<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) October 27, 1998
CORNERSTONE PROPANE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 1-12499 77-0439862
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
432 WESTRIDGE DRIVE
WATSONVILLE, CALIFORNIA 95076
(Address of principal executive offices)
(831) 724-1921
(Registrant's telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
<PAGE>
ITEM 5. OTHER EVENTS
On October 27, 1998, Cornerstone Propane Partners, L.P. (the
"Partnership"), Cornerstone Holding Corp. ("CHC"), Propane Continental, Inc.
("PCI") and certain PCI selling shareholders and warrant holders, entered
into a definitive agreement (the "Stock Purchase Agreement") by which the
Partnership and CHC would acquire all of PCI's outstanding common and
preferred stock and warrants to purchase common stock. PCI, based in Overland
Park, Kansas, is a distributor of propane gas to retail and wholesale
customers. PCI is the nation's 19th largest retail propane distributor in
terms of volume, serving approximately 60,000 residential, commercial,
industrial and agricultural customers from 34 customer service centers in
eleven states. For its fiscal year ended June 30, 1998, PCI had retail
propane sales of approximately 28.5 million gallons. Of the eleven states in
which PCI has customer service centers, five are states in which the
Partnership currently does not have its own customer service centers
(Colorado, Massachusetts, Michigan, Pennsylvania and Wisconsin).
Under the Stock Purchase Agreement, the Partnership will acquire PCI
for an estimated total purchase price of approximately $120 million. The
consideration that the Partnership will pay will consist of approximately
$113 million in cash, $3 million of the Partnership's Common Units and the
assumption of $4 million in PCI installment payment obligations to previous
owners of propane businesses which PCI acquired. In order to finance the cash
portion of the purchase price, the Partnership is offering additional Common
Units in a public offering and is expected to issue $60 million of senior notes
in a separate private placement transaction.
The transaction is subject to, among other things, regulatory approvals
and other customary conditions. The transaction is expected to close by December
31, 1998. Until the closing of the transaction, PCI may not solicit alternative
acquisition proposals.
Reference is made to the Stock Purchase and Contribution Agreement
between the Partnership, CHC, PCI and selling shareholders and warrant
holders, dated October 27, 1998 attached as exhibit 2.1 to this Form 8-K
Current Report.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired
The following financial statements of Propane Continental, Inc. and
subsidiaries appear below:
- Report of Independent Auditors
- Propane Continental, Inc. and Subsidiaries Consolidated
Balance Sheets as of June 30, 1998 and 1997.
- Propane Continental, Inc. and Subsidiaries Consolidated
Statements of Income for the years ended June 30, 1998,
1997 and 1996.
- Propane Continental, Inc. and Subsidiaries Consolidated
Statements of Shareholders' Equity for the years ended
June 30, 1998, 1997 and 1996.
2
<PAGE>
- Propane Continental, Inc. and Subsidiaries Consolidated
Statements of Cash Flows for the years ended June 30,
1998, 1997 and 1996.
- Notes to Consolidated Financial Statements
- Condensed Consolidated Balance Sheets September 30, 1998
(unaudited) and June 30, 1998.
- Condensed Consolidated Statements of Operations for the
three months ended September 30, 1998 (unaudited) and
September 30, 1997 (unaudited).
- Condensed Consolidated Statements of Cash Flows for the
three months ended September 30, 1998 (unaudited) and
September 30, 1997 (unaudited).
- Notes to Condensed Consolidated Financial Statements
(unaudited).
(b) Pro Forma Financial Information
The following pro forma financial statements appear below:
- Report of Independent Public Accountants
- Pro Forma Financial Information for the Partnership and
PCI for the fiscal year ended June 30, 1998 and for the
quarter ended September 30, 1998.
- Notes to Pro Forma Financial Information
(c) Exhibits
2.1 Stock Purchase and Contribution Agreement dated October 27,
1998, by and among Cornerstone Propane Partners, L.P.,
Cornerstone Holding Corp., Propane Continental, Inc. and
selling shareholders and warrant holders.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
99.1 Press Release dated October 27, 1998
99.2 Press Release dated December 2, 1998
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Propane Continental, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Propane
Continental, Inc. and subsidiaries (the Company) as of June 30, 1998 and 1997,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the three fiscal years in the period ended June 30, 1998.
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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Propane
Continental, Inc. and subsidiaries at June 30, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
August 24, 1998, except for
NOTE 11 as to which the date
is November 13, 1998
<PAGE>
Propane Continental, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30
1998 1997
-----------------------------------------
<S> <C> <C>
ASSETS (NOTE 3)
Current assets:
Cash $ 1,230,378 $ 1,972,906
Accounts receivable, less allowance for doubtful
accounts of $365,906 in 1998 and $270,023 in
1997 4,546,699 7,835,766
Inventories 9,477,807 6,376,760
Prepaid expenses and other current assets 487,675 290,018
Deferred income taxes (NOTE 5) 248,781 165,260
-----------------------------------------
Total current assets 15,991,340 16,640,710
Property, plant and equipment, at cost:
Land and buildings 2,543,131 1,987,432
Office furniture and equipment 659,045 507,327
Vehicles 4,977,317 3,551,300
Tanks and plant equipment 27,996,695 20,149,705
-----------------------------------------
36,176,188 26,195,764
Less accumulated depreciation 3,726,431 2,268,083
-----------------------------------------
Net property, plant and equipment 32,449,757 23,927,681
Intangible assets (NOTE 2):
Organization costs 441,566 391,754
Covenants not to compete 8,384,409 5,470,540
Loan origination costs 237,305 229,826
Goodwill 13,716,606 11,161,709
Other 248,138 200,540
-----------------------------------------
23,028,024 17,454,369
Less accumulated amortization 5,032,255 3,242,922
-----------------------------------------
Net intangible assets 17,995,769 14,211,447
Other 131,968 43,727
-----------------------------------------
Total assets $66,568,834 $54,823,565
-----------------------------------------
-----------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
JUNE 30
1998 1997
-----------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,413,656 $ 7,192,000
Accrued expenses 1,081,694 1,356,095
Customer deposits 6,689,943 7,006,035
Current portion of capital lease obligation (NOTE 4) 200,581 187,004
Current portion of long-term debt (NOTE 3) 1,231,174 1,012,906
-----------------------------------------
Total current liabilities 15,617,048 16,754,040
Deferred income taxes (NOTE 5) 4,022,437 3,055,587
Capital lease obligation, less current portion (NOTE 4) 659,920 903,333
Long-term debt, less current portion (NOTE 3) 28,916,185 18,386,830
Series A preferred stock, $.01 par value (NOTE 6):
Authorized, issued and outstanding shares - 1,125 in
1998 and 1997 11,250,000 11,250,000
Series B preferred stock, $.01 par value (NOTE 6):
Authorized, issued and outstanding shares -
250 in 1998 and 1997 2,500,000 2,500,000
Shareholders' equity (NOTES 2, 3, 6 AND 7):
Common stock, $.01 par value:
Authorized shares - 1,307,407
Issued and outstanding shares - 122,242 in
1998 and 1997 1,222 1,222
Common stock warrants 33,422 33,422
Additional paid-in capital 399,325 338,491
Retained earnings 3,169,275 1,600,640
-----------------------------------------
Total shareholders' equity 3,603,244 1,973,775
-----------------------------------------
Total liabilities and shareholders' equity $66,568,834 $54,823,565
-----------------------------------------
-----------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Propane Continental, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1998 1997 1996
------------------------------------------------------------
<S> <C> <C> <C>
Sales $142,378,638 $192,542,286 $113,184,563
Cost of sales 122,101,576 173,846,431 102,076,448
------------------------------------------------------------
Gross margin 20,277,062 18,695,855 11,108,115
Selling, general and administrative expenses 15,223,236 13,322,670 9,096,348
------------------------------------------------------------
Income from operations 5,053,826 5,373,185 2,011,767
Other expense (income):
Interest expense 2,361,804 2,069,887 1,289,006
Interest income (41,717) (132,215) (90,410)
Other (105,918) 26,703 26,433
------------------------------------------------------------
Income before income taxes 2,839,657 3,408,810 786,738
Provision for income taxes (NOTE 5) 1,271,022 1,360,974 450,769
------------------------------------------------------------
Net income $ 1,568,635 $ 2,047,836 $ 335,969
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Propane Continental, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
UNVESTED TOTAL
COMMON ADDITIONAL FOUNDERS' RETAINED SHAREHOLDERS'
COMMON STOCK PAID-IN COMMON EARNINGS EQUITY
STOCK WARRANTS CAPITAL STOCK (DEFICIT) (DEFICIT)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 $ 94 $33,422 $207,727 $ (69,428) $ (783,165) $ (611,350)
Issuance of 2,874 shares of common stock 28 - 105,240 (102,394) - 2,874
10-for-1 stock split 1,100 - (1,100) - - -
Amortization of deferred compensation - - 13,312 - - 13,312
Amortization of unvested founders' common
stock - - - 171,822 - 171,822
Net income - - - - 335,969 335,969
-----------------------------------------------------------------------------------
Balance at June 30, 1996 1,222 33,422 325,179 - (447,196) (87,373)
Amortization of deferred compensation - - 13,312 - - 13,312
Net income - - - - 2,047,836 2,047,836
-----------------------------------------------------------------------------------
Balance at June 30, 1997 1,222 33,422 338,491 - 1,600,640 1,973,775
Amortization of deferred compensation - - 60,834 - - 60,834
Net income - - - - 1,568,635 1,568,635
-----------------------------------------------------------------------------------
Balance at June 30, 1998 $1,222 $33,422 $399,325 $ - $3,169,275 $3,603,244
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Propane Continental, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,568,635 $ 2,047,836 $ 335,969
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts 250,267 564,332 132,734
Depreciation 1,621,807 1,184,847 716,682
Amortization 1,789,333 1,281,646 1,115,823
(Gain) loss on disposal of property, plant
and equipment (53,664) (39,743) 14,758
Loss on loan costs written off - 55,638 -
Amortization of unvested founders' common
stock - - 171,822
Amortization of deferred compensation 60,834 13,312 13,312
Deferred income taxes 883,329 1,084,524 448,594
Changes in operating assets and liabilities,
net of effects from acquisition of retail
propane companies:
Accounts receivable 3,397,243 (1,642,419) (2,006,340)
Inventories (2,912,063) (4,150,188) 1,326,304
Prepaid expenses and other current
assets (260,202) 1,446 21,807
Accounts payable (778,344) (246,423) 2,322,838
Accrued expenses (294,263) 865,372 244,772
Customer deposits (316,092) 3,340,348 1,985,898
------------------------------------------------------
Net cash provided by operating activities 4,956,820 4,360,528 6,844,973
INVESTING ACTIVITIES
Acquisition of retail propane companies (13,200,651) (4,688,000) (12,356,916)
Purchases of property, plant and equipment (1,852,993) (1,029,281) (1,482,096)
Additions of intangible assets (143,038) (432,764) (228,271)
(Additions) reductions to restricted cash - 2,000,000 (2,000,000)
Proceeds from sale of property, plant and
equipment 387,499 318,931 1,065,167
------------------------------------------------------
Net cash used in investing activities (14,809,183) (3,831,114) (15,002,116)
</TABLE>
<PAGE>
Propane Continental, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net payments on line of credit $ - $ - $ (234,454)
Principal payments of long-term debt (7,903,829) (21,628,120) (2,829,560)
Principal payments of capital lease obligations (229,836) (199,672) (94,336)
Proceeds from issuance of Series B preferred
stock - - 2,500,000
Proceeds from issuance of founders' common stock - - 2,874
Proceeds from issuance of long-term debt 17,243,500 19,515,038 12,330,000
------------------------------------------------------
Net cash provided by (used in) financing
activities 9,109,835 (2,312,754) 11,674,524
------------------------------------------------------
Net increase (decrease) in cash (742,528) (1,783,340) 3,517,381
Cash at beginning of year 1,972,906 3,756,246 238,865
------------------------------------------------------
Cash at end of year $ 1,230,378 $ 1,972,906 $ 3,756,246
------------------------------------------------------
------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 2,259,053 $ 1,979,358 $ 1,231,529
------------------------------------------------------
------------------------------------------------------
Cash paid during the year for income taxes $ 719,747 $ - $ -
------------------------------------------------------
------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Additions to covenants not to compete through the
issuance of noncompete obligations $ 1,407,952 $ 1,030,249 $ 1,042,746
------------------------------------------------------
------------------------------------------------------
Purchases of property, plant and equipment
through the issuances of debt $ - $ - $ 2,530,000
------------------------------------------------------
------------------------------------------------------
Additions to property, plant and equipment
through issuance of capital lease
obligations $ - $ 286,517 $ 987,515
------------------------------------------------------
------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Propane Continental, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Propane
Continental, Inc., a Delaware corporation, and its wholly-owned subsidiaries,
Pacheco Propane Co., Inc., PCMA, Inc., PCAZ, Inc. and R.E. Semple, Inc. (the
Company). All intercompany transactions and balances have been eliminated.
CREDIT CONCENTRATIONS
The Company is both a retail and wholesale supplier of propane. The Company
generally extends unsecured credit to its wholesale customers throughout the
midwestern and eastern portions of the United States. Credit is generally
extended to retail customers through delivery into company and customer owned
propane gas storage tanks. Adequate provision for doubtful accounts receivable
has been reflected in the Company's consolidated financial statements.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the year. Actual results could differ from those
estimates.
INVENTORIES
Inventories, which mainly consist of liquid propane, are stated at the lower of
cost, determined using the average cost method, or market.
<PAGE>
Propane Continental, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed by
the straight-line method over the assets' estimated useful lives, as follows:
<TABLE>
<CAPTION>
YEARS
--------------
<S> <C>
Buildings 20-40
Office furniture and equipment 5-10
Vehicles 5-10
Tanks and plant equipment 15-40
</TABLE>
INTANGIBLE ASSETS
Intangible assets are amortized on a straight-line basis over their estimated
economic lives, as follows:
<TABLE>
<CAPTION>
YEARS
--------------
<S> <C>
Organization costs 5
Covenants not to compete 5-10
Loan origination costs 1-3
Goodwill 40
Other 3-5
</TABLE>
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The
liability method provides that deferred tax assets and liabilities are recorded
based on the differences between financial reporting and tax bases of assets and
liabilities as measured by the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
CUSTOMER DEPOSITS
Customer deposits primarily represent cash received by the Company from
wholesale and retail customers for propane purchased that will be delivered at a
future date.
<PAGE>
Propane Continental, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS
During 1998, the Company acquired substantially all of the assets of Sharon Gas
Co., Inc., Sharon Oil Co., Inc., Martin Music Co. D/B/A Mar-Gas Propane, Alco
Bottled Gas, Inc., Briceton Elevator, Inc., Action Gas, Inc. and Tecumseh LP
Gas, Inc., as well as certain assets of Blue Water Oil Co., Jim and Donna Book
D/B/A Books Propane and C. Barron & Sons, Inc. During 1997, the Company acquired
substantially all of the net assets of Minns Gas, Inc. In addition, the Company
acquired 100% of the outstanding stock of Apache Gas Company and R.E. Semple,
Inc. During 1996, the Company acquired substantially all of the net assets of
C.F. LaFountaine, Inc., Bison NGL, Inc., Westport Gas Company and Town & Country
Gas Service, Inc., as well as certain assets of MG Ventures, Inc. In addition,
the Company acquired 100% of the outstanding stock of Hank's Southeastern
Propane, Inc. and Graves Propane Company, Inc. These acquired retail companies
are involved in the sale of propane to local customer bases throughout the
United States. The acquisitions have been accounted for using the purchase
method of accounting. The acquired companies were purchased in separate
transactions for aggregate purchase prices of $13,985,000, $5,573,000 and
$14,333,000 during 1998, 1997 and 1996, respectively. The 1998 acquisitions were
financed through cash in the amount of $12,152,048 and through the issuance of
long-term debt in the amount of $1,832,952. The 1997 acquisitions were financed
through cash in the amount of $4,542,751 and through the issuance of long-term
debt in the amount of $1,030,249. The 1996 acquisitions were financed through
cash in the amount of $10,760,254 and through the issuance of long-term debt in
the amount of $3,572,746. The excess of the aggregate purchase prices over the
fair market values of the net assets acquired amounted to $2,522,665, $955,856
and $5,304,000, which is recorded as an increase in goodwill in 1998, 1997 and
1996, respectively. Goodwill related to these acquisitions is being amortized
over 40 years. In addition, $2,907,952, $1,130,249 and $1,465,075 of the
purchase prices were allocated to covenants not to compete during 1998, 1997 and
1996, respectively. As part of the 1998 acquisitions, the Company entered into
agreements providing for various annual payments based on achieving certain
performance measurements. The total of these payments, should they be earned,
will not exceed $1,268,000. The operating results of all acquisitions are
included in the Company's consolidated results of operations from the dates of
acquisition.
The following unaudited pro forma data summarize the results of operations for
the periods indicated as if these acquisitions had been completed on July 1,
1996, the beginning of the 1997 fiscal year. The pro forma data give effect to
actual operating
<PAGE>
Propane Continental, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS (CONTINUED)
results prior to the acquisitions and adjustments to interest expense, goodwill
amortization and income taxes. These pro forma amounts do not purport to be
indicative of the results that would have actually been obtained if the
acquisitions had occurred on July 1, 1996 or that may be obtained in the future.
The pro forma data do not give effect to acquisitions completed subsequent to
June 30, 1998.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1998 1997
-----------------------------------------
<S> <C> <C>
(UNAUDITED)
Sales $145,607,102 $205,535,540
Net income 1,884,010 4,285,226
</TABLE>
Since June 30, 1998, the Company acquired substantially all of the assets of
Walsh NGL Marketing, Vineyard Propane, Inc., Francis F. Bezio, Inc., De's LP Gas
Service, Inc. and certain assets of Walsh Propane, Inc. in separate transactions
for aggregate purchase prices of $21,635,000. The acquisitions, which will be
accounted for as purchases, were financed through the issuance of long-term
debt. In addition, the Company entered into obligations under noncompetition
agreements requiring payments of $900,000 at closing and annual payments ranging
from $200,000 to $333,333 over the next five years. As part of these
acquisitions, the Company entered into agreements providing for various annual
payments based on achieving certain performance measurements. The total of these
payments, should they be earned, will not exceed $450,000.
3. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt at June 30 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------
<S> <C> <C>
Credit agreement $23,647,500 $12,829,000
Notes payable to financial institutions 104,003 379,194
Notes payable to sellers from acquisitions 3,160,286 3,801,171
Obligations under noncompetition agreements 3,235,570 2,390,371
-----------------------------------------
30,147,359 19,399,736
Less current portion 1,231,174 1,012,906
-----------------------------------------
$28,916,185 $18,386,830
-----------------------------------------
-----------------------------------------
</TABLE>
<PAGE>
Propane Continental, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
During 1997, the Company entered into a credit agreement with Bank One, Indiana
and LaSalle National Bank (the Banks), which was amended during 1998 to increase
borrowing capacity by $12,000,000, providing the Company with the capacity to
borrow up to $51,000,000 ($7,000,000 under a long-term working capital line of
credit and $44,000,000 under a long-term acquisition line of credit). At June
30, 1998, borrowings under the long-term working capital line of credit and the
long-term acquisition line of credit were $3,948,000 and $19,699,500,
respectively. The agreement is collateralized by substantially all of the assets
of the Company, requires interest only payments and is scheduled to mature on
March 31, 2001. Interest on these lines of credit is based on "prime rate"
and/or LIBOR plus the applicable spread. The applicable spread for each rate is
based on the Company's ratio of funded debt to earnings before interest, taxes,
depreciation and amortization. The prime rate and LIBOR plus the applicable
spreads were 8.5% and 7.9375%, respectively, at June 30, 1998.
