per gallon for fiscal 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses (which include salaries and commissions and related-party corporate
administration and management fees) decreased by $28.8 million, or 47.4%, to
$32.0 million for fiscal 1996, as compared to $60.8 million for fiscal 1995,
due to the Empire Acquisition of Certain Synergy Assets and the reduction of
employee positions, corporate overhead and related party salaries and
expenses. As a percentage of revenues, general and administrative expenses
decreased to 33.3% for fiscal 1996, as compared to 49.2% for fiscal 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
by $1.8 million, or 35.3%, to $3.3 million for fiscal 1996, as compared to
$5.1 million for fiscal 1995, due to the Empire Acquisition of Certain
Synergy Assets, partially offset by an increase in depreciation and
amortization due to the purchase accounting adjustment made in connection
with the Synergy Acquisition.
OPERATING INCOME. Operating income increased $16.8 million to $14.5
million for fiscal 1996, as compared to a loss of $2.3 million for fiscal
1995. This increase was primarily due to the significant reduction in general
and administrative expenses, partially offset by the effect of the Empire
Acquisition of Certain Synergy Assets. As a percentage of revenues, operating
income increased to 15.1% for fiscal 1996, as compared to a loss for fiscal
1995.
INTEREST EXPENSE. Interest expense decreased $5.5 million, or 49.6%, to
$5.6 million for fiscal 1996, as compared to $11.1 million for fiscal 1995,
primarily due to the recapitalization of Synergy in connection with the
Synergy Acquisition.
NET INCOME. Synergy had net income of $5.3 million for fiscal 1996, as
compared to a net loss of $13.4 million for fiscal 1995. The increase was
primarily the result of the reduction in general and administrative expenses
and interest expense, partially offset by the effect of the Empire
Acquisition of Certain Synergy Assets.
EBITDA. EBITDA increased $15.0 million, or 537.7%, to $17.8 million in
fiscal 1996, as compared to $2.8 million for fiscal 1995. This increase was
primarily due to the reduction in general and administrative expenses and
colder than normal weather, and was partially offset by the effect of the
Empire Acquisition of Certain Synergy Assets. As a percentage of revenues,
EBITDA increased to 18.6% for fiscal 1996, as compared to 2.3% for fiscal
1995. EBITDA should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations), but provides
additional information for evaluating the Partnership's ability to distribute
the Minimum Quarterly Distribution.
FISCAL YEAR ENDED MARCH 31, 1995 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1994
VOLUME. During fiscal 1995, Synergy sold 126.2 million retail propane
gallons, a decrease of 11.7 million gallons, or 8.5%, from the 137.9 million
retail propane gallons sold during fiscal 1994. The decrease in volume was
attributable to unusually warm weather during fiscal 1995 in Synergy's
marketing areas.
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REVENUES. Revenues decreased by $10.1 million, or 7.6%, to $123.6
million for fiscal 1995, as compared to $133.7 million for fiscal 1994. This
decrease was primarily attributable to the warmer than normal weather in
Synergy's marketing areas in fiscal 1995, which reduced sales volume.
COST OF PRODUCT SOLD. Cost of product sold decreased by $3.6 million, or
5.7%, to $59.9 million for fiscal 1995, as compared to $63.5 million for
fiscal 1994. The decrease was attributable to the warmer than normal weather
and reduced sales volume in fiscal 1995. As a percentage of revenues, cost of
product sold increased to 48.5% for fiscal 1995, as compared to 47.5% for
fiscal 1994.
GROSS PROFIT. Gross profit decreased by $6.5 million, or 9.3%, to $63.7
million for fiscal 1995, as compared to $70.2 million for fiscal 1994. This
decrease was primarily due to a decrease in sales volume resulting from the
warmer than normal weather in Synergy's marketing areas and to the lower
average gross margin per gallon of propane. Gross profit per retail gallon
(which includes non-propane related sales) decreased by $.004 per gallon, or
.8%, to $.505 per gallon for fiscal 1995, as compared to $.509 per gallon for
fiscal 1994.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(which include salaries and commissions and related-party corporate
administration and management fees) decreased by $.7 million, or 1.1%, to
$60.8 million for fiscal 1995, as compared to $61.5 million for fiscal 1994,
primarily due to a decrease in excise taxes, penalties and interest related
to Synergy's employee benefit plan of $2.9 million, which was offset by
increases in employee benefits of $.8 million and insurance expense of $1.4
million due to higher health insurance and legal settlement claims incurred
in 1995. As a percentage of revenues, general and administrative expenses
increased to 49.2% for fiscal 1995, as compared to 46.0% for fiscal 1994.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of $5.1
million and $5.2 million in fiscal 1995 and 1994, respectively, were
comparable, since an increase in depreciation expense in fiscal 1995 was
offset by a decrease in amortization expense in fiscal 1995. The increase in
depreciation was primarily attributable to an increase in vehicle-related
depreciation. The decrease in amortization was primarily due to decreases in
the amortization of deferred financing costs and acquisition-related costs.
OPERATING INCOME. Operating income decreased by $5.9 million to a loss
of $2.3 million in fiscal 1995, as compared to $3.6 million in income in
fiscal 1994, since the decrease in general and administrative expenses was
more than offset by the sum of (i) the decrease in gross profit resulting
from the lower retail sales volume and lower average gross margin per gallon
of propane and (ii) the increase in the provision for doubtful accounts.
INTEREST EXPENSE. Interest expense (which includes related-party
interest expense) decreased by $2.0 million, or 15.3%, in fiscal 1995 to
$11.1 million, as compared to $13.1 million in fiscal 1994, as a result of
the restructuring of Synergy's outstanding debt, which more than offset an
increase in interest expense related to borrowings under Synergy's revolving
credit facility.
NET LOSS. Synergy had a net loss of $13.4 million for fiscal 1995, as
compared to a net loss of $11.6 million for fiscal 1994. The increase in net
loss was primarily due to the reduction in gross profit due to warmer
weather, partially offset by the decrease in general and administrative
expenses and interest expense.
EBITDA. EBITDA decreased by $6.0 million, or 68.2%, to $2.8 million for
fiscal 1995, as compared to $8.8 million for fiscal 1994. This decrease was
due to unfavorable weather conditions, partially offset by a decrease in
general and administrative expenses. As a percentage of revenues, EBITDA
decreased to 2.3% for fiscal 1995, as compared to 6.6% for fiscal 1994.
EBITDA should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations), but provides
additional information for evaluating the Partnership's ability to distribute
the Minimum Quarterly Distribution.
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LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash provided by operating activities during the five and one-half months
ended December 16, 1996 was $4.3 million. Cash flow from operations included
a net income of $0.2 million. Net income was reduced by non-cash charges of
$2.4 million for the period, comprised principally of depreciation and
amortization expense. The impact of working capital changes increased cash
flow by approximately $1.7 million.
Cash used in investment activities for the five and one-half months ended
December 16, 1996 totaled $3.8 million, which was principally used to purchase
property and equipment. Cash used in financing activities was $0.3 million for
the five and one-half months ended December 16, 1996. This amount reflects
borrowings under Synergy's revolving credit line of $3.8 million, partially
offset by principal payments on other notes payable in the amount of $0.2
million and the payment of preferred stock dividends of $3.9 million.
FINANCING AND SOURCES OF LIQUIDITY
On December 28, 1995, Synergy entered into a revolving credit agreement with
Bank of Boston, which was amended in August 1996. Synergy's revolving credit
facility consists of a revolving credit line of up to $30.0 million, including
up to $7.5 million for letters of credit. The revolving credit facility bears
interest at either the Eurodollar rate plus 2.0% or the prime rate plus .75%.
The obligations of Synergy under the revolving credit agreement are secured by
its accounts receivable, inventory, instruments and documents and a pledge of
the capital stock of its subsidiaries. The revolving credit agreement contains
customary operating and maintenance covenants. Synergy's obligations under the
revolving credit agreement have been jointly and severally guaranteed by each of
its subsidiaries. The revolving credit facility matures on December 31, 1997.
On July 31, 1996, Synergy entered into a term loan agreement with NPS in the
principal amount of approximately $52.8 million, secured by substantially all of
Synergy's personal property. The term loan bears interest at a rate of 9.12% per
annum. The debt and security interests under the term loan agreement are
subordinate to the debt owed to and security interests of Bank of Boston under
the revolving credit agreement. The term loan agreement contains customary
financial and performance covenants. No principal payments are due under the
term loan until it matures on August 1, 2005.
All of the above debt was repaid in full on December 17, 1996 in
connection with the closing of the Transactions.
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EMPIRE ENERGY
ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS
The following discussion compares the results of operations and other
data for Empire Energy for the five and one-half months ended December 16,
1996 to the six months ended December 31, 1995 and for the fiscal year ended
June 30, 1996 to the fiscal year ended June 30, 1995, and the fiscal year
ended June 30, 1995 to the fiscal year ended June 30, 1994. On August 1,
1996, the principal founding shareholder of Empire Energy and certain other
shareholders sold their interests in Empire Energy to certain members of
management of Empire Energy (the "Management Buy-Out"). 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. As discussed below, the
comparability of financial matters is also affected by the Empire Acquisition
of Certain Synergy Assets, the operations of which are included since the
actual date of acquisition in August 1995, and the Split-Off in June 1994.
FIVE AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1995
VOLUME. During the five and one-half months ended December 16, 1996, the
Company sold 40.8 million retail propane gallons, a decrease of 8.4 million
gallons, or 17.1%, from the 49.2 million retail propane gallons sold during the
six months ended December 31, 1995. The decrease in retail volume was primarily
attributable to a reduction in gallons of 5.8 million for the fourteen days
ended December 31, 1996 and to warmer weather in the Company's market area.
OPERATING REVENUES. Total operating revenues decreased $0.8 million, or
1.8%, to $43.2 million for the five and one-half months ended December 16, 1996,
as compared to $44 million for the six months ended December 31, 1995. This
decrease was attributable to a reduction in operating revenues of $7.4 million
for the fourteen days ended December 31, 1996 offset by an increase in revenues
due to higher propane prices in the Company's core market area in fiscal 1996.
COST OF PRODUCT SOLD. Total cost of product sold increased by $2.1 million,
or 9.9%, to $23.3 million for the five and one-half months ended December 16,
1996, as compared to $21.2 million for the six months ended December 31, 1995.
The increase was primarily attributable to the higher propane prices in fiscal
1996 offset by a reduction of cost of product sold of $3.8 million for the
fourteen days ended December 31, 1996. As a percentage of revenues, cost of
product sold increased to 53.9% for the five and one-half months ended December
16, 1996, as compared to 48.2% for the six months ended December 31, 1995.
GROSS PROFIT. Gross profit decreased $2.9 million, or 12.7%, to $19.9
million for the five and one-half months ended December 16, 1996, as compared to
$22.8 million for the six months ended December 31, 1995. This decrease was
primarily due to reduced sales volume offset by a higher gross profit per
gallon.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(which include allowance for doubtful accounts) decreased by $1.2 million, or
8.2%, to $13.4 million for the five and one-half months ended December 16, 1996,
as compared to $14.5 million for the six months ended December 31, 1995. The
decrease was due primarily to a reduction in expense of $1.5 million for the
fourteen days ended December 31, 1996. As a percentage of revenues, general and
administrative expenses decreased to 31.0% for the five and one-half months
ended December 16, 1996, as compared to 33.0% for the six months ended December
31, 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $0.2
million, or 7.4%, to $2.9 million for the five and one-half months ended
December 16, 1996, as compared to $2.7 million for the six months ended December
31, 1995. This increase was largely the result of the revaluation of the assets
for purchase accounting adjustments in August of 1996, offset by a reduction of
$0.3 million in depreciation for the fourteen days ended December 31, 1996.
OPERATING INCOME. Operating income decreased $2.0 million, or 35.7%, to
$3.6 million for the five and one-half months ended December 16, 1996, as
compared to $5.6 million in the six months ended December 31, 1995. This
decrease was primarily due to the longer sales period in 1995.
INTEREST EXPENSE. Interest expense increased $2.5 million to $3.6 million
for the five and one-half months ended December 16, 1996, as compared to $1.1
million for the six months ended December 31, 1995. This increase was a result
of new debt for the Management Buyout which occurred in August of 1996.
NET LOSS. The Company had a net loss of $0.1 million for the five and
one-half months ended December 16, 1996, as compared to a net income of $2.5
million for the six months ended December 31, 1995. This decrease was primarily
the result of a reduction in net income of $1.8 million for the fourteen days
ended December 31, 1996, and the increase in interest expense, offset by a lower
provision for income taxes.
EBITDA. Total EBITDA decreased by $1.8 million, or 21.7%, to $6.5 million
for the five and one-half months ended December 16, 1996, as compared to $8.3
million for the six months ended December 31, 1995. The decrease in total EBITDA
reflects the longer sales period in 1995. As a percentage of revenues, total
EBITDA decreased to 15% for the five and one-half months ended December 16,
1996, as compared to 18.8% for the six months ended December 31, 1995. EBITDA
should not be considered as an alternative to net income (as an indicator of
operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations), but provides additional
information for evaluating the Partnership's ability to distribute the Minimum
Quarterly Distribution.
FISCAL YEAR ENDED 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.
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REVENUES. Revenues increased by $42.1 million, or 74.3%, to $98.8
million for fiscal 1996, as compared to $56.7 million for fiscal 1995. This
increase was attributable almost entirely to the Empire Acquisition of
Certain Synergy Assets and the colder weather in Empire Energy's marketing
areas in fiscal 1996, both of which had the effect of increasing sales.
COST OF PRODUCT SOLD. Cost of product sold increased by $23.3 million,
or 86.9%, to $50.1 million for fiscal 1996, as compared to $26.8 million for
fiscal 1995. The increase was attributable to increased volumes sold as a
result of the Empire Acquisition of Certain Synergy Assets and the colder
weather. As a percentage of revenues, cost of products sold increased to
50.7% for fiscal 1996, as compared to 47.3% for fiscal 1995.
GROSS PROFIT. Gross profit increased by $18.9 million, or 63.3%, to
$48.7 million for fiscal 1996, as compared to $29.8 million for fiscal 1995.
This increase was primarily due to the increase in sales volume resulting
from the Empire Acquisition of Certain Synergy Assets and colder than normal
weather. Gross profit per retail gallon (which includes non-propane related
sales) decreased by $.007, or 1.5%, to $.469 per gallon for fiscal 1996, as
compared to $.476 per gallon for fiscal 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(which include provision for doubtful accounts) increased by $8.6 million, or
35.1%, to $33.0 million for fiscal 1996, as compared to $24.4 million in
fiscal 1995, as a result of the Empire Acquisition of Certain Synergy Assets
and the increase in volumes sold due to the colder weather. As a percentage
of revenues, general and administrative expenses decreased to 33.4% for
fiscal 1996, as compared to 43.1% for fiscal 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
by $1.6 million, or 37.2%, to $5.9 million for fiscal 1996, as compared to
$4.3 million for fiscal 1995, primarily due to the acquisition of assets in
connection with the Empire Acquisition of Certain Synergy Assets.
OPERATING INCOME. Operating income increased by $8.7 million, or 790.9%,
to $9.8 million for fiscal 1996, compared to $1.1 million for fiscal 1995.
This increase was primarily the result of the Empire Acquisition of Certain
Synergy Assets, which resulted in significant operating efficiencies in
Empire Energy's existing business, and an increase in propane sales volumes
resulting from the colder winter in fiscal 1996. As a percentage of revenues,
operating income increased to 9.9% for fiscal 1996, as compared to 1.9% for
fiscal 1995.
INTEREST EXPENSE. Interest expense increased to $2.6 million for fiscal
1996, as compared to $39,000 for fiscal 1995, mainly due to an increase in
borrowings as a result of the Empire Acquisition of Certain Synergy Assets.
NET INCOME. Empire Energy had net income of $3.7 million for fiscal
1996, as compared to net income of $.4 million for fiscal 1995. The increase
was primarily the result of an increase in propane sales volume resulting
from the Empire Acquisition of Certain Synergy Assets and colder weather in
fiscal 1996.
EBITDA. EBITDA increased $10.3 million, or 190.8%, to $15.7 million in
fiscal 1996, as compared to $5.4 million for fiscal 1995. This increase was
due to the Empire Acquisition of Certain Synergy Assets, which resulted in
increased volumes and significant operating efficiencies, and the increase in
volumes sold due to the colder weather conditions. As a percentage of
revenues, EBITDA increased to 15.9% for fiscal 1996, as compared to 9.5% for
fiscal 1995. EBITDA should not be considered as an alternative to net income
(as an indicator of operating performance) or as an alternative to cash flow
(as a measure of liquidity or ability to service debt obligations), but
provides additional information for evaluating the Partnership's ability to
distribute the Minimum Quarterly Distribution.
FISCAL YEAR ENDED JUNE 30, 1995 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1994
VOLUME. During fiscal 1995, Empire Energy sold 62.6 million retail
propane gallons, a decrease of 4.7 million gallons, or 7.0%, from the 67.3
million retail propane gallons sold during fiscal 1994. The decrease in
volume was attributable to unusually warmer weather during fiscal 1995 in
Empire Energy's marketing areas.
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REVENUES. Revenues decreased by $3.5 million, or 5.8%, to $56.7 million
for fiscal 1995, as compared to $60.2 million for fiscal 1994. This decrease
was attributable almost entirely to the warmer than normal weather in Empire
Energy's marketing areas in fiscal 1995, which reduced sales volume.
COST OF PRODUCT SOLD. Cost of product sold decreased by $1.2 million, or
4.2%, to $26.8 million for fiscal 1995, as compared to $28.0 million for
fiscal 1994. The decrease was attributable to the warmer weather and
decreased sales volumes in fiscal year 1995. As a percentage of revenues,
cost of product sold increased to 47.3% for fiscal 1995, as compared to 46.5%
for fiscal 1994.
GROSS PROFIT. Gross profit decreased by $2.4 million, or 7.3%, to $29.8
million for fiscal 1995, as compared to $32.2 million for fiscal 1994. This
decrease was primarily due to the decrease in sales volume resulting from the
warmer than normal weather. The decrease in gross profit attributable to the
decrease in gallons sold was approximately $2.2 million. The remaining
decrease was due to the decrease in gross profit per retail gallon, as well
as decreases in gross profit from other sales. Gross profit per retail gallon
(which includes non-propane related sales) decreased by $.002 per gallon, or
.4%, to $.476 per gallon for fiscal 1995, as compared to $.478 per gallon for
fiscal 1994.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(which include provision for doubtful accounts) increased by $2.9 million, or
13.5%, to $24.4 million for fiscal 1995, as compared to $21.5 million for
fiscal 1994. The increase was primarily due to the partial allocation of
officers' salaries and other related expenses to Empire Gas operations in
fiscal 1994, whereas all such salaries and related expenses were allocated to
Empire Energy in fiscal 1995. As a percentage of revenues, general and
administrative expenses increased to 43.1% for fiscal 1995, as compared to
35.7% for fiscal 1994.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
by $.4 million, or 7.1%, to $4.3 million for fiscal 1995, as compared with
$4.7 million for fiscal 1994, largely as a result of a reduction in
depreciation expense for residential customer tanks.
OPERATING INCOME. Operating income decreased $4.9 million, or 82.0%, to
$1.1 million for fiscal 1995, as compared to $6.0 million for fiscal 1994.
This decrease was primarily due to the warmer weather in fiscal 1995 and the
increase in salaries and commissions as a result of the restructuring due to
the Split-Off in June 1994. As a percentage of revenues, operating income
decreased to 1.9% for fiscal 1995, as compared to 10.0% for fiscal 1994.
INTEREST EXPENSE. Interest expense decreased $79,000, or 66.9%, to
$39,000 for fiscal 1995, as compared to $118,000 for fiscal 1994, mainly due
to a decrease in borrowings under Empire Energy's operating line of credit in
fiscal 1995 as a result of the reduction in propane sales volume.
NET INCOME. Empire Energy had net income of $.4 million for fiscal 1995,
as compared to net income of $3.5 million for fiscal 1994. The decrease was
primarily the result of the reduction of sales volumes due to the warmer
weather in fiscal 1995.
EBITDA. EBITDA decreased $5.3 million, or 49.3%, to $5.4 million for
fiscal 1995, as compared to $10.7 million for fiscal 1994. This decrease was
primarily due to the warmer weather in fiscal 1995 and an increase in general
and administrative expenses due to the restructuring in connection with the
Split-Off. As a percentage of revenues, EBITDA decreased to 9.5% for fiscal
1995, as compared to 17.7% for fiscal 1994. EBITDA should not be considered
as an alternative to net income (as an indicator of operating performance) or
as an alternative to cash flow (as a measure of liquidity or ability to
service debt obligations), but provides additional information for evaluating
the Partnership's ability to distribute the Minimum Quarterly Distribution.
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LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash used in operating activities during the five and one-half months
ended December 16, 1996 was $8.8 million. Cash flow from operations included
a net loss of $0.1 million, largely offset by non-cash charges of $2.8
million for the period, comprised principally of depreciation and
amortization expense. The impact of working capital changes decreased cash
flow by approximately $11.5 million.
Cash used in investment activities for the five and one-half months ended
December 16, 1996 totaled $3.0 million, which was principally used for purchase
of property and equipment. Cash provided by financing activities was $10.3
million for the five and one-half months ended December 16, 1996. This amount
reflects borrowings under the Company's revolving credit line and funding from
the Management Buyout credit facilities of $10.4 million, partially offset by
principal payments on other notes payable in the amount of $0.1 million.
FINANCING AND SOURCES OF LIQUIDITY
In connection with the Management Buyout on August 1, 1996, Empire Energy
obtained a new credit facility from Bank of Boston replacing its prior credit
facilities. The new credit facility provides for loans of $124.0 million,
including (i) a $42.0 million term loan, which matures on December 31, 2002,
(ii) a $52.0 million second term loan, which matures on December 31, 2006, (iii)
a $20.0 million working capital facility which matures on June 30, 2001, and
(iv) a $10.0 million acquisition credit facility, which matures on December 30,
2002. These loans bear interest at rates ranging from the Bank of Boston prime
rate up to 3.25% plus the Eurodollar rate, depending on the type of loan and the
amount of debt outstanding. The new credit facility includes working capital,
cash flow and net worth requirements as well as dividend and capital expenditure
restrictions and is secured by all goods, machinery, equipment and other
personal property of Empire Energy. In addition, Empire Energy's obligations
under the credit facility have been jointly and severally guaranteed by each of
its subsidiaries.
All of the above debt was repaid in full on December 17, 1996 in
connection with the closing of the Transactions.
COAST
ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS
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The following discussion compares the results of operations and other
data for Coast for the four and one-half month period ended December 16, 1996
to the five-month period ended December 31, 1995, the fiscal year ended July
31, 1996 to the fiscal year ended July 31, 1995, and the fiscal year ended
July 31, 1995 to the fiscal year ended July 31, 1994.
FOUR AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996 COMPARED TO FIVE MONTHS ENDED
DECEMBER 31, 1995
VOLUME. During the four and one-half months ended December 16, 1996, Coast
sold 166.1 million wholesale propane gallons of natural gas liquids, a decrease
of 15.2 million gallons, or 8.4%, from the 181.3 million gallons sold in the
five months ended December 31, 1995. The decrease in volume was primarily
attributable to the 1996 period having fourteen days less than the 1995 period.
Sales volume for the fourteen-day period ended December 16, 1996 amounted to
18.6 million gallons. During the four and one-half months ended December 16,
1996, Coast sold 13.4 million retail propane gallons, a decrease of 0.1 million
gallons, or 0.9%, from the 13.5 million retail propane gallons sold during the
five months ended December 31, 1995. The decrease in retail volume was primarily
attributable to the 1996 period having fourteen days less than the 1995 period
offset by the impact of colder weather this year in some of the retail markets
served by Coast in the 1996 period.
REVENUES. Revenues increased by $23.0 million, or 14.4%, to $182.0 million
for the four and one-half months ended December 16, 1996, as compared to $159.1
million for the five months ended December 31, 1995. This increase was primarily
attributable to an increase in wholesale natural gas and propane prices. Retail
operating revenues increased by $1.7 million, or 11.7%, to $16.5 million for the
four and one-half months ended December 16, 1996, as compared to $14.8 million
for the five months ended December 31, 1995. This increase was attributable to
increases in propane prices offset by the 1996 period having fourteen days less
than the 1995 period.
COST OF PRODUCT SOLD. Cost of product sold increased by $21.6 million,
or 14.8%, to $168.1 million for the four and one-half months ended December
16, 1996, as compared to $146.5 million for the five months ended December
31, 1995. The increase in cost of product sold was primarily due to the
increase in the wholesale cost of natural gas and propane, which increased by
approximately 21.4% and 43.5%, respectively, in the four and one-half months
ended December 16, 1996, as compared to the five months ended December 31,
1995. Cost of retail product sold, increased by $1.7 million, or 25.5%, to
$8.6 million for the four and one-half months ended December 16, 1996, as
compared to $6.8 million for the five months ended December 31, 1995, as a
result of the increase in propane prices offset by the 1996 period having
fourteen days less than the 1995 period. The cost per gallon of propane for
the retail business increased from $0.46 in the five months ended December
31, 1995 to $0.59 in the four and one-half months ended December 16, 1996,
reflecting the increase in propane prices. As a percentage of revenues, cost
of product sold increased to 92.4% for the four and one-half months ended
December 16, 1996, as compared to 92.1% for the five months ended December
31, 1995.
GROSS PROFIT. Gross profit increased $1.3 million, or 10.3%, to $13.9
million for the four and one-half months ended December 16, 1996, as compared to
$12.6 million for the five months ended December 31, 1995. The increase was
primarily attributable to increased margins in Coast's wholesale business due to
inventory purchased at advantageous prices, offset by the 1996 period having
fourteen days less than 1995. Retail gross profits remained constant at $7.9
million for the four and one-half months ended December 16, 1996, and the five
months ended December 31, 1995. The decrease in gross profit due to fourteen
less days in the 1996 period is offset by increased profits resulting from
higher volumes sold. Gross profit per retail gallon remained constant at $0.59
per gallon for the four and one-half months ended December 16, 1996 and the five
months ended December 31, 1995.
OPERATING EXPENSES. Operating expenses decreased $0.1 million, or 0.9%, to
$8.2 million for the four and one-half months ended December 16, 1996, as
compared to $8.3 million for the five months ended December 31, 1995, primarily
due to fourteen less days in the 1996 period. Operating expenses during the
fourteen days ended December 31, 1996 were $1.0 million. Operating expenses for
the retail business decreased by $0.2 million, or 3.4%, to $4.9 million in the
four and one-half months ended December 16, 1996, as compared to $5.1 million in
the five months ended December 31, 1995, due to the 1996 period having fourteen
days less than the 1995 period. As a percentage of revenues, operating expenses
decreased to 4.5% for the five months ended December 31, 1995, as compared to
5.2% for the four and one-half months ended December 16, 1996.
SALE OF PARTNERSHIP INTEREST. Effective October 1, 1996, Coast terminated
its participation and interest in Coast Energy Investments, Inc., a limited
partnership in which Coast Energy Group, Inc., a wholly owned subsidiary of
Coast, had been a 50% limited partner. The original partnership agreement
provided for a minimum investment term through December 1997. The termination
resulted in the sale of Coast's partnership interest to its 50% partner and an
employee of the partnership. Coast recorded a net loss on the disposition of the
partnership interest of $0.7 million. This amount consisted of a $0.2 million
loss on the partnership investment and $0.5 million of termination costs
consisting of salary, consulting, non-compete agreements and other related
expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(which include corporate administrative expenses) increased by $0.4 million, or
28.4%, to $1.7 million for the four and one-half months ended December 16, 1996,
as compared to $1.4 million for the five months ended December 31, 1995. The
majority of this increase was attributable to outside services and travel
expenses in conjunction with acquisition matters, offset by the 1996 period
having fourteen days less than 1995. General and administrative expenses for the
fourteen-day period ended December 31, 1996 amounted to $0.2 million. As a
percentage of revenues, general and administrative expenses increased to 1.0%
for the four and one-half months ended December 16, 1996, as compared to 0.9%
for the five months ended December 31, 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased $0.1
million, or 4.1%, to $1.6 million for the four and one-half months ended
December 16, 1996, as compared to $1.7 million for the five months ended
December 31, 1995. This decrease was primarily attributable to the 1996 period
having fourteen days less than the 1995 period. Depreciation expense for the
fourteen-day period ended December 31, 1996 totaled $0.2 million.
OPERATING INCOME. Operating income increased $0.4 million, or 29.8%, to
$1.7 million for the four and one-half months ended December 16, 1996, as
compared to $1.3 million in the five months ended December 31, 1995. This
increase was primarily due to both higher retail and wholesale prices in 1996
offset by the 1996 period having fourteen days less than 1995. Operating income
for the fourteen-day period ended December 31, 1996 amounted to $0.9 million.
INTEREST EXPENSE. Interest expense decreased by $0.4 million, or 15.3%, to
$2.0 million for the four and one-half months ended December 16, 1996, as
compared to $2.4 million for the five months ended December 31, 1995. This
decrease was primarily due to the 1996 period having fourteen days less than the
1995 period and relatively lower interest rates in the four and one-half month
period ended December 16, 1996 than in the five month period ended December 31,
1995. Interest expense incurred in the fourteen-day period ended December 31,
1996 was $0.1 million.
NET LOSS. Coast had a net loss of $0.2 million for the four and one-half
months ended December 16, 1996, as compared to a net loss of $0.5 million for
the five months ended December 31, 1995. The change was primarily attributable
to an increase in wholesale sales and profits in 1996, offset by the 1996 period
having fourteen days less than the 1995 period.
EBITDA. Total EBITDA increased by $0.3 million, or 11.0%, to $3.3 million
for the four and one-half months ended December 16, 1996, as compared to $3.0
million for the five months ended December 31, 1995. Coast's retail EBITDA
increased by $0.2 million, or 5.3%, to $3.0 million for the four and one-half
months ended December 16, 1996, as compared to $2.9 million for the five months
ended December 31, 1995. The increase in total EBITDA reflects the impact of
higher earnings from wholesale operations and increased earnings from retail
operations primarily due to internal customer growth, offset by the 1996 period
having fourteen days less than the 1995 period. As a percentage of revenues,
total EBITDA decreased to 1.8% for the four and one-half months ended December
16, 1996, as compared to 1.9% for the five months ended December 31, 1995.
EBITDA should not be considered as an alternative to net income (as an indicator
of operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations), but provides additional
information for evaluating the Partnership's ability to distribute the Minimum
Quarterly Distribution.
FISCAL YEAR ENDED JULY 31, 1996 COMPARED TO FISCAL YEAR ENDED JULY 31, 1995
VOLUME. During fiscal 1996, Coast sold 328.4 million wholesale propane
gallons of natural gas liquids, an increase of 27.0 million gallons, or 9.0%,
from the 301.4 million gallons sold in fiscal 1995. The increase in volume
was primarily attributable to the impact of colder weather in the wholesale
markets served by Coast in the eastern United States. During fiscal 1996,
Coast sold 34.9 million retail propane gallons, a decrease of 1.7 million
gallons, or 4.6%, from the 36.6 million retail propane gallons sold during
fiscal 1995. The decrease in retail volume was primarily attributable to
warmer weather during fiscal 1996 in Coast's retail marketing areas. The
weather in Coast's areas of retail operations during fiscal 1996 was
approximately 16% warmer than normal for such areas. The weather in Coast's
areas of retail operations during fiscal 1995 was approximately 2% colder
than normal for such areas.
REVENUES. Revenues increased by $117.5 million, or 44.0%, to $384.4
million for fiscal 1996, as compared to $266.8 million for fiscal 1995. This
increase was primarily attributable to increased wholesale sales from Coast's
natural gas marketing efforts that resulted in an increase of $82.0 million
in fiscal 1996. Retail operating revenues decreased by $.1 million, or .3%,
to $38.8 million for fiscal 1996, as compared to $38.9 million for fiscal
1995. This decrease was attributable almost entirely to the warmer than
normal weather in Coast's marketing areas in fiscal 1996, which adversely
impacted both sales volumes and revenues.
COST OF PRODUCT SOLD. Cost of product sold increased by $116.7 million,
or 49.7%, to $351.2 million for fiscal 1996, as compared to $234.5 million
for fiscal 1995. The increase in cost of product sold was primarily related
to the increase in wholesale sales of natural gas. Cost of retail product
sold, primarily the cost of propane, was constant in fiscal 1996 and 1995 at
$17.4 million. The cost per gallon of propane for the retail business
increased from $.443 in fiscal 1995 to $.461 in fiscal 1996, reflecting
higher national demand resulting from colder than normal weather in many
regions. As a percentage of revenues, cost of product sold increased to 91.4%
for fiscal 1996, as compared to 87.9% for fiscal 1995.
GROSS PROFIT. Gross profit increased by $.8 million, or 2.6%, to $33.1
million in fiscal 1996, as compared to $32.3 million for fiscal 1995. This
increase was primarily attributable to increased margins in Coast's wholesale
businesses, due to a colder heating season in the eastern United States,
where a majority of Coast's wholesale sales are currently made. Retail gross
profits decreased by $.2 million, or .8%, to $21.3 million for fiscal 1996,
as compared to $21.5 million for fiscal 1995. This decrease was due primarily
to lower sales volumes as a result of warmer than normal weather in Coast's
retail marketing areas. The decrease in gross profits attributable to the
decrease in gallons sold was approximately $.9 million. Gross profit per
retail gallon increased by $.022, or 3.7%, to $.610 per gallon for fiscal
1996 from $.588 per gallon for fiscal 1995, due to increased average propane
selling prices.
OPERATING EXPENSES. Operating expenses increased $.8 million, or 4.0%,
to $21.0 million in fiscal 1996, as compared to $20.2 million in fiscal 1995.
Most of this increase was related to increases in Coast's retail operations.
Operating expense for the retail business segment increased by $.3 million,
or 2.1%, to $12.1 million in fiscal 1996, as compared to $11.9 million in
fiscal 1995. The majority of this increase was attributable to acquisitions
and start-up operations in fiscal 1996 that experienced higher operating
costs that, due to warmer weather, were not offset by added sales volumes. As
a percentage of revenues, operating expenses decreased to 5.5% for fiscal
1996, as compared to 7.6% for fiscal 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(which include corporate administration expenses) increased by $.1 million,
or 2.4%, to $3.8 million for fiscal 1996, as compared to $3.7 million for
fiscal 1995.
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The majority of this increase was attributable to normal salary increases
and the addition of one staff position to assist with future acquisitions. As a
percentage of revenues, general and administrative expenses decreased to 1.0%
for fiscal 1996, as compared to 1.4% for fiscal 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
by $.4 million, or 11.4%, to $4.2 million for fiscal 1996, as compared to
$3.8 million for fiscal 1995. This increase was primarily attributable to the
acquisition of North Star Fuel and Propane, Inc. in fiscal 1996 and the
purchase of retail customer tanks.
OPERATING INCOME. Operating income decreased by $.5 million, or 10.8%,
to $4.0 million for fiscal 1996, as compared to $4.5 million for fiscal 1995.
This decrease was primarily due to the decrease in retail gallons sold
because of warmer than normal weather in most of Coast's retail marketing
areas. As a percentage of revenues, operating income decreased to 1.1% for
fiscal 1996, as compared to 1.7% for fiscal 1995.
INTEREST EXPENSE. Interest expense increased by $.4 million, or 6.8%, to
$5.5 million in fiscal 1996, as compared to $5.1 million for fiscal 1995.
This increase was primarily due to an increase in borrowings under Coast's
acquisition revolving line of credit in fiscal 1996 related to the purchase
of North Star Fuel and Propane, Inc.
NET LOSS. Coast had a net loss of $1.0 million for fiscal 1996, as
compared to a net loss of $.4 million for fiscal 1995 before an extraordinary
charge to income for the early retirement of debt (net of income taxes). The
$.6 million greater loss in fiscal 1996 reflects the impact of the
significantly warmer than normal weather and higher interest expenses.
EBITDA. Total EBITDA decreased by $.1 million, or .7%, to 8.2 million
for fiscal 1996, as compared to $8.3 million for fiscal 1995. Coast's retail
EBITDA decreased by $.4 million, or 4.4%, to $9.2 million for fiscal 1996, as
compared to $9.6 million for fiscal 1995. The warmer than normal weather in
Coast's retail marketing areas in fiscal 1996 more than offset the positive
impact of higher earnings from recent acquisitions and internal customer
growth. As a percentage of revenues, total EBITDA decreased to 2.2% for
fiscal 1996, as compared to 3.1% for fiscal 1995. EBITDA should not be
considered as an alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow (as a measure of liquidity or
ability to service debt obligations), but provides additional information for
evaluating the Partnership's ability to distribute the Minimum Quarterly
Distribution.
FISCAL YEAR ENDED JULY 31, 1995 COMPARED TO FISCAL YEAR ENDED JULY 31, 1994
VOLUME. During fiscal 1995, Coast sold 301.4 million wholesale propane
gallons, a decrease of 73.0 million gallons, or 19.5%, from the 374.4 million
wholesale propane gallons sold for fiscal 1994. The decrease in wholesale
volume was due to warmer than normal weather in Coast's wholesale marketing
areas during fiscal 1995. Retail propane sales volumes increased by 5.7
million gallons, or 18.3%, to 36.6 million gallons for fiscal 1995, as
compared to 30.9 million gallons for fiscal 1994. The increase in retail
volume was primarily attributable to the consummation of two acquisitions in
fiscal 1995, with annual sales of approximately .9 million gallons, the
addition of new customers from internal growth and colder than normal weather
during fiscal 1995 in Coast's retail marketing areas. The weather in Coast's
areas of retail operations during fiscal 1995 was approximately 2% colder
than normal for such areas. The weather in Coast's areas of retail operations
during fiscal 1994 was approximately 5% warmer than normal for such areas.
REVENUES. Revenues increased by $23.8 million, or 9.8%, to $266.8
million for fiscal 1995, as compared to $243.0 million for fiscal 1994. The
increase in sales primarily reflects increased natural gas liquids sales in
Coast's natural gas procurement and marketing operations. Retail sales
revenues increased by $5.8 million, or 17.5%, to $38.9 million for fiscal
1995, as compared to $33.1 million for fiscal 1994. This increase was
primarily attributable to the addition of new customers from both
acquisitions and internal growth, and weather for fiscal 1995 that was colder
than normal in Coast's retail marketing areas.
COST OF PRODUCT SOLD. Cost of product sold increased by $19.9 million,
or 9.3%, to $234.5 million for fiscal 1995, as compared to $214.6 million for
fiscal 1994. This increase primarily reflects the increase in the cost of
wholesale sales. Cost of retail propane sold increased by $2.1 million, or
13.8%, to $17.4 million for fiscal 1995, as compared to $15.3
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million for fiscal 1994. The increase was primarily attributable to an
increase in retail gallons sold for fiscal 1995. The cost per gallon of
propane for the retail business decreased from $.458 in fiscal 1994 to $.443
in fiscal 1995, reflecting lower national demand. As a percentage of
revenues, cost of product sold decreased to 87.9% for fiscal 1995, as
compared to 88.3% for fiscal 1994.
GROSS PROFIT. Gross profit increased by $4.0 million, or 13.9%, to
$32.3 million for fiscal 1995, as compared to $28.3 million for fiscal 1994.
Most of the increase in gross profit was attributable to the retail business,
in which gross profit increased by $3.7 million, or 20.6%, to $21.5 million
for fiscal 1995, as compared to $17.8 million for fiscal 1994. This increase
was primarily due to an increase in sales volume resulting from acquisitions,
internal growth and colder weather in Coast's retail marketing areas. The
increase in gross profit attributable to an increase in retail gallons sold
was $3.4 million. The remaining increase was due to the increase in the gross
profit per retail gallon, as well as increases in gross profit from other
sales. Gross profit per retail gallon increased by $.011, or 1.9%, to $.588
per gallon for fiscal 1995, as compared to $.577 per gallon for fiscal 1994,
due to lower product costs on a per-gallon basis.
OPERATING EXPENSES. Operating expenses increased by $2.5 million, or
13.9%, to $20.2 million for fiscal 1995, as compared to $17.8 million for
fiscal 1994. This increase was primarily related to Coast's retail
operations, where operating expenses increased by $2.0 million, or 19.8%, to
$11.9 million for fiscal 1995, as compared to $9.9 million for fiscal 1994.
The majority of this increase was attributable to acquisitions and internal
growth and related customer service and delivery expenses. As a percentage of
revenues, operating expenses increased to 7.6% for fiscal 1995, as compared
to 7.3% for fiscal 1994.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(which include corporate administrative expenses) increased by $.2 million,
or 8.2%, to $3.7 million for fiscal 1995, as compared to $3.5 million for
fiscal 1994. This increase was primarily attributable to increased salaries
and employee medical and disability insurance expenses. As a percentage of
revenues, general and administrative expenses remained relatively constant
for fiscal 1995 and 1994.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
by $.5 million, or 15.3%, to $3.8 million for fiscal 1995, as compared with
$3.3 million for fiscal 1994, largely as a result of increased ownership of
tanks, trucks and customer lists as a result of acquisitions and internal
growth.
OPERATING INCOME. Operating income increased by $.7 million, or 18.0%,
to $4.5 million for fiscal 1995, as compared to $3.8 million for fiscal 1994.
The increase was primarily due to increased sales as a result of acquisitions
and internal growth. As a percentage of revenues, operating income increased
to 1.7% for fiscal 1995, as compared to 1.6% for fiscal 1994.
INTEREST EXPENSE. Interest expense increased by $1.1 million, or 27.1%,
to $5.1 million for fiscal 1995, as compared to $4.0 million for fiscal 1994,
primarily due to an increase in borrowings under Coast's operating line of
credit in fiscal 1995 related to acquisitions and increases in the interest
rate on borrowings.
NET LOSS. Coast had a net loss of $.4 million for fiscal 1995 before an
extraordinary charge to income for early retirement of debt (net of income
taxes), as compared to a net loss of $.2 million for fiscal 1994. The
increased loss was primarily due to higher interest expenses related to
increases in the interest rate on borrowings.
EBITDA. EBITDA increased $1.2 million, or 16.8%, to $8.3 million for
fiscal 1995, as compared to $7.1 million for fiscal 1994. This increase
primarily reflects the benefit of colder weather in Coast's retail marketing
areas, partially offset by warmer weather in Coast's wholesale markets.
Coast's retail EBITDA increased by $1.7 million, or 21.7%, to $9.6 million in
fiscal 1995, as compared to $7.9 million in fiscal 1994. The increase in
retail volumes is attributable primarily to internal growth, acquisitions and
favorable weather conditions. As a percentage of revenues, EBITDA increased
to 3.1% for fiscal 1995, as compared to 2.9% for fiscal 1994. EBITDA should
not be considered as an alternative to net income (as an indicator of
operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations), but provides additional
information for evaluating the Partnership's ability to distribute the
Minimum Quarterly Distribution.
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LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash used in operating activities during the four and one-half months ended
December 16, 1996 was $2.6 million. Cash flow from operations included a net
loss of $0.2 million, largely offset by non-cash charges of $1.3 million for the
period, comprised principally of depreciation and amortization expense. The
impact of working capital changes decreased cash flow by approximately $3.7
million.
Cash used in investment activities for the four and one-half months ended
December 16, 1996 totaled $1.0 million, which was principally used in purchases
of property and equipment. Cash provided by financing activities was $4.7
million for the four and one-half months ended December 16, 1996. This amount
reflects borrowings under Coast's revolving credit line of $6.0 million,
partially offset by principal payments on existing bank notes, capital lease
obligations and other notes payable in the amount of $1.3 million.
FINANCING AND SOURCES OF LIQUIDITY
In fiscal 1995, Coast Gas, Inc., the wholly owned operating subsidiary of
Coast, entered into a credit facility with Bank of America consisting of a
reducing revolving credit facility in the amount of up to $23.0 million and bank
term notes in the original amount of up to $15.0 million. The maximum amount of
the reducing revolving credit facility is fixed at $23.0 million until May 1,
1997, at which point it begins decreasing annually to $16.0 million on May 1,
2000 and matures on September 14, 2000. The revolving and term loans, at the
election of Coast Gas, Inc., bears interest at the Bank of America prime rate
plus 1.50% or LIBOR plus 2.75% per annum. The credit facility contains customary
financial and performance covenants. Coast's obligations under the credit
facility are collateralized by all of the personal property and fixtures of
Coast Gas, Inc. and its subsidiary and a pledge of the capital stock of Coast
Gas, Inc. and its subsidiary. Concurrently, Coast Gas, Inc. issued $15.0 million
in unsecured senior subordinated notes with a fixed interest rate of 12.50% per
annum. Coast also has a $20.0 million letter of credit line for its wholesale
operations.
As of December 16, 1996, the total outstanding indebtedness under Coast's
credit facility totaled $19.0 million. The outstanding balance under the credit
facility represents an increase of $5.9 million since July 31, 1996, primarily
due to purchases of customer tanks, capital expenditures, payments on term notes
and working capital charges.
The credit facility and subordinated notes were repaid in full on December
17, 1996 in connection with the closing of the Transactions.
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CAPITAL EXPENDITURES AND COMMITMENTS
The Partnership has budgeted maintenance capital expenditures for fiscal
1997 of approximately $3.5 million. In addition, the Partnership intends to
continue to pursue growth through acquisitions, internal growth and start-ups.
The Partnership expects to fund these expenditures from cash flow from
operations or from additional borrowings under the Bank Credit Facility.
LITIGATION AND OTHER CONTINGENCIES
For a description of certain litigation and other contingencies of the
Partnership, see "Business and Properties -- Litigation and Other
Contingencies."
EFFECTS OF INFLATION
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In general, inflation has not had any significant impact on the Partnership
in recent years and changes in propane prices, in particular, have been
dependent on factors generally more significant than inflation, such as weather
and availability of supply. However, to the extent inflation affects the amounts
the Partnership pays for propane as well as operating and administrative
expenses, the Partnership attempts to limit the effects of inflation by passing
on propane cost increases to customers in the form of higher selling prices to
the extent it can do so, as well as through cost controls and productivity
improvements. As such, inflation has not had a material adverse effect on the
Partnership's profitability, and the Partnership does not believe normal
inflationary pressures will have a material adverse effect on future results of
operations of the Partnership.
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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 360,000
residential, commercial, industrial and agricultural customers from 311 customer
service centers in 26 states. The Partnership's operations are concentrated in
the east coast, south-central and west coast regions of the United States. For
the fiscal year ended June 30, 1996, the Partnership had combined retail propane
sales of approximately 235 million gallons and pro forma EBITDA of approximately
$47.0 million. Pro forma EBITDA would have been approximately $54.9 million if
effect were given to an additional $7.9 million of expense reductions which the
Partnership believes are achievable as a result of the Transactions, but which
have not been included in the pro forma adjustments.
The Partnership believes that it is well positioned to compete successfully
in the propane business for the following reasons: (i) management's experience
in generating profitable growth at its customer service centers by fostering an
entrepreneurial approach by local managers; (ii) the Partnership's large
national and geographically diversified operations, which the Partnership
believes reduces the effects of adverse weather conditions in any one region on
EBITDA and allow it to achieve economies of scale; (iii) the significant
proportion of the Partnership's retail sales that is made to residential
customers, which are generally more profitable than sales to other customers;
(iv) management's experience in identifying, evaluating and completing both
small and large acquisitions; (v) the Partnership's substantial national
wholesale supply and logistics business, which provides it with a national
presence and a relatively secure source of propane to support the service goals
of its customer service centers; (vi) the Partnership's centralized
administrative systems that enable local managers to focus on customer service
and growth; and (vii) the Partnership's relationship with Northwestern Growth,
which has proven experience in the energy distribution business and in the
acquisition and growth of propane businesses. Although the Partnership believes
it has a number of competitive strengths, the propane industry is highly
competitive and includes a number of large national firms and regional firms and
several thousand small independent firms. Certain competitors may have greater
financial resources or lower operating costs than the Partnership. Further,
variations in the weather or the economy in one or more regions in which the
Partnership operates can significantly affect the total volume of propane sold
by the Partnership and, consequently, the Partnership's results of operations.
BUSINESS STRATEGY
The principal elements of the Partnership's business strategy are to (i)
extend and refine its existing service orientation, (ii) continue to pursue
balanced growth through small and large acquisitions, internal growth at its
existing customer service centers and start-ups of new customer service centers,
(iii) enhance the profitability of its existing operations by integrating the
Combined Operations, implementing entrepreneurially oriented local manager
incentive programs, where appropriate, and continuing to centralize
administrative systems and (iv) capitalize on the Partnership's national
wholesale supply and logistics business.
FOCUS ON CUSTOMER SERVICE.
The Partnership seeks to be recognized in the marketplace as the most
customer service-oriented propane supplier. Although propane is a commodity
product, the Partnership believes that it is able to distinguish itself from the
competition by providing reliable and timely delivery of propane at competitive
prices. The Partnership believes that establishing and clearly communicating
standards of service and performance expectations at all levels of the
Partnership, and rewarding its employees accordingly, will enable the
Partnership to achieve its service goals. The Partnership has incentive
programs at certain customer service centers targeted to fostering an
entrepreneurial environment at the customer service center level. These
programs provide substantial rewards to local managers for managing
service-oriented and profitable operations. The Partnership intends to expand
such incentive programs to additional customer service locations where
appropriate.
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CONTINUED BALANCED GROWTH.
The Partnership intends to continue to pursue balanced growth through small
and large acquisitions, internal growth at its existing customer service centers
and start-ups of new customer service centers. Acquisitions will be the
principal means of growth for the Partnership, as the retail propane industry is
mature and overall demand for propane is expected to experience limited growth
in the foreseeable future. The Partnership believes that the fragmented nature
of the retail propane industry provides significant opportunities for growth
through strategic acquisitions. Industry sources indicate that there are over
8,000 retail propane operations in the United States, of which the ten largest
account for approximately 33% of industry volumes. The Partnership's
acquisition strategy will concentrate on companies that have one or more of the
following characteristics: (i) locations in areas serviced by the Partnership
that may be combined with existing operations, providing greater economies of
scale at the customer service center level, (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. 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 dulitive to earnings and distributions to the
Unitholders or that any additional debt incurred to finance an acquisition will
not affect the ability of the Partnership to make distributions to the
Unitholders. The Partnership is not required under the Partnership Agreement to
seek Unitholder approval of any acquisition.
