<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-34581
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JANUARY 5, 1998)
1,750,000 COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
[CORNERSTONE PROPANE PARTNERS, L.P. LOGO]
------------
ALL THE COMMON UNITS OFFERED HEREBY ARE BEING OFFERED BY CORNERSTONE PROPANE
PARTNERS, L.P., A DELAWARE LIMITED PARTNERSHIP (THE "PARTNERSHIP"). THE
COMMON UNITS ARE TRADED ON THE NEW YORK STOCK EXCHANGE (THE "NYSE") UNDER
THE SYMBOL "CNO." ON JANUARY 8, 1998, THE LAST REPORTED SALE PRICE FOR
THE COMMON UNITS AS REPORTED ON THE NEW YORK STOCK EXCHANGE
COMPOSITE TRANSACTIONS TAPE WAS
$22 1/8 PER COMMON UNIT.
THE PARTNERSHIP WILL DISTRIBUTE TO ITS PARTNERS, ON A QUARTERLY BASIS, ALL OF
ITS AVAILABLE CASH, WHICH IS GENERALLY ALL CASH ON HAND AT THE END OF A
QUARTER, AS ADJUSTED FOR RESERVES. THE MANAGING GENERAL PARTNER HAS
BROAD DISCRETION IN MAKING CASH DISBURSEMENTS AND ESTABLISHING
RESERVES. THE PARTNERSHIP INTENDS, TO THE EXTENT THERE IS
SUFFICIENT AVAILABLE CASH, TO DISTRIBUTE TO EACH HOLDER OF COMMON
UNITS AT LEAST $.54 PER COMMON UNIT PER QUARTER (THE "MINIMUM
QUARTERLY DISTRIBUTION") OR $2.16 PER COMMON UNIT ON AN
ANNUALIZED BASIS. SEE "CASH AVAILABLE FOR DISTRIBUTION"
BELOW AND "CASH DISTRIBUTION POLICY" IN
THE ACCOMPANYING PROSPECTUS.
------------------------
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 S-3 BELOW
AND ON PAGE 28 OF THE ACCOMPANYING PROSPECTUS, IN EVALUATING
AN INVESTMENT IN THE PARTNERSHIP.
-----------------
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 SUPPLEMENT
OR THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
PRICE $22 1/8 A COMMON UNIT
-------------------
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) PARTNERSHIP(2)
------------------ ------------------ ------------------
<S> <C> <C> <C>
PER COMMON UNIT................................................ $22.125 $1.220 $20.905
TOTAL (3)...................................................... $38,718,750 $2,135,000 $36,583,750
</TABLE>
- ------------
(1) THE PARTNERSHIP, THE OPERATING PARTNERSHIP AND THE MANAGING GENERAL
PARTNER HAVE AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE PARTNERSHIP ESTIMATED AT
$150,000.
(3) THE PARTNERSHIP HAS GRANTED TO THE UNDERWRITERS AN OPTION, EXERCISABLE
WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF
262,500 ADDITIONAL COMMON UNITS AT THE PRICE TO PUBLIC LESS UNDERWRITING
DISCOUNTS AND COMMISSIONS, FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS,
IF ANY. IF THE UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE TOTAL PRICE
TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO
PARTNERSHIP WILL BE $44,526,563, $2,455,250 AND $42,071,313,
RESPECTIVELY. SEE "UNDERWRITERS."
------------------------
THE COMMON UNITS ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF
ACCEPTED BY THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN
LEGAL MATTERS BY SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, COUNSEL FOR THE
UNDERWRITERS. IT IS EXPECTED THAT DELIVERY OF THE COMMON UNITS WILL BE MADE ON
OR ABOUT JANUARY 14, 1998, AT THE OFFICE OF MORGAN STANLEY & CO. INCORPORATED,
NEW YORK, NEW YORK, AGAINST PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE FUNDS.
-------------------
MORGAN STANLEY DEAN WITTER PAINEWEBBER INCORPORATED
JANUARY 8, 1998
<PAGE>
The Partnership will furnish or make available to record holders of Common
Units (i) within 120 days after the close of each fiscal year of the
Partnership, an annual report containing audited financial statements and a
report thereon by its independent public accountants and (ii) within 90 days
after the close of each quarter (other than the fourth quarter), a quarterly
report containing unaudited summary financial information. The Partnership will
also furnish each Unitholder with tax information within 90 days after the close
of each calendar year.
--------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
The Partnership............................................................................................ S-3
Risk Factors............................................................................................... S-3
Recent Developments........................................................................................ S-5
The Offering............................................................................................... S-6
Use of Proceeds............................................................................................ S-6
Capitalization............................................................................................. S-7
Price Range of Common Units................................................................................ S-7
Cash Available for Distribution............................................................................ S-8
Underwriters............................................................................................... S-9
Validity of the Common Units............................................................................... S-10
Prospectus
Available Information...................................................................................... ii
Incorporation of Certain Documents by Reference............................................................ ii
Prospectus Summary......................................................................................... 1
Risk Factors............................................................................................... 28
The IPO and Related Transactions........................................................................... 40
Use of Proceeds............................................................................................ 41
Capitalization............................................................................................. 42
Price Range of Common Units................................................................................ 43
Cash Distribution Policy................................................................................... 44
Cash Available for Distribution............................................................................ 52
Selected Pro Forma Financial and Operating Data............................................................ 54
Selected Historical Financial and Operating Data........................................................... 57
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 63
Business and Properties.................................................................................... 72
Management................................................................................................. 80
Security Ownership of Certain Beneficial Owners and Management............................................. 86
Certain Relationships and Related Transactions............................................................. 87
Conflicts of Interest and Fiduciary Responsibilities....................................................... 88
Description of the Common Units............................................................................ 93
The Partnership Agreement.................................................................................. 96
Units Eligible for Future Sale............................................................................. 107
Plan of Distribution....................................................................................... 108
Tax Considerations......................................................................................... 109
Investment in the Partnership by Employee Benefit Plans.................................................... 128
Validity of the Common Units............................................................................... 129
Experts.................................................................................................... 129
Index to Financial Statements.............................................................................. F-1
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON UNITS,
INCLUDING THE PURCHASE OF COMMON UNITS TO STABILIZE THEIR MARKET PRICE OR TO
COVER SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITERS."
S-2
<PAGE>
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS QUALIFIED IN ITS ENTIRETY
BY THE DETAILED INFORMATION APPEARING IN THE ACCOMPANYING PROSPECTUS OR
INCORPORATED THEREIN BY REFERENCE. CERTAIN TERMS USED BUT NOT DEFINED HEREIN
HAVE THE MEANINGS ASSIGNED TO THEM IN THE ACCOMPANYING PROSPECTUS.
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 298 customer
service centers in 27 states as of December 31, 1997. The Partnership's
operations are concentrated in the east coast, south-central and west coast
regions of the United States. For the fiscal year ended June 30, 1997, the
Partnership had combined retail propane sales of approximately 214 million
gallons and pro forma operating income plus depreciation and amortization
("EBITDA") of approximately $41.0 million. The Partnership was formed in 1996 to
acquire, own and operate the propane businesses and assets of SYN Inc., Empire
Energy Corporation and CGI Holdings, Inc. 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
Corporation (a subsidiary of Northwestern Public Service Company), 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" below and in the
accompanying Prospectus.
The Partnership's headquarters and executive offices are located at 432
Westridge Drive, Watsonville, California 95076, and its telephone number is
(408) 724-1921.
RISK FACTORS
MINIMUM QUARTERLY DISTRIBUTION NOT GUARANTEED
The Minimum Quarterly Distribution is not guaranteed. The actual amount of
cash distributions will depend on future Partnership operating performance and
will be affected by the funding of reserves, operating and capital expenditures
and other matters within the discretion of the Managing General Partner, as well
as required interest and principal payments on, and the other terms of, the
Partnership's indebtedness. Pro forma Available Cash from Operating Surplus (as
defined in the Glossary) generated during fiscal 1997 would have been
insufficient by approximately $6.1 million to cover the Minimum Quarterly
Distribution for such fiscal year on all of the Common Units to be outstanding
upon issuance of the Common Units offered hereby and the related distribution on
the general partner interests, and would
S-3
<PAGE>
have been insufficient by approximately $20.6 million to cover the Minimum
Quarterly Distribution on all of such Common Units and the Subordinated Units
outstanding as of the date of this Prospectus and the related distribution on
the general partner interests.
FINANCIAL PERFORMANCE AFFECTED BY WEATHER
Weather conditions have a significant impact on the demand for propane for
both heating and agricultural purposes. Many customers of the Partnership rely
heavily on propane as a heating fuel. Accordingly, the volume of retail propane
sold is highest during the six-month peak heating season of October through
March and is directly affected by the severity of the winter weather. During
fiscal 1997, approximately 68.8% of the Partnership's combined retail propane
volume and approximately 90% of the Partnership's pro forma EBITDA were
attributable to sales during the peak heating season. Actual weather conditions
can vary substantially from year to year, significantly affecting the
Partnership's financial performance. Furthermore, variations in weather in one
or more regions in which the Partnership operates can significantly affect the
total volume of propane sold by the Partnership and the margins realized on such
sales and, consequently, the Partnership's results of operations. Agricultural
demand is also affected by weather, as dry weather during the harvest season
reduces demand for propane used in crop drying.
OFFERING INCREASES MINIMUM QUARTERLY DISTRIBUTION ON COMMON UNITS
The issuance of the Common Units offered hereby will increase the amount of
Available Cash needed to pay the Minimum Quarterly Distribution with respect to
all of the Common Units.
SUBSTANTIAL INDEBTEDNESS
At September 30, 1997, the Partnership's total indebtedness was
approximately $256.2 million, constituting approximately 53.0% of its total
capitalization. As a result, the Partnership has indebtedness that is
substantial in relation to its partners' capital. In addition, the Partnership's
financing agreements contain restrictive covenants that limit the Partnership's
ability to incur additional indebtedness and to make distributions to
Unitholders.
GROWTH DEPENDENT ON ACQUISITIONS
Because the retail propane industry is mature and overall demand for propane
is expected to experience limited growth in the foreseeable future, the
Partnership will depend on acquisitions as the principal means of growth. There
can be no assurance that the Partnership will 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.
S-4
<PAGE>
RECENT DEVELOPMENTS
ACQUISITIONS
On December 11, 1997, the Partnership announced that Flame, Inc. of
Prescott, Arizona and Graves Butane Company of Arizona of Flagstaff, Arizona had
combined their businesses with the Partnership through an exchange for Common
Units and cash. These transactions added an aggregate of 10.4 million retail
gallons per year and 12,200 customers to the Partnership's business, bringing
the aggregate amount of additions from external growth since the Partnership
commenced operations in December 1996 to 24 million retail gallons annually and
28,000 customers.
PRELIMINARY RESULTS FOR THE QUARTER ENDED DECEMBER 31, 1997
The Partnership's second quarter of fiscal 1998 ended December 31, 1997. As
of the date of this Prospectus Supplement, the Partnership does not yet have
financial results for the second quarter and, in particular, for the month of
December, which traditionally accounts for the majority of the quarter's sales,
expenses, earnings and cash flow. However, based on internally available data
for the months of October and November and preliminary sales figures for
December, the Partnership expects the number of gallons of propane sold, EBITDA
and earnings per average unit for the quarter to be substantially consistent
with pro forma amounts for the second quarter of fiscal 1997, which ended
December 31, 1996. For the quarter ended December 31, 1996 (which consisted of
pro forma results of the Combined Operations through December 16 and actual
performance of the Partnership commencing December 17), the Partnership reported
propane sales of approximately 75.5 million gallons, EBITDA of approximately
$17.5 million and earnings per unit of $.58.
As noted above, the Partnership does not yet have financial results for the
quarter ended December 31, 1997, and no assurance can be given as to the
accuracy of the expectation reflected above. Such expectation is based on
incomplete and preliminary data, which is subject to change as more definitive
financial information becomes available. The Partnership intends to announce its
earnings for the second fiscal quarter as soon as practicable after they become
available, in accordance with past practice.
S-5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities offered by the Partnership................ 1,750,000 Common Units
Units to be outstanding after the Offering........... 12,876,552 Common Units and
6,597,619 Subordinated Units,
representing an aggregate 64.8% and
33.2% limited partner interest in
the Partnership, respectively
Use of proceeds...................................... General business purposes and to
expand the Partnership's propane
business by internal growth and
through acquisitions; initially, to
repay debt
New York Stock Exchange symbol....................... CNO
</TABLE>
USE OF PROCEEDS
The net proceeds to the Partnership from the sale of the Common Units
offered hereby are estimated to be approximately $36.4 million ($41.9 million if
the Underwriters' over-allotment option is exercised in full). The Partnership
intends to use the net proceeds for general business purposes and to expand the
Partnership's propane business by internal growth and through acquisitions.
Initially, the Partnership intends to use approximately $10.0 million of the net
proceeds for general business purposes, approximately $12.5 million to repay
amounts outstanding under the Acquisition Facility and approximately $13.9
million to repay amounts outstanding under the Working Capital Facility. All
such indebtedness bears interest at a rate equal to the applicable base rate
plus .125% or the applicable Eurodollar rate plus .80% (approximately 8.625% and
approximately 6.716%, respectively, as of December 31, 1997) and matures
December 31, 1999 (at which time amounts outstanding under the Acquisition
Facility may be converted to a four-year term loan). Following completion of the
Offering and the application of the net proceeds therefrom, the Partnership will
have approximately $241.4 million of indebtedness outstanding and the ability to
borrow up to an additional $75 million under the Acquisition Facility and $40.4
million under the Working Capital Facility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" in the accompanying Prospectus.
S-6
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Partnership at
September 30, 1997 and as adjusted for the application of the net proceeds from
the sale of 1,750,000 Common Units offered hereby. The table should be read in
conjunction with the historical financial statements and notes thereto included
in the accompanying Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current portion)............................................... $ 256,165 $ 231,965(1)
---------- -----------
Partners' capital:
Common Unitholders..................................................................... 136,542 175,261
Subordinated Unitholders............................................................... 85,636 85,636
General Partners....................................................................... 4,628 5,402
---------- -----------
Total partners' capital.............................................................. 226,806 266,299
---------- -----------
Total capitalization................................................................. $ 482,971 $ 498,264
---------- -----------
---------- -----------
</TABLE>
- ---------
(1) Reflects the repayment of $24.2 million outstanding under the Bank Credit
Facility at September 30, 1997. At December 31, 1997, the Partnership had
approximately $36.0 million outstanding under the Bank Credit Facility
($12.5 million outstanding under the Acquisition Facility and approximately
$23.5 million outstanding under the Working Capital Facility), all of which
will be repaid with a portion of the net proceeds of this Offering.
PRICE RANGE OF COMMON UNITS
The following table sets forth the last reported high and low sales prices
per Common Unit and the distributions paid thereon by the Partnership with
respect to the calendar quarters indicated below:
<TABLE>
<CAPTION>
HIGH LOW DISTRIBUTIONS
---------- ---------- ---------------
<S> <C> <C> <C>
1996
Fourth Quarter (from December 12, 1996)..................... $ 211/2 $ 21 --
1997
First Quarter............................................... $ 223/8 $ 207/8 $ .63(1)
Second Quarter.............................................. $ 221/8 $ 193/4 $ .54
Third Quarter............................................... $ 237/8 $ 211/16 $ .54
Fourth Quarter.............................................. $ 231 /16 $ 22 (2)
1998
First Quarter (through January 8, 1998)..................... $ 23 $ 215/8 (2)
</TABLE>
- ---------
(1) The distribution of $.63 per Unit declared for the quarter ended March 31,
1997, included amounts attributable to the 15-day period commencing December
17, 1996.
(2) The Partnership expects to make distributions of all Available Cash within
45 days after the end of each quarter to holders of record on the applicable
record date.
On January 8, 1998, the last reported sale price for the Common Units as
reported on the New York Stock Exchange Composite Transactions tape was $22 1/8
per Common Unit.
S-7
<PAGE>
CASH AVAILABLE FOR DISTRIBUTION
The Partnership believes that the Partnership should have sufficient
Available Cash from Operating Surplus to enable it to distribute the Minimum
Quarterly Distribution on all of the Common Units to be outstanding immediately
after the consummation of this offering, and the related distribution on the
aggregate 2% general partner interest, with respect to each fiscal quarter at
least through the quarter ending December 31, 1998. However, no assurance can be
given respecting such distributions or any future distributions. The
Partnership's belief is based on a number of assumptions, including the
assumptions that (i) the Partnership will be able to continue to realize
significant cost savings from integrating the Combined Operations, including
acquisition and logistics cost savings associated with propane purchasing,
insurance premium reductions and certain operating, general and administrative
cost savings; (ii) the Partnership will be able to continue internal growth at a
rate generally consistent with historical levels; (iii) normal weather
conditions will prevail in the Partnership's operating areas; (iv) the
Partnership's operating margins will remain constant and (v) market and overall
economic conditions will not change substantially. Although the Partnership
believes its assumptions are within a range of reasonableness, whether the
assumptions are realized is not, in a number of cases, within the control of the
Partnership and cannot be predicted with any degree of certainty. For example,
in any particular year, or series of years, weather may deviate substantially
from normal. Therefore, certain of the Partnership's assumptions may prove to be
inaccurate, and the actual Available Cash from Operating Surplus generated by
the Partnership could deviate substantially from that currently expected. See
"Risk Factors" above and in the accompanying Prospectus.
In addition, the terms of the Partnership's indebtedness under certain
circumstances restrict the ability of the Partnership to distribute cash to
Unitholders. Accordingly, no assurance can be given that distributions of the
Minimum Quarterly Distribution or any other amounts will be made. The
Partnership does not undertake to update the expression of belief set forth
above. See "Cash Distribution Policy" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Description of Indebtedness"
in the accompanying Prospectus.
S-8
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date of this Prospectus Supplement (the "Underwriting Agreement"), the
Underwriters named below, for whom Morgan Stanley & Co. Incorporated and
PaineWebber Incorporated are serving as Representatives, have severally agreed
to purchase, and the Partnership has agreed to sell to them, the respective
number of Common Units set forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME COMMON UNITS
- ------------------------------------------------------------------------------ --------------
<S> <C>
Morgan Stanley & Co. Incorporated............................................. 725,000
PaineWebber Incorporated...................................................... 725,000
CIBC Oppenheimer Corp......................................................... 100,000
A.G. Edwards & Sons, Inc...................................................... 100,000
Prudential Securities Incorporated............................................ 100,000
--------------
Total..................................................................... 1,750,000
--------------
--------------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Common Units offered hereby
are subject to approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all Common
Units offered hereby (other than those covered by the Underwriters'
over-allotment option described below) if any such Common Units are taken.
The Underwriters initially propose to offer part of the Common Units
directly to the public at the Price to Public set forth on the cover page of
this Prospectus Supplement and part of such Common Units to certain dealers at a
price which represents a concession not in excess of $.75 per Common Unit under
the public offering price. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $.10 per Common Unit to other
Underwriters or to certain other dealers. After the initial offering of the
Common Units to the public, the offering price and other selling terms may from
time to time be varied by the Representatives.
Pursuant to the Underwriting Agreement, the Partnership has granted to the
Underwriters an option, exercisable for 30 days from the date of this Prospectus
Supplement, to purchase up to 262,500 additional Common Units at the public
offering price set forth on the cover page of this Prospectus Supplement less
underwriting discounts and commissions. The Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, made in
connection with the offering of the Common Units offered hereby. To the extent
such option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional Common Units as the number of Common Units set forth opposite such
Underwriter's name in the preceding table bears to the total number of Common
Units offered by the Underwriters hereby.
The Partnership, the Operating Partnership, the Managing General Partner and
the Underwriters have agreed to indemnify each other against certain civil
liabilities, including liabilities under the Securities Act.
Each of the Partnership and the Managing General Partner has agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated, it will
not (i) offer, issue, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any Common Units, Subordinated Units or securities convertible into
or exercisable or exchangeable for Common Units or Subordinated Units or (ii)
enter into any swap or other arrangement that transfers, in whole or in part,
any of the economic consequences of ownership of the Common Units or such other
securities, in cash or otherwise, for a period of 120 days after the date
hereof, except for (a) the Common Units offered hereby, (b) issuances of Common
Units pursuant to employee plans described in the accompanying Prospectus or
S-9
<PAGE>
(c) the issuance of Common Units in connection with Acquisitions or Capital
Improvements; provided that the Subordinated Units may be transferred without
such consent to an affiliate of the Managing General Partner who agrees to be
bound by the transfer restrictions contained in this paragraph.
The Representatives have informed the Partnership that the Underwriters do
not intend sales to discretionary accounts to exceed 5% of the Common Units
offered by them.
Because the National Association of Securities Dealers, Inc. ("NASD") views
the Common Units offered hereby as interests in a direct participation program,
the offering is being made in compliance with Rule 2810 of the NASD's Conduct
Rules. Investor suitability of the Common Units should be judged similarly to
the suitability of other securities which are listed for trading on a national
securities exchange.
In order to facilitate the offering of the Common Units, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Units. Specifically, the Underwriters may over-allot in
connection with such offering, creating short positions in the Common Units for
their own accounts. In addition, to cover over-allotments or to stabilize the
price of the Common Units, the Underwriters may bid for, and purchase, Common
Units in the open market. Finally, the Underwriters may reclaim selling
concessions allowed to a dealer for distributing the Common Units, if the
Underwriters repurchase previously distributed Common Units in transactions to
cover their short positions, in stabilization or otherwise. Any of these
activities may stabilize or maintain the market price of the Common Units above
independent market levels. The Underwriters are not required to engage in these
activities and may end any of these activities at any time.
From time to time, the Representatives render investment banking services to
the Partnership and its affiliates, for which they receive customary fees and
commissions.
VALIDITY OF THE COMMON UNITS
The validity of the Common Units will be passed upon for the Partnership by
Schiff Hardin & Waite, Chicago, Illinois. Certain legal matters in connection
with the Common Units offered hereby are being passed upon for the Underwriters
by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.
S-10
<PAGE>
PROSPECTUS
2,400,000 COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
CORNERSTONE PROPANE PARTNERS, L.P.
---------------
This Prospectus relates to up to 2,400,000 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 28, 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.
January 5, 1998
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AVAILABLE INFORMATION
The Partnership is subject to the informational requirements of the
Securities Exchange Act of 1934 (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 Section of the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates or from the Web site maintained by
the Commission at http://www.sec.gov. The Partnership's Common Units are listed
on the NYSE, 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 (the "Securities Act") with respect to the Common Units offered
hereby. This Prospectus does not contain all of the information set forth in
such Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. Reference is made to such
Registration Statement and to the exhibits relating thereto 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
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, 1997;
(b) Quarterly Report on Form 10-Q for the quarter ended September 30, 1997;
and
(c) 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
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.
The Partnership will provide without charge to each person to whom a copy of
this Prospectus is delivered, at the request of any such person, a copy of any
or all of the foregoing documents incorporated herein by reference other than
exhibits to such documents (unless such exhibits are specifically incorporated
by reference into the documents that this Prospectus incorporates). Written or
telephone requests for such copies should be directed to Ronald J. Goedde,
Cornerstone Propane Partners, L.P., at its principal executive offices, 432
Westridge Drive, Watsonville, California 95076 (telephone: (408) 724-1921).
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TABLE OF CONTENTS
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AVAILABLE INFORMATION..................................................... ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... ii
PROSPECTUS SUMMARY........................................................ 1
Cornerstone Propane Partners, L.P....................................... 1
Summary Pro Forma and Historical Financial and Operating Data........... 9
Risk Factors............................................................ 11
Cash Available for Distribution......................................... 16
Partnership Structure and Management.................................... 17
The Offering............................................................ 19
Summary of Tax Considerations........................................... 25
RISK FACTORS.............................................................. 28
Risks Inherent in the Partnership's Business............................ 28
Risks Inherent in an Investment in the Partnership...................... 30
Conflicts of Interest and Fiduciary Responsibilities.................... 34
Tax Risks............................................................... 36
THE IPO AND RELATED TRANSACTIONS.......................................... 40
USE OF PROCEEDS........................................................... 41
CAPITALIZATION............................................................ 42
PRICE RANGE OF COMMON UNITS............................................... 43
CASH DISTRIBUTION POLICY.................................................. 44
General................................................................. 44
Quarterly Distributions of Available Cash............................... 45
Distributions from Operating Surplus during Subordination Period........ 45
Distributions from Operating Surplus after Subordination Period......... 47
Incentive Distributions--Hypothetical Annualized Yield.................. 47
Distributions from Capital Surplus...................................... 48
Adjustment of Minimum Quarterly Distribution and Target Distribution
Levels................................................................ 49
Distributions of Cash Upon Liquidation.................................. 49
CASH AVAILABLE FOR DISTRIBUTION........................................... 52
SELECTED PRO FORMA FINANCIAL AND OPERATING DATA........................... 54
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA.......................... 57
The Partnership......................................................... 57
Synergy................................................................. 58
Empire Energy........................................................... 59
Coast................................................................... 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................. 63
General................................................................. 63
The Partnership......................................................... 63
Synergy................................................................. 67
Empire Energy........................................................... 68
Coast................................................................... 70
BUSINESS AND PROPERTIES................................................... 72
General................................................................. 72
Business Strategy....................................................... 73
Product................................................................. 75
Competition............................................................. 76
Operations.............................................................. 76
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Seasonality............................................................. 77
Sources of Supply....................................................... 77
Risks of Business....................................................... 78
Properties.............................................................. 78
Trademarks and Tradenames............................................... 78
Government Regulation................................................... 79
Employees............................................................... 79
Litigation and Other Contingencies...................................... 79
MANAGEMENT................................................................ 80
Partnership Management.................................................. 80
Directors and Executive Officers of the Managing General Partner........ 81
Reimbursement of Expenses of the Managing General Partner and its
Affiliates............................................................ 82
Executive Compensation.................................................. 83
Compensation of Directors............................................... 85
Compensation Committee Interlocks and Insider Participation in
Compensation Decisions................................................ 86
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 86
Ownership of Partnership Units by the General Partners and Directors and
Executive Officers of the Managing General Partner.................... 86
Ownership of NPS Common Stock by Directors and Executive Officers of the
Managing General Partner.............................................. 87
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 87
Rights of the General Partners.......................................... 87
Contribution, Conveyance and Assumption Agreement....................... 88
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES...................... 88
Conflicts of Interest................................................... 88
Fiduciary and Other Duties.............................................. 92
DESCRIPTION OF THE COMMON UNITS........................................... 93
The Units............................................................... 93
Transfer Agent and Registrar............................................ 94
Transfer of Common Units................................................ 94
THE PARTNERSHIP AGREEMENT................................................. 96
Organization and Duration............................................... 96
Purpose................................................................. 96
Power of Attorney....................................................... 97
Capital Contributions................................................... 97
Limited Liability....................................................... 97
Issuance of Additional Securities....................................... 98
Amendment of Partnership Agreement...................................... 99
Merger, Sale or Other Disposition of Assets............................. 100
Termination and Dissolution............................................. 101
Liquidation and Distribution of Proceeds................................ 101
Withdrawal or Removal of the General Partners........................... 101
Transfer of General Partners' Interests and Incentive Distribution
Rights................................................................ 103
Change of Management Provisions......................................... 103
Limited Call Right...................................................... 103
Meetings; Voting........................................................ 104
Status as Limited Partner or Assignee................................... 105
Non-Citizen Assignees; Redemption....................................... 105
Indemnification......................................................... 105
Books and Reports....................................................... 106
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Right to Inspect Partnership Books and Records.......................... 106
Registration Rights..................................................... 106
UNITS ELIGIBLE FOR FUTURE SALE............................................ 107
PLAN OF DISTRIBUTION...................................................... 108
TAX CONSIDERATIONS........................................................ 109
Classification of the Partnership....................................... 109
Tax Rates............................................................... 110
Consequences of Exchanging Property for Common Units.................... 110
Ownership of Units by S Corporations.................................... 111
Partnership Status...................................................... 113
Limited Partner Status.................................................. 114
Tax Consequences of Unit Ownership...................................... 115
Allocation of Partnership Income, Gain, Loss and Deduction.............. 117
Tax Treatment of Operations............................................. 118
Disposition of Common Units............................................. 121
Uniformity of Units..................................................... 123
Administrative Matters.................................................. 125
State, Local and Other Tax Considerations............................... 127
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS................... 128
VALIDITY OF THE COMMON UNITS.............................................. 129
EXPERTS................................................................... 129
INDEX TO FINANCIAL STATEMENTS............................................. F-1
APPENDIX A................................................................ A-1
APPENDIX B................................................................ B-1
</TABLE>
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.
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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 APPEARING ELSEWHERE IN THIS PROSPECTUS. THE TRANSACTIONS RELATED
TO THE FORMATION OF THE PARTNERSHIP, THE PARTNERSHIP'S ACQUISITION OF THE
ASSETS, BUSINESS AND OPERATIONS OF ITS PREDECESSORS, THE PARTNERSHIP'S INITIAL
PUBLIC OFFERING OF COMMON UNITS IN DECEMBER 1996 (THE "IPO"), THE ISSUANCE OF
$220.0 MILLION OF SENIOR SECURED NOTES DUE 2010 (THE "NOTES") BY CORNERSTONE
PROPANE, L.P., THE PARTNERSHIP'S OPERATING SUBSIDIARY (THE "OPERATING
PARTNERSHIP"), THE ENTERING INTO BANK CREDIT FACILITIES AND THE OTHER
TRANSACTIONS THAT OCCURRED IN CONNECTION THEREWITH ARE REFERRED TO IN THIS
PROSPECTUS AS THE "TRANSACTIONS." SEE "THE IPO AND RELATED TRANSACTIONS." 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"). EXCEPT AS THE CONTEXT OTHERWISE REQUIRES,
REFERENCES TO, OR DESCRIPTIONS OF, THE ASSETS, BUSINESS AND OPERATIONS OF THE
PARTNERSHIP GIVE PRO FORMA EFFECT TO THE TRANSACTIONS AND, ACCORDINGLY, INCLUDE
THE PROPANE ASSETS, BUSINESSES AND OPERATIONS OF SYN INC. ("SYNERGY"; IN ITS
CAPACITY AS THE SPECIAL GENERAL PARTNER OF THE PARTNERSHIP, THE "SPECIAL GENERAL
PARTNER" AND, TOGETHER WITH THE MANAGING GENERAL PARTNER, THE "GENERAL
PARTNERS"), EMPIRE ENERGY CORPORATION ("EMPIRE ENERGY") AND CGI HOLDINGS, INC.
("COAST") AS CONDUCTED PRIOR TO THE IPO. THE COMMON UNITS AND THE SUBORDINATED
LIMITED PARTNER INTERESTS OF THE PARTNERSHIP (THE "SUBORDINATED UNITS") ARE
COLLECTIVELY REFERRED TO HEREIN AS THE "UNITS," AND HOLDERS OF THE COMMON UNITS
AND SUBORDINATED UNITS ARE COLLECTIVELY REFERRED TO HEREIN AS "UNITHOLDERS."
UNLESS OTHERWISE SPECIFIED, REFERENCES TO THE PARTNERSHIP IN THIS PROSPECTUS
INCLUDE THE OPERATING PARTNERSHIP, AND REFERENCES TO PERCENTAGE OWNERSHIP OF THE
PARTNERSHIP REFLECT THE APPROXIMATE EFFECTIVE OWNERSHIP INTEREST OF THE
UNITHOLDERS AND THE GENERAL PARTNERS IN THE PARTNERSHIP AND THE OPERATING
PARTNERSHIP ON A COMBINED BASIS. FOR EASE OF REFERENCE, A GLOSSARY OF CERTAIN
TERMS USED IN THIS PROSPECTUS IS INCLUDED AS APPENDIX B TO THIS PROSPECTUS.
CAPITALIZED TERMS NOT OTHERWISE DEFINED HEREIN HAVE THE MEANINGS GIVEN IN THE
GLOSSARY.
CORNERSTONE PROPANE PARTNERS, L.P.
The Partnership believes that it is the fifth largest retail marketer of
propane in the United States in terms of volume, serving more than 380,000
residential, commercial, industrial and agricultural customers from 298 customer
service centers in 27 states as of December 31, 1997. The Partnership's
operations are concentrated in the east coast, south-central and west coast
regions of the United States. For the fiscal year ended June 30, 1997, the
Partnership had combined retail propane sales of approximately 214 million
gallons and pro forma operating income plus depreciation and amortization
("EBITDA") of approximately $41.0 million.
The Partnership was formed in 1996 to acquire, own and operate the propane
businesses and assets of Synergy and Empire Energy (formerly subsidiaries of
Northwestern Growth) and Coast (the "Combined Operations"). Northwestern Growth
is a wholly owned subsidiary of Northwestern Public Service Company ("NPS"), an
NYSE-listed energy distribution company. Northwestern Growth was formed in 1994
to pursue and manage nonutility investments and development activities for NPS,
with a primary focus on growth opportunities in the energy, energy equipment and
energy services industries. To capitalize on the growth and consolidation
opportunities in the propane distribution market, in August 1995, Northwestern
Growth acquired the predecessor of Synergy, then the sixth largest retail
marketer of propane in the United States; in October 1996 it acquired Empire
Energy, then the eighth largest retail marketer of propane in the United States;
and immediately prior to the IPO it acquired Coast, then the 18th largest retail
marketer of propane in the United States. The Partnership commenced operation on
December 17, 1996, concurrently with the closing of the IPO when substantially
all of the assets and liabilities of Synergy, Empire Energy and Coast were
contributed to the Operating Partnership. Information in this Prospectus related
to the pro forma year ended June 30, 1997, reflects a full year of activity for
the three predecessor companies, as if the Partnership had been in operation on
July 1, 1996.
The Partnership believes that it is well positioned to compete successfully
in the propane business for the following reasons: (i) management's experience
in generating profitable growth at its customer service
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centers by fostering an entrepreneurial approach by local managers; (ii) the
Partnership's large national and geographically diversified operations, which
the Partnership believes reduces the effects of adverse weather conditions in
any one region on EBITDA and allows it to achieve economies of scale; (iii) the
significant proportion of the Partnership's retail sales that is made to
residential customers, which are generally more profitable than sales to other
customers; (iv) management's experience in identifying, evaluating and
completing both small and large acquisitions; (v) the Partnership's substantial
national wholesale supply and logistics business, which provides it with a
national presence and a relatively secure source of propane to support the
service goals of its customer service centers; (vi) the Partnership's
centralized administrative systems that enable local managers to focus on
customer service and growth; and (vii) the Partnership's relationship with
Northwestern Growth, which has proven experience in the energy distribution
business and in the acquisition and growth of propane businesses.
Although the Partnership believes it has a number of competitive strengths,
the propane industry is highly competitive and includes a number of large
national firms and regional firms and several thousand small independent firms.
Certain competitors may have greater financial resources or lower operating
costs than the Partnership. Further, variations in the weather or the economy in
one or more regions in which the Partnership operates can significantly affect
the total volume of propane sold by the Partnership and, consequently, the
Partnership's results of operations. See "Risk Factors."
BUSINESS STRATEGY
The principal elements of the Partnership's business strategy are to (i)
extend and refine its existing service orientation, (ii) continue to pursue
balanced growth through small and large acquisitions, internal growth at its
existing customer service centers and start-ups of new customer service centers,
(iii) enhance the profitability of its existing operations by continuing to
integrate the Combined Operations, implement entrepreneurially oriented local
manager incentive programs, where appropriate, and centralize administrative
systems and (iv) capitalize on the Partnership's national wholesale supply and
logistics business.
FOCUS ON CUSTOMER SERVICE. The Partnership seeks to be recognized in the
marketplace as the most customer service-oriented propane supplier. Although
propane is a commodity product, the Partnership believes that it will be able to
distinguish itself from the competition by providing reliable and timely
delivery of propane at competitive prices. The Partnership believes that
establishing and clearly communicating standards of service and performance
expectations at all levels of the Partnership, and rewarding its employees
accordingly, will enable the Partnership to achieve its service goals. The
Partnership has incentive programs at certain customer service centers targeted
to fostering an entrepreneurial environment at the customer service center
level. These programs provide substantial rewards to local managers for managing
service-oriented and profitable operations. The Partnership intends to expand
such incentive programs to additional customer service locations, where
appropriate.
CONTINUED BALANCED GROWTH. The Partnership intends to continue to pursue
balanced growth through small and large acquisitions, internal growth at its
existing customer service centers and start-ups of new customer service centers.
Acquisitions are expected to be the principal means of growth for the
Partnership, as the retail propane industry is mature and overall demand for
propane is expected to experience limited growth in the foreseeable future. The
Partnership believes that the fragmented nature of the retail propane industry
provides significant opportunities for growth through strategic acquisitions.
Industry sources indicate that there are over 8,000 retail propane operations in
the United States, of which the ten largest account for approximately 33% of
industry volumes. The Partnership's acquisition strategy concentrates on
companies that have one or more of the following characteristics: (i) locations
in areas serviced by the Partnership that may be combined with existing
operations, providing greater economies of scale at the customer service center
level, (ii) a recent record of growth and a local reputation for quality
service, (iii) locations in areas that are relatively colder and (iv) operations
with a relatively high proportion of sales to the more profitable residential
customer segment. As part of its acquisition program, the Partnership generally
expects to retain the name and identity of the acquired entity, which the
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Partnership believes will preserve the goodwill of the acquired business and
promote continued local customer loyalty. The Partnership's ability to make
acquisitions is facilitated by the availability of a $75.0 million acquisition
credit facility and the ability to issue additional limited partner interests.
In calendar 1997, the Partnership acquired businesses in Arizona, California,
Florida, New Hampshire and North Carolina which added approximately 28,000
customers and annual retail propane sales of approximately 24 million gallons.
The aggregate purchase price for these acquisitions was approximately $44
million, of which approximately $30 million was in the form of Common Units
(approximately 1.3 million Common Units). There can be no assurance, however,
that the Partnership will continue to identify attractive acquisition candidates
in the future, that the Partnership will be able to acquire such businesses on
economically acceptable terms, that any acquisitions will not be dilutive to
earnings and distributions to the Unitholders or that any additional debt
incurred to finance an acquisition will not affect the ability of the
Partnership to make distributions to the Unitholders. The Partnership is not
required under the Partnership Agreement to seek Unitholder approval of any
acquisition.
The Partnership is from time to time engaged in ongoing discussions with
respect to acquisitions, and expects to continue to pursue such acquisition
opportunities actively. As of the date of this Prospectus, the Partnership does
not have any agreements with respect to any material acquisitions but is
involved in ongoing discussions with several companies and is continuing to
assess these and other acquisition opportunities. The Partnership is unable to
predict the size, number or timing of any future acquisitions.
In addition to pursuing growth through acquisitions, the Partnership
continues to focus on internal growth at its existing customer service centers.
The Partnership seeks to achieve internal growth by, among other things,
providing superior service and instituting programs that encourage employees,
existing customers and local real estate agents and contractors to refer new
accounts. This strategy is being implemented primarily through the Partnership's
incentive programs that reward local managers for managing service-oriented and
profitable operations.
In some instances, the Partnership may identify a market that has one or
more of the characteristics that would make it attractive for an acquisition but
in which there are no attractive available acquisition candidates. In certain of
these cases, the Partnership may seek to penetrate the market by establishing a
new customer service center. The Partnership believes it can successfully
initiate these start-up operations in attractive markets by identifying and
hiring local managers with proven propane service experience and establishing
programs that reward service-oriented and profitable operations and that allow
the managers to share in the growth of the business.
ENHANCE PROFITABILITY OF ITS EXISTING OPERATIONS. The Partnership believes
that it can enhance the profitability of its customer service centers by
integrating the Combined Operations, reducing inefficiencies in areas where
there is a geographic overlap of services and implementing "best practices" and
management incentive programs throughout the Partnership's operations. In
integrating the Combined Operations, the Partnership is in the process of
consolidating and centralizing ongoing administrative functions and systems,
which should enable local managers to devote their time to providing customer
service and achieving other performance goals. In addition, the Partnership
believes it can improve efficiencies in areas where there is a geographic
overlap of services provided by customer service centers. The Partnership's
management has identified effective operating programs and strategies used by
one of the constituent companies prior to the IPO but not used by one or more of
the others. The Partnership believes that the implementation of these "best
practices" throughout the Combined Operations will improve customer retention,
foster expansion of its customer base and create operating efficiencies and cost
savings opportunities. Furthermore, the Partnership believes that instituting
management incentive programs, where appropriate, and fostering an
entrepreneurial approach at additional customer service centers will give
managers the incentive to increase such customer service centers' profitability.
CAPITALIZE ON NATIONAL SUPPLY AND LOGISTICS BUSINESS. The Partnership has a
national wholesale natural gas liquids supply and logistics business with sales
of approximately 330 million gallons in fiscal
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1997. The Partnership believes that this business provides it with a reasonably
secure, competitively priced and efficient supply base to support the service
goals of its existing customer service centers. In addition, the Partnership
believes its wholesale and logistics business positions it well for expansion
through acquisitions or start-up operations in new markets. As part of its
wholesale business, the Partnership also provides product supply and financial
and technical assistance to certain small independent retailers. While these
arrangements provide some economic return to the Partnership, the Partnership
believes their greater value lies in the resulting relationships, which position
the Partnership to acquire such businesses in the event they become available
for purchase.
GENERAL
The Partnership is principally engaged in (i) the retail distribution of
propane for residential, commercial, industrial, agricultural and other retail
uses, (ii) the wholesale marketing and distribution of propane and natural gas
liquids to the retail propane industry, the chemical and petrochemical
industries and other commercial and agricultural markets, (iii) the repair and
maintenance of propane heating systems and appliances and (iv) the sale of
propane-related supplies, appliances and other equipment.
Propane, a by-product of natural gas processing and petroleum refining, is a
clean-burning energy source recognized for its transportability and ease of use
relative to alternative stand-alone energy sources. The retail propane business
of the Partnership consists principally of transporting propane to its retail
distribution outlets and then to tanks located on its customers' premises.
Retail propane use falls into four broad categories: (i) residential, (ii)
industrial and commercial, (iii) agricultural and (iv) other applications,
including motor fuel sales. Residential customers use propane primarily for
space and water heating. Industrial customers use propane primarily as fuel for
forklifts and stationary engines, to fire furnaces, as a cutting gas, in mining
operations and in other process applications. Commercial customers, such as
restaurants, motels, laundries and commercial buildings, use propane in a
variety of applications, including cooking, heating and drying. In the
agricultural market, propane is primarily used for tobacco curing, crop drying,
poultry brooding and weed control. Other retail uses include motor fuel for cars
and trucks, outdoor cooking and other recreational purposes, propane resales and
sales to state and local governments. In its wholesale operations, the
Partnership sells propane principally to large industrial customers and other
propane distributors.
The retail propane business is a "margin-based" business in which gross
profits depend on the excess of sales prices over propane supply costs. Sales of
propane to residential and commercial customers, which account for the vast
majority of the Partnership's gross profit, have provided a relatively stable
source of income for the Partnership. Based on pro forma fiscal 1997 retail
propane gallons sold, the customer base consisted of 55% residential, 26%
commercial and industrial and 19% agricultural and other customers. Sales to
residential customers have generally provided higher gross margins than other
retail propane sales. While commercial propane sales are generally less
profitable than residential retail sales, the Partnership has traditionally
relied on this customer base to provide a steady, noncyclical source of
revenues. No single customer accounted for more than 1% of total revenues.
Because a substantial amount of propane is sold for heating purposes, the
severity of winter and resulting residential and commercial heating usage have
an important impact on the Partnership's earnings. Approximately two-thirds of
the Partnership's retail propane sales usually occur during the six-month
heating season from October through March. As a result of this seasonality, the
Partnership's sales and operating profits are concentrated in its second and
third fiscal quarters. Cash flows from operations, however, are greatest from
November through April, when customers pay for propane purchased during the
six-month peak season. To the extent the Managing General Partner deems
appropriate, the Partnership may reserve cash from these periods for
distribution to Unitholders during periods with lower cash flows from
operations. Sales and profits are subject to variation from month to month and
from year to year, depending on temperature fluctuations.
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The Partnership's wholesale operations engage in the marketing of propane to
independent dealers, major interstate marketers and the chemical and
petrochemical industries. The Partnership participates to a lesser extent in the
marketing of other natural gas liquids, the processing and marketing of natural
gas and the gathering of crude oil. The Partnership either owns or has
contractual rights to use transshipment terminals, rail cars, long-haul tanker
trucks, pipelines and storage capacity. The Partnership believes that its
wholesale marketing and processing activities position it to achieve product
cost advantages and to avoid shortages during periods of tight supply to an
extent not generally available to other retail propane distributors.
Propane competes primarily with natural gas, electricity and fuel oil as an
energy source, principally on the basis of price, availability and portability.
Propane is more expensive than natural gas on an equivalent BTU basis in
locations served by natural gas, but serves as a substitute for natural gas in
rural and suburban areas where natural gas is unavailable or portability of
product is required. Propane is generally less expensive to use than electricity
for space heating, water heating, clothes drying and cooking. Although propane
is similar to fuel oil in certain applications and market demand, propane and
fuel oil compete to a lesser extent primarily because of the cost of converting
from one to the other.
As of December 31, 1997, the Partnership's retail operations consisted of
298 customer service centers in 27 states. As of such date, the Partnership
owned a fleet of approximately 50 transport truck tractors, approximately 60
transport trailers, approximately 940 bobtail trucks and approximately 900 other
delivery and service vehicles. In addition, in its retail operations, the
Partnership owns an aggregate of approximately 21 million gallons of
above-ground propane storage capacity at its customer service centers. In many
states, certain fire safety regulations restrict the refilling of a leased tank
solely to the propane supplier that owns the tank. The inconvenience of
switching tanks minimizes a customer's tendency to switch among suppliers of
propane.
THE IPO AND RELATED TRANSACTIONS
On December 17, 1996, the Partnership consummated the IPO, issuing 9,821,000
Common Units (including 1,281,000 Common Units issued pursuant to the exercise
in full of the underwriters' over-allotment option), and received gross proceeds
of $206.2 million. In addition, the Operating Partnership issued $220.0 million
aggregate principal amount of Notes to certain institutional investors in a
private placement (the "Note Placement"). Immediately prior to the closing of
the IPO, Synergy, Empire Energy and Coast entered into a series of transactions
which resulted in the Combined Operations being owned by the General Partners.
Concurrently with the IPO closing, the General Partners contributed, or caused
to be contributed, the Combined Operations to the Operating Partnership in
exchange for all of the interests in the Operating Partnership, and the
Operating Partnership assumed substantially all of the liabilities associated
with the Combined Operations. Immediately after such contributions, all of the
limited partner interests in the Operating Partnership were conveyed to the
Partnership in exchange for interests in the Partnership. In addition, the
Operating Partnership contributed the portion of the Combined Operations
utilized in the parts and appliance sales and service business to its corporate
subsidiary. As a result of these transactions, the General Partners own an
aggregate of 6,597,619 Subordinated Units, representing an aggregate 39.4%
limited partner interest in the Partnership as of the closing of the IPO, an
aggregate 2% general partner interest in the Partnership and the right to
receive Incentive Distributions (as defined below). Concurrently with the
closing of the IPO, the Operating Partnership entered into a $125.0 million bank
credit facility (the "Bank Credit Facility"), which includes a $50.0 million
revolving credit facility to be used for working capital and other general
partnership purposes (the "Working Capital Facility"), and a $75.0 million
revolving credit facility (the "Acquisition Facility") to be used for
acquisitions and capital improvements. For additional information regarding the
terms of the Notes and the Bank Credit Facility, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--The
Partnership--Liquidity and Capital Resources--Financing and Sources of
Liquidity."
5
<PAGE>
DISTRIBUTIONS AND PAYMENTS TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information summarizes the distributions and payments made and
to be made by the Partnership to the General Partners and their affiliates in
connection with the Transactions and the ongoing operations of the Partnership.
Such distributions and payments were determined by and among affiliated entities
and, consequently, were not the result of arm's length negotiations. See
"Conflicts of Interest and Fiduciary Responsibilities."
FORMATION STAGE
<TABLE>
<S> <C>
The Consideration Paid to the
General Partners and their
Affiliates for the Transfer of
the Propane Business of the
Combined Operations to the
Partnership..................... In exchange for conveying substantially all of the
assets of the Combined Operations to the Operating
Partnership, the General Partners received 6,597,619
Subordinated Units, an aggregate 2% general partner
interest in the Partnership and the Operating
Partnership, and all of the Incentive Distribution
Rights, and the Operating Partnership assumed
substantially all of the liabilities associated with the
Combined Operations. Of the proceeds from the IPO and
the Note Placement, approximately $59.9 million was used
to repay indebtedness owed by Synergy to NPS (including
a prepayment penalty of $6.5 million), approximately
$81.9 million was used to repay acquisition financing
incurred by Northwestern Growth principally in
connection with the acquisitions of Empire Energy and
Coast and the purchase of stock of (and certain rights
related to) Synergy, and approximately $76.7 million was
distributed to the Special General Partner and used to
redeem its preferred stock issued in connection with the
August 15, 1995 acquisition of Synergy's predecessor
(the "Synergy Acquisition") and held by NPS and the
unaffiliated shareholders ($61.2 million) and provide
net worth to the Special General Partner ($15.5
million). The shareholders of Coast who became senior
executives of the Managing General Partner received
approximately $9.3 million in connection with
Northwestern Growth's acquisition of Coast (the "Coast
Merger"). The Partnership used the proceeds from the
exercise of the over- allotment option to pay certain
expenses relating to the Transactions. See "The IPO and
Related Transactions and Certain Relationships and
Related Transactions."
OPERATIONAL STAGE
Distributions of Available Cash to
the General Partners............ Available Cash will generally be distributed 98% to the
Unitholders (including any distributions to the General
Partners as holders of the Subordinated Units) and 2% to
the General Partners, except that if distributions of
Available Cash from Operating Surplus exceed the Target
Distribution Levels (as defined below), the General
Partners will receive a percentage of such excess
distributions that will increase to up to 50% of the
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
excess distributions above the highest Target
Distribution Level (such distributions to the General
Partners in excess of their aggregate 2% general partner
interest being referred to as the "Incentive
Distributions"). "See Cash Distribution Policy."
Other Payments to the Managing
General Partner and its
Affiliates...................... The Managing General Partner does not receive a
management fee or other compensation in connection with
its management of the Partnership, but is reimbursed at
cost for all direct and indirect expenses incurred on
behalf of the Partnership, including the costs of
compensation and employee benefit plans described herein
properly allocable to the Partnership (including the
Annual Operating Performance Incentive Plan, the New
Acquisition Incentive Plan and the Restricted Unit Plan
described herein), and all other expenses necessary or
appropriate to the conduct of the business of, and
allocable to, the Partnership. On a pro forma basis in
fiscal 1997, an aggregate of approximately $48.9 million
of expenses (primarily wages and salaries) would have
been reimbursed by the Partnership to the Managing
General Partner (including $30.7 million actually
reimbursed for the six and one-half month period ended
June 30, 1997). See "Management-- Reimbursement of
Expenses of the Managing General Partner and its
Affiliates."
Affiliates of the Managing General Partner may provide
certain administrative services for the Managing General
Partner on behalf of the Partnership and will be
reimbursed for all direct and indirect expenses incurred
in connection therewith. In addition, the Managing
General Partner and its affiliates may provide
additional services to the Partnership, for which the
Partnership will be charged reasonable fees as
determined by the Managing General Partner. See
"Management-- Reimbursement of Expenses of the Managing
General Partner and its Affiliates."
The Managing General Partner adopted the Restricted Unit
Plan, which was effective upon the consummation of the
Transactions, under which certain officers and directors
of the Managing General Partner are granted rights to
receive authorized but unissued Common Units with an
aggregate value of $12.5 million (determined as of the
IPO closing). As of December 31, 1997, rights with
respect to Common Units with an aggregate value of $9.8
million had been granted under the Restricted Unit Plan.
In addition, the Managing General Partner adopted the
Annual Operating Performance Incentive Plan and the New
Acquisition Incentive Plan, pursuant to which certain
members of management are eligible to receive cash
bonuses. See "Management--Executive Compensation."
Withdrawal or Removal of the
General Partners................ If the Managing General Partner withdraws in violation
of the Partnership Agreement or is removed by the
Unitholders for
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Cause, the successor general partner will have the
option to purchase the general partner interests of the
General Partners in the Partnership and the Operating
Partnership (and the right to receive Incentive
Distributions) for a cash payment equal to the fair
market value thereof. If the Managing General Partner
withdraws in accordance with the Partnership Agreement
or is removed without Cause, it will have the option to
require a successor general partner to purchase the
general partner interests of the General Partners in the
Partnership and the Operating Partnership (and the right
to receive Incentive Distributions) for such price. If
the general partner interests of the General Partners in
the Partnership and the Operating Partnership (and the
right to receive Incentive Distributions) are not so
purchased by the successor general partner, such general
partner interests will be converted into a number of
Common Units equal in value to the fair market value
thereof as determined by an independent investment
banking firm or other independent experts. The Special
General Partner must withdraw or be removed as a general
partner upon the withdrawal or removal of the Managing
General Partner. See "The Partnership
Agreement--Withdrawal or Removal of the General
Partners."
LIQUIDATION STAGE
Liquidation....................... In the event of any liquidation of the Partnership, the
partners, including the General Partners, will be
entitled to receive liquidating distributions in
accordance with their respective capital account
balances. See "Cash Distribution Policy-- Distributions
of Cash Upon Liquidation."
</TABLE>
8
<PAGE>
SUMMARY PRO FORMA AND HISTORICAL FINANCIAL AND OPERATING DATA
The following Summary Pro Forma Financial and Operating Data reflect the
consolidated historical operating results of the companies that comprised the
Combined Operations, as adjusted for the Transactions (through December 16,
1996), and the actual consolidated operating results of the Partnership (after
December 16, 1996) and are derived from the unaudited Pro Forma Consolidated
Financial Statements of Cornerstone Propane Partners, L.P. included elsewhere in
this Prospectus. For a description of the assumptions used in preparing the
Summary Pro Forma Financial and Operating Data, see "Pro Forma Consolidated
Financial Statements of Cornerstone Propane Partners, L.P." The pro forma
information for the fiscal year ended June 30, 1997 set forth below has been
prepared by combining the historical results of operations of Synergy for the
five and one-half months ended December 16, 1996; Coast for the four and
one-half months ended December 16, 1996; Empire Energy for the five and one-half
months ended December 16, 1996; and the Partnership for the six and one-half
months ended June 30, 1997. The pro forma information for the three months ended
September 30, 1996 set forth below has been prepared by combining the historical
results of operations of Synergy for the three months ended September 30, 1996;
Coast for the three months ended October 31, 1996; and Empire Energy for the
three months ended September 30, 1996. The financial and operating data for the
three months ended September 30, 1997 are derived from the Partnership's
unaudited consolidated financial statements included elsewhere in this
Prospectus and, in the opinion of management, include all adjustments necessary
for a fair presentation of such information. The Partnership believes that it is
reasonable to combine the results of operations of companies having different
fiscal years because each of the fiscal years being combined includes the same
winter heating seasons in which the majority of the Partnership's revenue and
cash flow was generated. The financial and operating data for the three month
periods ended September 30, 1997 and 1996 are not necessarily indicative of the
results of operations for the full fiscal year. The following information should
not be deemed indicative of future operating results of the Partnership.
<TABLE>
<CAPTION>
PARTNERSHIP PRO FORMA PARTNERSHIP PRO FORMA PARTNERSHIP ACTUAL
FISCAL YEAR ENDED THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
--------------------- --------------------- -------------------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................................... $ 664,197 $ 141,756 $ 152,157
Cost of sales................................. 534,892 117,519 127,855
-------- -------- --------
Gross profit.................................. 129,305 24,237 24,302
Operating, general and administrative
expenses..................................... 88,264 20,858 22,602
Depreciation and amortization................. 15,073 3,738 4,592
-------- -------- --------
Operating income (loss)....................... 25,968 (359) (2,892)
Interest expense.............................. 18,215 4,467 4,782
-------- -------- --------
Net income (loss) before income taxes......... 7,753 (4,826) (7,674)
Income taxes.................................. 109 25 20
-------- -------- --------
Net income (loss)............................. $ 7,644 $ (4,851) $ (7,694)
-------- -------- --------
-------- -------- --------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
PARTNERSHIP PRO FORMA PARTNERSHIP PRO FORMA PARTNERSHIP ACTUAL
FISCAL YEAR ENDED THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
--------------------- --------------------- -------------------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C>
BALANCE SHEET DATA
(AS OF SEPTEMBER 30, 1997):
Current assets................................ $ 75,117
Total assets.................................. 548,784
Current liabilities........................... 64,188
Long-term debt (including current
maturities).................................. 256,165
Partners capital--General Partners............ 4,628
Partners' capital--Limited Partners........... 222,178
OPERATING DATA:
Capital expenditures(a)....................... $ 15,977 $ 3,513 $ 5,994
EBITDA(b)..................................... $ 41,041 $ 3,379 $ 1,700
Net income (loss) per Unit(c)................. $ .46 $ (.29) $ (.46)
Retail propane gallons sold................... 213,700 38,500 41,300
</TABLE>
- ------------------------------
(a) The Partnership's capital expenditures fall generally into three categories:
(i) growth capital expenditures, which include expenditures for the purchase
of new propane tanks and other equipment to facilitate expansion of the
Partnership's retail customer base, (ii) maintenance capital expenditures,
which include expenditures for repairs that extend the life of the assets
and replacement of property, plant and equipment, and (iii) acquisition
capital expenditures.
(b) EBITDA consists of net income before depreciation, amortization, interest
and income taxes. EBITDA should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative to
cash flow, and it is not a measure of performance or financial condition
under generally accepted accounting principles, but it provides additional
information for evaluating the Partnership's ability to distribute the
Minimum Quarterly Distribution and to service and incur indebtedness. Cash
flows in accordance with generally accepted accounting principles consist of
cash flows from operating, investing and financing activities; cash flows
from operating activities reflect net income (including charges for interest
and income taxes, which are not reflected in EBITDA), adjusted for noncash
charges or income (which are reflected in EBITDA) and changes in operating
assets and liabilities (which are not reflected in EBITDA). Further, cash
flows from investing and financing activities are not included in EBITDA.
(c) Net income per Unit is computed by dividing the limited partners' interest
in net income by the weighted average number of Units outstanding.
10
<PAGE>
RISK FACTORS
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A
CORPORATION, ALTHOUGH MANY OF THE BUSINESS RISKS TO WHICH THE PARTNERSHIP IS
SUBJECT ARE SIMILAR TO THOSE THAT WOULD BE FACED BY A CORPORATION ENGAGED IN A
SIMILAR BUSINESS. PROSPECTIVE PURCHASERS OF THE COMMON UNITS SHOULD CONSIDER THE
FOLLOWING RISK FACTORS IN EVALUATING AN INVESTMENT IN THE COMMON UNITS.
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
- Weather conditions have a significant impact on the demand for propane for
both heating and agricultural purposes. Many customers of the Partnership
rely heavily on propane as a heating fuel. Accordingly, the volume of
retail propane sold is highest during the six-month peak heating season of
October through March and is directly affected by the severity of the
winter weather. During fiscal 1997, approximately 68.8% of the
Partnership's combined retail propane volume and approximately 90% of the
Partnership's pro forma EBITDA were attributable to sales during the peak
heating season. Actual weather conditions can vary substantially from year
to year, significantly affecting the Partnership's financial performance.
Furthermore, variations in weather in one or more regions in which the
Partnership operates can significantly affect the total volumes sold by
the Partnership and the margins realized on such sales and, consequently,
the Partnership's results of operations.
- The retail propane business is a "margin-based" business in which gross
profits depend on the excess of sales prices over propane supply costs.
Consequently, the Partnership's profitability will be sensitive to changes
in wholesale propane prices. Propane is a commodity, the market price of
which can be subject to volatile changes in response to changes in supply
or other market conditions. As it may not be possible immediately to pass
on to customers rapid increases in the wholesale cost of propane, such
increases could reduce the Partnership's gross profits.
- The Partnership's profitability is affected by the competition for
customers among all participants in the retail propane business. Some of
the Partnership's competitors are larger or have greater financial
resources than the Partnership. Should a competitor attempt to increase
market share by reducing prices, the Partnership's financial condition and
results of operations could be materially adversely affected. In addition,
propane competes with other sources of energy, some of which are less
costly for equivalent energy value.
- Acquisitions will be the principal means of growth for the Partnership, as
the retail propane industry is mature and overall demand for propane is
expected to experience limited growth. There can be no assurance, however,
that the Partnership will identify attractive acquisition candidates in
the future, that the Partnership will be able to acquire such businesses
on economically acceptable terms, that any acquisitions will not be
dilutive to earnings and distributions to the Unitholders or that any
additional debt incurred to finance acquisitions will not affect the
ability of the Partnership to make distributions to the Unitholders.
- The Partnership's operations are subject to all operating hazards and
risks normally incidental to handling, storing and delivering combustible
liquids such as propane. As a result, the Partnership is a defendant in
various legal proceedings and litigation arising in the ordinary course of
business. The Partnership maintains insurance policies with insurers in
such amounts and with such coverages and deductibles as it believes are
reasonable and prudent. However, there can be no assurance that such
insurance will be adequate to protect the Partnership from all material
expenses related to potential future claims for personal injury and
property damage or that such levels of insurance will be available in the
future at economical prices.
- The Partnership believes that its success will depend to a significant
extent upon the efforts and abilities of its senior management team. The
failure by the Managing General Partner to retain
11
<PAGE>
members of its senior management team could adversely affect the financial
condition or results of operations of the Partnership. Each of Keith G.
Baxter, Charles J. Kittrell, Ronald J. Goedde and Vincent J. DiCosimo is
employed by the Managing General Partner pursuant to a three-year
employment contract.
RISKS INHERENT IN AN INVESTMENT IN THE PARTNERSHIP
- The Minimum Quarterly Distribution is not guaranteed. The actual amount of
cash distributions may fluctuate and will depend on future Partnership
operating performance. Cash distributions are dependent primarily on cash
flow, including from reserves and working capital borrowings, and not on
profitability, which is affected by non-cash items. Therefore, cash
distributions might be made during periods when the Partnership records
losses and might not be made during periods when the Partnership records
profits. Decisions of the Managing General Partner with respect to the
amount and timing of cash expenditures, borrowings, issuances of
additional Units and reserves will affect the amount of Available Cash.
Because the business of the Partnership is seasonal, it is likely that the
Managing General Partner will make additions to reserves during certain
quarters in order to fund operating expenses, interest payments and cash
distributions to partners with respect to other quarters.
- The amount of pro forma Available Cash from Operating Surplus generated
during fiscal 1997 was approximately $22.3 million (including
approximately $2.9 million of Available Cash from Operating Surplus of
businesses acquired in May and June 1997). Such amount would have been
insufficient by approximately $2.5 million to cover the Minimum Quarterly
Distribution for such fiscal year on all of the Common Units outstanding
as of the date of this Prospectus and the related distribution on the
aggregate 2% general partner interests, and would have been insufficient
by approximately $16.8 million to cover the Minimum Quarterly Distribution
on all the Subordinated Units outstanding as of the date of this
Prospectus and the related distribution on the general partner interests.
- There can be no assurance that the Partnership will be able to integrate
successfully the Combined Operations, achieve anticipated cost savings or
institute the necessary systems and procedures to successfully manage the
combined enterprise on a profitable basis. The Partnership is managed by
the senior executives who previously managed Coast, and such executives
have been involved with the operations of Synergy and Empire Energy only
since December 17, 1996. The pro forma financial results of the
Partnership include periods when the Combined Operations were not under
common control and management and, therefore, may not be indicative of the
Partnership's future financial and operating results. The inability of the
Partnership to integrate successfully the Combined Operations could have a
material adverse effect on the Partnership's business, financial condition
and results of operations.
- At September 30, 1997, the Partnership's total indebtedness was
approximately $256.2 million, constituting approximately 53.0% of its
total capitalization. As a result, the Partnership is significantly
leveraged and has indebtedness that is substantial in relation to its
partners' capital. The Partnership's leverage may adversely affect the
ability of the Partnership to finance its future operations and capital
needs, limit its ability to pursue acquisitions and other business
opportunities and make its results of operations more susceptible to
adverse economic or operating conditions. In addition, as of September 30,
1997 the Partnership had approximately $150.8 million of unused borrowing
capacity under the Bank Credit Facility. Future borrowings could result in
a significant increase in the Partnership's leverage. The Notes and the
Bank Credit Facility contain restrictive covenants that will limit the
ability of the Partnership to incur additional indebtedness and to make
distributions to Unitholders. The payment of principal and interest on the
Partnership's indebtedness will reduce the cash available to make
distributions on the Units.
12
<PAGE>
- The Partnership's indebtedness contains provisions relating to changes of
control. If such provisions are triggered, such outstanding indebtedness
may become due. There is no restriction on the ability of the Managing
General Partner or Northwestern Growth to enter into a transaction which
would trigger such change of control provisions.
- Prior to making any distribution on the Common Units, the Partnership will
reimburse the Managing General Partner and its affiliates at cost for all
expenses incurred on behalf of the Partnership. On a pro forma basis,
approximately $48.9 million of expenses (primarily wages and salaries)
would have been reimbursed by the Partnership to the Managing General
Partner in fiscal 1997 (including $30.7 million actually reimbursed for
the six and one-half month period ended June 30, 1997). In addition, the
Managing General Partner and its affiliates may provide services to the
Partnership for which the Partnership will be charged reasonable fees as
determined by the Managing General Partner. The reimbursement of such
expenses and the payment of any such fees could adversely affect the
ability of the Partnership to make distributions.