The agreement contains several covenants which, among other things, require the
maintenance of various financial performance ratios, restrict the payment of
dividends and require financial reports to be submitted periodically to the
Banks. Unused borrowings under the credit agreement amounted to $24,325,500 and
$24,171,000 at June 30, 1998 and 1997, respectively. The Banks have provided
letters of credit totaling $1,027,000 as security for certain vendors.
Notes payable to financial institutions consist of obligations to various
financial institutions bearing interest at rates from 7.5% to 11% payable in
varying monthly installments through 2000. These obligations are collateralized
by specific propane tanks, vehicles and other assets of the Company.
Notes payable to sellers from acquisitions consist of notes payable with
variable interest rates from 7.8% to 9.5% payable in varying monthly and annual
installments through 2005. The notes payable are collateralized by certain
assets and personal guarantees of certain owners of the Company (the Operators).
The Banks have provided an irrevocable standby letter of credit in the amount of
$2,000,000 as security for a certain long-term note payable.
Noninterest-bearing obligations due under noncompetition agreements consist of
agreements between the Company and the sellers of retail propane companies
acquired since August 1991 with payments due through 2004, some of which are
collateralized by certain assets of the Company.
<PAGE>
Propane Continental, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
The aggregate amounts of principal to be paid on the outstanding long-term debt
during the years ending June 30 are as follows:
<TABLE>
<S> <C>
1999 $ 1,231,174
2000 943,679
2001 24,585,405
2002 650,773
2003 510,310
Thereafter 2,226,018
---------------------
$30,147,359
---------------------
---------------------
</TABLE>
4. LEASES
During 1997, the Company entered into sale-leaseback transactions with a leasing
company whereby the Company sold vehicles and equipment for $286,519. The
Company recognized no gain or loss on the sale-leaseback, and the leases have
been accounted for as capital leases. At the conclusion of the lease term,
providing all payments under the lease agreement have been made, the lessor
transfers titles to the leased assets back to the Company.
The amounts of vehicles and other equipment under capitalized lease obligations
included in property, plant and equipment at June 30 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------
<S> <C> <C>
Assets under capitalized leases $1,365,960 $1,417,785
Accumulated amortization (279,639) (224,248)
------------------------------------
$1,086,321 $1,193,537
------------------------------------
------------------------------------
</TABLE>
Lease amortization is included in depreciation expense.
The Company has several noncancelable operating leases mainly for office space
which expire at various times over the next seven years.
<PAGE>
Propane Continental, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. LEASES (CONTINUED)
Future minimum lease payments under the capital leases and noncancelable
operating leases for the next five years ending June 30 and thereafter consist
of the following:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING JUNE 30 LEASES LEASES
- -----------------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 247,868 $ 393,160
2000 266,032 202,177
2001 419,416 161,341
2002 90,622 139,824
2003 - 98,105
Thereafter 3,711 78,658
----------------- ------------------
Total minimum lease payments 1,027,649 $1,073,265
------------------
------------------
Less amount representing interest 167,148
-----------------
Present value of minimum lease payments 860,501
Less current portion 200,581
-----------------
$ 659,920
-----------------
-----------------
</TABLE>
Rent expense for operating leases for 1998, 1997 and 1996 aggregated $492,908,
$400,434 and $299,656, respectively.
<PAGE>
Propane Continental, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Components of the
Company's deferred taxes at June 30 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------
<S> <C> <C>
Deferred tax assets:
Current:
Accrued expenses $ 106,626 $ 94,018
Allowance for doubtful accounts 142,155 71,242
------------------------------------
248,781 165,260
Noncurrent:
Alternative minimum tax credit carryforward 650,222 276,000
Net operating loss carryforwards 1,128,044 1,142,960
------------------------------------
1,778,266 1,418,960
------------------------------------
Total deferred tax assets 2,027,047 1,584,220
Noncurrent deferred tax liability:
Amortization of intangible assets (1,127,526) (1,305,128)
Depreciation (4,673,177) (3,169,419)
------------------------------------
Total deferred tax liabilities (5,800,703) (4,474,547)
------------------------------------
Net deferred tax liability $(3,773,656) $(2,890,327)
------------------------------------
------------------------------------
</TABLE>
At June 30, 1998, the Company had net operating loss carryforwards of
approximately $2,904,000 for income tax purposes that begin to expire in 2010
which may be used to offset future taxable income. The Company believes that it
is more likely than not that the net operating loss carryforwards will be
utilized prior to their expiration and, accordingly, has not provided a
valuation allowance to reduce the carrying value of deferred tax assets. Net
operating loss carryforwards and existing deductible temporary differences are
expected to be offset in part by existing taxable temporary differences
reversing within the carryforward period. Recorded tax benefits in excess of
such amounts could be realized upon the execution of an available tax planning
strategy.
<PAGE>
Propane Continental, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
The provision for income taxes for the years ended June 30 consists of the
following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------------------------------------------------------
<S> <C> <C> <C>
1998:
Federal $376,815 $ 717,350 $1,094,165
State 10,878 165,979 176,857
------------------------------------------------------
$387,693 $ 883,329 $1,271,022
------------------------------------------------------
------------------------------------------------------
1997:
Federal $273,407 $ 881,105 $1,154,512
State 2,593 203,869 206,462
------------------------------------------------------
$276,000 $1,084,974 $1,360,974
------------------------------------------------------
------------------------------------------------------
1996:
Federal $ - $ 366,069 $ 366,069
State - 84,700 84,700
------------------------------------------------------
$ - $ 450,769 $ 450,769
------------------------------------------------------
------------------------------------------------------
</TABLE>
A reconciliation of income tax expense at the statutory rate to the actual
income tax expense for the years ended June 30 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes at statutory rate
(34%) $ 965,483 $1,158,995 $267,491
State income taxes, net of federal tax
benefit 137,723 165,327 38,157
Nondeductible expenses 44,824 22,329 85,151
Amortization of excess of cost over fair market
value of net assets acquired 73,056 62,512 36,634
Other 49,936 (48,189) 23,336
------------------------------------------------------
$1,271,022 $1,360,974 $450,769
------------------------------------------------------
------------------------------------------------------
</TABLE>
<PAGE>
Propane Continental, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. SERIES A AND B PREFERRED STOCK
The Series A preferred stock earns cumulative dividends of 6% per annum. At June
30, 1998 and 1997, cumulative dividends in arrears were approximately $3,124,000
(ranging from $2,349 to $3,163 per share) and $2,449,000 (ranging from $1,749 to
$2,563 per share), respectively, none of which have been declared by the Board
of Directors. Series A preferred shareholders are entitled to the same voting
rights as common shareholders and receive 75 common stock votes for each
preferred share. Upon liquidation, Series A preferred shareholders are entitled
to an aggregate preference distribution of the stated issue price plus unpaid
dividends. By written notice, as defined by the certificate of incorporation,
given the occurrence of a specified event or at any time after March 24, 2003,
the holders of at least two thirds of the Series A preferred stock have the
option to declare a liquidation.
During September 1995, the Company's Board of Directors and shareholders
approved an amendment to its certificate of incorporation authorizing an
increase in the total authorized capital stock from 101,125 shares to 132,116
shares, on a presplit basis, by adding 250 shares of Series B preferred stock
and 30,471 shares of common stock, each with a par value of $.01. In connection
with this amendment, certain investors (the Investors) and the Operators
contributed $2.5 million to the Company in exchange for 250 shares of Series B
preferred stock. In addition, the Company's Board of Directors and shareholders
authorized the sale of 2,874 shares of founders' common stock to the Operators
for $1 per share.
The Series B preferred stock earns cumulative dividends of 6% per annum. At June
30, 1998 and 1997, cumulative dividends in arrears were approximately $409,000
(ranging from $1,511 to $1,667 per share) and $259,000 (ranging from $911 to
$1,067 per share), respectively, none of which have been declared by the Board
of Directors. Series B preferred shareholders are entitled to the same voting
rights as common shareholders and are entitled to 1,115 common stock votes for
each Series B preferred share. Holders of Series B preferred stock have the
right, at their option, to convert shares into common stock at any time prior to
March 24, 2003. The conversion rate per share shall equal the stated issue price
per share of Series B preferred stock ($10,000) divided by $8.9714. Upon
liquidation, Series B preferred shareholders are entitled to an aggregate
preference distribution of the stated issue price plus unpaid dividends. By
written notice, as defined by the amended certificate of incorporation, given
the occurrence of a specified event or at any time after March 24, 2003, the
holders of at least two thirds of the Series B preferred stock have the option
to declare a liquidation.
<PAGE>
Propane Continental, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY
As part of the amendment to the certificate of incorporation in September 1995
and the Company's initial capitalization in March 1993, the Company issued 2,874
and 9,350 shares of founders' common stock to the Operators, respectively. The
issuances of the founders' stock were recorded at fair market value, which was
estimated to be $105,268 and $208,378 in 1996 and 1993, respectively. In 1996
and 1993, a charge for unvested founders' common stock of $102,394 and $208,285
in 1996 and 1993, respectively, was recorded as a reduction to shareholders'
equity. Under employment agreements, the Operators became fully vested in these
shares during 1996. During 1996, the Company recorded amortization expense of
$171,822.
In connection with the issuance of the Series A preferred stock, the Company
issued warrants which are exercisable for 10 years and expire March 24, 2003.
The Operators received warrants to purchase 280,050 shares of common stock at an
exercise price of $4.4563 per share. The total exercise price of $1,250,000 must
be paid first by converting Series A preferred stock at the stated issue price
of $10,000 per share. Certain Investors received warrants to purchase 561,000
shares of common stock, all of which are exercisable at June 30, 1998 and 1997.
The warrant exercise price for these shares equates to the conversion price of
all outstanding Series A preferred stock owned by the Investors at the exercise
date. No value was assigned to either the Operators' or Investors' warrants in
the accompanying consolidated balance sheets, as they, in essence, represent a
conversion feature of the Series A preferred stock.
In connection with the Company's initial capitalization, the Company also issued
warrants permitting Bank of America (the former Bank) to purchase 15,000 shares
of common stock for $.001 per share through March 24, 2003. In addition, the
Company and the former Bank entered an agreement allowing the Company to buy, or
the former Bank to sell, the warrants at fair market value after five years from
March 24, 1993. The warrants were valued at the estimated fair market value of
$33,422 and recorded as loan origination costs.
On January 15, 1996, the Board of Directors declared a 10-for-1 common stock
split. A total of 110,018 shares of common stock was issued in connection with
the split. The stated par value of each share was not changed from $.01. A total
of $1,100 was reclassified from the Company's additional paid-in capital account
to the Company's common stock account. All share and per share amounts have been
restated to retroactively reflect the stock split.
<PAGE>
Propane Continental, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
The Company has authorized 1,185,165 shares of common stock which have not been
issued. These shares are reserved for future issuance as follows: 856,500 for
warrants, 278,665 for converting Series B preferred stock and 50,000 for the
Nonqualified Stock Option Plan (the Plan) described in NOTE 8.
8. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) profit-sharing plan for those associates who have
completed one year of service and have attained the age of 21. The plan permits
associates to make contributions up to the maximum limits allowed by Internal
Revenue Code Section 401(k) and provides for matching contributions by the
Company. Matching company contributions were $31,900, $34,600 and $13,243 in
1998, 1997 and 1996, respectively.
During 1996, the Company adopted the Plan under which stock options may be
granted to associates. Under the Plan, options to purchase up to 50,000 shares
of the Company's common stock may be granted. The exercise price of options
granted under the Plan shall be determined by the Board of Directors. Options
granted pursuant to the Plan will expire, if not exercised, on December 31, 2015
and generally vest at the earlier of a specified event, as defined by the Plan,
or a period not to exceed 10 years.
Activity in the Company's stock option plan is as follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE
OF SHARES PRICES
------------------------------------
<S> <C> <C>
Options outstanding at June 30, 1995 -
Options granted 22,500 $1.00
Options exercised -
Options canceled -
-------------------
Options outstanding at June 30, 1996 22,500 $1.00
Options granted -
Options exercised -
Options canceled -
-------------------
Options outstanding at June 30, 1997 22,500 $1.00
Options granted 13,000 $1.00
Options exercised -
Options canceled -
-------------------
Options outstanding at June 30, 1998 35,500 $1.00
-------------------
-------------------
</TABLE>
<PAGE>
Propane Continental, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
At June 30, 1998, there were 30,250 shares exercisable and 14,500 shares
available to be granted.
The effect of applying the fair value method required by SFAS No. 123,
"Accounting for Stock-Based Compensation," to the Company's stock option awards
results in net income that is not materially different from amounts reported in
the consolidated statements of income.
9. CONTINGENCIES AND COMMITMENTS
The Company is currently involved in a lawsuit alleging responsibility for an
accident that occurred on the premises of a customer of one of the Company's
wholesale customers. The results of litigation cannot be predicted with
certainty; however, in the opinion of management, any liability which may arise
from the litigation is expected to be fully covered by the Company's insurance
policies (see NOTE 11).
The Company periodically enters into agreements to purchase fixed quantities of
liquid propane at fixed prices with suppliers. At June 30, 1998, the total of
these firm purchase commitments was approximately $24,930,000.
10. YEAR 2000 - UNAUDITED
The Company has developed a plan to modify its information technology to be
ready for the year 2000 and has begun converting critical data processing
systems. The Company expects to be year 2000 compliant by early fiscal year
1999. The Company does not expect this project to have a significant effect on
operations.
11. SUBSEQUENT EVENTS
The Company signed a letter of intent whereby it agreed to sell all of its
outstanding capital stock to Cornerstone Propane Partners, L.P. (Cornerstone)
for approximately $115 million, comprised of an estimated $60 million in cash to
the Company's shareholders and an estimated $55 million resulting from the
refinancing of the Company's outstanding debt. This transaction is subject to
customary closing conditions and is expected to close in early December 1998.
<PAGE>
Propane Continental, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. SUBSEQUENT EVENTS (CONTINUED)
During November 1998, the Company negotiated settlement of a lawsuit filed by a
customer of one of the Company's wholesale customers (see NOTE 9). The
settlement and related legal fees, anticipated to be approximately $3,000,000 in
excess of the Company's insurance policy coverage, will be paid from proceeds of
the sale of the Company's capital stock to Cornerstone.
<PAGE>
Propane Continental, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 770,760 $ 1,230,378
Accounts receivable, net 4,679,457 4,546,699
Inventories 17,244,846 9,477,807
Prepaid expenses and other current assets 1,476,476 487,675
Deferred income taxes 248,781 248,781
-------------------------------------
Total current assets 24,420,320 15,991,340
Net property, plant and equipment 42,207,739 32,449,757
Goodwill and other intangible assets, net 31,648,416 17,995,769
Other 54,971 131,968
------------------------------------
Total assets $98,331,446 $66,568,834
------------------------------------
------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $10,184,518 $ 6,413,656
Accrued expenses 4,406,834 1,081,694
Customer deposits 5,924,647 6,689,943
Current portion of capital lease obligation 200,581 200,581
Current portion of long-term debt 1,231,174 1,231,174
------------------------------------
Total current liabilities 21,947,754 15,617,048
Deferred income taxes 1,557,175 4,022,437
Capital lease obligation, less current portion 598,675 659,920
Long-term debt, less current portion 59,786,665 28,916,185
Series A preferred stock, $.01 par value:
Authorized, issued and outstanding shares -
1,125 at September 30, 1998 and June 30, 1998 11,250,000 11,250,000
Series B preferred stock, $.01 par value:
Authorized, issued and outstanding shares -
250 at September 30, 1998 and June 30, 1998 2,500,000 2,500,000
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares - 1,307,407
Issued and outstanding shares - 122,242 at September 30,
1998 and June 30, 1998 1,222 1,222
Common stock warrants 33,422 33,422
Additional paid-in capital 399,325 399,325
Retained earnings 257,208 3,169,275
------------------------------------
Total shareholders' equity 691,177 3,603,244
------------------------------------
Total liabilities and shareholders' equity $98,331,446 $66,568,834
------------------------------------
------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Propane Continental, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
1998 1997
-----------------------------------------
<S> <C> <C>
Sales $25,575,461 $36,979,555
Cost of sales 22,043,144 34,427,744
-----------------------------------------
Gross margin 3,532,317 2,551,811
Operating expenses 4,842,000 3,361,761
-----------------------------------------
Loss from operations (1,309,683) (809,950)
Other expense (income):
Litigation settlement 3,000,000 -
Interest expense 1,190,420 640,162
Interest income (157,894) (159,276)
Other (47,541) (61,266)
-----------------------------------------
Loss before income taxes (5,294,668) (1,229,570)
Income tax benefit 2,382,601 625,000
-----------------------------------------
Net loss $ (2,912,067) $ (604,570)
-----------------------------------------
-----------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Propane Continental, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
1998 1997
------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (2,912,067) $ (604,570)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts 28,370 57,395
Depreciation and amortization 1,164,613 805,448
Changes in operating assets and liabilities, net of effects from
acquisition of retail propane companies:
Accounts receivable 246,077 (224,263)
Inventories (7,634,342) (13,511,272)
Prepaid expenses and other assets (890,336) (274,229)
Deferred income taxes (2,465,262) -
Accounts payable 3,770,862 12,712,435
Accrued expenses 3,317,457 (1,146,997)
Customer deposits (765,296) 966,835
------------------------------------
Net cash used in operating activities (6,139,924) (1,219,218)
INVESTING ACTIVITIES
Proceeds from disposal of property, plant and equipment - 12,402
Goodwill and other intangibles additions (6,605) (10,665)
Acquisition of retail propane companies (23,211,238) (7,938,635)
Purchases of property, plant and equipment (763,068) (273,329)
------------------------------------
Net cash used in investing activities (23,980,911) (8,210,227)
FINANCING ACTIVITIES
Principal payments of long-term debt (419,038) (2,243,640)
Principal payments of capital lease obligations (61,245) (54,926)
Proceeds from issuance of long-term debt 30,141,500 12,399,000
------------------------------------
Net cash provided by financing activities 29,661,217 10,100,434
------------------------------------
Net increase (decrease) in cash (459,618) 670,989
Cash at beginning of period 1,230,378 1,972,906
------------------------------------
Cash at end of period $ 770,760 $ 2,643,895
------------------------------------
------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Propane Continental, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(UNAUDITED)
September 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes require by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the financial position of Propane Continental, Inc. and Subsidiaries (the
Company) at September 30, 1998, and the results of their operations and their
cash flows for the three-month periods ended September 30, 1998 and 1997 have
been included. Operating results for the three months ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ended June 30, 1999. For further information, refer to the consolidated
financial statements of the Company and footnotes thereto included herein.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are net of $4,287,953 of accumulated depreciation
at September 30, 1998.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are net of $5,635,346 of accumulated
amortization at September 30, 1998.
4. LONG-TERM DEBT
During July and September 1998, the Company amended its credit agreement with
Bank One, Indiana and LaSalle National Bank to increase borrowing capacity by
$12,000,000, providing the Company with the capacity to borrow up to $63,000,000
($14,000,000 under a long-term working capital line of credit and $49,000,000
under a long-term acquisition line of credit). At September 30, 1998, the
consolidated borrowing base of the Company's credit facility amounted to
$62,150,410 and the consolidated availability under the credit facility was
$5,334,410 including a reduction for outstanding letters of credit.
At September 30, 1998, the Company further amended its credit agreement to add
Bank of Oklahoma, NA as a party to the agreement.
<PAGE>
Propane Continental, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(UNAUDITED)
5. ACQUISITIONS
During the three months ended September 30, 1998, the Company acquired
substantially all of the assets of Walsh NGL Marketing, Vineyard Propane, Inc.,
Francis F. Bezio, Inc., De's LP Gas Service, Inc. and certain assets of Walsh
Propane, Inc. in separate transactions for aggregate purchase prices of
$21,635,000. The acquisitions, which will be accounted for as purchases, were
financed through the issuance of long-term debt. In addition, the Company
entered into obligations under noncompetition agreements requiring payments of
$900,000 at closing and annual payments ranging from $200,000 to $333,333 over
the next five years. As part of these acquisitions, the Company entered into
agreements providing for various annual payments based on achieving certain
performance measurements. The total of these payments, should they be earned,
will not exceed $450,000.