The Partnership is from time to time engaged in ongoing discussions with
respect to acquisitions, and expects to continue to pursue such acquisition
opportunities actively. As of the date of this Prospectus, the Partnership does
not have any agreements with respect to any material acquisitions but is
involved in ongoing discussions with several companies and is continuing to
assess these and other acquisition opportunities. The Partnership is unable to
predict the size, number or timing of any future acquisitions.
In addition to pursuing growth through acquisitions, the Partnership
continues to focus on internal growth at its existing customer service centers.
The Partnership seeks to achieve internal growth by, among other things,
providing superior service and instituting programs that encourage employees,
existing customers and local real estate agents and contractors to refer new
accounts. This strategy is being implemented primarily through the
Partnership's incentive programs that reward local managers for managing
service-oriented and profitable operations.
In some instances, the Partnership may identify a market that has one or
more of the characteristics that would make it attractive for an acquisition but
in which there are no attractive available acquisition candidates. In certain
of these cases, the Partnership may seek to penetrate the market by establishing
a new customer service center. The Partnership believes that it can
successfully 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
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one or more of the others. The Partnership believes that the implementation
of these "best practices" throughout the Combined Operations will improve
customer retention, foster expansion of its customer base and create
operating efficiencies and cost savings opportunities. Furthermore, the
Partnership believes that instituting management incentive programs, where
appropriate, and fostering an entrepreneurial approach at additional customer
service centers will give managers the incentive to increase such customer
service centers' profitability.
CAPITALIZE ON NATIONAL SUPPLY AND LOGISTICS BUSINESS.
The Partnership has a national wholesale propane supply and logistics
business with sales of approximately 226 million gallons in fiscal 1996. The
Partnership believes that this business provides it with a reasonably secure,
competitively priced and efficient supply base to support the service goals of
its existing customer service centers. In addition, the Partnership believes its
wholesale and logistics business positions it well for expansion through
acquisitions or start-up operations in new markets. As part of its wholesale
business, the Partnership also provides product supply and financial and
technical assistance to certain small independent retailers. While these
arrangements provide some economic return to the Partnership, the Partnership
believes their greater value lies in the resulting relationships, which position
the Partnership to acquire such businesses in the event they become available
for purchase.
FORMATION BACKGROUND
Northwestern Growth is a wholly owned subsidiary of NPS, a New York Stock
Exchange-listed energy distribution company. Northwestern Growth was formed in
1994 to pursue and manage nonutility investments and development activities for
NPS, with a primary focus on growth opportunities in the energy, energy
equipment and energy services industries.
To capitalize on the growth and consolidation opportunities in the propane
distribution market, in August 1995, Northwestern Growth, through its
subsidiary, Synergy, acquired SGI, then the sixth largest retail marketer of
propane in the United States. SGI had been in the retail propane distribution
business since 1969. At the time of the acquisition, SGI maintained 152 retail
branches serving approximately 200,000 customers in 23 states in the east and
south-central regions of the United States. In conjunction with the acquisition
of SGI, Synergy sold 38 retail propane locations to Empire Energy pursuant to
the Empire Acquisition of Certain Synergy Assets. The transaction represented a
net cash investment by Northwestern Growth of approximately $105 million, after
the sale of such retail outlets. Following the acquisition of SGI, Northwestern
Growth acquired four smaller propane companies, which had aggregate annual
retail propane sales of approximately four million gallons.
In December 1995, NPS acquired Myers, located in Sandusky, Ohio, for
consideration of approximately $4.8 million. As of the time of the acquisition,
Myers served approximately 5,000 customers within a radius of approximately 50
miles around Sandusky. Myers had annual retail propane sales of approximately
six million gallons.
In October 1996, Northwestern Growth acquired Empire Energy, then the
eighth largest retail marketer of propane in the United States. Such transaction
involved total consideration of approximately $120 million. Empire Energy was
formed in June 1994 as a result of the Split-Off from Empire Gas, which was
founded in 1963. As a result of the Split-Off, Empire Energy acquired 133 of the
284 Empire Gas retail locations. As of September 30, 1996, Empire Energy's
operations consisted of 157 retail locations in 10 states, primarily in the
midwest and southeast regions of the United States, including the 38 retail
propane locations acquired by Empire Energy from Synergy described above.
In December 1996, Northwestern Growth acquired Coast, the 18th largest
retail marketer of propane in the United States with retail operations primarily
concentrated in the west coast region of the United States. Such acquisition was
consummated immediately prior to the consummation of the IPO closing. The Coast
Merger involved total consideration of approximately $97.0 million, subject to
working capital and capital expenditure adjustments.
INDUSTRY BACKGROUND AND COMPETITION
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Propane, a by-product of natural gas processing and petroleum refining, is
a clean-burning energy source recognized for its transportability and ease of
use relative to alternative stand-alone energy sources. The retail propane
business of the Partnership consists principally of transporting propane to its
retail distribution outlets and then to tanks located on its customers'
premises. Retail propane use falls into four broad categories: (i) residential,
(ii) industrial and commercial, (iii) agricultural and (iv) other applications,
including motor fuel sales. Residential customers use propane primarily for
space and water heating. Industrial customers use propane primarily as fuel for
forklifts and stationary engines, to fire furnaces, as a cutting gas, in mining
operations and in other process applications. Commercial customers, such as
restaurants, motels, laundries and commercial buildings, use propane in a
variety of applications, including cooking, heating and drying. In the
agricultural market, propane is primarily used for tobacco curing, crop drying,
poultry brooding and weed control. Other retail uses include motor fuel for cars
and trucks, outdoor cooking and other recreational uses, propane resales and
sales to state and local governments. In its wholesale operations, the
Partnership sells propane principally to large industrial end-users and other
propane distributors.
Propane is extracted from natural gas or oil wellhead gas at processing
plants or separated from crude oil during the refining process. Propane is
normally transported and stored in a liquid state under moderate pressure or
refrigeration for ease of handling in shipping and distribution. When the
pressure is released or the temperature is increased, it is usable as a
flammable gas. Propane is colorless and odorless; an odorant is added to allow
its detection. Like natural gas, propane is a clean burning fuel and is
considered an environmentally preferred energy source.
Based upon information provided by the Energy Information Administration,
propane accounts for approximately three to four percent of household energy
consumption in the United States. Propane competes primarily with natural gas,
electricity and fuel oil as an energy source, principally on the basis of price,
availability and portability. Propane is more expensive than natural gas on an
equivalent BTU basis in locations served by natural gas, but serves as a
substitute for natural gas in rural and suburban areas where natural gas is
unavailable or portability of product is required. Historically, the expansion
of natural gas into traditional propane markets has been inhibited by the
capital costs required to expand pipeline and retail distribution systems.
Although the extension of natural gas pipelines tends to displace propane
distribution in areas affected, the Partnership believes that new opportunities
for propane sales arise as more geographically remote neighborhoods are
developed. Propane is generally less expensive to use than electricity for space
heating, water heating, clothes drying and cooking. Although propane is similar
to fuel oil in certain applications and market demand, propane and fuel oil
compete to a lesser extent primarily because of the cost of converting from one
to the other.
In addition to competing with alternative energy sources, the Partnership
competes with other companies engaged in the retail propane distribution
business. Competition in the propane industry is highly fragmented and generally
occurs on a local basis with other large full-service multi-state propane
marketers, thousands of smaller local independent marketers and farm
cooperatives. Based on industry publications, the Partnership believes that the
domestic retail market for propane is approximately 9.2 billion gallons
annually, that the 10 largest retailers, including the Partnership, account for
approximately 33% of the total retail sales of propane in the United States, and
that no single marketer has a greater than 10% share of the total retail market
in the United States. Most of the Partnership's customer service centers compete
with five or more marketers or distributors. Each customer service center
operates in its own competitive environment, because retail marketers tend to
locate in close proximity to customers. The Partnership's customer service
centers generally have an effective marketing radius of approximately 25 to 50
miles, although in certain rural areas the marketing radius may be extended by a
satellite location.
The ability to compete effectively further depends on the reliability of
service, responsiveness to customers and the ability to maintain competitive
prices. The Partnership also believes that its service capabilities and customer
responsiveness differentiate it from many of these smaller competitors. The
Partnership's employees are on call 24 hours a day and seven days a week for
emergency repairs and deliveries.
The wholesale propane business is highly competitive. For fiscal year 1996,
the Partnership's wholesale propane operations accounted for 49% of combined
total propane volumes but less than 6% of pro forma gross profit.
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The Partnership believes that its wholesale business provides it with a
national presence and a reasonably secure, efficient supply base, and
positions it well for expansion through acquisitions or start-up operations
in new markets.
PRODUCTS, SERVICES AND MARKETING
The Partnership is principally engaged in (i) the retail distribution of
propane for residential, commercial, industrial, agricultural and other retail
uses, (ii) the wholesale marketing and distribution of propane and natural gas
liquids to the retail propane industry, the chemical and petrochemical
industries and other commercial and agricultural markets, (iii) the repair and
maintenance of propane heating systems and appliances and (iv) the sale of
propane-related supplies, appliances and other equipment.
As of March 1, 1997, the Partnership's retail operations consisted of 311
customer service centers in 26 states. The Partnership's operations are
concentrated primarily in the east coast, south-central and west coast regions
of the United States. The Partnership serves more than 360,000 active customers.
Propane sales generally peak during the six-month heating season from October
through March, as many customers use propane for heating purposes. During fiscal
1996, approximately 72.7% of the Partnership's combined retail propane volume
and in excess of 85% of its pro forma EBITDA were attributable to sales during
the six-month heating season of October through March. As a result of this
seasonality, the Partnership's sales and operating profits are concentrated in
its second and third fiscal quarters. Cash flows from operations, however, are
greatest from November through April when customers pay for propane purchased
during the six-month peak season. To the extent the Managing General Partner
deems appropriate, the Partnership may reserve cash from these periods for
distribution to Unitholders during periods with lower cash flows from
operations.
Typically, customer service centers are found in suburban and rural areas
where natural gas is not readily available. Generally, such locations consist of
a one to two acre parcel of land, an office, a small warehouse and service
facility, a dispenser and one or more 18,000 to 30,000 gallon storage tanks.
Propane is generally transported from refineries, pipeline terminals, leased
storage facilities and coastal terminals by rail or truck transports to the
Partnership's customer service centers, where it is unloaded into the storage
tanks. In order to make a retail delivery of propane to a customer, a bobtail
truck is loaded with propane from the storage tank. Propane is then pumped from
the bobtail truck, which generally holds 2,500 to 3,000 gallons of propane, into
a stationary storage tank on the customer's premises. The capacity of these
customer tanks ranges from approximately 100 gallons to 1,200 gallons, with a
typical tank having a capacity of 100 to 300 gallons in milder climates and from
500 to 1,000 gallons in colder climates. The Partnership also delivers propane
to retail customers in portable cylinders, which typically have a capacity of 5
to 35 gallons. When these cylinders are delivered to customers, empty cylinders
are picked up for refilling at the Partnership's distribution locations or are
refilled in place. The Partnership also delivers propane to certain other bulk
end users of propane in tractor trailers known as transports, which have an
average capacity of approximately 10,500 gallons. End users receiving transport
deliveries include industrial customers, large-scale heating accounts and large
agricultural accounts.
The Partnership encourages its customers to implement a regular delivery
schedule by, in some cases, charging extra for non-scheduled deliveries. Most of
the Partnership's residential customers receive their propane supply pursuant to
an automatic delivery system which eliminates the customer's need to make an
affirmative purchase decision and allows for more efficient route scheduling and
maximization of volumes delivered. From its customer service locations, the
Partnership also sells, installs and services equipment related to its propane
distribution business, including heating and cooking appliances.
Retail propane use falls into four broad categories: (i) residential, (ii)
industrial and commercial, (iii) agricultural and (iv) other applications,
including motor fuel sales. On a combined basis during fiscal 1996, the
Partnership sold approximately 235 million gallons of propane to retail
customers and 226 million gallons of propane to wholesale customers.
Approximately 57.8% of the retail gallons was sold to residential customers,
25.9% was sold to industrial and commercial customers, 13.1% was sold to
agricultural customers, and 3.2% was sold to all other retail users. Sales to
residential customers in fiscal 1996 accounted for 29.5% of total gallons
(including wholesale gallons) sold, but approximately 67.0% of the Partnership's
pro forma gross profit from propane sales. Residential sales have
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a greater profit margin and a more stable customer base than other retail
markets served by the Partnership. Industrial and commercial sales accounted
for 18.7% of the Partnership's pro forma gross profit from propane sales for
fiscal 1996, agricultural sales accounted for 6.1% and all other retail sales
accounted for 2.8%. Sales to wholesale customers contributed the remaining
5.4% of pro forma gross profit from propane sales. No single retail customer
accounted for more than 1% of the Partnership's pro forma revenues during
fiscal 1996.
The propane business is very seasonal, with weather conditions
significantly affecting demand for propane. The Partnership believes that the
geographic diversity of its areas of operations helps to minimize its exposure
to regional weather. Although overall demand for propane is affected by weather,
changes in price and other factors, the Partnership believes its residential
business to be relatively stable due to the following characteristics: (i)
residential demand for propane has been relatively unaffected by general
economic conditions due to the largely non-discretionary nature of most propane
purchases by the Partnership's residential customers, (ii) loss of customers to
competing energy sources has been low, (iii) the Partnership's customers tend to
remain with the Partnership due to a regular delivery schedule and the
Partnership's ownership of a substantial percentage of the storage tanks used by
its customers and (iv) the Combined Operations have been able to more than
offset customer losses through internal growth of their customer bases in
existing markets. Since home heating usage is the most sensitive to temperature,
residential customers account for the greatest usage variation due to weather.
Variations in the weather in one or more regions in which the Partnership
operates, however, can significantly affect the total volumes of propane sold by
the Partnership and the margins realized thereon and, consequently, the
Partnership's results of operations. The Partnership believes that sales to the
commercial and industrial markets, while affected by economic patterns, are not
as sensitive to variations in weather conditions as sales to residential and
agricultural markets.
In addition to its core retail operations, the Partnership is also engaged
in the wholesale marketing of propane to independent dealers, major interstate
marketers and the chemical and petrochemical industries. The Partnership
participates to a lesser extent in the marketing of other natural gas liquids,
the processing and marketing of natural gas and the gathering of crude oil. The
Partnership either owns or has contractual rights to use transshipment
terminals, rail cars, long-haul tanker trucks, pipelines and storage capacity.
The Partnership believes that its wholesale marketing and processing activities
position it to achieve product cost advantages and to avoid shortages during
periods of tight supply to an extent not generally available to other retail
propane distributors.
PROPANE SUPPLY AND STORAGE
The Partnership's propane supply is purchased from oil companies and
natural gas processors at numerous supply points located in the United States
and Canada. Most of the propane purchased by the Partnership in fiscal 1996 was
purchased pursuant to agreements with terms of less than one year, but the
percentage of contract purchases may vary from year to year as determined by the
Partnership. Supply contracts generally provide for pricing in accordance with
posted prices at the time of delivery or the current prices established at major
delivery points. Most of these agreements provide maximum and minimum seasonal
purchase guidelines. In addition, the Partnership makes purchases on the spot
market from time to time to take advantage of favorable pricing. The Partnership
receives its supply of propane predominantly through railroad tank cars and
common carrier transport.
Supplies of propane from the Partnership's sources historically have been
readily available. In fiscal 1996, Warren Gas Liquids was the Partnership's
largest supplier providing approximately 12.8% of the Partnership's total
propane supply for its retail and wholesale operations (excluding propane
obtained from the Partnership's natural gas processing operations). The
Partnership believes that if supplies from Warren Gas Liquids were interrupted,
it would be able to secure adequate propane supplies from other sources without
a material disruption of its operations. Aside from Warren Gas Liquids, no
single supplier provided more than 10% of the Partnership's domestic propane
supply in fiscal 1996. Although no assurance can be given that supplies of
propane will be readily available in the future, the Partnership expects a
sufficient supply to continue to be available. However, increased demand for
propane in periods of severe cold weather, or otherwise, could cause future
propane supply interruptions or significant volatility in the price of propane.
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The market price of propane is subject to volatile changes as a result of
supply or other market conditions over which the Partnership will have no
control. Since it may not be possible to pass rapid increases in the wholesale
cost of propane on to customers immediately, such increases could reduce the
Partnership's gross profits. Consequently, the Partnership's profitability will
be sensitive to changes in wholesale propane prices. The Partnership engages in
hedging of product cost and supply through common hedging practices. The
Partnership also engages in the trading of propane, natural gas, crude oil and
other commodities in amounts that have not had and are not expected to have a
material effect on the Partnership's financial condition or results of
operations.
The Partnership has from time to time leased space in storage facilities to
take advantage of supply purchasing opportunities as they have occurred, and the
Partnership believes that it will have adequate third party storage to take
advantage of such opportunities in the future. Access to storage facilities will
allow the Partnership, to the extent it may deem it desirable, to buy and store
large quantities of propane during periods of low demand, which generally occur
during the summer months, thereby helping to ensure a more secure supply of
propane during periods of intense demand or price instability.
PRICING POLICY
The Partnership expects to rely on customer service center managers to set
prices based on prevailing local market conditions and product cost within a
pre-established gross margin framework developed jointly by senior management
and local service center managers. The Partnership regularly assesses how each
customer service center manager's pricing policy affects the service center's
margins and discusses alternative pricing strategies to improve margins with the
service center managers. In most situations, the Partnership believes that its
pricing methods will permit the Partnership to respond to changes in supply
costs in a manner that protects the Partnership's gross margins and customer
base.
BILLING AND COLLECTION PROCEDURES
Customer statement billing is centralized, allowing the Partnership to
achieve efficiencies and reduce the time spent by local managers on billing,
while customer account and collection responsibilities are the responsibility of
the service centers. The Partnership provides service center managers with
weekly and monthly aging reports of accounts receivable and discusses the
reports with customer service center managers on a regular basis. The
Partnership believes that its decentralized approach to account collection is
beneficial for several reasons: (i) the customer is more apt to pay a "local"
business; (ii) cash payments are forwarded to lock boxes that are swept daily;
and (iii) district personnel have a current account status available to them at
all times to answer customer inquiries.
PROPERTIES
As of March 1, 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 March 1, 1997, the
Partnership operated 311 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 March 1, 1997, the
Partnership owned a fleet of 34 transport truck tractors, 63 transport trailers,
915 bobtail trucks and approximately 1,000 other delivery and service vehicles.
As of such date, the Partnership owned, and customers leased, approximately
268,000 customer storage tanks with typical capacities of 120 to 1,000 gallons.
The Partnership believes that it has satisfactory title to or valid rights
to use all of its material properties. Some of such properties are subject to
liabilities and leases, liens for taxes not yet due and payable, and immaterial
encumbrances, easements and restrictions, although the Partnership does not
believe that any such burdens will interfere with the continued use of such
properties by the Partnership to an extent material to its business, taken as a
whole. In
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addition, the Partnership believes that it has or is in the process of
obtaining all required material approvals, authorizations, orders, licenses,
permits, franchises and consents of, and has obtained or is in the process of
obtaining all required material registrations, qualifications and filings
with, the various state and local governmental and regulatory authorities
which relate to ownership of the Partnership's properties or the operations
of its business.
TRADEMARKS AND TRADENAMES
The Partnership utilizes a variety of trademarks, including "Synergy Gas"
and its related design, which the Partnership owns, and "Empire Gas" and its
related design, which the Partnership has the right to use, and tradenames,
including "Coast Gas." The Partnership generally expects to retain the names
and identities of acquired entities, which the Partnership believes preserves
the goodwill of the acquired business and promotes continued local customer
loyalty. The Partnership regards its trademarks, tradenames and other
proprietary rights as valuable assets and believes that they have significant
value in the marketing of its products.
GOVERNMENT REGULATION
The Partnership is subject to various federal, state and local
environmental, health and safety laws and regulations. Generally, these laws
impose limitations on the discharge of pollutants and establish standards for
the handling of solid and hazardous wastes. These laws include the Resource
Conservation and Recovery Act ("RCRA"), the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"), the Clean Air Act, the
Occupational Safety and Health Act, the Emergency Planning and Community
Right-to-Know Act, the Clean Water Act and comparable state statutes. CERCLA,
also known as the "Superfund" law, imposes joint and several liability without
regard to fault or the legality of the original conduct on certain classes of
persons that are considered to have contributed to the release or threatened
release of a "hazardous substance" into the environment. Propane is not a
hazardous substance within the meaning of CERCLA. However, automotive waste
products, such as waste oil, generated by the Partnership's truck fleet, as well
as "hazardous substances" disposed of during past operations by third parties on
the Partnership's properties, could subject the Partnership to liability under
CERCLA. Such laws and regulations could result in civil or criminal penalties in
cases of non-compliance or impose liability for remediation costs. In addition,
liquid petroleum products, such as gasoline and diesel fuel, are handled at some
of the Partnership's properties. Leaks of such materials from underground
storage tanks are regulated pursuant to RCRA and analogous state laws. Most
state laws also require the investigation and, where determined to be necessary,
the remediation of leaks or spills of liquid petroleum products, whether the
leaks or spills emanated from underground storage tanks or otherwise. Also,
third parties may make claims against owners or operators of properties for
personal injuries and property damage associated with releases of hazardous or
toxic substances.
National Fire Protection Association Pamphlets No. 54 and No. 58, which
establish rules and procedures governing the safe handling of propane, or
comparable regulations, have been adopted as the industry standard in all of the
states in which the Partnership operates. In some states these laws are
administered by state agencies, and in others they are administered on a
municipal level. With respect to the transportation of propane by truck, the
Partnership is subject to regulations promulgated under the Federal Motor
Carrier Safety Act. These regulations cover the transportation of hazardous
materials and are administered by the United States Department of
Transportation. The Partnership conducts ongoing training programs to help
ensure that its operations are in compliance with applicable regulations. The
Partnership maintains various permits that are necessary to operate some of its
facilities, some of which may be material to its operations. The Partnership
believes that the procedures currently in effect at all of its facilities for
the handling, storage and distribution of propane and liquid petroleum products
are consistent with industry standards and are in compliance in all material
respects with applicable laws and regulations.
Future developments, such as stricter environmental, health or safety laws
and regulations promulgated thereunder, could affect Partnership operations. It
is not anticipated that the Partnership's compliance with or liabilities under
existing environmental, health and safety laws and regulations, including
CERCLA, will have a material adverse effect on the Partnership. To the extent
that there are any environmental liabilities unknown to the Partnership or
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environmental, health or safety laws or regulations are made more stringent,
there can be no assurance that the Partnership's results of operations will not
be materially and adversely affected.
EMPLOYEES
As of March 1, 1997, the Managing General Partner had 1,881 full time
employees, of whom 135 were general and administrative and 1,746 were
operational employees. Twenty-eight of the Managing General Partner's employees
at four customer service centers were represented by labor unions. The
Partnership believes that its relations with its employees are satisfactory. The
Managing General Partner generally hires seasonal workers to meet peak winter
demand.
LITIGATION AND OTHER CONTINGENCIES
A number of personal injury, property damage and products liability suits
are pending or threatened against the Partnership. In general, these
lawsuits have arisen in the ordinary course of the Partnership's business and
involve claims for actual damages, and in some cases, punitive damages,
arising from the alleged negligence of the Partnership or as a result of
product defects or similar matters. Of the pending or threatened matters, a
number involve property damage, and several involve serious personal injuries
or deaths and the claims made are for relatively large amounts. Although any
litigation is inherently uncertain, based on past experience, the
information currently available to it and the availability of insurance
coverage, the Partnership does not believe that these pending or threatened
litigation matters will have a material adverse effect on its results of
operations or its financial condition.
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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, who are neither officers or employees of the General Partners nor
directors, officers or employees of any affiliate of either of the General
Partners, to its Board of Directors. Such directors, along with Richard
Hylland, serve on the Audit Committee, which has the authority to review
specific matters as to which the Board of Directors believes there may be a
conflict of interest in order to determine if the resolution of such conflict
proposed by the Managing General Partner is fair and reasonable to the
Partnership. Any matters approved by the Audit Committee will be conclusively
deemed to be fair and reasonable to the Partnership, approved by all partners
of the Partnership and not a breach by the Managing General Partner or its
Board of Directors of any duties they may owe the Partnership or the
Unitholders. See "Conflicts of Interest and Fiduciary Responsibilities --
Fiduciary and Other Duties." In addition, the Audit Committee will review the
external financial reporting of the Partnership, will recommend engagement of
the Partnership's independent public accountants and will review the
Partnership's procedures for internal auditing and the adequacy of the
Partnership's internal accounting controls.
As is commonly the case with publicly traded limited partnerships, the
Partnership does not directly employ any of the persons responsible for
managing or operating the Partnership. In general, the former management of
Coast manages and operates the Partnership's business as officers and
employees of the Managing General Partner and its affiliates. Neither the
Special General Partner nor the Unitholders will directly or indirectly
participate in the management or operation of the Partnership.
DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGING GENERAL PARTNER
The following table sets forth certain information with respect to the
executive officers and members of the Board of Directors of the Managing
General Partner. Executive officers and directors are elected for one-year
terms.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH MANAGING GENERAL PARTNER
- ---- --- --------------------------------------
<S> <C> <C>
Merle D. Lewis 49 Chairman of the Board of Directors
Richard R. Hylland 36 Vice Chairman of the Board of Directors
Keith G. Baxter 47 President, Chief Executive Officer and Director
Charles J. Kittrell 57 Executive Vice President, Chief Operating Officer and
Secretary
Ronald J. Goedde 47 Executive Vice President, Chief Financial Officer and
Treasurer
Vincent J. DiCosimo 39 Executive Vice President
Daniel K. Newell 40 Director
Paul Christen 68 Director
Kurt Katz 64 Director
</TABLE>
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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
Synergy and Empire Energy and is a member of the board of directors of Lucht,
Inc. (a manufacturer of photographic equipment) and Northwestern Energy
Corporation (a marketer of non-regulated energy products) ("Northwestern
Energy"), a subsidiary of NPS.
RICHARD R. HYLLAND has 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 Synergy and as a member of the boards of
directors of Northwestern Growth, Empire Energy, Lucht, Inc., Franklin
Industries (a steel fabricator of highway sign and fence posts), Northwestern
Energy and LodgeNet Entertainment Corporation (a television-based
entertainment and information services company).
KEITH G. BAXTER has 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 the Executive Vice President of Coast from 1993. From 1990 to 1993, Mr.
DiCosimo was a Vice President of Coast. Before joining Coast, Mr. DiCosimo
was Manager of Supply/Distribution for Cal Gas Corporation from 1981 to 1990
and prior thereto was Senior Financial Analyst with Unocal Oil & Gas.
DANIEL K. NEWELL has served as a director of the Managing General
Partner since its inception in 1996. He has been the Executive Vice
President of Northwestern Growth since July 1995 and has served as Vice
President -- Finance of NPS since July 1995 and Chief Financial Officer of
NPS since May 1996. Prior to joining NPS, Mr. Newell was Vice President --
Finance and Treasurer and a member of the board of directors of Energy Fuels
Corporation (a coal mining company) from 1991 to 1995. Mr. Newell serves as a
member of the boards of directors of Northwestern Growth.
PAUL CHRISTEN has served as a director of the Managing General Partner
since March 1997. Mr. Christen has served as the president and director of
First Western Bancorp Inc. since 1965 and has served as president and a
director of PRC, Inc. since 1984.
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KURT KATZ has served as a director of the Managing General Partner since
January 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.
REIMBURSEMENT OF EXPENSES OF THE MANAGING GENERAL PARTNER AND ITS AFFILIATES
The Managing General Partner does not receive any management fee or
other compensation in connection with its management of the Partnership. The
Managing General Partner and its affiliates performing services for the
Partnership are reimbursed at cost for all expenses incurred on behalf of the
Partnership, including the costs of compensation described herein properly
allocable to the Partnership, and all other expenses necessary or appropriate
to the conduct of the business of, and allocable to, the Partnership. On a
pro forma basis, approximately $48.0 million of expenses (primarily wages and
salaries) would have been reimbursed by the Partnership to the Managing
General Partner in fiscal 1996. The Partnership Agreement provides that the
Managing General Partner will determine the expenses that are allocable to
the Partnership in any reasonable manner determined by the Managing General
Partner in its sole discretion.
In addition, the General Partners received a combined 2% general partner
interest, the right to receive Incentive Distributions and 6,597,619
Subordinated Units as consideration for their contribution to the Partnership
of their limited partner interests in the Operating Partnership, which
interests were received as consideration for their contribution of the
Combined Operations to the Operating Partnership. See "The IPO and Related
Transactions." The General Partners will be entitled to distributions on
their general partner interests, Incentive Distributions and distributions on
such Subordinated Units as described under "Cash Distribution Policy."
EXECUTIVE COMPENSATION
The Partnership and the Managing General Partner were formed in October
1996. Accordingly, the Managing General Partner paid no compensation to its
directors and officers with respect to fiscal 1996, nor did any obligations
accrue in respect of management incentive or retirement benefits for the
directors and officers with respect to such year. Officers and employees of
the Managing General Partner may participate in employee benefit plans and
arrangements sponsored by Northwestern Growth, including plans which may be
established by Northwestern Growth in the future. Under the terms of the
Partnership Agreement, the Partnership is required to reimburse the Managing
General Partner for expenses relating to the operation of the Partnership,
including salaries and bonuses of employees employed on behalf of the
Partnership, as well as the costs of providing benefits to such persons under
employee benefit plans and for the costs of health and life insurance. See
"Certain Relationships and Related Transactions."
EMPLOYMENT AGREEMENTS, SEVERANCE ARRANGEMENTS
Employment agreements (the "Employment Agreements") between each of
Keith G. Baxter, Charles J. Kittrell, Ronald J. Goedde and Vincent 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
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of the Executives of approximately $135,000, $65,000, $40,000 and $25,000,
respectively, per year for three years related to the acquisition of Empire
Energy and Coast by Northwestern Growth (the "Management Fee"). In addition,
the Managing General Partner pays for a $725,000 life insurance policy for
Mr. Baxter and $410,000 life insurance policies for each of Messrs. Kittrell,
Goedde and DiCosimo. Each of the Executives will participate in the Annual
Operating Performance Incentive Plan of the Managing General Partner and
Messrs. Baxter, Kittrell and Goedde will participate in the New Acquisition
Incentive Plan of the Managing General Partner (together with the Annual
Operating Performance Incentive Plan, the "Plans,") as described below. The
Executives will also be entitled to participate in such other benefit plans
and programs as the Managing General Partner may provide for its employees in
general (the "Other Benefit Plans").
The Employment Agreements provide that in the event an Executive's
employment is terminated without "cause" (as defined in the Employment
Agreements) or if the Executive terminates his employment due to a
"Fundamental Change" (as defined below), such Executive will be entitled to
receive a severance payment in an amount equal to his total compensation for
the remainder of the employment term under the Employment Agreement and will
receive benefits under the Other Benefit Plans for a period of 12 months
after termination. In the event of termination due to disability, the
Executive will be entitled to his base salary, his Management Fee and
benefits under the Plans and the Other Benefit Plans for 12 months. In the
event of termination due to death, benefits under the Other Benefit Plans
will be continued for the Executive's dependents for 12 months. In the event
the Executive's employment is terminated for "cause," the Executive will
receive accrued salary and benefits (including his Management Fee and
benefits under the Plans) up to the date of termination and, if the Managing
General Partner does not waive the Executive's covenant not to compete,
benefits under the Other Benefit Plans for 12 months.
A Fundamental Change is defined in the Employment Agreements to have
occurred (i) if the Executive's duties, authority, responsibilities and/or
compensation is reduced without performance or market-related justification;
(ii) if the Executive's primary office is moved more than 50 miles from
Watsonville, California (or, with respect to Mr. DiCosimo, Houston, Texas)
without his consent; (iii) if the Partnership disposes of business and assets
which reduce the annual EBITDA of the Partnership below 70% of the annual
EBITDA level existing at the time employment commenced; or (iv) if securities
representing 10% of the voting power in elections of directors of NPS become
beneficially owned by any party or group or other prescribed events occur
constituting a change of control of NPS.
In addition, each Employment Agreement contains non-competition and
confidentiality provisions.
INCENTIVE PLANS
The Managing General Partner adopted the Annual Operating Performance
Incentive Plan, which was effective upon consummation of the Transactions.
The Annual Operating Performance Incentive Plan provides that annual
incentive bonuses be paid to participants in the plan (who will be determined
by the Board of Directors of the Managing General Partner from time to time
and who will include the Executives) based on a percentage of annual salary
plus his Management Fee for performance up to budgeted levels of net income
and EBITDA. Such bonuses will range from zero for performance at 10% below
budget to 50% for performance at budget. In addition, in the event of EBITDA
performance over budgeted amounts, there will be established a bonus pool
equal to 10% of the excess of EBITDA over budget, which will be divided among
Messrs. Baxter, Kittrell and Goedde and any other participants that the Board
of Directors of the Managing General Partner may determine. The period
covered by the plan upon the closing of the Transactions and ends on the
fifth anniversary thereof.
The Managing General Partner adopted the New Acquisition Incentive Plan,
which was effective upon consummation of the Transactions. The New Acquisition
Incentive Plan provides for bonuses to participants in the plan (who will be
determined by the Board of Directors of the Managing General Partner from time
to time and who will include the Executives) for adding new businesses to the
Partnership's propane operations, in an aggregate amount equal to 4% of the
gross acquisition purchase price, spread among the participants in the plan
based on their relative salaries. The transactions covered by the Plan will
include those occurring after the closing of the Coast Merger (excluding that
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transaction) and will end on the fifth anniversary thereof. Awards under this
program will be payable in cash 90 days after the close of the particular
acquisition transaction.
RESTRICTED UNIT PLAN
The Managing General Partner adopted the Restricted Unit Plan for
executives, officers and directors of the Managing General Partner which was
effective upon consummation of the Transactions. The summary of the
Restricted Unit Plan contained herein does not purport to be complete and is
qualified in its entirety by reference to the Restricted Unit Plan, which has
been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
Initially, rights to receive authorized but unissued Common Units with
an aggregate value of $12.5 million (determined as of the closing of the IPO)
were available under the Restricted Unit Plan. From these Units, rights to
receive Common Units with an aggregate value of $7.0 million (the "Initial
Units") were allocated to the Executives upon the consummation of the
Transactions, subject to the vesting conditions described below and subject
to other customary terms and conditions, as follows: (i) rights to receive
Common Units with an aggregate value of $2.8 million were allocated to Mr.
Baxter, (ii) rights to receive Common Units with an aggregate value of $1.6
million were allocated to Mr. Kittrell, (iii) rights to receive Common Units
with an aggregate value of $1.6 million were allocated to Mr. Goedde and (iv)
rights to receive Common Units with an aggregate value of $1.0 million were
allocated to Mr. DiCosimo. Rights to receive Common Units with an aggregate
value of $.9 million were allocated among the three initial non-officer
members of the Board of Directors of the Managing General Partner as follows:
(i) rights to receive Common Units with an aggregate value of $.4 million
were allocated to Mr. Lewis as Chairman of the Board; (ii) rights to receive
Common Units with an aggregate value of $.3 million were allocated to Mr.
Hylland as Vice Chairman; and (iii) rights to receive Common Units with an
aggregate value of $.2 million were allocated to Mr. Newell. Rights to
receive Common Units with an aggregate avlue of $.2 million were allocated to
each of Mr. Christen and Mr. Katz upon their election to the Board of
Directors. A total of nine individuals are currently eligible to receive
awards under the Restricted Unit Plan.
The right to receive the remaining $4.2 million of Common Units
initially available under the Restricted Unit Plan will be reserved and
allocated to future directors and may be allocated or issued in the future to
officers on such terms and conditions (including vesting conditions) as are
described below or as the Board of Directors of the Managing General Partner,
or a compensation committee thereof, shall determine. Each additional
director appointed or elected will receive rights to receive Common Units
with a value of $.2 million on the same terms and conditions as those granted
to the current directors.
The Initial Units will be subject to a bifurcated vesting procedure such
that (i) 25% of the Initial Units will vest over time, with one-third of such
units vesting at the end of each of the third, fifth and seventh
anniversaries of the consummation of the Transactions, and (ii) the remaining
75% of the Initial Units will vest automatically upon, and in the same
proportions as, the conversion of the Subordinated Units to Common Units. See
"Cash Distribution Policy -- Distributions from Operating Surplus during
Subordination Period." If a grantee's employment is terminated without
"cause" (as defined in the Restricted Unit Plan) or a grantee resigns with
"good reason" (as defined in the Restricted Unit Plan), the grantee's rights
to receive Common Units which vest over time will immediately vest. In the
event of a "change of control" of the Partnership (as defined in the
Restricted Unit Plan), all rights to acquire Common Units pursuant to the
Restricted Unit Plan will immediately vest.
Upon "vesting" in accordance with the terms and conditions of the
Restricted Unit Plan, Common Units allocated to a plan participant will be
issued to such participant. Until such allocated, but unissued, Common Units
have vested and have been issued to a participant, such participant shall not
be entitled to any distributions or allocations of income or loss and shall
not have any voting or other rights in respect of such Common Units.
The issuance of the Common Units pursuant to the Restricted Unit Plan is
intended to serve as a means of incentive compensation for performance.
Therefore, no consideration will be payable by the plan participants upon
vesting and issuance of the Common Units.
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COMPENSATION OF DIRECTORS
The Managing General Partner currently pays no additional remuneration
to its employees who also serve as directors. In addition to permitting its
non-officer directors to participate in the benefit plans described above,
Mr. Lewis is compensated $50,000 annually as Chairman of the Board and each
of its other non-employee directors is compensated $15,000 annually, plus
$1,000 per Board meeting attended and $500 per committee meeting attended.
All expenses associated with compensation of directors will be reimbursed to
the Managing General Partner by the Partnership.
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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 March 31, 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 New York Stock Exchange.
<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 86.0%
Special General Partner(2)................. Subordinated 920,579 14.0%
Merle D. Lewis............................. Common 1,000 *
Richard R. Hylland......................... Common -- *
Keith G. Baxter............................ Common 23,810 *
Charles J. Kittrell........................ Common 9,524 *
Ronald J. Goedde........................... Common 9,524 *
Vincent J. DiCosimo........................ Common 2,500 *
Daniel K. Newell........................... Common -- *
Paul Christen.............................. Common -- *
Kurt Katz.................................. Common 25,000 *
All directors and executive officers as a
group (9 persons)........................ 71,358 *
</TABLE>
- ------------------------
* Less than 1%
(1) The business address of the Managing General Partner is 432 West Ridge
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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OWNERSHIP OF NPS COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS
OF THE MANAGING GENERAL PARTNER
The table below sets forth, as of March 31, 1997, the beneficial
ownership of the common stock, par value $3.50 per share, of NPS owned by each
director and each named executive officer of the Managing General Partner, as
well as the directors and all of the executive officers of the Managing General
Partner as a group. No director or executive officer beneficially owns more than
1% of NPS's outstanding shares. The total shares beneficially owned by the
directors and executive officers as a group represent less than 1% of NPS's
outstanding shares.
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1)
- ------------------------ ------------------------
Merle D. Lewis (2)................................ 15,447
Richard R. Hylland (3)............................ 1,558
Keith G. Baxter................................... 2,893
Charles J. Kittrell............................... 2,000
Ronald J. Goedde.................................. --
Vincent J. DiCosimo............................... --
Daniel K. Newell (4).............................. 469
Paul Christen..................................... --
Kurt Katz......................................... 500
All directors and executive officers as a group
(9 persons)..................................... 22,867
- ------------------------
(1) The nature of beneficial ownership is sole voting and dispositive power,
unless otherwise noted.
(2) Includes 3,421 shares held jointly with spouse.
(3) Includes 336 shares held in custodial accounts for Mr. Hylland's children
and 547 shares held by Mr. Hylland's spouse.
(4) Includes 94 shares held jointly with spouse.
The Managing General Partner is a wholly owned subsidiary of
Northwestern Growth, which in turn is a wholly owned subsidiary of NPS. No
directors or officers of the Managing General Partner or 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 39.4% limited partner interest
in the Partnership. Through the Managing General Partner's ability, as
managing general partner, to manage and operate the Partnership and the
ownership of all of the outstanding Subordinated Units by the General
Partners (effectively giving the General Partners the ability to veto certain
actions of the Partnership), the General Partners will have the ability to
control the management of the Partnership.
CONTRIBUTION, CONVEYANCE AND ASSUMPTION AGREEMENT
In connection with the Transactions, the Partnership, the Operating
Partnership, the Managing General Partner, Northwestern Growth and certain
other parties entered into the Contribution, Conveyance and Assumption
Agreement (the "Contribution Agreement"), which generally governed the
Transactions, including the asset transfer to and the assumption of
liabilities by the Operating Partnership, and the application of the proceeds
of the IPO. The Contribution
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Agreement was not the result of arm's-length negotiations, and there can be
no assurance that it, or that any of the transactions provided for therein,
were effected on terms at least as favorable to the parties to such agreement
as could have been obtained from unaffiliated third parties. All of the
transaction expenses incurred in connection with the Transactions, including
the expenses associated with transferring assets into the Operating
Partnership, were paid from the proceeds of the IPO. For additional
information, see "Prospectus Summary--Cornerstone Propane Partners,
L.P.--Distributions and Payments to the General Partners and their
Affiliates--Formation Stage."
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CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
CONFLICTS OF INTEREST
Certain conflicts of interest exist and may arise in the future as a
result of the relationships between the General Partners and their
stockholders, on the one hand, and the Partnership and its limited partners,
on the other hand. The directors and officers of the Managing General Partner
have fiduciary duties to manage the Managing General Partner, including its
investments in its subsidiaries and affiliates, in a manner beneficial to its
stockholder. At the same time, the Managing General Partner has a fiduciary
duty to manage the Partnership in a manner beneficial to the Partnership and
the Unitholders. The Partnership Agreement contains provisions that allow the
Managing General Partner to take into account the interests of parties in
addition to the Partnership in resolving conflicts of interest, thereby
limiting its fiduciary duty to the Unitholders, as well as provisions that
may restrict the remedies available to Unitholders for actions taken that
might, without such limitations, constitute breaches of fiduciary duty. The
duty of the directors and officers of the Managing General Partner to its
stockholder may, therefore, come into conflict with the duties of the
Managing General Partner to the Partnership and the Unitholders. The Audit
Committee of the Board of Directors of the Managing General Partner will, at
the request of the Managing General Partner, review conflicts of interest
that may arise between the Managing General Partner or its affiliates, on the
one hand, and the Partnership, on the other. See "Management--Partnership
Management" and "--Fiduciary and Other Duties."
The fiduciary obligations of general partners is a developing area of
law. The provisions of the Delaware Act that allow the fiduciary duties of a
general partner to be waived or restricted by a partnership agreement have
not been resolved in a court of law, and the Managing General Partner has not
obtained an opinion of counsel covering the provisions set forth in the
Partnership Agreement that purport to waive or restrict fiduciary duties of
the Managing General Partner. Unitholders should consult their own legal
counsel concerning the fiduciary responsibilities of the Managing General
Partner and its officers and directors and the remedies available to the
Unitholders.
Conflicts of interest could arise with respect to the situations
described below, among others:
COMMON UNITHOLDERS 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
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such affiliates, except as may be provided in contracts entered into from
time to time specifically dealing with such use, nor is there any obligation
of the Managing General Partner and its affiliates to enter into any such
contracts.
CERTAIN ACTIONS TAKEN BY THE MANAGING GENERAL PARTNER MAY AFFECT THE
AMOUNT OF CASH AVAILABLE FOR DISTRIBUTION TO UNITHOLDERS OR ACCELERATE
THE CONVERSION OF SUBORDINATED UNITS
Decisions of the Managing General Partner with respect to the amount and
timing of cash expenditures, participation in capital expansions and
acquisitions, borrowings, issuances of additional partnership interests and
reserves in any quarter will affect whether, or the extent to which, there is
sufficient Available Cash from Operating Surplus to meet the Minimum
Quarterly Distribution and Target Distributions Levels on all Units in such
quarter or in subsequent quarters. The Partnership Agreement provides that
any borrowings by the Partnership or the approval thereof by the Managing
General Partner shall not constitute a breach of any duty owed by the
Managing General Partner to the Partnership or the Unitholders, including
borrowings that have the purpose or effect, directly or indirectly, of
enabling the General Partners to receive distributions on the Subordinated
Units or the Incentive Distributions or hasten the expiration of the
Subordination Period or the conversion of the Subordinated Units into Common
Units. The Partnership Agreement provides that the Partnership and the
Operating Partnership may borrow funds from the General Partners and their
affiliates. The General Partners and their affiliates may not borrow funds
from the Partnership or the Operating Partnership. Furthermore, any actions
taken by the Managing General Partner consistent with the standards of
reasonable discretion set forth in the definitions of Available Cash,
Operating Surplus and Capital Surplus will be deemed not to constitute a
breach of any duty of the Managing General Partner to the Partnership or the
Unitholders.
THE PARTNERSHIP REIMBURSES THE MANAGING GENERAL PARTNER AND ITS
AFFILIATES FOR CERTAIN EXPENSES
Under the terms of the Partnership Agreement, the Managing General
Partner and its affiliates are reimbursed by the Partnership for certain
expenses incurred on behalf of the Partnership, including costs incurred in
providing corporate staff and support services to the Partnership. The
Partnership Agreement provides that the Managing General Partner will
determine the expenses that are allocable to the Partnership in any
reasonable manner determined by the Managing General Partner in its sole
discretion. See "Management --Reimbursement of Expenses of the Managing
General Partner and its Affiliates."
THE MANAGING GENERAL PARTNER INTENDS TO LIMIT ITS LIABILITY WITH RESPECT
TO THE PARTNERSHIP'S OBLIGATIONS
Whenever possible, the Managing General Partner intends to limit the
Partnership's liability under contractual arrangements to all or particular
assets of the Partnership, with the other party thereto having no recourse
against the General Partners or their assets. The Partnership Agreement
provides that any action by the Managing General Partner in so limiting the
liability of the General Partners or that of the Partnership will not be
deemed to be a breach of the Managing General Partner's fiduciary duties,
even if the Partnership could have obtained more favorable terms without such
limitation on liability.
THE NEW ACQUISITION INCENTIVE PLAN MAY GIVE MANAGEMENT INCENTIVES TO
MAKE ACQUISITIONS THAT ARE NOT BENEFICIAL TO THE PARTNERSHIP
The terms of the New Acquisition Incentive Plan (described above under
"Management--Executive Compensation -- Incentive Plans") could give the
senior executives of the Managing General Partner an incentive to cause the
Partnership to acquire additional propane operations without regard to
whether the operations would prove beneficial to the Partnership and may
present the senior executives of the Managing General Partner with a conflict
of interest in negotiating the acquisition price on behalf of the
Partnership. Mr. Baxter, the only participant in the New Acquisition
Incentive Plan who is a member of the Board of Directors of the Managing
General Partner, has agreed that he will not participate in any board
deliberations regarding potential acquisitions subject to the New Acquisition
Incentive Plan. The Partnership believes that the fact that the ultimate
decision regarding acquisitions and their terms will be made by directors who
have no interest in the New Acquisition Incentive Plan will significantly
reduce the potential conflicts resulting from the structure of the plan.
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<PAGE>
COMMON UNITS ARE SUBJECT TO THE MANAGING GENERAL PARTNER'S LIMITED CALL
RIGHT
The Managing General Partner may exercise its right to call and purchase
Units as provided in the Partnership Agreement or assign such right to one of
its affiliates or to the Partnership. The Managing General Partner may use
its own discretion, free of fiduciary duty restrictions, in determining
whether to exercise such right. As a consequence, a Common Unitholder may
have his Common Units purchased from him even though he may not desire to
sell them, and the price paid may be less than the amount the holder would
desire to receive upon sale of his Common Units. For a description of such
right, see "The Partnership Agreement -- Limited Call Right."
THE PARTNERSHIP MAY RETAIN SEPARATE COUNSEL FOR ITSELF OR FOR THE
HOLDERS OF COMMON UNITS; ADVISORS RETAINED BY THE PARTNERSHIP HAVE NOT
BEEN RETAINED TO ACT FOR HOLDERS OF COMMON UNITS
The Common Unitholders were not represented by counsel in connection
with the preparation of the Partnership Agreement or other agreements
referred to herein. The attorneys, independent public accountants and others
who have performed services for the Partnership in connection with, the IPO,
the Transactions and the offering made hereby have been retained by the
Managing General Partner, its affiliates and the Partnership and may continue
to be retained by the Managing General Partner, its affiliates and the
Partnership. Attorneys, independent public accountants and others who will
perform services for the Partnership in the future will be selected by the
Managing General Partner or the Audit Committee and may also perform services
for the Managing General Partner and its affiliates. The Partnership may
retain separate counsel for itself or the holders of Common Units in the
event of a conflict of interest arising between the Managing General Partner
and its affiliates, on the one hand, and the Partnership or the holders of
Common Units, on the other, depending on the nature of such conflict, but it
does not intend to do so in most cases.
THE MANAGING GENERAL PARTNER IS NOT RESTRICTED FROM ENGAGING IN A
TRANSACTION WHICH WOULD TRIGGER CHANGE OF CONTROL PROVISIONS
The Partnership's indebtedness contains provisions relating to change of
control. If such change of control provisions are triggered, such outstanding
indebtedness may become due. There is no restriction on the ability of the
Managing General Partner or Northwestern Growth to enter into a transaction
which would trigger such change of control provisions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- -- The Partnership -- Financing and Sources of Liquidity."
THE GENERAL PARTNERS' AFFILIATES MAY COMPETE WITH THE PARTNERSHIP
The Managing General Partner may not engage in any business or activity
or incur any debts or liabilities except in connection with or incidental to
(i) its performance as a general partner of the Partnership or one or more
affiliates of the Partnership, (ii) the acquiring, owning or disposing of
debt or equity securities of the Partnership or such affiliates, and (iii)
permitting its employees to perform services for its affiliates. Except as
limited by the next paragraph, the Special General Partner and other
affiliates of the Managing General Partner (including NPS and Northwestern
Growth) are not restricted from engaging in any business activities,
including those in competition with the Partnership.