- The Managing General Partner manages and operates the Partnership. Holders
of Common Units have no right to elect the Managing General Partner on an
annual or other continuing basis and have only limited voting rights on
matters affecting the Partnership's business. The Managing General Partner
may not be removed except pursuant to the vote of the holders of at least
66 2/3% of the outstanding Units (including Units owned by the Managing
General Partner and its affiliates). The ownership of the Subordinated
Units by the Managing General Partner and its affiliates effectively gives
the Managing General Partner the ability to prevent its removal. The
management control exercised by the Managing General Partner may make it
more difficult for others to control, or influence the activities of, the
Partnership.
- Subject to certain limitations, the Partnership may issue additional
Common Units and other interests in the Partnership, the effect of which
may be to dilute the value of the interests of the then-existing holders
of Common Units in the net assets of the Partnership, dilute the interests
of holders of Common Units in distributions by the Partnership or to make
it more difficult for a person or group to remove the Managing General
Partner or otherwise change the management of the Partnership.
- The Partnership Agreement contains certain provisions that may have the
effect of discouraging a person or group from attempting to remove the
Managing General Partner or otherwise change the management of the
Partnership. The effect of these provisions may be to diminish the price
at which the Common Units trade under certain circumstances. The ownership
of the Subordinated Units by the General Partners effectively gives the
Managing General Partner the ability to prevent its removal.
- If at any time less than 20% of the then-issued and outstanding limited
partner interests of any class (including Common Units) are held by
persons other than the Managing General Partner and its affiliates, the
Managing General Partner will have the right, which it may assign to any
of its affiliates or the Partnership, to acquire all, but not less than
all, of the remaining limited partner interests of such class held by such
unaffiliated persons at a price generally equal to the then-current market
price of limited partner interests of such class. As a consequence, a
holder of Common Units may be required to sell his Common Units at a time
when he may not desire to sell them or at a price that is less than the
price he would desire to receive upon such sale.
- Under certain circumstances, holders of the Common Units could lose their
limited liability and could become liable for amounts improperly
distributed to them by the Partnership.
- The holders of the Common Units were not represented by counsel in
connection with the preparation of the Partnership Agreement or the other
agreements referred to herein.
13
<PAGE>
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
- The Managing General Partner and its affiliates may have conflicts of
interest with the Partnership and its limited partners. The Partnership
Agreement contains certain provisions that limit the liability and reduce
the fiduciary duties of the Managing General Partner to the Unitholders,
as well as provisions that may restrict the remedies available to
Unitholders for actions that might, without such limitations, constitute
breaches of fiduciary duty. Holders of Common Units are deemed to have
consented to certain actions and conflicts of interest that might
otherwise be deemed a breach of fiduciary or other duties under applicable
state law. The validity and enforceability of these types of provisions
under Delaware law are uncertain.
- Decisions of the Managing General Partner with respect to the amount and
timing of cash expenditures, borrowings, issuances of additional Units and
reserves in any quarter will affect whether or the extent to which there
is sufficient Available Cash from Operating Surplus to meet the Minimum
Quarterly Distribution and Target Distribution Levels on all Units in a
given quarter. In addition, actions by the Managing General Partner may
have the effect of enabling the General Partners to receive distributions
on the Subordinated Units or Incentive Distributions or hastening the
expiration of the Subordination Period or the conversion of Subordinated
Units into Common Units.
- The terms of the New Acquisition Incentive Plan (described below under
"Management--Executive Compensation--Incentive Plans") could give the
senior executives of the Managing General Partner an incentive to cause
the Partnership to acquire additional propane operations without regard to
whether the operations would prove beneficial to the Partnership and may
present the senior executives of the Managing General Partner with a
conflict of interest in negotiating the acquisition price on behalf of the
Partnership.
- The Partnership Agreement provides that the Managing General Partner is
generally restricted from engaging in any business activities other than
those incidental to its ownership of interests in the Partnership.
Notwithstanding the foregoing, the Partnership Agreement permits
affiliates of the Managing General Partner (including NPS, Northwestern
Growth and the Special General Partner) to compete with the Partnership
under certain circumstances. There can be no assurance that there will not
be competition between the Partnership and affiliates of the Managing
General Partner in the future.
- The Partnership Agreement does not prohibit the Partnership from engaging
in roll-up transactions. Were the Managing General Partner to cause the
Partnership to engage in a roll-up transaction, there could be no
assurance that such a transaction would not have a material adverse effect
on a Unitholder's investment in the Partnership.
TAX RISKS
- The availability to a Common Unitholder of the federal income tax benefits
of an investment in the Partnership depends, in large part, on the
classification of the Partnership as a partnership for federal income tax
purposes. Assuming the accuracy of certain factual matters as to which the
General Partners and the Partnership have made representations, Schiff
Hardin & Waite, counsel to the General Partners and the Partnership, is of
the opinion that, under current law, the Partnership will be classified as
a partnership for federal income tax purposes.
- No ruling has been requested from the Internal Revenue Service (the "IRS")
with respect to classification of the Partnership as a partnership for
federal income tax purposes, whether the Partnership's propane operations
generate "qualifying income" under Section 7704 of the Internal Revenue
Code of 1986, as amended (the "Code"), or any other matter affecting the
Partnership.
14
<PAGE>
- A Unitholder will be required to pay income taxes on his allocable share
of the Partnership's income, whether or not he receives cash distributions
from the Partnership.
- Investment in Common Units by certain tax-exempt entities, regulated
investment companies and foreign persons raises issues unique to such
persons. For example, virtually all of the taxable income derived by most
organizations exempt from federal income tax (including individual
retirement accounts ("IRAs") and other retirement plans) from the
ownership of Common Units will be unrelated business taxable income and
thus will be taxable to such a Unitholder.
- In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), any losses generated by the
Partnership will generally only be available to offset future income
generated by the Partnership and cannot be used to offset income from
other activities, including other passive activities or investments.
Passive losses which are not deductible because they exceed the
Unitholder's income generated by the Partnership may be deducted in full
when the Unitholder disposes of his entire investment in the Partnership
in a fully taxable transaction to an unrelated party.
- The Partnership has registered with the Secretary of the Treasury as a
"tax shelter." No assurance can be given that the Partnership will not be
audited by the IRS or that tax adjustments will not be made. Any
adjustments in the Partnership's tax returns will lead to adjustments in
the Unitholders' tax returns and may lead to audits of the Unitholders'
tax returns and adjustments of items unrelated to the Partnership.
- The Partnership will adopt certain depreciation and amortization
conventions that do not conform with all aspects of certain proposed and
final Treasury regulations. A successful challenge to those conventions by
the IRS could adversely affect the amount of tax benefits available to a
purchaser of Common Units or could affect the timing of such tax benefits
or the amount of gain from the sale of Units and could have a negative
impact on the value of the Common Units or result in audit adjustments to
the tax returns of Unitholders.
- A Unitholder will likely be required to file state and local income tax
returns and pay state and local income taxes in some or all of the
jurisdictions in which the Partnership does business or owns property. The
Partnership currently owns property and conducts business in the following
states which currently impose a personal income tax: Alabama, Arizona,
Arkansas, California, Georgia, Illinois, Indiana, Kentucky, Maryland,
Mississippi, Missouri, New Hampshire, New Jersey, New Mexico, New York,
North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Utah, Vermont
and Virginia.
See "Risk Factors," "Cash Distribution Policy," "Cash Available for
Distribution," "Conflicts of Interest and Fiduciary Responsibilities," "The
Partnership Agreement" and "Tax Considerations" for a more detailed description
of these and other risk factors and conflicts of interest that should be
considered in evaluating an investment in the Common Units.
15
<PAGE>
CASH AVAILABLE FOR DISTRIBUTION
The amount of Available Cash from Operating Surplus needed to distribute the
Minimum Quarterly Distribution for four quarters on the Common Units and
Subordinated Units outstanding as of the date of this Prospectus and on the
aggregate 2% general partner interests of the General Partners is approximately
$39.1 million ($24.0 million for the Common Units, $14.3 million for the
Subordinated Units and $781,000 for the aggregate 2% general partner interest of
the General Partners). The amount of pro forma Available Cash from Operating
Surplus generated during fiscal 1997 was approximately $22.3 million (including
approximately $2.9 million of Available Cash from Operating Surplus of
businesses acquired in May and June, 1997 but not reflecting approximately $3.5
million of Available Cash from Operating Surplus of businesses acquired
subsequent to June 30, 1997). Such amount would have been insufficient by
approximately $2.5 million to cover the Minimum Quarterly Distribution for such
fiscal year on all of the Common Units currently outstanding and the related
distribution on the general partner interests, and would have been insufficient
by approximately $16.8 million to cover the Minimum Quarterly Distribution for
such fiscal year on all Subordinated Units currently outstanding and the related
distribution on the general partner interests. See "Risk Factors--Risks Inherent
in an Investment in the Partnership-- Partnership Profitability Will Depend on
Successful Integration of the Combined Operations" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The amount of pro forma Available Cash from Operating Surplus for fiscal
1997 set forth above was derived from the Selected Pro Forma Financial and
Operating Data of the Partnership in the manner set forth in "Cash Available for
Distribution." The pro forma adjustments are based upon currently available
information and certain estimates and assumptions. The Selected Pro Forma
Financial and Operating Data do not purport to present the results of operations
of the Partnership had the Transactions referred to therein actually been
completed as of the dates indicated. Furthermore, the Selected Pro Forma
Financial and Operating Data are based on accrual accounting concepts while
Operating Surplus is defined in the Partnership Agreement on a cash accounting
basis. As a consequence, the amount of pro forma Available Cash from Operating
Surplus shown above should only be viewed as a general indication of the amount
of Available Cash from Operating Surplus that might in fact have been generated
by the Partnership had it been formed in earlier periods. Available Cash from
Operating Surplus generated during a specified period refers generally to (i)
all cash receipts of the Partnership from its operations generated during such
period, less (ii) all Partnership operating expenses, debt service payments
(including any increases in reserves therefor but not including amounts paid
from any reduction in reserves, or payments required in connection with the sale
of assets, or any refinancing with the proceeds of new indebtedness or an equity
offering) and maintenance capital expenditures, in each case during such period.
For a complete definition of Operating Surplus, see the Glossary.
The Partnership is required to establish reserves for the future payment of
principal and interest on the Notes and the indebtedness under the Bank Credit
Facility. There are other provisions in such agreements which will, under
certain circumstances, restrict the Partnership's ability to make distributions
to its partners. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--The Partnership--Liquidity and Capital
Resources--Financing and Sources of Liquidity."
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PARTNERSHIP STRUCTURE AND MANAGEMENT
The Partnership conducts, in substantially every respect, the propane
businesses that were formerly conducted by Synergy, Empire Energy and Coast (as
well as those businesses that have been acquired since the IPO). The operations
of the Partnership are conducted through, and the operating assets are owned by,
the Operating Partnership, a Delaware limited partnership, and any other
subsidiary operating partnerships and corporations. The Partnership owns a
98.9899% limited partner interest in the Operating Partnership. The General
Partners are also the general partners of the Operating Partnership, with an
aggregate 1.0101% general partner interest in the Operating Partnership. The
General Partners therefore own an aggregate 2% general partner interest in the
Partnership and the Operating Partnership on a combined basis.
The senior executives who managed Coast prior to the IPO manage and operate
the Partnership's business as the senior executives of the Managing General
Partner. The Managing General Partner and its affiliates do not receive any
management fee or other compensation in connection with its management of the
Partnership, but are reimbursed at cost for all direct and indirect expenses
incurred on behalf of the Partnership and all other necessary or appropriate
expenses allocable to the Partnership or otherwise reasonably incurred by the
Managing General Partner or its affiliates in connection with the operation of
the Partnership's business. The Special General Partner has no duty or right to
participate in the management or operation of the Partnership.
Conflicts of interest may arise between the Managing General Partner and its
affiliates, on the one hand, and the Partnership, the Operating Partnership and
the Unitholders, on the other, including conflicts relating to the compensation
of the officers and employees of the Managing General Partner and the
determination of fees and expenses that are allocable to the Partnership. The
Managing General Partner has an audit committee (the "Audit Committee"),
consisting of three members, including two independent members of its Board of
Directors, that is available at the Managing General Partner's discretion to
review matters involving conflicts of interest. See "Conflicts of Interest and
Fiduciary Responsibilities."
The principal executive offices of the Partnership and the Operating
Partnership are located at 432 Westridge Drive, Watsonville, California 95076.
The telephone number at such offices is (408) 724-1921.
The following chart depicts the organization and ownership of the
Partnership and the Operating Partnership as of the date of this Prospectus. The
percentages reflected in the following chart represent the approximate ownership
interest in each of the Partnership and the Operating Partnership individually
and not on an aggregate basis. Except in the following chart, the ownership
percentages referred to in this Prospectus reflect the approximate effective
ownership interest of the Unitholders in the Partnership and the Operating
Partnership on a combined basis. The 2% ownership percentage of the General
Partners referred to in this Prospectus reflects the approximate effective
ownership interest of the General Partners in the Partnership and the Operating
Partnership on a combined basis.
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[The following is a description of a graphic chart]
EFFECTIVE AGGREGATE OWNERSHIP OF THE PARTNERSHIP AND THE OPERATING
PARTNERSHIP
Public Unitholders' Common Units 61.5%
General Partners' Subordinated Units 36.5%
General Partners' Combined General Partner Interest 2.0%
NORTHWESTERN PUBLIC SERVICE COMPANY ("NPS") 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 31.7096% 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 5.1420% 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 62.1484% Limited Partnership Interest in the Partnership is
owned by the PUBLIC UNITHOLDERS (11,126,552 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.
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THE OFFERING
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Securities Offered................ 2,400,000 Common Units.
Use of Proceeds................... General business purposes, including working capital,
expansion of the Partnership's propane business by
internal growth and through acquisition, and repayment
of indebtedness.
Units Outstanding As of the Date
of This Prospectus.............. 11,126,552 Common Units and 6,597,619 Subordinated
Units, representing an aggregate 61.5% and 36.5% limited
partner interest in the Partnership, respectively.
Distributions of Available Cash... The Partnership will distribute all of its Available
Cash within 45 days after the end of each quarter to the
Unitholders of record on the applicable record date
and to the General Partners. "Available Cash" for any
quarter will consist generally of all cash on hand at
the end of such quarter, as adjusted for reserves. The
complete definition of Available Cash is set forth in
the Glossary. The Managing General Partner has broad
discretion in making cash disbursements and
establishing reserves, thereby affecting the amount of
Available Cash that will be distributed with respect
to any quarter. In addition, the terms of the
Partnership's indebtedness require that certain
reserves for the payment of principal and interest be
maintained. See "Risk Factors-- Risks Inherent in an
Investment in the Partnership--Cash Distributions Are
Not Guaranteed and May Fluctuate with Partnership
Performance" for a description of the reserves for the
payment of principal and interest that the Partnership
will be required to maintain. Available Cash will
generally be distributed 98% to Unitholders and 2% to
the General Partners, except that if distributions of
Available Cash from Operating Surplus exceed specified
target levels ("Target Distribution Levels") in excess
of the Minimum Quarterly Distribution, the General
Partners will receive a percentage of such excess
distributions that will increase to up to 50% of the
excess distributions above the highest Target
Distribution Level. See "Cash Distribution
Policy--Incentive Distributions--Hypothetical
Annualized Yield."
Distributions to Common and
Subordinated Unitholders........ The Partnership intends, to the extent there is
sufficient Available Cash from Operating Surplus, to
distribute to each holder of Common Units at least the
Minimum Quarterly Distribution of $.54 per Common Unit
per quarter. The Minimum Quarterly Distribution is not
guaranteed and is subject to adjustment as described
under "Cash Distribution Policy--Adjustment of Minimum
Quarterly Distribution and Target Distribution
Levels."
With respect to each quarter during the Subordination
Period, which will generally not end prior to December
31, 2001, the Common Unitholders will generally have
the right to receive the Minimum Quarterly
Distribution, plus any arrearages thereon ("Common
Unit Arrearages"), and the General
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Partners will have the right to receive the related
distribution on the general partner interests, before
any distribution of Available Cash from Operating
Surplus is made to the Subordinated Unitholders. This
subordination feature will enhance the Partnership's
ability to distribute the Minimum Quarterly
Distribution on the Common Units during the
Subordination Period. Subordinated Units will not
accrue distribution arrearages. Upon expiration of the
Subordination Period, Common Units will no longer
accrue distribution arrearages. See "Cash Distribution
Policy."
Subordination Period.............. The Subordination Period will generally extend until the
first day of any quarter beginning after December 31,
2001 in respect of which (i) distributions of
Available Cash from Operating Surplus on the Common
Units and the Subordinated Units with respect to each
of the three consecutive four-quarter periods
immediately preceding such date equaled or exceeded
the sum of the Minimum Quarterly Distribution on all
of the outstanding Common Units and Subordinated Units
during such periods, (ii) the Adjusted Operating
Surplus generated during each of the three consecutive
four-quarter periods immediately preceding such date
equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units
and Subordinated Units and the related distribution on
the general partner interests in the Partnership
during such periods, and (iii) there are no
outstanding Common Unit Arrearages. Upon expiration of
the Subordination Period, all remaining Subordinated
Units will convert into Common Units on a one-for-one
basis and will thereafter participate pro rata with
the other Common Units in distributions of Available
Cash.
Early Conversion of Subordinated
Units........................... A portion of the Subordinated Units will convert into
Common Units on the first day after the record date
established for the distribution in respect of any
quarter ending on or after (a) December 31, 1999 (with
respect to one-quarter of the Subordinated Units) and
(b) December 31, 2000 (with respect to one-quarter of
the Subordinated Units), in respect of which (i)
distributions of Available Cash from Operating Surplus
on the Common Units and the Subordinated Units with
respect to each of the three consecutive four-quarter
periods immediately preceding such date equaled or
exceeded the sum of the Minimum Quarterly Distribution
on all of the outstanding Common Units and
Subordinated Units during such periods, (ii) the
Adjusted Operating Surplus generated during each of
the two consecutive four-quarter periods immediately
preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the
outstanding Common Units and Subordinated Units and
the related distribution on the general partner
interests in the Partnership during such periods, and
(iii) there are no
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outstanding Common Unit Arrearages; provided, however,
that the early conversion of the second one-quarter of
Subordinated Units may not occur until at least one
year following the early conversion of the first
one-quarter of Subordinated Units. See "Cash
Distribution Policy-- Distributions from Operating
Surplus During Subordination Period."
Incentive Distributions........... If quarterly distributions of Available Cash exceed the
Target Distribution Levels, the General Partners will
receive distributions which are generally equal to
15%, then 25% and then 50% of the distributions of
Available Cash that exceed such Target Distribution
Levels. The Target Distribution Levels are based on
the amounts of Available Cash from Operating Surplus
distributed with respect to a given quarter that
exceed distributions made with respect to the Minimum
Quarterly Distribution and Common Unit Arrearages, if
any. See "Cash Distribution Policy--Incentive
Distributions-- Hypothetical Annualized Yield." The
distributions to the General Partners described above
that are in excess of their aggregate 2% general
partner interest are referred to herein as the
Incentive Distributions.
Adjustment of Minimum Quarterly
Distribution and Target
Distribution Levels............. The Minimum Quarterly Distribution and the Target
Distribution Levels are subject to downward
adjustments in the event that the Unitholders receive
distributions of Available Cash from Capital Surplus
or legislation is enacted or existing law is modified
or interpreted by the relevant governmental authority
in a manner that causes the Partnership to be treated
as an association taxable as a corporation or
otherwise taxable as an entity for federal, state or
local income tax purposes. Distributions of Available
Cash from Capital Surplus represent a "return of
capital" rather than a "return on capital." If, as a
result of distributions of Available Cash from Capital
Surplus, the Unitholders receive an amount equal to
the initial public offering price of the Common Units
and any unpaid Common Unit Arrearages, the
distributions of Available Cash payable to the General
Partners and their affiliates will increase to 50% of
all amounts distributed thereafter. See "Cash
Distribution Policy--General," "--Distributions from
Capital Surplus" and "--Adjustment of Minimum
Quarterly Distribution and Target Distribution
Levels."
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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) or an equivalent number of
securities ranking on a parity with the Common Units,
without the approval of the holders of a Unit
Majority. See "The Partnership Agreement--Issuance of
Additional Securities."
Limited Call Right................ If at any time less than 20% of the issued and
outstanding Common Units are held by persons other than
the Managing General Partner and its affiliates, the
Managing General Partner may purchase all of the
remaining Common Units at a price generally equal to
the then current market price of the Common Units. See
"The Partnership Agreement--Limited Call Right."
Limited Voting Rights............. Unitholders do not have voting rights except with
respect to the following matters, for which the
Partnership Agreement requires the approval of at
least a majority (and in certain cases a greater
percentage) of all of the holders of the Subordinated
Units and of all of the holders of the Common Units: a
sale or exchange of all or substantially all of the
Partnership's assets, the removal or the withdrawal of
the General Partners, the election of a successor
Managing General Partner, a dissolution or
reconstitution of the Partnership, a merger of the
Partnership, issuance of limited partner interests in
certain circumstances, approval of certain actions of
the General Partners (including the transfer by either
of the General Partners of its general partner
interest or Incentive Distribution Rights under
certain circumstances) and certain amendments to the
Partnership Agreement, including any amendment that
would cause the Partnership to be treated as an
association taxable as a corporation. Holders of
Subordinated Units will generally vote as a class
separate from the holders of Common Units. After
Subordinated Units convert into Common Units (either
upon termination of the Subordination Period or upon
early conversion), holders of such Common Units will
vote as a single class together with the holders of
the other Common Units. Under the Partnership
Agreement, the Managing General Partner generally is
permitted to effect amendments to the
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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 successor
general partner by the vote of the holders of not less
than a majority of the outstanding Units. A meeting of
holders of the Common Units may be called only by the
Managing General Partner or by the holders of 20% or
more of the outstanding Common Units. The ownership of
the Subordinated Units by the Managing General Partner
and its affiliates effectively gives the Managing
General Partner the ability to prevent its removal.
The Managing General Partner has agreed not to
voluntarily withdraw as general partner of the
Partnership and the Operating Partnership prior to
December 31, 2006, subject to limited exceptions,
without obtaining the approval of at least a Unit
Majority and furnishing an Opinion of Counsel (as
defined in the Glossary). The Special General Partner
must withdraw or be removed as a general partner upon
the withdrawal or removal of the Managing General
Partner. See "The Partnership Agreement--Withdrawal or
Removal of the General Partners" and "--Meetings;
Voting."
Distributions Upon Liquidation.... If the Partnership liquidates during the Subordination
Period, under certain circumstances holders of
outstanding Common Units will be entitled to receive
more per Unit in liquidating
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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 NYSE. Application
will be made to list the Common Units offered hereby on
the NYSE.
NYSE Symbol....................... CNO
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SUMMARY OF TAX CONSIDERATIONS
The tax consequences of an investment in the Partnership to a particular
investor will depend in part on the investor's own tax circumstances. Each
prospective investor should consult his own tax advisor about the United States
federal, state and local tax consequences of an investment in Common Units. The
following is a brief summary of certain expected tax consequences of acquiring
and disposing of Common Units. This summary reflects the opinion of Schiff
Hardin & Waite, counsel to the General Partners and the Partnership ("Counsel"),
described in "Tax Considerations." This summary is qualified by the discus-sion
in "Tax Considerations."
PARTNERSHIP STATUS
In the opinion of Counsel, the Partnership will be classified for federal
income tax purposes as a partnership, and the beneficial owners of Common Units
will generally be considered partners in the Partnership. Accordingly, the
Partnership will pay no federal income taxes, and a holder of Common Units will
be required to report in his federal income tax return his share of the
Partnership's income, gains, losses and deductions. In general, cash
distributions to a holder of Common Units will be taxable only if, and to the
extent that, they exceed the tax basis in his Common Units.
PARTNERSHIP ALLOCATIONS
In general, income and loss of the Partnership will be allocated to the
General Partners and the Unitholders for each taxable year in accordance with
their respective percentage interests in the Partnership, as determined annually
and prorated on a monthly basis and subsequently apportioned among the General
Partners and the Unitholders of record as of the opening of the first business
day of the month to which they relate, even though Unitholders may dispose of
their Units during the month in question. As described in greater detail in
"Consequences of Exchanging Property for Common Units," however, a Unitholder
acquiring Units in exchange for a conveyance of assets to the Partnership will
be required to take into account certain special allocations of income and loss
for federal income tax purposes related to the conveyed assets. At any time that
distributions are made on the Common Units and not on the Subordinated Units, or
that Incentive Distributions are made to the General Partners, gross income will
be allocated to the recipients to the extent of such distribution. A Unitholder
will be required to take into account, in determining his federal income tax
liability, his share of income generated by the Partnership for each taxable
year of the Partnership ending within or with the Unitholder's taxable year even
if cash distributions are not made to him. As a consequence, a Unitholder's
share of taxable income of the Partnership (and possibly the income tax payable
by him with respect to such income) may exceed the cash actually distributed to
him.
CONSEQUENCES OF EXCHANGING PROPERTY FOR COMMON UNITS
In general, no gain or loss will be recognized for federal income tax
purposes by the Partnership or by a person (including any individual,
partnership, S corporation or corporation taxed under Subchapter C of the Code)
contributing property (including stock) to the Partnership in exchange for
Common Units. If the Partnership assumes liabilities or takes assets subject to
liabilities in connection with a contribution of assets in exchange for Common
Units, however, taxable gain may be recognized by the contributing person in
certain circumstances. Any existing tax gain (generally, the excess of fair
market value over tax basis) is recognized over the period of time during which
the Partnership claims depreciation or amortization deductions with respect to
the contributed property, or when the contributed property is disposed of by the
Partnership. See "Tax Considerations--Consequences of Exchanging Property for
Common Units."
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BASIS OF COMMON UNITS
A person who contributes property (including stock) to the Partnership in
exchange for Common Units will generally have an initial tax basis for his
Common Units equal to the tax basis of the property contributed to the
Partnership in exchange for Common Units. The tax basis for a Common Unit will
be increased by the Unitholder's share of Partnership income and his share of
increases in Partnership debt. The basis for a Common Unit will be decreased
(but not below zero) by distributions from the Partnership (including deemed
distributions resulting from the assumption of indebtedness by the Partnership),
by the Unitholder's share of Partnership losses, by his share of decreases in
Partnership debt and by the Unitholder's share of expenditures of the
Partnership that are not deductible in computing the taxable income and are not
required to be capitalized.
LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), any Partnership losses will only be
available to offset future income generated by the Partnership and cannot be
used to offset income from other activities, including passive activities or
investments. Any losses unused by virtue of the passive loss rules may be fully
deducted when the Unitholder disposes of all of his Common Units in a taxable
transaction with an unrelated party.
SECTION 754 ELECTION
The Partnership intends to make the election provided for by Section 754 of
the Code, which will generally result in a Unitholder being allocated income and
deductions calculated by reference to the portion of his purchase price
attributable to each asset of the Partnership.
DISPOSITION OF COMMON UNITS
A Unitholder who sells Common Units will recognize gain or loss equal to the
difference between the amount realized and the adjusted tax basis of those
Common Units. Thus, distributions of cash from the Partnership to a Unitholder
in excess of the income allocated to him will, in effect, become taxable income
if he sells the Common Units at a price greater than his adjusted tax basis even
if the price is less than his original cost. A portion of the amount realized
(whether or not representing gain) may be ordinary income.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will likely be subject to
other taxes, such as state and local income taxes, unincorporated business
taxes, and estate, inheritance or intangible taxes that are imposed by the
various jurisdictions in which a Unitholder resides or in which the Partnership
does business or owns property. Although an analysis of those various taxes is
not presented here, each prospective Unitholder should consider their potential
impact on his investment in the Partnership. The Partnership currently owns
property and conducts business in the following states which currently impose a
personal income tax: Alabama, Arizona, Arkansas, California, Georgia, Illinois,
Indiana, Kentucky, Maryland, Mississippi, Missouri, New Hampshire, New Jersey,
New Mexico, New York, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee,
Utah, Vermont and Virginia. In certain states, tax losses may not produce a tax
benefit in the year incurred (if, for example, the Partnership has no income
from sources within that state) and also may not be available to offset income
in subsequent taxable years. Some of the states may require the Partnership, or
the Partnership may elect, to withhold a percentage of income from amounts to be
distributed to a Unitholder. Withholding, the amount of which may be more or
less than a particular Unitholder's income tax liability owed to the state, may
not relieve the nonresident Unitholder from the obligation to file an income tax
return. Amounts withheld may be treated as if distributed to Unitholders for
purposes of determining the amounts distributed by the Partnership. Based on
current law and its estimate of future Partnership operations, the Partnership
anticipates that any amounts required to
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be withheld will not be material. It is the responsibility of each prospective
Unitholder to investigate the legal and tax consequences, under the laws of
pertinent states and localities, of his investment in the Partnership.
Accordingly, each prospective Unitholder should consult, and must depend upon,
his own tax counsel or other advisor with regard to those matters. Further, it
is the responsibility of each Unitholder to file all U.S. federal, state and
local tax returns that may be required of such Unitholder. Counsel has not
rendered an opinion on the state or local tax consequences of an investment in
the Partnership.
OWNERSHIP OF COMMON UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER
INVESTORS
An investment in Common Units by tax-exempt organizations (including IRAs)
and other retirement plans), regulated investment companies and foreign persons
raises issues unique to such persons. Virtually all of the Partnership income
allocated to a Unitholder which is a tax-exempt organization will be unrelated
business taxable income and, thus, will be taxable to such Unitholder; no
significant amount of the Partnership's gross income will be qualifying income
for purposes of determining whether a Unitholder will qualify as a regulated
investment company; and a Unitholder who is a nonresident alien, foreign
corporation or other foreign person will be regarded as being engaged in a trade
or business in the United States as a result of ownership of Common Units and
thus will be required to file federal income tax returns and to pay tax on such
Unitholder's share of Partnership taxable income. Furthermore, distributions to
foreign Unitholders will be subject to federal income tax withholding. See "Tax
Considerations-- Uniformity of Units--Tax-Exempt Organizations and Certain Other
Investors."
TAX SHELTER REGISTRATION
The Code generally requires that "tax shelters" be registered with the
Secretary of the Treasury. It is arguable that the Partnership is not subject to
this registration requirement. Nevertheless, the Partnership has registered as a
tax shelter (I.D. No. 97071000067) with the Secretary of the Treasury. ISSUANCE
OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN THE
PARTNERSHIP OR THE CLAIMED TAX BENEFITS HAS BEEN REVIEWED, EXAMINED OR APPROVED
BY THE IRS. See "Tax Considerations--Administrative Matters-- Registration as a
Tax Shelter."
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RISK FACTORS
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A
CORPORATION, ALTHOUGH MANY OF THE BUSINESS RISKS TO WHICH THE PARTNERSHIP IS
SUBJECT ARE SIMILAR TO THOSE THAT WOULD BE FACED BY A CORPORATION ENGAGED IN A
SIMILAR BUSINESS. PROSPECTIVE PURCHASERS OF THE COMMON UNITS SHOULD CONSIDER THE
FOLLOWING RISK FACTORS IN EVALUATING AN INVESTMENT IN THE COMMON UNITS.
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
WEATHER CONDITIONS AFFECT THE DEMAND FOR PROPANE
Weather conditions have a significant impact on the demand for propane for
both heating and agricultural purposes. Many customers of the Partnership rely
heavily on propane as a heating fuel. Accordingly, the volume of retail propane
sold is highest during the six-month peak heating season of October through
March and is directly affected by the severity of the winter weather. During
fiscal 1997, approximately 68.8% of the Partnership's combined retail propane
volume and approximately 90% of the Partnership's pro forma EBITDA were
attributable to sales during the peak heating season. Actual weather conditions
can vary substantially from year to year, significantly affecting the
Partnership's financial performance. Furthermore, variations in weather in one
or more regions in which the Partnership operates can significantly affect the
total volume of propane sold by the Partnership and the margins realized on such
sales and, consequently, the Partnership's results of operations. Agricultural
demand is also affected by weather, as dry weather during the harvest season
reduces demand for propane used in crop drying. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
THE PARTNERSHIP WILL BE SUBJECT TO PRICING AND INVENTORY RISKS
The retail propane business is a "margin-based" business in which gross
profits depend on the excess of sales prices over propane supply costs.
Consequently, the Partnership's profitability will be sensitive to changes in
wholesale propane prices. Propane is a commodity, the market price of which can
be subject to volatile changes in response to changes in supply or other market
conditions. The Partnership will have no control over these market conditions.
Consequently, the unit price of propane purchased by the Partnership, as well as
other propane marketers, can change rapidly over a short period of time. In
general, product supply contracts permit suppliers to charge posted prices (plus
transportation costs) at the time of delivery or the current prices established
at major delivery points. As it may not be possible immediately to pass on to
customers rapid increases in the wholesale cost of propane, such increases could
reduce the Partnership's gross profits. See "--The Retail Propane Business Is
Highly Competitive."
Propane is available from numerous sources, including integrated
international oil companies, independent refiners and independent wholesalers.
The Partnership purchases propane from a variety of suppliers pursuant to supply
contracts or on the spot market. To the extent that the Partnership purchases
propane from foreign (including Canadian) sources, its propane business will be
subject to risks of disruption in foreign supply. The Partnership generally
attempts to minimize inventory risk by purchasing propane on a short-term basis.
However, the Partnership may purchase large volumes of propane during periods of
low demand, which generally occur during the summer months, at the then current
market price. Because of the potential volatility of propane prices, if the
Partnership makes such purchases, the market price for propane could fall below
the price at which the Partnership made the purchases, thereby adversely
affecting gross margins or sales or rendering sales from such inventory
unprofitable. The Partnership engages in hedging of product cost and supply
through common hedging practices. See "Business and Properties--Propane Supply
and Storage."
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THE RETAIL PROPANE BUSINESS IS HIGHLY COMPETITIVE
The Partnership's profitability is affected by the competition for customers
among all participants in the retail propane business. The Partnership competes
with other distributors of propane, including a number of large national and
regional firms and several thousand small independent firms. Some of these
competitors are larger or have greater financial resources than the Partnership.
Should a competitor attempt to increase market share by reducing prices, the
Partnership's financial condition and results of operations could be materially
adversely affected. Generally, warmer-than-normal weather further intensifies
competition. The Partnership believes that its ability to compete effectively
depends on the reliability of its service, its responsiveness to customers and
its ability to maintain competitive retail prices.
THE RETAIL PROPANE BUSINESS FACES COMPETITION FROM ALTERNATIVE ENERGY
SOURCES
Propane competes with other sources of energy, some of which are less costly
for equivalent energy value. The Partnership competes for customers against
suppliers of electricity, natural gas and fuel oil. Electricity is a major
competitor of propane, but propane generally enjoys a competitive price
advantage over electricity. Except for certain industrial and commercial
applications, propane is generally not competitive with natural gas in areas
where natural gas pipelines already exist because natural gas is a significantly
less expensive source of energy than propane. The gradual expansion of the
nation's natural gas distribution systems has resulted in the availability of
natural gas in many areas that previously depended upon propane. Although
propane is similar to fuel oil in certain applications and market demand,
propane and fuel oil compete to a lesser extent primarily because of the cost of
converting from one to the other. The Partnership cannot predict the effect that
the development of alternative energy sources might have on its operations.
THE PARTNERSHIP MAY NOT BE SUCCESSFUL IN GROWING THROUGH ACQUISITIONS
The retail propane industry is mature, and the Partnership foresees only
limited growth in total retail demand for propane. Moreover, as a result of
long-standing customer relationships that are typical in the retail home propane
industry, the inconvenience of switching tanks and suppliers and propane's
higher cost as compared to certain other energy sources, such as natural gas,
the Partnership may experience difficulty in acquiring new retail customers,
other than through acquisitions. Therefore, while the Partnership's business
strategy includes internal growth and start-ups of new customer service
locations, the ability of the Partnership's propane business to grow will depend
principally upon its ability to acquire other retail propane distributors. There
can be no assurance that the Partnership will identify attractive acquisition
candidates in the future, that the Partnership will be able to acquire such
businesses on economically acceptable terms, that any acquisitions will not be
dilutive to earnings and distributions to the Unitholders or that any additional
debt incurred to finance acquisitions will not affect the ability of the
Partnership to make distributions to the Unitholders. The Partnership is not
required under the Partnership Agreement to seek Unitholder approval of any
acquisition. The Partnership is subject to certain covenants in agreements
governing its indebtedness that restrict the Partnership's ability to incur
indebtedness to finance acquisitions. In addition, to the extent that warm
weather adversely affects the Partnership's operating and financial results, the
Partnership's access to capital and its acquisition activities may be limited.
THE PARTNERSHIP IS SUBJECT TO OPERATING AND LITIGATION RISKS WHICH MAY NOT
BE COVERED BY INSURANCE
The Partnership's operations are subject to all operating hazards and risks
normally incidental to handling, storing and delivering combustible liquids such
as propane. As a result, the Partnership is a defendant in various legal
proceedings and litigation arising in the ordinary course of business. The
Partnership maintains insurance policies with insurers in such amounts and with
such coverages and deductibles as it believes are reasonable and prudent.
However, there can be no assurance that such insurance will be adequate to
protect the Partnership from all material expenses related to potential future
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claims for personal injury and property damage or that such levels of insurance
will be available in the future at economical prices.
THE PARTNERSHIP IS DEPENDENT UPON KEY PERSONNEL
The Partnership believes that its success depends to a significant extent
upon the efforts and abilities of its senior management team. The failure by the
Managing General Partner to retain members of its senior management team could
adversely affect the financial condition or results of operations of the
Partnership. Each of Messrs. Baxter, Kittrell, Goedde and DiCosimo is employed
by the Managing General Partner pursuant to a three-year employment contract.
However, each of the executives will be entitled to terminate his agreement and
receive a severance amount equal to the total compensation due for the remainder
of the employment term upon a "change of control" of NPS, which is defined to
include any person or group becoming the beneficial owner of 10% of the voting
securities of NPS, and upon certain other circumstances. See
"Management--Executive Compensation--Employment Agreements, Severance
Arrangements."
ENERGY EFFICIENCY AND TECHNOLOGY ADVANCES MAY AFFECT DEMAND
The national trend toward increased conservation and technological advances,
including installation of improved insulation and the development of more
efficient furnaces and other heating devices, has adversely affected the demand
for propane by retail customers. The Partnership cannot predict the materiality
of the effect of future conservation measures or the effect that any
technological advances in heating, conservation, energy generation or other
devices might have on its operations.
RISKS INHERENT IN AN INVESTMENT IN THE PARTNERSHIP
CASH DISTRIBUTIONS ARE NOT GUARANTEED AND MAY FLUCTUATE WITH PARTNERSHIP
PERFORMANCE
Although the Partnership will distribute all of its Available Cash, there
can be no assurance regarding the amounts of Available Cash to be generated by
the Partnership. The actual amounts of Available Cash will depend upon numerous
factors, including cash flow generated by operations, required principal and
interest payments on the Partnership's debt, the costs of acquisitions
(including related debt service payments), restrictions contained in the
Partnership's debt instruments, issuances of debt and equity securities by the
Partnership, fluctuations in working capital, capital expenditures, adjustments
in reserves, prevailing economic conditions and financial, business and other
factors, a number of which are beyond the control of the Partnership and the
Managing General Partner. Because the Partnership is effectively a holding
company for the Operating Partnership, distributions by the Partnership are
dependent upon distributions of cash from the Operating Partnership to the
Partnership. Cash distributions are dependent primarily on cash flow, including
from reserves and working capital borrowings, and not on profitability, which is
affected by non-cash items. Therefore, cash distributions might be made during
periods when the Partnership records losses and might not be made during periods
when the Partnership records profits.
The amount of Available Cash from Operating Surplus needed to distribute the
Minimum Quarterly Distribution for four quarters on the Common Units and
Subordinated Units outstanding as of the date of this Prospectus and on the
General Partners' aggregate 2% general partner interest is approximately $39.1
million ($24.0 million for the Common Units, $14.3 million for the Subordinated
Units and $781,000 for the aggregate 2% general partner interest). The amount of
pro forma Available Cash from Operating Surplus generated during fiscal 1997 was
approximately $22.3 million (including approximately $2.9 million of Available
Cash from Operating Surplus of businesses acquired in May and June, 1997 but not
reflecting approximately $3.5 million of Available Cash from Operating Surplus
of businesses acquired subsequent to June 30, 1997). Such amount would have been
insufficient by approximately $2.5 million to cover the Minimum Quarterly
Distribution for such fiscal year on all of the Common Units currently
outstanding and the related distribution on the general partner interests, and
would have been insufficient by
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approximately $16.8 million to cover the Minimum Quarterly Distribution on all
Subordinated Units and the related distribution on the general partner
interests. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." For the calculation of pro forma Available Cash from
Operating Surplus, see "Cash Available for Distribution."
The Partnership Agreement gives the Managing General Partner broad
discretion in establishing reserves for the proper conduct of the Partnership's
business that will affect the amount of Available Cash. Because the business of
the Partnership is seasonal, the Managing General Partner will make additions to
reserves during certain quarters in order to fund operating expenses, interest
payments and cash distributions to partners with respect to other quarters. In
addition, the Partnership is required to establish reserves in respect of future
payments of principal and interest on the Notes and, in certain instances, in
respect of future payments of principal and interest under the Bank Credit
Facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--The Partnership--Liquidity and Capital
Resources--Financing and Sources of Liquidity." The Partnership anticipates that
reserves for interest on the Notes will be established at approximately $4.1
million at each March and September, and the reserves will be eliminated when
interest payments are made on the Notes in June and December. The $4.1 million
reserved for interest is approximately 10.5% of the amount of Available Cash
needed to distribute the Minimum Quarterly Distribution for four quarters on the
Common Units and the Subordinated Units outstanding as of the date of this
Prospectus and on the General Partners' general partner interests. Reserves for
repayment of principal on the Notes are not required until March 2003 and then
will equal 25%, 50% and 75% at each March, June and September, respectively, of
the next installment of principal, and the reserves will be eliminated when
principal payments are made on the Notes in December. The $20.6 million reserved
for principal payments is approximately 52.7% of the amount of Available Cash
needed to distribute the Minimum Quarterly Distribution for four quarters on the
Common Units and the Subordinated Units outstanding as of the date of this
Prospectus and on the General Partners' general partner interests. Furthermore,
the Notes and the Bank Credit Facility limit the Operating Partnership's ability
to distribute cash to the Partnership. Distributions from the Operating
Partnership will be the Partnership's primary source of Available Cash. Any
subsequent refinancing of the Notes, the Bank Credit Facility or any other
indebtedness incurred by the Partnership may have similar restrictions, and the
Partnership's ability to distribute cash may also be limited during the
existence of defaults under any of the Partnership's debt instruments. As a
result of these and other factors, there can be no assurance regarding the
actual levels of cash distributions to Unitholders by the Partnership.
PARTNERSHIP PROFITABILITY WILL DEPEND ON SUCCESSFUL INTEGRATION OF THE
COMBINED OPERATIONS
There can be no assurance that the Partnership will be able to integrate
successfully the Combined Operations, achieve anticipated cost savings or
institute the necessary systems and procedures to successfully manage the
combined enterprise on a profitable basis. The Partnership is managed by the
senior executives who managed Coast prior to the IPO, and such executives have
been involved with the operations of Synergy and Empire Energy only since
December 17, 1996. The pro forma financial results of the Partnership include
periods when the Combined Operations were not under common control and
management and, therefore, may not be indicative of the Partnership's future
financial and operating results. The inability of the Partnership to integrate
successfully the Combined Operations could have a material adverse effect on the
Partnership's business, financial condition and results of operations.
THE PARTNERSHIP'S INDEBTEDNESS MAY LIMIT THE PARTNERSHIP'S ABILITY TO MAKE
DISTRIBUTIONS AND MAY AFFECT ITS OPERATIONS
At September 30, 1997, the Partnership's total indebtedness was
approximately $256.2 million, constituting approximately 53.0% of its total
capitalization. As a result, the Partnership is significantly leveraged and has
indebtedness that is substantial in relation to its partners' capital. As of
September 30, 1997, the Partnership had approximately $100.8 million of unused
borrowing capacity under the Bank
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Credit Facility. Future borrowings could result in a significant increase in the
Partnership's leverage. The ability of the Partnership to make principal and
interest payments depends on future performance, which performance is subject to
many factors, a number of which will be outside the Partnership's control. The
Notes and the Bank Credit Facility contain provisions relating to change of
control. If such change of control provisions are triggered, such outstanding
indebtedness may become due. In such event, there is no assurance that the
Partnership would be able to pay the indebtedness. There is no restriction on
the ability of the Managing General Partner or Northwestern Growth to enter into
a transaction which would trigger such change of control provisions. The Notes
and the Bank Credit Facility contain restrictive covenants that limit the
ability of the Operating Partnership to distribute cash and to incur additional
indebtedness. The payment of principal and interest on such indebtedness and the
reserves required by the terms of the Partnership's indebtedness for the future
payment thereof will reduce the cash available to make distributions on the
Units. The Partnership's leverage may adversely affect the ability of the
Partnership to finance its future operations and capital needs, limit its
ability to pursue acquisitions and other business opportunities and make its
results of operations more susceptible to adverse economic or operating
conditions. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--The Partnership--Liquidity and Capital
Resources--Financing and Sources of Liquidity."
COST REIMBURSEMENTS AND FEES DUE TO THE MANAGING GENERAL PARTNER MAY BE
SUBSTANTIAL
Prior to making any distribution on the Common Units, the Partnership will
reimburse the Managing General Partner and its affiliates at cost for all
expenses incurred on behalf of the Partnership. On a pro forma basis,
approximately $48.9 million of expenses (primarily wages and salaries) would
have been reimbursed by the Partnership to the Managing General Partner in
fiscal 1997 (including $30.7 million actually reimbursed for the six and
one-half month period ended June 30, 1997). In addition, the Managing General
Partner and its affiliates may provide services to the Partnership for which the
Partnership will be charged reasonable fees as determined by the Managing
General Partner. The reimbursement of such expenses and the payment of any such
fees could adversely affect the ability of the Partnership to make
distributions.
UNITHOLDERS HAVE CERTAIN LIMITS ON THEIR VOTING RIGHTS; THE MANAGING GENERAL
PARTNER MANAGES AND OPERATES THE PARTNERSHIP
The Managing General Partner manages and operates the Partnership. Unlike
the holders of common stock in a corporation, holders of Common Units have only
limited voting rights on matters affecting the Partnership's business. Holders
of Common Units have no right to elect the Managing General Partner on an annual
or other continuing basis, and the Managing General Partner may not be removed
except pursuant to the vote of the holders of at least 66 2/3% of the
outstanding Units (including Units owned by the General Partners and their
affiliates) and upon the election of a successor general partner by the vote of
the holders of not less than a majority of the Outstanding Units. The ownership
of the Subordinated Units by the Managing General Partner and its affiliates
effectively gives the Managing General Partner the ability to prevent its
removal. As a result, holders of Common Units will have limited influence on
matters affecting the operation of the Partnership, and third parties may find
it difficult to attempt to gain control, or influence the activities, of the
Partnership. See "The Partnership Agreement."
THE PARTNERSHIP MAY ISSUE ADDITIONAL COMMON UNITS THEREBY DILUTING EXISTING
UNITHOLDERS' INTERESTS
The Partnership has the authority under the Partnership Agreement to issue
an unlimited number of additional Common Units or other equity securities for
such consideration and on such terms and conditions as are established by the
Managing General Partner, in its sole discretion without the approval of the
Unitholders. During the Subordination Period, however, the Partnership may not
issue equity securities ranking prior or senior to the Common Units or an
aggregate of more than 4,270,000 additional Common Units (excluding Common Units
issued upon conversion of Subordinated Units, pursuant to
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employee benefit plans (such as the Restricted Unit Plan) or in connection with
certain acquisitions or capital improvements or the repayment of certain
indebtedness) or an equivalent number of securities ranking on a parity with the
Common Units without the approval of holders of a Unit Majority. 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 December 31, 1997, the Partnership has
granted rights relating to 459,006 Common Units under the Restricted Unit Plan.
After the end of the Subordination Period, the Partnership may issue an
unlimited number of limited partner interests of any type without the approval
of the Unitholders. The Partnership Agreement does not give the holders of
Common Units the right to approve the issuance by the Partnership of equity
securities ranking junior to the Common Units at any time. Based on the
circumstances of each case, the issuance of additional Common Units or
securities ranking on a parity with the Common Units may dilute the value of the
interests of the then-existing holders of Common Units in the net assets of the
Partnership, dilute the interests of holders of Common Units in distributions by
the Partnership or make it more difficult for a person or group to remove the
Managing General Partner or otherwise change the management of the Partnership.
If some or all of the Subordinated Units are converted into Common Units,
the amount of Available Cash necessary to pay the Minimum Quarterly Distribution
with respect to all of the Common Units would be increased proportionately,
thereby resulting in a dilution of the interests of existing Common Unitholders
in distributions by the Partnership.
CHANGE OF MANAGEMENT PROVISIONS
The ownership of Subordinated Units by the Managing General Partner and its
affiliates effectively preclude the removal of the Managing General Partner
without its consent. In addition, the Partnership Agreement contains certain
provisions that may have the effect of discouraging a person or group from
attempting to remove the Managing General Partner of the Partnership or
otherwise change the management of the Partnership. If the Managing General
Partner is removed as general partner of the Partnership under circumstances
where "Cause" does not exist and Units held by the Managing General Partner and
its affiliates are not voted in favor of such removal, (i) the Subordination
Period will end and all outstanding Subordinated Units will immediately convert
into Common Units on a one-for-one basis, (ii) any existing Common Unit
Arrearages will be extinguished and (iii) the General Partners will have the
right to convert their general partner interests (and their rights to receive
Incentive Distributions) into Common Units or to receive cash in exchange for
such interests. "Cause" is defined as a court of competent jurisdiction having
entered a final, non-appealable judgment finding the Managing General Partner
liable for actual fraud, gross negligence or willful wanton misconduct in its
capacity as a general partner of the Partnership. Further, if any person or
group (other than the Managing General Partner or its affiliates) acquires
beneficial ownership of 20% or more of any class of Units then outstanding, such
person or group will lose voting rights with respect to all of its Units. In
addition, the Partnership has substantial latitude in issuing equity securities
without Unitholder approval. The Partnership Agreement also contains provisions
limiting the ability of Unitholders to call meetings of Unitholders or to
acquire information about the Partnership's operations as well as other
provisions limiting the Unitholders' ability to influence the manner or
direction of management. The effect of these provisions may be to diminish the
price at which the Common Units trade under certain circumstances. See "The
Partnership Agreement-- Withdrawal or Removal of the General Partners."
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THE MANAGING GENERAL PARTNER WILL HAVE A LIMITED CALL RIGHT WITH RESPECT TO
THE LIMITED PARTNER INTERESTS
If at any time less than 20% of the then-issued and outstanding limited
partner interests of any class (including Common Units) are held by persons
other than the Managing General Partner and its affiliates, the Managing General
Partner will have the right, which it may assign to any of its affiliates or the
Partnership, to acquire all, but not less than all, of the remaining limited
partner interests of such class held by such unaffiliated persons at a price
generally equal to the then-current market price of limited partner interests of
such class. As a consequence, a holder of Common Units may be required to sell
his Common Units at a time when he may not desire to sell them or at a price
that is less than the price he would desire to receive upon such sale. See "The
Partnership Agreement--Limited Call Right."
UNITHOLDERS MAY NOT HAVE LIMITED LIABILITY IN CERTAIN CIRCUMSTANCES;
LIABILITY FOR RETURN OF CERTAIN DISTRIBUTIONS
The limitations on the liability of holders of limited partner interests for
the obligations of a limited partnership have not been clearly established in
some states. If it were determined that the Partnership had been conducting
business in any state without compliance with the applicable limited partnership
statute, or that the right or the exercise of the right by the Unitholders as a
group to remove or replace the General Partners, to make certain amendments to
the Partnership Agreement or to take other action pursuant to the Partnership
Agreement constituted participation in the "control" of the Partnership's
business, then the Unitholders could be held liable in certain circumstances for
the Partnership's obligations to the same extent as a general partner. In
addition, under certain circumstances a Unitholder may be liable to the
Partnership for the amount of a distribution for a period of three years from
the date of the distribution. See "The Partnership Agreement--Limited Liability"
for a discussion of the limitations on liability and the implications thereof to
a Unitholder.
HOLDERS OF COMMON UNITS HAVE NOT BEEN REPRESENTED BY COUNSEL
The holders of the Common Units were not represented by counsel in
connection with the preparation of the Partnership Agreement or the other
agreements referred to herein.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Conflicts of interest could arise as a result of the relationships between
the Partnership, on the one hand, and the General Partners and their affiliates,
on the other. The directors and officers of the Managing General Partner have
fiduciary duties to manage the Managing General Partner in a manner beneficial
to its 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.
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(ii) The Partnership does not have any employees and relies solely on
employees of the Managing General Partner and its affiliates.
(iii) Under the terms of the Partnership Agreement, the Partnership
reimburses the Managing General Partner and its affiliates for costs
incurred in managing and operating the Partnership, including costs incurred
in rendering corporate staff and support services to the Partnership.
(iv) The terms of the New Acquisition Incentive Plan (described below
under "Management-- Executive Compensation--Incentive Plans") could give the
senior executives of the Managing General Partner an incentive to cause the
Partnership to acquire additional propane operations without regard to
whether the operations would prove beneficial to the Partnership and may
present the senior executives of the Managing General Partner with a
conflict of interest in negotiating the acquisition price on behalf of the
Partnership.
(v) Whenever possible, the Managing General Partner intends to limit the
Partnership's liability under contractual arrangements to all or particular
assets of the Partnership, with the other party thereto to have no recourse
against the General Partners or their assets.
(vi) Any agreements between the Partnership and the Managing General
Partner and its affiliates will not grant to the holders of Common Units,
separate and apart from the Partnership, the right to enforce the
obligations of the Managing General Partner and such affiliates in favor of
the Partnership. Therefore, the Managing General Partner, in its capacity as
the managing general partner of the Partnership, will be primarily
responsible for enforcing such obligations.
(vii) Under the terms of the Partnership Agreement, the Managing General
Partner is not restricted from causing the Partnership to pay the Managing
General Partner or its affiliates for any services rendered on terms that
are fair and reasonable to the Partnership or entering into additional
contractual arrangements with any of such entities on behalf of the
Partnership. Neither the Partnership Agreement nor any of the other
agreements, contracts and arrangements between the Partnership, on the one
hand, and the Managing General Partner and its affiliates, on the other, are
or will be the result of arm's-length negotiations.
(viii) The Managing General Partner may exercise its right to call for and
purchase Units as provided in the Partnership Agreement or assign such right
to one of its affiliates or to the Partnership.
(ix) The Partnership Agreement provides that the Managing General
Partner is generally restricted from engaging in any business activities
other than those incidental to its ownership of interests in the
Partnership. Notwithstanding the foregoing, the Partnership Agreement
permits affiliates of the Managing General Partner (including NPS,
Northwestern Growth and the Special General Partner) to compete with the
Partnership in the retail sale of propane in the continental United States
only if (A) the Managing General Partner determines, in its reasonable
judgment prior to the commencement of such activity, that it is not in the
best interests of the Partnership to engage in such activity either (1)
because of the financial commitments or operating characteristics associated
with such activity, or (2) because such activity is not consistent with the
Partnership's business strategy or cannot otherwise be integrated with the
Partnership's operations on a basis beneficial to the Partnership; or (B)
such activity is being undertaken as provided in a joint venture agreement
or other agreement between the Partnership and an affiliate of the Managing
General Partner and such joint venture or other agreement was determined at
the time it 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
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in the continental United States. There can be no assurance that there will
not be competition between the Partnership and affiliates of the Managing
General Partner in the future.
(x) The Partnership Agreement does not prohibit the Partnership from
engaging in roll-up transactions. Were the Managing General Partner to cause
the Partnership to engage in a roll-up transaction, there could be no
assurance that such a transaction would not have a material adverse effect
on a Unitholder's investment in the Partnership.
Unless provided for otherwise in the partnership agreement, Delaware law
generally requires a general partner of a Delaware limited partnership to adhere
to fiduciary duty standards under which it owes its limited partners the highest
duties of good faith, fairness and loyalty and which generally prohibit such
general partner from taking any action or engaging in any transaction as to
which it has a conflict of interest. The Partnership Agreement expressly permits
the Managing General Partner to resolve conflicts of interest between itself or
its affiliates, on the one hand, and the Partnership or the Unitholders, on the
other, and to consider, in resolving such conflicts of interest, the interests
of other parties in addition to the interests of the Unitholders. In addition,
the Partnership Agreement provides that a purchaser of Common Units is deemed to
have consented to certain conflicts of interest and actions of the Managing
General Partner and its affiliates that might otherwise be prohibited, including
those described in clauses (i)-(x) above, and to have agreed that such conflicts
of interest and actions do not constitute a breach by the Managing General
Partner of any duty stated or implied by law or equity. The Managing General
Partner will not be in breach of its obligations under the Partnership Agreement
or its duties to the Partnership or the Unitholders if the resolution of such
conflict is fair and reasonable to the Partnership. The latitude given in the
Partnership Agreement to the Managing General Partner in resolving conflicts of
interest may significantly limit the ability of a Unitholder to challenge what
might otherwise be a breach of fiduciary duty.
The Partnership Agreement expressly limits the liability of the General
Partners by providing that the General Partners, their affiliates and their
officers and directors will not be liable for monetary damages to the
Partnership, the limited partners or assignees for errors of judgment or for any
acts or omissions if the General Partners and such other persons acted in good
faith. In addition, the Partnership is required to indemnify the General
Partners, their affiliates and their respective officers, directors, employees,
agents and trustees to the fullest extent permitted by law against liabilities,
costs and expenses incurred by the General Partners or such other persons, if
the General Partners or such persons acted in good faith and in a manner they
reasonably believed to be in, or (in the case of a person other than a General
Partner) not opposed to, the best interests of the Partnership and, with respect
to any criminal proceedings, had no reasonable cause to believe the conduct was
unlawful.
The provisions of Delaware law that allow the common law fiduciary duties of
a general partner to be modified by a partnership agreement have not been tested
in a court of law, and the Managing General Partner has not obtained an opinion
of counsel covering the provisions set forth in the Partnership Agreement that
purport to waive or restrict the fiduciary duties of the General Partners that
would be in effect under common law were it not for the Partnership Agreement.
See "Conflicts of Interest and Fiduciary Responsibilities--Conflicts of
Interest."
TAX RISKS
For a general discussion of the expected federal income tax consequences of
owning and disposing of Common Units, see "Tax Considerations."
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
36
<PAGE>
and the Partnership have made representations, Counsel is of the opinion that,
under current law, the Partnership will be classified as a partnership for
federal income tax purposes. No ruling from the IRS as to classification has
been or is expected to be requested. Instead, the Partnership intends to rely on
such opinion of Counsel (which is not binding on the IRS). One of the
representations of the Partnership on which the opinion of Counsel is based is
that at least 90% of the Partnership's gross income for each taxable year in the
future will be "qualifying income." Whether the Partnership will continue to be
classified as a partnership in part depends, therefore, on the Partnership's
ability to meet this qualifying income test in the future. See "Tax
Considerations--Partnership Status."
If the Partnership were classified as an association taxable as a
corporation for federal income tax purposes, the Partnership would pay tax on
its income at corporate rates (currently a 35% federal rate), distributions
would generally be taxed again to the Unitholders as corporate distributions,
and no income, gains, losses or deductions would flow through to the
Unitholders. Because a tax would be imposed upon the Partnership as an entity,
the cash available for distribution to the holders of Common Units would be
substantially reduced. Treatment of the Partnership as an association taxable as
a corporation or otherwise as a taxable entity would result in a material
reduction in the anticipated cash flow and after-tax return to the holders of
Common Units and thus would likely result in a substantial reduction in the
value of the Common Units. See "Tax Considerations--Partnership Status."
There can be no assurance that the law will not be changed so as to cause
the Partnership to be treated as an association taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level taxation.
The Partnership Agreement provides that, if a law is enacted or existing law is
modified or interpreted in a manner that subjects the Partnership to taxation as
a corporation or otherwise subjects the Partnership to entity-level taxation for
federal, state or local income tax purposes, certain provisions of the
Partnership Agreement will be subject to change, including a decrease in the
Minimum Quarterly Distribution and the Target Distribution Levels to reflect the
impact of such law on the Partnership. See "Cash Distribution Policy--Adjustment
of Minimum Quarterly Distribution and Target Distribution Levels."
NO IRS RULING WITH RESPECT TO TAX CONSEQUENCES
No ruling has been requested from the IRS with respect to classification of
the Partnership as a partnership for federal income tax purposes, whether the
Partnership's propane operations generate "qualifying income" under Section 7704
of the Code or any other matter affecting the Partnership. Accordingly, the IRS
may adopt positions that differ from Counsel's conclusions expressed herein. It
may be necessary to resort to administrative or court proceedings in an effort
to sustain some or all of Counsel's conclusions, and some or all of such
conclusions ultimately may not be sustained. Any such contest with the IRS may
materially and adversely impact the market for the Common Units and the prices
at which Common Units trade. In addition, the costs of any contest with the IRS
will be borne directly or indirectly by some or all of the Unitholders and the
General Partners.
CONSEQUENCES OF EXCHANGING PROPERTY FOR COMMON UNITS
In general, no gain or loss will be recognized for federal income tax
purposes by the Partnership or by a person (including any individual,
partnership, 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
37
<PAGE>
the Partnership. There is no assurance that a Unitholder will receive cash
distributions equal to his allocable share of taxable income from the
Partnership or even the tax liability to him resulting from that income.
Further, a holder of Common Units may incur a tax liability, in excess of the
amount of cash received, upon the sale of his Common Units. See "Tax
Considerations--Tax Consequences of Unit Ownership" and "--Disposition of Common
Units."
OWNERSHIP OF COMMON UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER
INVESTORS
Investment in Common Units by certain tax-exempt entities, regulated
investment companies and foreign persons raises issues unique to such persons.
For example, virtually all of the taxable income derived by most organizations
exempt from federal income tax (including IRAs and other retirement plans) from
the ownership of Common Units will be unrelated business taxable income and thus
will be taxable to such a Unitholder. See "Tax Considerations--Uniformity of
Units--Tax-Exempt Organizations and Certain Other Investors."
DEDUCTIBILITY OF LOSSES
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), losses generated by the Partnership
will only be available to offset future income generated by the Partnership and
cannot be used to offset income from other activities, including passive
activities or investments. Passive losses which are not deductible because they
exceed the Unitholder's income generated by the Partnership may be deducted in
full when the Unitholder disposes of his entire investment in the Partnership in
a fully taxable transaction to an unrelated party. Net passive income from the
Partnership may be offset by unused Partnership losses carried over from prior
years, but not by losses from other passive activities, including losses from
other publicly traded partnerships. See "Tax Considerations--Tax Consequences of
Unit Ownership--Limitations on Deductibility of Partnership Losses."
TAX SHELTER REGISTRATION; POTENTIAL IRS AUDIT
The Partnership has registered with the Secretary of the Treasury as a "tax
shelter." No assurance can be given that the Partnership will not be audited by
the IRS or that tax adjustments will not be 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
38
<PAGE>
the various jurisdictions in which the Partnership does business or owns
property and may be subject to penalties for failure to comply with those
requirements. The Partnership currently owns property and conducts business in
the following states which currently impose a personal income tax: Alabama,
Arizona, Arkansas, California, Georgia, Illinois, Indiana, Kentucky, Maryland,
Mississippi, Missouri, New Hampshire, New Jersey, New Mexico, New York, North
Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Utah, Vermont and Virginia.
It is the responsibility of each Unitholder to file all United States federal,
state and local tax returns that may be required of such Unitholder. Counsel has
not rendered an opinion on the state or local tax consequences of an investment
in the Partnership. See "Tax Considerations-- State, Local and Other Tax
Considerations."
DISPOSITION OF COMMON UNITS
A Unitholder who sells Common Units will recognize gain or loss equal to the
difference between the amount realized (including his share of Partnership
nonrecourse liabilities) and his adjusted tax basis in such Common Units. Thus,
prior Partnership distributions in excess of cumulative net taxable income in
respect of a Common Unit which decreased a Unitholder's tax basis in such Common
Unit will, in effect, become taxable income if the Common Unit is sold at a
price greater than the Unitholder's tax basis in such Common Units, even if the
price is less than his original cost. A portion of the amount realized (whether
or not representing gain) may be ordinary income. Furthermore, should the IRS
successfully contest certain conventions to be used by the Partnership, a
Unitholder could realize more gain on the sale of Units than would be the case
under such conventions without the benefit of decreased income in prior years.
PARTNERSHIP TAX INFORMATION AND AUDITS
The Partnership will furnish each holder of Common Units with a Schedule K-1
that sets forth his allocable share of income, gains, losses and deductions. In
preparing these schedules, the Partnership will use various accounting and
reporting conventions and adopt various depreciation and amortization methods.
There is no assurance that these schedules will yield a result that conforms to
statutory or regulatory requirements or to administrative pronouncements of the
IRS. Further, the Partnership's tax return may be audited, and any such audit
could result in an audit of a partner's individual tax return as well as
increased liabilities for taxes because of adjustments resulting from the audit.
39
<PAGE>
THE IPO AND RELATED TRANSACTIONS
On December 17, 1996, the Partnership consummated the IPO, issuing 9,821,000
Common Units (including 1,281,000 Common Units issued pursuant to the
underwriters' over-allotment option that was exercised in full), and received
gross proceeds of $206.2 million. In addition, the Operating Partnership issued
$220.0 million aggregate principal amount of Notes to certain institutional
investors in the Note Placement.