The following unaudited pro forma data summarize the results of operations for
the periods indicated as if these acquisitions had been completed on July 1,
1996, the beginning of the 1997 fiscal year. The pro forma data give effect to
actual operating results prior to the acquisition and adjustments to interest
expense, goodwill amortization and income taxes. These pro forma amounts do not
purport to be indicative of the results that would have actually been obtained
if the acquisitions had occurred on July 1, 1996 or that may be obtained in the
future. The pro forma data do not give effect to acquisitions completed
subsequent to September 30, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
1998 1997
------------------------------------
<S> <C> <C>
Sales $25,996,415 $42,938,994
Net loss (2,942,031) (688,806)
</TABLE>
6. SUBSEQUENT EVENTS
The Company signed a letter of intent whereby it agreed to sell all of its
outstanding capital stock to Cornerstone Propane Partners, L.P. (Cornerstone)
for approximately $115 million, comprised of an estimated $60 million in cash to
the Company's shareholders and an estimated $55 million resulting from the
refinancing of the Company's outstanding debt. This transaction is subject to
customary closing conditions and is expected to close in early December 1998.
<PAGE>
Propane Continental, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(UNAUDITED)
6. SUBSEQUENT EVENTS (CONTINUED)
During November 1998, the Company negotiated the settlement of a lawsuit filed
by a customer of one of the Company's wholesale customers. The settlement,
anticipated to be $3,000,000 in excess of the Company's insurance policy
coverage, has been recorded by the Company and is included in accrued
liabilities at September 30, 1998.
<PAGE>
(b) PRO FORMA FINANCIAL INFORMATION.
Report of Independent Public Accountants
To Cornerstone Propane Partners, L.P.:
We have examined the pro forma adjustments reflecting the transactions
described in the headnote and the notes to the pro forma financial
information and the application of those adjustments to the historical
amounts in the accompanying pro forma condensed balance sheet data of
Cornerstone Propane Partners, L.P. and Subsidiary as of June 30, 1998, and
the pro forma condensed statement of operations data for the year then ended.
The historical amounts in the condensed financial information were derived
from the historical financial statements of Cornerstone Propane Partners,
L.P. and Subsidiary, which were audited by us and included in the
Partnership's 1998 Form 10-K, and of Propane Continental, Inc., which were
audited by other accountants and appear elsewhere herein. Such pro forma
adjustments are based upon management's assumptions described in the headnote
and the notes to the pro forma financial information. Our examination was
made in accordance with standards established by the American Institute of
Certified Public Accountants, and accordingly, included such procedures as we
considered necessary in the circumstances.
In addition, we have reviewed the related pro forma adjustments and the
application of those adjustments to the historical amounts in the
accompanying pro forma condensed balance sheet data of Cornerstone Propane
Partners, L.P. and Subsidiary as of September 30, 1998, and the pro forma
condensed statement of operations data for the three months then ended. The
historical amounts in the condensed financial information were derived from
the historical unaudited financial statements of Cornerstone Propane
Partners, L.P. and Subsidiary, which were reviewed by us and included in the
Partnership's September 30, 1998 10-Q, and of Propane Continental, Inc.,
which were reviewed by other accountants and appear elsewhere herein. Such
pro forma adjustments are based on management's assumptions as described in
the headnote and the notes to the pro forma financial information. Our review
was conducted in accordance with standards established by the American
Institute of Certified Public Accountants.
The objective of this pro forma financial information is to show what the
significant effects on the historical financial information might have been
had the transaction occurred at an earlier date. However, the pro forma
condensed financial information is not necessarily indicative of the results
of operations or related effects on financial position that would have been
attained had the above-mentioned transactions actually occurred earlier.
In our opinion, management's assumptions provide a reasonable basis for
presenting the significant effects directly attributable to the above
mentioned transactions as described in the headnote and the notes to the pro
forma financial information, the related pro forma adjustments give
appropriate effect to those assumptions and the "Partnership Pro Forma"
column and the "Adjusted Partnership Pro Forma" column reflect the proper
application of those adjustments to the historical financial statement
amounts in the pro forma condensed balance sheet data as of June 30, 1998,
and the pro forma condensed statement of operations data for the year then
ended.
A review is substantially less in scope than an examination, the objective of
which is the expression
<PAGE>
of an opinion on management's assumptions, the pro forma adjustments and the
application of those adjustments to historical financial information.
Accordingly, we do not express such an opinion on the pro forma adjustments
or the application of such adjustments to the pro forma condensed balance
sheet data as of September 30, 1998 and the pro forma condensed statement of
operations data for the three months then ended. Based on our review,
however, nothing came to our attention that caused us to believe that
management's assumptions do not provide a reasonable basis for presenting the
significant effects directly attributable to the above mentioned transactions
as described in the headnote and the notes to the pro forma financial
information, that the related pro forma adjustments do not give appropriate
effect to those assumptions, or that the "Partnership Pro Forma" column and
the "Adjusted Partnership Pro Forma" column do not reflect the proper
application of those adjustments to the historical financial statement
amounts in the pro forma condensed balance sheet data as of September 30,
1998 and the pro forma condensed statement of operations data for the three
months then ended.
/s/ Arthur Andersen LLP
Minneapolis, Minnesota
November 20, 1998
<PAGE>
The following table presents selected historical, pro forma and adjusted pro
forma financial and other data of the Partnership and PCI as of June 30, 1998
and the year then ended. The Partnership adjustments give effect to the
Partnership acquisitions consummated in fiscal 1998 that do not include a
full year's activities and results of operations for businesses acquired by
the Partnership subsequent to June 30, 1998, as though all such acquisitions
had been consummated on July 1, 1997. The PCI consolidation adjustments give
effect to cost and income tax savings expected to result from the acquisition
of PCI by the Partnership. The PCI annualization adjustments give effect to
PCI acquisitions consummated in fiscal 1998 that do not include a full year's
activities and results of operations for businesses acquired by PCI
subsequent to June 30, 1998, as though all such acquisitions had been
consummated on July 1, 1997. The offering and financing adjustments give
effect to estimated proceeds from the issuance of Common Units in the
Partnership's $60.0 million Common Unit offering at an assumed offering price
of $20.75, estimated proceeds from the private placement of $60.0 million
aggregate principal amount of Senior Secured Notes and repayment and assumption
of PCI bank notes and other obligations.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998
----------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
CORNERSTONE PROPANE CONTINENTAL
------------------ ----------------------------------
PCI PCI OFFERING
PARTNER- CONSOLI- ANNUAL- AND ADJUSTED
PARTNER- SHIP DATION IZATION FINANCING PARTNER- PARTNER-
SHIP ADJUST- PCI ADJUST- ADJUST- ADJUST- SHIP SHIP
HISTORICAL MENTS HISTORICAL MENTS MENTS MENTS PRO FORMA PRO FORMA
--------- ------- --------- ---------- --------- --------- ------------- ----------
(Col. 1) (Col. 2) (Col. 3) (Col. 4) (Col. 5) (Col. 6) Cols. 1,3,4,6 Cols. 1-6
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS
DATA:
Revenues $768,129 $14,299 $142,379 $ - $28,073 $ - $910,508 $952,880
Cost of sales 623,924 6,363 122,102 - 19,348 - 746,026 771,737
--------- ------- --------- ---------- --------- --------- ---------- ----------
Gross profit 144,205 7,936 20,277 - 8,725 - 164,482 181,143
Operating,
general and
administrative
expenses 97,184 3,725 11,665 (1,587)(2) 3,407 - 107,262 114,394
Depreciation and
amortization 18,246 812 3,411 - 3,832 1,028(3) 22,685 27,329
--------- ------- --------- ---------- --------- --------- ---------- ----------
Operating income
(loss) 28,775 3,399 5,201 1,587 1,486 (1,028) 34,535 39,420
Interest expense 19,222 2,040 2,362 - 2,138 (82)(4) 21,502 25,680
--------- ------- --------- ---------- --------- --------- ---------- ----------
Income (loss)
before provision
for income taxes 9,553 1,359 2,839 1,587 (652) (946) 13,033 13,740
Provision (benefit)
for income taxes 127 13 1,271 (1,021)(5) (240) - 377 150
--------- ------- --------- ---------- --------- --------- ---------- ----------
Net income (loss) $9,426 $1,346 $1,568 $2,608 $(412) $ (946) 12,656 13,590
========= ======= ========= ========== ========= =========
General partners'
interest in net
income 253 272
---------- ----------
Limited partners'
interest in net
income $12,403 $13,318
========== ==========
Net income per
Unit $.54 $.58
========== ==========
Number of Units
outstanding 23,057 23,057
========== ==========
OTHER DATA:
Capital
expenditures:
Maintenance $2,750 $100 $750 $ - $150 $ - $3,500 $3,750
Acquisitions and
internal growth 27,346 11,420 14,059 - 24,633 - 41,405 77,458
EBITDA (1) 47,021 4,211 8,612 1,587 5,318 - 57,220 66,749
Retail propane
gallons sold 235,030 13,538 28,453 - 15,845 - 263,483 292,866
BALANCE SHEET DATA
(AT PERIOD END):
Current assets $53,221 $458 $15,991 $ - $3,800 $ - $69,212 $73,470
Total assets 572,511 11,420 66,569 - 28,433 45,788(6) 684,868 724,721
Current
liabilities
(excluding
current
maturities) 47,795 - 14,185 - - - 61,980 61,980
Long-term debt
(including
current
maturities) 240,938 10,396 31,008 - 28,433 241(7) 272,187 311,016
Total partners'
capital(8) 279,594 1,024 17,353 - - 45,547(9) 342,494 343,518
</TABLE>
<PAGE>
The following table presents selected historical, pro forma and adjusted pro
forma financial and other data of the Partnership and PCI as of September 30,
1998 and the quarter then ended. The Partnership adjustments give effect to
Partnership acquisitions consummated in the period between July 1, 1998 and
September 30, 1998 that do not include a full quarter's activities and
results of operations for businesses acquired by the Partnership subsequent
to September 30, 1998, as though all such acquisitions had been consummated
on July 1, 1998. The PCI consolidation adjustments give effect to cost and
income tax savings expected to result from the acquisition of PCI by the
Partnership. The PCI annualization adjustments give effect to PCI
acquisitions consummated during the quarter ended September 30, 1998 that do
not include a full quarter's activities and results of operations for
businesses acquired by PCI subsequent to September 30, 1998, as though all
such acquisitions had been consummated on July 1, 1998. The offering and
financing adjustments give effect to estimated proceeds from the issuance of
Common Units in the Partnership's $60.0 million Common Unit offering at an
assumed offering price of $20.75, estimated proceeds from the private placement
of $60.0 million aggregate principal amount of Senior Secured Notes and
repayment and assumption of PCI bank notes and other obligations.
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30, 1998
--------------------------------------------------------------------------------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
CORNERSTONE PROPANE CONTINENTAL
------------------- --------------------------------
PCI PCI OFFERING
PARTNER- CONSOLI- ANNUAL- AND ADJUSTED
PARTNER- SHIP DATION IZATION FINANCING PARTNER- PARTNER-
SHIP ADJUST- PCI ADJUST- ADJUST- ADJUST- SHIP SHIP
HISTORICAL MENTS HISTORICAL MENT MENTS MENTS PRO FORMA PRO FORMA
---------- -------- --------- -------- --------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Col. 1) (Col. 2) (Col. 3) (Col. 4) (Col. 5) (Col. 6) Cols. 1,3,4,6 Cols. 1-6
STATEMENT OF
OPERATIONS
DATA:
Revenues $169,991 $377 $25,575 $ - $ 541 $ - $195,566 $196,484
Cost of sales 143,292 179 22,043 - 236 - 165,335 165,750
--------- -------- --------- -------- --------- --------- ---------- ----------
Gross profit 26,699 198 3,532 - 305 - 30,231 30,734
Operating,
general and
administrative
expenses 25,682 77 3,472 (397)(10) 224 - 28,757 29,058
Depreciation and
amortization 5,122 86 1,165 - 87 257(3) 6,544 6,717
--------- -------- --------- -------- --------- --------- ---------- ----------
Operating
income (loss) (4,105) 35 (1,105) 397 (6) (257) (5,070) (5,041)
Litigation
settlement - - 3,000 (11) - - - 3,000 (11) 3,000 (11)
Interest expense 5,132 96 1,190 - 170 (21)(12) 6,301 6,567
--------- -------- --------- -------- --------- --------- ---------- ----------
Income (loss)
before
provision for
income taxes (9,237) (61) (5,295) 397 (176) (236) (14,371) (14,608)
Provision (benefit)
for income taxes 29 - (2,383) 2,474(5) (80) - 120 40
--------- -------- --------- -------- --------- --------- ---------- ----------
Net income (loss) $(9,266) $(61) $(2,912)(11)$(2,077) $ (96) $ (236) (14,491)(11) (14,648)(11)
========= ======== ========= ======== ========= =========
General partners'
interest in net
loss (290) (293)
---------- ----------
Limited partners'
interest in net
loss $(14,201) $(14,355)
========== ==========
Net income (loss)
per Unit $(.62) $(.62)
========== ==========
Number of Units
outstanding 23,057 23,057
========== ==========
OTHER DATA:
Capital
expenditures: $9,440 $1,445 $23,981 $ - $ 830 $ - $ 33,421 $35,696
EBITDA (1) 1,017 121 (2,940)(11) 397 81 - (1,526)(11) (1,324)(11)
Retail propane
gallons sold 39,378 349 5,743 - 761 - 45,121 46,231
BALANCE SHEET
DATA (AT
PERIOD END):
Current assets $54,896 $153 $24,420 $ - $ 100 $ - $ 79,316 $79,569
Total assets 580,911 2,657 98,331 - 830 49,259(6) 728,501 731,988
Current
liabilities
(excluding
current
maturities) 49,418 - 20,516 - - - 69,934 69,934
Long-term debt
(including
current
maturities) 263,143 2,029 61,817 - 830 800(7) 325,760 328,619
Total partners' 264,037 628 14,441 - - 48,459(9) 326,937 327,565
capital(8)
</TABLE>
<PAGE>
- --------------------
1 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.
2 Reflects $1.6 million in savings resulting from the consolidation of PCI,
primarily salary and benefits.
3 The offering and financing adjustment for depreciation and amortization
includes the additional amortization expense related to the PCI purchase
price in excess of net assets acquired (goodwill), amortized over a forty
year term.
4 Reflects a decrease of interest expense in the amount of $4.9 million on
$60.0 million of PCI debt obligations that are expected to be repaid upon
consummation of the PCI Acquisition, an increase of $4.4 million in interest
expense associated with the anticipated private placement of $60.0 million
aggregate principal amount of Senior Secured Notes, and an increase of $0.4
million to adjust for seller notes in place for less than a full year.
5 It is anticipated that income tax expenses for PCI will be reduced as a
result of the additional debt obligations and other effects associated with
the PCI Acquisition.
6 Reflects the capitalized cost of the PCI purchase in excess of net assets
acquired.
7 Reflects (a) estimated proceeds from the anticipated private placement of
$60.0 million aggregate principal amount of Senior Secured Notes, plus
offering fees and expenses and (b) the repayment and assumption of PCI bank
notes and other obligations.
8 With respect to PCI, includes total shareholders' equity plus the
mandatorily redeemable Series A and Series B preferred stock.
9 Reflects the adjustment necessary to eliminate the capital stock of PCI,
plus the additional Common Unit partner equity and general partner interest
in the amount of $63.5 million less anticipated underwriting discounts and
commissions of $3.6 million related to the Partnership's $60.0 million Common
Unit offering, plus $3.0 million in Common Units to be issued to the selling
shareholders and warrantholders of PCI.
10 Reflects $0.4 million in savings resulting from the consolidation of PCI,
primarily salary and benefits.
11 Includes a $3.0 million charge for settlement of a claim not covered by
insurance.
12 Reflects a decrease of interest expense in the amount of $1.2 million on
$60.0 million of PCI debt obligations that are expected to be repaid upon
consummation of the PCI Acquisition, an increase of $1.1 million in interest
expense associated with the anticipated private placement of $60.0 million
aggregate principal amount of Senior Secured Notes, and an increase of $0.1
million to adjust for seller notes in place for less than a full year.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: December 2, 1998
CORNERSTONE PROPANE PARTNERS, L.P.
By: CORNERSTONE PROPANE GP, INC.,
Managing General Partner
By: /s/ KEITH G. BAXTER
-------------------------------------
Keith G. Baxter
President and Chief Executive Officer
<PAGE>
INDEX TO EXHIBITS
2.1 Stock Purchase and Contribution Agreement dated October
27, 1998, by and among Cornerstone Propane Partners, L.P.,
Cornerstone Holding Corp., Propane Continental, Inc. and
selling shareholders and warrant holders.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
99.1 Press Release dated October 27, 1998
99.2 Press Release dated December 2, 1998
<PAGE>
STOCK PURCHASE AND CONTRIBUTION AGREEMENT
This Stock Purchase and Contribution Agreement dated October 27, 1998
is entered into by CORNERSTONE PROPANE PARTNERS, L.P., a Delaware limited
partnership ("CNO"), CORNERSTONE HOLDING CORP., a Delaware corporation ("CHC")
and an indirect wholly-owned subsidiary of CNO, PROPANE CONTINENTAL, INC., a
Delaware corporation (the "COMPANY"), and the holders (the "HOLDERS") of all
outstanding Stock and Warrants. The Company is engaged in the business of
distributing propane gas to retail and wholesale customers (the "BUSINESS").
Capitalized terms used herein have the meanings stated in Section 10.
CNO desires to acquire from the Holders, and the Holders desire to
transfer to CNO, by contribution pursuant to Section 721 of the Code, certain
shares of the outstanding Stock of the Company, and CHC desires to purchase from
the Holders, and the Holders desire to sell to CHC, the entire remaining equity
interest in the Company represented by the other outstanding shares of Stock and
all outstanding Warrants.
Therefore, in consideration of the mutual agreements contained herein,
the parties hereby agree as follows:
SECTION 1 SALE AND CONTRIBUTION OF STOCK
1.1 THE CLOSING. The closing (the "CLOSING") under this Agreement shall
take place at the offices of McCutchen, Doyle, Brown & Enersen, L.L.P., Palo
Alto, within 5 business days after the satisfaction (or waiver by the party
entitled to waive) of all conditions stated in Sections 6 and 7, or at such
other place or on such other date as the parties may agree in writing. At the
Closing:
(a) The Company may pay each Holder of Preferred Stock the amount of
accrued unpaid dividends on its Preferred Stock.
(b) Each Management Holder shall contribute to CNO the shares of Stock
and/or Warrants, if any, owned by him and designated by him in writing on or
before November 3, 1998 as Contribution Shares (collectively, the "CONTRIBUTION
SHARES"), and shall deliver to CNO one or more certificates for the Contribution
Shares duly endorsed or accompanied by duly executed stock powers, in the case
of shares of Preferred Stock or Common Stock, or the original Warrants
accompanied by appropriate instruments of transfer, in each case free and clear
of all Third-Party Rights and in good order for transfer.
(c) Each Holder shall sell to CHC:
(i) the shares of Preferred Stock and Common Stock listed
opposite its, his or her name in the Primary Shares column of SCHEDULE
1.1, other than any thereof which have been designated as Contribution
Shares pursuant to Section 1.1(b) and
<PAGE>
(ii) the Warrants listed opposite its, his or her name in the
Warrants column of SCHEDULE 1.1.