Affiliates of the Managing General Partner may engage in a business
activity that involves the retail sale of propane to end users in the
continental United States only if (i) the Managing General Partner determines
in its reasonable judgment, prior to the commencement of such activity, that
it is not in the best interests of the Partnership to engage in such activity
either (A) because of the financial commitments or operating characteristics
associated with such activity or (B) because such activity is not consistent
with the business strategy or cannot otherwise be integrated with the
Partnership's operations on a basis beneficial to the Partnership; or (ii)
such activity is being undertaken as provided in a joint venture agreement or
other agreement between the Partnership and an affiliate of the Managing
General Partner and such joint venture or other agreement was determined at
the time it was entered into to be fair to the Partnership in the reasonable
judgment of the Managing General Partner.
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There are no restrictions on the ability of affiliates of the Managing
General Partner to engage in the retail sale of propane outside the
continental United States or in the trading, transportation, storage and
wholesale distribution of propane. The Partnership Agreement expressly
provides that if the Managing General Partner or its affiliates act in
accordance with the foregoing, it shall not constitute a breach of the
Managing General Partner's fiduciary duties to the Partnership or the
Unitholders if the Managing General Partner or its affiliates engage in
direct competition with the Partnership.
THE PARTNERSHIP AGREEMENT PERMITS THE PARTNERSHIP TO ENGAGE IN ROLL-UP
TRANSACTIONS
The Partnership Agreement does not prohibit the Partnership from
engaging in roll-up transactions. Were the Managing General Partner to cause
the Partnership to engage in a roll-up transaction, there could be no
assurance that such a transaction would not have a material adverse effect on
a Unitholder's investment in the Partnership.
FIDUCIARY AND OTHER DUTIES
The General Partners will be accountable to the Partnership and the
Unitholders as fiduciaries. Consequently, the Managing General Partner must
exercise good faith and integrity in handling the assets and affairs of the
Partnership. In contrast to the relatively well-developed law concerning
fiduciary duties owed by officers and directors to the shareholders of a
corporation, the law concerning the duties owed by general partners to other
partners and to partnerships is relatively undeveloped. Neither the Delaware
Revised Uniform Limited Partnership Act (the "Delaware Act") nor case law
defines with particularity the fiduciary duties owed by general partners to
limited partners or a limited partnership, but the Delaware Act provides that
Delaware limited partnerships may, in their partnership agreements, restrict
or expand the fiduciary duties that might otherwise be applied by a court in
analyzing the standard of duty owed by general partners to limited partners
and the partnership.
Fiduciary duties are generally considered to include an obligation to
act with the highest good faith, fairness and loyalty. Such duty of loyalty,
in the absence of a provision in a partnership agreement providing otherwise,
would generally prohibit a general partner of a Delaware limited partnership
from taking any action or engaging in any transaction as to which it has a
conflict of interest. In order to induce the Managing General Partner to
manage the business of the Partnership, the Partnership Agreement, as
permitted by the Delaware Act, contains various provisions intended to have
the effect of restricting the fiduciary duties that might otherwise be owed
by the Managing General Partner to the Partnership and its partners and
waiving or consenting to conduct by the Managing General Partner and its
affiliates that might otherwise raise issues as to compliance with fiduciary
duties or applicable law.
The Partnership Agreement provides that in order to become a limited
partner of the Partnership, a holder of Common Units is required to agree to
be bound by the provisions thereof, including the provisions discussed above.
This is in accordance with the policy of the Delaware Act favoring the
principle of freedom of contract and the enforceability of partnership
agreements. The Delaware Act also provides that a partnership agreement is
not unenforceable by reason of its not having been signed by a person being
admitted as a limited partner or becoming an assignee in accordance with the
terms thereof.
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
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Partnership Agreement) consider the relative interests of the parties
involved in such conflict or affected by such action, any customary or
accepted industry practices or historical dealings with a particular person
or entity and, if applicable, generally accepted accounting practices or
principles and such other factors as its deems relevant. Thus, unlike the
strict duty of a fiduciary who must act solely in the best interests of his
beneficiary, the Partnership Agreement permits the Managing General Partner
to consider the interests of all parties to a conflict of interest, including
the interests of the General Partners. In connection with the resolution of
any conflict that arises, unless the Managing General Partner has acted in
bad faith, the action taken by the Managing General Partner shall not
constitute a breach of the Partnership Agreement, any other agreement or any
standard of care or duty imposed by the Delaware Act or other applicable law.
The Partnership also provides that in certain circumstances the Managing
General Partner may act in its sole discretion, in good faith or pursuant to
other appropriate standards.
The Delaware Act provides that a limited partner may institute legal
action on behalf of the partnership (a partnership derivative action) to
recover damages from a third party where the general partner has refused to
institute the action or where an effort to cause the general partner to do so
is not likely to succeed. In addition, the statutory or case law of certain
jurisdictions may permit a limited partner to institute legal action on
behalf of himself and all other similarly situated limited partners (a class
action) to recover damages from a general partner for violations of its
fiduciary duties to the limited partners.
The Partnership Agreement also provides that any standard of care and
duty imposed thereby or under the Delaware Act or any applicable law, rule or
regulation will be modified, waived or limited, to the extent permitted by
law, as required to permit the Managing General Partner and its officers and
directors to act under the Partnership Agreement or any other agreement
contemplated therein and to make any decisions pursuant to the authority
prescribed in the Partnership Agreement, so long as such action is reasonably
believed by the Managing General Partner to be in, or not inconsistent with,
the best interests of the Partnership. Further, the Partnership Agreement
provides that the General Partners and their officers and directors will not
be liable for monetary damages to the Partnership, the limited partners or
assignees for errors of judgment or for any acts or omissions if the Managing
General Partner and such other persons acted in good faith.
In addition, under the terms of the Partnership Agreement, the
Partnership is required to indemnify the General Partners and their officers,
directors, employees, affiliates, partners, members, agents and trustees, to
the fullest extent permitted by law, against liabilities, costs and expenses
incurred by the General Partners or such other persons, if the General
Partners or such persons acted in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of the Partnership
and, with respect to any criminal proceedings, had no reasonable cause to
believe their conduct was unlawful. See "The Partnership Agreement --
Indemnification." Thus, the General Partners could be indemnified for their
negligent acts if they meet such requirements concerning good faith and the
best interests of the Partnership.
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DESCRIPTION OF THE COMMON UNITS
The Common Units are registered under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and regulations
promulgated thereunder, 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.
Purchasers of Common Units in this offering and subsequent transferees
of Common Units (or their brokers, agents or nominees on their behalf) who
wish to become Unitholders of record will be required to execute Transfer
Applications, the form of which is included as Appendix A to this Prospectus,
before the purchase or transfer of such Common Units will be registered on
the records of the Transfer Agent and before cash distributions or federal
income tax allocations can be made to the purchaser or transferee. The
Partnership will be entitled to treat the nominee holder of a Common Unit as
the absolute owner thereof, and the beneficial owner's rights will be limited
solely to those that it has against the nominee holder as a result of or by
reason of any understanding or agreement between such beneficial owner and
nominee holder.
THE UNITS
The Common Units and the Subordinated Units represent limited partner
interests in the Partnership, which entitle the holders thereof to
participate in Partnership distributions and exercise the rights or
privileges available to limited partners under the Partnership Agreement. For
a description of the relative rights and preferences of holders of Common
Units and Subordinated Units in and to Partnership distributions, together
with a description of the circumstances under which Subordinated Units may
convert into Common Units, see "Cash Distribution Policy." For a description
of the rights and privileges of limited partners under the Partnership
Agreement, see "The Partnership Agreement."
TRANSFER AGENT AND REGISTRAR
DUTIES
Continental Stock Transfer & Trust Company serves as registrar and
transfer agent (the "Transfer Agent") for the Common Units and receives a fee
from the Partnership for serving in such capacities. All fees charged by the
Transfer Agent for transfers of Common Units will be borne by the Partnership
and not by the holders of Common Units, except that fees similar to those
customarily paid by stockholders for surety bond premiums to replace lost or
stolen certificates, taxes and other governmental charges, special charges
for services requested by a holder of a Common Unit and other similar fees or
charges will be borne by the affected holder. There will be no charge to
holders for disbursements of the Partnership's cash distributions. The
Partnership has agreed to indemnify the Transfer Agent, its agents and each
of their respective shareholders, directors, officers and employees against
all claims and losses that may arise out of acts performed or omitted in
respect of its activities as such, except for any liability due to any
negligence, gross negligence, bad faith or intentional misconduct of the
indemnified person or entity.
RESIGNATION OR REMOVAL
The Transfer Agent may at any time resign, by notice to the Partnership,
or be removed by the Partnership, such resignation or removal to become
effective upon the appointment by the Partnership of a successor transfer
agent and registrar and its acceptance of such appointment. If no successor
has been appointed and accepted such appointment within 30 days after notice
of such resignation or removal, the Managing General Partner is authorized to
act as the transfer agent and registrar until a successor is appointed.
TRANSFER OF COMMON UNITS
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Until a Common Unit has been transferred on the books of the
Partnership, the Partnership and the Transfer Agent, notwithstanding any
notice to the contrary, may treat the record holder thereof as the absolute
owner for all purposes, except as otherwise required by law or stock exchange
regulations. The transfer of the Common Units to persons that purchase
directly from the 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
substitute limited partner, (ii) automatically requests admission as a
substituted limited partner in the Partnership, (iii) agrees to be bound by
the terms and conditions of, and executes, the Partnership Agreement, (iv)
represents that such transferee has the capacity, power and authority to
enter into the Partnership Agreement, (v) grants powers of attorney to
officers of the Managing General Partner and any liquidator of the
Partnership as specified in the Partnership Agreement, and (vi) makes the
consents and waivers contained in the Partnership Agreement. An assignee will
become a substituted limited partner of the Partnership in respect of the
transferred Common Units upon the consent of the Managing General Partner and
the recordation of the name of the assignee on the books and records of the
Partnership. Such consent may be withheld in the sole discretion of the
Managing General Partner.
Common Units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to request admission
as a substituted limited partner in the Partnership in respect of the
transferred Common Units. A purchaser or transferee of Common Units who does
not execute and deliver a Transfer Application obtains only (a) the right to
assign the Common Units to a purchaser or other transferee and (b) the right
to transfer the right to seek admission as a substituted limited partner in
the Partnership with respect to the transferred Common Units. Thus, a
purchaser or transferee of Common Units who does not execute and deliver a
Transfer Application will not receive cash distributions or federal income
tax allocations unless the Common Units are held in a nominee or "street
name" account and the nominee or broker has executed and delivered a Transfer
Application with respect to such Common Units, and may not receive certain
federal income tax information or reports furnished to record holders of
Common Units. The transferor of Common Units will have a duty to provide such
transferee with all information that may be necessary to obtain registration
of the transfer of the Common Units, but a transferee agrees, by acceptance
of the certificate representing Common Units, that the transferor will not
have a duty to insure the execution of the Transfer Application by the
transferee and will have no liability or responsibility if such transferee
neglects to or chooses not to execute and forward the Transfer Application to
the Transfer Agent. See "The Partnership Agreement -- Status as Limited
Partner or Assignee."
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THE PARTNERSHIP AGREEMENT
The following paragraphs are a summary of the material provisions of the
Partnership Agreement. The 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, 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
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Partnership Agreement in accordance with the terms thereof and to make
consents and waivers contained in the Partnership Agreement.
CAPITAL CONTRIBUTIONS
For a description of the initial capital contributions to be made to the
Partnership, see "The IPO and Related Transactions." The Unitholders are not
obligated to make additional capital contributions to the Partnership, except
as described below under "-- Limited Liability."
LIMITED LIABILITY
Assuming that a Limited Partner does not participate in the control of
the business of the Partnership within the meaning of the Delaware Act and
that he otherwise acts in conformity with the provisions of the Partnership
Agreement, his liability under the Delaware Act will be limited, subject to
certain possible exceptions, to the amount of capital he is obligated to
contribute to the Partnership in respect of his Common Units plus his share
of any undistributed profits and assets of the Partnership. If it were
determined, however, that the right or exercise of the right by the Limited
Partners as a group to remove or replace the General Partners, to approve
certain amendments to the Partnership Agreement or to take other action
pursuant to the Partnership Agreement constituted "participation in the
control" of the Partnership's business for the purposes of the Delaware Act,
then the Limited Partners could be held personally liable for the
Partnership's obligations under the laws of the State of Delaware to the same
extent as the General Partners with respect to persons who transact business
with the Partnership reasonably believing, based on the Limited Partner's
conduct, that the Limited Partner is a general partner.
Under the Delaware Act, a limited partnership may not make a
distribution to a partner to the extent that at the time of the distribution,
after giving effect to the distribution, all liabilities of the partnership,
other than liabilities to partners on account of their partnership interests
and liabilities for which the recourse of creditors is limited to specific
property of the partnership, exceed the fair value of the assets of the
limited partnership. For the purpose of determining the fair value of the
assets of a limited partnership, the Delaware Act provides that the fair
value of property subject to liability for which recourse of creditors is
limited shall be included in the assets of the limited partnership only to
the extent that the fair value of that property exceeds that nonrecourse
liability. The Delaware Act provides that a limited partner who receives such
a distribution and knew at the time of the distribution that the distribution
was in violation of the Delaware Act shall be liable to the limited
partnership for the amount of the distribution for three years from the date
of the distribution. Under the Delaware Act, an assignee who becomes a
substituted limited partner of a limited partnership is liable for the
obligations of his assignor to make contributions to the partnership, except
the assignee is not obligated for liabilities unknown to him at the time he
became a limited partner and which could not be ascertained from the
partnership agreement.
The Operating Partnership currently conducts business in at least 26
states. Maintenance of limited liability may require compliance with legal
requirements in such jurisdictions in which the Operating Partnership
conducts business, including qualifying the Operating Partnership to do
business there. Limitations on the liability of limited partners for the
obligations of a limited partnership have not been clearly established in
many jurisdictions. If it were determined that the Partnership was, by virtue
of its limited partner interest in the Operating Partnership or otherwise,
conducting business in any state without compliance with the applicable
limited partnership statute, or that the right or exercise of the right by
the Limited Partners as a group to remove or replace the General Partners, to
approve certain amendments to the Partnership Agreement, or to take other
action pursuant to the Partnership Agreement constituted "participation in
the control" of the Partnership's business for the purposes of the statutes
of any relevant jurisdiction, then the Limited Partners could be held
personally liable for the Partnership's obligations under the law of such
jurisdiction to the same extent as the General Partners under certain
circumstances. The Partnership will operate in such manner as the Managing
General Partner deems reasonable and necessary or appropriate to preserve the
limited liability of the Limited Partners.
ISSUANCE OF ADDITIONAL SECURITIES
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The Partnership Agreement authorizes the Partnership to issue an
unlimited number of additional limited partner interests and other equity
securities of the Partnership for such consideration and on such terms and
conditions as are established by the Managing General Partner in its sole
discretion without the approval of any limited partners; provided that,
during the Subordination Period, except as provided in clauses (i) and (ii)
below, the Partnership may not issue equity securities of the Partnership
ranking prior or senior to the Common Units or an aggregate of more than
4,270,000 additional Common Units (excluding Common Units issued upon
conversion of Subordinated Units, upon conversion of the general partner
interests and Incentive Distribution Rights as a result of a withdrawal of a
General Partner, and pursuant to the employee benefit plans of the Managing
General Partner, the Partnership or other members of the Partnership Group
and subject to adjustment in the event of a combination or subdivision of
Common Units) or an equivalent number of securities ranking on a parity with
the Common Units without the approval of the holders of at least a Unit
Majority. During the Subordination Period, the Partnership may also issue an
unlimited number of additional Common Units or parity securities without the
approval of the Unitholders (i) if such issuance occurs (A) in connection
with an Acquisition or a Capital Improvement or (B) within 365 days of, and
the net proceeds from such issuance are used to repay debt incurred in
connection with, an Acquisition or a Capital Improvement, in each case where
such Acquisition or Capital Improvement involves assets that, if acquired by
the Partnership as of the date that is one year prior to the first day of the
quarter in which such transaction is to be effected, would have resulted in
an increase in (1) the amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all outstanding Units) with respect to
each of the four most recently completed quarters (on a pro forma basis) as
compared to (2) the actual amount of Adjusted Operating Surplus generated by
the Partnership on a per-Unit basis (for all outstanding Units) (excluding
Adjusted Operating Surplus attributable to the Acquisition or Capital
Improvement) with respect to each of such four most recently completed
quarters (provided that if the issuance of Units with respect to an
Acquisition or Capital Improvement occurs within the first four full quarters
after the closing of the IPO, then Adjusted Operating Surplus as used in
clauses (1) (determined on a pro forma basis) and (2) above will be
calculated (A) for each quarter, if any, that commenced after the closing of
the IPO for which actual results of operations are available, based on the
actual Adjusted Operating Surplus of the Partnership generated with respect
to such quarter and (B) for each other quarter, on a pro forma basis not
inconsistent with the procedures, as applicable, set forth in "Cash Available
for Distribution" (which Units may include all or a portion of the 750,000
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 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 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
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required to effect the intent expressed in this Prospectus or the intent of
the Partnership Agreement or contemplated by the Partnership Agreement.
The Managing General Partner will not be required to obtain an Opinion
of Counsel (as defined below) in the event of the amendments described in the
two immediately preceding paragraphs. No other amendments to the Partnership
Agreement will become effective without the approval of holders of at least
90% of the Units unless the Partnership obtains an Opinion of Counsel to the
effect that such amendment will not affect the limited liability under
applicable law of any limited partner in the Partnership or the limited
partner of the Operating Partnership.
Any amendment that would have a material adverse effect on the rights or
preferences of any type or class of outstanding Units in relation to other
classes of Units will require the approval of at least a majority of the type
or class of Units so affected. Any amendment that reduces the voting
percentage required to take any action is required to be approved by the
affirmative vote of limited partners constituting not less than the voting
requirement sought to be reduced.
MERGER, SALE OR OTHER DISPOSITION OF ASSETS
The Managing General Partner is generally prohibited, without the prior
approval of holders of a Unit Majority, from causing the Partnership to,
among other things, sell, exchange or otherwise dispose of all or
substantially all of its assets in a single transaction or a series of
related transactions (including by way of merger, consolidation or other
combination) or approving on behalf of the Partnership the sale, exchange or
other disposition of all or substantially all of the assets of the Operating
Partnership; provided that the Managing General Partner may mortgage, pledge,
hypothecate or grant a security interest in all or substantially all of the
Partnership's assets without such approval. The Managing General Partner may
also sell all or substantially all of the Partnership's assets pursuant to a
foreclosure or other realization upon the foregoing encumbrances without such
approval. Furthermore, provided that certain conditions are satisfied, the
Managing General Partner may merge the Partnership or any member of the
Partnership Group into, or convey some or all of the Partnership Group's
assets to, a newly formed entity if the sole purpose of such merger or
conveyance is to effect a mere change in the legal form of the Partnership
into another limited liability entity. The Unitholders are not entitled to
dissenters' rights of appraisal under the Partnership Agreement or applicable
Delaware law in the event of a merger or consolidation of the Partnership, a
sale of substantially all of the Partnership's assets or any other
transaction or event.
TERMINATION AND DISSOLUTION
The Partnership will continue until December 31, 2086, unless sooner
terminated pursuant to the Partnership Agreement. The Partnership will be
dissolved upon (i) the election of the Managing General Partner to dissolve
the Partnership, if approved by the holders of a Unit Majority, (ii) the
sale, exchange or other disposition of all or substantially all of the assets
and properties of the Partnership and the Operating Partnership, (iii) the
entry of a decree of judicial dissolution of the Partnership or (iv) the
withdrawal or removal of the Managing General Partner or any other event that
results in its ceasing to be the Managing General Partner (other than by
reason of a transfer of its general partner interest in accordance with the
Partnership Agreement or withdrawal or removal following approval and
admission of a successor). Upon a dissolution pursuant to clause (iv), the
holders of a Unit Majority may also elect, within certain time limitations,
to reconstitute the Partnership and continue its business on the same terms
and conditions set forth in the Partnership Agreement by forming a new
limited partnership on terms identical to those set forth in the Partnership
Agreement and having as general partner an entity approved by the holders of
a Unit Majority subject to receipt by the Partnership of an opinion of
counsel to the effect that (x) such action would not result in the loss of
limited liability of any Limited Partner and (y) neither the Partnership, the
reconstituted limited partnership nor the Operating Partnership would be
treated as an association taxable as a corporation or otherwise be taxable as
an entity for federal income tax purposes upon the exercise of such right to
continue (hereinafter, an "Opinion of Counsel").
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LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon dissolution of the Partnership, unless the Partnership is
reconstituted and continued as a new limited partnership, the person
authorized to wind up the affairs of the Partnership (the "Liquidator") will,
acting with all of the powers of the Managing General Partner that such
Liquidator deems necessary or desirable in its good faith judgment in
connection therewith, liquidate the Partnership's assets and apply the
proceeds of the liquidation as provided in "Cash Distribution Policy --
Distributions of Cash Upon Liquidation." Under certain circumstances and
subject to certain limitations, the Liquidator may defer liquidation or
distribution of the Partnership's assets for a reasonable period of time or
distribute assets to partners in kind if it determines that a sale would be
impractical or would cause undue loss to the partners.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNERS
The Managing General Partner has agreed not to withdraw voluntarily as a
general partner of the Partnership and the Operating Partnership prior to
December 31, 2006 (with limited exceptions described below), without
obtaining the approval of the holders of a Unit Majority and furnishing an
Opinion of Counsel. On or after December 31, 2006, the Managing General
Partner may withdraw as the Managing General Partner (without first obtaining
approval from any Unitholder) by giving 90 days' written notice, and such
withdrawal will not constitute a violation of the Partnership Agreement.
Notwithstanding the foregoing, the Managing General Partner may withdraw
without Unitholder approval upon 90 days' notice to the Limited Partners if
at least 50% of the outstanding Common Units are held or controlled by one
person and its affiliates (other than the Managing General Partner and its
affiliates). In addition, the Partnership Agreement permits the General
Partners (in certain limited instances) to sell or otherwise transfer all of
their general partner interests in the Partnership without the approval of
the Unitholders. See "-- Transfer of General Partners' Interests."
Upon the withdrawal of the Managing General Partner under any
circumstances (other than as a result of a transfer by the Managing General
Partner of all or a part of its general partner interests in the
Partnership), the holders of a Unit Majority may select a successor to such
withdrawing Managing General Partner. If such a successor is not elected, or
is elected but an Opinion of Counsel cannot be obtained, the Partnership will
be dissolved, wound up and liquidated, unless within 180 days after such
withdrawal the holders of a Unit Majority agree in writing to continue the
business of the Partnership and to appoint a successor Managing General
Partner. See "-- Termination and Dissolution."
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
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"Departing Partners") in the Partnership and the Operating Partnership for a
cash payment equal to the fair market value of such interests. Under all
other circumstances where the General Partners withdraw or are removed by the
Limited Partners, the Departing Partners will have the option to require the
successor general partner to purchase such general partner interest of the
Departing Partners and their Incentive Distribution Rights for such amount.
In each case, such fair market value will be determined by agreement between
the Departing Partners and the successor general partner, or if no agreement
is reached, by an independent investment banking firm or other independent
expert selected by the Departing Partners and the successor general partner
(or if no expert can be agreed upon, by an expert chosen by agreement of the
experts selected by each of them). In addition, the Partnership will be
required to reimburse the Departing Partners for all amounts due the
Departing Partners, including, without limitation, all employee-related
liabilities, including severance liabilities, incurred in connection with the
termination of any employees employed by the Departing Partners for the
benefit of the Partnership.
If the above-described option is not exercised by either the Departing
Partners or the successor general partner, as applicable, the Departing
Partners' general partner interests in the Partnership and the Operating
Partnership and their Incentive Distribution Rights will be converted into
Common Units equal to the fair market value of such interests as determined
by an investment banking firm or other independent expert selected in the
manner described in the preceding paragraph.
TRANSFER OF GENERAL PARTNERS' INTERESTS AND INCENTIVE DISTRIBUTION RIGHTS
Except for a transfer by a General Partner of all, but not less than
all, of its general partner interest in the Partnership and the Operating
Partnership to (a) an affiliate of such General Partner or (b) another person
in connection with the merger or consolidation of such General Partner with
or into another person or the transfer by such General Partner of all or
substantially all of its assets to another person, such General Partner may
not transfer all or any part of its general partner interest in the
Partnership and the Operating Partnership to another person prior to December
31, 2006, without the approval of the holders of at least a Unit Majority;
provided that, in each case, such transferee assumes the rights and duties of
such General Partner to whose interest such transferee has succeeded, agrees
to be bound by the provisions of the Partnership Agreement, furnishes an
Opinion of Counsel and agrees to acquire all (or the appropriate portion
thereof, as applicable) of such General Partner's interest in the Operating
Partnership and agrees to be bound by the provisions of the Operating
Partnership Agreement. The Special General Partner cannot transfer its
general partner interest in the Partnership and the Operating Partnership
without the approval of the Managing General Partner. The General Partners
shall have the right at any time, however, to transfer their Subordinated
Units to one or more persons without Unitholder approval. At any time, the
stockholders of the General Partners may sell or transfer all or part of
their interest in the General Partners to an affiliate or a third party
without the approval of the Unitholders. Each General Partner or its
affiliates or a subsequent holder may transfer its Incentive Distribution
Rights to another person in connection with its merger or consolidation with
or into, or sale of all or substantially all of its assets to, such person
without the prior approval of the Unitholders. Holders of Incentive
Distribution Rights may also transfer such rights to their affiliates without
the prior approval of the Unitholders. Prior to December 31, 2006, other
transfers of the Incentive Distribution Rights will require the affirmative
vote of holders of at least a Unit Majority. On or after December 31, 2006,
the Incentive Distribution Rights will be freely transferable.
CHANGE OF MANAGEMENT PROVISIONS
The Partnership Agreement contains certain provisions that are intended
to discourage a person or group from attempting to remove the Managing
General Partner as general partner of the Partnership or otherwise change the
management of the Partnership. If any person or group other than the Managing
General Partner and its affiliates acquires beneficial ownership of 20% or
more of any class of Units, such person or group loses voting rights with
respect to all of its Units. The Partnership Agreement also provides that if
the Managing General Partner is removed as a general partner of the
Partnership under circumstances where Cause does not exist and Units held by
the General Partners and their affiliates are not voted in favor of such
removal, (i) the Subordination Period will end and all outstanding
Subordinated Units will immediately convert into Common Units on a
one-for-one basis, (ii) any existing Common Unit Arrearages will be
extinguished and (iii) the General Partners will have the right to convert
their partner
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interests (and all of their Incentive Distribution Rights) into Common Units
or to receive cash in exchange for such interests.
LIMITED CALL RIGHT
If at any time not more than 20% of the then-issued and outstanding
limited partner interests of any class (including Common Units) are held by
persons other than the Managing General Partner and its affiliates, the
Managing General Partner will have the right, which it may assign in whole or
in part to any of its affiliates or to the Partnership, to acquire all, but
not less than all, of the remaining limited partner interests of such class
held by such unaffiliated persons as of a record date to be selected by the
Managing General Partner, on at least 10 but not more than 60 days' notice.
The purchase price in the event of such a purchase shall be the greater of
(i) the highest price paid by the Managing General Partner or any of its
affiliates for any limited partner interests of such class purchased within
the 90 days preceding the date on which the Managing General Partner first
mails notice of its election to purchase such limited partner interests, and
(ii) the Current Market Price as of the date three days prior to the date
such notice is mailed. As a consequence of the Managing General Partner's
right to purchase outstanding limited partner interests, a holder of limited
partner interests may have his limited partner interests purchased even
though he may not desire to sell them, or the price paid may be less than the
amount the holder would desire to receive upon the sale of his limited
partner interests. The tax consequences to a Unitholder of the exercise of
this call right are the same as a sale by such Unitholder of his Common Units
in the market. See "Tax Considerations -- Disposition of Common Units."
MEETINGS; VOTING
Except as described below with respect to a Person or group owning 20%
or more of all Units, Unitholders or assignees who are record holders of
Units on the record date set pursuant to the Partnership Agreement will be
entitled to notice of, and to vote at, meetings of limited partners of the
Partnership and to act with respect to matters as to which approvals may be
solicited. With respect to voting rights attributable to Common Units that
are owned by an assignee who is a record holder but who has not yet been
admitted as a limited partner, the Managing General Partner shall be deemed
to be the limited partner with respect thereto and shall, in exercising the
voting rights in respect of such Common Units on any matter, vote such Common
Units at the written direction of such record holder. Absent such direction,
such Common Units will not be voted (except that, in the case of Common Units
held by the Managing General Partner on behalf of Non-citizen Assignees (as
defined below), the Managing General Partner shall distribute the votes in
respect of such Common Units in the same ratios as the votes of partners in
respect of other Units are cast).
The Managing General Partner does not anticipate that any meeting of
Unitholders will be called in the foreseeable future. Any action that is
required or permitted to be taken by the Unitholders may be taken either at a
meeting of the Unitholders or without a meeting if consents in writing
setting forth the action so taken are signed by holders of such number of
Units as would be necessary to authorize or take such action at a meeting of
all of the Unitholders. Meetings of the Unitholders of the Partnership may be
called by the Managing General Partner or by Unitholders owning at least 20%
of the outstanding Units of the class for which a meeting is proposed.
Unitholders may vote either in person or by proxy at meetings. The holders of
a majority of the outstanding Units of the class or classes for which a
meeting has been called represented in person or by proxy shall constitute a
quorum at a meeting of Unitholders of such class or classes, unless any such
action by the Unitholders requires approval by holders of a greater
percentage of such Units, in which case the quorum shall be such greater
percentage.
Each record holder of a Unit has a vote according to his percentage
interest in the Partnership, although additional limited partner interests
having special voting rights could be issued by the Partnership. See "--
Issuance of Additional Securities." However, if at any time any person or
group (other than the Managing General Partner and its affiliates) acquires,
in the aggregate, beneficial ownership of 20% or more of any class of Units
then outstanding, such person or group will lose voting rights with respect
to all of its Units and such Units may not be voted on any matter and will
not be considered to be outstanding when sending notices of a meeting of
Unitholders, calculating required votes, determining the presence of a quorum
or for other similar Partnership purposes. The Partnership Agreement provides
that Common Units held in nominee or street name account will be voted by the
broker (or other nominee)
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pursuant to the instruction of the beneficial owner unless the arrangement
between the beneficial owner and his nominee provides otherwise. Except as
otherwise provided in the Partnership Agreement, Subordinated Units will vote
together with Common Units as a single class.
Any notice, demand, request, report or proxy material required or
permitted to be given or made to record holders of Common Units (whether or
not such record holder has been admitted as a limited partner) under the
terms of the Partnership Agreement will be delivered to the record holder by
the Partnership or by the Transfer Agent at the request of the Partnership.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described above under "-- Limited Liability," the Common Units
will be fully paid, and Unitholders will not be required to make additional
contributions to the Partnership.
An assignee of a Common Unit, subsequent to executing and delivering a
Transfer Application, but pending its admission as a substituted Limited
Partner in the Partnership, is entitled to an interest in the Partnership
equivalent to that of a Limited Partner with respect to the right to share in
allocations and distributions from the Partnership, including liquidating
distributions. The Managing General Partner will vote and exercise other
powers attributable to Common Units owned by an assignee who has not become a
substitute Limited Partner at the written direction of such assignee. See "--
Meetings; Voting." Transferees who do not execute and deliver a Transfer
Application will be treated neither as assignees nor as record holders of
Common Units, and will not receive cash distributions, federal income tax
allocations or reports furnished to record holders of Common Units. See
"Description of the Common Units -- Transfer of Common Units."
NON-CITIZEN ASSIGNEES; REDEMPTION
If the Partnership is or becomes subject to federal, state or local laws
or regulations that, in the reasonable determination of the 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
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in a manner that such Indemnitee reasonably believed to be in or not opposed
to the best interests of the Partnership and, with respect to any criminal
proceeding, had no reasonable cause to believe its conduct was unlawful. Any
indemnification under these provisions will be only out of the assets of the
Partnership, and the General Partners shall not be personally liable for, or
have any obligation to contribute or loan funds or assets to the Partnership
to enable it to effectuate, such indemnification. The Partnership is
authorized to purchase (or to reimburse the General Partners or their
affiliates for the cost of) insurance against liabilities asserted against
and expenses incurred by such persons in connection with the Partnership's
activities, regardless of whether the Partnership would have the power to
indemnify such person against such liabilities under the provisions described
above.
BOOKS AND REPORTS
The Managing General Partner is required to keep appropriate books of
the business of the Partnership at the principal offices of the Partnership.
The books will be maintained for both tax and financial reporting purposes on
an accrual basis. For tax purposes, the fiscal year of the Partnership is the
calendar year. For financial reporting purposes, however, the fiscal year of
the Partnership is a fiscal year ending on June 30.
As soon as practicable, but in no event later than 120 days after the
close of each fiscal year, the Managing General Partner will furnish or make
available to each record holder of Units (as of a record date selected by the
Managing General Partner) an annual report containing audited financial
statements of the Partnership for the past fiscal year, prepared in
accordance with generally accepted accounting principles. As soon as
practicable, but in no event later than 90 days after the close of each
quarter (except the last quarter of each fiscal year), the Managing General
Partner will furnish or make available to each record holder of Units (as of
a record date selected by the Managing General Partner) a report containing
unaudited financial statements of the Partnership with respect to such
quarter and such other information as may be required by law.
The Partnership will furnish each record holder of a Unit information
reasonably required for tax reporting purposes within 90 days after the close
of each calendar year. Such information is expected to be furnished in
summary form so that certain complex calculations normally required of
partners can be avoided. The Partnership's ability to furnish such summary
information to Unitholders will depend on the cooperation of such Unitholders
in supplying certain information to the Partnership. Every Unitholder
(without regard to whether he supplies such information to the Partnership)
will receive information to assist him in determining his federal and state
tax liability and filing his federal and state income tax returns.
RIGHT TO INSPECT PARTNERSHIP BOOKS AND RECORDS
The Partnership Agreement provides that a Limited Partner can for a
purpose reasonably related to such Limited Partner's interest as a limited
partner, upon reasonable demand and at his own expense, have furnished to him
(i) a current list of the name and last known address of each partner, (ii) a
copy of the Partnership's tax returns, (iii) information as to the amount of
cash, and a description and statement of the agreed value of any other
property or services, contributed or to be contributed by each partner and
the date on which each became a partner, (iv) copies of the Partnership
Agreement, the certificate of limited partnership of the Partnership,
amendments thereto and powers of attorney pursuant to which the same have
been executed, (v) information regarding the status of the Partnership's
business and financial condition, and (vi) such other information regarding
the affairs of the Partnership as is just and reasonable. The Partnership
may, and intends to, keep confidential from the Limited Partners trade
secrets or other information the disclosure of which the Partnership believes
in good faith is not in the best interests of the Partnership or which the
Partnership is required by law or by agreements with third parties to keep
confidential.
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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 owned by an "affiliate" of the Partnership (as that
term is defined in the rules and regulations under the Securities Act) may
not be resold publicly except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption therefrom
under Rule 144 thereunder ("Rule 144") or otherwise. Rule 144 permits
securities acquired by an affiliate of the issuer in a public offering to be
sold into the market in an amount that does not exceed, during any
three-month period, the greater of (i) 1% of the total number of such
securities outstanding or (ii) the average weekly reported trading volume of
the Common Units for the four calendar weeks prior to such sale. Sales under
Rule 144 are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Partnership. A person who is not deemed to have been an affiliate of the
Partnership at any time during the three months preceding a sale, and who has
beneficially owned his Common Units for at least two years, would be entitled
to sell such Common Units under Rule 144 without regard to the public
information requirements, volume limitations, manner of sale provisions or
notice requirements of Rule 144.
Prior to the end of the Subordination Period, the Partnership may not
issue equity securities of the Partnership ranking prior or senior to the
Common Units or an aggregate of more than 4,270,000 additional Common Units
(excluding Common Units issued upon conversion of Subordinated Units,
pursuant to the employee benefit plans of the Managing General Partner, the
Partnership or other members of the Partnership Group, or in connection with
certain acquisitions (which Units may include all or a portion of the 750,000
Common Units offered hereby) or capital improvements or the repayment of
certain indebtedness and subject to adjustment in the event of a combination
or subdivision of the Common Units), or an equivalent amount of securities
ranking on a parity with the Common Units, without the approval of the
holders of at least a Unit Majority. The Partnership Agreement provides that,
after the Subordination Period, the Partnership may issue an unlimited number
of limited partner interests of any type without a vote of the Unitholders.
The Partnership Agreement does not impose any restriction on the
Partnership's ability to issue equity securities ranking junior to the Common
Units at any time. Any issuance of additional Common Units or certain other
equity securities would result in a corresponding decrease in the
proportionate ownership interest in the Partnership represented by, and could
adversely affect the cash distributions to and market price of, Common Units
then outstanding. See "The Partnership Agreement -- Issuance of Additional
Securities."
Authorized but unissued Common Units with an aggregate value of $12.5
million (valued at the initial offering price in the IPO) are available for
issuance to executives, officers and directors of the Managing General
Partner pursuant to the Restricted Unit Plan. Common Units will be issued
upon vesting in accordance with the terms and conditions of the Restricted
Unit Plan. Common Units with an aggregate value of $8.3 million have been
allocated and the remaining Common Units available under the Restricted Unit
Plan may be allocated or issued in the future to such participants, and
subject to such terms and conditions, as the Board of Directors of the
Managing General Partner, or a committee thereof, shall determine. See
"Management--Executive Compensation--Restricted Unit Plan.
Pursuant to the Partnership Agreement, the General Partners and their
affiliates will have the right, upon the terms and subject to the conditions
therein, to cause the Partnership to register under the Securities Act and
state laws the offer and sale of any Units or other Partnership Securities
that they hold. Subject to the terms and conditions of the Partnership
Agreement, such registration rights allow the General Partners and their
affiliates or their assignees holding any Units to require registration of
any such Units and to include any such Units in a registration by the
Partnership of
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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.
Each of the Partnership and the General Partners have agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated, it
will not (i) offer, issue, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any Common Units, Subordinated Units or any
securities convertible into or exercisable or exchangeable for Common Units
or Subordinated Units or (ii) enter into any swap or other arrangement that
transfers, in whole or in part, any of the economic consequences of ownership
of the Common Unit or such other securities, in cash or otherwise, for a
period of 180 days after the closing of IPO, except for issuances of Common
Units pursuant to employee plans described in this Prospectus or the issuance
of Common Units in connection with Acquisitions or Capital Improvements;
provided that the Subordinated Units may be transferred without such consent
to an affiliate of the Managing General Partner who agrees to be bound by the
transfer restrictions contained in this paragraph.
PLAN OF DISTRIBUTION
This Prospectus may be used by the Partnership for the offer and sale of
up to 750,000 Common Units from time to time in connection with the
acquisition of other businesses, properties or securities in business
combination transactions. The consideration offered by the Partnership in
such acquisitions, in addition to any Common Units offered by this
Prospectus, may include assets, debt or other 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
This section is a summary of material tax considerations that may be
relevant to prospective Unitholders and, to the extent set forth below under
"--Legal Opinions and Advice," expresses the opinion of Andrews & Kurth
L.L.P., special counsel to the General Partners and the Partnership
("Counsel"), insofar as it relates to matters of law and legal conclusions.
This section is based upon current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), existing and proposed regulations thereunder
and current administrative rulings and court decisions, all of which are
subject to change. Subsequent changes in such authorities may cause the tax
consequences to vary substantially from the consequences described below.
Unless the context otherwise requires, references in this section to the
Partnership are references to both the Partnership and the Operating
Partnership.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting the Partnership or the Unitholders.
Moreover, the discussion focuses on Unitholders who are individual citizens
or residents of the United States and has only limited application to
corporations, estates, trusts, non-resident aliens or other Unitholders
subject to specialized tax treatment (such as tax-exempt institutions,
foreign persons, individual retirement accounts, REITs or mutual funds).
Accordingly, each prospective Unitholder should consult, and should depend
on, his own tax advisor in analyzing the federal, state, local and foreign
tax consequences peculiar to him of the ownership or disposition of Common
Units.
LEGAL OPINIONS AND ADVICE
Counsel is of the opinion that, based on the representations and subject
to the qualifications set forth in the detailed discussion that follows, for
federal income tax purposes (i) the Partnership and the Operating Partnership
will each be treated as a partnership, and (ii) owners of Common Units (with
certain exceptions, as described in "-- Limited Partner Status" below) will
be treated as partners of the Partnership (but not the Operating
Partnership). In addition, all statements as to matters of law and legal
conclusions contained in this section, unless otherwise noted, reflect the
opinion of Counsel.
Although no attempt has been made in the following discussion to comment
on all federal income tax matters affecting the Partnership or prospective
Unitholders, Counsel has advised the Partnership that, based on current law,
the following is a general description of the principal federal income tax
consequences that should arise from the acquisition, ownership and
disposition of Common Units and, insofar as it relates to matters of law and
legal conclusions, addresses the material tax consequences to Unitholders who
are individual citizens or residents of the United States.
No ruling has been or will be requested from the Internal Revenue
Service (the "IRS") with respect to classification of the Partnership as a
partnership for federal income tax purposes, whether the Partnership's
propane operations generate "qualifying income" under Section 7704 of the
Code or any other matter affecting the Partnership or prospective
Unitholders. An opinion of counsel represents only that counsel's best legal
judgment and does not bind the IRS or the courts. Thus, no assurance can be
provided that the opinions and statements set forth herein would be sustained
by a court if contested by the IRS. Any such contest with the IRS may
materially and adversely impact the market for the Common Units and the
prices at which Common Units trade. In addition, the costs of any contest
with the IRS will be borne directly or indirectly by the Unitholders and the
General Partners. Furthermore, no assurance can be given that the treatment
of the Partnership or an investment therein will not be significantly
modified by future legislative or administrative changes or court decisions.
Any such modification may or may not be retroactively applied.
For the reasons hereinafter described, Counsel has not rendered an
opinion with respect to the following specific federal income tax issues: (i)
the treatment of a Unitholder whose Common Units are loaned to a short seller
to cover a short sale of Common Units (see "-- Tax Treatment of Operations --
Treatment of Short Sales"), (ii) whether a Unitholder acquiring Common Units
in separate transactions must maintain a single aggregate adjusted tax basis
in his Common Units (see "-- Disposition of Common Units -- Recognition of
Gain or Loss"), (iii) whether the
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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").
TAX RATES AND CHANGES IN FEDERAL INCOME TAX LAWS
The top marginal income tax rate for individuals is 36% subject to a 10%
surtax on individuals with taxable income in excess of $271,050 per year. The
surtax is computed by applying a 39.6% rate to taxable income in excess of
the threshold. The net capital gain of an individual remains subject to a
maximum 28% tax rate.
The 1995 Proposed Legislation that was passed by Congress in 1995, as
part of the Revenue Reconciliation Act of 1995, and vetoed by President
Clinton would have altered the tax reporting system and the deficiency
collection system applicable to large partnerships (generally defined as
electing partnerships with more than 100 partners) and would have made
certain additional changes to the treatment of large partnerships, such as
the Partnership. Certain of the proposed changes are discussed later in this
section. The 1995 Proposed Legislation was generally intended to simplify the
administration of the tax rules governing large partnerships such as the
Partnership. In addition, the 1995 Proposed Legislation contained provisions
which would have reduced the maximum tax rate applicable to the net capital
gains of an individual to 19.8%.
On March 19, 1996, certain tax legislation, known as the Revenue
Reconciliation Act of 1996, was presented to Congress that would impact the
taxation of certain financial products, including partnership interests. One
proposal would treat a taxpayer as having sold an "appreciated" partnership
interest (one in which gain would be recognized if such interest were sold)
if the taxpayer or related persons entered into one or more positions with
respect to the same or substantially identical property which, for some
period, substantially eliminated both the risk of loss and opportunity for
gain on the appreciated financial position (including selling "short against
the box" transactions). In addition, the Budget Proposal would require
taxpayers, including Unitholders, to use the average cost basis for
calculating gain on the sale of securities. Certain of these proposed
changes are also discussed under "-- Disposition of Common Units."
As of the date of this Prospectus, it is not possible to predict whether
any of the changes set forth in the 1995 Proposed Legislation, the Revenue
Reconciliation Act of 1996, the Budget Proposal or any other changes in the
federal income tax laws that would impact the Partnership and the Unitholders
will ultimately be enacted or, if enacted, what form they will take, what the
effective dates will be, and what, if any, transition rules will be provided.
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
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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.
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 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.
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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.
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,
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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 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 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;
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(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 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.
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LIMITED PARTNER STATUS
Unitholders who have become limited partners of the Partnership will be
treated as partners of the Partnership for federal income tax purposes.
Moreover, the IRS has ruled that assignees of partnership interests who have
not been admitted to a partnership as partners, but who have the capacity to
exercise substantial dominion and control over the assigned partnership
interests, will be treated as partners for federal income tax purposes. On
the basis of this ruling, except as otherwise described herein, Counsel is of
the opinion that (a) assignees who have executed and delivered Transfer
Applications, and are awaiting admission as limited partners and (b)
Unitholders whose Common Units are held in street name or by a nominee and
who have the right to direct the nominee in the exercise of all substantive
rights attendant to the ownership of their Common Units will be treated as
partners of the Partnership for federal income tax purposes. As this ruling
does not extend, on its facts, to assignees of Common Units who are entitled
to execute and deliver Transfer Applications, but who fail to do so,
Counsel's opinion does not extend to them. Income, gain, deductions or
losses would not appear to be reportable by a Unitholder who is not a partner
for federal income tax purposes, and any cash distributions received by such
a Unitholder would therefore be fully taxable as ordinary income. These
holders should consult their own tax advisors with respect to their status as
partners in the Partnership for federal income tax purposes. A purchaser or
other transferee of Common Units who does not execute and deliver a Transfer
Application may not receive certain federal income tax information or reports
furnished to record holders of Common Units unless the Common Units are held
in a nominee or street name account and the nominee or broker has executed
and delivered a Transfer Application with respect to such Common Units.
A beneficial owner of Common Units whose Common Units have been
transferred to a short seller to complete a short sale would appear to lose
his status as a partner with respect to such Common Units for federal income
tax purposes. See "-- Tax Treatment of Operations -- Treatment of Short
Sales."
TAX CONSEQUENCES OF UNIT OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME
No federal income tax will be paid by the Partnership. Instead, each
Unitholder will be required to report on his income tax return his allocable
share of the income, gains, losses and deductions of the Partnership without
regard to whether any cash distributions are received by such Unitholder.
Consequently, a Unitholder may be allocated income from the Partnership even
if he has not received a cash distribution. Each Unitholder will be required
to include in income his allocable share of Partnership income, gain, loss
and deduction for the taxable year of the Partnership ending with or within
the taxable year of the Unitholder.
TREATMENT OF PARTNERSHIP DISTRIBUTIONS
Distributions by the Partnership to a Unitholder generally will not be
taxable to the Unitholder for federal income tax purposes to the extent of
his tax basis in his Common Units immediately before the 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
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appreciated "inventory items" (both as defined in Section 751 of the Code)
(collectively, "Section 751 Assets"). To that extent, the Unitholder will be
treated as having been distributed his proportionate share of the Section 751
Assets and having exchanged such assets with the Partnership in return for
the non-pro rata portion of the actual distribution made to him. This latter
deemed exchange will generally result in the Unitholder's realization of
ordinary income under Section 751(b) of the Code. Such income will equal the
excess of (1) the non-pro rata portion of such distribution over (2) the
Unitholder's tax basis for the share of such Section 751 Assets deemed
relinquished in the exchange.
LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES
The deduction by a Unitholder of his share of Partnership losses will be
limited to the tax basis in his Units and, in the case of an individual
Unitholder or a corporate Unitholder (if more than 50% of the value of its
stock is owned directly or indirectly by five or fewer individuals or certain
tax-exempt organizations), to the amount for which the Unitholder is
considered to be "at risk" with respect to the Partnership's activities, if
that is less than the Unitholder's tax basis. A Unitholder must recapture
losses deducted in previous years to the extent that Partnership
distributions cause the Unitholder's at risk amount to be less than zero at
the end of any taxable year. Losses disallowed to a Unitholder or recaptured
as a result of these limitations will carry forward and will be allowable to
the extent that the Unitholder's tax basis or at risk amount (whichever is
the limiting factor) is subsequently increased. Upon the taxable disposition
of a Unit, any gain recognized by a Unitholder can be offset by losses that
were previously suspended by the at risk limitation but may not be offset by
losses suspended by the basis limitation. Any excess loss (above such gain)
previously suspended by the at risk or basis limitations is no longer
utilizable.
In general, a Unitholder will be at risk to the extent of the tax basis
of his Units, excluding any portion of that basis attributable to his share
of Partnership nonrecourse liabilities, reduced by any amount of money the
Unitholder borrows to acquire or hold his Units if the lender of such
borrowed funds owns an interest in the Partnership, is related to such a
person or can look only to Units for repayment. A Unitholder's at risk amount
will increase or decrease as the tax basis of the Unitholder's Units
increases or decreases (other than tax basis increases or decreases
attributable to increases or decreases in his share of Partnership
nonrecourse liabilities).
The passive loss limitations generally provide that individuals,
estates, trusts and certain closely-held corporations and personal service
corporations can deduct losses from passive activities (generally, activities
in which the taxpayer does not materially participate) only to the extent of
the taxpayer's income from those passive activities. The passive loss
limitations are applied separately with respect to each publicly-traded
partnership such as the Partnership. Consequently, any passive losses
generated by the Partnership will only be available to offset future income
generated by the Partnership and will not be available to offset income from
other passive activities or investments (including other publicly-traded
partnerships) or salary or active business income. Passive losses which are
not deductible because they exceed a Unitholder's income generated by the
Partnership may be deducted in full when he disposes of his entire investment
in the Partnership in a fully taxable transaction to an unrelated party. The
passive activity loss rules are applied after other applicable limitations on
deductions such as the at risk rules and the basis limitation.
A Unitholder's share of net income from the Partnership may be offset by
any suspended passive losses from the Partnership, but it may not be offset
by any other current or carryover losses from other passive activities,
including those attributable to other publicly-traded partnerships. The IRS
has announced that Treasury Regulations will be issued which characterize net
passive income from a publicly-traded Partnership as investment income for
purposes of the limitations on the deductibility of investment interest.