Immediately prior to the closing of the IPO, Synergy, Empire Energy and
Coast entered into a series of transactions which resulted in the Combined
Operations being owned by the General Partners. Concurrently with the IPO
closing, the General Partners contributed, or caused to be contributed, the
Combined Operations to the Operating Partnership in exchange for all of the
interests in the Operating Partnership, and the Operating Partnership assumed
substantially all of the liabilities associated with the Combined Operations.
Immediately after such contributions, all of the limited partner interests in
the Operating Partnership were conveyed to the Partnership in exchange for
interests in the Partnership. In addition, the Operating Partnership contributed
the portion of the Combined Operations utilized in the parts and appliance sales
and service businesses to its corporate subsidiary. As a result of such
transactions, the General Partners own an aggregate of 6,597,619 Subordinated
Units, representing an aggregate 39.4% limited partner interest in the
Partnership as of the closing of the IPO, an aggregate 2% general partner
interest in the Partnership and the right to receive Incentive Distributions.
Concurrently with the closing of the IPO, the Operating Partnership entered
into the Bank Credit Facility, which included the $50.0 million Working Capital
Facility to be used for working capital and other general partnership purposes,
and the $75.0 million Acquisition Facility to be used for acquisitions and
capital improvements. For additional information regarding the terms of the
Notes and the Bank Credit Facility, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations-- The Partnership--Liquidity and
Capital Resources--Financing and Sources of Liquidity."
40
<PAGE>
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.
41
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Partnership at
September 30, 1997. The table should be read in conjunction with the historical
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
(IN THOUSANDS OF
DOLLARS)
<S> <C>
Long-term debt, including current portion............................................... $ 256,165
Partners' capital:
Common Unitholders.................................................................. 136,542
Subordinated Unitholders............................................................ 85,636
General Partners.................................................................... 4,628
--------
Total partners' capital............................................................. 226,806
--------
Total capitalization................................................................ $ 482,971
--------
--------
</TABLE>
42
<PAGE>
PRICE RANGE OF COMMON UNITS
The Common Units are listed and principally traded on the NYSE under the
trading symbol "CNO." The Common Units began trading on the NYSE on December 12,
1996, three trading days before the assets and liabilities of the predecessor
companies were contributed to the Partnership in exchange for the proceeds from
the IPO and related transactions. The high and low sales prices for the Common
Units, as reported in the consolidated transaction reporting system, and the
amount of distributions declared with respect to the Common Units, for each
calendar quarter since December 12, 1996, are as follows:
<TABLE>
<CAPTION>
HIGH LOW DISTRIBUTIONS
--------- --------- ------------
<S> <C> <C> <C>
1996
Fourth Quarter (from December 12, 1996)......................................... $21 1/2 $21 $ --
1997
First Quarter................................................................... 22 3/8 20 7/8 .63(1)
Second Quarter.................................................................. 22 1/8 19 3/4 .54
Third Quarter................................................................... 23 7/8 21 1/16 .54
Fourth Quarter.................................................................. 23 15/16 22 (2)
</TABLE>
- ------------------------
(1) The distribution of $0.63 per Unit declared for the quarter ended March 31,
1997, included the 15-day period commencing December 17, 1996.
(2) The Partnership expects to make distributions of all Available Cash within
45 days after the end of each quarter to holders of record on the applicable
record date.
For a recent sale price of the Common Units, please see the Prospectus
Supplement. The Common Units were held by approximately 12,000 holders as of
June 30, 1997.
For a description of certain limitations on the Partnership's ability to
make distributions to its partners, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations-- The Partnership--Liquidity and
Capital Resources--Financing and Sources of Liquidity."
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<PAGE>
CASH DISTRIBUTION POLICY
GENERAL
The Partnership will distribute to its partners, on a quarterly basis, all
of its Available Cash in the manner described herein. Available Cash is defined
in the Glossary and generally means, with respect to any quarter of the
Partnership, all cash on hand at the end of such quarter less the amount of cash
reserves that is necessary or appropriate in the reasonable discretion of the
Managing General Partner to (i) provide for the proper conduct of the
Partnership's business, (ii) comply with applicable law or any Partnership debt
instrument or other agreement, or (iii) provide funds for distributions to
Unitholders and the General Partners in respect of any one or more of the next
four quarters.
Cash distributions will be characterized as distributions from either
Operating Surplus or Capital Surplus. This distinction affects the amounts
distributed to Unitholders relative to the General Partners, and under certain
circumstances it determines whether holders of Subordinated Units receive any
distributions. See "--Quarterly Distributions of Available Cash."
Operating Surplus is defined in the Glossary and refers generally to (i) the
cash balance of the Partnership on the date the Partnership commenced
operations, plus $25.0 million, plus all cash receipts of the Partnership from
its operations since the closing of the Transactions, less (ii) all Partnership
operating expenses, debt service payments (including reserves therefor but not
including payments required in connection with the sale of assets or any
refinancing with the proceeds of new indebtedness or an equity offering),
maintenance capital expenditures and reserves established for future Partnership
operations, in each case since the closing of the Transactions.
Capital Surplus is also defined in the Glossary and will generally be
generated only by borrowings (other than for working capital purposes), sales of
debt and equity securities and sales or other dispositions of assets for cash
(other than inventory, accounts receivable and other assets all as disposed of
in the ordinary course of business).
To avoid the difficulty of trying to determine whether Available Cash
distributed by the Partnership is from Operating Surplus or from Capital
Surplus, all Available Cash distributed by the Partnership from any source will
be treated as distributed from Operating Surplus until the sum of all Available
Cash distributed since the commencement of the Partnership equals the Operating
Surplus as of the end of the quarter prior to such distribution. Any Available
Cash in excess of such amount (irrespective of its source) will be deemed to be
from Capital Surplus and distributed accordingly.
If Available Cash from Capital Surplus is distributed in respect of each
Common Unit in an aggregate amount per Common Unit equal to $21.00 per Common
Unit (the "Initial Unit Price"), plus any Common Unit Arrearages, the
distinction between Operating Surplus and Capital Surplus will cease, and all
distributions of Available Cash will be treated as if they were from Operating
Surplus. The Partnership does not anticipate that there will be significant
distributions from Capital Surplus.
The Subordinated Units are a separate class of interests in the Partnership,
and the rights of holders of such interests to participate in distributions to
partners differ from the rights of the holders of Common Units. For any given
quarter, any Available Cash will be distributed to the General Partners and to
the holders of Common Units, and may also be distributed to the holders of
Subordinated Units depending upon the amount of Available Cash for the quarter,
the amount of Common Unit Arrearages, if any, and other factors discussed below.
The Incentive Distributions represent the right to receive an increasing
percentage of quarterly distributions of Available Cash from Operating Surplus
after the Target Distribution Levels have been achieved. The Target Distribution
Levels are based on the amounts of Available Cash from Operating Surplus
distributed in excess of the payments made with respect to the Minimum Quarterly
Distribution and Common Unit Arrearages, if any, and the related 2% distribution
to the General Partners.
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<PAGE>
Subject to the limitations described under "The Partnership
Agreement--Issuance of Additional Securities," the Partnership has the authority
to issue additional Common Units or other equity securities of the Partnership
for such consideration and on such terms and conditions as are established by
the Managing General Partner in its sole discretion and without the approval of
the Unitholders. It is possible that the Partnership will fund acquisitions of
other propane businesses through the issuance of additional Common Units or
other equity securities of the Partnership. Holders of any additional Common
Units issued by the Partnership will be entitled to share equally with the
then-existing holders of Common Units in distributions of Available Cash by the
Partnership. In addition, the issuance of additional Partnership Interests may
dilute the value of the interests of the then-existing holders of Common Units
in the net assets of the Partnership. The General Partners will be required to
make an additional capital contribution to the Partnership or the Operating
Partnership in connection with the issuance of additional Partnership Interests.
The discussion in the sections below indicates the percentages of cash
distributions required to be made to the General Partners and the holders of
Common Units and the circumstances under which holders of Subordinated Units are
entitled to cash distributions and the amounts thereof. Distributions and
allocations to the General Partners will be made pro rata in accordance with
their respective general partner interests. For a discussion of Available Cash
from Operating Surplus available for distributions with respect to the Common
Units on a pro forma basis, see "Cash Available for Distribution."
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Partnership will make distributions to its partners with respect to each
quarter of the Partnership prior to its liquidation in an amount equal to 100%
of its Available Cash for such quarter. The Partnership expects to make
distributions of all Available Cash within 45 days after the end of each quarter
to holders of record on the applicable record date. The Minimum Quarterly
Distribution and the Target Distribution Levels are also subject to certain
other adjustments as described below under "--Distributions from Capital
Surplus" and "--Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels."
With respect to each quarter during the Subordination Period, to the extent
there is sufficient Available Cash, the holders of Common Units will have the
right to receive the Minimum Quarterly Distribution, plus any Common Unit
Arrearages, prior to any distribution of Available Cash to the holders of
Subordinated Units. This subordination feature will enhance the Partnership's
ability to distribute the Minimum Quarterly Distribution on the Common Units
during the Subordination Period. There is no guarantee, however, that the
Minimum Quarterly Distribution will be made on the Common Units. Upon expiration
of the Subordination Period, all Subordinated Units will be converted on a
one-for-one basis into Common Units and will participate pro rata with all other
Common Units in future distributions of Available Cash. Under certain
circumstances, up to 3,298,810 Subordinated Units may convert into Common Units
prior to the expiration of the Subordination Period. Common Units will not
accrue arrearages with respect to distributions for any quarter after the
Subordination Period and Subordinated Units will not accrue any arrearages with
respect to distributions for any quarter.
DISTRIBUTIONS FROM OPERATING SURPLUS DURING SUBORDINATION PERIOD
The Subordination Period will generally extend until the first day of any
quarter beginning after December 31, 2001 in respect of which (i) distributions
of Available Cash from Operating Surplus on the Common Units and the
Subordinated Units with respect to each of the three consecutive four-quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the outstanding Common Units and
Subordinated Units during such periods, (ii) the Adjusted Operating Surplus
generated during each of the three consecutive four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units and
the related distribution on the general
45
<PAGE>
partner interests in the Partnership during such periods, and (iii) there are no
outstanding Common Unit Arrearages.
Prior to the end of the Subordination Period, a portion of the Subordinated
Units will convert into Common Units on a one-for-one basis on the first day
after the record date established for the distribution in respect of any quarter
ending on or after (a) December 31, 1999 with respect to one-quarter of the
Subordinated Units (1,649,405 Subordinated Units) and (b) December 31, 2000 with
respect to one-quarter of the Subordinated Units (1,649,405 Subordinated Units)
in respect of which (i) distributions of Available Cash from Operating Surplus
on the Common Units and the Subordinated Units with respect to each of the three
consecutive four-quarter periods immediately preceding such date equaled or
exceeded the sum of the Minimum Quarterly Distribution on all of the outstanding
Common Units and Subordinated Units during such periods, (ii) the Adjusted
Operating Surplus generated during each of the two consecutive four-quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the outstanding Common Units and
Subordinated Units and the related distribution on the general partner interests
in the Partnership during such periods, and (iii) there are no outstanding
Common Unit Arrearages; provided, however, that the early conversion of the
second one-quarter of Subordinated Units may not occur until at least one year
following the early conversion of the first one-quarter of Subordinated Units.
Upon expiration of the Subordination Period, all remaining Subordinated
Units will convert into Common Units on a one-for-one basis and will thereafter
participate, pro rata, with the other Common Units in distributions of Available
Cash. In addition, if the Managing General Partner is removed as managing
general partner of the Partnership under circumstances where Cause does not
exist and Units held by the Managing General Partner and its affiliates are not
voted in favor of such removal, (i) the Subordination Period will end and all
outstanding Subordinated Units will immediately convert into Common Units on a
one-for-one basis, (ii) any existing Common Unit Arrearages will be extinguished
and (iii) the General Partners will have the right to convert their general
partner interests (and the rights of each of them to receive Incentive
Distributions) into Common Units or to receive cash in exchange for such
interests.
"Adjusted Operating Surplus" for any period generally means Operating
Surplus generated during such period, less (a) any net increase in working
capital borrowings during such period and (b) any net reduction in cash reserves
for Operating Expenditures during such period not relating to an Operating
Expenditure made during such period; and plus (x) any net decrease in working
capital borrowings during such period and (y) any net increase in cash reserves
for Operating Expenditures during such period required by any debt instrument
for the repayment of principal, interest or premium. Operating Surplus generated
during a period is equal to the difference between (i) the Operating Surplus
determined at the end of such period and (ii) the Operating Surplus determined
at the beginning of such period.
Distributions by the Partnership of Available Cash from Operating Surplus
with respect to any quarter during the Subordination Period will be made in the
following manner:
FIRST, 98% to the Common Unitholders, pro rata, and 2% to the General
Partners, until there has been distributed in respect of each outstanding
Common Unit an amount equal to the Minimum Quarterly Distribution for such
quarter;
SECOND, 98% to the Common Unitholders, pro rata, and 2% to the General
Partners, until there has been distributed in respect of each outstanding
Common Unit an amount equal to any Common Unit Arrearages accrued and unpaid
with respect to any prior quarters during the Subordination Period;
THIRD, 98% to the Subordinated Unitholders, pro rata, and 2% to the
General Partners, until there has been distributed in respect of each
outstanding Subordinated Unit an amount equal to the Minimum Quarterly
Distribution for such quarter; and
46
<PAGE>
THEREAFTER, in the manner described in "--Incentive
Distributions--Hypothetical Annualized Yield" below.
The above references to the 2% of Available Cash from Operating Surplus
distributed to the General Partners are references to the amount of the
percentage interest in distributions from the Partnership and the Operating
Partnership of the General Partners on a combined basis (exclusive of their
interest as holders of the Subordinated Units). The General Partners own a
combined 1% general partner interest in the Partnership and a combined 1.0101%
general partner interest in the Operating Partnership. Other references in this
Prospectus to the General Partners' 2% interest or to distributions of 2% of
Available Cash are also references to the amount of the combined percentage
interest in the Partnership and the Operating Partnership of the General
Partners (exclusive of their interest as holders of the Subordinated Units).
With respect to any Common Unit, the term "Common Unit Arrearages" refers to the
amount by which the Minimum Quarterly Distribution in any quarter during the
Subordination Period exceeds the distribution of Available Cash from Operating
Surplus actually made for such quarter on a Common Unit, cumulative for such
quarter and all prior quarters during the Subordination Period. Common Unit
Arrearages will not accrue interest.
DISTRIBUTIONS FROM OPERATING SURPLUS AFTER SUBORDINATION PERIOD
Distributions by the Partnership of Available Cash from Operating Surplus
with respect to any quarter after the Subordination Period will be made in the
following manner:
FIRST, 98% to all Unitholders, pro rata, and 2% to the General Partners,
until there has been distributed in respect of each Unit an amount equal to
the Minimum Quarterly Distribution for such quarter; and
THEREAFTER, in the manner described in "--Incentive
Distributions--Hypothetical Annualized Yield" below.
INCENTIVE DISTRIBUTIONS--HYPOTHETICAL ANNUALIZED YIELD
For any quarter for which Available Cash from Operating Surplus is
distributed to the Common and Subordinated Unitholders in an amount equal to the
Minimum Quarterly Distribution on all Units and to the Common Unitholders in an
amount equal to any unpaid Common Unit Arrearages, then any additional Available
Cash from Operating Surplus in respect of such quarter will be distributed among
the Unitholders and the General Partners in the following manner:
FIRST, 98% to all Unitholders, pro rata, and 2% to the General Partners,
until the Unitholders have received (in addition to any distributions to
Common Unitholders to eliminate Common Unit Arrearages) a total of $0.594
for such quarter in respect of each outstanding Unit (the "First Target
Distribution");
SECOND, 85% to all Unitholders, pro rata, and 15% to the General
Partners, until the Unitholders have received (in addition to any
distributions to Common Unitholders to eliminate Common Unit Arrearages) a
total of $0.700 for such quarter in respect of each outstanding Unit (the
"Second Target Distribution");
THIRD, 75% to all Unitholders, pro rata, and 25% to the General
Partners, until the Unitholders have received (in addition to any
distributions to Common Unitholders to eliminate Common Unit Arrearages) a
total of $0.900 for such quarter in respect of each outstanding Unit (the
"Third Target Distribution"); and
THEREAFTER, 50% to all Unitholders, pro rata, and 50% to the General
Partners.
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<PAGE>
The distributions to the General Partners set forth above (other than in
their capacity as holders of the Subordinated Units) that are in excess of their
aggregate 2% general partner interest represent the Incentive Distributions. The
right to receive Incentive Distributions is not part of the general partner
interest and may be transferred separately from such interests. See "The
Partnership Agreement--Transfer of General Partners' Interests and Incentive
Distribution Rights."
The following table illustrates the percentage allocation of the additional
Available Cash from Operating Surplus between the Unitholders and the General
Partners up to the various Target Distribution Levels and a hypothetical
annualized percentage yield to be realized by a Unitholder at each Target
Distribution Level. For purposes of the following table, the annualized
percentage yield is calculated on a pretax basis assuming that (i) the Common
Unit was issued for a capital contribution of $21.00 per Common Unit (equal to
the initial public offering price) and (ii) the Partnership distributed each
quarter during the first year following the investment the amount set forth
under the column "Total Quarterly Distribution Target Amount." The calculations
are also based on the assumption that the quarterly distribution amounts shown
do not include any Common Unit Arrearages. The amounts set forth under "Marginal
Percentage Interest in Distributions" are the percentage interests of the
General Partners and the Unitholders in any Available Cash from Operating
Surplus distributed up to and including the corresponding amount in the column
"Total Quarterly Distribution Target Amount," until Available Cash distributed
reaches the next Target Distribution Level, if any. The percentage interests
shown for the Unitholders and the General Partners for the Minimum Quarterly
Distribution are also applicable to quarterly distribution amounts that are less
than the Minimum Quarterly Distribution.
<TABLE>
<CAPTION>
MARGINAL PERCENTAGE
INTEREST IN DISTRIBUTIONS
TOTAL QUARTERLY --------------------------
DISTRIBUTION TARGET HYPOTHETICAL GENERAL
AMOUNT ANNUALIZED YIELD UNITHOLDERS PARTNERS
------------------------- ----------------- ------------- -----------
<S> <C> <C> <C> <C>
Minimum Quarterly Distribution........... $0.540 10.286% 98% 2%
First Target Distribution................ $0.594 11.314% 98% 2%
Second Target Distribution............... $0.700 13.333% 85% 15%
Third Target Distribution................ $0.900 17.143% 75% 25%
Thereafter............................... above $0.900 above 17.143% 50% 50%
</TABLE>
DISTRIBUTIONS FROM CAPITAL SURPLUS
Distributions by the Partnership of Available Cash from Capital Surplus will
be made in the following manner:
FIRST, 98% to all Unitholders, pro rata, and 2% to the General Partners,
until the Partnership has distributed, in respect of each outstanding Common
Unit issued in the IPO, with the Available Cash from Capital Surplus in an
aggregate amount per Common Unit equal to the Initial Unit Price;
SECOND, 98% to the holders of Common Units, pro rata, and 2% to the
General Partners, until the Partnership has distributed, in respect of each
outstanding Common Unit, Available Cash from 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
48
<PAGE>
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.
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
49
<PAGE>
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;
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
50
<PAGE>
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 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.
51
<PAGE>
CASH AVAILABLE FOR DISTRIBUTION
The amount of Available Cash from Operating Surplus needed to distribute the
Minimum Quarterly Distribution for four quarters on the Common Units and
Subordinated Units outstanding as of the date of the Prospectus and on the
aggregate 2% general partner interest of the General Partners is approximately
$39.1 million ($24.0 million for the Common Units, $14.3 million for the
Subordinated Units and $781,000 for the aggregate 2% general partner interest of
the General Partners). The amount of pro forma Available Cash from Operating
Surplus generated during fiscal 1997 was approximately $22.3 million (including
approximately $2.9 million of Available Cash from Operating Surplus of
businesses acquired in May and June, 1997 but not reflecting approximately $3.5
million of Available Cash from Operating Surplus of businesses acquired
subsequent to June 30, 1997). Such amount would have been insufficient by
approximately $2.5 million to cover the full Minimum Quarterly Distribution for
such fiscal year on all of the Common Units currently outstanding and the
related distribution on the general partner interests, and would have been
insufficient by approximately $16.8 million to cover the Minimum Quarterly
Distribution on all Subordinated Units currently outstanding and the related
distribution on the general partner interests. See "Risk Factors--Risks Inherent
in an Investment in the Partnership--Partnership Profitability Will Depend on
Successful Integration of the Combined Operations" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
PRO FORMA AVAILABLE CASH FROM OPERATING SURPLUS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
JUNE 30, 1997
----------------
<S> <C>
Pro forma operating income(a)................................................................... $ 25,968
Add: Pro forma depreciation and amortization.................................................... 15,073
-------
Pro forma EBITDA(a)(b).......................................................................... 41,041
Less: Pro forma interest expense................................................................ 18,215
Pro forma capital expenditures--maintenance(c).............................................. 3,500
-------
Pro forma Available Cash from Operating Surplus before acquisitions (a)(d)...................... 19,326
Available Cash from Operating Surplus of businesses acquired in May and June, 1997(e)........... 2,951
-------
Pro Forma Available Cash from Operating Surplus (a)(d).......................................... $ 22,277
-------
-------
</TABLE>
- ------------------------
(a) The pro forma amounts of operating income, EBITDA and Available Cash from
Operating Surplus do not reflect (i) savings of certain non-recurring
expenses incurred by Empire Energy, (ii) propane acquisition and logistics
costs savings and (iii) insurance savings that the Partnership believes are
achievable as a result of the Transactions.
(b) EBITDA consists of net income before depreciation, amortization, interest
and income taxes. EBITDA should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative to
cash flow, and it is not a measure of performance or financial condition
under generally accepted accounting principles, but it provides additional
information for evaluating the Partnership's ability to distribute the
Minimum Quarterly Distribution and to service and incur indebtedness. Cash
flows in accordance with generally accepted accounting principles consist of
cash flows from operating, investing and financing activities; cash flows
from operating activities reflect net income (including charges for interest
and income taxes, which are not reflected in EBITDA), adjusted for noncash
charges or income (which are reflected in EBITDA) and changes in operating
assets and liabilities (which are not reflected in EBITDA). Further, cash
flows from investing and financing activities are not included in EBITDA.
(c) Based upon estimated maintenance capital expenditures for fiscal 1998.
(d) Available Cash from Operating Surplus generated during a specified period
refers generally to (i) all cash receipts of the Partnership from its
operations generated during such period, less (ii) all Partnership operating
expenses, debt service payments (including any increases in reserves
therefor but not including amounts paid from any reduction in reserves, or
payments
52
<PAGE>
required in connection with the sale of assets, or any refinancing with the
proceeds of new indebtedness or an equity offering) and maintenance capital
expenditures, in each case during such period. For a complete definition of
Operating Surplus, see the Glossary.
(e) Reflects Available Cash from Operating Surplus of businesses acquired in May
and June, 1997 as if they had been acquired July 1, 1996.
The amount of pro forma Available Cash from Operating Surplus for fiscal
1997 set forth above was derived from the Selected Pro Forma Financial and
Operating Data of the Partnership. The pro forma adjustments are based upon
currently available information and certain estimates and assumptions. The
Selected Pro Forma Financial and Operating Data do not purport to present the
results of operations of the Partnership had the Transactions actually been
completed as of the dates indicated. Furthermore, the Selected Pro Forma
Financial and Operating Data are based on accrual accounting concepts while
Operating Surplus is defined in the Partnership Agreement on a cash accounting
basis. As a consequence, the amount of pro forma Available Cash from Operating
Surplus shown above should only be viewed as a general indication of the amount
of Available Cash from Operating Surplus that might in fact have been generated
by the Partnership had it been formed in earlier periods.
53
<PAGE>
SELECTED PRO FORMA FINANCIAL AND OPERATING DATA
The following Summary Pro Forma Financial and Operating Data reflect the
consolidated historical operating results of the companies that comprised the
Combined Operations, as adjusted for the Transactions (through December 16,
1996), and the actual consolidated operating results of the Partnership (after
December 16, 1996) are unaudited. The pro forma information for the fiscal year
ended June 30, 1997 set forth below has been prepared by combining the
historical results of operations of Synergy for the five and one-half months
ended December 16, 1996; Coast for the four and one-half months ended December
16, 1996; Empire Energy for the five and one-half months ended December 16,
1996; and the Partnership for the six and one-half months ended June 30, 1997.
The pro forma information for the three months ended September 30, 1996 set
forth below has been prepared by combining the historical results of operations
of Synergy for the three months ended September 30, 1996; Coast for the three
months ended October 31, 1996; and Empire Energy for the three months ended
September 30, 1996. The information for the three months ended September 30,
1997 is derived from the Partnership's unaudited consolidated financial
statements included elsewhere in this Prospectus and, in the opinion of
management, includes all adjustments necessary for a fair presentation of such
information. The Partnership believes that it is reasonable to combine the
results of operations of companies having different fiscal years because each of
the fiscal years being combined includes the same winter heating seasons in
which the majority of the Selected Pro Forma Financial and Operating Data
Partnership's revenue and cash flow was generated. The financial and operating
data for the three month periods ended September 30, 1997 and 1996 are not
necessarily indicative of the results of operations for the full fiscal year.
The following information should not be deemed indicative of future operating
results of the Partnership.
<TABLE>
<CAPTION>
PREDECESSORS
--------------------------------------------------------
EMPIRE ACQUISITION/
SYNERGY ENERGY DISPOSITION PARTNERSHIP
PARTNERSHIP (JULY 1, (JULY 1, COAST ADJUSTMENTS PRO FORMA
(DECEMBER 17, 1996 TO 1996 TO (AUG. 1, 1996 (JULY 1, 1996 YEAR ENDED
1996 TO JUNE DEC. 16, DEC. 16, TO DEC. 16, TO DECEMBER 16, PRO-FORMA JUNE 30,
30, 1997) 1996) 1996) 1996) 1996)(A) ADJUSTMENTS 1997
------------- ----------- ----------- ------------- --------------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... $ 389,630 $ 44,066 $ 43,201 $ 185,460 $ 1,840 $ $ 664,197
Cost of sales.......... 315,324 23,322 23,310 173,155 1,339 (1,558)(b) 534,892
------------- ----------- ----------- ------------- ------ ------------- -----------
Gross profit........... 74,306 20,744 19,891 12,305 501 1,558 129,305
Operating, general and
administrative
expenses............. 50,023 15,071 13,394 10,579 360 (1,163)(c) 88,264
Depreciation and
amortization......... 8,519 1,904 2,930 1,604 71 45(d) 15,073
------------- ----------- ----------- ------------- ------ ------------- -----------
Operating income....... 15,764 3,769 3,567 122 70 2,676 25,968
Interest expense....... 9,944 3,311 3,621 2,238 86 (985)(e) 18,215
------------- ----------- ----------- ------------- ------ ------------- -----------
Net income (loss)
before income
taxes................ 5,820 458 (54) (2,116) (16) 3,661 7,753
Income taxes
(benefit)............ 64 298 32 (748) 7 456(f) 109
------------- ----------- ----------- ------------- ------ ------------- -----------
Net income (loss)...... $ 5,756 $ 160 $ (86) $ (1,368) $ (23) $ 3,205 $ 7,644
------------- ----------- ----------- ------------- ------ ------------- -----------
------------- ----------- ----------- ------------- ------ ------------- -----------
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
PARTNERSHIP YEAR ENDED
JUNE 30, 1997
---------------------------------
(IN THOUSANDS, EXCEPT PER UNIT
DATA)
<S> <C>
BALANCE SHEET DATA (AS OF JUNE 30, 1997):
Current assets................................................................ $ 70,261
Total assets.................................................................. 540,993
Current liabilities........................................................... 60,742
Long-term debt (including current maturities)................................. 237,268
Partners capital--General Partners............................................ 4,972
Partners' capital--Limited Partners........................................... 238,957
OPERATING DATA (PRO FORMA):
Capital expenditures(g)....................................................... $ 15,977
EBITDA(h)..................................................................... $ 41,041
Net income per Unit(i)........................................................ $ .46
Retail propane gallons sold................................................... 213,700
</TABLE>
<TABLE>
<CAPTION>
PREDECESSORS
--------------------------------------------------------------
ACQUISITION/ PARTNERSHIP
DISPOSITION PRO FORMA PARTNERSHIP
SYNERGY EMPIRE ENERGY COAST ADJUSTMENTS (JULY THREE MONTHS ACTUAL THREE
(JULY 1, 1996 (JULY 1, 1996 (AUG. 1, 1996 1, 1996 TO ENDED MONTHS ENDED
TO SEPTEMBER TO SEPTEMBER TO OCTOBER SEPTEMBER 30, PRO-FORMA SEPTEMBER 30, SEPTEMBER 30,
30, 1996) 30, 1996) 31, 1996) 1996)(A) ADJUSTMENTS 1996 1997
------------- ------------- ------------- ----------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............. $ 17,883 $ 15,035 $ 108,175 $ 663 $ $ 141,756 $ 152,157
Cost of sales........ 8,940 7,910 100,266 403 117,519 127,855
------------- ------------- ------------- ----- ------------- ------------- -------------
Gross profit......... 8,943 7,125 7,909 260 24,237 24,302
Operating, general
and administrative
expenses........... 7,913 7,008 6,952 (582) (433)(c) 20,858 22,602
Depreciation and
amortization....... 1,000 1,586 1,067 65 20(d) 3,738 4,592
------------- ------------- ------------- ----- ------------- ------------- -------------
Operating income
(loss)............. 30 (1,469) (110) 777 413 (359) (2,892)
Interest expense..... 1,665 1,704 1,294 77 (273)(e) 4,467 4,782
------------- ------------- ------------- ----- ------------- ------------- -------------
Net income (loss)
before income
taxes.............. (1,635) (3,173) (1,404) 700 686 (4,826) (7,674)
Income taxes
(benefit).......... (550) (1,165) (491) 266 1,965(f) 25 20
------------- ------------- ------------- ----- ------------- ------------- -------------
Net income (loss).... $ (1,085) $ (2,008) $ (913) $ 434 $ (1,279) $ (4,851) $ (7,694)
------------- ------------- ------------- ----- ------------- ------------- -------------
------------- ------------- ------------- ----- ------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
--------------------------------- ------------------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C>
BALANCE SHEET DATA (AS OF SEPTEMBER 30, 1997):
Current assets............................................. $ 75,117
Total assets............................................... 548,784
Current liabilities........................................ 64,188
Long-term debt (including current maturities).............. 256,165
Partners capital--General Partners......................... 4,628
Partners' capital--Limited Partners........................ 222,178
OPERATING DATA:
Capital expenditures(g).................................... $ 3,513 $ 5,994
EBITDA(h).................................................. $ 3,379 $ 1,700
Net loss per Unit(i)....................................... $ (.29) $ (.46)
Retail propane gallons sold................................ 38,500 41,300
</TABLE>
- ------------------------------
(a) Reflects the results of Myers Propane Gas Company, a subsidiary of NPS, and
pro forma five and one-half month (or three month) results of propane
operations acquired by Northwestern Growth subsequent to July 1, 1996, all
of which were
55
<PAGE>
contributed to the Operating Partnership as part of the Transactions.
(b) Reflects elimination of last-in, first-out (LIFO) inventory adjustment as of
December 16, 1996, because historically higher inventory levels as of June
30 fiscal year end would not require depletion of LIFO layers.
(c) Reflects the full year (or full quarter) effect of operating expense savings
resulting from the consolidation of certain operations subsequent to
December 16, 1996, as well as the elimination of certain operating and
general and administrative expenses associated with the operation of the
Partnership, as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE THREE MONTHS ENDED
30, 1997 SEPTEMBER 30, 1996
--------------- ---------------------
<S> <C> <C>
Eliminated bank and consulting fees.............................. $ 149 $ 96
Consolidation of certain retail locations........................ 321 174
Corporate overhead consolidation................................. 693 163
------ -----
$ 1,163 $ 433
------ -----
------ -----
</TABLE>
(d) Reflects the additional depreciation and amortization expense due to the
increase in property and intangibles that result from applying the purchase
method of accounting to the Empire Energy and Coast acquisitions.
(e) Reflects the following adjustment to interest expense directly resulting
from the Transactions, as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JUNE 30, 1997 SEPTEMBER 30, 1996
------------- -------------------
<S> <C> <C>
Historical interest expense, net................................. $ 19,114 $ 4,663
Interest expense from acquisitions............................... 86 77
------------- ------
19,200 4,740
------------- ------
Pro forma interest expense, net applicable to the Partnership:
$220,000 first mortgage notes at a rate of 7.53% per annum..... 16,566 4,142
Interest expense attributable to working capital facility based
on actual borrowings by the Partnership...................... 380 33
Interest expense attributable to actual purchase contract
obligations assumed by the Partnership at interest rates
ranging from 5% to 10%....................................... 929 161
Debt expense amortization based on $7,401 debt issuance
costs........................................................ 527 131
Less--actual interest income of the Partnership for the period
from December 17, 1996 to June 30, 1977...................... (187) --
------------- ------
Pro forma interest expense, net adjustment....................... 18,215 4,467
------------- ------
$ (985) $ (273)
------------- ------
------------- ------
</TABLE>
(f) Reflects the elimination of income tax provision (benefit), because income
taxes are not borne by the Partnership (except for income taxes applicable
to operations conducted by the Partnership's corporate subsidiary).
(g) The Partnership's capital expenditures fall generally into three categories:
(i) growth capital expenditures, which include expenditures for the purchase
of new propane tanks and other equipment to facilitate expansion of the
Partnership's retail customer base, (ii) maintenance capital expenditures,
which include expenditures for repairs that extend the life of the assets
and replacement of property, plant and equipment, and (iii) acquisition
capital expenditures.
(h) EBITDA consists of net income before depreciation, amortization, interest
and income taxes. EBITDA should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative to
cash flow, and it is not a measure of performance or financial condition
under generally accepted accounting principles, but it provides additional
information for evaluating the Partnership's ability to distribute the
Minimum Quarterly Distribution and to service and incur indebtedness. Cash
flows in accordance with generally accepted accounting principles consist of
cash flows from operating, investing and financing activities; cash flows
from operating activities reflect net income (including charges for interest
and income taxes, which are not reflected in EBITDA), adjusted for noncash
charges or income (which are reflected in EBITDA) and changes in operating
assets and liabilities (which are not reflected in EBITDA). Further, cash
flows from investing and financing activities are not included in EBITDA.
(i) Net income per Unit is computed by dividing the limited partners' interest
in net income by the weighted average number of Units outstanding.
56
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
THE PARTNERSHIP
The following table presents selected consolidated operating and balance
sheet data of the Partnership as of September 30, 1997, for the three months
ended September 30, 1997 and for the period from inception (December 17, 1996)
to June 30, 1997. The financial data of the Partnership as of June 30, 1997, and
for the period from inception (December 17, 1996) to June 30, 1997, were derived
from the Partnership's audited consolidated financial statements. The
information for the three months ended September 30, 1997 is derived from the
Partnership's unaudited consolidated financial statements included elsewhere in
this Prospectus and, in the opinion of management, includes all adjustments
necessary for a fair presentation of such information. The financial data set
forth below should be read in conjunction with the Partnership's consolidated
financial statements, together with the notes thereto, and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations--The
Partnership" included elsewhere in this Prospectus. The financial and operating
data for the three month period ended September 30, 1997 are not necessarily
indicative of the results of operations for the full fiscal year.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION THREE MONTHS
(DECEMBER 17, 1996) ENDED
TO JUNE 30, 1997 SEPTEMBER 30, 1997
-------------------- -------------------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................................................. $ 389,630 $ 152,157
Cost of sales......................................................... 315,324 127,855
-------- --------
Gross profit.......................................................... 74,306 24,302
Operating, general and administrative expenses........................ 50,023 22,602
Depreciation and amortization......................................... 8,519 4,592
-------- --------
Operating income (loss)............................................... 15,764 (2,892)
Interest expense...................................................... 9,944 4,782
-------- --------
Net income (loss) before income taxes................................. 5,820 (7,674)
Income taxes.......................................................... 64 20
-------- --------
Net income (loss)..................................................... $ 5,756 $ (7,694)
-------- --------
-------- --------
BALANCE SHEET DATA (AS OF SEPTEMBER 30, 1997):
Current assets........................................................ $ 75,117
Total assets.......................................................... 548,784
Current liabilities................................................... 64,188
Long-term debt (including current maturities)......................... 256,165
Partners' capital--General Partners................................... 4,628
Partners' capital--Limited Partners................................... 222,178
OPERATING DATA:
Capital expenditures(a)............................................... $ 4,227 $ 5,994
EBITDA(b)............................................................. $ 24,283 $ 1,700
Net income per unit(c)................................................ $ .34 $ (.46)
Retail propane gallons sold........................................... 213,700 41,300
</TABLE>
- ------------------------------
(a) The Partnership's capital expenditures fall generally into three categories:
(i) growth capital expenditures, which include expenditures for the purchase
of new propane tanks and other equipment to facilitate expansion of the
Partnership's retail customer base, (ii) maintenance capital expenditures,
which include expenditures for repairs that extend the life of the assets
and replacement of property, plant and equipment, and (iii) acquisition
capital expenditures.
(b) EBITDA consists of net income before depreciation, amortization, interest
and income taxes. EBITDA should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative to
cash flow, and it is not a
57
<PAGE>
measure of performance or financial condition under generally accepted
accounting principles, but it provides additional information for evaluating
the Partnership's ability to distribute the Minimum Quarterly Distribution
and to service and incur indebtedness. Cash flows in accordance with
generally accepted accounting principles consist of cash flows from
operating, investing and financing activities; cash flows from operating
activities reflect net income (including charges for interest and income
taxes, which are not reflected in EBITDA), adjusted for noncash charges or
income (which are reflected in EBITDA) and changes in operating assets and
liabilities (which are not reflected in EBITDA). Further, cash flows from
investing and financing activities are not included in EBITDA.
(c) Net income per Unit is computed by dividing the limited partners' interest
in net income by the weighted average number of Units outstanding.
SYNERGY
The financial information below as of June 30, 1996 and December 16, 1996,
and for the ten and one-half month period ended June 30, 1996 and the five and
one-half month period ended December 16, 1996, is derived from the audited
financial statements of Synergy. On August 15, 1995, Synergy Group Incorporated
("SGI"), the predecessor of Synergy, was acquired by Synergy in the Synergy
Acquisition. The five and one-half months ended December 16, 1996 covers the
period from the date of the Synergy Acquisition to December 16, 1996. The
financial information below as of September 30, 1996 is unaudited but, in the
opinion of management, includes all adjustments necessary for a fair
presentation of such information. The financial information below as of March
31, 1993, 1994 and 1995 is derived from the audited financial statements of SGI.
The comparability of financial matters is affected by the change in ownership of
SGI and the concurrent sale of approximately 25% of the operations acquired in
the Synergy Acquisition to Empire Energy (the "Empire Acquisition of Certain
Synergy Assets"). The Statement of Operations Data and the Operating Data for
the 4 1/2 months ended August 14, 1995 represent information for the period from
the end of the last fiscal year of SGI until the date of the Synergy
Acquisition, and are presented only to reflect operations of Synergy for a
complete five-year period. The retail propane gallons sold for all periods
presented is derived from the accounting records of Synergy and SGI and is
unaudited. The Selected Historical Financial and Operating Data below should be
read in conjunction with the financial statements of Synergy and SGI and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Synergy" included elsewhere in this Prospectus.
58
<PAGE>
<TABLE>
<CAPTION>
SYNERGY
SYNERGY GROUP INCORPORATED ---------------------------------
-------------------------------------------- 10 1/2 5 1/2
MONTHS MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED ENDED
------------------------------- JUNE 30, DEC. 16,
1993 1994 1995 1996 1996
--------- --------- --------- --------- ---------
4 1/2 3 MONTHS
MONTHS ENDED
ENDED SEPT. 30,
AUGUST 14, 1996
1995 -----------
-----------
(UNAUDITED)
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenue........... $ 132,855 $ 133,731 $ 123,562 $ 32,179 $ 96,062 $ 44,066 $ 17,883
Cost of product sold........ 66,891 63,498 59,909 15,387 46,187 23,322 8,940
Gross profit................ 65,964 70,233 63,653 16,792 49,875 20,744 8,943
Depreciation and
amortization............... 5,381 5,170 5,100 1,845 3,329 1,904 1,000
Operating income (loss)..... (809) 3,609 (2,291) (6,600) 14,520 3,769 30
Interest expense............ 13,342 13,126 11,086 3,223 5,584 3,311 1,665
Provision (benefit) for
income taxes............... 351 (400) (84) 31 3,675 298 (550)
Net income (loss)........... (15,274) (11,615) (13,417) (9,813) 5,261 160 (1,085)
BALANCE SHEET DATA (END OF PERIOD):
Current assets.............. $ 30,903 $ 31,149 $ 27,542 $ 21,501 $ 59,027 $ 21,271 $ 60,112
Total assets................ 112,153 111,914 103,830 96,500 166,762 174,140 170,042
Total debt.................. 123,168 122,626 92,717 89,541 79,524 84,585 81,151
Redeemable preferred stock.. -- -- -- -- 55,312 55,312 55,312
Stockholders' deficit....... (43,808) (55,424) (15,762) (25,576) (1,899) (5,617) (5,057)
OPERATING DATA:
EBITDA(a)................... $ 4,572 $ 8,779 $ 2,809 $ (4,815) $ 17,849 $ 5,673 $ 1,030
Capital expenditures(b)..... $ 2,504 $ 3,141 $ 3,737 $ 596 $ 8,708 $ 3,751 $ 1,571
Retail propane gallons
sold....................... 137,316 137,937 126,205 27,282 92,621 39,468 16,428
</TABLE>
- ------------------------------
(a) EBITDA consists of net income before depreciation, amortization, interest
and income taxes. EBITDA should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative to
cash flow, and it is not a measure of performance or financial condition
under generally accepted accounting principles, but it provides additional
information for evaluating the Partnership's ability to distribute the
Minimum Quarterly Distribution and to service and incur indebtedness. Cash
flows in accordance with generally accepted accounting principles consist of
cash flows from operating, investing and financing activities; cash flows
from operating activities reflect net income (including charges for interest
and income taxes, which are not reflected in EBITDA), adjusted for noncash
charges or income (which are reflected in EBITDA) and changes in operating
assets and liabilities (which are not reflected in EBITDA). Further, cash
flows from investing and financing activities are not included in EBITDA.
(b) Capital expenditures fall generally into three categories: (i) growth
capital expenditures, which include expenditures for the purchase of new
propane tanks and other equipment to facilitate expansion of the retail
customer base, (ii) maintenance capital expenditures, which include
expenditures for repair and replacement of property, plant and equipment,
and (iii) acquisition capital expenditures.
EMPIRE ENERGY
The financial information below as of June 30, 1994, 1995 and 1996 and
December 16, 1996, and for the years ended June 30, 1994, 1995 and 1996 and the
five and one-half month period ended December 16, 1996, is derived from the
audited financial statements of Empire Energy. The financial information below
as of September 30, 1996 is unaudited but, in the opinion of management,
includes all adjustments necessary for a fair presentation of such information.
Empire Energy was formed in June 1994 as a result of a tax-free split-off (the
"Split-Off") from Empire Gas Corporation. These financial statements give effect
to the Split-Off as if it occurred on July 1, 1992. As discussed elsewhere in
this Prospectus, on
59
<PAGE>
August 15, 1995, Empire Energy acquired from Synergy approximately 25% of the
operations of SGI. On August 1, 1996, the principal founding shareholder of
Empire Energy and certain other shareholders sold their interests in Empire
Energy to certain members of management (the "Management Buy-Out"). On October
7, 1996, Northwestern Growth purchased 100% of the Empire Energy common stock.
The results of operations and other data for the five and one-half months ended
December 16, 1996 are stated on a pro forma basis to combine the one month ended
prior to the Management Buy-Out, the two months ended prior to the Northwestern
Growth acquisition and the two and one-half months beginning with the
Northwestern Growth acquisition. The retail propane gallons sold for all periods
presented is derived from the accounting records of Empire Energy and is
unaudited. The Selected Historical Financial and Operating Data below should be
read in conjunction with the financial statements of Empire Energy and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Empire Energy" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
EMPIRE ENERGY
---------------------------------------------------------------------
5 1/2
MONTHS
FISCAL YEAR ENDED JUNE 30, ENDED
------------------------------------------- DEC. 16,
1993 1994 1995 1996 1996
--------- --------- --------- ---------- -----------
3 MONTHS
ENDED
SEPT. 30,
1996
-----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS - DATA:
Revenues................................ $ 61,057 $ 60,216 $ 56,689 $ 98,821 $ 43,201 $ 15,035
Cost of product sold.................... 29,157 28,029 26,848 50,080 23,310 7,910
Gross profit(a)......................... 31,900 32,187 29,841 48,741 19,891 7,125
Depreciation and amortization........... 4,257 4,652 4,322 5,875 2,929 1,586
Operating income (loss)................. 8,097 6,015 1,084 9,846 3,567 (1,469)
Interest expense........................ 366 118 39 2,598 3,621 1,704
Provision (benefit) for income taxes.... 2,900 2,400 600 3,550 32 (1,165)
Net income (loss)....................... 4,726 3,497 445 3,698 (86) (2,008)
BALANCE SHEET DATA (END OF PERIOD):
Current assets.......................... $ 8,751 $ 9,292 $ 9,615 $ 16,046 $ 27,491 $ 21,392
Total assets............................ 58,584 64,734 69,075 107,102 183,046 144,122
Current liabilities..................... 3,620 2,697 4,277 12,126 11,210 13,396
Long-term debt.......................... 2,258 135 1,701 25,442 111,853 98,882
Stockholders' equity.................... 42,614 46,111 46,535 50,233 15,922 1,588
OPERATING DATA:
EBITDA(a)............................... $ 12,354 $ 10,667 $ 5,406 $ 15,721 $ 6,496 $ 117
Capital expenditures(b)................. $ 2,446 $ 4,058 $ 8,365 $ 39,164 $ 2,823 $ 1,348
Retail propane gallons sold............. 66,456 67,286 62,630 104,036 40,847 15,773
</TABLE>
- ------------------------------
(a) EBITDA consists of net income before depreciation, amortization, interest
and income taxes. EBITDA should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative to
cash flow, and it is not a measure of performance or financial condition
under generally accepted accounting principles, but it provides additional
information for evaluating the Partnership's ability to distribute the
Minimum Quarterly Distribution and to service and incur indebtedness. Cash
flows in accordance with generally accepted accounting principles consist of
cash flows from operating, investing and financing activities; cash flows
from operating activities reflect net income (including charges for interest
and income taxes, which are not reflected in EBITDA), adjusted for noncash
charges or income (which are reflected in EBITDA) and changes in operating
assets and liabilities (which are not reflected in EBITDA). Further, cash
flows from investing and financing activities are not included in EBITDA.
(b) Capital expenditures fall generally into three categories: (i) growth
capital expenditures, which include expenditures for the purchase of new
propane tanks and other equipment to facilitate expansion of the retail
customer base, (ii) maintenance capital expenditures, which include
expenditures for repair and replacement of property, plant and equipment,
and (iii) acquisition capital expenditures.
60
<PAGE>
COAST
The financial information below as of July 31, 1994, 1995 and 1996 and as of
December 16, 1996 and for the years ended July 31, 1994, 1995 and 1996 and for
the four and one-half months ended December 16, 1996 is derived from the audited
financial statements of Coast. The financial information below as of October 31,
1996 is unaudited but, in the opinion of management, includes all adjustments
necessary for a fair presentation of such information. The financial information
as of July 31, 1993 and for the year ended July 31, 1993 is derived from the
accounting records of Coast and is unaudited. The Selected Historical Financial
and Operating Data below should be read in conjunction with the financial
statements of Coast and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Coast" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
COAST
-------------------------------------------------------------------------
4 1/2
MONTHS
FISCAL YEAR ENDED JULY 31, ENDED
----------------------------------------------- DEC. 16, 3 MONTHS
1994 1995 1996 1996 ENDED
---------- ---------- ---------- ----------- OCT. 31,
1996
-----------
(UNAUDITED)
1993
-----------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 229,860 $ 242,986 $ 266,842 $ 384,354 $ 185,460 $ 108,175
Cost of product sold............... 203,975 214,632 234,538 351,213 173,155 100,266
Gross profit....................... 25,885 28,354 32,304 33,141 12,305 7,909
Depreciation and amortization...... 3,184 3,282 3,785 4,216 1,604 1,067
Operating income (loss)............ 3,399 3,843 4,535 4,044 122 (110)
Interest expense................... 4,017 4,029 5,120 5,470 2,238 1,294
Benefit for income taxes........... (123) (28) (202) (473) (748) (491)
Net loss(a)........................ (495) (158) (889) (953) (1,368) (913)
BALANCE SHEET DATA (END OF PERIOD):
Current assets..................... $ 21,962 $ 29,150 $ 33,676 $ 35,297 $ 49,392 $ 35,071
Total assets....................... 82,626 93,559 101,545 106,179 119,066 105,574
Current liabilities................ 23,182 31,178 27,605 37,849 48,254 35,361
Long-term debt..................... 29,241 31,080 46,021 41,801 46,245 45,069
Mandatorily redeemable
securities....................... 8,325 8,874 7,781 8,559 8,675 8,675
Stockholders' equity............... 8,368 7,661 7,853 6,098 4,614 5,069
OPERATING DATA (UNAUDITED):
EBITDA(b).......................... $ 6,583 $ 7,125 $ 8,320 $ 8,260 $ 1,726 $ 957
Capital expenditure(c)............. $ 6,114 $ 4,451 $ 5,581 $ 6,060 $ 1,503 $ 594
Retail propane gallons sold........ 27,385 30,918 36,569 34,888 13,380 7,013
</TABLE>
- ------------------------
(a) Included in the net loss for the year ended July 31, 1995 is an
extraordinary charge to income of $506,000 for the early retirement of debt,
net of the income tax benefit.
(b) EBITDA consists of net income before depreciation, amortization, interest
and income taxes. EBITDA should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative to
cash flow, and it is not a measure of performance or financial condition
under generally accepted accounting principles, but it provides additional
information for evaluating the Partnership's ability to distribute the
Minimum Quarterly Distribution and to service and incur indebtedness. Cash
flows in accordance with generally accepted accounting principles consist of
cash flows from operating, investing and financing activities; cash flows
from operating activities reflect net income (including charges for interest
and income taxes, which are not reflected in EBITDA), adjusted for noncash
charges or income (which are reflected in EBITDA) and changes
61
<PAGE>
in operating assets and liabilities (which are not reflected in EBITDA).
Further, cash flows from investing and financing activities are not included
in EBITDA.
(c) Capital expenditures fall generally into three categories: (i) growth
capital expenditures, which include expenditures for the purchase of new
propane tanks and other equipment to facilitate expansion of the retail
customer base, (ii) maintenance capital expenditures, which include
expenditures for repair and replacement of property, plant and equipment,
and (iii) acquisition capital expenditures.
62
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE HISTORICAL FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE PARTNERSHIP AND ITS PRINCIPAL PREDECESSOR ENTITIES,
SYNERGY, EMPIRE ENERGY AND COAST, SHOULD BE READ IN CONJUNCTION WITH THE
SELECTED PRO FORMA FINANCIAL AND OPERATING DATA AND NOTES THERETO, THE SELECTED
HISTORICAL FINANCIAL AND OPERATING DATA AND NOTES THERETO AND THE HISTORICAL
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
GENERAL
The Partnership is a Delaware limited partnership formed to own and operate
the propane business and assets of Synergy, Empire Energy and Coast. The
Partnership believes that it is the fifth largest retail marketer of propane in
the United States, serving more than 380,000 residential, commercial, industrial
and agricultural customers from 298 customer service centers in 27 states. On a
combined basis, the Partnership's retail propane sales volume was approximately
230 million, 235 million and 214 million gallons during fiscal 1995, 1996 and
1997, respectively. On a combined basis in fiscal 1996 and 1997, the Partnership
also sold approximately 328 and 330 million gallons of natural gas liquids to
wholesale customers.
Because a substantial portion of the Partnership's propane is used in the
weather-sensitive residential markets, the temperatures realized in the
Partnership's areas of operations, particularly during the six-month peak
heating season, have a significant effect on the financial performance of the
Partnership. In any given area, warmer-than-normal temperatures will tend to
result in reduced propane use, while sustained colder-than-normal temperatures
will tend to result in greater propane use. Therefore, information on normal
temperatures is used by the Partnership in understanding how historical results
of operations are affected by temperatures that are colder or warmer than normal
and in preparing forecasts of future operations, which are based on the
assumption that normal weather will prevail in each of the Partnership's
regions.
Gross profit margins are not only affected by weather patterns but also by
changes in customer mix. For example, sales to residential customers ordinarily
generate higher margins than sales to other customer groups, such as commercial
or agricultural customers. In addition, gross profit margins vary by geographic
region. Accordingly, profit margins could vary significantly from year to year
in a period of identical sales volumes.
THE PARTNERSHIP
ANALYSIS OF RESULTS OF OPERATIONS
The following discussion compares the results of operations and other data
of the Partnership for the three months ended September 30, 1997 to the pro
forma three months ended September 30, 1996 and for the pro forma year ended
June 30, 1997 to the pro forma year ended June 30, 1996. Note all pro forma
information has been prepared assuming that the Partnership had been in
existence at the beginning of the periods presented. All references to periods
prior to December 17, 1996 (the date the Partnership commenced operations) refer
to pro forma amounts determined by combining the financial information of the
predecessor companies.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1997 1996
THOUSANDS OF DOLLARS (UNAUDITED) (ACTUAL) (PRO FORMA)
- ---------------------------------------------------------------------------------------- ---------- ------------
<S> <C> <C>
Revenues................................................................................ $ 152,157 $ 141,756
Cost of sales........................................................................... 127,855 117,519
---------- ------------
Gross profit............................................................................ $ 24,302 $ 24,237
---------- ------------
---------- ------------
</TABLE>
63
<PAGE>
VOLUME. During the three months ended September 30, 1997, the Partnership
sold 41.3 million retail propane gallons, an increase of 2.8 million gallons or
7.3% from the 38.5 million retail propane gallons sold during the pro forma
three months ended September 30, 1996. Wholesale volumes were 140.9 million
gallons and 109.1 million gallons, respectively, for the quarters ended
September 30, 1997 and 1996, which represents an increase of 31.8 million
gallons or 29.2%. A majority of the increase in retail volume-approximately 79%,
or 2.2 million gallons- is attributable to the addition of retail customer
service centers obtained through the acquisition of new propane businesses since
December 17, 1996.
The average heating degree days, in the markets served by the Partnership,
for the first fiscal quarter of 1998 was approximately 36% warmer than normal
and approximately 25% warmer than last year, respectively. These milder
temperatures, while not in the peak of the heating season, adversely affected
the Partnership's residential sales volume. The first fiscal quarter
historically accounts for approximately 17% and 7% of the Partnership's retail
sales volume and EBITDA, respectively.
REVENUES. Revenues increased by $10.4 million or 7.3% to $152.2 million for
the three months ended September 30, 1997, as compared to $141.8 million for the
pro forma three months ended September 30, 1996. This increase was attributable
to an increase in wholesale revenues of $10.5 million or 7.4% to $110.3 million
for the three months ended September 30, 1997, as compared to $99.8 million for
the pro forma three months ended September 30, 1996. This increase was due
primarily to the increase in wholesale volume mentioned above. The revenues for
the retail business also increased by $.4 million or 9.6% to $41.7 million for
the three months ended September 30, 1997, as compared to $41.3 million for the
pro forma three months ended September 30, 1996. This increase was a result of
the increase in volume described above offset by a decrease in the average sales
price per gallon of propane.
COST OF PRODUCT SOLD. Cost of product sold increased by $10.4 million or
8.9% to $127.9 million for the three months ended September 30, 1997, as
compared to $117.5 million for the pro forma three months ended September 30,
1996. The increase in cost of product sold was primarily due to the increased
sales volume described above. As a percentage of revenues, cost of product sold
increased to 84.0% for the three months ended September 30, 1997, as compared to
82.9% for the pro forma three months ended September 30, 1996.
GROSS PROFIT. Gross profit of $24.3 million for the three months ended
September 30, 1997, is consistent with the gross profit of $24.2 million for the
pro forma three months ended September 30, 1996. Retail per gallon margins for
the three months ended September 30, 1997 were slightly lower than for the pro
forma period. This is partially attributable to the fact that the pro forma
three months ended September 30, 1996, includes the results of operations for
Coast from August 1, 1996 to October 31, 1996. More heating degree days were
recorded for October 1996 than for July 1997 in the markets served by Coast,
causing the pro forma per gallon margins to be higher. As a percentage of
revenues, gross profit decreased to 16.0% for the three months ended September
30, 1997, as compared to 17.1% for the pro forma three months ended September
30, 1996. Gross profit from propane businesses acquired since December 17, 1996
was $.8 million for the three months ended September 30, 1997.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and
administrative expenses increased by $1.7 million or 8.1% to $22.6 million for
the three months ended September 30, 1997, as compared to the pro forma three
months ended September 30, 1996. Approximately $1.2 million, or 71%, of this
increase was attributable to increases in salaries and other operating expenses
resulting from the acquisitions of new businesses and the correspondingly
increased sales volumes discussed above. As a percentage of revenues, operating,
general and administrative expenses remained consistent at 14.8% for the three
months ended September 30, 1997, as compared to 14.7% for the pro forma three
months ended September 30, 1996.
The Partnership utilizes software and related technologies throughout its
businesses that will be affected by the date change in the year 2000. An
internal study is currently under way to determine the full
64
<PAGE>
scope and related costs to insure that the Partnership's systems continue to
meet its internal needs and those of its customers. The Partnership will begin
to incur expenses in 1998 to resolve this issue. These expenses may continue
through the year 1999.
<TABLE>
<CAPTION>
PRO FORMA FISCAL YEARS ENDED JUNE 30,
THOUSANDS OF DOLLARS (UNAUDITED) 1997 1996
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Revenues.................................................................................. $ 664,197 $ 595,790
Cost of sales............................................................................. 534,892 455,984
---------- ----------
Gross profit.............................................................................. $ 129,305 $ 139,806
---------- ----------
---------- ----------
</TABLE>
VOLUME. During the year ended June 30, 1997, the Partnership sold 213.7
million retail propane gallons, a decrease of 21.3 million gallons or 9.1% from
the 235.0 million retail propane gallons sold during the year ended June 30,
1996. The decrease in retail volume was primarily attributable to the decline in
volume of sales in the three months ended March 31, 1997, compared to the three
months ended March 31, 1996. The decline in retail volume was primarily
attributed to national temperatures that averaged 14% warmer than last year and
13% warmer in the markets served by the Partnership. Wholesale sales volumes
were 330.1 million gallons and 328.3 million gallons for the years ended June
30, 1997 and 1996, respectively.
REVENUES. Revenues increased by $68.4 million or 11.5% to $664.2 million
for the year ended June 30, 1997, as compared to $595.8 million for the year
ended June 30, 1996. This increase was attributable to an increase in wholesale
revenues of $84.5 million or 26.7% to $400.7 million for the year ended June 30,
1997, as compared to $316.2 million for the year ended June 30, 1996, due
primarily to higher product costs and sales prices. Revenues for the retail
business declined by $16.1 million or 5.8% to $263.5 million for the year ended
June 30, 1997, as compared to $279.6 million for the year ended June 30, 1996.
This decrease was due to the decline in retail sales volume described above.
COST OF PRODUCT SOLD. Cost of product sold increased by $78.9 million, or
17.3% to $534.9 million for the year ended June 30, 1997, as compared to $456.0
million for the year ended June 30, 1996. The increase in cost of product sold
was primarily due to the higher product costs described above. As a percentage
of revenues, cost of product sold increased to 80.5% for the year ended June 30,
1997, as compared to 76.5% for the year ended June 30, 1996.
GROSS PROFIT. Gross profit decreased $10.5 million or 7.5% to $129.3
million for the year ended June 30, 1997, as compared to $139.8 million for the
year ended June 30, 1996, primarily due to the reduction in retail sales volume
and higher product costs as discussed above.
RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 128, "Earnings per Share"
("Statement No. 128"), issued in February 1997 and effective for fiscal years
ending after December 15, 1997, establishes and simplifies standards for
computing and presenting earnings per share. Implementation of Statement No. 128
will not have a material impact on the Partnership's computation or presentation
of earnings per unit, as the Partnership's common stock equivalents have had no
material effect on earnings per unit amounts.
Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income", issued in June 1997 and effective for fiscal years
beginning after December 15, 1997, establishes standards for reporting and
display of the total of net income and the components of all other nonowner
changes in partners' capital, or comprehensive income, either below net income
(loss) or within the statement of partners' capital. The Partnership has had no
significant items of other comprehensive income.
65
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS. Cash used in operating activities during the three-month period
ended September 30, 1997 was $4.0 million. Cash flow from operations included a
net loss of $7.7 million and non-cash charges of $4.6 million for depreciation
and amortization expense. The impact of working capital changes decreased cash
flow by approximately $.9 million.
Cash used in investment activities for the three-month period ended
September 30, 1997 totaled $6.0 million, which was principally used for
purchases of property and equipment. Cash provided by financing activities was
$10.2 million for the three months ended September 30, 1997, which principally
reflects additional borrowings on the working capital facility, net of a
distribution to Unitholders of $9.4 million.
Cash provided by operating activities during the period from December 17,
1996 to June 30, 1997, was $11.2 million. Cash flow from operations included net
income of $5.8 million and noncash charges of $8.5 million for the period,
comprised principally of depreciation and amortization expense. The impact of
working capital changes decreased cash flow by approximately $3.1 million.
Cash used in investment activities for the period from December 17, 1996 to
June 30, 1997, totaled $3.8 million, which was principally used for acquisitions
and purchases of property and equipment. Cash used in financing activities was
$18 million for the period from December 17, 1996, to June 30, 1997. This amount
reflects net repayments on the Working Capital Facility and the payment of
partnership distributions.
On December 17, 1996, the Partnership completed its initial public offering,
proceeds from which amounted to $191.8 million. Concurrently with the IPO, the
Operating Partnership issued $220.0 million of Senior Notes and borrowed $12.8
million on its Working Capital Facility. Also on the IPO date, the Operating
Partnership received cash of $22.4 million from the Predecessor Companies.
Proceeds from the IPO, Senior Notes and the Working Capital Facility were used
to repay liabilities assumed by the Operating Partnership ($337.6 million), to
make distributions to the Partnership's Special General Partner to redeem its
preferred stock ($61.2 million), to provide net worth to the Special General
Partner ($15.5 million) and to pay expenses of the partnership organization and
formation ($13.7 million).
Concurrently with consummation of the IPO, the Partnership and the Operating
Partnership issued the entire general partner interest and 6,597,619
Subordinated Units to the General partners in exchange for their contribution to
the Operating Partnership of all of the assets of the Combined Operations, and
the Operating Partnership assumed substantially all the liabilities of the
Combined Operations. The general partner interests and the Subordinated Units
were valued at the approximate net book value of the assets contributed to the
Operating Partnership, which did not exceed the fair market value of such
assets, net of liabilities assumed.
FINANCING AND SOURCES OF LIQUIDITY. On December 17, 1996, the Operating
Partnership issued $220.0 million of Senior Notes with a fixed annual interest
rate of 7.53% pursuant to note purchase agreements with various investors
(collectively, the "Note Agreement"). The Senior Notes mature on December 30,
2010, and require semi-annual interest payments commencing December 30, 1996.
The Note Agreement requires that the principal be paid in equal annual payments
of $27.5 million starting December 30, 2003. Also on the same date, the
Operating Partnership entered into a bank credit agreement consisting of a
working capital facility (the "Working Capital Facility") and an acquisition
facility (the "Acquisition Facility"). The Working Capital Facility provides for
revolving borrowings up to $50.0 million (including a $30.0 million sublimit for
letters of credit through March 31, 1997, and $20.0 million thereafter), and
matures on December 31, 1999. The Bank Credit Agreement provides that there must
be no amount outstanding under the Working Capital Facility (excluding letters
of credit) in excess of $10.0 million for at least 30 consecutive days during
each fiscal year. At June 30, 1997, $4.6 million was outstanding under the
Working Capital Facility. Issued outstanding letters of credit totaled
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$7.6 million at June 30, 1997. The Acquisition Facility provides the Operating
Partnership with the ability to borrow up to $75.0 million to finance propane
business acquisitions. The Acquisition Facility operates as a revolving facility
through December 31, 1999, at which time any loans then outstanding may be
converted to term loans and will amortize quarterly for a period of four years
thereafter. No amounts were outstanding at June 30, 1997. Loans under the Bank
Credit Agreement bear interest at variable base or Eurodollar rates. At June 30,
1997, the applicable base and Eurodollar rates were 8.625% and 5.938%,
respectively. In addition, an annual fee is payable quarterly by the Operating
Partnership (whether or not borrowings occur) ranging from .125% to .325%
depending upon the ratio referenced above.
The Operating Partnership's obligations under the Note and Bank Credit
Agreements are secured by a security interest in the Operating Partnership's
inventory, accounts receivable and certain customer storage tanks. The Note and
Bank Credit Agreements contain various terms and covenants including financial
ratio covenants with respect to debt and interest coverage and limitations,
among others, on the ability of the Operating Partnership and its subsidiary to
incur additional indebtedness, create liens, make investments and loans, enter
into mergers, consolidations or sales of all or substantially all assets and
make asset sales. Generally, so long as no default exists or would result, the
Partnership is permitted to make distributions during each fiscal quarter in an
amount not in excess of Available Cash with respect to the immediately preceding
quarter. The Operating Partnership was in compliance with all terms and
covenants at September 30, 1997.