The shares of Common Stock transferred, and the shares of Common Stock subject
to the Warrants transferred, pursuant to this Section 1.1(c) are herein
collectively referred to as the "SALE SHARES." Each Holder of Sale Shares shall
deliver to CHC at the Closing one or more certificates for its, his or her Sale
Shares duly endorsed or accompanied by duly executed stock powers, in the case
of shares of Preferred Stock or Common Stock, or the original Warrants
accompanied by appropriate instruments of transfer, in each case free and clear
of all Third-Party Rights and in good order for transfer. The Sale Shares and
the Contribution Shares are herein collectively called the "SHARES." SCHEDULE
1.1 sets forth, for each class of Stock and Stock Rights held by each Holder the
associated number of fully-diluted shares (the "FULLY-DILUTED SHARES") of Common
Stock. The proportion of the Fully-Diluted Shares associated with the Sale
Shares is herein called the "SALE PROPORTION" and the proportion associated with
the Contribution Shares is herein called the "CONTRIBUTION PROPORTION." The Sale
Shares are further subdivided in SCHEDULE 1.1 into "CASH SALE SHARES" and "NOTE
SALE SHARES." The proportion of the Fully-Diluted Shares associated with the
Cash Sale Shares is herein called the "CASH SALE PROPORTION" and the proportion
of the Fully-Diluted Shares associated with the Note Sale Shares is herein
called the "NOTE SALE PROPORTION."
(d) The sale and contribution provided for in Sections 1.1(b) and (c)
shall also convey, without any further instrument or action being required
therefor, the Holder's rights to any distributions or any other rights of any
kind with respect to the Shares remaining after any dividend paid pursuant to
Section 1.1(a).
(e) Neither CNO nor CHC nor any Holder shall be obligated to purchase,
accept, sell or contribute any Shares unless all Shares are purchased and sold
or contributed and accepted pursuant to this Agreement.
(f) CHC and CNO shall transfer the Closing Acquisition Consideration to
the Holders in accordance with Section 1.3.
(g) Each Holder and the Company will enter into a mutual release of
claims in the form of EXHIBIT A.
(h) Each Holder, CNO and CHC will enter into an escrow agreement in the
form of EXHIBIT B (the "ESCROW AGREEMENT").
1.2 ACQUISITION CONSIDERATION. The "ACQUISITION CONSIDERATION" is the
sum of the following items, which shall be calculated on a running total basis:
(a) $115,000,000, MINUS
(b) the amount of all principal of and accrued unpaid interest under
the indebtedness of the Company listed in SCHEDULE 1.2(b) as of the Closing,
including without limitation any such indebtedness being refinanced in
connection with the Closing, (the "DEBT DEDUCTION"), MINUS
(c) the amount of $ 250,000, representing the agreed provision for
deferred income taxes (current and non-current) of the Company (the "DEFERRED
TAX DEDUCTION"), PLUS
<PAGE>
(d) the Working Capital of the Company as of immediately prior to the
Closing (which may be positive, increasing the foregoing sum, or negative,
decreasing the foregoing sum). "WORKING CAPITAL" is the amount equal to the
consolidated current assets of the Company, minus the consolidated current
liabilities of the Company (other than any amount included in the Debt Deduction
or the Deferred Tax Deduction, and any amount in respect of compensation expense
associated with Option acceleration), all as calculated in accordance with GAAP
and in accordance with the Company's historical accounting methods, consistently
applied. Any fees or expenses or compensation incurred by the Company in
connection with the transactions contemplated hereby shall be taken into account
in the calculation of Working Capital as of immediately prior to the Closing,
whether they are paid prior to the Closing (reducing cash and/or increasing bank
borrowings and thereby reducing Working Capital) or remain payable as of the
Closing (increasing current liabilities and thereby reducing Working Capital)
but without duplication. Any dividends or other distributions or payments with
respect to Stock or Stock Rights (including without limitation the amounts
payable under the option cash-out agreements to be entered into pursuant to
Section 6.13) shall be taken into account in the calculation of Working Capital
as of immediately prior to the Closing, whether they are paid prior to, at or
after the Closing. Working Capital shall reflect a reserve for the estimated
completion cost of any remediations, responses, etc. identified in SCHEDULE
4.16(b) as on-going. For purposes of calculating Working Capital, employee
bonuses and similar expenses shall be accrued based on actual results for the
year to date and budgeted results for the balance of the year. Working Capital
shall include a proration of period costs such as property taxes, rent,
un-metered utilities and the like, PLUS
(e) the aggregate amount paid by the Company after the Last Fiscal
Year-End and prior to the Closing for growth capital equipment described in
SCHEDULE 1.2(e) actually delivered to the Company after the Last Fiscal Year-End
and prior to the Closing, provided that the minimum credit under this Section
1.1(e) shall be $650,000, MINUS
(f) the aggregate proceeds of any sale, lease or other disposition of
Property, other than the Property described in SCHEDULE 1.2(f) and the sale of
inventory in the normal course of business, except to the extent such proceeds
have been continuously held by the Company from such sale, lease or other
disposition through the Closing in the form of long-term assets other than those
described in Section 1.2(e), PLUS
(g) the aggregate cash proceeds of any sale, lease or other disposition
of Property described in SCHEDULE 1.2(f) received within 90 days after Closing,
to the extent (and only to the extent) not otherwise included in the calculation
of Working Capital MINUS
(h) the aggregate amount payable on or after the Closing to the
Management Holders pursuant to Section 8.10, PLUS
(i) 6.90 times the Adjusted EBITDA of Asset Acquisitions as to which
letters of intent are signed by the Company after September 30, 1998 and on or
before the Closing and which are both (i) consummated on or before the Closing
or within 90 days thereafter and (ii) approved by CNO as to identity, size and
acquisition terms. It is understood that the purchase consideration for such
Asset Acquisitions will be taken into account in calculating the Acquisition
Consideration, through the associated reduction of Working Capital, increase in
the Debt Deduction or both. An "ASSET ACQUISITION" means an acquisition of a
business structured as a purchase of assets, a taxable forward
<PAGE>
merger or another structure that results in the Company becoming the direct
owner of the assets of the acquired business, with the tax and GAAP book values
of such assets being determined on the basis of the purchase price of the
acquired business. "ADJUSTED EBITDA" means net income in accordance with GAAP
for the four most recent available consecutive quarters plus (i) the sum of the
following expense items, to the extent deducted in computing such net income:
interest, income taxes, depreciation and amortization and (ii) operating
expenses actually incurred during such four quarters (other than any covered by
clause (i)) that will no longer be incurred (and will not be replaced by any
other operating expenses) following such acquisition.
1.3 TRANSFER OF ACQUISITION CONSIDERATION.
(a) Prior to the Closing, CHC, CNO and the Majority Holders will agree
on a reasonable estimate of the Acquisition Consideration based on the most
recent available financial statements of the Company (the "ESTIMATED ACQUISITION
CONSIDERATION").
(b) At the Closing:
(i) CNO will issue to the Holders of the Contribution Shares,
pro rata according to the Fully-Diluted Shares associated with the
Contribution Shares, a dollar value of newly issued publicly-tradable
common limited partnership interests of CNO ("COMMON UNITS") equal to
the Contribution Proportion of the Closing Acquisition Consideration.
The number of Common Units to be transferred shall be determined by
dividing the dollar value to be received in Common Units by the average
closing value of the Common Units for the ten trading days ending with
the second trading day prior to the Closing (the "AVERAGE UNIT PRICE").
(ii) CHC will pay to the Holders' Agents a cash amount equal
to the Cash Sale Proportion of the Closing Acquisition Consideration.
(iii) CHC will issue its promissory notes in the form attached
as EXHIBIT C to the Holders of the Note Sale Shares, pro rata according
to the Fully-Diluted Shares associated with the Note Sale Shares, in an
aggregate principal amount equal to the Note Sale Proportion of the
Closing Acquisition Consideration.
(iv) CHC will deposit $4,000,000 cash (the "ESCROW DEPOSIT")
into the escrow account designated in the Escrow Agreement (the
"ESCROW ACCOUNT").
The "CLOSING ACQUISITION CONSIDERATION" means the Estimated Acquisition
Consideration minus $6,000,000, which is the sum of the Escrow Account and a
$2,000,000 holdback (the "ADJUSTMENT HOLDBACK") pending the post-closing payment
under Section 1.3(d).
(c) Within 45 days after the Closing, the Majority Holders shall
furnish CNO their calculation of the Acquisition Consideration and documentation
in support thereof. The Acquisition Consideration so calculated shall become
final for all purposes of this Agreement unless, within 10 days of the delivery
of such calculation to CNO, the Holders receive written notice from CNO
specifying in reasonable detail one or more ways in which the Acquisition
Consideration so calculated is inaccurate. If CNO and the Majority Holders are
unable to agree on the Acquisition Consideration within 15 days after such
notice is delivered, CNO and the Majority Holders shall
<PAGE>
employ PricewaterhouseCoopers (except its San Jose office) to determine the
Acquisition Consideration and shall provide PricewaterhouseCoopers full access
to all records relevant to its determination. The determination by
PricewaterhouseCoopers of the Acquisition Consideration shall be final and
binding on CHC, CNO and the Holders. CHC and CNO on the one hand, and the
Holders on the other hand, shall each be responsible for 50% of the fees and
expenses of PricewaterhouseCoopers incurred in connection with such
determination.
(d) If the Acquisition Consideration as finally determined plus the
Adjustment Holdback exceeds the Estimated Acquisition Consideration, CHC will
pay the Holders' Agents, a cash amount equal to the amount of such excess. If
the Acquisition Consideration as finally determined plus the Adjustment Holdback
is less than the Estimated Acquisition Consideration, then CHC and CNO shall be
entitled to recover the shortfall by, at CNO's sole election, (i) CHC's and
CNO's recovery from the Holders, pro rata according to the Fully-Diluted Shares
associated with each, of a cash amount equal to the amount of such shortfall,
(ii) recovery from the Escrow Account of the amount of such shortfall or (iii) a
combination of (i) and (ii). In all cases, the payment will include interest
from the Closing to the date of payment at the ask yield quoted for U.S.
Treasury Bills with 30 days to maturity (or, if no such Bill is quoted, the
quoted Bill with days to maturity that is closest to 30 days, with averaging if
two quoted Bills are equidistant from 30 days) in the issue of The Wall Street
Journal dated the Closing date (or, if there is no issue dated the Closing date,
the most recent issue preceding the Closing date). Such payment shall be made,
and any such recovery shall be satisfied, within 10 business days after the
final determination of the Acquisition Consideration.
(e) For purposes of Sections 1.3(c) and (d), any amount payable under
Section 1.2(g) or (i) with respect to acquisitions consummated, or cash sales
proceeds received, prior to the furnishing of the Majority Holders' initial
calculation of the Acquisition Consideration will be included in such
calculation, and any Section 1.2(g) or (i) amounts possibly payable with respect
to acquisitions which are or may be consummated, or cash proceeds which are or
may be received, after such furnishing will be initially disregarded. CHC will
pay the Holders' Agents, within 120 days after the Closing, any additional
amount payable with respect to such initially disregarded acquisitions and cash
proceeds that are actually consummated or received after such furnishing and on
or before the 90th day after the Closing.
1.4 DISTRIBUTION FROM ESCROW.
(a) Promptly after the Last Escrow Claim Date, the Majority Holders and
CNO shall jointly disburse from the Escrow Account to the Holders' Agents the
portion thereof, if any, against which no CNO or CHC claim has been made.
(b) Promptly after resolution of any CNO or CHC claims, the Majority
Holders and CNO shall jointly disburse from the Escrow Account to the Holders'
Agents the Holders' share, if any, and to CHC and CNO their share, if any, of
the amount released to the Holders, CHC and CNO pursuant to such resolution.
SECTION 2 STOCK RIGHTS
The outstanding Warrants will be transferred to CNO and/or CHC pursuant
to Section 1. The outstanding Options will be cashed out at Closing pursuant to
option cash-out agreements to be
<PAGE>
entered into pursuant to Section 6.13. The conversion rights of the Series B
Preferred Stock will be included in the transfer of the Preferred Stock pursuant
to Section 1, rather than being exercised prior to or at the Closing.
SECTION 3 TRANSACTIONAL REPRESENTATIONS AND WARRANTIES OF THE HOLDERS AND THE
COMPANY
A. The Management Holders and the Company jointly and severally
represent to CHC and CNO as set forth in this part A of this Section 3. It is
understood that, following the Closing, (i) all obligations or liabilities of
the Company with respect to the representations and warranties set forth in this
part A of this Section 3 will be eliminated pursuant to Section 8.2(h), (ii) the
liability of the Management Holders with respect to the representations and
warranties set forth in this Section 3 will be subject to Section 8.2(c) and
(iii) the portion, if any, of the Escrow Account payable to the Holders' Agents
(for the benefit of both the Management Holders and other Holders) will be
subject to recovery in accordance with 8.2 in the event any breach of the
representations and warranties set forth in this part A of this Section 3.
3.1 CAPITAL STOCK.
(a) The authorized and outstanding capital stock of the Company is as
follows:
<TABLE>
<CAPTION>
SHARES SHARES
DESIGNATION OF CLASS AUTHORIZED OUTSTANDING
<S> <C> <C>
Series A Preferred Stock, par value $0.01 1,375 1,125.000
per share
Series B Preferred Stock, par value $0.01 250 250.000
per share
Common Stock, par value $0.01 per share 1,307,407 122,242.400
</TABLE>
There is no capital stock of the Company outstanding except as stated in this
Section 3.1(a). The outstanding Stock Rights of the Company are as follows:
<PAGE>
<TABLE>
<CAPTION>
CLASS OF SHARES NUMBER OF
SUBJECT TO SHARES SUBJECT
STOCK RIGHT TO STOCK RIGHT
DESIGNATION OF STOCK RIGHT
<S> <C> <C>
Options (the "OPTIONS") under 1996 Common 35,500
Non-Qualified Stock Option Plan of
Propane Continental, Inc.
Warrants issued in connection with loan by Common 15,000
Bank of America N.T.&S.A.
Warrants issued in connection with issuance Common 841,500
of Series A Preferred Stock
Conversion right included in terms of Common 278,663
Series B Preferred Stock
</TABLE>
The warrants listed above are herein referred to as the "WARRANTS." There are no
Stock Rights outstanding with respect to the Company except as set forth in this
Section 3.1(a). Except as disclosed in SCHEDULE 3.1, the Company is not a party
to any stockholders agreement, registration rights agreement or other Contract
with respect to capital stock or Stock Right issued or to be issued by it.
(b) All of the issued and outstanding capital stock of the Company has
been duly and validly authorized and issued and is fully paid and
non-assessable, and has not been issued in violation of any preemptive rights of
any stockholder. Except as disclosed in SCHEDULE 3.1, no Person has any right to
require the Company to redeem, purchase or otherwise reacquire any capital stock
issued by the Company or any Stock Rights with respect to any capital stock
issued by the Company. There are no preemptive rights in respect of any capital
stock of the Company except as set forth in SCHEDULE 3.1.
(c) Since June 30, 1998 (the "LAST FISCAL YEAR-END"), the Company has
not declared or paid any dividend payable other than in cash or made any
distribution other than in cash in respect of any of its capital stock or any
Stock Rights with respect thereto, or directly or indirectly redeemed, purchased
or otherwise acquired any of the capital stock issued by it or any Stock Rights
with respect thereto other than for cash.
3.2 ORGANIZATION; GOOD STANDING. The Company is a corporation duly
organized, validly existing and in good standing under the laws of Delaware and
has all requisite corporate power and authority to own, lease and operate its
Properties and to conduct the Business as currently conducted. The Company is
not required to be qualified to do business as a foreign corporation in any
jurisdiction, except where the failure to be so qualified would not have a
material adverse effect on the financial condition or results of operation of
the Company. Except as set forth in SCHEDULE 3.2, the Company has no subsidiary
and is not a partner in any general or limited partnership or a member in any
limited liability company.
<PAGE>
3.3. AUTHORITY. The Company has all requisite power and authority under
applicable corporate law to execute and deliver this Agreement and to perform
the transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by all requisite corporate action on the part of the Company and
no other approval on the part of the Company is necessary under applicable
corporate law for the execution, delivery and performance of this Agreement.
3.4 NO VIOLATION. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby (i) will not violate or
conflict with the certificate of incorporation or by-laws of the Company, (ii)
do not require any Third-Party Action with respect to the Company, (iii) do not
violate any Legal Requirement or Order applicable to the Company, (iv) do not
conflict with or constitute a default under, or, except as set forth in SCHEDULE
3.4, result in the acceleration or right of acceleration of any obligations
under any Contract to which the Company is a party, and (v) will not result in
the creation or imposition of any Lien, claim, charge, restriction, equity or
encumbrance of any kind upon or give any Person any interest or right in or with
respect to any of the Properties, assets, business, agreements or Contracts of
the Company.
B. Each Holder, with respect to itself, himself or herself only, hereby
represents and warrants to CHC and CNO that, on and as of the date hereof:
3.5. POWER AND AUTHORITY. Such Holder has all requisite power and
authority to execute and deliver this Agreement and to perform the transactions
contemplated hereby.
3.6 TITLE. Such Holder is the sole record and beneficial owner of the
Shares and/or Stock Rights listed opposite such Holder's name on SCHEDULE 1.1.
In the case of Stock Rights, such Holder has the full and unrestricted right,
power and authority to exercise such Stock Rights in their entirety and acquire
the Shares issuable upon complete exercise thereof. Such listed Shares are, and
the Shares issuable upon exercise of such Stock Rights upon issuance will be,
free and clear of all Third-Party Rights, and such Holder has, or, in the case
of Stock Rights, upon such issuance will have, the full and unrestricted right,
power and authority to sell such listed or issuable Shares, as the case may be.
Upon delivery of the certificate(s) for such listed or issuable Shares to CHC
and CNO and CHC's and CNO's delivery of the Closing Acquisition Consideration as
stated in Section 1.3, CHC or CNO, as the case may be, will acquire good and
marketable title to and complete ownership of such listed or issuable Shares,
free and clear of any Third-Party Right other than any created by CHC or CNO.
3.7 AUTHORITY; ENFORCEABILITY. Such Holder has full right and power and
all authorization and approval required by any Legal Requirement, and by any
Contract to which such Holder is a party, to sell or contribute (as the case may
be) and deliver the Stock and Stock Rights set forth opposite such Holder's name
in SCHEDULE 1.1 free and clear of any Third-Party Right. The execution, delivery
and performance of this Agreement by such Holder have been duly authorized by
all necessary action. This Agreement is legally binding on and enforceable
against such Holder in accordance with its terms. The execution, delivery and
performance of this Agreement by such Holder and the consummation by such Holder
of all of the transactions contemplated hereby (x) do not require any
Third-Party Action relating to such Holder, (y) do not violate any Legal
Requirement or Order applicable to such Holder, and (z) do not conflict with or
constitute a default (with or without the giving of notice or the passage of
time or both) under, or result in any acceleration or
<PAGE>
right of acceleration of any obligations under, any Contract to which such
Holder is a party or by which its, his or her Shares are bound, where, in each
case, the absence of such Third-Party Action or such violation, conflict,
default or acceleration would in any way adversely affect such Holder's
conveyance to CHC and CNO pursuant hereto of good and marketable title to such
Stock free and clear of any Third-Party Right.
3.8 SECURITIES MATTERS. Each Management Holder has received and
reviewed each of the documents referred to in Section 5.3, and has had the
opportunity to request and review such additional information concerning CNO,
its Common Units and the transactions contemplated by this Agreement as such
Holder desires. Prior to making any election to receive Common Units under
Section 1.1(b), each Management Holder will receive a further prospectus of CNO
under its Registration Statement No. 333-46343 on Form S-4 and have a further
opportunity to request and review such additional information concerning CNO,
its Common Units and the transactions contemplated by this Agreement as such
Holder desires. Each Management Holder is experienced in making investments
similar to the Common Units.
SECTION 4 BUSINESS REPRESENTATIONS AND WARRANTIES CONCERNING THE COMPANY
The Management Holders and the Company jointly and severally represent
to CHC and CNO as set forth in this Section 4. It is understood that, following
the Closing, (i) all obligations or liabilities of the Company with respect to
the representations and warranties set forth in this Section 4 will be
eliminated pursuant to Section 8.2(h), (ii) the liability of the Management
Holders with respect to the representations and warranties set forth in this
Section 4 will be subject to Section 8.2(b) and (iii) the portion, if any, of
the Escrow Account payable to the Holders' Agents (for the benefit of both the
Management Holders and other Holders) will be subject to recovery in accordance
with 8.2 in the event any breach of the representations and warranties set forth
in this Section 4.
