<PAGE>
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1999
Commission file Number 1-12499
CORNERSTONE PROPANE PARTNERS, L.P.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 77-0439862
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(State or other jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
432 Westridge Drive, Watsonville, California 95076
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (831) 724-1921
Securities registered pursuant to Section 12(b) of the Act.
Title of Each Class Name of Each Exchange on which Registered
- ------------------- -----------------------------------------
Common Units New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The aggregate market value of the 16,788,894 Common Units held by nonaffiliates
of the Registrant as of the close of business on September 22, 1999, is:
$280,173,000.
Documents Incorporated by Reference
NONE
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Cornerstone Propane Partners, L.P. ("Cornerstone Partners"), and its
subsidiary, Cornerstone Propane, L.P. ("the Operating Partnership"), were
organized in October 1996 and November 1996, respectively, as Delaware limited
partnerships. Cornerstone Propane GP, Inc. (the "Managing General Partner") and
SYN Inc. (the "Special General Partner" and, collectively with the Managing
General Partner, the "General Partners") are the general partners of Cornerstone
Partners and the Operating Partnership. The General Partners own an aggregate 2%
interest as general partners, and the Unitholders (including the General
Partners as holders of Subordinated Units) own a 98% interest as limited
partners, in Cornerstone Partners and the Operating Partnership on a combined
basis. Cornerstone Partners, the Operating Partnership and its corporate
subsidiary are referred to collectively herein as the "Partnership."
The Partnership was formed in 1996 to acquire, own and operate the propane
businesses and assets of SYN, Inc. and its subsidiaries ("Synergy"), Empire
Energy Corporation and its subsidiaries ("Empire Energy") (formerly subsidiaries
of Northwestern Growth Corporation ("Northwestern Growth")) and CGI Holdings,
Inc. and its subsidiaries ("Coast"). Northwestern Growth is a wholly owned
subsidiary of Northwestern Corporation ("NOR"), a New York Stock Exchange listed
national consumer services company. Northwestern Growth was formed in 1994 to
pursue and manage nonutility investments and development activities for NOR,
with a primary focus on growth opportunities in the energy, energy equipment and
energy services industries. To capitalize on the growth and consolidation
opportunities in the propane distribution market, in August 1995, Northwestern
Growth acquired the predecessor of Synergy, then the sixth largest retail
marketer of propane in the United States and, in October 1996, it acquired
Empire Energy, then the eighth largest retail marketer of propane in the United
States. Immediately prior to the Partnership's initial public offering ("IPO")
of Common Units in December 1996, Northwestern Growth acquired Coast, then the
18th largest retail marketer of propane in the United States. The Partnership
commenced operation on December 17, 1996, concurrently with the closing of the
IPO, when substantially all of the assets and liabilities of Synergy, Empire
Energy and Coast were contributed to the Operating Partnership. Information in
this Form 10-K related to the pro forma year ended June 30, 1997, reflects a
full year of activity for the three predecessor companies, as if the Partnership
had been in operation on July 1, 1996.
The Partnership believes that it is the fourth largest retail marketer of
propane in the United States in terms of volume, serving more than 460,000
residential, commercial, industrial and agricultural customers from 298 customer
service centers in 34 states as of June 30, 1999. The Partnership's operations
are concentrated in the east, south, central and west coast regions of the
United States. For the year ended June 30, 1999, the Partnership had retail
propane sales of approximately 262 million gallons.
The Partnership is principally engaged in (i) the retail distribution of
propane for residential, commercial, industrial, agricultural and other retail
uses, (ii) the wholesale marketing and distribution to suppliers and other end
users of propane, natural gas liquids and crude oil to the retail propane
industry, the chemical and petrochemical industries and other commercial and
<PAGE>
agricultural markets, (iii) the repair and maintenance of propane heating
systems and appliances and (iv) the sale of propane-related supplies, appliances
and other equipment.
The retail propane business is a "margin-based" business in which gross
profits depend on the excess of sales prices over propane supply costs. Sales of
propane to residential and commercial customers, which account for the vast
majority of the Partnership's revenue, have provided a relatively stable source
of revenue for the Partnership. Based on fiscal 1999 retail propane gallons
sold, the customer base consisted of 60% residential, 23% commercial and
industrial and 17% agricultural and other customers. Sales to residential
customers have generally provided higher gross margins than other retail propane
sales. While commercial propane sales are generally less profitable than
residential retail sales, the Partnership has traditionally relied on this
customer base to provide a steady, noncyclical source of revenues. No single
customer accounted for more than 1% of total retail revenues.
The Partnership's Coast Energy Group ("CEG") operation engages in the
marketing and distribution of propane to independent dealers, major interstate
marketers and the chemical and petrochemical industries in addition to
procurement and distribution of propane for the retail segment. Through CEG, the
Partnership also participates in the marketing of other natural gas liquids, the
processing and marketing of natural gas and the marketing of crude oil. The
Partnership either owns or has contractual rights to use transshipment
terminals, rail cars, long-haul tanker trucks, pipelines and storage capacity.
The Partnership believes that its CEG marketing and processing activities
position it to achieve product cost advantages and to avoid shortages during
periods of tight supply to an extent not generally available to other retail
propane distributors.
PRODUCT
Propane, a by-product of natural gas processing and petroleum refining, is a
clean-burning energy source recognized for its transportability and ease of use
relative to alternative stand-alone energy sources. The retail propane business
of the Partnership consists principally of transporting propane to its retail
distribution outlets and then to tanks located on its customers' premises.
Retail propane use falls into four broad categories: (i) residential, (ii)
industrial and commercial, (iii) agricultural and (iv) other applications,
including motor fuel sales. Residential customers use propane primarily for
space and water heating. Industrial customers use propane primarily as fuel for
forklifts and stationary engines, to fire furnaces, as a cutting gas, in mining
operations and in other process applications. Commercial customers, such as
restaurants, motels, laundries and commercial buildings, use propane in a
variety of applications, including cooking, heating and drying. In the
agricultural market, propane is primarily used for tobacco curing, crop drying,
poultry brooding and weed control. Other retail uses include motor fuel for cars
and trucks, outdoor cooking and other recreational purposes, propane resales and
sales to state and local governments. In its CEG operations, the Partnership
sells propane principally to large industrial customers and other propane
distributors.
Propane is extracted from natural gas or oil wellhead gas at processing
plants or separated from crude oil during the refining process. Propane is
normally transported and stored in a liquid state under moderate pressure or
refrigeration for ease of handling in shipping and distribution. When the
pressure is released or the temperature is increased, it is usable as a
flammable gas.
<PAGE>
Propane is colorless and odorless; an odorant is added to allow its
detection. Like natural gas, propane is a clean burning fuel and is
considered an environmentally preferred energy source.
SOURCES OF SUPPLY
The Partnership's propane supply is purchased from oil companies and natural
gas processors at numerous supply points located in the United States and
Canada. During the year ended June 30, 1999, virtually all of the Partnership's
propane supply was purchased pursuant to agreements with terms of less than one
year, but the percentage of contract purchases may vary from year to year as
determined by the Partnership. Supply contracts generally provide for pricing in
accordance with posted prices at the time of delivery or the current prices
established at major delivery points. Most of these agreements provide maximum
and minimum seasonal purchase guidelines. In addition, the Partnership makes
purchases on the spot market from time to time to take advantage of favorable
pricing. The Partnership receives its supply of propane predominantly through
railroad tank cars and common carrier transport.
Supplies of propane from the Partnership's sources historically have been
readily available. In the year ended June 30, 1999, Dynegy was the Partnership's
largest supplier providing approximately 8% of the Partnership's total propane
supply for its retail and CEG operations (excluding propane obtained from the
Partnership's natural gas processing operations). The Partnership believes that
if supplies from Dynegy were interrupted, it would be able to secure adequate
propane supplies from other sources without a material disruption of its
operations. No single supplier provided more than 10% of the Partnership's
domestic propane supply in the year ended June 30, 1999. Although no assurance
can be given that supplies of propane will be readily available in the future,
the Partnership expects a sufficient supply to continue to be available. The
Partnership has not experienced a shortage that has prevented it from satisfying
its customer's need and does not foresee any significant shortage in the supply
of propane.
The Partnership will engage in hedging of product cost and supply through
common hedging practices. These practices will be monitored and maintained by
management for the Partnership on a daily basis. Hedging of product cost and
supply does not always result in increased margins.
The market price of propane is subject to volatile changes as a result of
supply or other market conditions over which the Partnership will have no
control. Since it may not be possible to pass rapid increases in the wholesale
cost of propane on to customers immediately, such increases could reduce the
Partnership's gross profits. Consequently, the Partnership's profitability will
be sensitive to changes in wholesale propane prices. The Partnership also
engages in the trading of propane, natural gas, crude oil and other commodities
in amounts that have not had and are not expected to have a material effect on
the Partnership's financial condition or results of operations.
The Partnership has from time to time leased space in storage facilities to
take advantage of supply purchasing opportunities as they have occurred, and the
Partnership believes that it will have adequate third party storage to take
advantage of such opportunities in the future. Access to storage facilities will
allow the Partnership, to the extent it may deem it desirable, to buy and store
large quantities of propane during periods of low demand, which generally occur
during the
<PAGE>
summer months, thereby helping to ensure a more secure supply of propane
during periods of intense demand or price instability.
OPERATIONS
The Partnership has organized its operations in a manner that the
Partnership believes enables it to provide excellent service to its customers
and to achieve maximum operating efficiencies. The Partnership's retail propane
distribution business is organized into divisions, which are each comprised of
regions. Each region is comprised of a number of customer service centers. Each
division and region is supervised by a manager. Personnel located at the
customer service centers in the various regions are primarily responsible for
customer service, sales and delivery of product to the customer.
A number of functions are centralized at the Partnership's support locations
in order to achieve certain operating efficiencies as well as to enable the
personnel located in the customer service centers to focus on customer service
and sales. The corporate headquarters and the customer service centers are
linked via a computer system. Each of the Partnership's customer service centers
is equipped with a computer connected to the central management information
system in the Partnership's corporate headquarters. This computer network system
provides retail company personnel with accurate and timely information on supply
cost, inventory and customer accounts. The Partnership makes centralized
purchases of propane through its CEG operations for resale to the retail service
centers enabling the Partnership to achieve certain advantages, including price
advantages, because of its status as a large volume buyer. The functions of cash
management, accounting, taxes, payroll, permits, licensing, employee benefits,
human resources, and strategic planning are also performed on a centralized
basis.
TRADEMARKS
The Partnership utilizes a variety of trademarks, including "Synergy Gas"
and its related design, which the Partnership owns, and "Empire Gas" and its
related design, which the Partnership has the right to use, and trade names,
including "Coast Gas." The Partnership generally expects to retain the names and
identities of acquired entities, which the Partnership believes preserves the
goodwill of the acquired businesses and promotes continued local customer
loyalty. The Partnership regards its trademarks, trade names and other
proprietary rights as valuable assets and believes that they have significant
value in the marketing of its products.
SEASONALITY
Because a substantial amount of propane is sold for heating purposes, the
severity of winter and resulting residential and commercial heating usage have
an important impact on the Partnership's earnings. Approximately two-thirds of
the Partnership's retail propane sales usually occur during the six-month
heating season from October through March. As a result of this seasonality, the
Partnership's sales and operating profits are concentrated in its second and
third fiscal quarters. Cash flows from operations, however, are greatest from
November through April when customers pay for propane purchased during the
six-month peak season. To the extent the Managing General Partner deems
appropriate, the Partnership may reserve cash from
<PAGE>
these periods for distribution to Unitholders during periods with lower cash
flows from operations. Sales and profits are subject to variation from month
to month and from year to year, depending on temperature fluctuations.
COMPETITION
Based upon information provided by the Energy Information Administration,
propane accounts for approximately three to four percent of household energy
consumption in the United States. Propane competes primarily with natural gas,
electricity and fuel oil as an energy source, principally on the basis of price,
availability and portability. Propane is more expensive than natural gas on an
equivalent BTU basis in locations served by natural gas, but serves as a
substitute for natural gas in rural and suburban areas where natural gas is
unavailable or portability of product is required. Historically, the expansion
of natural gas into traditional propane markets has been inhibited by the
capital costs required to expand pipeline and retail distribution systems.
Although the extension of natural gas pipelines tends to displace propane
distribution in areas affected, the Partnership believes that new opportunities
for propane sales arise as more geographically remote neighborhoods are
developed. Propane is generally less expensive to use than electricity for space
heating, water heating, clothes drying and cooking. Although propane is similar
to fuel oil in certain applications and market demand, propane and fuel oil
compete to a lesser extent primarily because of the cost of converting from one
to the other.
In addition to competing with alternative energy sources, the Partnership
competes with other companies engaged in the retail propane distribution
business. Competition in the propane industry is highly fragmented and generally
occurs on a local basis with other large full-service multi-state propane
marketers, thousands of smaller local independent marketers and farm
cooperatives. Based on industry publications, the Partnership believes that the
domestic retail market for propane is approximately 8.6 billion gallons
annually, that the 10 largest retailers, including the Partnership, account for
approximately 37% of the total retail sales of propane in the United States, and
that no single marketer has a greater than 10% share of the total retail market
in the United States. Most of the Partnership's customer service centers compete
with five or more marketers or distributors. Each customer service center
operates in its own competitive environment, because retail marketers tend to
locate in close proximity to customers. The Partnership's customer service
centers generally have an effective marketing radius of approximately 25 to 50
miles, although in certain rural areas the marketing radius may be extended by a
satellite storage location.
The ability to compete effectively further depends on the reliability of
service, responsiveness to customers and the ability to maintain competitive
prices. The Partnership also believes that its service capabilities and customer
responsiveness differentiate it from many of these smaller competitors. The
Partnership's employees are on call 24 hours a day and seven days a week for
emergency repairs and deliveries.
The Partnership's CEG operations compete in the wholesale liquefied
petroleum gas ("LPG") business, which includes propane, and is highly
competitive. In addition, CEG provides marketing and risk management services in
the natural gas and crude oil markets which are highly competitive. For the year
ended June 30, 1999, the Partnership's CEG operations
<PAGE>
accounted for 77% of total revenue but less than 16% of the gross profit. The
Partnership believes that its CEG operations provides it with a national
presence and a reasonably secure, efficient supply base, and positions it
well for expansion through acquisitions or start-up operations in new markets.
RISKS OF BUSINESS
The Partnership's propane operations are subject to all the operating
hazards and risks normally incident to handling, storing and transporting
combustible liquids, such as the risk of personal injury and property damages
caused by accident or fire.
The Partnership's comprehensive general and excess liability policy provides
coverage for losses of up to $105.0 million with a $250,000 deductible.
REGULATION
The Partnership's operations are subject to various federal, state and local
laws governing the transportation, storage and distribution of propane,
occupational health and safety, and other matters. All states in which the
Partnership operates have adopted fire safety codes that regulate the storage
and distribution of propane. In some states these laws are administered by state
agencies, and in others they are administered on a municipal level. Certain
municipalities prohibit the below ground installation of propane furnaces and
appliances, and certain states are considering the adoption of similar
regulations. The Partnership cannot predict the extent to which any such
regulations might affect the Partnership, but does not believe that any such
effect would be material. It is not anticipated that the Partnership will be
required to expend material amounts by reason of environmental and safety laws
and regulations, but inasmuch as such laws and regulations are constantly being
changed, the Partnership is unable to predict the ultimate cost to the
Partnership of complying with environmental and safety laws and regulations.
The Partnership currently meets and exceeds federal regulations requiring
that all persons employed in the handling of propane gas be trained in proper
handling and operating procedures. All employees have participated or will
participate within 90 days of their employment date, in hazardous materials
training. The Partnership has established ongoing training programs in all
phases of product knowledge and safety including participation in the National
Propane Gas Association's ("NPGA") Certified Employee Training Program.
PERSONNEL
As of August 31, 1999, the Partnership had 2,396 full-time employees, of
whom 132 were general and administrative and 2,264 were operational employees.
Fewer than 20 of the Partnership's employees were represented by labor unions.
The Partnership believes that its relations with its employees are satisfactory.
The Partnership generally hires seasonal workers to meet peak winter demand.
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BUSINESS STRATEGY
The principal elements of the Partnership's business strategy are to (i)
extend and refine its existing service orientation, (ii) continue to pursue
balanced growth through small and large acquisitions, internal growth at its
existing customer service centers and start-ups of new customer service centers,
(iii) enhance the profitability of its existing operations by improving delivery
efficiencies, use of entrepreneurially oriented local manager incentive
programs, authorizing pricing decisions by the local manager and increased
emphasis in non-propane activities to reduce weather dependency and (iv)
capitalize on the Partnership's CEG marketing, supply and logistics business.
ITEM 2. PROPERTIES.
CORPORATE HEADQUARTERS
The principal executive offices of the Partnership are located at 432
Westridge Drive, Watsonville, California 95076. These offices are leased through
2002. The accounting and administrative operations are centralized in Lebanon,
Missouri. These offices are leased through 2006.
RETAIL/CUSTOMER SERVICE CENTERS
The Partnership leases customer service centers and administrative office
space under non-cancelable operating leases expiring at various times through
2015. These leases generally contain renewal options and require the Partnership
to pay all executory costs (property taxes, maintenance and insurance). As of
June 30, 1999, the Partnership operated 298 customer service centers.
As of June 30, 1999, the Partnership operated bulk storage facilities with
total propane storage capacity of approximately 57 million gallons, of which 3
million gallons are owned by the Partnership and 54 million gallons are leased.
The Partnership does not own, operate or lease any underground propane storage
facilities (excluding customer and local distribution tanks) or pipeline
transportation assets (excluding local delivery systems).
DISTRIBUTION
The Partnership purchases propane at refineries, gas processing plants,
underground storage facilities, and pipeline terminals and transports the
propane by railroad tank cars and tank trailer trucks to the Partnership's
customer service centers, each of which has gas bulk storage capacity ranging
from 30,000 to 120,000 gallons. The Partnership is a shipper on all major
interstate LPG pipeline systems. The customer service centers have an aggregate
storage capacity of approximately 18 million gallons of propane, and each
service center has equipment for transferring the gas into and from the bulk
storage tanks. The Partnership owns and operates 42 over-the-road tractors and
50 transport trailers to deliver propane and consumer tanks to its retail
service centers and also relies on common carriers to deliver propane to its
retail service centers.
Deliveries to customers are made by means of approximately 900 bobtail
trucks and
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approximately 950 other delivery and service vehicles owned by the
Partnership. Propane is stored by the customers on their premises in stationary
steel tanks generally ranging in capacity from 25 to 1,000 gallons, with large
users having tanks with a capacity of up to 30,000 gallons. Most of the propane
storage tanks used by the Partnership's residential and commercial customers are
owned by the Partnership and leased, rented or loaned to customers. The
Partnership owned approximately 85% of these customer storage tanks.
ITEM 3. LEGAL PROCEEDINGS.
A number of personal injury, property damage and products liability suits
are pending or threatened against the Partnership. In general, these lawsuits
have arisen in the ordinary course of the Partnership's business and involve
claims for actual damages, and in some cases punitive damages, arising from the
alleged negligence of the Partnership or as a result of product defects or
similar matters. Of the pending or threatened matters, a number involve property
damage, and several involve serious personal injuries or deaths and the claims
made are for relatively large amounts. Although any litigation is inherently
uncertain, based on past experience, the information currently available to it
and the availability of insurance coverage, the Partnership does not believe
that these pending or threatened litigation matters will have a material adverse
effect on its results of operations or its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF UNITHOLDERS.
No matters were submitted to a vote of Unitholders by the Partnership during
the fourth quarter of the fiscal year covered by this report.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED UNITHOLDER MATTERS.
Cornerstone Propane Partners, L.P. Common Units are traded on the New
York Stock Exchange under the symbol CNO. The high and low trading prices for
the following
quarters were:
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Fiscal Year 1999 High Low
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<S> <C> <C>
Quarter ended September 30 22 1/2 18 1/4
Quarter ended December 31 21 1/8 16
Quarter ended March 31 19 15 5/8
Quarter ended June 30 18 7/8 15 7/16
Fiscal Year 1998 High Low
- ---------------- ---- ----
Quarter ended September 30 23 7/8 21 1/16
Quarter ended December 31 23 15/16 22 1/4
Quarter ended March 31 23 3/8 20 1/2
Quarter ended June 30 22 15/16 21
Fiscal Year 1997 High Low
- ---------------- ---- ----
Quarter ended March 31 22 3/8 20 7/8
Quarter ended June 30 22 1/8 19 3/4
</TABLE>
As of September 22, 1999, there were approximately 16,075 holders of Common
Units, including individual participants in security position listings.
There is no established public trading market for the Subordinated Units,
all of which are held by the Managing General Partner and the Special General
Partner.
The Partnership will distribute to its partners, on a quarterly basis, all
of its Available Cash, which is generally all cash on hand at the end of a
quarter, as adjusted for reserves. The Managing General Partner has broad
discretion in making cash disbursements and establishing reserves. The
Partnership intends, to the extent there is sufficient Available Cash, to
distribute to each holder of Common Units at least $.54 per Common Unit per
quarter (the "Minimum Quarterly Distribution") or $2.16 per Common Unit on an
annualized basis.
To enhance the Partnership's ability to make the Minimum Quarterly
Distribution on the Common Units during the Subordination Period, each holder of
Common Units will be entitled to receive the Minimum Quarterly Distribution,
plus any arrearages thereon, before any distributions are made on the
outstanding subordinated limited partner interests of the Partnership (the
"Subordinated Units"). The Subordination Period will end and all Subordinated
Units will convert if full distribution has occurred for both Common Units and
Subordinated
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Units for twelve consecutive quarters. Upon expiration of the Subordination
Period, all Subordinated Units will convert to Common Units on a one-for-one
basis and will thereafter participate pro rata with the other Common Units in
distributions of Available Cash.
For a further discussion of the Partnership's cash distribution policy,
refer to Notes 4 and 7 in the Partnership's Consolidated Financial Statements
included in Item 8 of this report. For a discussion of certain restrictions
under the Partnership's loan agreements that limit the Partnership's ability
to pay cash distributions, refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources - Financing and Sources of Liquidity" included in Item 7 of this
report.
ITEM 6. SELECTED FINANCIAL DATA.
CORNERSTONE
The following table presents selected consolidated operating and balance
sheet data of Cornerstone Propane Partners, L.P. and its subsidiary as of June
30, 1999, 1998 and 1997, and for the years ended June 30, 1999 and 1998, and the
period from inception (December 17, 1996) to June 30, 1997. The financial data
of the Partnership was derived from the Partnership's audited consolidated
financial statements. The financial data set forth below should be read in
conjunction with the Partnership's consolidated financial statements, together
with the notes thereto, included in Item 8 of this report.
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CORNERSTONE PROPANE PARTNERS, L.P.
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
Period from
Inception
(December 17,
Year Ended Year Ended 1996) to
June 30, 1999 June 30, 1998 June 30, 1997
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<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 1,154,608 $ 768,129 $ 389,630
Cost of sales 973,367 623,924 15,324
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Gross profit 181,241 144,205 74,306
Operating, general and administrative expenses 123,735 97,184 50,023
Depreciation and amortization 27,253 18,246 8,519
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Operating income 30,253 28,775 15,764
Interest expense 25,033 19,222 9,944
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Income before provision for income taxes 5,220 9,553 5,820
Provision for income taxes 47 127 64
------------ ---------- ----------
Net income $ 5,173 $ 9,426 $ 5,756
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<CAPTION>
BALANCE SHEET DATA: 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
(As of June 30)
Current assets $ 91,089 $ 53,221 $ 50,461
Total assets 781,244 572,511 521,193
Current liabilities 71,063 51,595 40,942
Long-term debt (including current maturities) 398,940 240,938 237,268
Partners' capital 315,527 279,594 243,929
OPERATING DATA:
Capital expenditures (including acquisitions) $ 175,285 $ 30,096 $ 3,754
EBITDA(a) 57,506 47,021 24,283
Limited Partners' net income per unit .23 .50 .34
Retail propane gallons sold 261,600 235,000 213,700
</TABLE>
<PAGE>
(a) EBITDA consists of net income before interest, income taxes, depreciation
and amortization. EBITDA should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative to
cash flow, 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.
SYNERGY
The financial information set forth below is derived from the audited
financial statements of Synergy. On August 15, 1995, Synergy Group Incorporated
("SGI"), the predecessor of Synergy, was acquired by Synergy. The financial
information below as of March 31, 1994 and 1995, is derived from the audited
financial statement of SGI. The comparability of financial matters is affected
by the change in ownership of SGI and the concurrent sale of approximately 25%
of SGI's operations to Empire Energy (which at that time was not related to
Synergy). The Statement of Operations Data and the Operating Data for the four
and one-half months ended August 14, 1995, represent information for the period
from the end of the last fiscal year of SGI until the date of the sale to
Synergy, and are presented only to reflect operations of Synergy for a complete
five-year period. The retail propane gallons sold for all periods presented is
derived from the accounting records of Synergy and SGI and is unaudited. The
Selected Historical Financial and Operating Data below should be read in
conjunction with the consolidated financial statements of Synergy and SGI
included in Item 8 of this report.
<TABLE>
<CAPTION>
Synergy Group Incorporated Syn Inc.
------------------------------------------ --------------------------
Four and Ten and Five and
One-Half One-Half One-Half
Months Months Months
Fiscal Year Ended March 31, Ended Ended Ended
--------------------------- August 14, June 30, December 16,
1994 1995 1995 1996 1996
---- ---- ---------- -------- -------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues $ 133,731 $ 123,562 $ 32,179 $ 96,062 $ 44,066
Cost of product sold 63,498 59,909 15,387 46,187 23,322
Gross profit 70,233 63,653 16,792 49,875 20,744
Depreciation and
amortization 5,170 5,100 1,845 3,329 1,904
Operating income (loss) 3,609 (2,291) (6,660) 14,520 3,769
Interest expense 13,126 11,086 3,223 5,584 3,311
Provision (benefit) for income
Taxes (400) (84) 31 3,675 298
Net income (loss) (11,615) (13,417) (9,813) 5,261 160
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Synergy Group Incorporated Syn Inc.
------------------------------------------ --------------------------
Four and Ten and Five and
One-Half One-Half One-Half
Months Months Months
Fiscal Year Ended March 31, Ended Ended Ended
--------------------------- August 14, June 30, December 16,
1994 1995 1995 1996 1996
---- ---- ---------- -------- -------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
(END OF PERIOD)
Current assets $ 31,149 $ 27,542 $ 21,501 $ 59,027 $ 21,271
Total assets 111,914 103,830 96,500 166,762 174,140
Current liabilities 161,360 109,685 119,546 34,850 9,139
Total debt 122,626 92,717 89,541 79,524 84,585
Redeemable preferred stock -- -- -- 55,312 55,312
Stockholders' equity (deficit) (55,424) (15,762) (25,576) (1,899) (5,617)
OPERATING DATA:
EBITDA (a) $ 8,779 $ 2,809 $ (4,815) $ 17,849 $ 5,673
Capital expenditures 3,141 3,737 596 8,708 3,751
Retail propane gallons sold 137,937 126,205 27,282 92,621 39,468
</TABLE>
(a) EBITDA consists of net income before depreciation, amortization, interest
and income taxes. EBITDA should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative to
cash flow, and it is not a measure of performance or financial condition
under generally accepted accounting principles, but it provides additional
information for evaluating the Partnership's ability to distribute the
Minimum Quarterly Distribution and to service and incur indebtedness. Cash
flows in accordance with generally accepted accounting principles consist
of cash flows from operating, investing and financing activities; cash
flows from operating activities reflect net income (including charges for
interest and income taxes, which are not reflected in EBITDA), adjusted for
noncash charges or income (which are reflected in EBITDA). Further, cash
flows from investing and financing activities are not included in EBITDA.
EMPIRE ENERGY
The financial information set forth below is derived from the audited
financial statements of Empire Energy. Empire Energy was formed in June 1994 as
a result of a tax-free split-off (the "Split-Off") from Empire Gas Corporation.
As discussed in Note 2 to Empire Energy's Consolidated Financial Statements
included in Item 8, on August 1, 1996, the principal shareholder of Empire
Energy and certain other shareholders sold their interests in Empire Energy to
certain members of management (the "Management Buy-Out"). On October 7, 1996,
Northwestern Growth purchased 100% of the Empire Energy common stock. The
results of operations and other data for the five and one-half months ended
December 16, 1996, are stated on a pro forma basis to combine the one month
ended prior to the Management Buy-Out, the two months ended prior to the
Northwestern Growth acquisition and the two and one-half months beginning with
the Northwestern Growth acquisition. The retail propane gallons sold for all
periods presented is derived from the accounting records of Empire Energy and is
unaudited.
<PAGE>
The Selected Historical Financial and Operating Data below should be
read in conjunction with the consolidated financial statements of Empire Energy
included in Item 8 of this report.
<TABLE>
<CAPTION>
Empire Energy
--------------------------------------------------------
Five and
One-Half
Months
Fiscal Year Ended June 30, Ended
--------------------------------------- December 16,
1994 1995 1996 1996
---- ---- ---- ------------
(In Thousands)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Revenues $ 60,216 $ 56,689 $ 98,821 $ 43,201
Cost of product sold 28,029 26,848 50,080 23,310
Gross profit 32,187 29,841 48,741 19,891
Depreciation and amortization 4,652 4,322 5,875 2,929
Operating income 6,015 1,084 9,846 3,567
Interest expense 118 39 2,598 3,621
Provision for income taxes 2,400 600 3,550 32
Net income (loss) 3,497 445 3,698 (86)
BALANCE SHEET DATA:
(END OF PERIOD)
Current assets $ 9,292 $ 9,615 $ 16,046 $ 27,491
Total assets 64,734 69,075 107,102 183,046
Current liabilities 2,697 4,277 12,126 11,210
Long-term debt 135 1,701 25,442 111,853
Stockholders' equity 46,111 46,535 50,233 15,922
OPERATING DATA:
EBITDA (a) $ 10,667 $ 5,406 $ 15,721 $ 6,496
Capital expenditures 4,058 8,365 39,164 2,823
Retail propane gallons sold 67,286 62,630 104,036 40,847
</TABLE>
(a) EBITDA consists of net income before depreciation, amortization, interest
and income taxes. EBITDA should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative to
cash flow, and it is not a measure of performance or financial condition
under generally accepted accounting principles, but it provides additional
information for evaluating the Partnership's ability to distribute the
Minimum Quarterly Distribution and to service and incur indebtedness. Cash
flows in accordance with generally accepted accounting principles consist
of cash flows from operating, investing and financing activities; cash
flows from operating activities reflect net income (including charges for
interest and income taxes, which are not reflected in EBITDA), adjusted for
noncash charges or income (which are reflected in EBITDA) and changes in
operating assets and liabilities (which are not reflected in EBITDA).
Further, cash flows from investing and financing activities are not
included in EBITDA.
<PAGE>
COAST
The financial information set forth below is derived from the audited
financial statements of Coast. The Selected Historical Financial and Operating
Data below should be read in conjunction with the consolidated financial
statements of Coast included in Item 8 of this report.
<TABLE>
<CAPTION>
Coast
--------------------------------------------------------
Four and
One-Half
Months
Fiscal Year Ended July 31, Ended
--------------------------------------- December 16,
1994 1995 1996 1996
---- ---- ---- ------------
(In Thousands)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Revenues $ 242,986 $ 266,842 $ 384,354 $ 185,460
Cost of product sold 214,632 234,538 351,213 173,155
Gross profit 28,354 32,304 33,141 12,305
Depreciation and amortization 3,282 3,785 4,216 1,604
Operating income 3,843 4,535 4,044 122
Interest expense 4,029 5,120 5,470 2,238
Benefit for income taxes (28) (202) (473) (748)
Net loss (a) (158) (889) (953) (1,368)
BALANCE SHEET DATA:
(END OF PERIOD)
Current assets $ 29,150 $ 33,676 $ 35,297 $ 49,392
Total assets 93,559 101,545 106,179 119,066
Current liabilities 31,178 27,605 37,849 48,254
Long-term debt 31,080 46,021 41,801 46,245
Mandatorily redeemable securities 8,874 7,781 8,559 8,675
Stockholders' equity 7,661 7,853 6,098 4,614
OPERATING DATA (UNAUDITED):
EBITDA (b) $ 7,125 $ 8,320 $ 8,260 $ 1,726
Capital expenditures (c) 4,451 5,581 6,060 1,503
Retail propane gallons sold 30,918 36,569 34,888 13,380
</TABLE>
(a) Included in the net loss for the year ended July 31, 1995, is an
extraordinary charge to income of $506,000 for the early retirement of
debt, net of the income tax benefit.
(b) EBITDA consists of net income before depreciation, amortization,
interest and income taxes. EBITDA should not be considered as an
alternative to net income (as an indicator of operating performance)
or as an alternative to cash flow, and it is not a measure of
performance or financial condition under generally accepted accounting
principles, but it provides additional information for evaluating the
Partnership's ability to distribute the Minimum Quarterly Distribution
and to service and incur indebtedness. Cash flows in accordance with
generally accepted accounting principles consist of cash flows from
operating, investing and financing activities; cash flows from
operating activities reflect net income (including charges for
interest and income taxes, which are not reflected in EBITDA),
adjusted for noncash charges or income (which are reflected in EBITDA)
and
<PAGE>
changes in operating assets and liabilities (which are not reflected
in EBITDA). Further, cash flows from investing and financing activities
are not included in EBITDA.
(c) Capital expenditures fall generally into three categories: (i) growth
capital expenditures, which include expenditures for the purchase of
new propane tanks and other equipment to facilitate expansion of the
retail customer base, (ii) maintenance capital expenditures, which
include expenditures for repair and replacement of property, plant and
equipment, and (iii) acquisition capital expenditures.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the historical financial condition and
results of operations for Cornerstone Propane Partners, L.P. and its subsidiary,
Cornerstone Propane, L.P. (collectively "Cornerstone" or the "Partnership")
should be read in conjunction with the historical financial statements and
accompanying notes thereto included elsewhere in this report and the pro forma
financial information elsewhere herein.
GENERAL
The Partnership is a Delaware limited partnership formed in October
1996 to own and operate the propane businesses and assets of SYN Inc. and its
subsidiaries ("Synergy"), Empire Energy Corporation and its subsidiaries
("Empire"), and CGI Holdings, Inc. and its subsidiaries ("Coast"). The
Partnership's two principal business segments are its retail and Coast Energy
Group ("CEG") operations. The Partnership believes it is the fourth largest
retail marketer of propane in the United States, serving more than 460,000
residential, commercial, industrial and agricultural customers from 298 customer
service centers in 34 states.