INFLATION AND ECONOMIC TRENDS. Although its operations are affected by
general economic trends, the Partnership does not believe that inflation had had
a material effect on the results of its operations during the past three years.
SYNERGY
The following discussion compares the results of operations and other data
for Synergy for the ten and one-half month period ended June 30, 1996 to the
fiscal year ended March 31, 1995. As discussed below, the comparability of
financial matters for the periods is affected by the Synergy Acquisition and the
concurrent Empire Acquisition of Certain Synergy Assets.
TEN AND ONE-HALF MONTHS ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED
MARCH 31, 1995
VOLUME. During fiscal 1996, Synergy sold 92.6 million retail propane
gallons, a decrease of 33.6 million gallons, or 26.6%, from the 126.2 million
retail propane gallons sold during fiscal 1995. The decrease in volume was
primarily attributable to the Empire Acquisition of Certain Synergy Assets,
partially offset by the colder weather during fiscal 1996 in Synergy's marketing
areas. The weather in Synergy's marketing areas was approximately 3.5% colder
than normal for such areas during fiscal 1996, and was warmer than normal for
such areas during fiscal 1995.
REVENUES. Revenues declined by $27.5 million, or 22.2%, to $96.1 million
for fiscal 1996, as compared to $123.6 million for fiscal 1995. This decrease
was attributable almost entirely to the reduced sales volume in fiscal 1996 as a
result of the Empire Acquisition of Certain Synergy Assets, partially offset by
the colder than normal weather during fiscal 1996.
COST OF SALES. Cost of product sold decreased by $13.7 million, or 22.9%,
to $46.2 million for fiscal 1996, as compared to $59.9 million for fiscal 1995.
The decrease was attributable to the reduced sales volume in fiscal 1996
resulting from the Empire Acquisition of Certain Synergy Assets and was
partially offset by the colder than normal weather during fiscal 1996. As a
percentage of revenues, cost of product sold decreased slightly to 48.1% for
fiscal 1996, as compared to 48.5% for fiscal 1995.
GROSS PROFIT. Gross profit decreased by $13.8 million, or 21.7%, to $49.9
million for fiscal 1996, as compared to $63.7 million for fiscal 1995. This
decrease was due primarily to the Empire Acquisition of Certain Synergy Assets.
Gross profit per retail gallon (which includes non-propane related sales)
increased
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by $.033 per gallon, or 6.5%, to $.538 per gallon for fiscal 1996, as compared
to $.505 per gallon for fiscal 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(which include salaries and commissions and related-party corporate
administration and management fees) decreased by $28.8 million, or 47.4%, to
$32.0 million for fiscal 1996, as compared to $60.8 million for fiscal 1995, due
to the Empire Acquisition of Certain Synergy Assets and the reduction of
employee positions, corporate overhead and related party salaries and expenses.
As a percentage of revenues, general and administrative expenses decreased to
33.3% for fiscal 1996, as compared to 49.2% for fiscal 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
$1.8 million, or 35.3%, to $3.3 million for fiscal 1996, as compared to $5.1
million for fiscal 1995, due to the Empire Acquisition of Certain Synergy
Assets, partially offset by an increase in depreciation and amortization due to
the purchase accounting adjustment made in connection with the Synergy
Acquisition.
OPERATING INCOME. Operating income increased $16.8 million to $14.5 million
for fiscal 1996, as compared to a loss of $2.3 million for fiscal 1995. This
increase was primarily due to the significant reduction in general and
administrative expenses, partially offset by the effect of the Empire
Acquisition of Certain Synergy Assets. As a percentage of revenues, operating
income increased to 15.1% for fiscal 1996, as compared to a loss for fiscal
1995.
INTEREST EXPENSE. Interest expense decreased $5.5 million, or 49.6%, to
$5.6 million for fiscal 1996, as compared to $11.1 million for fiscal 1995,
primarily due to the recapitalization of Synergy in connection with the Synergy
Acquisition.
NET INCOME. Synergy had net income of $5.3 million for fiscal 1996, as
compared to a net loss of $13.4 million for fiscal 1995. The increase was
primarily the result of the reduction in general and administrative expenses and
interest expense, partially offset by the effect of the Empire Acquisition of
Certain Synergy Assets.
EBITDA. EBITDA increased $15.0 million, or 537.7%, to $17.8 million in
fiscal 1996, as compared to $2.8 million for fiscal 1995. This increase was
primarily due to the reduction in general and administrative expenses and colder
than normal weather, and was partially offset by the effect of the Empire
Acquisition of Certain Synergy Assets. As a percentage of revenues, EBITDA
increased to 18.6% for fiscal 1996, as compared to 2.3% for fiscal 1995. EBITDA
should not be considered as an alternative to net income (as an indicator of
operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations), but provides additional
information for evaluating the Partnership's ability to distribute the Minimum
Quarterly Distribution.
EMPIRE ENERGY
The following discussion compares the results of operations and other data
for Empire Energy for the fiscal year ended June 30, 1996 to the fiscal year
ended June 30, 1995. As discussed below, the comparability of financial matters
is affected by the Empire Acquisition of Certain Synergy Assets, the operations
of which are included since the actual date of acquisition in August 1995.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
VOLUME. During fiscal 1996, Empire Energy sold 104.0 million retail propane
gallons, an increase of 41.4 million gallons, or 66.1%, from the 62.6 million
retail propane gallons sold during fiscal 1995. The increase in volume was
primarily attributable to the Empire Acquisition of Certain Synergy Assets and
was also attributable to colder weather during fiscal 1996 in Empire Energy's
previously existing marketing areas.
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REVENUES. Revenues increased by $42.1 million, or 74.3%, to $98.8 million
for fiscal 1996, as compared to $56.7 million for fiscal 1995. This increase was
attributable almost entirely to the Empire Acquisition of Certain Synergy Assets
and the colder weather in Empire Energy's marketing areas in fiscal 1996, both
of which had the effect of increasing sales.
COST OF PRODUCT SOLD. Cost of product sold increased by $23.3 million, or
86.9%, to $50.1 million for fiscal 1996, as compared to $26.8 million for fiscal
1995. The increase was attributable to increased volumes sold as a result of the
Empire Acquisition of Certain Synergy Assets and the colder weather. As a
percentage of revenues, cost of products sold increased to 50.7% for fiscal
1996, as compared to 47.3% for fiscal 1995.
GROSS PROFIT. Gross profit increased by $18.9 million, or 63.3%, to $48.7
million for fiscal 1996, as compared to $29.8 million for fiscal 1995. This
increase was primarily due to the increase in sales volume resulting from the
Empire Acquisition of Certain Synergy Assets and colder than normal weather.
Gross profit per retail gallon (which includes non-propane related sales)
decreased by $.007, or 1.5%, to $.469 per gallon for fiscal 1996, as compared to
$.476 per gallon for fiscal 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(which include provision for doubtful accounts) increased by $8.6 million, or
35.1%, to $33.0 million for fiscal 1996, as compared to $24.4 million in fiscal
1995, as a result of the Empire Acquisition of Certain Synergy Assets and the
increase in volumes sold due to the colder weather. As a percentage of revenues,
general and administrative expenses decreased to 33.4% for fiscal 1996, as
compared to 43.1% for fiscal 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$1.6 million, or 37.2%, to $5.9 million for fiscal 1996, as compared to $4.3
million for fiscal 1995, primarily due to the acquisition of assets in
connection with the Empire Acquisition of Certain Synergy Assets.
OPERATING INCOME. Operating income increased by $8.7 million, or 790.9%, to
$9.8 million for fiscal 1996, compared to $1.1 million for fiscal 1995. This
increase was primarily the result of the Empire Acquisition of Certain Synergy
Assets, which resulted in significant operating efficiencies in Empire Energy's
existing business, and an increase in propane sales volumes resulting from the
colder winter in fiscal 1996. As a percentage of revenues, operating income
increased to 9.9% for fiscal 1996, as compared to 1.9% for fiscal 1995.
INTEREST EXPENSE. Interest expense increased to $2.6 million for fiscal
1996, as compared to $39,000 for fiscal 1995, mainly due to an increase in
borrowings as a result of the Empire Acquisition of Certain Synergy Assets.
NET INCOME. Empire Energy had net income of $3.7 million for fiscal 1996,
as compared to net income of $.4 million for fiscal 1995. The increase was
primarily the result of an increase in propane sales volume resulting from the
Empire Acquisition of Certain Synergy Assets and colder weather in fiscal 1996.
EBITDA. EBITDA increased $10.3 million, or 190.8%, to $15.7 million in
fiscal 1996, as compared to $5.4 million for fiscal 1995. This increase was due
to the Empire Acquisition of Certain Synergy Assets, which resulted in increased
volumes and significant operating efficiencies, and the increase in volumes sold
due to the colder weather conditions. As a percentage of revenues, EBITDA
increased to 15.9% for fiscal 1996, as compared to 9.5% for fiscal 1995. EBITDA
should not be considered as an alternative to net income (as an indicator of
operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations), but provides additional
information for evaluating the Partnership's ability to distribute the Minimum
Quarterly Distribution.
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COAST
The following discussion compares the results of operations and other data
for Coast for the fiscal year ended July 31, 1996 to the fiscal year ended July
31, 1995.
FISCAL YEAR ENDED JULY 31, 1996 COMPARED TO FISCAL YEAR ENDED JULY 31, 1995
VOLUME. During fiscal 1996, Coast sold 328.4 million wholesale propane
gallons of natural gas liquids, an increase of 27.0 million gallons, or 9.0%,
from the 301.4 million gallons sold in fiscal 1995. The increase in volume was
primarily attributable to the impact of colder weather in the wholesale markets
served by Coast in the eastern United States. During fiscal 1996, Coast sold
34.9 million retail propane gallons, a decrease of 1.7 million gallons, or 4.6%,
from the 36.6 million retail propane gallons sold during fiscal 1995. The
decrease in retail volume was primarily attributable to warmer weather during
fiscal 1996 in Coast's retail marketing areas. The weather in Coast's areas of
retail operations during fiscal 1996 was approximately 16% warmer than normal
for such areas. The weather in Coast's areas of retail operations during fiscal
1995 was approximately 2% colder than normal for such areas.
REVENUES. Revenues increased by $117.5 million, or 44.0%, to $384.4 million
for fiscal 1996, as compared to $266.8 million for fiscal 1995. This increase
was primarily attributable to increased wholesale sales from Coast's natural gas
marketing efforts that resulted in an increase of $82.0 million in fiscal 1996.
Retail operating revenues decreased by $.1 million, or .3%, to $38.8 million for
fiscal 1996, as compared to $38.9 million for fiscal 1995. This decrease was
attributable almost entirely to the warmer than normal weather in Coast's
marketing areas in fiscal 1996, which adversely impacted both sales volumes and
revenues.
COST OF PRODUCT SOLD. Cost of product sold increased by $116.7 million, or
49.7%, to $351.2 million for fiscal 1996, as compared to $234.5 million for
fiscal 1995. The increase in cost of product sold was primarily related to the
increase in wholesale sales of natural gas. Cost of retail product sold,
primarily the cost of propane, was constant in fiscal 1996 and 1995 at $17.4
million. The cost per gallon of propane for the retail business increased from
$.443 in fiscal 1995 to $.461 in fiscal 1996, reflecting higher national demand
resulting from colder than normal weather in many regions. As a percentage of
revenues, cost of product sold increased to 91.4% for fiscal 1996, as compared
to 87.9% for fiscal 1995.
GROSS PROFIT. Gross profit increased by $.8 million, or 2.6%, to $33.1
million in fiscal 1996, as compared to $32.3 million for fiscal 1995. This
increase was primarily attributable to increased margins in Coast's wholesale
businesses, due to a colder heating season in the eastern United States, where a
majority of Coast's wholesale sales are currently made. Retail gross profits
decreased by $.2 million, or .8%, to $21.3 million for fiscal 1996, as compared
to $21.5 million for fiscal 1995. This decrease was due primarily to lower sales
volumes as a result of warmer than normal weather in Coast's retail marketing
areas. The decrease in gross profits attributable to the decrease in gallons
sold was approximately $.9 million. Gross profit per retail gallon increased by
$.022, or 3.7%, to $.610 per gallon for fiscal 1996 from $.588 per gallon for
fiscal 1995, due to increased average propane selling prices.
OPERATING EXPENSES. Operating expenses increased $.8 million, or 4.0%, to
$21.0 million in fiscal 1996, as compared to $20.2 million in fiscal 1995. Most
of this increase was related to increases in Coast's retail operations.
Operating expense for the retail business segment increased by $.3 million, or
2.1%, to $12.1 million in fiscal 1996, as compared to $11.9 million in fiscal
1995. The majority of this increase was attributable to acquisitions and
start-up operations in fiscal 1996 that experienced higher operating costs that,
due to warmer weather, were not offset by added sales volumes. As a percentage
of revenues, operating expenses decreased to 5.5% for fiscal 1996, as compared
to 7.6% for fiscal 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(which include corporate administration expenses) increased by $.1 million, or
2.4%, to $3.8 million for fiscal 1996, as compared to $3.7 million for fiscal
1995. The majority of this increase was attributable to normal salary increases
and
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the addition of one staff position to assist with future acquisitions. As a
percentage of revenues, general and administrative expenses decreased to 1.0%
for fiscal 1996, as compared to 1.4% for fiscal 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$.4 million, or 11.4%, to $4.2 million for fiscal 1996, as compared to $3.8
million for fiscal 1995. This increase was primarily attributable to the
acquisition of North Star Fuel and Propane, Inc. in fiscal 1996 and the purchase
of retail customer tanks.
OPERATING INCOME. Operating income decreased by $.5 million, or 10.8%, to
$4.0 million for fiscal 1996, as compared to $4.5 million for fiscal 1995. This
decrease was primarily due to the decrease in retail gallons sold because of
warmer than normal weather in most of Coast's retail marketing areas. As a
percentage of revenues, operating income decreased to 1.1% for fiscal 1996, as
compared to 1.7% for fiscal 1995.
INTEREST EXPENSE. Interest expense increased by $.4 million, or 6.8%, to
$5.5 million in fiscal 1996, as compared to $5.1 million for fiscal 1995. This
increase was primarily due to an increase in borrowings under Coast's
acquisition revolving line of credit in fiscal 1996 related to the purchase of
North Star Fuel and Propane, Inc.
NET LOSS. Coast had a net loss of $1.0 million for fiscal 1996, as compared
to a net loss of $.4 million for fiscal 1995 before an extraordinary charge to
income for the early retirement of debt (net of income taxes). The $.6 million
greater loss in fiscal 1996 reflects the impact of the significantly warmer than
normal weather and higher interest expenses.
EBITDA. Total EBITDA decreased by $.1 million, or .7%, to 8.2 million for
fiscal 1996, as compared to $8.3 million for fiscal 1995. Coast's retail EBITDA
decreased by $.4 million, or 4.4%, to $9.2 million for fiscal 1996, as compared
to $9.6 million for fiscal 1995. The warmer than normal weather in Coast's
retail marketing areas in fiscal 1996 more than offset the positive impact of
higher earnings from recent acquisitions and internal customer growth. As a
percentage of revenues, total EBITDA decreased to 2.2% for fiscal 1996, as
compared to 3.1% for fiscal 1995. EBITDA should not be considered as an
alternative to net income (as an indicator of operating performance) or as an
alternative to cash flow (as a measure of liquidity or ability to service debt
obligations), but provides additional information for evaluating the
Partnership's ability to distribute the Minimum Quarterly Distribution.
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BUSINESS AND PROPERTIES
GENERAL
The Partnership believes that it is the fifth largest retail marketer of
propane in the United States in terms of volume, serving more than 380,000
residential, commercial, industrial and agricultural customers from 298 customer
service centers in 27 states as of December 31, 1997. The Partnership's
operations are concentrated in the east coast, south-central and west coast
regions of the United States. For the fiscal year ended June 30, 1997, the
Partnership had combined retail propane sales of approximately 214 million
gallons and pro forma EBITDA of approximately $41.0 million. The combined sales
and pro forma EBITDA do not reflect (i) the savings of certain non-recurring
expenses incurred by Empire Energy, (ii) propane acquisition and logistics costs
savings and (iii) insurance savings that the Partnership believes are achievable
as a result of the Transactions. Such amounts also do not reflect sales and
EBITDA of businesses acquired by the Partnership in late June 1997.
The Partnership was formed in 1996 to acquire, own and operate the propane
businesses and assets of Synergy and Empire Energy (formerly subsidiaries of
Northwestern Growth) and Coast. Northwestern Growth is a wholly owned subsidiary
of NPS, an NYSE-listed energy distribution company. Northwestern Growth was
formed in 1994 to pursue and manage nonutility investments and development
activities for NPS, with a primary focus on growth opportunities in the energy,
energy equipment and energy services industries. To capitalize on the growth and
consolidation opportunities in the propane distribution market, in August 1995,
Northwestern Growth acquired the predecessor of Synergy, then the sixth largest
retail marketer of propane in the United States and, in October 1996, it
acquired Empire Energy, then the eighth largest retail marketer of propane in
the United States. Immediately prior to the IPO, Northwestern Growth acquired
Coast, then the 18th largest retail marketer of propane in the United States.
The Partnership commenced operation on December 17, 1996, concurrently with the
closing of the IPO when substantially all of the assets and liabilities of
Synergy, Empire Energy and Coast were contributed to the Operating Partnership.
Information in this Prospectus related to the pro forma year ended June 30,
1997, reflects a full year of activity for the three predecessor companies, as
if the Partnership had been in operation on July 1, 1996.
The Partnership believes that it is well positioned to compete successfully
in the propane business for the following reasons: (i) management's experience
in generating profitable growth at its customer service centers by fostering an
entrepreneurial approach by local managers; (ii) the Partnership's large
national and geographically diversified operations, which the Partnership
believes reduces the effects of adverse weather conditions in any one region on
EBITDA and allow it to achieve economies of scale; (iii) the significant
proportion of the Partnership's retail sales that is made to residential
customers, which are generally more profitable than sales to other customers;
(iv) management's experience in identifying, evaluating and completing both
small and large acquisitions; (v) the Partnership's substantial national
wholesale supply and logistics business, which provides it with a national
presence and a relatively secure source of propane to support the service goals
of its customer service centers; (vi) the Partnership's centralized
administrative systems that enable local managers to focus on customer service
and growth; and (vii) the Partnership's relationship with Northwestern Growth,
which has proven experience in the energy distribution business and in the
acquisition and growth of propane businesses. Although the Partnership believes
it has a number of competitive strengths, the propane industry is highly
competitive and includes a number of large national firms and regional firms and
several thousand small independent firms. Certain competitors may have greater
financial resources or lower operating costs than the Partnership. Further,
variations in the weather or the economy in one or more regions in which the
Partnership operates can significantly affect the total volume of propane sold
by the Partnership and, consequently, the Partnership's results of operations.
The Partnership is principally engaged in (i) the retail distribution of
propane for residential, commercial, industrial, agricultural and other retail
uses, (ii) the wholesale marketing and distribution of
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propane, natural gas liquids and crude oil to the retail propane industry, the
chemical and petrochemical industries and other commercial and agricultural
markets, (iii) the repair and maintenance of propane heating systems and
appliances and (iv) the sale of propane-related supplies, appliances and other
equipment.
The retail propane business is a "margin-based" business in which gross
profits depend on the excess of sales prices over propane supply costs. Sales of
propane to residential and commercial customers, which account for the vast
majority of the Partnership's revenue, have provided a relatively stable source
of revenue for the Partnership. Based on pro forma fiscal 1997 retail propane
gallons sold, the customer base consisted of 55% residential, 26% commercial and
industrial and 19% agricultural and other customers. Sales to residential
customers have generally provided higher gross margins than other retail propane
sales. While commercial propane sales are generally less profitable than
residential retail sales, the Partnership has traditionally relied on this
customer base to provide a steady, noncyclical source of revenues. No single
customer accounted for more than 1% of total revenues.
The Partnership's wholesale operations engage in the marketing of propane to
independent dealers, major interstate marketers and the chemical and
petrochemical industries. The Partnership participates to a lesser extent in the
marketing of other natural gas liquids, the processing and marketing of natural
gas and the gathering of crude oil. The Partnership either owns or has
contractual rights to use transshipment terminals, rail cars, long-haul tanker
trucks, pipelines and storage capacity. The Partnership believes that its
wholesale marketing and processing activities position it to achieve product
cost advantages and to avoid shortages during periods of tight supply to an
extent not generally available to other retail propane distributors.
BUSINESS STRATEGY
The principal elements of the Partnership's business strategy are to (i)
extend and refine its existing service orientation, (ii) continue to pursue
balanced growth through small and large acquisitions, internal growth at its
existing customer service centers and start-ups of new customer service centers,
(iii) enhance the profitability of its existing operations by integrating the
Combined Operations, implementing entrepreneurially oriented local manager
incentive programs, where appropriate, and continuing to centralize
administrative systems and (iv) capitalize on the Partnership's national
wholesale supply and logistics business.
FOCUS ON CUSTOMER SERVICE
The Partnership seeks to be recognized in the marketplace as the most
customer service-oriented propane supplier. Although propane is a commodity
product, the Partnership believes that it is able to distinguish itself from the
competition by providing reliable and timely delivery of propane at competitive
prices. The Partnership believes that establishing and clearly communicating
standards of service and performance expectations at all levels of the
Partnership, and rewarding its employees accordingly, will enable the
Partnership to achieve its service goals. The Partnership has incentive programs
at certain customer service centers targeted to fostering an entrepreneurial
environment at the customer service center level. These programs provide
substantial rewards to local managers for managing service-oriented and
profitable operations. The Partnership intends to expand such incentive programs
to additional customer service locations where appropriate.
CONTINUED BALANCED GROWTH
The Partnership intends to continue to pursue balanced growth through small
and large acquisitions, internal growth at its existing customer service centers
and start-ups of new customer service centers. Acquisitions will be the
principal means of growth for the Partnership, as the retail propane industry is
mature and overall demand for propane is expected to experience limited growth
in the foreseeable future.
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The Partnership believes that the fragmented nature of the retail propane
industry provides significant opportunities for growth through strategic
acquisitions. Industry sources indicate that there are over 8,000 retail propane
operations in the United States, of which the ten largest account for
approximately 33% of industry volumes. The Partnership's acquisition strategy
will concentrate on companies that have one or more of the following
characteristics: (i) locations in areas serviced by the Partnership that may be
combined with existing operations, providing greater economies of scale at the
customer service center level, (ii) a recent record of growth and a local
reputation for quality service, (iii) locations in areas that are relatively
colder and (iv) operations with a relatively high proportion of sales to the
more profitable residential customer segment. As part of its acquisition
program, the Partnership generally expects to retain the name and identity of
the acquired entity, which the Partnership believes will preserve the goodwill
of the acquired business and promote continued local customer loyalty. The
Partnership's ability to make acquisitions is facilitated by the availability of
the Acquisition Facility and the ability to issue additional limited partner
interests. In calendar 1997, the Partnership acquired businesses in Arizona,
California, Florida, New Hampshire and North Carolina which added approximately
28,000 customers and annual retail propane sales of approximately 24 million
gallons. The aggregate purchase price for these acquisitions was approximately
$44 million, of which approximately $30 million was in the form of Common Units
(approximately 1.3 million Common Units). There can be no assurance, however,
that the Partnership will continue to identify attractive acquisition candidates
in the future, that the Partnership will be able to acquire such businesses on
economically acceptable terms, that any acquisitions will not be dilutive to
earnings and distributions to the Unitholders or that any additional debt
incurred to finance an acquisition will not affect the ability of the
Partnership to make distributions to the Unitholders. The Partnership is not
required under the Partnership Agreement to seek Unitholder approval of any
acquisition.
The Partnership is from time to time engaged in ongoing discussions with
respect to acquisitions, and expects to continue to pursue such acquisition
opportunities actively. As of the date of this Prospectus, the Partnership does
not have any agreements with respect to any material acquisitions but is
involved in ongoing discussions with several companies and is continuing to
assess these and other acquisition opportunities. The Partnership is unable to
predict the size, number or timing of any future acquisitions.
In addition to pursuing growth through acquisitions, the Partnership
continues to focus on internal growth at its existing customer service centers.
The Partnership seeks to achieve internal growth by, among other things,
providing superior service and instituting programs that encourage employees,
existing customers and local real estate agents and contractors to refer new
accounts. This strategy is being implemented primarily through the Partnership's
incentive programs that reward local managers for managing service-oriented and
profitable operations.
In some instances, the Partnership may identify a market that has one or
more of the characteristics that would make it attractive for an acquisition but
in which there are no attractive available acquisition candidates. In certain of
these cases, the Partnership may seek to penetrate the market by establishing a
new customer service center. The Partnership believes that it can successfully
initiate these start-up operations in attractive markets by identifying and
hiring local managers with proven propane service experience and establishing
programs that reward service-oriented and profitable operations and that allow
the managers to share in the growth of the business.
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ENHANCE PROFITABILITY OF ITS EXISTING OPERATIONS.
The Partnership believes that it can enhance the profitability of its
customer service centers by integrating the Combined Operations, reducing
inefficiencies in areas where there is a geographic overlap of services and
implementing "best practices" and management incentive programs throughout the
Partnership's operations. In integrating the Combined Operations, the
Partnership is in the process of consolidating and centralizing ongoing
administrative functions and systems, which should enable local managers to
devote their time to providing customer service and achieving other performance
goals. In addition, the Partnership believes it can improve efficiencies in
areas where there is a geographic overlap of services provided by customer
service centers. The Partnership's management has identified effective operating
programs and strategies used by one of the constituent companies prior to the
IPO but not used by one or more of the others. The Partnership believes that the
implementation of these "best practices" throughout the Combined Operations will
improve customer retention, foster expansion of its customer base and create
operating efficiencies and cost savings opportunities. Furthermore, the
Partnership believes that instituting management incentive programs, where
appropriate, and fostering an entrepreneurial approach at additional customer
service centers will give managers the incentive to increase such customer
service centers' profitability.
CAPITALIZE ON NATIONAL SUPPLY AND LOGISTICS BUSINESS.
The Partnership has a national wholesale natural gas liquids supply and
logistics business with sales of approximately 328 million and 330 million
gallons in pro forma fiscal 1996 and 1997, respectively. The Partnership
believes that this business provides it with a reasonably secure, competitively
priced and efficient supply base to support the service goals of its existing
customer service centers. In addition, the Partnership believes its wholesale
and logistics business positions it well for expansion through acquisitions or
start-up operations in new markets. As part of its wholesale business, the
Partnership also provides product supply and financial and technical assistance
to certain small independent retailers. While these arrangements provide some
economic return to the Partnership, the Partnership believes their greater value
lies in the resulting relationships, which position the Partnership to acquire
such businesses in the event they become available for purchase.
PRODUCT
Propane, a by-product of natural gas processing and petroleum refining, is a
clean-burning energy source recognized for its transportability and ease of use
relative to alternative stand-alone energy sources. The retail propane business
of the Partnership consists principally of transporting propane to its retail
distribution outlets and then to tanks located on its customers' premises.
Retail propane use falls into four broad categories: (i) residential, (ii)
industrial and commercial, (iii) agricultural and (iv) other applications,
including motor fuel sales. Residential customers use propane primarily for
space and water heating. Industrial customers use propane primarily as fuel for
forklifts and stationary engines, to fire furnaces, as a cutting gas, in mining
operations and in other process applications. Commercial customers, such as
restaurants, motels, laundries and commercial buildings, use propane in a
variety of applications, including cooking, heating and drying. In the
agricultural market, propane is primarily used for tobacco curing, crop drying,
poultry brooding and weed control. Other retail uses include motor fuel for cars
and trucks, outdoor cooking and other recreational uses, propane resales and
sales to state and local governments. In its wholesale operations, the
Partnership sells propane principally to large industrial end-users and other
propane distributors.
Propane is extracted from natural gas or oil wellhead gas at processing
plants or separated from crude oil during the refining process. Propane is
normally transported and stored in a liquid state under moderate pressure or
refrigeration for ease of handling in shipping and distribution. When the
pressure is released or the temperature is increased, it is usable as a
flammable gas. Propane is colorless and odorless;
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an odorant is added to allow its detection. Like natural gas, propane is a
clean-burning fuel and is considered an environmentally preferred energy source.
COMPETITION
Based upon information provided by the Energy Information Administration,
propane accounts for approximately three to four percent of household energy
consumption in the United States. Propane competes primarily with natural gas,
electricity and fuel oil as an energy source, principally on the basis of price,
availability and portability. Propane is more expensive than natural gas on an
equivalent BTU basis in locations served by natural gas, but serves as a
substitute for natural gas in rural and suburban areas where natural gas is
unavailable or portability of product is required. Historically, the expansion
of natural gas into traditional propane markets has been inhibited by the
capital costs required to expand pipeline and retail distribution systems.
Although the extension of natural gas pipelines tends to displace propane
distribution in areas affected, the Partnership believes that new opportunities
for propane sales arise as more geographically remote neighborhoods are
developed. Propane is generally less expensive to use than electricity for space
heating, water heating, clothes drying and cooking. Although propane is similar
to fuel oil in certain applications and market demand, propane and fuel oil
compete to a lesser extent primarily because of the cost of converting from one
to the other.
In addition to competing with alternative energy sources, the Partnership
competes with other companies engaged in the retail propane distribution
business. Competition in the propane industry is highly fragmented and generally
occurs on a local basis with other large full-service multi-state propane
marketers, thousands of smaller local independent marketers and farm
cooperatives. Based on industry publications, the Partnership believes that the
domestic retail market for propane is approximately 9.2 billion gallons
annually, that the 10 largest retailers, including the Partnership, account for
approximately 33% of the total retail sales of propane in the United States, and
that no single marketer has a greater than 10% share of the total retail market
in the United States. Most of the Partnership's customer service centers compete
with five or more marketers or distributors. Each customer service center
operates in its own competitive environment, because retail marketers tend to
locate in close proximity to customers. The Partnership's customer service
centers generally have an effective marketing radius of approximately 25 to 50
miles, although in certain rural areas the marketing radius may be extended by a
satellite location.
The ability to compete effectively further depends on the reliability of
service, responsiveness to customers and the ability to maintain competitive
prices. The Partnership also believes that its service capabilities and customer
responsiveness differentiate it from many of these smaller competitors. The
Partnership's employees are on call 24 hours a day and seven days a week for
emergency repairs and deliveries.
The wholesale propane business is highly competitive. For fiscal year 1997,
the Partnership's wholesale propane operations accounted for 49% of combined
total propane volumes but less than 6% of pro forma gross profit. The
Partnership believes that its wholesale business provides it with a national
presence and a reasonably secure, efficient supply base, and positions it well
for expansion through acquisitions or start-up operations in new markets.
OPERATIONS
The Partnership has organized its operations in a manner that the
Partnership believes enables it to provide excellent service to its customers
and to achieve maximum operating efficiencies. The Partnership's retail propane
distribution business is organized into regions. Each region is supervised by
Divisional Vice Presidents, or Managers. Personnel located at the retail service
centers in the various regions are primarily responsible for customer service
and sales.
A number of functions are centralized at the Partnership's corporate
headquarters in order to achieve certain operating efficiencies as well as to
enable the personnel located in the retail service centers to focus
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on customer service and sales. The corporate headquarters and the retail service
centers are linked via a computer system. Each of the Partnership's primary
retail service centers is equipped with a computer connected to the central
management information system in the Partnership's corporate headquarters. This
computer network system provides retail company personnel with accurate and
timely information on pricing, inventory and customer accounts. In addition,
this system enables management to monitor pricing, sales, delivery and the
general operations of its numerous retail service centers and to plan
accordingly to improve the operations of the Partnership. The Partnership makes
centralized purchases of propane through its corporate headquarters for resale
to the retail service centers enabling the Partnership to achieve certain
advantages, including price advantages, because of its status as a large volume
buyer. The functions of cash management, accounting, taxes, payroll, permits,
licensing, asset control, employee benefits, human resources, and strategic
planning are also performed on a centralized basis.
SEASONALITY
Because a substantial amount of propane is sold for heating purposes, the
severity of winter and resulting residential and commercial heating usage have
an important impact on the Partnership's earnings. Approximately two-thirds of
the Partnership's retail propane sales usually occur during the six-month
heating season from October through March. As a result of this seasonality, the
Partnership's sales and operating profits are concentrated in its second and
third fiscal quarters. Cash flows from operations, however, are greatest from
November through April when customers pay for propane purchased during the
six-month peak season. To the extent the Managing General Partner deems
appropriate, the Partnership may reserve cash from these periods for
distribution to Unitholders during periods with lower cash flows from
operations. Sales and profits are subject to variation from month to month and
from year to year, depending on temperature fluctuations.
SOURCES OF SUPPLY
The Partnership's propane supply is purchased from oil companies and natural
gas processors at numerous supply points located in the United States and
Canada. During the six and one-half month period ended June 30, 1997,
approximately 99% of the Partnership's purchases of its propane supply was
purchased pursuant to agreements with terms of less than one year, but the
percentage of contract purchases may vary from year to year as determined by the
Partnership. Supply contracts generally provide for pricing in accordance with
posted prices at the time of delivery or the current prices established at major
delivery points. Most of these agreements provide maximum and minimum seasonal
purchase guidelines. In addition, the Partnership makes purchases on the spot
market from time to time to take advantage of favorable pricing. The Partnership
receives its supply of propane predominantly through railroad tank cars and
common carrier transport.
Supplies of propane from the Partnership's sources historically have been
readily available. In the six and one-half month period ended June 30, 1997,
Warren Gas Liquids was the Partnership's largest supplier providing
approximately 12.8% of the Partnership's total propane supply for its retail and
wholesale operations (excluding propane obtained from the Partnership's natural
gas processing operations). The Partnership believes that if supplies from
Warren Gas Liquids were interrupted, it would be able to secure adequate propane
supplies from other sources without a material disruption of its operations.
Aside from Warren Gas Liquids, no single supplier provided more than 10% of the
Partnership's domestic propane supply in the six and one-half month period ended
June 30, 1997. Although no assurance can be given that supplies of propane will
be readily available in the future, the Partnership expects a sufficient supply
to continue to be available. However, increased demand for propane in periods of
severe cold weather, or otherwise, could cause future propane supply
interruptions or significant volatility in the price of propane.
The Partnership will engage in hedging of product cost and supply through
common hedging practices. These practices will be monitored and maintained by
management for the Partnership on a daily basis. Hedging of product cost and
supply does not always result in increased margins.
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The market price of propane is subject to volatile changes as a result of
supply or other market conditions over which the Partnership will have no
control. Since it may not be possible to pass rapid increases in the wholesale
cost of propane on to customers immediately, such increases could reduce the
Partnership's gross profits. Consequently, the Partnership's profitability will
be sensitive to changes in wholesale propane prices. The Partnership engages in
hedging of product cost and supply through common hedging practices. The
Partnership also engages in the trading of propane, natural gas, crude oil and
other commodities in amounts that have not had and are not expected to have a
material effect on the Partnership's financial condition or results of
operations.
The Partnership has from time to time leased space in storage facilities to
take advantage of supply purchasing opportunities as they have occurred, and the
Partnership believes that it will have adequate third party storage to take
advantage of such opportunities in the future. Access to storage facilities will
allow the Partnership, to the extent it may deem it desirable, to buy and store
large quantities of propane during periods of low demand, which generally occur
during the summer months, thereby helping to ensure a more secure supply of
propane uring periods of intense demand or price instability.
RISKS OF BUSINESS
The Partnership's propane operations are subject to all the operating
hazards and risks normally incident to handling, storing and transporting
combustible liquids, such as the risk of personal injury and property damages
caused by accident or fire.
Effective December 17, 1996, the Partnership's comprehensive general and
excess liability policy provides for losses of up to $96.0 million with a
$50,000 self-insured retention.
PROPERTIES
As of December 31, 1997, the Partnership operated bulk storage facilities
with total propane storage capacity of approximately 21 million gallons, all of
which was above-ground and all of which was owned by the Partnership. The
Partnership does not own, operate or lease any underground propane storage
facilities (excluding customer and local distribution tanks) or pipeline
transportation assets (excluding local delivery systems). In addition, as of
December 31, 1997, the Partnership operated 298 customer service centers.
The transportation of propane requires specialized equipment. The trucks and
railroad tank cars utilized for this purpose carry specialized steel tanks that
maintain the propane in a liquefied state. As of December 31, 1997, the
Partnership owned a fleet of approximately 50 transport truck tractors,
approximately 60 transport trailers, approximately 940 bobtail trucks and
approximately 900 other delivery and service vehicles. As of such date, the
Partnership owned, and customers leased, approximately 278,000 customer storage
tanks with typical capacities of 120 to 1,000 gallons.
TRADEMARKS AND TRADENAMES
The Partnership utilizes a variety of trademarks, including "Synergy Gas"
and its related design, which the Partnership owns, and "Empire Gas" and its
related design, which the Partnership has the right to use, and tradenames,
including "Coast Gas." The Partnership generally expects to retain the names and
identities of acquired entities, which the Partnership believes preserves the
goodwill of the acquired business and promotes continued local customer loyalty.
The Partnership regards its trademarks, tradenames and other proprietary rights
as valuable assets and believes that they have significant value in the
marketing of its products.
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GOVERNMENT REGULATION
The Partnership's operations are subject to various federal, state and local
laws governing the transportation, storage and distribution of propane,
occupational health and safety, and other matters. All states in which the
Partnership operates have adopted fire safety codes that regulate the storage
and distribution of propane. In some states these laws are administered by state
agencies, and in others they are administered on a municipal level. Certain
municipalities prohibit the below ground installation of propane furnaces and
appliances, and certain states are considering the adoption of similar
regulations. The Partnership cannot predict the extent to which any such
regulations might affect the Partnership, but does not believe that any such
effect would be material. It is not anticipated that the Partnership will be
required to expend material amounts by reason of environmental and safety laws
and regulations, but inasmuch as such laws and regulations are constantly being
changed, the Partnership is unable to predict the ultimate cost to the
Partnership of complying with environmental and safety laws and regulations.
The Partnership currently meets and exceeds federal regulations requiring
that all persons employed in the handling of propane gas be trained in proper
handling and operating procedures. All employees have participated or will
participate within 90 days of their employment date, in hazardous materials
training. The Partnership has established ongoing training programs in all
phases of product knowledge and safety including participation in the National
Propane Gas Association's ("NPGA") Certified Employee Training Program.
EMPLOYEES
The Managing General Partner directs and manages all activities of the
Partnership. The persons responsible for managing the Partnership are employed
by the Managing General Partner. The Managing General Partner has no activities
except managing the Partnership.
As of January 1, 1998, the Partnership had 2,153 full time employees, of
whom 165 were general and administrative and 1,988 were operational employees.
Approximately 30 of the Partnership's employees at four customer service centers
were represented by labor unions. The Partnership believes that its relations
with its employees are satisfactory. The Partnership generally hires seasonal
workers to meet peak winter demand. Prior to January 1, 1998, all of the
Partnership's employees were employed by the Managing General Partner.
LITIGATION AND OTHER CONTINGENCIES
A number of personal injury, property damage and products liability suits
are pending or threatened against the Partnership. In general, these lawsuits
have arisen in the ordinary course of the Partnership's business and involve
claims for actual damages, and in some cases, punitive damages, arising from the
alleged negligence of the Partnership or as a result of product defects or
similar matters. Of the pending or threatened matters, a number involve property
damage, and several involve serious personal injuries or deaths and the claims
made are for relatively large amounts. Although any litigation is inherently
uncertain, based on past experience, the information currently available to it
and the availability of insurance coverage, the Partnership does not believe
that these pending or threatened litigation matters will have a material adverse
effect on its results of operations or its financial condition.
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MANAGEMENT
PARTNERSHIP MANAGEMENT
The Managing General Partner manages and operates the activities of the
Partnership. Neither the Special General Partner nor the Unitholders directly or
indirectly participate in the management or operation of the Partnership or have
actual or apparent authority to enter into contracts on behalf of, or to
otherwise bind, the Partnership. Notwithstanding any limitation on their
obligations or duties, the Managing General Partner and the Special General
Partner will be liable, as general partners of the Partnership, for all debts of
the Partnership (to the extent not paid by the Partnership), except to the
extent that indebtedness or other obligations incurred by the Partnership are
made specifically non-recourse to the General Partners. Whenever possible, the
Managing General Partner intends to make any such indebtedness or other
obligations non-recourse to the General Partners.
In March 1997 the Managing General Partner appointed Paul Christen and Kurt
Katz to its Board of Directors. Neither Mr. Katz nor Mr. Christen is an officer
or employee of the General Partners nor a director, officer or employee of any
affiliate of either of the General Partners, however Mr. Katz served as a
director of Coast when the current executive officers of the Managing General
Partner were officers of that company. Such directors, along with Richard
Hylland, serve on the Audit Committee, which has the authority to review
specific matters as to which the Board of Directors believes there may be a
conflict of interest in order to determine if the resolution of such conflict
proposed by the Managing General Partner is fair and reasonable to the
Partnership. Any matters approved by the Audit Committee will be conclusively
deemed to be fair and reasonable to the Partnership, approved by all partners of
the Partnership and not a breach by the Managing General Partner or its Board of
Directors of any duties they may owe the Partnership or the Unitholders. See
"Conflicts of Interest and Fiduciary Responsibilities-- Fiduciary and Other
Duties." In addition, the Audit Committee will review the external financial
reporting of the Partnership, will recommend engagement of the Partnership's
independent public accountants and will review the Partnership's procedures for
internal auditing and the adequacy of the Partnership's internal accounting
controls.
The Nominating and Compensation Committee consists of three numbers, Kurt
Katz, Merle Lewis and Paul Christen. The Nominating and Compensation Committee
advises the Board of Directors with respect to nominations of directors and the
salary, compensation and benefits of directors and officers of the Managing
General Partner.
Merle Lewis, Keith Baxter and Richard Hylland serve on the Executive
Committee, which may exercise the powers of the Board of Directors while the
Board of Directors is not in session, subject to limitations imposed by law and
the by-laws of the Managing General Partner.
As is commonly the case with publicly traded limited partnerships, the
Partnership does not directly employ any of the persons responsible for managing
the Partnership. In general, the former management of Coast manages the
Partnership's business as officers and employees of the Managing General Partner
and its affiliates. Neither the Special General Partner nor the Unitholders will
directly or indirectly participate in the management or operation of the
Partnership.
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DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGING GENERAL PARTNER
The following table sets forth certain information with respect to the
executive officers and members of the Board of Directors of the Managing General
Partner. Executive officers and directors are elected for one-year terms.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH MANAGING GENERAL PARTNER
- ----------------------------- --------- -------------------------------------------------------------------------
<S> <C> <C>
Merle D. Lewis............... 50 Chairman of the Board of Directors
Richard R. Hylland........... 37 Vice Chairman of the Board of Directors
Keith G. Baxter.............. 48 President, Chief Executive Officer and Director
Charles J. Kittrell.......... 58 Executive Vice President, Chief Operating Officer and Secretary
Ronald J. Goedde............. 48 Executive Vice President, Chief Financial Officer and Treasurer
Vincent J. DiCosimo.......... 40 Executive Vice President
Paul Christen................ 68 Director
Kurt Katz.................... 64 Director
Daniel K. Newell............. 41 Director
</TABLE>
MERLE D. LEWIS has served as the Chairman of the Board of Directors for the
Managing General Partner since its inception in 1996. He has been the President
and Chief Executive Officer of NPS since February 1994, and has served as
Chairman and Chief Executive Officer of Northwestern Growth since September
1994. Mr. Lewis also served as Executive Vice President of NPS from May 1993 to
February 1994 and Vice President--Corporate Services of NPS from 1987 to 1993.
Mr. Lewis joined NPS in 1982 and has served as a member of the board of
directors of NPS since 1993. Mr. Lewis is also Chairman of the Special General
Partner and is a member of the board of directors of Lucht, Inc. (a manufacturer
of photographic equipment) and Northwestern Energy Corporation (a marketer of
non-regulated energy products) ("Northwestern Energy"), a subsidiary of NPS.
RICHARD R. HYLLAND has served as the Vice Chairman of the Board of Directors
of the Managing General Partner since its inception in 1996. He has been the
Executive Vice President--Strategic Development of NPS since November 1995 and
has been President and Chief Operating Officer of Northwestern Growth since
September 1994. Mr. Hylland also served as Vice President--Strategic Development
of NPS from August 1995 to November 1995, Vice President--Corporate Development
of NPS from May 1993 to August 1995 and Vice President--Finance of NPS from
April 1991 to August 1995. Mr. Hylland has served as a member of the board of
directors of NPS since 1995 and also serves as Vice Chairman of the Special
General Partner and as a member of the boards of directors of Northwestern
Growth, Lucht, Inc., Franklin Industries (a steel fabricator of highway sign and
fence posts), Northwestern Energy and LodgeNet Entertainment Corporation (a
television-based entertainment and information services company).
KEITH G. BAXTER has served as President, Chief Executive Officer and a
director of the Managing General Partner since its inception in 1996. He was the
President, Chief Executive Officer and Chairman of the Board of Directors of
Coast from 1986 until the closing of the IPO. Prior to joining Coast, Mr. Baxter
was Sector Vice President of Peabody International Corporation (an integrated
manufacturing company).
CHARLES J. KITTRELL has served as the Executive Vice President and Chief
Operating Officer of the Managing General Partner since its inception in 1996,
and as Secretary since January 30, 1997. He was the Executive Vice
President--Chief Operating Officer of Coast from 1986 until the closing of the
IPO. Prior to joining Coast, Mr. Kittrell was Vice President in charge of
manufacturing, product engineering and general operations at five manufacturing
and distribution centers for Peabody Floway Inc. (a pump manufacturing company),
a subsidiary of Peabody International Corporation.
RONALD J. GOEDDE has served as the Executive Vice President, Chief Financial
Officer and Treasurer of the Managing General Partner since its inception in
1996. He was the Executive Vice President--Chief
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Financial Officer of Coast from 1988 until the closing of the IPO. Prior to
joining Coast, Mr. Goedde was the Vice President of Finance and Controller for
Cal Gas Corporation (an integrated propane company).
VINCENT J. DICOSIMO served as the Senior Vice President of the Managing
General Partner from its inception in 1996 to January 30, 1997 and currently
serves as the Executive Vice President of the Managing General Partner. He was
an Executive Vice President of Coast from 1993 until the closing of the IPO.
From 1990 to 1993, Mr. DiCosimo was a Vice President of Coast. Before joining
Coast, Mr. DiCosimo was Manager of Supply/Distribution for Cal Gas Corporation
from 1981 to 1990 and prior thereto was Senior Financial Analyst with Unocal Oil
& Gas.
PAUL CHRISTEN has served as a director of the Managing General Partner since
March 1997. Mr. Christen has served as the president and director of First
Western Bancorp Inc. since 1965 and has served as president and a director of
PRC, Inc. since 1984.
KURT KATZ has served as a director of the Managing General Partner since
March 1997. Mr. Katz retired as president and chief operating officer of Peabody
International Corporation in 1985 where he held a variety of positions from 1973
to 1985, and for the last five years has been active in a number of private
ventures. Mr. Katz is also a director of Polymeric Resources Corp.
DANIEL K. NEWELL has served as a director of the Managing General Partner
since its inception in 1996. He has been the Executive Vice President of
Northwestern Growth since July 1995 and has served as Vice President--Finance of
NPS since July 1995 and Chief Financial Officer of NPS since May 1996. Prior to
joining NPS, Mr. Newell was Vice President--Finance and Treasurer and a member
of the board of directors of Energy Fuels Corporation (a coal mining company)
from 1991 to 1995. Mr. Newell serves as a member of the board of directors of
Northwestern Growth.
REIMBURSEMENT OF EXPENSES OF THE MANAGING GENERAL PARTNER AND ITS AFFILIATES
The Managing General Partner does not receive any management fee or other
compensation in connection with its management of the Partnership. The Managing
General Partner and its affiliates (including the Special General Partner)
performing services for the Partnership are reimbursed at cost for all expenses
incurred on behalf of the Partnership, including the costs of compensation
described herein properly allocable to the Partnership, and all other expenses
necessary or appropriate to the conduct of the business of, and allocable to,
the Partnership. On a pro forma basis, approximately $48.9 million of expenses
(primarily wages and salaries) would have been reimbursed by the Partnership to
the Managing General Partner in fiscal 1997 (including $30.7 million actually
reimbursed for the six and one-half month period ended June 30, 1997). The
Special General Partner received no reimbursements from the Partnership in
fiscal 1997. The Partnership Agreement provides that the Managing General
Partner will determine the expenses that are allocable to the Partnership in any
reasonable manner determined by the Managing General Partner in its sole
discretion.
In addition, the General Partners received a combined 2% general partner
interest, the right to receive Incentive Distributions and 6,597,619
Subordinated Units as consideration for their contribution to the Partnership of
their limited partner interests in the Operating Partnership, which interests
were received as consideration for their contribution of the Combined Operations
to the Operating Partnership. See "The IPO and Related Transactions." The
General Partners will be entitled to distributions on their general partner
interests, Incentive Distributions and distributions on such Subordinated Units
as described under "Cash Distribution Policy."
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EXECUTIVE COMPENSATION
The following table provides compensation information from commencement of
operations on December 17, 1996 to June 30, 1997, for the Chief Executive
Officer and for each of the four other most highly compensated executive
officers of the Managing General Partner whose total compensation exceeded
$100,000 for the most recent fiscal period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION --------------
------------------------------------------------ RESTRICTED
NAME AND OTHER ANNUAL UNIT ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) COMP(2) AWARDS(3) COMP(4)
- --------------------------------------- --------- ---------- ---------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Keith G. Baxter, 1997 $ 108,333 $ 25,000 $ 124,469 $ 2,800,000 $ 3,683
Chief Executive Officer
Robert Wooldridge, 1997 108,333 30,000 -- -- 0
Vice President
Charles J. Kittrell, 1997 88,125 15,000 67,313 1,600,000 4,256
Chief Operating Officer
Ronald J. Goedde, 1997 79,792 15,000 51,094 1,600,000 2,998
Chief Financial Officer
Vincent J. DiCosimo, 1997 81,250 175,000 21,667 1,000,000 2,333
Senior Vice President
</TABLE>
- ------------------------
(1) Reflects (a) a one-time special consolidating bonus awarded to Messrs.
Baxter, Kittrell and Goedde, (b) an annual incentive bonus payable to Mr.
Wooldridge pursuant to his employment agreement and (c) the bonus payable to
Mr. Di Cosimo under the Coast Energy Group Bonus Plan. No bonus was paid
under the Annual Operating Performance Incentive Plan with respect to the
fiscal period ended June 30, 1997. See "Incentive Plans."
(2) Reflects (a) the Management Fees payable to Messrs. Baxter, Kittrell, Goedde
and Di Cosimo in connection with the acquisition of Empire Energy and Coast
by Northwestern Growth and (b) amounts awarded under the New Acquisition
Incentive Plan for Messrs. Baxter, Kittrell and Goedde. See "Employment
Agreements, Severance Arrangements" and "Incentive Plans."
(3) The total number of restricted Common Units and their aggregate market value
as of June 30, 1997 were: Mr. Baxter, 133,333 Common Units valued at
$2,899,993; Mr. Kittrell, 76,190 Common Units valued at $1,657,133; Mr.
Goedde, 76,190 Common Units valued at $1,657,133; and Mr. DiCosimo, 47,619
Common Units valued at $1,035,713. There were no payouts under the
Restricted Unit Plan during the fiscal period ended June 30, 1997.
(4) The "All Other Compensation" category reflects the Managing General
Partner's matching contributions to its 401(k) Plan in the amount of $2,058
for each of Messrs. Baxter, Kittrell, Goedde and DiCosimo and payments for
life and disability insurance.
EMPLOYMENT AGREEMENTS, SEVERANCE ARRANGEMENTS
Employment agreements (the "Employment Agreements") between each of Keith G.
Baxter, Charles J. Kittrell, Ronald J. Goedde and Vincent J. DiCosimo (the
"Executives"), and the Managing General Partner, provide for the employment of
the Executives by the Managing General Partner. The summary of the Employment
Agreements which follows does not purport to be complete and is qualified in its
entirety by reference to the form of Employment Agreement, which has been filed
as an exhibit to the Registration Statement of which this Prospectus is a part.
Pursuant to the Employment Agreements, Messrs. Baxter, Kittrell, Goedde and
DiCosimo serve as President and Chief Executive Officer, Executive Vice
President and Chief Operating Officer, Executive Vice President and Chief
Financial Officer, and Senior Vice President, respectively, of the Managing
General Partner. Each of the Employment Agreements has a term of three years
from the closing of the Transactions, unless sooner terminated as provided in
the Employment Agreements. The Employment
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Agreements provide for an annual base salary of $200,000, $160,000, $150,000 and
$150,000 for each of Messrs. Baxter, Kittrell, Goedde and DiCosimo,
respectively, subject to such increases as the Board of Directors of the
Managing General Partner may authorize from time to time, plus a fee for each of
the Executives of approximately $135,000, $65,000, $40,000 and $25,000,
respectively, per year for three years related to the acquisition of Empire
Energy and Coast by Northwestern Growth (the "Management Fee"). In addition, the
Managing General Partner pays for a $725,000 life insurance policy for Mr.
Baxter and $410,000 life insurance policies for each of Messrs. Kittrell, Goedde
and DiCosimo. Each of the Executives will participate in the Annual Operating
Performance Incentive Plan of the Managing General Partner and Messrs. Baxter,
Kittrell and Goedde will participate in the New Acquisition Incentive Plan of
the Managing General Partner (together with the Annual Operating Performance
Incentive Plan, the "Plans,") as described below. The Executives will also be
entitled to participate in such other benefit plans and programs as the Managing
General Partner may provide for its employees in general (the "Other Benefit
Plans").
The Employment Agreements provide that in the event an Executive's
employment is terminated without "cause" (as defined in the Employment
Agreements) or if the Executive terminates his employment due to a "Fundamental
Change" (as defined below), such Executive will be entitled to receive a
severance payment in an amount equal to his total compensation for the remainder
of the employment term under the Employment Agreement and will receive benefits
under the Other Benefit Plans for a period of 12 months after termination. In
the event of termination due to disability, the Executive will be entitled to
his base salary, his Management Fee and benefits under the Plans and the Other
Benefit Plans for 12 months. In the event of termination due to death, benefits
under the Other Benefit Plans will be continued for the Executive's dependents
for 12 months. In the event the Executive's employment is terminated for
"cause," the Executive will receive accrued salary and benefits (including his
Management Fee and benefits under the Plans) up to the date of termination and,
if the Managing General Partner does not waive the Executive's covenant not to
compete, benefits under the Other Benefit Plans for 12 months.
A Fundamental Change is defined in the Employment Agreements to have
occurred (i) if the Executive's duties, authority, responsibilities and/or
compensation is reduced without performance or market-related justification;
(ii) if the Executive's primary office is moved more than 50 miles from
Watsonville, California (or, with respect to Mr. DiCosimo, Houston, Texas)
without his consent; (iii) if the Partnership disposes of business and assets
which reduce the annual EBITDA of the Partnership below 70% of the annual EBITDA
level existing at the time employment commenced; or (iv) if securities
representing 10% of the voting power in elections of directors of NPS become
beneficially owned by any party or group or other prescribed events occur
constituting a change of control of NPS.
In addition, each Employment Agreement contains non-competition and
confidentiality provisions.
INCENTIVE PLANS
The Managing General Partner has adopted the Annual Operating Performance
Incentive Plan, which provides for the payment of annual incentive bonuses to
participants in the plan (who will be determined by the Board of Directors of
the Managing General Partner from time to time and who will include the
Executives) equal to a percentage of annual salary (plus, in the case of the
Executives, his Management Fee) based on the Partnership's performance compared
to budgeted levels of net income and EBITDA. Such bonuses will range from zero
for performance at 10% below budget to 50% for performance at budget. In
addition, in the event EBITDA exceeds budgeted amounts, there will be
established a bonus pool equal to 10% of the excess of EBITDA over budget, which
will be divided among Messrs. Baxter, Kittrell and Goedde and any other
participants that the Board of Directors of the Managing General Partner may
determine. The period covered by the plan began December 16, 1996 and ends on
the fifth anniversary thereof.
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The Managing General Partner has also adopted the New Acquisition Incentive
Plan, which provides for bonuses to participants in the plan (who will be
determined by the Board of Directors of the Managing General Partner from time
to time and who will include the Executives) for adding new businesses to the
Partnership's propane operations. The bonuses will be an amount equal to 4% of
the gross acquisition purchase price, allocated among the participants in the
plan based on their relative salaries. The transactions covered by the plan will
include those occurring on or after December 17, 1997 through the fifth
anniversary thereof. Awards under this program will be payable in cash 90 days
after the close of the particular acquisition transaction.
RESTRICTED UNIT PLAN
The following table sets forth the restricted unit grants made under the
Restricted Unit Plan to the named executive officers of the Managing General
Partner during the fiscal period ended June 30, 1997.
<TABLE>
<CAPTION>
PERFORMANCE OR OTHER PERIOD
NUMBER OF SHARES, UNTIL
NAME UNITS OR OTHER RIGHTS (1) MATURATION OR PAYOUT
- ---------------------------------------------------- -------------------------- -------------------------------
<S> <C> <C>
Keith G. Baxter..................................... 133,333 Common Units (2)
Robert Wooldridge................................... 0 --
Charles J. Kittrell................................. 76,190 Common Units (2)
Ronald J. Goedde.................................... 76,190 Common Units (2)
Vincent J. DiCosimo................................. 47,619 Common Units (2)
</TABLE>
- ------------------------
(1) Granted on December 17, 1996 upon consummation of the IPO.
(2) Restricted units are subject to a bifurcated vesting procedure such that (a)
25% of a participant's restricted units will vest over time, with one-third
vesting on the third, fifth and seventh anniversaries of the date of grant
and (b) the remaining 75% of a participant's restricted units will vest
automatically upon, and in the same proportions as, the conversion of the
Subordinated units to Common Units. See Note 4 to the Partnership's
Consolidated Financial Statements included elsewhere in this Prospectus. If
a participant's employment is terminated without "cause" (as defined in the
Restricted Unit Plan) or a participant resigns with "good reason" (as
defined in the Restricted Unit Plan), the participant's rights to receive
Common Units which vest over time will immediately vest. In the event of a
"change of control" of the Partnership (as defined in the Restricted Unit
Plan), all rights to receive Common Units pursuant to the Restricted Unit
Plan will immediately vest. Until rights to receive Common Units have
vested, the Common Units to which they relate are not issued, and the
participant is not entitled to any distributions or allocations of income or
loss, and has no voting or other rights, with respect to such Common Units
COMPENSATION OF DIRECTORS
The Managing General Partner currently pays no additional remuneration to
its employees who also serve as directors. In addition to permitting its
non-officer directors to participate in the benefit plans described above, the
Chairman of the Board receives $50,000 annually, and each of its other
non-employee directors receives $15,000 annually, plus $1,000 per Board meeting
attended and $500 per committee meeting attended. All expenses associated with
compensation of directors are reimbursed to the Managing General Partner by the
Partnership.
In connection with the consummation of the IPO, the three initial
nonemployee directors of the Managing General Partner received rights with
respect to restricted units, as follows: Mr. Lewis, 19,048 Common Units valued
at $400,000; Mr. Hylland, 14,286 Common Units valued at $300,000; and Mr.
Newell, 9,524 Common Units valued at $200,000. In addition, under the Restricted
Unit Plan, upon his or her election to the Board of Directors of the Managing
General Partner, each nonemployee director receives rights with respect to
restricted units having an aggregate value of $200,000. The directors'
restricted units vest in accordance with the same procedure as is described in
note 2 to the table under "Executive Compensation--Restricted Unit Plan."
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Nominating and Compensation Committee of the Board of Directors of the
Managing General Partner is comprised of Messrs. Lewis, Christen and Katz. None
of these persons is an officer, employee or former employee of the Managing
General Partner, the Partnership or any of their subsidiaries, however, Mr. Katz
served as a director of Coast when the current executive officers of the
Managing General Partner were officers of that company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF PARTNERSHIP UNITS BY THE GENERAL PARTNERS AND DIRECTORS AND
EXECUTIVE OFFICERS OF THE MANAGING GENERAL PARTNER
The table below sets forth, as of September 30, 1997 the beneficial
ownership of Units by each person known to the Managing General Partner to be
the beneficial owner of more than 5% of any class of Units of the Partnership,
each director and named executive officer of the Managing General Partner, as
well as the directors and all of the executive officers of the Managing General
Partner as a group. The Common Units are traded on the NYSE.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
BENEFICIAL OWNER CLASS OF UNITS OWNERSHIP CLASS
- ---------------------------------------------------------------- --------------- ------------------- -----------
<S> <C> <C> <C>
Managing General Partner (1).................................... Subordinated 5,677,040(3) 86.0%
Special General Partner (2)..................................... Subordinated 920,579(3) 14.0%
Merle D. Lewis.................................................. Common 3,000(3) *
Richard R. Hylland.............................................. Common --(3) *
Keith G. Baxter................................................. Common 23,810(3) *
Charles J. Kittrell............................................. Common 9,524(3) *
Ronald J. Goedde................................................ Common 9,524(3) *
Vincent J. DiCosimo............................................. Common 2,500(3) *
Daniel K. Newell................................................ Common 1,000(3) *
Paul Christen................................................... Common --(3) *
Kurt Katz....................................................... Common 25,000(3) *
All directors and executive officers as a group (9 persons)..... Common 74,358(3) *
</TABLE>
- ------------------------
* Less than 1%
(1) The business address of the Managing General Partner is 432 Westridge Drive,
Watsonville, California 95076.
(2) The business address of the Special General Partner is 33 Third Street S.E.,
Huron, South Dakota 57350.
(3) Excludes Common Units awarded under the Restricted Unit Plan as follows:
Merle D. Lewis--19,048 Common Units; Richard R. Hylland--14,286 Common
Units; Keith G. Baxter--133,333 Common Units; Charles J. Kittrell--76,190
Common Units; Ronald J. Goedde--76,190 Common Units; Vincent J. Di
Cosimo--47,619 Common Units; Daniel K. Newell--9,524 Common Units; Paul
Christen--8,889 Common Units; Kurt Katz--9,302 Common Units; and all
directors and officers as a group-- 394,381 Common Units.
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OWNERSHIP OF NPS COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS OF THE
MANAGING GENERAL PARTNER
The table below sets forth, as of September 30, 1997, the beneficial
ownership of the common stock, par value $1.75 per share, of NPS owned by each
director and each named executive officer of the Managing General Partner, as
well as the directors and all of the executive officers of the Managing General
Partner as a group. No director or executive officer beneficially owns more than
1% of NPS's outstanding shares. The total shares beneficially owned by the
directors and executive officers as a group represent less than 1% of NPS's
outstanding shares.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL
NAME OF BENEFICIAL OWNER OWNERSHIP (1)
- -------------------------------------------------------------------------- -------------------
<S> <C>
Merle D. Lewis (2)........................................................ 39,084
Richard R. Hylland (3).................................................... 10,833
Keith G. Baxter........................................................... 5,882
Charles J. Kittrell....................................................... --
Ronald J. Goedde.......................................................... --
Vincent J. DiCosimo....................................................... --
Daniel K. Newell (4)...................................................... 3,654
Paul Christen............................................................. --
Kurt Katz................................................................. --
All directors and executive officers as a group (9 persons)............... 59,453
</TABLE>
- ------------------------------
(1) The nature of beneficial ownership is sole voting and dispositive power,
unless otherwise noted.
(2) Includes 10,384 shares held jointly with spouse, 4,187 shares held in IRA by
spouse and 162 shares held by daughter.
(3) Includes 688 shares held in custodial accounts for Mr. Hylland's children
and 2,465 shares held by Mr. Hylland's spouse.
(4) Includes 348 shares held jointly with spouse.
The Managing General Partner is a wholly owned subsidiary of Northwestern
Growth, which in turn is a wholly owned subsidiary of NPS. No directors or
officers of the Managing General Partner or Northwestern Growth own any shares
of common stock of the Managing General Partner or Northwestern Growth.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RIGHTS OF THE GENERAL PARTNERS
As of the date of this Prospectus, the General Partners own all of the
Subordinated Units, representing an aggregate 37.8% limited partner interest in
the Partnership. Through the Managing General Partner's ability, as managing
general partner, to manage and operate the Partnership and the ownership of all
of the outstanding Subordinated Units by the General Partners (effectively
giving the General Partners the ability to veto certain actions of the
Partnership), the General Partners will have the ability to control the
management of the Partnership.
The Managing General Partner is a wholly-owned subsidiary, and the Special
General Partner is a majority-owned subsidiary, of NPS. Mr. Lewis serves as the
Chairman of the Board, and Messrs. Hylland and Newell are executive officers, of
NPS.
The Managing General Partner does not receive any management fee or other
compensation in connection with its management of the Partnership, but it and
its affiliates performing services for the Partnership are reimbursed at cost
for all expenses incurred on behalf of the Partnership, including the costs of
compensation properly allocable to the Partnership. The Partnership's
Partnership Agreement
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<PAGE>
provides that the Managing General Partner will determine the expenses that are
allocable to the Partnership in any reasonable manner.
In addition, the General Partners are entitled to receive distributions on
their general partner interests, certain incentive distributions and
distributions on their Subordinated Units.