LIMITATIONS ON INTEREST DEDUCTIONS
The deductibility of a non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of such taxpayer's "net
investment income." As noted, a Unitholder's net passive income from the
Partnership will be treated as investment income for this purpose. In
addition, the Unitholder's share of the Partnership's portfolio income will
be treated as investment income. Investment interest expense includes (i)
interest on indebtedness properly allocable
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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 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,
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1996 discussed above, allocations under the Partnership Agreement will be
given effect for federal income tax purposes in determining a partner's
distributive share of an item of income, gain, loss or deduction. There are,
however, uncertainties in the Treasury Regulations relating to allocations of
Partnership income, and investors should be aware that the allocations of
recapture income and allocations of all items of income, gain, loss,
deduction or credit to the General Partners for the taxable period ending on
December 31, 1996 in the Partnership Agreement may be successfully challenged
by the IRS.
TAX TREATMENT OF OPERATIONS
ACCOUNTING METHOD AND TAXABLE YEAR
The Partnership uses the year ending December 31 as its taxable year and
has adopted the accrual method of accounting for federal income tax purposes.
Each Unitholder will be required to include in income his allocable share of
Partnership income, gain, loss and deduction for the taxable year of the
Partnership ending within or with the taxable year of the Unitholder. In
addition, a Unitholder who has a taxable year ending on a date other than
December 31 and who disposes of all of his Units following the close of the
Partnership's taxable year but before the close of his taxable year must
include his allocable share of Partnership income, gain, loss and deduction
in income for his taxable year with the result that he will be required to
report in income for his taxable year his distributive share of more than one
year of Partnership income, gain, loss and deduction. See "-- Disposition of
Common Units -- Allocations Between Transferors and Transferees."
INITIAL TAX BASIS, DEPRECIATION AND AMORTIZATION
The tax basis of the assets of the Partnership will be used for purposes
of computing depreciation and cost recovery deductions and, ultimately, gain
or loss on the disposition of such assets. The Partnership assets will
initially have an aggregate tax basis equal to the tax basis of the assets in
the possession of the General Partners or other contributor immediately prior
to their contributions to the Partnership plus the amount of gain, if any,
recognized by the General Partners or other contributor in connection with
their contribution to the Partnership. The federal income tax burden
associated with the difference between the fair market value of property
contributed to the Partnership and the tax basis established for such
property will be borne by the contributor of such property. See "--
Allocation of Partnership Income, Gain, Loss and Deduction."
To the extent allowable, the Partnership may elect to use the
depreciation and cost recovery methods that will result in the largest
depreciation deductions in the early years of the Partnership. The
Partnership will not be entitled to any amortization deductions with respect
to goodwill conveyed to the Partnership on formation. Property subsequently
acquired or constructed by the Partnership may be depreciated using
accelerated methods permitted by the Code.
If the Partnership disposes of depreciable property by sale,
foreclosure, or otherwise, all or a portion of any gain (determined by
reference to the amount of depreciation previously deducted and the nature of
the property) may be subject to the recapture rules and taxed as ordinary
income rather than capital gain. Similarly, a partner who has taken cost
recovery or depreciation deductions with respect to property owned by the
Partnership may be required to recapture such deductions as ordinary income
upon a sale of his interest in the Partnership. See "-- Allocation of
Partnership Income, Gain, Loss and Deduction" and "-- Disposition of Common
Units -- Recognition of Gain or Loss."
Costs incurred in organizing the Partnership may be amortized over any
period selected by the Partnership not shorter than 60 months. The costs
incurred in promoting the issuance of Units (i.e. syndication expenses) must
be capitalized and cannot be deducted 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.
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SECTION 754 ELECTION
The Partnership intends to make the election permitted by Section 754 of
the Code. That election is irrevocable without the consent of the IRS. The
election generally permits the Partnership to adjust a Common Unit
purchaser's tax basis in the Partnership's assets ("inside basis") pursuant
to Section 743(b) of the Code to reflect his purchase price. The Section
743(b) adjustment belongs to the purchaser and not to other partners. (For
purposes of this discussion, a partner's inside basis in the Partnership's
assets will be considered to have two components: (1) his share of the
Partnership's tax basis in such assets ("Common Basis") and (2) his Section
743(b) adjustment to that basis.)
Proposed Treasury Regulation Section 1.168-2(n) generally requires the
Section 743(b) adjustment attributable to recovery property to be depreciated
as if the total amount of such adjustment were attributable to newly-acquired
recovery property placed in service when the purchaser acquires the Unit.
Similarly, newly issued proposed Treasury regulations promulgated under
Section 197 indicate that the Section 743(b) adjustment attributable to an
amortizable Section 197 intangible should be treated as a newly-acquired
asset placed in service in the month when the purchaser acquires the Unit.
Under Treasury Regulation Section 1.167(c)-1(a)(6), a Section 743(b)
adjustment attributable to property subject to depreciation under Section 167
of the Code rather than cost recovery deductions under Section 168 is
generally required to be depreciated using either the straight-line method or
the 150% declining balance method. The depreciation and amortization methods
and useful lives associated with the Section 743(b) adjustment, therefore,
may differ from the methods and useful lives generally used to depreciate the
Common Basis in such properties. Pursuant to the Partnership Agreement, the
Partnership is authorized to adopt a convention to preserve the uniformity of
Units even if such convention is not consistent with Treasury Regulation
Sections 1.167(c)-1(a)(6), Proposed Treasury Regulation Section 1.168-2(n) or
the Section 197 proposed Treasury regulations. See "-- Uniformity of Units."
Although Counsel is unable to opine as to the validity of such an
approach, the Partnership intends to depreciate the portion of a Section
743(b) adjustment attributable to unrealized appreciation in the value of
Contributed Property (to the extent of any unamortized Book-Tax Disparity)
using a rate of depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the Common Basis of such
property, or treat that portion as 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.
TREATMENT OF SHORT SALES
A Unitholder whose Units are loaned to a "short seller" to cover a short
sale of Units may be considered as having disposed of ownership of those
Units. If so, he would no longer be a partner with respect to those Units
during the period of the loan and may recognize gain or loss from the
disposition. As a result, during this period, any Partnership income, gain,
deduction or loss with respect to those Units would not be reportable by the
Unitholder, any cash distributions received by the Unitholder with respect to
those Units would be fully taxable and all of such distributions would appear
to be treated as ordinary income. Unitholders desiring to assure their status
as partners and avoid the risk of gain recognition should modify any
applicable brokerage account agreements to prohibit their brokers from
borrowing their Units. The IRS has announced that it is actively studying
issues relating to the tax treatment of short sales of Partnership interests.
Also, both the 1996 Proposed Legislation and the Budget Proposal contain
provisions that would adversely affect certain short sales. See "--Current
Tax Rates; Changes in Federal Income Tax Law."
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DISPOSITION OF COMMON UNITS
RECOGNITION OF GAIN OR LOSS
Gain or loss will be recognized on a sale of Units equal to the
difference between the amount realized and the Unitholder's tax basis for the
Units sold. A Unitholder's amount realized will be measured by the sum of the
cash or the fair market value of other property received plus his share of
Partnership nonrecourse liabilities. Because the amount realized includes a
Unitholder's share of Partnership nonrecourse liabilities, the gain
recognized on the sale of Units could result in a tax liability in excess of
any cash received from such sale.
Prior Partnership distributions in excess of cumulative net taxable
income in respect of a Common Unit which decreased a Unitholder's tax basis
in such Common Unit will, in effect, become taxable income if the Common Unit
is sold at a price greater than the Unitholder's tax basis in such Common
Unit, even if the price is less than his original cost.
Should the IRS successfully contest the convention used by the
Partnership to amortize only a portion of the Section 743(b) adjustment
(described under "-- Tax Treatment of Operations -- Section 754 Election")
attributable to an amortizable Section 197 intangible after a sale by the
General Partners of Units, a Unitholder could realize additional gain from
the sale of Units than had such convention been respected. In that case, the
Unitholder may have been entitled to additional deductions against income in
prior years but may be unable to claim them, with the result to him of
greater overall taxable income than appropriate. Counsel is unable to opine
as to the validity of the convention but believes such a contest by the IRS
to be unlikely because a successful contest could result in substantial
additional deductions to other Unitholders.
Gain or loss recognized by a Unitholder (other than a "dealer" in Units)
on the sale or exchange of a Unit held for more than one year will generally
be taxable as long-term capital gain or loss. A portion of this gain or loss
(which could be substantial), however, will be separately computed and taxed
as ordinary income or loss under Section 751 of the Code to the extent
attributable to assets giving rise to depreciation recapture or other
"unrealized receivables" or to "substantially appreciated inventory" owned by
the Partnership. The term "unrealized receivables" includes potential
recapture items, including depreciation recapture. Inventory is considered to
be "substantially appreciated" if its value exceeds 120% of its adjusted
basis to the Partnership. Ordinary income attributable to unrealized
receivables, substantially appreciated inventory and depreciation recapture
may exceed net taxable gain realized upon the sale of the Unit and may be
recognized even if there is a net taxable loss realized on the sale of the
Unit. Thus, a Unitholder may recognize both ordinary income and a capital
loss upon a disposition of Units. Net capital loss may offset no more than
$3,000 of ordinary income in the case of individuals and may only be used to
offset capital gain in the case of corporations.
The IRS has ruled that a partner who acquires interests in a Partnership
in separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of such
interests, a portion of that tax basis must be allocated to the interests
sold using an "equitable apportionment" method. The ruling is unclear as to
how the holding period of these interests is determined once they are
combined. If this ruling is applicable to the holders of Common Units, a
Common Unitholder will be unable to select high or low basis Common Units to
sell as would be the case with corporate stock. It is not clear whether the
ruling applies to the Partnership, because, similar to corporate stock,
interests in the Partnership are evidenced by separate certificates.
Accordingly, Counsel is unable to opine as to the effect such ruling will
have on the Unitholders. In addition, under the financial product provisions
of the 1996 Proposed Legislation and the Budget Proposal, in the case of
partnership interests in publicly traded partnerships which are substantially
identical, the basis of such interests and any adjustments to basis, would be
determined on an average basis and, for holding period purposes, a taxpayer
would be treated as selling such interests on a first-in, first-out basis. A
Unitholder considering the purchase of additional Common Units or a sale of
Common Units purchased in separate transactions should consult his tax
advisor as to the possible consequences of such ruling and any subsequent
legislation.
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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 for the taxable year in which the sale or exchange occurred, that set
forth the amount of the consideration received for the Unit that is allocated
to goodwill or going concern value of the Partnership. Failure to satisfy
these reporting obligations may lead to the imposition of substantial
penalties.
CONSTRUCTIVE TERMINATION
The Partnership and the Operating Partnership will be considered to have
been terminated if there is a sale or exchange of 50% or more of the total
interests in Partnership capital and profits within a 12-month period. A
termination results in the closing of a Partnership's taxable year for all
partners and the Partnership's assets are regarded as having been distributed
to the partners and reconveyed to the Partnership, which is then treated as a
new partnership. However, under new proposed regulations which are not yet
effective, the Partnership will be deemed to have conveyed all its assets and
liabilities to a newly formed partnership in exchange for all the interests
in such partnership and then the Partnership will be deemed to have
liquidated and to have distributed to its partners the interests in this
newly formed partnership. A termination of the Partnership will cause a
termination of the Operating Partnership and any Subsidiary Partnership. Such
a termination could also result in penalties or loss of tax basis adjustments
under Section 754 of the Code if the Partnership were unable to determine
that the termination had occurred. (Under the 1995 Proposed Legislation,
termination of a large partnership, such as the Partnership, would not occur
by reason of the sale or exchange of interests in the partnership.)
In the case of a Unitholder reporting on a taxable year other than a
fiscal year ending December 31, the closing of the tax year of the
Partnership may result in more than 12 months' taxable income or loss of the
Partnership being includable in his taxable income for the year of
termination. In addition, each Unitholder will realize taxable gain to the
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extent that any money deemed as a result of the termination to have been
distributed to him exceeds the adjusted tax basis of his Units. New tax
elections required to be made by the Partnership, including a new election
under Section 754 of the Code, must be made subsequent to a constructive
termination. A termination could also result in a deferral of Partnership
deductions for depreciation. Finally, a termination might either accelerate
the application of, or subject the Partnership to, any tax legislation
enacted prior to the termination.
ENTITY-LEVEL COLLECTIONS
If the Partnership is required or elects under applicable law to pay any
federal, state or local income tax on behalf of any Unitholder or any General
Partner or any former Unitholder, the Partnership is authorized to pay those
taxes from Partnership funds. Such payment, if made, will be treated as a
distribution of cash to the partner on whose behalf the payment was made. If
the payment is made on behalf of a person whose identity cannot be
determined, the Partnership is authorized to treat the payment as a
distribution to current Unitholders. The Partnership is authorized to amend
the Partnership Agreement in the manner necessary to maintain uniformity of
intrinsic tax characteristics of Units and to adjust subsequent
distributions, so that after giving effect to such distributions, the
priority and characterization of distributions otherwise applicable under the
Partnership Agreement is maintained as nearly as is practicable. Payments by
the Partnership as described above could give rise to an overpayment of tax
on behalf of an individual partner in which event the partner could file a
claim for credit or refund.
UNIFORMITY OF UNITS
Because the Partnership cannot match transferors and transferees of
Units, uniformity of the economic and tax characteristics of the Units to a
purchaser of such Units must be maintained. In the absence of uniformity,
compliance with a number of federal income tax requirements, both statutory
and regulatory, could be substantially diminished. A lack of uniformity can
result from a literal application of Proposed Treasury Regulation Section
1.168-2(n) and Treasury Regulation Section 1.167(c)-1(a)(6) proposed Treasury
regulations recently promulgated under Section 197. Any non-uniformity could
have a negative impact on the value of the Units. See "--Tax Treatment of
Operations -- Section 754 Election."
The Partnership intends to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value of
contributed property or adjusted property (to the extent of any unamortized
Book-Tax Disparity) using a rate of depreciation or amortization derived from
the depreciation or amortization method and useful life applied to the Common
Basis of such property, or treat that portion as nonamortizable, to the
extent attributable to property the Common Basis of which is not amortizable,
despite its inconsistency with Proposed Treasury Regulation Section
1.168-2(n) and Treasury Regulation Section 1.167(c)-1(a)(6) (neither of which
is expected to directly apply to a material portion of the Partnership's
assets) or proposed Treasury regulations recently promulgated under Section
197. See "-- Tax Treatment of Operations -- Section 754 Election." To the
extent such Section 743(b) adjustment is attributable to appreciation in
value in excess of the unamortized Book-Tax Disparity, the Partnership will
apply the rules described in the Regulations and legislative history. If the
Partnership determines that such a position cannot reasonably be taken, the
Partnership may adopt a depreciation and amortization convention under which
all purchasers acquiring Units in the same month would receive depreciation
and amortization deductions, whether attributable to Common Basis or Section
743(b) basis, based upon the same applicable rate as if they had purchased a
direct interest in the Partnership's property. If such an aggregate approach
is adopted, it may result in lower annual depreciation and amortization
deductions than would otherwise be allowable to certain Unitholders and risk
the loss of depreciation and amortization deductions not taken in the year
that such deductions are otherwise allowable. This convention will not be
adopted if the Partnership determines that the loss of depreciation and
amortization deductions will have a material adverse effect on the
Unitholders. If the Partnership chooses not to utilize this aggregate method,
the Partnership may use any other reasonable depreciation and amortization
convention to preserve the uniformity of the intrinsic tax characteristics of
any Units that would not have a material adverse effect on the Unitholders.
The IRS may challenge any method of depreciating the Section 743(b)
adjustment described in this paragraph. If such a challenge were sustained,
the uniformity of Units might be affected, and the gain from the sale of
Units might be increased without the benefit of additional deductions. See
"-- Disposition of Common Units --Recognition of Gain or Loss."
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TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Ownership of Units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign
persons and regulated investment companies raises issues unique to such
persons and, as described below, may have substantially adverse tax
consequences. Employee benefit plans and most other organizations exempt from
federal income tax (including individual retirement accounts ("IRAs") and
other retirement plans) are subject to federal income tax on unrelated
business taxable income. Virtually all of the taxable income derived by such
an organization from the ownership of a Unit will be unrelated business
taxable income and thus will be taxable to such a Unitholder.
A regulated investment company or "mutual fund" is required to derive
90% or more of its gross income from interest, dividends, gains from the sale
of stocks or securities or foreign currency or certain related sources. It is
not anticipated that any significant amount of the Partnership's gross income
will include that type of income.
Non-resident aliens and foreign corporations, trusts or estates which
hold Units will be considered to be engaged in business in the United States
on account of ownership of Units. As a consequence they will be required to
file federal tax returns in respect of their share of Partnership income,
gain, loss or deduction and pay federal income tax at regular rates on any
net income or gain. Generally, a Partnership is required to pay a withholding
tax on the portion of the Partnership's income which is effectively connected
with the conduct of a United States trade or business and which is allocable
to the foreign partners, regardless of whether any actual distributions have
been made to such partners. However, under rules applicable to
publicly-traded partnerships, the Partnership will withhold (currently at the
rate of 39.6%) on actual cash distributions made quarterly to foreign
Unitholders. Each foreign Unitholder must obtain a taxpayer identification
number from the IRS and submit that number to the Transfer Agent of the
Partnership on a Form W-8 in order to obtain credit for the taxes withheld. A
change in applicable law may require the Partnership to change these
procedures.
Because a foreign corporation which owns Units will be treated as
engaged in a United States trade or business, such a corporation may be
subject to United States branch profits tax at a rate of 30%, in addition to
regular federal income tax, on its allocable share of the Partnership's
income and gain (as adjusted for changes in the foreign corporation's "U.S.
net equity") which are effectively connected with the conduct of a United
States trade or business. That tax may be reduced or eliminated by an income
tax treaty between the United States and the country with respect to which
the foreign corporate Unitholder is a "qualified resident." In addition, such
a Unitholder is subject to special information reporting requirements under
Section 6038C of the Code.
Under a ruling of the IRS a foreign Unitholder who sells or otherwise
disposes of a Unit will be subject to federal income tax on gain realized on
the disposition of such Unit to the extent that such gain is effectively
connected with a United States trade or business of the foreign Unitholder.
Apart from the ruling, a foreign Unitholder will not be taxed upon the
disposition of a Unit if that foreign Unitholder has held less than 5% in
value of the Units during the five-year period ending on the date of the
disposition and if the Units are regularly traded on an established
securities market at the time of the disposition.
ADMINISTRATIVE MATTERS
PARTNERSHIP INFORMATION RETURNS AND AUDIT PROCEDURES
The Partnership intends to furnish to each Unitholder, within 90 days
after the close of each calendar year, certain tax information, including a
Schedule K-1, which sets forth each Unitholder's allocable share of the
Partnership's income, gain, loss and deduction for the preceding Partnership
taxable year. In preparing this information, which will generally not be
reviewed by counsel, the Partnership will use various accounting and
reporting conventions, some of which have been mentioned in the previous
discussion, to determine the Unitholder's allocable share of income, gain,
loss and deduction. There is no 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
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prospective Unitholders that the IRS will not successfully contend in court
that such accounting and reporting conventions are impermissible. Any such
challenge by the IRS could negatively affect the value of the Units.
The federal income tax information returns filed by the Partnership may
be audited by the IRS. Adjustments resulting from any such audit may require
each Unitholder to adjust a prior year's tax liability, and possibly may
result in an audit of the Unitholder's own return. Any audit of a
Unitholder's return could result in adjustments of non-Partnership as well as
Partnership items.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS
and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss and deduction are determined in a partnership proceeding
rather than in separate proceedings with the partners. The Code provides for
one partner to be designated as the "Tax Matters Partner" for these purposes.
The Partnership Agreement appoints the Managing General Partner as the Tax
Matters Partner of the Partnership.
The Tax Matters Partner will make certain elections on behalf of the
Partnership and Unitholders and can extend the statute of limitations for
assessment of tax deficiencies against Unitholders with respect to
Partnership items. The Tax Matters Partner may bind a Unitholder with less
than a 1% profits interest in the Partnership to a settlement with the IRS
unless that Unitholder elects, by filing a statement with the IRS, not to
give such authority to the Tax Matters Partner. The Tax Matters Partner may
seek judicial review (by which all the Unitholders are bound) of a final
partnership administrative adjustment and, if the Tax Matters Partner fails
to seek judicial review, such review may be sought by any Unitholder having
at least a 1% interest in the profits of the Partnership and by the
Unitholders having in the aggregate at least a 5% profits interest. However,
only one action for judicial review will go forward, and each Unitholder with
an interest in the outcome may participate.
A Unitholder must file a statement with the IRS identifying the
treatment of any item on his federal income tax return that is not consistent
with the treatment of the item on the Partnership's return. Intentional or
negligent disregard of the consistency requirement may subject a Unitholder
to substantial penalties. Under the 1995 Proposed Legislation, partners in
electing large partnerships would be required to treat all Partnership items
in a manner consistent with the Partnership return.
Under the reporting provisions of the 1995 Proposed Legislation, each
partner of an electing large partnership would take into account separately
his share of the following items, determined at the partnership level: (1)
taxable income or loss from passive loss limitation activities; (2) taxable
income or loss from other activities (such as portfolio income or loss); (3)
net capital gains to the extent allocable to passive loss limitation
activities and other activities; (4) tax exempt interest; (5) a net
alternative minimum tax adjustment separately computed for passive loss
limitation activities and other activities; (6) general credits; (7)
low-income housing credit; (8) rehabilitation credit; (9) foreign income
taxes; (10) credit for producing fuel from a nonconventional source; and (11)
any other items the Secretary of Treasury deems appropriate.
The House version of the 1995 Proposed Legislation would also make a
number of changes to the tax compliance and administrative rules relating to
partnerships. One provision would require that each partner in a large
partnership, such as the Partnership, take into account his share of any
adjustments to partnership items in the year such adjustments are made. Under
current law, adjustments relating to partnership items for a previous taxable
year are taken into account by those persons who were partners in the
previous taxable year. Alternatively, under the 1995 Proposed Legislation, a
partnership could elect to or, in some circumstances, could be required to
directly pay the tax resulting from any such adjustments. In either case,
therefore, Unitholders could bear significant economic burdens associated
with tax adjustments relating to periods predating their acquisition of
Units.
It cannot be predicted whether or in what form the 1995 Proposed
Legislation, or other tax legislation that might affect Unitholders, will be
enacted. However, if tax legislation is enacted which includes provisions
similar to those discussed above, a Unitholder might experience a reduction
in cash distributions.
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NOMINEE REPORTING
Persons who hold an interest in the Partnership as a nominee for another
person are required to furnish to the Partnership (a) the name, address and
taxpayer identification number of the beneficial owner and the nominee; (b)
whether the beneficial owner is (i) a person that is not a United States
person, (ii) a foreign government, an international organization or any
wholly-owned agency or instrumentality of either of the foregoing, or (iii) a
tax-exempt entity; (c) the amount and description of Units held, acquired or
transferred for the beneficial owner; and (d) certain information including
the dates of acquisitions and transfers, means of acquisitions and transfers,
and acquisition cost for purchases, as well as the amount of net proceeds
from sales. Brokers and financial institutions are required to furnish
additional information, including whether they are United States persons and
certain information on Units they acquire, hold or transfer for their own
account. A penalty of $50 per failure (up to a maximum of $100,000 per
calendar year) is imposed by the Code for failure to report such information
to the Partnership. The nominee is required to supply the beneficial owner of
the Units with the information furnished to the Partnership.
REGISTRATION AS A TAX SHELTER
The Code requires that "tax shelters" be registered with the Secretary
of the Treasury. The temporary Treasury Regulations interpreting the tax
shelter registration provisions of the Code are extremely broad. It is
arguable that the Partnership is not subject to the registration requirement
on the basis that it will not constitute a tax shelter. However, the Managing
General Partner, as a principal organizer of the Partnership, has registered
the Partnership as a tax shelter (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 "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.
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A substantial valuation misstatement exists if the value of any property
(or the adjusted basis of any property) claimed on a tax return is 200% or
more of the amount determined to be the correct amount of such valuation or
adjusted basis. No penalty is imposed unless the portion of the underpayment
attributable to a substantial valuation misstatement exceeds $5,000 ($10,000
for most corporations). If the valuation claimed on a return is 400% or more
than the correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will be subject to
other taxes, such as state and local income taxes, unincorporated business
taxes, and estate, inheritance or intangible taxes that may be imposed by the
various jurisdictions in which the Partnership does business or owns
property. Although an analysis of those various taxes is not presented here,
each prospective Unitholder should consider their potential impact on his
investment in the Partnership. The Partnership will initially own property
and conduct business in the following states which currently impose a
personal income tax: Alabama, Arkansas, California, Georgia, Illinois,
Indiana, Kentucky, Maryland, Mississippi, Missouri, New Hampshire, New
Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, South Carolina,
Tennessee, Utah, Vermont and Virginia. A Unitholder will be required to file
state income tax returns and to pay state income taxes in some or all of
these states and may be subject to penalties for failure to comply with those
requirements. In certain states, tax losses may not produce a tax benefit in
the year incurred (if, for example, the Partnership has no income from
sources within that state) and also may not be available to offset income in
subsequent taxable years. Some of the states may require the Partnership, or
the Partnership may elect, to withhold a percentage of income from amounts to
be distributed to a Unitholder who is not a resident of the state.
Withholding, the amount of which may be greater or less than a particular
Unitholder's income tax liability to the state, generally does not relieve
the non-resident Unitholder from the obligation to file an income tax return.
Amounts withheld may be treated as if distributed to Unitholders for purposes
of determining the amounts distributed by the Partnership. See "--
Disposition of Common Units -- Entity-Level Collections." Based on current
law and its estimate of future Partnership operations, the Managing General
Partner anticipates that any amounts required to be withheld will not be
material.
It is the responsibility of each Unitholder to investigate the legal and
tax consequences, under the laws of pertinent states and localities of his
investment in the Partnership. Accordingly, each prospective Unitholder
should consult, and must depend upon, his own tax counsel or other advisor
with regard to those matters. Further, it is the responsibility of each
Unitholder to file all state and local, as well as U.S. federal, tax returns
that may be required of such Unitholder. Counsel has not rendered an opinion
on the state or local tax consequences of an investment in the Partnership.
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INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS
An investment in the Partnership by an employee benefit plan is subject
to certain additional considerations because the investments of such plans
are subject to the fiduciary responsibility and prohibited transaction
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and restrictions imposed by Section 4975 of the Code. As used
herein, the term "employee benefit plan" includes, but is not limited to,
qualified pension, profit-sharing and stock bonus plans, Keogh plans,
simplified employee pension plans and tax deferred annuities or IRAs
established or maintained by an employer or employee organization. Among
other things, consideration should be given to (a) whether such investment is
prudent under Section 404(a)(1)(B) of ERISA; (b) whether in making such
investment, such plan will satisfy the diversification requirement of Section
404(a)(1)(C) of ERISA; and (c) whether such investment will result in
recognition of unrelated business taxable income by such plan and, if so, the
potential after-tax investment return. See "Tax Considerations -- Uniformity
of Units -- Tax-Exempt Organizations and Certain Other Investors." The person
with investment discretion with respect to the assets of an employee benefit
plan (a "fiduciary") should determine whether an investment in the
Partnership is authorized by the appropriate governing instrument and is a
proper investment for such plan.
Section 406 of ERISA and Section 4975 of the Code (which also applies to
IRAs that are not considered part of an employee benefit plan) prohibit an
employee benefit plan from engaging in certain transactions involving "plan
assets" with parties that are "parties in interest" under ERISA or
"disqualified persons" under the Code with respect to the plan.
In addition to considering whether the purchase of Common Units is a
prohibited transaction, a fiduciary of an employee benefit plan should
consider whether such plan will, by investing in the Partnership, be deemed
to own an undivided interest in the assets of the Partnership, with the
result that the Managing General Partner also would be a fiduciary of such
plan and the operations of the Partnership would be subject to the regulatory
restrictions of ERISA, including its prohibited transaction rules, as well as
the prohibited transaction rules of the Code.
The Department of Labor regulations provide guidance with respect to
whether the assets of an entity in which employee benefit plans acquire
equity interests would be deemed "plan assets" under certain circumstances.
Pursuant to these regulations, an entity's assets would not be considered to
be "plan assets" if, among other things, (a) the equity interest acquired by
employee benefit plans are publicly offered securities -- i.e., the equity
interests are widely held by 100 or more investors independent of the issuer
and each other, freely transferable and registered pursuant to certain
provisions of the federal securities laws, (b) the entity is an "operating
company" -- i.e., it is primarily engaged in the production or sale of a
product or service other than the investment of capital either directly or
through a majority owned subsidiary or subsidiaries, or (c) there is no
significant investment by benefit plan investors, which is defined to mean
that less than 25% of the value of each class of equity interest
(disregarding certain interests held by the Managing General Partner, its
affiliates, and certain other persons) is held by the employee benefit plans
referred to above, IRAs and other employee benefit plans not subject to ERISA
(such as governmental plans). The Partnership's assets should not be
considered "plan assets" under these regulations because it is expected that
the investment will satisfy the requirements in (a) and (b) above and may
also satisfy the requirements in (c).
Plan fiduciaries contemplating a purchase of Common Units should consult
with their own counsel regarding the consequences under ERISA and the Code in
light of the serious penalties imposed on persons who engage in prohibited
transactions or other violations.
134
<PAGE>
VALIDITY OF THE COMMON UNITS
The validity of the Common Units will be passed upon for the Partnership by
Andrews & Kurth L.L.P., New York, New York.
EXPERTS
The audited financial statements of Cornerstone Propane GP, Inc. and of
Cornerstone Propane Partners, L.P. have been audited and the pro forma
consolidated financial statements of Cornerstone Propane Partners, L.P.
included in this Prospectus, to the extent indicated in their reports, have
been examined by Arthur Andersen LLP, independent public accountants, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
The audited financial statements included in this Prospectus for Empire
Energy Corporation, to the extent and for the periods indicated in their
report, have been audited by Baird, Kurtz & Dobson, independent public
accountants, and are included herein in reliance upon the report of said firm
given upon its authority as experts in giving such report.
The audited financial statements included in this Prospectus for SYN
Inc., to the extent and for the periods indicated in the report, have been
audited by Arthur Andersen LLP, independent public accountants, and are
included herein in reliance upon the authority of said firm as experts in
giving said report.
The CGI Holdings, Inc. financial statements as of July 31, 1996 and 1995
and for each of the three years in the period ended July 31, 1996 included in
this Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm
as experts in auditing and accounting.
The audited financial statements included in this Prospectus for Synergy
Group Incorporated, to the extent and for the periods indicated in their
report, have been audited by Baird, Kurtz & Dobson, independent public
accountants, and are included herein in reliance upon the report of said firm
given upon its authority as experts in giving such report.
135
<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.
136
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF CORNERSTONE PROPANE PARTNERS, L.P.
Introduction............................................................................................. F-3
Pro Forma Consolidated Statements of Operations for the periods July 1, 1996 to December 31, 1996, July
1, 1995 to December 31, 1995, October 1, 1996 to December 31, 1996 and October 1, 1995 to December 31,
1995................................................................................................... F-4
Notes to Pro Forma Consolidated Statements of Operations................................................. F-5
Report of Independent Public Accountants................................................................. F-7
Pro Forma Consolidated Statement of Operations for the Period Ended June 30, 1996........................ F-8
Notes to Pro Forma Consolidated Financial Statements..................................................... F-9
CORNERSTONE PROPANE PARTNERS, L.P.
Consolidated Balance Sheet as of December 31, 1996....................................................... F-13
Consolidated Statement of Operations from Commencement of Operations (on December 17, 1996) to December
31, 1996............................................................................................... F-14
Consolidated Statement of Cash Flows from Commencement of Operations (on December 17, 1996) to December
31, 1996............................................................................................... F-15
Consolidated Statement of Partners' Capital from Commencement of Operations (on December 17, 1996) to
December 31, 1996...................................................................................... F-16
Notes to Consolidated Financial Statements............................................................... F-17
EMPIRE ENERGY CORPORATION CONSOLIDATED FINANCIAL STATEMENTS
Independent Accountants' Report.......................................................................... F-25
PREDECESSOR COMPANY:
Consolidated Balance Sheets dated June 30, 1995 and 1996................................................. F-26
Consolidated Statements of Income for the Years Ended June 30, 1994, 1995, and 1996, for the Three Months
Ended September 30, 1995, and for the One Month Ended July 31, 1996.................................... F-27
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1994, 1995 and 1996 and for
the One Month Ended July 31, 1996...................................................................... F-28
Consolidated Statements of Cash Flows for the Years Ended June 30, 1994, 1995, and 1996, for the Three
Months Ended September 30, 1995, and for the One Month Ended July 31, 1996............................. F-29
Notes to Consolidated Financial Statements............................................................... F-30
NEW BASIS (UNAUDITED):
Consolidated Balance Sheet dated September 30, 1996...................................................... F-40
Consolidated Statement of Operations for the Two Months Ended September 30, 1996......................... F-41
Consolidated Statement of Cash Flows for the Two Months Ended September 30, 1996......................... F-42
Consolidated Statement of Stockholders' Equity for the Two Months Ended September 30, 1996............... F-43
Notes to Consolidated Financial Statements dated September 30, 1996...................................... F-44
Consolidated Statements of Operations for the periods July 1, 1996 to December 16, 1996, July 1, 1995 to
December 31, 1995, October 1, 1996 to December 16, 1996, and October 1, 1995 to December 31, 1995...... F-50
Consolidated Statements of Cash Flows for the periods July 1, 1996 to December 16, 1996 and July 1, 1995
to December 31, 1995................................................................................... F-51
Notes to Consolidated Statements......................................................................... F-52
</TABLE>
F-1
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
CGI HOLDINGS, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................................................................ F-56
Consolidated Balance Sheets at July 31, 1996 and 1995 and October 31, 1996 (unaudited)................... F-57
Consolidated Statements of Operations for the Years Ended July 31, 1996, 1995, and 1994 and for the Three
Months Ended October 31, 1996 and 1995 (unaudited)..................................................... F-59
Consolidated Statements of Stockholders' Equity for the Three Years Ended July 31, 1996, 1995, and 1994
and for the Three Months Ended October 31, 1996 (unaudited)............................................ F-60
Consolidated Statements of Cash Flows for the Three Years Ended July 31, 1996, 1995, and 1994 and for the
Three Months Ended October 31, 1996 and 1995 (unaudited)............................................... F-61
Notes to Consolidated Financial Statements............................................................... F-62
Consolidated Statements of Operations for the periods August 1, 1996 to December 16, 1996, August 1, 1995
to December 31, 1995, November 1, 1996 to December 16, 1996 and November 1, 1995 to December 31, 1995
(unaudited)............................................................................................ F-74
Consolidated Statements of Cash Flows for the periods August 1, 1996 to December 16, 1996 and August 1,
1995 to December 31, 1995 (unaudited).................................................................. F-75
Notes to Consolidated Financial Statements (unaudited)................................................... F-76
SYN INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants................................................................. F-78
Consolidated Balance Sheets dated June 30, 1996 and September 30, 1996................................... F-79
Consolidated Statements of Income for the Period from Inception (August 15, 1995) through June 30, 1996,
for the 46 Days Ended September 30, 1995, and for the Three Months Ended September 30, 1996............ F-80
Consolidated Statements of Stockholders' Equity for the Period from Inception (August 15, 1995) through
September 30, 1996..................................................................................... F-81
Consolidated Statements of Cash Flows for the Period from Inception (August 15, 1995) through June 30,
1996, for the 46 Days Ended September 30, 1995, and for the Three Months Ended September 30, 1996...... F-82
Notes to Consolidated Financial Statements............................................................... F-83
Consolidated Statements of Operations for the periods July 1, 1996 to December 16, 1996, August 15, 1995
to December 31, 1995, July 1, 1995 to August 14, 1995, October 1, 1996 to December 16, 1996 and October
1, 1995 to December 31, 1995........................................................................... F-90
Consolidated Statements of Cash Flows for the the periods July 1, 1996 to December 16, 1996, August 15,
1995 to December 31, 1995, and July 1, 1995 to August 14, 1995......................................... F-91
Notes to Consolidated Financial Statements............................................................... F-92
SYNERGY GROUP INCORPORATED CONSOLIDATED FINANCIAL STATEMENTS
Independent Accountants' Report.......................................................................... F-94
Consolidated Balance Sheet dated August 14, 1995......................................................... F-95
Consolidated Statements of Operations for the Years Ended March 31, 1994 and 1995 and for the Four and
One-Half Months Ended August 14, 1995.................................................................. F-96
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended March 31, 1994 and 1995 and
for the Four and One-Half Months Ended August 14, 1995................................................. F-97
Consolidated Statements of Cash Flows for the Years Ended March 31, 1994 and 1995 and for the Four and
One-Half Months Ended August 14, 1995.................................................................. F-98
Notes to Consolidated Financial Statements............................................................... F-99
</TABLE>
F-2
<PAGE>
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED FINANCIAL
STATEMENTS OF
CORNERSTONE PROPANE PARTNERS, L.P.
The pro forma consolidated statements of operations and consolidated
financial statements of Cornerstone Propane Partners, L.P. (the "Partnership")
are based upon the historical consolidated financial statements of SYN Inc.
("Synergy"), Empire Energy Corporation ("Empire Energy") and CGI Holdings, Inc.
("Coast") appearing elsewhere herein. The pro forma consolidated statements of
operations and consolidated financial statements were prepared to reflect the
formation of the Partnership to own and operate the propane business and
operations of Synergy, Empire Energy, Coast and Myers Propane Gas Company
("Myers"). Historical financial statements of Myers have not been included based
on the Partnership's belief that the inclusion of Myers does not have a material
effect on the pro forma consolidated financial statements of the Partnership.
Cornerstone Propane GP, Inc. serves as the Managing General Partner of the
Partnership. The formation of the Partnership is described in the Notes to Pro
Forma Consolidated Financial Statements.
The pro forma consolidated statements of operations and consolidated
financial statements do not purport to present the financial position or results
of operations of the Partnership had the transactions effected at the closing of
the Partnership's initial public offering through underwriters of 9,821,000
Common Units on December 17, 1996 (the "IPO") actually been completed as of the
dates indicated. In addition, the pro forma consolidated statements of
operations and consolidated financial statements are not necessarily indicative
of the results of future operations of the Partnership and should be read in
conjunction with the historical financial statements of Synergy, Empire Energy
and Coast and the notes thereto appearing elsewhere in this Prospectus.
F-3
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 1, 1996 JULY 1, 1995 OCTOBER 1, 1996 OCTOBER 1, 1995
TO TO TO TO
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUE............................. $ 314,937 $ 253,787 $ 173,181 $ 137,470
COST OF SALES....................... 250,909 192,162 133,390 97,931
-------- -------- -------- --------
GROSS PROFIT........................ 64,028 61,625 39,791 39,539
-------- -------- -------- --------
EXPENSES
Operating......................... 36,112 34,784 18,439 18,632
General and administrative........ 6,507 6,268 3,322 3,357
Depreciation and amortization..... 7,129 6,752 3,391 3,296
-------- -------- -------- --------
OPERATING INCOME.................... 14,280 13,821 14,639 14,254
INTEREST EXPENSE, NET............... (9,049) (8,909) (4,582) (4,487)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES.......... 5,231 4,912 10,057 9,767
INCOME TAXES........................ 50 50 25 25
-------- -------- -------- --------
NET INCOME.......................... $ 5,181 $ 4,862 $ 10,032 $ 9,742
-------- -------- -------- --------
-------- -------- -------- --------
General partners' interest in net
income............................ $ 104 $ 97 $ 201 $ 195
-------- -------- -------- --------
Limited partner's interest in net
income............................ $ 5,077 $ 4,765 $ 9,831 $ 9,547
-------- -------- -------- --------
Net income per Unit................. $ 0.31 $ 0.29 $ 0.60 $ 0.58
-------- -------- -------- --------
Weighted average number of Units
outstanding....................... 16,513 16,513 16,513 16,513
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited pro forma consolidated statements of operations for the three
and six month periods ended December 31, 1996 and 1995 were derived from the
historical statements of operations of Empire Energy Corporation for the periods
October 1 through December 16, 1996, October 1 through December 31, 1995, July 1
through December 16, 1996 and July 1 through December 31, 1995, of SYN Inc. and
Myers Propane Gas Company ("Myers") for the periods October 1, 1996 to December
16, 1996, October 1, 1995 to December 31, 1995, July 1, 1996 to December 16,
1996 and August 15, 1995 to December 31, 1995, of Synergy Group Incorporated for
the period July 1, 1995 to August 14, 1995, of CGI Holdings, Inc. for the
periods November 1 through December 31, 1995, November 1 through December 16,
1996, August 1 through December 31, 1995 and August 1 through December 16, 1996,
and the consolidated statement of operations of the Partnership from December
17, 1996 through December 31, 1996. Historical financial statements of Myers
have not been separately presented based on the Partnership's belief that the
separate inclusion of Myers does not have a material effect on the pro forma
consolidated financial statements of the Partnership. The pro forma consolidated
statements of operations were prepared to reflect the effects of the IPO and
related Transactions as if they had been completed in their entirety as of the
beginning of the periods presented. However, these statements do not purport to
present the results of operations of the Partnership had the IPO and related
Transactions actually been completed as of the beginning of the periods
presented. In addition, the pro forma consolidated statements of operations are
not necessarily indicative of the results of future operations of the
Partnership and should therefore be read in conjunction with the historical
consolidated financial statements of the Predecessor Companies and the
Partnership appearing elsewhere in this Registration Statement.
2. PRO FORMA ADJUSTMENTS
Significant pro forma adjustments reflected in the pro forma consolidated
statements of operations include the following:
Adjustments to reflect the full period effect of operating expense savings
resulting from the consolidation of certain operations that occurred subsequent
to July 1, 1995, as well as the elimination of certain operating and general
administrative expenses associated with the operation of the Partnership.
Operating expense adjustments for retail overlap consolidations were $360 and
$185 for the six and three months ended December 31, 1995, respectively. General
and administrative adjustments relating to corporate overhead consolidation, the
elimination of bank and consulting fees and the estimated incremental general
and administrative cost associated with the Partnership were $838 for each of
the six month periods ended December 31, 1996 and 1995, and $405 and $420 for
the three month periods ended December 31, 1996 and 1995, respectively. The pro
forma adjustments do not include any amount for the incentive compensation that
might be paid to key employees.
Adjustments to reflect the additional depreciation and amortization expense
due to the increase in property and intangibles that result from applying the
purchase method of accounting to the Empire Energy and Coast acquisitions.
Depreciation and amortization adjustments were $40 for each of the six month
periods ended December 31, 1996 and 1995, and $20 for each of the three month
periods ended December 31, 1996 and 1995.
F-5
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
DECEMBER 31, 1996
(UNAUDITED)
Adjustments to reflect interest expense applicable to the Partnership.
Interest expense adjustments relating to expense for the $220,000 first mortgage
notes at a rate of 7.53% per annum, expense attributable to the working capital
facility based on an average outstanding principal balance of $2,000 at 6.5% per
annum, expense attributable to debt assumed based on an average outstanding
principal balance of $9,500 at 8.5% per annum and debt expense amortization
based on $5,050 estimated debt issuance costs were $180 for each for the six
month periods ended December 31, 1996 and 1995 and $90 for each of the three
month periods ended December 31, 1996 and 1995.
Adjustments to reflect the elimination of income tax related accounts
because income taxes will not be borne by the Partnership, except for income
taxes applicable to operations to be conducted by the Partnership's wholly owned
corporate subsidiary.
Net income per limited partner Unit is determined by dividing the net income
that would be allocated to the Unitholders, which is 98% of net income, by the
number of Units outstanding. The weighted average number of Units outstanding,
16,513 were assumed to have been outstanding the entire period.
F-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cornerstone Propane Partners, L.P.:
We have examined the pro forma adjustments reflecting the transactions
described in the notes to the pro forma consolidated financial statements and
the application of those adjustments to the historical amounts in the
accompanying pro forma consolidated statement of operations of Cornerstone
Propane Partners, L.P. (a Delaware limited partnership) for the year ended June
30, 1996. The historical amounts in the accompanying statements are derived from
the historical financial statements of SYN Inc., which were audited by us, and
the historical financial statements of Empire Energy Corporation and CGI
Holdings, Inc., which were audited by other accountants, appearing elsewhere
herein. The historical amounts related to Myers Propane Gas Company were derived
from the unaudited historical financial statements of Myers Propane Gas Company.
The pro forma adjustments are based upon management's assumptions described in
the notes to the pro forma consolidated financial statements. Our examination
was made in accordance with standards established by the American Institute of
Certified Public Accountants and, accordingly, included such procedures as we
considered necessary in the circumstances.
The objective of this pro forma consolidated financial information is to
show what the significant effects on the historical financial information might
have been had the transactions occurred at an earlier date. However, the pro
forma consolidated statement of operations is not necessarily indicative of the
results of operations or related effects on financial position that would have
been attained had the above-mentioned transactions actually occurred earlier.
In our opinion, management's assumptions provide a reasonable basis for
presenting the significant effects directly attributable to the transactions
described in the notes to the pro forma consolidated statement of operations,
the related pro forma adjustments give appropriate effect to those assumptions,
and the pro forma column reflects the proper application of those adjustments to
the historical financial statement amounts in the pro forma consolidated
financial statements as of and for the year ended June 30, 1996.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
December 4, 1996
F-7
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
EMPIRE
ENERGY PRO FORMA PARTNERSHIP
HISTORICAL ADJUSTMENTS PRO FORMA
SYNERGY ---------- COAST MYERS ACQUISITION/ ----------- -----------
-------- -------- ------ DISPOSITION
(D)
(A) (B) (C) -----------
(D)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE....................... $106,121 $98,821 $384,961 $4,725 $1,162 $ -- $595,790
COST OF SALES................. 51,112 50,080 351,549 2,767 476 -- 455,984
-------- ---------- -------- ------ ----------- ----------- -----------
GROSS PROFIT.................. 55,009 48,741 33,412 1,958 686 -- 139,806
-------- ---------- -------- ------ ----------- ----------- -----------
EXPENSES
Operating................... 32,559 24,766 20,768 902 312 (700)(E) 78,607
General and
administrative............ 3,750 8,254 3,835 -- -- (1,675)(E) 14,164
Depreciation and
amortization.............. 3,973 5,875 4,268 184 122 78(F) 14,500
-------- ---------- -------- ------ ----------- ----------- -----------
40,282 38,895 28,871 1,086 434 (2,297) 107,271
-------- ---------- -------- ------ ----------- ----------- -----------
OPERATING INCOME.............. 14,727 9,846 4,541 872 252 2,297 32,535
INTEREST EXPENSE, NET......... 6,682 2,598 5,550 175 133 2,727(G) 17,865
-------- ---------- -------- ------ ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME
TAXES........................ 8,045 7,248 (1,009) 697 119 (430) 14,670
INCOME TAX PROVISION
(BENEFIT).................... 3,336 3,550 (314) 265 42 (6,779)(H) 100
-------- ---------- -------- ------ ----------- ----------- -----------
NET INCOME (LOSS)............. $ 4,709 $ 3,698 $ (695) $ 432 $ 77 $ 6,349 $ 14,570
-------- ---------- -------- ------ ----------- -----------
-------- ---------- -------- ------ ----------- -----------
General partners' interest in
net income................... 291
-----------
Limited partner's interest in
net income................... $ 14,279
-----------
Net income per unit........... $ .87(I)
-----------
-----------
Weighted average number of
Units outstanding............ 16,419
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-8
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
1. BASIS OF PRESENTATION:
The pro forma adjustments described in Note 4 below have been prepared as if
the Transactions effected at the closing of the IPO and the related Transactions
had taken place on June 30, 1996 with respect to balance sheet information and
at the beginning of the respective periods with respect to statement of
operations. The adjustments are based upon currently available information and
certain estimates and assumptions, and therefore the actual adjustments made to
effect the Transactions will differ from the pro forma adjustments. However,
management believes that the assumptions provide a reasonable basis for
presenting the significant effects of the Transactions as contemplated and that
the pro forma adjustments give appropriate effect to these assumptions and are
properly applied in the pro forma financial information. Capitalized terms used
herein and not otherwise defined have the meaning set forth in the Prospectus.
2. THE TRANSACTIONS:
Concurrently with the closing of the initial public offering of 9,821,000
Common Units on December 17, 1996 (the "Offering") by Cornerstone Propane
Partners, L.P. (the "Partnership"), Cornerstone Propane GP, Inc. (the "Managing
General Partner") and SYN Inc. ("Synergy" or the "Special General Partner")
contributed, or caused to be contributed, the operations (the "Combined
Operations") of Synergy, Empire Energy Corporation ("Empire Energy")
(subsidiaries of Northwestern Growth Corporation ("Northwestern Growth")), Myers
Propane Gas Company ("Myers") and CGI Holdings, Inc. ("Coast") to Cornerstone
Propane, L.P. (the "Operating Partnership") in exchange for all the interests in
the Operating Partnership, and the Operating Partnership assumed substantially
all of the liabilities associated with the Combined Operations. Immediately
thereafter, all of the limited partner interests in the Operating Partnership
were conveyed to the Partnership in exchange for interests in the Partnership.
As a result of such transactions, the Managing General Partner and the Special
General Partner own an aggregate 39.4% limited partner interest in the
Partnership and an aggregate 2% general partner interest in the Partnership and
the Operating Partnership (including the right to receive incentive
distributions).
3. OTHER EXPENSE REDUCTIONS:
The pro forma adjustments for the year ended June 30, 1996 exclude certain
non-recurring expenses incurred by Empire Energy of approximately $4.3 million,
propane acquisition and logistics cost savings associated with the integration
of the Coast wholesale operations with the Combined Operations of approximately
$1.5 million, and insurance savings of approximately $2.1 million, which the
Partnership believes are achievable as a result of the Transactions. These
expense reductions are not reflected in the accompanying pro forma statements of
operations. If effect were given to these anticipated expense reductions, the
following amounts would have resulted:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1996
-------------
<S> <C>
Pro forma operating income..................................................... $ 40,397
Pro forma net income........................................................... $ 22,432
Pro forma net income per Unit.................................................. $ 1.34
</TABLE>
There can be no assurance that the Partnership will be able to integrate
successfully the Combined Operations, achieve anticipated cost savings or
institute the necessary systems and procedures to successfully manage the
Combined Operations on a profitable basis. The Partnership was recently formed
and has conducted no operations and generated no revenues to date.