Because a substantial portion of the Partnership's propane is used in
the weather-sensitive residential markets, the heating degree days in the
Partnership's areas of operations, particularly during the six-month
peak-heating season, have a significant effect on the financial performance of
the Partnership. Heating degree days are a general indicator of weather
impacting propane usage and are calculated by taking the difference between 65
degrees and the average temperature of the day (if less than 65 degrees).
Warmer-than-normal temperatures will generally result in reduced propane use.
Gross profit margins are not only affected by weather patterns but also
by changes in customer mix. For example, sales to residential customers
ordinarily generate higher margins than sales to other customer groups, such as
commercial or agricultural customers. In addition, gross profit margins vary by
geographic region. Accordingly, gross profit margins could vary significantly
from year to year in a period of identical sales volumes.
ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS
The following discussion compares the results of operations and
other data of Cornerstone for the years ended June 30, 1999, 1998, and the
pro forma year ended June 30,
<PAGE>
1997. The pro forma consolidated statement of income was prepared to reflect
the effects of the Partnership's December 17, 1996 Initial Public Offering
("IPO") as if it had been completed in its entirety as of July 1, 1996.
<TABLE>
<CAPTION>
Pro Forma
Years Ended June 30, thousands of dollars 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues $ 1,154,608 $768,129 $664,197
Cost of sales 973,367 623,924 534,892
----------- -------- --------
Gross profit 181,241 144,205 129,305
Operating, general and administrative
expenses 123,735 97,184 88,264
Depreciation and amortization 27,253 18,246 15,073
----------- -------- --------
Operating income 30,253 28,775 25,968
Interest expense 25,033 19,222 18,215
Provision for income taxes 47 127 109
----------- -------- --------
Net income $ 5,173 $ 9,426 $ 7,644
----------- -------- --------
----------- -------- --------
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998:
In fiscal 1999, Cornerstone consummated fifteen retail acquisitions,
which in aggregate will add approximately 65.0 million annual retail gallons and
83,700 customers, compared to fiscal 1998 which included eleven retail
acquisitions with 23,000 customers and over 17.0 million annual gallons. In
December 1998, Cornerstone acquired Propane Continental, Inc., the nation's 19th
largest distributor of propane gas, which added approximately 60,000 customers,
34 service centers in eleven states and 50.0 million annual retail gallons.
During fiscal 1999, CEG's acquisitions included Propane Continental, Inc.'s
wholesale business as well as two other acquisitions in Calgary, Canada.
In fiscal 1999, Cornerstone sold 261.6 million retail propane gallons,
an increase of 26.6 million gallons or 11.3% from the 235.0 million retail
propane gallons sold in fiscal 1998. The increase in retail volume was
attributable to acquisitions, which added 32.6 million gallons. Excluding
acquisitions, retail volumes were down, with increases in customer base being
more than offset by the warmer weather conditions. Temperatures during the heart
of the heating season (October through February) were 18% warmer than normal and
12% warmer than last year. The heating season for fiscal 1999 was the warmest on
record in the last 104 years, since weather records have been maintained, a fact
both noted and felt by the Partnership.
Revenues increased by $386.5 million or 50.3% to $1,154.6 million in
fiscal 1999, as compared to $768.1 million in fiscal 1998. This increase was
attributable to an increase in CEG's revenues of $364.8 million or 69.5% to
$890.0 million in fiscal 1999, as compared to $525.2 million in fiscal 1998, due
primarily to CEG's business acquisitions consummated during fiscal 1999.
Revenues for the retail business increased by $21.7 million or 8.9% to $264.6
<PAGE>
million in fiscal 1999, as compared to $242.9 million in fiscal 1998. This
increase in retail revenues was due to acquisitions, offset to some extent by
lower gallon sales associated with a warmer than normal retail heating season
and lower selling prices related to lower fuel costs.
Cost of sales increased by $349.5 million or 56.0% to $973.4 million in
fiscal 1999, as compared to $623.9 million in fiscal 1998. The increase in cost
of sales was due to higher CEG volumes. As a percentage of revenues, cost of
sales increased to 84.3% in fiscal 1999, as compared to 81.2% in fiscal 1998.
This increase is due to acquisitions and internal growth in the CEG business
segment, which has a higher cost of sales to revenue ratio.
Gross profit increased by $37.0 million or 25.7% to $181.2 million in
fiscal 1999, as compared to $144.2 million in fiscal 1998. This increase was due
primarily to acquisitions and increases in retail fuel margins offset to some
extent by lower retail volumes associated with the abnormally mild fiscal 1999
heating season.
Operating, general and administrative expenses increased by $26.5
million or 27.3% to $123.7 million in fiscal 1999, as compared to $97.2 million
in fiscal 1998. This increase was related primarily to acquisitions, with some
additional costs required to support the increased business growth. As a
percentage of revenues, operating, general and administrative expenses decreased
to 10.7% in fiscal 1999, as compared to 12.7% in fiscal 1998. Depreciation and
amortization increased $9.1 million or 50.0% to $27.3 million in fiscal 1999, as
compared to $18.2 million in fiscal 1998. This increase was primarily due to the
additional amortization and depreciation expense associated with newly acquired
businesses.
Operating income increased $1.5 million or 5.1% to $30.3 million for
fiscal 1999, as compared to $28.8 million for fiscal 1998. This increase was
primarily the result of the increased gross profit described above, partially
offset by the increased operating, general and administrative expenses also
described above.
Interest expense increased by $5.8 million or 30.2% to $25.0 million in
fiscal 1999, as compared to $19.2 million in fiscal 1998. The increase was due
to higher borrowings related to business acquisitions.
Net income decreased $4.2 million or 44.7% to $5.2 million in fiscal
1999, as compared to $9.4 million in fiscal 1998, as a result of the factors
outlined above. Total earnings before interest, taxes, depreciation and
amortization ("EBITDA") increased by $10.5 million or 22.3% to $57.5 million for
fiscal 1999, as compared to $47.0 million for fiscal 1998. The increase in
EBITDA is due to the earnings contributions from acquisitions, partially offset
by lower volumes due to warmer winter weather. Retail operations contributed
approximately 23% of the revenue and 85% of the EBITDA from operations for
fiscal 1999.
EBITDA should not be considered as an alternative to net income (as an
indication of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations) but provides
additional information to evaluate the Partnership's ability to distribute the
Minimum Quarterly Distribution.
<PAGE>
FISCAL 1998 COMPARED TO PRO FORMA 1997:
In fiscal 1998, Cornerstone sold 235.0 million retail propane gallons,
an increase of 21.3 million gallons or 10.0% from the 213.7 million retail
propane gallons sold in fiscal 1997. The increase in retail volume was primarily
attributable to acquisitions, which added 22.0 million gallons. Excluding
acquisitions, retail volumes were flat, with increases in customer base being
offset by the warmer weather conditions attributable to the El Nino winter
weather pattern. The heating season for 1998 was the third warmest on record in
the last 104 years, since weather records were maintained, which negatively
impacted retail sales volumes and profits.
Revenues increased by $103.9 million or 15.6% to $768.1 million in
fiscal 1998, as compared to $664.2 million in fiscal 1997. This increase was
attributable to an increase in CEG's revenues of $124.5 million or 31.1% to
$525.2 million in fiscal 1998, as compared to $400.7 million in fiscal 1997, due
primarily to higher volumes which were offset by lower selling prices. Revenues
for the retail business declined by $20.6 million or 7.8% to $242.9 million in
fiscal 1998, as compared to $263.5 million in fiscal 1997, as a result of lower
product selling prices, partially offset by higher gallons.
Cost of sales increased by $89.0 million or 16.6% to $623.9 million in
fiscal 1998, as compared to $534.9 million in fiscal 1997. The increase in cost
of sales was due to higher CEG volumes. As a percentage of revenues, cost of
sales increased to 81.2% in fiscal 1998, as compared to 80.5% in fiscal 1997,
due to higher growth in the CEG business segment, which has a higher cost of
sales to revenue ratio.
Gross profit increased $14.9 million or 11.5% to $144.2 million in
fiscal 1998, as compared to $129.3 million in fiscal 1997, primarily due to
acquisitions.
Operating, general and administrative expenses increased by $8.9
million or 10.1% to $97.2 million in fiscal 1998, as compared to $88.3 million
in fiscal 1997. This increase was related primarily to acquisitions, with some
additional costs required to support the increased business growth. As a
percentage of revenues, operating, general and administrative expenses decreased
to 12.7% in fiscal 1998, as compared to 13.3% in fiscal 1997. Depreciation and
amortization increased $3.1 million or 20.5% to $18.2 million in fiscal 1998, as
compared to $15.1 million in fiscal 1997, due to the additional depreciation and
amortization expense related to acquisitions.
Operating income increased $2.8 million or 10.8% to $28.8 million in
fiscal 1998, as compared to $26.0 million in fiscal 1997. This increase was
primarily the result of the increased gross profit described above, partially
offset by the increased operating, general and administrative expenses also
described above.
Interest expense increased by $1.0 million or 5.5% to $19.2 million in
fiscal 1998, as compared to $18.2 million in fiscal 1997 due to higher
borrowings in the current period related to business acquisitions.
Net income increased $1.8 million or 23.7% to $9.4 million in fiscal
1998, as compared to $7.6 million in fiscal 1997. This increase reflects the
increased operating income discussed
<PAGE>
above, partially offset by increased depreciation, amortization and interest
costs. Total EBITDA increased by $6.0 million or 14.6% to $47.0 million for
fiscal 1998, as compared to $41.0 million for fiscal 1997. The increase in
EBITDA reflects the increased operating income discussed above. Retail
operations contributed approximately 32% of the revenue and 91% of the EBITDA
from operations for fiscal year 1998.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING AND INVESTING ACTIVITIES.
FISCAL 1999:
Cash provided by operating activities during 1999 totaled $27.0
million. Cash flow from operations included net income of $5.2 million and
non-cash charges of $27.4 million for the period, comprised of depreciation
expense, amortization expense, foreign currency revaluation and the loss on sale
of assets. The impact of working capital changes decreased cash flow by
approximately $5.6 million.
Cash used in investing activities for 1999 totaled $175.3 million,
which was principally used for acquisitions and, to a lesser extent, for
purchases of property and equipment. The acquisition of Propane Continental,
Inc. was the largest component of the cash used for investing activities,
comprising approximately 73% of cash used in investing activities in fiscal
1999. Cash provided by financing activities was $148.1 million for 1999. This
amount reflects funds from a secondary offering of Common Units, net borrowings
on the Working Capital Facility, and the issuance of additional Senior Notes,
partially offset by the payment of Partnership quarterly distributions.
FISCAL 1998:
Cash provided by operating activities during 1998 totaled $24.9
million. Cash flow from operations included net income of $9.4 million and
non-cash charges of $17.5 million for the period, comprised of depreciation and
amortization expense and the gain on sale of assets. The impact of working
capital changes decreased cash flow by approximately $2.0 million.
Cash used in investing activities for 1998 totaled $30.1 million, which
was principally used for acquisitions and purchases of property and equipment.
Cash provided by financing activities was $6.2 million for 1998. This amount
reflects funds from a secondary offering of Common Units and net borrowings on
the Working Capital Facility, partially offset by the payment of Partnership
distributions.
FINANCING AND SOURCES OF LIQUIDITY:
Financing of investments in acquisitions and property, plant and
equipment had been obtained through a balanced funding approach which included
issuance of additional Common Units, placement of Senior Notes and utilization
of bank credit facility advances.
<PAGE>
In October 1998, the Partnership filed a Form S-3 registration
statement covering the proposed issuance of 3,487,500 Common Units for general
corporate purposes, which may include acquisitions, working capital, expansion
of the Partnership's propane business by internal growth and repayment of
indebtedness. In December 1998, the Partnership issued 3.1 million additional
Common Units as part of the funding for the Propane Continental, Inc.
acquisition. Approximately 387,500 units are available for issuance under this
registration statement as of June 30, 1999.
Additionally, approximately 454,000 units were issued in fiscal 1999 to
the selling shareholders of Propane Continental, Inc. and other acquired
businesses, which did not require the use of cash.
In June 1999, Cornerstone Propane Partners, L.P. (the "Master Limited
Partnership") issued $45.0 million of Senior Notes with a fixed annual interest
rate of 10.26% pursuant to note purchase agreements with various investors.
These notes were issued principally to fund various acquisitions and for general
corporate purposes. These notes mature on June 30, 2009, and require semi-annual
interest payments each December 31 and June 30. The Note Agreement requires that
the principal be paid in equal annual installments of $9.0 million starting June
30, 2005.
In December 1998, Cornerstone Propane, L.P. (the "Operating
Partnership") issued $85.0 million of Senior Notes with a fixed annual interest
rate of 7.33% pursuant to note purchase agreements with various investors. The
proceeds from these notes were principally related to the Propane Continental,
Inc. acquisition. These notes mature on January 31, 2013, and require
semi-annual interest payments each January 31 and July 31. The Note Agreement
requires that the principal be paid in equal annual installments of $9.4 million
starting January 31, 2005.
In addition to the Senior Notes mentioned above, the Operating
Partnership had previously issued $220.0 million of Senior Notes with a fixed
annual interest rate of 7.53% pursuant to note purchase agreements with various
investors. These notes were issued in conjunction with the IPO in December 1996.
These notes mature on December 30, 2010, and require semi-annual interest
payments each December 30 and June 30. The Note Agreement requires that the
principal be paid in equal annual installments of $27.5 million starting
December 30, 2003.
During fiscal 1999, the Operating Partnership entered into a refunding
credit agreement (the "Refunding Credit Agreement") which principally modified
the allocation of funds available for working capital and acquisition needs and
revised some of the debt covenants from the previous agreement. The Refunding
Credit Agreement has a working capital facility (the "Working Capital Facility")
and an acquisition facility (the "Acquisition Facility"). The Working Capital
Facility provides for revolving borrowings up to $75 million (including a $20
million sublimit for letters of credit) and matures on November 30, 2001. The
Refunding Credit Agreement provides that there must be no amount outstanding
under the Working Capital Facility (excluding letters of credit) in excess of
$10 million for at least 30 consecutive days during each fiscal year. At June
30, 1999, $18.1 million was outstanding under the Working Capital Facility.
Issued outstanding letters of credit totaled $12.8 million at June 30, 1999. The
Acquisition Facility provides the Operating Partnership with the ability to
borrow up to $35
<PAGE>
million to finance propane business acquisitions. The Acquisition Facility
operates as a revolving facility through November 30, 2001. There were no
amounts outstanding on the Acquisition Facility at June 30, 1999. Both the
Working Capital Facility and the Acquisition Facility can be extended one
year upon approval of the banks. The Acquisition Facility can be converted to
a two year term note beginning on November 30, 2001. At June 30, 1999, the
applicable base and Eurodollar rates were 8.50% and 6.81%, respectively. In
addition, an annual fee is payable quarterly by the Operating Partnership
(whether or not borrowings occur) ranging from .25% to .50% depending upon
coverage ratios.
The Operating Partnership's obligations under the Senior Notes and
Refunding Credit Agreements and the Master Limited Partnership's obligations are
secured by a security interest in the Partnership's inventory, accounts
receivable and propane storage tanks. The Notes and Refunding Credit Agreements
contain various terms and covenants including financial covenants with respect
to debt and interest coverage and limitations, among others, on the ability of
the Partnership and its subsidiaries to incur additional indebtedness, create
liens, make investments and loans, sell assets and enter into mergers,
consolidations or sales of all or substantially all assets. The Operating
Partnership and Master Limited Partnership were in compliance with all terms and
covenants at June 30, 1999.
MARKET RISK
The Partnership has limited exposure to technology risk, credit risk,
interest rate risk, foreign currency risk and commodity price risk.
STRATEGIES AND PROCEDURES - In the normal course of business, the
Partnership employs various strategies and procedures to manage its exposure to
changes in interest rates, fluctuations in the value of foreign currencies and
changes in commodity prices.
CONCENTRATION OF CREDIT RISK - The Partnership's trade receivables and
short-term investments do not represent significant concentration of credit risk
at June 30, 1999, due to the wide variety of customers and markets in which the
Partnership's products and services are sold. None of the Partnership's
customers account for more than 10% of the Partnership's revenue or receivable
balances at June 30, 1999. Short-term investments at any single financial
institution account for less than 10% of the Partnership's current assets.
COMMODITY PRICE RISK - Commodity price risk arises from the risk of
price changes in the commodities that the Partnership buys and sells and as a
consequence of providing price risk management services to customers. Futures
and forward contracts are utilized to alter the Partnership's exposure to price
fluctuations related to the purchase of propane, natural gas and crude oil. If
commodity prices changed by 5%, the impact on open positions at June 30, 1999
would be approximately $0.3 million. In the past, price changes have generally
been passed along to the Partnership's customers to maintain gross margins,
mitigating the commodity price risk. The Partnership enters into hedging
instruments to lock into purchases when prices are deemed favorable by
management.
INTEREST RATE RISK - Interest rate risk arises from having variable
rate debt obligations, as changing interest rates impact the Partnership's
future cash flows and net income. The
<PAGE>
Partnership's objective in managing its exposure to interest rate changes is
to limit the impact of interest rate changes on earnings and cash flows and
to lower its overall borrowing costs. To achieve this objective, the
Partnership maintains the majority of its debt in fixed rate instruments and
periodically places some of its floating rate debt under short-term fixed
rate Eurodollar loans. On the Partnership's variable rate debt, a change in
interest rates of one percentage point would change interest expense by
approximately $0.3 million.
FOREIGN CURRENCY EXCHANGE RATE RISK - Foreign currency rate risk arises
from the Partnership's Canadian operations. The Partnership's objective in
managing the exposure to foreign currency fluctuations is to reduce earnings and
cash flow volatility associated with foreign exchange rate changes and to allow
management to focus its attention on its core business issues and activities.
Accordingly, the Partnership enters into various contracts that change in value
as foreign exchange rates change to protect the value of existing foreign
currency assets, liabilities and foreign currency sales. If foreign exchange
rates changed by 5%, projected earnings would change by approximately $0.1
million due to the translation of earnings in foreign currencies.
It is the Partnership's policy to enter into interest rate and foreign currency
transactions only to the extent considered necessary to meet its objectives as
stated above. The Partnership does not enter into interest or foreign currency
transactions for speculative purposes.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue is the result of computer programs using only the
last two digits to indicate the year. If uncorrected, such computer programs
will not be able to interpret dates correctly beyond the year 1999 and, in some
cases prior to that time (as some computer experts believe), which could cause
computer system failures or other computer errors disrupting business
operations. Recognizing the potentially severe consequences of the failure to be
Year 2000 compliant, the Partnership's management has developed and implemented
a company-wide program to identify and remedy the Year 2000 issues. A project
team, consisting of the Partnership's Director of Information Systems and the
Partnership's key IS managers who supervise operations at each of the
Partnership's three main regional facilities in California, Missouri and Texas,
together with the Chief Information Officer of Northwestern Corporation, the
Managing General Partner's parent corporation, was created to manage the
Partnership's Year 2000 issues, enabling a smooth transition into the Year 2000.
The project team reports directly to executive management who have assigned a
high priority to such efforts within the Partnership.
The scope of the Partnership's Year 2000 readiness program includes the
review and evaluation of (i) the Partnership's information technology ("IT")
such as hardware and software utilized in the operation of the Partnership's
business; (ii) the Partnership's non-IT systems or embedded technology such as
micro-controllers contained in various equipment and facilities; and (iii) the
readiness of third parties, including customers, suppliers and other key vendors
to the Partnership, and the electronic data interchange ("EDI") with those key
third parties. If needed modifications and conversions are not made on a timely
basis, the Year 2000 issue could have a material adverse effect on the
Partnership's operations.
<PAGE>
The Partnership is currently using internal and external resources to
identify, correct and test large quantities of lines of application software
code for systems that were developed internally. Remediation of these systems is
scheduled for completion in October 1999 except for the Partnership's Retail
Information System, consisting principally of its billing and accounts
receivable systems, which is already Year 2000 compliant. Since January 1997,
the Partnership has been converting its old billing system installed at each of
the approximately 300 customer service centers to the new Retail Information
System. Currently, approximately 95% of the Partnership's customer service
centers are running the new system, with the roll-out to the balance of the
centers scheduled to be completed in October 1999.
Software developed externally has been evaluated for Year 2000
compliance and is being upgraded or replaced. The Partnership's
NT-platform-based year 2000 compliant financial system was installed in January
1999. The new financial system encompasses general ledger, accounts payable and
fixed assets. Remediation efforts for sub-systems integrated with the financial
system are scheduled for completion in October 1999. The Partnership's oil and
gas systems are being replaced with a year 2000 compliant third party vendor
solution. Scheduled completion date for this project is November 1999. The
Partnership is using this process as an opportunity to upgrade and enhance its
information systems.
In addition to internal Year 2000 remediation activities, the
Partnership has contacted key suppliers, vendors and customers to determine
their readiness for the Year 2000, surveying each of them about their compliance
and contingency plans to supply the Partnership upon the approach and arrival of
the Year 2000. While none of the Partnership's products are directly date
sensitive, the supply and transportation of propane gas products are dependent
upon companies whose own systems may need to be Year 2000 compliant. If third
parties do not convert their systems in a timely manner and in a way compatible
with the Partnership's systems, the arrival of the Year 2000 could have an
adverse effect on Partnership operations. The Partnership believes that its
actions with key suppliers, vendors and customers minimizes these risks.
Furthermore, no single customer accounts for more than 10% of the Partnership's
consolidated gross profits, thus mitigating the adverse risk to the
Partnership's business if some but not all customers are not Year 2000
compliant. Also, only a minimal number of transactions are conducted through
EDI.
The Partnership's primary focus has been directed at resolving the Year
2000 problem. While the Partnership expects its internal IT and non-IT systems
to be Year 2000 compliant by the dates specified, the Partnership has developed
a contingency plan specifying what the Partnership will do if it or important
third parties are not Year 2000 compliant by the required dates. A majority of
such a contingency plan is based on manual back-up systems, procedures and
practices.
Through June 30, 1999, the Partnership estimates that incremental costs
of approximately $1.7 million have been incurred and expensed related to Year
2000 issues. Since many systems are being modified to provide significant
enhanced capabilities, the Year 2000 expenses have not been nor are planned to
be specifically tracked. The current estimated additional cost to complete
remediation is expected to be less than $0.3 million. The Partnership expects
that a portion of these costs will be capitalized, as they are principally
related to adding new software applications and functionality. Other costs will
continue to be expensed as incurred.
<PAGE>
The Partnership's current estimates of the amount of time and costs
necessary to remediate and test its computer systems are based on the facts
and circumstances existing at this time. The estimates were made using
assumptions of future events including the continued availability of existing
resources, Year 2000 modification plans, implementation success by
third-parties, and other factors. New developments may occur that could
affect the Partnership's estimates of the amount of time and costs necessary
to modify and test its IT and non-IT systems for Year 2000 compliance. These
developments include, but are not limited to; (i) the availability and cost
of personnel trained in this area, (ii) the ability to locate and correct all
relevant computer codes and equipment and (iii) the planning and Year 2000
compliance success that key suppliers, vendors and customers attain.
In October 1998, President Clinton signed into law the Year 2000
Readiness Disclosure Act. The Partnership intends to obtain the benefits of
the Act's protections by implementing certain procedures described in that
Act.
FORWARD-LOOKING STATEMENTS
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.
INFLATION AND ECONOMIC TRENDS
Although its operations are affected by general economic trends, the
Partnership does not believe that inflation had a material effect on the
results of its operations during the past three fiscal years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the Partnership and its
predecessors appear following Item 14. An index of the Consolidated Financial
Statements appears in Item 14(a)(1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Managing General Partner manages and operates the activities of the
Partnership. The following table sets forth certain information with respect
to the executive officers and members of the Board of Directors of the
Managing General Partner. Executive officers and directors are elected for
one-year terms.
<TABLE>
<CAPTION>
Name Age Position with Managing General Partner
- ---- --- --------------------------------------
<S> <C> <C>
Merle D. Lewis 51 Chairman of the Board of Directors
Richard R. Hylland 38 Vice Chairman of the Board of Directors
Keith G. Baxter 50 President, Chief Executive Officer and
Director
Charles J. Kittrell 59 Executive Vice President, Chief
Operating Officer and Secretary
Ronald J. Goedde 50 Executive Vice President, Chief Financial
Officer and Treasurer
Vincent J. Di Cosimo 41 Executive Vice President
William L. Woods 49 Vice President
Paul Christen 70 Director
Kurt Katz 66 Director
Daniel K. Newell 42 Director
</TABLE>
Each of the officers and directors has served since 1996, except Messrs.
Christen and Katz, who were elected directors in 1997.
Section 16(a) Beneficial Ownership Reporting Compliance.
Based solely upon a review of Forms 3, 4 and 5 and related
representations furnished to the Partnership during the most recent fiscal
year, no person who, at any time during the fiscal year, was a director,
officer or beneficial owner of more than ten percent of the Common Units
failed to file on a timely basis reports required by Section 16(a) of the
Securities Exchange Act of 1934 during the most recent fiscal year.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The following table provides compensation information from commencement
of operations through the year ended June 30, 1999, for the Chief Executive
Officer and for each of the four other most highly compensated executive
officers of the Managing General Partner whose total compensation exceeded
$100,000 for the most recent fiscal period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term
--------------------------------- Compensation
Bonus on
----------------------- Other Restricted
Acquisition Other Annual Unit All Other
Name and Principal Position Year Salary Incentive(1) Bonus(2) Compensation(3) Awards(4) Compensation(5)
- --------------------------- ---- ------ ------------ -------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Keith G. Baxter 1999 $313,958 $924,785 $256,947 $135,000 $300,000 $81,120
Chief Executive Officer 1998 191,485 590,814 60,000 135,000 -- 11,059
1997 108,333 364,670 25,000 67,500 2,800,000 3,683
Charles J. Kittrell 1999 219,375 633,543 28,000 65,000 200,000 55,845
Chief Operating Officer 1998 155,283 393,876 30,000 5,000 -- 10,125
1997 88,125 243,113 15,000 3,500 1,600,000 4,256
Ron J. Goedde 1999 172,917 579,201 31,900 40,000 200,000 40,368
Chief Financial Officer 1998 145,171 328,230 35,000 40,000 -- 6,143
1997 79,192 202,594 15,000 20,000 1,600,000 2,998
Vincent J. Di Cosimo 1999 184,771 -- 777,233 25,000 150,000 39,342
Senior Vice President 1998 159,933 -- 245,000 25,000 -- 5,003
1997 81,250 -- 175,000 12,500 1,000,000 2,333
William L. Woods 1999 164,690 356,518 36,000 -- 60,000 31,959
Vice President 1998 130,495 187,560 40,000 -- 300,000 3,179
1997 62,292 115,766 50,000 -- -- --
</TABLE>
(1) Reflects amounts awarded under the Acquisition Incentive Plan for
Messrs. Baxter, Kittrell, Goedde and Woods. See "Incentive Plans."
(2) Reflects (a) bonus paid under the Annual Operating Incentive Plan
payable to Messrs. Baxter, Kittrell, Goedde, Di Cosimo and Woods; (b) the
bonus payable to Mr. Di Cosimo under the Coast Energy Group Bonus Plan;
(c) the amounts vested under the CEG Stock Appreciation Rights Plan to
Mr. Baxter and Mr. Di Cosimo; and (d) a one-time special consolidating
bonus awarded to Messers. Baxter, Kittrell, Goedde and Woods in 1997. See
"Incentive Plans."
(3) Reflects the Management Fees payable to Messrs. Baxter, Kittrell,
Goedde and Di Cosimo in connection with the acquisition of Empire Energy
and Coast by Northwestern Growth. See "Employment Agreements."
(4) The total number of restricted Common Units and their aggregate market
value as of June 30, 1999, were: Mr. Baxter, 148,286 Common Units valued
at $2,613,546; Mr. Kittrell,
<PAGE>
86,159 Common Units valued at $1,518,550; Mr. Goedde, 85,159 Common Units
valued at $1,518,550; Mr. Di Cosimo, 55,095 Common Units valued at
$971,049 and Mr. Woods, 16,360 Common Units valued at $288,350. Amounts
listed in the table are units valued at time of issuance. There were no
payouts under the Restricted Unit Plan during the fiscal period ended
June 30, 1999.
(5) The "All Other Compensation" category reflects (a) the Managing General
Partner's matching contributions to its 401(k) Plan; (b) amounts vested in
the Supplemental Executive Retirement Plan; and (c) payments for life and
disability insurance. Amounts relate to all Executives listed. See
"Employment Agreements".
EMPLOYMENT AGREEMENTS
The Managing General Partner has entered into employment agreements (the
"Employment Agreements") with each of Keith G. Baxter, Charles J. Kittrell,
Ronald J. Goedde and Vincent J. Di Cosimo and William L. Woods (the
"Executives").
Pursuant to the Employment Agreements, Messrs. Baxter, Kittrell, Goedde,
Di Cosimo and Woods serve as President and Chief Executive Officer, Executive
Vice President and Chief Operating Officer, Executive Vice President and
Chief Financial Officer, Senior Vice President and Vice President,
respectively, of the Managing General Partner. Each of the Employment
Agreements has a term of three years from July 1, 1998, unless sooner
terminated as provided in the Employment Agreements. The Employment
Agreements provide for an annual base salary of $300,000, $210,000, $165,000,
$185,000 and $165,000 for each of Messrs. Baxter, Kittrell, Goedde, Di Cosimo
and Woods, respectively, subject to such increases as the Board of Directors
of the Managing General Partner may authorize from time to time, plus a fee
for each of the Executives of approximately $135,000, $65,000, $40,000,
$25,000 and $0, respectively, per year for three years related to the
acquisition of Empire Energy and Coast by Northwestern Growth (the
"Management Fee"). In addition, the Managing General Partner pays for a
$725,000 life insurance policy for Mr. Baxter and $410,000 life insurance
policies for each of Messrs. Kittrell, Goedde and Di Cosimo and $250,000 for
Mr. Woods. Each of the Executives participates in the Annual Operating
Performance Incentive Plan of the Managing General Partner and Messrs.
Baxter, Kittrell, Goedde and Woods participate in the New Acquisition
Incentive Plan of the Managing General Partner (together with the Annual
Operating Performance Incentive Plan, the "Plans") as described below.
Messrs. Baxter and Di Cosimo participate in the Coast Energy Group Stock
Appreciation Rights Plan. The Executives are also entitled to participate in
such other benefit plans and programs as the Managing General Partner may
provide for its employees in general (the "Other Benefit Plans").
The Employment Agreements provide that in the event an Executive's
employment is terminated without "cause" (as defined in the Employment
Agreements) or if an Executive terminates his employment due to a
"Fundamental Change" (as defined below), such Executive will be entitled to
receive a severance payment in an amount equal to his total compensation for
the remainder of the employment term under the Employment Agreement and will
receive benefits under the Other Benefit Plans for a period of twelve months
after termination. In the event of termination due to disability, the
Executive will be entitled to his base salary, his Management Fee and
benefits under the Plans and the Other Benefit Plans for twelve months. In
<PAGE>
the event of termination due to death, benefits under the Other Benefit Plans
will be continued for the Executive's dependents for twelve months. In
the event the Executive's employment is terminated for "cause," the Executive
will receive accrued salary and benefits (including his Management Fee and
benefits under the Plans) up to the date of termination and, if the Managing
General Partner does not waive the Executive's covenant not to compete,
benefits under the Other Benefit Plans for 12 months.
A Fundamental Change is defined in the Employment Agreements to have
occurred (i) if the Executive's duties, authority, responsibilities and/or
compensation is reduced without performance or market-related justification;
(ii) if the Executive's primary office is moved more than 50 miles from
Watsonville, California (or, with respect to Mr. Di Cosimo, Houston, Texas)
without his consent; (iii) if the Partnership disposes of business and assets
which reduce the annual EBITDA of the Partnership below 70% of the annual
EBITDA level existing at the time employment commenced; or (iv) if securities
representing 10% of the voting power in elections of directors of NOR become
beneficially owned by any party or group or other prescribed events occur
constituting a change of control of NOR.
In addition, each Employment Agreement contains non-competition and
confidentiality provisions.
INCENTIVE PLANS
The Managing General Partner has adopted the Annual Operating Performance
Incentive Plan, which provides for the payment of annual incentive bonuses to
participants in the plan (who will be determined by the Board of Directors of
the Managing General Partner from time to time and who will include the
Executives) equal to a percentage of annual salary (plus in the case of the
Executives, his Management Fee) based on the Partnership's performance
compared to budgeted levels of net income and EBITDA. Such bonuses will range
from zero for performance at 10% below budget to 50% for performance at
budget. In addition, in the event EBITDA exceeds budgeted amounts, there will
be established a bonus pool equal to 10% of the excess of EBITDA over budget,
which will be divided among Messrs. Baxter, Kittrell, Goedde and Woods and
any other participants that the Board of Directors of the Managing General
Partner may determine. The period covered by the plan began December 17,
1996, and ends on the fifth anniversary thereof.
The Managing General Partner has an Acquisition Incentive Plan, which
provides for bonuses to participants in the plan (who will be determined by
the Board of Directors of the Managing General Partner from time to time and
who will include the Executives) for adding new businesses to the
Partnership's propane operations. The bonuses will be an amount equal to 4%
of the gross acquisition purchase price, allocated among the participants in
the plan based on defined percentages. The transactions covered by the plan
will include those occurring on or after December 17, 1997 through the fifth
anniversary thereof. Awards under this program will be payable in cash 90
days after the close of the particular acquisition transaction.
<PAGE>
RESTRICTED UNIT PLAN
LONG-TERM INCENTIVE PLAN
The following table sets forth the restricted unit grants made under the
Restricted Unit Plan to the named executive officers of the Partnership.
<TABLE>
<CAPTION>
Number of Shares, Units or Performance or Other Period
Name Other Rights Until Maturation or Payout
------ --------------------------- ----------------------------
<S> <C> <C>
Keith G. Baxter 148,286 Common Units(1) (3)
Charles J. Kittrell 86,159 Common Units(1) (3)
Ronald J. Goedde 86,159 Common Units(1) (3)
Vincent J. Di Cosimo 55,095 Common Units(1) (3)
William L. Woods 16,360 Common Units(2) (3)
</TABLE>
(1) Granted on December 17, 1996 upon consummation of the IPO and on
December 1, 1998.
(2) Granted during fiscal year 1998 and on December 1, 1998.
