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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 14, 1998
REGISTRATION NO. 333-60931
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CORNERSTONE PROPANE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
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DELAWARE 5984 77-0439862
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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432 WESTRIDGE DRIVE
WATSONVILLE, CALIFORNIA 95076
(831) 724-1921
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
RONALD J. GOEDDE
432 WESTRIDGE DRIVE
WATSONVILLE, CALIFORNIA 95076
(831) 724-1921
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
WITH A COPY TO:
BARTLEY C. DEAMER
MCCUTCHEN, DOYLE, BROWN & ENERSEN, LLP
3150 Porter Drive
Palo Alto, CA 94304
(650) 849-4400
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after this Registration Statement becomes effective.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. /X/
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
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Common Units.................................. 3,487,500 $20.125 $50,312,500 $0(2)
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(1) Calculated in accordance with Rule 457(c) on the basis of the average of the
high and low sale prices of the Common Units on August 5, 1998 , as reported
on the New York Stock Exchange composite tape.
(2) Pursuant to Rule 429, the Prospectus contained in this Registration
Statement also relates to 987,500 Common Units registered under Registration
Statement on Form S-3 (File No. 333-34581) declared effective by the
Securities and Exchange Commission on January 5, 1998. A registration fee of
$21,250 has already been paid by the registrant with respect to such
securities.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
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SUBJECT TO COMPLETION
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED OCTOBER 14, 1998
COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
CORNERSTONE PROPANE PARTNERS, L.P.
---------------
This Prospectus relates to up to 3,487,500 Common Units representing limited
partner interests in Cornerstone Propane Partners, L.P., a Delaware limited
partnership (the "Partnership"), which may be offered from time to time by the
Partnership at prices and on terms to be determined at the time of each offering
hereunder and to be set forth in one or more supplements to this Prospectus
(each, a "Prospectus Supplement"). The Partnership's Common Units are listed on
the New York Stock Exchange (the "NYSE") under the symbol "CNO."
------------------------
The Partnership has registered with the Secretary of the Treasury as a "tax
shelter." No assurance can be given that the Partnership will not be audited by
the IRS or that tax adjustments will not be made. Any adjustments in the
Partnership's tax returns will lead to adjustments in the Unitholders' tax
returns and may lead to audits of the Unitholders' tax returns and adjustments
of items unrelated to the Partnership.
------------------------
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A
CORPORATION. PURCHASERS OF COMMON UNITS SHOULD CONSIDER EACH OF THE FACTORS
DESCRIBED UNDER "RISK FACTORS," STARTING ON PAGE 7, IN EVALUATING AN INVESTMENT
IN THE PARTNERSHIP.
------------------------
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.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Common Units may be offered through underwriters, brokers or dealers, or
directly to investors. See "Plan of Distribution." The Prospectus Supplement
will set forth the names of any underwriters, brokers or dealers involved in the
sale of Common Units and any applicable fee, commission or discount arrangements
with them.
This Prospectus may not be used to consummate sales of Common Units unless
accompanied by a Prospectus Supplement.
October , 1998
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AVAILABLE INFORMATION
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 Securities and
Exchange Commission (the "Commission"). Such reports and other information can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; 500
West Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can also
be obtained from the Public Reference Room of the Commission at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates.
Information regarding operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. The Commission also maintains an
Internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the Commission at
http://www.sec.gov. The Partnership's Common Units are listed on the New York
Stock Exchange, and reports and other information concerning the Partnership can
be inspected and copied at the offices of such exchange at 20 Broad Street, New
York, New York 10005.
This Prospectus constitutes a part of a Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Partnership with the Commission under the Securities
Act of 1933, as amended (the "Securities Act"), with respect to the Common Units
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Reference is made
to the Registration Statement for further information with respect to the
Partnership and the Common Units offered hereby. Any statements contained herein
concerning the provisions of any document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission or incorporated by
reference herein are not necessarily complete, and in each instance reference is
made to the copy of such document so filed for a more complete description of
the matter involved. Each such statement is qualified in its entirety by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. COPIES OF THESE DOCUMENTS (EXCLUDING EXHIBITS
THERETO UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO
SUCH DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE UPON ORAL OR WRITTEN REQUEST OF ANY
PERSON, INCLUDING ANY BENEFICIAL OWNER, FROM RONALD J. GOEDDE, CORNERSTONE
PROPANE PARTNERS, L.P., AT ITS PRINCIPAL EXECUTIVE OFFICES, 432 WESTRIDGE DRIVE,
WATSONVILLE, CALIFORNIA 95076 (TELEPHONE: (831) 724-1921).
The following documents filed with the Commission by the Partnership (File
No. 1-12499) pursuant to Section 13(a) of the Exchange Act are incorporated
herein by reference as of their respective dates:
(a) Annual Report on Form 10-K for the year ended June 30, 1998, as amended;
and
(b) The description of the Common Units contained in the Partnership's
Registration Statement on Form 8-A dated November 25, 1996.
Each document filed by the Partnership pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the Common Units pursuant hereto shall be
deemed to be incorporated herein by reference and to be a part hereof from the
date of filing of such document. Any statement contained herein or in a document
all or a portion of which is incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
i
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subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
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.
ii
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TABLE OF CONTENTS
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PAGE
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AVAILABLE INFORMATION...................................................................................... i
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................................ i
PROSPECTUS SUMMARY......................................................................................... 1
The Partnership.......................................................................................... 1
The Offering............................................................................................. 2
RISK FACTORS............................................................................................... 7
Risks Inherent in the Partnership's Business............................................................. 7
Risks Inherent in an Investment in the Partnership....................................................... 9
Conflicts of Interest and Fiduciary Responsibilities..................................................... 13
Tax Risks................................................................................................ 15
USE OF PROCEEDS............................................................................................ 18
BUSINESS................................................................................................... 19
General.................................................................................................. 19
PARTNERSHIP STRUCTURE AND MANAGEMENT....................................................................... 20
DESCRIPTION OF THE COMMON UNITS............................................................................ 22
The Units................................................................................................ 22
Transfer Agent and Registrar............................................................................. 22
Transfer of Common Units................................................................................. 22
CASH DISTRIBUTION POLICY................................................................................... 23
General.................................................................................................. 23
Quarterly Distributions of Available Cash................................................................ 24
Distributions from Operating Surplus During Subordination Period......................................... 25
Distributions from Operating Surplus after Subordination Period.......................................... 26
Incentive Distributions.................................................................................. 27
Distributions from Capital Surplus....................................................................... 28
Adjustment of Minimum Quarterly Distribution and Target Distribution Levels.............................. 28
Distributions of Cash Upon Liquidation................................................................... 29
THE PARTNERSHIP AGREEMENT.................................................................................. 32
Organization and Duration................................................................................ 32
Purpose.................................................................................................. 32
Power of Attorney........................................................................................ 33
Capital Contributions.................................................................................... 33
Limited Liability........................................................................................ 33
Issuance of Additional Securities........................................................................ 34
Amendment of Partnership Agreement....................................................................... 35
Merger, Sale or Other Disposition of Assets.............................................................. 36
Termination and Dissolution.............................................................................. 36
Liquidation and Distribution of Proceeds................................................................. 37
Withdrawal or Removal of the General Partners............................................................ 37
Transfer of General Partners' Interests and Incentive Distribution Rights................................ 38
Change of Management Provisions.......................................................................... 39
Limited Call Right....................................................................................... 39
Meetings; Voting......................................................................................... 39
Status as Limited Partner or Assignee.................................................................... 40
Non-Citizen Assignees; Redemption........................................................................ 41
Indemnification.......................................................................................... 41
Books and Reports........................................................................................ 41
Right to Inspect Partnership Books and Records........................................................... 42
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Registration Rights...................................................................................... 42
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES....................................................... 43
Conflicts of Interest.................................................................................... 43
Fiduciary and Other Duties............................................................................... 45
TAX CONSIDERATIONS......................................................................................... 47
Tax Rates................................................................................................ 47
Partnership Status....................................................................................... 48
Consequences of Exchanging Property for Common Units..................................................... 49
Ownership of Units by S Corporations..................................................................... 50
Limited Partner Status................................................................................... 51
Tax Consequences of Unit Ownership....................................................................... 52
Allocation of Partnership Income, Gain, Loss and Deduction............................................... 54
Tax Treatment of Operations.............................................................................. 54
Disposition of Common Units.............................................................................. 57
Uniformity of Units...................................................................................... 60
Administrative Matters................................................................................... 61
State, Local and Other Tax Considerations................................................................ 64
UNITS ELIGIBLE FOR FUTURE SALE............................................................................. 64
PLAN OF DISTRIBUTION....................................................................................... 65
VALIDITY OF THE COMMON UNITS............................................................................... 66
EXPERTS.................................................................................................... 66
APPENDIX A................................................................................................. A-1
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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 INCORPORATED BY REFERENCE IN THIS PROSPECTUS. THE MANAGING
GENERAL PARTNER OF THE PARTNERSHIP IS CORNERSTONE PROPANE GP, INC. (THE
"MANAGING GENERAL PARTNER"), A WHOLLY-OWNED SUBSIDIARY OF NORTHWESTERN GROWTH
CORPORATION ("NORTHWESTERN GROWTH"). CAPITALIZED TERMS NOT DEFINED HEREIN HAVE
THE MEANINGS GIVEN IN THE GLOSSARY INCLUDED AS APPENDIX A.
THE PARTNERSHIP
The Partnership believes that it is the fifth largest retail marketer of
propane in the United States in terms of volume, serving more than 380,000
residential, commercial, industrial and agricultural customers from 282 customer
service centers in 27 states as of June 30, 1998. 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, 1998, the Partnership had
retail propane sales of approximately 235 million gallons and operating income
plus depreciation and amortization ("EBITDA") of approximately $47.0 million.
The Partnership was formed in 1996 to acquire, own and operate the propane
businesses and assets of SYN, Inc. and its subsidiaries ("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 and its subsidiaries ("Empire Energy") and
CGI Holdings, Inc. and its subsidiaries ("Coast") and commenced operations on
December 17, 1996.
The Partnership believes that it is well positioned to compete successfully
in the propane business for the following reasons: (i) management's experience
in generating profitable growth at its customer service centers by fostering an
entrepreneurial approach by local managers; (ii) the Partnership's large
national and geographically diversified operations, which the Partnership
believes reduces the effects of adverse weather conditions in any one region on
EBITDA and allows it to achieve economies of scale; (iii) the significant
proportion of the Partnership's retail sales that is made to residential
customers, which are generally more profitable than sales to other customers;
(iv) management's experience in identifying, evaluating and completing both
small and large acquisitions; (v) the Partnership's substantial national
wholesale supply and logistics business, which provides it with a national
presence and a relatively secure source of propane to support the service goals
of its customer service centers; (vi) the Partnership's centralized
administrative systems that enable local managers to focus on customer service
and growth; and (vii) the Partnership's relationship with Northwestern Growth (a
subsidiary of Northwestern Corporation ("NOR")), 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. See "Risk Factors."
The Partnership's principal executive offices are located at 432 Westridge
Drive, Watsonville, California 95076, and its telephone number is (831)
724-1921.
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THE OFFERING
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Securities Offered................ Common Units.
Units Outstanding As of the Date
of This Prospectus.............. 13,234,411 Common Units and 6,597,619 Subordinated
Units, representing an aggregate 65.4% and 32.6% limited
partner interest in the Partnership, respectively.
Distributions of Available Cash... The Partnership distributes 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 consists generally of all cash on hand at the
end of such quarter, as adjusted for reserves. 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 is generally 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."
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 generally have the
right to receive the Minimum Quarterly Distribution,
plus any arrearages thereon ("Common Unit Arrearages"),
and the General Partners 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 enhances the Partnership's ability
to distribute the Minimum Quarterly Distribution on the
Common
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Units during the Subordination Period. Subordinated
Units do not accrue distribution arrearages. Upon
expiration of the Subordination Period, Common Units
will no longer accrue distribution arrearages. See "Cash
Distribution Policy."
Adjustment of Minimum Quarterly
Distribution and Target
Distribution Levels............. The Minimum Quarterly Distribution and the Target
Distribution Levels are subject to downward adjustments
in the event that the Unitholders receive distributions
of Available Cash from Capital Surplus or legislation is
enacted or existing law is modified or interpreted by
the relevant governmental authority in a manner that
causes the Partnership to be treated as an association
taxable as a corporation or otherwise taxable as an
entity for federal, state or local income tax purposes.
Distributions of Available Cash from Capital Surplus
represent a "return of capital" rather than a "return on
capital." If, as a result of distributions of Available
Cash from Capital Surplus, the Unitholders receive an
amount equal to the initial public offering price of the
Common Units ($21.00) 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."
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........................... One quarter 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 December 31, 2000, in respect
of which (i) distributions of
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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.
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." 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."
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 or capital
improvements or the repayment of certain indebtedness),
of which 1,405 Common Units have been issued as of June
30, 1998, 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."
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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 the
holders of at least a majority (and in certain cases a
greater percentage) of the Subordinated Units and 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 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
</TABLE>
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<TABLE>
<S> <C>
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 Cornerstone Propane, L.P. (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.
</TABLE>
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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 ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE
PARTNERSHIP BELIEVES THAT THE EXPECTATION 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 1998, approximately 61.5% of the Partnership's combined retail propane
volume and approximately 85.4% 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. For example, during fiscal 1998, the impact
of the recent El Nino winter adversely affected average customer sales due to
the reduced heating degree days during the winter months in the markets served
by the Partnership. The Partnership cannot predict if or when a similar weather
phenomenon will affect the markets served by the Partnership.
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.
THE PARTNERSHIP IS 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 is 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 has 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
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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.
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. In
the first nine months of calendar 1998, the Partnership added approximately
15,200 customers and annual retail propane sales of approximately 10 million
gallons through acquisitions. However, there can be no assurance that the
Partnership will continue to identify attractive acquisition candidates in the
future, that the Partnership will be able to acquire such businesses on
economically acceptable terms, that any acquisitions will not be dilutive to
earnings and distributions to the Unitholders or that any additional debt
incurred to finance 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
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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.
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 four-year employment contract that
expires June 30, 2002. 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 NOR, which is defined to include any person or group becoming the
beneficial owner of 10% of the voting securities of NOR, and upon certain other
circumstances.
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 distributes 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 depend upon numerous factors,
including cash flow generated by operations, required principal and interest
payments on the Partnership's debt, the costs of acquisitions (including related
debt service payments), restrictions contained in the Partnership's debt
instruments, issuances of debt and equity securities by the Partnership,
fluctuations in working capital, capital expenditures, adjustments in reserves,
prevailing economic conditions and financial, business and other factors, a
number of which are beyond the control of the Partnership and the Managing
General Partner. Because the Partnership is effectively a holding company for
the Operating Partnership, distributions by the Partnership are dependent upon
distributions of cash from the Operating Partnership to the Partnership. Cash
distributions are dependent primarily on cash flow, including from reserves and
working capital borrowings, and not on profitability, which is affected by
non-cash items. Therefore, cash distributions might be made during periods when
the Partnership records losses and might not be made during periods when the
Partnership records profits.
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<PAGE>
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 $43.7
million ($28.6 million for the Common Units, $14.2 million for the Subordinated
Units and $874,000 for the aggregate 2% general partner interest). The amount of
Available Cash from Operating Surplus generated during fiscal 1998 was
approximately $26.0 million (including approximately $1.2 million of Available
Cash from Operating Surplus of businesses acquired from March through June, 1998
but not reflecting Available Cash from Operating Surplus of businesses acquired
subsequent to June 30, 1998). Such amount was insufficient by approximately $2.6
million to cover the Minimum Quarterly Distribution for such fiscal year on all
of the Common Units currently outstanding and the related distribution on the
general partner interests, and would have been insufficient by approximately
$17.7 million to cover the Minimum Quarterly Distribution on all Subordinated
Units and the related distribution on the general partner interests. The
Partnership elected not to pay the Minimum Quarterly Distribution with respect
to the Subordinated Units for the quarters ended December 31, 1997 and March 31
and June 30, 1998. 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 a $125.0 million bank
credit facility (the "Bank Credit Facility"). The Partnership anticipates that
reserves for interest on the Notes will be established at approximately $4.1
million at each March and September, and the reserves will be eliminated when
interest payments are made on the Notes in June and December. The $4.1 million
reserved for interest is approximately 9.4% 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. 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 are 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.
THE PARTNERSHIP'S INDEBTEDNESS MAY LIMIT THE PARTNERSHIP'S ABILITY TO MAKE
DISTRIBUTIONS AND MAY AFFECT ITS OPERATIONS
At June 30, 1998, the Partnership's total indebtedness was approximately
$240.9 million, constituting approximately 46.3% of its total capitalization. As
a result, the Partnership is significantly leveraged and has indebtedness that
is substantial in relation to its partners' capital. As of June 30, 1998, the
Partnership had approximately $116.3 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,
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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.
COST REIMBURSEMENTS AND FEES DUE TO THE MANAGING GENERAL PARTNER MAY BE
SUBSTANTIAL
Prior to making any distribution on the Common Units, the Partnership
reimburses the Managing General Partner and its affiliates at cost for all
expenses incurred on behalf of the Partnership. Approximately $29.9 million of
expenses (primarily wages and salaries) were reimbursed by the Partnership to
the Managing General Partner in fiscal 1998. 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 have limited influence on matters
affecting the operation of the Partnership, and third parties may find it
difficult to attempt to gain control, or influence the activities, of the
Partnership. See "The Partnership Agreement."
THE PARTNERSHIP MAY ISSUE ADDITIONAL COMMON UNITS THEREBY DILUTING EXISTING
UNITHOLDERS' INTERESTS
The Partnership has the authority under the Partnership Agreement to issue
an unlimited number of additional Common Units or other equity securities for
such consideration and on such terms and conditions as are established by the
Managing General Partner, in its sole discretion without the approval of the
Unitholders. During the Subordination Period, however, the Partnership may not
issue equity securities ranking prior or senior to the Common Units or an
aggregate of more than 4,270,000 additional Common Units (excluding Common Units
issued upon conversion of Subordinated Units, pursuant to employee benefit plans
(such as the Restricted Unit Plan) or in connection with certain acquisitions or
capital improvements or the repayment of certain indebtedness), of which 1,405
Common Units have been issued as of June 30, 1998, or an equivalent number of
securities ranking on a parity with the Common Units without the approval of
holders of a Unit Majority. Under the Restricted Unit Plan, the executive
officers and directors of the Managing General Partner are eligible to receive
rights which, subject to vesting, entitle them to receive Common Units. The
issuance of Common Units pursuant to the Restricted Unit Plan may dilute the
interests of holders of Common Units in distributions by the Partnership. As of
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June 30, 1998, the Partnership had granted rights relating to 483,603 Common
Units under the Restricted Unit Plan.
After the end of the Subordination Period, the Partnership may issue an
unlimited number of limited partner interests of any type without the approval
of the Unitholders. The Partnership Agreement does not give the holders of
Common Units the right to approve the issuance by the Partnership of equity
securities ranking junior to the Common Units at any time. Based on the
circumstances of each case, the issuance of additional Common Units or
securities ranking on a parity with the Common Units may dilute the value of the
interests of the then-existing holders of Common Units in the net assets of the
Partnership, dilute the interests of holders of Common Units in 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 precludes the removal of the Managing General Partner
without its consent. In addition, the Partnership Agreement contains certain
provisions that may have the effect of discouraging a person or group from
attempting to remove the Managing General Partner of the Partnership or
otherwise change the management of the Partnership. If the Managing General
Partner is removed as general partner of the Partnership under circumstances
where "Cause" does not exist and Units held by the Managing General Partner and
its affiliates are not voted in favor of such removal, (i) the Subordination
Period will end and all outstanding Subordinated Units will immediately convert
into Common Units on a one-for-one basis, (ii) any existing Common Unit
Arrearages will be extinguished and (iii) the General Partners will have the
right to convert their general partner interests (and their rights to receive
Incentive Distributions) into Common Units or to receive cash in exchange for
such interests. "Cause" is defined as a court of competent jurisdiction having
entered a final, non-appealable judgment finding the Managing General Partner
liable for actual fraud, gross negligence or willful wanton misconduct in its
capacity as a general partner of the Partnership. Further, if any person or
group (other than the Managing General Partner or its affiliates) acquires
beneficial ownership of 20% or more of any class of Units then outstanding, such
person or group will lose voting rights with respect to all of its Units. In
addition, the Partnership has substantial latitude in issuing equity securities
without Unitholder approval. The Partnership Agreement also contains provisions
limiting the ability of Unitholders to call meetings of Unitholders or to
acquire information about the Partnership's operations as well as other
provisions limiting the Unitholders' ability to influence the manner or
direction of management. The effect of these provisions may be to diminish the
price at which the Common Units trade under certain circumstances. See "The
Partnership Agreement-- Withdrawal or Removal of the General Partners."
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
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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:
(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 relies for its management on employees of the Managing
General Partner and its affiliates.
(iii) The terms of the Partnership's New Acquisition Incentive Plan could
give the senior executives of the Managing General Partner an incentive to cause
the Partnership to acquire additional propane operations without regard to
whether the operations would prove beneficial to the Partnership and may present
the senior executives of the Managing General Partner with a conflict of
interest in negotiating the acquisition price on behalf of the Partnership.
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(iv) Whenever possible, the Managing General Partner intends to limit the
Partnership's liability under contractual arrangements to all or particular
assets of the Partnership, with the other party thereto to have no recourse
against the General Partners or their assets.
(v) Any agreements between the Partnership and the Managing General Partner
and its affiliates will not grant to the holders of Common Units, separate and
apart from the Partnership, the right to enforce the obligations of the Managing
General Partner and such affiliates in favor of the Partnership. Therefore, the
Managing General Partner, in its capacity as the managing general partner of the
Partnership, will be primarily responsible for enforcing such obligations.
(vi) Under the terms of the Partnership Agreement, the Managing General
Partner is not restricted from causing the Partnership to pay the Managing
General Partner or its affiliates for any services rendered on terms that are
fair and reasonable to the Partnership or entering into additional contractual
arrangements with any of such entities on behalf of the Partnership. Neither the
Partnership Agreement nor any of the other agreements, contracts and
arrangements between the Partnership, on the one hand, and the Managing General
Partner and its affiliates, on the other, are or will be the result of
arm's-length negotiations.
(vii) The Managing General Partner may exercise its right to call for and
purchase Units as provided in the Partnership Agreement or assign such right to
one of its affiliates or to the Partnership.
(viii) 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 NOR, Northwestern Growth and the Special General Partner) to
compete with the Partnership in the retail sale of propane in the continental
United States only if (A) the Managing General Partner determines, in its
reasonable judgment prior to the commencement of such activity, that it is not
in the best interests of the Partnership to engage in such activity either (1)
because of the financial commitments or operating characteristics associated
with such activity, or (2) because such activity is not consistent with the
Partnership's business strategy or cannot otherwise be integrated with the
Partnership's operations on a basis beneficial to the Partnership; or (B) such
activity is being undertaken as provided in a joint venture agreement or other
agreement between the Partnership and an affiliate of the Managing General
Partner and such joint venture or other agreement was determined at the time it
was entered into to be fair to the Partnership in the reasonable judgment of the
Managing General Partner. See "Conflicts of Interest and Fiduciary
Responsibilities--Conflicts of Interest--The General Partners' Affiliates May
Compete with the Partnership." In addition, affiliates of the Managing General
Partner (including the Special General Partner) may compete with the Partnership
in businesses other than the retail sale of propane in the continental United
States. There can be no assurance that there will not be competition between the
Partnership and affiliates of the Managing General Partner in the future.