F-9
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
4. PRO FORMA ADJUSTMENTS:
A. Reflects the results of operations for the pre-acquisition period July 1,
1995 to August 14, 1995 for Synergy and the pro forma full year results of
propane operations acquired by Synergy subsequent to July 1, 1995.
<TABLE>
<CAPTION>
ADJUST
HISTORICAL ACQUISITION/
SYNERGY TO FULL DISPOSITION
HISTORICAL YEAR ADJUSTMENTS SYNERGY
----------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
REVENUE.......................................................... $ 96,062 $ 7,568 $ 2,491 $ 106,121
COST OF SALES.................................................... 46,187 3,631 1,294 51,112
----------- ----------- ------ ----------
GROSS PROFIT..................................................... 49,875 3,937 1,197 55,009
----------- ----------- ------ ----------
EXPENSES
Operating...................................................... 28,745 3,163 651 32,559
General and administrative..................................... 3,281 469 -- 3,750
Depreciation and amortization.................................. 3,329 472 172 3,973
----------- ----------- ------ ----------
35,355 4,104 823 40,282
----------- ----------- ------ ----------
OPERATING INCOME (LOSS).......................................... 14,520 (167) 374 14,727
INTEREST EXPENSE, NET............................................ 5,584 816 282 6,682
----------- ----------- ------ ----------
INCOME (LOSS) BEFORE INCOME TAXES................................ 8,936 (983) 92 8,045
INCOME TAX PROVISON (BENEFIT).................................... 3,675 (373) 34 3,336
----------- ----------- ------ ----------
NET INCOME (LOSS)................................................ $ 5,261 $ (610) $ 58 $ 4,709
----------- ----------- ------ ----------
----------- ----------- ------ ----------
</TABLE>
B. Reflects the pro forma full year results of propane operations acquired by
Coast subsequent to August 1, 1995. Also reflects the elimination of results
of discontinued operations subsequent to August 1, 1995.
<TABLE>
<CAPTION>
ACQUISITION/
COAST DISPOSITION
HISTORICAL ADJUSTMENT COAST
---------- ------------- ----------
<S> <C> <C> <C>
REVENUE..................................................................... $ 384,354 $ 607 $ 384,961
COST OF SALES............................................................... 351,213 336 351,549
---------- ----- ----------
GROSS PROFIT................................................................ 33,141 271 33,412
EXPENSES
Operating................................................................. 21,046 (278) 20,768
General and administrative................................................ 3,835 -- 3,835
Depreciation and amortization............................................. 4,216 52 4,268
---------- ----- ----------
29,097 (226) 28,871
---------- ----- ----------
OPERATING INCOME............................................................ 4,044 497 4,541
INTEREST EXPENSE, NET....................................................... 5,470 80 5,550
---------- ----- ----------
INCOME (LOSS) BEFORE INCOME TAXES........................................... (1,426) 417 (1,009)
INCOME TAX PROVISION (BENEFIT).............................................. (473) 159 (314)
---------- ----- ----------
NET INCOME (LOSS)........................................................... $ (953) $ 258 $ (695)
---------- ----- ----------
---------- ----- ----------
</TABLE>
F-10
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
4. PRO FORMA ADJUSTMENTS: (CONTINUED)
C. Reflects the results of operations for the pre-acquisition period July 1,
1995 to December 6, 1995 for Myers.
<TABLE>
<CAPTION>
ADJUST
HISTORICAL
TO FULL
YEAR MYERS
MYERS ----------- ---------
HISTORICAL
-----------
(C)
<S> <C> <C> <C>
REVENUE.......................................................................... $ 3,178 $ 1,547 $ 4,725
COST OF SALES.................................................................... 1,842 925 2,767
----------- ----------- ---------
GROSS PROFIT..................................................................... 1,336 622 1,958
EXPENSES
Operating...................................................................... 554 348 902
General and Administrative..................................................... -- -- --
Depreciation and amortization.................................................. 103 81 184
----------- ----------- ---------
657 429 1,086
----------- ----------- ---------
OPERATING INCOME................................................................. 679 193 872
INTEREST EXPENSE, NET............................................................ 101 74 175
----------- ----------- ---------
INCOME (LOSS) BEFORE INCOME TAXES................................................ 578 119 697
INCOME TAX PROVISION............................................................. 220 45 265
----------- ----------- ---------
NET INCOME....................................................................... $ 358 $ 74 $ 432
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
D. Reflects the pro forma full year results of propane operations acquired by
Northwestern Growth subsequent to July 1, 1995.
E. Reflects the full period effect of operating expense savings resulting from
the consolidation of certain operations that occurred subsequent to July 1,
1995, as well as the estimated elimination of certain operating and general
and administrative expenses associated with the operation of the
Partnership, as follows:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1996
-----------
<S> <C>
Operating:
- ----------------------------------------------------------------------------------------------
Retail overlap consolidations................................................................. $ 700
-----------
-----------
General and Administrative:
- ----------------------------------------------------------------------------------------------
Corporate overhead consolidation.............................................................. $ 2,100
Eliminated bank and consulting fees........................................................... 325
Estimated incremental general and administrative cost associated with the partnership......... (750)
-----------
$ 1,675
-----------
-----------
</TABLE>
The pro forma adjustment for general and administrative expenses does not
include any amount for the incentive compensation that might be paid to key
employees.
F-11
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
4. PRO FORMA ADJUSTMENTS: (CONTINUED)
F. Reflects the additional depreciation and amortization expense due to the
increase in property and intangibles that result from applying the purchase
method of accounting to the Empire Energy and Coast acquisitions.
G. Reflects the following adjustment to interest expense from the Transactions:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1996
-------------
<S> <C>
Historical interest expense.............................................................. $ 13,753
Pro forma interest expense from adjustment to full year.................................. 890
Pro forma interest expense from acquisitions............................................. 495
-------------
$ 15,138
-------------
Pro forma interest expense applicable to the Partnership:
$220,000 first mortgage notes at a rate of 7.53% per annum............................. $ 16,566
Interest expense attributable to working capital facility based on an average
outstanding principal balance of $2,000 at 6.50% per annum........................... 130
Interest expense attributable to debt assumed based on an average outstanding principal
balance of $9,500 at 8.50% per annum................................................. 808
Debt expense amortization based on $5,050 estimated debt issuance costs................ 361
-------------
$ 17,865
-------------
-------------
Pro forma interest expense adjustment.................................................... $ 2,727
-------------
-------------
</TABLE>
H. Reflects the elimination of income tax related accounts because income taxes
will not be borne by the Partnership, except for income taxes applicable to
operations to be conducted by the Partnership's wholly owned corporate
subsidiary.
I. Net income (loss) per Unit is determined by dividing the net income (loss)
that would be allocated to the Unitholders, which is 98% of net income
(loss), by the number of units outstanding. The number of units outstanding,
16,419, were assumed to have been outstanding the entire period.
F-12
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................................................... $ 24,050
Trade receivables................................................................................. 76,204
Inventories....................................................................................... 31,328
Prepayments and other current assets.............................................................. 2,942
------------
Total current assets............................................................................ 134,524
------------
Property, plant and equipment, net of accumulated depreciation of $350............................ 243,004
Excess of cost over fair value, net............................................................... 193,802
Other assets, net................................................................................. 5,810
Deferred costs.................................................................................... 5,446
------------
Total assets.................................................................................... $ 582,586
------------
------------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current portion of long-term debt................................................................. $ 674
Trade accounts payable............................................................................ 82,856
Accrued liabilities............................................................................... 10,084
------------
Total current liabilities....................................................................... 93,614
------------
Notes payable..................................................................................... 220,000
Long-term debt.................................................................................... 10,445
Notes payable related party....................................................................... 2,074
Other non-current liabilities..................................................................... 22,590
------------
Total liabilities............................................................................... 348,723
------------
COMMITMENTS AND CONTINGENCIES (Note 6)
PARTNERS' CAPITAL
Common unitholders................................................................................ 137,090
Subordinated unitholders.......................................................................... 92,096
General partners.................................................................................. 4,677
------------
Total partners' capital......................................................................... 233,863
------------
Total liabilities and partners' capital......................................................... $ 582,586
------------
------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FROM COMMENCEMENT
OF OPERATIONS
(ON DECEMBER 17,
1996)
TO DECEMBER 31, 1996
---------------------
<S> <C>
REVENUE.................................................................................... $ 40,370
COST OF SALES.............................................................................. 31,341
-------
GROSS PROFIT............................................................................... 9,029
-------
EXPENSES
Operating................................................................................ 3,798
General and administrative............................................................... 580
Depreciation and amortization............................................................ 575
-------
4,953
-------
OPERATING INCOME........................................................................... 4,076
INTEREST EXPENSE........................................................................... (778)
-------
INCOME BEFORE INCOME TAXES................................................................. 3,298
INCOME TAXES............................................................................... 5
-------
NET INCOME................................................................................. $ 3,293
-------
-------
General partners' interest in net income................................................... $ 66
-------
Limited partner's interest in net income................................................... $ 3,227
-------
Net income per Unit........................................................................ $ 0.20
-------
Weighted average number of Units outstanding............................................... 16,513
-------
-------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FROM COMMENCEMENT OF
OPERATIONS
(ON DECEMBER 17,
1996)
TO DECEMBER 31, 1996
---------------------
<S> <C>
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES:
Net income............................................................................... $ 3,293
Adjustments to reconcile net income to net cash provided by (used for) operating
activities:
Depreciation and amortization.......................................................... 575
Changes in assets and liabilities, net of acquisitions:
Trade receivables.................................................................... 2,275
Inventories.......................................................................... (5,035)
Prepayments and other current assets................................................. (202)
Deferred costs and other assets...................................................... 20
Trade accounts payable............................................................... 3,710
Accrued liabilities.................................................................. (197)
Other non-current liabilities........................................................ 50
----------
Net cash provided by operating activities.......................................... 4,489
----------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES:
Expenditures for property, plant and equipment........................................... (504)
----------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES:
Net repayments on Working Capital Facility............................................... (2,355)
----------
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.................................................................. (10,277)
----------
Net cash provided by partnership formation transactions............................ 22,418
----------
Cash and cash equivalents increase......................................................... $ 24,048
----------
----------
CASH AND CASH EQUIVALENTS:
End of period............................................................................ $ 24,050
Beginning of period...................................................................... 2
----------
Increase........................................................................... $ 24,048
----------
----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF
LIMITED PARTNER UNITS TOTAL
------------------------ GENERAL PARTNERS'
COMMON SUBORDINATED COMMON SUBORDINATED PARTNERS CAPITAL
---------- ------------ ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at Commencement of Operations
(on December 17, 1996)............. -- -- $ -- $ -- $ -- $ --
Contributions of net assets of
predecessor companies and issuance
of Common Units.................... 9,821,000 6,597,619 135,160 90,799 -- 225,959
Issuance of 2% interest for general
partners contribution.............. -- -- -- -- 4,611 4,611
Net income........................... -- -- 1,930 1,297 66 3,293
---------- ------------ ---------- ------------ ----------- ----------
Balance December 31, 1996............ 9,821,000 6,597,619 $ 137,090 $ 92,096 $ 4,677 $ 233,863
---------- ------------ ---------- ------------ ----------- ----------
---------- ------------ ---------- ------------ ----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
(UNAUDITED)
1. PARTNERSHIP ORGANIZATION AND FORMATION
Cornerstone Propane Partners, L.P. ("Cornerstone Partners") was formed on
October 7, 1996 as a Delaware limited partnership. Cornerstone Partners and its
subsidiary Cornerstone Propane, L.P., a Delaware limited partnership (the
"Operating Partnership"), were formed to acquire, own and operate substantially
all of the propane businesses and assets of SYN Inc. and its subsidiaries
("Synergy"), Empire Energy Corporation and its subsidiaries ("Empire"), Myers
Propane Gas Company ("Myers") and CGI Holdings, Inc. and its subsidiaries
("Coast"). The principal predecessor entities, Synergy, Empire and Coast are
collectively referred to herein as the "Predecessor Companies." The consolidated
financial statements include the accounts of Cornerstone Partners, the Operating
Partnership and its corporate subsidiary Cornerstone Sales & Service
Corporation, a Delaware corporation, collectively referred to herein as the
Partnership. The Operating Partnership is, and the Predecessor Companies were,
principally engaged in (i) the retail marketing and distribution of propane for
residential, commercial, industrial, agricultural and other retail uses, (ii)
the wholesale marketing and distribution of propane and natural gas liquids to
the retail propane industry, the chemical and petrochemical industries and other
commercial and agricultural markets, (iii) the repair and maintenance of propane
heating systems and appliances and (iv) the sale of propane-related supplies,
appliances and other equipment. Pursuant to a Contribution, Conveyance and
Assumption Agreement dated as of December 17, 1996, substantially all of the
assets and liabilities of the Predecessor Companies were contributed to the
Operating Partnership (the "Conveyance"). As a result of the Conveyance,
Cornerstone Propane GP, Inc., a Delaware corporation and the managing general
partner of Cornerstone Partners (the "Managing General Partner") and SYN Inc., a
Delaware corporation and the special general partner (the "Special General
Partner") received all of the interests in the Operating Partnership, and the
Operating Partnership received substantially all of the assets and assumed
substantially all of the liabilities of the Predecessor Companies. Immediately
after the Conveyance, and in accordance with the Amended and Restated Agreement
of Limited Partnership of Cornerstone Partners (the "Partnership Agreement"),
the Managing General Partner and the Special General Partner conveyed their
limited partner interests in the Operating Partnership to Cornerstone Partners
in exchange for a 2% general partner interest and a 39.4% limited partner
interest in Cornerstone Partners.
Following these transactions, on December 17, 1996, Cornerstone Partners
completed its initial public offering through underwriters of 9,821,000 Common
Units (the "IPO") at a price to the public of $21.00 a unit. The proceeds of
approximately $206,241 from the IPO, the proceeds from the issuance of $220,000
aggregate principal amount of the Operating Partnership's 7.53% first mortgage
notes, and $12,800 borrowings under the Working Capital Facility (as described
in Note 3) were used to repay $329.9 in liabilities assumed by the Operating
Partnership that were in large part incurred in connection with the transactions
entered into prior to the offering. A portion of the funds were distributed to
the Special General Partner to redeem its preferred stock ($61,196) and to
provide net worth to the Special General Partner ($15,500). Approximately $25.2
was used to pay underwriters' discounts and commissions and expenses and the
balance was retained by the Partnership.
Partners' capital of limited partners consists of 9,821,000 Common Units and
6,597,619 Subordinated Units, representing an aggregate 58.6% and 39.4% limited
partner interest in Cornerstone Partners, respectively. Partners' capital of
general partners consists of a 2% interest in the Partnership.
F-17
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
(UNAUDITED)
During the Subordination Period (see Note 5), the Partnership may issue up
to 4,270,000 additional Parity Units (generally defined as Common Units and all
other Units having rights to distribution or in liquidation ranking on a parity
with the Common Units), excluding Common Units issued in connection with (i)
employee benefit plans and (ii) the conversion of Subordinated Units into Common
Units, without the approval of a majority of the Unitholders (see Note 5). The
Partnership may issue an unlimited number of additional Parity Units without
Unitholder approval if such issuance occurs in connection with acquisitions,
including, in certain circumstances, the repayment of debt incurred in
connection with an acquisition. In addition, under certain conditions the
Partnership may issue without Unitholder approval an unlimited number of parity
securities for the repayment of up to $75,000 of long-term indebtedness of the
Partnership. After the Subordination Period, the Managing General Partner may
cause the Partnership to issue an unlimited number of additional limited partner
interests and other equity securities of the Partnership for such consideration
and on such terms and conditions as shall be established by the General Partner
in its sole discretion.
Cornerstone Partners and the Operating Partnership have no employees. The
Managing General Partner conducts, directs and manages all activities of
Cornerstone Partners and the Operating Partnership and is reimbursed on a
monthly basis for all direct and indirect expenses it incurs on their behalf.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. The Partnership is the fifth largest retail marketer
of propane in the United States in terms of volume, serving more than 360,000
residential, commercial, industrial and agricultural customers from 311 customer
service centers in 26 states. The Partnership was recently formed to own and
operate the propane business and assets of Synergy, Empire, Myers and Coast. The
Partnership's operations are concentrated in the east coast, south-central and
west coast regions of the United States.
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of the Predecessor Companies and Myers. Historical financial statements
of Myers have not been separately presented based on the Partnership's belief
that the separate inclusion of Myers does not have a material effect on the
consolidated financial statements of the Partnership. The acquisitions of the
Predecessor Companies are accounted for as purchase business combinations based
on management's best estimate. All purchase price allocations for the
acquisition of the Predecessor Companies are preliminary in nature and are
subject to change within the twelve months following the acquisitions based on
refinements as actual data becomes available. All significant inter-company
transactions and accounts have been eliminated. The accompanying consolidated
financial statements are unaudited and have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission. They include
all adjustments which the Partnership considers necessary for a fair statement
of the results for the interim periods presented. Such adjustments consisted
only of normal recurring items unless otherwise disclosed. Due to the seasonal
nature of the Partnership's propane business, the results of operations for
interim periods are not necessarily indicative of the results to be expected for
a full year.
FISCAL YEAR. The Partnership's fiscal year is July 1 to June 30.
Previously, Coast's fiscal year began on August 1 and ended on July 31, while
Empire's, Synergy's and Myers' fiscal years began on July 1 and ended on June
30. Because the Partnership commenced operations upon completion of the IPO, the
accompanying consolidated statements of operations, cash flows and partners'
capital are for the period from commencement of operations on December 17, 1996
to December 31, 1996.
F-18
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
(UNAUDITED)
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FUTURES CONTRACTS. The Partnership routinely uses commodity futures
contracts to reduce the risk of future price fluctuations for natural gas and
LPG inventories and contracts. Gains and losses on futures contracts purchased
as hedges are deferred and recognized in cost of sales as a component of the
product cost for the related hedged transaction. In the statement of cash flows,
cash flows from qualifying hedges are classified in the same category as the
cash flows from the items being hedged. Contracts which do not qualify as hedges
are marked to market, with the resulting gains and losses charged to current
operations. Net realized gains and losses for the current fiscal year and
unrealized gains, losses on outstanding positions and open positions as of
December 31, 1996 are not material.
ACCOUNTS RECEIVABLE. The outstanding balance is stated net of allowance of
doubtful accounts of $4,586 at December 31, 1996.
REVENUE RECOGNITION. Sales of natural gas, crude oil, natural gas liquids
and LPG and the related cost of product are recognized upon delivery of the
product.
INVENTORIES. Inventories are stated at the lower of cost or market. The
cost of natural gas, crude oil, natural gas liquids and LPG is determined using
the first-in, first-out (FIFO) method. The cost of gas distribution parts,
appliances and equipment is determined using the weighted average method. The
major components of inventory consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
(UNAUDITED)
<S> <C>
LPG and Other.............................................................. $ 22,553
Parts and Fittings......................................................... 8,775
-------
$ 31,328
-------
-------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
cost. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets as follows: buildings and improvements, 25 to 33
years; LPG storage and rental tanks, 40 to 50 years; and office furniture,
equipment and tank installation costs, 5 to 10 years. Leasehold improvements are
amortized over the shorter of the estimated useful life or the lease term. When
property, plant or equipment is retired or otherwise disposed, the cost and
related accumulated depreciation is removed from the accounts, and the resulting
gain or loss is credited or charged to operations. Maintenance and repairs are
charged to earnings, while replacements and betterments that extend estimated
useful lives are capitalized.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED. The excess of
acquisition cost over the estimated fair market value of identifiable net assets
of acquired businesses is amortized on a straight-line basis over forty years.
The related costs and accumulated amortization were $193,977 and $175
respectively, at December 31, 1996.
F-19
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
(UNAUDITED)
It is the Partnership's policy to review intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. If such a review should indicate that the
carrying amount of intangible assets is not recoverable, it is the Partnership's
policy to reduce the carrying amount of such assets to fair value.
INCOME TAXES. Neither Cornerstone Partners nor the Operating Partnership
are directly subject to federal and state income taxes. Instead, taxable income
or loss is allocated to the individual partners. As a result, no recognition of
income tax expense has been reflected in the Partnership's consolidated
financial statements relating to the earnings of Cornerstone Partners or the
Operating Partnership. The Partnership has one subsidiary which operates in
corporate form and is subject to federal and state income taxes. Accordingly,
the Partnership's consolidated financial statements reflect income tax expense
related to the subsidiary's earnings.
NET INCOME PER UNIT. Net income per Unit is computed by dividing net
income, after deducting the General Partners' 2% interest, by the weighted
average number of outstanding Common and Subordinated Units.
UNIT-BASED COMPENSATION. The Partnership accounts for unit-based
compensation as (a) deferred compensation for time-vesting units and (b)
contingent consideration for performance-vesting units. Compensation expense for
the time-vesting units is recognized over the vesting period. Compensation
expense for the performance-vesting units is recognized when the units become
issuable. Time vesting units are considered Common Unit equivalents for the
purpose of computing primary earnings per unit. Performance-vesting units are
considered for the purpose of computing fully diluted earnings per unit.
3. CREDIT FACILITIES
Concurrently with the IPO, the Operating Partnership entered into a credit
agreement (the "Bank Credit Agreement") which consists of a Working Capital
Facility and an Acquisition Facility.
The Working Capital Facility provides for borrowings up to $50,000
(including a $30,000 sublimit for letters of credit through March 31, 1997 and
$20,000 thereafter), and matures on December 31, 1999. The Bank Credit Agreement
provides that there must be no amount outstanding under the Working Capital
Facility (excluding letters of credit) in excess of $10,000 for at least 30
consecutive days during each fiscal year. Borrowings under the Working Capital
Facility totaled $10,445 at December 31, 1996. Issued outstanding letters of
credit totaled $18,425 at December 31, 1996.
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 December 31, 1996.
The Operating Partnership's obligations under the Bank Credit Agreement are
secured, on an equal and ratable basis, with its obligations under the Note
Agreement (see Note 4), by a first priority security interest in the Operating
Partnership's inventory, accounts receivable and certain customer storage tanks.
Loans under the Bank Credit Agreement bear interest at a per annum rate equal to
either (at the Operating Partnership's option): (a) the sum (the "Base Rate") of
the applicable margin, and the higher of
F-20
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
(UNAUDITED)
(i) the agent bank's prime rate and (ii) the federal funds rate plus 1/2 of 1%,
and (b) the sum (the "Eurodollar Rate") of the applicable margin and the rate
offered by the agent bank to major banks in the offshore dollar market (as
adjusted for applicable reserve requirements, if any). The applicable margin for
Base Rate loans varies between 0% and .12%, and the applicable margin for
Eurodollar Rate loans varies between .25% and .80%, in each case depending upon
the Operating Partnership's ratio of consolidated "Debt" to "Consolidated Cash
Flow" (as such terms are defined in the Bank Credit Agreement). At December 31,
1996, the applicable Base and Eurodollar Rates were 8.275% and 6.2375%,
respectively. In addition, an annual fee is payable quarterly by the Operating
Partnership (whether or not borrowings occur) ranging from .125% to .325%
depending upon the ratio referenced above.
The Bank Credit Agreement contains customary representations, warranties,
events of defaults and covenants including limitations, among others, on the
ability of the Operating Partnership and its "Restricted Subsidiaries" (as
defined therein) to incur or maintain certain indebtedness or liens, make
investments and loans, enter into mergers, consolidations or sales of all or
substantially all of its assets and make assets sales. Generally, so long as no
default exists or would result, the Operating Partnership is permitted to make
any Restricted Payment (as defined in the Bank Credit Agreement and including
distributions to the Partnership) during each fiscal quarter in amount not to
exceed Available Cash with respect to the immediately preceding quarter.
In addition, the Bank Credit Agreement provides that: (1) the Operating
Partnership not permit the ratio of its consolidated Debt (as defined in the
Bank Credit Agreement) less cash on hand (in excess of $1,000 up to $10,000) to
Consolidated Cash Flow (as defined in the Bank Credit Agreement) to exceed
4.75:1.00 at any time on or before December 31, 1997, 4.50:1.00 at any time on
or before December 31, 1998 and 4.25:1.00 at any time thereafter; and (2) the
Operating Partnership not permit the ratio of its Consolidated Cash Flow to
consolidated "Interest Expense" (as defined therein) to be less than 2.00:1.00
prior to December 31, 1997, 2.25:1.00 any time thereafter on or before December
31, 1998 and 2.50:1.00 at any time thereafter.
4. LONG-TERM DEBT
On the IPO date, the Operating Partnership issued $220,000 of Senior Notes
with an annual interest rate of 7.53% pursuant to note purchase agreements with
various investors (collectively, the "Note Agreement"). The Senior Notes mature
on December 30, 2010, and require semi-annual interest payments commencing
December 30, 1996. The Note Agreement requires that the principal be paid in
equal annual payments of $27,500 starting December 30, 2003.
The Operating Partnership's obligations under the Note Agreement are
secured, on an equal and ratable basis with its obligations under the Bank
Credit Agreement, by a first priority security interest in the Operating
Partnership's inventory, accounts receivable and certain customer storage tanks.
The Note Agreement contains customary representations, warranties, events of
defaults and covenants applicable to the Operating Partnership and its
"Restricted Subsidiaries" (as defined therein), including limitations, among
others, on the ability of the Operating Partnership and its Restricted
Subsidiaries to incur additional indebtedness, create liens, make investments
and loans, enter into mergers, consolidations or sales of all or substantially
all assets and make asset sales. Generally, so long as no default exists or
would result, the Operating Partnership is permitted to make any Restricted
Payment (as defined in the Note
F-21
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
(UNAUDITED)
Agreement and including distributions to the Partnership) during each fiscal
quarter in amount not in excess of Available Cash (see Note 5) with respect to
the immediately preceding quarter.
5. QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Partnership will make distributions to its partners with respect to each
fiscal quarter of the Partnership approximately 45 days after the end of each
fiscal quarter in an aggregate amount equal to its Available Cash for such
quarter. Available Cash generally means, with respect to any fiscal quarter of
the Partnership, all cash on hand at the end of such quarter less the amount of
cash reserves established by the Managing General Partner in its reasonable
discretion for future cash requirements. These reserves are retained to provide
for the proper conduct of the Partnership's business, the payment of debt
principal and interest and to provide funds for distribution during the next
four quarters. The Partnership has not made a distribution to holders of the
Common Units and Subordinated Units ("Unitholders") for the partial fiscal
quarter ended December 31, 1996. The Partnership expects to make a distribution
with respect to the fiscal quarter ending March 31, 1997 to holders of record on
the applicable record date. The Minimum Quarterly Distribution ($0.54 per Unit)
for said fiscal quarter is expected to be increased proportionately to reflect
the fact that a distribution was not made for the partial fiscal quarter ended
December 31, 1996.
Distributions by the Partnership in an amount equal to 100% of its Available
Cash will generally be made 98% to all Unitholders and 2% to the General
Partners until there has been distributed in respect of each Unit an amount
equal to the Minimum Quarterly Distribution for such quarter. With respect to
each quarter during the Subordination Period (defined below), to the extent
there is sufficient Available Cash, the holders of Common Units have the right
to receive the Minimum Quarterly Distribution, plus any arrearages on the
Minimum Quarterly Distribution ("Common Unit Arrearages"), prior to the
distribution of Available Cash to holders of Subordinated Units. Common Units
will not accrue arrearages with respect to distributions for any quarter after
the Subordination Period and Subordinated Units will not accrue any arrearages
with respect to distributions for any quarter.
The Subordination Period will generally extend to the first day of any
quarter beginning after December 31, 2001 in respect of which (i) distributions
of Available Cash from Operating Surplus (generally defined as $25,000 plus
$22,420 cash on hand as of December 17, 1996 plus all operating cash receipts
less operating cash expenditures, debt service payments, maintenance capital
expenditures and cash reserves) on the Common Units and the Subordinated Units
with respect to each of the three consecutive four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units
during such periods, (ii) the Adjusted Operating Surplus (generally defined as
Operating Surplus generated during such period (a) less (i) any net increase in
working capital borrowings during such period and (ii) any net reduction in cash
reserves for operating expenditures during such period not relating to an
operating expenditure made during such period, and (b) plus (i) any net decrease
in working capital borrowings during such period and (ii) any net increase in
cash reserves for operating expenditures during such period required by any debt
instrument for the repayment of principal, interest or premium. Adjusted
Operating Surplus does not include that portion of Operating Surplus included in
clause (a)(i) of the definition of Operating Surplus) generated during each of
the three consecutive four-quarter periods immediately preceding such date
equaled or exceeded the sum of the Minimum Quarterly Distribution on all of the
outstanding Common Units and Subordinated Units and the related distribution on
the general
F-22
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
(UNAUDITED)
partner interests in the Partnership during such periods, and (iii) there are no
outstanding Common Unit Arrearages.
6. COMMITMENTS AND CONTINGENCIES
The Partnership has succeeded to obligations of the self insurance programs
maintained by Empire and Synergy for any incidents occurring prior to December
17, 1996. The companies' insurance programs provided coverage for comprehensive
general liability and vehicle liability for catastrophic exposures as well as
those risks required to be insured by law or contract. The companies retained a
significant portion of certain expected losses related primarily to
comprehensive general liability and vehicle liability. Provisions for
self-insured losses were recorded based upon the companies' estimates of the
aggregate self-insured liability for claims incurred, and totaled $3,018 on
December 31, 1996.
The Partnership leases certain property, plant and equipment for various
periods under noncancelable leases, including an office space agreement with the
previous owner of Empire for $175 each year over a period of ten years. The
annual rental payments may increase to $250, depending on certain circumstances
occurring after two years.
A number of personal injury, property damage and products liability suits
are pending or threatened against the Partnership. In general, these lawsuits
have arisen in the ordinary course of the Partnership's business and involve
claims for actual damages and in some cases, punitive damages, arising from the
alleged negligence of the Partnership or as a result of product defects or
similar matters. Of the pending or threatened matters, a number involve property
damage, and several involve serious personal injuries and the claims made are
for relatively large amounts. Although any litigation is inherently uncertain,
based on past experience, the information currently available to it and the
availability of insurance coverage, the Partnership does not believe that these
pending or threatened litigation matters will have a material adverse effect on
its results of operations or its financial condition.
7. RESTRICTED UNIT PLAN
The Partnership adopted the 1996 Restricted Unit Award Plan (the "Restricted
Unit Plan") which authorizes the issuance of Common Units with an aggregate
value of $12,500 (595,238 Common Units valued at the initial public offering
price of $21.00 per Unit) to executives, managers and elected supervisors of the
Partnership. Units issued under the Restricted Unit Plan are subject to a
bifurcated vesting procedure such that (a) 25% of the issued Units will vest
over time with one-third of such units vesting at the end of each of the third,
fifth and seventh anniversaries of the issuance date, and (b) the remaining 75%
of the Units will vest automatically upon, and in the same proportions as, the
conversion of Subordinated Units to Common Units. Restricted Unit Plan
participants are not eligible to receive quarterly distributions or vote their
respective Units until vested. Restrictions generally limit the sale or transfer
of the Units during the restricted periods. The value of the restricted Unit is
established by the market price of the Common Unit at the date of grant.
As of and for the fourteen-day period ended December 31, 1996, a total of
376,190 restricted Common Units were awarded. For the fourteen-day period ended
December 31, 1996, the Partnership recorded $20 of compensation expense.
F-23
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
(UNAUDITED)
8. PARTNERS' CAPITAL
A portion of the Subordinated Units will convert into Common Units on the
first day after the record date established for the distribution in respect of
any quarter ending on or after (a) December 31, 1999 (with respect to
one-quarter of the Subordinated Units) and (b) December 31, 2000 (with respect
to one-quarter of the Subordinated Units), in respect of which (i) distributions
of Available Cash from Operating Surplus on the Common Units and the
Subordinated Units with respect to each of the three consecutive four-quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the outstanding Common Units and
Subordinated Units during such periods, (ii) the Adjusted Operating Surplus
generated during each of the two consecutive four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units and
the related distribution on the general partner interests in the Partnership
during such periods, and (iii) there are no outstanding Common Unit Arrearages;
provided, however that the early conversion of the second one-quarter of
Subordinated Units may not occur until at least one year following the early
conversion of the first one-quarter of Subordinated Units.
Upon expiration of the Subordination Period, all remaining Subordinated
Units will convert into Common Units on a one-for-one basis and will thereafter
participate pro rata with the other Common Units in distributions of Available
Cash.
9. RELATED PARTY TRANSACTIONS
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
$2,657 for the period December 17, 1996 to December 31, 1996, include employee
compensation and benefit expenses of employees of the Managing General Partner
and its affiliates.
F-24
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
Empire Energy Corporation
Lebanon, Missouri
We have audited the accompanying consolidated balance sheets of EMPIRE
ENERGY CORPORATION as of June 30, 1995 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of EMPIRE
ENERGY CORPORATION as of June 30, 1995 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1996, in conformity with generally accepted accounting principles.
BAIRD, KURTZ & DOBSON
Springfield, Missouri
August 14, 1996 (except with respect
to the matter discussed in Note 14
as to which the date is October 7, 1996)
F-25
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1995 1996
----------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash....................................................................................... $ -- $ 2,064
Trade receivables, less allowance for doubtful accounts; 1995 -- $905 and 1996 -- $1,262... 3,302 5,724
Inventories................................................................................ 4,831 6,702
Prepaid expenses........................................................................... 103 103
Refundable income taxes.................................................................... 727 457
Deferred income taxes...................................................................... 652 996
----------- ---------
Total Current Assets..................................................................... 9,615 16,046
----------- ---------
DUE FROM SYN INC............................................................................. -- 7,978
----------- ---------
PROPERTY AND EQUIPMENT, At Cost:
Land and buildings......................................................................... 7,329 8,903
Storage and consumer service facilities.................................................... 56,827 80,615
Transportation, office and other equipment................................................. 16,804 18,702
----------- ---------
80,960 108,220
Less accumulated depreciation.............................................................. (25,037) (28,686)
----------- ---------
55,923 79,534
----------- ---------
OTHER ASSETS:
Excess of cost over fair value of net assets acquired, at amortized cost................... 3,285 3,033
Other...................................................................................... 252 511
----------- ---------
3,537 3,544
----------- ---------
$ 69,075 $ 107,102
----------- ---------
----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks in process of collection............................................................ $ 158 $ --
Current maturities of long-term debt....................................................... 163 6,019
Accounts payable........................................................................... 2,048 3,368
Accrued salaries........................................................................... 767 1,063
Accrued expenses........................................................................... 1,141 1,676
----------- ---------
Total Current Liabilities................................................................ 4,277 12,126
----------- ---------
LONG-TERM DEBT............................................................................... 1,701 25,442
----------- ---------
DEFERRED INCOME TAXES........................................................................ 15,458 16,877
----------- ---------
ACCRUED SELF-INSURANCE LIABILITY 1,104 2,424
----------- ---------
STOCKHOLDERS' EQUITY:
Common stock; $.001 par value; authorized 17,500,000 shares; issued at June 30, 1995 and
1996 -- 12,004,430 shares................................................................ 12 12
Additional paid-in capital................................................................. 46,099 46,099
Retained earnings.......................................................................... 445 4,143
----------- ---------
46,556 50,254
Treasury stock, at cost -- 3,000 shares.................................................... (21) (21)
----------- ---------
46,535 50,233
----------- ---------
$ 69,075 $ 107,102
----------- ---------
----------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
F-26
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
AND THREE MONTHS ENDED SEPTEMBER 30, 1995
AND THE ONE MONTH ENDED JULY 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ONE MONTH
ENDED ENDED JULY
SEPTEMBER 30, 31, 1996
1994 1995 1996 1995 -----------
--------- --------- --------- ------------- (UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE................................... $ 60,216 $ 56,689 $ 98,821 $ 12,223 $ 2,596
COST OF PRODUCT SOLD................................ 28,029 26,848 50,080 6,128 1,439
--------- --------- --------- ------------- -----------
GROSS PROFIT........................................ 32,187 29,841 48,741 6,095 1,157
--------- --------- --------- ------------- -----------
OPERATING COSTS AND EXPENSES:
Provision for doubtful accounts................... 537 983 1,450 222 40
General and administrative........................ 20,983 23,452 31,570 5,849 2,440
Depreciation and amortization..................... 4,652 4,322 5,875 1,288 499
--------- --------- --------- ------------- -----------
26,172 28,757 38,895 7,359 2,979
--------- --------- --------- ------------- -----------
OPERATING INCOME (LOSS)............................. 6,015 1,084 9,846 (1,264) (1,822)
INTEREST EXPENSE (Net).............................. 118 39 2,598 376 217
--------- --------- --------- ------------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................... 5,897 1,045 7,248 (1,640) (2,039)
PROVISION (CREDIT) FOR INCOME TAXES................. 2,400 600 3,550 (550) (765)
--------- --------- --------- ------------- -----------
NET INCOME (LOSS)................................... $ 3,497 $ 445 $ 3,698 $ (1,090) $ (1,274)
--------- --------- --------- ------------- -----------
--------- --------- --------- ------------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
F-27
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
AND ONE MONTH ENDED JULY 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK STOCK EARNINGS STOCK EQUITY
------------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1993................................ $ -- $ -- $ 42,614 $ -- $ 42,614
NET INCOME............................................ -- -- 3,497 -- 3,497
EFFECT OF CORPORATE RESTRUCTURING..................... 12 46,099 (46,111) -- --
--- ----------- ---------- --- ------------
BALANCE, JUNE 30, 1994................................ 12 46,099 -- -- 46,111
PURCHASE OF TREASURY STOCK............................ -- -- -- (21) (21)
NET INCOME............................................ -- -- 445 -- 445
--- ----------- ---------- --- ------------
BALANCE, JUNE 30, 1995................................ 12 46,099 445 (21) 46,535
NET INCOME............................................ -- -- 3,698 -- 3,698
--- ----------- ---------- --- ------------
BALANCE, JUNE 30, 1996................................ $ 12 $ 46,099 $ 4,143 $ (21) $ 50,233
NET INCOME (LOSS) (UNAUDITED)......................... -- -- (1,274) -- (1,274)
--- ----------- ---------- --- ------------
BALANCE, JULY 31, 1996 (UNAUDITED).................... $ 12 $ 46,099 $ 2,869 $ (21) $ 48,959
--- ----------- ---------- --- ------------
--- ----------- ---------- --- ------------
</TABLE>
See Notes to Consolidated Financial Statements
F-28
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
AND THREE MONTHS ENDED SEPTEMBER 30, 1995
AND ONE MONTH ENDED JULY 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ONE MONTH
ENDED ENDED JULY
SEPTEMBER 30, 31, 1996
1994 1995 1996 1995 -----------
--------- --------- ---------- ------------- (UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 3,497 $ 445 $ 3,698 $ (1,090) $ (1,274)
Items not requiring (providing) cash:
Depreciation.................................. 4,336 4,084 5,593 1,231 474
Amortization.................................. 316 238 282 57 24
Gain on sale of assets........................ (31) (145) (67) (6) 8
Deferred income taxes......................... (849) 194 1,075 (207) --
Changes in:
Trade receivables............................... (522) 388 (1,799) (2,949) 222
Inventories..................................... 952 (985) (348) (5,739) (340)
Accounts payable................................ (821) 1,444 1,301 1,789 335
Accrued expenses and self insurance............. 229 325 2,124 1,303 (5)
Prepaid expenses and other...................... (7) 72 (279) (965) (99)
Income taxes payable (refundable)............... (53) (702) 270 261 (768)
--------- --------- ---------- ------------- -----------
Net cash provided by (used in) operating
activities.................................. 7,047 5,358 11,850 (6,315) (1,423)
--------- --------- ---------- ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets...................... 125 295 162 14 14
Purchases of property and equipment............... (4,058) (8,365) (3,184) (405) (487)
Purchase of assets from SYN Inc................... -- -- (35,980) (35,980) --
--------- --------- ---------- ------------- -----------
Net cash used in investing activities......... (3,933) (8,070) (39,002) (36,371) (473)
--------- --------- ---------- ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in credit facilities.......... (2,051) 1,600 (5,500) 7,900 --
Principal payments on purchase obligations........ (109) (132) (126) (30) (15)
Checks in process of collection................... -- 158 (158) (158) --
Purchase of treasury stock........................ -- (21) -- -- --
Proceeds from acquisition credit facility......... -- -- 35,000 35,000 --
--------- --------- ---------- ------------- -----------
Net cash provided by (used in) financing
activities.................................. (2,160) 1,605 29,216 42,712 (15)
--------- --------- ---------- ------------- -----------
INCREASE (DECREASE) IN CASH......................... 954 (1,107) 2,064 26 (1,911)
CASH, BEGINNING OF PERIOD........................... 153 1,107 0 0 2,064
--------- --------- ---------- ------------- -----------
CASH, END OF PERIOD................................. $ 1,107 $ 0 $ 2,064 $ 26 153
--------- --------- ---------- ------------- -----------
--------- --------- ---------- ------------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
F-29
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Company for the periods ended
September 30, 1995 and July 31, 1996 are unaudited. In the opinion of
management, these unaudited statements include all adjustments, all of which are
of a normal recurring nature, which are necessary to a fair presentation of
results of operations and cash flows for the period.
Due to the seasonal nature of the Company's propane business, the results of
operations for the interim periods are not necessarily indicative of results to
be expected for a full year.
NATURE OF OPERATIONS
The Company's principal operations are the retail sale of LP gas. Most of
the Company's customers are owners of residential single or multi-family
dwellings who make periodic purchases on credit. Such customers are located in
the Southeast and Midwest regions of the United States. At June 30, 1994, the
Company was separated from Empire Gas Corporation (Empire Gas). The financial
statements for the year ended June 30, 1994 reflect the operations of the
subsidiaries of Empire Gas which the Company received in the restructuring
transaction. In addition to the direct operations of the subsidiaries, 47.7% of
Empire Gas corporate overhead for the year ended June 30, 1994 has been
allocated to Empire Energy. This percentage of overhead is considered reasonable
by management as it reflects the percentage of earnings before interest,
depreciation and income taxes of the subsidiaries received by the Company. See
Note 2 for a description of the restructuring transaction.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Empire Energy
Corporation and its subsidiaries. All significant intercompany balances have
been eliminated in consolidation.
REVENUE RECOGNITION POLICY
Sales and related cost of product sold are recognized upon delivery of the
product or service.
F-30
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the first-in, first-out method for retail operations and specific identification
method for wholesale operations. The inventories consist of the following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Gas and other petroleum products........................................... $ 1,679 $ 2,727
Gas distribution parts, appliances and equipment........................... 3,152 3,975
--------- ---------
$ 4,831 $ 6,702
--------- ---------
--------- ---------
</TABLE>
PROPERTY AND EQUIPMENT
Depreciation is provided on all property and equipment on the straight-line
method over estimated useful lives of 5 to 33 years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 1996, the Company's only financial instruments are cash,
long-term debt and related accrued interest for which their carrying amounts
approximate fair value.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
AMORTIZATION
The excess of cost over fair value of net assets acquired (originally
$4,850,000) is being amortized on the straight-line basis over 20 years.
NOTE 2: RESTRUCTURING TRANSACTION
On June 30, 1994, the Company was separated from Empire Gas in an exchange
of the majority ownership of Empire Gas for all of the shares of the Company (a
subsidiary of Empire Gas) (the "Split-off Transaction"). The Company received
locations principally in the Southeast plus certain home office assets and
liabilities.
In connection with this transaction, the principal shareholder of Empire Gas
terminated his employment with Empire Gas as well as terminated certain lease
and use agreements. This shareholder was the principal shareholder and chairman
of the board of the Company prior to the management buy out (See Note 3).
F-31
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: MANAGEMENT BUY OUT
Prior to year end, professional and other fees amounting to $1,926,000 were
incurred in connection with an effort to sell the Company and are included in
general and administrative expense during the year ended June 30, 1996. The
Company abandoned these efforts.
On August 1, 1996, subsequent to year end, the principal shareholder of the
Company since its inception and certain other shareholders sold their interests
in the Company to a new entity formed by certain members of management of the
Company.
In connection with this transaction, the principal shareholder of the
Company terminated employment with the Company as well as terminated certain
lease and use agreements. The new entity is principally owned by the son of the
former principal shareholder. All references in these financial statements to
the principal shareholder relate to the former principal shareholder.
The new entity paid approximately $59,000,000 cash, and distributed certain
home office assets and a portion of the SYN Inc. receivable in exchange for the
shares of Company stock purchased. In addition to the above consideration, the
new entity issued a $5,000,000 note payable to the principal shareholder. The
amount paid to the selling shareholders was financed with proceeds from a new
credit agreement with the Company's current lender.
The new credit facility provides for a $42,000,000 term loan, a $52,000,000
second term loan, a $20,000,000 working capital facility and a $10,000,000
acquisition credit facility. The new credit facility includes working capital,
capital expenditures, cash flow and net worth requirements as well as dividend
restrictions. The principal payment requirements on the two term loans will be
$3,400,000 in the year ended June 30, 1997.
NOTE 4: SYNERGY ACQUISITION
On August 15, 1995, the Company acquired the assets of 38 retail locations
previously operated by Synergy Group, Inc. These locations were purchased from
SYN Inc., a company formed for the purpose of acquiring Synergy Group
Incorporated. SYN Inc. is majority owned by Northwestern Growth Corporation, a
wholly-owned subsidiary of Northwestern Public Service Company, and minority
owned and managed by Empire Gas. The purchase price of the 38 retail locations
was approximately $38 million. The total consideration for the purchase was
approximately $36 million in cash financed by the new acquisition credit
facility (see Note 6) plus the assets of nine retail locations principally in
Mississippi valued at approximately $2 million. The results of operations for
the period after August 15, 1995, of the Synergy locations are included in the
financial statements for the period ended June 30, 1996. The purchase price of
the Synergy assets has been allocated as follows (In Thousands):
<TABLE>
<S> <C>
Current Assets..................................................... $ 2,499
Property and Equipment............................................. 27,435
Due from SYN Inc................................................... 7,978
---------
$ 37,912
---------
---------
</TABLE>
Unaudited pro forma operations assuming the acquisition was made at the
beginning of the year ended June 30, 1994 and 1995, are presented below. Pro
forma results for the year ended June 30, 1996,
F-32
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: SYNERGY ACQUISITION (CONTINUED)
are not presented since they would not differ materially from the audited
results of operations presented in the statement of income.
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Operating revenue........................................ $ 88,620 $ 82,222
Cost of product sold..................................... 42,589 40,724
--------- ---------
Gross profit............................................. $ 46,031 $ 41,498
--------- ---------
--------- ---------
</TABLE>
The purchase price of the assets acquired from SYN Inc. is subject to
adjustment based on the amount of working capital acquired by the Company. A
receivable has been recorded in the amount of $3,978,000, which reflects the
reduction in purchase price of the assets based on the amount of working capital
acquired. On August 1, 1996, this receivable was assigned to the former
principal shareholder in connection with the management buy out.
The purchase price of the assets acquired from SYN Inc. is also subject to
adjustment based on the value of consumer tanks which cannot be located within a
specified period of time. The Company has made a claim to SYN Inc. for
approximately $4,000,000 which represents the value of unlocated tanks at June
30, 1996. A receivable for these tanks has been recorded on the balance sheet at
June 30, 1996. On August 1, 1996, one-half of this receivable was assigned to
the former principal shareholder in connection with the management buy out.
These amounts receivable in connection with the purchase from SYN Inc. are
management's best estimate of amounts which will be ultimately collected.
However, the parties are still negotiating final settlement, and the final
amounts received could differ materially.
NOTE 5: RELATED-PARTY TRANSACTIONS
The Company provides data processing, office rent and other clerical
services to two corporations owned by officers and shareholders of the Company
and is reimbursed $5,000 per month for these services.
The Company leases a jet aircraft and an airport hangar from a corporation
owned by the principal shareholder of the Company. The lease requires annual
rent payments of $100,000 beginning July 1, 1994. In addition to direct lease
payments, the Company is also responsible for the operating costs of the
aircraft and the hangar. The lease agreement was terminated August 1, 1996, in
connection with the management buy out.
The Company has an agreement with a corporation owned by the principal
shareholder of the Company which provides the Company the right to use business
guest facilities. The agreement requires annual payments of $250,000 beginning
July 1, 1994. In addition to direct payments, the Company is also responsible
for providing vehicles and personnel to serve as security for the facilities.
This agreement was terminated August 1, 1996, in connection with the management
buy out.
The Company leases the corporate home office, land, buildings and certain
equipment from a corporation owned principally by the principal shareholder. The
lease requires annual payments of $200,000 beginning July 1, 1994. The lease was
terminated August 1, 1996, in connection with the management buy out.
F-33
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: RELATED-PARTY TRANSACTIONS (CONTINUED)
The Company leases a lodge from a corporation owned by the principal
shareholder of the Company. The lease requires annual rent payments of $120,000
beginning July 1, 1994. The lease was terminated August 1, 1996, in connection
with the management buy out.
On August 1, 1996, the Company entered into a new lease agreement with
entities controlled by the former principal shareholder. The new lease agreement
provides for the payment of $600,000 per year for the corporate home office,
land, buildings and certain equipment, the use of the airport hangar and the
right to use land underlying the Company's warehouse facility. The agreement
expires June 30, 2005.
A subsidiary of the Company has entered into a seven-year services agreement
with Empire Gas to provide data processing and management information services
beginning July 1, 1994. The services agreement provides for payments by Empire
Gas to be based on an allocation of the subsidiary's actual costs based on the
gallons of LP gas sold by Empire Gas as a percentage of the gallons of LP gas
sold by the Company and Empire Gas combined. For the years ended June 30, 1995,
and June 30, 1996, total amounts received related to this services agreement
were $1.1 million and $713,000, respectively. Such amounts have been netted
against related general and administrative expenses in the accompanying
statements of income.
NOTE 6: LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit facility (A)............................................ $ 1,600 $ --
Acquisition credit facility (B).......................................... -- 31,100
Purchase contract obligations (C)........................................ 264 361
--------- ---------
1,864 31,461
Less current maturities.................................................. 163 6,019
--------- ---------
$ 1,701 $ 25,442
--------- ---------
--------- ---------
</TABLE>
(A) On September 30, 1994, the Company entered into an agreement with a lender
to provide a revolving credit facility. The facility provides for borrowings
up to $20 million, bears interest at either 1/2% over the lender's prime
rate or 1 1/8% over the Eurodollar rate and matures June 30, 2000. The
facility includes working capital, capital expenditure, cash flow and net
worth requirements as well as dividend restrictions which limit the payment
of cash dividends to 50% of the preceding year's net income. The Company's
unused revolving credit line at June 30, 1996, amounted to $18,148,000 after
considering $1,852,000 of letters of credit. The credit facility was
terminated August 1, 1996, in connection with the management buy out.