(3) Restricted units are subject to a bifurcated vesting procedure such that
(a) 25% of a participant's restricted units will vest over time, with
one-third vesting on the third, fifth and seventh anniversaries of the
date of grant and (b) the remaining 75% of a participant's restricted
units will vest automatically upon, and in the same proportions as, the
conversion of the Subordinated Units to Common Units. See Note 4 to the
Partnership's Consolidated Financial Statements included in Item 8. If a
participant's employment is terminated without "cause" (as defined in the
Restricted Unit Plan) or a participant resigns with "good reason" (as
defined in the Restricted Unit Plan), the participant's rights to receive
Common Units which vest over time will immediately vest. In the event of
a "change of control" of the Partnership (as defined in the Restricted
Unit Plan), all rights to receive Common Units pursuant to the Restricted
Unit Plan will immediately vest. Until rights to receive Common Units have
vested, the Common Units to which they relate are not issued, and the
participant is not entitled to any distributions or allocations of income
or loss, and has no voting or other rights, with respect to such Common
Units.
DIRECTOR COMPENSATION
The Chairman of the Board of the Managing General Partner receives
$50,000 annually and each of its other nonemployee directors receives $15,000
annually, plus $1,000 per Board meeting attended and $500 per committee
meeting attended. Committee chairmen receive $500 per quarter.
In connection with the consummation of the IPO and in connection with the
acquisition of Propane Continental, Inc., the three initial nonemployee
directors of the Managing General Partner received rights with respect to
restricted units, as follows: Mr. Lewis, 23,035 Common Units valued at
$480,000; Mr. Hylland, 17,276 Common Units valued at $360,000; and Mr.
Newell, 11,518 Common Units valued at $240,000. In addition, under the
Restricted Unit Plan, upon his or her election to the Board of Directors of
the Managing General Partner, each nonemployee director receives rights with
respect to restricted units having an aggregate value of
<PAGE>
$240,000. The directors' restricted units vest in accordance with the same
procedure as is described in Note 3 to the Long-Term Incentive Plan - Awards
in Last Fiscal Year table above.
COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION IN COMPENSATION DECISIONS
The Nominating and Compensation Committee of the Board of Directors of
the Managing General Partner is comprised of Messrs. Lewis, Christen and
Katz. None of these persons is an officer, employee or former employee of the
Managing General Partner, the Partnership or any of their subsidiaries.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF PARTNERSHIP UNITS BY THE GENERAL PARTNERS AND
DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGING GENERAL PARTNER
The table below sets forth, as of June 30, 1999, the beneficial ownership
of Units by each person known to the Managing General Partner to be the
beneficial owner of more than 5% of any class of Units of the Partnership,
each director and named executive officer of the Managing General Partner, as
well as the directors and all of the executive officers of the Managing
General Partner as a group.
<TABLE>
<CAPTION>
Name and Address Amount and Nature Percent of
of Beneficial Owner Class of Beneficial Owner Class
------------------- ----- ------------------- -----
<S> <C> <C> <C>
Managing General Partner(1) Subordinated 5,677,040 86.0%
Special General Partner(2) Subordinated 920,579 14.0%
Merle Lewis Common 5,078 (3)(4) *
Richard R. Hylland Common 610 (3)(4) *
Keith G. Baxter Common 36,316 (3) *
Charles J. Kittrell Common 18,736 (3) *
Ronald J. Goedde Common 33,153 (3) *
Vincent J. Di Cosimo Common 4,367 (3) *
William L. Woods Common 13,764 (3) *
Paul Christen Common 692 (3) *
Kurt Katz Common 30,692 (3) *
Daniel K. Newell Common 2,805 (3)(4) *
All directors and executive officers (10 persons) as a common group 146,213 (3) *
</TABLE>
*Less than 1%
(1) The business address of the Managing General Partner is 432 Westridge
Drive, Watsonville, California 95076.
(2) The business address of the Special General Partner is 600Market
Street W., Huron, South Dakota 57350.
(3) Excludes Common Units awarded under the Restricted Unit Plan as
follows: Mr. Lewis- 23,035 Common Units; Mr. Hylland - 17,276 Common
Units; Mr. Baxter - 148,286 Common Units; Mr. Kittrell - 86,159 Common
Units; Mr. Goedde - 86,159 Common Units;
<PAGE>
Mr. Di Cosimo - 55,095 Common Units; Mr. Woods - 16,360 Common
Units; Mr. Christen - 10,883 Common Units; Mr. Katz - 11,296 Common
Units; Mr. Newell - 11,518 Common Units; and all directors and officers
as a group - 466,067 Common Units.
(4) Excludes Subordinated Units held by the General Partners. Messrs.
Lewis, Hylland and Newell are executive officers of the parent of the
General Partners.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As of June 30, 1999, the General Partners own the entire general partner
interest in the Partnership and all of the Subordinated Units, representing
an aggregate 27.6% limited partner interest and a 2% General Partner interest
in the Partnership. Through the Managing General Partner's ability, as
managing general partner, to manage and operate the Partnership and the
ownership of all of the outstanding Subordinated Units by the General
Partners (effectively giving the General Partners the ability to veto certain
actions of the Partnership), the General Partners have the ability to control
the management of the Partnership.
The Managing General Partner is a wholly-owned subsidiary of NOR, and
the Special General Partner is a majority-owned subsidiary of NOR. Mr. Lewis
serves as the Chairman of the Board, and Messrs. Hylland and Newell are
executive officers of NOR.
The Managing General Partner does not receive any management fee or other
compensation in connection with its management of the Partnership, but it and
its affiliates performing services for the Partnership are reimbursed at cost
for all expenses incurred on behalf of the Partnership, including the cost of
compensation properly allocable to the Partnership. The Partnership's
Partnership Agreement provides that the Managing General Partner will
determine the expenses that are allocable to the Partnership in any
reasonable manner.
In addition, the General Partners are entitled to receive distributions
on their general partner interest, certain incentive distributions and
distributions on their Subordinated Units.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
Cornerstone Propane Partners, L.P.
Report of Independent Public Accountants
Consolidated Balance Sheets as of June 30, 1999 and 1998
Consolidated Statements of Income for the years ended June 30, 1999
and 1998, and the period ended June 30, 1997
Consolidated Statements of Cash Flows for the years ended
June 30, 1999 and 1998, and the period ended June 30, 1997
Consolidated Statements of Partners' Capital for the years ended
June 30, 1999 and 1998, and the period ended June 30, 1997
Empire Energy Corporation
Independent Accountants' Report
Consolidated Statements of Operations for the periods ended
December 16, 1996, and the Year Ended June 30, 1996
Consolidated Statements of Stockholders' Equity for the periods ended
December 16, 1996, and the Year Ended June 30, 1996
Consolidated Statements of Cash Flows for the periods ended
December 16, 1996, and the Year Ended June 30, 1996
CGI Holdings, Inc.
Report of Independent Accountants
Consolidated Statements of Operations for the four and one-half month
period ended December 16, 1996 and for the fiscal year ended
July 31, 1996
Consolidated Statements of Stockholders' Equity for the four and
one-half month period ended December 16, 1996 and for the fiscal
year ended July 31, 1996
Consolidated Statements of Cash Flows for the four and one-half month
period ended December 16, 1996 and for the fiscal year ended
July 31, 1996
<PAGE>
SYN, Inc.
Report of Independent Public Accountants
Consolidated Statements of Operations for the period ended
December 16, 1996, and the period ended June 30, 1996
Consolidated Statements of Stockholders' Equity for the period ended
December 16, 1996, and the period ended June 30, 1996
Consolidated Statements of Cash Flows for the period ended
December 16, 1996, and the period ended June 30, 1996
Synergy Group Incorporated
Independent Accountants Report
Consolidated Statement of Operations for the period ended August 14,
1995
Consolidated Statement of Stockholders' Equity (Deficit) for the
period ended August 14, 1995
Consolidated Statement of Cash Flows for the period ended August 14,
1995
(a) (2) Financial Statement Schedules
All financial statement schedules are omitted because the information is
not required, is not material or is otherwise included in the financial
statements or related notes thereto.
(a) (3) Exhibits
3.1 Amended and Restated Agreement of Limited Partnership of Cornerstone
Propane Partners, L.P. dated as of December 17, 1996. (Incorporated by
reference to Exhibit 3.1 of the Partnership's report on Form 8-K dated
April 14, 1997 (The Form 8-K).)
3.2 Amended and Restated Agreement of Limited Partnership of Cornerstone
Propane, L.P. dated as of December 17, 1996. (Incorporated by
reference to Exhibit 3.2 to the Form 8-K.)
10.1 Credit Agreement dated December 17, 1996, among Cornerstone Propane,
L.P., various financial institutions and Bank of America National
Trust and Savings Association, as agent. (Incorporated by reference to
Exhibit 10.1 to the Form 8-K.)
10.2 Note Purchase Agreement dated December 17, 1996, among Cornerstone
Propane, L.P. and various investors. (Incorporated by reference to
Exhibit 10.2 to the Form 8-K.)
10.3 Contribution, Conveyance and Assumption Agreement dated as of December
17, 1996 among Cornerstone Propane Partners, L.P., Cornerstone
Propane, L.P., Cornerstone Propane GP, Inc., Empire Energy SC
Corporation and SYN Inc. (Incorporated by reference to Exhibit 10.3 to
the Form 8-K.)
10.4* 1996 Cornerstone Propane Partners, L.P. Restricted Unit Plan
(Incorporated by reference to Exhibit 10.4 to the Form 8-K.)
<PAGE>
10.5* Form of Employment Agreements for Messrs. Baxter, Kittrell, Goedde, Di
Cosimo, and Woods (Incorporated by reference to Exhibit 10.5 of the
Partnership's report on Form 10-Q dated November 13, 1998.)
10.6 Amendment No. 1 to Credit Agreement (Incorporated by reference to
Exhibit 10.6 to the Partnership's previous report on Form 10-K, dated
September 28, 1997.)
10.7 Amendment No. 2 to Credit Agreement (Incorporated by reference to
Exhibit 10.7 to the Partnership's previous report on Form 10-K, dated
September 28, 1997.)
10.8* Cornerstone Propane Deferred Compensation Plan, effective July 1, 1998
(Incorporated by reference to Exhibit 10.8 of the Partnership's report
on Form 10-Q, dated February 15, 1999)
10.9 Note agreement, dated as of December 11, 1998, by and among
Cornerstone Propane GP, Inc., SYN, Inc., Cornerstone Propane, L.P.,
and the purchasers set forth therein. (Incorporated by reference to
Exhibit 10.9 to the Partnership's previous report on Form 10-Q, dated
February 15, 1999)
10.10 Note agreement, dated as of June 25, 1999, by and among Cornerstone
Propane GP, Inc., SYN, Inc., Cornerstone Propane, L.P., and the
purchasers set forth therein.
10.11* Coast Energy Group Stock Appreciation Rights Agreement, dated
May 14, 1996.
21.1 List of Subsidiaries
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Baird, Kurtz & Dobson
23.3 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to be
signed on its behalf by the undersigned, thereunto duly authorized.
Cornerstone Propane Partners, L.P.
By: Cornerstone Propane GP, Inc.
Managing General Partner
By: /s/ Keith G. Baxter
------------------------------
Keith G. Baxter
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity in which Signed Date
--------- ------------------------ ----
<S> <C> <C>
/s/ Merle D. Lewis Chairman of the Board September 23, 1999
---------------------------- Of Directors of the
Merle D. Lewis Managing General Partner
/s/ Richard R. Hylland Vice Chairman of the Board September 23, 1999
---------------------------- Of Directors of the
Richard R. Hylland Managing General Partner
/s/ Keith G. Baxter President, Chief Executive September 23, 1999
---------------------------- Officer and Director
Keith G. Baxter of the Managing General Partner
(principal executive officer)
/s/ Ronald J. Goedde Executive Vice President, Chief Financial September 23, 1999
---------------------------- Officer and Treasurer of the
Ronald J. Goedde Managing General Partner
(principal financial/accounting officer)
/s/ Paul R. Christen Director of the Managing September 23, 1999
---------------------------- General Partner
Paul R. Christen
/s/ Kurt Katz Director of the September 23, 1999
---------------------------- Managing General Partner
Kurt Katz
/s/ Daniel K. Newell Director of the September 23, 1999
---------------------------- Managing General Partner
Daniel K. Newell
/s/ Richard D. Nye Vice President - Finance of the September 23, 1999
---------------------------- Managing General Partner
Richard D. Nye
</TABLE>
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Cornerstone Propane Partners, L.P. :
We have audited the accompanying consolidated balance sheets of Cornerstone
Propane Partners, L.P. (a Delaware limited partnership) and Subsidiary as of
June 30, 1999 and 1998, and the related consolidated statements of income,
partners' capital and cash flows for the years ended June 30, 1999 and 1998,
and for the period from commencement of operations (December 17, 1996) to
June 30, 1997. These financial statements are the responsibility of the
partnership's management. Our responsibility is to express an opinion on
these financial statements based on our 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 financial position of Cornerstone Propane
Partners, L.P. and Subsidiary as of June 30, 1999 and 1998, and the results
of their operations and their cash flows for the years ended June 30, 1999
and 1998, and for the period from commencement of operations (December 17,
1996) to June 30, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
August 4, 1999
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
(Thousands of dollars, except unit data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,229 $ 9,366
Trade receivables, net 29,097 18,467
Inventories 42,629 18,238
Prepaid expenses 5,444 1,107
Other current assets 4,690 6,043
------------- -------------
Total current assets 91,089 53,221
Property, plant and equipment, net 336,820 275,288
Goodwill, net 314,735 224,064
Other intangible assets, net 31,612 18,135
Due from related party 3,020 -
Other assets 3,968 1,803
------------- -------------
Total assets $ 781,244 $ 572,511
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Current portion of long-term debt $ 10,456 $ 3,800
Trade accounts payable 33,182 18,460
Accrued expenses 27,425 29,335
------------- -------------
Total current liabilities 71,063 51,595
Long-term debt 388,484 237,138
Due to related party - 1,684
Other noncurrent liabilities 6,170 2,500
------------- -------------
Total liabilities 465,717 292,917
------------- -------------
Partners' capital:
Common Unitholders (16,788,889 and 13,234,411
units issued and outstanding) 220,077 185,803
Subordinated Unitholders (6,597,619 units issued and outstanding) 88,965 88,117
General Partners 6,485 5,674
------------- -------------
Total partners' capital 315,527 279,594
------------- -------------
Total liabilities and partners' capital $ 781,244 $ 572,511
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
From Commencement
of Operations on
Year Ended Year Ended December 17, 1996
June 30, 1999 June 30, 1998 to June 30, 1997
- -------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except per unit data)
<S> <C> <C> <C>
Revenues $ 1,154,608 $ 768,129 $ 389,630
Cost of sales 973,367 623,924 315,324
-------------- --------------- ----------------------
Gross profit 181,241 144,205 74,306
-------------- --------------- ----------------------
Expenses:
Operating, general and administrative 123,735 97,184 50,023
Depreciation and amortization 27,253 18,246 8,519
-------------- --------------- ----------------------
Total expenses 150,988 115,430 58,542
-------------- --------------- ----------------------
Operating income 30,253 28,775 15,764
Interest expense 25,033 19,222 9,944
-------------- --------------- ----------------------
Income before provision for income taxes 5,220 9,553 5,820
Provision for income taxes 47 127 64
-------------- --------------- ----------------------
Net income $ 5,173 $ 9,426 $ 5,756
-------------- --------------- ----------------------
-------------- --------------- ----------------------
General Partners' interest in net income $ 103 $ 189 $ 212
-------------- --------------- ----------------------
-------------- --------------- ----------------------
Limited Partners' interest in net income $ 5,070 $ 9,237 $ 5,544
-------------- --------------- ----------------------
-------------- --------------- ----------------------
Limited Partners' net income per unit $ 0.23 $ 0.50 $ 0.34
-------------- --------------- ----------------------
-------------- --------------- ----------------------
Weighted average number of units outstanding 21,805 18,429 16,531
-------------- --------------- ----------------------
-------------- --------------- ----------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Thousands of Dollars
----------------------------------------------------
Total
Number of Units General Partners'
---------------------------
Common Subordinated Common Subordinated Partners Capital
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at commencement of
operations on December 17, 1996 - - $ - $ - $ - $ -
Contributions of net
assets of predecessor
companies and issuance of
Common Units 9,821,000 6,597,619 136,997 92,032 - 229,029
Issuance of Common
Units in connection with
acquisitions 691,805 - 14,784 - - 14,784
Issuance of 2% General
Partners' interest - - - - 4,674 4,674
General Partners'
contribution in connection
with acquisitions - - - - 300 300
Quarterly distributions - - (6,244) (4,156) (214) (10,614)
Net income - - 1,314 4,230 212 5,756
-------------- ------------ ------------- -------------- --------- ----------
Balance at June 30, 1997 10,512,805 6,597,619 146,851 92,106 4,972 243,929
Issuance of Common Units 1,960,000 - 40,828 - - 40,828
General Partners'
contribution in connection
with additional units - - - - 832 832
Issuance of Common Units
in connection with
acquisitions 761,606 - 17,589 - - 17,589
General Partners'
contribution in connection
with acquisitions - - - - 353 353
Quarterly distributions - - (25,567) (7,124) (672) (33,363)
Net income - - 6,102 3,135 189 9,426
-------------- ------------ ------------- -------------- --------- ----------
<PAGE>
Balance at June 30, 1998 13,234,411 6,597,619 185,803 88,117 5,674 279,594
Comprehensive net income:
Net income - - 4,158 912 103 5,173
Other comprehensive
income - - (160) (64) (5) (229)
Issuance of Common Units 3,100,000 - 53,790 - - 53,790
General Partners'
contribution in connection
with additional units - - - - 1,201 1,201
Issuance of Common Units
in connection with
acquisitions 454,478 - 8,959 - - 8,959
General Partners'
contribution in connection
with acquisitions - - - - 178 178
Quarterly distributions - - (32,473) - (666) (33,139)
-------------- ------------ ------------- -------------- --------- ----------
Balance at June 30, 1999 16,788,889 6,597,619 $ 220,077 $ 88,965 $ 6,485 $ 315,527
-------------- ------------ ------------- -------------- --------- ----------
-------------- ------------ ------------- -------------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
From Commencement
of Operations on
Year Ended Year Ended December 17, 1996
June 30, 1999 June 30, 1998 to June 30, 1997
- ---------------------------------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,173 $ 9,426 $ 5,756
Adjustments to reconcile net income to net cash
from operating activities:
Other comprehensive income (229) - -
Depreciation and amortization 27,253 18,246 8,519
Loss (gain) on sale of assets 363 (734) -
Changes in assets and liabilities, net of effect
of acquisitions and dispositions:
Trade receivables (1,217) 4,768 37,100
Inventories 864 (4,206) 11,020
Prepaid expenses and other current assets (1,383) (5,354) (734)
Trade accounts payable and accrued expenses (3,821) 3,148 (39,299)
Other assets and liabilities - (434) (11,211)
------------ ------------ ------------
Net cash provided by operating activities 27,003 24,860 11,151
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (21,948) (13,532) (1,954)
Acquisitions, net of cash received (153,337) (16,564) (1,800)
------------ ------------ ------------
Net cash used in investing activities (175,285) (30,096) (3,754)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on Working Capital Facility 9,380 4,120 (8,200)
Net (payments) borrowings on purchase obligations (7,171) (4,609) 799
Proceeds from Senior Note Offerings 130,000 - -
Payments for debt financing (1,390) (2,420) -
Proceeds from additional unit offering 58,900 43,365 -
Payments for additional unit offering (5,110) (2,537) -
General Partners' payments and contributions, net (3,325) 1,640 -
Partnership distributions (33,139) (33,363) (10,614)
------------ ------------ ------------
Net cash provided by (used by) financing activities 148,145 6,196 (18,015)
------------ ------------ ------------
PARTNERSHIP FORMATION TRANSACTIONS:
Net proceeds from issuance of Common and Subordinated Units - - 191,804
Borrowings on Working Capital Facility - - 12,800
Issuance of Senior Notes - - 220,000
Cash transfers from predecessor companies - - 22,418
<PAGE>
Repayment of long-term debt and related interest - - (337,631)
Distribution to Special General Partner for the redemption - -
of preferred stock - - (61,196)
Distribution to Special General Partner - - (15,500)
Other fees and expenses - - (13,673)
------------ ------------ ------------
Net cash provided by partnership formation transactions - - 19,022
------------ ------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (137) 960 8,404
CASH AND CASH EQUIVALENTS, beginning of period 9,366 8,406 2
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,229 $ 9,366 $ 8,406
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
<PAGE>
Cornerstone Propane Partners, L.P. and Subsidiary
Notes to Consolidated Financial Statements
(tabular dollars in thousands)
1. PARTNERSHIP ORGANIZATION AND FORMATION
Cornerstone Propane Partners, L.P. ("Cornerstone Partners") was
formed on October 7, 1996, as a Delaware limited partnership. Cornerstone
Partners and its subsidiary, Cornerstone Propane, L.P., a Delaware limited
partnership (the "Operating Partnership"), were formed to acquire, own and
operate substantially all of the propane businesses and assets of SYN Inc.
and its subsidiaries ("Synergy"), Empire Energy Corporation and its
subsidiaries ("Empire"), and CGI Holdings, Inc. and its subsidiaries
("Coast"). The principal predecessor entities, Synergy, Empire and Coast, are
collectively referred to herein as the "Predecessor Companies." The
consolidated financial statements include the accounts of Cornerstone
Partners, the Operating Partnership and its corporate subsidiaries,
Cornerstone Sales & Service Corporation, a California corporation, Flame,
Inc., an Arizona corporation and Propane Continental, Inc. ("PCI"), a
Delaware corporation, collectively referred to herein as the "Partnership."
The Operating Partnership is, and the Predecessor Companies were, principally
engaged in (a) the retail marketing and distribution of propane for
residential, commercial, industrial, agricultural and other retail uses; (b)
the wholesale marketing and distribution of propane, other natural gas
liquids, crude oil and natural gas to the retail propane industry, the
chemical and petrochemical industries and other commercial and agricultural
markets; (c) the repair and maintenance of propane heating systems and
appliances; and (d) the sale of propane-related supplies, appliances and
other equipment. The Partnership entities commenced operations on December
17, 1996 pursuant to a Contribution, Conveyance and Assumption Agreement
dated as of the same date, wherein substantially all of the assets and
liabilities of the Predecessor Companies were contributed to the Operating
Partnership (the "Conveyance"). As a result of the Conveyance, Cornerstone
Propane GP, Inc., a California corporation and the managing general partner
of Cornerstone Partners and the Operating Partnership (the "Managing General
Partner"), and SYN Inc., a Delaware corporation and the special general
partner of Cornerstone Partners and the Operating Partnership (the "Special
General Partner"), received all interests in the Operating Partnership, and
the Operating Partnership received substantially all assets and assumed
substantially all liabilities of the Predecessor Companies. Immediately after
the Conveyance, and in accordance with the Amended and Restated Agreement of
Limited Partnership of Cornerstone Partners (the "Partnership Agreement"),
the Managing General Partner and the Special General Partner (collectively
the "General Partners") conveyed their limited partner interests in the
Operating Partnership to Cornerstone Partners in exchange for a 2% interest
in Cornerstone Partners and the Operating Partnership.
Following these transactions, on December 17, 1996, Cornerstone
Partners completed its initial public offering of 9,821,000 Common Units (the
"IPO") at a price to the public of $21.00 a unit. The net proceeds of
approximately $191.8 million from the IPO, the proceeds from the issuance of
$220.0 million aggregate principal amount of the Operating Partnership's
7.53% Senior Notes, and $12.8 million borrowings under the Working Capital
Facility (as described in Note 3) were used to repay $337.6 million in
liabilities assumed by the Operating Partnership (including $141.8 million
paid to affiliates of the Managing General Partner) that were in large part
incurred in connection with the transactions entered into prior to the IPO. A
portion of the funds was distributed to the Special General Partner to redeem
its preferred stock ($61.2 million) to provide net worth to the Special
General Partner ($15.5 million) and to pay expenses ($13.7 million).
Partners' capital of limited partners immediately after the IPO
consisted of 9,821,000 Common Units and 6,597,619 Subordinated Units,
representing an aggregate 58.6% and 39.4% limited partner interest in
Cornerstone Partners, respectively. Partners' capital of General Partners
consists of a 2% interest in the Partnership.
<PAGE>
During the Subordination Period (see Note 4), the Partnership may
issue up to 4,270,000 additional Parity Units (generally defined as Common
Units and all other Units having rights to distribution or in liquidation
ranking on a parity with the Common Units), excluding Common Units issued in
connection with (a) employee benefit plans and (b) the conversion of
Subordinated Units into Common Units, without the approval of a majority of
the Unitholders. As of June 30, 1999, 4,265,318 Parity Units are available
for issuance. The Partnership may issue an unlimited number of additional
Parity Units without Unitholder approval if such issuance occurs in
connection with acquisitions, including, in certain circumstances, the
repayment of debt incurred in connection with an acquisition. In addition,
under certain conditions the Partnership may issue without Unitholder
approval an unlimited number of parity securities for the repayment of up to
$75.0 million of long-term indebtedness of the Partnership. After the
Subordination Period, the Managing General Partner may cause the Partnership
to issue an unlimited number of additional limited partner interests and
other equity securities of the Partnership for such consideration and on such
terms and conditions as shall be established by the Managing General Partner
at its sole discretion.
The Partnership consummated several acquisitions during the years
ended June 30, 1999 and 1998 and the period ended June 30, 1997. The total
consideration for these acquisitions consisted of both Common Units and debt,
as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
# of acquisitions Total consideration Dollar Value of
(MILLIONS) Partnership Units issued
(MILLIONS)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Period ended:
June 30, 1997 4 $ 20.5 $14.8
June 30, 1998 11 $ 38.9 $17.6
June 30, 1999 15 $160.9 $ 9.0
- ----------------------------------------------------------------------------------------------------------
</TABLE>
All acquisitions have been accounted for using the purchase method
of accounting and, accordingly, the purchase price has been allocated to the
assets acquired and liabilities assumed based on preliminary estimates of
fair value as of the date of acquisition. In addition, costs are accrued at
the time of the acquisition to be incurred as a direct result of the
acquisition which will have no future benefit. The balance of these costs was
$0.8 million at June 30, 1998; fiscal 1999 additions were $11.2 million,
expenses were $5.1 million, and the balance at June 30, 1999 was $6.9
million. The estimated purchase price allocations (including estimates of
these costs) are subject to adjustments, generally within one year of the
date of the acquisitions, should new or additional facts about the
acquisitions become available. The excess of the total purchase price over
the estimated fair value of the net tangible and intangible assets acquired
has been recorded as goodwill. Operating activities of the acquired companies
have been included in the accompanying consolidated financial statements
since their purchase dates.
The following unaudited pro forma financial data presents the effect of the
significant acquisition (PCI) as if it had occurred on July 1, 1997. The pro
forma financial data is provided for informational purposes only and does not
purport to be indicative of the results which would have been obtained if the
acquisition had been effective on the first day of the period presented. Pro
forma 1999 net income does not include a $3.3 million (pre-tax) litigation
settlement that was paid by the selling shareholders of PCI prior to the
completion of the PCI acquisition. The unaudited pro forma financial
information reflects the amortization of the excess purchase price over the
fair value of net assets acquired and the income tax effect thereof (in
thousands, except per unit data):
<TABLE>
<CAPTION>
Pro Forma
---------
Twelve Months Ended
-------------------
June 1999 June 1998
--------- ---------
<S> <C> <C>
Revenue $1,217,990 $ 938,581
Net Income 2,973 11,867
<PAGE>
Limited partners' net income per unit .12 .54
</TABLE>
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - The Partnership believes it is the fourth largest
retail marketer of propane in the United States in terms of volume, serving
more than 460,000 residential, commercial, industrial and agricultural
customers from 298 customer service centers in 34 states. The Partnership was
formed to own and operate the propane businesses and assets of Synergy,
Empire and Coast. The Partnership's operations are concentrated in the east,
south, central and west coast regions of the United States.
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of the Partnership and its Subsidiary. The acquisitions of the
Predecessor Companies have been accounted for as purchase business
combinations based on the fair value of the assets acquired. Certain 1998
amounts in the accompanying financial statements have been reclassified to
conform to the 1999 presentation. These reclassifications had no effect on
net income or partners' capital as previously reported. All significant
intercompany transactions and accounts have been eliminated.
FISCAL YEAR - The Partnership's fiscal year is July 1 to June 30. Because the
Partnership commenced operations upon completion of the IPO, the accompanying
consolidated statements of income, partners' capital and cash flows for the
period ended June 30, 1997 are for the period from commencement of operations
on December 17, 1996 to June 30, 1997.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS - THE carrying amounts for cash and cash equivalents,
accounts receivable and accounts payable approximate fair value because of
the immediate or short-term maturity of these financial instruments. Based on
the borrowing rates currently available to the Partnership for bank loans
with similar terms and average maturities, the fair value of long-term debt
was substantially the same as its carrying value at June 30, 1999 and 1998.
The Partnership routinely uses commodity futures contracts to reduce
the risk of future price fluctuations and to help ensure supply during
periods of high demand for natural gas and liquefied petroleum gas ("LPG")
inventories and contracts. Gains and losses on futures and forward contracts
designated as hedges are deferred and recognized in cost of sales as a
component of the product cost for the related hedged transaction. In order
for a future or forward contract to be accounted for as a hedge, the item
hedged must expose the Partnership to price risk and the future or forward
contract must reduce such price risk. The Partnership accounts for financial
investments that do not meet the hedge criteria or for terminated hedging
transactions under mark to market rules, which require gains or losses to be
immediately recognized in earnings. In the Consolidated Statements of Cash
Flows, cash flows from qualifying hedges are classified in the same category
as the cash flows from the items being hedged. Net realized gains and losses
for the current and prior fiscal years, and unrealized gains and losses on
open positions as of June 30, 1999 and 1998 were not material.
REVENUE RECOGNITION - Sales of natural gas, crude oil, natural gas liquids
and LPG and the related cost of product are recognized at the time product is
shipped or delivered to the customer. Revenue from the sale of propane
appliances
<PAGE>
and equipment is recognized at the time of sale or installation, while
revenue from repairs and maintenance is recognized upon completion of the
service.
CASH AND CASH EQUIVALENTS - The Partnership considers all liquid investments
with original maturities of three months or less to be cash equivalents. Cash
equivalents consist of money market accounts and certificates of deposit.
There was no restricted cash or cash equivalents at June 30, 1999. At June
30, 1998 the Partnership had approximately $3.0 million of restricted cash
equivalents.
TRADE RECEIVABLES, NET - Trade receivables are stated net of allowance for
doubtful accounts of $1.9 million and $2.8 million at June 30, 1999 and 1998,
respectively.
INVENTORIES - Inventories are stated at the lower of cost or market, with
cost being determined using the first-in, first-out ("FIFO") method for LPG
and parts and fittings, and the specific identification method for
appliances. At June 30, the major components of inventory consisted of the
following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
LPG and other $ 33,384 $ 8,777
Appliances 4,887 5,023
Parts and fittings 4,358 4,438
---------------- ----------------
$ 42,629 $ 18,238
- -------------------------------------------------------------------------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at
cost of acquisition, primarily based upon estimates of fair value at the date
of the IPO, with subsequent additions being added at their actual cost or
based upon estimates of their fair value at the dates the applicable
companies or assets were acquired. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets as
follows: buildings and improvements, 10 to 40 years; LPG storage and consumer
tanks, together with applicable installation costs, 10 to 40 years; and
vehicles, equipment, office furnishings and software costs, 3 to 10 years.
The Partnership capitalizes both internal and external costs to develop and
implement software. Leasehold improvements are amortized over the shorter of
the estimated useful lives or the applicable lease terms. When property,
plant or equipment is retired or otherwise disposed, the cost and related
accumulated depreciation is removed from the accounts, and the resulting gain
or loss is credited or charged to operations. Maintenance and repairs are
expensed as incurred, while replacements and betterments that extend
estimated useful lives are capitalized. Property, plant and equipment at June
30 consisted of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Land $ 15,157 $ 13,515
Buildings and improvements 17,046 14,351
Storage and consumer tanks 263,597 211,104
Other equipment 71,282 50,783
--------------- ---------------
367,082 289,753
Less accumulated depreciation 30,262 14,465
--------------- ---------------
$ 336,820 $ 275,288
- -----------------------------------------------------------------------------
</TABLE>
GOODWILL - Goodwill represents the excess of acquisition cost over the
estimated fair market value of identifiable net assets of acquired businesses
and is being amortized on a straight-line basis over 40 years. Goodwill at
June 30 consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------
<S> <C> <C>
Goodwill $ 326,868 $ 229,039
- ---------------------------------------------------------------------------
<PAGE>
Less accumulated amortization 12,133 4,975
---------------- -----------------
$ 314,735 $ 224,064
- ---------------------------------------------------------------------------
</TABLE>
OTHER INTANGIBLE ASSETS - Noncompete and other agreements are amortized over the
terms of the applicable agreements. Financing costs incurred in connection with
the placement of Partnership debt are amortized over the terms of the applicable
notes using the straight-line method. Other intangible assets at June 30
consisted of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Noncompete agreements $ 21,444 $ 7,912
Financing costs 9,922 8,532
Other 7,841 6,136
---------------- -----------------
39,207 22,580
Less accumulated amortization 7,595 4,445
---------------- -----------------
$ 31,612 $ 18,135
- -------------------------------------------------------------------------
</TABLE>
It is the Partnership's policy to review long-lived assets,
including intangible assets, for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. If such a review should indicate that the carrying amount of
such assets is not recoverable, it is the Partnership's policy to reduce the
carrying amount of such assets to fair value.
FOREIGN CURRENCY - The Partnership uses the U.S. Dollar as its functional
currency. Financial statements of the Partnership's Canadian operations are
translated to U.S. Dollars for consolidation purposes using current rates of
exchange for assets and liabilities. Revenues and expenses are translated at
rates that approximate the rates in effect on the transaction date. Gains and
losses from this process are included in the Partnership's Consolidated
Financial Statements.
INCOME TAXES - Neither Cornerstone Partners nor the Operating Partnership is
directly subject to federal and state income taxes. Instead, taxable income
or loss is allocated to the individual partners. As a result, no income tax
expense has been reflected in the Partnership's consolidated financial
statements relating to the earnings of Cornerstone Partners or the Operating
Partnership. The Operating Partnership has two subsidiaries that operate in
corporate form and are subject to federal and state income taxes.
Accordingly, the Partnership's consolidated financial statements reflect
income tax expense related to the earnings of these corporate subsidiaries.
Net earnings for financial statement purposes may differ significantly from
taxable income reportable to Unitholders as a result of differences between
the tax basis and financial reporting basis of assets and liabilities and the
taxable income allocation requirements under the Partnership Agreement and
the Internal Revenue Code.
Income taxes are provided based on the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements and tax returns in different years. Under this method, deferred
income tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of the assets and liabilities
using the enacted tax rates in effect for the year in which the differences
are expected to reverse.