4.1 SUBSIDIARIES, ETC. Except as set forth in SCHEDULE 4.1, the Company
does not own any beneficial interest (except as a creditor in the ordinary
course of business), direct or indirect, in any Person.
4.2 FINANCIAL STATEMENTS; ABSENCE OF LIABILITIES; ABSENCE OF
CHANGES; INDEBTEDNESS.
(a) FINANCIAL STATEMENTS. SCHEDULE 4.2(a) contains copies of the
audited consolidated balance sheets and consolidated statements of operations
and retained earnings and of cash flows for the Company at and for each of the
three years ended June 30, 1998, 1997 and 1996 (the "FINANCIAL STATEMENTS"). The
Financial Statements fairly present the consolidated financial condition of the
Company at the dates indicated and the consolidated results of operations and
cash flows of the Company for the periods indicated in accordance with GAAP
consistently applied throughout the periods indicated (except as stated
therein).
(b) ABSENCE OF CERTAIN LIABILITIES. The Company has no liability or
obligation of any nature, whether absolute, accrued, contingent or otherwise,
arising out of acts or omissions heretofore occurring, or circumstances
heretofore existing, except: (i) as set forth in this Agreement (including
without limitation disclosures in the Schedules hereto); (ii) as accrued in the
Financial Statements; (iii) for liabilities and obligations incurred since the
Last Fiscal Year-End in the ordinary
<PAGE>
course of business consistent in nature and amount with past practice; (iv)
liabilities and obligations of a kind not required to be accrued in a balance
sheet at the date hereof prepared in accordance with GAAP which individually (or
in the aggregate for related matters) will not subject the Company to Damages in
excess of $50,000; and (v) executory Contracts not required to be listed in
SCHEDULE 4.7 OR 4.11 entered into in the ordinary course of business.
(c) ABSENCE OF CERTAIN CHANGES. Since the Last Fiscal Year-End, except
as set forth in SCHEDULE 4.2(c):
(i) The Company has operated its business in the ordinary
course.
(ii) There has been no material adverse change in the assets,
business, liabilities, financial condition, results of operations or
customer base of the Company, other than any changes affecting the
propane gas distribution business generally.
(iii) There has not been any damage, destruction or
condemnation known to the Company with respect to Property having an
aggregate net book value on the Company's books in excess of $50,000,
net of any insurance recoveries.
(iv) There has not been any change in the accounting methods,
practices or principles of the Company.
(v) The Company has not sold, transferred or otherwise
disposed of (or agreed or committed to sell, transfer or otherwise
dispose of) any Property related to its Business (other than (i) the
sale of inventory or tanks in the ordinary course and (ii) any sale or
other disposition of excess Property referred to in Section 1.2(f)), or
canceled, compromised, released or assigned any debt or claim in its
favor relating to its business, where the aggregate amount of such
sales, transfers, dispositions, cancellations, compromises, releases or
assignments exceeds $50,000.
(vi) The Company has not instituted, settled or agreed to
settle any litigation, action or proceeding before any Governmental
Agency, except for the settlement of workers' compensation and similar
claims or other claims for personal injury, in any such case, not in
excess of $50,000.
(vii) The Company has not assumed, guaranteed, endorsed or
otherwise become responsible (or otherwise agreed to become
responsible) for the obligations of any other Person, except (x) for
the endorsement of negotiable instruments in the ordinary course of
business and (y) with respect to the obligations of its wholly-owned
direct or indirect subsidiaries.
(viii) The Company has not granted (or agreed or committed to
grant) any increase in compensation or fringe benefits other than
normal salary increases consistent with prior periods.
(ix) The Company has not agreed, undertaken or committed to
carry out any investigation, assessment, remediation or response action
regarding the presence or possible presence of any Hazardous Materials,
other than (x) Phase I investigations of properties to be
<PAGE>
acquired in proposed acquisitions of retail and/or wholesale propane
distribution companies and (y) as set forth in SCHEDULE 4.16(b).
(d) INDEBTEDNESS. The Company has no obligations for any of the
following, other than the obligations set forth in SCHEDULE 1.2(b):
(i) borrowed money,
(ii) debt instruments,
(iii) the deferred purchase price of Property or services
over an original period of 90 days or more,
(iv) acquisition consideration, noncompetition payments or
other payments to acquired businesses or their former owners or
(v) capital leases.
4.3 TAXES.
(a) The Company has properly completed and filed, within the time and
in the manner prescribed by law, all Tax returns and other documents required to
be filed in respect of all Taxes, and all such returns and other documents are
true, correct and complete. The Company has furnished to CNO copies of all
income Tax returns of the Company for the past two years. The Company has,
within the time and in the manner prescribed by law, paid all Taxes that are due
and payable. The Company has established reserves on its books that are adequate
for the payment of all Taxes not yet due and payable.
(b) The federal net operating loss carryforward of the Company as of
the Last Fiscal Year-End is not less than $1.5 million.
(c) (i) None of the returns specified in Section 4.3(a)
contained a disclosure statement under Section 6662 of the Code or any
similar provision of foreign law;
(ii) The Company has not received written notice from any
federal or foreign taxing authority asserting any deficiency against
any the Company or claim for additional Taxes in connection therewith,
other than any deficiency or claim which has been previously settled or
for which appropriate reserves are included in the Unaudited
Statements;
(iii) There is no pending action, audit, proceeding or
investigation with respect to the assessment or collection of federal
or foreign Taxes or a claim for refund made by the Company with respect
to federal or foreign Taxes previously paid, except as set forth in
SCHEDULE 4.3(c)(iii), and the Company has reserved the amount set forth
in such Schedule with respect to such the matter(s) set forth therein;
(iv) All amounts that are required to be collected or withheld
by the Company with respect to federal or foreign Taxes have been duly
collected or withheld, and all such
<PAGE>
amounts that are required to be remitted to any federal or foreign
taxing authority have been duly remitted;
(v) No audit has been conducted of any federal or foreign
income tax return filed by the Company since the Last Fiscal Year-End.
The time during which such returns remain open for examination has
expired in accordance with applicable statute and regulations, except
for those returns for which the normally applicable
statutory/regulatory period has not yet elapsed;
(vi) The Company has not requested nor been granted any
currently effective waiver or extension of any statute of limitations
with respect to the assessment or filing of any federal or foreign Tax
or return with respect thereto;
(vii) No consent has been filed under Section 341(f) of the
Code with respect to the Company;
(viii) The Company is not required to include in income any
adjustment pursuant to Section 481(a) of the Code (or similar
provisions of foreign laws or regulations) by reason of a change in
accounting method nor does the Company have any knowledge that the
Internal Revenue Service (or other federal or foreign taxing authority)
has proposed, or is considering, any such change in accounting method;
and
(ix) The Company is not a party to and is not bound by nor has
any continuing obligation under any tax sharing or similar agreement or
arrangement with any Person.
(x) SCHEDULE 4.3(c) lists all federal and state tax years
within the audit period that have not been closed.
4.4 TITLE TO PROPERTIES.
(a) SCHEDULE 4.4(a) is a true and complete summary of all real property
and interests in real property owned by the Company. Since the Last Fiscal
Year-End, no portion of such real property has been condemned, requisitioned or
otherwise taken by any Governmental Agency and to the Company's knowledge no
such condemnation, requisition or taking is pending, threatened or contemplated.
The Company has delivered or made available to CNO correct and complete copies
of all title insurance, if any, with respect to each parcel of such real estate.
(b) SCHEDULE 4.4(b) is a true and complete summary based on the books
and records of the Company of (i) all propane tanks owned by the Company, (ii)
all vehicles owned or used by the Company and (iii) all other items of personal
property owned by the Company with a net book value at the Last Fiscal Year-End
in excess of $50,000 per item.
(c) Except as set forth in SCHEDULE 4.4(c), the Company has good and
marketable title, in fee simple absolute (in the case of real property), and
good title (in the case of personal property), to all of its Properties, in each
case free and clear of all Third-Party Rights except such as neither (i) were
incurred to secure borrowed money, the deferred payment of the purchase price of
Property or services or debt instruments nor (ii) materially interfere with the
use of the Property for its intended purpose.
<PAGE>
(d) As of the Closing, the Company will own all material items of
non-inventory tangible personal property that were owned as of the Last Fiscal
Year-End and used in generating the revenue shown in the last audited statement
of operations of the Company for the fiscal year ending on the Last Fiscal
Year-End previously delivered to CNO, subject to any sales or dispositions
thereof since the Last Fiscal Year-End in the ordinary course of business.
4.5 INVENTORIES. Since the Last Fiscal Year-End, all sales of
inventory have been made in the ordinary course of business and no inventory has
been pledged as collateral, except pursuant to the Company's current bank credit
agreement(s) with Bank One, as agent, and the lenders listed in such
agreement(s).
4.6 ACCOUNTS RECEIVABLE. The accounts receivable of the Company (i)
are bona fide and arose from valid sales in the ordinary course of business in
conformity with all applicable Legal Requirements (other than any nonconformity
which will not have a material adverse effect on the Company's financial
condition or results of operations), (ii) are valid and binding obligations of
the debtors requiring no further performance by the Company, and (iii) are fully
collectible (subject to the allowance for doubtful accounts receivable shown in
the Financial Statements and not subject to any offsets or counterclaims (other
than in the ordinary course of business) and do not represent guaranteed sale,
sell-or-return transactions or any other similar understanding. No accounts
receivable have been pledged as collateral to any Person, except pursuant to the
Company's current bank credit agreement(s) with Bank One, as agent, and the
lenders listed in such agreement(s). The allowance for doubtful accounts
receivable shown in the Financial Statements was calculated in accordance with
GAAP consistently applied.
4.7 LEASES, ETC. SCHEDULE 4.7 lists all leases, rental agreements,
conditional sales contracts and other similar Contracts under which the Company
holds any real Property, or leases any real Property to others, with rental
payments exceeding $5,000 per year, or holds any personal Property, or leases
any personal Property to others, with rental payments exceeding $10,000 per year
(collectively, the "DISCLOSABLE LEASES"). All Disclosable Leases are, in all
material respects, valid, in good standing and, to the Company's knowledge,
enforceable by the Company in accordance with their terms. Neither the Company
nor, to the Company's knowledge, any other party to any Disclosable Lease is in
material breach thereof. The Company enjoys peaceable possession of all real
estate premises subject to Disclosable Leases to which it is a party and to all
personal Property (other than those on customer premises or in transit) subject
to Disclosable Leases to which it is a party.
4.8 FACILITIES, EQUIPMENT. The Company owns or leases all material
land, buildings and equipment used in the operation of its business. The Company
has not received any written notice, and no officer of the Company has received
any other notice, of any material violation of any Legal Requirement or Order by
the Company's facilities which has not been corrected. No facility of the
Company is in violation of any Legal Requirement or Order which violation would
have a material adverse effect on the operations, financial condition or results
of operation of the Company.
4.9 INSURANCE. SCHEDULE 4.9 lists and describes briefly all binders and
policies of liability, theft, life, fire and other forms of insurance and surety
bonds, insuring the Company or any of its Properties, assets and business as of
the date hereof. Except as noted in SCHEDULE 4.9, all listed policies and
binders insure on an occurrence, rather than claims-made, basis. All policies
and
<PAGE>
binders listed in SCHEDULE 4.9 are valid and in good standing and in full force
and effect and the premiums have been paid when due. The Company has not
received any notice of cancellation, general disclaimer of liability or
non-renewal of any such policy or binder.
4.10 EMPLOYMENT AND BENEFIT MATTERS.
(a) SCHEDULE 4.10(a) lists all of the following items which are
applicable to the Company: (i) employment Contracts with any employee, officer
or director; and (ii) Contracts or arrangements with any Person providing for
bonuses, profit sharing payments, deferred compensation, stock options, stock
purchase rights, retainer, consulting, incentive, severance pay or retirement
benefits, payments triggered by a change in control, life, medical or other
insurance or any other employee benefits or any other payments, "fringe
benefits" or perquisites which are not terminable at will without liability to
the Company or which are subject to ERISA. The contracts or arrangements
referred to in the foregoing clause (ii) are herein called "BENEFIT PLANS."
(b) Neither the Company, nor any of its ERISA Affiliates, has any union
contracts, collective bargaining, union or labor agreements or other Contract
with any group of employees, labor union or employee representative(s), nor has
the Company or any ERISA Affiliate ever participated in or contributed to any
single employer defined benefit plan or multi-employer plan within the meaning
of ERISA Section 3(37), nor is the Company currently engaged in any labor
negotiations, excepting minor grievances, nor is the Company the subject of any
union organization effort. The Company is in material compliance with applicable
Legal Requirements respecting employment and employment practices and terms and
conditions of employment, including without limitation health and safety and
wages and hours. No unfair labor practice complaint is pending against the
Company before the National Labor Relations Board or other Governmental Agency.
There is no labor dispute, strike, slowdown or work stoppage pending or
threatened against the Company.
(c) True and correct copies of each Benefit Plan listed in SCHEDULE
4.10(a) that is subject to ERISA (a "COMPANY ERISA PLAN") and related trust
agreements, insurance contracts, and summary descriptions have been delivered or
made available to CNO by the Company. The Company has also delivered or made
available to CNO a copy of the two most recently filed IRS Forms 5500, with
attached financial statement and accountant's opinion, if applicable, for each
Company ERISA Plan. The Company has also delivered or made available to CNO a
copy of, in the case of each Company ERISA Plan intended to qualify under
Section 401(a) of the Code, the most recent Internal Revenue Service letter as
to its qualification under Section 401(a) of the Code. Nothing has occurred
prior to or since the issuance of such letters to cause the loss of
qualification under the Code of any of such plans.
(d) Except as disclosed in SCHEDULE 4.10(d), none of the Company ERISA
Plans has participated in, engaged in or been a party to any prohibited
transaction as defined in ERISA or the Code, and, except for routine claims for
covered benefits, there are no material claims pending or overtly threatened,
involving any Benefit Plan listed in SCHEDULE 4.10(a). There have been no
material violations of any reporting or disclosure requirements with respect to
any Company ERISA Plan.
<PAGE>
(e) Neither the Company nor any of its ERISA Affiliates has any
liability for any excise tax imposed by Section 4971, 4972, 4974, 4975, 4976,
4977, 4978, 4978B, 4979, 4979A, 4980 or 4980B of the Code.
(f) Except as disclosed in SCHEDULE 4.10(f), the Company and its ERISA
Affiliates do not maintain any plans providing benefits within the meaning of
Section 3(1) of ERISA (other than group health plan continuation coverage under
Section 601 of ERISA and 4980B(f) of the Code) to former employees or retirees.
4.11 CONTRACTS. Except as shown on SCHEDULES 4.7 and 4.11, and except
for Contracts fully performed or terminable at will without liability to the
Company, the Company is not a party to any Contract (i) that affects the
Company, its business, Properties, assets, operations or financial condition and
which contemplates performance by the Company during a remaining period of more
than one year (90 days in the case of any fixed-price propane sale or purchase
Contract) or involves remaining commitments for sale or purchase in excess of
$100,000, or (ii) that is an unhedged or speculative commodity, currency or
similar contract, option or swap which, if closed on the date hereof, would
result in a loss. SCHEDULE 4.11 also includes a summary of all forward contracts
for any commodities. True and complete copies of each Contract disclosable on
SCHEDULE 4.11 (a "DISCLOSABLE CONTRACT") have been delivered to CNO. Each
Disclosable Contract is, in all material respects, valid, in good standing and,
to the Company's knowledge, enforceable by the Company in accordance with its
terms. Neither the Company nor, to the Company's knowledge, any other party to
any Disclosable Contract is in material breach thereof.
4.12 OFFICERS AND DIRECTORS, ETC. SCHEDULE 4.12 is a true and complete
list of:
(a) the names and addresses of each of the Company's officers and
directors;
(b) the name of each bank or other financial institution in which the
Company has an account, deposit or safe deposit box and the names of all persons
authorized to draw thereon or to have access thereto; and
(c) the name of each bank or other financial institution in which the
Company has a line of credit or other loan facility.
4.13 CORPORATE DOCUMENTS, HOLDERS OF STOCK RIGHTS. The Company has
furnished or made available to CNO or its representatives true, correct and
complete copies of (i) the articles or certificate of incorporation and bylaws
of the Company, (ii) the minute books of the Company containing all records
required to be set forth of all proceedings, consents, actions and meetings of
the stockholders and board of directors of the Company; (iii) all material
Permits and Orders with respect to the Company and (iv) the stock transfer books
of the Company setting forth all transfers of any capital stock. SCHEDULE 1.1
sets forth the holders of all outstanding Stock Rights with respect to any
capital stock issued or to be issued by the Company.
4.14 LEGAL PROCEEDINGS. There is no action, suit, proceeding or
investigation pending in any court or before any arbitrator or before or by any
Governmental Agency against the Company or any of its Properties or business
except as set forth in SCHEDULE 4.14. There is no such action, suit, proceeding
or investigation overtly threatened which, if decided adversely, would adversely
affect
<PAGE>
the transactions contemplated by this Agreement or, except as set forth
in SCHEDULE 4.14, would entail Damages in excess of $25,000.
4.15 COMPLIANCE WITH INSTRUMENTS, ORDERS AND LEGAL REQUIREMENTS. The
Company is not in material violation of, or in default in any material respect
with respect to, any term or provision of its articles or certificate of
incorporation or bylaws, or any Order or any Legal Requirement applicable to the
Company.
4.16 ENVIRONMENTAL MATTERS.
(a) COMPANY SITES AND THIRD-PARTY SITES. Each location of which the
Company is, or the Company or any predecessor was, an Owner/Operator is herein
called a "COMPANY SITE." Each location, other than a Company Site, at or to
which any Hazardous Material or solid waste originating on a Company Site has
been released, stored, treated or disposed of is herein called a "THIRD-PARTY
SITE."
(b) ENVIRONMENTAL CONDITIONS, ETC. There is no Environmental Condition
in, on or under, and no release has occurred or is occurring from, to or
through, any Company Site or, to the knowledge of the Company, any Third-Party
Site. No Company Site or, to the knowledge of the Company, any Third-Party Site
is on the National Priorities List (also known as a CERCLA or Superfund site) or
any similar list or is proposed to be listed. Except as set forth in SCHEDULE
4.16(b), no remediation, response, investigation, assessment, reclamation,
closure or similar activity with respect to any Environmental Condition or
Environmental Requirement, whether voluntary, pursuant to any Contract, Permit
or Order or otherwise, has been or is being conducted by the Company or (to the
knowledge of the Company) any governmental agency or any other Person with
respect to any Company Site or, to the knowledge of the Company, any Third-Party
Site. SCHEDULE 4.16(b) separately identifies those matters which are on-going.
Except as listed on SCHEDULE 4.16(b)-1, there are no underground storage tanks,
sumps, septic tanks, asbestos-containing materials, lead-based paint or PCBs in,
on or under any Company Site or, to the knowledge of the Company, any
Third-Party Site. No Company Site has been used for the manufacture of gas from
coal. SCHEDULE 4.16(b)-2 lists all reports, investigations, sample reports and
similar information in the possession or control of the Company with respect to
any Environmental Subject Matter or Environmental Condition that relates to a
Company Site or a Third-Party Site. True and complete copies of all listed items
have been delivered to CNO.
(c) ENVIRONMENTAL CLAIMS, CONTINGENCIES. To the knowledge of the
Company, no condition has existed or exists, no event has occurred or is
occurring, no activity has been conducted or is being conducted by the Company
or any other Person and no action has been omitted or is being omitted by the
Company or any other Person which could reasonably be expected to result in (i)
any claim against, liability of or investigation or other proceeding with
respect to the Company or any Company Site or Third-Party Site by any Person
relating in whole or in part to any Environmental Subject Matter or (ii) a
Release in, on, under, from, to or through a Company Site or Third-Party Site.