(ix) 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
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Partner and its affiliates that might otherwise be prohibited, including those
described in clauses (i)-(ix) 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
extensively in the courts, and the Managing General Partner has not obtained an
opinion of counsel covering the provisions set forth in the Partnership
Agreement that purport to waive or restrict the fiduciary duties of the General
Partners that would be in effect under common law were it not for the
Partnership Agreement. See "Conflicts of Interest and Fiduciary
Responsibilities--Conflicts of Interest."
TAX RISKS
For a general discussion of the expected federal income tax consequences of
owning and disposing of Common Units, see "Tax Considerations."
TAX TREATMENT IS DEPENDENT ON PARTNERSHIP STATUS
The availability to a Common Unitholder of the federal income tax benefits
of an investment in the Partnership depends, in large part, on the
classification of the Partnership as a partnership for federal income tax
purposes. Assuming the accuracy of certain factual matters as to which the
General Partners and the Partnership have made representations, Counsel is of
the opinion that, under current law, the Partnership will be classified as a
partnership for federal income tax purposes. No ruling from the IRS as to
classification has been or is expected to be requested. Instead, the Partnership
intends to rely on such opinion of Counsel (which is not binding on the IRS).
One of the representations of the Partnership on which the opinion of Counsel is
based is that at least 90% of the Partnership's gross income for each taxable
year will be income from sources that Counsel has opined or may opine generate
"qualifying income." Whether the Partnership will continue to be classified as a
partnership in part depends, therefore, on the Partnership's ability to meet
this qualifying income test in the future. See "Tax Considerations--Partnership
Status."
If the Partnership were classified as an association taxable as a
corporation for federal income tax purposes, the Partnership would pay tax on
its income at corporate rates (currently a 35% federal rate), distributions
would generally be taxed again to the Unitholders as corporate distributions,
and no income, gains, losses or deductions would flow through to the
Unitholders. Because a tax would be imposed upon the Partnership as an entity,
the cash available for distribution to the holders of Common Units would be
substantially reduced. Treatment of the Partnership as an association taxable as
a corporation or otherwise
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as a taxable entity would result in a material reduction in the anticipated cash
flow and after-tax return to the holders of Common Units and thus would likely
result in a substantial reduction in the value of the Common Units. See "Tax
Considerations--Partnership Status."
There can be no assurance that the law will not be changed so as to cause
the Partnership to be treated as an association taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level taxation.
The Partnership Agreement provides that, if a law is enacted or existing law is
modified or interpreted in a manner that subjects the Partnership to taxation as
a corporation or otherwise subjects the Partnership to entity-level taxation for
federal, state or local income tax purposes, certain provisions of the
Partnership Agreement will be subject to change, including a decrease in the
Minimum Quarterly Distribution and the Target Distribution Levels to reflect the
impact of such law on the Partnership. See "Cash Distribution Policy--Adjustment
of Minimum Quarterly Distribution and Target Distribution Levels."
NO IRS RULING WITH RESPECT TO TAX CONSEQUENCES
No ruling has been requested from the IRS with respect to classification of
the Partnership as a partnership for federal income tax purposes, whether the
Partnership's propane operations generate "qualifying income" under Section 7704
of the Code or any other matter affecting the Partnership. Accordingly, the IRS
may adopt positions that differ from Counsel's conclusions expressed herein. It
may be necessary to resort to administrative or court proceedings in an effort
to sustain some or all of Counsel's conclusions, and some or all of such
conclusions ultimately may not be sustained. Any such contest with the IRS may
materially and adversely impact the market for the Common Units and the prices
at which Common Units trade. In addition, the costs of any contest with the IRS
will be borne directly or indirectly by some or all of the Unitholders and the
General Partners.
CONSEQUENCES OF EXCHANGING PROPERTY FOR COMMON UNITS
In general, no gain or loss will be recognized for federal income tax
purposes by the Partnership or by a person (including any individual,
partnership, corporation or corporation taxed under Subchapter S of the Code)
contributing property (including stock) to the Partnership in exchange for
Common Units. If the Partnership assumes liabilities in connection with a
contribution of assets in exchange for Common Units, however, taxable gain may
be recognized by the contributing person in certain circumstances.
TAX LIABILITY EXCEEDING CASH DISTRIBUTIONS
A Unitholder will be required to pay federal income taxes and, in certain
cases, state and local income taxes on his allocable share of the Partnership's
income, whether or not he receives cash distributions from the Partnership.
There is no assurance that a Unitholder will receive cash distributions equal to
his allocable share of taxable income from the Partnership or even the tax
liability to him resulting from that income. Further, a holder of Common Units
may incur a tax liability, in excess of the amount of cash received, upon the
sale of his Common Units. See "Tax Considerations--Tax Consequences of Unit
Ownership" and "--Disposition of Common Units."
OWNERSHIP OF COMMON UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER
INVESTORS
Investment in Common Units by certain tax-exempt entities, regulated
investment companies and foreign persons raises issues unique to such persons.
For example, virtually all of the taxable income derived by most organizations
exempt from federal income tax (including IRAs and other retirement plans) from
the ownership of Common Units will be unrelated business taxable income and thus
will be taxable to such a Unitholder. See "Tax Considerations--Uniformity of
Units--Tax-Exempt Organizations and Certain Other Investors."
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DEDUCTIBILITY OF LOSSES
In the case of taxpayers subject to the passive loss rules (generally,
individuals, estates, trusts and certain 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 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. 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." The IRS has issued the following registration number to the
Partnership: 97071000067. No assurance can be given that the Partnership will
not be audited by the IRS or that tax adjustments will not be made. The rights
of a Unitholder owning less than a 1% profits interest in the Partnership to
participate in the income tax audit process are very limited. Further, any
adjustments in the Partnership's tax returns will lead to adjustments in the
Unitholders' tax returns and may lead to audits of Unitholders' tax returns and
adjustments of items unrelated to the Partnership. Each Unitholder would bear
the cost of any expenses incurred in connection with an examination of such
Unitholder's personal tax return.
UNIFORMITY OF COMMON UNITS AND NONCONFORMING DEPRECIATION CONVENTIONS
Because the Partnership cannot match transferors and transferees of Common
Units, uniformity of the economic and tax characteristics of the Common Units to
a purchaser of Common Units must be maintained. To maintain uniformity and for
other reasons, the Partnership will adopt certain depreciation and amortization
conventions that do not conform with all aspects of certain proposed and final
Treasury Regulations. A successful challenge to those conventions by the IRS
could adversely affect the amount of tax benefits available to a purchaser of
Common Units and could have a negative impact on the value of the Common Units.
See "Tax Considerations--Uniformity of Units."
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will likely be subject to
other taxes, such as state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which the Partnership does business or owns property. A
Unitholder will likely be required to file state and local income tax returns
and pay state and local income taxes in some or all of the various jurisdictions
in which the Partnership does business or owns property and may be subject to
penalties for failure to comply with those requirements. The Partnership
currently owns property and conducts business in the following states which
currently impose a personal income tax: Alabama, Arizona, Arkansas, California,
Georgia, Illinois, Indiana, Kentucky, Maryland, Mississippi, Missouri, New
Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma,
South Carolina, Tennessee, Utah, Vermont and Virginia. It is the responsibility
of each Unitholder to file all United States federal, state and local tax
returns that may be required of such Unitholder. Counsel has not rendered an
opinion on the state or local tax consequences of an investment in the
Partnership. See "Tax Considerations-- State, Local and Other Tax
Considerations."
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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.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement, the net
proceeds from the sale of the Common Units offered hereby will be used for
general business purposes, which may include working capital, expansion of the
Partnership's propane business by internal growth and through acquisition, and
repayment of indebtedness. Pending application for the foregoing purposes, the
net proceeds will be invested in short-term securities.
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BUSINESS
GENERAL
The Partnership is principally engaged in (i) the retail distribution of
propane for residential, commercial, industrial, agricultural and other retail
uses, (ii) the wholesale marketing and distribution of propane and natural gas
liquids to the retail propane industry, the chemical and petrochemical
industries and other commercial and agricultural markets, (iii) the repair and
maintenance of propane heating systems and appliances and (iv) the sale of
propane-related supplies, appliances and other equipment. Propane, a by-product
of natural gas processing and petroleum refining, is a clean-burning energy
source recognized for its transportability and ease of use relative to
alternative stand-alone energy sources. The retail propane business of the
Partnership consists principally of transporting propane to its retail
distribution outlets and then to tanks located on its customers' premises.
Retail propane use falls into four broad categories: (i) residential, (ii)
industrial and commercial, (iii) agricultural and (iv) other applications,
including motor fuel sales. Residential customers use propane primarily for
space and water heating. Industrial customers use propane primarily as fuel for
forklifts and stationary engines, to fire furnaces, as a cutting gas, in mining
operations and in other process applications. Commercial customers, such as
restaurants, motels, laundries and commercial buildings, use propane in a
variety of applications, including cooking, heating and drying. In the
agricultural market, propane is primarily used for tobacco curing, crop drying,
poultry brooding and weed control. Other retail uses include motor fuel for cars
and trucks, outdoor cooking and other recreational purposes, propane resales and
sales to state and local governments. In its wholesale operations, the
Partnership sells propane principally to large industrial customers and other
propane distributors.
The retail propane business is a "margin-based" business in which gross
profits depend on the excess of sales prices over propane supply costs. Sales of
propane to residential and commercial customers, which account for the vast
majority of the Partnership's gross profit, have provided a relatively stable
source of income for the Partnership. Based on fiscal 1998 retail propane
gallons sold, the customer base consisted of 57% residential, 23% commercial and
industrial and 20% agricultural and other customers. Sales to residential
customers have generally provided higher gross margins than other retail propane
sales. While commercial propane sales are generally less profitable than
residential retail sales, the Partnership has traditionally relied on this
customer base to provide a steady, noncyclical source of revenues. No single
customer accounted for more than 1% of total revenues.
Because a substantial amount of propane is sold for heating purposes, the
severity of winter weather and resulting residential and commercial heating
usage have an important impact on the Partnership's earnings. Approximately
two-thirds of the Partnership's retail propane sales usually occur during the
six-month heating season from October through March. As a result of this
seasonality, the Partnership's sales and operating profits are concentrated in
its second and third fiscal quarters. Cash flows from operations, however, are
greatest from November through April, when customers pay for propane purchased
during the six-month peak season. To the extent the Managing General Partner
deems appropriate, the Partnership may reserve cash from these periods for
distribution to Unitholders during periods with lower cash flows from
operations. Sales and profits are subject to variation from month to month and
from year to year, depending on temperature fluctuations.
The Partnership's wholesale operations engage in the marketing of propane to
independent dealers, major interstate marketers and the chemical and
petrochemical industries. The Partnership participates to a lesser extent in the
marketing of other natural gas liquids, the processing and marketing of natural
gas and the gathering of crude oil. The Partnership either owns or has
contractual rights to use transshipment terminals, rail cars, long-haul tanker
trucks, pipelines and storage capacity. The Partnership believes that its
wholesale marketing and processing activities position it to achieve product
cost advantages and to avoid shortages during periods of tight supply to an
extent not generally available to other retail propane distributors.
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Propane competes primarily with natural gas, electricity and fuel oil as an
energy source, principally on the basis of price, availability and portability.
Propane is more expensive than natural gas on an equivalent BTU basis in
locations served by natural gas, but serves as a substitute for natural gas in
rural and suburban areas where natural gas is unavailable or portability of
product is required. Propane is generally less expensive to use than electricity
for space heating, water heating, clothes drying and cooking. Although propane
is similar to fuel oil in certain applications and market demand, propane and
fuel oil compete to a lesser extent primarily because of the cost of converting
from one to the other.
As of June 30, 1998, the Partnership's retail operations consisted of 282
customer service centers in 27 states. As of such date, the Partnership owned a
fleet of approximately 43 transport truck tractors, approximately 47 transport
trailers, approximately 760 bobtail trucks and approximately 900 other delivery
and service vehicles. In addition, in its retail operations, the Partnership
owns an aggregate of approximately 17 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.
PARTNERSHIP STRUCTURE AND MANAGEMENT
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 of the Managing General Partner manage the
Partnership's business. 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 following chart depicts the organization and ownership of the
Partnership and the Operating Partnership as of the date of this Prospectus. The
percentages reflected in the following chart represent the approximate ownership
interest in each of the Partnership and the Operating Partnership individually
and not on an aggregate basis. Except in the following chart, the ownership
percentages referred to in this Prospectus reflect the approximate effective
ownership interest of the Unitholders in the Partnership and the Operating
Partnership on a combined basis. The 2% ownership percentage of the General
Partners
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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.
[CHART]
EFFECTIVE AGGREGATE OWNERSHIP OF THE PARTNERSHIP AND THE
OPERATING PARTNERSHIP
Public Unitholders' Common Units 65.4%
General Partners' Subordinated Units 32.6%
General Partners' Combined General Partner Interest 2.0%
NORTHWESTERN CORPORATION ("NOR") has 100% Ownership of NORTHWESTERN GROWTH
CORPORATION ("Northwestern Growth"), which has 100% Ownership of CORNERSTONE
PROPANE GP, INC. ("Managing General Partner").
The Managing General Partner owns (i) 5,677,040 Subordinated Units
(representing a 28.3394% Limited Partner Interest) and has a 0.7686% Managing
General Partner Interest in CORNERSTONE PROPANE PARTNERS, L.P. ("Partnership"),
(ii) a 0.7764% Managing General Partner interest in CORNERSTONE PROPANE, L.P.
("Operating Partnership") and (iii) an 82.5% Common Stock Ownership Interest in
SYN INC. ("Synergy" or "Special General Partner"). (The remaining 17.5% Common
Stock Ownership Interest in Synergy is owned by unaffiliated shareholders.)
Synergy owns (i) 920,579 Subordinated Units (representing a 4.5954% Limited
Partner Interest) and a 0.2314% Special General Partner Interest in the
Partnership and (ii) a 0.2337% Special General Partner Interest in the Operating
Partnership.
The remaining 66.0652% Limited Partnership Interest in the Partnership is
owned by the PUBLIC UNITHOLDERS (13,234,411 Common Units).
The Partnership has a 98.9899% Limited Partner Interest in the Operating
Partnership and the Operating Partnership has 100% ownership of Cornerstone
Sales & Service Corporation and Flame, Inc.
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DESCRIPTION OF THE COMMON UNITS
THE UNITS
The Common Units and the Subordinated Units represent limited partner
interests in the Partnership, which entitle the holders thereof to participate
in Partnership distributions and to exercise the rights or privileges available
to limited partners under the Partnership Agreement. The holders of Common Units
do not have preemptive rights to acquire additional Common Units or other
partnership interests that may be issued by the Partnership. For a description
of the relative rights and preferences of holders of Common Units and
Subordinated Units in and to Partnership distributions, together with a
description of the circumstances under which Subordinated Units may convert into
Common Units, see "Cash Distribution Policy." For a description of the rights
and privileges of limited partners under the Partnership Agreement, see "The
Partnership Agreement."
TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer & Trust Company serves as registrar and transfer
agent (the "Transfer Agent") for the Common Units and receives a fee from the
Partnership for serving in such capacities. All fees charged by the Transfer
Agent for transfers of Common Units will be borne by the Partnership and not by
the holders of Common Units, except that fees similar to those customarily paid
by stockholders for surety bond premiums to replace lost or stolen certificates,
taxes and other governmental charges, special charges for services requested by
a holder of a Common Unit and other similar fees or charges will be borne by the
affected holder. There will be no charge to holders for disbursements of the
Partnership's cash distributions. The Partnership has agreed to indemnify the
Transfer Agent, its agents and each of their respective shareholders, directors,
officers and employees against all claims and losses that may arise out of acts
performed or omitted in respect of its activities as such, except for any
liability due to any negligence, gross negligence, bad faith or intentional
misconduct of the indemnified person or entity.
The Transfer Agent may at any time resign, by notice to the Partnership, or
be removed by the Partnership, such resignation or removal to become effective
upon the appointment by the Partnership of a successor transfer agent and
registrar and its acceptance of such appointment. If no successor has been
appointed and accepted such appointment within 30 days after notice of such
resignation or removal, the Managing General Partner is authorized to act as the
transfer agent and registrar until a successor is appointed.
TRANSFER OF COMMON UNITS
Persons acquiring Common Units in this offering and subsequent transferees
of Common Units (or their brokers, agents or nominees on their behalf) who wish
to become Unitholders of record will be required to execute transfer
applications before the acquisition or transfer of such Common Units will be
registered on the records of the Transfer Agent and before cash distributions or
federal income tax allocations can be made to the acquiror or transferee. 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. By executing
and delivering a transfer application, the transferee of Common Units (i)
becomes the record holder of such Common Units and shall constitute an assignee
until admitted into the Partnership as a substituted limited partner, (ii)
automatically requests admission as a substituted limited partner in the
Partnership, (iii) agrees to be bound by the terms and conditions of, and
executes, the Partnership Agreement, (iv) represents that such transferee has
the capacity, power and authority to enter into the Partnership Agreement, (v)
grants powers of attorney to officers of the Managing General Partner and any
liquidator of the Partnership as specified in the Partnership Agreement, and
(vi) makes the consents and waivers contained in the Partnership Agreement. An
assignee will become a substituted limited partner of the Partnership in respect
of the transferred
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Common Units upon the consent of the Managing General Partner and the
recordation of the name of the assignee on the books and records of the
Partnership. Such consent may be withheld in the sole discretion of the Managing
General Partner.
Common Units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to request admission as
a substituted limited partner in the Partnership in respect of the transferred
Common Units. A person acquiring Common Units who does not execute and deliver a
transfer application obtains only (a) the right to assign the Common Units to a
purchaser or other transferee and (b) the right to transfer the right to seek
admission as a substituted limited partner in the Partnership with respect to
the transferred Common Units. Thus, a person acquiring Common Units who does not
execute and deliver a transfer application will not receive cash distributions
or federal income tax allocations unless the Common Units are held in a nominee
or "street name" account and the nominee or broker has executed and delivered a
transfer application with respect to such Common Units, and may not receive
certain federal income tax information or reports furnished to record holders of
Common Units. The transferor of Common Units will have a duty to provide such
transferee with all information that may be necessary to obtain registration of
the transfer of the Common Units, but a transferee agrees, by acceptance of the
certificate representing Common Units, that the transferor will not have a duty
to insure the execution of the transfer application by the transferee and will
have no liability or responsibility if such transferee neglects to or chooses
not to execute and forward the transfer application to the Transfer Agent. See
"The Partnership Agreement--Status as Limited Partner or Assignee."
CASH DISTRIBUTION POLICY
GENERAL
The Partnership distributes 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 are 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
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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.
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.
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Partnership will make distributions to its partners with respect to each
quarter of the Partnership prior to its liquidation in an amount equal to 100%
of its Available Cash for such quarter. The Partnership expects to make
distributions of all Available Cash within 45 days after the end of each quarter
to holders of record on the applicable record date. The Minimum Quarterly
Distribution and the Target Distribution Levels are also subject to certain
other adjustments as described below under "--Distributions from Capital
Surplus" and "--Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels."
With respect to each quarter during the Subordination Period, to the extent
there is sufficient Available Cash, the holders of Common Units will have the
right to receive the Minimum Quarterly
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<PAGE>
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 1,649,405 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, one quarter of the
Subordinated Units (1,649,405 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 December 31, 2000
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.
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
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<PAGE>
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"
below.
The above references to the 2% of Available Cash from Operating Surplus
distributed to the General Partners are references to the amount of the
percentage interest in distributions from the Partnership and the Operating
Partnership of the General Partners on a combined basis (exclusive of their
interest as holders of the Subordinated Units). The General Partners own a
combined 1% general partner interest in the Partnership and a combined 1.0101%
general partner interest in the Operating Partnership. Other references in this
Prospectus to the General Partners' 2% interest or to distributions of 2% of
Available Cash are also references to the amount of the combined percentage
interest in the Partnership and the Operating Partnership of the General
Partners (exclusive of their interest as holders of the Subordinated Units).
With respect to any Common Unit, the term "Common Unit Arrearages" refers to the
amount by which the Minimum Quarterly Distribution in any quarter during the
Subordination Period exceeds the distribution of Available Cash from Operating
Surplus actually made for such quarter on a Common Unit, cumulative for such
quarter and all prior quarters during the Subordination Period. Common Unit
Arrearages will not accrue interest.
DISTRIBUTIONS FROM OPERATING SURPLUS AFTER SUBORDINATION PERIOD
Distributions by the Partnership of Available Cash from Operating Surplus
with respect to any quarter after the Subordination Period will be made in the
following manner:
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 Distribution"
below.
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<PAGE>
INCENTIVE DISTRIBUTIONS
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. The calculations are also
based on the assumption that the quarterly distribution amounts shown do not
include any Common Unit Arrearages. The amounts set forth under "Marginal
Percentage Interest in Distributions" are the percentage interests of the
General Partners and the Unitholders in any Available Cash from Operating
Surplus distributed up to and including the corresponding amount in the column
"Total Quarterly Distribution Target Amount," until Available Cash distributed
reaches the next Target Distribution Level, if any. The percentage interests
shown for the Unitholders and the General Partners for the Minimum Quarterly
Distribution are also applicable to quarterly distribution amounts that are less
than the Minimum Quarterly Distribution
<TABLE>
<CAPTION>
MARGINAL PERCENTAGE
INTEREST IN DISTRIBUTIONS
TOTAL QUARTERLY --------------------------
DISTRIBUTION TARGET GENERAL
AMOUNT UNITHOLDERS PARTNERS
------------------------- ------------- -----------
<S> <C> <C> <C>
Minimum Quarterly Distribution................................. $0.540 98% 2%
First Target Distribution...................................... $0.594 98% 2%
Second Target Distribution..................................... $0.700 85% 15%
Third Target Distribution...................................... $0.900 75% 25%
Thereafter..................................................... above $0.900 50% 50%
</TABLE>
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<PAGE>
DISTRIBUTIONS FROM CAPITAL SURPLUS
Distributions by the Partnership of Available Cash from Capital Surplus will
be made in the following manner:
FIRST, 98% to all Unitholders, pro rata, and 2% to the General
Partners, until the Partnership has distributed, in respect of each
outstanding Common Unit issued in the IPO, with the Available Cash from
Capital Surplus in an aggregate amount per Common Unit equal to the
Initial Unit Price;
SECOND, 98% to the holders of Common Units, pro rata, and 2% to the
General Partners, until the Partnership has distributed, in respect of
each outstanding Common Unit, Available Cash from Capital Surplus in an
aggregate amount equal to any unpaid Common Unit Arrearages with respect
to such Common Unit; and
THEREAFTER, all distributions of Available Cash from Capital Surplus
will be distributed as if they were from Operating Surplus.