(B) On August 15, 1995, the Company modified the above agreement to include a
$35 million acquisition credit facility which was used for the purchase of
assets from SYN Inc. The acquisition credit facility bears interest at
either 1/2% over the lender's prime rate or 1 1/8% over the Eurodollar rate
and matures June 30, 2000. The acquisition credit facility requires
quarterly principal payments of $1,944,000. This credit facility was
terminated August 1, 1996, in connection with the management buy out.
(C) Purchase contract obligations arise from the purchase of operating
businesses and are collateralized by the equipment and real estate acquired
in the respective acquisitions. The Company has also
F-34
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: LONG-TERM DEBT (CONTINUED)
entered into purchase contract obligations for equipment used in
administrative activities. At June 30, 1996, these obligations carried
interest rates ranging from 7% to 10% and are due periodically through 2001.
Based on the borrowing rates currently available to the Corporation from
bank loans with similar terms and average maturities, the estimated fair
value of long-term debt approximates its carrying value at June 30, 1995,
and June 30, 1996, respectively.
Aggregate annual maturities (in thousands) of the long-term debt outstanding
at June 30, 1996, are:
<TABLE>
<S> <C>
1997............................................... $ 6,019
1998............................................... 7,854
1999............................................... 7,807
2000............................................... 7,819
2001............................................... 1,962
---------
$ 31,461
---------
---------
</TABLE>
NOTE 7: INCOME TAXES
The provision for income taxes includes these components (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Taxes currently payable...................................................... $ 3,249 $ 406 $ 2,475
Deferred income taxes........................................................ (849) 194 1,075
--------- --------- ---------
$ 2,400 $ 600 $ 3,550
--------- --------- ---------
--------- --------- ---------
</TABLE>
The tax effects of temporary differences related to deferred taxes shown on
the balance sheets were (in thousands):
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Deferred Tax Assets
- --------------------------------------------------------------------------------
Allowance for doubtful accounts............................................. $ 335 $ 468
Accounts receivable advance collections..................................... 140 246
Self-insurance liabilities and contingencies................................ 480 1,229
Accrued expenses............................................................ 44 81
Alternative minimum tax credit carryover.................................... 39 --
---------- ----------
1,038 2,024
---------- ----------
Deferred Tax Liability
- --------------------------------------------------------------------------------
Accumulated depreciation.................................................... (15,844) (17,205)
Change in estimated taxes................................................... -- (700)
---------- ----------
(15,844) (17,905)
---------- ----------
Net deferred tax liability.............................................. $ (14,806) $ (15,881)
---------- ----------
---------- ----------
</TABLE>
F-35
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: INCOME TAXES (CONTINUED)
The above net deferred tax liability is presented on the balance sheets as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Deferred tax asset - current.................................................... $ 652 $ 996
Deferred tax liability - long-term.............................................. (15,458) (16,877)
---------- ----------
Net deferred tax liability.............................................. $ (14,806) $ (15,881)
---------- ----------
---------- ----------
</TABLE>
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Computed at the statutory rate (34%)......................................... $ 2,005 $ 355 $ 2,464
Increase resulting from:
Amortization of excess of cost over fair value of net assets acquired........ 107 77 79
State income taxes - net of federal tax benefit.............................. 258 116 248
Change in estimated taxes.................................................... -- -- 700
Other........................................................................ 30 52 59
--------- --------- ---------
Actual tax provision......................................................... $ 2,400 $ 600 $ 3,550
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 8: SELF-INSURANCE AND RELATED CONTINGENCIES
Under the Company's current insurance program, coverage for comprehensive
general liability and vehicle liability is obtained for catastrophic exposures
as well as those risks required to be insured by law or contract. The Company
retains a significant portion of certain expected losses related primarily to
comprehensive general liability and vehicle liability. Under these current
insurance programs, the Company self insures the first $1 million of coverage
(per incident) on general liability and on vehicle liability. In addition, the
Company has a $100,000 deductible for each and every liability claim. The
Company obtains excess coverage from carriers for these programs on claims-made
basis policies. The excess coverage for comprehensive general liability provides
a loss limitation that limits the Company's aggregate of self-insured losses to
$1.5 million per policy period.
The Company self insures the first $250,000 of workers' compensation
coverage (per incident). The Company purchased excess coverage from carriers for
workers' compensation claims in excess of the self-insured coverage. Provisions
for losses expected under this program are recorded based upon the Company's
estimates of the aggregate liability for claims incurred. The Company provided
letters of credit aggregating approximately $1,852,000 in connection with this
program.
Provisions for self-insured losses are recorded based upon the Company's
estimates of the aggregate self-insured liability for claims incurred. At June
30, 1995 and 1996, the self-insurance liability and general, vehicle and
workers' compensation liabilities accrued in the balance sheets totaled
$1,604,000 and $3,174,000, respectively.
The accrued liability includes $500,000 for incurred but not reported claims
for both June 30, 1995 and 1996. The current portion of the liability of
$500,000 and $750,000 at June 30, 1995 and 1996, respectively, is included in
accrued expenses in the consolidated balance sheets. The noncurrent portion is
included in accrued self-insurance liability.
F-36
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: SELF-INSURANCE AND RELATED CONTINGENCIES (CONTINUED)
The Company currently self insures health benefits provided to the employees
of the Company and its subsidiaries. Provisions for losses expected under this
program are recorded based upon the Company's estimate of the aggregate
liability for claims incurred. At June 30, 1995 and 1996, the self-insurance
health benefit liability accrued in the balance sheets totalled $122,000 and
$150,000, respectively. The accrued liability includes $6,000 and $35,000 for
incurred but not reported claims for June 30, 1995 and 1996, respectively.
In conjunction with the restructuring that occurred in June 1994 the Company
agreed to indemnify Empire Gas for 47.7% of the self-insured liabilities of
Empire Gas incurred prior to June 30, 1994. The Company has included in its
self-insurance liability its best estimate of the amount it will owe Empire Gas
under this indemnification agreement.
The Company and its subsidiaries are presently defendants in various
lawsuits related to the self-insurance program and other business-related
lawsuits which are not expected to have a material, adverse effect on the
Company's financial position or results of operations.
NOTE 9: INCOME TAX AUDITS
The State of Missouri has assessed Empire Gas approximately $1,400,000 for
additional state income tax for the years ended June 30, 1992 and 1993. An
amount approximating one-half of the above assessment could be at issue for the
year ended June 30, 1994. Empire Gas and Empire Energy have protested these
assessments and are currently waiting for a response from the Missouri
Department of Revenue. It is likely that this matter will have to be settled in
litigation. Empire Gas and Empire Energy believe that they have a strong
position on this matter and intend to vigorously contest the assessment. It is
not possible at this time to conclude on the outcome of this matter.
The Internal Revenue Service has begun a federal income tax audit of Empire
Gas for the year ended June 30, 1994. While the audit is still in process, the
audit has principally focused on the deductibility of certain professional fees
and travel and entertainment expenses as well as on the tax-free treatment of
the Split-off Transaction.
As a former member of the Empire Gas controlled group and in connection with
a tax indemnity agreement with Empire Gas, the Company agreed to indemnify 47.7%
of the total liabilities related to these tax audits of the years ended June 30,
1994, and prior thereto.
The Split-off Transaction was structured with the intent of qualifying for
tax-free treatment under Section 355 of the Internal Revenue Code and the
Company, and Empire Gas, obtained a private letter ruling (the "Letter Ruling")
from the Internal Revenue Service confirming such treatment, subject to certain
representations and conditions specified in the Letter Ruling. The Internal
Revenue Service is currently conducting an audit of Empire Gas for the year in
which the Split-off Transaction occurred. If the Internal Revenue Service were
to reverse the position it took in the Letter Ruling and prevail on a challenge
to the tax-free treatment of the Split-off Transaction, the Company would be
liable for a portion of any taxes, interest and penalties due, both as a former
member of the Empire Gas controlled group and under a tax indemnity agreement
with Empire Gas that was executed in connection with the Split-off Transaction.
The Company's liability in such circumstances could exceed the percentage under
the tax indemnity agreement if Empire Gas were unable to fund its percentage
share under that agreement. If the Company were held liable for any taxes,
interest or penalties in connection with the above Split-off
F-37
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: INCOME TAX AUDITS (CONTINUED)
Transaction, the amount of this liability could be substantial and could
adversely affect the Company's financial position and results of operations.
The Company and its subsidiaries are presently included in various state tax
audits which are not expected to have a material, adverse effect on the
Company's financial position or results of operation.
NOTE 10: STOCK OPTIONS
The Company's current stock options provide for a fixed option price of
$7.00 per share for options granted to officers and key employees. Options
granted are exercisable beginning one year after the date of grant at the rate
of 20% per year and expire six years after the date of grant. Option activity
for each period was:
<TABLE>
<CAPTION>
1995 1996
--------------------- ---------------------
SHARES PRICE SHARES PRICE
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Beginning options outstanding................................ 0 $ 0 1,145,000 $ 7.00
Options granted............................................ 1,170,000 7.00 25,000 7.00
Options canceled........................................... (25,000) 7.00 (50,000) 7.00
---------- --------- ---------- ---------
Ending options outstanding................................... 1,145,000 7.00 1,120,000 7.00
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
On August 1, 1996, in connection with the management buy out, 150,000
options of the selling shareholders were cancelled.
NOTE 11: ADDITIONAL CASH FLOW INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ONE MONTH
ENDED ENDED
SEPTEMBER 30, 1995 JULY 31, 1996
1994 1995 1996 ------------------- ---------------
--------- --------- --------- (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NONCASH INVESTING AND FINANCING
ACTIVITIES
Purchase contract obligations
incurred............................ $ -- $ 172 $ 222 $ -- $ --
ADDITIONAL CASH PAYMENT INFORMATION
Interest paid......................... $ 155 $ 64 $ 2,432 $ 8 $ 106
Income taxes paid (refunded).......... $ 3,302 $ 1,108 $ 2,995 $ (604) $ --
</TABLE>
NOTE 12: FUTURE ACCOUNTING PRONOUNCEMENTS
IMPACT OF SFAS NO. 121
In 1995 the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for the Impairment of Long-Lived Assets to be Disposed
of." The Company must adopt this standard effective July 1, 1996. The Company
does not expect that the adoption of this standard will have a material impact
on its financial position or results of operations.
F-38
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
DEPENDENCE ON PRINCIPAL SUPPLIERS
Three suppliers, Conoco, Phillips and Texaco, account for approximately 50%
of Empire Energy's volume of propane purchases.
Although the Company believes that alternative sources of propane are
readily available, in the event that the Company is unable to purchase propane
from one of these three suppliers, the failure to obtain alternate sources of
supply at competitive prices and on a timely basis would have a material,
adverse effect on the Company.
ESTIMATES
Significant estimates related to self-insurance, litigation, collectibility
of receivables and income tax assessments are discussed in Notes 4, 8, and 9.
Actual losses related to these items could vary materially from amounts
reflected in the financial statements.
NOTE 14: SUBSEQUENT EVENTS
On October 7, 1996, the new ownership of the Company pursuant to the
management buy out sold 100% of Company common stock to Northwestern Growth
Corporation.
F-39
<PAGE>
EMPIRE ENERGY CORPORATION
(NEW BASIS)
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................................ $ --
Trade receivables, less allowance for doubtful accounts of $1,536............... 7,987
Inventories..................................................................... 10,938
Prepaid expenses................................................................ 350
Refundable income taxes......................................................... 1,016
Deferred income taxes........................................................... 1,101
---------
Total Current Assets.......................................................... 21,392
---------
DUE FROM SYN INC.................................................................. 2,000
---------
PROPERTY AND EQUIPMENT, At Cost:
Land and buildings.............................................................. 5,738
Storage and consumer service facilities......................................... 93,271
Transportation, office and other equipment...................................... 10,838
---------
109,847
Less accumulated depreciation................................................... (887)
---------
108,960
---------
OTHER ASSETS:
Excess of cost over fair value of net assets acquired, at amortized cost........ 8,112
Other........................................................................... 224
Debt acquisition costs.......................................................... 3,434
---------
11,770
---------
$ 144,122
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks in process of collection................................................. $ 37
Current maturities of long-term debt............................................ 5,229
Accounts payable................................................................ 3,986
Accrued salaries................................................................ 594
Accrued expenses................................................................ 3,550
---------
Total Current Liabilities..................................................... 13,396
---------
LONG-TERM DEBT.................................................................... 93,882
---------
NOTE PAYABLE -- RELATED PARTY..................................................... 5,000
---------
DEFERRED INCOME TAXES............................................................. 28,078
---------
ACCRUED SELF-INSURANCE LIABILITY.................................................. 2,178
---------
STOCKHOLDERS' EQUITY:
Common stock; $.001 par value; authorized 17,500,000 shares; issued 879,346
shares........................................................................ 1
Additional paid-in capital...................................................... 2,321
Retained earnings (deficit)..................................................... (734)
---------
1,588
---------
$ 144,122
---------
---------
</TABLE>
See Notes to Consolidated Financial Statements
F-40
<PAGE>
EMPIRE ENERGY CORPORATION
(NEW BASIS)
CONSOLIDATED STATEMENT OF OPERATIONS
TWO MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING REVENUE.................................................................. $ 12,439
COST OF PRODUCT SOLD............................................................... 6,471
---------
GROSS PROFIT....................................................................... 5,968
---------
OPERATING COSTS AND EXPENSES:
Provision for doubtful accounts.................................................. 234
General and administrative....................................................... 4,294
Depreciation and amortization.................................................... 1,087
---------
5,615
---------
OPERATING INCOME................................................................... 353
INTEREST EXPENSE, Net.............................................................. 1,487
---------
LOSS BEFORE INCOME TAXES........................................................... (1,134)
CREDIT FOR INCOME TAXES............................................................ (400)
---------
NET LOSS........................................................................... $ (734)
---------
---------
</TABLE>
See Notes to Consolidated Financial Statements
F-41
<PAGE>
EMPIRE ENERGY CORPORATION
(NEW BASIS)
CONSOLIDATED STATEMENT OF CASH FLOWS
TWO MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................................... $ (734)
Items not requiring (providing) cash:
Depreciation................................................................... 1,002
Amortization................................................................... 85
Gain on sale of assets......................................................... (4)
Changes in:
Trade receivables.............................................................. (2,485)
Inventories.................................................................... (3,896)
Accounts payable............................................................... 283
Accrued expenses and self insurance............................................ 1,164
Prepaid expenses and other..................................................... (536)
Income taxes refundable........................................................ 209
---------
Net cash used in operating activities........................................ (4,912)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets..................................................... 18
Purchases of property and equipment.............................................. (861)
---------
Net cash used in investing activities........................................ (843)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in credit facilities.................................................... 4,800
Principal payments on purchase obligations....................................... (35)
Checks in process of collection.................................................. 37
Proceeds from management buy out loan............................................ 94,000
Repayment of acquisition credit facility......................................... (31,100)
Purchase of company stock in management buy out.................................. (59,000)
Payment of debt acquisition costs................................................ (3,100)
---------
Net cash provided by financing activities.................................... 5,602
---------
DECREASE IN CASH................................................................... (153)
CASH, BEGINNING OF PERIOD.......................................................... 153
---------
CASH, END OF PERIOD................................................................ $ -0-
---------
---------
</TABLE>
See Notes to Consolidated Financial Statements
F-42
<PAGE>
EMPIRE ENERGY CORPORATION
(NEW BASIS)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
TWO MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON PAID-IN EARNINGS TREASURY STOCKHOLDERS'
STOCK STOCK (DEFICIT) STOCK EQUITY
------------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, AUGUST 1, 1996............................... $ 12 $ 46,099 $ 2,869 $ (21) $ 48,959
PURCHASE OF COMPANY STOCK............................. (11) (70,744) -- -- (70,755)
EFFECT OF PURCHASE ACCOUNTING......................... -- 26,966 (2,869) 21 24,118
NET LOSS.............................................. -- -- (734) -- (734)
--- ----------- ---------- --- ------------
BALANCE, SEPTEMBER 30, 1996........................... $ 1 $ 2,321 $ (734) $ -- $ 1,588
--- ----------- ---------- --- ------------
--- ----------- ---------- --- ------------
</TABLE>
See Notes to Consolidated Financial Statements
F-43
<PAGE>
EMPIRE ENERGY CORPORATION
(NEW BASIS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Company for the period ended
September 30, 1996, are unaudited. In the opinion of management, these unaudited
statements include all adjustments, all of which are of normal recurring nature,
which are necessary to a fair presentation of results of operations and cash
flows for the period. Due to the seasonal nature of the Company's propane
business, the results of operations for the interim periods are not necessarily
indicative of results to be expected for a full year.
NATURE OF OPERATIONS
The Company's principal operations are the retail sale of LP gas. Most of
the Company's customers are owners of residential single or multi-family
dwellings who make periodic purchases on credit. Such customers are located in
the southeast and midwest regions of the United States. On August 1, 1996,
members of management of Empire Energy purchased the ownership of Empire Energy
from the principal shareholder and certain other shareholders. (See Note 2)
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Empire Energy
and its subsidiaries. All significant intercompany balances have been eliminated
in consolidation.
REVENUE RECOGNITION POLICY
Sales and related cost of product sold are recognized upon delivery of the
product or service.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the first-in, first-out method for retail operations and specific identification
method for wholesale operations. The inventories consist of the following:
<TABLE>
<S> <C>
Gas and other petroleum products................................... $ 7,146
Gas distribution parts, appliances and equipment................... 3,792
---------
$ 10,938
---------
---------
</TABLE>
F-44
<PAGE>
EMPIRE ENERGY CORPORATION
(NEW BASIS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FUTURES CONTRACTS
The Company uses commodity futures contracts to reduce the risk of future
price fluctuations for LPG inventories and contracts. Gains and losses on
futures contracts purchased as hedges are deferred and recognized in cost of
sales as a component of the product cost for the related hedged transaction. In
the statement of cash flows, cash flows from qualifying hedges are classified in
the same category as the cash flows of the items being hedged. Net realized
gains and losses for the current period and unrealized gains and losses on open
positions as of September 30, 1996, are not material.
PROPERTY AND EQUIPMENT
Depreciation is provided on all property and equipment on the straight-line
method over estimated useful lives of five to 40 years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At September 30, 1996, the Company's only financial instruments are cash,
long-term debt and related accrued interest for which their carrying amounts
approximate fair value.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
AMORTIZATION
The excess of cost over fair value of net assets acquired (originally
$8,150,000) is being amortized on the straight-line basis over 40 years.
NOTE 2: MANAGEMENT BUY OUT
On August 1, 1996, members of management of Empire Energy purchased the
ownership (92.7% of the Common Stock) of Empire Energy from the principal
shareholder and certain other shareholders.
In connection with this transaction, the principal shareholder of Empire
Energy terminated employment with the Company as well as terminated certain
lease and use agreements. The new entity is principally owned (71.3% of the
Common Stock) by the son of the former principal shareholder.
The new entity paid approximately $59,000,000 cash, distributed certain home
office assets and a portion of the SYN Inc. receivable in exchange for the
shares of Company stock purchased. In addition to the above consideration, the
new entity issued a $5,000,000 note payable to the principal shareholder. The
amount paid to the selling shareholders was financed with proceeds from a new
credit agreement with the Company's current lender.
F-45
<PAGE>
EMPIRE ENERGY CORPORATION
(NEW BASIS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 2: MANAGEMENT BUY OUT (CONTINUED)
Because of the change in control of the Company, the balance sheet accounts
were adjusted at the acquisition date to reflect new bases determined using the
principles of purchase accounting. Stockholders' equity was adjusted to the cost
of the investors' interest in Empire Energy of $2,322,000. The principal effects
of the purchase accounting adjustments were to increase the book value of
equipment (principally storage tanks) by $30,367,000, accrue additional deferred
income tax liabilities of $11,096,000, record the excess of cost over fair value
of assets acquired of $5,129,000 and write off unamortized debt acquisition
costs of $282,000.
NOTE 3: LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
--------------
(IN THOUSANDS)
<S> <C>
Tranche A term note (A)....................................................... $ 42,000
Tranche B term note (A)....................................................... 52,000
Revolving credit facility (A)................................................. 4,800
Note payable to former owner (B).............................................. 5,000
Purchase contract obligations (C)............................................. 311
-------
104,111
Less current maturities....................................................... 5,229
-------
$ 98,882
-------
-------
</TABLE>
(A) On August 1, 1996, in conjunction with the management buy-out, the Company
entered into an agreement with a lender to provide a $42 million term note
maturing December 31, 2002, a $52 million term note maturing December 31,
2006, a $20 million revolving working capital credit facility maturing June
30, 2001 and a $10 million acquisition credit facility maturing June 30,
2001. The Company has the choice of keeping the borrowings at prime or
transferring the loans to Eurodollar. Amounts at prime on these notes bear
interest at the Bank of Boston daily rate or 1/2% over the Federal Funds
Rate. Amounts at Eurodollar on these notes bear interest at the Eurodollar
rate plus an applicable margin which is dependent on a ratio of debt
(excluding note payable to former principal shareholder and purchase
contract obligations) to earnings before depreciation, interest and income
taxes. The facility includes working capital, capital expenditure, cash flow
and net worth requirements as well as dividend restrictions.
(B) On August 1, 1996, in conjunction with the management buy-out, the Company
entered into a $5 million subordinated promissory note with the former
principal shareholder of the Company. The note bears interest at 8% and
matures August 1, 2007.
(C) Purchase contract obligations arise from the purchase of operating
businesses and are collateralized by the equipment and real estate acquired
in the respective acquisitions. The Company has also entered into purchase
contract obligations for equipment used in administrative activities. At
June 30,
F-46
<PAGE>
EMPIRE ENERGY CORPORATION
(NEW BASIS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 3: LONG-TERM DEBT (CONTINUED)
1996, these obligations carried interest rates ranging from 7% to 10% and
were due periodically through 2001.
Aggregate annual maturities (in thousands) of the long-term debt outstanding
at September 30, 1996, are:
<TABLE>
<S> <C>
1997...................................................................... $ 5,229
1998...................................................................... 6,837
1999...................................................................... 7,370
2000...................................................................... 8,123
2001...................................................................... 8,751
Thereafter................................................................ 67,801
---------
$ 104,111
---------
---------
</TABLE>
NOTE 4: INCOME TAXES
The tax effects of temporary differences related to deferred taxes shown on
the balance sheet were (in thousands):
<TABLE>
<S> <C>
Deferred Tax Assets
- --------------------------------------------------------------------------
Allowance for doubtful accounts....................................... $ 584
Accounts receivable advance collections............................... 281
Self-insurance liabilities and contingencies.......................... 1,046
Accrued expenses...................................................... 82
Net operating loss.................................................... 342
---------
2,335
Deferred Tax Liability
- --------------------------------------------------------------------------
Accumulated depreciation.............................................. (29,312)
---------
Net deferred tax liability.......................................... $ (26,977)
---------
---------
</TABLE>
The above net deferred tax liability is presented on the balance sheet as
follows (in thousands):
<TABLE>
<S> <C>
Deferred tax asset - current.............................................. $ 1,101
Deferred tax liability - long-term........................................ (28,078)
---------
Net deferred tax liability............................................ $ (26,977)
---------
---------
</TABLE>
F-47
<PAGE>
EMPIRE ENERGY CORPORATION
(NEW BASIS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 4: INCOME TAXES (CONTINUED)
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below (in thousands):
<TABLE>
<S> <C>
Computed at the statutory rate (34%)...................................... $ (352)
Increase resulting from:
Amortization of excess of cost over fair value of net assets acquired... 33
State income taxes - net of federal tax benefit......................... (44)
Other................................................................... (37)
---------
Actual tax credit......................................................... $ (400)
---------
---------
</TABLE>
NOTE 5: SELF-INSURANCE AND RELATED CONTINGENCIES
The Company self-insures its general and vehicle liability and worker's
compensation. For details of the self insurance program, see Note 8 of the June
30, 1996, financial statements.
NOTE 6: INCOME TAX AUDITS
The Company and its subsidiaries are presently included in various state tax
audits. For details of the state tax audits, see Note 9 of the June 30, 1996,
financial statements.
NOTE 7: STOCK OPTIONS
The Company's current stock options provide for a fixed option price of
$7.00 per share for options granted to officers and key employees. Options
granted are exercisable beginning one year after the date of grant at the rate
of 20% per year and expire six years after the date of grant. The Company has
945,000 shares of stock under option as of September 30, 1996. During the
two-month period ended September 30, 1996, 25,000 shares of stock under option
were canceled.
NOTE 8: ADDITIONAL CASH FLOW INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
TWO MONTHS ENDED
SEPTEMBER 30, 1996
-------------------
<S> <C>
ADDITIONAL CASH PAYMENT INFORMATION
Interest paid..................................................................... $ 804
Income taxes paid................................................................. $ (609)
NONCASH INVESTING AND FINANCING ACTIVITIES
Nonmonetary assets distributed to former principal shareholders................... $ 6,755
Note payable issued to former principal shareholder............................... $ 5,000
</TABLE>
F-48
<PAGE>
EMPIRE ENERGY CORPORATION
(NEW BASIS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 9: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
DEPENDENCE ON PRINCIPAL SUPPLIERS
Three suppliers, Conoco, Phillips and Texaco, account for approximately 50%
of Empire Energy's annual volume of propane purchases.
Although the Company believes that alternative sources of propane are
readily available, in the event that the Company is unable to purchase propane
from one of these three suppliers, the failure to obtain alternate sources of
supply at competitive prices and on a timely basis would have a material adverse
effect on the Company.
ESTIMATES
Significant estimates related to self-insurance and litigation (Note 5),
collectibility of receivables and income tax assessments (Note 6) are discussed
in the financial statements. Actual losses related to these items could vary
materially from amounts reflected in the financial statements.
NOTE 10: SUBSEQUENT EVENTS
On October 7, 1996, 100% of the Company stock was sold to Northwestern
Growth Corporation.
F-49
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE PERIOD FOR THE PERIOD
PERIOD PERIOD FROM OCTOBER FROM OCTOBER
FROM JULY 1, FROM JULY 1, 1, 1,
1996 TO 1995 TO 1996 TO 1995 TO
DECEMBER 16, DECEMBER 31, DECEMBER 16, DECEMBER 31,
1996 1995 1996 1995
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATING REVENUE................................ $ 43,201 $ 44,035 $ 28,166 $ 31,812
COST OF PRODUCT SOLD............................. 23,310 21,207 15,400 15,079
------------- ------------- ------- -------
GROSS PROFIT..................................... 19,891 22,828 12,766 16,733
OPERATING COSTS AND EXPENSES:
Provision for doubtful accounts................ 710 775 436 553
General and administrative..................... 12,685 13,769 5,950 7,920
Depreciation and amortization.................. 2,929 2,726 1,344 1,438
------------- ------------- ------- -------
OPERATING INCOME................................. 3,567 5,558 5,036 6,822
INTEREST EXPENSE (NET)........................... 3,621 1,112 1,917 736
------------- ------------- ------- -------
INCOME (LOSS) BEFORE INCOME
TAXES.......................................... (54) 4,446 3,119 6,086
PROVISION FOR INCOME TAXES....................... 32 1,900 1,197 2,450
------------- ------------- ------- -------
NET INCOME (LOSS)................................ $ (86) $ 2,546 $ 1,922 $ 3,636
------------- ------------- ------- -------
------------- ------------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-50
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FROM FROM
JULY 1, 1996 TO JULY 1, 1995 TO
DECEMBER 16, 1996 DECEMBER 31, 1995
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................... $ (86) $ 2,546
Items not requiring (providing) cash--
Depreciation.......................................................... 2,671 2,590
Amortization.......................................................... 258 136
Gain on sale of assets................................................ 4 7
Deferred income taxes................................................. (126) (218)
Changes in--
Trade receivables..................................................... (8,352) (9,243)
Inventories........................................................... (4,383) (7,032)
Accounts payable...................................................... 1,616 3,009
Accrued expenses and self insurance................................... 3,273 4,846
Prepaid expenses and other............................................ (2,313) (941)
Due from SYN Inc...................................................... (1,863) --
Income taxes payable (refundable)..................................... 457 619
-------- --------
Net cash used in operating activities............................... (8,844) (3,681)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of assets........................................ 57 27
Purchases of property and equipment..................................... (2,823) (2,963)
Purchase of assets from SYN Inc......................................... -- (35,980)
Capitalized costs....................................................... (242) --
-------- --------
Net cash used in investing activities............................... (3,008) (38,916)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in credit facilities........................................... 9,606 7,800
Principal payments on purchase obligations.............................. (114) (98)
Proceeds from management buyout loan.................................... 94,000 --
Purchase of company stock in management buyout.......................... (59,000) --
Payment of debt acquisition costs....................................... (3,100) --
Proceeds from (repayments of) acquisition credit facility............... (31,100) 35,000
-------- --------
Net cash provided by financing activities........................... 10,292 42,702
-------- --------
Increase (decrease) in cash......................................... (1,560) 105
CASH:
Beginning of period..................................................... 2,064 --
-------- --------
End of period........................................................... $ 504 $ 105
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-51
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIVE AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
SIX MONTHS ENDED DECEMBER 31, 1995,
TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996 AND
THREE MONTHS ENDED DECEMBER 31, 1995,
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly Empire
Energy Corporation's ("Empire Energy") consolidated results of operations and
cash flows for the periods ended December 16, 1996, and December 31, 1995. All
such adjustments are of a normal recurring nature.
The accounting policies followed by Empire Energy are set forth in Note 1 to
Empire Energy's audited consolidated financial statements as of June 30, 1996,
included herein. Other disclosures required by generally accepted accounting
principles are not included herein but are included in the notes to the June 30,
1996, audited statements previously mentioned.
The results of operations for the two and one-half month and five and
one-half month periods ended December 16, 1996, are not necessarily indicative
of the results to be expected for the full year due to the seasonal nature of
Empire Energy's business.
2. COMPANY FORMATION
On August 1, 1996, members of management of Empire Energy purchased the
ownership (92.7% of the common stock) of Empire Energy from the principal
shareholder and certain other shareholders. Because of the change in control of
Empire Energy, the balance sheet accounts were adjusted at the acquisition date
to reflect new bases using the principles of purchase accounting.
In connection with this transaction, the principal shareholder of Empire
Energy terminated employment as well as certain lease and use agreements. The
new entity was principally owned (71.3% of the common stock) by the son of the
former principal shareholder.
On October 7, 1996, Northwestern Growth Corporation purchased 100% of the
Empire Energy common stock. See Note 2 to Pro Forma Consolidated Financial
Information for Cornerstone Propane Partners, L.P. included herein. This
purchase also resulted in a change of control and purchase accounting
adjustments were reflected in the balance sheet as of the acquisition date.
F-52
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIVE AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
SIX MONTHS ENDED DECEMBER 31, 1995,
TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996 AND
THREE MONTHS ENDED DECEMBER 31, 1995,
(DOLLARS IN THOUSANDS)
(UNAUDITED)
2. COMPANY FORMATION (CONTINUED)
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWO MONTHS
ONE MONTH ENDED TWO AND ONE- FIVE AND ONE-
ENDED JULY SEPTEMBER 30, HALF MONTHS ENDED HALF MONTHS ENDED
31, 1996 1996 DECEMBER 16, 1996 DECEMBER 16, 1996
----------- ------------- ------------------- -------------------
<S> <C> <C> <C> <C>
OPERATING REVENUE............................ 2,596 12,439 28,166 43,201
COST OF PRODUCT SOLD......................... 1,439 6,471 15,400 23,310
----------- ------ ------ ------
GROSS PROFIT................................. 1,157 5,968 12,766 19,891
OPERATING COSTS AND EXPENSES:
Provision for doubtful accounts............ 40 234 436 710
General and administrative................. 2,441 4,294 5,950 12,685
Depreciation and amortization.............. 498 1,087 1,344 2,929
----------- ------ ------ ------
OPERATING INCOME (LOSS)...................... (1,822) 353 5,036 3,567
INTEREST EXPENSE (NET)....................... 217 1,487 1,917 3,621
----------- ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES............ (2,039) (1,134) 3,119 (54)
PROVISION (CREDIT) FOR INCOME TAXES.......... (765) (400) 1,197 32
----------- ------ ------ ------
NET INCOME (LOSS)............................ (1,274) (734) 1,922 (86)
----------- ------ ------ ------
----------- ------ ------ ------
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
Empire Energy reports the following contingencies. Except as noted, there
have been no significant changes in these items since reported in Empire
Energy's audited consolidated balance sheet as of June 30, 1996.
Under Empire Energy's current insurance program, coverage for comprehensive
general liability and vehicle liability is obtained for catastrophic exposures
as well as those risks required to be insured by law or contract. Empire Energy
retains a significant portion of certain expected losses related primarily to
comprehensive general liability and vehicle liability. Under these current
insurance programs, Empire Energy self insures the first $1 million of coverage
(per incident) on general liability and on vehicle liability. In addition,
Empire Energy has a $100 deductible for each and every liability claim. Empire
F-53
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIVE AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
SIX MONTHS ENDED DECEMBER 31, 1995,
TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996 AND
THREE MONTHS ENDED DECEMBER 31, 1995,
(DOLLARS IN THOUSANDS)
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Energy obtains excess coverage from carriers for these programs on claims-made
basis policies. The excess coverage for comprehensive general liability provides
a loss limitation that limits Empire Energy's aggregate of self-insured losses
to $1.5 million per policy period. Provisions for self-insured losses are
recorded based upon Empire Energy's estimates of the aggregate self-insured
liability for claims incurred.
Empire Energy self insures the first $250 of workers' compensation coverage
(per incident). Empire Energy purchased excess coverage from carriers for
workers' compensation claims in excess of the self-insured coverage. Provisions
for losses expected under this program are recorded based upon Empire Energy's
estimates of the aggregate liability for claims incurred.
Empire Energy currently self insures health benefits provided to the
employees of Empire Energy and its subsidiaries. Provisions for losses expected
under this program are recorded based upon Empire Energy's estimate of the
aggregate liability for claims incurred.
In conjunction with the restructuring that occurred in June 1994 (the "Split
Off Transaction") Empire Energy agreed to indemnify Empire Gas for 47.7% of the
self-insured liabilities of Empire Gas incurred prior to June 30, 1994. Empire
Energy has included in its self-insurance liability its best estimate of the
amount it will owe Empire Gas under this indemnification agreement.
Empire Energy are presently defendants in various lawsuits related to the
self-insurance program and other business-related lawsuits which are not
expected to have a material, adverse effect on Empire Energy's financial
position or results of operations.
The state of Missouri has assessed Empire Gas approximately $1,400 for
additional state income tax for the years ended June 30, 1992 and 1993. An
amount approximating one-half of the above assessment could be at issue for the
year ended June 30, 1994. Empire Gas and Empire Energy have protested these
assessments and are currently waiting for a response from the Missouri
Department of Revenue. It is likely that this matter will have to be settled in
litigation. Empire Gas and Empire Energy believe that they have a strong
position on this matter and intend to vigorously contest the assessment. It is
not possible at this time to conclude on the outcome of this matter.
The Internal Revenue Service has begun a federal income tax audit of Empire
Gas for the year ended June 30, 1994. While the audit is still in process, the
audit has principally focused on the deductibility of certain professional fees
and travel and entertainment expenses as well as on the tax-free treatment of
the Split-Off Transaction.
As a former member of the Empire Gas controlled group and in connection with
a tax indemnity agreement with Empire Gas, Empire Energy agreed to indemnify
47.7% of the total liabilities related to these tax audits of the years ended
June 30, 1994, and prior thereto.
The Split-Off Transaction was structured with the intent of qualifying for
tax-free treatment under Section 355 of the Internal Revenue Code and Empire
Energy, and Empire Gas, obtained a private letter
F-54
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIVE AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
SIX MONTHS ENDED DECEMBER 31, 1995,
TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996 AND
THREE MONTHS ENDED DECEMBER 31, 1995,
(DOLLARS IN THOUSANDS)
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
ruling (the "Letter Ruling") from the Internal Revenue Service confirming such
treatment, subject to certain representations and conditions specified in the
Letter Ruling. The Internal Revenue Service is currently conducting an audit of
empire Gas for the year in which the Split-Off Transaction occurred. If the
Internal Revenue Service were to reverse the position it took in the Letter
Ruling and prevail on a challenge to the tax-free treatment of the Split-Off
Transaction, Empire Energy would be liable for a portion of any taxes, interest
and penalties due, both as a former member of the Empire Gas controlled group
and under a tax indemnity agreement with Empire Gas that was executed in
connection with the Split-Off Transaction. Empire Energy's liability in such
circumstances could exceed the percentage under the tax indemnity agreement if
Empire Gas were unable to fund its percentage share under that agreement. If
Empire Energy were held liable for any taxes, interest or penalties in
connection with the above Split-Off Transaction, the amount of this liability
could be substantial and could adversely affect Empire Energy's financial
position and results of operations.
Empire Energy are presently included in various state tax audits which are
not expected to have a material, adverse effect on Empire Energy's financial
position or results of operations.
4. SUBSEQUENT EVENTS
On December 17, 1996, substantially all of the assets and liabilities of
Empire Energy were contributed to Cornerstone Propane, L.P., a Delaware limited
partnership, a subsidiary of Cornerstone Propane Partners, L.P. Following this
transaction, on December 17, 1996, Cornerstone Propane Partners, L.P. completed
its initial public offering (see Note 1 to the consolidated financial statements
of Cornerstone Propane Partners, L.P., included herein).
F-55
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
CGI Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity, and cash flows
present fairly, in all material respects, the financial position of CGI
Holdings, Inc. and its subsidiaries at July 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended July 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Francisco, California
September 13, 1996
F-56
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JULY 31,
----------------------
1996 1995
OCTOBER 31, ---------- ----------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 4,753 $ 1,519 $ 4,423
Accounts and notes receivable............................................. 21,443 23,664 20,817
Inventories............................................................... 6,751 7,316 5,870
Prepaid expenses and deposits............................................. 1,322 1,996 1,586
Deferred income tax benefit............................................... 802 802 980
----------- ---------- ----------
Total current assets.................................................... 35,071 35,297 33,676
----------- ---------- ----------
Property and equipment, at cost less accumulated depreciation............... 51,435 51,495 50,860
Cost in excess of net assets acquired, net of amortization.................. 11,761 11,844 9,447
Notes receivable............................................................ 1,380 1,357 1,108
Deferred charges and other assets........................................... 5,927 6,186 6,454
----------- ---------- ----------
$ 105,574 $ 106,179 $ 101,545
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
LIABILITIES, MANDATORILY REDEEMABLE SECURITIES
AND STOCKHOLDERS' EQUITY
JULY 31,
--------------------
1996 1995
--------- ---------
OCTOBER 31,
1996
-----------
(UNAUDITED)
CURRENT LIABILITIES:
<S> <C> <C> <C>
Accounts payable........................................... $ 27,364 $ 30,824 $ 21,248
Accrued liabilities........................................ 3,777 3,101 3,210
Current maturities of long-term debt and capital lease
obligations.............................................. 4,220 3,924 3,147
----------- --------- ---------
Total current liabilities................................ 35,361 37,849 27,605
----------- --------- ---------
Long-term debt and capital lease obligations................. 45,069 41,801 46,021
Deferred income taxes........................................ 10,305 10,777 11,471
Other liabilities............................................ 1,095 1,095 814
Commitments and contingencies (Note 9)
MANDATORILY REDEEMABLE SECURITIES:
Redeemable exchangeable preferred stock:
10% cumulative, $0.01 par value, 62,500 shares
authorized, issued and outstanding; at redemption
value.................................................. 8,675 8,559 7,781
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value, 6,515,000 shares authorized;
4,312,247 issued and outstanding (1995 - 4,316,457
shares):
Class A voting common stock, $0.01 par value, 3,000,000
shares authorized; 2,789,784 issued and outstanding.... 28 28 28
Class B voting common stock, $0.01 par value, 200,000
shares authorized; 149,485 issued and outstanding...... 1 1 1
Class C voting common stock, $0.01 par value, 3,000,000
shares authorized; 1,343,831 issued and outstanding
(1995 -- 1,348,041 shares)............................. 13 13 13
Class D non-voting common stock, $0.01 par value, 250,000
shares authorized; 29,147 issued and outstanding....... -- -- --
Warrants outstanding..................................... 2,134 2,134 2,134
Additional paid-in capital................................. 8,945 8,945 8,969
Accumulated deficit........................................ (6,052) (5,023) (3,292)
----------- --------- ---------
Total stockholders' equity............................... 5,069 6,098 7,853
----------- --------- ---------
$ 105,574 $ 106,179 $ 101,545
----------- --------- ---------
----------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
OCTOBER 31, FISCAL YEAR ENDED JULY 31,
---------------------- ----------------------------------
1996 1995 1996 1995 1994
----------- --------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales and other revenue.............................. $ 108,175 $ 84,070 $ 384,354 $ 266,842 $ 242,986
Costs and expenses:
Cost of sales, except for depreciation and
amortization..................................... 100,266 77,837 351,213 234,538 214,632
Operating expenses................................. 5,201 4,973 21,046 20,239 17,767
Sale of partnership interest....................... 660 -- -- -- --
General and administrative expenses................ 1,091 926 3,835 3,745 3,462
Depreciation and amortization...................... 1,067 983 4,216 3,785 3,282
Interest expense................................... 1,294 1,385 5,470 5,120 4,029
----------- --------- ---------- ---------- ----------
Loss before income taxes and extraordinary charge.... (1,404) (2,034) (1,426) (585) (186)
Income tax benefit................................... (491) (671) (473) (202) (28)
----------- --------- ---------- ---------- ----------
Loss before extraordinary charge..................... (913) (1,363) (953) (383) (158)
Extraordinary charge for early retirement of debt,
net of income tax benefit.......................... -- -- -- (506) --
----------- --------- ---------- ---------- ----------
Net loss............................................. $ (913) $ (1,363) $ (953) $ (889) $ (158)
----------- --------- ---------- ---------- ----------
----------- --------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK WARRANTS CAPITAL DEFICIT
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at July 31, 1993.......................................... $ 42 $ -- $ 9,969 $ (990)
Net loss.......................................................... -- -- -- (158)
Accrued dividends on redeemable and exchangeable preferred
stock........................................................... -- -- -- (548)
----------- ----------- ----------- ------------
Balance at July 31, 1994.......................................... 42 -- 9,969 (1,696)
Net loss.......................................................... -- -- -- (889)
Issuance of warrants.............................................. -- 2,134 -- --
Repurchase of common stock........................................ -- -- (1,000) --
Accrued dividends on redeemable and exchangeable preferred
stock........................................................... -- -- -- (707)
----------- ----------- ----------- ------------
Balance at July 31, 1995.......................................... 42 2,134 8,969 (3,292)
Net loss.......................................................... -- -- -- (953)
Repurchase of common stock........................................ -- -- (24) --
Accrued dividends on redeemable and exchangeable preferred
stock........................................................... -- -- -- (778)
----------- ----------- ----------- ------------
Balance at July 31, 1996.......................................... 42 2,134 8,945 (5,023)
Net loss (unaudited).............................................. -- -- -- (913)
Accrued dividends on redeemable and exchangeable preferred stock
(unaudited)..................................................... -- -- -- (116)
----------- ----------- ----------- ------------
Balance at October 31, 1996 (unaudited)........................... $ 42 $ 2,134 $ 8,945 $ (6,052)
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
OCTOBER 31, FISCAL YEAR ENDED JULY 31,
-------------------- -------------------------------
1996 1995 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES:
Net loss........................................................... $ (913) $ (1,363) $ (953) $ (889) $ (158)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization.................................... 1,067 983 4,216 3,785 3,282
Deferred income taxes............................................ (472) (672) (516) (488) (66)
Extraordinary charge to earnings................................. -- -- -- 506 --
Sale of partnership interest..................................... 202 -- -- -- --
Changes in assets and liabilities net of acquisitions:
Accounts and notes receivable.................................. 2,198 (3,958) (2,950) (2,700) (5,122)
Inventories.................................................... 565 (2,329) (1,511) (617) (1,121)
Prepaid expenses and deposits.................................. 472 (599) (410) 1,451 (1,307)
Other assets................................................... (91) 75 (193) (495) --
Accounts payable............................................... (3,460) 5,838 9,327 (3,897) 8,103
Accrued liabilities............................................ 676 (555) 172 (1,630) 434
--------- --------- --------- --------- ---------
244 (2,580) 7,182 (4,974) 4,045
--------- --------- --------- --------- ---------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES:
Payments for acquisitions of retail outlets........................ -- (3,000) (3,000) (1,091) (1,030)
Proceeds from sale of property and equipment....................... 20 140 415 878 239
Purchases of and investments in property and equipment............. (594) (495) (3,060) (4,490) (3,421)
Other, net......................................................... -- -- -- -- (890)
--------- --------- --------- --------- ---------
(574) (3,355) (5,645) (4,703) (5,102)
--------- --------- --------- --------- ---------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES:
Repurchase of common stock......................................... -- -- (24) (1,000) --
Prepayment of long-term debt....................................... -- -- -- (26,940) --
Net proceeds from issuance of long-term debt....................... -- -- -- 28,111 --
Proceeds from issuance of senior subordinated debt................. -- -- -- 13,073 --
Repayment of long-term debt........................................ (562) (312) (1,250) (1,000) (850)
Borrowings on capital leases and other term loans.................. -- 871 1,248 2,263 1,113
Repayment of other notes payable................................... (104) (78) (561) (739) (741)
Principal payments under capital lease obligations................. (345) (329) (1,579) (2,929) (1,607)
Borrowings (repayments) under acquisition line..................... 4,575 5,145 (2,275) 1,054 3,041
--------- --------- --------- --------- ---------
3,564 5,297 (4,441) 11,893 956
--------- --------- --------- --------- ---------
Net (decrease) increase in cash.................................... 3,234 (638) (2,904) 2,216 (101)
Cash balance, beginning of year.................................... 1,519 4,423 4,423 2,207 2,308
--------- --------- --------- --------- ---------
Cash balance, end of year.......................................... $ 4,753 $ 3,785 $ 1,519 $ 4,423 $ 2,207
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Pursuant to a Stock Purchase Agreement dated March 31, 1993, by and among
CGI Holdings, Inc., a Delaware corporation (the "Company") formed to effect this
transaction and a major shareholder of Coast Gas Industries ("Industries"), the
Company acquired all of the outstanding stock of Industries (the "Buyout"). The
financial statements of the Company for each of the three years ended July 31,
1996 are presented on the Company's basis of accounting giving effect to the
Stock Purchase Agreement.
The Company engages in the sale and distribution of natural gas, crude oil,
natural gas liquids, liquefied petroleum gas ("LPG"), LPG storage and
transportation equipment through its wholly-owned subsidiary, Coast Gas, Inc.
Its operations consist primarily of the sale, transportation and storage of LPG
to wholesale and retail customers; the sale of LPG storage equipment; and the
leasing of LPG storage and transportation equipment under monthly operating
leases. Sales are made to approximately 75,000 customers in seven states,
primarily in the western regions of the United States.
In connection with the Stock Purchase Agreement, the Company pays a monthly
fee to Aurora Capital Partners ("Aurora"), an investor in the Company, for
management services provided. Payments for each of the years ended July 31,
1996, 1995 and 1994 amounted to $250,000.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Coast Gas, Inc., and its wholly-owned
subsidiary Coast Energy Group, Inc. ("CEG"). In 1989 the Company formed CEG,
headquartered in Houston, Texas, to conduct its wholesale procurement and
distribution operations. All significant intercompany transactions have been
eliminated in consolidation.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1994 consolidated
financial statements to conform to the 1996 presentation. In addition, the
Company changed its method of accounting to gross-up in the consolidated
statement of operations sales and the cost of those sales related to certain
bulk purchases and resales of natural gas, crude oil and certain propane
transactions which resulted in reporting sales and cost of sales of $136.2
million and $124.8 million for the years ended July 31, 1995 and 1994,
respectively. This reclassification had no effect on net income for any period.
The Company believes that this presentation better reflects the activities of
its wholesale operations.
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements of the Company as of October 31, 1996
and 1995 are unaudited. In the opinion of the Company's management, the interim
data include all adjustments necessary for a fair statement of the results for
the interim periods. These adjustments were of a normal recurring nature, except
as disclosed in Note 11.
The results of operations for the interim periods are not necessarily
indicative of future financial results.
REVENUE RECOGNITION
Sales of natural gas, crude oil, natural gas liquids and LPG are recognized
when delivered to the customer.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-62
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
The Company offers credit terms on sales to its retail and wholesale customers.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The Company
maintains an allowance for uncollectible accounts receivable based upon the
expected collectibility of all accounts receivable.
CASH FLOWS
For purposes of the comparative statements of cash flows, the Company
considers all highly liquid investments having original maturities of three
months or less to be cash equivalents. The carrying amount of cash, cash
equivalents and short-term debt approximates fair market value due to the short
maturity of these instruments.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of LPG is
determined using the last-in, first-out (LIFO) method. The LIFO reserve was $0.9
million and $0.1 million at July 31, 1996 and 1995, respectively. The cost of
parts and fittings is determined using the first-in, first-out (FIFO) method.
The major components of inventory consist of the following (in thousands of
dollars):
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31
1996 --------------------
(UNAUDITED) 1996 1995
--------------- --------- ---------
<S> <C> <C> <C>
LPG....................................................... $ 5,890 $ 6,474 $ 5,085
Parts and fittings........................................ 861 842 785
------ --------- ---------
$ 6,751 $ 7,316 $ 5,870
------ --------- ---------
------ --------- ---------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets as
follows: buildings and improvements, 25 years; LPG storage and rental tanks, 40
to 50 years; and office furniture, equipment and tank installation costs, 5 to
10 years. Leasehold improvements are amortized over the shorter of the estimated
useful life or the lease term. Depreciation of equipment acquired under capital
leases of $132,000, $160,000 and $120,000 for the years ended July 31, 1996,
1995 and 1994, respectively, is included in depreciation and amortization
expense.
When property or equipment is retired or otherwise disposed, the cost and
related accumulated depreciation is removed from the accounts, and the resulting
gain or loss is credited or charged to operations. Maintenance and repairs are
charged to earnings, while replacements and betterments that extend estimated
useful lives are capitalized.