(d) ENVIRONMENTAL COMPLIANCE. The Company and each Company Site, and,
to the knowledge of the Company, each Person performing transportation,
treatment, disposal or any other services relating to Hazardous Materials for or
at the request of the Company, directly or indirectly,
<PAGE>
is in material compliance with all applicable Environmental Requirements, and
any past noncompliance by any such Person with any applicable Environmental
Requirement has been fully satisfied and discharged. The Company has received no
notice from any Person asserting any noncompliance by the Company or any
contractor or agent of the Company with any Environmental Requirement or seeking
information concerning any Environmental Subject Matter. To the knowledge of the
Company, no such notice is presently contemplated by any governmental agency and
no investigation that might lead to any such notice is pending by any
governmental agency.
(e) ENVIRONMENTAL INDEMNITIES, COMMITMENTS. Neither the Company nor any
Property of the Company is bound by or subject to any Contract, Permit or Order
requiring it to indemnify or hold any Person harmless against or otherwise bear,
in whole or in part, any costs, damages, expenses, claims, liabilities or other
amounts with respect to any Environmental Requirement applicable to, or any
Environmental Condition in, on or under, or any Release from, to or through, any
location, or any investigation, assessment, response, remediation or similar
activity with respect to any of the foregoing. To the knowledge of the Company,
the Company Sites do not require, nor are they likely to require, any capital
expenditure, operating expense or other amount or any change in or limit on its
existing facilities or methods of operation, in each case with a view to
preventing, reducing the likelihood of, remediating or producing or avoiding any
other result or possible result with respect to any Environmental Requirement
applicable to, or any Environmental Condition in, on or under, or any Release
from, to or through, any location.
(f) ENVIRONMENTAL TRANSPORT, ETC. Except for the transportation of
natural gas liquids ("NGLS") in the ordinary course of business and except as
listed on SCHEDULE 4.16(f), neither the Company nor any predecessor has
transported or transports, or arranged or arranges for the disposal of,
Hazardous Materials.
4.17 PERMITS. The Company holds all Permits material to the conduct its
business as and where now conducted. To the Company's knowledge, there is not
pending nor, threatened any proceedings to terminate, revoke, limit or impair
any material Permit.
4.18 INTELLECTUAL PROPERTY. The Company has all rights to and ownership
of brand names, copyrights, patents, service marks, trademarks, applications for
registration of any of the foregoing and other items of intellectual property,
trade secrets, secret processes or know-how (collectively, "INTELLECTUAL
PROPERTY") which are material to the conduct of its business substantially as
presently conducted. No action, suit, proceeding or investigation is pending or,
to the Company's knowledge, threatened pertaining to any Intellectual Property
used by the Company. To the Company's knowledge, no Intellectual Property used
by the Company interferes with, infringes upon, conflicts with or otherwise
violates the rights of others or is being interfered with or infringed upon by
others, or is subject to any outstanding Order. The Company is not subject to
any royalty or license payment obligation with respect to any Intellectual
Property used by the Company other than any such obligation included in a
Disclosable Contract.
4.19 CAPITAL EXPENDITURES. SCHEDULE 4.19 sets forth, by nature and
amount, all capital expenditures of the Company for which commitments are
outstanding, or for which payments or current liabilities have been made or
incurred since the Last Fiscal Year-End.
<PAGE>
SECTION 5 REPRESENTATIONS AND WARRANTIES OF CHC AND CNO
CHC and CNO hereby jointly and severally represent and warrant to the
Holders that, on and as of the date hereof:
5.1 ORGANIZATION, STANDING, ETC. OF CHC AND CNO. CHC is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. CHC has full power and authority under applicable corporate
law to own, lease and operate its Properties and to carry on the business in
which it is engaged. CNO is a limited partnership duly organized, validly
existing and in good standing under the laws of the State of Delaware. CNO has
full power and authority under applicable partnership law to own, lease and
operate its Properties and to carry on the business in which it is engaged.
5.2 AUTHORITY; ENFORCEABITLITY. CHC has all necessary power and
authority under applicable corporate law to execute, deliver and perform its
obligations under this Agreement. The execution, delivery and performance of
this Agreement by CHC have been duly authorized by all necessary action under
applicable corporate law. CNO has all necessary power and authority under
applicable partnership law to execute, deliver and perform its obligations under
this Agreement. The execution, delivery and performance of this Agreement by CNO
have been duly authorized by all necessary action under applicable partnership
law. This Agreement is legally binding on and enforceable against CHC and CNO in
accordance with its terms. The execution, delivery and performance of this
Agreement by CHC and CNO and the consummation by CHC and CNO of all of the
transactions contemplated hereby, (x) do not require any Third-Party Action
relating to CHC or CNO except those listed on SCHEDULE 5.2, (y) subject to
receipt of the approvals listed on SCHEDULE 5.2, do not violate any Legal
Requirement or Order applicable to CHC or CNO and (z) do not conflict with or
constitute a default (with or without the giving of notice or the passage of
time or both) under, or result in any acceleration or right of acceleration of
any obligations under, any Contract to which CHC or CNO is a party, where, in
each case, the absence of such Third-Party Action or such violation, conflict,
default or acceleration would in any way adversely affect the transactions
contemplated hereby.
5.3 SEC REPORTS. The registration statement of CNO on Form S-3, as
filed with the SEC on August 7, 1998, and all reports, schedules, forms,
statements and other documents subsequently filed by CNO with the SEC, as of
their respective dates, (a) complied with the applicable requirements of the
Securities Act of 1933 or the Securities Exchange Act of 1934, as the case may
be, and the rules and regulations of the SEC promulgated thereunder, and (b) did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
5.4 SECURITIES LAW COMPLIANCE. CHC and CNO are acquiring the Shares for
their own account. Neither CHC nor CNO will resell the Shares except in
compliance with the Securities Act of 1933.
5.5 TAX STATUS. CNO is not an "investment company" within the meaning
of Section 721(b) of the Code, or a "publicly traded partnership" treated as a
corporation under
<PAGE>
Section 7704 of the Code. CNO has not and will not elect to be treated as a
corporation under the Code.
SECTION 6 CONDITIONS TO OBLIGATIONS OF CHC AND CNO AT CLOSING
The obligations of CHC and CNO hereunder to be performed at the Closing
are subject to the satisfaction at or prior to the Closing of the following
conditions, except for any condition CHC and CNO may waive in writing in
accordance with Section 9.3.
6.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
contained in Sections 3 and 4 shall have been true in all material respects on
the date of this Agreement and shall be true in all material respects at and as
of immediately prior to the Closing with the same effect as though made at and
as of immediately prior to the Closing. Changes in the information disclosable
in SCHEDULES 4.4(a), 4.4(b) and 4.12 (as to Section 4.12(b) which reflect only
changes occurring in the ordinary course of business, none of which adversely
affect the Company's operations, financial condition or results of operations,
will not constitute a failure of the condition stated in this Section 6.1.
6.2 CLOSING CERTIFICATE. Each Holder shall have delivered to CHC and
CNO his, her or its certificate dated the date of the Closing that the
conditions specified in Section 6.1 are satisfied. Such certificate shall be
deemed a representation and warranty of the Holder under Sections 3 and 4 for
all purposes of this Agreement.
6.3 PERFORMANCE. The Holders and the Company shall have performed and
complied in all material respects with all covenants required herein to be
performed or complied with by them on or before the Closing.
6.4 THIRD-PARTY ACTIONS. All Third-Party Action required in order to
consummate the Closing on the terms hereof, other than any the absence of which
in the aggregate would not have a material effect on the transactions
contemplated hereby or on the Company or its business, shall have been taken,
and the Hart-Scott waiting period shall have expired.
6.5 OPINION OF COUNSEL. CHC and CNO shall have received from Katten
Muchin & Zavis, counsel to the Holders, an opinion dated the date of the
Closing, reasonably satisfactory in form and substance to CHC and CNO.
6.6 TRANSACTIONAL LITIGATION. No action, suit or proceeding before any
Governmental Agency shall have been commenced, and no investigation by any
Governmental Agency shall have been commenced or overtly threatened, against the
Company, CHC, CNO, or any of their respective principals, officers, directors or
shareholders seeking to restrain, prevent or change the transactions
contemplated hereby or questioning the validity or legality of any of such
transactions or seeking damages in connection with any of such transactions.
6.7 INTERIM EVENTS. None of the events listed in Section 8.9 shall have
occurred.
6.8 MANAGEMENT CHANGES. No change in the chief executive officer, chief
operating officer or chief financial officer of the Company, no material adverse
change in the employees reporting directly to such officers, taking such
employees as a group, and no change in the wholesale
<PAGE>
managers and sales personnel set forth in SCHEDULE 6.8 shall have occurred from
the date hereof (it being understood that the death or disability of any of such
individuals will not affect CHC's and CNO's obligations with respect to the
Closing).
6.9 REFINANCIING. The holders of all Indebtedness of the Company which
CHC or CNO, in its business discretion, desires to refinance in connection with
the consummation of the transactions contemplated hereby shall have accepted
CNO's tender of the pay-off amount and delivered such releases as are reasonably
satisfactory to CNO and CNO's lenders. Any prepayment penalties associated with
early repayment of debt, other than Seller notes arising in the course of the
Company's acquisition efforts and assumable capital lease obligations, shall be
the responsibility of the Company and shall, for purposes of this Agreement, be
considered a fee incurred by the Company in connection with the transactions
contemplated hereby.
6.10 ACCERLERATION/PAYMENT FEE WAIVERS. All acceleration and prepayment
fee rights listed in SCHEDULE 3.4 shall have been duly waived in full.
6.11 RISK MANAGEMENT. The risk management arrangements set forth in
SCHEDULE 6.11 shall have been consummated.
6.12 EMPLOYMENT AGREEMENT. CNO or its parent, as selected by CNO, shall
have entered into an employment agreement with Thomas E. Knauff.
6.13 OPTION CASH-OUT AND NON-COMPETETION AGREEMENTS. The holders of all
Options shall have entered into agreements with the Company, reasonably
satisfactory in form and substance to CNO, for the surrender and termination of
all such Options for a designated lump-sum cash amount paid or payable not later
than January 2, 1999 and for the non-competition covenants and payments set
forth in Section 8.10.
6.14 HOLDERS' AGENTS. The Majority Holders shall have appointed the
Holders' Agents pursuant to Section 8.11 and the Holders' Agents shall have
agreed in writing to act as Holders' Agents in accordance with this Agreement.
6.15 CORPORATE AND OTHER PROCEEDINGS. All corporate and other
proceedings on the part of the Company and the Holders in connection with the
transactions to be consummated at the Closing, and all documents and instruments
incident to such transactions, shall be reasonably satisfactory in substance and
form to CNO.
SECTION 7 CONDITIONS TO HOLDERS' OBLIGATIONS AT CLOSING
The obligations of the Holders hereunder to be performed at the Closing
are subject to the satisfaction at or prior to the Closing of the following
conditions, except for any condition the Majority Holders may waive in
accordance with Section 9.3.
7.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of CHC and CNO contained in Section 5 shall have been true in all material
respects on the date of this Agreement and shall be true in all material
respects at and as of immediately prior to the Closing with the same effect as
though made at and as of immediately prior to the Closing.
<PAGE>
7.2 CLOSING CERTIFICATE. CHC and CNO shall have delivered to the
Company their joint certificate dated the date of the Closing that the
conditions specified in Section 7.1 are satisfied. Such certificate shall be
deemed a representation and warranty of CHC and CNO under Sections 5 for all
purposes of this Agreement.
7.3 PERFORMANCE. CHC and CNO shall have performed and complied in all
material respects with all covenants required herein to be performed or complied
with by it on or before the Closing.
7.4 THIRD-PARTY ACTION. All Third-Party Action required in order to
consummate the Closing on the terms hereof, other than any the absence of which
in the aggregate would not have a material effect on the transactions
contemplated hereby, shall have been taken, and the Hart-Scott waiting period
shall have expired.
7.5 OPINION OF COUNSEL. The Holders and the Company shall have received
at the Closing from McCutchen, Doyle, Brown & Enersen, L.L.P., counsel to CHC
and CNO, an opinion dated the date of the Closing, in form and substance
substantially as set forth in EXHIBIT D.
7.6 TRANSACTIONAL LITIGATION. No action, suit or proceeding before any
Governmental Agency shall have been commenced, and no investigation by any
Governmental Agency shall have been commenced or overtly threatened, against the
Company, CHC, CNO or any of their respective principals, officers, directors or
stockholders seeking to restrain, prevent or change the transactions
contemplated hereby or questioning the validity or legality of any of such
transactions or seeking damages in connection with any of such transactions.
7.7 PARTNERSHIP AND OTHER PROCEEDINGS. All corporate and other
proceedings on the part of CHC, and all partnership and other proceedings on the
part of CNO, in connection with the transactions to be consummated at the
Closing, and all documents and instruments incident to such transactions, shall
be reasonably satisfactory in substance and form to the Company.
SECTION 8 ADDITIONAL AGREEMENTS OF THE HOLDERS, CHC AND CNO
8.1 NON-DISCLOSURE. Each party agrees not to divulge or communicate, or
use for any purpose other than evaluating this transaction or exercising rights
as a party hereto, (i) any confidential business information or trade secrets of
any other party and (ii) any information or materials concerning this Agreement,
the negotiation between the parties hereto and the transactions contemplated
hereby, except to the extent that such information (v) was known by the
recipient when received and is so documented by the recipient, (w) is or
hereafter becomes lawfully obtainable from other sources, (x) is required to be
disclosed to a Governmental Agency having jurisdiction over the party or its
Affiliates, (y) is otherwise required by law to be disclosed or (z) is disclosed
following a waiver in writing from the other parties. CHC's and CNO's
obligations under this Section 8.1, insofar as they relate to the Company, shall
expire when and if the Closing occurs. Promptly after the date hereof, CNO and
the Company will issue a mutually agreeable press release concerning the
transactions contemplated hereby.
<PAGE>
8.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES, INDEMNIFICATION.
(a) SURVIVAL. All representations and warranties made under Section 3,
4 or 5 shall survive the Closing and any investigation with respect thereto by
an authorized party, subject to the express provisions of this Section 8.2.
(b) REPRESENTATIONS AND WARRANTIES IN SECTION 4. In the event of any
misrepresentation or breach of warranty in Section 4 (it being agreed that for
purposes of determining the existence of any such misrepresentation, all such
representations, warranties or covenants of the Company that are qualified as to
materiality shall be deemed to be not so qualified), CHC and CNO shall be
entitled to recover the related Recoverable Amount from the Escrow Account,
provided that (i) CNO gives notice of such misrepresentation or breach in
reasonable detail, specifying the amount of the claim, on or before 5:00 p.m.
Pacific Time on the Last Escrow Claim Date, it being understood that no recovery
may be had against the Escrow Account with respect to any claim which is not the
subject of such a notice given by such time, and (ii) CHC and CNO shall be
entitled to any such recovery only if and to the extent the aggregate
Recoverable Amount for all claims made under this Section 8.2(b) exceeds a
deductible of $250,000.
"RECOVERABLE AMOUNT" means Damages, if any, proximately resulting to
CHC and/or CNO on account of any misrepresentation, breach of warranty or breach
of covenant.
The right to recover the Recoverable Amount from the Escrow Account, as
stated in this Section 8.2, shall be the sole remedy of CHC, CNO and any other
Person on account of the subject matter of any representation or warranty made
in Section 4. Notwithstanding the foregoing, any liability or obligation
resulting from the knowing personal fraud of an individual shall not be subject
to the foregoing limitation or any of the other limitations stated in this
Section 8.2(b).
(c) TRANSACTIONAL REPRESENTATIONS AND WARRANTIES RELATING TO THE
COMPANY. CHC's and CNO's recovery for misrepresentations and breaches of
warranty in part A of Section 3 shall be governed by the provisions of Section
8.2(b), PROVIDED, HOWEVER, that CHC and CNO shall be entitled to recover from
the Escrow Account any claims made in accordance with the provisions of this
Section 8.2(c) without regard to any $250,000 or other deductible or threshold
dollar value.
(d) PRE-CLOSING TAXES. Subject to the deductible for claims against the
Escrow Account set forth in Section 8.2(b), CHC and CNO shall be entitled to
recover from the Escrow Account any Damages to either CHC or CNO resulting from
the failure of the Company to pay Taxes payable, or accruing under GAAP, on or
before the Closing, if the aggregate amount of all such Taxes exceeds $50,000,
in which event CHC and CNO may so recover the entire aggregate amount of all
such Taxes.
(e) ENVIRONMENTAL CLAIMS. Subject to the deductible for claims against
the Escrow Account set forth in Section 8.2(b), CHC and CNO shall be entitled to
recover from the Escrow Account any Damages resulting from (i) any claim
against, liability of or investigation or other proceeding with respect to the
Company or any Company Site or Third-Party Site by any Person relating in whole
or in part to any Environmental Subject Matter or (ii) a Release or
Environmental Condition in, on, under, from, to or through a Company Site or
Third-Party Site occurring or existing
<PAGE>
on or before the Closing if the aggregate amount of claims made under this
Section 8.2(e) exceeds $100,000, in which event CHC and CNO may so recover the
entire aggregate amount of such claims.
(f) INDIVIDUAL TRANSACTIONAL REPRESENTATIONS AND WARRANTIES OF THE
HOLDERS. Each Holder individually, for himself, herself or itself only, hereby
agrees to indemnify, defend and hold CHC and CNO harmless against Damages
resulting from breaches by him, her or it of the representations and warranties
in part B of Section 3. At the option of CNO and without limitation on other
remedies available to CHC and CNO, amounts recoverable against individual
Holders pursuant to this Section 8.2(f) may be asserted against the individual
Holder's share of any distributions from the Escrow Account.
(g) ACTION BY MAJORITY HOLDERS OR HOLDERS' AGENTS. In the event any
action taken or omitted by the Majority Holders the Holders' Agents is the
subject of a claim by one or more other Holders, the Holders whose action or
omission is the subject of the claim, jointly and severally, hereby agree to
indemnify, defend and hold CHC and CNO harmless against Damages resulting from
such claim.
(h) REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. If the
Closing occurs, all representations, warranties and covenants of the Company
under this Agreement shall expire simultaneously with the Closing, and the
Company will not thereafter be subject to any claims by any party on account of
such representations, warranties or covenants, whether directly, by
contribution, indemnity, reimbursement or otherwise.
8.3 DISPUTED AND THIRD-PARTY CLAIMS.
(a) If CHC and/or CNO shall give notice of a claim in accordance with
Section 8.2, and CNO and the Majority Holders do not resolve such matter by
written agreement within 45 days after such notice is given, the dispute will be
settled exclusively by arbitration before a single arbitrator appointed by
JAMS/Endispute. If the total amount (not including interest) of the dispute and
any counterclaim exceeds $250,000, the arbitration will be conducted in
accordance with the Comprehensive Arbitration Rules and Procedures of
JAMS/Endispute; any other arbitration under this Section will be conducted in
accordance with the Streamlined Arbitration Rules and Procedures of
JAMS/Endispute. CHC and CNO on the one hand, and the Holders on the other hand,
shall each bear their own expenses (including without limitation the fees and
expenses of legal counsel and accountants) in connection with such arbitration.
The arbitral award shall allocate the arbitrator's fees and expenses according
to the relative success of CHC and CNO on the one hand, and the Holders on the
other hand, in the arbitration, as determined by the arbitrator.
(b) To the extent a claim by CHC and/or CNO under Section 8.2 relates
to a claim asserted against a party to this Agreement (other than to enforce
this Agreement) (a "THIRD-PARTY CLAIM") and CNO gives notice of the assertion of
the Third-Party Claim, then the Majority Holders will have the option,
exercisable by written notice to CNO within 20 days after receipt of CHC's
and/or CNO's notice, to control the defense of such Third-Party Claim. All
expenses (including, without limitation, attorneys' fees) incurred by such
Holders in connection with their assumption of control of the defense of a
Third-Party Claim shall be paid by such Holders for the account of all Holders.