As a distribution of Available Cash from Capital Surplus is made, it is
treated as if it were a repayment of the Initial Unit Price with respect to
Common Units issued in the IPO--it is a "return of capital" rather than a
"return on capital." To reflect such repayment, the Minimum Quarterly
Distribution and the Target Distribution Levels will be adjusted downward by
multiplying each such amount by a fraction, the numerator of which is the
Unrecovered Capital of the Common Units immediately after giving effect to such
repayment and the denominator of which is the Unrecovered Capital of the Common
Units immediately prior to such repayment. This adjustment to the Minimum
Quarterly Distribution may make it more likely that Subordinated Units will be
converted into Common Units (whether pursuant to the termination of the
Subordination Period or to the provisions permitting early conversion of some
Subordinated Units) and may accelerate the dates at which such conversions
occur.
When "payback" of the Initial Unit Price has occurred, i.e., when the
Unrecovered Capital of the Common Units is zero (and any accrued Common Unit
Arrearages have been paid), then in effect the Minimum Quarterly Distribution
and each of the Target Distribution Levels will have been reduced to zero for
subsequent quarters. Thereafter, all distributions of Available Cash from all
sources will be treated as if they were from Operating Surplus. Because the
Minimum Quarterly Distribution and the Target Distribution Levels will have been
reduced to zero, the General Partners will be entitled thereafter to receive 50%
of all distributions of Available Cash in their capacities as General Partners
and as holders of the Incentive Distribution Rights (in addition to any
distributions to which they may be entitled as holders of Units).
Distributions of Available Cash from Capital Surplus will not reduce the
Minimum Quarterly Distribution or Target Distribution Levels for the quarter
with respect to which they are distributed.
ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
In addition to reductions of the Minimum Quarterly Distribution and Target
Distribution Levels made upon a distribution of Available Cash from Capital
Surplus, the Minimum Quarterly Distribution, the Target Distribution Levels, the
Unrecovered Capital, the number of additional Common Units issuable during the
Subordination Period without a Unitholder vote, the number of Common Units
issuable upon conversion of the Subordinated Units and other amounts calculated
on a per Unit basis will be proportionately adjusted upward or downward, as
appropriate, in the event of any combination or subdivision of Common Units
(whether effected by a distribution payable in Common Units or otherwise), but
not by reason of the issuance of additional Common Units for cash or property.
For example, in the event of a two-for-one split of the Common Units (assuming
no prior adjustments), the Minimum Quarterly Distribution, each of the Target
Distribution Levels and the Unrecovered Capital of the Common Units would each
be reduced to 50% of its initial level.
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<PAGE>
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;
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;
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<PAGE>
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.
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
30
<PAGE>
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.
31
<PAGE>
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." Persons considering acquiring Common Units 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.
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<PAGE>
POWER OF ATTORNEY
Each Limited Partner, and each person who acquires a Unit from a Unitholder
and executes and delivers a transfer application with respect thereto, grants to
the Managing General Partner and, if a liquidator of the Partnership has been
appointed, such liquidator, a power of attorney to, among other things, execute
and file certain documents required in connection with the qualification,
continuance or dissolution of the Partnership or the amendment of the
Partnership Agreement in accordance with the terms thereof and to make consents
and waivers contained in the Partnership Agreement.
CAPITAL CONTRIBUTIONS
The Unitholders are not obligated to make additional capital contributions
to the Partnership, except as described below under "--Limited Liability."
LIMITED LIABILITY
Assuming that a Limited Partner does not participate in the control of the
business of the Partnership within the meaning of the Delaware Act and that he
otherwise acts in conformity with the provisions of the Partnership Agreement,
his liability under the Delaware Act will be limited, subject to certain
possible exceptions, to the amount of capital he is obligated to contribute to
the Partnership in respect of his Common Units plus his share of any
undistributed profits and assets of the Partnership. If it were determined,
however, that the right or exercise of the right by the Limited Partners as a
group to remove or replace the General Partners, to approve certain amendments
to the Partnership Agreement or to take other action pursuant to the Partnership
Agreement constituted "participation in the control" of the Partnership's
business for the purposes of the Delaware Act, then a Limited Partner could be
held personally liable for the Partnership's obligations under the laws of the
State of Delaware to the same extent as the General Partners with respect to
persons who transact business with the Partnership reasonably believing, based
on the Limited Partner's conduct, that the Limited Partner is a general partner.
Under the Delaware Act, a limited partnership may not make a distribution to
a partner to the extent that at the time of the distribution, after giving
effect to the distribution, all liabilities of the partnership, other than
liabilities to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to specific property
of the partnership, exceed the fair value of the assets of the limited
partnership. For the purpose of determining the fair value of the assets of a
limited partnership, the Delaware Act provides that the fair value of property
subject to liability for which recourse of creditors is limited shall be
included in the assets of the limited partnership only to the extent that the
fair value of that property exceeds that nonrecourse liability. The Delaware Act
provides that a limited partner who receives such a distribution and knew at the
time of the distribution that the distribution was in violation of the Delaware
Act shall be liable to the limited partnership for the amount of the
distribution for three years from the date of the distribution. Under the
Delaware Act, an assignee who becomes a substituted limited partner of a limited
partnership is liable for the obligations of his assignor to make contributions
to the partnership, except the assignee is not obligated for liabilities unknown
to him at the time he became a limited partner and which could not be
ascertained from the partnership agreement.
The Operating Partnership currently conducts business in at least 27 states.
Maintenance of limited liability may require compliance with legal requirements
in such jurisdictions in which the Operating Partnership conducts business,
including qualifying the Operating Partnership to do business there. Limitations
on the liability of limited partners for the obligations of a limited
partnership have not been clearly established in many jurisdictions. If it were
determined that the Partnership was, by virtue of its limited partner interest
in the Operating Partnership or otherwise, conducting business in any 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
33
<PAGE>
"participation in the control" of the Partnership's business for the purposes of
the statutes of any relevant jurisdiction, then the Limited Partners could be
held personally liable for the Partnership's obligations under the law of such
jurisdiction to the same extent as the General Partners under certain
circumstances. The Partnership will operate in such manner as the Managing
General Partner deems reasonable and necessary or appropriate to preserve the
limited liability of the Limited Partners.
ISSUANCE OF ADDITIONAL SECURITIES
The Partnership Agreement authorizes the Partnership to issue an unlimited
number of additional limited partner interests and other equity securities of
the Partnership for such consideration and on such terms and conditions as are
established by the Managing General Partner in its sole discretion without the
approval of any limited partners; provided that, during the Subordination
Period, except as provided in clauses (i) and (ii) below, the Partnership may
not issue equity securities of the Partnership ranking prior or senior to the
Common Units or an aggregate of more than 4,270,000 additional Common Units
(excluding Common Units issued upon conversion of Subordinated Units, upon
conversion of the general partner interests and Incentive Distribution Rights as
a result of a withdrawal of a General Partner, and pursuant to the employee
benefit plans of the Managing General Partner, the Partnership or other members
of the Partnership Group and subject to adjustment in the event of a combination
or subdivision of Common Units), of which 1,405 Common Units have been issued as
of June 30, 1998, 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; or (ii) if the proceeds from such issuance are
used exclusively to repay up to $75.0 million in indebtedness of a member of the
Partnership Group, in each case only where the aggregate amount of distributions
that would have been paid with respect to such newly issued Units and the
related additional distributions that would have been made to the General
Partners in respect of the (actual or pro forma) four-quarter period ending
prior to the first day of the quarter in which the issuance is to be consummated
(assuming such additional Units had been outstanding throughout such period and
that distributions equal to the distributions that were actually paid on the
outstanding Units during the period were paid on such additional Units) did not
exceed the interest costs actually incurred during such period on the
indebtedness that is to be repaid (or, if such indebtedness was not outstanding
throughout the entire period, would have been incurred had such indebtedness
been outstanding for the entire period). In accordance with Delaware law and the
provisions of the Partnership Agreement, the Partnership may also issue
additional partnership interests that, in the sole discretion of the Managing
General Partner, may have special voting rights to which the Common Units are
not entitled.
Upon issuance of additional Partnership Securities, the General Partners
will be required to make additional capital contributions to the extent
necessary to maintain their 2% general partner interest in the Partnership and
the Operating Partnership. Moreover, the Managing General Partner will have the
right, which it may from time to time assign in whole or in part to any of its
affiliates, to purchase Common Units, Subordinated Units or other equity
securities of the Partnership from the Partnership whenever, and on the same
terms that, the Partnership issues such securities or rights to persons other
than the Managing
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General Partner and its affiliates, to the extent necessary to maintain the
percentage interest of the General Partners and their affiliates in the
Partnership (including their interest represented by Subordinated Units) that
existed immediately prior to each such issuance. The holders of Common Units do
not have preemptive rights to acquire additional Common Units or other
partnership interests that may be issued by the Partnership.
AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed only by or with the
consent of the Managing General Partner, which consent may be given or withheld
in its sole discretion. In order to adopt a proposed amendment (other than
certain amendments discussed below), the Managing General Partner is required to
seek written approval of the holders of the number of Units required to approve
such amendment or call a meeting of the Limited Partners to consider and vote
upon the proposed amendment, except as described below. Proposed amendments
(unless otherwise specified) must be approved by holders of a Unit Majority,
except that no amendment may be made which would (i) enlarge the obligations of
any Limited Partner without its consent, unless approved by at least a majority
of the type or class of Units so affected, (ii) enlarge the obligations of,
restrict in any way any action by or rights of, or reduce in any way the amounts
distributable, reimbursable or otherwise payable by the Partnership to the
Managing General Partner or any of its affiliates without its 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.
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In addition to the Managing General Partner's right to amend the Partnership
Agreement as described above, the Managing General Partner may make amendments
to the Partnership Agreement without the approval of any Partner or assignee if
such amendments, in the discretion of the Managing General Partner, (i) do not
adversely affect the Limited Partners in any material respect, (ii) are
necessary or advisable to satisfy any requirements, conditions or guidelines
contained in any opinion, directive, order, ruling or regulation of any federal
or state agency or judicial authority or contained in any federal or state
statute, (iii) are necessary or advisable to facilitate the trading of the
Common Units (including the division of any class or classes of outstanding
Partnership Securities into different classes to facilitate uniformity of tax
consequences within such classes of Partnership Securities) or to comply with
any rule, regulation, guideline or requirement of any securities exchange on
which the Common Units are or will be listed for trading, compliance with any of
which the Managing General Partner deems to be in the best interests of the
Partnership and the Limited Partners, (iv) are necessary or advisable in
connection with any action taken by the Managing General Partner relating to
splits or combinations of Units pursuant to the provisions of the Partnership
Agreement or (v) are required to effect the intent expressed in this Prospectus
or the intent of the Partnership Agreement or contemplated by the Partnership
Agreement.
The Managing General Partner will not be required to obtain an Opinion of
Counsel (as defined below) in the event of the amendments described in the two
immediately preceding paragraphs. No other amendments to the Partnership
Agreement will become effective without the approval of holders of at least 90%
of the Units unless the Partnership obtains an Opinion of Counsel to the effect
that such amendment will not affect the limited liability under applicable law
of any limited partner in the Partnership or the limited partner of the
Operating Partnership.
Any amendment that would have a material adverse effect on the rights or
preferences of any type or class of outstanding Units in relation to other
classes of Units will require the approval of at least a majority of the type or
class of Units so affected. Any amendment that reduces the voting percentage
required to take any action is required to be approved by the affirmative vote
of limited partners constituting not less than the voting requirement sought to
be reduced.
MERGER, SALE OR OTHER DISPOSITION OF ASSETS
The Managing General Partner is generally prohibited, without the prior
approval of holders of a Unit Majority, from causing the Partnership to, among
other things, sell, exchange or otherwise dispose of all or substantially all of
its assets in a single transaction or a series of related transactions
(including by way of merger, consolidation or other combination) or approving on
behalf of the Partnership the sale, exchange or other disposition of all or
substantially all of the assets of the Operating Partnership; provided that the
Managing General Partner may mortgage, pledge, hypothecate or grant a security
interest in all or substantially all of the Partnership's assets without such
approval. The Managing General Partner may also sell all or substantially all of
the Partnership's assets pursuant to a foreclosure or other realization upon the
foregoing encumbrances without such approval. Furthermore, provided that certain
conditions are satisfied, the Managing General Partner may merge the Partnership
or any member of the Partnership Group into, or convey some or all of the
Partnership Group's assets to, a newly formed entity if the sole purpose of such
merger or conveyance is to effect a mere change in the legal form of the
Partnership into another limited liability entity. The Unitholders are not
entitled to dissenters' rights of appraisal under the Partnership Agreement or
applicable Delaware law in the event of a merger or consolidation of the
Partnership, a sale of substantially all of the Partnership's assets or any
other transaction or event.
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
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Partnership, (iii) the entry of a decree of judicial dissolution of the
Partnership or (iv) the withdrawal or removal of the Managing General Partner or
any other event that results in its ceasing to be the Managing General Partner
(other than by reason of a transfer of its general partner interest in
accordance with the Partnership Agreement or withdrawal or removal following
approval and admission of a successor). Upon a dissolution pursuant to clause
(iv), the holders of a Unit Majority may also elect, within certain time
limitations, to reconstitute the Partnership and continue its business on the
same terms and conditions set forth in the Partnership Agreement by forming a
new limited partnership on terms identical to those set forth in the Partnership
Agreement and having as general partner an entity approved by the holders of a
Unit Majority subject to receipt by the Partnership of an opinion of counsel to
the effect that (x) such action would not result in the loss of limited
liability of any Limited Partner and (y) neither the Partnership, the
reconstituted limited partnership nor the Operating Partnership would be treated
as an association taxable as a corporation or otherwise be taxable as an entity
for federal income tax purposes upon the exercise of such right to continue
(hereinafter, an "Opinion of Counsel").
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon dissolution of the Partnership, unless the Partnership is reconstituted
and continued as a new limited partnership, the person authorized to wind up the
affairs of the Partnership (the "Liquidator") will, acting with all of the
powers of the Managing General Partner that such Liquidator deems necessary or
desirable in its good faith judgment in connection therewith, liquidate the
Partnership's assets and apply the proceeds of the liquidation as provided in
"Cash Distribution Policy--Distributions of Cash Upon Liquidation." Under
certain circumstances and subject to certain limitations, the Liquidator may
defer liquidation or distribution of the Partnership's assets for a reasonable
period of time or distribute assets to partners in kind if it determines that a
sale would be impractical or would cause undue loss to the partners.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNERS
The Managing General Partner has agreed not to withdraw voluntarily as a
general partner of the Partnership and the Operating Partnership prior to
December 31, 2006 (with limited exceptions described below), without obtaining
the approval of the holders of a Unit Majority and furnishing an Opinion of
Counsel. On or after December 31, 2006, the Managing General Partner may
withdraw as the Managing General Partner (without first obtaining approval from
any Unitholder) by giving 90 days' written notice, and such withdrawal will not
constitute a violation of the Partnership Agreement. Notwithstanding the
foregoing, the Managing General Partner may withdraw without Unitholder approval
upon 90 days' notice to the Limited Partners if at least 50% of the outstanding
Common Units are held or controlled by one person and its affiliates (other than
the Managing General Partner and its affiliates). In addition, the Partnership
Agreement permits the General Partners (in certain limited instances) to sell or
otherwise transfer all of their general partner interests in the Partnership
without the approval of the Unitholders. See "--Transfer of General Partners'
Interests."
Upon the withdrawal of the Managing General Partner under any circumstances
(other than as a result of a transfer by the Managing General Partner of all or
a part of its general partner interests in the Partnership), the holders of a
Unit Majority may select a successor to such withdrawing Managing General
Partner. If such a successor is not elected, or is elected but an Opinion of
Counsel cannot be obtained, the Partnership will be dissolved, wound up and
liquidated, unless within 180 days after such withdrawal the holders of a Unit
Majority agree in writing to continue the business of the Partnership and to
appoint a successor Managing General Partner. See "--Termination and
Dissolution."
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
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general partner by the vote of the holders of not less than a Unit Majority. The
Partnership Agreement also provides that if the Managing General Partner is
removed as general partner of the Partnership under circumstances where Cause
does not exist and Units held by the General Partners and their affiliates are
not voted in favor of such removal (i) the Subordination Period will end and all
outstanding Subordinated Units will immediately convert into Common Units on a
one-for-one basis, (ii) any existing Common Unit Arrearages will be extinguished
and (iii) the General Partners will have the right to convert their partner
interests (and all the Incentive Distribution Rights) into Common Units or to
receive cash in exchange for such interests.
Withdrawal or removal of the Managing General Partner as a general partner
of the Partnership also constitutes withdrawal or removal, as the case may be,
of the Managing General Partner as a general partner of the Operating
Partnership. Any withdrawal or removal of the Managing General Partner will
result in the simultaneous withdrawal or removal of the Special General Partner
from the Partnership and the Operating Partnership.
In the event of removal of the General Partners under circumstances where
Cause exists or withdrawal of the General Partners where such withdrawal
violates the Partnership Agreement, a successor general partner will have the
option to purchase the general partner interests and Incentive Distribution
Rights of the departing General Partners (the "Departing Partners") in the
Partnership and the Operating Partnership for a cash payment equal to the fair
market value of such interests. Under all other circumstances where the General
Partners withdraw or are removed by the Limited Partners, the Departing Partners
will have the option to require the successor general partner to purchase such
general partner interest of the Departing Partners and their Incentive
Distribution Rights for such amount. In each case, such fair market value will
be determined by agreement between the Departing Partners and the successor
general partner, or if no agreement is reached, by an independent investment
banking firm or other independent expert selected by the Departing Partners and
the successor general partner (or if no expert can be agreed upon, by an expert
chosen by agreement of the experts selected by each of them). In addition, the
Partnership will be required to reimburse the Departing Partners for all amounts
due the Departing Partners, including, without limitation, all employee-related
liabilities, including severance liabilities, incurred in connection with the
termination of any employees employed by the Departing Partners for the benefit
of the Partnership.
If the above-described option is not exercised by either the Departing
Partners or the successor general partner, as applicable, the Departing
Partners' general partner interests in the Partnership and the Operating
Partnership and their Incentive Distribution Rights will be converted into
Common Units equal to the fair market value of such interests as determined by
an investment banking firm or other independent expert selected in the manner
described in the preceding paragraph.
TRANSFER OF GENERAL PARTNERS' INTERESTS AND INCENTIVE DISTRIBUTION RIGHTS
Except for a transfer by a General Partner of all, but not less than all, of
its general partner interest in the Partnership and the Operating Partnership to
(a) an affiliate of such General Partner or (b) another person in connection
with the merger or consolidation of such General Partner with or into another
person or the transfer by such General Partner of all or substantially all of
its assets to another person, such General Partner may not transfer all or any
part of its general partner interest in the Partnership and the Operating
Partnership to another person prior to December 31, 2006, without the approval
of the holders of at least a Unit Majority; provided that, in each case, such
transferee assumes the rights and duties of such General Partner to whose
interest such transferee has succeeded, agrees to be bound by the 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
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time, however, to transfer their Subordinated Units to one or more persons
without Unitholder approval. At any time, the stockholders of the General
Partners may sell or transfer all or part of their interest in the General
Partners to an affiliate or a third party without the approval of the
Unitholders. Each General Partner or its affiliates or a subsequent holder may
transfer its Incentive Distribution Rights to another person in connection with
its merger or consolidation with or into, or sale of all or substantially all of
its assets to, such person without the prior approval of the Unitholders.
Holders of Incentive Distribution Rights may also transfer such rights to their
affiliates without the prior approval of the Unitholders. Prior to December 31,
2006, other transfers of the Incentive Distribution Rights will require the
affirmative vote of holders of at least a Unit Majority. On or after December
31, 2006, the Incentive Distribution Rights will be freely transferable.
CHANGE OF MANAGEMENT PROVISIONS
The Partnership Agreement contains certain provisions that are intended to
discourage a person or group from attempting to remove the Managing General
Partner as general partner of the Partnership or otherwise change the management
of the Partnership. If any person or group other than the Managing General
Partner and its affiliates acquires beneficial ownership of 20% or more of any
class of Units, such person or group loses voting rights with respect to all of
its Units. The Partnership Agreement also provides that if the Managing General
Partner is removed as a general partner of the Partnership under circumstances
where Cause does not exist and Units held by the General Partners and their
affiliates are not voted in favor of such removal, (i) the Subordination Period
will end and all outstanding Subordinated Units will immediately convert into
Common Units on a one-for-one basis, (ii) any existing Common Unit Arrearages
will be extinguished and (iii) the General Partners will have the right to
convert their partner interests (and all of their Incentive Distribution Rights)
into Common Units or to receive cash in exchange for such interests.
LIMITED CALL RIGHT
If at any time not more than 20% of the then-issued and outstanding limited
partner interests of any class (including Common Units) are held by persons
other than the Managing General Partner and its affiliates, the Managing General
Partner will have the right, which it may assign in whole or in part to any of
its affiliates or to the Partnership, to acquire all, but not less than all, of
the remaining limited partner interests of such class held by such unaffiliated
persons as of a record date to be selected by the Managing General Partner, on
at least 10 but not more than 60 days' notice. The purchase price in the event
of such a purchase shall be the greater of (i) the highest price paid by the
Managing General Partner or any of its affiliates for any limited partner
interests of such class purchased within the 90 days preceding the date on which
the Managing General Partner first mails notice of its election to purchase such
limited partner interests, and (ii) the Current Market Price as of the date
three days prior to the date such notice is mailed. As a consequence of the
Managing General Partner's right to purchase outstanding limited partner
interests, a holder of limited partner interests may have his limited partner
interests purchased even though he may not desire to sell them, or the price
paid may be less than the amount the holder would desire to receive upon the
sale of his limited partner interests. The tax consequences to a Unitholder of
the exercise of this call right are the same as a sale by such Unitholder of his
Common Units in the market. See "Tax Considerations--Disposition of Common
Units."
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
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has not yet been admitted as a limited partner, the Managing General Partner
shall be deemed to be the limited partner with respect thereto and shall, in
exercising the voting rights in respect of such Common Units on any matter, vote
such Common Units at the written direction of such record holder. Absent such
direction, such Common Units will not be voted (except that, in the case of
Common Units held by the Managing General Partner on behalf of Non-citizen
Assignees (as defined below), the Managing General Partner shall distribute the
votes in respect of such Common Units in the same ratios as the votes of
partners in respect of other Units are cast).
The Managing General Partner does not anticipate that any meeting of
Unitholders will be called in the foreseeable future. Any action that is
required or permitted to be taken by the Unitholders may be taken either at a
meeting of the Unitholders or without a meeting if consents in writing setting
forth the action so taken are signed by holders of such number of Units as would
be necessary to authorize or take such action at a meeting of all of the
Unitholders. Meetings of the Unitholders of the Partnership may be called by the
Managing General Partner or by Unitholders owning at least 20% of the
outstanding Units of the class for which a meeting is proposed. Unitholders may
vote either in person or by proxy at meetings. The holders of a majority of the
outstanding Units of the class or classes for which a meeting has been called
represented in person or by proxy shall constitute a quorum at a meeting of
Unitholders of such class or classes, unless any such action by the Unitholders
requires approval by holders of a greater percentage of such Units, in which
case the quorum shall be such greater percentage.