CONTRIBUTION, CONVEYANCE AND ASSUMPTION AGREEMENT
In connection with the Transactions, the Partnership, the Operating
Partnership, the Managing General Partner, Northwestern Growth and certain other
parties entered into the Contribution, Conveyance and Assumption Agreement (the
"Contribution Agreement"), which generally governed the Transactions, including
the asset transfer to and the assumption of liabilities by the Operating
Partnership, and the application of the proceeds of the IPO. The Contribution
Agreement was not the result of arm's-length negotiations, and there can be no
assurance that it, or that any of the transactions provided for therein, were
effected on terms at least as favorable to the parties to such agreement as
could have been obtained from unaffiliated third parties. All of the transaction
expenses incurred in connection with the Transactions, including the expenses
associated with transferring assets into the Operating Partnership, were paid
from the proceeds of the IPO. For additional information, see "Prospectus
Summary--Cornerstone Propane Partners, L.P.--Distributions and Payments to the
General Partners and their Affiliates-- Formation Stage."
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
CONFLICTS OF INTEREST
Certain conflicts of interest exist and may arise in the future as a result
of the relationships between the General Partners and their stockholders, on the
one hand, and the Partnership and its limited partners, on the other hand. The
directors and officers of the Managing General Partner have fiduciary duties to
manage the Managing General Partner, including its investments in its
subsidiaries and affiliates, in a manner beneficial to its stockholder. At the
same time, the Managing General Partner has a fiduciary duty to manage the
Partnership in a manner beneficial to the Partnership and the Unitholders. The
Partnership Agreement contains provisions that allow the Managing General
Partner to take into account the interests of parties in addition to the
Partnership in resolving conflicts of interest, thereby limiting its fiduciary
duty to the Unitholders, as well as provisions that may restrict the remedies
available to Unitholders for actions taken that might, without such limitations,
constitute breaches of fiduciary duty. The duty of the directors and officers of
the Managing General Partner to its stockholder may, therefore, come into
conflict with the duties of the Managing General Partner to the Partnership and
the Unitholders. The Audit Committee of the Board of Directors of the Managing
General Partner will, at the request of the Managing General Partner, review
conflicts of interest that may arise between the Managing General Partner or its
affiliates, on the one hand, and the Partnership, on the other. The Partnership
Agreement provides that the Managing General Partner may adopt a resolution or
course of action that has not been approved by a majority of the members of the
Audit Committee. See "Management--Partnership Management" and "--Fiduciary and
Other Duties."
The fiduciary obligations of general partners is a developing area of law.
The provisions of the Delaware Act that allow the fiduciary duties of a general
partner to be waived or restricted by a partnership agreement have not been
resolved in a court of law, and the Managing General Partner has not obtained an
opinion of counsel covering the provisions set forth in the Partnership
Agreement that purport to waive or restrict fiduciary duties of the Managing
General Partner. Unitholders should consult their own legal counsel concerning
the fiduciary responsibilities of the Managing General Partner and its officers
and directors and the remedies available to the Unitholders.
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<PAGE>
Conflicts of interest could arise with respect to the situations described
below, among others:
COMMON UNITHOLDERS HAVE NO RIGHT TO ENFORCE OBLIGATIONS OF THE MANAGING
GENERAL PARTNER AND ITS AFFILIATES UNDER AGREEMENTS WITH THE PARTNERSHIP
The agreements between the Partnership and the Managing General Partner do
not grant to the Unitholders, separate and apart from the Partnership, the right
to enforce the obligations of the Managing General Partner and its affiliates in
favor of the Partnership. Therefore, the Partnership will be primarily
responsible for enforcing such obligations.
CONTRACTS BETWEEN THE PARTNERSHIP, ON THE ONE HAND, AND THE MANAGING GENERAL
PARTNER AND ITS AFFILIATES, ON THE OTHER, WILL NOT BE THE RESULT OF
ARM'S-LENGTH NEGOTIATIONS
Under the terms of the Partnership Agreement, the Managing General Partner
is not restricted from paying the Managing General Partner or its affiliates for
any services rendered (provided such services are rendered on terms fair and
reasonable to the Partnership) or entering into additional contractual
arrangements with any of them on behalf of the Partnership. Neither the
Partnership Agreement nor any of the other agreements, contracts and
arrangements between the Partnership, on the one hand, and the Managing General
Partner and its affiliates, on the other, are or will be the result of
arm's-length negotiations. All of such transactions entered into after the
closing of IPO are to be on terms which are fair and reasonable to the
Partnership, provided that any transaction shall be deemed fair and reasonable
if (i) such transaction is approved by the Audit Committee, (ii) its terms are
no less favorable to the Partnership than those generally being provided to or
available from unrelated third parties or (iii) taking into account the totality
of the relationships between the parties involved (including other transactions
that may be particularly favorable or advantageous to the Partnership), the
transaction is fair to the Partnership. The Managing General Partner and its
affiliates have no obligation to permit the Partnership to use any facilities or
assets of the Managing General Partner and such affiliates, except as may be
provided in contracts entered into from time to time specifically dealing with
such use, nor is there any obligation of the Managing General Partner and its
affiliates to enter into any such contracts.
CERTAIN ACTIONS TAKEN BY THE MANAGING GENERAL PARTNER MAY AFFECT THE AMOUNT
OF CASH AVAILABLE FOR DISTRIBUTION TO UNITHOLDERS OR ACCELERATE THE
CONVERSION OF SUBORDINATED UNITS
Decisions of the Managing General Partner with respect to the amount and
timing of cash expenditures, participation in capital expansions and
acquisitions, borrowings, issuances of additional partnership interests and
reserves in any quarter will affect whether, or the extent to which, there is
sufficient Available Cash from Operating Surplus to meet the Minimum Quarterly
Distribution and Target Distributions Levels on all Units in such quarter or in
subsequent quarters. The Partnership Agreement provides that any borrowings by
the Partnership or the approval thereof by the Managing General Partner shall
not constitute a breach of any duty owed by the Managing General Partner to the
Partnership or the Unitholders, including borrowings that have the purpose or
effect, directly or indirectly, of enabling the General Partners to receive
distributions on the Subordinated Units or the Incentive Distributions or hasten
the expiration of the Subordination Period or the conversion of the Subordinated
Units into Common Units. The Partnership Agreement provides that the Partnership
and the Operating Partnership may borrow funds from the General Partners and
their affiliates. The General Partners and their affiliates may not borrow funds
from the Partnership or the Operating Partnership. Furthermore, any actions
taken by the Managing General Partner consistent with the standards of
reasonable discretion set forth in the definitions of Available Cash, Operating
Surplus and Capital Surplus will be deemed not to constitute a breach of any
duty of the Managing General Partner to the Partnership or the Unitholders.
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<PAGE>
THE PARTNERSHIP REIMBURSES THE MANAGING GENERAL PARTNER AND ITS AFFILIATES
FOR CERTAIN EXPENSES
Under the terms of the Partnership Agreement, the Managing General Partner
and its affiliates are reimbursed by the Partnership for certain expenses
incurred on behalf of the Partnership, including costs incurred in providing
corporate staff and support services to the Partnership. The Partnership
Agreement provides that the Managing General Partner will determine the expenses
that are allocable to the Partnership in any reasonable manner determined by the
Managing General Partner in its sole discretion. See "Management--Reimbursement
of Expenses of the Managing General Partner and its Affiliates."
THE MANAGING GENERAL PARTNER INTENDS TO LIMIT ITS LIABILITY WITH RESPECT TO
THE PARTNERSHIP'S OBLIGATIONS
Whenever possible, the Managing General Partner intends to limit the
Partnership's liability under contractual arrangements to all or particular
assets of the Partnership, with the other party thereto having no recourse
against the General Partners or their assets. The Partnership Agreement provides
that any action by the Managing General Partner in so limiting the liability of
the General Partners or that of the Partnership will not be deemed to be a
breach of the Managing General Partner's fiduciary duties, even if the
Partnership could have obtained more favorable terms without such limitation on
liability.
THE NEW ACQUISITION INCENTIVE PLAN MAY GIVE MANAGEMENT INCENTIVES TO MAKE
ACQUISITIONS THAT ARE NOT BENEFICIAL TO THE PARTNERSHIP
The terms of the New Acquisition Incentive Plan (described above under
"Management--Executive Compensation--Incentive Plans") could give the senior
executives of the Managing General Partner an incentive to cause the Partnership
to acquire additional propane operations without regard to whether the
operations would prove beneficial to the Partnership and may present the senior
executives of the Managing General Partner with a conflict of interest in
negotiating the acquisition price on behalf of the Partnership. Mr. Baxter, the
only participant in the New Acquisition Incentive Plan who is a member of the
Board of Directors of the Managing General Partner, has agreed that he will not
participate in any board deliberations regarding potential acquisitions subject
to the New Acquisition Incentive Plan. The Partnership believes that the fact
that the ultimate decision regarding acquisitions and their terms will be made
by directors who have no interest in the New Acquisition Incentive Plan will
significantly reduce the potential conflicts resulting from the structure of the
plan.
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
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services for the Partnership in the future will be selected by the Managing
General Partner or the Audit Committee and may also perform services for the
Managing General Partner and its affiliates. The Partnership may retain separate
counsel for itself or the holders of Common Units in the event of a conflict of
interest arising between the Managing General Partner and its affiliates, on the
one hand, and the Partnership or the holders of Common Units, on the other,
depending on the nature of such conflict, but it does not intend to do so in
most cases.
THE MANAGING GENERAL PARTNER IS NOT RESTRICTED FROM ENGAGING IN A
TRANSACTION WHICH WOULD TRIGGER CHANGE OF CONTROL PROVISIONS
The Partnership's indebtedness contains provisions relating to change of
control. If such change of control provisions are triggered, such outstanding
indebtedness may become due. There is no restriction on the ability of the
Managing General Partner or Northwestern Growth to enter into a transaction
which would trigger such change of control provisions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--The
Partnership--Liquidity and Capital Resources--Financing and Sources of
Liquidity."
THE GENERAL PARTNERS' AFFILIATES MAY COMPETE WITH THE PARTNERSHIP
The Managing General Partner may not engage in any business or activity or
incur any debts or liabilities except in connection with or incidental to (i)
its performance as a general partner of the Partnership or one or more
affiliates of the Partnership, (ii) the acquiring, owning or disposing of debt
or equity securities of the Partnership or such affiliates, and (iii) permitting
its employees to perform services for its affiliates. Except as limited by the
next paragraph, the Special General Partner and other affiliates of the Managing
General Partner (including NPS and Northwestern Growth) are not restricted from
engaging in any business activities, including those in competition with the
Partnership.
Affiliates of the Managing General Partner may engage in a business activity
that involves the retail sale of propane to end users in the continental United
States only if (i) the Managing General Partner determines in its reasonable
judgment, prior to the commencement of such activity, that it is not in the best
interests of the Partnership to engage in such activity either (A) because of
the financial commitments or operating characteristics associated with such
activity or (B) because such activity is not consistent with the business
strategy or cannot otherwise be integrated with the 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.
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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 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
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circumstances the Managing General Partner may act in its sole discretion, in
good faith or pursuant to other appropriate standards.
The Delaware Act provides that a limited partner may institute legal action
on behalf of the partnership (a partnership derivative action) to recover
damages from a third party where the general partner has refused to institute
the action or where an effort to cause the general partner to do so is not
likely to succeed. In addition, the statutory or case law of certain
jurisdictions may permit a limited partner to institute legal action on behalf
of himself and all other similarly situated limited partners (a class action) to
recover damages from a general partner for violations of its fiduciary duties to
the limited partners.
The Partnership Agreement also provides that any standard of care and duty
imposed thereby or under the Delaware Act or any applicable law, rule or
regulation will be modified, waived or limited, to the extent permitted by law,
as required to permit the Managing General Partner and its officers and
directors to act under the Partnership Agreement or any other agreement
contemplated therein and to make any decisions pursuant to the authority
prescribed in the Partnership Agreement, so long as such action is reasonably
believed by the Managing General Partner to be in, or not inconsistent with, the
best interests of the Partnership. Further, the Partnership Agreement provides
that the General Partners and their officers and directors will not be liable
for monetary damages to the Partnership, the limited partners or assignees for
errors of judgment or for any acts or omissions if the Managing General Partner
and such other persons acted in good faith.
In addition, under the terms of the Partnership Agreement, the Partnership
is required to indemnify the General Partners and their officers, directors,
employees, affiliates, partners, members, agents and trustees, to the fullest
extent permitted by law, against liabilities, costs and expenses incurred by the
General Partners or such other persons, if the General Partners or such persons
acted in good faith and in a manner they reasonably believed to be in, or not
opposed to, the best interests of the Partnership and, with respect to any
criminal proceedings, had no reasonable cause to believe their conduct was
unlawful. See "The Partnership Agreement--Indemnification." Thus, the General
Partners could be indemnified for their negligent acts if they meet such
requirements concerning good faith and the best interests of the Partnership.
DESCRIPTION OF THE COMMON UNITS
The Common Units are registered under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the Partnership is subject to the reporting
and certain other requirements of the Exchange Act. The Partnership is required
to file periodic reports containing financial and other information with the
Commission.
Persons acquiring Common Units in this offering and subsequent transferees
of Common Units (or their brokers, agents or nominees on their behalf) who wish
to become Unitholders of record will be required to execute Transfer
Applications, the form of which is included as Appendix A to this Prospectus,
before the acquisition or transfer of such Common Units will be registered on
the records of the Transfer Agent and before cash distributions or federal
income tax allocations can be made to the acquiror or transferee. The
Partnership will be entitled to treat the nominee holder of a Common Unit as the
absolute owner thereof, and the beneficial owner's rights will be limited solely
to those that it has against the nominee holder as a result of or by reason of
any understanding or agreement between such beneficial owner and nominee holder.
THE UNITS
The Common Units and the Subordinated Units represent limited partner
interests in the Partnership, which entitle the holders thereof to participate
in Partnership distributions and to exercise the rights or privileges available
to limited partners under the Partnership Agreement. The holders of Common Units
do not have preemptive rights to acquire additional Common Units or other
partnership interests
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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
Until a Common Unit has been transferred on the books of the Partnership,
the Partnership and the Transfer Agent, notwithstanding any notice to the
contrary, may treat the record holder thereof as the absolute owner for all
purposes, except as otherwise required by law or stock exchange regulations. The
transfer of the Common Units to persons that purchase or acquire Common Units
directly from the Partnership will be accomplished through the completion,
execution and delivery of a Transfer Application by such investor in connection
with such Common Units. Any subsequent transfers of a Common Unit will not be
recorded by the Transfer Agent or recognized by the Partnership unless the
transferee executes and delivers a Transfer Application. By executing and
delivering a Transfer Application (the form of which is set forth as Appendix A
to this Prospectus and which is also set forth on the reverse side of the
certificates representing the Common Units), the transferee of Common Units (i)
becomes the record holder of such Common Units and shall constitute an assignee
until admitted into the Partnership as a substituted limited partner, (ii)
automatically requests admission as a substituted limited partner in the
Partnership, (iii) agrees to be bound by the terms and conditions of, and
executes, the Partnership Agreement, (iv) represents that such transferee has
the capacity, power and authority to enter into the Partnership Agreement, (v)
grants powers of attorney to officers of the Managing General Partner and any
liquidator of the Partnership as specified in the Partnership Agreement, and
(vi) makes the consents and waivers contained in the Partnership Agreement. An
assignee will become a substituted limited partner of the Partnership in respect
of the transferred Common Units upon the consent of the Managing General Partner
and the recordation of the name of the assignee on the books and records of the
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
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Units. A person acquiring Common Units who does not execute and deliver a
Transfer Application obtains only (a) the right to assign the Common Units to a
purchaser or other transferee and (b) the right to transfer the right to seek
admission as a substituted limited partner in the Partnership with respect to
the transferred Common Units. Thus, a person acquiring Common Units who does not
execute and deliver a Transfer Application will not receive cash distributions
or federal income tax allocations unless the Common Units are held in a nominee
or "street name" account and the nominee or broker has executed and delivered a
Transfer Application with respect to such Common Units, and may not receive
certain federal income tax information or reports furnished to record holders of
Common Units. The transferor of Common Units will have a duty to provide such
transferee with all information that may be necessary to obtain registration of
the transfer of the Common Units, but a transferee agrees, by acceptance of the
certificate representing Common Units, that the transferor will not have a duty
to insure the execution of the Transfer Application by the transferee and will
have no liability or responsibility if such transferee neglects to or chooses
not to execute and forward the Transfer Application to the Transfer Agent. See
"The Partnership Agreement--Status as Limited Partner or Assignee."
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THE PARTNERSHIP AGREEMENT
The following paragraphs are a summary of the material provisions of the
Partnership Agreement. The Partnership Agreement for the Partnership and the
Partnership Agreement for the Operating Partnership (the "Operating Partnership
Agreement") are exhibits to the Registration Statement of which this Prospectus
constitutes a part. The Partnership will provide prospective investors with a
copy of the Partnership Agreement and the Operating Partnership Agreement upon
request at no charge. The discussions presented herein and below of the material
provisions of the Partnership Agreement are qualified in their entirety by
reference to the Partnership Agreements for the Partnership and for the
Operating Partnership. The Partnership is the sole limited partner of the
Operating Partnership, which owns, manages and operates the Partnership's
business. The General Partners serve as the general partners of the Partnership
and of the Operating Partnership, owning an aggregate 2% general partner
interest in the Partnership and the Operating Partnership on a combined basis.
The Managing General Partner manages and operates the Partnership, and the
Special General Partner has no duty or right to participate in the management or
operation of the Partnership. Unless the context otherwise requires, references
herein to the "Partnership Agreement" constitute references to the Partnership
Agreement and the Operating Partnership Agreement, collectively.
Certain provisions of the Partnership Agreement are summarized elsewhere in
this Prospectus under various headings. With regard to the transfer of Common
Units, see "Description of the Common Units-- Transfer of Common Units." With
regard to distributions of Available Cash, see "Cash Distribution Policy." With
regard to allocations of taxable income and taxable loss, see "Tax
Considerations." Prospective investors are urged to review these sections of
this Prospectus and the Partnership Agreement carefully.
ORGANIZATION AND DURATION
The Partnership and the Operating Partnership were organized in October 1996
and November 1996, respectively, as Delaware limited partnerships. The General
Partners are the general partners of the Partnership and the Operating
Partnership. The General Partners own an aggregate 2% interest as general
partners and the right to receive Incentive Distributions, and the Unitholders
(including the General Partners as holders of Subordinated Units) own a 98%
interest as limited partners, in the Partnership and the Operating Partnership
on a combined basis. The Partnership will dissolve on December 31, 2086, 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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POWER OF ATTORNEY
Each Limited Partner, and each person who acquires a Unit from a Unitholder
and executes and delivers a Transfer Application with respect thereto, grants to
the Managing General Partner and, if a liquidator of the Partnership has been
appointed, such liquidator, a power of attorney to, among other things, execute
and file certain documents required in connection with the qualification,
continuance or dissolution of the Partnership or the amendment of the
Partnership Agreement in accordance with the terms thereof and to make consents
and waivers contained in the Partnership Agreement.
CAPITAL CONTRIBUTIONS
For a description of the initial capital contributions made to the
Partnership, see "The IPO and Related Transactions." The Unitholders are not
obligated to make additional capital contributions to the Partnership, except as
described below under "--Limited Liability."
LIMITED LIABILITY
Assuming that a Limited Partner does not participate in the control of the
business of the Partnership within the meaning of the Delaware Act and that he
otherwise acts in conformity with the provisions of the Partnership Agreement,
his liability under the Delaware Act will be limited, subject to certain
possible exceptions, to the amount of capital he is obligated to contribute to
the Partnership in respect of his Common Units plus his share of any
undistributed profits and assets of the Partnership. If it were determined,
however, that the right or exercise of the right by the Limited Partners as a
group to remove or replace the General Partners, to approve certain amendments
to the Partnership Agreement or to take other action pursuant to the Partnership
Agreement constituted "participation in the control" of the Partnership's
business for the purposes of the Delaware Act, then a Limited Partner could be
held personally liable for the Partnership's obligations under the laws of the
State of Delaware to the same extent as the General Partners with respect to
persons who transact business with the Partnership reasonably believing, based
on the Limited Partner's conduct, that the Limited Partner is a general partner.
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
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the Partnership Agreement, or to take other action pursuant to the Partnership
Agreement constituted "participation in the control" of the Partnership's
business for the purposes of the statutes of any relevant jurisdiction, then the
Limited Partners could be held personally liable for the Partnership's
obligations under the law of such jurisdiction to the same extent as the General
Partners under certain circumstances. The Partnership will operate in such
manner as the Managing General Partner deems reasonable and necessary or
appropriate to preserve the limited liability of the Limited Partners.
ISSUANCE OF ADDITIONAL SECURITIES
The Partnership Agreement authorizes the Partnership to issue an unlimited
number of additional limited partner interests and other equity securities of
the Partnership for such consideration and on such terms and conditions as are
established by the Managing General Partner in its sole discretion without the
approval of any limited partners; provided that, during the Subordination
Period, except as provided in clauses (i) and (ii) below, the Partnership may
not issue equity securities of the Partnership ranking prior or senior to the
Common Units or an aggregate of more than 4,270,000 additional Common Units
(excluding Common Units issued upon conversion of Subordinated Units, upon
conversion of the general partner interests and Incentive Distribution Rights as
a result of a withdrawal of a General Partner, and pursuant to the employee
benefit plans of the Managing General Partner, the Partnership or other members
of the Partnership Group and subject to adjustment in the event of a combination
or subdivision of Common Units) or an equivalent number of securities ranking on
a parity with the Common Units without the approval of the holders of at least a
Unit Majority. During the Subordination Period, the Partnership may also issue
an unlimited number of additional Common Units or parity securities without the
approval of the Unitholders (i) if such issuance occurs (A) in connection with
an Acquisition or a Capital Improvement or (B) within 365 days of, and the net
proceeds from such issuance are used to repay debt incurred in connection with,
an Acquisition or a Capital Improvement, in each case where such Acquisition or
Capital Improvement involves assets that, if acquired by the Partnership as of
the date that is one year prior to the first day of the quarter in which such
transaction is to be effected, would have resulted in an increase in (1) the
amount of Adjusted Operating Surplus generated by the Partnership on a per-Unit
basis (for all outstanding Units) with respect to each of the four most recently
completed quarters (on a pro forma basis) as compared to (2) the actual amount
of Adjusted Operating Surplus generated by the Partnership on a per-Unit basis
(for all outstanding Units) (excluding Adjusted Operating Surplus attributable
to the Acquisition or Capital Improvement) with respect to each of such four
most recently completed quarters (provided that if the issuance of Units with
respect to an Acquisition or Capital Improvement occurs within the first four
full quarters after the closing of the IPO, then Adjusted Operating Surplus as
used in clauses (1) (determined on a pro forma basis) and (2) above will be
calculated (A) for each quarter, if any, that commenced after the closing of the
IPO for which actual results of operations are available, based on the actual
Adjusted Operating Surplus of the Partnership generated with respect to such
quarter and (B) for each other quarter, on a pro forma basis not inconsistent
with the procedures, as applicable, set forth in "Cash Available for
Distribution"; 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
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sole discretion of the Managing General Partner, may have special voting rights
to which the Common Units are not entitled.
Upon issuance of additional Partnership Securities, the General Partners
will be required to make additional capital contributions to the extent
necessary to maintain their 2% general partner interest in the Partnership and
the Operating Partnership. Moreover, the Managing General Partner will have the
right, which it may from time to time assign in whole or in part to any of its
affiliates, to purchase Common Units, Subordinated Units or other equity
securities of the Partnership from the Partnership whenever, and on the same
terms that, the Partnership issues such securities or rights to persons other
than the Managing General Partner and its affiliates, to the extent necessary to
maintain the percentage interest of the General Partners and their affiliates in
the Partnership (including their interest represented by Subordinated Units)
that existed immediately prior to each such issuance. The holders of Common
Units do not have preemptive rights to acquire additional Common Units or other
partnership interests that may be issued by the Partnership.
AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed only by or with the
consent of the Managing General Partner, which consent may be given or withheld
in its sole discretion. In order to adopt a proposed amendment (other than
certain amendments discussed below), the Managing General Partner is required to
seek written approval of the holders of the number of Units required to approve
such amendment or call a meeting of the Limited Partners to consider and vote
upon the proposed amendment, except as described below. Proposed amendments
(unless otherwise specified) must be approved by holders of a Unit Majority,
except that no amendment may be made which would (i) enlarge the obligations of
any Limited Partner without its consent, unless approved by at least a majority
of the type or class of Units so affected, (ii) enlarge the obligations of,
restrict in any way any action by or rights of, or reduce in any way the amounts
distributable, reimbursable or otherwise payable by the Partnership to the
Managing General Partner or any of its affiliates without its 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
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Partner acting alone, (vii) an amendment effected, necessitated or contemplated
by a merger agreement that has been approved pursuant to the terms of the
Partnership Agreement, (viii) any amendment that, in the discretion of the
Managing General Partner, is necessary or advisable in connection with the
formation by the Partnership of, or its investment in, any corporation,
partnership or other entity (other than the Operating Partnership) as otherwise
permitted by the Partnership Agreement, (ix) a change in the fiscal year and/or
taxable year of the Partnership and changes related thereto, and (x) any other
amendments substantially similar to any of the foregoing.
In addition to the Managing General Partner's right to amend the Partnership
Agreement as described above, the Managing General Partner may make amendments
to the Partnership Agreement without the approval of any Partner or assignee if
such amendments, in the discretion of the Managing General Partner, (i) do not
adversely affect the Limited Partners in any material respect, (ii) are
necessary or advisable to satisfy any requirements, conditions or guidelines
contained in any opinion, directive, order, ruling or regulation of any federal
or state agency or judicial authority or contained in any federal or state
statute, (iii) are necessary or advisable to facilitate the trading of the
Common Units (including the division of any class or classes of outstanding
Partnership Securities into different classes to facilitate uniformity of tax
consequences within such classes of Partnership Securities) or to comply with
any rule, regulation, guideline or requirement of any securities exchange on
which the Common Units are or will be listed for trading, compliance with any of
which the Managing General Partner deems to be in the best interests of the
Partnership and the Limited Partners, (iv) are necessary or advisable in
connection with any action taken by the Managing General Partner relating to
splits or combinations of Units pursuant to the provisions of the Partnership
Agreement or (v) are required to effect the intent expressed in this Prospectus
or the intent of the Partnership Agreement or contemplated by the Partnership
Agreement.
The Managing General Partner will not be required to obtain an Opinion of
Counsel (as defined below) in the event of the amendments described in the two
immediately preceding paragraphs. No other amendments to the Partnership
Agreement will become effective without the approval of holders of at least 90%
of the Units unless the Partnership obtains an Opinion of Counsel to the effect
that such amendment will not affect the limited liability under applicable law
of any limited partner in the Partnership or the limited partner of the
Operating Partnership.
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
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Partnership Agreement or applicable Delaware law in the event of a merger or
consolidation of the Partnership, a sale of substantially all of the
Partnership's assets or any other transaction or event.
TERMINATION AND DISSOLUTION
The Partnership will continue until December 31, 2086, unless sooner
terminated pursuant to the Partnership Agreement. The Partnership will be
dissolved upon (i) the election of the Managing General Partner to dissolve the
Partnership, if approved by the holders of a Unit Majority, (ii) the sale,
exchange or other disposition of all or substantially all of the assets and
properties of the Partnership and the Operating Partnership, (iii) the entry of
a decree of judicial dissolution of the Partnership or (iv) the withdrawal or
removal of the Managing General Partner or any other event that results in its
ceasing to be the Managing General Partner (other than by reason of a transfer
of its general partner interest in accordance with the Partnership Agreement or
withdrawal or removal following approval and admission of a successor). Upon a
dissolution pursuant to clause (iv), the holders of a Unit Majority may also
elect, within certain time limitations, to reconstitute the Partnership and
continue its business on the same terms and conditions set forth in the
Partnership Agreement by forming a new limited partnership on terms identical to
those set forth in the Partnership Agreement and having as general partner an
entity approved by the holders of a Unit Majority subject to receipt by the
Partnership of an opinion of counsel to the effect that (x) such action would
not result in the loss of limited liability of any Limited Partner and (y)
neither the Partnership, the reconstituted limited partnership nor the Operating
Partnership would be treated as an association taxable as a corporation or
otherwise be taxable as an entity for federal income tax purposes upon the
exercise of such right to continue (hereinafter, an "Opinion of Counsel").
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon dissolution of the Partnership, unless the Partnership is reconstituted
and continued as a new limited partnership, the person authorized to wind up the
affairs of the Partnership (the "Liquidator") will, acting with all of the
powers of the Managing General Partner that such Liquidator deems necessary or
desirable in its good faith judgment in connection therewith, liquidate the
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
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Partnership will be dissolved, wound up and liquidated, unless within 180 days
after such withdrawal the holders of a Unit Majority agree in writing to
continue the business of the Partnership and to appoint a successor Managing
General Partner. See "--Termination and Dissolution."
The Managing General Partner may not be removed unless such removal is
approved by the vote of the holders of not less than 66 2/3% of the outstanding
Units (including Units held by the General Partners and their affiliates) and
the Partnership receives an Opinion of Counsel. The ownership of the
Subordinated Units by the Managing General Partner and its affiliates
effectively gives the Managing General Partner the ability to prevent its
removal. Any such removal is also subject to the approval of a successor general
partner by the vote of the holders of not less than a Unit Majority. The
Partnership Agreement also provides that if the Managing General Partner is
removed as general partner of the Partnership under circumstances where Cause
does not exist and Units held by the General Partners and their affiliates are
not voted in favor of such removal (i) the Subordination Period will end and all
outstanding Subordinated Units will immediately convert into Common Units on a
one-for-one basis, (ii) any existing Common Unit Arrearages will be extinguished
and (iii) the General Partners will have the right to convert their partner
interests (and all the Incentive Distribution Rights) into Common Units or to
receive cash in exchange for such interests.
Withdrawal or removal of the Managing General Partner as a general partner
of the Partnership also constitutes withdrawal or removal, as the case may be,
of the Managing General Partner as a general partner of the Operating
Partnership. Any withdrawal or removal of the Managing General Partner will
result in the simultaneous withdrawal or removal of the Special General Partner
from the Partnership and the Operating Partnership.
In the event of removal of the General Partners under circumstances where
Cause exists or withdrawal of the General Partners where such withdrawal
violates the Partnership Agreement, a successor general partner will have the
option to purchase the general partner interests and Incentive Distribution
Rights of the departing General Partners (the "Departing Partners") in the
Partnership and the Operating Partnership for a cash payment equal to the fair
market 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.
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TRANSFER OF GENERAL PARTNERS' INTERESTS AND INCENTIVE DISTRIBUTION RIGHTS
Except for a transfer by a General Partner of all, but not less than all, of
its general partner interest in the Partnership and the Operating Partnership to
(a) an affiliate of such General Partner or (b) another person in connection
with the merger or consolidation of such General Partner with or into another
person or the transfer by such General Partner of all or substantially all of
its assets to another person, such General Partner may not transfer all or any
part of its general partner interest in the Partnership and the Operating
Partnership to another person prior to December 31, 2006, without the approval
of the holders of at least a Unit Majority; provided that, in each case, such
transferee assumes the rights and duties of such General Partner to whose
interest such transferee has succeeded, agrees to be bound by the provisions of
the Partnership Agreement, furnishes an Opinion of Counsel and agrees to acquire
all (or the appropriate portion thereof, as applicable) of such General
Partner's interest in the Operating Partnership and agrees to be bound by the
provisions of the Operating Partnership Agreement. The Special General Partner
cannot transfer its general partner interest in the Partnership and the
Operating Partnership without the approval of the Managing General Partner. The
General Partners shall have the right at any time, however, to transfer their
Subordinated Units to one or more persons without Unitholder approval. At any
time, the stockholders of the General Partners may sell or transfer all or part
of their interest in the General Partners to an affiliate or a third party
without the approval of the Unitholders. Each General Partner or its affiliates
or a subsequent holder may transfer its Incentive Distribution Rights to another
person in connection with its merger or consolidation with or into, or sale of
all or substantially all of its assets to, such person without the prior
approval of the Unitholders. Holders of Incentive Distribution Rights may also
transfer such rights to their affiliates without the prior approval of the
Unitholders. Prior to December 31, 2006, other transfers of the Incentive
Distribution Rights will require the affirmative vote of holders of at least a
Unit Majority. On or after December 31, 2006, the Incentive Distribution Rights
will be freely transferable.
CHANGE OF MANAGEMENT PROVISIONS
The Partnership Agreement contains certain provisions that are intended to
discourage a person or group from attempting to remove the Managing General
Partner as general partner of the Partnership or otherwise change the management
of the Partnership. If any person or group other than the Managing General
Partner and its affiliates acquires beneficial ownership of 20% or more of any
class of Units, such person or group loses voting rights with respect to all of
its Units. The Partnership Agreement also provides that if the Managing General
Partner is removed as a general partner of the Partnership under circumstances
where Cause does not exist and Units held by the General Partners and their
affiliates are not voted in favor of such removal, (i) the Subordination Period
will end and all outstanding Subordinated Units will immediately convert into
Common Units on a one-for-one basis, (ii) any existing Common Unit Arrearages
will be extinguished and (iii) the General Partners will have the right to
convert their partner 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
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interests, and (ii) the Current Market Price as of the date three days prior to
the date such notice is mailed. As a consequence of the Managing General
Partner's right to purchase outstanding limited partner interests, a holder of
limited partner interests may have his limited partner interests purchased even
though he may not desire to sell them, or the price paid may be less than the
amount the holder would desire to receive upon the sale of his limited partner
interests. The tax consequences to a Unitholder of the exercise of this call
right are the same as a sale by such Unitholder of his Common Units in the
market. See "Tax Considerations--Disposition of Common Units."
MEETINGS; VOTING
Except as described below with respect to a Person or group owning 20% or
more of all Units, Unitholders or assignees who are record holders of Units on
the record date set pursuant to the Partnership Agreement will be entitled to
notice of, and to vote at, meetings of limited partners of the Partnership and
to act with respect to matters as to which approvals may be solicited. With
respect to voting rights attributable to Common Units that are owned by an
assignee who is a record holder but who has not yet been admitted as a limited
partner, the Managing General Partner shall be deemed to be the limited partner
with respect thereto and shall, in exercising the voting rights in respect of
such Common Units on any matter, vote such Common Units at the written direction
of such record holder. Absent such direction, such Common Units will not be
voted (except that, in the case of Common Units held by the Managing General
Partner on behalf of Non-citizen Assignees (as defined below), the Managing
General Partner shall distribute the votes in respect of such Common Units in
the same ratios as the votes of partners in respect of other Units are cast).
The Managing General Partner does not anticipate that any meeting of
Unitholders will be called in the foreseeable future. Any action that is
required or permitted to be taken by the Unitholders may be taken either at a
meeting of the Unitholders or without a meeting if consents in writing setting
forth the action so taken are signed by holders of such number of Units as would
be necessary to authorize or take such action at a meeting of all of the
Unitholders. Meetings of the Unitholders of the Partnership may be called by the
Managing General Partner or by Unitholders owning at least 20% of the
outstanding Units of the class for which a meeting is proposed. Unitholders may
vote either in person or by proxy at meetings. The holders of a majority of the
outstanding Units of the class or classes for which a meeting has been called
represented in person or by proxy shall constitute a quorum at a meeting of
Unitholders of such class or classes, unless any such action by the Unitholders
requires approval by holders of a greater percentage of such Units, in which
case the quorum shall be such greater percentage.
Each record holder of a Unit has a vote according to his percentage interest
in the Partnership, although additional limited partner interests having special
voting rights could be issued by the Partnership. See "--Issuance of Additional
Securities." However, if at any time any person or group (other than the
Managing General Partner and its affiliates) acquires, in the aggregate,
beneficial ownership of 20% or more of any class of Units then outstanding, such
person or group will lose voting rights with respect to all of its Units and
such Units may not be voted on any matter and will not be considered to be
outstanding when sending notices of a meeting of Unitholders, calculating
required votes, determining the presence of a quorum or for other similar
Partnership purposes. The Partnership Agreement provides that Common Units held
in nominee or street name account will be voted by the broker (or other nominee)
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.
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STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described above under "--Limited Liability," the Common Units will
be fully paid, and Unitholders will not be required to make additional
contributions to the Partnership.
An assignee of a Common Unit, subsequent to executing and delivering a
Transfer Application, but pending its admission as a substituted Limited Partner
in the Partnership, is entitled to an interest in the Partnership equivalent to
that of a Limited Partner with respect to the right to share in allocations and
distributions from the Partnership, including liquidating distributions. The
Managing General Partner will vote and exercise other powers attributable to
Common Units owned by an assignee who has not become a substitute Limited
Partner at the written direction of such assignee. See "--Meetings; Voting."
Transferees who do not execute and deliver a Transfer Application will be
treated neither as assignees nor as record holders of Common Units, and will not
receive cash distributions, federal income tax allocations or reports furnished
to record holders of Common Units. See "Description of the Common
Units--Transfer of Common Units."
NON-CITIZEN ASSIGNEES; REDEMPTION
If the Partnership is or becomes subject to federal, state or local laws or
regulations that, in the reasonable determination of the Managing General
Partner, create a substantial risk of cancellation or forfeiture of any property
in which the Partnership has an interest because of the nationality, citizenship
or other related status of any Limited Partner or assignee, the Partnership may
redeem the Units held by such Limited Partner or assignee at their Current
Market Price (as defined in the Glossary). In order to avoid any such
cancellation or forfeiture, the Managing General Partner may require each
Limited Partner or assignee to furnish information about his nationality,
citizenship or related status. If a Limited Partner or assignee fails to furnish
information about such nationality, citizenship or other related status within
30 days after a request for such information or the Managing General Partner
determines after receipt of such information that the Limited Partner or
assignee is not an eligible citizen, such Limited Partner or assignee may be
treated as a non-citizen assignee ("Non-citizen Assignee"). In addition to other
limitations on the rights of an assignee who is not a substituted Limited
Partner, a Non-citizen Assignee does not have the right to direct the voting of
his Units and may not receive distributions in kind upon liquidation of the
Partnership.
INDEMNIFICATION
The Partnership Agreement provides that the Partnership will indemnify the
General Partners, any Departing Partner, any Person who is or was an affiliate
of a General Partner or any Departing Partner, any Person who is or was a
member, partner, officer, director, employee, agent or trustee of a General
Partner or any Departing Partner or any affiliate of a General Partner or any
Departing Partner, or any Person who is or was serving at the request of a
General Partner or any Departing Partner or any affiliate of any such person,
any affiliate of a General Partner or any Departing Partner as an officer,
director, employee, member, partner, agent, fiduciary or trustee of another
Person ("Indemnitees"), to the fullest extent permitted by law, from and against
any and all losses, claims, damages, liabilities (joint or several), expenses
(including, without limitation, legal fees and expenses), judgments, fines,
penalties, interest, settlements and other amounts arising from any and all
claims, demands, actions, suits or proceedings, whether civil, criminal,
administrative or investigative, in which any Indemnitee may be involved, or is
threatened to be involved, as a party or otherwise, by reason of its status as
an Indemnitee; provided that in each case the Indemnitee acted in good faith and
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
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persons in connection with the Partnership's activities, regardless of whether
the Partnership would have the power to indemnify such person against such
liabilities under the provisions described above.
BOOKS AND REPORTS
The Managing General Partner is required to keep appropriate books of the
business of the Partnership at the principal offices of the Partnership. The
books will be maintained for both tax and financial reporting purposes on an
accrual basis. For tax purposes, the fiscal year of the Partnership is the
calendar year. For financial reporting purposes, however, the fiscal year of the
Partnership is a fiscal year ending on June 30.
As soon as practicable, but in no event later than 120 days after the close
of each fiscal year, the Managing General Partner will furnish or make available
to each record holder of Units (as of a record date selected by the Managing
General Partner) an annual report containing audited financial statements of the
Partnership for the past fiscal year, prepared in accordance with generally
accepted accounting principles. As soon as practicable, but in no event later
than 90 days after the close of each quarter (except the last quarter of each
fiscal year), the Managing General Partner will furnish or make available to
each record holder of Units (as of a record date selected by the Managing
General Partner) a report containing unaudited financial statements of the
Partnership with respect to such quarter and such other information as may be
required by law.
The Partnership will furnish each record holder of a Unit information
reasonably required for tax reporting purposes within 90 days after the close of
each calendar year. Such information is expected to be furnished in summary form
so that certain complex calculations normally required of partners can be
avoided. The Partnership's ability to furnish such summary information to
Unitholders will depend on the cooperation of such Unitholders in supplying
certain information to the Partnership. Every Unitholder (without regard to
whether he supplies such information to the Partnership) will receive
information to assist him in determining his federal and state tax liability and
filing his federal and state income tax returns.
RIGHT TO INSPECT PARTNERSHIP BOOKS AND RECORDS
The Partnership Agreement provides that a Limited Partner can for a purpose
reasonably related to such Limited Partner's interest as a limited partner, upon
reasonable demand and at his own expense, have furnished to him (i) a current
list of the name and last known address of each partner, (ii) a copy of the
Partnership's tax returns, (iii) information as to the amount of cash, and a
description and statement of the agreed value of any other property or services,
contributed or to be contributed by each partner and the date on which each
became a partner, (iv) copies of the Partnership Agreement, the certificate of
limited partnership of the Partnership, amendments thereto and powers of
attorney pursuant to which the same have been executed, (v) information
regarding the status of the Partnership's business and financial condition, and
(vi) such other information regarding the affairs of the Partnership as is just
and reasonable. The Partnership may, and intends to, keep confidential from the
Limited Partners trade secrets or other information the disclosure of which the
Partnership believes in good faith is not in the best interests of the
Partnership or which the Partnership is required by law or by agreements with
third parties to keep confidential.
REGISTRATION RIGHTS
Pursuant to the terms of the Partnership Agreement and subject to certain
limitations described therein, the Partnership has agreed to register for resale
under the Securities Act and applicable state securities laws any Common Units
or other securities of the Partnership (including Subordinated Units) proposed
to be sold by the General Partners or any of their affiliates if an exemption
from such registration requirements is not otherwise available for such proposed
transaction. The Partnership is obligated to pay all expenses incidental to such
registration, excluding underwriting discounts and commissions. See "Units
Eligible for Future Sale."
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UNITS ELIGIBLE FOR FUTURE SALE
The General Partners 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. For a discussion of the
transactions whereby the General Partners acquired the Subordinated Units in
connection with the organization of the Partnership, see "The IPO and Related
Transactions."
The Common Units offered hereby will generally be freely transferable
without restriction or further registration under the Securities Act, other than
by an "affiliate" (as that term is defined in the under 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, 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), or an
equivalent amount of securities ranking on a parity with the Common Units,
without the approval of the holders of at least a Unit Majority. The Partnership
Agreement provides that, after the Subordination Period, the Partnership may
issue an unlimited number of limited partner interests of any type without a
vote of the Unitholders. The Partnership Agreement does not impose any
restriction on the Partnership's ability to issue equity securities ranking
junior to the Common Units at any time. Any issuance of additional Common Units
or certain other equity securities would result in a corresponding decrease in
the proportionate ownership interest in the Partnership represented by, and
could adversely affect the cash distributions to and market price of, Common
Units then outstanding. See "The Partnership Agreement--Issuance of Additional
Securities."
Authorized but unissued Common Units with an aggregate value of $12.5
million (valued at the initial offering price in the IPO) are available for
issuance to executives, officers and directors of the Managing General Partner
pursuant to the Restricted Unit Plan. Common Units will be issued upon vesting
in accordance with the terms and conditions of the Restricted Unit Plan. Common
Units with an aggregate value of $9.8 million have been allocated and the
remaining Common Units available under the Restricted Unit Plan may be allocated
or issued in the future to such participants, and subject to such terms and
conditions, as the Board of Directors of the Managing General Partner, or a
committee thereof, shall determine. See "Management--Executive
Compensation--Restricted Unit Plan."
Pursuant to the Partnership Agreement, the General Partners and their
affiliates will have the right, upon the terms and subject to the conditions
therein, to cause the Partnership to register under the Securities Act and state
laws the offer and sale of any Units or other Partnership Securities that they
hold. Subject to the terms and conditions of the Partnership Agreement, such
registration rights allow the General Partners and their affiliates or their
assignees holding any Units to require registration of any such
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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' commissions 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 in 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 resales of
the Common Units from time to time to 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.
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TAX CONSIDERATIONS
The following section describes the material United States tax
considerations that may be relevant to prospective Unitholders. The statements
of law or legal conclusion set forth in this section constitute the opinion of
Schiff Hardin & Waite, counsel to the General Partners and the Partnership
("Counsel"). This section is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed regulations
thereunder and current administrative rulings and court decisions, including
modifications made by the Taxpayer Relief Act of 1997 (the "Act"), all of which
are subject to change at any time. Such changes, which may be applied
retroactively, may cause the tax consequences to vary substantially from the
consequences described below. Unless the context otherwise requires, references
in this section to the Partnership are references to both the Partnership and
the Operating Partnership.
This section only addresses the tax consequences to Unitholders who are
individual citizens or residents of the United States and has only limited
application to corporations, estates, trusts, non-resident aliens or other
Unitholders subject to specialized tax treatment (such as tax-exempt
institutions, foreign persons, individual retirement accounts, REITs or mutual
funds). This section does not address all tax consequences that may be
applicable to a Unitholder. Accordingly, each prospective Unitholder should
consult, and should depend on, his own tax advisor in analyzing the federal,
state, local and foreign tax consequences peculiar to him of the ownership or
disposition of Common Units.
For the reasons hereinafter described, Counsel has not rendered an opinion
with respect to the following specific federal income tax issues: (i) the
treatment of a Unitholder whose Common Units are loaned to a short seller to
cover a short sale of Common Units (see "--Tax Treatment of Operations--
Treatment of Short Sales"), (ii) whether a Unitholder acquiring Common Units in
separate transactions must maintain a single aggregate adjusted tax basis in his
Common Units (see "--Disposition of Common Units--Recognition of Gain or Loss"),
(iii) whether the Partnership's monthly convention for allocating taxable income
and losses is permitted by existing Treasury Regulations (see "--Disposition of
Common Units--Allocations Between Transferors and Transferees"), (iv) whether
the Partnership's convention for allocating recapture income and allocating all
items of income, gain, loss, deduction and credit for the period ending December
31, 1996 to the General Partners will be recognized for federal income tax
purposes (see "--Allocation of Partnership Income, Gain, Loss and Deduction"),
and (v) whether the Partnership's method for depreciating Section 743
adjustments will be recognized for federal income tax purposes (see "--Tax
Treatment of Operations--Section 754 Election").
An opinion of counsel represents only that counsel's best legal judgment and
does not bind the Internal Revenue Service (the "IRS") or the courts. No ruling
has been or will be requested from the IRS with respect to classification of the
Partnership as a partnership for federal income tax purposes, whether the
Partnership's propane operations generate "qualifying income" under Section 7704
of the Code or any other matter affecting the Partnership or prospective
Unitholders. Thus, no assurance can be provided that the opinions set forth
herein would be sustained by a court if contested by the IRS. Any such contest
with the IRS may materially and adversely impact the market for the Common Units
and the prices at which Common Units trade. In addition, the costs of any
contest with the IRS will be borne directly or indirectly by the Unitholders and
the General Partners.
CLASSIFICATION OF THE PARTNERSHIP
Based on the representations and subject to the qualifications set forth in
the detailed discussion that follows, for federal income tax purposes (i) the
Partnership and the Operating Partnership will each be treated as a partnership,
and (ii) owners of Common Units (with certain exceptions, as described in
"--Limited Partner Status" below) will be treated as partners of the Partnership
(but not the Operating Partnership).
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TAX RATES
The top marginal income tax rate for individuals is 36% subject to a 10%
surtax on individuals with taxable income in excess of $271,050 per year. The
surtax is computed by applying a 39.6% rate to taxable income in excess of the
threshold. Long-term capital gains recognized after July 28, 1997 on marketable
securities such as Common Units will be taxed at a maximum rate of 20% for
individuals if the individual's holding period is more than 18 months and a
maximum rate of 28% if the holding period is more than one year, but not more
than 18 months.
CONSEQUENCES OF EXCHANGING PROPERTY FOR COMMON UNITS
RECOGNITION OF GAIN OR LOSS
In general, no gain or loss will be recognized for federal income tax
purposes by the Partnership or by a person (including any individual,
partnership, S corporation or corporation taxed under Subchapter C of the Code)
contributing property (including stock) to the Partnership in exchange for
Common Units. If the Partnership assumes liabilities or takes assets subject to
liabilities in connection with a contribution of assets in exchange for Common
Units, however, the application of either one or both of two federal income tax
rules may result in the recognition of taxable gain by the contributing person.
The first of these rules is the "disguised sale rule." Under the disguised
sale rule, if the Partnership assumes or takes property subject to a liability
of the contributing person other than a "qualified liability," the Partnership
is treated as transferring taxable consideration to the contributing person to
the extent that the amount of the liability exceeds the contributing person's
share of that liability immediately after the Partnership assumes or takes
subject to the liability. For this purpose, a qualified liability includes: (a)
a liability that was incurred by the partner more than two years prior to the
earlier of the date the partner agrees in writing to transfer the property or
the date the partner transfers the property to the Partnership and that has
encumbered the transferred property throughout that two-year period; (b) a
liability that was not incurred in anticipation of the transfer of the property
to the Partnership, but that was incurred by the partner within the two-year
period prior to the earlier of the date the partner agrees in writing to
transfer the property or the date the partner transfers the property to the
Partnership and that has encumbered the transferred property since it was
incurred; (c) a liability that is allocable under the rules of Treasury
Regulation Section 1.163-8T to capital expenditures with respect to the
property; or (d) a liability that was 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 Contributed Property is disposed of by the
Partnership.
BASIS OF COMMON UNITS
A person who contributes property (including stock) to the Partnership in
exchange for Common Units will generally have an initial tax basis for his
Common Units equal to the tax basis of the property contributed to the
Partnership in exchange for Common Units plus any gain recognized on the
contribution. The tax basis for a Common Unit will be increased by the
Unitholder's share of Partnership income and his share of increases in
Partnership debt. The basis for a Common Unit will be decreased (but not below
zero) by distributions from the Partnership (including deemed distributions
resulting from the assumption of indebtedness by the Partnership), by the
Unitholder's share of Partnership losses, by his share of decreases in
Partnership debt and by the Unitholder's share of expenditures of the
Partnership that are not deductible in computing its taxable income and are not
required to be capitalized.
OWNERSHIP OF UNITS BY S CORPORATIONS
Section 1362(b) of the Code provides that certain small business
corporations may elect to be treated as an "S corporation." In order to elect S
corporation status, a corporation must not: (a) have more than 75 shareholders
(a husband and wife are treated as one shareholder); (b) have as a shareholder a
person (other than an estate and other than certain trusts) who is not an
individual; (c) have a nonresident alien as a shareholder; and (d) have more
than one class of stock. All of the shareholders of a corporation must elect for
the corporation to be treated as an S corporation. The election is made by
filing Form 2553, which must be filed on or before the 15th day of the third
month of a taxable year in order for the election to be effective for that
taxable year. (A corporation that has not elected S corporation status is
referred to as a "C corporation").
In general, an S corporation is not subject to tax on its income. Instead,
each shareholder takes into account his pro rata share of the corporation's
items of income (including tax-exempt income), loss, deduction or credit. The
character of any item included in a shareholder's pro rata share is determined
as if such item were realized or incurred directly by the shareholder. Thus, an
S corporation that exchanges its assets for Common Units will not generally pay
tax on its distributive share of partnership income. Instead, such income will
be taxed as if the Common Units were held directly by the shareholders of the S
corporation.
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Distributions made by an S corporation are generally nontaxable to the
extent they are made out of the corporation's "accumulated adjustments account,"
which represents the undistributed income of the corporation accumulated
subsequent to the effective date of its S election. Distributions in excess of
the accumulated adjustments account are treated as taxable dividends to the
extent that the corporation has "subchapter C earnings and profits," which
includes any earnings and profits accumulated by a corporation prior to the date
an S corporation election is effective, reduced by any distributions that are
treated as having been made out of subchapter C earnings and profits.
Distributions in excess of the accumulated adjustments account and subchapter
earnings a profits are treated as a return of capital to the extent of a
shareholder's basis in his stock, and are treated as gain from the sale or
exchange of property to the extent in excess of such basis.
A corporation that operates as a C corporation and subsequently makes an
election to be treated as an S corporation may be subject to tax on the excess
of the aggregate fair market value of its assets over the aggregate adjusted tax
basis of its assets as of the first day it is treated as an S corporation (any
such excess is referred to as "net unrealized built-in gain"). This tax is not
immediately imposed at the time of conversion to S corporation status. Instead,
if a C corporation converts to S corporation status, it will be subject to tax
on its net unrealized built-in gain if and to the extent that is has a net
recognized built-in gain at any time during the next ten years. If an S
corporation is subject to tax on built-in gain, the gain is recognized and taxed
to the corporation at the highest corporate tax rate, and is then passed through
(after reduction for corporate taxes paid) and taxed to the shareholder. A
corporation's net recognized built-in gain for any tax year is the lesser of the
net amount of the corporation's recognized built-in gains and recognized
built-in losses for the tax year or what the corporation's taxable income would
have been for the year had it been a C corporation.
Recognized built-in gain is defined as any gain recognized during the
recognition period (the 10 year period beginning with the first day as an S
corporation) on the disposition of any asset except to the extent that the
corporation can establish that the asset was not held by the corporation on its
first day as an S corporation or that the gain recognized exceeds the excess of
the fair market value of the asset as of the first day the corporation was an S
corporation over the adjusted basis of the asset on that date. Similarly, the
term recognized built-in loss means any loss recognized during the recognition
period on the disposition of any asset to the extent that the S corporation
establishes that the asset was held at the beginning of its first day as an S
corporation and that the loss does not exceed the excess of the adjusted basis
of the asset as of the corporation's first day as an S corporation over the fair
market value of the asset as of that date.
For example, assume that a corporation elects to be treated as an S
corporation on January 1, 1994, and that it has a net unrealized built-in gain
of $500,000. On January 1, 1994, it has a piece of equipment with a fair market
value of $1 million and a tax basis of $800,000. If the company sold this asset
in 1996 and had a tax gain of $300,000, the recognized built-in gain would be
$200,000. Assuming the company had no other recognized built-in gains or
recognized built-in losses for that tax year and that its taxable income had it
been a C corporation would have been greater than $200,000, a corporate tax
would be assessed on gain of $200,000.
Under the rules relating to taxation of an S corporation's built-in gains,
if an S corporation owns a partnership interest on the first day of its first
taxable year as an S corporation, or transfers property which it held on the
first day of its first taxable year as an S corporation to a partnership during
the recognition period, a disposition of the partnership interest during the
recognition period may result in recognized built-in gain, taxable as described
above. Thus, an S corporation receiving Common Units in exchange for its assets
could be taxable on a sale or other disposition of those Common Units within the
recognition period. In addition, sales or other dispositions of assets
(including inventory), by the Partnership, which were contributed by an S
corporation in exchange for Common Units could result in the recognition of
taxable built-in gain by the S corporation.
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A C corporation electing S corporation status will be immediately taxable to
the extent of any "LIFO recapture amount." LIFO recapture amount is defined as
the amount by which inventory of the C corporation maintained on a LIFO basis
has a tax basis which is less than the tax basis the inventory would have had
the corporation maintained its inventory using the FIFO method.
Prospective Unitholders should also note that additional proposals have been
made which would alter the rules described above, generally requiring the
immediate recognition of corporate and shareholder level taxable gain upon the
conversion of a large C corporation to S corporation status.
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner is required to take into account his allocable
share of items of income, gain, loss and deduction of the partnership in
computing his federal income tax liability, regardless of whether cash
distributions are made. Distributions by a partnership to a partner are
generally not taxable unless the amount of any cash distributed is in excess of
the partner's adjusted basis in his partnership interest.
No ruling has been or will be sought from the IRS as to the status of the
Partnership or the Operating Partnership as a partnership for federal income tax
purposes. Instead the Partnership has relied on the opinion of Counsel that,
based upon the Code, the regulations thereunder, published revenue rulings and
court decisions, the Partnership and the Operating Partnership will each be
classified as a partnership for federal income tax purposes.
In rendering its opinion, Counsel has relied on certain factual
representations made by the Partnership and the General Partners. Such factual
matters are as follows:
(a) With respect to the Partnership and the Operating Partnership, the
General Partners, at all times while acting as general partners of the
Partnership and the Operating Partnership (since the IPO), have had and
will have combined net worth, computed on a fair market value basis,
excluding their interests in the Partnership and in the Operating
Partnership and any notes or receivables due from the Partnership or the
Operating Partnership, of not less than $15 million;
(b) The Partnership has been and will be operated in accordance with (i) all
applicable partnership statutes, (ii) the Partnership Agreement, and
(iii) the description thereof in this Prospectus;
(c) The Operating Partnership has been and will be operated in accordance
with (i) all applicable partnership statutes, (ii) the limited
partnership agreement for the Operating Partnership, and (iii) the
description thereof in this Prospectus;
(d) The General Partners have and will, at all times, act independently of
the limited partners (other than the limited partner interest held by the
General Partners);
(e) For each taxable year of the Partnership's existence, less than 10% of
the gross income of the Partnership has been and will be derived from
sources other than (i) the exploration, development, production,
processing, refining, transportation or marketing of any mineral or
natural resource, including oil, gas or products thereof, or (ii) other
items of "qualifying income" within the meaning of Section 7704(d) of the
Code; and
(f) None of the Partnership, the Operating Partnership, or any subsidiary
partnership will elect to be treated as an association or corporation.
Counsel's opinion as to the partnership classification of the Partnership in
the event of a change in one of the general partners is based upon the
assumption that the new general partner will satisfy the foregoing
representations.
Section 7704 of the Code provides that publicly-traded partnerships will, as
a general rule, be taxed as corporations. However, an exception (the "Qualifying
Income Exception") exists with respect to publicly-
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traded partnerships of which 90% or more of the gross income for every taxable
year consists of "qualifying income." Qualifying income includes interest (from
other than a financial business), dividends and income and gains from the
transportation and marketing of crude oil, natural gas, and products thereof,
including the retail and wholesale marketing of propane and the transportation
of propane and natural gas liquids. Based upon the representations of the
Partnership and the General Partners and a review of the applicable legal
authorities, Counsel is of the opinion that at least 90% of the Partnership's
gross income will constitute qualifying income. The Partnership estimates that
less than 7% of its gross income for each taxable year will not constitute
qualifying income.
If the Partnership fails to meet the Qualifying Income Exception (other than
a failure which is determined by the IRS to be inadvertent and which is cured
within a reasonable time after discovery), the Partnership will be treated as if
it had transferred all of its assets (subject to liabilities) to a newly formed
corporation (on the first day of the year in which it fails to meet the
Qualifying Income Exception) in return for stock in that corporation, and then
distributed that stock to the partners in liquidation of their interests in the
Partnership. This contribution and liquidation should be tax-free to Unitholders
and the Partnership, so long as the Partnership, at that time, does not have
liabilities in excess of the tax basis of its assets. Thereafter, the
Partnership would be treated as a corporation for federal income tax purposes.
If the Partnership or the Operating Partnership were treated as an
association taxable as a corporation in any taxable year, either as a result of
a failure to meet the Qualifying Income Exception or otherwise, its items of
income, gain, loss and deduction would be reflected only on its tax return
rather than being passed through to the Unitholders, and its net income would be
taxed to the Partnership or the Operating Partnership at corporate rates. In
addition, any distribution made to a Unitholder would be treated as either
taxable dividend income (to the extent of the Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
nontaxable return of capital (to the extent of the Unitholder's tax basis in his
Common Units) or taxable capital gain (after the Unitholder's tax basis in the
Common Units is reduced to zero). Accordingly, treatment of either the
Partnership or the Operating Partnership as an association taxable as a
corporation would result in a material reduction in a Unitholder's cash flow and
after-tax return and thus would likely result in a substantial reduction of the
value of the Units.
The discussion below is based on the assumption that the Partnership will be
classified as a partnership for federal income tax purposes.
LIMITED PARTNER STATUS
Unitholders who have become limited partners of the Partnership will be
treated as partners of the Partnership for federal income tax purposes.
Moreover, the IRS has ruled that assignees of partnership interests who have not
been admitted to a partnership as partners, but who have the capacity to
exercise substantial dominion and control over the assigned partnership
interests, will be treated as partners for federal income tax purposes. On the
basis of this ruling, except as otherwise described herein, Counsel is of the
opinion that (a) assignees who have executed and delivered Transfer
Applications, and are awaiting admission as limited partners and (b) Unitholders
whose Common Units are held in street name or by a nominee and who have the
right to direct the nominee in the exercise of all substantive rights attendant
to the ownership of their Common Units will be treated as partners of the
Partnership for federal income tax purposes. As this ruling does not extend, on
its facts, to assignees of Common Units who are entitled to execute and deliver
Transfer Applications, but who fail to do so, Counsel's opinion does not extend
to them. Income, gain, deductions or losses would not appear to be reportable by
a Unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by such a Unitholder would therefore be fully taxable as
ordinary income. These holders should consult their own tax advisors with
respect to their status as partners in the Partnership for federal income tax
purposes. A purchaser or other transferee of Common Units who does not execute
and deliver a Transfer Application may not receive certain federal income tax
information or reports furnished to record holders of Common Units unless the
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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.
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
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amount to be less than zero at the end of any taxable year. Losses disallowed to
a Unitholder or recaptured as a result of these limitations will carry forward
and will be allowable to the extent that the Unitholder's tax basis or at risk
amount (whichever is the limiting factor) is subsequently increased. Upon the
taxable disposition of a Unit, any gain recognized by a Unitholder can be offset
by losses that were previously suspended by the at risk limitation but may not
be offset by losses suspended by the basis limitation. Any excess loss (above
such gain) previously suspended by the at risk or basis limitations is no longer
utilizable.
In general, a Unitholder will be at risk to the extent of the tax basis of
his Units, excluding any portion of that basis attributable to his share of
Partnership nonrecourse liabilities, reduced by any amount of money the
Unitholder borrows to acquire or hold his Units if the lender of such borrowed
funds owns an interest in the Partnership, is related to such a person or can
look only to Units for repayment. A Unitholder's at risk amount will increase or
decrease as the tax basis of the Unitholder's Units increases or decreases
(other than tax basis increases or decreases attributable to increases or
decreases in his share of Partnership nonrecourse liabilities).
The passive loss limitations generally provide that individuals, estates,
trusts and certain closely-held corporations and personal service corporations
can deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) only to the extent of the taxpayer's
income from those passive activities. The passive loss limitations are applied
separately with respect to each publicly-traded partnership such as the
Partnership. Consequently, any passive losses generated by the Partnership will
only be available to offset future income generated by the Partnership and will
not be available to offset income from other passive activities or investments
(including other publicly-traded partnerships) or salary or active business
income. Passive losses which are not deductible because they exceed a
Unitholder's income generated by the Partnership may be deducted in full when he
disposes of his entire investment in the Partnership in a fully taxable
transaction to an unrelated party. The passive activity loss rules are applied
after other applicable limitations on deductions such as the at risk rules and
the basis limitation.
A Unitholder's share of net income from the Partnership may be offset by any
suspended passive losses from the Partnership, but it may not be offset by any
other current or carryover losses from other passive activities, including those
attributable to other publicly-traded partnerships. The IRS has announced that
Treasury Regulations will be issued which characterize net passive income from a
publicly-traded Partnership as investment income for purposes of the limitations
on the deductibility of investment interest.
LIMITATIONS ON INTEREST DEDUCTIONS
The deductibility of a non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of such taxpayer's "net investment
income." As noted, a Unitholder's net passive income from the Partnership will
be treated as investment income for this purpose. In addition, the Unitholder's
share of the Partnership's portfolio income will be treated as investment
income. Investment interest expense includes (i) interest on indebtedness
properly allocable 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
distribution. If the Partnership has a net loss, items of income, gain, loss and
deduction will generally be allocated first, to the General Partners and the
Unitholders in accordance with their respective Percentage Interests to the
extent of their positive capital accounts (as maintained under the Partnership
Agreement) and, second, to the General Partners.
As required by Section 704(c) of the Code and as permitted by Regulations
thereunder, certain items of Partnership income, deduction, gain and loss will
be allocated to account for the difference between the tax basis and fair market
value of property contributed to the Partnership by each of the General Partners
or any other person contributing property to the Partnership ("Contributed
Property"). Under the Code, the partners in a partnership cannot be allocated
more depletion, depreciation, gain or loss than the total amount of any such
item recognized by that partnership in a particular taxable period (the "ceiling
limitation"). To the extent the ceiling limitation is or becomes applicable, the
Partnership Agreement requires that certain items of income and deduction be
allocated in a way designed to effectively "cure" this problem and eliminate the
impact of the ceiling limitation. Regulations under Section 704(c) of the Code
permit a partnership to make reasonable allocations to reduce or eliminate such
differences. The effect of these allocations will be to cause a property
contributor to recognize any built-in tax gain (or loss) over the period of time
during which the Partnership claims depreciation or amortization deductions with
respect to the contributed property, or when such property is disposed of. In
addition, certain items of recapture income will be allocated to the extent
possible to the partner allocated the deduction giving rise to the treatment of
such gain as recapture income in order to minimize the recognition of ordinary
income by some Unitholders, but these allocations may not be respected under
current law. Under recently proposed regulations, which are not yet effective,
the allocation of depreciation recapture should be respected. If these
allocations of recapture income are not respected, the amount of the income or
gain allocated to a Unitholder will not change but instead a change in the
character of the income allocated to a Unitholder would result. Finally,
although the Partnership does not expect that its operations will result in the
creation of negative capital accounts, if negative capital accounts nevertheless
result, items of Partnership income and gain will be allocated in an amount and
manner sufficient to eliminate the negative balance as quickly as possible.