LIMITED PARTNERS' NET INCOME PER UNIT - Net income per Unit is computed by
dividing net income, after deducting the General Partners' 2% interest, by
the weighted average number of outstanding Common and Subordinated Units. In
accordance with the Offering Prospectus, 100% of the income for the 14-day
period ended December 31, 1996, was allocated to the Subordinated Unitholders
and the General Partners.
<PAGE>
UNIT-BASED COMPENSATION - The Partnership accounts for unit-based
compensation as (a) deferred compensation for time-vesting units and (b)
compensation for performance-vesting units when the Partnership's performance
meets defined criteria. Compensation for the time-vesting units was accrued
at the time of the IPO and the time vested units for subsequent awards were
accrued when granted. No compensation has been accrued for
performance-vesting units since the Partnership has not made any
distributions to the Subordinated Unitholders (see Note 6). No time-vesting
units or performance-vesting units were fully vested as of June 30, 1999.
Neither time-vesting units nor performance-vesting units were considered
Common Unit equivalents for the purpose of computing primary earnings per
unit. The Partnership follows the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Pro forma net income and net
income per unit under the fair value based method of accounting for equity
instruments under SFAS No. 123 would be the same as reported net income and
net income per unit.
COMPREHENSIVE INCOME - Comprehensive income is comprised of net income and,
beginning in fiscal 1999, foreign currency translation adjustments. Total
comprehensive income was $4,944 for fiscal 1999.
RECENTLY ISSUED ACCOUNTING STANDARDS - SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities," which was issued in June
1998, provides a comprehensive standard for the recognition and measurement
of derivatives and hedging activities. The standard requires all derivatives
to be recorded on the balance sheet at fair value and establishes special
accounting for three types of hedges. The accounting treatment for each of
these three types of hedges is unique but results in including the offsetting
changes in fair values of cash flows of both the hedge and hedged item in
results of operations in the same period. Changes in fair value of
derivatives that do not meet the criteria of one of the aforementioned
categories of hedges are included in the results of operations. The
Partnership must adopt the provisions of SFAS No. 133, as amended by SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133 - an amendment of FASB
Statement No. 133" for the Partnership's fiscal year beginning July 1, 2000.
Management is currently evaluating the impact that SFAS 133 may have on the
Partnership's financial statements.
3. LONG-TERM DEBT
Long-term debt at June 30 consisted of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------
<S> <C> <C>
Working Capital Facility $ 18,100 $ 8,720
Senior Notes 350,000 220,000
Notes payable 30,840 12,218
---------------- -----------------
398,940 240,938
Less current maturities 10,456 3,800
---------------- -----------------
$ 388,484 $ 237,138
- --------------------------------------------------------------------
</TABLE>
On November 20, 1998, the Bank Credit Agreement was refinanced under the terms
of a Refunding Credit Agreement.
The Working Capital Facility under the Refunding Credit Agreement
provides for revolving borrowings up to $75.0 million (including a $20.0
million sub-limit for letters of credit) and matures on November 30, 2001.
The Refunding Credit Agreement provides that there must be less than $10.0
million outstanding under the Working Capital Facility (excluding letters of
credit) for at least 30 consecutive days during each fiscal year. Outstanding
letters of credit totaled $12.8 million at June 30, 1999.
The Acquisition Facility under the Refunding Credit Agreement
provides the Operating Partnership with the ability to borrow up to $35.0
million to finance business acquisitions. The Acquisition Facility operates
as a revolving facility through November 30, 2001, at which time any loans
then outstanding may be converted to term
<PAGE>
loans and be amortized quarterly for a period of two years thereafter. No
amounts were outstanding at June 30, 1999.
Both the Working Capital Facility and the Acquisition Facility can be extended
to November 30, 2002 upon approval of the banks in the Refunding Credit
Facility.
The Operating Partnership's obligations under the Refunding Credit Agreement are
secured, on an equal and ratable basis, with its obligations under its Senior
Note Agreements, by a first priority security interest in the Operating
Partnership's inventory, trade receivables and propane storage tanks. Loans
under the Refunding Credit Agreement are variable interest rate loans, based on
the prime or Eurodollar interest rates. At June 30, 1999, the applicable base
and Eurodollar rates were 8.50% and 6.81%, respectively. In addition, an annual
fee is payable quarterly by the Operating Partnership (whether or not borrowings
occur) ranging from .25% to .50% depending upon the coverage ratio. The
weighted-average interest rates for the Bank Credit Agreement and Senior Notes
for the periods ended June 30, 1999, 1998, and 1997 were 7.7%, 7.6%, and 8.5%,
respectively.
The Refunding Credit Agreement contains various terms and covenants,
including financial covenants with respect to debt and interest coverage, and
limitations, among others, on the ability of the Operating Partnership and its
Subsidiaries to incur or maintain certain indebtedness or liens, make
investments and loans, sell assets, and enter into mergers, consolidations or
sales of all or substantially all of its assets. The Operating Partnership was
in compliance with all terms and covenants at June 30, 1999.
On the IPO date, the Operating Partnership issued $220.0 million of
Senior Notes with a fixed annual interest rate of 7.53% pursuant to note
purchase agreements with various investors (the "7.53% Notes"). These notes rank
on an equal and ratable basis with the Operating Partnership's obligations under
the bank Refunding Credit Agreement discussed above, mature on December 30,
2010, and require semi-annual interest payments each December 30 and June 30.
This note agreement requires that the principal be paid in equal annual
installments of $27.5 million starting December 30, 2003.
On December 11, 1998, the Operating Partnership issued $85.0 million of
Senior Notes with a fixed annual interest rate of 7.33% pursuant to note
purchase agreements with various investors (the "7.33% Notes"). These notes rank
on an equal and ratable basis with the Operating Partnership's obligations under
the bank Refunding Credit Agreement discussed above, mature on January 31, 2013,
and require semi-annual interest payments each January 31 and July 31. This note
agreement requires that the principal be paid in equal annual installments of
$9.4 million starting January 31, 2005.
On June 25, 1999, Cornerstone Partners issued $45.0 million of Senior
Notes with a fixed annual interest rate of 10.26% pursuant to note purchase
agreements with various investors. These notes are subordinated to the 7.53%
Notes, the 7.33% Notes and the Refunding Credit Agreement, mature on June 30,
2009, and require semi-annual interest payments each December 31 and June 30.
This note agreement requires that the principal be paid in equal annual
installments of $9.0 million starting June 30, 2005. Cornerstone Partners was in
compliance with all terms and covenants at June 30, 1999.
Notes payable consist of mortgages, capital leases and noncompete
agreements. At June 30, 1999, these notes payable carried interest rates ranging
from 7.5% to 10.5% and were due periodically through fiscal 2008.
Aggregate annual maturities of the long-term debt outstanding at June 30 are:
<TABLE>
<S> <C>
2000 $ 10,456
2001 5,907
2002 22,093
<PAGE>
2003 3,206
2004 29,505
Thereafter 327,773
-------------------
$ 398,940
-------------------
-------------------
</TABLE>
4. DISTRIBUTIONS OF AVAILABLE CASH
The Partnership will make distributions to its partners for each fiscal
quarter of the Partnership within 45 days after the end of the fiscal quarter in
an aggregate amount equal to its Available Cash for such quarter. Available Cash
generally means all cash on hand at the end of each quarter less the amount of
cash reserves established by the Managing General Partner in its reasonable
discretion for future cash requirements. These reserves are retained to provide
for the proper conduct of the Partnership's business, the payment of debt
principal and interest and to provide funds for distribution during the next
four quarters.
The Partnership will distribute 100% of its Available Cash (98% to all
Unitholders and 2% to the General Partners) until the Minimum Quarterly
Distribution ($.54 per unit) for such quarter has been met. During the
Subordination Period (defined below), to the extent there is sufficient
Available Cash, the holders of Common Units have the right to receive the
Minimum Quarterly Distribution, plus any arrearages, prior to the distribution
of Available Cash to holders of Subordinated Units.
The Subordination Period will end the first day of any quarter in
which:
distributions from Operating Surplus (as defined in the Partnership Agreement)
on the Common Units and the Subordinated Units with respect to each of the
twelve consecutive quarter periods immediately preceding such date equaled or
exceeded the Minimum Quarterly Distribution on all of the outstanding Common and
Subordinated Units during such periods,
the Adjusted Operating Surplus (as defined in the Partnership Agreement)
generated during each of the twelve consecutive quarter periods immediately
preceding such date equaled or exceeded the Minimum Quarterly Distribution on
all of the outstanding Common and Subordinated Units plus the related
distribution on the General Partner interests in the Partnership during such
periods, and
there were no outstanding Common Unit arrearages.
Distributions are determined on a quarterly basis. During fiscal 1999, Common
Unitholders were paid $.54 per unit for each quarter. There were no
distributions to Subordinated Unitholders in fiscal 1999.
5. COMMITMENTS AND CONTINGENCIES
The Partnership has succeeded to obligations of the self-insurance
programs maintained by Empire and Synergy for any incidents occurring prior to
December 17, 1996. These companies' insurance programs provided coverage for
comprehensive general liability and vehicle liability for catastrophic exposures
as well as those risks required to be insured by law or contract. These
companies retained a significant portion of certain expected losses related
primarily to comprehensive general liability and vehicle liability. Estimated
liabilities for self-insured losses were recorded based upon the Partnerships'
estimates of the aggregate self-insured liability for claims incurred.
A number of personal injury, property damage and product liability
suits are pending or threatened against the Partnership. These lawsuits have
arisen in the ordinary course of the Partnership's business and involve claims
for actual damages and in some cases, punitive damages, arising from the alleged
negligence of the Partnership or as
<PAGE>
a result of product defects or similar matters. Of the pending or threatened
matters, a number involve property damage and several involve serious
personal injuries. In certain cases, the claims made are for relatively large
amounts. Although any litigation is inherently uncertain, based on past
experience, the information currently available and the presence of insurance
coverage, the Partnership does not believe that these pending or threatened
litigation matters will have a material adverse effect on its results of
operations or its financial condition.
6. RESTRICTED UNIT PLAN
The Partnership adopted the 1996 Restricted Unit Plan (the "Restricted
Unit Plan"), as amended, to authorize the issuance of Common Units with an
aggregate value of $17.5 million (approximately 870,000 Common Units) to
directors, executives, managers and selected supervisors of the Partnership.
Units issued under the Restricted Unit Plan are subject to a bifurcated vesting
procedure such that (a) 25% of the issued Units will vest over time with
one-third of such units vesting at the end of each of the third, fifth and
seventh anniversaries of the issuance date, and (b) the remaining 75% of the
Units will vest automatically upon the conversion of Subordinated Units to
Common Units. Restricted Unit Plan participants are not eligible to receive
quarterly distributions or vote their respective units until vested.
Restrictions generally limit the sale or transfer of the Units during the
restricted periods. The value of the restricted unit is established by the
market price of the Common Unit at the date of grant. As of June 30, 1999,
restricted common units with a value of $14.6 million have been awarded and the
compensation cost related to such units will be recognized over the vesting
period of the related awards.
7. PARTNERS' CAPITAL
Partners' Capital consists of General Partner ownership (2.0%), Common
Unitholder Interest (70.4%) and Subordinated Unitholder Interest (27.6%) as of
June 30, 1999. When additional units are issued, the General Partners are
required to make additional contributions to maintain their 2% interest in the
Partnership.
During fiscal 1999, the Minimum Quarterly Distribution was made to the Common
Unitholders, with 2% of the distribution made to the General Partners; no
distribution was made to the Subordinated Unitholders.
Upon expiration of the Subordination Period (see Note 4), all remaining
Subordinated Units will convert into Common Units on a one-for-one basis and
will thereafter participate pro rata with the other Common Units in
distributions of Available Cash.
8. EMPLOYEE BENEFIT PLAN
The Partnership maintains a defined contribution retirement plan (the
"Plan") available to substantially all employees. Employees who elect to
participate may contribute a percentage of their salaries to the Plan. The
Partnership contributed from 10% to 40% of the employee's contributions to the
Plan up to a maximum of 5% of the employee's salary. Contributions to the Plan
were not material for the years ended June 30, 1999, 1998, or the period ended
June 30, 1997.
9. OPERATING LEASES
The Partnership leases retail sales offices and administrative office
space under cancelable and noncancelable operating leases expiring in various
years through 2008. These leases generally contain renewal options and require
the Partnership to pay all executory costs (property taxes, maintenance and
insurance). Rental expense under all operating leases was $5.6 million in each
of the years ended June 30, 1999 and 1998, and $2.5 million for the period
December 17, 1996 to June 30, 1997.
Future minimum lease payments under noncancelable operating leases at
June 30 were:
<PAGE>
<TABLE>
<S> <C>
2000 $ 2,909
2001 2,821
2002 2,463
2003 2,111
2004 1,513
Thereafter 3,515
</TABLE>
10. SEGMENT AND RELATED INFORMATION
In 1999, the Partnership adopted the provisions of SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," which requires the
reporting of certain financial information by business segment. For the purpose
of providing segment information, the Partnership's two principal business
segments are its retail and Coast Energy Group ("CEG") operations. The retail
segment includes propane sales, principally to end-users; repair and maintenance
of propane heating systems and appliances; and the sale of propane-related
supplies, appliances and other equipment. These transactions are accounted for
as one business segment internally and share the same customer base. CEG
provides marketing and distribution services to other resellers of propane and
end-users. Principal products are propane, other natural gas liquids, crude oil,
and natural gas. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. Intra-company
transactions between segments are recorded approximately at market value at the
transaction date. The segments are evaluated internally using earnings before
interest, taxes, depreciation and amortization ("EBITDA"). Depreciation,
amortization, interest and some operating, general and administrative expenses
are not specifically tracked by business segment, and are therefore included in
the "Other" category in the following schedules:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999
- ------------------------------------------------------------------------------
Retail CEG Other Total
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $ 264,631 $ 889,977 $ - $ 1,154,608
Cost of sales 111,402 861,965 - 973,367
----------- --------- --------- -----------
Gross profit 153,229 28,012 - 181,241
Operating, general
and administrative
expenses 93,646 17,712 12,377 123,735
----------- --------- --------- -----------
EBITDA 59,583 10,300 (12,377) 57,506
Non-allocated expenses - - 52,333 52,333
----------- --------- --------- -----------
Net income $ 59,583 $ 10,300 $ (64,710) $ 5,173
----------- --------- --------- -----------
----------- --------- --------- -----------
Trade receivables and
inventories $ 33,578 $ 38,148 $ - $ 71,726
Other assets - - 709,518 709,518
----------- --------- --------- -----------
Total assets $ 33,578 $ 38,148 $ 709,518 781,244
----------- --------- --------- -----------
----------- --------- --------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998
- ------------------------------------------------------------------------------
Retail CEG Other Total
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $ 242,925 $ 525,204 $ - $ 768,129
Cost of sales 111,572 506,352 - 623,924
----------- --------- --------- -----------
Gross profit 125,353 18,852 - 144,205
Operating, general
and administrative
expenses 73,324 13,723 10,137 97,184
----------- --------- --------- -----------
EBITDA 52,029 5,129 (10,137) 47,021
Non-allocated expenses - - 37,595 37,595
----------- --------- --------- -----------
Net income $ 52,029 $ 5,129 $ (47,732) $ 9,426
----------- --------- --------- -----------
----------- --------- --------- -----------
Trade receivables and
inventories $ 24,200 $ 12,505 $ - $ 36,705
Other assets - - 535,806 535,806
----------- --------- --------- -----------
Total assets $ 24,200 $ 12,505 $ 535,806 572,511
----------- --------- --------- -----------
----------- --------- --------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FROM COMMENCEMENT OF OPERATIONS ON DECEMBER 17, 1996 TO JUNE 30, 1997
- ------------------------------------------------------------------------------
Retail CEG Other Total
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $ 148,906 $ 240,724 $ - $ 389,630
Cost of sales 81,231 234,093 - 315,324
----------- --------- --------- -----------
Gross profit 67,675 6,631 - 74,306
Operating, general
and administrative
expenses 40,393 4,501 5,129 50,023
----------- --------- --------- -----------
EBITDA 27,282 2,130 (5,129) 24,283
Non-allocated expenses - - 18,527 18,527
----------- --------- --------- -----------
Net income $ 27,282 $ 2,130 $ (23,656) $ 5,756
----------- --------- --------- -----------
----------- --------- --------- -----------
Trade receivables and
inventories $ 24,831 $ 12,831 $ - $ 37,662
Other assets - - 483,531 483,531
----------- --------- --------- -----------
Total assets $ 24,831 $ 12,831 $ 483,531 521,193
----------- --------- --------- -----------
----------- --------- --------- -----------
</TABLE>
11. ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Noncash Transactions
Assets acquired in exchange for partnership units $ 8,959 $ 17,589 $ 14,784
Assets acquired in exchange for assumption of current
liabilities and long term debt $ 31,078 $ 7,243 $ 3,527
Cash Payment Information
Cash paid for interest $ 29,002 $ 10,939 $ 9,942
</TABLE>
12. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL
1999: SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
- ---------------------------------- ------------------ ------------------- -------------- ----------------
<S> <C> <C> <C> <C>
Revenues $169,991 $224,053 $338,536 $422,028
Operating income (loss) (4,104) 10,289 28,093 (4,025)
<PAGE>
Net income (loss) (9,266) 4,457 21,230 (11,248)
Net income (loss) per unit (0.46) 0.21 0.89 (0.48)
<CAPTION>
FISCAL
1998: SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
- ---------------------------------- ------------------ ------------------- -------------- ----------------
<S> <C> <C> <C> <C>
Revenues $152,157 $241,778 $229,332 $144,862
Operating income (loss) (2,892) 14,569 19,916 (2,818)
Net income (loss) (7,694) 9,502 15,049 (7,431)
Net income (loss) per unit (0.44) 0.54 0.76 (0.37)
- ---------------------------------- ------------------ ------------------- -------------- -----------------
</TABLE>
STOCK EXCHANGE AND UNIT PRICE INFORMATION
Cornerstone Propane Partners, L.P. Common Units are traded on the New York Stock
Exchange under the symbol CNO. The high and low trading prices for the following
quarters were:
<TABLE>
<CAPTION>
Fiscal Year 1999 HIGH LOW
-------------- --------------
<S> <C> <C>
Quarter ended September 30 $ 22 1/2 $ 18 1/4
Quarter ended December 31 21 1/8 16
Quarter ended March 31 19 15 5/8
Quarter ended June 30 18 7/8 15 7/16
Fiscal Year 1998
Quarter ended September 30 23 7/8 21 1/16
Quarter ended December 31 23 15/16 22 1/4
Quarter ended March 31 23 3/8 20 1/2
Quarter ended June 30 22 15/16 21
Fiscal Year 1997
Quarter ended March 31 22 3/8 20 7/8
Quarter ended June 30 22 1/8 19 3/4
</TABLE>
TAX INFORMATION
Cornerstone Propane Partners, L.P. is a publicly traded limited partnership.
Unitholders are partners in the Partnership and receive cash distributions. A
partnership is not generally subject to federal or state income tax. The annual
income, gains, losses, deductions, or credits of the Partnership flow through to
the Unitholders who are required to report their allocated share of these
amounts on their individual tax returns as though the Unitholder had incurred
these items directly.
In March 2000, Unitholders of Record will receive Schedule K-1 tax packages that
will summarize their allocated share of the Partnership's reportable tax items
for the calendar year ended December 31, 1999, and certain information required
to be included in their tax returns. It is important to note that cash
distributions received during 1999 should not be reported as taxable income even
though those distributions may be shown on a statement issued by a broker. Only
the amounts shown on the Schedule K-1 should be entered on each Unitholder's
1999 tax return.
Should you have questions regarding the Schedule K-1, please call 800-231-0683.
<PAGE>
CASH DISTRIBUTIONS
Cornerstone Propane Partners, L.P.'s Minimum Quarterly Distribution of $0.54 per
Common Unit was paid within 45 days after the end of September, December, March
and June to Unitholders of Record on the applicable record dates.
CERTIFICATE AND CASH DISTRIBUTION PAYMENT INQUIRIES
Unitholder communications regarding transfer of units, lost certificates, lost
distribution checks, or change of address should be directed to:
Continental Stock Transfer and Trust Company
Shareholder Services
2 Broadway, 19th Floor
New York, NY 10004
212-509-4000
ADDITIONAL INVESTOR INFORMATION
Investor Relations - Steven M. Chodes
800-299-3101, ext. 213 / 417-532-3100, ext. 213, or access web page
PARTNERSHIP ADDRESS
Cornerstone Propane Partners, L.P.
432 Westridge Drive
Watsonville, CA 95076
800-288-5206 / 831-724-1921
WEB SITE
www.cornerstonepropane.com
<PAGE>
Independent Accountants' Report
Board of Directors and Stockholders
Empire Energy Corporation
Lebanon, Missouri
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of EMPIRE ENERGY CORPORATION for each of the
periods ended June 30, 1996, July 31, 1996, September 30, 1996, and December 16,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of EMPIRE ENERGY CORPORATION for each of the periods ended June 30, 1996,
July 31, 1996, September 30, 1996, and December 16, 1996, in conformity with
generally accepted accounting principles.
BAIRD, KURTZ & DOBSON
Springfield, Missouri
August 4, 1997
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996
THE MONTH ENDED JULY 31, 1996,
THE TWO MONTHS ENDED SEPTEMBER 30, 1996 AND
THE TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Periods Ended
--------------------------------------------------------
December 16, September 30, July 31, June 30,
1996 1996 1996 1996
------------ ------------ --------- ----------
<S> <C> <C> <C> <C>
REVENUES $ 28,166 $ 12,439 $ 2,596 $ 98,821
COST OF SALES 15,400 6,471 1,439 50,080
---------- ---------- ---------- ----------
GROSS PROFIT 12,766 5,968 1,157 48,741
---------- ---------- ---------- ----------
EXPENSES
Operating, general and administrative 6,386 4,528 2,480 33,020
Depreciation and amortization 1,344 1,087 499 5,875
---------- ---------- ---------- ----------
7,730 5,615 2,979 38,895
---------- ---------- ---------- ----------
OPERATING INCOME 5,036 353 (1,822) 9,846
INTEREST EXPENSE, NET 1,917 1,487 217 2,598
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES 3,119 (1,134) (2,039) 7,248
INCOME TAX
PROVISION (BENEFIT) 1,197 (400) (765) 3,550
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 1,922 $ (734) $ (1,274) $ 3,698
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1996
THE MONTH ENDED JULY 31, 1996,
THE TWO MONTHS ENDED SEPTEMBER 30, 1996 AND
THE TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Retained Treasury Stockholders'
Stock Stock Earnings Stock Equity
----------- --------------- --------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 $ 12 $ 46,099 $ 445 $ (21) $ 46,535
NET INCOME -- -- 3,698 -- 3,698
--------- -------------- -------------- --------- --------------
BALANCE, JUNE 30, 1996 12 46,099 4,143 (21) 50,233
NET LOSS -- -- (1,274) -- (1,274)
--------- -------------- -------------- --------- --------------
BALANCE, JULY 31, 1996 12 46,099 2,869 (21) 48,959
PURCHASE OF COMPANY STOCK (11) (70,744) -- -- (70,755)
EFFECT OF PURCHASE ACCOUNTING -- 26,966 (2,869) 21 24,118
NET LOSS -- -- (734) -- (734)
--------- -------------- -------------- --------- --------------
BALANCE, SEPTEMBER 30, 1996 1 2,321 (734) -- 1,588
PURCHASE OF COMPANY STOCK (1) (13,999) -- -- (14,000)
EFFECT OF PURCHASE ACCOUNTING 1 25,677 734 -- 26,412
NET INCOME -- -- 1,922 -- 1,922
--------- -------------- -------------- --------- --------------
BALANCE, DECEMBER 16, 1996 $ 1 $ 13,999 $ 1,922 $ -- $ 15,922
--------- -------------- -------------- --------- --------------
--------- -------------- -------------- --------- --------------
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1996
THE MONTH ENDED JULY 31, 1996,
THE TWO MONTHS ENDED SEPTEMBER 30, 1996 AND
THE TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 16, September 30, July 31, June 30,
1996 1996 1996 1996
------------- -------------- ---------- ----------
<S> <S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $ 1,922 $ (734) $ (1,274) $ 3,698
Items not requiring (providing) cash:
Depreciation 1,195 1,002 474 5,593
(Gain) loss on sale of assets -- (4) 8 (67)
Amortization 149 85 25 282
Deferred income taxes (126) -- -- 1,075
Changes in:
Trade receivables (6,089) (2,485) 222 (1,799)
Inventories (147) (3,896) (340) (348)
Accounts payable 998 283 335 1,301
Accrued expenses and self insurance 2,114 1,164 (5) 2,124
Income taxes payable (refundable) 1,016 209 (768) 270
Due from SYN, Inc. (1,863) -- -- --
Prepaid expenses and other (1,678) (536) (100) (279)
------------ ------------ ---------- ---------
Net cash provided by (used in)
operating activities (2,509) (4,912) (1,423) 11,850
------------ ------------ ---------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from sale of assets 25 18 14 162
Purchases of property and equipment (1,475) (861) (487) (3,184)
Capitalized costs (242) -- -- --
Purchase of assets from SYN Inc. -- -- -- (35,980)
------------ ------------ ---------- ---------
Net cash used in investing activities (1,692) (843) (473) (39,002)
------------ ------------ ---------- ---------
</TABLE>
<PAGE>
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, 1996
THE MONTH ENDED JULY 31, 1996,
THE TWO MONTHS ENDED SEPTEMBER 30, 1996 AND
THE TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 16, September 30, July 31, June 30,
1996 1996 1996 1996
------------- -------------- ---------- ----------
<S> <S> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES
Increase (decrease) in credit facilities $ 4,806 $ 4,800 $ -- $ (5,500)
Principal payments on purchase
Obligations (64) (35) (15) (126)
Checks in process of collection (37) 37 -- (158)
Proceeds from (repayments of)
acquisition credit facility -- (31,100) -- 35,000
Proceeds from management buy out
Loan -- 94,000 -- --
Purchase of company stock in
management buy out -- (59,000) -- --
Payment of debt acquisition costs -- (3,100) -- --
----------- ----------- ---------- ---------
Net cash provided by (used in)
financing activities 4,705 5,602 (15) 29,216
----------- ----------- ---------- ---------
INCREASE (DECREASE) IN CASH 504 (153) (1,911) 2,064
CASH, BEGINNING OF PERIOD -- 153 2,064 0
----------- ----------- ---------- ---------
CASH, END OF PERIOD $ 504 $ 0 $ 153 $ 2,064
----------- ----------- ---------- ---------
----------- ----------- ---------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The consolidated financial statements for the periods ended July 31, 1996,
September 30, 1996, and December 16, 1996, are presented because of the changes
in control described in Note 2. Due to the seasonal nature of the propane
business, the results of operations for these periods are not necessarily
indicative of results to be expected for a full year.
NATURE OF OPERATIONS
The Company's principal operations are the retail sale of LP gas. Most of the
Company's customers are owners of residential single or multi-family dwellings
who make periodic purchases on credit. Such customers are located in the
Southeast and Midwest regions of the United States.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Empire Energy
Corporation and its subsidiaries. All significant intercompany balances have
been eliminated in consolidation.
REVENUE RECOGNITION POLICY
Sales and related cost of product sold are recognized upon delivery of the
product or service.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the first-in, first-out method for retail operations and specific identification
method for wholesale operations.
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
FUTURES CONTRACTS
The Company uses commodity futures contracts to reduce the risk of future
price fluctuations for LPG inventories and contracts. Gains and losses on
futures contracts purchased as hedges are deferred and recognized in cost of
sales as a component of the product cost for the related hedged transaction. In
the statement of cash flows, cash flows from qualifying hedges are classified in
the same category as the cash flows of the items being hedged. Net realized
gains and losses and unrealized gains and losses on open positions are not
material.
PROPERTY AND EQUIPMENT
Depreciation is provided on all property and equipment on the straight-line
method over estimated useful lives of 5 to 33 years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The company's only financial instruments are cash, long-term debt and
related accrued interest for which their carrying amounts approximate fair
value.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
AMORTIZATION
The excess of cost over fair value of net assets acquired (originally
$4,850,000) is being amortized on the straight-line basis over 20 years.
NOTE 2: CHANGES OF CONTROL
On June 30, 1994, the Company was separated from Empire Gas Corporation
(subsequently All Star Gas referred to hereafter as Empire Gas) in an exchange
of the majority ownership of Empire Gas for all of the shares of the Company (a
subsidiary of Empire Gas). The Company received locations principally in the
Southeast plus certain home office assets and liabilities.
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: CHANGES OF CONTROL (CONTINUED)
Professional and other fees amounting to $1,926,000 were incurred in
connection with an effort to sell the Company and are included in general and
administrative expense during the year ended June 30, 1996.
On August 1, 1996, the principal shareholder of the Company since its
inception and certain other shareholders sold their interest in the Company to a
new entity formed by the remaining shareholders of the Company (Management Buy
Out).
In connection with this transaction, the principal shareholder of the
Company terminated employment with the Company as well as terminated certain
lease and use agreements. The new entity was principally owned by the son of the
former principal shareholder. All references in these financial statements to
the principal shareholder relate to the former principal shareholder.
The new entity paid approximately $59,000,000 cash, and distributed certain
home office assets and a portion of the SYN Inc. receivable in exchange for the
shares of Company stock purchased. In addition to the above consideration, the
new entity issued a $5,000,000 note payable to the principal shareholder. The
amount paid to the selling shareholders was financed with proceeds from a new
credit agreement.
The new credit facility provides for a $42,000,000 term loan, a $52,000,000
second term loan, a $20,000,000 working capital facility and a $10,000,000
acquisition credit facility. The new credit facility includes working capital,
capital expenditures, cash flow and net worth requirements as well as dividend
restrictions.
On October 7, 1996, the new ownership of the Company pursuant to the
Management Buy Out sold 100% of Company common stock for approximately
$14,000,000 cash to Northwestern Growth Corporation (NGC).
Because of the changes in control of the Company, the balance sheet
accounts were adjusted at August 1, 1996 and October 7, 1996, to reflect new
bases determined using the principles of purchase accounting.
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: SYNERGY ACQUISITION
On August 15, 1995, the Company acquired the assets of 38 retail locations
previously operated by Synergy Group, Inc. These locations were purchased from
SYN Inc., a company formed for the purpose of acquiring Synergy Group
Incorporated. SYN Inc. is majority owned by Northwestern Growth Corporation, a
wholly owned subsidiary of Northwestern Public Service Company, and minority
owned and managed by Empire Gas. The purchase price of the 38 retail locations
was approximately $38 million. The total consideration for the purchase was
approximately $36 million in cash financed by the new acquisition credit
facility (see Note 5) plus the assets of nine retail locations principally in
Mississippi valued at approximately $2 million. The results of operations for
the period after August 15, 1995, of the Synergy locations are included in the
accompanying financial statements. The purchase price of the Synergy assets has
been allocated as follows (In Thousands):
<TABLE>
<S> <C>
Current assets $ 2,499
Property and equipment 27,435
Due from SYN Inc. 7,978
------------
$ 37,912
------------
------------
</TABLE>
Unaudited pro forma operations assuming the acquisition was made at the
beginning of the year ended June 30, 1995, is presented below. Pro forma results
for the year ended June 30, 1996, are not presented since they would not differ
materially from the audited results of operations presented in the statement of
income.
<TABLE>
<CAPTION>
1995
(In Thousands)
<S> <C>
Operating revenue $ 82,222
Cost of product sold 40,724
------------
Gross profit $ 41,498
------------
------------
</TABLE>
The purchase price of the assets acquired from SYN Inc. is subject to
adjustment based on the amount of working capital acquired by the Company. A
receivable has been recorded in the amount of $3,978,000, which reflects the
reduction in purchase price of the assets based on the amount of working capital
acquired. On August 1, 1996, this receivable was assigned to the former
principal shareholder in connection with the management buy out.
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: SYNERGY ACQUISITION (CONTINUED)
The purchase price of the assets acquired from SYN Inc. is also subject to
adjustment based on the value of consumer tanks, which cannot be located within
a specified period of time. The Company has made a claim to SYN Inc. for
approximately $4,000,000, which represents the value of unlocated tanks at June
30, 1996. A receivable for these tanks has been recorded on the balance sheet at
June 30, 1996. On August 1, 1996, one-half of this receivable was assigned to
the former principal shareholder in connection with the management buy out.
In connection with the October 7, 1996, acquisition of the Company's stock
by NGC, the SYN Inc. receivable was paid in full and assumed by NGC.
NOTE 4: RELATED-PARTY TRANSACTIONS
The Company provides data processing, office rent and other clerical services
to two corporations owned by officers and shareholders of the Company and is
reimbursed $5,000 per month for these services.
The Company leases a jet aircraft and an airport hangar from a corporation
owned by the principal shareholder of the Company. The lease requires annual
rent payments of $100,000. In addition to direct lease payments, the Company is
also responsible for the operating costs of the aircraft and the hangar. The
lease agreement was terminated August 1, 1996, in connection with the management
buy out.
The Company has an agreement with a corporation owned by the principal
shareholder of the Company, which provides the Company the right to use business
guest facilities. The agreement requires annual payments of $250,000. In
addition to direct payments, the Company is also responsible for providing
vehicles and personnel to serve as security for the facilities. This agreement
was terminated August 1, 1996, in connection with the management buy out.
The Company leases the corporate home office, land, buildings and certain
equipment from a corporation owned principally by the principal shareholder. The
lease requires annual payments of $200,000. The lease was terminated August 1,
1996, in connection with the management buy out.
The Company leases a lodge from a corporation owned by the principal
shareholder of the Company. The lease requires annual rent payments of $120,000.
The lease was terminated August 1, 1996, in connection with the management buy
out.
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: RELATED-PARTY TRANSACTIONS (CONTINUED)
On August 1, 1996, the Company entered into a new lease agreement with
entities controlled by the former principal shareholder. The new lease agreement
provides for the payment of $600,000 per year for the corporate home office,
land, buildings and certain equipment, the use of the airport hangar and the
right to use land underlying the Company's warehouse facility. This lease was
assumed by Cornerstone on December 17, 1996.
A subsidiary of the Company entered into a seven-year services agreement with
Empire Gas to provide data processing and management information services
beginning July 1, 1994. The services agreement provides for payments by Empire
Gas to be based on an allocation of the subsidiary's actual costs based on the
gallons of LP gas sold by Empire Gas as a percentage of the gallons of LP gas
sold by the Company and Empire Gas combined. For the year ended June 30, 1996,
total amount received related to this services agreement was $713,000. For the
month ended July 31, 1996, the two months ended September 30, 1996, and the two
and one-half months ended December 16, 1996, amounts were $88,000, $195,000 and
$173,000, respectively. Such amounts have been netted against related general
and administrative expenses in the accompanying statements of operations. This
services agreement was assumed by Cornerstone on December 17, 1996.