Each record holder of a Unit has a vote according to his percentage interest
in the Partnership, although additional limited partner interests having special
voting rights could be issued by the Partnership. See "--Issuance of Additional
Securities." However, if at any time any person or group (other than the
Managing General Partner and its affiliates) acquires, in the aggregate,
beneficial ownership of 20% or more of any class of Units then outstanding, such
person or group will lose voting rights with respect to all of its Units and
such Units may not be voted on any matter and will not be considered to be
outstanding when sending notices of a meeting of Unitholders, calculating
required votes, determining the presence of a quorum or for other similar
Partnership purposes. The Partnership Agreement provides that Common Units held
in nominee or street name account will be voted by the broker (or other nominee)
pursuant to the instruction of the beneficial owner unless the arrangement
between the beneficial owner and his nominee provides otherwise. Except as
otherwise provided in the Partnership Agreement, Subordinated Units will vote
together with Common Units as a single class.
Any notice, demand, request, report or proxy material required or permitted
to be given or made to record holders of Common Units (whether or not such
record holder has been admitted as a limited partner) under the terms of the
Partnership Agreement will be delivered to the record holder by the Partnership
or by the Transfer Agent at the request of the Partnership.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described above under "--Limited Liability," the Common Units will
be fully paid, and Unitholders will not be required to make additional
contributions to the Partnership. An assignee of a Common Unit, subsequent to
executing and delivering a Transfer Application, but pending its admission as a
substituted Limited Partner in the Partnership, is entitled to an interest in
the Partnership equivalent to that of a Limited Partner with respect to the
right to share in allocations and distributions from the Partnership, including
liquidating distributions. The Managing General Partner will 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."
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NON-CITIZEN ASSIGNEES; REDEMPTION
If the Partnership is or becomes subject to federal, state or local laws or
regulations that, in the reasonable determination of the Managing General
Partner, create a substantial risk of cancellation or forfeiture of any property
in which the Partnership has an interest because of the nationality, citizenship
or other related status of any Limited Partner or assignee, the Partnership may
redeem the Units held by such Limited Partner or assignee at their Current
Market Price (as defined in the Glossary). In order to avoid any such
cancellation or forfeiture, the Managing General Partner may require each
Limited Partner or assignee to furnish information about his nationality,
citizenship or related status. If a Limited Partner or assignee fails to furnish
information about such nationality, citizenship or other related status within
30 days after a request for such information or the Managing General Partner
determines after receipt of such information that the Limited Partner or
assignee is not an eligible citizen, such Limited Partner or assignee may be
treated as a non-citizen assignee ("Non-citizen Assignee"). In addition to other
limitations on the rights of an assignee who is not a substituted Limited
Partner, a Non-citizen Assignee does not have the right to direct the voting of
his Units and may not receive distributions in kind upon liquidation of the
Partnership.
INDEMNIFICATION
The Partnership Agreement provides that the Partnership will indemnify the
General Partners, any Departing Partner, any Person who is or was an affiliate
of a General Partner or any Departing Partner, any Person who is or was a
member, partner, officer, director, employee, agent or trustee of a General
Partner or any Departing Partner or any affiliate of a General Partner or any
Departing Partner, or any Person who is or was serving at the request of a
General Partner or any Departing Partner or any affiliate of any such person,
any affiliate of a General Partner or any Departing Partner as an officer,
director, employee, member, partner, agent, fiduciary or trustee of another
Person ("Indemnitees"), to the fullest extent permitted by law, from and against
any and all losses, claims, damages, liabilities (joint or several), expenses
(including, without limitation, legal fees and expenses), judgments, fines,
penalties, interest, settlements and other amounts arising from any and all
claims, demands, actions, suits or proceedings, whether civil, criminal,
administrative or investigative, in which any Indemnitee may be involved, or is
threatened to be involved, as a party or otherwise, by reason of its status as
an Indemnitee; provided that in each case the Indemnitee acted in good faith and
in a manner that such Indemnitee reasonably believed to be in or not opposed to
the best interests of the Partnership and, with respect to any criminal
proceeding, had no reasonable cause to believe its conduct was unlawful. Any
indemnification under these provisions will be only out of the assets of the
Partnership, and the General Partners shall not be personally liable for, or
have any obligation to contribute or loan funds or assets to the Partnership to
enable it to effectuate, such indemnification. The Partnership is authorized to
purchase (or to reimburse the General Partners or their affiliates for the cost
of) insurance against liabilities asserted against and expenses incurred by such
persons in connection with the Partnership's activities, regardless of whether
the Partnership would have the power to indemnify such person against such
liabilities under the provisions described above.
BOOKS AND REPORTS
The Managing General Partner is required to keep appropriate books of the
business of the Partnership at the principal offices of the Partnership. The
books will be maintained for both tax and financial reporting purposes on an
accrual basis. For tax purposes, the fiscal year of the Partnership is the
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
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principles. As soon as practicable, but in no event later than 90 days after the
close of each quarter (except the last quarter of each fiscal year), the
Managing General Partner will furnish or make available to each record holder of
Units (as of a record date selected by the Managing General Partner) a report
containing unaudited financial statements of the Partnership with respect to
such quarter and such other information as may be required by law.
The Partnership will furnish each record holder of a Unit information
reasonably required for tax reporting purposes within 90 days after the close of
each calendar year. Such information is expected to be furnished in summary form
so that certain complex calculations normally required of partners can be
avoided. The Partnership's ability to furnish such summary information to
Unitholders will depend on the cooperation of such Unitholders in supplying
certain information to the Partnership. Every Unitholder (without regard to
whether he supplies such information to the Partnership) will receive
information to assist him in determining his federal and state tax liability and
filing his federal and state income tax returns.
RIGHT TO INSPECT PARTNERSHIP BOOKS AND RECORDS
The Partnership Agreement provides that a Limited Partner can for a purpose
reasonably related to such Limited Partner's interest as a limited partner, upon
reasonable demand and at his own expense, have furnished to him (i) a current
list of the name and last known address of each partner, (ii) a copy of the
Partnership's tax returns, (iii) information as to the amount of cash, and a
description and statement of the agreed value of any other property or services,
contributed or to be contributed by each partner and the date on which each
became a partner, (iv) copies of the Partnership Agreement, the certificate of
limited partnership of the Partnership, amendments thereto and powers of
attorney pursuant to which the same have been executed, (v) information
regarding the status of the Partnership's business and financial condition, and
(vi) such other information regarding the affairs of the Partnership as is just
and reasonable. The Partnership may, and intends to, keep confidential from the
Limited Partners trade secrets or other information the disclosure of which the
Partnership believes in good faith is not in the best interests of the
Partnership or which the Partnership is required by law or by agreements with
third parties to keep confidential.
REGISTRATION RIGHTS
Pursuant to the terms of the Partnership Agreement and subject to certain
limitations described therein, the Partnership has agreed to register for resale
under the Securities Act and applicable state securities laws any Common Units
or other securities of the Partnership (including Subordinated Units) proposed
to be sold by the General Partners or any of their affiliates if an exemption
from such registration requirements is not otherwise available for such proposed
transaction. The Partnership is obligated to pay all expenses incidental to such
registration, excluding underwriting discounts and commissions. See "Units
Eligible for Future Sale."
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CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
CONFLICTS OF INTEREST
Certain conflicts of interest exist and may arise in the future as a result
of the relationships between the General Partners and their stockholders, on the
one hand, and the Partnership and its limited partners, on the other hand. The
directors and officers of the Managing General Partner have fiduciary duties to
manage the Managing General Partner, including its investments in its
subsidiaries and affiliates, in a manner beneficial to its stockholder. At the
same time, the Managing General Partner has a fiduciary duty to manage the
Partnership in a manner beneficial to the Partnership and the Unitholders. The
Partnership Agreement contains provisions that allow the Managing General
Partner to take into account the interests of parties in addition to the
Partnership in resolving conflicts of interest, thereby limiting its fiduciary
duty to the Unitholders, as well as provisions that may restrict the remedies
available to Unitholders for actions taken that might, without such limitations,
constitute breaches of fiduciary duty. The duty of the directors and officers of
the Managing General Partner to its stockholder may, therefore, come into
conflict with the duties of the Managing General Partner to the Partnership and
the Unitholders. The Audit Committee of the Board of Directors of the Managing
General Partner will, at the request of the Managing General Partner, review
conflicts of interest that may arise between the Managing General Partner or its
affiliates, on the one hand, and the Partnership, on the other. The Partnership
Agreement provides that the Managing General Partner may adopt a resolution or
course of action that has not been approved by a majority of the members of the
Audit Committee.
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.
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.
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 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
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executives of the Managing General Partner with a conflict of interest in
negotiating the acquisition price on behalf of the Partnership. Mr. Baxter, the
only participant in the New Acquisition Incentive Plan who is a member of the
Board of Directors of the Managing General Partner, has agreed that he will not
participate in any board deliberations regarding potential acquisitions subject
to the New Acquisition Incentive Plan. The Partnership believes that the fact
that the ultimate decision regarding acquisitions and their terms will be made
by directors who have no interest in the New Acquisition Incentive Plan will
significantly reduce the potential conflicts resulting from the structure of the
plan.
COMMON UNITS ARE SUBJECT TO THE MANAGING GENERAL PARTNER'S LIMITED CALL
RIGHT
The Managing General Partner may exercise its right to call and purchase
Units as provided in the Partnership Agreement or assign such right to one of
its affiliates or to the Partnership. The Managing General Partner may use its
own discretion, free of fiduciary duty restrictions, in determining whether to
exercise such right. As a consequence, a Common Unitholder may have his Common
Units purchased from him even though he may not desire to sell them, and the
price paid may be less than the amount the holder would desire to receive upon
sale of his Common Units. For a description of such right, see "The Partnership
Agreement--Limited Call Right."
THE PARTNERSHIP MAY RETAIN SEPARATE COUNSEL FOR ITSELF OR FOR THE HOLDERS OF
COMMON UNITS; ADVISORS RETAINED BY THE PARTNERSHIP HAVE NOT BEEN RETAINED
TO ACT FOR HOLDERS OF COMMON UNITS
The Common Unitholders were not represented by counsel in connection with
the preparation of the Partnership Agreement or other agreements referred to
herein. The attorneys, independent public accountants and others who have
performed services for the Partnership 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.
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 NOR and Northwestern Growth) are not restricted from
engaging in any business activities, including those in competition with the
Partnership.
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Affiliates of the Managing General Partner may engage in a business activity
that involves the retail sale of propane to end users in the continental United
States only if (i) the Managing General Partner determines in its reasonable
judgment, prior to the commencement of such activity, that it is not in the best
interests of the Partnership to engage in such activity either (A) because of
the financial commitments or operating characteristics associated with such
activity or (B) because such activity is not consistent with the business
strategy or cannot otherwise be integrated with the Partnership's operations on
a basis beneficial to the Partnership; or (ii) such activity is being undertaken
as provided in a joint venture agreement or other agreement between the
Partnership and an affiliate of the Managing General Partner and such joint
venture or other agreement was determined at the time it was entered into to be
fair to the Partnership in the reasonable judgment of the Managing General
Partner.
There are no restrictions on the ability of affiliates of the Managing
General Partner to engage in the retail sale of propane outside the continental
United States or in the trading, transportation, storage and wholesale
distribution of propane. The Partnership Agreement expressly provides that if
the Managing General Partner or its affiliates act in accordance with the
foregoing, it shall not constitute a breach of the Managing General Partner's
fiduciary duties to the Partnership or the Unitholders if the Managing General
Partner or its affiliates engage in direct competition with the Partnership.
THE PARTNERSHIP AGREEMENT PERMITS THE PARTNERSHIP TO ENGAGE IN ROLL-UP
TRANSACTIONS
The Partnership Agreement does not prohibit the Partnership from engaging in
roll-up transactions. Were the Managing General Partner to cause the Partnership
to engage in a roll-up transaction, there could be no assurance that such a
transaction would not have a material adverse effect on a Unitholder's
investment in the Partnership.
FIDUCIARY AND OTHER DUTIES
The General Partners will be accountable to the Partnership and the
Unitholders as fiduciaries. Consequently, the Managing General Partner must
exercise due care, good faith and integrity in handling the assets and affairs
of the Partnership. In contrast to the relatively well-developed law concerning
fiduciary duties owed by officers and directors to the shareholders of a
corporation, the law concerning the duties owed by general partners to other
partners and to partnerships is relatively undeveloped. Neither the Delaware
Revised Uniform Limited Partnership Act (the "Delaware Act") nor case law
defines with particularity the fiduciary duties owed by general partners to
limited partners or a limited partnership, but the Delaware Act provides that
Delaware limited partnerships may, in their partnership agreements, restrict or
expand the fiduciary duties that might otherwise be applied by a court in
analyzing the standard of duty owed by general partners to limited partners and
the partnership.
Fiduciary duties are generally considered to include an obligation to act
with due care and the highest good faith, fairness and loyalty. Such duty of
loyalty, in the absence of a provision in a 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
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that a partnership agreement is not unenforceable by reason of its not having
been signed by a person being admitted as a limited partner or becoming an
assignee in accordance with the terms thereof.
The Partnership Agreement provides that whenever a conflict arises between
the General Partners or their affiliates, on the one hand, and the Partnership
or any other partner, on the other, the Managing General Partner shall resolve
such conflict. The Managing General Partner in general shall not be in breach of
its obligations under the Partnership Agreement or its duties to the Partnership
or the Unitholders if the resolution of such conflict is fair and reasonable to
the Partnership, and any resolution shall conclusively be deemed to be fair and
reasonable to the Partnership if such resolution is (i) approved by the Audit
Committee (although no party is obligated to seek such approval and the Managing
General Partner may adopt a resolution or course of action that has not received
such approval), (ii) on terms no less favorable to the Partnership than those
generally being provided to or available from unrelated third parties or (iii)
fair to the Partnership, taking into account the totality of the relationships
between the parties involved (including other transactions that may be
particularly favorable or advantageous to the Partnership). In resolving such
conflict, the Managing General Partner may (unless the resolution is
specifically provided for in the Partnership Agreement) consider the relative
interests of the parties involved in such conflict or affected by such action,
any customary or accepted industry practices or historical dealings with a
particular person or entity and, if applicable, generally accepted accounting
practices or principles and such other factors as its deems relevant. Thus,
unlike the strict duty of a fiduciary who must act solely in the best interests
of his beneficiary, the Partnership Agreement permits the Managing General
Partner to consider the interests of all parties to a conflict of interest,
including the interests of the General 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
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their negligent acts if they meet such requirements concerning good faith and
the best interests of the Partnership.
TAX CONSIDERATIONS
The following section describes the material United States tax
considerations that may be relevant to prospective Unitholders. The statements
of law or legal conclusion set forth in this section constitute the opinion of
McCutchen, Doyle, Brown & Enersen, LLP, counsel to the General Partners and the
Partnership ("Counsel"). This section is based upon current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed
regulations thereunder and current administrative rulings and court decisions,
including modifications made by the Taxpayer Relief Act of 1997 (the "1997 Act")
and the IRS Restructuring and Reform Act of 1998 (the "1998 Act"), all of which
are subject to change at any time. Such changes, which may be applied
retroactively, may cause the tax consequences to vary substantially from the
consequences described below. Unless the context otherwise requires, references
in this section to the Partnership are references to both the Partnership and
the Operating Partnership.
This section only addresses the tax consequences to Unitholders who are
individual citizens or residents of the United States and has only limited
application to corporations, estates, trusts, non-resident aliens or other
Unitholders subject to specialized tax treatment (such as tax-exempt
institutions, foreign persons, individual retirement accounts, REITs or mutual
funds). This section does not address all tax consequences that may be
applicable to a Unitholder. Accordingly, each prospective Unitholder should
consult, and should depend on, his own tax advisor in analyzing the federal,
state, local and foreign tax consequences peculiar to him of the ownership or
disposition of Common Units.
For the reasons hereinafter described, Counsel has not rendered an opinion
with respect to the following specific federal income tax issues: (i) the
treatment of a Unitholder whose Common Units are loaned to a short seller to
cover a short sale of Common Units (see "--Tax Treatment of Operations--
Treatment of Short Sales"), (ii) whether a Unitholder acquiring Common Units in
separate transactions must maintain a single aggregate adjusted tax basis in his
Common Units (see "--Disposition of Common Units--Recognition of Gain or Loss"),
(iii) whether the Partnership's monthly convention for allocating taxable income
and losses is permitted by existing Treasury Regulations (see "--Disposition of
Common Units--Allocations Between Transferors and Transferees"), and (iv)
whether the Partnership's method for depreciating Section 743 adjustments will
be recognized for federal income tax purposes (see "--Tax Treatment of
Operations--Section 754 Election").
An opinion of counsel represents only that counsel's best legal judgment and
does not bind the Internal Revenue Service (the "IRS") or the courts. No ruling
has been or will be requested from the IRS with respect to classification of the
Partnership as a partnership for federal income tax purposes, whether the
Partnership's propane operations generate "qualifying income" under Section 7704
of the Code or any other matter affecting the Partnership or prospective
Unitholders. Thus, no assurance can be provided that the opinions set forth
herein would be sustained by a court if contested by the IRS. Any such contest
with the IRS may materially and adversely impact the market for the Common Units
and the prices at which Common Units trade. In addition, the costs of any
contest with the IRS will be borne directly or indirectly by the Unitholders and
the General Partners.
TAX RATES
The top marginal income tax rate for individuals is 36% subject to a 10%
surtax on individuals with taxable income in excess of $278,450 per year. The
surtax is computed by applying a 39.6% rate to taxable income in excess of the
threshold. As provided in the 1998 Act, long-term capital gains recognized after
January 1, 1998 on marketable securities such as Common Units will be taxed at a
maximum rate of 20% for individuals if the individual's holding period is more
than one year.
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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) Neither the Partnership nor the Operating Partnership has or will elect
to be treated as an association or corporation;
(b) The Partnership and the Operating Partnership have been and will be
operated in accordance with (i) all applicable partnership statutes, (ii)
the applicable partnership agreement, and (iii) the description thereof
in this Prospectus; and
(c) For each taxable year of the Partnership's existence, at least 90% of
the gross income of the Partnership has been and will be income from
sources that Counsel opined or may opine generate "qualifying income"
within the meaning of Section 7704(d) of the Code.
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 exploration, development,
production, processing, refining, 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. 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
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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 both the Partnership
and the Operating Partnership will be classified as partnerships for federal
income tax purposes.
CONSEQUENCES OF EXCHANGING PROPERTY FOR COMMON UNITS
RECOGNITION OF GAIN OR LOSS
In general, no gain or loss will be recognized for federal income tax
purposes by the Partnership or by a person (including any individual,
partnership, S corporation or corporation taxed under Subchapter C of the Code)
contributing property (including stock) to the Partnership in exchange for
Common Units. If the Partnership assumes liabilities or takes assets subject to
liabilities in connection with a contribution of assets in exchange for Common
Units, however, the application of either one or both of two federal income tax
rules may result in the recognition of taxable gain by the contributing person.
The first of these rules is the "disguised sale rule." Under the disguised
sale rule, if the Partnership assumes or takes property subject to a liability
of the contributing person other than a "qualified liability," the Partnership
is treated as transferring taxable consideration to the contributing person to
the extent that the amount of the liability exceeds the contributing person's
share of that liability immediately after the Partnership assumes or takes
subject to the liability. For this purpose, a qualified liability includes: (a)
a liability that was incurred by the partner more than two years prior to the
earlier of the date the partner agrees in writing to transfer the property or
the date the partner transfers the property to the Partnership and that has
encumbered the transferred property throughout that two-year period; (b) a
liability that was not incurred in anticipation of the transfer of the property
to the Partnership, but that was incurred by the partner within the two-year
period prior to the earlier of the date the partner agrees in writing to
transfer the property or the date the partner transfers the property to the
Partnership and that has encumbered the transferred property since it was
incurred; (c) a liability that is allocable under the rules of Treasury
Regulation Section 1.163-8T to capital expenditures with respect to the
property; or (d) a liability that was incurred in the ordinary course of the
trade or business in which property transferred to the Partnership was used or
held but only if all the assets related to that trade or business are
transferred other than assets that are not material to a continuation of the
trade or business. Assuming that any such liabilities are nonrecourse in nature
(no partner of the Partnership has any liability for failure to pay), a
contributing person's "share" of the liabilities will generally equal his
Percentage Interest in the Partnership multiplied by the amount of such
liabilities.
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.
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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 Partnership disposes of the Contributed
Property in a taxable transaction.
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 nonrecourse 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 nonrecourse debt and by the Unitholder's share of expenditures of
the Partnership that are not deductible in computing its taxable income and are
not required to be capitalized.
OWNERSHIP OF UNITS BY S CORPORATIONS
Section 1362(b) of the Code provides that certain small business
corporations may elect to be treated as "S corporations." 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, certain trusts and certain tax-exempt
organizations) 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 persons who
are shareholders of a corporation at the time it elects to be an S corporation
must consent to the S election. 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
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having been made out of subchapter C earnings and profits. Distributions in
excess of the accumulated adjustments account and subchapter C earnings and
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 the distributions exceed 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 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.
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 by the Partnership
of assets (including inventory) 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.
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
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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 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.
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LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES
The deduction by a Unitholder of his share of Partnership losses will be
limited to the tax basis in his Units and, in the case of an individual
Unitholder or a corporate Unitholder (if more than 50% of the value of its stock
is owned directly or indirectly by five or fewer individuals or certain
tax-exempt organizations), to the amount for which the Unitholder is considered
to be "at risk" with respect to the Partnership's activities, if that is less
than the Unitholder's tax basis. A Unitholder must recapture losses deducted in
previous years to the extent that Partnership distributions cause the
Unitholder's at risk amount to be less than zero at the end of any taxable year.
Losses disallowed to a Unitholder or recaptured as a result of these limitations
will carry forward and will be allowable to the extent that the Unitholder's tax
basis or at risk amount (whichever is the limiting factor) is subsequently
increased. Upon the taxable disposition of a Unit, any gain recognized by a
Unitholder can be offset by losses that were previously suspended by the at risk
limitation but may not be offset by losses suspended by the basis limitation.
Any excess loss (above such gain) previously suspended by the at risk or basis
limitations is no longer deductible.
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.
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." 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. In addition, the Unitholder's share of the Partnership's portfolio
income will be treated as investment income. Investment interest expense
includes (i) interest on indebtedness properly allocable to property held for
investment, (ii) the Partnership's interest expense attributed to portfolio
income, and (iii) the portion of interest expense incurred to purchase or carry
an interest in a passive activity to the extent attributable to portfolio
income. The computation of a Unitholder's investment interest expense will take
into account interest on any margin account borrowing or other loan incurred to
purchase or carry a Unit. Net investment income includes gross income from
property held for investment and amounts treated as portfolio income pursuant to
the passive loss rules less deductible expenses (other than interest) directly
connected with the production of investment income, but generally does not
include gains attributable to the disposition of property held for investment.