Regulations provide that an allocation of items of partnership income, gain,
loss or deduction, other than an allocation required by Section 704(c) of the
Code to eliminate the disparity between a partner's "book" capital account
(credited with the fair market value of Contributed Property) and "tax" capital
account (credited with the tax basis of Contributed Property) (the "Book-Tax
Disparity"), will generally be given effect for federal income tax purposes in
determining a partner's distributive share of an item of income, gain, loss or
deduction only if the allocation has substantial economic effect. In any other
case, a partner's distributive share of an item will be determined on the basis
of the partner's interest in the partnership, which will be determined by taking
into account all the facts and circumstances, including the partner's relative
contributions to the partnership, the interests of the partners in economic
profits and losses, the interest of the partners in cash flow and other
nonliquidating distributions and rights of the partners to distributions of
capital upon liquidation.
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Counsel is of the opinion that, with the exception of the allocations of
recapture income and allocations of all items of income, gain, loss, deduction
or credit to the General Partners for the taxable period ending on December 31,
1996 discussed above, allocations under the Partnership Agreement will be given
effect for federal income tax purposes in determining a partner's distributive
share of an item of income, gain, loss or deduction. There are, however,
uncertainties in the Treasury Regulations relating to allocations of Partnership
income, and investors should be aware that the allocations of recapture income
and allocations of all items of income, gain, loss, deduction or credit to the
General Partners for the taxable period ending on December 31, 1996 in the
Partnership Agreement may be successfully challenged by the IRS.
TAX TREATMENT OF OPERATIONS
ACCOUNTING METHOD AND TAXABLE YEAR
The Partnership uses the year ending December 31 as its taxable year and has
adopted the accrual method of accounting for federal income tax purposes. Each
Unitholder will be required to include in income his allocable share of
Partnership income, gain, loss and deduction for the taxable year of the
Partnership ending within or with the taxable year of the Unitholder. In
addition, a Unitholder who has a taxable year ending on a date other than
December 31 and who disposes of all of his Units following the close of the
Partnership's taxable year but before the close of his taxable year must include
his allocable share of Partnership income, gain, loss and deduction in income
for his taxable year with the result that he will be required to report in
income for his taxable year his distributive share of more than one year of
Partnership income, gain, loss and deduction. See "--Disposition of Common
Units--Allocations Between Transferors and Transferees."
INITIAL TAX BASIS, DEPRECIATION AND AMORTIZATION
The tax basis of the assets of the Partnership will be used for purposes of
computing depreciation and cost recovery deductions and, ultimately, gain or
loss on the disposition of such assets. The Partnership assets will initially
have an aggregate tax basis equal to the tax basis of the assets in the
possession of the General Partners or other contributor immediately prior to
their contributions to the Partnership plus the amount of gain, if any,
recognized by the General Partners or other contributor in connection with their
contribution to the Partnership. The federal income tax burden associated with
the difference between the fair market value of property contributed to the
Partnership and the tax basis established for such property will be borne by the
contributor of such property. See "--Allocation of Partnership Income, Gain,
Loss and Deduction."
To the extent allowable, the Partnership may elect to use the depreciation
and cost recovery methods that will result in the largest depreciation
deductions in the early years of the Partnership. The Partnership will not be
entitled to any amortization deductions with respect to goodwill conveyed to the
Partnership on formation. Property subsequently acquired or constructed by the
Partnership may be depreciated using accelerated methods permitted by the Code.
If the Partnership disposes of depreciable property by sale, foreclosure, or
otherwise, all or a portion of any gain (determined by reference to the amount
of depreciation previously deducted and the nature of the property) may be
subject to the recapture rules and taxed as ordinary income rather than capital
gain. Similarly, a partner who has taken cost recovery or depreciation
deductions with respect to property owned by the Partnership may be required to
recapture such deductions as ordinary income upon a sale of his interest in the
Partnership. See "--Allocation of Partnership Income, Gain, Loss and Deduction"
and "--Disposition of Common Units--Recognition of Gain or Loss."
Costs incurred in organizing the Partnership may be amortized over any
period selected by the Partnership not shorter than 60 months. The costs
incurred in promoting the issuance of Units (i.e. syndication expenses) must be
capitalized and cannot be deducted currently, ratably or upon termination
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of the Partnership. There are uncertainties regarding the classification of
costs as organization expenses, which may be amortized, and as syndication
expenses, which may not be amortized. Under recently adopted regulations, the
underwriting discounts and commissions would be treated as a syndication cost.
SECTION 754 ELECTION
The Partnership intends to make the election permitted by Section 754 of the
Code. That election is irrevocable without the consent of the IRS. The election
generally permits the Partnership to adjust a Common Unit purchaser's tax basis
in the Partnership's assets ("inside basis") pursuant to Section 743(b) of the
Code to reflect his purchase price. The Section 743(b) adjustment belongs to the
purchaser and not to other partners. (For purposes of this discussion, a
partner's inside basis in the Partnership's assets will be considered to have
two components: (1) his share of the Partnership's tax basis in such assets
("Common Basis") and (2) his Section 743(b) adjustment to that basis.)
Proposed Treasury Regulation Section 1.168-2(n) generally requires the
Section 743(b) adjustment attributable to recovery property to be depreciated as
if the total amount of such adjustment were attributable to newly-acquired
recovery property placed in service when the purchaser acquires the Unit.
Similarly, newly issued proposed Treasury regulations promulgated under Section
197 indicate that the Section 743(b) adjustment attributable to an amortizable
Section 197 intangible should be treated as a newly-acquired asset placed in
service in the month when the purchaser acquires the Unit. Under Treasury
Regulation Section 1.167(c)-1(a)(6), a Section 743(b) adjustment attributable to
property subject to depreciation under Section 167 of the Code rather than cost
recovery deductions under Section 168 is generally required to be depreciated
using either the straight-line method or the 150% declining balance method. The
depreciation and amortization methods and useful lives associated with the
Section 743(b) adjustment, therefore, may differ from the methods and useful
lives generally used to depreciate the Common Basis in such properties. Pursuant
to the Partnership Agreement, the Partnership is authorized to adopt a
convention to preserve the uniformity of Units even if such convention is not
consistent with Treasury Regulation Sections 1.167(c)-1(a)(6), Proposed Treasury
Regulation Section 1.168-2(n) or the Section 197 proposed Treasury regulations.
See "--Uniformity of Units."
Although Counsel is unable to opine as to the validity of such an approach,
the Partnership intends to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property (to
the extent of any unamortized Book-Tax Disparity) using a rate of depreciation
or amortization derived from the depreciation or amortization method and useful
life applied to the Common Basis of such property, or treat that portion as
non-amortizable to the extent attributable to property the Common Basis of which
is not amortizable, despite its inconsistency with Proposed Treasury Regulation
Section 1.168-2(n), Treasury Regulation Section 1.167(c)-1(a)(6) (neither of
which is expected to directly apply to a material portion of the Partnership's
assets) or the Section 197 proposed Treasury regulations. To the extent such
Section 743(b) adjustment is attributable to appreciation in value in excess of
the unamortized Book-Tax Disparity, the Partnership will apply the rules
described in the Regulations and legislative history. If the Partnership
determines that such position cannot reasonably be taken, the Partnership may
adopt a depreciation or amortization convention under which all purchasers
acquiring Units in the same month would receive depreciation or amortization,
whether attributable to Common Basis or Section 743(b) adjustment, based upon
the same applicable rate as if they had purchased a direct interest in the
Partnership's assets. Such an aggregate approach may result in lower annual
depreciation or amortization deductions than would otherwise be allowable to
certain Unitholders. See "--Uniformity of Units."
The allocation of the Section 743(b) adjustment must be made in accordance
with the Code. The IRS may seek to reallocate some or all of any Section 743(b)
adjustment not so allocated by the Partnership to goodwill which, as an
intangible asset, would be amortizable over a longer period of time than the
Partnership's tangible assets.
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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.
ALTERNATIVE MINIMUM TAX
Each Unitholder will be required to take into account his distributive share
of any items of Partnership income, gain, deduction or loss for purposes of the
alternative minimum tax.
A Unitholder's alternative minimum taxable income derived from the
Partnership may be higher than his share of Partnership net income because the
Partnership may use accelerated methods of depreciation for purposes of
computing federal taxable income or loss. The minimum tax rate for non-corporate
taxpayers is 26% on the first $175,000 of alternative minimum taxable income in
excess of the exemption amount and 28% on any additional alternative minimum
taxable income. Prospective Unitholders should consult with their tax advisors
as to the impact of an investment in Units on their liability for the
alternative minimum tax.
VALUATION OF PARTNERSHIP PROPERTY AND BASIS OF PROPERTIES
The federal income tax consequences of the acquisition, ownership and
disposition of Units will depend in part on estimates by the Partnership of the
relative fair market values, and determinations of the initial tax bases, of the
assets of the Partnership. Although the Partnership may from time to time
consult with professional appraisers with respect to valuation matters, many of
the relative fair market value estimates will be made by the Partnership. These
estimates and determinations of basis are subject to challenge and will not be
binding on the IRS or the courts. If the estimates of fair market value or
determinations of basis are subsequently found to be incorrect, the character
and amount of items of income, gain, loss or deductions previously reported by
Unitholders might change, and Unitholders might be required to adjust their tax
liability for prior years.
TREATMENT OF SHORT SALES
A Unitholder whose Units are loaned to a "short seller" to cover a short
sale of Units may be considered as having disposed of ownership of those Units.
If so, he would no longer be a partner with respect to those Units during the
period of the loan and may recognize gain or loss from the disposition. As a
result, during this period, any Partnership income, gain, deduction or loss with
respect to those Units would not be reportable by the Unitholder, any cash
distributions received by the Unitholder with respect to those Units would be
fully taxable and all of such distributions would appear to be treated as
ordinary income. Unitholders desiring to assure their status as partners and
avoid the risk of gain recognition should modify any applicable brokerage
account agreements to prohibit their brokers from borrowing their Units.
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DISPOSITION OF COMMON UNITS
RECOGNITION OF GAIN OR LOSS
Gain or loss will be recognized on a sale of Units equal to the difference
between the amount realized and the Unitholder's tax basis for the Units sold. A
Unitholder's amount realized will be measured by the sum of the cash or the fair
market value of other property received plus his share of Partnership
nonrecourse liabilities. Because the amount realized includes a Unitholder's
share of Partnership nonrecourse liabilities, the gain recognized on the sale of
Units could result in a tax liability in excess of any cash received from such
sale.
Under the Act, a taxpayer is treated as having sold an "appreciated"
partnership interest (one in which gain would be recognized if such interest
were sold) if such taxpayer or related persons entered into one or more
positions with respect to the same or substantially identical property which,
for some period, substantially eliminated both the risk of loss and opportunity
for gain on the appreciated financial position (including selling "short against
the box" transactions). Unitholders should consult with their tax advisers in
the event they are considering entering into a short sale transaction or any
other risk arbitrage transaction involving their Common Units.
Prior Partnership distributions in excess of cumulative net taxable income
in respect of a Common Unit which decreased a Unitholder's tax basis in such
Common Unit will, in effect, become taxable income if the Common Unit is sold at
a price greater than the Unitholder's tax basis in such Common Unit, even if the
price is less than his original cost.
Should the IRS successfully contest the convention used by the Partnership
to amortize only a portion of the Section 743(b) adjustment (described under
"--Tax Treatment of Operations--Section 754 Election") attributable to an
amortizable Section 197 intangible after a sale by the General Partners of
Units, a Unitholder could realize additional gain from the sale of Units than
had such convention been respected. In that case, the Unitholder may have been
entitled to additional deductions against income in prior years but may be
unable to claim them, with the result to him of greater overall taxable income
than appropriate. Counsel is unable to opine as to the validity of the
convention but believes such a contest by the IRS to be unlikely because a
successful contest could result in substantial additional deductions to other
Unitholders.
Gain or loss recognized by a Unitholder (other than a "dealer" in Common
Units) on the sale or exchange of a Unit held for more than one year will
generally be taxable as long-term capital gain or loss, with the tax rate on a
long-term cacpital gain depending upon whether the Unitholder held Common Units
for more than 18 months. A portion of this gain or loss (which could be
substantial), however, will be separately computed and taxed as ordinary income
or loss under Section 751 of the Code to the extent attributable to assets
giving rise to depreciation recapture or other "unrealized receivables" or to
"substantially appreciated inventory" owned by the Partnership. The term
"unrealized receivables" includes potential recapture items, including
depreciation recapture. Inventory is considered to be "substantially
appreciated" if its value exceeds 120% of its adjusted basis to the Partnership.
Ordinary income attributable to unrealized receivables, substantially
appreciated inventory and depreciation recapture may exceed net taxable gain
realized upon the sale of the Unit and may be recognized even if there is a net
taxable loss realized on the sale of the Unit. Thus, a Unitholder may recognize
both ordinary income and a capital loss upon a disposition of Units. Net capital
loss may offset no more than $3,000 of ordinary income in the case of
individuals and may only be used to offset capital gain in the case of
corporations.
The IRS has ruled that a partner who acquires interests in a Partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of such
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. The ruling is unclear as to how the
holding period of these interests is determined once they are combined. If this
ruling is applicable to the holders of Common Units, a Common Unitholder will be
unable to select high or low basis Common Units to sell as would be the case
with corporate stock. It is not clear whether the ruling applies to the
Partnership, because, similar to corporate stock, interests in the Partnership
are evidenced by separate certificates. Accordingly, Counsel is
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unable to opine as to the effect such ruling will have on the Unitholders. A
Unitholder considering the purchase of additional Common Units or a sale of
Common Units purchased in separate transactions should consult his tax advisor
as to the possible consequences of such ruling.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES
In general, the Partnership's taxable income and losses will be determined
annually, will be prorated on a monthly basis and will be subsequently
apportioned among the Unitholders in proportion to the number of Units owned by
each of them as of the opening of the NYSE on the first business day of the
month (the "Allocation Date"). However, gain or loss realized on a sale or other
disposition of Partnership assets other than in the ordinary course of business
will be allocated among the Unitholders on the Allocation Date in the month in
which that gain or loss is recognized. As a result, a Unitholder transferring
Common Units in the open market may be allocated income, gain, loss and
deduction accrued after the date of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, Counsel is unable to opine on the validity of this
method of allocating income and deductions between the transferors and the
transferees of Units. If this method is not allowed under the Treasury
Regulations (or only applies to transfers of less than all of the Unitholder's
interest), taxable income or losses of the Partnership might be reallocated
among the Unitholders. The Partnership is authorized to revise its method of
allocation between transferors and transferees (as well as among partners whose
interests otherwise vary during a taxable period) to conform to a method
permitted under future Treasury Regulations.
A Unitholder who owns Units at any time during a quarter and who disposes of
such Units prior to the record date set for a cash distribution with respect to
such quarter will be allocated items of Partnership income, gain, loss and
deductions attributable to such quarter but will not be entitled to receive that
cash distribution.
NOTIFICATION REQUIREMENTS
A Unitholder who sells or exchanges Units is required to notify the
Partnership in writing of that sale or exchange within 30 days after the sale or
exchange and in any event by no later than January 15 of the year following the
calendar year in which the sale or exchange occurred. The Partnership is
required to notify the IRS of that transaction and to furnish certain
information to the transferor and transferee. However, these reporting
requirements do not apply with respect to a sale by an individual who is a
citizen of the United States and who effects the sale or exchange through a
broker. Additionally, a transferor and a transferee of a Unit will be required
to furnish statements to the IRS, filed with their income tax returns for the
taxable year in which the sale or exchange occurred, that set forth the amount
of the consideration received for the Unit that is allocated to goodwill or
going concern value of the Partnership. Failure to satisfy these reporting
obligations may lead to the imposition of substantial penalties.
CONSTRUCTIVE TERMINATION
The Partnership and the Operating Partnership will be considered to have
been terminated if there is a sale or exchange of 50% or more of the total
interests in Partnership capital and profits within a 12-month period. A
termination results in the closing of a Partnership's taxable year for all
partners and the Partnership's assets are regarded as having been distributed to
the partners and reconveyed to the Partnership, which is then treated as a new
partnership. However, under new proposed regulations which are not yet
effective, the Partnership will be deemed to have conveyed all its assets and
liabilities to a newly formed partnership in exchange for all the interests in
such partnership and then the Partnership will be deemed to have liquidated and
to have distributed to its partners the interests in this newly formed
partnership. A termination of the Partnership will cause a termination of the
Operating Partnership and any Subsidiary Partnership. Such a termination could
also result in penalties or loss of tax basis adjustments under Section 754 of
the Code if the Partnership were unable to determine that the termination had
occurred.
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In the case of a Unitholder reporting on a taxable year other than a fiscal
year ending December 31, the closing of the tax year of the Partnership may
result in more than 12 months' taxable income or loss of the Partnership being
includable in his taxable income for the year of termination. In addition, each
Unitholder will realize taxable gain to the extent that any money deemed as a
result of the termination to have been distributed to him exceeds the adjusted
tax basis of his Units. New tax elections required to be made by the
Partnership, including a new election under Section 754 of the Code, must be
made subsequent to a constructive termination. A termination could also result
in a deferral of Partnership deductions for depreciation. Finally, a termination
might either accelerate the application of, or subject the Partnership to, any
tax legislation enacted prior to the termination.
ENTITY-LEVEL COLLECTIONS
If the Partnership is required or elects under applicable law to pay any
federal, state or local income tax on behalf of any Unitholder or any General
Partner or any former Unitholder, the Partnership is authorized to pay those
taxes from Partnership funds. Such payment, if made, will be treated as a
distribution of cash to the partner on whose behalf the payment was made. If the
payment is made on behalf of a person whose identity cannot be determined, the
Partnership is authorized to treat the payment as a distribution to current
Unitholders. The Partnership is authorized to amend the Partnership Agreement in
the manner necessary to maintain uniformity of intrinsic tax characteristics of
Units and to adjust subsequent distributions, so that after giving effect to
such distributions, the priority and characterization of distributions otherwise
applicable under the Partnership Agreement is maintained as nearly as is
practicable. Payments by the Partnership as described above could give rise to
an overpayment of tax on behalf of an individual partner in which event the
partner could file a claim for credit or refund.
UNIFORMITY OF UNITS
Because the Partnership cannot match transferors and transferees of Units,
uniformity of the economic and tax characteristics of the Units to a purchaser
of such Units must be maintained. In the absence of uniformity, compliance with
a number of federal income tax requirements, both statutory and regulatory,
could be substantially diminished. A lack of uniformity can result from a
literal application of Proposed Treasury Regulation Section 1.168-2(n) and
Treasury Regulation Section 1.167(c)-1(a)(6) proposed Treasury regulations
recently promulgated under Section 197. Any non-uniformity could have a negative
impact on the value of the Units. See "--Tax Treatment of Operations--Section
754 Election."
The Partnership intends to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value of contributed
property or adjusted property (to the extent of any unamortized Book-Tax
Disparity) using a rate of depreciation or amortization derived from the
depreciation or amortization method and useful life applied to the Common Basis
of such property, or treat that portion as nonamortizable, to the extent
attributable to property the Common Basis of which is not amortizable, despite
its inconsistency with Proposed Treasury Regulation Section 1.168-2(n) and
Treasury Regulation Section 1.167(c)-1(a)(6) (neither of which is expected to
directly apply to a material portion of the Partnership's assets) or proposed
Treasury regulations recently promulgated under Section 197. See "--Tax
Treatment of Operations--Section 754 Election." To the extent such Section
743(b) adjustment is attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, the Partnership will apply the rules described
in the Regulations and legislative history. If the Partnership determines that
such a position cannot reasonably be taken, the Partnership may adopt a
depreciation and amortization convention under which all purchasers acquiring
Units in the same month would receive depreciation and amortization deductions,
whether attributable to Common Basis or Section 743(b) basis, based upon the
same applicable rate as if they had purchased a direct interest in the
Partnership's property. If such an aggregate approach is adopted, it may result
in lower annual depreciation and amortization deductions
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than would otherwise be allowable to certain Unitholders and risk the loss of
depreciation and amortization deductions not taken in the year that such
deductions are otherwise allowable. This convention will not be adopted if the
Partnership determines that the loss of depreciation and amortization deductions
will have a material adverse effect on the Unitholders. If the Partnership
chooses not to utilize this aggregate method, the Partnership may use any other
reasonable depreciation and amortization convention to preserve the uniformity
of the intrinsic tax characteristics of any Units that would not have a material
adverse effect on the Unitholders. The IRS may challenge any method of
depreciating the Section 743(b) adjustment described in this paragraph. If such
a challenge were sustained, the uniformity of Units might be affected, and the
gain from the sale of Units might be increased without the benefit of additional
deductions. See "--Disposition of Common Units--Recognition of Gain or Loss."
TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Ownership of Units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to such persons and, as
described below, may have substantially adverse tax consequences. Employee
benefit plans and most other organizations exempt from federal income tax
(including individual retirement accounts ("IRAs") and other retirement plans)
are subject to federal income tax on unrelated business taxable income.
Virtually all of the taxable income derived by such an organization from the
ownership of a Unit will be unrelated business taxable income and thus will be
taxable to such a Unitholder.
A regulated investment company or "mutual fund" is required to derive 90% or
more of its gross income from interest, dividends, gains from the sale of stocks
or securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of the Partnership's gross income will
include that type of income.
Non-resident aliens and foreign corporations, trusts or estates which hold
Units will be considered to be engaged in business in the United States on
account of ownership of Units. As a consequence they will be required to file
federal tax returns in respect of their share of Partnership income, gain, loss
or deduction and pay federal income tax at regular rates on any net income or
gain. Generally, a Partnership is required to pay a withholding tax on the
portion of the Partnership's income which is effectively connected with the
conduct of a United States trade or business and which is allocable to the
foreign partners, regardless of whether any actual distributions have been made
to such partners. However, under rules applicable to publicly-traded
partnerships, the Partnership will withhold (currently at the rate of 39.6%) on
actual cash distributions made quarterly to foreign Unitholders. Each foreign
Unitholder must obtain a taxpayer identification number from the IRS and submit
that number to the Transfer Agent of the Partnership on a Form W-8 in order to
obtain credit for the taxes withheld. A change in applicable law may require the
Partnership to change these procedures.
Because a foreign corporation which owns Units will be treated as engaged in
a United States trade or business, such a corporation may be subject to United
States branch profits tax at a rate of 30%, in addition to regular federal
income tax, on its allocable share of the Partnership's income and gain (as
adjusted for changes in the foreign corporation's "U.S. net equity") which are
effectively connected with the conduct of a United States trade or business.
That tax may be reduced or eliminated by an income tax treaty between the United
States and the country with respect to which the foreign corporate Unitholder is
a "qualified resident." In addition, such a Unitholder is subject to special
information reporting requirements under Section 6038C of the Code.
Under a ruling of the IRS a foreign Unitholder who sells or otherwise
disposes of a Unit will be subject to federal income tax on gain realized on the
disposition of such Unit to the extent that such gain is effectively connected
with a United States trade or business of the foreign Unitholder. Apart from the
ruling, a foreign Unitholder will not be taxed upon the disposition of a Unit if
that foreign Unitholder has
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held less than 5% in value of the Units during the five-year period ending on
the date of the disposition and if the Units are regularly traded on an
established securities market at the time of the disposition.
ADMINISTRATIVE MATTERS
PARTNERSHIP INFORMATION RETURNS AND AUDIT PROCEDURES
The Partnership intends to furnish to each Unitholder, within 90 days (75
days for taxable years of the Partnership beginning after December 31, 1997)
after the close of each calendar year, certain tax information, including a
Schedule K-1, which sets forth each Unitholder's allocable share of the
Partnership's income, gain, loss and deduction for the preceding Partnership
taxable year. In preparing this information, which will generally not be
reviewed by counsel, the Partnership will use various accounting and reporting
conventions, some of which have been mentioned in the previous discussion, to
determine the Unitholder's allocable share of income, gain, loss and deduction.
There is no assurance that any of those conventions will yield a result which
conforms to the requirements of the Code, regulations or administrative
interpretations of the IRS. The Partnership cannot assure prospective
Unitholders that the IRS will not successfully contend in court that such
accounting and reporting conventions are impermissible. Any such challenge by
the IRS could negatively affect the value of the Units.
The federal income tax information returns filed by the Partnership may be
audited by the IRS. Adjustments resulting from any such audit may require each
Unitholder to adjust a prior year's tax liability, and possibly may result in an
audit of the Unitholder's own return. Any audit of a Unitholder's return could
result in adjustments of non-Partnership as well as Partnership items.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership proceeding rather than
in separate proceedings with the partners. The Code provides for one partner to
be designated as the "Tax Matters Partner" for these purposes. The Partnership
Agreement appoints the Managing General Partner as the Tax Matters Partner of
the Partnership.
The Tax Matters Partner will make certain elections on behalf of the
Partnership and Unitholders and can extend the statute of limitations for
assessment of tax deficiencies against Unitholders with respect to Partnership
items. The Tax Matters Partner may bind a Unitholder with less than a 1% profits
interest in the Partnership to a settlement with the IRS unless that Unitholder
elects, by filing a statement with the IRS, not to give such authority to the
Tax Matters Partner. The Tax Matters Partner may seek judicial review (by which
all the Unitholders are bound) of a final partnership administrative adjustment
and, if the Tax Matters Partner fails to seek judicial review, such review may
be sought by any Unitholder having at least a 1% interest in the profits of the
Partnership and by the Unitholders having in the aggregate at least a 5% profits
interest. However, only one action for judicial review will go forward, and each
Unitholder with an interest in the outcome may participate.
A Unitholder must file a statement with the IRS identifying the treatment of
any item on his federal income tax return that is not consistent with the
treatment of the item on the Partnership's return. Intentional or negligent
disregard of the consistency requirement may subject a Unitholder to substantial
penalties. Partners in electing large partnerships would be required to treat
all Partnership items in a manner consistent with the Partnership return. The
Partnership will elect to be treated as an electing large partnership.
Under the reporting provisions of the Act, each partner of an electing large
partnership will take into account separately his share of the following items,
determined at the partnership level: (1) taxable income or loss from passive
loss limitation activities; (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
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for passive loss limitation activities and other activities; (6) general
credits; (7) low-income housing credit; (8) rehabilitation credit; (9) foreign
income taxes; (10) credit for producing fuel from a nonconventional source; and
(11) any other items the Secretary of Treasury deems appropriate.
The Act also makes a number of changes to the tax compliance and
administrative rules relating to partnerships. One provision requires that each
partner in an electing large partnership, such as the Partnership, take into
account his share of any adjustments to partnership items in the year such
adjustments are made. Alternatively, under the Act, an electing large
partnership can elect to or, in some circumstances, can be required to directly
pay the tax resulting from any such adjustments. Moreover, a partnership (and
not its partners) is liable for any interest and penalties that result from a
partnership adjustment. In either case, therefore, Unitholders could bear
significant economic burdens associated with tax adjustments relating to periods
predating their acquisition of Units.
NOMINEE REPORTING
Persons who hold an interest in the Partnership as a nominee for another
person are required to furnish to the Partnership (a) the name, address and
taxpayer identification number of the beneficial owner and the nominee; (b)
whether the beneficial owner is (i) a person that is not a United States person,
(ii) a foreign government, an international organization or any wholly-owned
agency or instrumentality of either of the foregoing, or (iii) a tax-exempt
entity; (c) the amount and description of Units held, acquired or transferred
for the beneficial owner; and (d) certain information including the dates of
acquisitions and transfers, means of acquisitions and transfers, and acquisition
cost for purchases, as well as the amount of net proceeds from sales. Brokers
and financial institutions are required to furnish additional information,
including whether they are United States persons and certain information on
Units they acquire, hold or transfer for their own account. A penalty of $50 per
failure (up to a maximum of $100,000 per calendar year) is imposed by the Code
for failure to report such information to the Partnership. The nominee is
required to supply the beneficial owner of the Units with the information
furnished to the Partnership.
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
126
<PAGE>
regulations, substantial understatements of income tax and substantial valuation
misstatements, is imposed by the Code. No penalty will be imposed, however, with
respect to any portion of an underpayment if it is shown that there was a
reasonable cause for that portion and that the taxpayer acted in good faith with
respect to that portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on the return (i)
with respect to which there is, or was, "substantial authority" or (ii) as to
which there is a reasonable basis and the pertinent facts of such position are
disclosed on the return. Certain more stringent rules apply to "tax shelters," a
term that in this context does not appear to include the Partnership. If any
Partnership item of income, gain, loss or deduction included in the distributive
shares of Unitholders might result in such an "understatement" of income for
which no "substantial authority" exists, the Partnership must disclose the
pertinent facts on its return. In addition, the Partnership will make a
reasonable effort to furnish sufficient information for Unitholders to make
adequate disclosure on their returns to avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property (or
the adjusted basis of any property) claimed on a tax return is 200% or more of
the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement exceeds $5,000 ($10,000 for most
corporations). If the valuation claimed on a return is 400% or more than the
correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will be subject to other
taxes, such as state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which the Partnership does business or owns property. Although
an analysis of those various taxes is not presented here, each prospective
Unitholder should consider their potential impact on his investment in the
Partnership. The Partnership currently owns property and conducts business in
the following states which currently impose a personal income tax: Alabama,
Arizona, Arkansas, California, Georgia, Illinois, Indiana, Kentucky, Maryland,
Mississippi, Missouri, New Hampshire, New Jersey, New Mexico, New York, North
Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Utah, Vermont and Virginia.
A Unitholder will be required to file state income tax returns and to pay state
income taxes in some or all of these states and may be subject to penalties for
failure to comply with those requirements. In certain states, tax losses may not
produce a tax benefit in the year incurred (if, for example, the Partnership has
no income from sources within that state) and also may not be available to
offset income in subsequent taxable years. Some of the states may require the
Partnership, or the Partnership may elect, to withhold a percentage of income
from amounts to be distributed to a Unitholder who is not a resident of the
state. Withholding, the amount of which may be greater or less than a particular
Unitholder's income tax liability to the state, generally does not relieve the
non-resident Unitholder from the obligation to file an income tax return.
Amounts withheld may be treated as if distributed to Unitholders for purposes of
determining the amounts distributed by the Partnership. See "--Disposition of
Common Units--Entity-Level Collections." Based on current law and its estimate
of future Partnership operations, the Managing General Partner anticipates that
any amounts required to be withheld will not be material.
It is the responsibility of each Unitholder to investigate the legal and tax
consequences, under the laws of pertinent states and localities of his
investment in the Partnership. Accordingly, each prospective Unitholder should
consult, and must depend upon, his own tax counsel or other advisor with regard
to those matters. Further, it is the responsibility of each Unitholder to file
all state and local, as well as U.S. federal, tax returns that may be required
of such Unitholder. Counsel has not rendered an opinion on the state or local
tax consequences of an investment in the Partnership.
127
<PAGE>
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS
An investment in the Partnership by an employee benefit plan is subject to
certain additional considerations because the investments of such plans are
subject to the fiduciary responsibility and prohibited transaction provisions of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
restrictions imposed by Section 4975 of the Code. As used herein, the term
"employee benefit plan" includes, but is not limited to, qualified pension,
profit-sharing and stock bonus plans, Keogh plans, simplified employee pension
plans and tax deferred annuities or IRAs established or maintained by an
employer or employee organization. Among other things, consideration should be
given to (a) whether such investment is prudent under Section 404(a)(1)(B) of
ERISA; (b) whether in making such investment, such plan will satisfy the
diversification requirement of Section 404(a)(1)(C) of ERISA; and (c) whether
such investment will result in recognition of unrelated business taxable income
by such plan and, if so, the potential after-tax investment return. See "Tax
Considerations--Uniformity of Units--Tax-Exempt Organizations and Certain Other
Investors." The person with investment discretion with respect to the assets of
an employee benefit plan (a "fiduciary") should determine whether an investment
in the Partnership is authorized by the appropriate governing instrument and is
a proper investment for such plan.
Section 406 of ERISA and Section 4975 of the Code (which also applies to
IRAs that are not considered part of an employee benefit plan) prohibit an
employee benefit plan from engaging in certain transactions involving "plan
assets" with parties that are "parties in interest" under ERISA or "disqualified
persons" under the Code with respect to the plan.
In addition to considering whether the purchase of Common Units is a
prohibited transaction, a fiduciary of an employee benefit plan should consider
whether such plan will, by investing in the Partnership, be deemed to own an
undivided interest in the assets of the Partnership, with the result that the
Managing General Partner also would be a fiduciary of such plan and the
operations of the Partnership would be subject to the regulatory restrictions of
ERISA, including its prohibited transaction rules, as well as the prohibited
transaction rules of the Code.
The Department of Labor regulations provide guidance with respect to whether
the assets of an entity in which employee benefit plans acquire equity interests
would be deemed "plan assets" under certain circumstances. Pursuant to these
regulations, an entity's assets would not be considered to be "plan assets" if,
among other things, (a) the equity interest acquired by employee benefit plans
are publicly offered securities--i.e., the equity interests are widely held by
100 or more investors independent of the issuer and each other, freely
transferable and registered pursuant to certain provisions of the federal
securities laws, (b) the entity is an "operating company"--i.e., it is primarily
engaged in the production or sale of a product or service other than the
investment of capital either directly or through a majority owned subsidiary or
subsidiaries, or (c) there is no significant investment by benefit plan
investors, which is defined to mean that less than 25% of the value of each
class of equity interest (disregarding certain interests held by the Managing
General Partner, its affiliates, and certain other persons) is held by the
employee benefit plans referred to above, IRAs and other employee benefit plans
not subject to ERISA (such as governmental plans). The Partnership's assets
should not be considered "plan assets" under these regulations because it is
expected that the investment will satisfy the requirements in (a) and (b) above
and may also satisfy the requirements in (c).
Plan fiduciaries contemplating a purchase of Common Units should consult
with their own counsel regarding the consequences under ERISA and the Code in
light of the serious penalties imposed on persons who engage in prohibited
transactions or other violations.
128
<PAGE>
VALIDITY OF THE COMMON UNITS
The validity of the Common Units has been passed upon for the Partnership by
Schiff Hardin & Waite, Chicago, Illinois.
EXPERTS
The audited financial statements of Cornerstone Propane Partners, L.P.
included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The audited financial statements included in this Prospectus for Empire
Energy Corporation, to the extent and for the periods indicated in their report,
have been audited by Baird, Kurtz & Dobson, independent public accountants, and
are included herein in reliance upon the report of said firm given upon its
authority as experts in giving such report.
The audited financial statements of SYN Inc. included in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
The CGI Holdings, Inc. financial statements as of July 31, 1996 and for each
of the two years in the period ended July 31, 1996, and for the four and
one-half months ended December 16, 1996 included in this Prospectus have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The audited financial statements included in this Prospectus for Synergy
Group Incorporated, to the extent and for the periods indicated in their report,
have been audited by Baird, Kurtz & Dobson, independent public accountants, and
are included herein in reliance upon the report of said firm given upon its
authority as experts in giving such report.
129
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
CORNERSTONE PROPANE PARTNERS, L.P.
Report of Independent Public Accountants................................................................... F-3
Consolidated Balance Sheet as of June 30, 1997 and September 30, 1997 (unaudited).......................... F-4
Consolidated Statements of Income for the six and one-half month period ended June 30, 1997 and the three
months ended September 30, 1997 (unaudited).............................................................. F-5
Consolidated Statements of Cash Flows for the six and one-half month period ended June 30, 1997 and the
three months ended September 30, 1997 (unaudited)........................................................ F-6
Consolidated Statements of Partners' Capital for the six and one-half month period ended June 30, 1997 and
the three months ended September 30, 1997 (unaudited).................................................... F-7
Notes to Consolidated Financial Statements................................................................. F-8
EMPIRE ENERGY CORPORATION
Independent Accountants' Report............................................................................ F-18
Consolidated Balance Sheet as of June 30, 1996............................................................. F-19
Consolidated Statements of Operations for the Two and One-Half Months Ended December 16, 1996, the Two
Months Ended September 30, 1996, the Month Ended July 31, 1996 and the Years Ended June 30, 1996 and
1995..................................................................................................... F-20
Consolidated Statements of Stockholders' Equity for the Two and One-Half Months Ended December 16, 1996,
the Two Months Ended September 30, 1996, the Month Ended July 31, 1996 and the Years Ended June 30, 1996
and 1995................................................................................................. F-21
Consolidated Statements of Cash Flows for the Two and One-Half Months Ended December 16, 1996, the Two
Months Ended September 30, 1996, the Month Ended July 31, 1996 and the Years Ended June 30, 1996 and
1995..................................................................................................... F-22
Notes to Consolidated Financial Statements................................................................. F-24
CGI HOLDINGS, INC.
Report of Independent Accountants.......................................................................... F-33
Consolidated Balance Sheet as of July 31, 1996............................................................. F-34
Consolidated Statements of Operations for the Four and One-Half Month Period Ended December 16, 1996, the
Years Ended July 31, 1996 and 1995 and the Three Months Ended October 31, 1996 (unaudited)............... F-35
Consolidated Statements of Stockholders' Equity for the Four and One-Half Month Period Ended December 16,
1996 and the Years Ended July 31, 1996 and 1995.......................................................... F-36
Consolidated Statements of Cash Flows for the Four and One-Half Month Period Ended December 16, 1996, the
Years Ended July 31, 1996 and 1995 and the Three Months Ended October 31, 1996 (unaudited)............... F-37
Notes to Consolidated Financial Statements................................................................. F-39
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SYN, INC.
Report of Independent Public Accountants................................................................... F-52
Consolidated Balance Sheet as of June 30, 1996............................................................. F-53
Consolidated Statements of Operations for the period ended June 30, 1996, the period Ended December 16,
1996 and the Three Months Ended September 30, 1996 (unaudited)........................................... F-54
Consolidated Statements of Stockholders' Equity for the period ended June 30, 1996 and the period Ended
December 16, 1996........................................................................................ F-55
Consolidated Statements of Cash Flows for the period ended June 30, 1996, the period Ended December 16,
1996 and the Three Months ended September 30, 1996 (unaudited)........................................... F-56
Notes to Consolidated Financial Statements................................................................. F-57
SYNERGY GROUP INCORPORATED
Independent Accountants Report............................................................................. F-64
Consolidated Statements of Operations for the period ended August 14, 1995, and the Year Ended March 31,
1995..................................................................................................... F-65
Consolidated Statements of Stockholders' Equity (Deficit) for the period ended August 14, 1995, and the
Year Ended March 31, 1995................................................................................ F-66
Consolidated Statements of Cash Flows for the period ended August 14, 1995, and the Year Ended March 31,
1995..................................................................................................... F-67
Notes to Consolidated Financial Statements................................................................. F-68
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cornerstone Propane Partners, L.P.
We have audited the accompanying consolidated balance sheet of CORNERSTONE
PROPANE PARTNERS, L.P., (A DELAWARE LIMITED PARTNERSHIP) AND SUBSIDIARY as of
June 30, 1997, and the related consolidated statements of income, cash flows and
partners' capital for the period from commencement of operations (December 17,
1996) to June 30, 1997. These financial statements are the responsibility of the
partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cornerstone Propane
Partners, L.P. and Subsidiary as of June 30, 1997, and the results of their
operations and their cash flows for the period from commencement of operations
(December 17, 1996) to June 30, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
August 4, 1997
F-3
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
<TABLE>
<CAPTION>
JUNE 30,
1997
---------- SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................................ $ 8,406 $ 8,593
Trade receivables, net............................................................... 41,924 46,391
Inventories.......................................................................... 15,538 15,908
Prepaid expenses and other current assets............................................ 4,393 4,225
---------- -------------
Total current assets............................................................... 70,261 75,117
Property, plant and equipment, net..................................................... 247,943 250,300
Goodwill and other intangible assets, net.............................................. 221,748 220,963
Other assets........................................................................... 1,041 2,404
---------- -------------
Total assets....................................................................... $ 540,993 $ 548,784
---------- -------------
---------- -------------
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Current portion of long-term debt.................................................... $ 5,736 $ 5,010
Trade accounts payable............................................................... 42,334 42,351
Accrued expenses..................................................................... 12,672 16,827
---------- -------------
Total current liabilities.......................................................... 60,742 64,188
Long-term debt......................................................................... 231,532 251,155
Due to related party................................................................... 740 740
Other noncurrent liabilities........................................................... 4,050 5,895
---------- -------------
Total liabilities.................................................................. 297,064 321,978
---------- -------------
Commitments and contingencies
Partners' Capital:
Common unitholders, 10,512,805 units issued and outstanding.......................... 146,851 136,542
Subordinated unitholders, 6,597,619 units issued and outstanding..................... 92,106 85,636
General partners..................................................................... 4,972 4,628
---------- -------------
Total partners' capital............................................................ 243,929 226,806
---------- -------------
Total liabilities and partners' capital............................................ $ 540,993 $ 548,784
---------- -------------
---------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
FROM COMMENCEMENT OF
OPERATIONS ON
DECEMBER 17, 1996 TO
JUNE 30,
1997
-------------------- THREE MONTHS ENDED
SEPTEMBER 30,
1997
-------------------
(UNAUDITED)
<S> <C> <C>
Revenues.............................................................. $ 389,630 $ 152,157
Cost of sales......................................................... 315,324 127,855
-------- --------
Gross profit.......................................................... 74,306 24,302
-------- --------
Expenses
Operating, general and administrative............................... 50,023 22,602
Depreciation and amortization....................................... 8,519 4,592
-------- --------
58,542 27,194
-------- --------
Operating income (loss)............................................... 15,764 (2,892)
Interest expense...................................................... 9,944 4,782
-------- --------
Net income (loss) before provision for income taxes................... 5,820 (7,674)
Provision for income taxes............................................ 64 20
-------- --------
Net income............................................................ $ 5,756 $ (7,694)
-------- --------
-------- --------
General partners' interest in net income (loss)....................... $ 212 $ (155)
--------
--------
Limited partners' interest in net income (loss)....................... $ 5,544 $ (7,539)
-------- --------
-------- --------
Net income (loss) per unit............................................ $ 0.34 $ (.46)
-------- --------
-------- --------
Weighted average number of units outstanding.......................... 16,531 16,712
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FROM COMMENCEMENT
OF OPERATIONS THREE MONTHS
ON DECEMBER 17, 1996 ENDED
TO JUNE 30, 1997 SEPTEMBER 30, 1997
-------------------- ------------------
<S> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................... $ 5,756 $ (7,694)
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation and amortization...................................... 8,519 4,592
Changes in assets and liabilities, net of effect of acquisitions
and dispositions:
Trade receivables................................................ 37,100 (4,467)
Inventories...................................................... 11,020 (370)
Prepaid expenses and other current assets........................ (734) 268
Trade accounts payable........................................... (40,335) 17
Accrued expenses, other assets and other noncurrent
liabilities.................................................... (10,175) 3,641
---------- -------
Net cash provided by operating activities........................ 11,151 (4,013)
---------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets......................................... 473 --
Expenditures for property, plant and equipment....................... (2,427) (4,522)
Acquisitions, net of cash received................................... (1,800) (1,472)
---------- -------
Net cash used in investing activities............................ (3,754) (5,994)
---------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on Working Capital Facility............................... 4,600 19,600
Payments on Working Capital Facility................................. (12,800) --
Borrowings on purchase obligations................................... 2,083 553
Payments on purchase obligations..................................... (1,284) (530)
Partnership distributions............................................ (10,614) (9,429)
---------- -------
Net cash used in financing activities............................ (18,015) 10,194
---------- -------
PARTNERSHIP FORMATION TRANSACTIONS:
Net proceeds from issuance of Common and Subordinated Units.......... 191,804 --
Borrowings on Working Capital Facility............................... 12,800 --
Issuance of long-term debt........................................... 220,000 --
Cash transfers from predecessor companies............................ 22,418 --
Repayment of long-term debt and related interest..................... (337,631) --
Distribution to Special General Partner for the redemption of
preferred stock.................................................... (61,196) --
Distribution to Special General Partner.............................. (15,500) --
Other fees and expenses.............................................. (13,673) --
---------- -------
Net cash provided by partnership formation transactions.......... 19,022 --
---------- -------
INCREASE IN CASH AND CASH EQUIVALENTS.................................. 8,404 187
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......................... 2 8,406
---------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................... $ 8,406 $ 8,593
---------- -------
---------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
<TABLE>
<CAPTION>
NUMBER OF UNITS TOTAL
-------------------------- GENERAL PARTNERS'
COMMON SUBORDINATED COMMON SUBORDINATED PARTNER CAPITAL
------------ ------------ ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, Commencement of Operations
on December 17, 1996............... -- -- $ -- $ -- $ -- $ --
Contribution of net assets of
predecessor companies and issuance
of Common Units.................... 9,821,000 6,597,619 136,997 92,032 -- 229,029
Issuance of Common units in
connection with acquisitions....... 691,805 -- 14,784 -- -- 14,784
Issuance of 2% interest for general
partner contribution............... -- -- -- -- 4,674 4,674
Additional general partner
contribution in connection with
acquisitions....................... -- -- -- -- 300 300
Quarterly distribution.............. -- -- (6,244) (4,156) (214) (10,614)
Net income.......................... -- -- 1,314 4,230 212 5,756
------------ ------------ ---------- ------------ ----------- ----------
Balance, June 30, 1997.............. 10,512,805 6,597,619 146,851 92,106 4,972 243,929
Quarterly Distribution
(unaudited)........................ -- -- (5,677) (3,563) (189) (9,429)
Net loss (unaudited)................ -- -- (4,632) (2,907) (155) (7,694)
------------ ------------ ---------- ------------ ----------- ----------
Balance, September 30, 1997
(unaudited)........................ 10,512,805 6,597,619 $ 136,542 $ 85,636 $ 4,628 $ 226,806
------------ ------------ ---------- ------------ ----------- ----------
------------ ------------ ---------- ------------ ----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
1. PARTNERSHIP ORGANIZATION AND FORMATION
Cornerstone Propane Partners, L.P. ("Cornerstone Partners") was formed on
October 7, 1996 as a Delaware limited partnership. Cornerstone Partners and its
subsidiary Cornerstone Propane, L.P., a Delaware limited partnership (the
"Operating Partnership"), were formed to acquire, own and operate substantially
all of the propane businesses and assets of SYN Inc. and its subsidiaries
("Synergy"), Empire Energy Corporation and its subsidiaries ("Empire") and CGI
Holdings, Inc. and its subsidiaries ("Coast"). The principal predecessor
entities, Synergy, Empire and Coast, are collectively referred to herein as the
"Predecessor Companies." The consolidated financial statements include the
accounts of Cornerstone Partners, the Operating Partnership and its corporate
subsidiary, Cornerstone Sales & Service Corporation, a Delaware corporation,
collectively referred to herein as the "Partnership". The Operating Partnership
is, and the Predecessor Companies were, principally engaged in (a) the retail
marketing and distribution of propane for residential, commercial, industrial,
agricultural and other retail uses; (b) the wholesale marketing and distribution
of propane and natural gas liquids and crude oil to the retail propane industry,
the chemical and petrochemical industries and other commercial and agricultural
markets; (c) the repair and maintenance of propane heating systems and
appliances and; (d) the sale of propane-related supplies, appliances and other
equipment. The Partnership entities commenced operations on December 17, 1996,
pursuant to a Contribution, Conveyance and Assumption Agreement dated as of the
same date, wherein substantially all of the assets and liabilities of the
Predecessor Companies were contributed to the Operating Partnership (the
"Conveyance"). As a result of the Conveyance, Cornerstone Propane GP, Inc., a
Delaware corporation and the managing general partner of Cornerstone Partners
and the Operating Partnership (the "Managing General Partner"), and SYN Inc., a
Delaware corporation and the special general partner of Cornerstone Partners and
the Operating Partnership (the "Special General Partner"), received all
interests in the Operating Partnership, and the Operating Partnership received
substantially all assets and assumed substantially all liabilities of the
Predecessor Companies. Immediately after the Conveyance, and in accordance with
the Amended and Restated Agreement of Limited Partnership of Cornerstone
Partners (the "Partnership Agreement"), the Managing General Partner and the
Special General Partner conveyed their limited partner interests in the
Operating Partnership to Cornerstone Partners in exchange for a 2% interest in
Cornerstone Partners and the Operating Partnership.
Following these transactions, on December 17, 1996, Cornerstone Partners
completed its initial public offering through underwriters of 9,821,000 Common
Units (the "IPO") at a price to the public of $21.00 a unit. The net proceeds of
approximately $191,804 from the IPO, the proceeds from the issuance of $220,000
aggregate principal amount of the Operating Partnership's 7.53% senior notes,
and $12,800 borrowings under the Working Capital Facility (as described in Note
3) were used to repay $337,631 in liabilities assumed by the Operating
Partnership (including $141,799 paid to affiliates of the Managing General
Partner) that were in large part incurred in connection with the transactions
entered into prior to the IPO. A portion of the funds was distributed to the
Special General Partner to redeem its preferred stock ($61,196), to provide net
worth to the Special General Partner ($15,500) and to pay expenses of the
Partnership organization and formation ($13,673).
Partners' capital of limited partners immediately after the IPO consisted of
9,821,000 Common Units and 6,597,619 Subordinated Units, representing an
aggregate 58.6% and 39.4% limited partner interest in Cornerstone Partners,
respectively. Partners' capital of General Partners consists of a 2% interest in
the Partnership.
F-8
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
1. PARTNERSHIP ORGANIZATION AND FORMATION (CONTINUED)
During the Subordination Period (as described in Note 4), the Partnership
may issue up to 4,270,000 additional Parity Units (generally defined as Common
Units and all other Units having rights to distribution or in liquidation
ranking on a parity with the Common Units), excluding Common Units issued in
connection with (a) employee benefit plans and (b) the conversion of
Subordinated Units into Common Units, without the approval of a majority of the
Unitholders. The Partnership may issue an unlimited number of additional Parity
Units without Unitholder approval if such issuance occurs in connection with
acquisitions, including, in certain circumstances, the repayment of debt
incurred in connection with an acquisition. In addition, under certain
conditions the Partnership may issue without Unitholder approval an unlimited
number of parity securities for the repayment of up to $75 million of long-term
indebtedness of the Partnership. After the Subordination Period, the Managing
General Partner may cause the Partnership to issue an unlimited number of
additional limited partner interests and other equity securities of the
Partnership for such consideration and on such terms and conditions as shall be
established by the Managing General Partner at its sole discretion.
Effective April 16, 1997, the Partnership registered 750,000 additional
Common Units to be used for future acquisitions. The Partnership consummated
several acquisitions during the quarter ended June 30, 1997. The total
consideration for these acquisitions was approximately $20.5 million of which
approximately $14.8 million was in the form of Common Units (approximately
692,000 Common Units) with the remainder paid primarily with the issuance of
debt. All acquisitions have been accounted for using the purchase method of
accounting and had no significant effect on operating results for the period
ended June 30, 1997.
Cornerstone Partners and the Operating Partnership have no employees. The
Managing General Partner conducts, directs and manages all activities of
Cornerstone Partners and the Operating Partnership and is reimbursed on a
monthly basis for all direct and indirect expenses incurred on their behalf.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. The Partnership believes it is the fifth largest
retail marketer of propane in the United States in terms of volume, serving more
than 360,000 residential, commercial, industrial and agricultural customers from
296 customer service centers in 26 states. The Partnership was formed to own and
operate the propane business and assets of Synergy, Empire and Coast. The
Partnership's operations are concentrated in the east coast, south-central and
west coast regions of the United States.
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of the Partnership and its Subsidiary following the date of
acquisition. The acquisitions of the Predecessor Companies have been accounted
for as purchase business combinations based on the fair value of the net assets
acquired. All purchase price allocations for the acquisition of the Predecessor
Companies are preliminary in nature and are subject to change within the twelve
months following the acquisitions based on refinements as actual data becomes
available. All significant intercompany transactions and accounts have been
eliminated.
FISCAL YEAR. The Partnership's fiscal year is July 1 to June 30. Because
the Partnership commenced operations upon completion of the IPO, the
accompanying consolidated statements of income, cash flows and partners' capital
are for the period from commencement of operations on December 17, 1996 to June
30, 1997.
F-9
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS. The carrying amounts reported in the consolidated
balance sheet for cash and cash equivalents, accounts receivable and accounts
payable approximate fair value because of the immediate or short-term maturity
of these financial instruments. Based on the borrowing rates currently available
to the Partnership for bank loans with similar terms and average maturities, the
fair value of long-term debt was substantially the same as its carrying value.
The Partnership routinely uses commodity futures contracts to reduce the
risk of future price fluctuations for natural gas and liquified petroleum gas
(LPG) inventories and contracts. Gains and losses on futures contracts purchased
as hedges are deferred and recognized in cost of sales as a component of the
product cost for the related hedged transaction. In the statement of cash flows,
cash flows from qualifying hedges are classified in the same category as the
cash flows from the items being hedged. Net realized gains and losses for the
current fiscal year and unrealized gains, losses on outstanding positions and
open positions as of June 30, 1997, were not material.
REVENUE RECOGNITION. Sales of natural gas, crude oil, natural gas liquids
and LPG and the related cost of product are recognized upon delivery of the
product.
CASH AND CASH EQUIVALENTS. The Partnership considers all liquid investments
with original maturities of three months or less to be cash equivalents. Cash
equivalents consisted primarily of certificates of deposit.
ACCOUNTS RECEIVABLE. The outstanding balance is stated net of allowance of
doubtful accounts of $3,083 and $3,332 at June 30, 1997 and September 30, 1997.
INVENTORIES. Inventories are stated at the lower of cost or market. The
cost of natural gas, crude oil, natural gas liquids and LPG is determined using
the first-in, first-out (FIFO) method. The cost of gas distribution parts,
appliances and equipment is determined using the weighted average method. The
major components of inventory consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
LPG and other................................................................. $ 7,122 $ 6,841
Appliances.................................................................... 3,846 4,666
Parts and fittings............................................................ 4,570 4,401
--------- -------------
$ 15,538 $ 15,908
--------- -------------
--------- -------------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
cost of acquisition, primarily based upon estimates of fair value at the date of
the IPO. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets as follows: buildings and improvements, 25
to 33 years; LPG storage and rental tanks, 40 to 50 years; and office furniture,
equipment and tank installation costs, 5 to 10 years. Leasehold improvements are
amortized over the shorter of the estimated
F-10
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
useful life or the lease term. When property, plant or equipment is retired or
otherwise disposed, the cost and related accumulated depreciation is removed
from the accounts, and the resulting gain or loss is credited or charged to
operations. Maintenance and repairs are charged to earnings, while replacements
and betterments that extend estimated useful lives are capitalized. Property,
plant and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1997
---------- -------------
<S> <C> <C>
Land......................................................................... $ 8,388 $ 10,940
Buildings and improvements................................................... 11,256 11,196
Storage and consumer tanks................................................... 206,014 208,032
Other equipment.............................................................. 27,843 28,381
---------- -------------
253,501 258,549
Accumulated depreciation..................................................... 5,558 8,249
---------- -------------
$ 247,943 $ 250,300
---------- -------------
---------- -------------
</TABLE>
GOODWILL AND OTHER INTANGIBLE ASSETS. The excess of acquisition cost over
the estimated fair market value of identifiable net assets of acquired
businesses (goodwill) is being amortized on a straight-line basis over 40 years.
Noncompete agreements are amortized over the term of the agreement. Financing
costs are amortized over the term of the Senior Notes. Goodwill and other
intangible assets consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1997
---------- -------------
<S> <C> <C>
Goodwill..................................................................... $ 213,092 $ 215,728
Noncompete agreements........................................................ 4,398 4,567
Financing costs.............................................................. 7,116 7,125
---------- -------------
224,606 227,420
Accumulated amortization..................................................... 2,858 6,457
---------- -------------
$ 221,748 $ 220,963
---------- -------------
---------- -------------
</TABLE>
It is the Partnership's policy to review long-lived assets including
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. If such
a review should indicate that the carrying amount of intangible assets is not
recoverable, it is the Partnership's policy to reduce the carrying amount of
such assets to fair value.
INCOME TAXES. Neither Cornerstone Partners nor the Operating Partnership is
directly subject to federal and state income taxes. Instead, taxable income or
loss is allocated to the individual partners. As a result, no income tax expense
has been reflected in the Partnership's consolidated financial statements
relating to the earnings of Cornerstone Partners or the Operating Partnership.
The Operating Partnership has one subsidiary which operates in corporate form
and is subject to federal and state income taxes. Accordingly, the Partnership's
consolidated financial statements reflect income tax expense related to the
subsidiary's earnings. Net earnings for financial statement purposes may differ
significantly from taxable
F-11
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
income reportable to Unitholders as a result of differences between the tax
basis and financial reporting basis of assets and liabilities and the taxable
income allocation requirements under the Partnership agreement.
NET INCOME PER UNIT. Net income per Unit is computed by dividing net
income, after deducting the General Partners' 2% interest, by the weighted
average number of outstanding Common and Subordinated Units. In accordance with
the IPO Prospectus, 100% of the income for the 14-day period ended December 31,
1996, was allocated to the Subordinated Unitholders and the General Partners.
UNIT-BASED COMPENSATION. The Partnership accounts for unit-based
compensation (see Note 6) as (a) deferred compensation for time-vesting units
and (b) contingent consideration for performance-vesting units. Compensation
expense for the time-vesting units is recognized over the vesting period.
Compensation expense for the performance-vesting units is recognized when the
units become issuable. Time-vesting units are considered Common Unit equivalents
for the purpose of computing primary earnings per unit. Performance-vesting
units are considered for the purpose of computing fully diluted earnings per
unit. The Partnership has adopted Financial Accounting Standards Board (FASB)
Statement No. 123, "Accounting for Stock-Based Compensation" for disclosure
purposes only. Pro forma disclosures of net income and net income per unit as if
the fair value based method of accounting for stock options under FASB Statement
No. 123 had been applied would not have changed net income and net income per
unit.
Recently Issued Accounting Standards--FASB Statement No. 128, "Earnings per
Share" ("Statement No. 128), issued in February 1997 and effective for fiscal
years ending after December 15, 1997, establishes and simplifies standards for
computing and presenting earnings per share. Implementation of Statement No. 128
will not have a material impact on the Partnership's computation or presentation
of earnings per unit, as the Partnership's common unit equivalents have had no
material effect on earnings per unit amounts.
FASB Statement No. 130, "Reporting Comprehensive Income," issued in June
1997 and effective for fiscal years beginning after December 15, 1997,
established standards for reporting and display of the total of net income and
all other nonowner changes in partners' capital, or comprehensive income, either
below net income (loss) in the statement of operations, in a separate statement
of comprehensive income (loss) or within the statement of partners' capital. The
Partnership has had no significant items of other comprehensive income.
3. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1997
---------- -------------
<S> <C> <C>
Working Capital Facility..................................................... $ 4,600 $ 24,200
Senior Notes................................................................. 220,000 220,000
Purchase contract obligations................................................ 12,668 11,965
---------- -------------
237,268 256,165
Less current maturities.................................................... 5,736 5,010
---------- -------------
$ 231,532 $ 251,155
---------- -------------
---------- -------------
</TABLE>
F-12
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
3. LONG-TERM DEBT (CONTINUED)
Concurrently with the IPO, the Operating Partnership entered into a credit
agreement (the "Bank Credit Agreement") which consists of a Working Capital
Facility and an Acquisition Facility.
The Working Capital Facility provides for revolving borrowings up to $50,000
(including a $30,000 sublimit for letters of credit through March 31, 1997 and
$20,000 thereafter), and matures on December 31, 1999. The Bank Credit Agreement
provides that there must be less than $10,000 outstanding under the Working
Capital Facility (excluding letters of credit) for at least 30 consecutive days
during each fiscal year. Outstanding letters of credit totaled $7,600 at June
30, 1997 and $19,750 at September 30, 1997.
The Acquisition Facility provides the Operating Partnership with the ability
to borrow up to $75,000 to finance propane business acquisitions. The
Acquisition Facility operates as a revolving facility through December 31, 1999,
at which time any loans then outstanding may be converted to term loans and be
amortized quarterly for a period of four years thereafter. No amounts were
outstanding at June 30, 1997 and September 30, 1997.
The Operating Partnership's obligations under the Bank Credit Agreement are
secured, on an equal and ratable basis, with its obligations under the Senior
Note Agreement, by a first priority security interest in the Operating
Partnership's inventory, accounts receivable and certain customer storage tanks.
Loans under the Bank Credit Agreement bear interest at variable base or
Eurodollar rates. At June 30, 1997, the applicable base and Eurodollar rates
were 8.625% and 5.938%, respectively. In addition, an annual fee is payable
quarterly by the Operating Partnership (whether or not borrowings occur) ranging
from .125% to .325% depending upon various financial ratios. The
weighted-average interest rate for the period ended June 30, 1997, was 8.494%
per annum and 7.7645% per annum for the three months ended September 30, 1997.
The Bank Credit Agreement contains various terms and covenants, including
financial ratio covenants with respect to debt and interest coverage, and
limitations, among others, on the ability of the Operating Partnership to incur
or maintain certain indebtedness or liens, make investments and loans, enter
into mergers, consolidations or sales of all or substantially all of its assets
and make asset sales. The Operating Partnership was in compliance with all terms
and covenants at June 30, 1997 and September 30, 1997.
On the IPO date, the Operating Partnership issued $220,000 of Senior Notes
with a fixed annual interest rate of 7.53% pursuant to note purchase agreements
with various investors (collectively, the "Note Agreement"). The Senior Notes
mature on December 30, 2010, and require semi-annual interest payments each
December 30 and June 30. The Note Agreement requires that the principal be paid
in equal annual payments of $27,500 starting December 30, 2003.
Purchase contract obligations arise from the purchase of operating
businesses and are collateralized by the equipment and real estate acquired in
the respective acquisitions. At June 30, 1997 and September 30, 1997, those
obligations carried interest rates ranging from 5.0% to 10.0% per annum and were
due periodically through 2007.
F-13
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
3. LONG-TERM DEBT (CONTINUED)
Aggregate annual maturities of the long-term debt outstanding at June 30,
1997, are:
<TABLE>
<S> <C>
1998.............................................. $ 5,736
1999.............................................. 1,557
2000.............................................. 6,478
2001.............................................. 1,092
2002.............................................. 641
Thereafter........................................ 221,764
---------
$ 237,268
---------
---------
</TABLE>
4. DISTRIBUTIONS OF AVAILABLE CASH
The Partnership will make distributions to its partners with respect to each
fiscal quarter of the Partnership within 45 days after the end of each fiscal
quarter in an aggregate amount equal to its Available Cash for such quarter.
Available Cash generally means, with respect to any fiscal quarter of the
Partnership, all cash on hand at the end of such quarter less the amount of cash
reserves established by the Managing General Partner in its reasonable
discretion for future cash requirements. These reserves are retained to provide
for the proper conduct of the Partnership's business, the payment of debt
principal and interest and to provide funds for distribution during the next
four quarters.
The Partnership will distribute 100% of its Available Cash (98% to all
Unitholders and 2% to the General Partners) until the Minimum Quarterly
Distribution ($.54 per unit) for such quarter has been met. During the
Subordination Period (defined below), to the extent there is sufficient
Available Cash, the holders of Common Units have the right to receive the
Minimum Quarterly Distribution, plus any arrearages, prior to the distribution
of Available Cash to holders of Subordinated Units. For the period commencing
December 17, 1996, and ending March 31, 1997, the Partnership paid a Minimum
Quarterly Distribution of $.63 per Common and Subordinated Unit amounting to
approximately $10,614. Subsequent to June 30, 1997, the Partnership declared a
Minimum Quarterly Distribution, for the period from April 1, 1997, to June 30,
1997, of $.54 per Common and Subordinated Unit totaling approximately $9,429.
Subsequent to September 30, 1997, the Partnership declared a Minimum Quarterly
Distribution for the three months ended September 30, 1997 of $.54 per Common
and Subordinated Unit totaling approximately $9,429.
The Subordination Period will generally extend to the first day of any
quarter beginning after December 31, 2001, in which (a) distributions from
Operating Surplus (as defined in the Partnership Agreement) on the Common Units
and the Subordinated Units with respect to each of the three consecutive
four-quarter periods immediately preceding such date equaled or exceeded the
Minimum Quarterly Distribution on all of the outstanding Common and Subordinated
Units during such periods, (b) the Adjusted Operating Surplus (as defined in the
Partnership Agreement) generated during each of the three consecutive
four-quarter periods immediately preceding such date equaled or exceeded the
Minimum Quarterly Distribution on all of the outstanding Common and Subordinated
Units plus the related distribution on the General Partner interests in the
Partnership during such periods, and (c) there were no outstanding Common Unit
Arrearages.
F-14
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
5. COMMITMENTS AND CONTINGENCIES
The Partnership has succeeded to obligations of the self-insurance programs
maintained by Empire and Synergy for any incidents occurring prior to December
17, 1996. These companies' insurance programs provided coverage for
comprehensive general liability and vehicle liability for catastrophic exposures
as well as those risks required to be insured by law or contract. These
companies retained a significant portion of certain expected losses related
primarily to comprehensive general liability and vehicle liability. Estimated
liabilities for self-insured losses were recorded based upon the predecessor
companies' and the Partnerships' estimates of the aggregate self-insured
liability for claims incurred.