If the Holders have not thus assumed the defense of a Third-Party Claim, then
CNO shall have the right to control the defense of the Third-Party Claim, and
the expenses reasonably incurred by CNO
<PAGE>
in connection with such defense shall be recoverable as part of the underlying
claim on the same basis and subject to the same limitations as stated in Section
8.2 and this Section.
(c) The party controlling the defense may use counsel selected by it,
but if the other party reasonably objects (within 20 days after designation of
counsel initially selected) on account of such counsel's representation or
potential representation of the designating party in matters in which CHC's and
CNO's interests on the one hand and the Holders' interests on the other hand are
adverse or potentially adverse, the designating party shall select other counsel
free of any such adverse representation. The party controlling the defense shall
have the right, in its discretion exercised in good faith and upon the advice of
counsel, to settle such matter, either before or after the initiation of
litigation, at such time and upon such terms as they deem fair and reasonable,
PROVIDED that (i) at least 10 days' prior notice shall be given to the other
party of the intention to settle the Third-Party Claim, (ii) no settlement by
the controlling party shall include any equitable relief binding on the
noncontrolling party, and (iii) the controlling party shall not agree to any
settlement of such Third-Party Claim without the prior written consent of the
other party, which consent shall not be unreasonably withheld. The
noncontrolling party will have the right to be represented by counsel, solely at
its own expense. The controlling party shall keep the other party advised of the
status of the Third-Party Claim and the defense thereof and shall consider in
good faith recommendations made by the other party with respect thereto.
(d) Unless otherwise agreed by the parties, arbitration under Section
8.3(a) of a claim by CHC and/or CNO with respect to a Third-Party Claim shall be
deferred until the resolution of the Third-Party Claim.
8.4 TERMINATION OF THIS AGREEMENT; LIQUIDATED DAMAGES. If any condition
of the Closing stated in Section 6 is not satisfied on or before the Last
Closing Date, then, provided neither CHC nor CNO is not in material default
hereunder, CNO may at any time thereafter terminate any further obligations of
CHC or CNO under this Agreement by giving written notice thereof to the Holders.
If any condition of the Closing stated in Section 7 is not satisfied on or
before such date, then, provided the Holders are not in material default
hereunder, the Majority Holders may at any time thereafter terminate any further
obligations under this Agreement by giving written notice thereof to CNO. Any
such termination will not, however, terminate or otherwise affect the
obligations of the parties under Sections 8.1, 9.1 or 9.2. If the Closing does
not occur due to a material breach hereof by CHC or CNO, then, in addition to
the right of termination stated in this Section 8.4, CHC and CNO, jointly and
severally, will pay, as liquidated damages, $250,000. The parties agree that
actual damages resulting from any such breach would be difficult to ascertain
and that the foregoing provision is a reasonable estimate of the actual damages
resulting from any such breach.
8.5 REASONABLE BUSINESS EFFORTS. Each party will use its, his or her
reasonable business efforts to cause the conditions over which it has control to
be satisfied on or before the Last Closing Date. No party will take any action
which will foreseeably result in the nonsatisfaction of any condition stated in
Section 5 or 6 on or before the Closing.
8.6 ACCESS. Between the date of this Agreement and the Closing or any
earlier termination of this Agreement in accordance with its terms, the Holders
will cause the Company to (i) give CNO and its authorized representatives access
to its books, records, Properties, officers,
<PAGE>
attorneys and accountants and permit CNO to make inspections and copies of such
books and records, and (ii) furnish CNO with such financial information and
operating data and other information with respect to its business and
Properties, and to discuss with CNO and its authorized representative its
affairs, all as CNO may from time to time reasonably request for the purposes of
this Agreement, during normal office hours. Any on-site visit shall be subject
to reasonable advance notice and to being accompanied by an officer or
designated employee of the Company.
8.7 NO SOLICITATION OR NEGATIATION. The Holders agree that, between the
date of this Agreement and the Closing or any earlier termination of this
Agreement in accordance with its terms, they will not (and will not permit the
Company or any person or entity which it controls to) seek or entertain, or
negotiate any terms of, a Strategic Transaction with any party other than CNO
and its affiliates, or give any information concerning its business to any such
party, or enter into any agreement inconsistent with this letter of intent or
the proposed transaction with CHC and CNO. A "STRATEGIC TRANSACTION" means (i)
any form of acquisition, direct or indirect, whether by purchase, merger, stock
sale (primary or secondary) or any other structure, of any significant (15% or
greater in the aggregate) portion of the Company's consolidated business or a
significant (15% or greater in the aggregate) equity interest therein, (ii) any
arrangement whereby effective operating control of the Company's consolidated
business or a portion thereof is granted to another party or (iii) any
transaction which is similar in form, substance or purpose to any the foregoing.
During such period, the Company will promptly notify CNO of the content and
identity of any proposal or communication it receives from any such person
concerning any Strategic Transaction. This Section 8.7 will not, however, limit
continued discussions (but not more), as a fall-back transaction in case the
Closing does not occur, of the management buy-out transaction already under
discussion.
8.8 INTERIM FINANCIAL INFORMATION. The Company will supply to CNO
unaudited consolidated monthly financial statements within 30 business days of
the end of each month ending between the date of this Agreement and the Closing
or any earlier termination of this Agreement in accordance with its terms,
prepared on a basis consistent with the unaudited consolidated financial
statements for the preceding months, together with additional monthly reports
substantially in the form heretofore delivered to the Company's major
stockholder. For purposes of these statements, employee bonuses and similar
expenses may be accrued based on actual results for the year to date and
budgeted results for the balance of the year.
8.9 INTERIM CONDUCT OF BUSINESS. From the date of this Agreement until
the Closing or any earlier termination of this Agreement in accordance with its
terms, unless approved by CNO in writing, the Company will operate its business
consistently with past practice and in the ordinary course of business, and will
not:
(a) merge or consolidate with or agree to merge or consolidate
with, or sell or agree to sell all or substantially all of its Property
to, or purchase or agree to purchase all or substantially all of the
Property of, or otherwise acquire, any other Person or a division
thereof, except (i) as provided in this Agreement and (ii) for the
acquisition in the ordinary course of business consistent with prior
practice (including, without limitation, the ordinary course and
consistency with prior practice as to economic and other terms) of
retail propane businesses, provided that to the extent the aggregate
consideration paid for such acquisitions since September 30, 1998
exceeds or would upon consummation exceed $3,000,000, the identity,
<PAGE>
size and acquisition terms shall be subject to the review and consent
(not unreasonably to be withheld) of CNO;
(b) amend its Articles of Incorporation or Bylaws;
(c) make any changes (within the meaning of APB 20) in its
accounting methods, principles or practices which would affect the
calculation of the Acquisition Consideration by $50,000 or more;
(d) sell, consume or otherwise dispose of any Property, except
in the ordinary course of business consistent with past practices and
except for the sale, lease or other disposition of the real estate
referred to in Section 1.2(f) on terms reasonably satisfactory to CNO;
(e) authorize for issuance, issue, sell or deliver any
additional shares of its capital stock of any class or any securities
or obligations convertible into shares of its capital stock or issue or
grant any option, warrant or other right to purchase any shares of its
capital stock of any class, other than, in each case, (i) the issuance
of Stock to one or more Holders pursuant to the exercise of Stock
Rights listed in Section 3.1(a) and (ii) the issuance of Stock or Stock
Rights aggregating, for all such issuances pursuant to this Section
8.9(e), not more than 10% of the number of the Fully-Diluted Shares to
Persons who simultaneously become Holders by executing a counterpart
hereof;
(f) declare any dividend on, make any distribution with
respect to, its capital stock payable other than in cash, or redeem or
repurchase, any of its capital stock for consideration other than cash;
(g) modify, amend or terminate any Benefit Plans, except as
required under Legal Requirements or any Disclosable Contract;
(h) authorize or enter into a Contract to do any of the
foregoing which would be binding at or after the consummation of the
Closing.
8.10 NON-COMPETITION AGREEMENT. Each Holder who is listed in SCHEDULE
8.10 (the "MANAGEMENT HOLDERS") agrees, and each Option holder shall agree
pursuant to Section 6.13, in consideration of the consummation of the Closing
and the additional amounts stated in SCHEDULE 8.10 that from the Closing to the
anniversary of the Closing designated in SCHEDULE 8.10 (the "RESTRICTED PERIOD")
he or she will not (i) engage in any Competitive Activity in the geographic area
designated in SCHEDULE 8.10, (ii) induce, solicit, aid or encourage any employee
of CNO or any subsidiary of CNO to leave such employ or (iii) employ in
connection with any Competitive Activity any person within one year after such
person voluntarily leaves the employ of CNO or any subsidiary of CNO. For
purposes of this Agreement, "COMPETITIVE ACTIVITY" means directly or indirectly
performing any services for, or owning an interest in, any corporation,
partnership, proprietorship, business or other entity (other an interest in CNO)
which engages in the business of selling, distributing or transporting natural
gas liquids (i.e., methane, ethane, propane, butane and pentane) to retail,
wholesale, reseller or end user customers, storing liquid propane for
distribution to any of such customers, leasing (as lessor or lessee) liquid
propane tanks, leasing (as lessor or lessee) equipment related to the sale,
distribution or transportation of liquid propane, or providing financial support
for any of the aforementioned activities. This Section 8.10 will not, however,
preclude the
<PAGE>
Management Holders from holding, as a passive investment, not more than 5% of
any class of securities of any corporation, partnership, business or other
entity, which class is publicly traded on a U.S. exchange or the Nasdaq National
Market. Each Management Holder acknowledges and agrees that this Section 8.10
will materially restrict his ability to earn a livelihood in any Competitive
Activity during the Restricted Period, but that the scope and duration of this
Section 8.10 are reasonable in order to protect the goodwill of the Company
following its acquisition pursuant to this Agreement and in light of the
consideration being received by such Management Holder pursuant to this
Agreement. Effective upon the Closing, the provisions of this Section 8.10 will
supersede any other noncompetition agreements or understandings between the
Management Holders and the Company.
8.11 HOLDERS' AGENTS. Prior to the Closing, the Majority Holders will
designate one or more individuals as the Holders' Agents. Each Holder agrees
that any payment or transfer to the Holders' Agents provided for herein will be
a complete satisfaction and discharge of CHC's and CNO's obligations under or in
connection with this Agreement with respect to the amount paid or Property
transferred, notwithstanding any action taken or omitted by the Holders' Agents,
and that following such payment or transfer, the Holder will be entitled to look
only to the Holders' Agents for the realization of its, his or her interest in
such payment or transfer. The Holders' Agents will be responsible for the
withholding of any applicable taxes or other amounts required to be withheld in
connection with respect to any Holder's interest in any such payment or
transfer. The individual(s) initially designated as the Holders' Agents can be
replaced at any time upon the written vote of the Majority Holders, provided
that notice of such replacement and of the name(s) of such replacement(s) is
promptly given to CHC and CNO pursuant to Section 9.4. The individual(s) so
initially designated, or any replacement so noticed from time to time are herein
referred to as the "HOLDERS' AGENTS."
SECTION 9 MISCELLANEOUS
9.1 NO BROKERS, FINDERS, ETC.
(a) COMPANY. Neither the Company nor the Holders have engaged any
agent, broker, finder or investment or commercial banker in connection with the
negotiation, execution or performance of this Agreement or the transactions
contemplated hereby. The Holders (severally and not jointly) shall, indemnify,
defend and hold CHC and CNO harmless against and in respect of any claim for
brokerage fees or other commissions incurred or owing due to any such engagement
or alleged engagement , including without limitation, any fees and expenses of
counsel incurred by CNO in connection with enforcing this Section 9.1(a).
(b) CHC AND CNO. Neither CHC nor CNO has engaged any agent, broker,
finder or investment or commercial banker in connection with the negotiation,
execution or performance of this Agreement or the transactions contemplated
hereby. CHC and CNO shall jointly and severally indemnify, defend and hold the
Holders harmless against and in respect of any claim for brokerage fees or other
commissions incurred or owing due to any such engagement or alleged engagement,
including without limitation, any fees and expenses of counsel incurred by the
Holders in connection with enforcing this Section 9.1(b).
9.2 EXPENSES. Whether or not the transactions contemplated by this
Agreement are consummated, the Holders on the one hand and CHC and CNO on the
other hand shall each pay
<PAGE>
their own fees and expenses incident to the negotiation, preparation, execution,
delivery and performance hereof, including, without limitation, the fees and
expenses of their respective counsel, accountants and other experts. If the
Closing does not occur, the Holders and/or the Company shall bear the Company's
portion of such fees and expenses. If the Closing does occur, the Holders shall
bear the Company's portion of such fees and expenses through the reflection of
such amounts in Working Capital pursuant to Section 1.2(d).
9.3 COMPLETE AGREEMENT; WAIVER AND MODIFICATION, ETC. This Agreement
constitutes the entire agreement between the parties pertaining to the subject
matter hereof and supersedes all prior and contemporaneous agreements and
understandings of the parties. There are no representations or warranties by any
party except those expressly stated or provided for herein, any implied
warranties being hereby expressly disclaimed. There are no covenants or
conditions except those expressly stated herein. No amendment, supplement or
termination of or to this Agreement, and no waiver of any of the provisions
hereof, shall be binding on a party unless made in a writing signed by such
party. This Agreement may be modified by mutual agreement of the parties as
authorized by their respective boards of directors, notwithstanding approval
hereof and thereof by the stockholders of the parties, subject to the
limitations stated in Section 251(d) of the Delaware General Corporation Law.
Nothing in this Agreement shall be construed to give any Person other than the
express parties hereto any rights or remedies.
9.4 NOTICES. All notices, requests, demands, claims and other
communications hereunder shall be in writing and shall be given by delivery (by
mail or otherwise) or transmitted to the address or facsimile number listed
below, and will be effective (in all cases) upon receipt. Without limiting the
generality of the foregoing, a mail, express, messenger or other receipt signed
by any Person at such address shall conclusively evidence delivery to and
receipt at such address, and any printout showing successful facsimile
transmission of the correct total pages to the correct facsimile number shall
conclusively evidence transmission to and receipt at such facsimile number.
(a) If to CHC or CNO:
432 Westridge Drive
Watsonville, California 95076
attention: Keith G. Baxter, Chief Executive Officer
facsimile: (831) 724-4038
with a copy to:
McCutchen, Doyle, Brown & Enersen, L.L.P.
3150 Porter Drive
Palo Alto, California 94304
attention: Bartley C. Deamer
facsimile: (650) 849-4800
<PAGE>
(b) If to the Holders:
CID Equity Partners
One American Square, Suite 2850
Indianapolis, IN 82074
attention: John C. Aplin
facsimile: (317) 269-2355, and
Allstate Private Equity
3075 Sanders Road, Suite G5-D
Northbrook, IL 60062-7127
attention: Mark A. Bounds
facsimile: (847) 402-0880, and
c/o Kent A. Misemer
1201 Douglas Avenue
Kansas City, KS 66103
facsimile: (913) 321-0430
with a copy in each case to:
Katten Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661-3693
attention: Matthew S. Brown
facsimile: (312) 902-1061
Any party may change its address or facsimile number for purposes of this
Section 9.4 by giving the other party written notice of the new address or
facsimile number in accordance with this Section 9.4, PROVIDED it is a normal
street address, or normal operating facsimile number, in the continental United
States.
9.5 LAW GOVERNING. This Agreement shall be interpreted in accordance
with and governed by the laws of the State of Delaware, without regard to
principles of conflicts of laws.
9.6 HEADINGS; REFERENCES; "HEREOF." ETC. The Section headings in this
Agreement are provided for convenience only, and shall not be considered in the
interpretation hereof. References herein to Sections or Exhibits refer, unless
otherwise specified, to the designated Section of or Exhibit to this Agreement.
References herein to Schedules refer to the designated Schedule of the
Disclosure Memorandum. Terms such as "herein," "hereto" and "hereof" refer to
this Agreement as a whole.
9.7 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of and be binding upon the heirs, executors, administrators and successors of
the parties hereto, but no right or liability or obligation arising hereunder
may be assigned by any party hereto.
9.8 COUNTERPARTS, SEPERATE SIGNATURE PAGES. This Agreement may be
executed in any number of counterparts, or using separate signature pages. Each
such executed counterpart and each
<PAGE>
counterpart to which such signature pages are attached shall be deemed to be an
original instrument, but all such counterparts together shall constitute one and
the same instrument.
9.9 SEVERABILITY. In the event any of the provisions of this Agreement
shall be declared by a court or arbitrator to be void or unenforceable, then
such provision shall be severed from this Agreement without affecting the
validity and enforceability of any of the other provisions hereof, and the
parties shall negotiate in good faith to replace such unenforceable or void
provisions with a similar clause to achieve, to the extent permitted under law,
the purpose and intent of the provisions declared void and unenforceable.
9.10 ATTORNEYS' FEES. In the event any suit, counterclaim, arbitration
or other proceeding is brought to enforce or interpret the provisions of this
Agreement, the prevailing side (CHC and CNO on the one hand and the Holders on
the other hand) shall be entitled to recover from the nonprevailing side, in
addition to all other remedies available at equity and law, the cost, including
but not limited to reasonable attorneys' fees, incurred by the prevailing side
therein, including any appeal or other subsequent proceeding. A side shall be
considered to prevail if it secures a more favorable result than the other side
(who shall be considered the nonprevailing party), as determined by the
arbitrator or judge.
9.11 WHOLE COMMON UNITS. Whenever any provision of this Agreement would
otherwise call for the issue or transfer of a non-integral number of Common
Units, the fractional Common Unit shall instead be issued or transferred in the
form of cash equal to such fraction times the Average Unit Price.
SECTION 10 GLOSSARY
ACQUISITION CONSIDERATION - Section 1.2.
ADJUSTED EBITDA - Section 1.2(i).
AFFILIATE - a Person who controls, is controlled by or is under common
control with another Person, or who directly or indirectly owns 10% or more of
the voting power in such other Person, or of whose voting power such other
Person (or a Person holding 10% or more of the voting power in such other
Person) owns 10% or more. For purposes of this definition, "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
AGREEMENT - this Stock Purchase and Contribution Agreement, including
the Exhibits and Schedules hereto.
ASSET ACQUISITION - Section 1.2(i).
AVERAGE UNIT PRICE - Section 1.3(b)(i).
BENEFIT PLANS - Section 4.10(a).
BUSINESS - introductory paragraphs.
<PAGE>
CASH SALE PROPORTION - Section 1.1(c).
CHC - introductory paragraphs.
CLOSING - Section 1.1.
CLOSING ACQUISITION CONSIDERATION - Section 1.3(b).
CNO - introductory paragraphs.
CODE - the Internal Revenue Code of 1986, as amended.
COMMON STOCK - the Common Stock, par value $0.01, of the Company.
COMMON UNITS - Section 1.3(b)(i).
COMPANY - introductory paragraphs.
COMPANY ERISA PLAN - Section 4.10(c).
COMPANY SITE - Section 4.16(a).
CONTRACT - any agreement, written or oral, or any promissory note or
other instrument of a contractual nature, which is intended to be enforceable
against the Person in question or against any Property of such Person. Any
Person which is, or any of whose Property is, subject to enforcement of a
Contract shall, for purposes of this Agreement, be deemed a party to it.
CONTRIBUTION PROPORTION - Section 1.1(c).
CONTRIBUTION SHARES - Section 1.1(b).