NOTE 5: LONG-TERM DEBT
Long-term debt at June 30, 1996, consists of the following:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
Revolving credit facility (A) $ --
Acquisition credit facility (B) 31,100
Purchase contract obligations (C) 361
--------------
31,461
Less current maturities 6,019
$ 25,442
--------------
--------------
</TABLE>
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: LONG-TERM DEBT (CONTINUED)
(A) The Company has an agreement with a lender to provide a revolving credit
facility. The facility provides for borrowings up to $20 million, bears
interest at either 1/2% over the lender's prime rate or 1 1/8% over the
Eurodollar rate and matures June 30, 2000. The facility includes working
capital, capital expenditure, cash flow and net worth requirements as
well as dividend restrictions, which limit the payment of cash dividends
to 50% of the preceding year's net income. The Company's unused revolving
credit line at June 30, 1996, amounted to $18,148,000 after considering
$1,852,000 of letters of credit. The credit facility was terminated
August 1, 1996, in connection with the management buy out.
(B) On August 15, 1995, the Company modified the above agreement to include a
$35 million acquisition credit facility, which was used for the purchase
of assets from SYN Inc. The acquisition credit facility bears interest at
either 1/2% over the lender's prime rate or 1 1/8% over the Eurodollar
rate. The acquisition credit facility requires quarterly principal
payments of $1,944,000. This credit facility was terminated August 1,
1996, in connection with the management buy out.
(C) Purchase contract obligations arise from the purchase of operating
businesses and are collateralized by the equipment and real estate
acquired in the respective acquisitions. The Company has also entered
into purchase contract obligations for equipment used in administrative
activities. At June 30, 1996, these obligations carried interest rates
ranging from 7% to 10% and are due periodically through 2001.
(D) On August 1, 1996, in conjunction with the management buyout, the
Company entered into an agreement with a lender to provide a $42 million
term note maturing December 31, 2002, a $52 million term note maturing
December 31, 2006, a $20 million revolving working capital credit
facility maturing June 30, 2001, and a $10 million acquisition credit
facility maturing June 30, 2001. The Company has the choice of keeping
the borrowings at prime or transferring the loans to Eurodollar. Amounts
at prime on these notes bear interest at the Bank of Boston daily rate
or 1/2% over the Federal Funds Rate. Amounts at Eurodollar on these
notes bear interest at the Eurodollar rate plus an applicable margin
which is dependent on a ratio of debt (excluding note payable to former
principal shareholder and purchase contract obligations) to earnings
before depreciation, interest and income taxes. The facility includes
working capital, capital expenditures, cash flow and net worth
requirements as well as dividend restrictions. This credit facility
was terminated December 16, 1996, in connection with the public
offering.
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: LONG-TERM DEBT (CONTINUED)
(E) On August 1, 1996, in conjunction with the management buyout, the Company
entered into a $5 million subordinated promissory note bearing interest
at 8% with the former principal shareholder of the Company. On October 7,
1996, this note was paid by NGC.
NOTE 6: INCOME TAXES
The provision (credit) for income taxes includes these components (in
thousands):
<TABLE>
<CAPTION>
Two and Two One
One-Half Months Month Year
Months Ended Ended Ended Ended
December 16, September 30, July 31, June 30,
1996 1996 1996 1996
--------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Taxes currently payable (refundable) $ 1,323 $ (400) $ (765) $ 2,475
Deferred income taxes (126) -- -- 1,075
------------- ------------ ---------- ----------
$ 1,197 $ (400) $ (765) $ 3,550
------------- ------------ ---------- ----------
------------- ------------ ---------- ----------
</TABLE>
A reconciliation of income tax expense at the statutory rate to the Company's
actual income tax expense is shown below (in thousands):
<TABLE>
<CAPTION>
Two and Two One
One-Half Months Month Year
Months Ended Ended Ended Ended
December 16, September 30, July 31, June 30,
1996 1996 1996 1996
--------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Computed at the statutory rate (34%) $ 1,060 $ (386) $ (693) $ 2,464
Increase resulting from:
Amortization of excess of cost over
fair value of net assets acquired 196 33 17 79
State income taxes - net of federal
tax benefit 102 (54) (100) 248
Change in estimated taxes 700
Other (161) 7 11 59
------------ ---------- --------- -----------
Actual tax provision $ 1,197 $ (400) $ (765) $ 3,550
------------ ---------- --------- -----------
------------ ---------- --------- -----------
</TABLE>
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: SELF-INSURANCE AND RELATED CONTINGENCIES
Under the Company's insurance program, coverage for comprehensive general
liability and vehicle liability is obtained for catastrophic exposures as well
as those risks required to be insured by law or contract. The Company retains a
significant portion of certain expected losses related primarily to
comprehensive general liability and vehicle liability. Under these insurance
programs, the Company self-insures the first $1 million of coverage (per
incident) on general liability and on vehicle liability. In addition, the
Company has a $100,000 deductible for each and every liability claim. The
Company obtains excess coverage from carriers for these programs on claims-made
basis policies. The excess coverage for comprehensive general liability provides
a loss limitation that limits the Company's aggregate of self-insured losses to
$1.5 million per policy period.
The Company self-insures the first $250,000 of workers' compensation coverage
(per incident). The Company purchased excess coverage from carriers for workers'
compensation claims in excess of the self-insured coverage. Provisions for
losses expected under this program were recorded based upon the Company's
estimates of the aggregate liability for claims incurred. The Company provided
letters of credit aggregating approximately $1,852,000 in connection with this
program.
Provisions for self-insured losses are recorded based upon the Company's
estimates of the aggregate self-insured liability for claims incurred.
The Company self-insures health benefits provided to the employees of the
Company and its subsidiaries. Provisions for losses expected under this program
are recorded based upon the Company's estimate of the aggregate liability for
claims incurred.
In conjunction with the restructuring that occurred in June 1994, the Company
agreed to indemnify Empire Gas for 47.7% of the self-insured liabilities of
Empire Gas incurred prior to June 30, 1994. The Company includes in its
self-insurance liability its best estimate of the amount it will owe Empire Gas
under the indemnification agreement.
The Company and its subsidiaries are presently defendants in various lawsuits
related to the self-insurance program and other business-related lawsuits which
are not expected to have a material, adverse effect on the Company's financial
position or results of operations. All liabilities related to the insurance
program and other business-related lawsuits were assumed by Cornerstone on
December 17, 1996.
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: INCOME TAX AUDITS
The State of Missouri has assessed Empire Gas approximately $1,400,000 for
additional state income tax for the years ended June 30, 1992 and 1993. An
amount approximating one-half of the above assessment could be at issue for the
year ended June 30, 1994. Empire Gas and Empire Energy have protested these
assessments and are currently waiting for a response from the Missouri
Department of Revenue. It is likely that this matter will have to be settled in
litigation. Empire Gas and Empire Energy believe that they have a strong
position on this matter and intend to vigorously contest the assessment. It is
not possible at this time to conclude on the outcome of this matter.
The Company and its subsidiaries are presently included in various state tax
audits which are not expected to have a material, adverse effect on the
Company's financial position or results of operation.
The Company's Federal Income Tax Returns have been audited through the year
ended June 30, 1994, and all income taxes due have either been accrued or paid.
As a former member of the Empire Gas controlled group and in connection with
a tax indemnity agreement with Empire Gas, the Company agreed to indemnify 47.7%
of the total liabilities related to these tax audits of the years ended June 30,
1994, and prior thereto.
NOTE 9: STOCK OPTIONS
The Company's stock options provide for a fixed option price of $7.00 per
share for options granted to officers and key employees. Options granted are
exercisable beginning one year after the date of grant at the rate of 20% per
year and expire six years after the date of grant. Option activity for each
period was:
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C>
Stock options outstanding June 30, 1995 1,145,000
Options granted 25,000
Options cancelled (50,000)
-------------
Stock options outstanding June 30, 1996 1,120,000
Options cancelled (150,000)
Options exercised (970,000)
-------------
Stock options outstanding December 16, 1996 0
-------------
-------------
</TABLE>
NOTE 10: ADDITIONAL CASH FLOW INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
Two and Two One
One-Half Months Month Year
Months Ended Ended Ended Ended
December 16, September 30, July 31, June 30,
1996 1996 1996 1996
--------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
NONCASH INVESTING AND FINANCING
ACTIVITIES
Purchase contract obligations incurred $ -- $ -- $ -- $ 222
Nonmonetary assets distributed to
former principal shareholders -- 6,755 -- --
Note payable issued to former
principal shareholder -- 5,000 -- --
ADDITIONAL CASH PAYMENT INFORMATION
Interest paid -- 804 106 2,432
Income taxes paid (refunded) -- (609) -- 2,995
</TABLE>
<PAGE>
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
DEPENDENCE ON PRINCIPAL SUPPLIERS
Three suppliers, Conoco, Phillips and Texaco, account for approximately 50%
of Empire Energy's volume of propane purchases.
Although the Company believes that alternative sources of propane are readily
available, in the event that the Company is unable to purchase propane from one
of these three suppliers, the failure to obtain alternate sources of supply at
competitive prices and on a timely basis would have a material, adverse effect
on the Company.
ESTIMATES
Significant estimates related to self-insurance, litigation, collectibility
of receivables and income tax assessments are discussed in Notes 3, 7 and 8.
Actual losses related to these items could vary materially from amounts
reflected in the financial statements.
NOTE 12: SUBSEQUENT EVENT
On December 17, 1996, substantially all of the assets and liabilities of the
Company were contributed to Cornerstone Propane, L.P., a Delaware limited
partnership, a subsidiary of Cornerstone Propane Partners, L.P. Following this
transaction, on December 17, 1996, Cornerstone Propane Partners, L.P. completed
its initial public offering (see Note 1 to the consolidated financial statements
of Cornerstone Propane Partners, L.P. for the period ended June 30, 1997,
included in this form 10-K).
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
CGI Holdings, Inc.
In our opinion, the accompanying consolidated statements of operations,
stockholders' equity, and cash flows present fairly, in all material respects,
the results of operations and cash flows of CGI Holdings, Inc. and its
subsidiaries for the four and one-half month period ended December 16, 1996 and
for the year ended July 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
August 8, 1997
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
August 1, Fiscal Year
1996 to Ended
December 16, July 31,
1996 1996
--------------- ---------------
<S> <C> <C>
Sales and other revenue $ 185,460 $ 384,354
Costs and expenses:
Cost of sales, except for depreciation
and amortization 173,155 351,213
Operating expenses 8,181 21,046
Sale of partnership interest 660 --
General and administrative expenses 1,738 3,835
Depreciation and amortization 1,604 4,216
Interest expense 2,238 5,470
--------- ---------
Loss before income taxes (2,116) (1,426)
Income tax benefit (748) (473)
--------- ---------
Net loss $ (1,368) $ (953)
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated
Stock Warrants Capital Deficit
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at July 31, 1995 $ 42 $ 2,134 $ 8,969 $ (3,292)
Net loss -- -- -- (953)
Repurchase of common stock -- -- (24) --
Accrued dividends on redeemable and
exchangeable preferred stock -- -- -- (778)
-------------- ------------- -------------- --------------
Balance at July 31, 1996 42 2,134 8,945 (5,023)
Net loss -- -- -- (1,368)
Accrued dividends on redeemable and
exchangeable preferred stock -- -- -- (116)
-------------- ------------- -------------- --------------
Balance at December 16, 1996 $ 42 $ 2,134 $ 8,945 $ (6,507)
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
August 1, Fiscal Year
1996 to Ended
December 16, July 31,
1996 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM (USED FOR)
OPERATING ACTIVITIES:
Net loss $ (1,368) $ (953)
Adjustments to reconcile net loss to net cash
from (used for) operating activities:
Depreciation and amortization 1,604 4,216
Deferred income taxes (732) (516)
Sale of partnership interest 202 --
Changes in assets and liabilities net of acquisitions:
Accounts and notes receivable (11,532) (2,950)
Inventories 4,257 (1,511)
Prepaid expenses and deposits (729) (410)
Other assets (154) (193)
Accounts payable 11,082 9,327
Accrued liabilities (1,007) 172
------------- -------------
1,623 7,182
------------- -------------
CASH FLOWS FROM (USED FOR)
INVESTING ACTIVITIES:
Payments for acquisitions of retail outlets -- (3,000)
Proceeds from sale of property and
Equipment 57 415
Purchases of and investments
in property and equipment (1,503) (3,060)
------------- -------------
(1,446) (5,645)
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
August 1, Fiscal Year
1996 to Ended
December 16, July 31,
1996 1996
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM (USED FOR)
FINANCING ACTIVITIES:
Repurchase of common stock $ -- $ (24)
Repayment of long-term debt (562) (1,250)
Borrowings on capital leases and other term
Loans -- 1,248
Repayment of other notes payable (252) (561)
Principal payments under capital lease
Obligations (506) (1,579)
Borrowings (repayments) under acquisition
Line 5,999 (2,275)
-------------- --------------
4,679 (4,441)
-------------- --------------
Net increase (decrease) in cash 4,856 (2,904)
Cash balance, beginning of period 1,519 4,423
-------------- --------------
Cash balance, end of period $ 6,375 $ 1,519
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Pursuant to a Stock Purchase Agreement dated March 31, 1993, by and among
CGI Holdings, Inc., a Delaware corporation (the "Company") formed to effect this
transaction and a major shareholder of Coast Gas Industries ("Industries"), the
Company acquired all of the outstanding stock of Industries (the "Buyout"). The
accompanying financial statements are presented on the Company's basis of
accounting giving effect to the Stock Purchase Agreement.
The Company engages in the sale and distribution of natural gas, crude oil,
natural gas liquids, liquefied petroleum gas ("LPG"), LPG storage and
transportation equipment through its wholly-owned subsidiary, Coast Gas, Inc.
Its operations consist primarily of the sale, transportation and storage of LPG
to wholesale and retail customers; the sale of LPG storage equipment; and the
leasing of LPG storage and transportation equipment under monthly operating
leases. Sales are made to approximately 77,000 customers in seven states,
primarily in the western regions of the United States.
In connection with the Stock Purchase Agreement, the Company pays a monthly
fee to Aurora Capital Partners ("Aurora"), an investor in the Company, for
management services provided. Payments for the four and one-half month period
ended December 16, 1996 were $101,625. Payments for the year ended July 31, 1996
amounted to $250,000.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Coast Gas, Inc., and its wholly-owned
subsidiary Coast Energy Group, Inc. ("CEG"). In 1989 the Company formed CEG,
headquartered in Houston, Texas, to conduct its wholesale procurement and
distribution operations. All significant intercompany transactions have been
eliminated in consolidation.
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Sales of natural gas, crude oil, natural gas liquids and LPG are recognized
when delivered to the customer.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
The Company offers credit terms on sales to its retail and wholesale customers.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The Company
maintains an allowance for uncollectible accounts receivable based upon the
expected collectibility of all accounts receivable.
CASH FLOWS
For purposes of the comparative statements of cash flows, the Company
considers all highly liquid investments having original maturities of three
months or less to be cash equivalents. The carrying amount of cash, cash
equivalents and short-term debt approximates fair market value due to the short
maturity of these instruments.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of LPG is
determined using the last-in, first-out (LIFO) method. The cost of parts and
fittings is determined using the first-in, first-out (FIFO) method.
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES (CONTINUED)
During the four and one-half months ended December 16, 1996, inventory
quantities were reduced. This reduction resulted in a liquidation of LIFO
inventory quantities carried at lower costs prevailing in prior years as
compared with the cost of purchases for the four and one-half month period ended
December 16, 1996, the effect of which decreased cost of goods sold by
approximately $.2 million and increased net income by approximately $.1 million.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets as
follows: buildings and improvements, 25 years; LPG storage and rental tanks, 40
to 50 years; and office furniture, equipment and tank installation costs, 5 to
10 years. Leasehold improvements are amortized over the shorter of the estimated
useful life or the lease term. Depreciation of equipment acquired under capital
leases of $54,500 and $132,000 for the four and one-half month period ended
December 16, 1996 and for the year ended July 31, 1996, respectively, is
included in depreciation and amortization expense.
When property or equipment is retired or otherwise disposed, the cost and
related accumulated depreciation is removed from the accounts, and the resulting
gain or loss is credited or charged to operations. Maintenance and repairs are
charged to earnings, while replacements and betterments that extend estimated
useful lives are capitalized.
A majority of the LPG rental and storage tanks are leased to customers on a
month-to-month basis under operating lease agreements. Tank rental income of
approximately $.9 million and $2.3 million for the four and one-half month
period ended December 16, 1996 and for the year ended July 31, 1996,
respectively, is included in sales and other revenue. Direct costs associated
with the installation of LPG storage tanks leased to customers are capitalized
and amortized over the estimated average customer retention term.
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST IN EXCESS OF NET ASSETS ACQUIRED
The excess of acquisition cost over the estimated fair market value of
identifiable net assets of acquired businesses is amortized on a straight-line
basis over forty years.
It is the Company's policy to review intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. If such a review should indicate that the
carrying amount of intangible assets is not recoverable, it is the Company's
policy to reduce the carrying amount of such assets to fair value.
DEFERRED CHARGES AND OTHER ASSETS
Deferred charges consist primarily of deferred debt issuance costs and
capitalized non-compete covenant agreement costs. Deferred debt issuance costs
are amortized using the bonds outstanding method over the life of the related
loans, other deferred charges are amortized on a straight-line basis over
varying lives, ranging from five to seven years. Other assets include customer
lists purchased in business acquisitions that are amortized on a straight-line
basis over a ten-year life.
FUTURES CONTRACTS
The Company routinely uses commodity futures contracts to reduce the risk
of future price fluctuations for natural gas and LPG inventories and contracts.
Gains and losses on futures contracts purchased as hedges are deferred and
recognized in cost of sales as a component of the product cost for the related
hedged transaction. In the statement of cash flows, cash flows from qualifying
hedges are classified in the same category as the cash flows from the items
being hedged. Contracts that do not qualify as hedges are marked to market, with
the resulting gains and losses charged to current operations. Net realized gains
and losses for the four and one-half month period ended December 16, 1996 and
for the year ended July 31, 1996 are not material.
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST RATE SWAP AGREEMENT
Interest rate differentials to be paid or received under interest rate swap
agreements are accrued and recognized over the life of the agreements. Interest
payable or receivable under these interest rate swap agreements is recognized in
the periods when market rates exceed contract limits as an increase or reduction
in interest expense. Interest rate swap agreements held by the Company expired
during fiscal 1996.
IMPAIRMENT OF LONG-LIVED ASSETS
On August 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" ("SFAS No. 121"). This statement
requires impairment losses to be recorded on long-lived assets used in
operations and certain identifiable intangible assets when indications of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Adoption of SFAS No.
121 did not have a material impact on the financial statements.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies APB Opinion 25 and related interpretations in
accounting for the stock options and stock appreciation rights. Had compensation
cost for the Company's options and stock appreciation rights been determined
based on the fair market value at the grant date of these awards consistent with
the methodology described by SFAS 123 "Accounting for Stock-Based Compensation"
the effect on the Company's net income would not have been material.
NOTE 2: ACCOUNTS AND NOTES RECEIVABLE AND OTHER ASSETS
Notes receivable arise in the ordinary course of business from the sale of
LPG storage and transportation equipment. Terms are generally from one to five
years, with interest rates ranging from 12.0% to 13.0%.
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2: ACCOUNTS AND NOTES RECEIVABLE AND OTHER ASSETS (CONTINUED)
The Company has accounts and notes receivable due from employees that
primarily relate to employee stock purchase loans and employee housing
assistance programs. The terms of the employee stock purchase loans require
interest payments of 6.0% per annum on the outstanding principal balance and
that all outstanding principal and interest be paid by October 31, 1997. Under
the employee housing assistance program, the Company is a guarantor on primary
residential notes issued in conjunction with the Company's relocation program
for a fixed term of seven years through October 1997. In conjunction with the
purchase of the Company (see Note 12), the balance of accounts and notes
receivable due from employees was either repaid or forgiven.
The Company, through its wholly-owned subsidiary Coast Gas, Inc., holds a
50% limited interest in Coast Energy Investments, Inc., a limited partnership.
The partnership was established to facilitate the formation of a trading fund
and is accounted for under the equity method. Coast Gas, Inc. receives a
management fee.
Effective October 1, 1996, the Company terminated its participation and
interest in Coast Energy Investments, Inc. The original partnership agreement
provided for a minimum investment term through December 1997. The termination
resulted in the sale of the Company's partnership interest to its 50% partner
and an employee of the partnership. The Company recorded a pretax loss on the
disposition of the partnership interest of $660,000. This amount consisted of a
$202,000 loss on the partnership investment and $458,000 of termination costs
consisting of salary, consulting, noncompete agreements and other related
expenses.
Beginning on December 12, 1996, insurance coverage for CGI Holdings,
Inc. was provided by Cornerstone Propane Partners, L.P. (see Note 12).
The coverage maintained was consistent with the coverage previously held by
the Company.
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3: PROPERTY AND EQUIPMENT
LPG rental and storage tanks acquired under capital leases are pledged as
collateral under the capital lease agreements. All assets of the Company are
pledged as collateral for the Company's long-term debt under the provisions of
the Credit Agreement (see Note 4).
Depreciation expense for the four and one-half month period ended
December 16, 1996 and for the year ended July 31, 1996, totaled $1.0 million
and $2.4 million, respectively.
NOTE 4: LONG-TERM DEBT
During the year ended July 31, 1995, Coast Gas, Inc. entered into a Credit
Agreement (the "Credit Agreement") with Bank of America, which provided
financing of up to $35.0 million, consisting of $15.0 million in term debt and a
$20.0 million revolving credit facility. The revolving and term loans, at the
election of Coast Gas, Inc., bear interest at the Bank of America prime rate
plus 1.50% or Libor plus 2.75% per annum. Concurrently, Coast Gas, Inc. issued
$15.0 million in senior subordinated notes with a fixed interest rate of 12.50%
per annum. The proceeds of the subordinated notes and a portion of the proceeds
available under the Credit Agreement were used to repay the notes to Heller
Financial, Inc. ("Heller"). The balance of the funds available under the Credit
Agreement ("Working Capital Line") will be used for general corporate purposes
and to finance future acquisitions.
The terms of the Credit Agreement were amended during the year ended July
31, 1996 to increase the Working Capital line by an additional $3.0 million. An
additional provision of the amendment requires that the maximum amount of the
facility is fixed at $23.0 million until May 1, 1997, at which point it begins
decreasing annually to $16.0 million by May 1, 2000 and matures on September 14,
2000. Advances against the line used to finance acquisitions were $0 and $3.0
million for the four and one-half month period ended December 16, 1996 and the
year ended July 31, 1996, respectively.
The terms of the Credit Agreement contain restrictions on the issuance of
new debt or liens, the purchase or sale of assets not in the ordinary course of
business and the declaration and payment of dividends, and requires that Coast
Gas, Inc. maintain specified levels of fixed charge and interest payment
coverage ratios. The Credit Agreement also provides for prepayment of excess
funds in the event of sales of pledged assets if such funds are not reinvested
in like kind assets. The Credit Agreement provides for an unused commitment fee
of .5% on funds not drawn against the revolving line.
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4: LONG-TERM DEBT (CONTINUED)
Total interest paid during the four and one-half month period ended
December 16, 1996, was $1.6 million of which interest paid on bank long-term and
subordinated debt totaled $1.4 million. Total interest paid during the year
ended July 31, 1996 was $5.4 million, of which interest paid on bank long-term
and subordinated debt totaled $4.4 million.
Annual maturities of revolving, term and other long-term debt through July
31, 2001, are as follows: 1997 - $2.9 million; 1998 - $3.5 million; 1999 - $3.9
million; 2000 - $4.4 million; 2001 - $13.3 million; and thereafter - $15.1
million. The subordinated notes amortize $5.0 million per annum commencing in
fiscal 2003.
Debt issuance costs associated with the new subordinated, revolving and
term bank debt totaling $2.2 million are being amortized using the bonds
outstanding method over the life of the related loans.
The carrying value of the Company's long-term debt approximates fair value,
in that most of the long-term debt is at floating market rates, or incurred at
rates that are not materially different from those current at July 31, 1996.
The Company has a Continuing Letter of Credit Agreement with Banque Paribas
to provide a $25.0 million credit guidance line for the operations of Coast
Energy Group, Inc., the Company's wholly owned subsidiary. The agreement
provides for a compensating balance of $1.3 million, and grants Banque Paribas a
security interest in certain pledged accounts receivable of CEG.
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5: MANDATORILY REDEEMABLE SECURITIES
The Company has outstanding 62,500 shares of cumulative redeemable,
exchangeable preferred stock, with par value of $0.01 and stated value of $100.
Cumulative dividends of 10% are payable annually. Payment of dividends is
restricted under the terms of the Credit Agreement with Coast Gas, Inc. (see
Note 4). Each share of preferred stock may be redeemed at a price equal to
stated value per share plus accrued and unpaid dividends. The stock is also
exchangeable, at the option of the Company, for Coast Gas, Inc.'s subordinated
exchange debentures due September 15, 2002 (see Note 4). The stock shall, with
respect to dividend rights and rights on liquidation, winding up and
dissolution, rank senior to all classes of common stock. The Company shall
redeem the stock in full at the earliest of twelve consecutive years of unpaid
dividends, sale or disposal of substantially all the assets of the Company or
merger of the Company, subject to certain conditions. No dividends have been
declared or paid since April 1, 1993. Pursuant to the Stock Purchase and Merger
Agreement (see Note 11), no dividends were accrued after September 9, 1996.
NOTE 6: INCOME TAXES
The income tax provision for the four and one-half month period ended
December 16, 1996 and for the year ended July 31, 1996 are summarized as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
December 16, July 31,
1996 1996
------------- -------------
<S> <C> <C>
Current provision:
Federal $ -- $ --
State -- 25
------------- -------------
-- 25
Deferred provision (benefit):
Federal (632) (428)
State (116) (70)
------------- -------------
(748) (498)
------------- -------------
$ (748) $ (473)
------------- -------------
------------- -------------
</TABLE>
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6: INCOME TAXES (CONTINUED)
A reconciliation of the Company's income tax provision computed at the
United States federal statutory rate to the effective rate for the recorded
provision for income taxes for the four and one-half month period ended December
16, 1996 and for the year ended July 31, 1996 is as follows:
<TABLE>
<CAPTION>
December 16, July 31,
1996 1996
------------- -------------
<S> <C> <C>
Federal statutory rate (34)% (34)%
Amortization of cost in excess of assets
Acquired 2 7
State franchise taxes, net of federal income
tax benefit (5) 2
Prior year tax adjustments -- (5)
Other, net 2 (3)
----- -----
(35)% (33)%
----- -----
----- -----
</TABLE>
Tax payments during the four and one-half month period ended December
16, 1996 and for the year ended July 31, 1996 were minimal due to the
Company's tax loss position. Payments were solely for state income taxes in
various states.
As of July 31, 1996, the Company has a federal and state net operating loss
carryforward of approximately $20.0 million and $2.3 million, respectively,
available to reduce future payments of income tax liabilities. If not used, the
tax benefits of these NOL carryforwards expire during the period from 2006 to
2011.
Under the provisions of Internal Revenue Code Section 382, the annual
utilization of the Company's net operating loss carryforwards may be limited
under certain circumstances. Events which may affect utilization include, but
are not limited to, cumulative stock ownership changes of more than 50% over a
three-year period. An ownership change occurred effective March 31, 1993, due to
cumulative changes in the Company's ownership. The annual and cumulative limits
on the utilization of net operating losses incurred prior to March 31, 1993 are
approximately $1.6 million and $5.5 million, respectively.
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6: INCOME TAXES (CONTINUED)
On December 17, 1996, a more than 50% ownership change occurred (see Note
12). As a result, utilization of net operating losses incurred before that date
will be subject to an annual limitation. Management believes the net operating
losses will be fully utilizable.
NOTE 7: LEASES
Coast Gas, Inc. leases rental tanks and vehicles from a former owner of the
Company on a month-to-month operating lease. The lease provides for cancellation
within 90 days, and includes a lease purchase option at the greater of the
original cost or current list price. Coast Gas, Inc. also leases real estate,
LPG storage tanks, and office equipment from certain of its current directors,
officers and employees under operating and capital lease agreements.
Rental payments under such leases totaled $403,000 and $204,000 for the
four and one-half month period ended December 16, 1996 and for the year ended
July 31, 1996, respectively.
Coast Gas, Inc. generally leases vehicles, computer equipment, office
equipment and real property under operating lease agreements. The typical
equipment lease term is four to six years. Real property leases generally have
terms in excess of ten years with renewal options. Rent expense under all
operating lease agreements for the four and one-half month period ended December
16, 1996 and for the year ended July 31, 1996 totaled $.9 million and $2.5
million, respectively.
Capital leases consist primarily of financing agreements for the
acquisition of LPG storage tanks with terms ranging from five to seven years.
These leases provide fixed price purchase options at the end of the
noncancelable lease term.
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7: LEASES (CONTINUED)
As of July 31, 1996, future minimum lease commitments under noncancelable
leases, with terms in excess of one year were as follows:
<TABLE>
<CAPTION>
Operating Capital
--------- -------
(In Thousands)
<S> <C> <C>
Years Ended July 31,
1997 $ 2,020 $ 1,624
1998 1,495 1,336
1999 991 1,150
2000 753 885
2001 679 113
--------------- ---------------
Total minimum lease payments $ 5,938 5,108
---------------
---------------
Less amounts representing interest 755
---------------
Present value of future minimum lease payments 4,353
Less amounts due within one year 1,362
---------------
$ 2,991
---------------
---------------
</TABLE>
Total assets acquired under capital leases totaled $0 and $1.2 million
for the four and one-half months ended December 16, 1996 and for the year ended
July 31, 1996, respectively.
In addition to these minimum lease rentals, Coast Gas, Inc. has an
agreement to lease the assets of a retail LPG distributor at a fixed percentage
of the gross profits generated by the business. Contingent lease rents paid
under this lease agreement for the four and one-half month period ended December
16, 1996 and for the year ended July 31, 1996, totaled $119,000 and $344,000,
respectively. The original lease term of five years, which expired in 1995, was
extended for five years and has various renewal and purchase options available
to Coast Gas, Inc. through January 31, 2014.
Coast Gas, Inc. subleases some of its LPG storage tanks and vehicles to
other propane distributors under non-cancelable operating lease agreements. The
lease terms are generally for one year with automatic renewal provisions.
Additionally, these distributors may purchase the LPG storage tanks under lease,
at the greater of original cost or current list price. Sublease income totaled
$96,000 and $270,000 for the four and one-half month period ended December 16,
1996 and for the year ended July 31, 1996, respectively.
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 8: STOCKHOLDERS' EQUITY
EMPLOYEE BENEFIT PLANS
The Company has a 401(k) employee benefit plan. All full-time employees who
have completed one year of service and are twenty-one years of age or older are
eligible to participate. Under the plan provisions, participants are allowed to
make monthly contributions on a tax-deferred basis subject to the limitations of
the plan. In addition, the Company will contribute a discretionary matching
contribution based upon participant contributions. Employees are 100% vested for
all contributions. The plan is managed by a trustee, and is fully funded.
In 1990 the Company established a discretionary profit-sharing plan for the
benefit of all eligible full time employees. Contributions are made annually at
the sole discretion of the Board of Directors. Participant benefits vest and are
paid annually over a five-year period. Unvested contributions are forfeited upon
termination of employment, and are allocated to the remaining plan participants.
Contributions are unfunded until the time of payment. No amounts were accrued
during the four and one-half month period ended December 16, 1996 and the year
ended July 31, 1996.
EMPLOYEE BENEFIT PLANS (CONTINUED)
Additionally, the Company provides certain health and life insurance
benefits to all eligible full time employees. Expenses are recorded based upon
actual paid claims and expected liabilities for incurred but not reported claims
at year-end.
WARRANTS
In conjunction with the refinancing in fiscal 1995, the Company repurchased
175,438 shares of common stock from officers of the Company for $1.0 million.
Warrants in the Company were issued to senior subordinated note holders which
have been assigned an estimated fair value of $2.1 million, to be amortized over
the life of the credit agreement using the bonds outstanding method. The
warrants include 175,438 Series A Warrants with an exercise price of $2.85 and
287,228 Series B Warrants with an exercise price of $0.01. The warrants are
exercisable at the earliest of a sale, acquisition or initial public offering,
subject to certain conditions, or September 15, 1997 into shares of the
Company's Class D non-voting common stock.
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 8: STOCKHOLDERS' EQUITY (CONTINUED)
OPTIONS
The Company has a 1987 stock plan available to grant incentive and
nonqualified stock options to officers and other employees. The plan provides
for the granting of a maximum of 175,000 options to purchase common shares of
the Company. The option price per share may not be less than the fair market
value of a share on the date the option is granted and the maximum term of the
option may not exceed 10 years. Options granted vest over a period of four years
from the date of grant. Granting of options under this plan will expire on the
10th anniversary of the plan. Pursuant to the Merger Agreement (see Note 11),
each outstanding option shall be converted into the right to receive cash
whether or not such option is exercisable in full. Information regarding the
Company's stock option plan is summarized below:
<TABLE>
<CAPTION>
Options Per Share Range
------- -------------------------------
<S> <C> <C>
Outstanding at July 31, 1996 174,973 $ 0.01 $ 9.13
Granted --
Exercised --
Canceled --
--------------
Outstanding at December 16, 1996 174,973 $ 0.01 $ 9.13
Available for grant at December 16, 1996 27
</TABLE>
During 1996, the Company adopted a Stock Appreciation Rights (SARs) plan.
The Company granted 500,000 SARs, which are to vest over a five-year period, at
a per share value of $1.20. Compensation expense related to the grant of SARs of
$45,000 and $120,000 was recorded for the four and one-half month period ended
December 16, 1996 and for the year ended July 31, 1996, respectively.
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 9: COMMITMENTS AND CONTINGENCIES
The Company has contracts with various suppliers to purchase a portion of
its supply needs of LPG for future deliveries with terms ranging from one to
twelve months. The contracted quantities are not significant with respect to the
Company's anticipated total sales requirements and will generally be acquired at
prevailing market prices at the time of shipment. Outstanding letters of credit
issued in conjunction with product supply contracts are a normal business
requirement.
The Company is engaged in certain legal actions related to the normal
conduct of business. In the opinion of management, any possible liability
arising from such actions will be adequately covered by insurance or will not
have a material adverse effect on the Company's financial position or results of
operations.
NOTE 10: BUSINESS ACQUISITIONS
During the year ended July 31, 1996, Coast Gas, Inc. acquired one retail
outlet in a transaction accounted for using the purchase method of accounting.