A number of personal injury, property damage and product liability suits are
pending or threatened against the Partnership. These lawsuits have arisen in the
ordinary course of the Partnership's business and involve claims for actual
damages and in some cases, punitive damages, arising from the alleged negligence
of the Partnership or as a result of product defects or similar matters. Of the
pending or threatened matters, a number involve property damage and several
involve serious personal injuries. In certain cases, the claims made are for
relatively large amounts. Although any litigation is inherently uncertain, based
on past experience, the information currently available to it and the
availability of insurance coverage, the Partnership does not believe that these
pending or threatened litigation matters will have a material adverse effect on
its results of operations or its financial condition.
The Managing General Partner and its affiliates performing services for the
Partnership are entitled to reimbursement for all expenses incurred on behalf of
the Partnership, including the cost of compensation properly allocable to the
Partnership, and all other expenses necessary or appropriate to the conduct of
the business of, and allocable to, the Partnership. These costs, which totaled
$30,702 and $14,471 for the period from December 17, 1996, to June 30, 1997 and
the three months ended September 30, 1997, include employee compensation and
benefit expenses of employees of the Managing General Partner and its
affiliates.
6. RESTRICTED UNIT PLAN
The Partnership adopted the 1996 Restricted Unit Award Plan (the "Restricted
Unit Plan") which authorizes the issuance of Common Units with an aggregate
value of $12,500 (595,238 Common Units valued at the Partnerships IPO trading
price as of December 12, 1996, of $21.00 per Unit) to executives, directors,
managers and selected supervisors of the Partnership. Awards under the
Restricted Unit Plan are subject to a bifurcated vesting procedure such that (a)
25% of the awarded Units will vest over time with one-third of such units
vesting at the end of each of the third, fifth and seventh anniversaries of the
issuance date, and (b) the remaining 75% of the Units will vest automatically
upon, and in the same proportions as, the conversion of Subordinated Units to
Common Units. Restricted Unit Plan participants are not eligible to receive
quarterly distributions or vote their respective Units until vested.
Restrictions generally limit the sale or transfer of the Units during the
restricted periods. The value of the restricted Unit is established by the
market price of the Common Unit at the date of grant. As of and for the period
from December 17, 1996 to June 30, 1997, a value of $8,300 of restricted Common
Units were awarded.
7. PARTNERS' CAPITAL
A portion of the Subordinated Units will convert into Common Units on the
first day after the record date established for the distribution in respect of
any quarter ending on or after (a) December 31, 1999, (with respect to
one-quarter of the Subordinated Units) and (b) December 31, 2000, (with respect
to one-
F-15
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
7. PARTNERS' CAPITAL (CONTINUED)
quarter of the Subordinated Units), in respect of which (i) distributions of
Available Cash from Operating Surplus on the Common Units and the Subordinated
Units with respect to each of the three consecutive four-quarter periods
immediately preceding such date equaled or exceeded the sum of the Minimum
Quarterly Distribution on all of the outstanding Common Units and Subordinated
Units during such periods, (ii) the Adjusted Operating Surplus generated during
each of the two consecutive four-quarter periods immediately preceding such date
equaled or exceeded the sum of the Minimum Quarterly Distribution on all of the
outstanding Common Units and Subordinated Units and the related distribution on
the general partner interests in the Partnership during such periods, and (iii)
there are no outstanding Common Unit Arrearages; provided, however that the
early conversion of the second one-quarter of Subordinated Units may not occur
until at least one year following the early conversion of the first one-quarter
of Subordinated Units.
Upon expiration of the Subordination Period, all remaining Subordinated
Units will convert into Common Units on a one-for-one basis and will thereafter
participate pro rata with the other Common Units in distributions of Available
Cash.
8. EMPLOYEE BENEFIT PLAN
The Partnership established a defined contribution 401(k) retirement plan
available to substantially all employees. Employees who elect to participate may
contribute a percentage of their salaries to the plan. The Partnership may make
contributions to the plan at the discretion of the Board of Directors of the
Managing General Partner. Contributions to the plan were not material for the
period ended June 30, 1997 and the three months ended September 30, 1997.
9. OPERATING LEASES
The Partnership leases retail sales offices and administrative office space
under noncancelable operating leases expiring at various times through 2006.
These leases generally contain renewal options and require the Partnership to
pay all executory costs (property taxes, maintenance and insurance). Lease
expense for the period ended June 30, 1997, was $2,490.
Future minimum lease payments at June 30, 1997, were:
<TABLE>
<S> <C>
1998................................................ $ 4,062
1999................................................ 3,899
2000................................................ 3,851
2001................................................ 3,799
2002................................................ 3,771
Thereafter.......................................... 3,284
</TABLE>
F-16
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
10. ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 17, 1996 THREE MONTHS ENDED
TO JUNE 30, 1997 SEPTEMBER 30, 1997
----------------- ---------------------
<S> <C> <C>
Noncash Transactions
Assets acquired in exchange for Common Units................... $ 14,784 --
Assets acquired in exchange for current liabilities assumed.... $ 2,283 --
Assets acquired in exchange for long-term debt assumed or
issued....................................................... $ 1,244 --
Cash Payment Information
Cash paid for interest......................................... $ 9,942 $ 944
</TABLE>
11. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 17, 1996 QUARTER ENDED
TO DECEMBER 31, -------------------------------------------------
1996 MARCH 31, 1997 JUNE 30, 1997 SEPTEMBER 30, 1997
------------------- -------------- ------------- ------------------
<S> <C> <C> <C> <C>
Revenues....................... $ 40,370 $ 220,566 $ 128,694 $ 152,157
Operating income (loss)........ 4,076 15,107 (3,419) (2,892)
Net income (loss).............. 3,293 10,637 (8,174) (7,694)
Net income (loss) per unit..... .20 .63 (.49) (.46)
</TABLE>
F-17
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
Empire Energy Corporation
Lebanon, Missouri
We have audited the accompanying consolidated balance sheet as of June 30,
1996, and the consolidated statements of operations, stockholders' equity and
cash flows of Empire Energy Corporation for the years ended June 30, 1995 and
1996, the one month ended July 31, 1996, the two months ended September 30, 1996
and the two and one-half months ended December 16, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects the financial position of Empire Energy
Corporation as of June 30, 1996, and the results of its operations and its cash
flows for each of the periods ended June 30, 1995 and 1996, July 31, 1996,
September 30, 1996, and December 16, 1996, in conformity with generally accepted
accounting principles.
BAIRD KURTZ & DOBSON
Springfield, Missouri
August 4, 1997
F-18
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash...................................................................................... $ 2,064
Trade receivables, less allowance for doubtful accounts: 1996--$1,262..................... 5,724
Inventories............................................................................... 6,702
Prepaid expenses.......................................................................... 103
Refundable income taxes................................................................... 457
Deferred income taxes..................................................................... 996
---------
Total Current Assets.................................................................... 16,046
---------
DUE FROM SYN INC............................................................................ 7,978
---------
PROPERTY AND EQUIPMENT, at cost:
Land and buildings........................................................................ 8,903
Storage and consumer service facilities................................................... 80,615
Transportation, office and other equipment................................................ 18,702
---------
108,220
Less Accumulated depreciation............................................................. (28,686)
---------
79,534
---------
OTHER ASSETS:
Excess of cost over fair value of net assets acquired, at amortized cost.................. 3,033
Other..................................................................................... 511
---------
3,544
---------
$ 107,102
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................................................... $ 6,019
Accounts payable.......................................................................... 3,368
Accrued salaries.......................................................................... 1,063
Accrued expenses.......................................................................... 1,676
---------
Total Current Liabilities............................................................... 12,126
---------
LONG-TERM DEBT.............................................................................. 25,442
---------
DEFERRED INCOME TAXES....................................................................... 16,877
---------
ACCRUED SELF-INSURANCE LIABILITY............................................................ 2,424
---------
STOCKHOLDERS' EQUITY:
Common stock; $0.001 par value; authorized 17,500,000 shares, issued at June 30, 1996--
12,004,430 shares....................................................................... 12
Additional paid-in capital................................................................ 46,099
Retained earnings......................................................................... 4,143
---------
50,254
Treasury stock, at cost--3,000 shares..................................................... (21)
---------
50,233
---------
$ 107,102
---------
---------
</TABLE>
See Notes to Consolidated Financial Statements
F-19
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
THE TWO MONTHS ENDED SEPTEMBER 30, 1996,
THE MONTH ENDED JULY 31, 1996 AND
THE YEARS ENDED JUNE 30, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED
-----------------------------------------------------
OCT. 1, AUG. 1, JULY 1, FISCAL YEAR ENDED
1996 TO 1996 TO 1996 TO JUNE 30,
DEC. 16, SEPT. 30, JULY 31, --------------------
1996 1996 1996 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES................................................... $ 28,166 $ 12,439 $ 2,596 $ 98,821 $ 56,689
COST OF SALES.............................................. 15,400 6,471 1,439 50,080 26,848
--------- --------- --------- --------- ---------
GROSS PROFIT............................................... 12,766 5,968 1,157 48,741 29,841
--------- --------- --------- --------- ---------
EXPENSES
Operating, general and administrative.................... 6,386 4,528 2,480 33,020 24,435
Depreciation and amortization............................ 1,344 1,087 499 5,875 4,322
--------- --------- --------- --------- ---------
7,730 5,615 2,979 38,895 28,757
--------- --------- --------- --------- ---------
OPERATING INCOME........................................... 5,036 353 (1,822) 9,846 1,084
INTEREST EXPENSE, NET...................................... 1,917 1,487 217 2,598 39
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES.......................... 3,119 (1,134) (2,039) 7,248 1,045
INCOME TAX PROVISION (BENEFIT)............................. 1,197 (400) (765) 3,550 600
--------- --------- --------- --------- ---------
NET INCOME (LOSS).......................................... $ 1,922 $ (734) $ (1,274) $ 3,698 $ 455
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
F-20
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
THE TWO MONTHS ENDED SEPTEMBER 30, 1996,
THE MONTH ENDED JULY 31, 1996 AND
THE YEARS ENDED JUNE 30, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN RETAINED TREASURY STOCKHOLDERS'
COMMON STOCK STOCK EARNINGS STOCK EQUITY
------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1994................................. $ 12 $ 46,099 $ -- $ -- $ 46,111
Purchase of Treasury Stock............................. -- -- -- (21) (21)
Net Income............................................. -- -- 445 -- 445
--- ----------- ----------- --- ------------
Balance, June 30, 1995................................. 12 46,099 445 (21) 46,535
Net Income............................................. -- -- 3,698 -- 3,698
--- ----------- ----------- --- ------------
Balance, June 30, 1996................................. 12 46,099 4,143 (21) 50,233
Net Loss............................................... -- -- (1,274) -- (1,274)
--- ----------- ----------- --- ------------
Balance, July 31, 1996................................. 12 46,099 2,869 (21) 48,959
Purchase of Company Stock.............................. (1) (70,744) -- -- (70,755)
Effect of Purchase Accounting.......................... -- 26,966 (2,869) 21 24,118
Net Loss............................................... -- -- (734) -- (734)
--- ----------- ----------- --- ------------
Balance, Sept. 30, 1996................................ 1 2,321 (734) -- 1,588
Purchase of Company Stock.............................. (1) (13,999) -- -- (14,000)
Effect of Purchase Accounting.......................... 1 25,677 734 -- 26,412
Net Income............................................. -- -- 1,922 -- 1,922
--- ----------- ----------- --- ------------
Balance, Dec 16, 1996.................................. $ 1 $ 13,999 $ 1,922 $ -- $ 15,922
--- ----------- ----------- --- ------------
--- ----------- ----------- --- ------------
</TABLE>
See Notes to Consolidated Financial Statements
F-21
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
THE TWO MONTHS ENDED SEPTEMBER 30, 1996,
THE MONTH ENDED JULY 31, 1996 AND
THE YEARS ENDED JUNE 30, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCT. 1, AUG. 1, JULY 1, FISCAL YEAR ENDED
1996 TO 1996 TO 1996 TO JUNE 30,
DEC. 16, SEPT. 30, JULY 31, ---------------------
1996 1996 1996 1996 1995
--------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................ $ 1,922 $ (734) $ (1,274) $ 3,698 $ 445
Items not requiring (providing) cash:
Depreciation......................................... 1,195 1,002 474 5,593 4,084
(Gain)loss on sale of assets......................... -- (4) 8 (67) (145)
Amortization......................................... 149 85 25 282 238
Deferred income taxes................................ (126) -- -- 1,075 194
Changes in:
Trade receivables........................................ (6,089) (2,485) 222 (1,799) 388
Inventories.............................................. (147) (3,896) (340) (348) (985)
Accounts payable......................................... 998 283 335 1,301 1,444
Accrued expenses and self insurance...................... 2,114 1,164 (5) 2,124 325
Income taxes payable (refundable)........................ 1,016 209 (768) 270 (702)
Due from SYN Inc......................................... (1,863) -- -- -- --
Prepaid expenses and other............................... (1,678) (536) (100) (279) 72
--------- --------- --------- ---------- ---------
Net cash provided by (used in) operating
activities......................................... (2,509) (4,912) (1,423) 11,850 5,358
--------- --------- --------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets............................. 25 18 14 162 295
Purchases of property and equipment...................... (1,475) (861) (487) (3,184) (8,365)
Capitalized costs........................................ (242) -- -- -- --
Purchase of assets from SYN Inc.......................... -- -- -- (35,980) --
--------- --------- --------- ---------- ---------
Net cash used in investing activities................ (1,692) (843) (473) (39,002) (8,070)
--------- --------- --------- ---------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
F-22
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
THE TWO MONTHS ENDED SEPTEMBER 30, 1996,
THE MONTH ENDED JULY 31, 1996 AND
THE YEARS ENDED JUNE 30, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL
OCT 1, AUG 1, JULY 1, YEAR ENDED
1996 TO 1996 TO 1996 TO JUNE 30,
DEC 16, SEPT 30, JULY 31, --------------------
1996 1996 1996 1996 1995
--------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in credit facilities................. $ 4,806 $ 4,800 $ -- $ (5,500) $ 1,600
Principal payments on purchase obligations............... (64) (35) (15) (126) (132)
Checks in process of collection.......................... (37) 37 -- (158) 158
Purchase of treasury stock............................... -- -- -- -- (21)
Proceeds from (repayments of) acquisition credit
facility............................................... -- (31,100) -- 35,000 --
Proceeds from management buy out loan.................... -- 94,000 -- -- --
Purchase of company stock in management buy out.......... -- (59,000) -- -- --
Payment of debt acquisition costs........................ -- (3,100) -- --
--------- ---------- --------- --------- ---------
Net cash provided by (used in) financing
activities............................................. 4,705 5,602 (15) 29,216 1,605
--------- ---------- --------- --------- ---------
INCREASE (DECREASE) IN CASH................................ 504 (153) (1,911) 2,064 (1,107)
CASH, BEGINNING OF PERIOD.................................. -- 153 2,064 0 1,107
--------- ---------- --------- --------- ---------
CASH, END OF PERIOD........................................ $ 504 $ 0 $ 153 $ 2,064 $ 0
--------- ---------- --------- --------- ---------
--------- ---------- --------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
F-23
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements for the periods ended July 31, 1996,
September 30, 1996, and December 16, 1996, are presented because of the changes
in control described in Note 2. Due to the seasonal nature of the propane
business, the results of operations for these periods are not necessarily
indicative of results to be expected for a full year.
NATURE OF OPERATIONS
The Company's principal operations are the retail sale of LP gas. Most of
the Company's customers are owners of residential single or multi-family
dwellings who make periodic purchases on credit. Such customers are located in
the Southeast and Midwest regions of the United States.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Empire Energy
Corporation and its subsidiaries. All significant intercompany balances have
been eliminated in consolidation.
REVENUE RECOGNITION POLICY
Sales and related cost of product sold are recognized upon delivery of the
product or service.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the first-in, first-out method for retail operations and specific identification
method for wholesale operations. The inventories at June 30, 1996, consist of
the following:
<TABLE>
<S> <C>
Gas and other petroleum products............................................ $ 2,727
Gas distribution parts, appliances and equipment............................ 3,975
---------
$ 6,702
---------
---------
</TABLE>
FUTURES CONTRACTS
The Company uses commodity futures contracts to reduce the risk of future
price fluctuations for LPG inventories and contracts. Gains and losses on
futures contracts purchased as hedges are deferred and recognized in cost of
sales as a component of the product cost for the related hedged transaction. In
the statement of cash flows, cash flows from qualifying hedges are classified in
the same category as the cash flows of the items being hedged. Net realized
gains and losses and unrealized gains and losses on open positions are not
material.
F-24
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROPERTY AND EQUIPMENT
Depreciation is provided on all property and equipment on the straight-line
method over estimated useful lives of 5 to 33 years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 1996, the company's only financial instruments are cash,
long-term debt and related accrued interest for which their carrying amounts
approximate fair value.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
AMORTIZATION
The excess of cost over fair value of net assets acquired (originally
$4,850,000) is being amortized on the straight-line basis over 20 years.
NOTE 2: CHANGES OF CONTROL
On June 30, 1994, the Company was separated from Empire Gas Corporation
(subsequently All Star Gas referred to hereafter as Empire Gas) in an exchange
of the majority ownership of Empire Gas for all of the shares of the Company (a
subsidiary of Empire Gas). The Company received locations principally in the
Southeast plus certain home office assets and liabilities.
Professional and other fees amounting to $1,926,000 were incurred in
connection with an effort to sell the Company and are included in general and
administrative expense during the year ended June 30, 1996.
On August 1, 1996, the principal shareholder of the Company since its
inception and certain other shareholders sold their interest in the Company to a
new entity formed by the remaining shareholders of the Company (Management Buy
Out).
In connection with this transaction, the principal shareholder of the
Company terminated employment with the Company as well as terminated certain
lease and use agreements. The new entity was principally owned by the son of the
former principal shareholder. All references in these financial statements to
the principal shareholder relate to the former principal shareholder.
The new entity paid approximately $59,000,000 cash, and distributed certain
home office assets and a portion of the SYN Inc. receivable in exchange for the
shares of Company stock purchased. In addition to the above consideration, the
new entity issued a $5,000,000 note payable to the principal shareholder. The
amount paid to the selling shareholders was financed with proceeds from a new
credit agreement.
The new credit facility provides for a $42,000,000 term loan, a $52,000,000
second term loan, a $20,000,000 working capital facility and a $10,000,000
acquisition credit facility. The new credit facility includes working capital,
capital expenditures, cash flow and net worth requirements as well as dividend
restrictions.
F-25
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: CHANGES OF CONTROL (CONTINUED)
On October 7, 1996, the new ownership of the Company pursuant to the
Management Buy Out sold 100% of Company common stock for approximately
$14,000,000 cash to Northwestern Growth Corporation (NGC).
Because of the changes in control of the Company, the balance sheet accounts
were adjusted at August 1, 1996 and October 7, 1996, to reflect new bases
determined using the principles of purchase accounting.
NOTE 3: SYNERGY ACQUISITION
On August 15, 1995, the Company acquired the assets of 38 retail locations
previously operated by Synergy Group, Inc. These locations were purchased from
SYN Inc., a company formed for the purpose of acquiring Synergy Group
Incorporated. SYN Inc. is majority owned by Northwestern Growth Corporation, a
wholly-owned subsidiary of Northwestern Public Service Company, and minority
owned and managed by Empire Gas. The purchase price of the 38 retail locations
was approximately $38 million. The total consideration for the purchase was
approximately $36 million in cash financed by the new acquisition credit
facility (see Note 5) plus the assets of nine retail locations principally in
Mississippi valued at approximately $2 million. The results of operations for
the period after August 15, 1995, of the Synergy locations are included in the
accompanying financial statements. The purchase price of the Synergy assets has
been allocated as follows (In Thousands):
<TABLE>
<S> <C>
Current assets..................................... $ 2,499
Property and equipment............................. 27,435
Due from SYN Inc................................... 7,978
---------
$ 37,912
---------
---------
</TABLE>
Unaudited pro forma operations assuming the acquisition was made at the
beginning of the year ended June 30, 1995, is presented below. Pro forma results
for the year ended June 30, 1996, are not presented since they would not differ
materially from the audited results of operations presented in the statement of
income.
<TABLE>
<CAPTION>
1995
(IN THOUSANDS)
--------------
<S> <C>
Operating revenue......................................... $ 82,222
Cost of product sold...................................... 40,724
-------
Gross profit.............................................. $ 41,498
-------
-------
</TABLE>
The purchase price of the assets acquired from SYN Inc. is subject to
adjustment based on the amount of working capital acquired by the Company. A
receivable has been recorded in the amount of $3,978,000, which reflects the
reduction in purchase price of the assets based on the amount of working capital
acquired. On August 1, 1996, this receivable was assigned to the former
principal shareholder in connection with the management buy out.
The purchase price of the assets acquired from SYN Inc. is also subject to
adjustment based on the value of consumer tanks which cannot be located within a
specified period of time. The Company has
F-26
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: SYNERGY ACQUISITION (CONTINUED)
made a claim to SYN Inc. for approximately $4,000,000 which represents the value
of unlocated tanks at June 30, 1996. A receivable for these tanks has been
recorded on the balance sheet at June 30, 1996. On August 1, 1996, one-half of
this receivable was assigned to the former principal shareholder in connection
with the management buy out.
In connection with the October 7, 1996, acquisition of the Company's stock
by NGC, the SYN Inc. receivable was paid in full and assumed by NGC.
NOTE 4: RELATED-PARTY TRANSACTIONS
The Company provides data processing, office rent and other clerical
services to two corporations owned by officers and shareholders of the Company
and is reimbursed $5,000 per month for these services.
The Company leases a jet aircraft and an airport hangar from a corporation
owned by the principal shareholder of the Company. The lease requires annual
rent payments of $100,000. In addition to direct lease payments, the Company is
also responsible for the operating costs of the aircraft and the hangar. The
lease agreement was terminated August 1, 1996, in connection with the management
buy out.
The Company has an agreement with a corporation owned by the principal
shareholder of the Company which provides the Company the right to use business
guest facilities. The agreement requires annual payments of $250,000. In
addition to direct payments, the Company is also responsible for providing
vehicles and personnel to serve as security for the facilities. This agreement
was terminated August 1, 1996, in connection with the management buy out.
The Company leases the corporate home office, land, buildings and certain
equipment from a corporation owned principally by the principal shareholder. The
lease requires annual payments of $200,000. The lease was terminated August 1,
1996, in connection with the management buy out.
The Company leases a lodge from a corporation owned by the principal
shareholder of the Company. The lease requires annual rent payments of $120,000.
The lease was terminated August 1, 1996, in connection with the management buy
out.
On August 1, 1996, the Company entered into a new lease agreement with
entities controlled by the former principal shareholder. The new lease agreement
provides for the payment of $600,000 per year for the corporate home office,
land, buildings and certain equipment, the use of the airport hangar and the
right to use land underlying the Company's warehouse facility. This lease was
assumed by Cornerstone on December 17, 1996.
A subsidiary of the Company entered into a seven-year services agreement
with Empire Gas to provide data processing and management information services
beginning July 1, 1994. The services agreement provides for payments by Empire
Gas to be based on an allocation of the subsidiary's actual costs based on the
gallons of LP gas sold by Empire Gas as a percentage of the gallons of LP gas
sold by the Company and Empire Gas combined. For the years ended June 30, 1995,
and June 30, 1996, total amounts received related to this services agreement
were $1.1 million and $713,000, respectively. For the month ended July 31, 1996,
the two months ended September 30, 1996, and the two and one-half months ended
December 16, 1996, amounts were $88,000, $195,000 and $173,000, respectively.
Such amounts have been netted against related general and administrative
expenses in the accompanying statements of operations. This services agreement
was assumed by Cornerstone on December 17, 1996.
F-27
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: LONG-TERM DEBT
Long-term debt at June 30, 1996, consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Revolving credit facility (A)............................. $ --
Acquisition credit facility (B)........................... 31,100
Purchase contract obligations (C)......................... 361
-------
31,461
Less current maturities................................... 6,019
-------
$ 25,442
-------
-------
</TABLE>
- ------------------------
(A) The Company has an agreement with a lender to provide a revolving credit
facility. The facility provides for borrowings up to $20 million, bears
interest at either 1/2% over the lender's prime rate or 1 1/8% over the
Eurodollar rate and matures June 30, 2000. The facility includes working
capital, capital expenditure, cash flow and net worth requirements as well
as dividend restrictions which limit the payment of cash dividends to 50% of
the preceding year's net income. The Company's unused revolving credit line
at June 30, 1996, amounted to $18,148,000 after considering $1,852,000 of
letters of credit. The credit facility was terminated August 1, 1996, in
connection with the management buy out.
(B) On August 15, 1995, the Company modified the above agreement to include a
$35 million acquisition credit facility which was used for the purchase of
assets from SYN Inc. The acquisition credit facility bears interest at
either 1/2% over the lender's prime rate or 1 1/8% over the Eurodollar rate.
The acquisition credit facility requires quarterly principal payments of
$1,944,000. This credit facility was terminated August 1, 1996, in
connection with the management buy out.
(C) Purchase contract obligations arise from the purchase of operating
businesses and are collateralized by the equipment and real estate acquired
in the respective acquisitions. The Company has also entered into purchase
contract obligations for equipment used in administrative activities. At
June 30, 1996, these obligations carried interest rates ranging from 7% to
10% and are due periodically through 2001.
(D) On August 1, 1996, in conjunction with the management buyout, the Company
entered into an agreement with a lender to provide a $42 million term note
maturing December 31, 2002, a $52 million term note maturing December 31,
2006, a $20 million revolving working capital credit facility maturing June
30, 2001, and a $10 million acquisition credit facility maturing June 30,
2001. The Company has the choice of keeping the borrowings at prime or
transferring the loans to Eurodollar. Amounts at prime on these notes bear
interest at the Bank of Boston daily rate or 1/2% over the Federal Funds
Rate. Amounts at Eurodollar on these notes bear interest at the Eurodollar
rate plus an applicable margin which is dependent on a ratio of debt
(excluding note payable to former principal shareholder and purchase
contract obligations) to earnings before depreciation, interest and income
taxes. The facility includes working capital, capital expenditures, cash
flow and net worth requirements as well as dividend restrictions. This
credit facility was terminated December 16, 1996, in connection with the
public offering.
F-28
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: LONG-TERM DEBT (CONTINUED)
(E) On August 1, 1996, in conjunction with the management buyout, the Company
entered into a $5 million subordinated promissory note bearing interest at
8% with the former principal shareholder of the Company. On October 7, 1996,
this note was paid by NGC.
NOTE 6: INCOME TAXES
The provision (credit) for income taxes includes these components (in
thousands):
<TABLE>
<CAPTION>
TWO AND
ONE-HALF YEAR ENDED
MONTHS ENDED TWO MONTHS ONE MONTH ------------------------
DECEMBER 16, ENDED SEPT. ENDED JULY JUNE 30, JUNE 30,
1996 30, 1996 31, 1996 1996 1995
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Taxes currently payable (refundable)............. $ 1,323 $ (400) $ (765) $ 2,475 $ 406
Deferred income taxes............................ (126) -- -- 1,075 194
------ ----- ----- ----------- -----
$ 1,197 $ (400) $ (765) $ 3,550 $ 600
------ ----- ----- ----------- -----
------ ----- ----- ----------- -----
</TABLE>
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below (in thousands):
<TABLE>
<CAPTION>
TWO AND
ONE-HALF YEAR ENDED
MONTHS ENDED TWO MONTHS ONE MONTH ------------------------
DECEMBER 16, ENDED SEPT. ENDED JULY JUNE 30, JUNE 30,
1996 30, 1996 31, 1996 1996 1995
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Computed at the statutory rate (34%)............. $ 1,060 $ (386) $ (693) $ 2,464 $ 355
Increase resulting from:
Amortization of excess of cost over fair value
of net assets acquired....................... 196 33 17 79 77
State income taxes net of federal tax
benefit...................................... 102 (54) (100) 248 116
Change in estimated taxes...................... 700 -
Other.......................................... (161) 7 11 59 52
------ ----- ----- ----------- -----
Actual tax provision............................. $ 1,197 $ (400) $ (765) $ 3,550 $ 600
------ ----- ----- ----------- -----
</TABLE>
NOTE 7: SELF-INSURANCE AND RELATED CONTINGENCIES
Under the Company's insurance program, coverage for comprehensive general
liability and vehicle liability is obtained for catastrophic exposures as well
as those risks required to be insured by law or contract. The Company retains a
significant portion of certain expected losses related primarily to
comprehensive general liability and vehicle liability. Under these insurance
programs, the Company self-insures the first $1 million of coverage (per
incident) on general liability and on vehicle liability. In addition, the
Company has a $100,000 deductible for each and every liability claim. The
Company obtains excess coverage from carriers for these programs on claims-made
basis policies. The excess coverage for
F-29
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: SELF-INSURANCE AND RELATED CONTINGENCIES (CONTINUED)
comprehensive general liability provides a loss limitation that limits the
Company's aggregate of self-insured losses to $1.5 million per policy period.
The Company self insures the first $250,000 of workers' compensation
coverage (per incident). The Company purchased excess coverage from carriers for
workers' compensation claims in excess of the self-insured coverage. Provisions
for losses expected under this program were recorded based upon the Company's
estimates of the aggregate liability for claims incurred. The Company provided
letters of credit aggregating approximately $1,852,000 in connection with this
program.
Provisions for self-insured losses are recorded based upon the Company's
estimates of the aggregate self-insured liability for claims incurred.
The Company self-insures health benefits provided to the employees of the
Company and its subsidiaries. Provisions for losses expected under this program
are recorded based upon the Company's estimate of the aggregate liability for
claims incurred.
In conjunction with the restructuring that occurred in June 1994, the
Company agreed to indemnify Empire Gas for 47.7% of the self-insured liabilities
of Empire Gas incurred prior to June 30, 1994. The Company includes in its
self-insurance liability its best estimate of the amount it will owe Empire Gas
under the indemnification agreement.
The Company and its subsidiaries are presently defendants in various
lawsuits related to the self-insurance program and other business-related
lawsuits which are not expected to have a material, adverse effect on the
Company's financial position or results of operations. All liabilities related
to the insurance program and other business-related lawsuits were assumed by
Cornerstone on December 17, 1996.
NOTE 8: INCOME TAX AUDITS
The State of Missouri has assessed Empire Gas approximately $1,400,000 for
additional state income tax for the years ended June 30, 1992 and 1993. An
amount approximating one-half of the above assessment could be at issue for the
year ended June 30, 1994. Empire Gas and Empire Energy have protested these
assessments and are currently waiting for a response from the Missouri
Department of Revenue. It is likely that this matter will have to be settled in
litigation. Empire Gas and Empire Energy believe that they have a strong
position on this matter and intend to vigorously contest the assessment. It is
not possible at this time to conclude on the outcome of this matter.
The Company and its subsidiaries are presently included in various state tax
audits which are not expected to have a material, adverse effect on the
Company's financial position or results of operation.
The Company's Federal Income Tax Returns have been audited through the year
ended June 30, 1994, and all income taxes due have either been accrued or paid.
As a former member of the Empire Gas controlled group and in connection with
a tax indemnity agreement with Empire Gas, the Company agreed to indemnify 47.7%
of the total liabilities related to these tax audits of the years ended June 30,
1994, and prior thereto.
F-30
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: STOCK OPTIONS
The Company's stock options provide for a fixed option price of $7.00 per
share for options granted to officers and key employees. Options granted are
exercisable beginning one year after the date of grant at the rate of 20% per
year and expire six years after the date of grant. Option activity for each
period was:
<TABLE>
<S> <C>
Stock options outstanding July 1, 1994........................... 0
Options granted.................................................. 1,170,000
Options canceled................................................. (25,000)
---------
Stock options outstanding June 30, 1995.......................... 1,145,000
Options granted.................................................. 25,000
Options cancelled................................................ (50,000)
---------
Stock options outstanding June 30, 1996.......................... 1,120,000
Options cancelled................................................ (150,000)
Options exercised................................................ (970,000)
---------
Stock options outstanding December 16, 1996...................... 0
---------
---------
</TABLE>
NOTE 10: ADDITIONAL CASH FLOW INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
TWO AND ONE-HALF TWO MONTHS ONE MONTH ------------------------
MONTHS ENDED ENDED SEPT. ENDED JULY JUNE 30, JUNE 30,
DECEMBER 16, 1996 30, 1996 31, 1996 1996 1995
----------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Noncash Investing and Financing Activities
Purchase contract obligations incurred................... $ -- $ -- $ -- $ 222 $ 172
Nonmonetary assets distributed to former principal
shareholder............................................ -- 6,755 -- -- --
Note payable issued to former principal shareholder...... -- 5,000 -- -- --
Additional Cash Payment Information
Interest paid............................................ -- 804 106 2,432 64
Income taxes paid (refunded)............................. -- (609) -- 2,995 1,108
</TABLE>
NOTE 11: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
DEPENDENCE ON PRINCIPAL SUPPLIERS
Three suppliers, Conoco, Phillips and Texaco, account for approximately 50%
of Empire Energy's volume of propane purchases.
Although the Company believes that alternative sources of propane are
readily available, in the event that the Company is unable to purchase propane
from one of these three suppliers, the failure to obtain
F-31
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: SIGNIFICANT ESTIMATES AND CONCENTRATIONS (CONTINUED)
alternate sources of supply at competitive prices and on a timely basis would
have a material, adverse effect on the Company.
ESTIMATES
Significant estimates related to self-insurance, litigation, collectibility
of receivables and income tax assessments are discussed in Notes 3, 7 and 8.
Actual losses related to these items could vary materially from amounts
reflected in the financial statements.
NOTE 12: SUBSEQUENT EVENT
On December 17, 1996, substantially all of the assets and liabilities of the
Company were contributed to Cornerstone Propane, L.P., a Delaware limited
partnership, a subsidiary of Cornerstone Propane Partners, L.P. Following this
transaction, on December 17, 1996, Cornerstone Propane Partners, L.P. completed
its initial public offering (see Note 1 to the consolidated financial statements
of Cornerstone Propane Partners, L.P. for the period ended June 30, 1997,
included in this prospectus.)
F-32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
CGI Holdings, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of CGI
Holdings, Inc. and its subsidiaries at July 31, 1996, and the results of their
operations and their cash flows for the four and one-half month period ended
December 16, 1996 and for each of the two years in the period ended July 31,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Francisco, California
August 8, 1997
F-33
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
JULY 31, 1996
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................................ $ 1,519
Accounts and notes receivable............................................................ 23,664
Inventories.............................................................................. 7,316
Prepaid expenses and deposits............................................................ 1,996
Deferred income tax benefit.............................................................. 802
---------
Total current assets................................................................. 35,297
---------
Property and equipment, at cost less accumulated depreciation.............................. 51,495
Cost in excess of net assets acquired, net of amortization................................. 11,844
Notes receivable........................................................................... 1,357
Deferred charges and other assets.......................................................... 6,186
---------
$ 106,179
---------
---------
LIABILITIES, MANDATORILY REDEEMABLE
SECURITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................................................... $ 30,824
Accrued liabilities...................................................................... 3,101
Current maturities of long-term debt and capital lease obligations....................... 3,924
---------
Total current liabilities............................................................ 37,849
---------
Long-term debt and capital lease obligations............................................... 41,801
Deferred income taxes...................................................................... 10,777
Other liabilities.......................................................................... 1,095
Commitments and contingencies (Note 9)
MANDATORILY REDEEMABLE SECURITIES:
Redeemable exchangeable preferred stock:
10% cumulative, $0.01 par value, 62,500 shares authorized, issued and outstanding; at
redemption value....................................................................... 8,559
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value, 6,515,000 shares authorized; 4,312,247 issued and
outstanding:
Class A voting common stock, $0.01 par value, 3,000,000 shares authorized; 2,789,784
issued and outstanding................................................................ 28
Class B voting common stock, $0.01 par value, 200,000 shares authorized; 149,485 issued
and outstanding....................................................................... 1
Class C voting common stock, $0.01 par value, 3,000,000 shares authorized; 1,343,831
issued and outstanding................................................................ 13
Class D non-voting common stock, $0.01 par value, 250,000 shares authorized; 29,147
issued and outstanding................................................................ --
Warrants outstanding..................................................................... 2,134
Additional paid-in capital............................................................... 8,945
Accumulated deficit...................................................................... (5,023)
---------
Total stockholders' equity........................................................... 6,098
---------
$ 106,179
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
CGI HOLDINGS, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 1, FISCAL YEAR ENDED JULY
1996 TO 31, THREE MONTHS
DECEMBER 16, ---------------------- ENDED OCTOBER
1996 1996 1995 31, 1996
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Sales and other revenue.................................... $ 185,460 $ 384,354 $ 266,842 $ 108,175
Costs and expenses:
Cost of sales, except for depreciation and
amortization........................................... 173,155 351,213 234,538 100,266
Operating expenses....................................... 8,181 21,046 20,239 5,201
Sale of partnership interest............................. 660 -- -- 660
General and administrative expenses...................... 1,738 3,835 3,745 1,091
Depreciation and amortization............................ 1,604 4,216 3,785 1,067
Interest expense......................................... 2,238 5,470 5,120 1,294
------------ ---------- ---------- -------------
Loss before income taxes and extraordinary charge.......... (2,116) (1,426) (585) (1,404)
Income tax benefit......................................... (748) (473) (202) (491)
------------ ---------- ---------- -------------
Loss before extraordinary charge........................... (1,368) (953) (383) (913)
Extraordinary charge for early retirement of debt, net of
income tax benefit....................................... -- -- (506) --
------------ ---------- ---------- -------------
Net loss................................................... $ (1,368) $ (953) $ (889) $ (913)
------------ ---------- ---------- -------------
------------ ---------- ---------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
COMMON STOCK WARRANTS CAPITAL DEFICIT
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at August 1, 1994......................................... $ 42 $ -- $ 9,969 $ (1,696)
Net loss.......................................................... -- -- -- (889)
Issuance of warrants.............................................. -- 2,134 -- --
Repurchase of common stock........................................ -- -- (1,000) --
Accrued dividends on redeemable and exchangeable preferred
stock........................................................... -- -- -- (707)
--- ----------- ----------- ------------
Balance at July 31, 1995.......................................... 42 2,134 8,969 (3,292)
Net loss.......................................................... -- -- -- (953)
Repurchase of common stock........................................ -- -- (24) --
Accrued dividends on redeemable and exchangeable preferred
stock........................................................... -- -- -- (778)
--- ----------- ----------- ------------
Balance at July 31, 1996.......................................... 42 2,134 8,945 (5,023)
Net loss.......................................................... -- -- -- (1,368)
Accrued dividends on redeemable and exchangeable preferred
stock........................................................... -- -- -- (116)
--- ----------- ----------- ------------
Balance at December 16, 1996...................................... $ 42 $ 2,134 $ 8,945 $ (6,507)
--- ----------- ----------- ------------
--- ----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 1, FISCAL YEAR ENDED
1996 TO JULY 31,
DECEMBER 16, --------------------
1996 1996 1995
------------ --------- --------- THREE MONTHS
ENDED
OCTOBER 31,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES:
Net loss..................................................... $ (1,368) $ (953) $ (889) $ (913)
Adjustments to reconcile net loss to net cash from (used for)
operating activities:
Depreciation and amortization.............................. 1,604 4,216 3,785 1,067
Deferred income taxes...................................... (732) (516) (488) (472)
Extraordinary charge to earnings........................... -- -- 506
Sale of partnership interest............................... 202 -- -- 202
Changes in assets and liabilities net of acquisitions:
Accounts and notes receivable............................ (11,532) (2,950) (2,700) 2,198
Inventories.............................................. 4,257 (1,511) (617) 565
Prepaid expenses and deposits............................ (729) (410) 1,451 472
Other assets............................................. (154) (193) (495) (91)
Accounts payable......................................... 11,082 9,327 (3,897) (3,460)
Accrued liabilities...................................... (1,007) 172 (1,630) 676
------------ --------- --------- -------------
1,623 7,182 (4,974) 244
------------ --------- --------- -------------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES:
Payments for acquisitions of retail outlets.................. -- (3,000) (1,091)
Proceeds from sale of property and equipment................. 57 415 878 20
Purchases of and investments in property and equipment....... (1,503) (3,060) (4,490) (594)
------------ --------- --------- -------------
(1,446) (5,645) (4,703) (574)
------------ --------- --------- -------------
------------ --------- --------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 1, FISCAL YEAR ENDED THREE MONTHS
1996 TO JULY 31, ENDED
DECEMBER 16, --------------------- OCTOBER 31,
1996 1996 1995 1996
------------- --------- ---------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES:
Repurchase of common stock................................. -- $ (24) $ (1,000)
Prepayment of long-term debt............................... -- -- (26,940)
Net proceeds from issuance of long-term debt............... -- -- 28,111
Proceeds from issuance of senior subordinated debt......... -- -- 13,073
Repayment of long-term debt................................ (562) (1,250) (1,000) (562)
Borrowings on capital leases and other term loans.......... -- 1,248 2,263
Repayment of other notes payable........................... (252) (561) (739) (104)
Principal payments under capital lease obligations......... (506) (1,579) (2,929) (345)
Borrowings (repayments) under acquisition line............. 5,999 (2,275) 1,054 4,575
------ --------- ---------- ------
4,679 (4,441) 11,893 3,564
------ --------- ---------- ------
Net (decrease) increase in cash.............................. 4,856 (2,904) 2,216 3,234
Cash balance, beginning of period............................ 1,519 4,423 2,207 1,519
------ --------- ---------- ------
Cash balance, end of period.................................. $ 6,375 $ 1,519 $ 4,423 $ 4,753
------ --------- ---------- ------
------ --------- ---------- ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Pursuant to a Stock Purchase Agreement dated March 31, 1993, by and among
CGI Holdings, Inc., a Delaware corporation (the "Company") formed to effect this
transaction and a major shareholder of Coast Gas Industries ("Industries"), the
Company acquired all of the outstanding stock of Industries (the "Buyout"). The
accompanying financial statements are presented on the Company's basis of
accounting giving effect to the Stock Purchase Agreement.
The Company engages in the sale and distribution of natural gas, crude oil,
natural gas liquids, liquefied petroleum gas ("LPG"), LPG storage and
transportation equipment through its wholly-owned subsidiary, Coast Gas, Inc.
Its operations consist primarily of the sale, transportation and storage of LPG
to wholesale and retail customers; the sale of LPG storage equipment; and the
leasing of LPG storage and transportation equipment under monthly operating
leases. Sales are made to approximately 77,000 customers in seven states,
primarily in the western regions of the United States.
In connection with the Stock Purchase Agreement, the Company pays a monthly
fee to Aurora Capital Partners ("Aurora"), an investor in the Company, for
management services provided. Payments for the four and one-half month period
ended December 16, 1996 were $101,625. Payments for each of the years ended July
31, 1996 and 1995 amounted to $250,000.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Coast Gas, Inc., and its wholly-owned
subsidiary Coast Energy Group, Inc. ("CEG"). In 1989 the Company formed CEG,
headquartered in Houston, Texas, to conduct its wholesale procurement and
distribution operations. All significant intercompany transactions have been
eliminated in consolidation.
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements of operations and cash flows of the
Company for the three month period ended October 31, 1996 are unaudited. In the
opinion of the Company's management, the interim data include all adjustments
necessary for a fair statement of the results for the interim period. These
adjustments were of a normal recurring nature, except as discussed in Note 2.
The results of operations for the interim period are not necessarily
indicative of future financial results.
REVENUE RECOGNITION
Sales of natural gas, crude oil, natural gas liquids and LPG are recognized
when delivered to the customer.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-39
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
The Company offers credit terms on sales to its retail and wholesale customers.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The Company
maintains an allowance for uncollectible accounts receivable based upon the
expected collectibility of all accounts receivable.
CASH FLOWS
For purposes of the comparative statements of cash flows, the Company
considers all highly liquid investments having original maturities of three
months or less to be cash equivalents. The carrying amount of cash, cash
equivalents and short-term debt approximates fair market value due to the short
maturity of these instruments.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of LPG is
determined using the last-in, first-out (LIFO) method. At July 31, 1996 the
excess of LIFO cost over replacement cost was $.9 million. The cost of parts and
fittings is determined using the first-in, first-out (FIFO) method.
During the four and one-half months ended December 16, 1996, inventory
quantities were reduced. This reduction resulted in a liquidation of LIFO
inventory quantities carried at lower costs prevailing in prior years as
compared with the cost of purchases for the four and one-half month period ended
December 16, 1996, the effect of which decreased cost of goods sold by
approximately $.2 million and increased net income by approximately $.1 million.
The major components of inventory as of July 31, 1996, consist of the
following (in thousands of dollars):
<TABLE>
<S> <C>
LPG................................................. $ 6,474
Parts and fittings.................................. 842
---------
$ 7,316
---------
---------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets as
follows: buildings and improvements, 25 years; LPG storage and rental tanks, 40
to 50 years; and office furniture, equipment and tank installation costs, 5 to
10 years. Leasehold improvements are amortized over the shorter of the estimated
useful life or the lease term. Depreciation of equipment acquired under capital
leases of $54,500, $132,000 and $160,000 for the four and one-half month period
ended December 16, 1996 and for the years ended July 31, 1996 and 1995,
respectively, is included in depreciation and amortization expense.
When property or equipment is retired or otherwise disposed, the cost and
related accumulated depreciation is removed from the accounts, and the resulting
gain or loss is credited or charged to operations. Maintenance and repairs are
charged to earnings, while replacements and betterments that extend estimated
useful lives are capitalized.
A majority of the LPG rental and storage tanks are leased to customers on a
month-to-month basis under operating lease agreements. Tank rental income of
approximately $.9 million, $2.3 million and $2.2 million for the four and
one-half month period ended December 16, 1996 and for the years ended
F-40
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
July 31, 1996 and 1995, respectively, is included in sales and other revenue.
Direct costs associated with the installation of LPG storage tanks leased to
customers are capitalized and amortized over the estimated average customer
retention term.
COST IN EXCESS OF NET ASSETS ACQUIRED
The excess of acquisition cost over the estimated fair market value of
identifiable net assets of acquired businesses is amortized on a straight-line
basis over forty years. The related costs and accumulated amortization were
$12.8 million and $0.9 million at July 31, 1996.
It is the Company's policy to review intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. If such a review should indicate that the
carrying amount of intangible assets is not recoverable, it is the Company's
policy to reduce the carrying amount of such assets to fair value.
DEFERRED CHARGES AND OTHER ASSETS
Deferred charges consist primarily of deferred debt issuance costs and
capitalized non-compete covenant agreement costs. Deferred debt issuance costs
are amortized using the bonds outstanding method over the life of the related
loans, other deferred charges are amortized on a straight-line basis over
varying lives, ranging from five to seven years. Total deferred charges and the
related accumulated amortization were $6.2 million and $3.0 million as of July
31, 1996. Included in these amounts are unamortized debt issuance costs
associated with the bank borrowings of $1.6 million at July 31, 1996.
Other assets include customer lists purchased in business acquisitions that
are amortized on a straight-line basis over a ten-year life. The total cost of
customer lists and the related accumulated amortization were $2.6 million and
$1.0 million at July 31, 1996.
FUTURES CONTRACTS
The Company routinely uses commodity futures contracts to reduce the risk of
future price fluctuations for natural gas and LPG inventories and contracts.
Gains and losses on futures contracts purchased as hedges are deferred and
recognized in cost of sales as a component of the product cost for the related
hedged transaction. In the statement of cash flows, cash flows from qualifying
hedges are classified in the same category as the cash flows from the items
being hedged. Contracts which do not qualify as hedges are marked to market,
with the resulting gains and losses charged to current operations. Net realized
gains and losses for the four and one-half month period ended December 16, 1996
and for each of the two years ended July 31, 1996 and 1995 and unrealized gains,
losses on outstanding positions and open positions as of July 31, 1996, are not
material.
INTEREST RATE SWAP AGREEMENT
Interest rate differentials to be paid or received under interest rate swap
agreements are accrued and recognized over the life of the agreements. Interest
payable or receivable under these interest rate swap agreements is recognized in
the periods when market rates exceed contract limits as an increase or reduction
in interest expense. Interest rate swap agreements held by the Company expired
during fiscal 1996.
F-41
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
On August 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" ("SFAS No. 121"). This statement
requires impairment losses to be recorded on long-lived assets used in
operations and certain identifiable intangible assets when indications of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Adoption of SFAS No.
121 did not have a material impact on the financial statements.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company applies APB Opinion 25 and related interpretations in accounting
for the stock options and stock appreciation rights. Had compensation cost for
the Company's options and stock appreciation rights been determined based on the
fair market value at the grant date of these awards consistent with the
methodology described by SFAS 123 "Accounting for Stock-Based Compensation" the
effect on the Company's net income would not have been material. SFAS No. 123
does not apply to awards granted prior to July 31, 1995.
NOTE 2: ACCOUNTS AND NOTES RECEIVABLE AND OTHER ASSETS
Accounts and notes receivable as of July 31, 1996 consist of the following
(in thousands of dollars):
<TABLE>
<S> <C>
Accounts receivable from customers......................................... $ 23,814
Allowance for doubtful accounts............................................ (367)
Notes receivable from customers............................................ 753
Notes and accounts receivable from employees............................... 821
---------
Total accounts and notes receivable........................................ 25,021
Less: non-current portion.................................................. 1,357
---------
Current notes and accounts receivable...................................... $ 23,664
---------
---------
</TABLE>
Notes receivable arise in the ordinary course of business from the sale of
LPG storage and transportation equipment. Terms are generally from one to five
years, with interest rates ranging from 12.0% to 13.0%.
The Company has accounts and notes receivable due from employees totaling
$821,000 at July 31, 1996. The notes primarily relate to employee stock purchase
loans and employee housing assistance programs. The terms of the employee stock
purchase loans require interest payments of 6.0% per annum on the outstanding
principal balance and that all outstanding principal and interest be paid by
October 31, 1997. Under the employee housing assistance program, the Company is
a guarantor on primary residential notes issued in conjunction with the
Company's relocation program for a fixed term of seven years through October
1997. In conjunction with the purchase of the Company (see Note 12), the balance
of accounts and notes receivable due from employees was either repaid or
forgiven.
The Company, through its wholly-owned subsidiary Coast Gas, Inc., holds a
50% limited interest in Coast Energy Investments, Inc., a limited partnership.
The partnership was established to facilitate the formation of a trading fund
and is accounted for under the equity method. Coast Gas, Inc. receives a
F-42
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: ACCOUNTS AND NOTES RECEIVABLE AND OTHER ASSETS (CONTINUED)
management fee. For the year ended July 31, 1996, the investment in the
partnership amounted to $122,000. In addition, at July 31, 1996, Coast Gas, Inc.
recorded a management fee receivable of $93,000.
Effective October 1, 1996, the Company terminated its participation and
interest in Coast Energy Investments, Inc. The original partnership agreement
provided for a minimum investment term through December 1997. The termination
resulted in the sale of the Company's partnership interest to its 50% partner
and an employee of the partnership. The Company recorded a pretax loss on the
disposition of the partnership interest of $660,000. This amount consisted of a
$202,000 loss on the partnership investment and $458,000 of termination costs
consisting of salary, consulting, noncompete agreements and other related
expenses.
Beginning on December 12, 1996, insurance coverage for CGI Holdings, Inc.
was provided by Cornerstone Propane Partners, L.P. (see Note 12). The coverage
maintained was consistent with the coverage previously held by the Company.
NOTE 3: PROPERTY AND EQUIPMENT
Property and equipment as of July 31, 1996, consists of the following (in
thousands of dollars):
<TABLE>
<S> <C>
Land....................................................................... $ 2,312
Buildings and improvements................................................. 4,600
LPG rental and storage tanks............................................... 44,690
Equipment and office furnishings........................................... 6,447
---------
58,049
Less accumulated depreciation and amortization............................. 6,554
---------
$ 51,495
---------
---------
</TABLE>
At July 31, 1996, LPG rental and storage tanks include $7.3 million for
tanks acquired under capital leases. Tanks acquired under capital leases are
pledged as collateral under the capital lease agreements. All assets of the
Company are pledged as collateral for the Company's long-term debt under the
provisions of the Credit Agreement (see Note 4).
Depreciation expense for the four and one-half month period ended December
16, 1996 and for the years ended July 31, 1996 and 1995, totaled $1.0 million,
$2.4 million and $2.2 million, respectively.
F-43
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: LONG-TERM DEBT
Long-term debt as of July 31, 1996, consists of the following (in thousands
of dollars):
<TABLE>
<S> <C>
Revolving loan, variable interest at prime plus 1.50%, due in monthly
installments of interest only until September 14, 2000, secured by all
assets of the Company..................................................... $ 13,080
Term loan, variable interest at prime plus 1.50%, due in quarterly
installments through July 31, 2000, secured by all assets of the
Company................................................................... 12,750
Senior subordinated notes, fixed interest rate of 12.50%, due in equal
annual installments of $5.0 million, commencing September 15, 2002. The
senior subordinated notes are unsecured obligations of the Company with
quarterly interest payments over the life of the loan..................... 13,310
Other notes payable with periodic payments through 2002, interest rates
ranging from 8.0% to 12.0%................................................ 2,232
---------
41,372
Less current maturities.................................................... 2,562
---------
$ 38,810
---------
---------
</TABLE>
During the year ended July 31, 1995, Coast Gas, Inc. entered into a Credit
Agreement (the "Credit Agreement") with Bank of America, which provided
financing of up to $35.0 million, consisting of $15.0 million in term debt and a
$20.0 million revolving credit facility. The revolving and term loans, at the
election of Coast Gas, Inc., bear interest at the Bank of America prime rate
plus 1.50% or Libor plus 2.75% per annum. Concurrently, Coast Gas, Inc. issued
$15.0 million in senior subordinated notes with a fixed interest rate of 12.50%
per annum. The proceeds of the subordinated notes and a portion of the proceeds
available under the Credit Agreement were used to repay the notes to Heller
Financial, Inc. ("Heller"). The balance of the funds available under the Credit
Agreement ("Working Capital Line") will be used for general corporate purposes
and to finance future acquisitions.
The terms of the Credit Agreement were amended during the year ended July
31, 1996 to increase the Working Capital line by an additional $3.0 million. An
additional provision of the amendment requires that the maximum amount of the
facility is fixed at $23.0 million until May 1, 1997, at which point it begins
decreasing annually to $16.0 million by May 1, 2000 and matures on September 14,
2000. Advances against the line used to finance acquisitions were $0, $3.0
million and $1.1 million for the four and one-half month period ended December
16, 1996 and for the years ended July 31, 1996 and 1995 respectively.
The terms of the Credit Agreement contain restrictions on the issuance of
new debt or liens, the purchase or sale of assets not in the ordinary course of
business and the declaration and payment of dividends, and requires that Coast
Gas, Inc. maintain specified levels of fixed charge and interest payment
coverage ratios. The Credit Agreement also provides for prepayment of excess
funds in the event of sales of pledged assets if such funds are not reinvested
in like kind assets. The Credit Agreement provides for an unused commitment fee
of .5% on funds not drawn against the revolving line.
Total interest paid during the four and one-half month period ended December
16, 1996 was $1.6 million of which interest paid on bank long-term and
subordinated debt totaled $1.4 million. Total interest paid during the three
month period ended October 31, 1996 was $1.3 million. Total interest paid during
the years ended July 31, 1996 and 1995 was $5.4 million and $4.9 million,
respectively, of which interest paid on bank long-term and subordinated debt
totaled $4.4 million and $4.0 million, respectively.
F-44
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: LONG-TERM DEBT (CONTINUED)
Annual maturities of revolving, term and other long-term debt through July
31, 2001, are as follows: 1997 - $2.9 million; 1998 - $3.5 million; 1999 - $3.9
million; 2000 - $4.4 million; 2001 - $13.3 million; and thereafter - $15.1
million. The subordinated notes amortize $5.0 million per annum commencing in
fiscal 2003.
For the year ended July 31, 1995, the Company recorded an extraordinary
charge of $506,000 (net of $337,000 tax benefit) for the write-off of deferred
debt issuance costs upon the early extinguishment of the Heller debt. Debt
issuance costs associated with the new subordinated, revolving and term bank
debt totaling $2.2 million are being amortized using the bonds outstanding
method over the life of the related loans.
The carrying value of the Company's long-term debt approximates fair value,
in that most of the long-term debt is at floating market rates, or incurred at
rates that are not materially different from those current at July 31, 1996.
The Company has a Continuing Letter of Credit Agreement with Banque Paribas
to provide a $25.0 million credit guidance line for the operations of Coast
Energy Group, Inc., the Company's wholly owned subsidiary. The agreement
provides for a compensating balance of $1.3 million, and grants Banque Paribas a
security interest in certain pledged accounts receivable of CEG. At July 31,
1996, outstanding letters of credit drawn against this line amounted to $11.3
million.
NOTE 5: MANDATORILY REDEEMABLE SECURITIES
The Company has outstanding 62,500 shares of cumulative redeemable,
exchangeable preferred stock, with par value of $0.01 and stated value of $100.
Cumulative dividends of 10% are payable annually. Payment of dividends is
restricted under the terms of the Credit Agreement with Coast Gas, Inc. (see
Note 4). Each share of preferred stock may be redeemed at a price equal to
stated value per share plus accrued and unpaid dividends. The redemption amount
per share at July 31, 1996 was $136.94. The stock is also exchangeable, at the
option of the Company, for Coast Gas, Inc.'s subordinated exchange debentures
due September 15, 2002 (see Note 4). The stock shall, with respect to dividend
rights and rights on liquidation, winding up and dissolution, rank senior to all
classes of common stock. The Company shall redeem the stock in full at the
earliest of twelve consecutive years of unpaid dividends, sale or disposal of
substantially all the assets of the Company or merger of the Company, subject to
certain conditions. No dividends have been declared or paid since April 1, 1993.
Pursuant to the Stock Purchase and Merger Agreement (see Note 11), no dividends
were accrued after September 9, 1996. Accrued dividends were $2.4 million and
$2.3 million at October 31, 1996 and July 31, 1996, respectively, and have been
recorded as a charge to accumulated deficit.
F-45
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: INCOME TAXES
The income tax provision for the four and one-half month period ended
December 16, 1996 and for the years ended July 31, 1996 and 1995 are summarized
as follows (in thousands of dollars):
<TABLE>
<CAPTION>
JULY 31,
DECEMBER 16, --------------------
1996 1996 1995
------------- --------- ---------
<S> <C> <C> <C>
Current provision:
Federal............................................................... $ -- $ -- $ --
State................................................................. -- 25 7
----- --------- ---------
-- 25 7
----- --------- ---------
Deferred provision (benefit):
Federal............................................................... (632) (428) (176)
State................................................................. (116) (70) (33)
----- --------- ---------
(748) (498) (209)
----- --------- ---------
$ (748) $ (473) $ (202)
----- --------- ---------
----- --------- ---------
</TABLE>
The significant components of temporary differences which give rise to
deferred tax assets (liabilities) as of July 31, 1996 are as follows (in
thousands of dollars):
<TABLE>
<S> <C>
Accruals, reserves and other.............................................. $ 1,178
Federal NOLs.............................................................. 6,833
State NOLs................................................................ 220
---------
Deferred tax assets................................................... 8,231
---------
Accumulated depreciation.................................................. (13,385)
PP&E book/tax basis difference............................................ (1,793)
Capitalized tank installation costs....................................... (1,607)
LIFO inventory basis...................................................... (245)
Other..................................................................... (1,176)
---------
Deferred tax liabilities.............................................. (18,206)
---------
Net deferred tax liabilities.............................................. $ (9,975)
---------
---------
</TABLE>
F-46
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: INCOME TAXES (CONTINUED)
A reconciliation of the Company's income tax provision computed at the
United States federal statutory rate to the effective rate for the recorded
provision for income taxes for the four and one-half month period ended December
16, 1996 and for the years ended July 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
JULY 31,
DECEMBER 16, --------------------------
1996 1996 1995
--------------- ------------ ------------
<S> <C> <C> <C>
Federal statutory rate.............................................. (34)% (34)% (34)%
Amortization of cost in excess of assets acquired................... 2 7 6
State franchise taxes, net of federal income tax benefit............ (5) 2 2
Prior year tax adjustments.......................................... -- (5) --
Extraordinary loss.................................................. -- -- (9)
Other, net.......................................................... 2 (3) --
--- --- ---
(35)% (33)% (35)%
--- --- ---
--- --- ---
</TABLE>
Tax payments during the four and one-half month period ended December 16,
1996 and for the years ended July 31, 1996 and 1995 were minimal due to the
Company's tax loss position. Payments were solely for state income taxes in
various states.
As of July 31, 1996, the Company has a federal and state net operating loss
carryforward of approximately $20.0 million and $2.3 million, respectively,
available to reduce future payments of income tax liabilities. The tax benefits
of these NOLs are reflected in the accompanying table of deferred tax assets and
liabilities. If not used, carryforwards expire during the period from 2006 to
2011.
Under the provisions of Internal Revenue Code Section 382, the annual
utilization of the Company's net operating loss carryforwards may be limited
under certain circumstances. Events which may affect utilization include, but
are not limited to, cumulative stock ownership changes of more than 50% over a
three-year period. An ownership change occurred effective March 31, 1993, due to
cumulative changes in the Company's ownership. The annual and cumulative limits
on the utilization of net operating losses incurred prior to March 31, 1993 are
approximately $1.6 million and $5.5 million, respectively.
On December 17, 1996, a more than 50% ownership change occurred (see Note
12). As a result, utilization of net operating losses incurred before that date
will be subject to an annual limitation. Management believes the net operating
losses will be fully utilizable.
NOTE 7: LEASES
Coast Gas, Inc. leases rental tanks and vehicles from a former owner of the
Company on a month-to-month operating lease. The lease provides for cancellation
within 90 days, and includes a lease purchase option at the greater of the
original cost or current list price. Coast Gas, Inc. also leases real estate,
LPG storage tanks, and office equipment from certain of its current directors,
officers and employees under operating and capital lease agreements.
Rental payments under such leases totaled $403,000, $204,000 and $135,000
for the four and one-half month period ended December 16, 1996 and for the years
ended July 31, 1996 and 1995, respectively.
Coast Gas, Inc. generally leases vehicles, computer equipment, office
equipment and real property under operating lease agreements. The typical
equipment lease term is four to six years. Real property
F-47
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: LEASES (CONTINUED)
leases generally have terms in excess of ten years with renewal options. Rent
expense under all operating lease agreements for the four and one-half month
period ended December 16, 1996 and for the years ended July 31, 1996 and 1995,
totaled $.9 million, $2.5 million and $2.4 million, respectively.
Capital leases consist primarily of financing agreements for the acquisition
of LPG storage tanks with terms ranging from five to seven years. These leases
provide fixed price purchase options at the end of the noncancelable lease term.
As of July 31, 1996, future minimum lease commitments under noncancelable
leases, with terms in excess of one year were as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Years Ended July 31,
1997............................................................................. $ 2,020 $ 1,624
1998............................................................................. 1,495 1,336
1999............................................................................. 991 1,150
2000............................................................................. 753 885
2001............................................................................. 679 113
----------- ---------
Total minimum lease payments....................................................... $ 5,938 5,108
-----------
-----------
Less amounts representing interest................................................. 755
---------
Present value of future minimum lease payments..................................... 4,353
Less amounts due within one year................................................... 1,362
---------
$ 2,991
---------
---------
</TABLE>
Total assets acquired under capital leases totaled $0, $1.2 million and $2.2
million for the four and one-half months ended December 16, 1996 and for the
years ended July 31, 1996 and 1995, respectively.
In addition to these minimum lease rentals, Coast Gas, Inc. has an agreement
to lease the assets of a retail LPG distributor at a fixed percentage of the
gross profits generated by the business. Contingent lease rents paid under this
lease agreement for the four and one-half month period ended December 16, 1996
and for the years ended July 31, 1996 and 1995, totaled $119,000, $344,000 and
$406,000, respectively. The original lease term of five years, which expired in
1995, was extended for five years and has various renewal and purchase options
available to Coast Gas, Inc. through January 31, 2014.
Coast Gas, Inc. subleases some of its LPG storage tanks and vehicles to
other propane distributors under non-cancelable operating lease agreements. The
lease terms are generally for one year with automatic renewal provisions.
Additionally, these distributors may purchase the LPG storage tanks under lease,
at the greater of original cost or current list price. Sublease income totaled
$96,000, $270,000 and $390,000 for the four and one-half month period ended
December 16, 1996 and for the years ended July 31, 1996 and 1995, respectively.
F-48
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: STOCKHOLDERS' EQUITY
EMPLOYEE BENEFIT PLANS
The Company has a 401(k) employee benefit plan. All full-time employees who
have completed one year of service and are twenty-one years of age or older are
eligible to participate. Under the plan provisions, participants are allowed to
make monthly contributions on a tax-deferred basis subject to the limitations of
the plan. In addition, the Company will contribute a discretionary matching
contribution based upon participant contributions. Employees are 100% vested for
all contributions. The plan is managed by a trustee, and is fully funded.
In 1990 the Company established a discretionary profit-sharing plan for the
benefit of all eligible full time employees. Contributions are made annually at
the sole discretion of the Board of Directors. Participant benefits vest and are
paid annually over a five-year period. Unvested contributions are forfeited upon
termination of employment, and are allocated to the remaining plan participants.
Contributions are unfunded until the time of payment. At July 31, 1995, the
Company had accrued $76,000 for the profit sharing plan. No additional amounts
were accrued for the year ended July 31, 1996, or for the four and one-half
month period ended December 16, 1996.
Additionally, the Company provides certain health and life insurance
benefits to all eligible full time employees. Expenses are recorded based upon
actual paid claims and expected liabilities for incurred but not reported claims
at year end.
WARRANTS
In conjunction with the refinancing in fiscal 1995, the Company repurchased
175,438 shares of common stock from officers of the Company for $1.0 million.