DAMAGES - any loss, loss in value, cost, liability or expense actually
incurred, including without limitation, costs and expenses of litigation and
reasonable attorneys' fees, but excluding in each case incidental, consequential
or punitive damages. (The foregoing exclusion of punitive damages does not
apply, however, to any punitive damages awarded in a Third-Party Claim.) All
Damages shall be net of (i) any applicable insurance recovery (net of any
retrospective premium adjustment), (ii) any related net realized tax benefit
(taking any applicable recovery into account), (iii) any related refund or
recovery realized by CHC or CNO, (iv) any related reserve included in the
Unaudited Statements or in the calculation of Working Capital, and (v) any other
reserve (whether or not related to the Damages in question) included in the
Unaudited Statements or in the calculation of Working Capital, to the extent
that, at the time of determination of Damages under this Agreement, such other
reserve has proved to be in excess of the Company's actual losses or liabilities
reserved against (PROVIDED, that such other reserves shall thereafter be reduced
by the excess thus utilized for netting).
DEFERRED TAX DEDUCTION - Section 1.2(c).
DEBT DEDUCTION - Section 1.2(b).
<PAGE>
DISCLOSABLE CONTRACT - Section 4.11.
DISCLOSABLE LEASES - Section 4.7.
ENVIRONMENTAL CONDITION - the presence of any Hazardous Material
(whether or not properly stored or contained) or of solid wastes or of any
wetland or endangered or threatened species or habitat. However, (i) the
presence of propane in approved storage tanks, or (ii) the presence of Hazardous
Materials or solid waste at a Third-Party Site which is licensed to accept such
Hazardous Materials or solid waste for disposal does not, without more,
constitute an "Environmental Condition," and the presence of solid waste at the
location of its generation pending its disposal to an appropriately licensed
Third-Party site in the ordinary course of business does not, without more,
constitute an "Environmental Condition."
ENVIRONMENTAL LAWS - any Legal Requirement relating to pollution,
waste, disposal, industrial hygiene, land use or the protection of human health,
safety or welfare, plant life or animal life, natural resources, the environment
or property, including without limitation those pertaining to reporting,
licensing, permitting, controlling, investigating or remediating emissions,
discharges, releases or threatened releases of Hazardous Materials, chemical
substances, pollutants, contaminants or toxic substances, materials or wastes,
whether solid, liquid or gaseous in nature, into the air, surface water,
groundwater or land, or relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous Material,
chemical substances, pollutants, contaminants or toxic substances, materials or
wastes, whether solid, liquid or gaseous in nature.
ENVIRONMENTAL REQUIREMENT - any federal, state, local or foreign
statute, treaty, ordinance, rule, regulation, policy, Permit or Order relating
to any Environmental Subject Matter.
ENVIRONMENTAL SUBJECT MATTER - (a) any Hazardous Material, (b) any
Release or threatened Release from, to or through any location, (c) the
generation, treatment, storage, presence, disposal, use, handling,
manufacturing, transporting or shipment by any Person of any Hazardous Material
or solid waste, (d) the health or safety of employees in the workplace
environment, (e) natural resources, (f) wetlands, (g) an endangered or
threatened species or habitat, (h) the environment or (i) compliance with any
Environmental Laws.
ERISA - the Employee Retirement Income Security Act of 1974, as
amended, and any successor statute.
ERISA AFFILIATE - any company which, as of the relevant measuring date
under ERISA, is or was a member of a controlled group of corporations or trades
or businesses (as defined in Sections 414(b), (c), (m) or (o) of the Code) of
which the Company is or was a member.
ESCROW ACCOUNT- Section 1.3(b)(iv).
ESCROW AGREEMENT - Section 1.1(h).
ESCROW DEPOSIT - Section 1.3(b)(iv).
ESTIMATED ACQUISITION CONSIDERATION - Section 1.3(a).
<PAGE>
FINANCIAL STATEMENTS - Section 4.2(a).
FULLY-DILUTED SHARES - Section 1.1(c).
GAAP - generally accepted accounting principles applied on a consistent
basis, as set forth in authoritative pronouncements which are applicable to the
circumstances as of the date in question. The requirement that such principles
be applied on a "consistent basis" means that accounting principles observed in
the period in question are comparable in all material respects to those applied
in the preceding periods, except as change is permitted or required under or
pursuant to such accounting principles.
GOVERNMENTAL AGENCY - any agency, department, board, commission,
district or other public organ, whether federal, state, local or foreign.
HART-SCOTT - the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the regulations issued thereunder.
HAZARDOUS MATERIAL - all or any of the following: (i) any substance the
presence of which requires investigation or remediation under any applicable law
or regulation; (ii) substances that are defined or listed in, or otherwise
classified pursuant to, any applicable laws or regulations as "hazardous
substances," "hazardous materials," "hazardous wastes," "toxic substances" or
any other formulation intended to define, list or classify substances by reason
of deleterious properties such as ignitability, corrosivity, reactivity,
carcinogenicity, reproductive toxicity or "EP toxicity;" (iii) any petroleum
products, explosives or any radioactive materials; and (iv) asbestos in any form
or electrical equipment which contains any oil or dielectric fluid containing
levels of polychlorinated biphenyls in excess of fifty parts per million.
HOLDERS - introductory paragraphs.
HOLDERS' AGENTS - Section 8.11.
INTELLECTUAL PROPERTY - Section 4.18.
LAST ESCROW CLAIM DATE - the same numerical day in the month as the
numerical day on which the Closing occurs, in the 12th month following the month
in which the Closing occurs. If there is no corresponding numerical day in such
12th month, the Last Escrow Claim Date will be the first day of the 13th month
following the month in which the Closing occurs.
LAST CLOSING DATE - December 31, 1998.
LAST FISCAL YEAR-END - Section 3.1(c).
LEGAL REQUIREMENT - a statute, regulation, ordinance or similar legal
requirement, whether federal, state, local or foreign, or any requirement of a
permit or other authorization issued by a Governmental Agency.
LIEN - any lien, security interest, mortgage, deed of trust, pledge,
hypothecation, capitalized lease or interest or right for security purposes.
<PAGE>
MAJORITY HOLDERS - Holders holding Shares whose associated
Fully-Diluted Shares constitute a majority of the Fully-Diluted Shares.
MANAGEMENT HOLDER - Section 8.10.
NGLS - Section 4.16(f).
NOTE SALE PROPORTION - Section 1.1(c).
OPTIONS - Section 3.1(a).
ORDER - any judgment, injunction, order or similar mandatory direction
of, or stipulation or agreement filed with, a Governmental Agency, court,
judicial body, arbitrator or arbitral body.
OWNER/OPERATOR - an owner or operator, as those terms are defined in
the federal Comprehensive Environmental Response, Compensation and Liability
Act, as amended.
PERMIT - a permit, license, franchise, certificate of authority or
similar instrument issued by a Governmental Agency.
PERSON - an individual, or a corporation, partnership, limited
liability company, trust, association or other entity of any nature, or a
Governmental Agency.
PREFERRED STOCK - the Series A Preferred Stock, par value $0.01, and
Series B Preferred Stock, par value $0.01, of the Company.
PROPERTY - any interest in any real, personal or mixed property,
whether tangible or intangible.
RECOVERABLE AMOUNT - Section 8.2(b).
RESTRICTED PERIOD - Section 8.10.
SALE PROPORTION - Section 1.1(c).
SALE SHARES - Section 1.1(c).
SHARES - Section 1.1(c).
STOCK - Common Stock and Preferred Stock.
STOCK RIGHT - any right (including without limitation any option or
warrant or subscription right) to acquire any capital stock or any other Stock
Right or any security or instrument convertible into or exchangeable for any
capital stock or any other Stock Right.
STRATEGIC TRANSACTION - Section 8.7.
TAX - any federal, state, local or foreign tax, assessment, duty, fee
and other governmental charge or imposition of any kind, whether measured by
properties, assets, wages, payroll, purchases,
<PAGE>
value added, payments, sales, use, business, capital stock, surplus or income,
and any addition, interest, penalty, deficiency imposed with respect to any Tax.
THIRD-PARTY ACTION - any consent, waiver, approval, license or other
authorization of, or notice to, or filing with, any other Person, whether or not
a Governmental Agency, and the expiration of any associated mandatory waiting
period.
THIRD-PARTY CLAIM - Section 8.3(b).
THIRD-PARTY RIGHT - any Lien on any Property of the Person in question,
or any right (other than the rights of CHC and CNO hereunder) (i) to acquire,
lease, use, dispose of, vote or exercise any right or power conferred by any
Property of such Person, or (ii) restricting the Person's right to lease, use,
dispose of, vote or exercise any right or power conferred by any Property of
such Person.
THIRD-PARTY SITE - Section 4.16(a).
WARRANTS - Section 3.1(a).
WORKING CAPITAL - Section 1.2(d).
(REMAINDER OF PAGE LEFT BLANK INTENTIONALLY)
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement.
CNO: CORNERSTONE PROPANE PARTNERS, L.P.
By CORNERSTONE PROPANE GP, INC.,
Managing General Partner
By: /s/ Keith G. Baxter
-----------------------------------
Name: Keith G. Baxter
Title: CEO
CHC:
CORNERSTONE HOLDING CORP.
By: /s/ Keith G. Baxter
-----------------------------------
Name: Keith G. Baxter
Title: CEO
COMPANY: PROPANE CONTINENTAL, INC.
By: /s/ Kent A. Misemer
-----------------------------------
Name: Kent A. Misemer
Title: CEO
HOLDERS: CID EQUITY CAPITAL III, L.P.
By /s/ John C. Aplin
-----------------------------------
General Partner
By: John C. Aplin
------------------------
Name: John C. Aplin
Title: General Partner
CID VENTURES, L.P.
By /s/ John C. Aplin,
-----------------------------------
General Partner
By: /s/ John C. Aplin
-------------------------
Name: John C. Aplin
Title: General Partner
<PAGE>
ALLSTATE INSURANCE COMPANY
By: /s/ Mark A. Bounds
-----------------------------------
Name: Mark A. Bounds
Title: Director
By: /s/ John M. Goense
-----------------------------------
Name: John M. Goense
Title: Managing Director
ALLSTATE LIFE INSURANCE COMPANY
By: /s/ Mark A. Bounds
-----------------------------------
Name: Mark A. Bounds
Title: Director
By: /s/ John M. Goense
-----------------------------------
Name: John M. Goense
Title: Managing Director
/s/ Kent A. Misemer
-----------------------------------
Kent A. Misemer
/s/ Thomas E. Knauff
-----------------------------------
Thomas E. Knauff
BANK OF AMERICA NATIONAL TRUST & SAVINGS
ASSOCIATION
By: /s/ Paul A. O'Mara
-----------------------------------
Name: Paul A. O'Mara
Title: Senior Vice President
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts"
with respect to the consolidated financial statements of Propane Continental,
Inc. and Subsidiaries in the Prospectus Supplement to the Registration
Statement on Form S-3 (No. 333-60931) of Cornerstone Propane Partners, L.P.
for the registration of 3,000,000 common units of its limited partner
interests and to the incorporation by reference therein of our report dated
August 24, 1998, except for Note 11 as to which the date is November 13,
1998, with respect to the consolidated financial statements of Propane
Continental, Inc. and Subsidiaries included in Cornerstone Propane Partners,
L.P.'s Current Report on Form 8-K filed December 2, 1998.
/s/ ERNST & YOUNG LLP
Kansas City, Missouri
December 2, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated November 20, 1998 included in or made a part of this Form 8-K and to
the incorporation by reference of that report into Registration Statement
No. 333-60931.
/s/ Arthur Andersen
Minneapolis, Minnesota,
November 30, 1998
<PAGE>
EXHIBIT 99.1
NYSE SYMBOL - CNO
IMMEDIATE RELEASE CONTACT:
WATSONVILLE, CALIFORNIA CORNERSTONE PROPANE
OCTOBER 27, 1998 RONALD J. GOEDDE, EVP/CFO
(831) 724-1921
CORNERSTONE PROPANE PARTNERS, L.P., ANNOUNCES
TRANSACTION WITH PROPANE CONTINENTAL, INC.
WATSONVILLE, CALIFORNIA - Cornerstone Propane Partners, L.P. (NYSE: CNO),
("Cornerstone" or the "Partnership"), today announced that they have entered
into a definitive agreement to combine operations with Propane Continental,
Inc. ("Propane Continental" or "PCI").
Propane Continental, the nation's 19th largest retail propane distributor,
operates 34 propane customer service centers selling over 50 million gallons
on a proforma basis annually in 11 states. Through Tri Power Fuels, its
wholesale business, PCI distributes over 150 million gallons of propane and
other natural gas liquids to independent dealers, resellers and end users
predominately in the west, midwest, and northeast sections of the country.
After the combination, Cornerstone will move up to #4 in the nation's "Top
50" propane retailers list.
"We are extremely excited about joining forces with PCI," said Keith G.
Baxter, Cornerstone's president. "Propane Continental is well run and
complements both our retail propane business and logistic and supply division
(Coast Energy Group). In addition, their people are first rate and their
culture of service is compatible with our team of dedicated professionals and
our approach to the marketplace."
The price for the transaction is expected to be approximately $110-$120
million, including debt to be refunded. It will be financed with
approximately 50% common unit equity and 50% long-term debt. The combination
of the two companies, after considering financing and transaction costs, is
expected to increase both Cornerstone's EBITDA per unit and its available
cash coverage per unit. Closing is scheduled this calendar year, although it
is subject to a number of conditions, including the expiration of applicable
Hart Scott Rodino waiting periods.
"This transaction is an important and timely move for our company," said
Thomas E. Knauff, president of Propane Continental. "Our industry is
experiencing a period of dramatic convergence," Knauff continued, "and
Cornerstone is a premier and progressive leader of this trend. Moreover,
their dedication to excellent customer service and employee relations make
them the right partner for PCI to march forward with." Knauff will remain as
president of Propane Continental and continue to have overall responsibility
for all their retail operations. He will also assume the additional role of
Executive Vice President-Corporate Development at Cornerstone with
responsibility for the HVAC market segment.
<PAGE>
Cornerstone Propane Partners, L.P. is a master limited partnership. The
partnership believes it is the nation's fifth largest retail propane marketer
serving over 385,000 customers with sales of approximately 250 million
gallons annually in 29 states through over 280 customer service centers.
Through its Coast Energy Group division, the Partnership also markets over
330 million gallons of natural gas liquids annually to resellers and end
users and an average of 285,000 mmbtus per day of natural gas and 12,400
barrels per day of crude oil. For more information, please visit CNO's
website at www.cornerstonepropane.com.
THE INFORMATION PRESENTED HEREIN MAY CONTAIN CERTAIN "FORWARD-LOOKING
STATEMENTS" WITH THE MEANING OF THE FEDERAL SECURITIES LAWS. THE
PARTNERSHIP'S ACTUAL FUTURE PERFORMANCE WILL BE AFFECTED BY A NUMBER OF
FACTORS, RISKS AND UNCERTAINTIES, INCLUDING WITHOUT LIMITATION, WEATHER
CONDITIONS, REGULATORY CHANGES, COMPETITIVE FACTORS, THE PARTNERSHIP'S
SUCCESS IN DEALING WITH THE YEAR 2000 ISSUES AND THE OPERATIONS OF VENDORS,
SUPPLIERS AND CUSTOMERS, MANY OF WHICH ARE BEYOND THE PARTNERSHIP'S CONTROL.
FUTURE EVENTS AND RESULTS MAY VARY SUBSTANTIALLY FROM WHAT THE PARTNERSHIP
CURRENTLY FORESEES, AND THERE CAN BE NO ASSURANCE THAT THE PARTNERSHIP'S
ACTUAL RESULTS WILL NOT DIFFER MATERIALLY FROM ITS EXPECTATIONS. THE
PARTNERSHIP UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE ANY REVISION TO
THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE
DATE OF SUCH STATEMENTS OR TO REFLECT THE OCCURRENCE OF ANTICIPATED OR
UNANTICIPATED EVENTS.
###
<PAGE>
Exhibit 99.2
NYSE SYMBOL - CNO
IMMEDIATE RELEASE CONTACT:
WATSONVILLE, CALIFORNIA CORNERSTONE PROPANE
DECEMBER 2, 1998 RONALD J. GOEDDE, EVP/CFO
(831) 724-1921
- --------------------------------------------------------------------------------
CORNERSTONE PROPANE PARTNERS, L.P., ANNOUNCES
THREE MILLION UNIT OFFERING
- --------------------------------------------------------------------------------
WATSONVILLE, CALIFORNIA - Cornerstone Propane Partners, L.P. (NYSE: CNO),
("Cornerstone" or the "Partnership"), today announced that it intends to
commence this week the offering of 3.0 million of its Common Units. Proceeds
from the offering, combined with proceeds from a $60 million private debt
placement, circled last week, will be used to fund the Company's previously
announced acquisition of Propane Continental, Inc. ("Propane Continental" or
"PCI"), the nation's 19th largest retail propane distributor. The Company
intends to complete the offering process early next week and anticipates pricing
the issue shortly thereafter. Both the debt and the equity portions of the
financing are expected to close simultaneously with the closing of the PCI
acquisition in mid-December.
Separately, the Partnership announced that the 1998-99 heating season has
started warmer than usual, with retail gallons sold in October down 5,700,000
gallons, or 24%, compared to the volume that would have been expected with
normal weather, based on the internal growth and acquisitions Cornerstone has
achieved since last year. The preliminary information for November indicates
that continued unusually warm weather has had a similar impact on results for
the month.
"We are approaching the key winter months of December through March, which
typically represent over 75% of our annual EBITDA," said Keith G. Baxter, Chief
Executive Officer of Cornerstone. "The fundamentals of our business are good,
as reflected in our demonstrated ability to grow both internally and through
acquisitions, our ability to maintain margins on a per-gallon basis and our
control of operating expenses. All of these factors, together with the PCI
acquisition, position the Partnership well for stronger performance," Baxter
stated.
<PAGE>
Cornerstone Propane Partners, L.P. is a master limited partnership. The
Partnership believes it is the nation's fifth largest retail propane marketer
serving over 385,000 customers with sales of approximately 250 million gallons
annually in 29 states through over 280 customer service centers, before giving
effect to the PCI acquisition. Through its Coast Energy Group division, the
Partnership also markets over 330 million gallons of natural gas liquids
annually to resellers and end users and an average of 285,000 mmbtus per day of
natural gas and 12,400 barrels per day of crude oil. For more information,
please visit CNO's website at www.cornerstonepropane.com.
Cornerstone's general partner, NorthWestern Corporation (NYSE:NOR), is a leading
provider of consumer services to customers across America. In addition to
NorthWestern's participation in Cornerstone, NOR's energy division, Northwestern
Public Service, provides electric and natural gas services to Midwestern
customers. Through its wholly-owned subsidiaries, NorthWestern also holds
interests in Communication Systems USA, a national provider of communications
and data services, and Blue Dot., a national provider of heating, ventilating,
air conditioning, plumbing and related services. NorthWestern is also engaged
in other service and non-energy related businesses.
THE INFORMATION PRESENTED HEREIN MAY CONTAIN CERTAIN "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. THE PARTNERSHIP'S
ACTUAL FUTURE PERFORMANCE WILL BE AFFECTED BY A NUMBER OF FACTORS, RISKS AND
UNCERTAINTIES, INCLUDING WITHOUT LIMITATION, WEATHER CONDITIONS, REGULATORY
CHANGES, COMPETITIVE FACTORS, THE PARTNERSHIP'S SUCCESS IN DEALING WITH THE YEAR
2000 ISSUES AND THE OPERATIONS OF VENDORS, SUPPLIERS AND CUSTOMERS, MANY OF
WHICH ARE BEYOND THE PARTNERSHIP'S CONTROL. FUTURE EVENTS AND RESULTS MAY VARY
SUBSTANTIALLY FROM WHAT THE PARTNERSHIP CURRENTLY FORESEES, AND THERE CAN BE NO
ASSURANCE THAT THE PARTNERSHIP'S ACTUAL RESULTS WILL NOT DIFFER MATERIALLY FROM
ITS EXPECTATIONS. THE PARTNERSHIP UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE
ANY REVISION TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS OR TO REFLECT THE OCCURRENCE OF
ANTICIPATED OR UNANTICIPATED EVENTS.
###