The cost of the acquired company totaled $4.0 million, including $1.0 million of
seller notes and other liabilities and $3.0 from the increase in the Company's
Working Capital/Acquisition bank line. Goodwill resulting from the acquisition
totaled $2.8 million. Revenues of the acquired company for the year ended July
31, 1996, subsequent to the dates of acquisition and included in the Company's
consolidated sales totaled $1.9 million.
NOTE 11: STOCK PURCHASE AND MERGER AGREEMENT
Effective September 9, 1996, the Company and the preferred shareholders of
the Company entered into a Stock Purchase and Merger Agreement (the "Merger
Agreement") for the sale of the preferred stock of the Company for $8.7 million.
The terms of the Agreement also provided an option to the buyer of the preferred
stock to acquire all of the outstanding common stock of the Company, for a
period of one year from the date of the sale of the preferred stock.
Additionally, the shareholders of the Company have an option to put the common
stock of the Company to the buyer of the preferred stock on April 30, 1997, if
the buyer has not previously exercised the option to acquire the common stock.
Subsequent to December 16, 1996, the common stock of the company was purchased
as described in Note 12.
<PAGE>
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 12: SUBSEQUENT EVENT
On December 17, 1996, substantially all of the assets and liabilities of
the Company were contributed to Cornerstone Propane, L.P., a Delaware limited
partnership, a subsidiary of Cornerstone Propane Partners, L.P. Following this
transaction, on December 17, 1996, Cornerstone Propane Partners, L.P. completed
its initial public offering (see Note 1 to the consolidated financial statements
of Cornerstone Propane Partners, L.P. included in this Form 10-K).
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SYN Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of SYN Inc. (a Delaware corporation and
52.5% owned subsidiary of Northwestern Public Service Company) and Subsidiaries
for the period from inception (August 15, 1995) to June 30, 1996, and for the
period from July 1, 1996 to December 16, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of SYN Inc.
and Subsidiaries for the period from inception (August 15, 1995) to June 30,
1996 and for the period from July 1, 1996 to December 16, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
August 4, 1997
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Period
For the Period from Inception
July 1, 1996 August 15, 1995
to to
December 16, June 30,
1996 1996
-------------- ---------------
<S> <C> <C>
REVENUES $ 44,066 $ 96,092
COST OF PRODUCT SOLD 23,322 46,187
--------- ---------
GROSS PROFIT 20,744 49,875
--------- ---------
OPERATING EXPENSES
Salaries and commissions 7,252 14,520
General and administrative 6,151 14,225
Depreciation and amortization 1,904 3,329
Related-party corporate administration
and management fees 1,668 3,281
--------- ---------
Total operating expenses 16,975 35,355
--------- ---------
OPERATING INCOME 3,769 14,520
INTEREST EXPENSE, INCLUDING $2,214 AND
$4,388 TO RELATED PARTY 3,311 5,584
--------- ---------
INCOME BEFORE INCOME TAXES 458 8,936
PROVISION FOR INCOME TAXES 298 3,675
--------- ---------
NET INCOME 160 5,261
DIVIDENDS ON CUMULATIVE PREFERRED STOCK (3,878) (7,260)
--------- ---------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (3,718) $ (1,999)
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Common Stock
---------------------------------------
Preferred Stock Additional Total
------------------------ Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
---------- ---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT INCEPTION,
AUGUST 15, 1995 -- $ -- -- $ -- $ -- $ -- $ --
Common stock issued -- -- 100,000 1 99 -- 100
Preferred stock issued 55,312 55,312 -- -- -- -- 55,312
Dividends on
preferred stock,
$131.25 per share -- -- -- -- -- (7,260) (7,260)
Net income -- -- -- -- -- 5,261 5,261
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, 55,312 55,312 100,000 1 99 (1,999) 53,413
JUNE 30, 1996
Dividends on
preferred stock,
$70.11 per share -- -- -- -- -- (3,878) (3,878)
Net income -- -- -- -- -- 160 160
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE,
DECEMBER 16,
1996 55,312 $ 55,312 100,000 $ 1 $ 99 $ (5,717) $ 49,695
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SYN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Period
For the Period from Inception
July 1, 1996 August 15, 1995
to to
December 16, June 30,
1996 1996
------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 160 $ 5,261
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 1,904 3,329
Gain on sale of assets 233 --
Deferred income tax benefit 298 3,624
Changes in assets and liabilities, net of effect of acquisitions
Trade receivables (1,991) (1,247)
Inventories (1,873) 704
Prepaid expenses (569) 189
Accounts payable 2,549 (5,571)
Accrued expenses 3,602 (3,423)
--------- ---------
Net cash provided by operating activities 4,313 2,866
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of assets of Synergy Group Incorporated -- (150,922)
Proceeds from the sale of certain Synergy Group
Incorporated assets to Empire Energy Corporation -- 35,980
Expenditures for property and equipment (4,240) (9,182)
Proceeds from sale of assets 129 474
Proceeds from disposal of companies 829 --
Acquisitions, net of cash received (469) --
Decrease in investments and restricted cash deposits -- 70
--------- ---------
Net cash used in investing activities (3,751) (123,580)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on credit facility 20,367 --
Payments on credit facility (16,532) --
Borrowing under long-term debt agreements -- 23,910
Proceeds from issuance of common stock -- 100
Proceeds from issuance of preferred stock -- 52,812
Proceeds from issuance of note payable - related party -- 52,812
Borrowings from related party -- 36,458
Repayments to related party -- (36,458)
Payment on long-term debt agreements (242) (1,834)
Preferred stock dividends paid (3,878) (7,072)
--------- ---------
Net cash provided by (used in) financing activities (285) 120,728
--------- ---------
INCREASE IN CASH 277 14
CASH, BEGINNING OF PERIOD 14 --
--------- ---------
CASH, END OF PERIOD $ 291 $ 14
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
SYN Inc. (Synergy) is engaged in the retail sale of liquid propane gas
primarily in the Southern, Midwest and Eastern regions of the United States.
Most of Synergy's customers use propane for residential home heating and make
periodic purchases with cash or on credit. Synergy was formed to acquire
Synergy Group Incorporated (SGI).
SYNERGY ACQUISITION
On August 15, 1995, Synergy acquired the common stock of SGI, a retail
distributor of propane with 152 locations, for approximately $151 million. In
conjunction with the acquisition, Synergy sold 38 of the retail locations to
Empire Energy Corporation (Empire Energy) for approximately $36 million cash
and the assets of nine retail locations valued at $2 million. There was no
gain or loss recognized on this sale.
The total net purchase price paid by Synergy for the acquisition of SGI
consisted of $105.6 million in cash (which was provided by proceeds from the
issuance of $52.8 million of preferred stock and the issuance of $52.8
million of debt), $1.25 million in long-term debt and the assumption of
certain liabilities. The acquisition was accounted for under the purchase
method of accounting with all tangible assets and liabilities acquired
recorded at fair value at date of acquisition and the cost in excess of such
fair value of $32.5 million recorded as an intangible asset.
The purchase price is subject to adjustment based on the amount of
working capital acquired by Synergy. Synergy has made a claim against the
former owners of SGI (the Former Stockholders) for a working capital
adjustment and recorded a receivable of $26.7 million, which reflects the
reduction in purchase price of the assets based on the amount of working
capital acquired. The purchase price is also subject to adjustment based on
the value of customer tanks which cannot be located within a specified period
of time. Synergy has made a claim against the Former Stockholders for the
value of unlocated tanks and recorded a receivable for $11.3 million related
to this claim. Subsequent to June 30, 1996, a settlement has been reached
with the former owners of SGI (the Former Stockholders) for a reduction in
the purchase price of $5 million as an adjustment of working capital.
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SYNERGY ACQUISITION (CONTINUED)
These amounts receivable in connection with the acquisition of SGI are
management's best estimate of the amounts that will ultimately be due from
the Former Stockholders. However, the parties continue to negotiate final
settlement and the Former Stockholders have objected to a number of the
claims made by Synergy. An adjustment of the consideration paid for SGI could
also result in an adjustment in the amount of consideration received from
Empire Energy.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Synergy and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
period. Significant estimates related to self-insurance, litigation,
collectibility of receivables and income tax assessments are discussed in
Notes 6 and 7. Actual results could differ from those estimates.
REVENUE RECOGNITION POLICY
Revenue from propane sales and the related cost of product sold are
recognized upon delivery of the product.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
by the first-in, first-out method for retail operations inventory and by the
specific identification method for wholesale operations inventory.
PROPERTY AND EQUIPMENT
For financial reporting purposes, property and equipment are stated at
acquisition cost. Repairs and maintenance costs that do not significantly extend
the useful lives of the respective assets are charged to operations as incurred.
Depreciation is computed using the straight-line method over the following
estimated useful lives of the assets:
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Buildings 40 years
Storage and consumer service facilities 35-40 years
Transportation, office and other equipment 5-10 years
</TABLE>
INTANGIBLE ASSETS
The excess of cost over the fair value of the net acquired assets of SGI
has been recorded as an intangible asset and is being amortized on a
straight-line basis over 40 years. Costs related to arranging the debt
financing for the acquisition of SGI have been capitalized and are being
amortized on a straight-line basis over the two-year term of the debt.
It is Synergy's policy to review long-lived assets including intangible
assets whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. If such a review should
indicate that the carrying amount of intangible assets is not recoverable, it
is Synergy's policy to reduce the carrying amount of such assets to fair
value.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects
of differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax
assets if it is more likely than not that a deferred asset will not be
realized.
NOTE 2: RELATED-PARTY TRANSACTIONS
Synergy entered into a Management Service Agreement with Empire Gas
Corporation (Empire Gas), a 30% common stockholder of Synergy, under which
Empire Gas provides all management services to Synergy for payment of an annual
overhead reimbursement of $3.25 million, and a management fee of $500,000 plus a
performance-based payment for certain operating results. Amounts paid at
June 30, 1996, and December 16, 1996, were $3.28 million and $1.73 million.
During the period ended December 16, 1996, and the period ended June 30,
1996, Synergy purchased $20.5 and $42 million, respectively, of liquid
propane gas from Empire Gas.
During the period ended June 30, 1996, Synergy transferred real and
personal property of three retail locations valued at $1,615,000 to Empire
Gas in exchange for four Empire Gas retail locations valued at approximately
$1,713,000, the value difference of $98,000 paid to Empire Gas in cash.
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Synergy paid $6,343,000 during the period ended June 30, 1996, to the
controlling stockholder of Synergy and $1,103,000 to Empire Gas for
reimbursement of costs incurred relating to the acquisition of SGI.
During the period ended June 30, 1996, Synergy leased, under operating
leases, transportation equipment to Propane Resources Transportation, Inc. in
which Synergy owns a 15% common stock interest. Synergy received $274,000 in
lease income during the period ended June 30, 1996, from these leases.
Aggregate annual maturities of the long-term debt outstanding at June 30,
1996, are as follows (in thousands):
<TABLE>
<S> <C>
1997 $ 1,025
1998 24,603
1999 680
2000 204
2001 200
--------
$ 26,712
--------
--------
</TABLE>
NOTE 3: OPERATING LEASES
Synergy leases retail location sales offices under noncancelable operating
leases expiring at various times through 2006. These leases generally contain
renewal options and require Synergy to pay all executory costs (property taxes,
maintenance and insurance).
Scheduled future minimum lease payments (in thousands) at June 30, 1996,
were:
<TABLE>
<S> <C>
1997 $ 598
1998 310
1999 206
2000 41
2001 19
Thereafter 53
-------
$ 1,227
-------
-------
</TABLE>
Lease expense during the five and one-half months ended December 16, 1996,
and the period ended June 30, 1996, was approximately $320,000 and $600,000.
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: INCOME TAXES
The provision for income taxes includes the following components (in
thousands):
<TABLE>
<CAPTION>
For the
Period
For the from
Period Inception
July 1, (August 15,
1996 1995)
to to
December 16, June 30,
1996 1996
------------ -----------
<S> <C> <C>
Taxes currently payable $ -- $ 51
Deferred income taxes 298 3,624
------------ -----------
$ 298 $ 3,675
------------ -----------
------------ -----------
</TABLE>
A reconciliation of income tax expense at the statutory rate to the actual
income tax expense is as follows (in thousands):
<TABLE>
<CAPTION>
For the
Period
For the from
Period Inception
July 1, (August 15,
1996 1995)
to to
December 16, June 30,
1996 1996
------------ ------------
<S> <C> <C>
Taxes computed at statutory rate (34%) $ 156 $ 3,038
Amortization of excess of cost over fair
value of net assets acquired 126 157
State income taxes, net of federal tax benefit 18 378
Other (2) 102
------------ ------------
Actual tax provision $ 298 $ 3,675
------------ ------------
------------ ------------
</TABLE>
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: INCOME TAXES (CONTINUED)
At June 30, 1996, Synergy had approximately $20 million of net operating
loss carryforwards for tax reporting purposes expiring in varying amounts from
2007 through 2010. These net operating loss carryforwards have been reflected in
the financial statements as deferred income tax assets at June 30, 1996 and are
subject to certain limitations on utilization under provisions of the Internal
Revenue Code.
NOTE 6: COMMITMENTS AND CONTINGENCIES
SELF-INSURANCE
Synergy obtains insurance coverage for catastrophic exposures related to
comprehensive general liability, vehicle liability and workers' compensation, as
well as those risks required to be insured by law or contract. Synergy
self-insures the first $250,000 of coverage per incident and obtains excess
coverage from carriers for these programs.
Provisions for self-insured losses are recorded based upon Synergy's
estimates of the aggregate self-insured liability for claims incurred. Synergy
has provided letters of credit aggregating approximately $2.875 million in
connection with these programs.
Synergy self-insures for health benefits provided to its employees.
Provisions for losses expected under this program are recorded based upon
Synergy's estimate of the aggregate liability for claims incurred.
CONTINGENCIES
Synergy and the acquired operations of SGI are presently involved in
various federal and state tax audits and are also defendants in other
business-related lawsuits which are not expected to have a material adverse
effect on Synergy's financial position or results of operations.
In conjunction with the acquisition of SGI, the Former Stockholders of SGI
are contractually liable for all insurance claims and tax liabilities that
relate to periods prior to the acquisition date. Funds have been placed in
escrow accounts to provide for payment of these liabilities. In the event that
the escrow amount is insufficient to settle these liabilities, Synergy could be
obligated to fund any additional amounts due and would have to seek
reimbursement from the Former Stockholders for such amounts. Synergy has
recorded its best estimates of the ultimate liabilities expected to arise from
these matters and has made claims against the Former Stockholders for
reimbursement (see Note 1).
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: EMPLOYEE BENEFIT PLAN
Synergy succeeded to the SGI-sponsored defined contribution retirement plan
covering substantially all salaried employees. Employees who elect to
participate may contribute a percentage of their salaries to the plan and
Synergy at its discretion may match a portion of the employee contribution.
Synergy may also make profit-sharing contributions to the plan at the discretion
of its Board of Directors. Synergy made no profit-sharing contributions to the
plan during the period July 1, 1996 to December 16, 1996, and the period from
inception (August 15, 1995) to June 30, 1996.
The plan is currently under audit by the U.S. Department of Labor (DOL),
which has alleged that the plan violated certain sections of the Employee
Retirement Income Security Act of 1974. However, the DOL has advised that it is
not contemplating current action regarding these violations. The DOL audit is
continuing and the outcome cannot be determined at this time. In the event the
Former Stockholders are unable to satisfy any liabilities resulting from the
above examination, Synergy could be obligated to fund these liabilities and seek
reimbursement from the Former Stockholders. Synergy has recorded its best
estimates of the ultimate liabilities expected to arise from these matters and
has made claims against the Former Stockholders for reimbursement (see Note 1).
NOTE 8: ADDITIONAL CASH FLOW INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
For the
Period
For the from
Period Inception
July 1, (August 15,
1996 1995)
to to
December 16, June 30,
1996 1996
------------ -----------
<S> <C> <C>
Assets acquired through issuance of:
Long-term debt $ 1,468 $ 2,250
Preferred stock -- 2,500
Additional cash payment information:
Interest paid 3,339 5,535
Income taxes paid 190 2,284
</TABLE>
<PAGE>
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: SUBSEQUENT EVENT
On December 17, 1996, substantially all of the assets and liabilities of the
Company were contributed to Cornerstone Propane, L.P., a Delaware limited
partnership, a subsidiary of Cornerstone Propane Partners, L.P. Following this
transaction, on December 17, 1996, Cornerstone Propane Partners, L.P. completed
its initial public offering (see Note 1 to the consolidated financial statements
of Cornerstone Propane Partners, L.P. for the period ended June 30, 1997,
included in this form 10-K.
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
Northwestern Growth Corporation
Huron, South Dakota
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of SYNERGY GROUP INCORPORATED for
the period ended August 14, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of SYNERGY GROUP INCORPORATED for the period ended August 14, 1995, in
conformity with generally accepted accounting principles.
BAIRD, KURTZ & DOBSON
Springfield, Missouri
October 9, 1996
<PAGE>
SYNERGY GROUP INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FOUR AND ONE-HALF MONTHS
ENDED AUGUST 14, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the
Four and
One-Half
Months
Ended
August 14,
1995
----------
<S> <C>
OPERATING REVENUE $ 32,179
COST OF PRODUCT SOLD 15,387
---------
GROSS PROFIT 16,792
---------
OPERATING COSTS AND EXPENSES
Provision for doubtful accounts 926
General and administrative 20,681
Depreciation and amortization 1,845
---------
Total operating expenses 23,452
---------
Operating loss (6,660)
---------
OTHER INCOME (EXPENSE)
Interest expense (2,436)
Related-party interest expense (787)
Other income 101
---------
(3,122)
---------
LOSS BEFORE INCOME TAXES (9,782)
PROVISION FOR INCOME TAXES 31
---------
NET LOSS $ (9,813)
---------
---------
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
SYNERGY GROUP INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE FOUR AND ONE-HALF MONTHS
ENDED AUGUST 14, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Series A Series B Class A Class B Additional Retained Stockholders'
Preferred Preferred Common Common Paid-in Earnings Equity
Stock Stock Stock Stock Capital (Deficit) (Deficit)
--------- --------- ------- -------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1995 $ 25,000 $ 16,700 $ 1 $ 40 $ 11,378 $ (68,882) $ (15,763)
NET LOSS -- -- -- -- -- (9,813) (9,813)
-------- -------- ------- ------- -------- -------- ----------
BALANCE, AUGUST 14, 1995 $ 25,000 $ 16,700 $ 1 $ 40 $ 11,378 $ (78,695) $ (25,576)
-------- -------- ------- ------- -------- -------- ----------
-------- -------- ------- ------- -------- -------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
SYNERGY GROUP INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE FOUR AND ONE-HALF MONTHS
ENDED AUGUST 14, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the
Four and
One-Half
Months
Ended
August 14,
1995
-----------
<S> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $ (9,813)
Items not requiring (providing) cash:
Depreciation 1,770
Amortization 75
Gain on sale of assets (61)
Changes in:
Trade receivables 5,139
Inventories 1,251
Accounts payable and accrued expenses 3,591
Prepaid expenses and other 764
-----------
Net cash provided by operating activities 2,716
-----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from sale of assets 104
Purchase of property and equipment (596)
Change in restricted cash deposits (615)
-----------
Net cash used in investing activities (1,107)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (108)
Decrease in credit facilities (1,000)
-----------
Net cash used in financing activities (1,108)
-----------
INCREASE IN CASH 501
CASH, BEGINNING OF PERIOD 1,246
-----------
CASH, END OF PERIOD $ 1,747
-----------
-----------
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
SYNERGY GROUP INCORPORATED
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF OPERATIONS
Synergy Group Incorporated (the Company) is engaged primarily in the
retail sale of liquid propane gas through its branch offices located in the
Northeast, Mid-Atlantic, Southeast and South-central regions of the United
States. Most of the Company's customers use propane for residential home
heating and make periodic purchases with cash or on credit.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Synergy
Group Incorporated and its subsidiaries. All significant intercompany
balances have been eliminated in consolidation.
REVENUE RECOGNITION POLICY
Sales and related cost of product sold are recognized upon delivery of
the product or service.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is
determined by the last-in, first-out (LIFO) method for propane and the
first-in, first-out (FIFO) method for all others.
<PAGE>
SYNERGY GROUP INCORPORATED
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Depreciation is provided on all property and equipment primarily by the
straight-line method over the estimated useful lives of 3 to 30 years.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects
of differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax
assets if it is more likely than not that a deferred tax asset will not be
realized.
AMORTIZATION
The excess of current fair value over cost of net assets acquired is being
amortized on the straight-line basis over 40 years.
CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents.
NOTE 2: SALE OF THE COMPANY
On August 15, 1995, the Company was acquired by SYN Inc. which is majority
owned by Northwestern Growth Corporation, a wholly owned subsidiary of
Northwestern Public Service Company. The acquisition cost was approximately $151
million and included the redemption of the Senior Secured Notes at par value and
the repayment of the Company's existing revolving credit facility. As a result
of the above sale the financial statements reflect operations for the four and
one-half month period ended August 14, 1995.
<PAGE>
SYNERGY GROUP INCORPORATED
NOTE 3: DEBT RESTRUCTURING
On September 2, 1993, the Company and a committee of holders of the
Company's 11 5/8% Senior Subordinated Notes due 1997 (the 11 5/8% Notes)
announced that they had reached agreement on the major issues to restructure
the Company's outstanding debt and on August 23, 1994, the Company completed
the restructuring. The agreement contemplated that certain related parties to
the Company exchange $41,700,000 in debt for Series A Preferred Stock and
Series B Preferred Stock (the Recapitalization). This amount included
$16,700,000 in 90-day unsecured promissory notes and $25,000,000 of 11 5/8%
Notes (see Note 4). The remaining 11 5/8% Notes plus accrued interest through
September 14, 1993, were proposed to be exchanged (the Exchange Offer) for
new Increasing Rate Senior Secured Notes due 2000 (the Senior Secured Notes).
NOTE 4: NOTES PAYABLE
Long-term debt consists of the following:
<TABLE>
<CAPTION>
August 14,
1995
--------------
(In Thousands)
<S> <C>
11 5/8% Senior subordinated notes due 1997 (A) $ 1,700
Increasing rate senior secured notes due 2000 (A) 65,054
Revolving credit facility (B) 22,100
Purchase contract obligations (C) 687
--------------
89,541
Less current maturities 89,104
--------------
$ 437
--------------
--------------
</TABLE>
<PAGE>
SYNERGY GROUP INCORPORATED
NOTE 4: NOTES PAYABLE (CONTINUED)
(A) On April 2, 1987, the Company sold $85,000,000 of 11 5/8% Notes in a
public offering. On March 15, 1993, September 15, 1993, and March 15,
1994, the Company failed to make the required $4,941,000 interest payments
due on each of such dates on the 11 5/8% Notes. Under the terms of the
Indenture to the 11 5/8% Notes, the failure to pay such interest
constituted an Event of Default.
On August 23, 1994, the Company completed the Exchange Offer and
Recapitalization (see Note 3). The 11 5/8% Notes not tendered in the
Exchange Offer, amounting to $1,700,000, remain outstanding at
August 14, 1995.
(B) In August 1989, the Company entered into a revolving credit agreement with
a bank under which the maximum credit line available is $20,000,000. On
September 14, 1990, a party related to the Company repaid the bank and the
bank assigned the credit agreement to the related party. The credit
agreement contains certain restrictive covenants. Borrowings under the
credit facility are secured by cash, accounts receivable and inventory.
Interest based on the prime rate plus 1 1/2% is payable quarterly. The
amount outstanding under the facility was not repaid by the Company on the
maturity date of April 1, 1993. The failure to repay the facility
constituted an Event of Default. In November 1993 the maximum credit line
available under the facility was increased to $25,000,000 with advances in
excess of $20,000,000 at the discretion of the related party. The maturity
date of the revolving credit agreement was extended to September 30, 1996.
(C) Purchase contract obligations arise from the purchase of operating
businesses or other assets and are collateralized by the respective assets
acquired. At August 14, 1995, these obligations carried interest rates
from 8% to 14.5% and are due periodically through 1999.
<PAGE>
SYNERGY GROUP INCORPORATED
NOTE 5: OPERATING LEASES
The Company leases certain property and equipment under lease agreements
expiring through 2011. At August 14, 1995, future minimum lease payments under
noncancelable operating leases are as follows:
<TABLE>
<S> <C>
1996 $ 907
1997 971
1998 402
1999 238
2000 191
-------
$ 2,709
-------
-------
</TABLE>
Rent charged to operations including rental expense to related parties (see
Note 6) for the period ended August 14, 1995, was $929,000.
NOTE 6: RELATED PARTY TRANSACTIONS
The Company leases certain property and equipment from related parties
under operating lease agreements. Rental expense for the period ended August 14,
1995, was $318,000.
For the period ended August 14, 1995, interest expense related to the
Company's revolving credit facility from a related party (see Note 4) amounted
to $787,000, respectively.
<PAGE>
SYNERGY GROUP INCORPORATED
NOTE 7: INCOME TAXES
The provision for income taxes includes these components (in thousands):
<TABLE>
<CAPTION>
August 14,
1995
--------------
(In Thousands)
<S> <C>
Taxes currently payable $ 31
Deferred income taxes --
-------------
$ 31
-------------
-------------
</TABLE>
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
<TABLE>
<CAPTION>
August 14,
1995
--------------
(In Thousands)
<S> <C>
Computed at the statutory rate (34%) $ (3,326)
Increase resulting from:
Amortization of excess cost over fair value of
net assets acquired 9
State income taxes - net of federal tax benefit 31
Change in deferred tax asset valuation allowance 3,310
Other 7
-------------
Actual tax provision $ 31
-------------
-------------
</TABLE>
The Company estimates that as of August 14, 1995, it has available
net operating loss carryforwards of approximately $94.6 million to offset
future taxable income.
<PAGE>
SYNERGY GROUP INCORPORATED
NOTE 8: EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution retirement plan covering
substantially all salaried employees. Employees who elect to participate may
contribute a percentage of their salaries to the plan, and the Company at its
discretion may match a portion of the employee contribution. The Company may
also make profit-sharing contributions to the plan at the discretion of its
Board of Directors. Contribution expense amounted to $37,000 for the period
ended August 14, 1995.
The plan is currently under audit by the U.S. Department of Labor (DOL),
which has notified the Company that the prior Plan Trustees engaged in
prohibited transactions. The DOL audit is continuing and the outcome cannot be
determined at this time. In addition, the Internal Revenue Service has been
notified of prohibited transactions. The Company believes that it may be subject
to excise taxes, penalties and interest in connection with these prohibited
transactions and has recorded its best estimates of the potential liabilities
expected to arise from these matters.
NOTE 9: SELF-INSURANCE AND LITIGATION CONTINGENCIES
Under the Company's insurance program, coverage for comprehensive general
liability, workers' compensation and vehicle liability was obtained for
catastrophic exposures as well as those risks required to be insured by law or
contract. The Company retains a significant portion of certain expected losses
related primarily to comprehensive general liability. Under this insurance
program, the Company self-insures the first $250,000 of coverage (per incident).
The Company obtained excess coverage from carriers for this program. The Company
self-insures health benefits provided to employees of the Company and its
subsidiaries.
Provisions for losses expected under these programs are recorded based upon
the Company's estimates of the aggregate liability for claims incurred. The
Company provides letters of credit aggregating $2,875,000 in connection with
these programs which are collateralized with restricted cash deposits.
<PAGE>
SYNERGY GROUP INCORPORATED
NOTE 9: SELF-INSURANCE AND LITIGATION CONTINGENCIES (CONTINUED)
At August 14, 1995, the self-insured liability accrued in the balance sheet
totaled $4,160,000, which includes $500,000 of incurred but not reported claims.
The Company and its subsidiaries are presently defendants in various lawsuits
related to the self-insurance program and other business-related lawsuits which
are not expected to have a material adverse effect on the Company's results of
operations.
NOTE 10: ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
August 14,
1995
--------------
(In Thousands)
<S> <C>
ADDITIONAL CASH PAYMENT INFORMATION
Interest paid $ 1,146
Income taxes paid 15
</TABLE>
NOTE 11: FUTURE ACCOUNTING PRONOUNCEMENTS
IMPACT OF SFAS NO. 121
In 1995 the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for the Impairment of Long-Lived Assets to be Disposed
of." The Company must adopt this standard effective April 1, 1996. The Company
does not expect that the adoption of this standard will have a material impact
on its financial position or results of operations.
NOTE 12: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
<PAGE>
SYNERGY GROUP INCORPORATED
NOTE 12: SIGNIFICANT ESTIMATES AND CONCENTRATIONS (CONTINUED)
DEPENDENCE ON PRINCIPAL SUPPLIERS
Three suppliers, Chevron, Texaco and Powder Horn Petroleum, account for
approximately 55% of the Company's volume of propane purchases. Although the
Company believes that alternative sources of propane are readily available, in
the event that the Company is unable to obtain alternate sources of supply at
competitive prices and on a timely basis, such inability would have a material,
adverse effect on the Company.
ESTIMATES
Significant estimates related to tax liabilities, self-insurance and
litigation are discussed in Notes 8 and 9. Actual losses related to these
items could vary materially from amounts reflected in the financial
statements.
<PAGE>
EXHIBIT 10.10
CORNERSTONE PROPANE PARTNERS, L.P.
CORNERSTONE PROPANE GP, INC.
SYN INC.
432 Westridge Drive,
Watsonville, California 95076
10.26% Senior Notes due June 30, 2009
Dated as of June 25, 1999
TO EACH OF THE PURCHASERS LISTED
IN THE ATTACHED SCHEDULE A
Dear Purchaser:
Cornerstone Propane Partners, L.P., a Delaware limited partnership (the
"COMPANY"), Cornerstone Propane GP, Inc., a California corporation (the
"MANAGING GENERAL PARTNER"), and SYN Inc., a Delaware corporation (the "SPECIAL
GENERAL PARTNER," and together with the Managing General Partner, each a
"GENERAL PARTNER" and together, the "GENERAL PARTNERS"), hereby agree with you
as follows:
SECTION 1. OPERATING PARTNERSHIP; AUTHORIZATION OF NOTES.
The Company is the sole limited partner of Cornerstone Propane L.P., a
Delaware limited partnership (the "OPERATING PARTNERSHIP"), and owns a 98.9899%
limited partnership interest in the Operating Partnership. The Company derives
all of its cash flow from the operations conducted by the Operating Partnership
and its Subsidiaries. The Managing General Partner is managing general partner
of both the Company and the Operating Partnership and the Special General
Partner is special general partner of both the Company and the Operating
Partnership.
The Company will authorize the issue and sale of $45,000,000 aggregate
principal amount of its 10.26% Senior Notes due June 30, 2009 (the "NOTES",
such term to include any Notes issued in substitution therefor or replacement
thereof pursuant to SECTION 14). The Notes shall be substantially in the form of
EXHIBIT A, with such changes therefrom, if any, as may be approved by you and
the Company. Certain capitalized terms used in this Note Agreement (as amended
or supplemented from time to time, this "AGREEMENT") are defined in SECTION 13;
references to a "Section" or a "Schedule" or an "Exhibit" are, unless otherwise
specified, to a Section of this Agreement or to a Schedule or an Exhibit
attached to this Agreement.
SECTION 2. SALE AND PURCHASE OF NOTES; OTHER AGREEMENTS.
Subject to the terms and conditions of this Agreement, the Company
will issue and sell to you and you will purchase from the Company, at the
Closing provided for in SECTION 3, Notes in the principal amount specified
opposite your name in SCHEDULE A for purchase by you at the Closing, at the
purchase price of 100% of the principal amount thereof. At the Closing provided
for in SECTION 3, the Company will use the proceeds of the sale of the Notes to
make an equity contribution to the Operating Partnership which will be used by
the Operating Partnership to prepay certain of its Indebtedness, all as provided
in SECTION 4.8.
Contemporaneously with entering into this Agreement, the General
Partners and the Company are entering into identical Note Agreements (the "OTHER
AGREEMENTS") with each of the other purchasers named in SCHEDULE A (the "OTHER
PURCHASERS"), providing for the sale to each of the Other Purchasers, at the
Closing, of Notes in the principal amount specified opposite its name in
SCHEDULE A. The sale of Notes to you and the Other Purchasers are to be separate
sales, and this Agreement and the Other Agreements constitute separate
agreements.
<PAGE>
SECTION 3. CLOSING.
The sales of the Notes to you and the Other Purchasers shall take place
at the offices of Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza,
New York, New York, at 9:00 a.m., New York time, at a closing (the "CLOSING") on
June 25, 1999, or such later date as may be agreed upon by Managing General
Partner, the Company, you and the Other Purchasers. At the Closing, the Company
will deliver to you Notes in the principal amount to be purchased by you, in the
form of a single Note (or such greater number of Notes as you may request;
PROVIDED that each such Note shall be in a denomination of at least $500,000),
each dated the date of the Closing and registered in your name (or in the name
of your nominee as indicated in SCHEDULE A), against payment of the purchase
price therefor on the date of Closing by transfer of immediately available funds
to the Company, or as otherwise directed by the Company in writing (at least two
days prior to the date of the Closing). If at the Closing the Company shall fail
to tender such Notes to you as provided above in this SECTION 3 or if any of the
conditions specified in SECTION 4 shall not have been fulfilled to your
satisfaction, you shall, at your election, be relieved of all further
obligations under this Agreement, without thereby waiving any other rights you
may have by reason of such failure or such nonfulfillment. At the Closing, the
Company will designate (to the extent not theretofore so designated) the
Operating Partnership, Cornerstone Sales & Service Corporation, Flame, Inc.,
Propane Continental, Inc., Coast Energy Global Services, Inc. and Coast Energy
Canada, Inc. as Restricted Subsidiaries under this Agreement and the Other
Agreements.
SECTION 4. CONDITIONS TO CLOSING.
Your obligation to purchase and pay for the Notes to be sold to you at
the Closing is subject to the fulfillment to your satisfaction, prior to or at
the Closing, of the following conditions:
4.1. REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Company and its Affiliates contained in this Agreement, the other
Operative Agreements, and those otherwise made in writing by or on behalf of the
Company or any Affiliate of the Company in connection with the transactions
contemplated by this Agreement, shall be true and correct when made and at the
time of the Closing, except as affected by the consummation of such transactions
and except for any representation and warranty that is expressly stated to
relate to a specific date, in which case such representation and warranty shall
be true and correct as of such earlier date.
4.2. PERFORMANCE; NO DEFAULT. Each of the Company and its Affiliates
shall have performed and complied with all agreements and conditions contained
in this Agreement or any other Operative Agreement required to be performed or
complied with by it prior to or at the Closing, and at the time of the Closing
no Event of Default or Potential Event of Default under this Agreement or
default by any party under any other Operative Agreement shall have occurred and
be continuing.