A majority of the LPG rental and storage tanks are leased to customers on a
month-to-month basis under operating lease agreements. Tank rental income of
approximately $2.3 million, $2.2 million and $2.3 million, for the years ended
July 31, 1996, 1995 and 1994, respectively, is included in sales and other
revenue. Direct costs associated with the installation of LPG storage tanks
leased to customers are capitalized and amortized over the estimated average
customer retention term.
F-63
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST IN EXCESS OF NET ASSETS ACQUIRED
The excess of acquisition cost over the estimated fair market value of
identifiable net assets of acquired businesses is amortized on a straight-line
basis over forty years. The related costs and accumulated amortization were
$12.8 million and $0.9 million at July 31, 1996 and $10.0 million and $0.6
million at July 31, 1995, respectively.
It is the Company's policy to review intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. If such a review should indicate that the
carrying amount of intangible assets is not recoverable, it is the Company's
policy to reduce the carrying amount of such assets to fair value.
DEFERRED CHARGES AND OTHER ASSETS
Deferred charges consist primarily of deferred debt issuance costs and
capitalized non-compete covenant agreement costs. Deferred debt issuance costs
are amortized using the bonds outstanding method over the life of the related
loans, other deferred charges are amortized on a straight-line basis over
varying lives, ranging from five to seven years. Total deferred charges and the
related accumulated amortization were $6.2 million and $3.0 million as of July
31, 1996 and $5.5 million and $1.9 million as of July 31, 1995, respectively.
Included in these amounts are unamortized debt issuance costs associated with
the bank borrowings of $1.6 million and $1.9 million at July 31, 1996 and 1995,
respectively.
Other assets include customer lists purchased in business acquisitions that
are amortized on a straight-line basis over a ten year life. The total cost of
customer lists and the related accumulated amortization were $2.6 million and
$1.0 million at July 31, 1996 and $2.2 million and $0.6 million at July 31,
1995, respectively.
FUTURES CONTRACTS
The Company routinely uses commodity futures contracts to reduce the risk of
future price fluctuations for natural gas and LPG inventories and contracts.
Gains and losses on futures contracts purchased as hedges are deferred and
recognized in cost of sales as a component of the product cost for the related
hedged transaction. In the statement of cash flows, cash flows from qualifying
hedges are classified in the same category as the cash flows from the items
being hedged. Contracts which do not qualify as hedges are marked to market,
with the resulting gains and losses charged to current operations. Net realized
gains and losses for the current fiscal year and unrealized gains, losses on
outstanding positions and open positions as of July 31, 1996 are not material.
INTEREST RATE SWAP AGREEMENT
Interest rate differentials to be paid or received under interest rate swap
agreements are accrued and recognized over the life of the agreements. Interest
payable or receivable under these interest rate swap agreements is recognized in
the periods when market rates exceed contract limits as an increase or reduction
in interest expense. Interest rate swap agreements held by the Company expired
during fiscal 1996.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121").
This statement requires companies to investigate potential impairments of
long-lived assets, including identifiable intangibles and goodwill, if there is
evidence that events or changes in circumstances have made recovery of an
asset's carrying value unlikely. The statement is effective for the
F-64
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company in fiscal 1997. SFAS 121 also requires companies to measure potential
impairments to carrying value at the lowest level of identifiable cash flows,
and to record impairment losses to the extent that the undiscounted cash flows
exceed the carrying amount of the asset. The Company does not expect the
adoption of SFAS 121 to have a material effect on the Company's financial
position or operating results.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This statement establishes a fair value-based method
of accounting for stock-based compensation plans. It also encourages entities to
adopt that method in place of the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," for all arrangements
under which employees receive shares of stock or other equity instruments of the
employer or the employer incurs liabilities to employees in amounts based upon
the price of its stock. The Company is required to adopt this statement in
fiscal 1997. The adoption of this statement is not expected to have a material
impact on the Company's financial position or operating results. The Company
currently accounts for stock based compensation in accordance with Accounting
Principles Board Opinion No. 25.
2. ACCOUNTS AND NOTES RECEIVABLE AND OTHER ASSETS
Accounts and notes receivable as of July 31, 1996 and 1995 consist of the
following (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Accounts receivable from customers................................................ $ 23,814 $ 21,064
Allowance for doubtful accounts................................................... (367) (421)
Notes receivable from customers................................................... 753 397
Notes and accounts receivable from employees...................................... 821 885
--------- ---------
Total accounts and notes receivable............................................... 25,021 21,925
Less: non-current portion......................................................... 1,357 1,108
--------- ---------
Current notes and accounts receivable............................................. $ 23,664 $ 20,817
--------- ---------
--------- ---------
</TABLE>
Notes receivable arise in the ordinary course of business from the sale of
LPG storage and transportation equipment. Terms are generally from one to five
years, with interest rates ranging from 12.0% to 13.0%.
The Company has accounts and notes receivable due from employees totaling
$821,000 and $885,000 at July 31, 1996 and 1995, respectively. The notes
primarily relate to employee stock purchase loans and employee housing
assistance programs. The terms of the employee stock purchase loans require
interest payments of 6.0% per annum on the outstanding principal balance and
that all outstanding principal and interest be paid by October 31, 1997. Under
the employee housing assistance program, the Company is a guarantor on primary
residential notes issued in conjunction with the Company's relocation program
for a fixed term of seven years through October 1997, after which the employee
will refinance and the Company's guarantee will be eliminated.
The Company, through its wholly-owned subsidiary Coast Gas, Inc., holds a
50% limited interest in Coast Energy Investments, Inc., a limited partnership.
The partnership was established to facilitate the formation of a trading fund
and is accounted for under the equity method. Coast Gas, Inc. receives a
F-65
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. ACCOUNTS AND NOTES RECEIVABLE AND OTHER ASSETS (CONTINUED)
management fee. For the years ended July 31, 1996 and 1995, the investment in
the partnership amounted to $122,000 and $124,000, respectively. In addition, at
July 31, 1996, Coast Gas, Inc. recorded a management fee receivable of $93,000
(see Note 11).
3. PROPERTY AND EQUIPMENT
Property and equipment as of July 31, 1996 and 1995 consists of the
following (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Land.............................................................................. $ 2,312 $ 2,212
Buildings and improvements........................................................ 4,600 4,513
LPG rental and storage tanks...................................................... 44,690 42,550
Equipment and office furnishings.................................................. 6,447 5,989
--------- ---------
58,049 55,264
Less accumulated depreciation and amortization.................................... 6,554 4,404
--------- ---------
$ 51,495 $ 50,860
--------- ---------
--------- ---------
</TABLE>
At July 31, 1996 and 1995, LPG rental and storage tanks include $7.3 million
and $8.2 million, respectively, for tanks acquired under capital leases. Tanks
acquired under capital leases are pledged as collateral under the capital lease
agreements. All assets of the Company are pledged as collateral for the
Company's long-term debt under the provisions of the Credit Agreement (see Note
4).
Depreciation expense for the years ended July 31, 1996, 1995 and 1994
totaled $2.4 million, $2.2 million and $2.1 million, respectively.
4. LONG-TERM DEBT
Long-term debt as of July 31, 1996 and 1995 consists of the following (in
thousands of dollars):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Revolving loan, variable interest at prime plus 1.50%, due in monthly installments
of interest only until September 14, 2000, secured by all assets of the
Company......................................................................... $ 13,080 $ 15,355
Term loan, variable interest at prime plus 1.50%, due in quarterly installments
through July 31, 2000, secured by all assets of the Company..................... 12,750 14,000
Senior subordinated notes, fixed interest rate of 12.50%, due in equal annual
installments of $5.0 million, commencing September 15, 2002.The senior
subordinated notes are unsecured obligations of the Company with quarterly
interest payments over the life of the loan..................................... 13,310 13,073
Other notes payable with periodic payments through 2002, interest rates ranging
from 8.0% to 12.0%.............................................................. 2,232 2,212
--------- ---------
41,372 44,640
Less current maturities........................................................... 2,562 1,831
--------- ---------
$ 38,810 $ 42,809
--------- ---------
--------- ---------
</TABLE>
F-66
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
In fiscal 1995, Coast Gas, Inc. entered into a Credit Agreement (the "Credit
Agreement") with Bank of America, which provided financing of up to $35.0
million, consisting of $15.0 million in term debt and a $20.0 million revolving
credit facility. The revolving and term loans, at the election of Coast Gas,
Inc., bear interest at the Bank of America prime rate plus 1.50% or Libor plus
2.75% per annum. Concurrently, Coast Gas, Inc. issued $15.0 million in senior
subordinated notes with a fixed interest rate of 12.50% per annum. The proceeds
of the subordinated notes and a portion of the proceeds available under the
Credit Agreement were used to repay the notes to Heller Financial, Inc.
("Heller"). The balance of the funds available under the Credit Agreement
("Working Capital Line") will be used for general corporate purposes and to
finance future acquisitions.
The terms of the Credit Agreement were amended in fiscal 1996 to increase
the Working Capital line by an additional $3.0 million. An additional provision
of the amendment requires that the maximum amount of the facility is fixed at
$23.0 million until May 1, 1997, at which point it begins decreasing annually to
$16.0 million by May 1, 2000 and matures on September 14, 2000. Advances against
the line used to finance acquisitions were $3.0 million and $1.1 million for the
years ended July 31, 1996 and 1995, respectively.
The terms of the Credit Agreement contain restrictions on the issuance of
new debt or liens, the purchase or sale of assets not in the ordinary course of
business and the declaration and payment of dividends, and requires that Coast
Gas, Inc. maintain specified levels of fixed charge and interest payment
coverage ratios. The Credit Agreement also provides for prepayment of excess
funds in the event of sales of pledged assets if such funds are not reinvested
in like kind assets. The Credit Agreement provides for an unused commitment fee
of .5% on funds not drawn against the revolving line.
Total interest paid during the three month periods ended October 31, 1996
and 1995 was $1.3 million and $1.4 million, respectively. Total interest paid
during the years ended July 31, 1996, 1995 and 1994 was $5.4 million, $4.9
million, and $3.8 million, respectively, of which interest paid on bank
long-term and subordinated debt totaled $4.4 million, $4.0 million and $2.5
million, respectively.
Annual maturities of revolving, term and other long-term debt through July
31, 2001 are as follows: 1997 - $2.9 million; 1998 - $3.5 million; 1999 - $3.9
million; 2000 - $4.4 million; 2001 - $13.3 million; and thereafter - $15.1
million. The subordinated notes amortize $5.0 million per annum commencing in
fiscal 2003.
For the year ended July 31, 1995, the Company recorded an extraordinary
charge of $506,000 (net of $337,000 tax benefit) for the write-off of deferred
debt issuance costs upon the early extinguishment of the Heller debt. Debt
issuance costs associated with the new subordinated, revolving and term bank
debt totaling $2.2 million are being amortized using the bonds outstanding
method over the life of the related loans.
The carrying value of the Company's long-term debt approximates fair value,
in that most of the long-term debt is at floating market rates, or incurred at
rates that are not materially different from those current at July 31, 1996.
The Company has a Continuing Letter of Credit Agreement with Banque Paribas
to provide a $20.0 million credit guidance line for the operations of Coast
Energy Group, Inc., the Company's wholly owned subsidiary. The agreement
provides for a compensating balance of $1.3 million, and grants Banque Paribas a
security interest in certain pledged accounts receivable of CEG. At July 31,
1996, outstanding letters of credit drawn against this line amounted to $11.3
million.
F-67
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. MANDATORILY REDEEMABLE SECURITIES
The Company has outstanding 62,500 shares of cumulative redeemable,
exchangeable preferred stock, with par value of $0.01 and stated value of $100.
Cumulative dividends of 10% are payable annually. Payment of dividends is
restricted under the terms of the Credit Agreement with Coast Gas, Inc. (see
Note 4). Each share of preferred stock may be redeemed at a price equal to
stated value per share plus accrued and unpaid dividends. The redemption amounts
per share at October 31, 1996, July 31, 1996 and 1995 were $138.80, $136.94 and
$124.50, respectively. The stock is also exchangeable, at the option of the
Company, for Coast Gas, Inc.'s subordinated exchange debentures due September
15, 2002 (see Note 4). The stock shall, with respect to dividend rights and
rights on liquidation, winding up and dissolution, rank senior to all classes of
common stock. The Company shall redeem the stock in full at the earliest of
twelve consecutive years of unpaid dividends, sale or disposal of substantially
all the assets of the Company or merger of the Company, subject to certain
conditions. No dividends have been declared or paid since April 1, 1993.
Pursuant to the Stock Purchase and Merger Agreement (see Note 11), no dividends
can be accrued after September 9, 1996. Accrued dividends were $2.4 million and
$1.7 million at October 31, 1996 and 1995, respectively, and $2.3 million, $1.5
million and $0.8 million at July 31, 1996, 1995 and 1994, respectively, and have
been recorded as a charge to accumulated deficit.
6. INCOME TAXES
The income tax provision for the years ended July 31, 1996, 1995 and 1994
are summarized as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current provision:
Federal............................................................................ $ -- $ -- $ --
State.............................................................................. 25 7 38
--------- --------- ---------
25 7 38
--------- --------- ---------
Deferred provison (benefit):
Federal............................................................................ (428) (176) (48)
State.............................................................................. (70) (33) (18)
--------- --------- ---------
(498) (209) (66)
--------- --------- ---------
$ (473) $ (202) $ (28)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-68
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. INCOME TAXES (CONTINUED)
The significant components of temporary differences which give rise to
deferred tax assets (liabilities) as of July 31, 1996 and 1995 are as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Accruals, reserves and other..................................................... $ 1,178 $ 1,365
Federal NOLs..................................................................... 6,833 5,875
State NOLs....................................................................... 220 234
--------- ----------
Deferred tax assets............................................................ 8,231 7,474
--------- ----------
Accumulated depreciation......................................................... (13,385) (13,167)
PP&E book/tax basis difference................................................... (1,793) (1,793)
Capitalized tank installation costs.............................................. (1,607) (1,456)
LIFO inventory basis............................................................. (245) (245)
Other............................................................................ (1,176) (1,304)
--------- ----------
Deferred tax liabilities....................................................... (18,206) (17,965)
--------- ----------
Net deferred tax liabilities..................................................... $ (9,975) $ (10,491)
--------- ----------
--------- ----------
</TABLE>
A reconciliation of the Company's income tax provision computed at the
United States federal statutory rate to the effective rate for the recorded
provision for income taxes for the years ended July 31, 1996, 1995 and 1994 is
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate..................................................... (34%) (34%) (34%)
Amortization of cost in excess of assets acquired.......................... 7% 6% 8%
State franchise taxes, net of federal income tax benefit................... 2% 2% 11%
Prior year tax adjustments................................................. (5%) -- --
Extraordinary loss......................................................... -- (9%) --
Other, net................................................................. (3%) -- --
--------- --------- ---------
(33%) (35%) (15%)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Tax payments during the year ended July 31, 1996, 1995 and 1994 were minimal
due to the Company's tax loss position. Payments were solely for state income
taxes in various states.
The Company has a federal and state net operating loss carryforward of
approximately $20.0 million and $2.3 million, respectively, available to reduce
future payments of income tax liabilities. The tax benefits of these NOLs are
reflected in the accompanying table of deferred tax assets and liabilities. If
not used, carryforwards expire during the period from 2006 to 2011.
Under the provisions of Internal Revenue Code Section 382, the annual
utilization of the Company's net operating loss carryforwards may be limited
under certain circumstances. Events which may affect utilization include, but
are not limited to, cumulative stock ownership changes of more than 50% over a
three-year period. An ownership change occurred effective March 31, 1993, due to
cumulative changes in the Company's ownership. The annual and cumulative limits
on the utilization of net operating losses incurred prior to March 31, 1993 are
approximately $1.6 million and $5.5 million, respectively.
F-69
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. LEASES
Coast Gas, Inc. leases rental tanks and vehicles from a former owner of the
Company on a month-to-month operating lease. The lease provides for cancellation
within 90 days, and includes a lease purchase option at the greater of the
original cost or current list price. Coast Gas, Inc. also leases real estate,
LPG storage tanks, and office equipment from certain of its current directors,
officers and employees under operating and capital lease agreements.
Rental payments under such leases totaled $204,000, $135,000 and $161,000
for the years ended July 31, 1996, 1995 and 1994, respectively.
Coast Gas, Inc. generally leases vehicles, computer equipment, office
equipment and real property under operating lease agreements. The typical
equipment lease term is four to six years. Real property leases generally have
terms in excess of ten years with renewal options. Rent expense under all
operating lease agreements for the years ended July 31, 1996, 1995 and 1994
totaled $2.5 million, $2.4 million and $1.9 million, respectively.
Capital leases consist primarily of financing agreements for the acquisition
of LPG storage tanks with terms ranging from five to seven years. These leases
provide fixed price purchase options at the end of the non-cancelable lease
term. As of July 31, 1996, future minimum lease commitments under non-cancelable
leases, with terms in excess of one year were as follows:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31, OPERATING CAPITAL
- ----------------------------------------------------------------------------------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C>
1997.......................................................................... $ 2,020 $ 1,624
1998......................................................................... 1,495 1,336
1999......................................................................... 991 1,150
2000......................................................................... 753 885
2001......................................................................... 679 113
----------- ---------
Total minimum lease payments....................................................... $ 5,938 $ 5,108
-----------
-----------
Less amounts representing interest................................................. 755
---------
Present value of future minimum lease payments..................................... 4,353
Less amounts due within one year................................................... 1,362
---------
$ 2,991
---------
---------
</TABLE>
Total assets acquired under capital leases totaled $1.2 million, $2.2
million and $1.5 million for the years ended July 31, 1996, 1995 and 1994,
respectively.
In addition to these minimum lease rentals, Coast Gas, Inc. has an agreement
to lease the assets of a retail LPG distributor at a fixed percentage of the
gross profits generated by the business. Contingent lease rents paid under this
lease agreement for the years ended July 31, 1996, 1995 and 1994 totaled
$344,000, $406,000 and $394,000, respectively. The original lease term of five
years, which expired in 1995, was extended for five years and has various
renewal and purchase options available to Coast Gas, Inc. through January 31,
2014.
Coast Gas, Inc. subleases some of its LPG storage tanks and vehicles to
other propane distributors under non-cancelable operating lease agreements. The
lease terms are generally for one year with automatic renewal provisions.
Additionally, these distributors may purchase the LPG storage tanks under
F-70
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. LEASES (CONTINUED)
lease, at the greater of original cost or current list price. Sublease income
totaled $270,000, $390,000 and $494,000 for the years ended July 31, 1996, 1995
and 1994, respectively.
8. STOCKHOLDERS' EQUITY
EMPLOYEE BENEFIT PLANS
The Company has a 401(k) employee benefit plan. All full-time employees who
have completed one year of service and are twenty-one years of age or older are
eligible to participate. Under the plan provisions, participants are allowed to
make monthly contributions on a tax deferred basis subject to the limitations of
the plan. In addition, the Company will contribute a discretionary matching
contribution based upon participant contributions. Employees are 100% vested for
all contributions. The plan is managed by a trustee, and is fully funded.
In 1990 the Company established a discretionary profit-sharing plan for the
benefit of all eligible full time employees. Contributions are made annually at
the sole discretion of the Board of Directors. Participant benefits vest and are
paid annually over a five year period. Unvested contributions are forfeited upon
termination of employment, and are allocated to the remaining plan participants.
Contributions are unfunded until the time of payment. At July 31, 1995, the
Company had accrued $76,000 for the profit sharing plan. No additional amounts
were accrued for fiscal year 1996.
Additionally, the Company provides certain health and life insurance
benefits to all eligible full time employees. Expenses are recorded based upon
actual paid claims and expected liabilities for incurred but not reported claims
at year end.
WARRANTS
In conjunction with the refinancing in fiscal 1995, the Company repurchased
175,438 shares of common stock from officers of the Company for $1.0 million.
Warrants in the Company were issued to senior subordinated note holders which
have been assigned an estimated fair value of $2.1 million, to be amortized over
the life of the credit agreement using the bonds outstanding method. The
warrants include 175,438 Series A Warrants with an exercise price of $2.85 and
287,228 Series B Warrants with an exercise price of $0.01. The warrants are
exerciseable at the earliest of a sale, acquisition or initial public offering,
subject to certain conditions, or September 15, 1997 into shares of the
Company's Class D non-voting common stock. The warrants issued to Heller under
the previous debt agreement were returned unexercised.
OPTIONS
The Company has a 1987 stock plan available to grant incentive and
non-qualified stock options to officers and other employees. The plan provides
for the granting of a maximum of 175,000 options to purchase common shares of
the Company. The option price per share may not be less than the fair market
value of a share on the date the option is granted and the maximum term of the
option may not exceed 10 years. Options granted vest over a period of four years
from the date of grant. Granting of options under this plan will expire on the
10th anniversary of the plan. Pursuant to the Merger Agreement (see Note 11),
each outstanding option shall be converted into the right to receive cash
whether or not such option is
F-71
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
exerciseable in full. Compensation expense related to the granting of options
amounted to $21,000 for the year ended July 31, 1995. Information regarding the
Company's stock option plan is summarized below:
<TABLE>
<CAPTION>
PER SHARE
OPTIONS RANGE
--------- --------------
<S> <C> <C>
Outstanding at August 1, 1993................................................ 132,031 $ 0.01 - $9.11
Granted.................................................................... --
Exercised.................................................................. --
Canceled................................................................... --
---------
Outstanding at July 31, 1994................................................. 132,031 $ 0.01 - $9.11
Granted.................................................................... 42,942 $ 0.10 - $9.13
Exercised.................................................................. --
Canceled................................................................... --
---------
Outstanding at July 31, 1995................................................. 174,973 $ 0.01 - $9.13
Granted.................................................................... --
Exercised.................................................................. --
Canceled................................................................... --
---------
Outstanding at July 31, 1996................................................. 174,973 $ 0.01 - $9.13
Available for grant at July 31, 1996......................................... 27
</TABLE>
During 1996, the Company adopted a Stock Appreciation Rights (SARs) plan.
The Company granted 500,000 SARs, which are to vest over a five-year period, at
a per share value of $1.20. Compensation expense related to the grant of SARs of
$120,000 was recorded in 1996.
9. COMMITMENTS AND CONTINGENCIES
The Company has contracts with various suppliers to purchase a portion of
its supply needs of LPG for future deliveries with terms ranging from one to
twelve months. The contracted quantities are not significant with respect to the
Company's anticipated total sales requirements and will generally be acquired at
prevailing market prices at the time of shipment. Outstanding letters of credit
issued in conjunction with product supply contracts are a normal business
requirement. There were no outstanding letters of credit issued on behalf of the
Company as of October 31, 1996 or July 31, 1996 other than the $14.0 million and
$11.3 million, respectively, drawn against the credit guidance line (see Note
4).
The Company is engaged in certain legal actions related to the normal
conduct of business. In the opinion of management, any possible liability
arising from such actions will be adequately covered by insurance or will not
have a material adverse effect on the Company's financial position or results of
operations.
10. BUSINESS ACQUISITIONS
During the year ended July 31, 1996, Coast Gas, Inc. acquired one retail
outlet in a transaction accounted for using the purchase method of accounting.
The cost of the acquired company totaled $4.0 million, including $1.0 million of
seller notes and other liabilities and $3.0 from the increase in the Company's
Working Capital/Acquisition bank line. Goodwill resulting from the acquisition
totaled $2.8 million. Revenues of the acquired company for the year ended July
31, 1996, subsequent to the dates of acquisition and included in the Company's
consolidated sales totaled $1.9 million.
F-72
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. BUSINESS ACQUISITIONS (CONTINUED)
During the year ended July 31, 1995, Coast Gas, Inc. acquired three retail
outlets in transactions accounted for using the purchase method of accounting.
The cost of the acquired companies totaled $1.8 million (including $0.7 million
of seller notes). Goodwill resulting from these acquisitions totaled $0.3
million. Revenues of the acquired companies for the year ended July 31, 1995,
subsequent to the dates of acquisition and included in the Company's
consolidated sales totaled $0.7 million.
During the year ended July 31, 1994, Coast Gas, Inc. acquired two retail
outlets in transactions accounted for using the purchase method of accounting.
The cost of the acquired companies totaled $2.0 million (including $1.0 million
of seller notes and other liabilities). Goodwill resulting from these
acquisitions totaled $0.2 million. Revenues of the acquired companies for the
year ended July 31, 1994, subsequent to the dates of acquisition, included in
the Company's consolidated sales totaled $1.2 million.
11. SUBSEQUENT EVENTS
STOCK PURCHASE AND MERGER AGREEMENT
Effective September 9, 1996, subsequent to the fiscal year end, the Company
and the preferred shareholders of the Company entered into a Stock Purchase and
Merger Agreement (the "Merger Agreement") for the sale of the preferred stock of
the Company for $8.7 million. The terms of the Agreement also provided an option
to the buyer of the preferred stock to acquire all of the outstanding common
stock of the Company, for a period of one year from the date of the sale of the
preferred stock. Additionally, the shareholders of the Company have an option to
put the common stock of the Company to the buyer of the preferred stock on April
30, 1997, if the buyer has not previously exercised the option to acquire the
common stock.
SALE OF PARTNERSHIP INTEREST
Effective October 1, 1996, the Company terminated its participation and
interest in Coast Energy Investments, Inc., a limited partnership in which Coast
Energy Group, Inc. was a 50% limited partner. The original partnership agreement
provided for a minimum investment term through December 1997. The termination
resulted in the sale of the Company's partnership interest to its 50% partner
and an employee of the partnership. The Company recorded a net loss on the
disposition of the partnership interest of $660,000. This amount consisted of a
$202,000 loss on the partnership investment and $458,000 of termination costs
consisting of salary, consulting, non-compete agreements and other related
expenses.
F-73
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
AUGUST 1, 1996 TO AUGUST 1, 1995 TO NOVEMBER 1, 1996 TO NOVEMBER 1, 1995 TO
DECEMBER 16, 1996 DECEMBER 31, 1995 DECEMBER 16, 1996 DECEMBER 31, 1995
----------------- ----------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Sales and other revenue.......... $ 182,029 $ 159,104 $ 73,854 $ 75,034
Costs and expenses:
Cost of sales, except for
depreciation and
amortization................. 168,105 146,480 67,839 68,643
Operating expenses............. 8,181 8,257 2,980 3,284
Sale of partnership interest... 660 -- -- --
General and administrative
expenses..................... 1,738 1,354 647 428
Depreciation and
amortization................. 1,604 1,672 537 689
Interest expense............... 2,002 2,364 708 979
-------- -------- ------- -------
Income (loss) before income
taxes.......................... (261) (1,023) 1,143 1,011
Income tax (provision) benefit... 25 529 (466) (142)
-------- -------- ------- -------
Net income (loss)................ $ (236) $ (494) $ 677 $ 869
-------- -------- ------- -------
-------- -------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-74
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
AUGUST 1, 1996 AUGUST 1, 1995
TO TO
DECEMBER 16, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES:
Net loss................................................................. $ (236) $ (494)
Adjustments to reconcile net loss to net cash used
for operating activities
Depreciation and amortization.......................................... 1,604 1,672
Deferred income taxes.................................................. (476) (529)
Sale of partnership interest........................................... 202 --
Changes in assets and liabilities, net of acquisitions:
Accounts and notes receivable.......................................... (6,922) (17,167)
Inventories............................................................ 449 (1,727)
Prepaid expenses and deposits.......................................... (628) (304)
Other assets........................................................... (663) 45
Accounts payable....................................................... (2,265) 20,762
Accrued liabilities.................................................... 6,332 (477)
------- --------
(2,603) 1,781
------- --------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES
Payments for acquisitions of retail outlets.............................. -- (3,000)
Proceeds from sale of property and equipment............................. 57 140
Purchases of and investments in property and equipment................... (1,083) (1,556)
------- --------
(1,026) (4,416)
------- --------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES:
Repayments of long-term debt............................................. (562) (625)
Borrowings on capital leases and other term loans........................ -- 997
Repayment of other notes payable......................................... (252) (497)
Principal payments under capital lease obligations....................... (506) (548)
Borrowings (repayments) under acquisition line........................... 5,998 2,806
------- --------
4,678 2,133
------- --------
Net (decrease) increase in cash.......................................... 1,049 (502)
Cash and cash equivalents, beginning of period........................... 1,519 4,423
------- --------
Cash and cash equivalents, end of period................................. $ 2,568 $ 3,921
------- --------
------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-75
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
In management's opinion, the unaudited interim statements of operations and
cash flows for CGI Holdings, Inc. reflect all adjustments which are necessary
for a fair statement of its operations and cash flows for the interim periods
presented.
Such adjustments consisted only of normal recurring items unless otherwise
disclosed. Certain notes and other information have been condensed or omitted
from the interim financial statements presented. These financial statements
should be read in conjunction with the Company's financial statements contained
in this Form S-1 Registration Statement. Due to the seasonal nature of the
Company's propane business, the results of operations for interim periods are
not necessarily indicative of the results to be expected for a full year.
2. COMMITMENTS AND CONTINGENCIES
The Company has contracts with various suppliers to purchase a portion of
its supply needs of LPG for future deliveries with terms ranging from one to
twelve months. The contracted quantities are not significant with respect to the
Company's anticipated total sales requirements and will generally be acquired at
prevailing market prices at the time of shipment. Outstanding letters of credit
issued in conjunction with product supply contracts are a normal business
requirement. There were no outstanding letters of credit issued on behalf of the
Company as of December 16, 1996 other than $13.0 million drawn against its
credit guidance line.
The Company is engaged in certain legal actions related to the normal
conduct of business. In the opinion of management, any possible liability
arising from such actions will be adequately covered by insurance or will not
have a material adverse effect on the Company's financial position or results of
operations.
3. BUSINESS ACQUISITIONS
During the quarter ended October 31, 1995, Coast Gas, Inc. acquired one
retail outlet in a transaction accounted for using the purchase method of
accounting. The cost of the acquired company totaled $4.0 million, including
$1.0 million of seller notes and other liabilities and $3.0 million from the
increase in the Company's Working Capital/Acquisition bank line. Goodwill
resulting from the acquisition totaled $2.8 million.
4. SALE OF PARTNERSHIP INTEREST
Effective October 1, 1996, the Company terminated its participation and
interest in Coast Energy Investments, Inc., a limited partnership in which Coast
Energy Group, Inc. was a 50% limited partner. The original partnership agreement
provided for a minimum investment term through December 1997. The termination
resulted in the sale of the Company's partnership interest to its 50% partner
and an employee of the partnership. The Company recorded a net loss on the
disposition of the partnership interest of $660,000. This amount consisted of a
$202,000 loss on the partnership investment and $458,000 of termination costs
consisting of salary, consulting, non-compete agreements and other related
expenses.
F-76
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. SUBSEQUENT EVENTS
On December 17, 1996, substantially all of the assets and liabilities of the
Company were contributed to Cornerstone Propane, L.P., a Delaware limited
partnership, a subsidiary of Cornerstone Propane Partners, L.P. Following this
transaction, on December 17, 1996, Cornerstone Propane Partners, L.P. completed
its initial public offering (see Note 1 to the consolidated financial statements
of Cornerstone Propane Partners, L.P., for the period ended December 31, 1996
included herein).
F-77
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SYN Inc.:
We have audited the accompanying consolidated balance sheet of SYN Inc. (a
Delaware corporation and 52.5% owned subsidiary of Northwestern Public Service
Company) and Subsidiaries as of June 30, 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for the period from
inception (August 15, 1995) through June 30, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SYN Inc. and Subsidiaries as
of June 30, 1996, and the results of their operations and their cash flows for
the period from inception (August 15, 1995) through June 30, 1996 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
August 9, 1996 (except with respect
to the matter discussed in Note 9 as to
which the date is September 28, 1996)
F-78
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
JUNE 30, -------------
1996
--------- (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash..................................................................................... $ 14 $ 1,444
Trade receivables, less allowance for doubtful accounts of $1,505 and $1,475,
respectively........................................................................... 9,195 7,791
Inventories.............................................................................. 7,447 8,165
Prepaid expenses and other............................................................... 678 1,019
Deferred income tax benefit.............................................................. 3,727 3,727
Due from Former Stockholders............................................................. 37,966 37,966
--------- -------------
Total current assets................................................................... 59,027 60,112
--------- -------------
PROPERTY AND EQUIPMENT:
Land and buildings....................................................................... 6,420 6,644
Storage and consumer service facilities.................................................. 52,953 54,036
Transportation, office and other equipment............................................... 11,910 12,510
Less--Accumulated depreciation........................................................... (2,592) (3,297)
--------- -------------
Total property and equipment........................................................... 68,691 69,893
--------- -------------
OTHER ASSETS:
Investments and restricted cash deposits................................................. 3,025 3,048
Deferred income tax benefit.............................................................. 4,849 5,400
Intangible assets, primarily the excess of cost over fair value of net assets acquired,
net of accumulated amortization........................................................ 30,943 31,381
Other.................................................................................... 227 208
--------- -------------
Total other assets..................................................................... 39,044 40,037
--------- -------------
$ 166,762 $ 170,042
--------- -------------
--------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt..................................................... $ 1,025 $ 2,630
Accounts payable......................................................................... 1,604 6,270
Accrued expenses......................................................................... 2,915 2,999
Acquisition related liabilities.......................................................... 29,306 29,367
--------- -------------
Total current liabilities.............................................................. 34,850 41,266
LONG-TERM DEBT............................................................................. 25,687 25,709
NOTE PAYABLE--RELATED PARTY................................................................ 52,812 52,812
--------- -------------
Total liabilities...................................................................... 113,349 119,787
--------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Cumulative preferred stock, $.01 par value; 70,500 shares authorized; 55,312 shares,
issued and outstanding, at stated value of $1,000 per share............................ 55,312 55,312
Common stock; $0.01 par value; 100,000 shares authorized, issued and outstanding......... 1 1
Additional paid-in capital............................................................... 99 99
Accumulated deficit...................................................................... (1,999) (5,157)
--------- -------------
Total stockholders' equity............................................................. 53,413 50,255
--------- -------------
$ 166,762 $ 170,042
--------- -------------
--------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-79
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION FOR THE 46 FOR THE 3
(AUGUST 15, DAYS ENDED MONTHS ENDED
1995) THROUGH SEPTEMBER 30, SEPTEMBER 30,
JUNE 30, 1996 1995 1996
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES:
Propane sales................................................... $ 81,706 $ 8,584 $ 15,026
Appliance and parts sales....................................... 5,546 773 776
Other........................................................... 8,810 1,208 2,081
------- ------- -------
Total revenues................................................ 96,062 10,565 17,883
COST OF PRODUCT SOLD.............................................. 46,187 5,582 8,940
------- ------- -------
Gross profit.................................................. 49,875 4,983 8,943
------- ------- -------
OPERATING EXPENSES:
Salaries and commissions........................................ 14,520 1,662 3,865
General and administrative...................................... 14,225 1,333 3,083
Depreciation and amortization................................... 3,329 511 1,000
Related-party corporate administration and management fees...... 3,281 468 965
------- ------- -------
Total operating expenses...................................... 35,355 3,974 8,913
------- ------- -------
Operating income.............................................. 14,520 1,009 30
INTEREST EXPENSE, including $4,388, $589 and $1,204, respectively
to related party................................................ 5,584 589 1,665
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES................................. 8,936 420 (1,635)
PROVISION (BENEFIT) FOR INCOME TAXES.............................. 3,675 88 (550)
------- ------- -------
Net income (loss)............................................. 5,261 332 (1,085)
DIVIDENDS ON CUMULATIVE PREFERRED STOCK........................... (7,260) -- (2,073)
------- ------- -------
Net income (loss) applicable to common stockholders........... $ (1,999) $ 332 $ (3,158)
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
F-80
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------
PREFERRED STOCK ADDITIONAL
------------------- PAID-IN ACCUMU- LATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- ------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT INCEPTION, August 15, 1995............. -- $ -- -- $ -- $ -- $ --
Common stock issued............................. -- -- 100,000 1 99 --
Preferred stock issued.......................... 55,312 55,312 -- -- -- --
Dividends on preferred stock, $131.25 per
share......................................... -- -- -- -- -- (7,260)
Net income...................................... -- -- -- -- -- 5,261
---------- ------- -------- --- --- ------------
BALANCE, June 30, 1996............................ 55,312 $55,312 100,000 $ 1 $ 99 $ (1,999)
Dividends on preferred stock, $37.48 per share
(unaudited)................................... -- -- -- -- -- (2,073)
Net loss (unaudited)............................ -- -- -- -- -- (1,085)
---------- ------- -------- --- --- ------------
BALANCE, September 30, 1996 (unaudited)........... 55,312 $55,312 100,000 $ 1 $ 99 $ (5,157)
---------- ------- -------- --- --- ------------
---------- ------- -------- --- --- ------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE AT INCEPTION, August 15, 1995............. $ --
Common stock issued............................. 100
Preferred stock issued.......................... 55,312
Dividends on preferred stock, $131.25 per
share......................................... (7,260)
Net income...................................... 5,261
-------------
BALANCE, June 30, 1996............................ $ 53,413
Dividends on preferred stock, $37.48 per share
(unaudited)................................... (2,073)
Net loss (unaudited)............................ (1,085)
-------------
BALANCE, September 30, 1996 (unaudited)........... $ 50,255
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-81
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION FOR THE 3
(AUGUST 15, FOR THE 46 DAYS MONTHS ENDED
1995) THROUGH ENDED SEPTEMBER SEPTEMBER 30,
JUNE 30, 1996 30, 1995 1996
-------------- --------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................................... $ 5,261 $ 332 $ (1,085)
Items not requiring (providing) cash--
Depreciation and amortization................................. 3,329 511 1,000
Deferred income taxes......................................... 3,624 518 (550)
Changes in operating items--
Trade receivables............................................. (1,247) (1,388) 1,270
Inventories................................................... 704 495 (1,253)
Prepaid expenses and other.................................... 189 (731) (311)
Accounts payable.............................................. (5,571) 658 4,665
Accrued expenses.............................................. (3,423) (3,418) 206
-------------- --------------- -------------
Net cash provided by (used in) operating activities......... 2,866 (3,023) 3,942
-------------- --------------- -------------
INVESTING ACTIVITIES:
Acquisition of assets of Synergy Group Incorporated............. (150,922) (143,436) --
Proceeds from the sale of certain Synergy Group Incorporated
assets to Empire Energy Corporation........................... 35,980 35,980 --
Purchases of property and equipment............................. (9,182) (3,802) (1,571)
Proceeds from sale of assets.................................... 474 -- 973
Change in investments and restricted cash deposits.............. 70 (330) --
-------------- --------------- -------------
Net cash used in investing activities....................... (123,580) (111,588) (598)
-------------- --------------- -------------
FINANCING ACTIVITIES:
Increase in credit facility..................................... -- 8,916 90
Borrowing under long-term debt agreements....................... 23,910 -- --
Proceeds from issuance of common stock.......................... 100 100 --
Proceeds from issuance of preferred stock....................... 52,812 52,812 --
Proceeds from issuance of note payable--related party........... 52,812 52,812 --
Borrowings from related party................................... 36,458 36,458 90
Repayments to related party..................................... (36,458) (36,458) --
Payment on long-term debt....................................... (1,834) (1) (21)
Preferred stock dividends paid.................................. (7,072) -- (2,073)
-------------- --------------- -------------
Net cash provided by financing activities................... 120,728 114,639 (1,914)
-------------- --------------- -------------
Increase in cash............................................ 14 28 1,430
CASH:
Beginning of period............................................. -- -- 14
-------------- --------------- -------------
End of period................................................... $ 14 $ 28 $ 1,444
-------------- --------------- -------------
-------------- --------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-82
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
SYN Inc. (Synergy) is engaged in the retail sale of liquid propane gas
primarily in the southern, midwest and eastern regions of the United States.
Most of Synergy's customers use propane for residential home heating and make
periodic purchases with cash or on credit. Synergy was formed to acquire Synergy
Group Incorporated (SGI).
SYNERGY ACQUISITION
On August 15, 1995, Synergy completed its acquisition of SGI, a retail
distributor of propane with 152 locations. In conjunction with the acquisition,
the Company sold certain retail locations to Empire Energy Corporation (Empire
Energy) for approximately $36 million in cash and the assets of nine retail
locations valued at $2 million. There was no gain or loss recognized on this
sale.
The total net purchase price paid by Synergy for the acquisition of SGI
consisted of $105.6 million in cash (which was provided by proceeds from the
issuance of $52.8 million of preferred stock and the issuance of $52.8 million
of debt), $1.25 million in long-term debt and the assumption of certain
liabilities. The acquisition was accounted for under the purchase method of
accounting with all tangible assets and liabilities acquired recorded at fair
value at date of acquisition and the cost in excess of such fair value of $32.5
million recorded as an intangible asset.
The purchase price is subject to adjustment based on the amount of working
capital acquired by Synergy. Synergy has made a claim against the former owners
of SGI (the Former Stockholders) for a working capital adjustment and has
recorded a receivable of $26.7 million, which reflects the reduction in purchase
price of the assets based on the amount of working capital acquired. The
purchase price is also subject to adjustment based on the value of customer
tanks which cannot be located within a specified period of time. Synergy has
made a claim against the Former Stockholders for the value of unlocated tanks
and has recorded a receivable for $11.3 million related to this claim.
These amounts receivable in connection with the acquisition of SGI are
management's best estimate of the amounts which will ultimately be due from the
Former Stockholders. However, the parties continue to negotiate final settlement
and the Former Stockholders have objected to a number of the claims made by
Synergy. An adjustment of the consideration paid for SGI could also result in an
adjustment in the amount of consideration received from Empire Energy.
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements of Synergy as of September 30, 1995
and 1996 have not been audited by independent public accountants. In the opinion
of Synergy's management, the interim data include all adjustments necessary for
a fair statement of the results for the interim periods. These adjustments were
of a normal recurring nature, except as disclosed in Note 9.
Due to the seasonal nature of Synergy's propane business, the results of
operations for the interim periods are not necessarily indicative of results to
be expected for a full year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Synergy and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
F-83
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
statements and the reported amounts of revenues and expenses during the period.
Significant estimates related to self-insurance, litigation, collectibility of
receivables and income tax assessments are discussed in Notes 6 and 7. Actual
results could differ from those estimates.
DEPENDENCE ON PRINCIPAL SUPPLIER
Synergy obtains management services and all of its propane supplies through
Empire Gas Corporation (Empire Gas) which sells such propane to Synergy at cost.
Although Synergy believes that alternative sources of propane are readily
available, in the event that Empire Gas ceases to supply propane to Synergy or
has to obtain propane from alternate suppliers, the failure to obtain such
alternate sources of supply at competitive prices and on a timely basis may have
a material adverse effect on Synergy.
REVENUE RECOGNITION POLICY
Revenue from propane sales and the related cost of product sold are
recognized upon delivery of the product.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the first-in, first-out method for retail operations inventory and by the
specific identification method for wholesale operations inventory. The
inventories were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
JUNE 30, -------------
1996
----------- (UNAUDITED)
<S> <C> <C>
Gas and other petroleum products..................................... $ 4,058 $ 5,041
Gas distribution parts, appliances and equipment..................... 4,034 3,449
Obsolescence reserve................................................. (645) (325)
----------- ------
$ 7,447 $ 8,165
----------- ------
----------- ------
</TABLE>
PROPERTY AND EQUIPMENT
For financial reporting purposes, property and equipment are stated at
acquisition cost. Repairs and maintenance costs which do not significantly
extend the useful lives of the respective assets are charged to operations as
incurred. Depreciation is computed using the straight-line method over the
following estimated useful lives of the assets:
<TABLE>
<S> <C>
Buildings......................................... 40 years
Storage and consumer service facilities........... 35-40 years
Transportation, office and other equipment........ 5-10 years
</TABLE>
INTANGIBLE ASSETS
The excess of cost over the fair value of the net acquired assets of SGI has
been recorded as an intangible asset and is being amortized on a straight-line
basis over 40 years. Costs related to arranging the debt financing for the
acquisition of SGI have been capitalized and are being amortized on a
straight-line basis over the two-year term of the debt. Intangible assets are
reflected net of accumulated amortization of $737,000 in the June 30, 1996
consolidated balance sheet.
F-84
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred asset will not be realized.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121), which
established new standards for accounting for the impairment of long-lived
assets. The statement will be effective for Synergy in fiscal 1997, and, while
Synergy has not performed a detailed analysis of the impact of SFAS 121,
management does not expect that its initial adoption will have a material effect
on Synergy's financial position or results of operations.
2. RELATED-PARTY TRANSACTIONS:
Synergy entered into a Management Service Agreement with Empire Gas, a 30%
common stockholder of Synergy, under which Empire Gas provides all management
services to Synergy for payment of an annual overhead reimbursement of $3.25
million, and a management fee of $500,000 plus a performance-based payment for
certain operating results.
During 1996, Synergy purchased $42 million of liquid propane gas from Empire
Gas and accounts payable at June 30, 1996 includes $116,000 due to Empire Gas
resulting from the purchase of inventory.
The related party note payable represents borrowings by Synergy from
Northwestern Public Service Company (the parent corporation of the controlling
stockholder of Synergy). This note is subordinate to Synergy's other long-term
debt under its working capital facility (see Note 3), matures August 15, 2005,
bears interest at 9.12% and is subject to a prepayment premium.
Synergy transferred real and personal property of three retail locations
valued at $1,615,000 to Empire Gas in exchange for four Empire Gas retail
locations valued at approximately $1,713,000, with the difference of $98,000
paid to Empire Gas in cash.
Synergy paid $6,343,000 in 1996 to the controlling stockholder of Synergy
and $1,103,000 to Empire Gas for reimbursement of costs incurred relating to the
acquisition of SGI.
During 1996, Synergy leased, under operating leases, transportation
equipment to Propane Resources Transportation, Inc. (PRT) in which Synergy owns
a 15% common stock interest. Synergy received $274,000 in lease income during
1996 from these leases.
F-85
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
JUNE 30, -------------
1996
--------- (UNAUDITED)
<S> <C> <C>
Working capital facility............................................ $ 23,910 $ 24,000
Note payable to Former Stockholders, 9 1/2% payable in three
equal annual installments through August 15, 1998................. 1,250 1,250
Other, interest at 7.5% to 11.6%, due through 2001,
collateralized by certain equipment and materials................. 1,552 3,089
--------- -------------
26,712 28,339
Less--Current maturities............................................ 1,025 2,630
--------- -------------
$ 25,687 $ 25,709
--------- -------------
--------- -------------
</TABLE>
On December 28, 1995, Synergy entered into a working capital facility
agreement with the First National Bank of Boston providing for borrowings of up
to $25 million, interest at either the Eurodollar rate plus 2% or the prime rate
plus 3/4% (an average of 7.5% at June 30, 1996), and maturing December 31, 1997.
Synergy is required to comply with certain financial covenants including
compliance with restrictions upon other indebtedness and dividend distributions.
Borrowings under the agreement are collateralized by all receivables, inventory,
and property and equipment of Synergy.
Based on the borrowing rates currently available to Synergy from bank loans
with similar terms and average maturities, the fair value of long-term debt
approximates carrying value.
Aggregate annual maturities of the long-term debt outstanding at June 30,
1996, are as follows (in thousands):
<TABLE>
<S> <C>
1997.............................................. $ 1,025
1998.............................................. 24,603
1999.............................................. 680
2000.............................................. 204
2001.............................................. 200
-------
$26,712
-------
-------
</TABLE>
4. OPERATING LEASES:
Synergy leases retail location sales offices under noncancelable operating
leases expiring at various times through 2006. These leases generally contain
renewal options and require Synergy to pay all executory costs (property taxes,
maintenance and insurance).
F-86
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. OPERATING LEASES: (CONTINUED)
Future minimum lease payments (in thousands) at June 30, 1996, were:
<TABLE>
<S> <C>
1997.............................................. $ 598
1998.............................................. 310
1999.............................................. 206
2000.............................................. 41
2001.............................................. 19
Thereafter........................................ 53
-------
$ 1,227
-------
-------
</TABLE>
Lease expense during 1996 was approximately $600,000.
5. INCOME TAXES:
The provision for income taxes includes the following components (in
thousands):
<TABLE>
<S> <C>
Taxes currently payable........................... $ 51
Deferred income taxes............................. 3,624
------
$3,675
------
------
</TABLE>
A reconciliation of income tax expense at the statutory rate to the actual
income tax expense is as follows (in thousands):
<TABLE>
<S> <C>
Taxes computed at statutory rate (34%)............ $3,038
Amortization of excess of cost over fair value of
net assets acquired............................. 157
State income taxes, net of federal tax benefit.... 378
Other............................................. 102
------
Actual tax provision.............................. $3,675
------
------
</TABLE>
The tax effects of temporary differences which relate to deferred taxes
reflected on the balance sheet were as follows (in thousands):
<TABLE>
<S> <C>
Current deferred tax assets:
Allowance for doubtful accounts................. $ 2,302
Self-insurance liabilities...................... 1,005
Inventory costs and reserves capitalized for tax
purposes...................................... 420
--------
Net current deferred income tax asset......... $ 3,727
--------
--------
Long-term deferred tax assets:
Net operating loss carryforward................. $ 7,596
Alternative minimum tax carryover............... 910
Deferred tax liability related to accelerated
depreciation.................................. (3,657)
--------
Net long-term deferred income tax asset....... $ 4,849
--------
--------
</TABLE>
At June 30, 1996, Synergy had approximately $20 million of net operating
loss carryforwards for tax reporting purposes expiring in varying amounts from
2007 through 2010. These net operating loss
F-87
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. INCOME TAXES: (CONTINUED)
carryforwards have been reflected in the financial statements as deferred income
tax assets at June 30, 1996 and are subject to certain limitations on
utilization under provisions of the Internal Revenue Code.
6. COMMITMENTS AND CONTINGENCIES:
SELF-INSURANCE
Synergy obtains insurance coverage for catastrophic exposures related to
comprehensive general liability, vehicle liability and workers' compensation, as
well as those risks required to be insured by law or contract. Synergy
self-insures the first $250,000 of coverage per incident and obtains excess
coverage from carriers for these programs.
Provisions for self-insured losses are recorded based upon Synergy's
estimates of the aggregate self-insured liability for claims incurred. Synergy
has provided letters of credit aggregating approximately $2.875 million in
connection with these programs.
Synergy self-insures for health benefits provided to its employees.
Provisions for losses expected under this program are recorded based upon
Synergy's estimate of the aggregate liability for claims incurred.