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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
distributions. 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"). 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 upon disposition of such property.
Similar rules permit the Partnership to adjust the book values of Partnership
property whenever property is contributed to or distributed by the Partnership
(a "Book-Up"). 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. Finally, although the Partnership does
not expect that its operations will result in the creation of negative capital
accounts, if negative capital accounts (as determined for "book" purposes)
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 or adjusted by a
Book-Up) and "tax" capital account (credited with the tax basis of Contributed
Property and unchanged in a Book-Up) (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 the 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.
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
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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 contributors immediately prior to
their contributions to the Partnership plus the amount of gain, if any,
recognized by the General Partners or other contributors 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 has elected 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 the Treasury Regulations, the underwriting
discounts and commissions would be treated as a syndication cost.
SECTION 754 ELECTION
The Partnership has made 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 Regulations under Section 743 of the Code require a portion of the
Section 743(b) adjustment to be depreciated over the remaining cost recovery
period for the Section 704(c) built-in gain. Nevertheless, the proposed
regulations under Section 197 indicate that if the remedial allocation method is
adopted (which the Partnership has done) 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
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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. Although the proposed regulations
under Section 743 will likely eliminate many of the problems if finalized in
their current form, the depreciation and amortization methods and useful lives
associated with the Section 743(b) adjustment 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) and Proposed
Treasury Regulation Section 1.197-2(g)(3). 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. This method is consistent with the proposed regulations
under Section 743 but is arguably inconsistent with Treasury Regulation Section
1.167(c)-1(a)(6) (which is not expected to directly apply to a material portion
of the Partnership's assets) and Proposed Treasury Regulation Section
1.197-2(g)(3). To the extent such Section 743(b) adjustment is attributable to
appreciation in value in excess of the unamortized Book-Tax Disparity, the
Partnership will apply the rules described in the Regulations and legislative
history. If the Partnership determines that such position cannot reasonably be
taken, the Partnership may adopt a depreciation or amortization convention under
which all purchasers acquiring Units in the same month would receive
depreciation or amortization, whether attributable to Common Basis or Section
743(b) adjustment, based upon the same applicable rate as if they had purchased
a direct interest in the Partnership's assets. Such an aggregate approach may
result in lower annual depreciation or amortization deductions than would
otherwise be allowable to certain Unitholders. See "--Uniformity of Units."
The allocation of the Section 743(b) adjustment must be made in accordance
with the Code. The IRS may seek to reallocate some or all of any Section 743(b)
adjustment not so allocated by the Partnership to goodwill which, as an
intangible asset, would be amortizable over a longer period of time than the
Partnership's tangible assets.
A Section 754 election is advantageous if the transferee's tax basis in his
Units is higher than such Units' share of the aggregate tax basis to the
Partnership of the Partnership's assets immediately prior to the transfer. In
such a case, as a result of the election, the transferee would have a higher tax
basis in his share of the Partnership's assets for purposes of calculating,
among other items, his depreciation and depletion deductions and his share of
any gain or loss on a sale of the Partnership's assets. Conversely, a Section
754 election is disadvantageous if the transferee's tax basis in such Units is
lower than such Unit's share of the aggregate tax basis of the Partnership's
assets immediately prior to the transfer. Thus, the fair market value of the
Units may be affected either favorably or adversely by the election.
The calculations involved in the Section 754 election are complex and will
be made by the Partnership on the basis of certain assumptions as to the value
of Partnership assets and other matters. There is no assurance that the
determinations made by the Partnership will not be successfully challenged by
the IRS and that the deductions resulting from them will not be reduced or
disallowed altogether. Should the IRS require a different basis adjustment to be
made, and should, in the Partnership's opinion, the expense of compliance exceed
the benefit of the election, the Partnership may seek permission from the IRS to
revoke the Section 754 election for the Partnership. If such permission is
granted, a subsequent purchaser of Units may be allocated more income than he
would have been allocated had the election not been revoked.
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ALTERNATIVE MINIMUM TAX
Each Unitholder will be required to take into account his distributive share
of any items of Partnership income, gain, deduction or loss for purposes of the
alternative minimum tax.
A Unitholder's alternative minimum taxable income derived from the
Partnership may be higher than his share of Partnership net income because the
Partnership may use accelerated methods of depreciation for purposes of
computing federal taxable income or loss. The minimum tax rate for non-corporate
taxpayers is 26% on the first $175,000 of alternative minimum taxable income in
excess of the exemption amount and 28% on any additional alternative minimum
taxable income. Prospective Unitholders should consult with their tax advisors
as to the impact of an investment in Units on their liability for the
alternative minimum tax.
VALUATION OF PARTNERSHIP PROPERTY AND BASIS OF PROPERTIES
The federal income tax consequences of the acquisition, ownership and
disposition of Units will depend in part on estimates by the Partnership of the
relative fair market values, and determinations of the initial tax bases, of the
assets of the Partnership. Although the Partnership may from time to time
consult with professional appraisers with respect to valuation matters, many of
the relative fair market value estimates will be made by the Partnership. These
estimates and determinations of basis are subject to challenge and will not be
binding on the IRS or the courts. If the estimates of fair market value or
determinations of basis are subsequently found to be incorrect, the character
and amount of items of income, gain, loss or deductions previously reported by
Unitholders might change, and Unitholders might be required to adjust their tax
liability for prior years.
TREATMENT OF SHORT SALES
A Unitholder whose Units are loaned to a "short seller" to cover a short
sale of Units may be considered as having disposed of ownership of those Units.
If so, he would no longer be a partner with respect to those Units during the
period of the loan and may recognize gain or loss from the disposition. As a
result, during this period, any Partnership income, gain, deduction or loss with
respect to those Units would not be reportable by the Unitholder, any cash
distributions received by the Unitholder with respect to those Units would be
fully taxable and all of such distributions would appear to be treated as
ordinary income. Unitholders desiring to assure their status as partners and
avoid the risk of gain recognition should modify any applicable brokerage
account agreements to prohibit their brokers from borrowing their Units.
DISPOSITION OF COMMON UNITS
RECOGNITION OF GAIN OR LOSS
Gain or loss will be recognized on a sale of Units equal to the difference
between the amount realized and the Unitholder's tax basis for the Units sold. A
Unitholder's amount realized will be measured by the sum of the cash or the fair
market value of other property received plus his share of Partnership
nonrecourse liabilities. Because the amount realized includes a Unitholder's
share of Partnership nonrecourse liabilities, the gain recognized on the sale of
Units could result in a tax liability in excess of any cash received from such
sale.
Under the 1997 Act, a taxpayer is treated as having sold an "appreciated"
partnership interest (one in which gain would be recognized if such interest
were sold, assigned or terminated at fair market value) if such taxpayer or
related persons entered into one or more positions with respect to the same or
substantially identical property which, for some period, substantially
eliminated both the risk of loss and opportunity for gain on the appreciated
financial position (including selling "short against the box" transactions).
Unitholders should consult with their tax advisers in the event they are
considering entering into a short sale transaction or any other risk arbitrage
transaction involving their Common Units.
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Prior Partnership distributions in excess of cumulative net taxable income
in respect of a Common Unit which decreased a Unitholder's tax basis in such
Common Unit will, in effect, become taxable income if the Common Unit is sold at
a price greater than the Unitholder's tax basis in such Common Unit, even if the
price is less than his original cost.
Should the IRS successfully contest the convention used by the Partnership
to amortize only a portion of the Section 743(b) adjustment (described under
"--Tax Treatment of Operations--Section 754 Election") attributable to an
amortizable Section 197 intangible after a sale by the General Partners of
Units, a Unitholder could realize additional gain from the sale of Units than
had such convention been respected. In that case, the Unitholder may have been
entitled to additional deductions against income in prior years but may be
unable to claim them, with the result to him of greater overall taxable income
than appropriate. Counsel is unable to opine as to the validity of the
convention but believes such a contest by the IRS to be unlikely because a
successful contest could result in substantial additional deductions to other
Unitholders.
Gain or loss recognized by a Unitholder (other than a "dealer" in Common
Units) on the sale or exchange of a Unit held for more than one year will
generally be taxable as long-term capital gain or loss. 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 inventory items owned by the Partnership. The
term "unrealized receivables" includes potential recapture items, including
depreciation recapture. Ordinary income attributable to unrealized receivables,
inventory items and depreciation recapture may exceed net taxable gain realized
upon the sale of the Unit and may be recognized even if there is a net taxable
loss realized on the sale of the Unit. Thus, a Unitholder may recognize both
ordinary income and a capital loss upon a disposition of Units. Net capital loss
may offset no more than $3,000 of ordinary income in the case of individuals and
may only be used to offset capital gain in the case of corporations.
The IRS has ruled that a partner who acquires interests in a Partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of such
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. The ruling is unclear as to how the
holding period of these interests is determined once they are combined. If this
ruling is applicable to the holders of Common Units, a Common Unitholder will be
unable to select high or low basis Common Units to sell as would be the case
with corporate stock. It is not clear whether the ruling applies to the
Partnership, because, similar to corporate stock, interests in the Partnership
are evidenced by separate certificates. Accordingly, Counsel is unable to opine
as to the effect such ruling will have on the Unitholders. A Unitholder
considering the purchase of additional Common Units or a sale of Common Units
purchased in separate transactions should consult his tax advisor as to the
possible consequences of such ruling.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES
In general, the Partnership's taxable income and losses will be determined
annually, will be prorated on a monthly basis and will be subsequently
apportioned among the Unitholders in proportion to the number of Units owned by
each of them as of the opening of the New York Stock Exchange 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
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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 will be deemed to have conveyed all its assets and
liabilities to a newly formed partnership in exchange for all the interests in
such partnership and then the Partnership will be deemed to have liquidated and
to have distributed to its partners the interests in this newly formed
partnership. A termination of the Partnership will cause a termination of the
Operating Partnership and any Subsidiary Partnership. Such a termination could
also result in penalties or loss of tax basis adjustments under Section 754 of
the Code if the Partnership were unable to determine that the termination had
occurred.
In the case of a Unitholder reporting on a taxable year other than a fiscal
year ending December 31, the closing of the tax year of the Partnership may
result in more than 12 months' taxable income or loss of the Partnership being
includable in his taxable income for the year of termination. In addition, each
Unitholder will realize taxable gain to the extent that any money deemed as a
result of the termination to have been distributed to him exceeds the adjusted
tax basis of his Units. New tax elections required to be made by the
Partnership, including a new election under Section 754 of the Code, must be
made subsequent to a constructive termination. A termination could also result
in a deferral of Partnership deductions for depreciation. Finally, a termination
might either accelerate the application of, or subject the Partnership to, any
tax legislation enacted prior to the termination.
ENTITY-LEVEL COLLECTIONS
If the Partnership is required or elects under applicable law to pay any
federal, state or local income tax on behalf of any Unitholder or any General
Partner or any former Unitholder, the Partnership is authorized to pay those
taxes from Partnership funds. Such payment, if 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
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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 Treasury Regulation Section 1.167(c)-1(a)(6) and Proposed
Treasury Regulation Section 1.197-2(g)(3). 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,
consistent with the proposed regulations under Section 743 but despite its
inconsistency with Treasury Regulation Section 1.167(c)-1(a)(6) (which is not
expected to directly apply to a material portion of the Partnership's assets)
and Proposed Treasury Regulation Section 1.197-2(g)(3). See "--Tax Treatment of
Operations--Section 754 Election." To the extent such Section 743(b) adjustment
is attributable to appreciation in value in excess of the unamortized Book-Tax
Disparity, the Partnership will apply the rules described in the Regulations and
legislative history. If the Partnership determines that such a position cannot
reasonably be taken, the Partnership may adopt a depreciation and amortization
convention under which all purchasers acquiring Units in the same month would
receive depreciation and amortization deductions, whether attributable to Common
Basis or Section 743(b) basis, based upon the same applicable rate as if they
had purchased a direct interest in the Partnership's property. If such an
aggregate approach is adopted, it may result in lower annual depreciation and
amortization deductions than would otherwise be allowable to certain Unitholders
and risk the loss of depreciation and amortization deductions not taken in the
year that such deductions are otherwise allowable. This convention will not be
adopted if the Partnership determines that the loss of depreciation and
amortization deductions will have a material adverse effect on the Unitholders.
If the Partnership chooses not to utilize this aggregate method, the Partnership
may use any other reasonable depreciation and amortization convention to
preserve the uniformity of the intrinsic tax characteristics of any Units that
would not have a material adverse effect on the Unitholders. The IRS may
challenge any method of depreciating the Section 743(b) adjustment described in
this paragraph. If such a challenge were sustained, the uniformity of Units
might be affected, and the gain from the sale of Units might be increased
without the benefit of additional deductions. See "--Disposition of Common
Units--Recognition of Gain or Loss."
TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Ownership of Units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to such persons and, as
described below, may have substantially adverse tax consequences. Employee
benefit plans and most other organizations exempt from federal income tax
(including individual retirement accounts ("IRAs") and other retirement plans)
are subject to federal income tax on unrelated business
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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 attributable to United
States property of the Partnership.
ADMINISTRATIVE MATTERS
PARTNERSHIP INFORMATION RETURNS AND AUDIT PROCEDURES
The Partnership intends to furnish to each Unitholder, within 75 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 each Unitholder's
allocable share of income, gain, loss and deduction. There is no assurance that
any of those conventions will yield a result which conforms to the requirements
of the Code, regulations or administrative interpretations of the IRS. The
Partnership cannot assure prospective Unitholders that the IRS will not
successfully contend in court that such accounting and reporting conventions are
impermissible. Any such challenge by the IRS could negatively affect the value
of the Units.
The federal income tax information returns filed by the Partnership may be
audited by the IRS. Adjustments resulting from any such audit may require each
Unitholder to adjust a prior year's tax liability, and possibly may result in an
audit of the Unitholder's own return. Any audit of a Unitholder's return could
result in adjustments of non-Partnership as well as Partnership items.
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Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership proceeding rather than
in separate proceedings with the partners. The Code provides for one partner to
be designated as the "Tax Matters Partner" for these purposes. The Partnership
Agreement appoints the Managing General Partner as the Tax Matters Partner of
the Partnership.
The Tax Matters Partner will make certain elections on behalf of the
Partnership and Unitholders and can extend the statute of limitations for
assessment of tax deficiencies against Unitholders with respect to Partnership
items. The Tax Matters Partner may bind a Unitholder with less than a 1% profits
interest in the Partnership to a settlement with the IRS unless that Unitholder
elects, by filing a statement with the IRS, not to give such authority to the
Tax Matters Partner. The Tax Matters Partner may seek judicial review (by which
all the Unitholders are bound) of a final partnership administrative adjustment
and, if the Tax Matters Partner fails to seek judicial review, such review may
be sought by any Unitholder having at least a 1% interest in the profits of the
Partnership and by the Unitholders having in the aggregate at least a 5% profits
interest. However, only one action for judicial review will go forward, and each
Unitholder with an interest in the outcome may participate.
A Unitholder must file a statement with the IRS identifying the treatment of
any item on his federal income tax return that is not consistent with the
treatment of the item on the Partnership's return. Intentional or negligent
disregard of the consistency requirement may subject a Unitholder to substantial
penalties. Partners in electing large partnerships are required to treat all
Partnership items in a manner consistent with the Partnership return. The
Partnership is evaluating its situation and has not yet decided whether it will
elect to be treated as an electing large partnership.
Under the reporting provisions of the 1997 Act, each partner of an electing
large partnership will take into account separately his share of the following
items, determined at the partnership level: (1) taxable income or loss from
passive loss limitation activities; (2) taxable income or loss from other
activities (such as portfolio income or loss); (3) net capital gains to the
extent allocable to passive loss limitation activities and other activities; (4)
tax exempt interest; (5) a net alternative minimum tax adjustment separately
computed for passive loss limitation activities and other activities; (6)
general credits; (7) low-income housing credit; (8) rehabilitation credit; (9)
foreign income taxes; (10) credit for producing fuel from a nonconventional
source; and (11) any other items the Secretary of Treasury deems appropriate.
The 1997 Act also makes a number of changes to the tax compliance and
administrative rules relating to partnerships. One provision requires that each
partner in an electing large partnership, such as the Partnership, take into
account his share of any adjustments to partnership items in the year such
adjustments are made. Alternatively, under the 1997 Act, an electing large
partnership can elect to or, in some circumstances, can be required to directly
pay the tax resulting from any such adjustments. Moreover, a partnership (and
not its partners) is liable for any interest and penalties that result from a
partnership adjustment. In either case, therefore, Unitholders could bear
significant economic burdens associated with tax adjustments relating to periods
predating their acquisition of Units.
NOMINEE REPORTING
Persons who hold an interest in the Partnership as a nominee for another
person are required to furnish to the Partnership (a) the name, address and
taxpayer identification number of the beneficial owner and the nominee; (b)
whether the beneficial owner is (i) a person that is not a United States person,
(ii) a foreign government, an international organization or any wholly-owned
agency or instrumentality of either of the foregoing, or (iii) a tax-exempt
entity; (c) the amount and description of Units held, acquired or transferred
for the beneficial owner; and (d) certain information including the dates of
acquisitions and transfers, means of acquisitions and transfers, and acquisition
cost for purchases, as well as the amount of net proceeds from sales. Brokers
and financial institutions are required to furnish additional information,
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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.
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%.
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STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will be subject to other
taxes, such as state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which the Partnership does business or owns property. Although
an analysis of those various taxes is not presented here, each prospective
Unitholder should consider their potential impact on his investment in the
Partnership. The Partnership currently owns property and conducts business in
the following states which currently impose a personal income tax: Alabama,
Arizona, Arkansas, California, Georgia, Illinois, Indiana, Kentucky, Maryland,
Mississippi, Missouri, New Hampshire, New Jersey, New Mexico, New York, North
Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Utah, Vermont and Virginia.
A Unitholder will be required to file state income tax returns and to pay state
income taxes in some or all of these states and may be subject to penalties for
failure to comply with those requirements. In certain states, tax losses may not
produce a tax benefit in the year incurred (if, for example, the Partnership has
no income from sources within that state) and also may not be available to
offset income in subsequent taxable years. Some of the states may require the
Partnership, or the Partnership may elect, to withhold a percentage of income
from amounts to be distributed to a Unitholder who is not a resident of the
state. Withholding, the amount of which may be greater or less than a particular
Unitholder's income tax liability to the state, generally does not relieve the
non-resident Unitholder from the obligation to file an income tax return.
Amounts withheld may be treated as if distributed to Unitholders for purposes of
determining the amounts distributed by the Partnership. See "--Disposition of
Common Units--Entity-Level Collections."
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.
UNITS ELIGIBLE FOR FUTURE SALE
The General Partners hold 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.
The Common Units offered hereby will generally be freely transferable
without restriction or further registration under the Securities Act, other than
by an "affiliate" (as that term is defined in the Securities Act) of the
Partnership. The Common Units issuable to the General Partners upon conversion
of the Subordinated Units ("Restricted Units") may not be sold unless registered
under the Securities Act or sold in accordance with an exemption therefrom, such
as Rule 144. In general, under Rule 144 as currently in effect, a person (and
persons whose Common Units are aggregated with those of such person) who has
owned Restricted Units beneficially for at least one year, including an
affiliate for purposes of Rule 144, would be entitled to sell within any
three-month period a number of Common Units that does not exceed the greater of
(i) one percent of the then outstanding Common Units or (ii) the average weekly
trading volume of the Common Units during the four calendar weeks preceding the
date on which notice of the sale is filed with the Commission. Sales under Rule
144 are subject to certain manner of sale provisions, notice requirements and
the availability of current public information about the Partnership.
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,
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pursuant to the employee benefit plans of the Managing General Partner, the
Partnership or other members of the Partnership Group, or in connection with
certain acquisitions or capital improvements or the repayment of certain
indebtedness and subject to adjustment in the event of a combination or
subdivision of the Common Units), of which 1,405 Common Units have been issued
as of June 30, 1998, 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. As of
June 30, 1998 Common Units with an aggregate value of $10.4 million had 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.
Pursuant to the Partnership Agreement, the General Partners and their
affiliates have the right, upon the terms and subject to the conditions therein,
to cause the Partnership to register under the Securities Act and state laws the
offer and sale of any Units or other Partnership Securities that they hold.
Subject to the terms and conditions of the Partnership Agreement, such
registration rights allow the General Partners and their affiliates or their
assignees holding any Units to require registration of any such Units and to
include any such Units in a registration by the Partnership of other Units,
including Units offered by the Partnership or by any Unitholder. Such
registration rights will continue in effect for two years following any
withdrawal or removal of the Managing General Partner as a general partner of
the Partnership. In connection with any such registration, the Partnership will
indemnify each Unitholder participating in such registration and its officers,
directors and controlling persons from and against any liabilities under the
Securities Act or any state securities laws arising from the registration
statement or prospectus. The Partnership will bear all costs and expenses of any
such registration. In addition, the General Partners and their affiliates may
sell their Units in private transactions at any time, subject to compliance with
applicable laws.
PLAN OF DISTRIBUTION
The Common Units may be offered through one or more broker-dealers, through
underwriters, or directly to investors, at a fixed price or prices, which may be
changed from time to time, at market prices prevailing at the time of such sale,
at prices related to such market prices or at negotiated prices, and in
connection therewith distributors' or sellers' commission may be paid or
allowed, which will not exceed those customary in the types of transactions
involved. Broker-dealers may act as agents for the Partnership, or may purchase
Common Units from the Partnership as principal and thereafter resell such Common
Units from time to time or through one or more transactions (which may involve
crosses and block transactions) or distributions on the NYSE, in the
over-the-counter market, in private transactions or in some combination of the
foregoing.
Any such broker-dealer or underwriter may receive compensation in the form
of underwriting discounts or commissions and may receive commissions from
purchasers of the Common Units for whom they may act as agents. If any such
broker-dealer purchases the Common Units as principal, it may effect
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resales of the Common Units from time to time or through other broker-dealers,
and such other broker-dealers may receive compensation in the form of
concessions or commissions from the purchasers of Common Units for whom they may
act as agents.
To the extent required, the names of the specific managing underwriter or
underwriters, if any, as well as certain other information, will be set forth in
a Prospectus Supplement. In such event, the discounts and commissions to be
allowed or paid to the underwriters, if any, and the discounts and commissions
to be allowed or paid to dealers or agents, if any, will be set forth in, or may
be calculated from the Prospectus Supplement.
Agents, dealers and underwriters may be entitled under agreements, entered
into with the Partnership, to indemnification by the Partnership against certain
civil liabilities, including liabilities under the Securities Act, or to
contribution with respect to payments which such agents, dealers or underwriters
may be required to make in respect thereof. Agents, dealers and underwriters may
be customers of, engage in transactions with or perform services for the
Partnership or its affiliates in the ordinary course of business.
Under certain circumstances, this Prospectus also may be used for resales of
Common Units by persons who receive Common Units in acquisitions. See
"Outstanding Securities Covered by this Prospectus."