4.3. COMPLIANCE CERTIFICATES. You shall have received Officers'
Certificates of the Company and each General Partner, dated the date of the
Closing and satisfactory in substance and form to you, certifying that the
conditions specified in SECTIONS 4.1 and 4.2 have been fulfilled in all material
respects insofar as the relevant representation or warranty is made by, or the
relevant agreement or condition is required to be performed or complied with by,
or the relevant Event of Default, Potential Event of Default or default has been
caused by or relates to, each of such entities and, with respect to the
Officers' Certificate of the Company, its Subsidiaries, and in the case of the
Officers' Certificate of the Managing General Partner, certifying that no
material adverse change has occurred in the financial condition of the Business
subsequent to March 31, 1999.
<PAGE>
4.4. OPINIONS OF COUNSEL. You shall have received favorable opinions
from (a) McCutchen, Doyle, Brown & Enersen, L.L.P., counsel for the Company and
its Affiliates, substantially in the form of EXHIBIT B1 and (b) Fried, Frank,
Harris, Shriver & Jacobson, your special counsel in connection with the
transactions contemplated by this Agreement, substantially in the form of
EXHIBIT B2, and in each case covering such other matters incident to such
transactions as you may reasonably request, each addressed to you, dated the
date of the Closing and otherwise reasonably satisfactory in substance and form
to you. The Company and the General Partners hereby direct their counsel
referred to in clause (a) of this SECTION 4.4 to deliver to you such opinions
and letters to be delivered by it and authorize you to rely thereon.
4.5. LEGAL INVESTMENT. On the date of the Closing your purchase of
Notes shall be permitted by the laws and regulations of each jurisdiction to
which your investments are subject, but without recourse to provisions (such as
section 1404(b) or 1405(a)(8) of the New York Insurance Law) permitting limited
investments by insurance companies in securities not otherwise legally eligible
for investment. If requested by you by prior written request to the Company or
the General Partners, you shall have received, at least five Business Days prior
to the Closing, an Officers' Certificate of the Company or the General Partners,
as the case may be, certifying as to such matters of fact as you may reasonably
specify to enable you to determine whether such purchase is so permitted.
4.6. OPERATIVE AGREEMENTS. Each of the Operative Agreements shall be in
full force and effect, and shall constitute the legal, valid and binding and
enforceable obligations of the respective parties thereto, except that such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws of general application relating to
or affecting the rights and remedies of creditors and by general equitable
principles, regardless of whether such enforceability is considered in a
proceeding in equity or law, and no default or accrued right of termination on
the part of any of the parties thereto shall exist thereunder as of the date of
the Closing, and you shall have received a fully executed original, or a true
and complete copy, of each such document.
4.7. SALE AND ISSUANCE OF OTHER NOTES. Contemporaneously with the
Closing, the Company shall sell to the Other Purchasers the Notes to be
purchased by them at the Closing under the Other Agreements as specified in
SCHEDULE A.
4.8. USE OF PROCEEDS. At the time of the Closing, (a) the Company shall
have contributed the net proceeds of the sale of the Notes to you and the Other
Purchasers, net of the Closing fees paid pursuant to SECTION 4.12 and other
expenses of the offering and sale of the Notes, to the Operating Partnership as
an additional contribution to partnership capital and (b) the Operating
Partnership shall have repaid, out of the proceeds of such contribution, certain
of its Indebtedness as set forth in SCHEDULE 4.8.
4.9. PROCEEDINGS AND DOCUMENTS. All proceedings in connection with the
transactions contemplated by this Agreement and the Other Agreements and all
documents and instruments incident to such transactions shall be satisfactory to
you and your special counsel, and you and your special counsel shall have
received all such counterpart originals or certified or other copies of such
documents as you or they may reasonably request.
4.10. RATING. Prior to the Closing, the Notes shall have received a
rating of at least BB+ from Fitch IBCA, Inc., which rating shall remain in
effect as of the Closing.
4.11. INSURANCE. Insurance complying with the provisions of SECTION
10.13 hereof shall be in full force and effect.
4.12. PAYMENT OF CLOSING FEES. The Company shall have paid the fees
and disbursements required by SECTION 16 to be paid by the Company on the
date of the Closing.
4.13. PRIVATE PLACEMENT NUMBER. The Company shall have obtained for the
Notes a Private Placement Number issued by Standard & Poor's CUSIP Service
Bureau (in cooperation with the Securities Valuation Office of the National
Association of Insurance Commissioners).
<PAGE>
4.14. YEAR 2000 QUESTIONNAIRE. The Company shall have delivered to you
a copy of the Company's response to the Year 2000 Due Diligence Questionnaire
supplied by the Securities Valuation Office of the National Association of
Insurance Commissioners.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE GENERAL
PARTNERS AND THE COMPANY.
Each of the General Partners and the Company represents and warrants
that:
5.1. ORGANIZATION, STANDING, ETC. (a) The Company is a limited
partnership duly organized, validly existing and in good standing under the
Delaware Revised Uniform Limited Partnership Act and has all requisite
partnership power and authority to own and operate its properties and assets, to
conduct its business as described in the Memorandum, to enter into this
Agreement and the other Operative Agreements to which it is a party, to issue
and deliver the Notes and to carry out the terms of this Agreement, such other
Operative Agreements and the Notes.
(b) Each General Partner is a corporation duly organized, validly
existing and in good standing (in the case of the Managing General Partner)
under the laws of the State of California or (in the case of the Special General
Partner) under the laws of the State of Delaware and has all requisite corporate
power and authority to own and operate its properties, to conduct its business,
to enter into and carry out the terms of this Agreement and the other Operative
Agreements to which it is a party, and, in the case of the Managing General
Partner, to execute and deliver as managing general partner of the Company this
Agreement, the Notes and the other Operative Agreements to which the Company is
a party.
(c) Each Restricted Subsidiary is a corporation or limited partnership
duly organized, validly existing and in good standing under the laws of the
state of its incorporation or formation and has all requisite corporate or
partnership power and authority to own and operate its properties and to conduct
its business as may be described in the Memorandum.
5.2. PARTNERSHIP AND STOCK INTERESTS. The only general partners of the
Company are the General Partners which own an aggregate 1% general partner
interest in the Company. The only general partners of the Operating Partnership
are the General Partners, which own an aggregate 1.0101% general partner
interest in the Operating Partnership. The only limited partner of the Operating
Partnership is the Company, which owns a 98.9899% limited partner interest in
the Operating Partnership. The Operating Partnership does not have any other
partners. Except for (i) the Operating Partnership and (ii) Cornerstone Sales &
Service Corporation, a Delaware corporation, Flame, Inc., an Arizona
corporation, Propane Continental, Inc., a Delaware corporation and Coast Energy
Global Services, Inc., a Delaware corporation, each of which is a Wholly Owned
Subsidiary of the Operating Partnership, and Coast Energy Canada, Inc., a
Delaware corporation which is a Wholly Owned Subsidiary of Coast Energy Global
Services, Inc., the Company does not have, and immediately after giving effect
to the transactions contemplated by the Operative Agreements will not have, any
Subsidiaries or any Investments in any Person (other than Investments of the
types described in SECTION 10.4(f)). Each Subsidiary of the Company is a
Restricted Subsidiary.
5.3. QUALIFICATION. The Company is duly qualified or registered and is
in good standing as a foreign limited partnership for the transaction of
business, and each General Partner and Restricted Subsidiary is qualified or
registered and is in good standing as a foreign corporation or limited
partnership for the transaction of business, in the jurisdictions set forth in
SCHEDULE 5.3, which are the only jurisdictions in which the nature of their
respective activities or the character of the properties they own, lease or use
makes such qualification or registration necessary and in which the failure so
to qualify or to be so registered would, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect. Each of the General
Partners and the Company has taken all necessary partnership or corporate action
to authorize the
<PAGE>
execution, delivery and performance by it of this Agreement, the Notes and
each other Operative Agreement to which it is a party. Each of the General
Partners and the Company has duly executed and delivered each of this
Agreement, the Notes and the other Operative Agreements to which it is a
party, and each of them constitutes the legal, valid, binding and enforceable
obligation of a General Partner or the Company, as the case may be, in
accordance with its terms, except that such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium and similar
laws of general application relating to or affecting the rights and remedies
of creditors and by general equitable principles, regardless of whether such
enforceability is considered in a proceeding in equity or at law.
5.4. FINANCIAL STATEMENTS. The Company has delivered to you complete
and correct copies of (i) the private placement memorandum, dated May 4, 1999,
prepared by the Company for use in connection with the Company's private
placement of the Notes (together with any supplements or amendments, the
"MEMORANDUM") and (ii) the Company's (x) Annual Report on Form 10-K for the
fiscal year ended on June 30, 1998 and (y) Quarterly Reports on Form 10-Q for
the fiscal quarters ended on September 30, 1998, December 31, 1998 and March 31,
1999, respectively, in each case filed with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934, as amended, and
rules and regulations promulgated thereunder (collectively, the "FILINGS")
delivered in connection with the offering of the Notes. The historical and PRO
FORMA consolidated financial statements of the Company set forth in or
incorporated by reference into the Memorandum and in the Filings comply in all
material respects with the applicable accounting requirements of the Securities
Exchange Act of 1934, as amended, and the published rules and regulations
thereunder and, in the opinion of the Managing General Partner, the assumptions
on which the PRO FORMA adjustments set forth in or incorporated by reference
into the Memorandum to such historical consolidated financial statements of the
Company are based, provide a reasonable basis for presenting the significant
effects of the transactions contemplated by the PRO FORMA consolidated financial
statements set forth in or incorporated by reference into the Memorandum and
such PRO FORMA adjustments give appropriate effect to such assumptions and are
properly applied in all material respects to the historical amounts in the
compilation of such PRO FORMA consolidated financial statements. The financial
statements and financial schedules included in the Memorandum and in the Filings
(other than with respect to PRO FORMA matters) have been prepared in accordance
with GAAP applied on a consistent basis throughout the periods specified, except
to the extent disclosed therein, and present fairly the consolidated financial
position of the Company as of the respective dates specified and the results of
its consolidated operations and cash flows for the respective periods specified
(subject, as to interim statements, to the omission of footnotes and year-end
audit adjustments). Except as may be disclosed on SCHEDULE 5.4, since March 31,
1999, there has been no change or event which would, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect. Except as
otherwise disclosed on SCHEDULE 5.4, the financial data included under the
caption "Selected Historical and Pro Forma Financial and Operating Data" in the
Memorandum present fairly, on the basis stated in the Memorandum, the
information set forth therein and have been compiled on a basis consistent with
the audited and unaudited historical financial statements included in the
Memorandum; the PRO FORMA financial data included in the Memorandum represent,
in all material respects and on the basis stated in the Memorandum, the Managing
General Partner's best estimate with respect to PRO FORMA financial information;
and the assumptions on which the PRO FORMA adjustments to the PRO FORMA aspects
of the financial data included in the Memorandum are based provide a reasonable
basis for presenting all of the significant effects of the transactions
contemplated by such PRO FORMA financial data and such PRO FORMA adjustments
give appropriate effect to such assumptions and are properly applied in all
material respects to the historical amounts in the compilation of such PRO FORMA
financial data.
<PAGE>
5.5. CHANGES, ETC. Except as contemplated by this Agreement, the other
Operative Agreements or the Memorandum, subsequent to March 31, 1999, the
Company and its Affiliates have not incurred any material liabilities or
obligations, direct or contingent, or entered into any material transaction not
in the ordinary course of business, and no events have occurred, which would,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect, and there has not been any Restricted Payment of any kind
declared, paid or made by the Company, the Operating Partnership or either
General Partner other than the distribution by the Company to its partners of
$9,252,000 on May 14, 1999.
5.6. TAX RETURNS AND PAYMENTS. On the date of the Closing and after
giving effect to the transactions then to be consummated under the Operative
Agreements, each of the Company and its Affiliates has filed all federal, state
and other tax returns required by law to be filed by it or has properly filed
for an extension of time for the filing thereof and has paid all taxes,
assessments and other governmental charges levied upon it or any of its
properties, assets, income or franchises which are due and payable, except those
(a) which are not past due or are presently being contested in good faith by
appropriate proceedings diligently conducted for which such reserves or other
appropriate provisions, if any, as shall be required by GAAP have been made, or
(b) for which the failure to file or extend would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect. Each of the
Company and the Operating Partnership is a limited partnership that is treated
as a pass-through entity for federal income tax purposes.
5.7. INDEBTEDNESS. At the time of the Closing, other than the
Indebtedness represented by the Notes and the Indebtedness listed in SCHEDULE
5.7, none of the Company, either General Partner or any Restricted Subsidiary
will have any secured or unsecured Indebtedness outstanding. At the time of the
Closing, no instrument or agreement to which the Company, any Restricted
Subsidiary or, other than SECTION 7.6(a) of the MLP Agreement and SECTION 7.6(a)
of the Operating Partnership Agreement, either General Partner is a party or by
which the Company, any Restricted Subsidiary or either General Partner is bound
or which is applicable to the Company, any Restricted Subsidiary or either
General Partner (other than this Agreement, the Other Agreements, the OP Note
Agreements and the Bank Credit Facilities) contains any restrictions on the
incurrence by the Company, any Restricted Subsidiary or either General Partner
of additional Indebtedness. At the time of the Closing, both before and after
giving effect to the sale of the Notes, no event of default shall exist in
respect of any Indebtedness of the Company, either General Partner or any
Restricted Subsidiary or under any agreement or instrument relating to or
securing any such Indebtedness.
5.8. OWNERSHIP OF ASSETS. (a) The Company and each Restricted
Subsidiary are in possession of and operating in compliance in all respects with
all franchises, grants, authorizations, approvals, licenses, permits, easements,
rights-of-way, consents, certificates and orders required to own, lease or use
its properties and assets and (considering all such Permits (as below defined)
in the possession of, and being complied with by, the Company and such
Restricted Subsidiary taken together) to permit the conduct of the Business as
now conducted and proposed to be conducted ("PERMITS"), except for those Permits
(collectively, "PERMITTED EXCEPTIONS") (i) which are not required at such time
and are routine or administrative in nature and are expected in the reasonable
judgment of Managing General Partner to be obtained or given in the ordinary
course of business after the date of the Closing, or (ii) which, if not obtained
or given, would not, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect.
(b) The Company and each Restricted Subsidiary has (i) title to the
portion of its properties and assets constituting real property owned in fee
simple, (ii) good and valid leasehold interests in the portion of its properties
and assets constituting real property and leased to the Company or such
Restricted Subsidiary pursuant to which the Company or such Restricted
<PAGE>
Subsidiary enjoys undisturbed possession thereof, except for defects in, or lack
of recorded title and exceptions to, leasehold interests as would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect, and (iii) sufficient title to the portion of its properties and
assets constituting personal property reasonably necessary for the use and
operation of such personal property as it has been used in the past and as it is
proposed to be used in the Business, in each case subject to no Liens except
Permitted Encumbrances. Such properties and assets are all of the assets and
properties reasonably necessary to enable the Company and the Restricted
Subsidiaries to conduct the Business. Subject to exceptions as would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect, (A) the Company and each Restricted Subsidiary enjoys peaceful
and undisturbed possession under all leases necessary for the operation of the
Business, other than certain immaterial leased property of which the Company and
such Restricted Subsidiary shall enjoy undisturbed possession, and (B) all such
leases are valid and subsisting and are in full force and effect. No effective
financing statement under the Uniform Commercial Code which names the Company as
debtor is on file in any jurisdiction and the Company has not signed any
effective financing statement or any effective security agreement authorizing
any secured party thereunder to file any such financing statement.
(c) The Company has no material assets other than a 98.9899%
limited partnership interest in the Operating Partnership.
5.9. LITIGATION, ETC. Except as set forth on SCHEDULE 5.9, there is no
action, proceeding or investigation pending or, to the knowledge of the Company
and the General Partners upon reasonable inquiry, threatened (or any basis
therefor known to the Company or either General Partner) which questions the
validity of this Agreement, any other Operative Agreement or the Notes or any
action taken or to be taken pursuant to this Agreement, any other Operative
Agreement or the Notes, or which would, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
5.10. COMPLIANCE WITH OTHER INSTRUMENTS, ETC. After giving effect to
the sale of the Notes and consummation by the Company and its Subsidiaries of
the other transactions contemplated by the Operative Agreements, neither the
Company, any Restricted Subsidiary nor either General Partner (i) is in
violation of any term of the MLP Agreement (in the case of the Company), the
Operating Partnership Agreement (in the case of the Operating Partnership) or,
in the case of any Restricted Subsidiary (other than the Operating Partnership)
and the General Partners, of their respective articles or certificates of
incorporation or by-laws, or (ii) is in violation of any term of any other
agreement or instrument to which the Company, any Restricted Subsidiary or
either General Partner is a party or by which any of them or any of their
properties is bound or any term of any applicable law, ordinance, rule or
regulation of any governmental authority or any term of any applicable order,
judgment or decree of any court, arbitrator or governmental authority, in the
case of clause (ii), the consequences of which would, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect; the
execution, delivery and performance by each of the General Partners and the
Company of this Agreement and the other Operative Agreements to which it is a
party and the Notes, as the case may be, will not result in any violation of or
be in conflict with or constitute a default under any such term or result in the
creation of (or impose any obligation on the Company, any Restricted Subsidiary
or either General Partner to create) any Lien upon any of the properties or
assets of the Company, any Restricted Subsidiary or either General Partner
prohibited by any such term; and there is no such term the compliance with which
would, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.
5.11. GOVERNMENTAL CONSENT. No consent, approval or authorization of,
or declaration or filing with, any governmental authority (which has not been
obtained) is required for the valid execution, delivery and performance of this
Agreement or the other Operative Agreements, and
<PAGE>
no such consent, approval, authorization, declaration or filing is required
for the valid offer, issue, sale and delivery of the Notes pursuant to this
Agreement and the Other Agreements.
5.12. OFFER OF NOTES. Neither the Company nor any of its Affiliates nor
anyone acting on its or their behalf has directly or indirectly offered the
Notes or any part thereof or any similar securities for sale to, or solicited
any offer to buy any of the same from, or otherwise approached or negotiated in
respect thereof with, anyone other than you, the Other Purchasers and not more
than 75 other institutional investors. Neither the General Partners nor the
Company nor anyone authorized to act on their behalf has taken or will take any
action which would subject the issuance and sale of the Notes to the
registration and prospectus delivery provisions of the Securities Act of 1933,
as amended, or to the registration or qualification provisions of any securities
or Blue Sky law of any applicable jurisdiction or require qualification of any
indenture with respect to the Notes under the Trust Indenture Act of 1939, as
amended; PROVIDED, HOWEVER, that it is understood that any action taken by you
or any Other Purchaser shall not have been taken on behalf of the Company or the
General Partners.
5.13. USE OF PROCEEDS. The proceeds of the sale of the Notes to you and
the Other Purchasers will be used as set forth in SECTION 4.8 and to pay fees
and expenses associated with the offering of the Notes as set forth in SECTION
4.12 and other expenses of the offering and sale of the Notes.
5.14. FEDERAL RESERVE REGULATIONS. Neither the General Partners nor the
Company nor the Operating Partnership will, directly or indirectly, use any of
the proceeds of the sale of the Notes for the purpose, whether immediate,
incidental or ultimate, of buying a "margin stock" or of maintaining, reducing
or retiring any indebtedness originally incurred to purchase a stock that is
currently a "margin stock", or for any other purpose which might constitute this
transaction a "purpose credit", in each case, within the meaning of Regulation U
of the Board of Governors of the Federal Reserve System (12 C.F.R. 221, as
amended), or otherwise take or permit to be taken any action which would involve
a violation of such Regulation U or of Regulations T or X (12 C.F.R. 220, as
amended, and 12 C.F.R. 224, as amended, respectively) or any other applicable
regulation of such Board. No indebtedness being reduced or retired, directly or
indirectly, out of the proceeds of the sale of the Notes was incurred for the
purpose of buying or carrying any stock which is currently a "margin stock", and
neither General Partner nor the Company nor the Operating Partnership owns or
has any present intention of acquiring with the proceeds thereof any amount of
such "margin stock".
5.15. INVESTMENT COMPANY ACT. None of the General Partners, the Company
or the Operating Partnership is an "investment company", or a company
"controlled" by an "investment company", within the meaning of the Investment
Company Act of 1940, as amended.
5.16. PUBLIC UTILITY HOLDING COMPANY ACT; FEDERAL POWER ACT. None of
the General Partners, the Company or the Operating Partnership is a "holding
company", or a "subsidiary company" of a "holding company", or an "affiliate" of
a "holding company" or of a "subsidiary company" of a "holding company", as such
terms are defined in the Public Utility Holding Company Act of 1935, as amended;
none of the General Partners, the Company or the Operating Partnership, or the
issue and sale of the Notes by the Company is subject to regulation under such
Act; and none of the General Partners, the Company or the Operating Partnership
is a "public utility" as such term is defined in the Federal Power Act, as
amended.
5.17. ERISA. (a) None of the General Partners, the Company, any
Subsidiary of the Company or any Related Person of the General Partners or the
Company (other than Northwestern Growth Corporation, a Delaware corporation, and
any Subsidiaries of Northwestern Growth Corporation (except for the General
Partners and any Subsidiary of the General Partners that is a Related Person of
the Company)) is obligated to contribute to, and none of the General Partners,
the Company, any Subsidiary of the Company or any Related
<PAGE>
Person of the Company has any liability or obligation with respect to, any
Plan that is subject to Section 302 or Title IV of ERISA or Section 412 of
the Code (other than a Multiemployer Plan). None of the Company, any
Subsidiary of the Company or any Related Person of the Company has any
liability or obligation to provide any amount or type of compensation or
benefit in respect of any employee or former employee of the Business which
relates to periods, services performed or benefits or amounts accrued prior
to December 17, 1996 (other than pursuant to a Multiemployer Plan,
continuation coverage provided pursuant to Section 4980B of the Code or
Section 601, et seq., of ERISA, or any liability or obligation for
contributions pursuant to a Plan not yet required to be paid). None of the
General Partners, the Company, any Subsidiary of the Company or any Related
Person of the Company has incurred any material liability under Title IV of
ERISA with respect to any such Plan and no event or condition exists or has
occurred as a result of which such a liability would reasonably be expected
to be incurred. None of the General Partners, the Company, any Subsidiary of
the Company or any Related Person of the Company has engaged in any
transaction, including the transactions contemplated hereunder which could
subject the Company, any Subsidiary of the Company or any Related Person of
the Company to a material liability pursuant to Section 4069(a) or 4212(c) of
ERISA. There has been no reportable event (within the meaning of Section
4043(b) of ERISA other than one for which the applicable notice requirements
have been waived by PBGC regulation) or any other event or condition with
respect to any Plan which presents a risk of the termination of, or the
appointment of a trustee to administer, any such Plan (other than a
Multiemployer Plan) by the PBGC. No prohibited transaction (within the
meaning of Section 406(a) of ERISA or Section 4975 of the Code) exists or has
occurred with respect to any Plan which has subjected or could reasonably be
expected to subject either General Partner, the Company or any Subsidiary of
the Company to a material liability under Section 502(i) or 502(l) of ERISA
or Section 4975 of the Code. No material liability to the PBGC (other than
liability for premiums not yet due) has been or is expected to be incurred
with regard to any Plan by the General Partners, the Company, any Subsidiary
of the Company or any Related Person of the Company. None of the General
Partners, the Company, any Subsidiary of the Company or any Related Person of
the Company contributes or is obligated to contribute or has ever contributed
or been obligated to contribute to any single employer plan that has at least
two contributing sponsors not under common control. Timely payment has been
made of all amounts which the General Partners, the Company, any Subsidiary
of the Company or any Related Person of the Company is required under
applicable law, the terms of each Plan or any collective bargaining agreement
to have paid as contributions to each such Plan except to the extent that
failure to do so would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect. To the knowledge of the General
Partners and the Company, no Multiemployer Plan has been terminated or
presents a material risk of termination, is insolvent or is in reorganization
within the meaning of Section 4241 or 4245 of ERISA and the transactions
contemplated hereby will not result in a withdrawal from any Multiemployer
Plan that would, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect. None of the General Partners, the Company or
any Subsidiary of the Company has any obligation to provide any material
amount of post-employment welfare benefits or coverage (other than
continuation coverage provided pursuant to Section 4980B of the Code or
Section 601, et seq., of ERISA).
(b) The execution and delivery of this Agreement and the Other
Agreements and the issue and sale of the Notes, and delivery of the Notes
hereunder and thereunder will not involve any non-exempt "prohibited
transaction" within the meaning of Section 406 of ERISA or Section 4975 of the
Code. The representations by the Company and the General Partners in the
immediately preceding sentence are made in reliance upon and subject to the
accuracy of your representation in SECTION 6.2 of this Agreement and the
representations of the Other Purchasers in SECTION 6.2 of the Other Agreements
as to the source of the funds to be used to pay the
<PAGE>
purchase price of the Notes to be purchased by you and the Other Purchasers,
respectively. With respect to each employee benefit plan identified to the
Company in accordance with clause (c) of SECTION 6.2 of this Agreement or of
any of the Other Agreements, none of the General Partners, the Company or any
"affiliate" (as defined in Section V(c) of the QPAM Exemption) of either
General Partner or the Company has at this time, and has not exercised at any
time within the one year period preceding the date of the Closing, the
authority to appoint or terminate you or any Other Purchaser as manager of
any of the assets of any such plan or to negotiate the terms of any
management agreement with you or any Other Purchaser on behalf of any such
plan.
5.18. ENVIRONMENTAL MATTERS. (a) Except as disclosed in SCHEDULE 5.18,
each of the Company, each Restricted Subsidiary and each General Partner is in
compliance with all Environmental Laws applicable to it or to the Business or
its properties or assets except where such noncompliance would not, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect.
Each of the Company and each Restricted Subsidiary has timely and properly
applied for renewal of all environmental permits or licenses that have expired
or are about to expire and are necessary for the conduct of the Business as now
conducted and as proposed to be conducted, except where the failure to timely
and properly reapply would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect. SCHEDULE 5.18 lists (i) all notices
from Federal, state or local environmental agencies to the Company, any
Restricted Subsidiary or the General Partners citing environmental violations
that have not been finally resolved and disposed of, and no such violation,
whether or not notice regarding such violation is listed on SCHEDULE 5.18, if
ultimately resolved against the Company, such Restricted Subsidiary or either
General Partner, as the case may be, would, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect, and (ii) all current
reports filed by the Company, each Restricted Subsidiary or either General
Partner with any Federal, state or local environmental agency having
jurisdiction over the properties and assets of each, true and complete copies of
which reports have been made available to you and your special counsel.
Notwithstanding any such notice, the Company, each Restricted Subsidiary and
each General Partner are currently operating in all material respects within the
limits set forth in such environmental permits or licenses and any current
noncompliance with such permits or licenses will not result in any material
liability or penalty to the Company, any Restricted Subsidiary or either General
Partner or in the revocation, loss or termination of any such environmental
permits or licenses, the revocation, loss or termination of which would,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
(b) Except as disclosed in SCHEDULE 5.18, all facilities located on the
real property of the Company or any Restricted Subsidiary which are subject to
regulation by RCRA are and have been operated in compliance with RCRA, except
where such noncompliance would not, individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect and none of the Company, such
Restricted Subsidiary or either General Partner has received, or, to the
knowledge of the Company and either General Partner, been threatened with, a
notice of violation of RCRA regarding such facilities.
(c) Except as disclosed in SCHEDULE 5.18, no hazardous substance (as
defined in CERCLA) or hazardous waste (as defined in RCRA) is located or present
at any of the real property of the Company or any Restricted Subsidiary in
violation of any Environmental Law, which violation would, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect, and
with respect to such real property there has not occurred (i) any release or
threatened release of any such hazardous substance, (ii) any discharge or
threatened discharge of any substance into ground, surface, or navigable waters
which violates any Federal, state, local or foreign laws, rules or regulations
concerning water pollution, or (iii) any assertion of any Lien pursuant to
Environmental Laws resulting from any use, spill, discharge or clean-up
<PAGE>
of any hazardous or toxic substance or waste, which occurrence would,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
5.19. FOREIGN ASSETS CONTROL REGULATIONS, ETC. The issue and sale of
the Notes by the Company and the use by the Company and the Operating
Partnership of the proceeds thereof as contemplated by this Agreement, will not
violate any of the regulations (other than those regulations, if any, that are
implicated solely as a result of the actions of the purchasers of the Notes)
administered by the Office of Foreign Assets Control, the United States
Department of the Treasury, including, without limitation, the Foreign Assets
Control Regulations, the Transaction Control Regulations, the Cuban Assets
Control Regulations, the Foreign Funds Control Regulations, the Iranian Assets
Control Regulations, the Iranian Transactions Regulations, the Iraqi Sanctions
Regulations, the Libyan Sanctions Regulations, the Federal Republic of
Yugoslavia (Serbia and Montenegro) and Bosnian Serb-Controlled Areas of the
Republic of Bosnia and Herzegovina Sanctions Regulations, the Unita (Angola)
Sanctions Regulations, the Terrorism Sanctions Regulations, and the Soviet Gold
Coin Regulations of the United States Treasury Department (31 C.F.R., Subtitle
B, Chapter V, as amended) or the restrictions set forth in Executive Orders No.
8389, 9193, 12543 (Libya), 12544 (Libya), 12801 (Libya), 12722 (Iraq), 12724
(Iraq), 12775 (Haiti), 12779 (Haiti), 12808 (Yugoslavia), 12810 (Yugoslavia) or
12831 (Yugoslavia), as amended, of the President of the United States of America
or of any rules or regulations issued thereunder.
5.20. DISCLOSURE. This Agreement, the other Operative Agreements, the
Memorandum (as such may be updated by SCHEDULE 5.4 hereto), the Filings, the
document titled "Senior Note Lenders Presentation," dated June 10,1999,
delivered by the Company in connection with the offering and sale of the Notes
and each other historical financial statement, document, certificate or
instrument delivered to you by or on behalf of the Company, any Restricted
Subsidiary, or either General Partner or any of their Affiliates (as amended,
updated or revised by any subsequent delivery) in connection with the
transactions contemplated by this Agreement, taken together, do not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements contained therein, in light of the circumstances
under which they were made, not misleading (other than the statements made
regarding general economic conditions relating to national or local economies
(PROVIDED that this reference shall not affect the representation made in
SECTION 5.4) and except for projections made and delivered in good faith and on
the basis of reasonable assumptions). There is no fact actually known to the
Company or either General Partner which has or in the future would, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect
which has not been set forth or referred to in this Agreement, the Memorandum
(as such may be updated by SCHEDULE 5.4 hereto) or another document, certificate
or instrument delivered to you. You and the Other Purchasers shall be entitled
to rely on the statements and disclosures set forth herein and therein.
5.21. SOLVENCY. Upon the sale of the Notes and the concurrent or prior
consummation of the transactions contemplated hereby, the Company and each
Restricted Subsidiary will be Solvent. "SOLVENT" means, with respect to any
Person, that (a) the sum of the assets of such Person, both at a fair valuation
and at present fair saleable value, will exceed the liabilities of such Person,
(b) such Person will have sufficient capital with which to conduct its business
as presently conducted and as proposed to be conducted and (c) such Person has
not incurred debts, and does not intend to incur debts, beyond its ability to
pay such debts as they mature. For purposes of the foregoing definition, "debts"
means any liabilities or claims, and "CLAIM" means (i) a right to payment,
whether or not such right is reduced to judgment, liquidated, unliquidated,
fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable,
secured or unsecured or (ii) a right to an equitable remedy for breach of
performance if such breach gives rise to a payment, whether or not such right to
an equitable remedy is reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed, undisputed, legal,
<PAGE>
equitable, secured or unsecured. With respect to any contingent liabilities,
such liabilities shall be computed at the amount which, in light of all the
facts and circumstances existing at the time, represents the amount which can
reasonably be expected to become an actual or matured liability.
5.22. YEAR 2000. The Company and its Subsidiaries have reviewed the
areas within their business and operations which could be adversely affected by,
and have developed or are developing a program to address on a timely basis, the
Year 2000 Problem. Based on such review and program, the Company represents and
warrants that (a) the Company's and its Subsidiaries' computer based systems are
Year 2000 Compliant or will be Year 2000 Compliant not later than December 30,
1999 and (b) the Year 2000 Problem will not result in an Event of Default or
have a material adverse effect on the condition (financial or otherwise),
business, operations, assets or properties of the Company and the Restricted
Subsidiaries (taken as a whole). The Company and its Subsidiaries, to the best
of the Company's and its Subsidiaries' knowledge, have worked or will work with
their relevant customers, suppliers and other service providers to seek to
prevent any Year 2000 Problem in such customers', suppliers' and other service
providers' systems from having a material adverse effect on the Company and the
Restricted Subsidiaries (taken as a whole).
SECTION 6. PURCHASER'S REPRESENTATIONS; SOURCE OF FUNDS.
6.1. PURCHASER'S REPRESENTATIONS. You represent that you are purchasing
the Notes for your own account or for one or more separate accounts maintained
by you or for the account of one or more pension or trust funds, in each case
not with a view to or for sale in connection with any distribution thereof
within the meaning of the Securities Act of 1933, as amended, or with any
present intention of selling any of the Notes in connection with any
distribution; PROVIDED that the disposition of your property shall at all times
be within your control. If you are purchasing for the account of one or more
pension or trust funds (other than pension or trust funds included in the
general account of an insurance company), you represent that (except to the
extent that you have otherwise advised Fried, Frank, Harris, Shriver & Jacobson
and the Company in writing) you have sole investment discretion with respect to
the acquisition of the Notes to be issued to you pursuant to this Agreement and
the authority to make the representations herein contained on behalf of such
pension or trust funds and on your own behalf and that the determination and
decision on your behalf to purchase such Notes for such pension or trust funds
is being made by the same individual or group of individuals who customarily
pass on such investments.