CONTINGENCIES
Synergy and the acquired operations of SGI are presently involved in various
federal and state tax audits and are also defendants in other business-related
lawsuits which are not expected to have a material adverse effect on Synergy's
financial position or results of operations.
In conjunction with the acquisition of SGI, the Former Stockholders of SGI
are contractually liable for all insurance claims and tax liabilities that
relate to periods prior to the acquisition date. Funds have been placed in
escrow accounts to provide for payment of these liabilities. In the event that
the escrow amount is insufficient to settle these liabilities, Synergy could be
obligated to fund any additional amounts due and would have to seek
reimbursement from the Former Stockholders for such amounts. Synergy has
recorded its best estimates of the ultimate liabilities expected to arise from
these matters and has made claims against the Former Stockholders for
reimbursement (see Note 1).
7. EMPLOYEE BENEFIT PLAN:
Synergy succeeded to the SGI-sponsored defined contribution retirement plan
covering substantially all salaried employees. Employees who elect to
participate may contribute a percentage of their salaries to the plan and
Synergy at its discretion may match a portion of the employee contribution.
Synergy may also make profit-sharing contributions to the plan at the discretion
of its Board of Directors. Synergy made no profit-sharing contributions to the
plan in 1996.
The plan is currently under audit by the U.S. Department of Labor (DOL),
which has alleged that the plan violated certain sections of the Employee
Retirement Income Security Act of 1974. However, the DOL has advised that it is
not contemplating current action regarding these violations. The DOL audit is
continuing and the outcome cannot be determined at this time. In the event the
Former Stockholders are unable to satisfy any liabilities resulting from the
above examination, Synergy could be obligated to fund these liabilities and seek
reimbursement from the Former Stockholders. Synergy has recorded its best
estimates of the ultimate liabilities expected to arise from these matters and
has made claims against the Former Stockholders for reimbursement (see Note 1).
F-88
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. ADDITIONAL CASH FLOW INFORMATION (IN THOUSANDS):
<TABLE>
<S> <C>
Assets acquired through issuance of:
Long-term debt.................................. $2,250
------
------
Preferred stock................................. $2,500
------
------
</TABLE>
ADDITIONAL CASH PAYMENT INFORMATION
<TABLE>
<S> <C>
Interest paid..................................... $5,535
------
------
Income taxes paid................................. $2,284
------
------
</TABLE>
9. SUBSEQUENT EVENT:
Synergy and its controlling stockholder have negotiated an agreement with
Empire Gas to, among other items, terminate the Empire Gas management agreement
and to have the controlling stockholder acquire the 30% common stock interest in
Synergy owned by Empire Gas. The range of total consideration to be paid for
these transactions is subject to certain future events, but will be funded
solely by Synergy's controlling stockholder which is also in the process of
arranging for alternative management services. Synergy does not expect that this
ownership and managerial change will have a significant effect on its operations
or financial position.
F-89
<PAGE>
SYN INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR PERIOD FROM FOR PERIOD FROM FOR PERIOD FROM FOR PERIOD FROM FOR PERIOD FROM
JULY 1, 1996 AUGUST 15, 1995 JULY 1, 1995 OCTOBER 1, 1996 OCTOBER 1, 1995
TO TO TO TO TO
DECEMBER 16, DECEMBER 31, AUGUST 14, DECEMBER 16, DECEMBER 31,
1996 1995 1995 1996 1995
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
REVENUES.............................. 44,066 38,589 7,568 26,183 28,024
COST OF PRODUCT SOLD.................. 23,322 18,375 3,631 14,382 12,793
------- ------- ------- ------- -------
Gross profit........................ 20,744 20,214 3,937 11,801 15,231
OPERATING EXPENSES:
Salaries and commissions............ 7,252 6,312 -- 3,387 4,650
General and administrative.......... 6,151 5,461 3,632 3,068 4,128
Depreciation and amortization....... 1,904 1,728 472 904 1,217
Related-party corporate
administration and management
fees.............................. 1,668 1,406 -- 703 938
------- ------- ------- ------- -------
Total operating expenses.......... 16,975 14,907 4,104 8,062 10,933
------- ------- ------- ------- -------
Operating income (loss)........... 3,769 5,307 (167) 3,739 4,298
INTEREST EXPENSE, including $2,214,
$2,228, $0, $1,010, $1,639 to
related party....................... 3,311 2,347 816 1,646 1,758
------- ------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES..... 458 2,960 (983) 2,093 2,540
PROVISION (BENEFIT) FOR INCOME
TAXES............................... 298 1,350 (373) 848 1,262
------- ------- ------- ------- -------
Net income (loss)................. 160 1,610 (610) 1,245 1,278
DIVIDENDS ON CUMULATIVE PREFERRED
STOCK............................... (3,878) (3,111) -- (1,805) (3,111)
------- ------- ------- ------- -------
Net loss applicable to common
stockholders.................... $ (3,718) $ (1,501) $ (610) $ (560) $ (1,833)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-90
<PAGE>
SYN INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE PERIOD FROM JULY 1, 1995
FOR THE PERIOD FROM FROM AUGUST 15, TO AUGUST 14, 1995
JULY 1, 1996 TO 1995 TO DECEMBER (PREDECESSOR
DECEMBER 16, 1996 31, 1995 BASIS)
------------------- ------------------ ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................ $ 160 $ 1,610 (610)
Items not requiring (providing) cash--
Depreciation and amortization.......................... 1,904 1,728 472
Gain on sale of assets................................. 233 -- --
Deferred income taxes.................................. 298 3,734 --
Changes in operating items--
Trade receivables...................................... (1,991) (9,166) 4,897
Inventories............................................ (1,873) (226) 1,244
Prepaid expenses and other............................. (569) (863) 345
Accounts payable....................................... 2,549 (1,655) (1,864)
Accrued expenses....................................... 3,602 3,121 --
------- ---------- -------
Net cash provided by (used in) operating
activities......................................... 4,313 (1,717) 4,484
------- ---------- -------
INVESTING ACTIVITIES:
Acquisition of assets of Synergy Group Incorporated...... -- (150,922) --
Proceeds from the sale of certain Synergy Group
Incorporated assets to Empire Energy Corporation....... -- -- 35,980
Sale of assets........................................... 129 -- 1,880
Disposals of Companies................................... 829 -- --
Purchases of property and equipment...................... (4,240) (4,497) --
Acquisition of Companies................................. (469) -- --
Change in investments and restricted cash deposits....... -- (270) --
------- ---------- -------
Net cash provided by (used in) investing
activities......................................... (3,751) (119,709) 1,880
------- ---------- -------
FINANCING ACTIVITIES:
Increase in credit facility.............................. 3,835 21,342 (6,965)
Proceeds from issuance of common stock................... -- 100 --
Proceeds from issuance of preferred stock................ -- 52,812 --
Proceeds from issuance of note payable--related party.... -- 52,812 --
Borrowings from related party............................ -- 36,458 --
Repayments to related party.............................. -- (36,458) --
Payment on long-term debt................................ (242) (1,771) --
Preferred stock dividends paid........................... (3,878) (3,111) --
------- ---------- -------
Net cash provided by (used in) financing activities.... (285) 122,184 (6,965)
------- ---------- -------
Increase (decrease) in cash............................ 277 758 (601)
CASH:
Beginning of period...................................... 14 -- 5,323
------- ---------- -------
End of period............................................ $ 291 $ 758 $ 4,722
------- ---------- -------
------- ---------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-91
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIVE AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
FOUR AND ONE-HALF MONTHS ENDED DECEMBER 31, 1995,
ONE AND ONE-HALF MONTHS ENDED AUGUST 14, 1995 (PREDECESSOR),
TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996 AND
AND THREE MONTHS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly SYN
Inc. and its subsidiaries ("Synergy") consolidated results of operations and
cash flows for the periods ended December 16, 1996, and December 31, 1995. All
such adjustments are of a normal recurring nature.
Synergy completed its acquisition of Synergy Group Incorporated ("SGI") on
August 14, 1995. The unaudited consolidated statement of operations and of cash
flows for the period ended August 14, 1995 are presented as a predecessor entity
of Synergy and contain all adjustments necessary to present fairly SGI
consolidated results of operations and cash flows for the period then ended.
The accounting policies followed by Synergy are set forth in Note 1 to
Synergy's audited consolidated financial statements as of June 30, 1996,
included herein. Other disclosures required by generally accepted accounting
principles are not included herein but are included in the notes to the June 30,
1996, audited statements previously mentioned.
The results of operations for the two and one-half month and five and
one-half month periods ended December 16, 1996, are not necessarily indicative
of the results to be expected for the full year due to the seasonal nature of
Synergy's business.
2. COMMITMENTS AND CONTINGENCIES
Synergy obtains insurance coverage for catastrophic exposures related to
comprehensive general liability, vehicle liability and workers' compensation, as
well as those risks required to be insured by law or contract. Synergy
self-insures the first $250 of coverage per incident and obtains excess coverage
from carriers for these programs.
Provisions for self-insured losses are recorded based upon Synergy's
estimates of the aggregate self-insured liability for claims incurred.
Synergy self-insures for health benefits provided to its employees.
Provisions for losses expected under this program are recorded based upon
Synergy's estimate of the aggregate liability for claims incurred.
Synergy and the acquired operations of SGI are presently involved in various
federal and state tax audits and are also defendants in other business-related
lawsuits which are not expected to have a material adverse effect on Synergy's
financial position or results of operations.
In conjunction with the acquisition of SGI, the former stockholders of SGI
are contractually liable for all insurance claims and tax liabilities that
relate to periods prior to the acquisition date. Funds have been placed in
escrow accounts to provide for payment of these liabilities. In the event that
the escrow amount is insufficient to settle these liabilities, Synergy could be
obligated to fund any additional amounts due and would have to seek
reimbursement form the former stockholders for such amounts. Synergy has
recorded
F-92
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIVE AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
FOUR AND ONE-HALF MONTHS ENDED DECEMBER 31, 1995,
ONE AND ONE-HALF MONTHS ENDED AUGUST 14, 1995 (PREDECESSOR),
TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996 AND
AND THREE MONTHS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(UNAUDITED)
2. COMMITMENTS AND CONTINGENCIES (CONTINUED)
its best estimates of the ultimate liabilities expected to arise from these
matters and has made claims against the former stockholders for reimbursement.
3. SUBSEQUENT EVENTS
On December 17, 1996, substantially all of the assets and liabilities of
Synergy were contributed to Cornerstone Propane, L.P., a Delaware limited
partnership, a subsidiary of Cornerstone Propane Partners, L.P. Following this
transaction, on December 17, 1996, Cornerstone Propane Partners L.P. completed
its initial public offering (see Note 1 to the consolidated financial statements
of Cornerstone Propane Partners, L.P., included herein).
F-93
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
Northwestern Growth Corporation
Huron, South Dakota
We have audited the accompanying consolidated balance sheet of SYNERGY GROUP
INCORPORATED as of August 14, 1995 and the related consolidated statements of
operations, changes in stockholders' equity (deficit) and cash flows for each of
the years ended March 31, 1994 and 1995, and the period ended August 14, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SYNERGY
GROUP INCORPORATED as of August 14, 1995 and the results of its operations and
its cash flows for each of the years ended March 31, 1994 and 1995, and the
period ended August 14, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 13, in 1995 the Company restated prior years' financial
statements for changes in previously reported accrued liabilities.
BAIRD, KURTZ & DOBSON
Springfield, Missouri
October 9, 1996
F-94
<PAGE>
SYNERGY GROUP INCORPORATED
CONSOLIDATED BALANCE SHEET
AUGUST 14, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 1,747
Trade receivables, less allowance for doubtful accounts of $5,547................ 9,504
Inventories...................................................................... 9,356
Prepaid expenses................................................................. 894
---------
Total Current Assets........................................................... 21,501
---------
INVESTMENTS:
Restricted cash deposit.......................................................... 3,095
---------
PROPERTY AND EQUIPMENT, At Cost:
Land and buildings............................................................... 8,656
Storage and consumer service facilities.......................................... 84,319
Transportation, office and other equipment....................................... 24,196
---------
117,171
Less accumulated depreciation.................................................... (48,343)
---------
68,828
---------
OTHER ASSETS:
Excess of cost over fair value of net assets acquired, at amortized cost......... 2,929
Other............................................................................ 147
---------
3,076
---------
$ 96,500
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt............................................. $ 89,104
Accounts payable................................................................. 4,101
Accrued salaries................................................................. 3,605
Accrued expenses................................................................. 12,808
Accrued interest................................................................. 5,768
Accrued self-insurance liability................................................. 4,160
---------
Total Current Liabilities...................................................... 119,546
---------
LONG-TERM DEBT..................................................................... 437
---------
DEFERRED INCOME TAXES.............................................................. 2,093
---------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, Series A; no par value; authorized
10,000 shares; issued and outstanding 2,500 shares............................. 25,000
Preferred stock, Series B; no par value; authorized
5,000 shares; issued and outstanding 1,670 shares.............................. 16,700
Common stock, Class A; voting; $1 par value; authorized 2,000 shares; issued and
outstanding 405 shares......................................................... 1
Common stock, Class B; non-voting; no par value; authorized 2,000 shares; issued
and outstanding 405 shares..................................................... 40
Additional paid-in capital....................................................... 11,378
Retained earnings (deficit)...................................................... (78,695)
---------
(25,576)
---------
$ 96,500
---------
---------
</TABLE>
See Notes to Consolidated Financial Statements
F-95
<PAGE>
SYNERGY GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
4 1/2
YEAR ENDED MARCH 31, MONTHS
---------------------- ENDED
1994 1995 AUGUST 14,
RESTATED RESTATED 1995
---------- ---------- -----------
<S> <C> <C> <C>
OPERATING REVENUE............................................................ $ 133,731 $ 123,562 $ 32,179
COST OF PRODUCT SOLD......................................................... 63,498 59,909 15,387
---------- ---------- -----------
GROSS PROFIT................................................................. 70,233 63,653 16,792
---------- ---------- -----------
OPERATING COSTS AND EXPENSES
Provision for doubtful accounts............................................ 3,052 3,786 926
General and administrative................................................. 58,402 57,058 20,681
Depreciation and amortization.............................................. 5,170 5,100 1,845
---------- ---------- -----------
66,624 65,944 23,452
---------- ---------- -----------
OPERATING INCOME (LOSS)...................................................... 3,609 (2,291) (6,660)
---------- ---------- -----------
OTHER INCOME (EXPENSE)
Interest expense........................................................... (10,079) (8,385) (2,436)
Related-party interest expense............................................. (3,047) (2,701) (787)
Debt restructuring costs................................................... (2,650) (350) --
Other income............................................................... 152 226 101
---------- ---------- -----------
(15,624) (11,210) (3,122)
---------- ---------- -----------
LOSS BEFORE INCOME TAXES..................................................... (12,015) (13,501) (9,782)
PROVISION (CREDIT) FOR INCOME TAXES.......................................... (400) (84) 31
---------- ---------- -----------
NET LOSS..................................................................... $ (11,615) $ (13,417) $ (9,813)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-96
<PAGE>
SYNERGY GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 1994 AND 1995,
AND THE PERIOD ENDED AUGUST 14, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
SERIES A SERIES B CLASS A CLASS B ADDITIONAL RETAINED STOCKHOLDERS'
PREFERRED PREFERRED COMMON COMMON PAID-IN EARNINGS EQUITY
STOCK STOCK STOCK STOCK CAPITAL (DEFICIT) (DEFICIT)
----------- ----------- ------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1993, AS
PREVIOUSLY REPORTED............. $ -- $ -- $ 1 $ 40 $ -- $ (33,916) $ (33,875)
Adjustments applicable to prior
years........................... (9,934) (9,934)
----------- ----------- --- --- ----------- ----------- -------------
BALANCE, MARCH 31, 1993, AS
RESTATED........................ -- -- 1 40 -- (43,850) (43,809)
NET LOSS......................... (11,615) (11,615)
----------- ----------- --- --- ----------- ----------- -------------
BALANCE, MARCH 31, 1994.......... -- -- 1 40 -- (55,465) (55,424)
Long-term debt converted to
preferred stock................. 25,000 16,700 -- -- -- -- 41,700
Stockholder wages, related-party
rent and accrued interest
converted to additional paid-in
capital net of unamortized debt
costs........................... -- -- -- -- 11,378 -- 11,378
NET LOSS......................... -- -- -- -- -- (13,417) (13,417)
----------- ----------- --- --- ----------- ----------- -------------
BALANCE, MARCH 31, 1995.......... 25,000 16,700 1 40 11,378 (68,882) (15,763)
NET LOSS......................... -- -- -- -- -- (9,813) (9,813)
----------- ----------- --- --- ----------- ----------- -------------
BALANCE, AUGUST 14, 1995......... $ 25,000 $ 16,700 $ 1 $ 40 $ 11,378 $ (78,695) $ (25,576)
----------- ----------- --- --- ----------- ----------- -------------
----------- ----------- --- --- ----------- ----------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-97
<PAGE>
SYNERGY GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED 4 1/2
MARCH 31, MONTHS
---------------------- ENDED
1994 1995 AUGUST 14,
RESTATED RESTATED 1995
---------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................................... $ (11,615) $ (13,417) $ (9,813)
Items not requiring (providing) cash:
Depreciation............................................................. 4,611 5,014 1,770
Amortization............................................................. 559 86 75
Gain on sale of assets................................................... (730) (237) (61)
Deferred income taxes.................................................... (428) (125) --
Changes in:
Trade receivables........................................................ 1,612 2,486 5,139
Inventories.............................................................. 43 (814) 1,251
Accounts payable and accrued expenses.................................... 12,346 2,841 3,591
Prepaid expenses and other............................................... 127 (902) 764
---------- ---------- -----------
Net cash provided by (used in) operating activities.................... 6,525 (5,068) 2,716
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets............................................... 1,862 404 104
Purchase of property and equipment......................................... (3,141) (3,737) (596)
Change in restricted cash deposits......................................... (2,581) 3,181 (615)
---------- ---------- -----------
Net cash used in investing activities.................................. (3,860) (152) (1,107)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt................................................. (542) (260) (108)
Increase (decrease) in credit facilities................................... -- 3,100 (1,000)
---------- ---------- -----------
Net cash provided by (used in) financing activities.................... (542) 2,840 (1,108)
---------- ---------- -----------
INCREASE (DECREASE) IN CASH.................................................. 2,123 (2,380) 501
CASH, BEGINNING OF PERIOD.................................................... 1,503 3,626 1,246
---------- ---------- -----------
CASH, END OF PERIOD.......................................................... $ 3,626 $ 1,246 $ 1,747
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-98
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Synergy Group Incorporated (the Company) is engaged primarily in the retail
sale of liquid propane gas through its branch offices located in the Northeast,
Mid-Atlantic, Southeast and Southcentral regions of the United States. Most of
the Company's customers use propane for residential home heating and make
periodic purchases with cash or on credit.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Synergy Group
Incorporated and its subsidiaries. All significant intercompany balances have
been eliminated in consolidation.
REVENUE RECOGNITION POLICY
Sales and related cost of product sold are recognized upon delivery of the
product or service.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the last-in, first-out (LIFO) method for propane and the first-in, first-out
(FIFO) method for all others. At August 14, 1995, inventories consisted of the
following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Gas and other petroleum products.............................................. $ 5,549
Gas distribution parts, appliances and equipment.............................. 4,651
Obsolescence reserve.......................................................... (772)
LIFO reserve.................................................................. (72)
------
$ 9,356
------
------
</TABLE>
PROPERTY AND EQUIPMENT
Depreciation is provided on all property and equipment primarily by the
straight-line method over the estimated useful lives of 3 to 30 years.
F-99
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
At August 14, 1995, the Company's only financial instruments are cash,
long-term debt and related accrued interest for which their carrying amounts
approximate fair value.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
AMORTIZATION
The excess of current fair value over cost of net assets acquired is being
amortized on the straight-line basis over 40 years.
CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents. At August 14, 1995, cash
equivalents consisted primarily of overnight investing in commercial paper.
NOTE 2: SALE OF THE COMPANY
On August 15, 1995, the Company was acquired by SYN Inc. which is majority
owned by Northwestern Growth Corporation, a wholly owned subsidiary of
Northwestern Public Service Company. The acquisition cost was approximately $151
million and included the redemption of the Senior Secured Notes at par value and
the repayment of the Company's existing revolving credit facility. As a result
of the above sale the financial statements reflect operations for the four and
one-half month period ended August 14, 1995.
NOTE 3: DEBT RESTRUCTURING
On September 2, 1993, the Company and a committee of holders of the
Company's 11 5/8% Senior Subordinated Notes due 1997 (the 11 5/8% Notes)
announced that they had reached agreement on the major issues to restructure the
Company's outstanding debt and on August 23, 1994, the Company completed the
restructuring. The agreement contemplated that certain related parties to the
Company exchange $41,700,000 in debt for Series A Preferred Stock and Series B
Preferred Stock (the Recapitalization). This amount included $16,700,000 in
90-day unsecured promissory notes and $25,000,000 of 11 5/8% Notes (see Note 4).
The remaining 11 5/8% Notes plus accrued interest through September 14, 1993,
were proposed to be exchanged (the Exchange Offer) for new Increasing Rate
Senior Secured Notes due 2000 (the Senior Secured Notes).
F-100
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 3: DEBT RESTRUCTURING (CONTINUED)
Debt restructuring costs, principally legal fees and banking fees, incurred
in connection with the restructuring, amounting to $2,650,000 and $350,000 for
the years ended March 31, 1994 and 1995, respectively, have been expensed.
NOTE 4: NOTES PAYABLE
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, AUGUST 14,
1994 1995 1995
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
11 5/8% Senior subordinated notes due 1997 (A)................................ $ 85,000 $ 1,700 $ 1,700
Increasing rate senior secured notes due 2000 (A)............................. -- 65,054 65,054
Revolving credit facility (B)................................................. 20,000 23,100 22,100
Unsecured notes payable (C)................................................... 16,700 -- --
Purchase contract obligations (D)............................................. 926 795 687
---------- ----------- -----------
122,626 90,649 89,541
Less current maturities................................................... 122,002 90,087 89,104
---------- ----------- -----------
$ 624 $ 562 $ 437
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
(A) On April 2, 1987, the Company sold $85,000,000 of 11 5/8% Notes in a public
offering. On March 15, 1993, September 15, 1993, and March 15, 1994, the
Company failed to make the required $4,941,000 interest payments due on each
of such dates on the 11 5/8% Notes. Under the terms of the Indenture to the
11 5/8% Notes, the failure to pay such interest constituted an Event of
Default.
On August 23, 1994, the Company completed the Exchange Offer and
Recapitalization (see Note 3). The 11 5/8% Notes not tendered in the
Exchange Offer, amounting to $1,700,000, remain outstanding at August 14,
1995.
The Indenture governing the new Senior Secured Notes contains provisions,
among others, that require the Company to maintain certain financial ratios
and limit additional debt, asset dispositions and management salaries. As of
March 31, 1995, the Company was not in compliance with certain financial
covenants. Such noncompliance constitutes an Event of Default.
(B) In August 1989, the Company entered into a revolving credit agreement with a
bank under which the maximum credit line available is $20,000,000. On
September 14, 1990, the bank was repaid by a related party to the Company
and the credit agreement was assigned by the bank to the related party. The
credit agreement contains certain restrictive covenants. Borrowings under
the credit facility are secured by cash, accounts receivable and inventory.
Interest based on the prime rate plus 1 1/2% is payable quarterly. The
amount outstanding under the facility was not repaid by the Company on the
maturity date of April 1, 1993. The failure to repay the facility
constituted an Event of Default. In November 1993 the maximum credit line
available under the facility was increased to $25,000,000 with advances in
excess of $20,000,000 at the discretion of the related party. The maturity
date of the revolving credit agreement was extended to September 30, 1996.
F-101
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 4: NOTES PAYABLE (CONTINUED)
(C) At March 31, 1994, the Company had outstanding borrowings of $16,700,000
from an affiliate evidenced by 90-day unsecured promissory notes. Interest
based on the prime rate plus 2 1/2% was payable at the respective maturity
dates of each note. Since June 1993 neither the principal nor the interest
on $16,700,000 of notes was paid by the Company. On August 23, 1994, in
connection with the Recapitalization, the Company issued 1,670 shares of
Series B Preferred Stock in exchange for the $16,700,000 of 90-day unsecured
notes.
(D) Purchase contract obligations arise from the purchase of operating
businesses or other assets and are collateralized by the respective assets
acquired. At August 14, 1995, these obligations carried interest rates from
8% to 14.5% and are due periodically through 1999.
Aggregate annual maturities of long-term debt at August 14, 1995 are:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996.......................................................................... $ 89,104
1997.......................................................................... 251
1998.......................................................................... 80
1999.......................................................................... 83
2000.......................................................................... 23
-------
$ 89,541
-------
-------
</TABLE>
NOTE 5: OPERATING LEASES
The Company leases certain property and equipment under lease agreements
expiring through 2011. At August 14, 1995, future minimum lease payments under
noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
- ------------------------------------------------------------------------------ ---------------
<S> <C>
1996.......................................................................... $ 907
1997.......................................................................... 971
1998.......................................................................... 402
1999.......................................................................... 238
2000 and thereafter........................................................... 191
------
$ 2,709
------
------
</TABLE>
Rent charged to operations including rental expense to related parties (see
Note 6) for the years ended March 31, 1994 and 1995, and the period ended August
14, 1995, aggregated $4,303,000, $2,687,000 and $929,000, respectively.
NOTE 6: RELATED PARTY TRANSACTIONS
On March 31, 1995, the stockholders of the Company determined that they
would forego the payment of an aggregate of $4,766,000 of accrued and unpaid
wages due to the stockholders from the Company as of March 31, 1995. The
foregone wages have been recorded as a contribution to additional paid-in
capital.
F-102
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 6: RELATED PARTY TRANSACTIONS (CONTINUED)
The Company leases certain property and equipment from related parties under
operating lease agreements. Rental expense for the years ended March 31, 1994
and 1995, and the period ended August 14, 1995, was $3,276,000, $1,491,000 and
$318,000, respectively. On March 31, 1995, the related parties determined that
they would forego the payment of accrued and unpaid vehicle and equipment
rentals due from the Company as of March 31, 1995, amounting to $1,328,000. The
foregone rent has been recorded as a contribution to additional paid-in capital.
For the years ended March 31, 1994 and 1995, and the period ended August 14,
1995, interest expense related to the Company's revolving credit facility from a
related party (see Note 4) amounted to $3,047,000, $2,701,000 and $787,000,
respectively.
NOTE 7: INCOME TAXES
The provision for income taxes includes these components (in thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, AUGUST 14,
1994 1995 1995
----------- ----------- -------------
<S> <C> <C> <C>
Taxes currently payable............................................. $ 29 $ 41 $ 31
Deferred income taxes............................................... (429) (125) --
----- ----- -----
$ (400) $ (84) $ 31
----- ----- -----
----- ----- -----
</TABLE>
The tax effects of temporary differences related to deferred taxes shown on
the balance sheets were (in thousands):
<TABLE>
<CAPTION>
AUGUST 14,
1995
-----------
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts......................................................... $ 3,536
Inventory overhead costs capitalized for tax purposes................................... 421
Accrued expenses........................................................................ 1,390
Self-insurance liabilities and contingencies............................................ 4,185
Net operating loss carry-forwards....................................................... 35,948
-----------
45,480
Deferred tax liabilities:
Accumulated depreciation................................................................ (29,913)
-----------
Net deferred tax asset before valuation allowance........................................... $ 15,567
-----------
Valuation allowance:
Beginning balance....................................................................... (14,350)
Increase during the period.............................................................. (3,310)
-----------
Ending balance.......................................................................... (17,660)
-----------
Net deferred tax liability.......................................................... (2,093)
-----------
-----------
</TABLE>
F-103
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 7: INCOME TAXES (CONTINUED)
The above net deferred tax liability is presented on the balance sheets as
follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 14,
1995
-----------
<S> <C>
Deferred tax liability -- long-term................................................... $ (2,093)
-----------
-----------
</TABLE>
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
<TABLE>
<CAPTION>
MARCH 31 MARCH 31 AUGUST 14
1994 1995 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed at the statutory rate (34%).......................................... $ (4,085) $ (2,518) $ (3,326)
Increase (decrease) resulting from:
Amortization of excess cost over fair value of net assets acquired.......... 27 27 9
Interest expense transferred to paid-in capital............................. -- 1,916 --
State income taxes--net of federal tax benefit.............................. (69) -- 31
Change in deferred tax asset valuation allowance............................ 4,149 576 3,310
Other....................................................................... (422) (85) 7
----------- ----------- -----------
Actual tax provision.......................................................... $ (400) $ (84) $ 31
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The Company estimates that as of August 14, 1995, it has available net
operating loss carryforwards of approximately $94.6 million to offset future
taxable income.
NOTE 8: EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution retirement plan covering
substantially all salaried employees. Employees who elect to participate may
contribute a percentage of their salaries to the plan, and the Company at its
discretion may match a portion of the employee contribution. The Company may
also make profit-sharing contributions to the plan at the discretion of its
Board of Directors. Contribution expense amounted to $60,000 for the years ended
March 31, 1995 and 1994, and $37,000 for the period ended August 14, 1995.
The plan is currently under audit by the U.S. Department of Labor (DOL),
which has notified the Company that the prior Plan Trustees engaged in
prohibited transactions. The DOL audit is continuing and the outcome cannot be
determined at this time. In addition, the Internal Revenue Service has been
notified of prohibited transactions. The Company believes that it may be subject
to excise taxes, penalties and interest in connection with these prohibited
transactions and has recorded its best estimates of the potential liabilities
expected to arise from these matters (see Note 13).
NOTE 9: SELF-INSURANCE AND LITIGATION CONTINGENCIES
Under the Company's insurance program, coverage for comprehensive general
liability, workers' compensation and vehicle liability was obtained for
catastrophic exposures as well as those risks required
F-104
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 9: SELF-INSURANCE AND LITIGATION CONTINGENCIES (CONTINUED)
to be insured by law or contract. The Company retains a significant portion of
certain expected losses related primarily to comprehensive general liability.
Under this insurance program, the Company self insures the first $250,000 of
coverage (per incident). The Company obtained excess coverage from carriers for
this program. The Company currently self insures health benefits provided to
employees of the Company and its subsidiaries.
Provisions for losses expected under these programs are recorded based upon
the Company's estimates of the aggregate liability for claims incurred. The
Company provides letters of credit aggregating $2,875,000 in connection with
these programs which are collateralized with restricted cash deposits.
At August 14, 1995, the self-insured liability accrued in the balance sheet
totaled $4,160,000, which includes $500,000 of incurred but not reported claims.
The Company and its subsidiaries are presently defendants in various lawsuits
related to the self-insurance program and other business-related lawsuits which
are not expected to have a material adverse effect on the Company's results of
operations.
NOTE 10: ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 PERIOD
ENDED
-------------------- AUGUST 14,
1994 1995 1995
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ADDITIONAL CASH PAYMENT INFORMATION
Interest paid.............................................. $ 1,873 $ 11,877 $ 1,146
Income taxes paid.......................................... $ 35 $ 41 $ 15
NONCASH INVESTING AND FINANCING ACTIVITIES
Purchase contract obligation incurred...................... $ -- $ 129 $ --
Long-term debt converted to preferred stock................ $ -- $ 41,700 $ --
Accrued interest converted to additional paid-in capital
net of unamortized debt costs............................ $ -- $ 5,284 $ --
Accrued interest converted to long-term debt............... $ -- $ 7,054 $ --
Accrued wages converted to additional paid-in-capital...... $ -- $ 4,766 $ --
Accrued rent converted to additional paid-in capital....... $ -- $ 1,328 $ --
</TABLE>
NOTE 11: FUTURE ACCOUNTING PRONOUNCEMENTS
IMPACT OF SFAS NO. 121
In 1995 the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for the Impairment of Long-Lived Assets to be Disposed
of." The Company must adopt this standard effective April 1, 1996. The Company
does not expect that the adoption of this standard will have a material impact
on its financial position or results of operations.
F-105
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995
NOTE 12: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
DEPENDENCE ON PRINCIPAL SUPPLIERS
Three suppliers, Chevron, Texaco and Powder Horn Petroleum, account for
approximately 55% of the Company's volume of propane purchases. Although the
Company believes that alternative sources of propane are readily available, in
the event that the Company is unable to obtain alternate sources of supply at
competitive prices and on a timely basis, such inability would have a material,
adverse effect on the Company.
ESTIMATES
Significant estimates related to tax liabilities, self-insurance and
litigation are discussed in Notes 8 and 9. Actual losses related to these items
could vary materially from amounts reflected in the financial statements.
NOTE 13: RESTATEMENT OF PRIOR YEARS' FINANCIAL STATEMENTS
Fiscal years 1994 and 1995 have been restated to reflect excise taxes,
penalties and interest related to prohibited transactions involving the employee
benefit plan. This correction decreased previously reported March 31, 1994 and
1995, net income by $3,667,000 and $794,000, respectively.
Fiscal year 1995 has been restated to reflect the conversion of foregone
wages and rents to additional paid-in capital in the amounts of $4,766,000 and
$1,328,000, respectively, resulting in a further reduction in March 31, 1995 net
income of $6,094,000.
In addition, the retained earnings (deficit) as of March 31, 1993 has been
restated for the effect of adjustments related to the allowance for doubtful
accounts, self insurance reserves, accrued vacation pay, reserves for state
taxes and for the effect of the above employee benefit plan. This correction
decreased previously reported retained earnings by $9,934,000.
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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
identifying number of Assignee Signature of Assignee
Purchase Price including commissions, if any Name and Address of Assignee
Type of Entity (check one):
/ / Individual / / Partnership / / Corporation
/ / Trust / / Other (specify)
Nationality (check one):
/ / U.S. Citizen, Resident or Domestic Entity
/ / Foreign Corporation / / Non-resident 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:
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A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (Social Security Number) is _____.
3. My home address is_________________________________________________.
B. Partnership, Corporation or Other Interestholder
1._____________________ is not a foreign
(Name of Interestholder)
corporation, foreign partnership, foreign trust or foreign estate (as
those terms are defined in the Code and Treasury Regulations).
2. The interestholder's U.S. employer identification number is_____________.
3. The interestholder's office address and place of incorporation (if
applicable) is_________________.
The interestholder agrees to notify the Partnership within sixty (60)
days of the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to
the Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct
and complete and, if applicable, I further declare that I have authority to
sign this document on behalf of
Name of Interestholder
Signature and Date
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company,
clearing corporation, other nominee holder or an agent of any of the
foregoing, and is holding for the account of any other person, this
application should be completed by an officer thereof or, in the case of a
broker or dealer, by a registered representative who is a member of a
registered national securities exchange or a member of the National
Association of Securities Dealers, Inc., or, in the case of any other nominee
holder, a person performing a similar function. If the Assignee is a broker,
dealer, bank, trust company, clearing corporation, other nominee owner or an
agent of any of the foregoing, the above certification as to any person for
whom the Assignee will hold the Common Units shall be made to the best of the
Assignee's knowledge.
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APPENDIX B
GLOSSARY OF CERTAIN TERMS
1995 PROPOSED LEGISLATION: Legislation passed by Congress in 1995 but vetoed
by President Clinton which would have altered the tax reporting procedures
and the deficiency collection procedures applicable to electing partnerships
with more than 100 partners.
ACQUISITION: Any transaction in which any member of the Partnership Group
acquires (through an asset acquisition, merger, stock acquisition or other
form of investment) control over all or a portion of the assets, properties
or business of another person for the purpose of increasing the operating
capacity or revenues of the Partnership Group from the operating capacity or
revenues of the Partnership Group existing immediately prior to such
transaction.
ACQUISITION FACILITY: A $75.0 million revolving credit facility entered into
by the Operating Partnership to be used for acquisitions and improvements.
ADJUSTED OPERATING SURPLUS: With respect to any period, Operating Surplus
generated during such period (a) less (i) any net increase in working capital
borrowings during such period and (ii) any net reduction in cash reserves for
Operating Expenditures during such period not relating to an Operating
Expenditure made during such period, and (b) plus (i) any net decrease in
working capital borrowings during such period and (ii) any net increase in
cash reserves for Operating Expenditures during such period required by any
debt instrument for the repayment of principal, interest or premium. Adjusted
Operating Surplus does not include that portion of Operating Surplus included
in clause (a)(i) of the definition of Operating Surplus.
ANNUAL OPERATING PERFORMANCE INCENTIVE PLAN: The plan providing that annual
incentive bonuses be paid to participants in the plan (who will be determined
by the Board of Directors of the Managing General Partner and who will
include the Executives) based on a percentage of annual salary plus certain
acquisition management fees related to the acquisition of Empire Energy and
Coast by Northwestern Growth for performance up to budgeted levels of net
income and EBITDA.
AUDIT COMMITTEE: A committee of the board of directors of the Managing
General Partner composed of at least two or more directors who are neither
officers nor employees of either of the General Partners nor officers,
directors or employees of any affiliate of either of the General Partners.
AVAILABLE CASH: With respect to any quarter prior to liquidation:
(a) the sum of (i) all cash and cash equivalents of the
Partnership Group on hand at the end of such quarter and (ii) all
additional cash and cash equivalents of the Partnership Group on hand on
the date of determination of Available Cash with respect to such quarter
resulting from borrowings for working capital purposes made subsequent to
the end of such quarter, less
(b) the amount of any cash reserves that is necessary or
appropriate in the reasonable discretion of the Managing General Partner to
(i) provide for the proper conduct of the business of the Partnership Group
(including reserves for future capital expenditures and for anticipated
future credit needs of the Partnership Group) subsequent to such quarter,
(ii) comply with applicable law or any loan agreement, security agreement,
mortgage, debt instrument or other agreement or obligation to which any
member of the Partnership Group is a party or by which it is bound or its
assets are subject, or (iii) provide funds for distributions to Unitholders
and the General Partners in respect of any one or more of the next four
quarters; provided, however, that the Managing General Partner may not
establish cash reserves pursuant to (iii) above if the effect of such
reserves would be that the Partnership is unable to distribute the Minimum
Quarterly Distribution on all Common Units with respect to such quarter;
and, provided further, that disbursements made by a Group Member or cash
reserves established, increased or reduced after the end of such quarter
but on or before the date of
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determination of Available Cash with respect to such quarter shall be
deemed to have been made, established, increased or reduced for purposes
of determining Available Cash within such quarter if the Managing General
Partner so determines. Notwithstanding the foregoing, "Available Cash" with
respect to the quarter in which the liquidation of the Partnership occurs
and any subsequent quarter shall equal zero.
BANK CREDIT FACILITY: The $75.0 million Acquisition Facility and the $50.0
million Working Capital Facility both entered into by the Operating
Partnership.
CAPITAL ACCOUNT: The capital account maintained for a Partner pursuant to
the Partnership Agreement. The Capital Account of a Partner in respect of a
general partner interest, a Common Unit, a Subordinated Unit, an Incentive
Distribution Right or any other Partnership Interest shall be the amount
which such Capital Account would be if such general partner interest, Common
Unit, Subordinated Unit, Incentive Distribution Right, or other Partnership
Interest were the only interest in the Partnership held by a Partner from and
after the date on which such general partner interest, Common Unit,
Subordinated Unit, Incentive Distribution Right or other Partnership Interest
was first issued.
CAPITAL IMPROVEMENTS: Any addition or improvement to the capital assets
owned by any member of the Partnership Group or acquisition of existing or
the construction of new capital assets (including retail distribution
outlets, propane tanks, pipeline systems, storage facilities, appliance
showrooms, training facilities and related assets), made to increase the
operating capacity of the Partnership Group from the operating capacity of
the Partnership Group existing immediately prior to such addition,
improvement, acquisition or construction.
CAPITAL SURPLUS: All Available Cash distributed by the Partnership from any
source will be treated as distributed from Operating Surplus until the sum of
all Available Cash distributed since the commencement of the Partnership
equals the Operating Surplus as of the end of the quarter prior to such
distribution. Any excess Available Cash will be deemed to be Capital Surplus.
CAUSE: Means a court of competent jurisdiction has entered a final,
non-appealable judgment finding the Managing General Partner liable for
actual fraud, gross negligence or willful or wanton misconduct in its
capacity as a general partner of the Partnership.
CLOSING DATE: The first date on which Common Units were sold by the
Partnership to the Underwriters pursuant to the provisions of the
Underwriting Agreement.
COAST: CGI Holdings, Inc., a Delaware corporation.
COAST MERGER: The merger of Coast and CGI Acquisition Corp. consummated
pursuant to the Stock Purchase and Merger Agreement dated September 4, 1996,
between Northwestern Growth, Coast Acquisition Corp., Coast and the holders
of preferred stock of Coast.
CODE: Internal Revenue Code of 1986, as amended.
COMBINED OPERATIONS: The propane business and assets of Synergy, Empire
Energy, Myers and Coast contributed to the Partnership pursuant to the
Contribution Agreement.
COMMISSION: Securities and Exchange Commission.
COMMON UNIT ARREARAGE: The amount by which the Minimum Quarterly
Distribution in respect of a quarter during the Subordination Period exceeds
the distribution of Available Cash from Operating Surplus actually made for
such quarter on a Common Unit, cumulative for such quarter and all prior
quarters during the Subordination Period.
COMMON UNITS: A Unit representing a fractional part of the Partnership
Interests of all limited partners and assignees and having the rights and
obligations specified with respect to Common Units in the Partnership
Agreement.
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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 operations of Synergy,
Empire Energy, Myers and Coast were transferred and the liabilities assumed.
CORNERSTONE: Cornerstone Propane Partners, L.P., a Delaware limited
partnership.
COUNSEL: Andrews & Kurth L.L.P., special counsel to the General Partners
and the Partnership.
CURRENT MARKET PRICE: With respect to any class of Units listed or admitted
to trading on any national securities exchange as of any date, the average of
the daily Closing Prices (as hereinafter defined) for the 20 consecutive
Trading Days (as hereinafter defined) immediately prior to such date.
"Closing Price" for any day means the last sale price on such day, regular
way, or in case no such sale takes place on such day, the average of the
closing bid and asked prices on such day, regular way, in either case as
reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the principal national
securities exchange (other than the Nasdaq Stock Market) on which the Units
of such class are listed or admitted to trading or, if the Units of such
class are not listed or admitted to trading on any national securities
exchange (other than the Nasdaq Stock Market), the last quoted price on such
day, or, if not so quoted, the average of the high bid and low asked prices
on such day in the over-the-counter market, as reported by the Nasdaq Stock
Market or such other system then in use, or if on any such day the Units of
such class are not quoted by any such organization, the average of the
closing bid and asked prices on such day as furnished by a professional
market maker making a market in the Units of such class selected by the
Managing General Partner, or if on any such day no market maker is making a
market in the Units of such class, the fair value of such Units on such day
as determined reasonably and in good faith by the Managing General Partner.
"Trading Days" means a day on which the principal national securities
exchange on which Units of any class are listed or admitted to trading is
open for the transaction of business or, if the Units of a class are not
listed or admitted to trading on any national securities exchange, a day on
which banking institutions in New York City generally are open.
DELAWARE ACT: The Delaware Revised Uniform Limited Partnership Act, 6 Del C.
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 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.
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GENERAL PARTNERS: The Managing General Partner and the Special General
Partner and their successors and permitted assigns as general partners of the
Partnership and the Operating Partnership.
HEATING DEGREE DAY: Heating Degree Days measure the amount by which the
average of the high and low temperature on a given day is below 65 degrees
Fahrenheit. For example, if the high temperature is 60 degrees and the low
temperature is 40 degrees for a National Oceanic and Atmospheric
Administration measurement location, the average temperature is 50 degrees
and the number of heating degree days for that day is 15.
INCENTIVE DISTRIBUTION RIGHT: A non-voting limited partner Partnership
Interest issued to the General Partners in connection with the transfer of
their assets to the Partnership, which Partnership Interest confers upon the
holder thereof only the rights and obligations specifically provided in the
Partnership Agreement with respect to Incentive Distribution Rights (and no
other rights otherwise available to or other obligations of holders of a
Partnership Interest).
INCENTIVE DISTRIBUTIONS: The distributions of Available Cash from Operating
Surplus initially made to the General Partners that are in excess of the
General Partners' aggregate 2% general partner interest.
INITIAL COMMON UNITS: The Common Units sold in the IPO.
INITIAL UNIT PRICE: $21.00 per Common Unit, the amount per Unit equal to the
initial public offering price of the Common Units in the IPO.
INITIAL UNITS: The Common Units with an aggregate value of $7.0 million
which were allocated to selected executives upon the 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."
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MYERS: Myers Propane Gas Company, a Delaware corporation and a subsidiary of
NPS prior to the consummation of the Transactions.
NEW ACQUISITION INCENTIVE PLAN: The plan providing bonuses to participants
in the plan (who will be determined by the Board of Directors of the Managing
General Partner and will include the Executives) for adding new businesses to
the Partnership's propane operations, based upon 4% of the gross acquisition
price, spread among the participants in the plan based on their relative
salaries.
NON-CITIZEN ASSIGNEE: A Limited Partner or assignee who (i) fails to furnish
information about nationality, citizenship, residency or other related status
within 30 days after a request by the Managing General Partner for such
information, or (ii) the Managing General Partner determines after receipt of
such information is not an eligible citizen.
NORTHWESTERN GROWTH: Northwestern Growth Corporation, a South Dakota
corporation and a wholly owned subsidiary of NPS.
NOTE PLACEMENT: The private placement by the Operating Partnership of the
Notes.
NOTES: The $220.0 million aggregate principal amount of Senior Secured Notes
due 2010 privately placed by the Operating Partnership.
NPS: Northwestern Public Service Company, a Delaware corporation.
NYSE: The New York Stock Exchange, Inc.
OPERATING EXPENDITURES: All Partnership Group expenditures, including taxes,
reimbursements of the General Partners, debt service payments and capital
expenditures, subject to the following:
(a) Payments (including prepayments) of principal and premium on a
debt shall not be an Operating Expenditure if the payment is (i) required
in connection with the sale or other disposition of assets or (ii) made in
connection with the refinancing or refunding of indebtedness with the
proceeds from new indebtedness or from the sale of equity interests. For
purposes of the foregoing, at the election and in the reasonable discretion
of the Managing General Partner, any payment of principal or premium shall
be deemed to be refunded or refinanced by any indebtedness incurred or to
be incurred by the Partnership Group within 180 days before or after such
payment to the extent of the principal amount of such indebtedness.
(b) Operating Expenditures shall not include (i) capital
expenditures made for Acquisitions or for Capital Improvements (as opposed
to capital expenditures made to maintain assets), (ii) payment of
transaction expenses relating to Interim Capital Transactions or (iii)
distributions to partners. Where capital expenditures are made in part for
Acquisitions or Capital Improvements and in part for other purposes, the
Managing General Partner's good faith allocation between the amounts paid
for each shall be conclusive.
OPERATING PARTNERSHIP: Cornerstone Propane, L.P., a Delaware limited
partnership, and any successors thereto.
OPERATING PARTNERSHIP AGREEMENT: The Amended and Restated Agreement of
Limited Partnership of the Operating Partnership dated as of December 17,
1996 (which has been filed as an exhibit to the registration statement of
which this Prospectus is a part).
OPERATING SURPLUS: As to any period prior to liquidation, on a cumulative
basis and without duplication:
(a) the sum of (i) $25 million plus all cash and cash equivalents
of the Partnership Group on hand as of the close of business on the Closing
Date, (ii) all cash receipts of the Partnership Group for the
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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.
PARTNERSHIP GROUP: The Partnership, the Operating Partnership and any
subsidiary of either such entity, treated as a single consolidated entity.
PARTNERSHIP INTEREST: An interest in the Partnership, which shall include
general partner interests, Common Units, Subordinated Units, Incentive
Distribution Rights or other equity securities of the Partnership, or a
combination thereof or interest therein as the case may be.
PARTNERSHIP SECURITY: Means any class or series of Units, any option, right,
warrant or appreciation rights relating thereto, or any other type of equity
interest that the Partnership may lawfully issue, or any unsecured or secured
debt obligation of the Partnership that is convertible into any class or
series of equity interests of the Partnership.
PLANS: The New Acquisition Incentive Plan of the Managing General Partner,
together with the Annual Operating Performance Incentive Plan.
REGISTRATION STATEMENT: The Registration Statement on Form S-1, as amended
(No. 333-________), filed by the Partnership with the Commission.
RESTRICTED UNIT PLAN: The Cornerstone Propane Partners, L.P. 1996 Restricted
Unit Plan.
RULE 144: Rule 144 of the Securities Act.
SECURITIES ACT: The Securities Act of 1933, as amended.
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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 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.
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.
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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-8
<PAGE>
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.
TABLE OF CONTENTS
Page
----
Prospectus Summary
Risk Factors . . . . . . . . . . . . . . .
The IPO and Related Transactions . . . . .
Use of Proceeds. . . . . . . . . . . . . .
Capitalization . . . . . . . . . . . . . .
Price Range of Common Units. . . . . . . .
Cash Distribution Policy . . . . . . . . .
Cash Available for Distribution. . . . . .
Selected Pro Forma Financial and
Operating Data. . . . . . . . . . . . .
Selected Historical and Operating Data . .
Management's Discussion and Analysis
of Financial Condition And Results . .
of Operations . . . . . . . . . . . . .
Business and Properties. . . . . . . . . .
Management . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . .
Certain Relationships and Related
Transaction . . . . . . . . . . . . . .
Conflicts of Interest and Fiduciary
Responsibilities. . . . . . . . . . . .
Description of the Common Units. . . . . .
The Partnership Agreement. . . . . . . . .
Units Eligible for Future Sale . . . . . .
Plan of Distribution . . . . . . . . . . .
Tax Considerations . . . . . . . . . . . .
Investment in the Partnership by
Employee Benefit Plans. . . . . . . . .
Validity of the Common Units . . . . . . .
Experts. . . . . . . . . . . . . . . . . .
Available Information. . . . . . . . . . .
Index to Financial Statements. . . . . . . F-1
Form of Application for Transfer of
Common Units. . . . . . . . . . . . . . Appendix A
Glossary of Certain Terms. . . . . . . . . Appendix B
CORNERSTONE PROPANE
PARTNERS, L.P.
COMMON UNITS
REPRESENTING
LIMITED PARTNER INTERESTS
PROSPECTUS
April 16, 1997