VALIDITY OF THE COMMON UNITS
The validity of the Common Units has been passed upon for the Partnership by
McCutchen, Doyle, Brown & Enersen, LLP.
EXPERTS
The audited financial statements of Cornerstone Propane Partners, L.P.
incorporated by reference in this Prospectus and elsewhere in the Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
The audited financial statements incorporated by reference in this
Prospectus and elsewhere in the Registration Statement for Empire Energy
Corporation, to the extent and for the periods indicated in their report, have
been audited by Baird, Kurtz & Dobson, independent public accountants, and are
included herein in reliance upon the report of said firm given upon its
authority as experts in giving such report.
The audited financial statements of SYN Inc. incorporated by reference in
this Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
The CGI Holdings, Inc. financial statements for the year ended July 31, 1996
and for the four and one-half months ended December 16, 1996 incorporated in
this Prospectus by reference to the Cornerstone Propane Partners, L.P.'s Annual
Report on Form 10-K for the year ended June 30, 1998, as amended have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The audited financial statements incorporated by reference in this
Prospectus and elsewhere in the Registration Statement for Synergy Group
Incorporated, to the extent and for the periods indicated in their report, have
been audited by Baird, Kurtz & Dobson, independent public accountants, and are
included herein in reliance upon the report of said firm given upon its
authority as experts in giving such report.
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APPENDIX A
GLOSSARY OF CERTAIN TERMS
ACQUISITION: Any transaction in which any member of the Partnership Group
acquires (through an asset acquisition, merger, stock acquisition or other form
of investment) control over all or a portion of the assets, properties or
business of another person for the purpose of increasing the operating capacity
or revenues of the Partnership Group from the operating capacity or revenues of
the Partnership Group existing immediately prior to such transaction.
ACQUISITION FACILITY: A $75.0 million revolving credit facility entered
into by the Operating Partnership to be used for acquisitions and improvements.
ADJUSTED OPERATING SURPLUS: With respect to any period, Operating Surplus
generated during such period (a) less (i) any net increase in working capital
borrowings during such period and (ii) any net reduction in cash reserves for
Operating Expenditures during such period not relating to an Operating
Expenditure made during such period, and (b) plus (i) any net decrease in
working capital borrowings during such period and (ii) any net increase in cash
reserves for Operating Expenditures during such period required by any debt
instrument for the repayment of principal, interest or premium. Adjusted
Operating Surplus does not include that portion of Operating Surplus included in
clause (a)(i) of the definition of Operating Surplus.
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 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.
A-1
<PAGE>
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.
CODE: Internal Revenue Code of 1986, as amended.
COMBINED OPERATIONS: The propane business and assets of Synergy, Empire
Energy and Coast contributed to the Partnership pursuant to the Contribution
Agreement.
COMMISSION: Securities and Exchange Commission.
COMMON UNIT ARREARAGE: The amount by which the Minimum Quarterly
Distribution in respect of a quarter during the Subordination Period exceeds the
distribution of Available Cash from Operating Surplus actually made for such
quarter on a Common Unit, cumulative for such quarter and all prior quarters
during the Subordination Period.
COMMON UNITS: A Unit representing a fractional part of the Partnership
Interests of all limited partners and assignees and having the rights and
obligations specified with respect to Common Units in the Partnership Agreement.
CONTRIBUTION AGREEMENT: The Contribution, Conveyance and Assumption
Agreement dated the Closing Date among the Operating Partnership, the General
Partners and certain other parties governing the Transactions pursuant to which,
among other things, the propane assets and operations of Synergy, Empire Energy
and Coast were transferred and the liabilities assumed.
CORNERSTONE: Cornerstone Propane Partners, L.P., a Delaware limited
partnership.
COUNSEL: McCutchen, Doyle, Brown & Enersen, LLP, special counsel to the
General Partners and the Partnership.
A-2
<PAGE>
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.
EMPIRE ENERGY: Empire Energy Corporation, a Tennessee corporation.
EXCHANGE ACT: Securities Exchange Act of 1934, as amended.
EXECUTIVES: Messrs. Keith G. Baxter, Charles J. Kittrell, Ronald J. Goedde
and Vincent J. DiCosimo.
GENERAL PARTNERS: The Managing General Partner and the Special General
Partner and their successors and permitted assigns as general partners of the
Partnership and the Operating Partnership.
HEATING DEGREE DAY: Heating Degree Days measure the amount by which the
average of the high and low temperature on a given day is below 65 degrees
Fahrenheit. For example, if the high temperature is 60 degrees and the low
temperature is 40 degrees for a National Oceanic and Atmospheric Administration
measurement location, the average temperature is 50 degrees and the number of
heating degree days for that day is 15.
INCENTIVE DISTRIBUTION RIGHT: A non-voting limited partner Partnership
Interest issued to the General Partners in connection with the transfer of their
assets to the Partnership, which Partnership Interest confers upon the holder
thereof only the rights and obligations specifically provided in the Partnership
Agreement with respect to Incentive Distribution Rights (and no other rights
otherwise available to or other obligations of holders of a Partnership
Interest).
INCENTIVE DISTRIBUTIONS: The distributions of Available Cash from Operating
Surplus initially made to the General Partners that are in excess of the General
Partners' aggregate 2% general partner interest.
A-3
<PAGE>
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.
IPO: The Partnership's initial public offering of Common Units in December
1996.
IRS: Internal Revenue Service.
MANAGING GENERAL PARTNER: Cornerstone Propane GP, Inc., a California
corporation, and its successors, as managing general partner of the Partnership.
MINIMUM QUARTERLY DISTRIBUTION: $.54 per Unit with respect to each quarter
or $2.16 per Unit on an annualized basis, subject to adjustment as described in
"Cash Distribution Policy--Distributions from Capital Surplus" and "Cash
Distribution Policy--Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels."
NEW ACQUISITION INCENTIVE PLAN: The plan providing bonuses to participants
in the plan (who are determined by the Board of Directors of the Managing
General Partner and 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.
NOR: Northwestern Corporation, a Delaware corporation.
NORTHWESTERN GROWTH: Northwestern Growth Corporation, a South Dakota
corporation and a wholly owned subsidiary of NOR.
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.
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.
A-4
<PAGE>
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 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.
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-3, as amended
(No. 333-60931), filed by the Partnership with the Commission.
RESTRICTED UNIT PLAN: The Cornerstone Propane Partners, L.P. 1996
Restricted Unit Plan.
A-5
<PAGE>
SECURITIES ACT: The Securities Act of 1933, as amended.
SPECIAL GENERAL PARTNER: Synergy and its successors and assigns as special
general partner of the Partnership.
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, one-quarter of the Subordinated Units (1,649,405 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 December 31, 2000 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. 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.
TARGET DISTRIBUTION LEVELS: See "Cash Distribution Policy--Incentive
Distributions."
TRANSFER AGENT: Continental Stock Transfer & Trust Company serving as
registrar and transfer agent for the Common Units.
TRANSFER APPLICATION: An application for transfer of Units in the form set
forth on the back of a certificate.
UNITHOLDERS: Holders of the Common Units and the Subordinated Units,
collectively.
A-6
<PAGE>
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.
A-7
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an estimate of the expenses expected to be
incurred in connection with the issuance and distribution of the securities
being registered, other than underwriting compensation:
<TABLE>
<S> <C>
Registration Fee--Securities and Exchange Commission.............. $ 14,842
New York Stock Exchange additional listing fee.................... 8,750
Blue Sky Fees and Expenses........................................ 1,000
Accounting Fees and Expenses...................................... 10,000
Legal Fees and Expenses........................................... 75,000
Printing Fees and Expenses........................................ 10,000
Transfer Agent Fees and Expenses.................................. 1,000
Miscellaneous..................................................... 1,000
---------
TOTAL......................................................... $ 121,592
---------
---------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Section of the Prospectus entitled "The Partnership
Agreement--Indemnification" is incorporated herein by this reference.
Subject to any terms, conditions or restrictions set forth in the
Partnership Agreements, Section 17-108 of the Delaware Revised Limited
Partnership Act empowers a Delaware limited partnership to indemnify and hold
harmless any partner or other person from and against all claims and demands
whatsoever.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Cornerstone Propane Partners L.P., Common Units Representing Limited Partners Interests, Form of
Underwriting Agreement--Standard Provisions.
*3.1 Amended and Restated Agreement of Limited Partnership of Cornerstone Propane Partners, L.P. dated as
of December 17, 1996.
*3.2 Amended and Restated Agreement of Limited Partnership of Cornerstone Propane, L.P. dated as of
December 17, 1996.
5.1 Opinion of McCutchen, Doyle, Brown & Enersen, LLP as to the legality of the securities being
registered.
8.1 Opinion of McCutchen, Doyle, Brown & Enersen, LLP relating to tax matters.
*10.1 Credit Agreement dated December 17, 1996, among Cornerstone Propane, L.P., various financial
institutions and Bank of America National Trust and Savings Association, as agent.
*10.2 Note Purchase Agreement dated December 17, 1996, among Cornerstone Propane, L.P. and certain
investors.
*10.3 Contribution, Conveyance and Assumption Agreement dated as of December 17, 1996, among Cornerstone
Propane Partners, L.P., Cornerstone Propane, L.P., Cornerstone Propane GP, Inc., Empire Energy SC
Corporation and SYN Inc.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
*10.4 1996 Cornerstone Propane Partners, L.P. Restricted Unit Plan.
***10.5 Form of Amended and Restated Employment Agreements for Messrs. Baxter, Kittrell, Goedde and DiCosimo
effective as of May 1, 1997.
**10.6 Amendment No. 1 to Credit Agreement.
**10.7 Amendment No. 2 to Credit Agreement.
****21.1 List of Subsidiaries.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Baird, Kurtz & Dobson.
23.3 Consent of PricewaterhouseCoopers LLP.
23.4 Consent of McCutchen, Doyle, Brown & Enersen, LLP (included in Exhibit 5.1 and 8.1).
</TABLE>
- ------------------------
* Incorporated by reference to the Partnership's Current Report on Form 8-K
dated April 14, 1997.
** Incorporated by reference to the Partnership's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997.
*** Incorporated by reference to the Partnership's Quarterly Report on Form
10-Q for the quarter ended December 31, 1997.
**** Incorporated by reference to the Partnership's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998, as amended.
(b) Financial Statement Schedules.
All Financial statement schedules are omitted because the information is not
required, is not material or is otherwise included in the financial statements
or related notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(a) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement provided, however,
that the undertakings set forth in paragraphs(1)(a) and (1)(b) above do
not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with
or furnished to the Commission by the registrant pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in this Registration Statement; and
II-2
<PAGE>
(c) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended (the "Securities Act"), each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefor, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer of controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(5) That, for the purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(6) For purposes of determining any liability under the Securities Act
of 1933:
(a) the information omitted from the form of prospectus filed as part
of the Registration Statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
the Registration Statement as of the time it was declared effective; and
(b) each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment to this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Watsonville, State of California, on October 14,
1998.
<TABLE>
<S> <C> <C> <C>
CORNERSTONE PROPANE PARTNERS, L.P.
By: CORNERSTONE PROPANE GP, INC.,
GENERAL PARTNER
By: /s/ KEITH G. BAXTER
-------------------------------------
Keith G. Baxter
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment to this Registration Statement has been signed by the following
persons in the capacities and dates indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------- --------------------------------------
<C> <S>
/s/ MERLE D. LEWIS*
- -------------------------------------- Chairman of the Board and Director of
Merle D. Lewis Cornerstone Propane GP, Inc.
/s/ RICHARD R. HYLLAND* Vice Chairman of the Board and
- -------------------------------------- Director of Cornerstone Propane GP,
Richard R. Hylland Inc.
/s/ KEITH G. BAXTER President, Chief Executive Officer and
- -------------------------------------- Director of Cornerstone Propane GP,
Keith G. Baxter Inc. (Principal Executive Officer)
Executive Vice President and Chief
/s/ RONALD J. GOEDDE* Financial Officer of Cornerstone
- -------------------------------------- Propane GP, Inc. (Principal
Ronald J. Goedde Financial and Accounting Officer)
/s/ DANIEL K. NEWELL*
- -------------------------------------- Director of Cornerstone Propane GP,
Daniel K. Newell Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------- --------------------------------------
<C> <S>
/s/ PAUL CHRISTEN*
- -------------------------------------- Director of Cornerstone Propane GP,
Paul Christen Inc.
/s/ KURT KATZ*
- -------------------------------------- Director of Cornerstone Propane GP,
Kurt Katz Inc.
</TABLE>
<TABLE>
<S> <C>
*By /s/ KEITH G. BAXTER
--------------------------------------
Keith G. Baxter, ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
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EXHIBITS DESCRIPTION
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1.1 Cornerstone Propane Partners, L.P., Common Units Representing Limited Partner Interests, Form of
Underwriting Agreement--Standard Provisions.
*3.1 Amended and Restated Agreement of Limited Partnership of Cornerstone Propane Partners, L.P. dated as
of December 17, 1996.
*3.2 Amended and Restated Agreement of Limited Partnership of Cornerstone Propane, L.P. dated as of
December 17, 1996.
5.1 Opinion of McCutchen, Doyle, Brown & Enersen, LLP as to the legality of the securities being
registered.
8.1 Opinion of McCutchen, Doyle, Brown & Enersen, LLP relating to tax matters.
*10.1 Credit Agreement dated December 17, 1996, among Cornerstone Propane, L.P., various financial
institutions and Bank of America National Trust and Savings Association, as agent.
*10.2 Note Purchase Agreement dated December 17, 1996, among Cornerstone Propane, L.P. and certain
investors.
*10.3 Contribution, Conveyance and Assumption Agreement dated as of December 17, 1996, among Cornerstone
Propane Partners, L.P., Cornerstone Propane, L.P., Cornerstone Propane GP, Inc., Empire Energy SC
Corporation and SYN Inc.
*10.4 1996 Cornerstone Propane Partners, L.P. Restricted Unit Plan.
***10.5 Form of Amended and Restated Employment Agreements for Messrs. Baxter, Kittrell, Goedde and DiCosimo,
effective as of May 1, 1997.
**10.6 Amendment No. 1 to Credit Agreement.
**10.7 Amendment No. 2 to Credit Agreement.
****21.1 List of Subsidiaries.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Baird, Kurtz & Dobson.
23.3 Consent of PricewaterhouseCoopers LLP.
23.4 Consent of McCutchen, Doyle, Brown & Enersen, LLP (included in Exhibit 5.1 and 8.1).
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* Incorporated by reference to the Partnership's Current Report on Form 8-K
dated April 14, 1997.
** Incorporated by reference to the Partnership's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997.
*** Incorporated by reference to the Partnership's Quarterly Report on Form
10-Q for the quarter ended December 31, 1997.
**** Incorporated by reference to the Partnership's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998, as amended.
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EXHIBIT 1.1
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CORNERSTONE PROPANE PARTNERS, L.P.
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COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
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FORM OF UNDERWRITING AGREEMENT
STANDARD PROVISIONS
, 1998
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From time to time, Cornerstone Propane Partners, L.P., a Delaware limited
partnership (the "Partnership"), may enter into one or more underwriting
agreements that provide for the sale of common units representing limited
partner interests in the Partnership (the "Firm Units") to the several
underwriters named therein (the "Underwriters"). If specified in such
underwriting agreement, the Partnership may also grant to the Underwriters the
right to purchase at their election an additional amount of common units
representing limited partner interests in the Partnership (the "Additional
Units") as provided in Section 2 hereof. The Firm Units and the Additional Units
are hereinafter collectively referred to as the "Units." The common units
representing limited partner interests in the Partnership to be outstanding
after giving effect to such contemplated sales are hereinafter referred to as
the "Common Units." The standard provisions set forth herein may be incorporated
by reference in any such underwriting agreement (an "Underwriting Agreement") as
set forth in Annex I or as may otherwise be agreed with the Underwriters. The
Underwriting Agreement, including the provisions incorporated therein by
reference is herein sometimes referred to as this Agreement. Terms defined in
the Underwriting Agreement are used herein as therein defined.
The Partnership has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3, including a prospectus,
pursuant to Rule 415 under the Securities Act of 1933, as amended (the
"Securities Act") and relating to the Common Units and has filed with, or
transmitted for filing to, or shall promptly hereafter file with or transmit for
filing to, the Commission a prospectus supplement (the "Prospectus Supplement")
specifically relating to the Common Units pursuant to Rule 424 under the
Securities Act. The term "Registration Statement" means the registration
statement, including the exhibits thereto, as amended to the date of this
Agreement. The term "Basic Prospectus" means the prospectus included in the
Registration Statement. The term "Prospectus" means the Basic Prospectus
together with the Prospectus Supplement. The term "preliminary prospectus" means
a preliminary prospectus supplement specifically relating to the Common Units,
together with the Basic Prospectus. As used herein, the terms "Basic
Prospectus," "Prospectus" and "preliminary prospectus" shall include in each
case the documents, if any, incorporated by reference therein. The terms
"supplement," "amendment," and "amend" as used herein shall include all
documents deemed to be incorporated by reference in the Prospectus that are
filed subsequent to the date of the Basic Prospectus by the Partnership with the
Commission pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
Cornerstone Propane GP, Inc., a California corporation, is the general
partner (the "Managing General Partner") of both the Partnership and Cornerstone
Propane, L.P., a Delaware limited partnership (the "Operating Partnership"). SYN
Inc., a Delaware corporation, is the special general partner (the "Special
General Partner") of the Partnership and the Operating Partnership. The
Partnership and the Operating Partnership, and Flame Inc. and Cornerstone Sales
& Service Corporation, Delaware corporations and wholly owned subsidiaries of
the Operating Partnership (the "Corporate Subs"), are collectively referred to
herein as the "Partnership Entities."
1. REPRESENTATIONS AND WARRANTIES. Each of the Partnership, the Operating
Partnership and the Managing General Partner represents and warrants to and
agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect, and
no proceedings for such purpose are pending before or, to the knowledge of
the Partnership, the Operating Partnership, or the Managing General Partner,
threatened by the Commission.
(b) (i) Each document, if any, filed or to be filed pursuant to the
Exchange Act and incorporated by reference in the Prospectus complied or
will comply when so filed in all material respects with the Exchange Act and
the applicable rules and regulations of the Commission thereunder, (ii) each
part of the Registration Statement, when such part became effective, did not
contain, and each such part, as amended or supplemented, if applicable, will
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein
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not misleading, (iii) the Registration Statement and the Prospectus comply,
and, as amended or supplemented, if applicable, will comply in all material
respects with the Securities Act and the applicable rules and regulations of
the Commission thereunder and (iv) the Prospectus does not contain and, as
amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or
omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Partnership in
writing by such Underwriter through the Manager expressly for use therein.
(c) None of the Partnership Entities, the Managing General Partner or
the Special General Partner has taken, and none of them will take, directly
or indirectly, any action designed to or that could reasonably be expected
to cause or result in the stabilization or manipulation of the price of the
Common Units, and the Partnership has not distributed and, prior to the
later to occur of (i) the Closing Date and (ii) completion of the
distribution of the Units, will not distribute, any prospectus (as defined
under the Securities Act) in connection with the offering and sale of the
Units other than the Registration Statement, any Preliminary Prospectus, the
Prospectus or other materials, if any, permitted by the Securities Act,
including Rule 134 of the general rules and regulations thereunder.
(d) Each of the Partnership and the Operating Partnership is a limited
partnership duly formed, validly existing and in good standing under the
Delaware Revised Uniform Limited Partnership Act (the "Delaware Act") with
full partnership power and authority to own or lease its properties and to
conduct its business in all material respects as described in the
Registration Statement and the Prospectus, and each of the Partnership and
the Operating Partnership is duly registered or qualified as a foreign
limited partnership to conduct its business and in good standing in each
jurisdiction or place where the nature or location of its properties or the
conduct of its business requires such registration or qualification, except
where the failure so to register or qualify (i) would not have a material
adverse effect on the Partnership Entities taken as a whole, and (ii) would
not subject the limited partners of the Partnership to any material
liability.
(e) The Managing General Partner is a corporation duly organized and
validly existing in good standing under the laws of the State of California,
with full corporate power and authority to own or lease its properties and
to conduct its business and to act as managing general partner of the
Partnership and of the Operating Partnership, in each case in all material
respects as described in the Registration Statement and the Prospectus, and
the Managing General Partner is duly registered or qualified as a foreign
corporation to conduct its business and in good standing in each
jurisdiction or place where the nature or location of its properties or the
conduct of its business requires such registration or qualification, except
where the failure so to register or qualify (i) would not have a material
adverse effect on the Partnership Entities taken as a whole, and (ii) would
not subject the limited partners of the Partnership to any material
liability.
(f) Each subsidiary of the Operating Partnership is a corporation duly
organized and validly existing in good standing under the laws of the state
of its incorporation, with full corporate power and authority to own or
lease its properties and to conduct its business, in each case in all
material respects as described in the Registration Statement and the
Prospectus, and each subsidiary of the Operating Partnership is duly
registered or qualified as a foreign corporation to conduct its business and
in good standing in each jurisdiction or place where the nature or location
of its properties or the conduct of its business requires such registration
or qualification, except where the failure so to register or qualify (i)
would not have a material adverse effect on the Partnership Entities taken
as a whole, and (ii) would not subject the limited partners of the
Partnership to any material liability; all of the issued shares of capital
stock of each subsidiary of the Operating Partnership have been duly and
validly authorized and issued, are fully paid and nonassessable and are
owned directly by the Operating Partnership, free and clear of all liens,
encumbrances, equities or claims.
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(g) The authorized interests in the Partnership outstanding prior to the
issuance of the Units have been duly authorized and are validly issued,
fully paid and non-assessable, except as described in the Prospectus.
(h) The Units have been duly authorized and, when issued and delivered
in accordance with the terms of this Agreement, will be validly issued,
fully paid and non-assessable, except as described in the Prospectus; and,
except as described in the Prospectus, there are no preemptive rights or
other rights to subscribe for or to purchase, nor any restriction upon the
voting or transfer of, any limited partner interests in the Partnership or
the Operating Partnership pursuant to the Partnership Agreement, the
Operating Partnership Agreement or any agreement or other instrument to
which the Partnership or the Operating Partnership is a party or by which
either of them may be bound. Except as described in the Prospectus, there
are no outstanding options or warrants to purchase any Common Units or
Subordinated Units. The Units, when issued and delivered against payment
therefor as provided herein, will conform in all material respects to the
descriptions thereof contained in the Prospectus. The Partnership has all
requisite power and authority to issue, sell and deliver the Units, in
accordance with and upon the terms and conditions set forth in this
Agreement and in the Prospectus. At the Closing Date and the Option Closing
Date, all corporate and partnership action, as the case may be, required to
be taken by any of the Partnership Entities, the Managing General Partner,
the Special General Partner or any of their shareholders or partners for the
authorization, issuance, sale and delivery of the Units contemplated by this
Agreement shall have been validly taken.
(i) This Agreement has been duly authorized, executed and delivered by
each of the Partnership, the Operating Partnership and the Managing General
Partner.