Warrants in the Company were issued to senior subordinated note holders which
have been assigned an estimated fair value of $2.1 million, to be amortized over
the life of the credit agreement using the bonds outstanding method. The
warrants include 175,438 Series A Warrants with an exercise price of $2.85 and
287,228 Series B Warrants with an exercise price of $0.01. The warrants are
exercisable at the earliest of a sale, acquisition or initial public offering,
subject to certain conditions, or September 15, 1997 into shares of the
Company's Class D non-voting common stock. The warrants issued to Heller under
the previous debt agreement were returned unexercised.
OPTIONS
The Company has a 1987 stock plan available to grant incentive and
non-qualified stock options to officers and other employees. The plan provides
for the granting of a maximum of 175,000 options to purchase common shares of
the Company. The option price per share may not be less than the fair market
value of a share on the date the option is granted and the maximum term of the
option may not exceed 10 years. Options granted vest over a period of four years
from the date of grant. Granting of options under this plan will expire on the
10th anniversary of the plan. Pursuant to the Merger Agreement (see Note 11),
each outstanding option shall be converted into the right to receive cash
whether or not such option is exercisable in full. Compensation expense related
to the granting of options amounted to $21,000 for the
F-49
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: STOCKHOLDERS' EQUITY (CONTINUED)
year ended July 31, 1995. Information regarding the Company's stock option plan
is summarized as follows:
<TABLE>
<CAPTION>
PER SHARE
OPTIONS RANGE
--------- --------------------
<S> <C> <C> <C>
Outstanding at August 1, 1994............................................... 132,031 $ 0.01 $ 9.11
Granted................................................................... 42,942 .10 9.13
Exercised................................................................. --
Canceled.................................................................. --
---------
Outstanding at July 31, 1995................................................ 174,973 $ 0.01 $ 9.13
Granted................................................................... --
Exercised................................................................. --
Canceled.................................................................. --
---------
Outstanding at July 31, 1996................................................ 174,973 $ 0.01 $ 9.13
Granted................................................................... --
Exercised................................................................. --
Canceled.................................................................. --
---------
Outstanding at December 16, 1996............................................ 174,973 $ 0.01 $ 9.13
Available for grant at December 16, 1996.................................... 27
</TABLE>
During 1996, the Company adopted a Stock Appreciation Rights (SARs) plan.
The Company granted 500,000 SARs, which are to vest over a five-year period, at
a per share value of $1.20. Compensation expense related to the grant of SARs of
$45,000 and $120,000 was recorded for the four and one-half month period ended
December 16, 1996 and for the year ended July 31, 1996, respectively.
NOTE 9: COMMITMENTS AND CONTINGENCIES
The Company has contracts with various suppliers to purchase a portion of
its supply needs of LPG for future deliveries with terms ranging from one to
twelve months. The contracted quantities are not significant with respect to the
Company's anticipated total sales requirements and will generally be acquired at
prevailing market prices at the time of shipment. Outstanding letters of credit
issued in conjunction with product supply contracts are a normal business
requirement. There were no outstanding letters of credit issued on behalf of the
Company as of July 31, 1996, other than the $11.3 million drawn against the
credit guidance line (see Note 4).
The Company is engaged in certain legal actions related to the normal
conduct of business. In the opinion of management, any possible liability
arising from such actions will be adequately covered by insurance or will not
have a material adverse effect on the Company's financial position or results of
operations.
NOTE 10: BUSINESS ACQUISITIONS
During the year ended July 31, 1996, Coast Gas, Inc. acquired one retail
outlet in a transaction accounted for using the purchase method of accounting.
The cost of the acquired company totaled $4.0 million, including $1.0 million of
seller notes and other liabilities and $3.0 from the increase in the Company's
Working Capital/Acquisition bank line. Goodwill resulting from the acquisition
totaled
F-50
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: BUSINESS ACQUISITIONS (CONTINUED)
$2.8 million. Revenues of the acquired company for the year ended July 31, 1996,
subsequent to the dates of acquisition and included in the Company's
consolidated sales totaled $1.9 million.
During the year ended July 31, 1995, Coast Gas, Inc. acquired three retail
outlets in transactions accounted for using the purchase method of accounting.
The cost of the acquired companies totaled $1.8 million (including $0.7 million
of seller notes). Goodwill resulting from these acquisitions totaled $0.3
million. Revenues of the acquired companies for the year ended July 31, 1995,
subsequent to the dates of acquisition and included in the Company's
consolidated sales totaled $0.7 million.
NOTE 11: STOCK PURCHASE AND MERGER AGREEMENT
Effective September 9, 1996, the Company and the preferred shareholders of
the Company entered into a Stock Purchase and Merger Agreement (the "Merger
Agreement") for the sale of the preferred stock of the Company for $8.7 million.
The terms of the Agreement also provided an option to the buyer of the preferred
stock to acquire all of the outstanding common stock of the Company, for a
period of one year from the date of the sale of the preferred stock.
Additionally, the shareholders of the Company have an option to put the common
stock of the Company to the buyer of the preferred stock on April 30, 1997, if
the buyer has not previously exercised the option to acquire the common stock.
Subsequent to December 16, 1996, the common stock of the company was purchased
as described in Note 12.
NOTE 12: SUBSEQUENT EVENT
On December 17, 1996, substantially all of the assets and liabilities of the
Company were contributed to Cornerstone Propane, L.P., a Delaware limited
partnership, a subsidiary of Cornerstone Propane Partners, L.P. Following this
transaction, on December 17, 1996, Cornerstone Propane Partners, L.P. completed
its initial public offering (see Note 1 to the consolidated financial statements
of Cornerstone Propane Partners, L.P. for the period ended June 30, 1997,
included in this prospectus.)
F-51
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SYN Inc.:
We have audited the accompanying consolidated balance sheet of SYN Inc. (a
Delaware corporation and 52.5% owned subsidiary of Northwestern Public Service
Company) and Subsidiaries as of June 30, 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for the period
from inception (August 15, 1995) to June 30, 1996, and for the period from July
1, 1996 to December 16, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SYN Inc. and Subsidiaries as
of June 30, 1996, and the results of their operations and their cash flows for
the period from inception (August 15, 1995) to June 30, 1996 and for the period
from July 1, 1996 to December 16, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
August 4, 1997
F-52
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash...................................................................................... $ 14
Trade receivables, less allowance for doubtful accounts of $1,505......................... 9,195
Inventories............................................................................... 7,447
Prepaid expenses.......................................................................... 678
Deferred income tax benefit............................................................... 3,727
Due from former stockholders.............................................................. 37,966
---------
Total current assets.................................................................... 59,027
---------
PROPERTY AND EQUIPMENT
Land and buildings........................................................................ 6,420
Storage and consumer service facilities................................................... 52,953
Transportation, office and other equipment................................................ 11,910
Less accumulated depreciation............................................................. (2,592)
---------
Total property and equipment............................................................ 68,691
---------
OTHER ASSETS
Investments and restricted cash deposits.................................................. 3,025
Deferred income tax benefit............................................................... 4,849
Intangible assets, primarily the excess of cost over fair value of net assets acquired,
net of accumulated amortization......................................................... 30,943
Other..................................................................................... 227
---------
Total other assets...................................................................... 39,044
---------
$ 166,762
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................................................... $ 1,025
Accounts payable.......................................................................... 1,604
Accrued expenses.......................................................................... 2,915
Acquisition related liabilities........................................................... 29,306
---------
Total current liabilities............................................................... 34,850
LONG-TERM DEBT.............................................................................. 25,687
NOTE PAYABLE--RELATED PARTY................................................................. 52,812
---------
Total liabilities....................................................................... 113,349
---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Cumulative preferred stock, $.01 par value; 70,500 shares authorized; 55,312 shares,
issued and outstanding, at stated value of $1.00 per share $55,312 Common stock; $0.01
par value; authorized 100,000 shares, issued and outstanding............................ 1
Additional paid-in capital................................................................ 99
Accumulated deficit....................................................................... (1,999)
---------
Total stockholders' equity................................................................ 53,413
---------
$ 166,762
---------
---------
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-53
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE
FROM INCEPTION PERIOD JULY
AUGUST 15, 1, 1996 TO
1995 TO JUNE DECEMBER 16,
30, 1996 1996
-------------- ------------- FOR THE THREE
MONTHS ENDED
SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES........................................................... $ 96,092 $ 44,066 $ 17,883
COST OF PRODUCT SOLD............................................... 46,187 23,322 8,940
------- ------------- -------------
GROSS PROFIT....................................................... 49,875 20,744 8,943
------- ------------- -------------
OPERATING EXPENSES
Salaries and commissions......................................... 14,520 7,252 3,865
General and administrative....................................... 14,225 6,151 3,083
Depreciation and amortization.................................... 3,329 1,904 1,000
Related-party corporate administration and management fees....... 3,281 1,668 965
------- ------------- -------------
Total operating expenses....................................... 35,355 16,975 8,913
------- ------------- -------------
OPERATING INCOME................................................... 14,520 3,769 30
INTEREST EXPENSE, including $2,214 and $4,388, respectively to
related party.................................................... 5,584 3,311 1,665
------- ------------- -------------
INCOME BEFORE INCOME TAXES......................................... 8,936 458 (1,635)
PROVISION FOR INCOME TAXES......................................... 3,675 298 (550)
------- ------------- -------------
NET INCOME......................................................... 5,261 160 (1,085)
DIVIDENDS ON CUMULATIVE PREFERRED STOCK............................ (7,260) (3,878) (2,073)
------- ------------- -------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS......................... $ (1,999) $ (3,718) $ (3,158)
------- ------------- -------------
------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------
PREFERRED STOCK ADDTL. TOTAL
-------------------- PAID-IN ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- --------- --------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT INCEPTION, AUGUST 15,
1995............................ $ -- $ -- $ -- $ -- $ -- $ -- $ --
Common stock issued............... -- -- 100,000 1 99 -- 100
Preferred stock issued............ 55,312 55,312 -- -- -- -- 55,312
Dividends on preferred stock,
$131.25 per share............... -- -- -- -- -- (7,260) (7,260)
Net income........................ -- -- -- -- -- 5,261 5,261
--------- --------- --------- ----- ----- ------------ ------------
BALANCE, JUNE 30, 1996............ 55,312 55,312 100,000 1 99 (1,999) 53,413
Dividends on preferred stock,
$70.11 per share................ -- -- -- -- -- (3,878) (3,878)
Net income........................ -- -- -- -- -- 160 160
--------- --------- --------- ----- ----- ------------ ------------
BALANCE, DECEMBER 16, 1996........ 55,312 $ 55,312 100,000 $ 1 $ 99 $ (5,717) $ 49,695
--------- --------- --------- ----- ----- ------------ ------------
--------- --------- --------- ----- ----- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE PERIOD FROM
PERIOD JULY INCEPTION
1, 1996 TO AUGUST 15,
DECEMBER 16, 1995 TO JUNE THREE MONTHS ENDED
1996 30, 1996 SEPTEMBER 30, 1996
------------- ------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................... $ 160 $ 5,261 $ (1,085)
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization.............................. 1,904 3,329 1,000
Gain on sale of assets..................................... 233 -- --
Deferred income tax benefit................................ 298 3,624 (550)
Changes in assets and liabilities, net of effect of
acquisitions
Trade receivables........................................ (1,991) (1,247) 1,270
Inventories.............................................. (1,873) 704 (1,253)
Prepaid expenses......................................... (569) 189 (311)
Accounts payable......................................... 2,549 (5,571) 4,665
Accrued expenses......................................... 3,602 (3,423) 206
------------- ------------- -------
Net cash provided by operating activities................ 4,313 2,866 3,942
------------- ------------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of assets of Synergy Group Incorporated -- (150,922) --
Proceeds from the sale of certain Synergy Group Inc assets to
Empire Energy Corporation -- 35,980 --
Expenditures for property and equipment...................... (4,240) (9,182) (1,571)
Proceeds from sale of assets................................. 129 474 973
Proceeds from disposal of companies.......................... 829 -- --
Acquisitions, net of cash received........................... (469) -- --
Decrease in investments and restricted cash deposits......... -- 70 --
------------- ------------- -------
Net cash used in investing activities...................... (3,751) (123,580) (598)
------------- ------------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on credit facility................................ 20,367 -- 90
Payments on credit facility.................................. (16,532) -- --
Borrowing under long-term debt agreements.................... -- 23,910 --
Proceeds from issuance of common stock....................... -- 100 --
Proceeds from issuance of preferred stock.................... -- 52,812 --
Proceeds from issuance of note payable--related party........ -- 52,812 --
Borrowings from related party................................ -- 36,458 90
Repayments to related party.................................. -- (36,458) --
Payment on long-term debt agreements......................... (242) (1,834) (21)
Preferred stock dividends paid............................... (3,878) (7,072) (2,073)
------------- ------------- -------
Net cash provided by (used in) financing activities........ (285) 120,728 (1,914)
------------- ------------- -------
INCREASE IN CASH............................................... 277 14 1,430
CASH, BEGINNING OF PERIOD...................................... 14 -- 14
------------- ------------- -------
CASH, END OF PERIOD............................................ $ 291 $ 14 $ 1,444
------------- ------------- -------
------------- ------------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-56
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
SYN Inc. (Synergy) is engaged in the retail sale of liquid propane gas
primarily in the Southern, Midwest and Eastern regions of the United States.
Most of Synergy's customers use propane for residential home heating and make
periodic purchases with cash or on credit. Synergy was formed to acquire Synergy
Group Incorporated (SGI).
SYNERGY ACQUISITION
On August 15, 1995, Synergy acquired the common stock of SGI, a retail
distributor of propane with 152 locations, for approximately $151 million. In
conjunction with the acquisition, Synergy sold 38 of the retail locations to
Empire Energy Corporation (Empire Energy) for approximately $36 million cash and
the assets of nine retail locations valued at $2 million. There was no gain or
loss recognized on this sale.
The total net purchase price paid by Synergy for the acquisition of SGI
consisted of $105.6 million in cash (which was provided by proceeds from the
issuance of $52.8 million of preferred stock and the issuance of $52.8 million
of debt), $1.25 million in long-term debt and the assumption of certain
liabilities. The acquisition was accounted for under the purchase method of
accounting with all tangible assets and liabilities acquired recorded at fair
value at date of acquisition and the cost in excess of such fair value of $32.5
million recorded as an intangible asset.
The purchase price is subject to adjustment based on the amount of working
capital acquired by Synergy. Synergy has made a claim against the former owners
of SGI (the Former Stockholders) for a working capital adjustment and has
recorded a receivable of $26.7 million, which reflects the reduction in purchase
price of the assets based on the amount of working capital acquired. The
purchase price is also subject to adjustment based on the value of customer
tanks which cannot be located within a specified period of time. Synergy has
made a claim against the Former Stockholders for the value of unlocated tanks
and has recorded a receivable for $11.3 million related to this claim.
Subsequent to June 30, 1996 a settlement has been reached with the former owners
of SGI (the Former Stockholders) for a reduction in the purchase price of $5
million as an adjustment of working capital.
These amounts receivable in connection with the acquisition of SGI are
management's best estimate of the amounts which will ultimately be due from the
Former Stockholders. However, the parties continue to negotiate final settlement
and the Former Stockholders have objected to a number of the claims made by
Synergy. An adjustment of the consideration paid for SGI could also result in an
adjustment in the amount of consideration received from Empire Energy.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Synergy and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Significant estimates related to self-
F-57
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
insurance, litigation, collectibility of receivables and income tax assessments
are discussed in Notes 6 and 7. Actual results could differ from those
estimates.
REVENUE RECOGNITION POLICY
Revenue from propane sales and the related cost of product sold are
recognized upon delivery of the product.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the first-in, first-out method for retail operations inventory and by the
specific identification method for wholesale operations inventory. The
inventories at June 30, 1996, were as follows (in thousands):
<TABLE>
<S> <C>
Gas and other petroleum products............................................ $ 4,058
Gas distribution parts, appliances and equipment............................ 4,034
Obsolescence reserve........................................................ (645)
---------
$ 7,447
---------
---------
</TABLE>
PROPERTY AND EQUIPMENT
For financial reporting purposes, property and equipment are stated at
acquisition cost. Repairs and maintenance costs which do not significantly
extend the useful lives of the respective assets are charged to operations as
incurred. Depreciation is computed using the straight-line method over the
following estimated useful lives of the assets:
<TABLE>
<S> <C>
Buildings............................................................... 40 years
35-40
Storage and consumer service facilities................................. years
Transportation, office and other equipment.............................. 5-10 years
</TABLE>
INTANGIBLE ASSETS
The excess of cost over the fair value of the net acquired assets of SGI has
been recorded as an intangible asset and is being amortized on a straight-line
basis over 40 years. Costs related to arranging the debt financing for the
acquisition of SGI have been capitalized and are being amortized on a
straight-line basis over the two-year term of the debt. Intangible assets are
reflected net of accumulated amortization of $737,000 in the June 30, 1996
consolidated balance sheet.
It is Synergy's policy to review long-lived assets including intangible
assets whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. If such a review should indicate
that the carrying amount of intangible assets is not recoverable, it is
Synergy's policy to reduce the carrying amount of such assets to fair value.
F-58
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred asset will not be realized.
NOTE 2: RELATED-PARTY TRANSACTIONS
Synergy entered into a Management Service Agreement with Empire Gas
Corporation (subsequently All Star Gas referred to hereafter as Empire Gas), a
30% common stockholder of Synergy, under which Empire Gas provides all
management services to Synergy for payment of an annual overhead reimbursement
of $3.25 million, and a management fee of $500,000 plus a performance-based
payment for certain operating results. Amounts paid at June 30, 1996, and
December 16, 1996, were $3.28 million and $1.73 million, respectively.
During the period ended December 16, 1996, and the period ended June 30,
1996, Synergy purchased $20.5 and $42 million, respectively, of liquid propane
gas from Empire Gas and accounts payable at June 30, 1996 includes $116,000 due
to Empire Gas resulting from the purchase of inventory.
The related party note payable represents borrowings by Synergy from
Northwestern Public Service Company (the parent corporation of the controlling
stockholder of Synergy NPS). This note is subordinate to Synergy's other
long-term debt under its working capital facility (see Note 3), matures August
15, 2005, bears interest at 9.12% and is subject to a prepayment premium. On
December 1, 1996, NPS purchased Empire Gas common stock of Synergy and Synergy
terminated the Management Service Agreement with Empire Gas.
During the period ended June 30, 1996, Synergy transferred real and personal
property of three retail locations valued at $1,615,000 to Empire Gas in
exchange for four Empire Gas retail locations valued at approximately
$1,713,000, the value difference of $98,000 paid to Empire Gas in cash.
Synergy paid $6,343,000 during the period ended June 30, 1996, to the
controlling stockholder of Synergy and $1,103,000 to Empire Gas for
reimbursement of costs incurred relating to the acquisition of SGI.
During the period ended June 30, 1996, Synergy leased, under operating
leases, transportation equipment to Propane Resources Transportation, Inc. in
which Synergy owns a 15% common stock interest. Synergy received $274,000 in
lease income during the period ended June 30, 1996, from these leases.
F-59
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: LONG-TERM DEBT
Long-term debt at June 30, 1996, consists of the following (in thousands):
<TABLE>
<S> <C>
Working capital facility................................................... $ 23,910
Note payable to Former Stockholders, 9 1/2% payable in three equal annual
installments through August 15, 1998...................................... 1,250
Other, interest at 7.5% to 11.6%, due through 2001, collateralized by
certain equipment and materials........................................... 1,552
---------
26,712
Less--current maturities................................................... 1,025
---------
$ 25,687
---------
---------
</TABLE>
On December 28, 1995, Synergy entered into a working capital facility
agreement with the First National Bank of Boston providing for borrowings of up
to $25 million, interest at either the Eurodollar rate plus 2% or the prime rate
plus 3/4% (an average of 7.5% at June 30, 1996 and 8.6% at December 16, 1996),
and maturing December 31, 1997. Synergy is required to comply with certain
financial covenants including compliance with restrictions upon other
indebtedness and dividend distributions. Borrowings under the agreement are
collateralized by all receivables, inventory, and property and equipment of
Synergy.
Aggregate annual maturities of the long-term debt outstanding at June 30,
1996, are as follows (in thousands):
<TABLE>
<S> <C>
1997............................................... $ 1,025
1998............................................... 24,603
1999............................................... 680
2000............................................... 204
2001............................................... 200
---------
$ 26,712
---------
---------
</TABLE>
NOTE 4: OPERATING LEASES
Synergy leases retail location sales offices under noncancelable operating
leases expiring at various times through 2006. These leases generally contain
renewal options and require Synergy to pay all executory costs (property taxes,
maintenance and insurance).
Future minimum lease payments (in thousands) at June 30, 1996, were:
<TABLE>
<S> <C>
1997................................................ $ 598
1998................................................ 310
1999................................................ 206
2000................................................ 41
2001................................................ 19
Thereafter.......................................... 53
---------
$ 1,227
---------
---------
</TABLE>
F-60
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: OPERATING LEASES (CONTINUED)
Lease expense during the five and one-half months ended December 16, 1996,
and the period ended June 30, 1996, was approximately $320,000 and $600,000,
respectively.
NOTE 5: INCOME TAXES
The provision for income taxes includes the following components (in
thousands):
<TABLE>
<CAPTION>
FOR THE
PERIOD
FOR THE FROM
PERIOD INCEPTION
JULY 1, (AUGUST 15,
1996 TO 1995) TO
DECEMBER 16, JUNE 30,
1996 1996
--------------- -----------
<S> <C> <C>
Taxes currently payable...................................................... $ -- $ 51
Deferred income taxes........................................................ 298 3,624
----- -----------
$ 298 $ 3,675
----- -----------
----- -----------
</TABLE>
A reconciliation of income tax expense at the statutory rate to the actual
income tax expense is as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE
PERIOD
FOR THE FROM
PERIOD INCEPTION
JULY 1, (AUGUST 15,
1996 TO 1995) TO
DECEMBER 16, JUNE 30,
1996 1996
--------------- -----------
<S> <C> <C>
Taxes computed at staturory rate (34%)....................................... $ 156 $ 3,038
Amortization of excess of cost over fair value of net assets acquired........ 126 157
State income taxes, net of federal tax benefit............................... 18 378
Other........................................................................ (2) 102
----- -----------
Actual tax provision......................................................... $ 298 $ 3,675
----- -----------
----- -----------
</TABLE>
F-61
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: INCOME TAXES (CONTINUED)
The tax effects of temporary differences which relate to deferred taxes
reflected on the balance sheet at June 30, 1996, were as follows (in thousands):
<TABLE>
<S> <C>
Current deferred tax assets:
Allowance for doubtful accounts.......................................... $ 2,302
Self-insurance liabilities............................................... 1,005
Inventory costs and reserves capitalized for tax purposes.................. 420
---------
Net current deferred income tax asset.................................. $ 3,727
---------
---------
Long-term deferred tax assets:
Net operating loss carryforward.......................................... $ 7,596
Alternative minimum tax carryover........................................ 910
Deferred tax liability related to accelerated depreciation............... (3,657)
---------
Net long-term deferred income tax asset................................ $ 4,849
---------
---------
</TABLE>
At June 30, 1996, Synergy had approximately $20 million of net operating
loss carryforwards for tax reporting purposes expiring in varying amounts from
2007 through 2010. These net operating loss carryforwards have been reflected in
the financial statements as deferred income tax assets at June 30, 1996 and are
subject to certain limitations on utilization under provisions of the Internal
Revenue Code.
NOTE 6: COMMITMENTS AND CONTINGENCIES
SELF-INSURANCE
Synergy obtains insurance coverage for catastrophic exposures related to
comprehensive general liability, vehicle liability and workers' compensation, as
well as those risks required to be insured by law or contract. Synergy
self-insures the first $250,000 of coverage per incident and obtains excess
coverage from carriers for these programs.
Provisions for self-insured losses are recorded based upon Synergy's
estimates of the aggregate self-insured liability for claims incurred. Synergy
has provided letters of credit aggregating approximately $2.875 million in
connection with these programs.
Synergy self-insures for health benefits provided to its employees.
Provisions for losses expected under this program are recorded based upon
Synergy's estimate of the aggregate liability for claims incurred.
CONTINGENCIES
Synergy and the acquired operations of SGI are presently involved in various
federal and state tax audits and are also defendants in other business-related
lawsuits which are not expected to have a material adverse effect on Synergy's
financial position or results of operations.
In conjunction with the acquisition of SGI, the Former Stockholders of SGI
are contractually liable for all insurance claims and tax liabilities that
relate to periods prior to the acquisition date. Funds have been placed in
escrow accounts to provide for payment of these liabilities. In the event that
the escrow amount is insufficient to settle these liabilities, Synergy could be
obligated to fund any additional amounts
F-62
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: COMMITMENTS AND CONTINGENCIES (CONTINUED)
due and would have to seek reimbursement from the Former Stockholders for such
amounts. Synergy has recorded its best estimates of the ultimate liabilities
expected to arise from these matters and has made claims against the Former
Stockholders for reimbursement (see Note 1).
NOTE 7: EMPLOYEE BENEFIT PLAN
Synergy succeeded to the SGI-sponsored defined contribution retirement plan
covering substantially all salaried employees. Employees who elect to
participate may contribute a percentage of their salaries to the plan and
Synergy at its discretion may match a portion of the employee contribution.
Synergy may also make profit-sharing contributions to the plan at the discretion
of its Board of Directors. Synergy made no profit-sharing contributions to the
plan during the period July 1, 1996 to December 16, 1996, and the period from
inception (August 15, 1995) to June 30, 1996.
The plan is currently under audit by the U.S. Department of Labor (DOL),
which has alleged that the plan violated certain sections of the Employee
Retirement Income Security Act of 1974. However, the DOL has advised that it is
not contemplating current action regarding these violations. The DOL audit is
continuing and the outcome cannot be determined at this time. In the event the
Former Stockholders are unable to satisfy any liabilities resulting from the
above examination, Synergy could be obligated to fund these liabilities and seek
reimbursement from the Former Stockholders. Synergy has recorded its best
estimates of the ultimate liabilities expected to arise from these matters and
has made claims against the Former Stockholders for reimbursement (see Note 1).
NOTE 8: ADDITIONAL CASH FLOW INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM FOR THE
INCEPTION PERIOD
(AUGUST 15, JULY 1,
1995) TO 1996 TO
JUNE 30, DECEMBER 16,
1996 1996
----------- -------------
<S> <C> <C>
Assets acquired through issuance of:
Long-term debt............................................................. $ 2,250 $ 1,468
Preferred stock............................................................ 2,500 --
Additional cash payment information:
Interest paid.............................................................. 5,535 3,339
Income taxes paid.......................................................... 2,284 190
</TABLE>
NOTE 9: SUBSEQUENT EVENT
On December 17, 1996, substantially all of the assets and liabilities of
Synergy were contributed to Cornerstone Propane, L.P., a Delaware limited
partnership, a subsidiary of Cornerstone Propane Partners, L.P. Following this
transaction, on December 17, 1996, Cornerstone Propane Partners, L.P. completed
its initial public offering (see Note 1 to the consolidated financial statements
of Cornerstone Propane Partners, L.P. for the period ended June 30, 1997,
included in this prospectus.)
F-63
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
Northwestern Growth Corporation
Huron, South Dakota
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity (deficit) and cash flows of Synergy Group
Incorporated for the year ended March 31, 1995, and the period ended August 14,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Synergy Group Incorporated for the year ended March 31, 1995, and the
period ended August 14, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 13, in 1995 the Company restated prior years' financial
statements for changes in previously reported accrued liabilities.
BAIRD, KURTZ & DOBSON
Springfield, Missouri
October 9, 1996
F-64
<PAGE>
SYNERGY GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995 AND
THE YEAR ENDED MARCH 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOUR AND
ONE-HALF
MONTHS FOR THE
ENDED YEAR ENDED
AUGUST 14 MARCH 31
1995 1995
----------- ----------
<S> <C> <C>
OPERATING REVENUE......................................................................... $ 32,179 $ 123,562
COST OF PRODUCT SOLD...................................................................... 15,387 59,909
----------- ----------
GROSS PROFIT.............................................................................. 16,792 63,653
----------- ----------
OPERATING COSTS AND EXPENSES
Provisions for doubtful accounts........................................................ 926 3,786
General and administrative.............................................................. 20,681 57,058
Depreciation and amortization........................................................... 1,845 5,100
----------- ----------
Total Operating Expenses.............................................................. 23,452 65,944
----------- ----------
Operating loss........................................................................ (6,600) (2,291)
----------- ----------
OTHER INCOME (EXPENSE)
Interest expense........................................................................ (2,436) (8,385)
Related-party interest expense.......................................................... (787) (2,701)
Debt restructuring costs................................................................ -- (350)
Other income............................................................................ 101 226
----------- ----------
(3,122) (11,210)
----------- ----------
LOSS BEFORE INCOME TAXES.................................................................. (9,782) (13,501)
PROVISION (CREDIT) FOR INCOME TAXES....................................................... 31 (84)
----------- ----------
NET LOSS.................................................................................. $ (9,813) $ (13,417)
----------- ----------
----------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
F-65
<PAGE>
SYNERGY GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995 AND
THE YEAR ENDED MARCH 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
STOCK
SERIES A SERIES B CLASS A CLASS B ADDTL RETAINED HOLDER'
PRFRD PRFRD COMMON COMMON PAID-IN EARNINGS EQUITY
STOCK STOCK STOCK STOCK CAPITAL (DEFICIT) (DEFICIT)
--------- --------- ----------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE MARCH 31, 1994,............ $ -- $ -- $ 1 $ 40 $ -- $ (55,465) $ (55,424)
Long-term debt converted to
preferred stock.................. 25,000 16,700 -- -- -- -- 41,700
Stockholder wages, related-party
rent and accrued interest
converted to additional paid-in
capital net of unamortized debt
costs............................ -- -- -- -- 11,378 -- 11,378
NET LOSS........................... -- -- -- -- -- (13,417) (13,417)
--------- --------- ----- ----- --------- ---------- ----------
BALANCE, MARCH 31,
1995............................. 25,000 16,700 1 40 11,378 (68,882) (15,763)
NET LOSS........................... -- -- -- -- -- (9,813) (9,813)
--------- --------- ----- ----- --------- ---------- ----------
BALANCE, AUGUST 14, 1995........... $ 25,000 $ 16,700 $ 1 $ 40 $ 11,378 $ (78,695) $ (25,576)
--------- --------- ----- ----- --------- ---------- ----------
--------- --------- ----- ----- --------- ---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
F-66
<PAGE>
SYNERGY GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995 AND
THE YEAR ENDED MARCH 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOUR AND
ONE-HALF
MONTHS FOR THE
ENDED YEAR ENDED
AUGUST 14, MARCH 31,
1995 1995
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................................................ $ (9,813) $ (13,417)
Items not requiring (providing) cash:
Depreciation.......................................................................... 1,770 5,014
Amortization.......................................................................... 75 86
Gain on sale of assets................................................................ (61) (237)
Deferred income taxes................................................................. -- (125)
Changes in:
Trade receivables..................................................................... 5,139 2,486
Inventories........................................................................... 1,251 (814)
Accounts payable and accured expenses................................................. 3,591 2,481
Prepaid expenses and other............................................................ 764 (902)
----------- ----------
Net cash provided by (used in) operating activities................................. 2,716 (5,068)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets............................................................ 104 404
Purchase of property and equipment...................................................... (596) (3,737)
Change in restricted cash deposits...................................................... (615) 3,181
----------- ----------
Net cash used in investing activities............................................... (1,107) (152)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt.............................................................. (108) (260)
Increase (decrease) in credit facilities................................................ (1,000) 3,100
----------- ----------
Net cash provided by (used in) financing activities................................. (1,108) 2,840
----------- ----------
INCREASE (DECREASE) IN CASH............................................................... 501 (2,380)
CASH, BEGINNING OF PERIOD................................................................. 1,246 3,626
----------- ----------
CASH, END OF PERIOD....................................................................... $ 1,747 $ 1,246
----------- ----------
----------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
F-67
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995 AND
THE YEAR ENDED MARCH 31, 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Synergy Group Incorporated (the Company) is engaged primarily in the retail
sale of liquid propane gas through its branch offices located in the Northeast,
Mid-Atlantic, Southeast and South-central regions of the United States. Most of
the Company's customers use propane for residential home heating and make
periodic purchases with cash or on credit.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Synergy Group
Incorporated and its subsidiaries. All significant intercompany balances have
been eliminated in consolidation.
REVENUE RECOGNITION POLICY
Sales and related cost of product sold are recognized upon delivery of the
product or service.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the last-in, first-out (LIFO) method for propane and the first-in, first-out
(FIFO) method for all others.
PROPERTY AND EQUIPMENT
Depreciation is provided on all property and equipment primarily by the
straight-line method over the estimated useful lives of 3 to 30 years.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
AMORTIZATION
The excess of current fair value over cost of net assets acquired is being
amortized on the straight-line basis over 40 years.
F-68
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995 AND
THE YEAR ENDED MARCH 31, 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents.
NOTE 2: SALE OF THE COMPANY
On August 15, 1995, the Company was acquired by SYN Inc. which is majority
owned by Northwestern Growth Corporation, a wholly owned subsidiary of
Northwestern Public Service Company. The acquisition cost was approximately $151
million and included the redemption of the Senior Secured Notes at par value and
the repayment of the Company's existing revolving credit facility. As a result
of the above sale the financial statements reflect operations for the four and
one-half month period ended August 14, 1995.
NOTE 3: DEBT RESTRUCTURING
On September 2, 1993, the Company and a committee of holders of the
Company's 11 5/8% Senior Subordinated Notes due 1997 (the 11 5/8% Notes)
announced that they had reached agreement on the major issues to restructure the
Company's outstanding debt and on August 23, 1994, the Company completed the
restructuring. The agreement contemplated that certain related parties to the
Company exchange $41,700,000 in debt for Series A Preferred Stock and Series B
Preferred Stock (the Recapitalization). This amount included $16,700,000 in
90-day unsecured promissory notes and $25,000,000 of 11 5/8% Notes (see Note 4).
The remaining 11 5/8% Notes plus accrued interest through September 14, 1993,
were proposed to be exchanged (the Exchange Offer) for new Increasing Rate
Senior Secured Notes due 2000 (the Senior Secured Notes).
Debt restructuring costs, principally legal fees and banking fees, incurred
in connection with the restructuring, amounting to $350,000 for the year ended
March 31, 1995, have been expensed.
F-69
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995 AND
THE YEAR ENDED MARCH 31, 1995
NOTE 4: NOTES PAYABLE
Long-term debt consists of the following:
<TABLE>
<CAPTION>
AUGUST 14, MARCH 31,
1995 1995
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
11 5/8% Senior subordinated notes due 1997 (A).................................. $ 1,700 $ 1,700
Increasing rate senior secured notes due 2000 (A)............................... 65,054 65,054
Revolving credit facility (B)................................................... 22,100 23,100
Purchase contract obligations (C)............................................... 687 795
----------- -----------
89,541 90,649
Less current maturities....................................................... 89,104 90,087
----------- -----------
$ 437 $ 562
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(A) On April 2, 1987, the Company sold $85,000,000 of 11 5/8% Notes in a public
offering. On March 15, 1993, September 15, 1993, and March 15, 1994, the
Company failed to make the required $4,941,000 interest payments due on each
of such dates on the 11 5/8% Notes. Under the terms of the Indenture to the
11 5/8% Notes, the failure to pay such interest constituted an Event of
Default.
On August 23, 1994, the Company completed the Exchange Offer and
Recapitalization (see Note 3). The 11 5/8% Notes not tendered in the
Exchange Offer, amounting to $1,700,000, remain outstanding at August 14,
1995.
The Indenture governing the new Senior Secured Notes contains provisions,
among others, that require the Company to maintain certain financial ratios
and limit additional debt, asset dispositions and management salaries. As of
March 31, 1995, the Company was not in compliance with certain financial
covenants. Such noncompliance constitutes an Event of Default.
(B) In August 1989, the Company entered into a revolving credit agreement with a
bank under which the maximum credit line available is $20,000,000. On
September 14, 1990, the bank was repaid by a related party to the Company
and the credit agreement was assigned by the bank to the related party. The
credit agreement contains certain restrictive covenants. Borrowings under
the credit facility are secured by cash, accounts receivable and inventory.
Interest based on the prime rate plus 1 1/2% is payable quarterly. The
amount outstanding under the facility was not repaid by the Company on the
maturity date of April 1, 1993. The failure to repay the facility
constituted an Event of Default. In November 1993 the maximum credit line
available under the facility was increased to $25,000,000 with advances in
excess of $20,000,000 at the discretion of the related party. The maturity
date of the revolving credit agreement was extended to September 30, 1996.
(C) Purchase contract obligations arise from the purchase of operating
businesses or other assets and are collateralized by the respective assets
acquired. At August 14, 1995, these obligations carried interest rates from
8% to 14.5% and are due periodically through 1999.
F-70
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995 AND
THE YEAR ENDED MARCH 31, 1995
NOTE 5: OPERATING LEASES
The Company leases certain property and equipment under lease agreements
expiring through 2011. At August 14, 1995, future minimum lease payments under
noncancellable operating leases are as follows:
<TABLE>
<S> <C>
1996................................................ $ 907
1997................................................ 971
1998................................................ 402
1999................................................ 238
2000................................................ 191
---------
$ 2,709
---------
---------
</TABLE>
Rent charged to operations including rental expense to related parties (see
Note 6) for the year ended March 31, 1995, and the period ended August 14, 1995,
aggregated $2,687,000 and $929,000, respectively.
NOTE 6: RELATED PARTY TRANSACTIONS
On March 31, 1995, the stockholders of the Company determined that they
would forego the payment of an aggregate of $4,766,000 of accrued and unpaid
wages due to the stockholders from the Company as of March 31, 1995. The
foregone wages have been recorded as a contribution to additional paid-in
capital.
The Company leases certain property and equipment from related parties under
operating lease agreements. Rental expense for the year ended March 31, 1995,
and the period ended August 14, 1995, was $1,491,000 and $318,000, respectively.
On March 31, 1995, the related parties determined that they would forego the
payment of accrued and unpaid vehicle and equipment rentals due from the Company
as of March 31, 1995, amounting to $1,328,000. The foregone rent has been
recorded as a contribution to additional paid-in capital.
For the year ended March 31, 1995, and the period ended August 14, 1995,
interest expense related to the Company's revolving credit facility from a
related party (see Note 4) amounted to $2,701,000 and $787,000, respectively.
NOTE 7: INCOME TAXES
The provision for income taxes includes these components (in thousands):
<TABLE>
<CAPTION>
AUGUST 14, MARCH 31,
1995 1995
------------- -----------
(IN THOUSANDS)
<S> <C> <C>
Taxes currently payable......................................................... $ 31 $ 41
Deferred income taxes........................................................... -- (125)
----- -----
$ 31 $ (84)
----- -----
----- -----
</TABLE>
F-71
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995 AND
THE YEAR ENDED MARCH 31, 1995
NOTE 7: INCOME TAXES (CONTINUED)
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
<TABLE>
<CAPTION>
AUGUST 14, MARCH 31,
1995 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Computed at the statutory rate (34%)............................................ $ (3,326) $ (2,518)
Increase (decrease) resulting from:
Amortization of excess cost over fair value of net assets acquired............ 9 27
Interest expense transferred to paid-in capital............................... -- 1,916
State income taxes-net of federal tax benefit................................. 31 --
Change in deferred tax asset valuation allowance.............................. 3,310 576
Other......................................................................... 7 (85)
----------- -----------
Actual tax provision............................................................ $ 31 $ (84)
----------- -----------
----------- -----------
</TABLE>
The Company estimates that as of August 14, 1995, it has available net
operating loss carryforwards of approximately $94.6 million to offset future
taxable income.
NOTE 8: EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution retirement plan covering
substantially all salaried employees. Employees who elect to participate may
contribute a percentage of their salaries to the plan, and the Company at its
discretion may match a portion of the employee contribution. The Company may
also make profit-sharing contributions to the plan at the discretion of its
Board of Directors. Contribution expense amounted to $60,000 for the year ended
March 31, 1995, and $37,000 for the period ended August 14, 1995.
The plan is currently under audit by the U.S. Department of Labor (DOL),
which has notified the Company that the prior Plan Trustees engaged in
prohibited transactions. The DOL audit is continuing and the outcome cannot be
determined at this time. In addition, the Internal Revenue Service has been
notified of prohibited transactions. The Company believes that it may be subject
to excise taxes, penalties and interest in connection with these prohibited
transactions and has recorded its best estimates of the potential liabilities
expected to arise from these matters (see Note 13).
NOTE 9: SELF-INSURANCE AND LITIGATION CONTINGENCIES
Under the Company's insurance program, coverage for comprehensive general
liability, workers' compensation and vehicle liability was obtained for
catastrophic exposures as well as those risks required to be insured by law or
contract. The Company retains a significant portion of certain expected losses
related primarily to comprehensive general liability. Under this insurance
program, the Company self-insures the first $250,000 of coverage (per incident).
The Company obtained excess coverage from carriers for this program. The Company
self-insures health benefits provided to employees of the Company and its
subsidiaries.
F-72
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995 AND
THE YEAR ENDED MARCH 31, 1995
NOTE 9: SELF-INSURANCE AND LITIGATION CONTINGENCIES (CONTINUED)
Provisions for losses expected under these programs are recorded based upon
the Company's estimates of the aggregate liability for claims incurred. The
Company provides letters of credit aggregating $2,875,000 in connection with
these programs which are collateralized with restricted cash deposits.
At August 14, 1995, the self-insured liability accrued in the balance sheet
totaled $4,160,000, which includes $500,000 of incurred but not reported claims.
The Company and its subsidiaries are presently defendants in various lawsuits
related to the self-insurance program and other business-related lawsuits which
are not expected to have a material adverse effect on the Company's results of
operations.
NOTE 10: ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
AUGUST 14, MARCH 31,
1995 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
ADDITIONAL CASH PAYMENT INFORMATION
Interest paid................................................................. $ 1,146 $ 11,877
Income taxes paid............................................................. 15 41
NONCASH INVESTING AND FINANCING ACTIVITIES
Purchase contract obligation incurred......................................... -- 129
Long-term debt converted to preferred stock................................... -- 41,700
Accrued interest coverted to additional paid-in capital net of unamortized
debt costs.................................................................. -- 5,284
Accrued interest converted to long-term debt.................................. -- 7,054
Accrued wages converted to additional paid-in capital......................... -- 4,766
Accrued rent converted to additional paid-in capital.......................... -- 1,328
</TABLE>
NOTE 11: FUTURE ACCOUNTING PRONOUNCEMENTS
IMPACT OF SFAS NO. 121
In 1995 the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for the Impairment of Long-Lived Assets to be Disposed
of." The Company must adopt this standard effective April 1, 1996. The Company
does not expect that the adoption of this standard will have a material impact
on its financial position or results of operations.
NOTE 12: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
DEPENDENCE ON PRINCIPAL SUPPLIERS
Three suppliers, Chevron, Texaco and Powder Horn Petroleum, account for
approximately 55% of the Company's volume of propane purchases. Although the
Company believes that alternative sources of
F-73
<PAGE>
SYNERGY GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FOUR AND ONE-HALF MONTHS ENDED AUGUST 14, 1995 AND
THE YEAR ENDED MARCH 31, 1995
NOTE 12: SIGNIFICANT ESTIMATES AND CONCENTRATIONS (CONTINUED)
propane are readily available, in the event that the Company is unable to obtain
alternate sources of supply at competitive prices and on a timely basis, such
inability would have a material, adverse effect on the Company.
ESTIMATES
Significant estimates related to tax liabilities, self-insurance and
litigation are discussed in Notes 8 and 9. Actual losses related to these items
could vary materially from amounts reflected in the financial statements.
NOTE 13: RESTATEMENT OF PRIOR YEARS' FINANCIAL STATEMENTS
Fiscal year 1995 has been restated to reflect excise taxes, penalties and
interest related to prohibited transactions involving the employee benefit plan.
This correction decreased previously reported March 31, 1995, net income by
$794,000.
Fiscal year 1995 has also been restated to reflect the conversion of
foregone wages and rents to additional paid-in capital in the amounts of
$4,766,000 and $1,328,000, respectively, resulting in a further reduction in
March 31, 1995 net income of $6,094,000.
F-74
<PAGE>
APPENDIX A
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the Certificate evidencing the Common Units to
be transferred is surrendered for registration or transfer and an Application
for Transfer of Common Units has been executed by a transferee either (a) on the
form set forth below or (b) on a separate application that the Partnership will
furnish on request without charge. A transferor of the Common Units shall have
no duty to the transferee with respect to execution of the transfer application
in order for such transferee to obtain registration of the transfer of the
Common Units.
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of Cornerstone Propane Partners, L.P.
(the "Partnership"), as amended, supplemented or restated to the date hereof
(the "Partnership Agreement"), (b) represents and warrants that the Assignee has
all right, power and authority and, if an individual, the capacity necessary to
enter into the Partnership Agreement, (c) appoints the Managing General Partner
and, if a Liquidator shall be appointed, the Liquidator of the Partnership as
the Assignee's attorney-in-fact to execute, swear to, acknowledge and file any
document, including, without limitation, the Partnership Agreement and any
amendment thereto and the Certificate of Limited Partnership of the Partnership
and any amendment thereto, necessary or appropriate for the Assignee's admission
as a Substituted Limited Partner and as a party to the Partnership Agreement,
(d) gives the powers of attorney provided for in the Partnership Agreement and
(e) makes the waivers and gives the consents and approvals contained in the
Partnership Agreement. Capitalized terms not defined herein have the meanings
assigned to such terms in the Partnership Agreement.
Date: ____________________
<TABLE>
<CAPTION>
- ------------------------------------ ------------------------------------
<S> <C>
Social Security or other Signature of Assignee
identifying number of Assignee
- ------------------------------------ ------------------------------------
Purchase Price including commissions, if any Name and Address of Assignee
</TABLE>
Type of Entity (check one):
<TABLE>
<CAPTION>
/ / Individual / / Partnership / / Corporation
<S> <C> <C>
/ / Trust / / Other (specify) ----------------------------
Nationality (check one):
/ / U.S. Citizen, Resident or Domestic Entity
/ / Foreign Corporation / / Non-resident Alien
</TABLE>
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
A-1
<PAGE>
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (Social Security Number) is
.
3. My home address is .
B. Partnership, Corporation or Other Interestholder
1.
------------------------------------- is not a foreign corporation, foreign
partnership,
(Name of Interestholder)
foreign trust or foreign estate (as those terms are defined in the Code
and Treasury Regulations).
2. The interestholder's U.S. employer identification number is
.
3. The interestholder's office address and place of incorporation (if
applicable) is .
The interestholder agrees to notify the Partnership within sixty (60) days
of the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct and
complete and, if applicable, I further declare that I have authority to sign
this document on behalf of
------------------------------------
Name of Interestholder
------------------------------------
Signature and Date
------------------------------------
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
A-2
<PAGE>
APPENDIX B
GLOSSARY OF CERTAIN TERMS
ACQUISITION: Any transaction in which any member of the Partnership Group
acquires (through an asset acquisition, merger, stock acquisition or other form
of investment) control over all or a portion of the assets, properties or
business of another person for the purpose of increasing the operating capacity
or revenues of the Partnership Group from the operating capacity or revenues of
the Partnership Group existing immediately prior to such transaction.
ACQUISITION FACILITY: A $75.0 million revolving credit facility entered
into by the Operating Partnership to be used for acquisitions and improvements.
ADJUSTED OPERATING SURPLUS: With respect to any period, Operating Surplus
generated during such period (a) less (i) any net increase in working capital
borrowings during such period and (ii) any net reduction in cash reserves for
Operating Expenditures during such period not relating to an Operating
Expenditure made during such period, and (b) plus (i) any net decrease in
working capital borrowings during such period and (ii) any net increase in cash
reserves for Operating Expenditures during such period required by any debt
instrument for the repayment of principal, interest or premium. Adjusted
Operating Surplus does not include that portion of Operating Surplus included in
clause (a)(i) of the definition of Operating Surplus.
ANNUAL OPERATING PERFORMANCE INCENTIVE PLAN: The plan providing that annual
incentive bonuses be paid to participants in the plan (who will be determined by
the Board of Directors of the Managing General Partner and who will include the
Executives) based on a percentage of annual salary plus certain acquisition
management fees related to the acquisition of Empire Energy and Coast by
Northwestern Growth for performance up to budgeted levels of net income and
EBITDA.
AUDIT COMMITTEE: A committee of the board of directors of the Managing
General Partner composed of at least two or more directors who are neither
officers nor employees of either of the General Partners nor officers, directors
or employees of any affiliate of either of the General Partners.
AVAILABLE CASH: With respect to any quarter prior to liquidation:
(a) the sum of (i) all cash and cash equivalents of the Partnership
Group on hand at the end of such quarter and (ii) all additional cash and
cash equivalents of the Partnership Group on 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
B-1
<PAGE>
the Managing General Partner so determines. Notwithstanding the foregoing,
"Available Cash" with respect to the quarter in which the liquidation of the
Partnership occurs and any subsequent quarter shall equal zero.
BANK CREDIT FACILITY: The $75.0 million Acquisition Facility and the $50.0
million Working Capital Facility both entered into by the Operating Partnership.
CAPITAL ACCOUNT: The capital account maintained for a Partner pursuant to
the Partnership Agreement. The Capital Account of a Partner in respect of a
general partner interest, a Common Unit, a Subordinated Unit, an Incentive
Distribution Right or any other Partnership Interest shall be the amount which
such Capital Account would be if such general partner interest, Common Unit,
Subordinated Unit, Incentive Distribution Right, or other Partnership Interest
were the only interest in the Partnership held by a Partner from and after the
date on which such general partner interest, Common Unit, Subordinated Unit,
Incentive Distribution Right or other Partnership Interest was first issued.
CAPITAL IMPROVEMENTS: Any addition or improvement to the capital assets
owned by any member of the Partnership Group or acquisition of existing or the
construction of new capital assets (including retail distribution outlets,
propane tanks, pipeline systems, storage facilities, appliance showrooms,
training facilities and related assets), made to increase the operating capacity
of the Partnership Group from the operating capacity of the Partnership Group
existing immediately prior to such addition, improvement, acquisition or
construction.
CAPITAL SURPLUS: All Available Cash distributed by the Partnership from any
source will be treated as distributed from Operating Surplus until the sum of
all Available Cash distributed since the commencement of the Partnership equals
the Operating Surplus as of the end of the quarter prior to such distribution.
Any excess Available Cash will be deemed to be Capital Surplus.
CAUSE: Means a court of competent jurisdiction has entered a final,
non-appealable judgment finding the Managing General Partner liable for actual
fraud, gross negligence or willful or wanton misconduct in its capacity as a
general partner of the Partnership.
CLOSING DATE: The first date on which Common Units were sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement.
COAST: CGI Holdings, Inc., a Delaware corporation.
COAST MERGER: The merger of Coast and CGI Acquisition Corp. consummated
pursuant to the Stock Purchase and Merger Agreement dated September 4, 1996,
between Northwestern Growth, Coast Acquisition Corp., Coast and the holders of
preferred stock of Coast.
CODE: Internal Revenue Code of 1986, as amended.
COMBINED OPERATIONS: The propane business and assets of Synergy, Empire
Energy 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.
B-2
<PAGE>
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 andoperations of Synergy, Empire Energy
and Coast were transferred and the liabilities assumed.
CORNERSTONE: Cornerstone Propane Partners, L.P., a Delaware limited
partnership.
COUNSEL: Schiff Hardin & Waite, special counsel to the General Partners and
the Partnership.
CURRENT MARKET PRICE: With respect to any class of Units listed or admitted
to trading on any national securities exchange as of any date, the average of
the daily Closing Prices (as hereinafter defined) for the 20 consecutive Trading
Days (as hereinafter defined) immediately prior to such date. "Closing Price"
for any day means the last sale price on such day, regular way, or in case no
such sale takes place on such day, the average of the closing bid and asked
prices on such day, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the principal national securities exchange (other than
the Nasdaq Stock Market) on which the Units of such class are listed or admitted
to trading or, if the Units of such class are not listed or admitted to trading
on any national securities exchange (other than the Nasdaq Stock Market), the
last quoted price on such day, or, if not so quoted, the average of the high bid
and low asked prices on such day in the over-the-counter market, as reported by
the Nasdaq Stock Market or such other system then in use, or if on any such day
the Units of such class are not quoted by any such organization, the average of
the closing bid and asked prices on such day as furnished by a professional
market maker making a market in the Units of such class selected by the Managing
General Partner, or if on any such day no market maker is making a market in the
Units of such class, the fair value of such Units on such day as determined
reasonably and in good faith by the Managing General Partner. "Trading Days"
means a day on which the principal national securities exchange on which Units
of any class are listed or admitted to trading is open for the transaction of
business or, if the Units of a class are not listed or admitted to trading on
any national securities exchange, a day on which banking institutions in New
York City generally are open.
DELAWARE ACT: The Delaware Revised Uniform Limited Partnership Act, 6 Del
C. Section 17-101, et seq., as amended, supplemented or restated from time to
time, and any successor to such statute.
DEPARTING PARTNER: A former General Partner, either Managing General
Partner or Special General Partner, from and after the effective date of any
withdrawal or removal of such former General Partner pursuant to the Partnership
Agreement.
EBITDA: Operating income plus depreciation and amortization. As used in
this Prospectus, EBITDA is not intended to be construed as an alternative to net
income as an indicator of operating performance or as an alternative to cash
flow as a measure of liquidity or ability to service debt obligations.
EMPLOYMENT AGREEMENTS: Employment agreements between the Executives and the
Managing General Partner.
EMPIRE ACQUISITION OF CERTAIN SYNERGY ASSETS: The sale by Synergy to Empire
Energy of approximately 25% of the operations acquired in the Synergy
Acquisition.
EMPIRE ENERGY: Empire Energy Corporation, a Tennessee corporation.
EMPIRE GAS: Empire Gas Corporation, a Missouri corporation, now known as
All Star Gas Corporation.
EXCHANGE ACT: Securities Exchange Act of 1934, as amended.
EXECUTIVES: Messrs. Keith G. Baxter, Charles J. Kittrell, Ronald J. Goedde
and Vincent J. DiCosimo.
B-3
<PAGE>
GENERAL PARTNERS: The Managing General Partner and the Special General
Partner and their successors and permitted assigns as general partners of the
Partnership and the Operating Partnership.
HEATING DEGREE DAY: Heating Degree Days measure the amount by which the
average of the high and low temperature on a given day is below 65 degrees
Fahrenheit. For example, if the high temperature is 60 degrees and the low
temperature is 40 degrees for a National Oceanic and Atmospheric Administration
measurement location, the average temperature is 50 degrees and the number of
heating degree days for that day is 15.
INCENTIVE DISTRIBUTION RIGHT: A non-voting limited partner Partnership
Interest issued to the General Partners in connection with the transfer of their
assets to the Partnership, which Partnership Interest confers upon the holder
thereof only the rights and obligations specifically provided in the Partnership
Agreement with respect to Incentive Distribution Rights (and no other rights
otherwise available to or other obligations of holders of a Partnership
Interest).
INCENTIVE DISTRIBUTIONS: The distributions of Available Cash from Operating
Surplus initially made to the General Partners that are in excess of the General
Partners' aggregate 2% general partner interest.
INITIAL COMMON UNITS: The Common Units sold in the IPO.
INITIAL UNIT PRICE: $21.00 per Common Unit, the amount per Unit equal to
the initial public offering price of the Common Units in the IPO.
INITIAL UNITS: The Common Units with an aggregate value of $7.0 million
which were allocated to selected executives upon the consummation of the
Transactions, subject to certain vesting conditions, under the Restricted Unit
Plan.
INTERIM CAPITAL TRANSACTIONS: (a) Borrowings, refinancings and refundings
of indebtedness and sales of debt securities (other than for working capital
purposes and other than for items purchased on open account in the ordinary
course of business) by any member of the Partnership Group, (b) sales of equity
interests (including the Common Units sold to the Underwriters pursuant to the
exercise of their over-allotment option) by any member of the Partnership Group
and (c) sales or other voluntary or involuntary dispositions of any assets of
any member of the Partnership Group (other than (i) sales or other dispositions
of inventory in the ordinary course of business, (ii) sales or other
dispositions of other current assets, including, without limitation, receivables
and accounts, in the ordinary course of business and (iii) sales or other
dispositions of assets as a part of normal retirements or replacements), in each
case prior to the commencement of the dissolution and liquidation of the
Partnership.
IRA: Individual retirement account.
IRS: Internal Revenue Service.
MANAGEMENT BUY-OUT: The August 1, 1996 sale by the principal founding
shareholder of Empire Energy and certain other shareholders of their interests
in Empire Energy to certain members of management of Empire Energy.
MANAGEMENT FEE: A fee for each of the Executives relating to the
acquisition of Empire Energy and Coast by Northwestern Growth.
MANAGING GENERAL PARTNER: Cornerstone Propane GP, Inc., a California
corporation, and its successors, as managing general partner of the Partnership.
MINIMUM QUARTERLY DISTRIBUTION: $.54 per Unit with respect to each quarter
or $2.16 per Unit on an annualized basis, subject to adjustment as described in
"Cash Distribution Policy--Distributions from
B-4
<PAGE>
Capital Surplus" and "Cash Distribution Policy--Adjustment of Minimum Quarterly
Distribution and Target Distribution Levels."
NEW ACQUISITION INCENTIVE PLAN: The plan providing bonuses to participants
in the plan (who will be determined by the Board of Directors of the Managing
General Partner and will include the Executives) for adding new businesses to
the Partnership's propane operations, based upon 4% of the gross acquisition
price, spread among the participants in the plan based on their relative
salaries.
NON-CITIZEN ASSIGNEE: A Limited Partner or assignee who (i) fails to
furnish information about nationality, citizenship, residency or other related
status within 30 days after a request by the Managing General Partner for such
information, or (ii) the Managing General Partner determines after receipt of
such information is not an eligible citizen.
NORTHWESTERN GROWTH: Northwestern Growth Corporation, a South Dakota
corporation and a wholly owned subsidiary of NPS.
NOTE PLACEMENT: The private placement by the Operating Partnership of the
Notes.
NOTES: The $220.0 million aggregate principal amount of Senior Secured
Notes due 2010 privately placed by the Operating Partnership.
NPS: Northwestern Public Service Company, a Delaware corporation.
NYSE: The New York Stock Exchange, Inc.
OPERATING EXPENDITURES: All Partnership Group expenditures, including
taxes, reimbursements of the General Partners, debt service payments and capital
expenditures, subject to the following:
(a) Payments (including prepayments) of principal and premium on a debt
shall not be an Operating Expenditure if the payment is (i) required in
connection with the sale or other disposition of assets or (ii) made in
connection with the refinancing or refunding of indebtedness with the
proceeds from new indebtedness or from the sale of equity interests. For
purposes of the foregoing, at the election and in the reasonable discretion
of the Managing General Partner, any payment of principal or premium shall
be deemed to be refunded or refinanced by any indebtedness incurred or to be
incurred by the Partnership Group within 180 days before or after such
payment to the extent of the principal amount of such indebtedness.
(b) Operating Expenditures shall not include (i) capital expenditures
made for Acquisitions or for Capital Improvements (as opposed to capital
expenditures made to maintain assets), (ii) payment of transaction expenses
relating to Interim Capital Transactions or (iii) distributions to partners.
Where capital expenditures are made in part for Acquisitions or Capital
Improvements and in part for other purposes, the Managing General Partner's
good faith allocation between the amounts paid for each shall be conclusive.
OPERATING PARTNERSHIP: Cornerstone Propane, L.P., a Delaware limited
partnership, and any successors thereto.
OPERATING PARTNERSHIP AGREEMENT: The Amended and Restated Agreement of
Limited Partnership of the Operating Partnership dated as of December 17, 1996
(which has been filed as an exhibit to the registration statement of which this
Prospectus is a part).
OPERATING SURPLUS: As to any period prior to liquidation, on a cumulative
basis and without duplication:
(a) the sum of (i) $25 million plus all cash and cash equivalents of the
Partnership Group on hand as of the close of business on the Closing Date,
(ii) all cash receipts of the Partnership Group for
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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.
PARTNERSHIP SECURITY: Means any class or series of Units, any option,
right, warrant or appreciation rights relating thereto, or any other type of
equity interest that the Partnership may lawfully issue, or any unsecured or
secured debt obligation of the Partnership that is convertible into any class or
series of equity interests of the Partnership.
PLANS: The New Acquisition Incentive Plan of the Managing General Partner,
together with the Annual Operating Performance Incentive Plan.
REGISTRATION STATEMENT: The Registration Statement, as amended (No.
333-34581), filed by the Partnership with the Commission.
RESTRICTED UNIT PLAN: The Cornerstone Propane Partners, L.P. 1996
Restricted Unit Plan.
RULE 144: Rule 144 of the Securities Act.
SECURITIES ACT: The Securities Act of 1933, as amended.
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SGI: Synergy Group Incorporated, a Delaware corporation.
SPECIAL GENERAL PARTNER: Synergy and its successors and assigns as special
general partner of the Partnership.
SPLIT-OFF: The tax-free split-off of Empire Energy from Empire Gas in June
1994.
SUBORDINATED UNIT: A Unit representing a fractional part of the Partnership
Interests of all limited partners and assignees and having the rights and
obligations specified with respect to Subordinated Units in the Partnership
Agreement.
SUBORDINATION PERIOD: The Subordination Period will generally extend until
the first to occur of: (a) the first day of any quarter beginning after December
31, 2001 in respect of which (i) distributions of Available Cash from Operating
Surplus on each of the outstanding Common Units and the Subordinated Units with
respect to each of the three consecutive, non-overlapping four-quarter periods
immediately preceding such date equaled or exceeded the sum of the Minimum
Quarterly Distribution on all of the outstanding Common Units and Subordinated
Units during such periods, (ii) the Adjusted Operating Surplus generated during
each of the three consecutive, non-overlapping four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units, plus
the related distribution on the general partner interests in the Partnership and
in the Operating Partnership during such periods, and (iii) there are no
outstanding Common Unit Arrearages; and (b) the date on which the Managing
General Partner is removed as general partner of the Partnership upon the
requisite vote by holders of Outstanding Units under circumstances where Cause
does not exist and Units held by the General Partners and their Affiliates are
not voted in favor of such removal. Prior to the end of the Subordination
Period, a portion of the Subordinated Units will convert into Common Units on a
one-for-one basis on the first day after the record date established by the
Managing General Partner for any quarter ending on or after (a) December 31,
1999 with respect to one-quarter of the Subordinated Units (1,649,405
Subordinated Units) and (b) December 31, 2000 with respect to an additional
one-quarter of the Subordinated Units (1,649,405 Subordinated Units), on a
cumulative basis, in respect of which (i) distributions of Available Cash from
Operating Surplus on the Common Units and the Subordinated Units with respect to
each of the three consecutive, non-overlapping four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units
during such periods, (ii) the Adjusted Operating Surplus generated during each
of the two consecutive, non-overlapping four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units and
the related distribution on the general partner interests in the Partnership and
in the Operating Partnership during such periods, and (iii) there are no
outstanding Common Unit Arrearages; provided, however, that the early conversion
of the second quarter of Subordinated Units may not occur until at least one
year following the early conversion of the first quarter of Subordinated Units.
In addition, if the Managing General Partner is removed as general partner of
the Partnership under circumstances where Cause does not exist and Units held by
the General Partners and their affiliates are not voted in favor of such removal
(i) the Subordination Period will end and all outstanding Subordinated Units
will immediately and automatically convert into Common Units on a one-for-one
basis, (ii) any existing Common Unit Arrearages will be extinguished and (iii)
the General Partners will have the right to convert their 2% general partner
interests (and all the rights to the Incentive Distribution) into Common Units
or to receive cash in exchange for such interests.
SYNERGY: SYN Inc., a Delaware corporation and majority-owned subsidiary of
Northwestern Growth.
SYNERGY ACQUISITION: The acquisition of SGI by Synergy on August 15, 1995.
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TARGET DISTRIBUTION LEVELS: See "Cash Distribution Policy--Incentive
Distributions--Hypothetical Annualized Yield."
TRANSFER AGENT: Continental Stock Transfer & Trust Company serving as
registrar and transfer agent for the Common Units.
TRANSFER APPLICATION: An application for transfer of Units in the form set
forth on the back of a certificate, substantially in the form included in this
Prospectus as Appendix A, or in a form substantially to the same effect in a
separate instrument.
UNITHOLDERS: Holders of the Common Units and the Subordinated Units,
collectively.
UNIT MAJORITY: During the Subordination Period, at least a majority of the
outstanding Common Units, voting as class, and at least a majority of the
outstanding Subordinated Units, voting as a class and, thereafter, at least a
majority of the outstanding Units.
UNITS: The Common Units and the Subordinated Units, collectively, but not
including the right to receive Incentive Distributions.
UNRECOVERED CAPITAL: At any time, the Initial Unit Price, less the sum of
all distributions theretofore made in respect of an Initial Common Unit
constituting Capital Surplus and any distributions of cash (or the net agreed
value of any distributions in kind) in connection with the dissolution and
liquidation of the Partnership theretofore made in respect of such Unit,
adjusted as the Managing General Partner determines to be appropriate to give
effect to any distribution, subdivision or combination of such Units.
WORKING CAPITAL FACILITY: A $50.0 million revolving credit facility entered
into by the Operating Partnership to be used for working capital and other
Partnership purposes.
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[CORNERSTONE PROPANE PARTNERS, L.P. LOGO]