(j) The Partnership Agreement is a valid and legally binding agreement
of the Managing General Partner and the Special General Partner, enforceable
against the Managing General Partner and the Special General Partner in
accordance with its terms.
(k) None of the offering, issuance and sale by the Partnership of the
Units, the execution, delivery and performance of this Agreement nor the
consummation of the transactions contemplated hereby (i) will conflict with
or will constitute a violation of the agreement of limited partnership,
certificate or articles of incorporation or bylaws or other organizational
documents of any of the Partnership Entities, the Managing General Partner
or the Special General Partner, (ii) will conflict with or will constitute a
breach or violation of, or a default (or an event which, with notice or
lapse of time or both, would constitute such an event) under any indenture,
mortgage, deed of trust, loan agreement, lease or other agreement or
instrument to which any of the Partnership Entities, the Managing General
Partner, or the Special General Partner is a party or by which any of them
or any of their respective properties may be bound, (iii) violates or will
violate any order, judgment, decree or injunction of any court or
governmental agency or body directed to any of the Partnership Entities, the
Managing General Partner or the Special General Partner or any of their
properties in a proceeding to which any of them or their property is a
party, (iv) violates or will violate any statute, law or regulation
applicable to any of the Partnership Entities, the Managing General Partner
or the Special General Partner or any of their respective properties, or (v)
will result in the creation or imposition of any lien, charge or encumbrance
(except as contemplated by the Note Agreement and the Bank Credit Agreement)
upon any property or assets of any of the Partnership Entities, the Managing
General Partner or the Special General Partner, or in the case of clause
(ii), (iii), (iv) or (v) which conflicts, breaches, violations or defaults
would have a material adverse effect upon the Partnership Entities taken as
a whole.
(l) No permit, consent approval, authorization or order of any court,
governmental agency or body or financial institution is required in
connection with the execution and delivery of, or the consummation of the
transactions contemplated by, this Agreement except (i) for such permits,
consents, approvals and similar authorizations required under the Securities
Act, the Securities
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Exchange Act of 1934, as amended (the "Exchange Act"), and the securities or
"Blue Sky" laws of certain jurisdictions, (ii) for such permits, consents,
approvals and similar authorizations which have been, or on or prior to the
Closing Date will be, obtained, (iii) for such permits, consents, approvals
and similar authorizations which, if not obtained, would not, individually
or in the aggregate, have a material adverse effect upon the Partnership
Entities taken as a whole and (iv) as set forth or contemplated in the
Prospectus.
(m) Arthur Andersen LLP, who have expressed their opinions on the
audited consolidated financial statements of the Partnership and SYN Inc.
included in the Registration Statement and the Prospectus, are independent
public accountants as required by the Securities Act and the rules and
regulations thereunder.
(n) Baird, Kurtz & Dobson, who have expressed their opinions on the
audited consolidated financial statements of Empire Energy Corporation and
Synergy Group, Incorporated included in the Registration Statement and the
Prospectus, are independent public accountants as required by the Securities
Act and the rules and regulations thereunder.
(o) PricewaterhouseCoopers LLP, who have expressed their opinion on the
audited consolidated financial statements of CGI Holdings, Inc. included in
the Registration Statement and the Prospectus, are independent public
accountants as required by the Securities Act and the rules and regulations
thereunder.
(p) As of the date for which capitalization information is presented in
the Prospectus, the Partnership had the capitalization set forth in the
Prospectus. The financial statements (including the related notes and
supporting schedules) included in the Registration Statement and the
Prospectus present fairly in all material respects the financial position,
results of operations and cash flows of the entities purported to be shown
thereby on the basis stated therein at the respective dates or for the
respective periods to which they apply and have been prepared in accordance
with generally accepted accounting principles consistently applied
throughout the periods involved, except to the extent disclosed therein. The
information set forth in the Registration Statement and the Prospectus under
the captions "Selected [Pro Forma] Financial and Operating Data" and
"Selected Historical Financial and Operating Data" is accurately presented
in all material respects and has been prepared on a basis consistent with
the audited and unaudited historical consolidated financial statements
included in the Registration Statement and the Prospectus.
(q) The Units have been approved for listing on the New York Stock
Exchange, subject only to official notice of issuance.
(r) From the date of the most recent financial statements included in
the Prospectus, there has not occurred any material adverse change, or any
development involving a prospective material adverse change (compared with
the immediately preceeding twelve month period), in the condition, financial
or otherwise, or in the earnings, business or operations of the Partnership
Entities taken as a whole from that set forth in the Prospectus (exclusive
of any amendments or supplements thereto subsequent to the date of this
Agreement).
(s) There are no legal or governmental proceedings pending or threatened
to which any of the Partnership Entities is a party or to which any of the
properties of the Partnership Entities is subject that are required to be
described in the Registration Statement or the Prospectus and are not so
described or any statutes, regulations, contracts or other documents that
are required to be described in the Registration Statement or the Prospectus
or to be filed as exhibits to the Registration Statement that are not
described or filed as required.
(t) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied
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when so filed in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder.
(u) None of the Partnership Entities or the Managing General Partner is
now, or after the sale of the Units to be sold by the Partnership hereunder
and the application of the net proceeds from such sale as described in the
Prospectus under the caption "Use of Proceeds" will be, an "investment
company" as such term is defined in the Investment Company Act of 1940, as
amended.
(v) After sale of the Units to be sold by the Partnership hereunder and
application of the net proceeds from such sale as described in the
Prospectus under the caption "Use of Proceeds," the Operating Partnership
will not be a "gas utility company" and none of the Partnership Entities,
the Managing General Partner or the Special General Partner will be a
"holding company" within the meaning of the Public Utility Holding Company
Act of 1935, as amended, or subject to regulation thereunder.
(w) All of the Partnership Entities (i) are in compliance with any and
all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals would not, singly or in
the aggregate, have a material adverse effect upon the Partnership Entities
taken as a whole.
(x) There are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures
required for clean up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties) which would, singly or in the aggregate, have a material adverse
effect on the Partnership Entities, taken as a whole.
(y) There are no contracts, agreements or understandings between the
Partnership Entities, the Managing General Partner or the Special General
Partner and any person granting such person the right to require the
Partnership to file a registration statement under the Securities Act with
respect to any securities of the Partnership or to require the Partnership
to include such securities with the Units registered pursuant to the
Registration Statement.
(z) Each of the Partnership Entities maintains insurance against such
losses and risks and in such amounts as is reasonably adequate to protect
the Partnership Entities, the Managing General Partner, the Special General
Partner and their businesses; none of the Partnership Entities (or their
predecessors) has within the last two years been refused any insurance
coverage sought or applied for; and none of the Partnership Entities has any
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage
from similar insurers as may be necessary to continue its business at a cost
that would not materially and adversely affect the condition (financial or
otherwise), business or operations of the Partnership Entities taken as a
whole, except as described in or contemplated by the Prospectus.
(aa) Each of the Partnership Entities maintains a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
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(bb) Each of the Partnership Entities, the Managing General Partner and
the Special General Partner has complied with all provisions of Section
517.075, Florida Statutes relating to issuers doing business with the
Government of Cuba or with any person or affiliate located in Cuba.
2. AGREEMENTS TO SELL AND PURCHASE. Upon the execution of the Underwriting
Agreement applicable to any Units and authorization by the Manager of the
release of the Firm Units, the several Underwriters propose to offer the Firm
Units for sale upon the terms and conditions set forth in the Prospectus as
amended or supplemented.
The Partnership may specify in the Underwriting Agreement applicable to any
Units that the Partnership thereby grants to the Underwriters the right (an
"Overallotment Option") to purchase at their election up to the number of
Additional Units set forth in such Underwriting Agreement, on the terms set
forth in the paragraph above, for the sole purpose of covering over-allotments
in the sale of the Firm Units. Any such election to purchase Additional Units
may be exercised by written notice from the Manager to the Partnership, given
within a period specified in the Underwriting Agreement, setting forth the
aggregate number of Additional Units to be purchased and the date on which such
Additional Units are to be delivered, as determined by the Manager but in no
event earlier than the Closing Date or, unless the Manager and the Partnership
otherwise agree in writing, earlier than or later than the respective number of
business days after the date of such notice set forth in such Underwriting
Agreement.
3. TERMS OF PUBLIC OFFERING. The Partnership will be advised, as of the
date of the Underwriting Agreement, by the Manager that the Underwriters propose
to make a public offering of their respective portions of the Units as soon
after the Registration Statement and this Agreement has been entered into as in
the Manager's judgment is advisable. The terms of the public offering of the
Units are set forth in the Prospectus.
4. PAYMENT AND DELIVERY. Payment for the Units shall be made to the
Partnership in Federal or other funds immediately available at the time and
place set forth in the Underwriting Agreement upon delivery to the Manager for
the respective accounts of the several Underwriters of the Units registered in
such names and in such denominations as the Manager shall request in writing not
less than two full business days prior to the date of delivery, with any
transfer taxes payable in connection with the transfer of the Units to the
Underwriters duly paid.
5. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The several obligations of
the Underwriters to purchase and pay for the Units on the Closing Date are
subject to the following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and prior
to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of any
review for a possible change that does not indicate the direction of the
possible change, in the rating accorded any of the securities of the
Partnership Entities by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule 436(g)(2)
under the Securities Act; and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition, financial
or otherwise, or in the earnings, business or operations of the
Partnership Entities taken as a whole from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto subsequent
to the date of this Agreement) that, in the Manager's judgment, is
material and adverse and that makes it, in the Manager's judgment,
impracticable to market the Units on the terms and in the manner
contemplated in the Prospectus.
(b) The representations and warranties of the Partnership, the Operating
Partnership and the Managing General Partner contained in this Agreement
shall be true and correct as of the Closing Date and the Partnership, the
Operating Partnership and the Managing General Partner shall have
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complied in all material respects with all of the agreements and satisfied
in all material respects all of the conditions on their part to be performed
or satisfied hereunder on or before the Closing Date.
(c) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Managing General Partner, to the effect set forth in clause (b) above.
(d) The Underwriters shall have received on the Closing Date, an opinion
of McCutchen, Doyle, Brown & Enersen LLP ("McCutchen Doyle"), outside
counsel for the Partnership, the Operating Partnership, the Managing General
Partner and the Special General Partner, dated the Closing Date, to the
effect that:
(i) Each of the Partnership and the Operating Partnership has
been duly formed and is validly existing in good standing as a limited
partnership under the Delaware Act with all necessary partnership power
and authority to own or lease its properties, and to conduct its
business, in each case in all material respects as described in the
Prospectus.
(ii) The Units to be issued and sold to the Underwriters by the
Partnership pursuant to this Agreement and the limited partner interests
represented thereby are duly authorized under the Partnership Agreement
and, when issued and delivered against payment therefor as provided in
this Agreement, will be validly issued, fully paid (to the extent
required under the Partnership Agreement) and nonassessable (except as
such nonassessability may be affected by matters described in the
Prospectus under the caption "The Partnership Agreement--Limited
Liability").
(iii) The Partnership Agreement constitutes a valid and legally
binding agreement of the Managing General Partner and the Special General
Partner, enforceable against the Managing General Partner and the Special
General Partner in accordance with its terms, except as the
enforceability thereof may be limited by (A) bankruptcy, insolvency,
fraudulent transfer, reorganization, receivership, moratorium and similar
laws of general application relating to or affecting creditors' rights
generally and to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law) and (B)
public policy, applicable law relating to fiduciary duties and an implied
covenant of good faith and fair dealing.
(iv) The Operating Partnership Agreement constitutes a valid and
legally binding agreement of the Managing General Partner, the Special
General Partner and the Partnership, enforceable against the Managing
General Partner, the Special General Partner and the Partnership in
accordance with its terms, except as the enforceability thereof may be
limited by (A) bankruptcy, fraudulent transfer, reorganization,
receivership, moratorium and similar laws of general application relating
to or affecting creditors' rights generally and to general principles of
equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law) and (B) public policy, applicable law
relating to fiduciary duties and an implied covenant of good faith and
fair dealing.
(v) The opinion of McCutchen Doyle that is filed as Exhibit 8.1
to the Registration Statement is confirmed and the Underwriters may rely
upon such opinion as if it were addressed to them.
(vi) The Registration Statement was declared effective under the
Securities Act on October , 199 ; to the knowledge of such counsel, no
stop order suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been instituted or
threatened by the Commission; and any required filing of the Prospectus
pursuant to Rule 424(b) has been made in the manner and within the time
period required by such Rule.
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(vii) Upon delivery to the Underwriters of certificates
evidencing the Units issued in the name of the Underwriters and payment
by the Underwriters of the purchase price for the Units, the Underwriters
will acquire the Units free of any adverse claim (as such term is defined
in Section 8-302 of the New York Uniform Commercial Code), assuming that
the Underwriters are acting in good faith and without notice of any
adverse claim.
(viii) The Partnership has all requisite power and authority under
the Delaware Act and the Partnership Agreement to issue, sell and deliver
the Units, in accordance with and upon the
terms and conditions set forth in this Agreement and in the Registration
Statement and Prospectus.
(ix) The Managing General Partner is a corporation duly
organized and validly existing in good standing under the laws of the
State of California, with full corporate power and
authority to own or lease its properties and to conduct its business and
to act as managing general partner of the Partnership and of the
Operating Partnership, in each case in all material respects as described
in the Registration Statement and the Prospectus.
(x) The Special General Partner is a corporation duly organized
and validly existing in good standing under the laws of the State of
Delaware, with full corporate power and authority to own or lease its
properties and to conduct its business and to act as special general
partner of the Partnership and the Operating Partnership, in each case in
all material respects as described in the Registration Statement and the
Prospectus.
(xi) Each Corporate Sub is a corporation duly organized and
validly existing in good standing under the laws of the State of
Delaware, with full corporate power and authority to own or lease its
properties and to conduct its business as contemplated by the
Registration Statement and the Prospectus.
(xii) Each of the Partnership and the Operating Partnership is
duly qualified or registered as a foreign limited partnership for the
transaction of business under the laws of the states listed on Schedule I
to such opinion; and to the knowledge of such counsel, such jurisdictions
are the only jurisdictions in which the character of the business
conducted by the Partnership and the Operating Partnership or the
location of the properties owned or leased by either of them makes such
qualification or registration necessary (except where the failure to so
qualify or so register would not (A) have a material adverse effect on
the Partnership Entities taken as a whole or (B) subject the limited
partners of the Partnership to any material liability).
(xiii) Each of the Managing General Partner and the Special
General Partner is duly qualified or registered as a foreign corporation
for the transaction of business under the laws of the states listed on
Schedule II to such opinion; and to the knowledge of such counsel, such
jurisdictions are the only jurisdictions in which the character of the
business conducted by the Managing General Partner and the Special
General Partner or the location of the properties owned or leased by
either of them makes such qualification or registration necessary (except
where the failure to so qualify or so register would not (A) have a
material adverse effect on the Partnership Entities taken as a whole or
(B) subject the limited partners of the Partnership to any material
liability).
(xiv) Each of the Corporate Subs is duly qualified or registered
as a foreign corporation for the transaction of business under the laws
of the states listed on Schedule III to such opinion; and to the
knowledge of such counsel, such jurisdictions are the only jurisdictions
in which the character of the business conducted by the Corporate Subs or
the location of the properties owned or leased by them makes such
qualification or registration necessary (except where the failure to so
qualify or so register would not (A) have a material adverse effect on
the Partnership
9
<PAGE>
Entities taken as a whole or (B) subject the limited partners of the
Partnership to any material liability).
(xv) All of the issued and outstanding shares of capital stock of
the Corporate Subs have been duly authorized and validly issued and are
fully paid and nonassessable; and all of such shares are owned of record
by the Operating Partnership free and clear of all liens, encumbrances,
security interests, charges or claims known to such counsel, without
independent investigation, other than those created by or arising under
the Delaware General Corporation Law.
(xvi) This Agreement has been duly authorized, executed and
delivered by each of the Partnership, the Operating Partnership and the
Managing General Partner.
(xvii) The statements (A) in the Prospectus under the captions
"Plan of Distribution", "The Partnership Agreement" and "Description of
Common Units" and (B) in "Item 7-- Management's Discussion and Analysis
of Financial Condition and Results of Operations--The
Partnership--Liquidity and Capital Resources--Financing and Sources of
Liquidity," of the Partnership's most recent annual report on Form 10-K
incorporated by reference in the Prospectus insofar as they constitute
descriptions of the operative agreements or refer to statements of law or
legal conclusions, are accurate and complete in all material respects.
(xviii) After due inquiry, such counsel does not know of any legal
or governmental proceedings pending or threatened to which any of the
Partnership Entities is a party or to which any of the properties of any
of the Partnership Entities is subject that are required to be described
in the Registration Statement or the Prospectus and are not so described
or of any statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the Prospectus
or to be filed or incorporated by reference as exhibits to the
Registration Statement that are not described, filed or incorporated as
required.
(xix) To the knowledge of such counsel, other than as described
or contemplated in the Prospectus, there is no litigation, proceeding or
governmental investigation pending or threatened against any of the
Partnership Entities, the Managing General Partner or the Special General
Partner which, if adversely determined, (x) would have a material adverse
effect on the Partnership Entities taken as a whole or (y) would impair
or call into question the validity of this Agreement or the performance
by any of the Partnership Entities or the Managing General Partner of
their obligations under this Agreement.
(xx) None of the Partnership Entities or the Managing General
Partner is now, or after sale of the Units to be sold by the Partnership
hereunder and application of the net proceeds from such sale as described
in the Prospectus under the caption "Use of Proceeds" none of them will
be, an "investment company" as such term is defined in the Investment
Company Act of 1940, as amended.
(xxi) After sale of the Units to be sold by the Partnership
hereunder and application of the net proceeds from such sale as described
in the Prospectus under the caption "Use of Proceeds," the Operating
Partnership will not be a "gas utility company" and none of the
Partnership Entities, the Managing General Partner or the Special General
Partner will be a "holding company" within the meaning of the Public
Utility Holding Company Act of 1935, as amended, or subject to regulation
thereunder.
(xxii) Neither the offering, issuance and sale by the Partnership
of the Units, nor the execution, delivery and performance of this
Agreement by any of the Partnership, the Operating Partnership or the
Managing General Partner, nor the consummation of the transactions
contemplated hereby (A) will constitute a violation of the certificate or
articles of incorporation or bylaws or other organizational documents of
the Partnership Entities, the Managing General
10
<PAGE>
Partner or the Special General Partner, (B) will constitute a breach or
violation of, or a default under (or an event which, with notice or lapse
of time or both, would constitute such an event), any indenture,
mortgage, deed of trust, loan agreement or other material agreement or
instrument (other than the Partnership Agreements) known to such counsel
to which any of the Partnership Entities, the Managing General Partner or
the Special General Partner is a party or by which any of them or any of
their respective properties may be bound, (C) will violate any order,
judgment, decree or injunction of any court or governmental agency or
body known to such counsel directed to any of the Partnership Entities,
the Managing General Partner or the Special General Partner, or any of
their properties in a proceeding to which any of the Partnership
Entities, the Managing General Partner or the Special General Partner or
any of their property is a party, (D) violates or will violate any
federal statute, law or regulation applicable to any of the Partnership
Entities, the Managing General Partner or the Special General Partner or
any of their respective properties, or (E) will result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets
of any of the Partnership Entities except as contemplated by the Note
Agreement and the Bank Credit Agreement.
(xxiii) No permit consent, approval, authorization or order of any
federal court, governmental agency or body or any financial institution
is required in connection with the execution and delivery of, or the
consummation of the transactions contemplated by, this Agreement except
(A) as may be required under state securities or "Blue Sky" laws, as to
which such counsel need not express any opinion, and (B) for such
permits, consents, approvals and similar authorizations which have been
obtained.
(xxiv) Except as described in the Prospectus, there are no
preemptive rights or other rights to subscribe for or to purchase, nor
any restriction upon the voting or transfer of, any limited partner
interests in the Partnership or the Operating Partnership or shares of
capital stock of the Managing General Partner or the Special General
Partner pursuant to the certificate of incorporation or bylaws of the
Managing General Partner or the Special General Partner or, to the
knowledge of such counsel, pursuant to any agreement or instrument to
which any Partnership Entity, the Managing General Partner or the Special
General Partner is a party or by which any of them may be bound. To such
counsel's knowledge, neither the filing of the Registration Statement nor
the offering or sale of the Units as contemplated hereby gives rise to
any rights for or relating to the registration of any Units or other
securities of the Partnership. To such counsel's knowledge, except as
disclosed in the Prospectus, there are no outstanding options or warrants
to purchase any Units or Subordinated Units or other partnership
interests in the Partnership or the Operating Partnership. All corporate
and partnership action required to be taken by the Partnership Entities,
the Managing General Partner, the Special General Partner and their
shareholders or partners for the authorization, issuance, sale and
delivery of the Units has been validly taken.
(xxv) Such counsel (A) is of the opinion that each document, if
any, filed pursuant to the Exchange Act and incorporated by reference in
the Prospectus (except for financial statements and schedules, and other
historical pro forma and projected financial and statistical data
included therein as to which such counsel need not express any belief)
complied when so filed as to form in all material respects with the
Exchange Act and the applicable rules and regulations of the Commission
thereunder, (B) is of the opinion that the Registration Statement and
Prospectus (except for financial statements and schedules and other
historical, pro forma and projected financial and statistical data
included therein as to which such counsel need not express any belief)
comply as to form in all material respects with the Securities Act and
the applicable rules and regulations of the Commission thereunder, (C)
has no reason to believe that (except for financial statements and
schedules and other historical, pro forma and projected financial and
11
<PAGE>
statistical data as to which such counsel need not express any belief)
each part of the Registration Statement, when such part became effective,
contained, and as of the date such opinion is delivered, contains any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading.
(e) The Underwriters shall have received on the Closing Date an opinion
of Andrews & Kurth L.L.P., counsel for the Underwriters, dated the Closing
Date, with respect to such matters as the Manager may reasonably request.
(f) The Underwriters shall have received, on the date of the
Underwriting Agreement and the Closing Date, a letter dated the date of the
Underwriting Agreement and the Closing Date, in form and substance
satisfactory to the Underwriters, from each of Arthur Andersen LLP, Baird,
Kurtz & Dobson and PricewaterhouseCoopers LLP, independent public
accountants, containing statements and information of the type ordinarily
included in accountants' "comfort letters" to underwriters with respect to
the financial statements and certain financial information contained in or
incorporated by reference into the Prospectus; provided that the letters
delivered on the Closing Date shall use a "cut-off date" not earlier than
the date of the Underwriting Agreement.
(g) The Units shall have been approved for listing on the New York Stock
Exchange.
The several obligations of the Underwriters to purchase Additional Units
hereunder are subject to the delivery to the Manager on the Option Closing Date
of such documents as the Manager may reasonably request with respect to the good
standing of the Partnership, the due authorization and issuance of the
Additional Units and other matters related to the issuance of the Additional
Units and the satisfaction of the foregoing conditions to the several
obligations of the Underwriters to purchase and pay for the Firm Units on the
Closing Date, except that all references to the Firm Units and the Closing Date
shall be deemed to refer to the Additional Units and the Option Closing Date,
respectively.
6. COVENANTS OF THE PARTNERSHIP. In further consideration of the agreements
of the Underwriters herein contained, each of the Partnership, the Operating
Partnership and the Managing General Partner covenants with each Underwriter as
follows:
(a) To furnish the Manager, without charge, three signed copies of the
Registration Statement (including exhibits thereto) and for delivery to each
other Underwriter a conformed copy of the Registration Statement (without
exhibits thereto) and to furnish the Manager in New York City, without
charge, prior to 10:00 A.M., New York City time, on the business day next
succeeding the date of this Agreement and during the period mentioned in
paragraph 6(c) below, as many copies of the Prospectus, any documents
incorporated by reference therein and any supplements and amendments thereto
or to the Registration Statement as the Manager may reasonably request.
(b) Before amending or supplementing the Registration Statement or the
Prospectus, to furnish to the Manager a copy of each such proposed amendment
or supplement and not to file any such proposed amendment or supplement to
which the Manager reasonably objects, and to file with the Commission within
the applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public offering
of the Units as in the opinion of counsel for the Underwriters the
Prospectus is required by law to be delivered in connection with sales by an
Underwriter or dealer, any event shall occur or condition exist as a result
of which it is necessary to amend or supplement the Prospectus in order to
make the statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to amend or
supplement the Prospectus to comply with applicable law, forthwith to
prepare, file with the Commission and furnish, at its own expense, to the
Underwriters and to the dealers (whose names and addresses the Manager will
furnish to the Partnership) to which Units may have been sold by the Manager
on behalf of the Underwriters
12
<PAGE>
and to any other dealers upon request, either amendments or supplements to
the Prospectus so that the statements in the Prospectus as so amended or
supplemented will not, in the light of the circumstances when the Prospectus
is delivered to a purchaser, be misleading or so that the Prospectus, as
amended or supplemented, will comply with law.
(d) To endeavor to qualify the Units for offer and sale under the
securities or Blue Sky laws of such jurisdictions as the Manager shall
reasonably request; PROVIDED, HOWEVER, that neither the Partnership, the
Managing General Partner nor the Special General Partner shall be required
to qualify to do business or to file a general consent to service of process
in any such jurisdictions.
(e) To make generally available to the Partnership's security holders
and to the Manger as soon as practicable an earning statement covering a
twelve month period beginning on the first day of the first full fiscal
quarter after the date of the Underwriting Agreement, which earning
statement shall satisfy the provisions of Section 11(a) of the Securities
Act and the rules and regulations of the Commission thereunder. If such
fiscal quarter is the last fiscal quarter of the Partnership's fiscal year,
such earning statement shall be made available not later than 90 days after
the close of the period covered thereby and in all other cases shall be made
available not later than 45 days after the close of the period covered
thereby.
(f) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the
Partnership's counsel and the Partnership's accountants in connection with
the registration and delivery of the Units under the Securities Act and all
other fees or expenses in connection with the preparation and filing of the
Registration Statement, any Preliminary Prospectus, the Prospectus and
amendments and supplements to any of the foregoing, including all printing
costs associated therewith, and the mailing and delivering of copies thereof
to the Underwriters and dealers, in the quantities hereinabove specified,
(ii) all costs and expenses related to the transfer and delivery of the
Units to the Underwriters, including any transfer or other taxes payable
thereon, (iii) the cost of printing or producing any Blue Sky or Legal
Investment memorandum in connection with the offer and sale of the Units
under state securities laws and all expenses in connection with the
qualification of the Units for offer and sale under state securities laws as
provided in Section 6(d) hereof, including filing fees and the reasonable
fees and disbursements of counsel for the Underwriters in connection with
the Blue Sky or Legal Investment memorandum, (iv) all filing fees and
disbursements of counsel to the Underwriters incurred in connection with the
review and qualification of the offering of the Units by the National
Association of Securities Dealers, Inc., (v) all costs and expenses incident
to listing the Units on the New York Stock Exchange, (vi) the cost of
printing certificates representing the Units, (vii) the costs and charges of
any transfer agent, registrar or depositary, (viii) the costs and expenses
of the Partnership relating to investor presentations on any "road show"
undertaken in connection with the marketing of the Offering of the Units,
including, without limitation expenses associated with the production of
road show slides and graphics, fees and expenses of any consultants engaged
in connection with the road show presentations with the prior approval of
the Partnership, travel and lodging expenses of the representatives and
officers of the Partnership and any such consultants, and the cost of any
aircraft chartered in connection with the road show, and (ix) other costs
and expenses incident to the performance of the obligations of the
Partnership hereunder for which provision is not otherwise made in this
Section. It is understood, however, that except as provided in this Section,
Section 7 entitled "Indemnity and Contribution," and the last paragraph of
Section 9 below, the Underwriters will pay all of their costs and expenses,
including fees and disbursements of their counsel, stock transfer taxes
payable on resale of any of the Units by them and any advertising expenses
connected with any offers they may make. Notwithstanding anything to the
contrary provided in the foregoing, each of the parties to this Agreement
shall bear its own expenses in connection with road show presentations.
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<PAGE>
(g) The Partnership Entities will use the net proceeds received by them
from the sale of the Units in the manner specified in the Prospectus under
"Use of Proceeds."
7. INDEMNITY AND CONTRIBUTION.
(a) Each of the Partnership, the Operating Partnership and the Managing
General Partner, jointly and severally, agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating
any such action or claim) caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
amendment thereof, any preliminary prospectus or the Prospectus (as amended
or supplemented if the Partnership shall have furnished any amendments or
supplements thereto), or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses,
claims, damages or liabilities are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished to the Partnership in writing by such
Underwriter through the Manager expressly for use therein; PROVIDED,
HOWEVER, that the foregoing indemnity agreement with respect to any
preliminary prospectus shall not inure to the benefit of any Underwriter
from whom the person asserting any such losses, claims, damages or
liabilities purchased Units, or any person controlling such Underwriter, if
a copy of the Prospectus (as then amended or supplemented if the Partnership
shall have furnished any amendments or supplements thereto) was not sent or
given by or on behalf of such Underwriter to such person, if required by law
so to have been delivered, at or prior to the written confirmation of the
sale of the Units to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such losses,
claims, damages or liabilities, unless such failure is the result of
noncompliance by the Partnership with Section 6(a) hereof.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Partnership, the Operating Partnership and the Managing
General Partner, their respective directors and officers who sign the
Registration Statement and each person, if any, who controls the Partnership
within the meaning of either Section 15 of the Securities Act or Section 20
of the Exchange Act to the same extent as the foregoing indemnity from the
Partnership, the Operating Partnership and the Managing General Partner to
such Underwriter, but only with reference to information relating to such
Underwriter furnished to the Partnership in writing by such Underwriter
through the Manager expressly for use in the Registration Statement, any
preliminary prospectus, the Prospectus or any amendments or supplements
thereto.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to paragraph (a) or (b) of this Section 7, such person
(the "indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party and any others the indemnifying party may designate in
such proceeding and shall pay the fees and disbursements of such counsel
related to such proceeding. In any such proceeding, any indemnified party
shall have the right to retain its own counsel, but the fees and expenses of
such counsel shall be at the expense of such indemnified party unless (i)
the indemnifying party and the indemnified party shall have mutually agreed
to the retention of such counsel or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the indemnifying
party and the indemnified party and representation of both parties by the
same counsel would be inappropriate due to actual or potential differing
interests between them. It is understood that the indemnifying party shall
not, in respect of the legal expenses of any indemnified
14
<PAGE>
party in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one separate
firm (in addition to any local counsel) for all such indemnified parties and
that all such fees and expenses shall be reimbursed as they are incurred.
Such firm shall be designated in writing by the Manager, in the case of
parties indemnified pursuant to paragraph (a) of this Section 7, and by the
Managing General Partner, in the case of parties indemnified pursuant to
paragraph (b) of this Section 7. The indemnifying party shall not be liable
for any settlement of any proceeding effected without its written consent
but if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or
judgment. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter
of such proceeding.
(d) To the extent the indemnification provided for in paragraph (a) or
(b) of this Section 7 is unavailable to an indemnified party or insufficient
in respect of any losses, claims, damages or liabilities referred to
therein, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (i) in such proportion as is appropriate to
reflect the relative benefits received by the Partnership, the Operating
Partnership and the Managing General Partner on the one hand and the
Underwriters on the other hand from the offering of the Units or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Partnership, the Operating Partnership and the Managing General Partner on
the one hand and of the Underwriters on the other hand in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Partnership, the Operating Partnership and
the Managing General Partner on the one hand and the Underwriters on the
other hand in connection with the offering of the Units shall be deemed to
be in the same respective proportions as the net proceeds from the offering
of the Units (before deducting expenses) received by the Partnership and the
total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover of the Prospectus, bear
to the aggregate Public Offering Price of the Units. The relative fault of
the Partnership, the Operating Partnership and the Managing General Partner
on the one hand and the Underwriters on the other hand shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Partnership, the
Operating Partnership and the Managing General Partner or by the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The Underwriters' respective obligations to contribute pursuant to
this Section 7 are several in proportion to the respective number of Units
they have purchased hereunder, and not joint.
(e) The Partnership, the Operating Partnership and the Managing General
Partner and the Underwriters agree that it would not be just or equitable if
contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in paragraph (d) of this Section 7.
The amount paid or payable by an indemnified Party as a result of the
losses, claims, damages and liabilities referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations
set forth above, any legal or other expenses reasonably incurred by an
indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 7, no
Underwriter shall be
15
<PAGE>
required to contribute any amount in excess of the amount by which the total
price at which the Units underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages that such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The remedies provided for
in this Section 7 are not exclusive and shall not limit any rights or
remedies which may otherwise be available to any indemnified party at law or
in equity.
(f) The indemnity and contribution provisions contained in this Section
7 and the representations, warranties and other statements of the
Partnership, the Operating Partnership and the Managing General Partner
contained in this Agreement shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter or by or on behalf of the Partnership, the
Operating Partnership and the Managing General Partner, or the respective
officers or directors or any person controlling the Partnership and (iii)
acceptance of and payment for any of the Units.
8. TERMINATION. This Agreement shall be subject to termination by notice
given by the Manager to the Partnership, if (a) after the execution and delivery
of this Agreement and prior to the Closing Date, (i) trading generally shall
have been suspended or materially limited on or by, as the case may be, any of
the New York Stock Exchange, the American Stock Exchange, the National
Association of Securities Dealers, Inc., the Chicago Board Options Exchange, the
Chicago Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Partnership shall have been suspended on any exchange or in
any over-the-counter market (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis that
in the Manager's judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 8(a)(i) through (iv), such event, singly or
together with any other such event, makes it, in the Manager's judgment,
impracticable to market the Units on the terms and in the manner contemplated in
the Prospectus.
9. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall become
effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be, any
one or more of the Underwriters shall fail or refuse to purchase Units that it
has or they have agreed to purchase hereunder on such date, and the aggregate
number of Units which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Units to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Firm Units set forth
opposite their respective names on the Underwriting Agreement bears to the
aggregate number of Firm Units set forth opposite the names of all such
nondefaulting Underwriters, or in such other proportions as the Manager may
specify, to purchase the Units which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase on such date; provided that in no event
shall the number of Units that any Underwriter has agreed to purchase pursuant
to this Agreement be increased pursuant to this Section 9 by an amount in excess
of one ninth of such number of Units without the written consent of such
Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail
or refuse to purchase Firm Units and the aggregate number of Firm Units with
respect to which such default occurs is more than one-tenth of the aggregate
number of Firm Units to be purchased, and arrangements satisfactory to the
Manager and the Partnership for the purchase of such Firm Units are not made
within 48 hours after such default, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriter or the Partnership. In
any such case either the Manager or the Partnership shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and in the
Prospectus or in any other
16
<PAGE>
documents or arrangements may be effected. If, on the Option Closing Date, any
Underwriter or Underwriters shall fail or refuse to purchase Additional Units
and the aggregate number of Additional Units with respect to which such default
occurs is more than one-tenth of the aggregate number of Additional Units to be
purchased, the nondefaulting Underwriters shall have the option to (i) terminate
their obligation hereunder to purchase Additional Units or (ii) purchase not
less than the number of Additional Units that such nondefaulting Underwriters
would have been obligated to purchase in the absence of such default. Any action
taken under this paragraph shall not relieve any defaulting Underwriter from
liability in respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of them,
because of any failure or refusal on the part of the Partnership, the Operating
Partnership or the Managing General Partner to comply with the terms or to
fulfill any of the conditions of this Agreement, or if for any reason the
Partnership, the Operating Partnership or the Managing General Partner shall be
unable to perform their obligations under this Agreement, the Partnership, the
Operating Partnership and the Managing General Partner will reimburse the
Underwriters or such Underwriters as have so terminated this Agreement with
respect to themselves, severally, for all out-of-pocket expenses (including the
fees and disbursements of their counsel) reasonably incurred by such
Underwriters in connection with this Agreement or the offering contemplated
hereunder.
10. COUNTERPARTS. This Agreement may be signed in two or more counterparts,
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
11. APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York.
12. HEADINGS. The heading of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
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ANNEX I
UNDERWRITING AGREEMENT
------------------------
Cornerstone Propane Partners, L.P.
432 Westridge Drive
Watsonville, CA 95076
Dear Sirs and Mesdames:
We (the "Manager") are acting on behalf of the underwriter or underwriters
(including ourselves) named below (such underwriter or underwriters being herein
called the "Underwriters"), and we understand that Cornerstone Propane Partners,
L.P., a Delaware limited partnership (the "Partnership"), proposes to issue and
sell common units representing limited partner interests in the
Partnership (the "Firm Units").
Subject to the terms and conditions set forth or incorporated by reference
herein, the Partnership hereby agrees to sell to the several Underwriters, and
each Underwriter agrees, severally and not jointly, to purchase from the
Partnership the number of Firm Units set forth below opposite their names at a
purchase price of $ per Unit.
<TABLE>
<CAPTION>
NAME NUMBER OF FIRM UNITS
- ---------------------------------------------------------------------------------- --------------------
<S> <C>
Morgan Stanley & Co. Incorporated.................................................
-----------
Total.........................................................................
-----------
-----------
</TABLE>
The Underwriters will pay for the Firm Units upon delivery thereof at
[office] at a.m. (New York City time) on , , or at such other
time, not later than 5:00 p.m. (New York City time) on , , as
shall be designated by the Manager. The time and date of such payment and
delivery are hereinafter referred to as the "Closing Date."
The Underwriters will pay for any Additional Units upon deliver thereof at
[office] at a.m. (New York City time) on the date specified in the notice
described in Section 2 of this Agreement or at such other time on the same or on
such other date, in any event not later than , , as shall be
designated in writing by the Manager. The time and date of such payment and
delivery are hereinafter referred to as the "Option Closing Date."
The Units shall have the terms set forth in the Prospectus dated
, , and the Prospectus Supplement dated , ,
including the following:
<TABLE>
<S> <C>
NUMBER OF UNITS:
Number of Firm Units:
Maximum Number of Additional Units:
INITIAL OFFERING PRICE TO PUBLIC:
$ per Unit
PURCHASE PRICE BY UNDERWRITERS:
$ per Unit
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
FORM OF UNITS:
Definitive form, to be made available for checking [and packaging] at least twenty-four
hours prior to the Closing Date at the office of [The Depository Trust Company or its
designated custodian] [the Manager]
SPECIFIED FUNDS FOR PAYMENT OF PURCHASE PRICE:
Wire transfer of same day funds
[DESCRIBE ANY BLACKOUT PROVISIONS WITH RESPECT TO THE UNITS]
CLOSING DATE:
a.m. (New York City time), , 19
CLOSING LOCATION:
NAMES AND ADDRESSES OF MANAGER:
Designated Manager:
Address for Notices, etc.:
[OTHER TERMS]*
</TABLE>
All provisions contained in the document entitled Cornerstone Propane
Partners, L.P. Underwriting Agreement Standard Provisions dated ,
1998, a copy of which is attached hereto, are herein incorporated by reference
in their entirety and shall be deemed to be a part of this Agreement to the same
extent as if such provisions had been set forth in full herein, except that (i)
if any term defined in such document is otherwise defined herein, the definition
set forth herein shall control, (ii) all references in such document to a type
of security that is not a Common Unit shall not be deemed to be a part of this
Agreement, and (iii) all references in such document to a type of agreement that
has not been entered into in connection with the transactions contemplated
hereby shall not be deemed to be a part of this Agreement.
- ------------------------
*A description of particular tax, accounting or other unusual features
(including any event risk provisions) of the Units should be set forth, or
referenced to an attached or accompanying description, if necessary, to ensure
agreement as to the terms of the Units to be purchased and sold. Such a
description might appropriately be in the form in which such features will be
described in the Prospectus Supplement for the offering.
2
<PAGE>
ANNEX II
[SIGNATURE PAGE WHERE
MORGAN STANLEY & CO. INCORPORATED
OR MORGAN STANLEY & CO. INTERNATIONAL LIMITED
IS A CO-LEAD MANAGER]
Please confirm your agreement by having an authorized officer sign a copy of
this Agreement in the space set forth below.
Very truly yours,
MORGAN STANLEY & CO.
INCORPORATED
[Name of Other Lead Managers]
Acting severally on behalf of
themselves
and the several Underwriters named
herein
By: [MORGAN STANLEY & CO.
INCORPORATED]
By: __________________________________
Name:
Title:
Accepted:
CORNERSTONE PROPANE PARTNERS, L.P.
By: Cornerstone Propane GP, Inc.,
its Managing General Partner
By: __________________________________________
Keith G. Baxter
President and Chief Executive
Officer
CORNERSTONE PROPANE, L.P.
By: Cornerstone Propane GP, Inc.,
its Managing General Partner:
By __________________________________________
Keith G. Baxter
President and Chief Executive
Officer
3
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF MCCUTCHEN, DOYLE, BROWN & ENERSEN, LLP]
October 14, 1998
Cornerstone Propane Partners, L.P.
432 Westridge Drive
Watsonville, California 95076
Gentlemen:
We have acted as counsel to Cornerstone Propane Partners, L.P., a Delaware
limited partnership (the "Partnership"), and Cornerstone Propane GP, Inc., a
California corporation and the managing general partner of the Partnership, in
connection with the registration under the Securities Act of 1933, as amended,
of up to 3,487,500 common units representing limited partner interests in the
Partnership (the "Common Units") which may be issued from time to time pursuant
to the Partnership's registration statement on Form S-3 being filed with the
Securities and Exchange Commission (the "Registration Statement").
In connection with the opinions expressed below, we have examined such
statutes, regulations, partnership and corporate records and documents,
certificates of corporate and public officials, and other instruments as we have
deemed necessary or advisable. In such examination, we have assumed the
authenticity of all documents submitted to us as originals and the conformity
with the original documents of all documents submitted to us as copies. We have
also assumed that, at the time of each issuance, sale and delivery of Common
Units, such Common Units will be issued, sold and delivered in a manner
consistent with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware Act") and the partnership agreement of the Partnership as in effect at
such time.
Based on the foregoing and on such legal considerations as we deem relevant,
we are of the opinion that:
1. The Partnership has been duly formed and is validly existing as a
limited partnership under the Delaware Act.
2. When appropriate partnership action has been taken to authorize the
issuance of any Common Units and such Common Units have been issued and paid
for as described in the prospectus contained in the Registration Statement,
as amended or supplemented (the "Prospectus"), such Common Units will be
duly authorized, validly issued, fully paid and nonassessable, except as
such nonassessability may be affected by the matters described in the
Prospectus under the caption "The Partnership Agreement--Limited Liability."
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption
"Validity of the Common Units" in the Prospectus.
Very truly yours,
McCUTCHEN, DOYLE, BROWN & ENERSEN, LLP
By: /s/ BARTLEY C. DEAMER
-----------------------------------
A Member of the Firm
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF MCCUTCHEN, DOYLE, BROWN & ENERSEN, LLP]
October 14, 1998
Cornerstone Propane Partners, L.P.
432 Westridge Drive
Watsonville, California 95076
Re: Cornerstone Propane Partners, L.P. Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as special tax counsel to Cornerstone Propane Partners, L.P.,
a Delaware limited partnership (the "Partnership"), in connection with the
registration under the Securities Act of 1933, as amended, of up to 3,487,500
common units representing limited partner interests in the Partnership (the
"Common Units") which may be issued from time to time pursuant to the
Partnership's registration statement on Form S-3 being filed with the Securities
and Exchange Commission (the "Registration Statement"). The Common Units will be
issued from time to time in connection with the Partnership's acquisitions of
businesses, assets or securities in amounts, at prices and on terms to be
determined at the time of such acquisitions.
Assuming the transactions set forth in the operative documents for the
Common Units (which are described in the prospectus contained in the
Registration Statement (the "Prospectus"), as it may be amended or
supplemented), will be performed in accordance with the terms described therein,
we hereby confirm to you our opinion as set forth under the heading "Tax
Considerations" in the Prospectus, subject to the limitations set forth therein.
Our opinion is based on current provisions of the Internal Revenue Code of
1986, as amended, the Treasury Regulations promulgated thereunder, published
pronouncements of the Internal Revenue Service and case law, any of which may be
changed at any time with retroactive effect. Any change in applicable laws or
facts and circumstances surrounding the offering of the Common Units, or any
inaccuracy in the statements, facts, assumptions and representations on which we
have relied, may affect the continuing validity of the opinions set forth
herein. We assume no responsibility to inform you of any such change or
inaccuracy that may occur or come to our attention.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the reference to us under the heading "Tax
Considerations" in the Prospectus.
Very truly yours,
McCUTCHEN, DOYLE, BROWN & ENERSEN, LLP
By: /s/ ROGER D. EHLERS
-----------------------------------
A MEMBER OF THE FIRM
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement of our report dated July 30, 1998 on
Cornerstone Propane Partners, L.P. and our report dated August 4, 1997 on SYN
Inc. included in Cornerstone Propane Partners, L.P.'s Form 10-K for the year
ended June 30, 1998 and to all references to our Firm included in this
Registration Statement.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
October 12, 1998
<PAGE>
EXHIBIT 23.2
We hereby consent to the use in the Registration Statement on Form S-3 of
our report dated August 4, 1997, relating to the financial statements of EMPIRE
ENERGY CORPORATION and our report dated October 9, 1996, relating to the
financial statements of SYNERGY GROUP INCORPORATED, incorporated by reference
from the 1998 Cornerstone Propane Partners, L.P. Form 10-K. We also consent to
the reference to us under the heading "Experts" in such Registration Statement.
BAIRD KURTZ & DOBSON
Springfield, Missouri
October 12, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of Cornerstone
Propane Partners, L.P. of our report dated August 8, 1997 relating to the
consolidated financial statements of CGI Holdings, Inc. appearing in Cornerstone
Propane Partners, L.P.'s Annual Report on Form 10-K for the year ended June 30,
1998. We also consent to the reference to us under the heading "Experts" in such
Prospectus.
PRICEWATERHOUSECOOPERS LLP
San Francisco, California
October 12, 1998