6.2. SOURCE OF FUNDS. You represent that at least one of the following
statements is an accurate representation as to the source of funds to be used by
you to pay the purchase price of the Notes purchased by you hereunder:
(a) if you are an insurance company, no part of such funds constitutes
assets allocated to any separate account maintained by you in which an
employee benefit plan (or its related trust) has any interest and, if the
source of funds includes assets of an insurance company general account,
then the statements in SECTION 6.2(e) are accurate as to such source; or
(b) if you are an insurance company, to the extent that any of such
funds constitutes assets allocated to any separate account maintained by
you, (i) such separate account is a "pooled separate account" within the
meaning of Prohibited Transaction Class Exemption 90-1, in which case you
have disclosed to the Company the names of each employee benefit plan whose
assets in such separate account exceed 10% of the total assets or are
expected to exceed 10% of the total assets of such account as of the date
of such purchase (and for the purposes of this clause (b), all employee
benefit plans maintained by the same employer or employee organization are
deemed to be a single plan), or (ii) such separate account contains
<PAGE>
only the assets of a specific employee benefit plan, the identity of which
you have delivered to the Company in writing; or
(c) if you are a "qualified professional asset manager" or "QPAM" (as
defined in Part V of Prohibited Transaction Class Exemption 84-14, issued
March 13, 1984 (the "QPAM EXEMPTION")), all of such funds constitute assets
of an "investment fund" (as defined in Part V of the QPAM Exemption)
managed by you, no employee benefit plan assets which are included in such
investment fund, when combined with the assets of all other employee
benefit plans (i) established or maintained by the same employer or an
affiliate (as defined in Part V of the QPAM Exemption) of such employer or
by the same employee organization and (ii) managed by you, exceed 20% of
the total client assets managed by you, the conditions of the QPAM
Exemption (other than Section I(a) thereof) are satisfied and you have
disclosed to the Company the names of all employee benefit plans whose
assets are included in such investment fund; or
(d) if you are other than an insurance company, all or a portion of
such funds consists of funds which do not constitute assets of any employee
benefit plan (other than a governmental plan exempt from the coverage of
ERISA) and the remaining portion, if any, of such funds consists of funds
which may be deemed to constitute assets of one or more specific employee
benefit plans, accurate information as to the identity of which you have
delivered to the Company in writing; or
(e) if you are an insurance company, the source of the funds is an
insurance company general account in respect of which the reserves and
liabilities for the general account contract(s) held by or on behalf of any
benefit plan (as defined by the annual statement for life insurance
companies approved by the National Association of Insurance Commissioners
(the "NAIC ANNUAL STATEMENT"), determined before reduction for credits on
account of any reinsurance ceded on a coinsurance basis) together with the
amount of the reserves and liabilities for the general account contract(s)
held by or on behalf of any other benefit plans (as defined by the NAIC
Annual Statement) maintained by the same employer (or affiliate thereof as
defined in Prohibited Transaction Class Exemption 95-60) or by the same
employee organization (as defined by the NAIC Annual Statement) in the
general account do not exceed 10% of the total reserves and liabilities of
the general account (exclusive of separate account liabilities) plus
surplus as set forth in the NAIC Annual Statement filed with the state of
domicile of the insurance company.
As used in this SECTION 6.2, the terms "EMPLOYEE BENEFIT PLAN", "GOVERNMENTAL
PLAN" and "SEPARATE ACCOUNT" shall have the respective meanings assigned to such
terms in Section 3 of ERISA.
SECTION 7. ACCOUNTING; FINANCIAL STATEMENTS AND OTHER INFORMATION.
The Company will maintain, and will cause each Restricted Subsidiary to
maintain, a system of accounting established and administered in accordance with
GAAP, and will accrue, and will cause each Restricted Subsidiary to accrue, all
such liabilities as shall be required by GAAP. The Company will deliver (in
duplicate, unless you have advised us otherwise) to you, so long as you shall be
entitled to purchase Notes under this Agreement or you or your nominee shall be
the holder of any Notes, and to each other Institutional Investor holding any
Notes (other than a Competitor of the Company):
(a) as soon as practicable, but in any event within 60 days after the
end of each of the first three quarterly fiscal periods in each fiscal year
of the Company beginning with the fiscal period ending September 30, 1999,
consolidated (and to the extent that such are being prepared,
consolidating) balance sheets of the Company and the Restricted
Subsidiaries as at the end of such period and the related consolidated
(and, as to statements of income and cash
<PAGE>
flows, if applicable and, to the extent that such are being prepared,
consolidating) statements of income and cash flows of the Company and
the Restricted Subsidiaries (i) for such period and (ii) (in the case of
the second and third quarterly periods) for the period from the
beginning of the current fiscal year to the end of such quarterly
period, setting forth in each case in comparative form the consolidated
and, where applicable and as appropriate, consolidating figures for the
corresponding periods of the previous fiscal year, all in reasonable
detail and certified by an authorized financial officer of the Managing
General Partner as presenting fairly, in all material respects, the
information contained therein (subject to changes resulting from normal
year-end adjustments), in accordance with GAAP applied on a basis
consistent with prior fiscal periods; PROVIDED that delivery within the
time period specified above of copies of the Company's Quarterly Report
on Form 10-Q prepared in compliance with the requirements therefor and
filed with the Securities and Exchange Commission shall be deemed to
satisfy the requirements hereof to the extent such reports otherwise
satisfy the requirements of this SECTION 7(a);
(b) as soon as practicable, but in any event within 120 days after the
end of each fiscal year of the Company beginning with the fiscal year
ending June 30, 1999, consolidated (and to the extent that such are being
prepared, consolidating) balance sheets of the Company and the Restricted
Subsidiaries as at the end of such year and the related consolidated (and,
as to statements of income and cash flows, if applicable and to the extent
that such are being prepared, consolidating) statements of income,
partners' capital and cash flows of the Company and the Restricted
Subsidiaries for such fiscal year, setting forth in each case in
comparative form the consolidated and, where applicable and, to the extent
that such are being prepared, consolidating figures for the previous fiscal
year, all in reasonable detail; PROVIDED that delivery within the time
period specified above of copies of the Company's Annual Report on Form
10-K prepared in compliance with the requirements therefor and filed with
the Securities and Exchange Commission shall be deemed to satisfy the
requirements hereof to the extent such reports otherwise satisfy such
requirements; and accompanied by a report thereon of Arthur Andersen LLP or
other independent public accountants of recognized national standing
selected by the Company, which report shall state that such consolidated
financial statements present fairly in all material respects the financial
position of the Company and the Restricted Subsidiaries as at the dates
indicated and the results of their operations and cash flows for the
periods indicated in conformity with GAAP applied on a basis consistent
with prior years and that the audit by such accountants in connection with
such consolidated financial statements has been made in accordance with
generally accepted auditing standards in effect in the United States from
time to time, and in the case of such consolidating financial statements of
the Company, if any, certified by an authorized financial officer of the
Managing General Partner of the Company, as presenting fairly in all
material respects the information contained therein, in accordance with
GAAP applied on a basis consistent with prior fiscal periods;
(c) together with each delivery of financial statements pursuant to
clauses (a) and (b) of this SECTION 7, a certificate by an authorized
financial officer of the Managing General Partner of the Company (i)
stating that the signer has reviewed the terms of this Agreement and the
other Operative Agreements and has made, or caused to be made under his or
her supervision, a review in reasonable detail of the transactions and
condition of the Company and the Restricted Subsidiaries during the
accounting period covered by such financial statements and that the signer
does not have knowledge of the existence and continuance as at the date of
such certificate of any condition or event which constitutes an Event of
Default or Potential Event of Default, or, if any such condition or event
exists, specifying the nature and period of existence thereof and what
action the Company has taken or is taking or proposes to take with respect
thereto, (ii) specifying (x) compliance with the ratio set forth in
<PAGE>
SECTION 10.1 and (y) the amount available at the end of such accounting
period for Restricted Payments in compliance with SECTION 10.5, and
showing in reasonable detail all calculations required in arriving at
such results, (iii) demonstrating in reasonable detail, if applicable,
compliance during and at the end of such accounting period with the
restrictions contained in Sections 10.2(c) through (h), inclusive, (j)
through (l), inclusive, and (o), 10.4(g), 10.9(a)(ii), 10.9(a)(iii) and
10.9(c), and (iv) if not specified in the related financial statements
being delivered pursuant to clauses (a) and (b) above, specifying the
aggregate amount of interest paid or accrued by the Company and the
Restricted Subsidiaries, and the aggregate amount of depreciation,
depletion and amortization charged on the books of the Company and the
Restricted Subsidiaries, during the fiscal period covered by such
financial statements;
(d) together with each delivery of consolidated financial statements
pursuant to clause (b) of this SECTION 7, a written statement by the
independent public accountants giving the report thereon (i) stating that
in connection with their audit examination, the terms of this Agreement and
the other Operative Agreements were reviewed to the extent considered
necessary for the purpose of expressing an opinion on the consolidated
financial statements and for making the statement contained in clause (ii)
hereof (it being understood that no special audit procedures in addition to
those required by generally accepted auditing standards then in effect in
the United States shall be required) and (ii) stating whether, in the
course of their audit examination, they obtained knowledge (and whether, as
of the date of such written statement, they have knowledge) of the
existence and continuance of any condition or event which constitutes an
Event of Default or Potential Event of Default insofar as such Event of
Default or Potential Event of Default relates to accounting or financial
matters, and, if so, specifying the nature and period of existence thereof;
(e) promptly upon their becoming publicly available, copies of (i) all
financial statements, reports, notices and proxy statements sent or made
available by the Company, the Managing General Partner or the Operating
Partnership to all of its security holders in compliance with the
Securities Exchange Act of 1934, as amended from time to time, or any
comparable Federal or state laws relating to the disclosure by any Person
of information to its security holders, (ii) all regular and periodic
reports and all registration statements and prospectuses filed by the
Company, the Managing General Partner or the Operating Partnership with any
securities exchange or with the Securities and Exchange Commission or any
governmental authority succeeding to any of its functions (other than
Registration Statements on Form S-8), and (iii) all press releases and
other statements made available by the Company, either General Partner or
the Operating Partnership to the public concerning material developments in
the business of the Company, either General Partner of the Company or the
Operating Partnership, as the case may be;
(f) promptly, but in any event within five days after any Responsible
Officer of the Company knows that (x) any condition or event which
constitutes an Event of Default or Potential Event of Default has occurred
or exists, or is expected to occur or exist, (y) the holder of any Note has
given any notice or taken any other action with respect to a claimed Event
of Default or Potential Event of Default under this Agreement or default
under any other Operative Agreement or (z) any Person has given any notice
to the Company, either General Partner or any Restricted Subsidiary or
taken any other action with respect to a claimed default or event or
condition of the type referred to in SECTION 11(f), an Officers'
Certificate of the Company describing the same and the period of existence
thereof and what action the Company has taken, is taking and proposes to
take with respect thereto;
(g) promptly, and in any event within five Business Days after a
Responsible Officer of the Company obtains knowledge of (i) the occurrence
of an adverse development with respect to any litigation or proceeding
involving the Company, any of its Subsidiaries or either General Partner
which in the reasonable judgment of the Company presents a
<PAGE>
reasonable likelihood of having a Material Adverse Effect or (ii) the
commencement of any litigation or proceeding involving the Company, any
of the Subsidiaries or either General Partner which in the reasonable
judgment of the Company presents a reasonable likelihood of having a
Material Adverse Effect, a written notice of a Responsible Officer
describing in reasonable detail such commencement of, or adverse
development with respect to, such litigation or proceeding;
(h) promptly, but in any event within five days after any Responsible
Officer of the Company knows that any of the events or conditions specified
below with respect to any Plan has occurred or exists, or is expected to
occur or exist, a statement setting forth details respecting such event or
condition and the action, if any, that the Company or any Related Person of
the Company has taken, is taking and proposes to take or cause to be taken
with respect thereto (and a copy of any notice or report filed with or
given to or communication received from the PBGC, the Internal Revenue
Service or the Department of Labor with respect to such event or
condition):
(A) any reportable event, as defined in Section 4043(b) of
ERISA and the regulations issued thereunder (other than one for which
the applicable notice requirements have been waived by PBGC
regulation);
(B) the filing under Section 4041 of ERISA of a notice of
intent to terminate any Plan or the termination of any Plan;
(C) a substantial cessation of operations within the meaning
of Section 4062(e) of ERISA under circumstances which could result in
the treatment of the Company or any Related Person of the Company as a
substantial employer under a "multiple employer plan" or the
application of the provisions of Section 4062, 4063 or 4064 of ERISA to
the Company or any Related Person of the Company;
(D) the taking of any steps by the PBGC or the institution by
the PBGC of proceedings under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any Plan, or the
receipt by the Company or any Related Person of the Company of a notice
from a Multiemployer Plan that such action has been taken by the PBGC
with respect to such Multiemployer Plan;
(E) the complete or partial withdrawal by the Company or any
Related Person of the Company under Section 4063, 4203 or 4205 of ERISA
from a Plan which is a "multiple employer plan" or a Multiemployer
Plan, or the receipt by the Company or any Related Person of the
Company of notice from a Multiemployer Plan regarding any alleged
withdrawal or that it intends to impose withdrawal liability on the
Company or any Related Person of the Company or that it is in
reorganization or is insolvent within the meaning of Section 4241 or
4245 of ERISA or that it intends to terminate under Section 4041A of
ERISA or from a "multiple employer plan" that it intends to terminate;
(F) the taking of any steps concerning the threat or the
institution of a proceeding against the Company or any Related Person
of the Company to enforce Section 515 of ERISA;
(G) the occurrence or existence of any event or series of
events which could result in a material liability to the Company or any
Related Person of the Company pursuant to Section 4069(a) or 4212(c) of
ERISA;
(H) the failure to make a contribution to any Plan, which
failure, either alone or when taken together with any other such
failure, is sufficient to result in the imposition of a Lien on any
property of the Company or any Related Person of the Company pursuant
to Section 302(f) of ERISA or Section 412(n) of the Code or could
result in the imposition of a material tax or material penalty pursuant
to Section 4971 of the Code on the Company or any Related Person of the
Company;
<PAGE>
(I) the amendment of any Plan in a manner which would be
treated as a termination of such Plan under Section 4041(e) of ERISA or
require the Company or any Related Person of the Company to provide
security to such Plan pursuant to Section 307 of ERISA or Section
401(a)(29) of the Code; or
(J) the incurrence of liability in connection with the
occurrence of a "prohibited transaction" (within the meaning of Section
406 of ERISA or Section 4975 of the Code);
(i) promptly, but in any event within five days, after an officer of
any of the Company, any Subsidiary of the Company or either General
Partner receives any notice or request from any Person (other than any
Affiliate or any agent, attorney or similar party employed by the Company
or either General Partner) for information, or if the Company, any
Subsidiary of the Company or either General Partner provides any notice or
information to any such Person (other than any Affiliate or any agent,
attorney or similar party employed by the Company or either General
Partner), concerning the presence or release of any hazardous substance (as
defined in CERCLA) or hazardous waste (as defined in RCRA) or other
contaminants (as defined by any applicable federal, state, local or foreign
laws) within, on, from, relating to or affecting any property owned,
leased, or subleased by the Company, any Subsidiary of the Company or
either General Partner (each such notice, request or information, an
"ENVIRONMENTAL NOTICE"), copies of such Environmental Notice, except (i)
any Environmental Notice which the Company reasonably determines will not
result in any claim or liability in excess of $250,000 (it being understood
that to the extent that all such Environmental Notices could reasonably be
expected to result in aggregate claims or liabilities in excess of
$250,000, the Company shall provide a summary of such Environmental
Notices) and (ii) any Environmental Notice made in the normal course of
business which does not pertain to the violation by the Company, any
Subsidiary of the Company or either General Partner of an Environmental
Law;
(j) with reasonable promptness, such other financial reports and
information and data (including, without limitation, any management letter
issued or provided by independent public accountants of the Company or any
Restricted Subsidiary) with respect to the Company, any Restricted
Subsidiary, any other Subsidiary of the Company (to the extent such
reports, information and data relate to environmental matters or any
material litigation or proceeding) or either General Partner as from time
to time may be requested by you (so long as you hold a Note), or by any
Institutional Investor holder of any Note other than a Competitor of the
Company;
(k) promptly after a Responsible Officer of the Company or any
Restricted Subsidiary becomes aware of (i) any material violation of or
notice of potential liability under any Environmental Law or (ii) any
release or threatened release of any Hazardous Material at, on, into, under
or from any real property of any facility or equipment thereat in excess of
reportable or allowable standards or levels under any Environmental Law, or
in a manner and/or amount which could reasonably be expected to result in
liability under any Environmental Law, which liability would, individually
or in the aggregate, reasonably be expected to result in a Material Adverse
Effect, a statement setting forth details respecting such event or
condition and the action, if any, that the Company or any Restricted
Subsidiary of the Company has taken, is taking and proposes to take or
cause to be taken with respect thereto; and
(l) promptly, and, in any event, within 30 days after such material is
provided to the governmental authority or third party, copies of any
notice, submission or documentation provided by the Company or any
Restricted Subsidiary to any governmental authority or third party under
any Environmental Law if the matter which is the subject of the notice,
<PAGE>
submission or other documentation would, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
SECTION 8. INSPECTION.
The Company will permit or cause the Managing General Partner to permit
(a) at any time when an Event of Default or Potential Event of Default shall
have occurred and be continuing, any authorized representatives designated by
you, so long as you shall be entitled to purchase the Notes under this Agreement
or you or your nominee shall be the holder of any Notes, or by any other
Institutional Investor that is a holder of any Notes (other than a Competitor of
the Company), and (b) at any other time, any authorized representative
designated by any Purchaser or Purchasers holding (together with its or their
Affiliates) at least $3,000,000 in aggregate principal amount of the Notes or by
any other holder or holders (together with its or their Affiliates) of at least
$3,000,000 in aggregate principal amount of the Notes (other than a Competitor
of the Company) then outstanding and an authorized representative of all of the
holders of the Notes, in each case, upon prior written notice and as may be
reasonably requested, to visit during normal business hours and inspect any of
the properties of the Company, any Restricted Subsidiary and any other
Subsidiary (to the extent relating to environmental or litigation matters) and,
to the extent relating to the Business, any properties of either General Partner
or of either General Partner's Subsidiaries, including the books of account of
the Company, the Restricted Subsidiaries, such other Subsidiaries, either
General Partner and either General Partner's Subsidiaries, and to make copies
and take extracts therefrom, and to discuss its and their affairs, finances and
accounts with its and their senior officers and (with reasonable prior written
notice) independent public accountants (and by this provision each of the
Company and either General Partner authorizes such accountants to discuss with
such representatives the affairs, finances and accounts of the Company, any
Restricted Subsidiary and such other Subsidiaries), and, to the extent relating
to the Business, either General Partner or any of either General Partner's
Subsidiaries, as the case may be) all at such times and as often as may be
requested; PROVIDED that you shall bear the expenses of your authorized
representative, except the Company will bear the expenses of such authorized
representatives if an Event of Default or Potential Event of Default has
occurred and is continuing; and the Company shall at all times bear the expenses
of its and its Affiliates' officers and independent public accountants.
SECTION 9. PREPAYMENT OF NOTES.
9.1. REQUIRED PREPAYMENTS OF THE NOTES. On each of the dates set forth
in the following table, the Company will prepay the principal amount of the
Notes set forth opposite such date in such table (or such lesser principal
amount of the Notes as shall at the time be outstanding), at the principal
amount of the Notes so prepaid, without premium, together with interest accrued
thereon:
<TABLE>
<CAPTION>
Principal Amount
Date of Prepayment of Prepayment
----------------------------- ------------------------------
<S> <C>
June 30, 2005 $9,000,000
June 30, 2006 $9,000,000
June 30, 2007 $9,000,000
June 30, 2008 $9,000,000
</TABLE>
Any partial prepayment of the Notes pursuant to SECTION 9.2 or 9.3 and
any acquisition of Notes by the Company or any of its Subsidiaries or either
General Partner made pursuant to SECTION 9.7 shall be applied to reduce each
prepayment thereafter required to be made pro rata,
<PAGE>
but otherwise no acquisition of the Notes by the Company or any of its
Affiliates, shall relieve the Company from its obligation to make the
required prepayments provided for in this SECTION 9.1. The Company shall
notify the holders of the Notes of any application provided for in the
immediately preceding sentence five days prior to such application. On
the maturity date, the Company will pay the then outstanding principal
amount of the Notes together with interest accrued thereon.
9.2. OPTIONAL PREPAYMENTS OF THE NOTES WITH MAKE WHOLE AMOUNT. The
Notes shall be subject to prepayment, in whole at any time or from time to time
in part (in an amount of not less than $5,000,000), at the option of the
Company, upon notice as provided in SECTION 9.4 at 100% of the principal amount
of the Notes so prepaid plus interest accrued thereon to the prepayment date and
the Make Whole Amount.
9.3. PREPAYMENT ON CHANGE OF CONTROL. (a) The Company will, within 90
days after any Change of Control, give written notice of such Change of Control
to each holder of Notes. Such notice shall contain and constitute an offer to
prepay the Notes as described in clause (b) of this SECTION 9.3 and shall be
accompanied by the certificate described in clause (e) of this SECTION 9.3.
(b) The offer to prepay Notes contemplated by clause (a) of this
SECTION 9.3 shall be an offer to prepay, in accordance with and subject to this
SECTION 9.3, all, but not less than all, the Notes held by each holder (in this
case only, "HOLDER" in respect of any Note registered in the name of a nominee
for a disclosed beneficial owner shall mean such beneficial owner) on the
Business Day specified in such offer (the "PROPOSED PREPAYMENT DATE") that is
not less than 20 days and not more than 30 days after the date of such offer (if
the Proposed Prepayment Date shall not be specified in such offer, the Proposed
Prepayment Date shall be the 20th day after the date of such offer).
(c) A holder of Notes may accept the offer to prepay made pursuant to
this SECTION 9.3 by causing a notice of such acceptance to be delivered to the
Company at least 5 days prior to the Proposed Prepayment Date. A failure by a
holder of Notes to respond to an offer to prepay made pursuant to this SECTION
9.3 shall be deemed to constitute a rejection of such offer by such holder.
(d) Prepayment of the Notes to be prepaid pursuant to this SECTION 9.3
shall be at 100% of the principal amount of such Notes, plus a premium equal to
1% of such principal amount (the "PREMIUM AMOUNT"), together with interest on
such Notes accrued to the date of prepayment. The principal amount and accrued
interest and the Premium Amount shall, with respect to all Notes the holders of
which accepted the offer to prepay pursuant to clause (c), become due and
payable on the Proposed Prepayment Date.
(e) Each offer to prepay the Notes pursuant to this SECTION 9.3 shall
be accompanied by a certificate, executed by a senior financial officer of the
Managing General Partner and dated the date of such offer, specifying: (i) the
Proposed Prepayment Date; (ii) that such offer is made pursuant to this SECTION
9.3; (iii) the principal amount of each Note offered to be prepaid; (iv) the
Premium Amount due on each Note in connection with such prepayment; (v) the
interest that would be due on each Note offered to be prepaid, accrued to the
Proposed Prepayment Date; (vi) that the conditions of this SECTION 9.3 have been
fulfilled; (vii) in reasonable detail, the nature and date of the Change of
Control; and (viii) that a failure to respond to such notice shall be deemed a
rejection of such offer to prepay the Notes.
9.4. NOTICE OF PREPAYMENTS; OFFICERS' CERTIFICATE. The Company will
give each holder of any Notes irrevocable written notice of each prepayment
under SECTION 9.2 not less than 10 days and not more than 30 days prior to the
Business Day fixed for such prepayment, in each case specifying such prepayment
date, the aggregate principal amount of the Notes, the principal amount of each
Note held by such holder to be prepaid and the Section under which such
prepayment is to be made and the estimate of any Make Whole Amount to be paid in
connection
<PAGE>
with such prepayment (calculated as if the date of such notice were the
date of such prepayment). Notice of prepayment having been given as
aforesaid, the principal amount of the Notes specified in such notice,
together with interest thereon to the prepayment date and together with
the Make Whole Amount, if any, with respect thereto, shall become due
and payable on such prepayment date. The Company shall, on or before the
Business Day next succeeding the date which the Company sends such
written notice, give telephonic notice (immediately followed by written
notice sent by facsimile transmission) of the principal amount of the
Notes to be prepaid and the prepayment date to each holder of any Notes
which shall have designated a recipient of such notices in SCHEDULE A or
by notice in writing to the Company. Each holder of a Note shall
receive, on the Business Day immediately preceding the date scheduled
for any such prepayment, an Officers' Certificate setting forth the
calculations of the Make Whole Amount, certifying that the conditions of
the Section under which such prepayment is to be made have been
fulfilled and specifying the particulars of such fulfillment. In the
event that there shall have been a partial prepayment of the Notes under
SECTION 9.2 or 9.3 or an acquisition of the Notes by the Company or any
of its Subsidiaries or either General Partner pursuant to SECTION 9.7,
the Company shall promptly give notice to the holders of the Notes,
accompanied by an Officers' Certificate setting forth the principal
amount of each of the Notes that was prepaid and specifying how each
such amount was determined, setting forth the reduced amount of each
required prepayment thereafter becoming due with respect to the Notes
under SECTION 9.1, and certifying that such reduction has been computed
in accordance with such Section.
9.5. ALLOCATION OF PARTIAL PREPAYMENTS. Upon any partial prepayment of
the Notes pursuant to SECTION 9.1 or 9.2 the principal amount so prepaid shall
be allocated (as nearly as practicable) to all Notes at the time outstanding in
proportion to the respective outstanding principal amounts thereof not
theretofore called for prepayment, with adjustments, to the extent practicable,
to compensate for any prior prepayments not made exactly in such proportion.
9.6. MATURITY; SURRENDER, ETC. In the case of each prepayment, the
principal amount of each Note to be prepaid shall mature and become due and
payable on the date fixed for such prepayment, together with interest on such
principal amount accrued to such date and the applicable Make Whole Amount or
Premium Amount, if any. From and after such date, unless the Company shall fail
to pay such principal amount when so due and payable, together with the interest
and Make Whole Amount or Premium Amount, if any, as aforesaid, interest on such
principal amount shall cease to accrue. Any Note paid or prepaid in full shall,
after such payment or prepayment in full, be surrendered to the Company and
canceled and shall not be reissued, and no Note shall be issued in lieu of any
such paid or prepaid principal amount of any Note.
9.7. ACQUISITION OF NOTES. None of the General Partners or the Company
shall, nor shall any of them permit any of their respective Subsidiaries or any
Restricted Affiliate to, prepay or otherwise retire in whole or in part prior to
their stated final maturity (other than by prepayment pursuant to SECTION 9.1,
9.2, or 9.3 or upon acceleration of such final maturity pursuant to SECTION 11),
or purchase or otherwise acquire, directly or indirectly, Notes held by any
holder, except, in the case of such purchase or acquisition, pursuant to an
offer to purchase made pro rata to the holders of all of the Notes on the same
terms and conditions. Any Notes prepaid in full or otherwise retired or
purchased or otherwise acquired by the Company or any of its Subsidiaries or
either General Partner shall not be deemed to be outstanding for any purpose
under this Agreement or any other Operative Agreement, shall be canceled and
shall not be reissued. Any Notes prepaid or otherwise purchased or otherwise
acquired by any Affiliate of the Company (other than any of its Subsidiaries or
either General Partner) shall not be deemed outstanding for the purpose of any
vote of the holders of the Notes (including, without limitation, the calculation
of any percentage of principal amount of the Notes outstanding with respect to
any such vote) pursuant to this Agreement or any other Operative Agreement but
shall be
<PAGE>
deemed outstanding with respect to the calculation of any future
payment of principal, premium and interest on the Notes.
SECTION 10. BUSINESS AND FINANCIAL COVENANTS OF THE COMPANY.
The Company covenants that from the date of this Agreement
through the Closing and thereafter so long as any of the Notes are
outstanding:
10.1. MAINTENANCE OF MINIMUM INTEREST COVERAGE. The Company will not
at any time permit the ratio of (a) Consolidated Cash Flow to (b) Consolidated
Interest Expense to be less than 1.50:1.00.
10.2. INDEBTEDNESS. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create, incur, assume or
suffer to exist (such condition to be satisfied only on the date of such
incurrence) with respect to, any Indebtedness, except that:
(a) the Company may become and remain liable with respect to the
Indebtedness evidenced by the Notes;
(b) the Operating Partnership may become and remain liable with
respect to the Indebtedness evidenced by the OP Notes;
(c) the Operating Partnership may become and remain liable with
respect to (i) the Indebtedness incurred under the Bank Credit Facilities,
and (ii) if no Event of Default or Potential Event of Default exists at the
time and after giving effect to the initial borrowings thereunder, any
extension, renewal, refunding, refinancing or successor facility of the
Operating Partnership which permits (A) borrowings and the issuance of
letters of credit under a working capital facility thereunder in an
aggregate amount outstanding at no time in excess of the sum of (x)
$75,000,000 plus, if the ratio of total Consolidated Funded Indebtedness
(including the Indebtedness to be incurred) to Consolidated Cash Flow is
less than 6.00 to 1.00, (y) the excess, if any, of (1) Consolidated Cash
Flow over (2) $53,000,000, for working capital and other partnership
purposes, and (B) borrowings under an acquisition facility thereunder in an
aggregate amount outstanding at no time in excess of the greater of (1)
$35,000,000 or (2) if the ratio of total Consolidated Funded Indebtedness
(including the Indebtedness to be incurred) to Consolidated Cash Flow is
less than 6.00 to 1.00, 40% of the Consolidated Net Worth of the Company as
of the date of incurrence of the Indebtedness, for the purpose of financing
acquisitions;
(d) the Restricted Subsidiaries may become and remain liable with
respect to Indebtedness incurred by the Restricted Subsidiaries to finance
the making of expenditures (which may be capitalized in accordance with
GAAP) for the improvement or repair of or additions to their respective
properties or assets; PROVIDED that the aggregate principal amount of
Indebtedness incurred under this SECTION 10.2(d) and outstanding at any
time shall not exceed an amount equal to the net cash proceeds received by
the Operating Partnership from the Managing General Partner or from the
Company as a capital contribution or as consideration for the issuance by
the Operating Partnership of additional partnership interests, in each case
for the sole purpose of financing such expenditures;
(e) the Operating Partnership may become and remain liable with respect
to secured Indebtedness incurred in connection with Capital Lease
obligations; PROVIDED that (1) the security for such Indebtedness shall
extend only to such property or asset, (2) the obligation incurred does not
exceed the fair market value of such property or asset (as determined in
good faith by the board of directors of the Managing General Partner) and
(3) after incurring such Indebtedness, and giving effect to the
substantially concurrent retirement of any other Indebtedness, no Event of
Default or Potential Event of Default will exist and the Operating
Partnership could incur (without reflecting the Notes as obligations of the
Operating Partnership or its Subsidiaries) at least $1.00 of additional
Indebtedness in compliance with the requirements set forth in clauses (i),
(ii) and (iii) of SECTION 10.1(f) of the 1996 Note
<PAGE>
Agreements and the 1998 Note Agreements (or the corresponding
requirements, if any, of any agreement included in the definition of
such terms); PROVIDED that for this purpose, and irrespective of any
amendment or elimination of such requirements after the date hereof, the
incurrence test of this subclause (3) shall always require that (A) the
Consolidated Cash Flow Coverage of Debt Service be at least 2.25 to
1.00, (B) the ratio of Consolidated Cash Flow to Maximum Consolidated
Pro Forma Debt Service be at least 1.25 to 1.00, and (C) the ratio of
Consolidated Funded Indebtedness (including the Indebtedness to be
incurred) to Consolidated Cash Flow be no more than 5.25 to 1.00;
(f) the Operating Partnership may become and remain liable with respect
to secured Indebtedness incurred in connection with purchase money
obligations in respect of any property or asset; PROVIDED that (1) the
security for such Indebtedness shall extend only to such property or asset,
(2) the obligation incurred does not exceed 85% of the fair market value of
such property or asset (as determined in good faith by the board of
directors of the Managing General Partner) and (3) after incurring such
Indebtedness and giving effect to the substantially concurrent retirement
of any other Indebtedness, no Event of Default or Potential Event of
Default will exist and the Operating Partnership could incur (without
reflecting the Notes as obligations of the Operating Partnership or its
Subsidiaries) at least $1.00 of additional Indebtedness in compliance with
the requirements set forth in clauses (i), (ii) and (iii) of SECTION
10.1(f) of the 1996 Note Agreements and the 1998 Note Agreements (or the
corresponding requirements, if any, of any agreement included in the
definition of such terms); PROVIDED that for this purpose, and irrespective
of any amendment or elimination of such requirements after the date hereof,
the incurrence test of this subclause (3) shall always require that (A) the
Consolidated Cash Flow Coverage of Debt Service be at least 2.25 to 1.00,
(B) the ratio of Consolidated Cash Flow to Maximum Consolidated Pro Forma
Debt Service be at least 1.25 to 1.00, and (C) the ratio of Consolidated
Funded Indebtedness (including the Indebtedness to be incurred) to
Consolidated Cash Flow be no more than 5.25 to 1.00;
(g) the Operating Partnership may become and remain liable with respect
to secured Indebtedness incurred to pay all or a portion of the purchase
price of property acquired by the Company or to secure obligations incurred
in consideration of non-compete agreements; PROVIDED that (1) the security
for such Indebtedness shall extend only to the property or assets so
acquired, (2) such obligation does not exceed 85% of the fair market value
of such property or asset or 35% in the case of non-compete obligations
(each as determined in good faith by the board of directors of the Managing
General Partner) and (3) after incurring such Indebtedness, and giving
effect to the substantially concurrent retirement of any other
Indebtedness, no Event of Default or Potential Event of Default will exist
and the Operating Partnership could incur (without reflecting the Notes as
obligations of the Operating Partnership or its Subsidiaries) at least
$1.00 of additional Indebtedness in compliance with the requirements set
forth in clauses (i), (ii) and (iii) of SECTION 10.1(f) of the 1996 Note
Agreements and the 1998 Note Agreements (or the corresponding requirements,
if any, of any agreement included in the definition of such terms);
PROVIDED that for this purpose, and irrespective of any amendment or
elimination of such requirements after the date hereof, the incurrence test
of this subclause (3) shall always require that (A) the Consolidated Cash
Flow Coverage of Debt Service be at least 2.25 to 1.00, (B) the ratio of
Consolidated Cash Flow to Maximum Consolidated Pro Forma Debt Service be at
least 1.25 to 1.00, and (C) the ratio of Consolidated Funded Indebtedness
(including the Indebtedness to be incurred) to Consolidated Cash Flow be no
more than 5.25 to 1.00;
(h) the Company and the Restricted Subsidiaries may become and remain
liable with respect to Indebtedness, in addition to that otherwise
permitted by the other clauses of this SECTION 10.2, if on the date the
Company or any Restricted Subsidiary becomes liable with
<PAGE>
respect to any such additional Indebtedness and immediately after giving
effect thereto and to the substantially concurrent repayment of any
other Indebtedness (i) the Consolidated Cash Flow Coverage of the Debt
Service is greater than 2.00 to 1.00 and (ii) the ratio of total
Consolidated Funded Indebtedness (including the Indebtedness to be
incurred) to Consolidated Cash Flow is less than 6.00 to 1.00;
(i) any Restricted Subsidiary may become and remain liable with respect
to Indebtedness of such Restricted Subsidiary owing to the Company or to
another Restricted Subsidiary; PROVIDED that such Indebtedness is created
and is outstanding under an agreement or instrument pursuant to which such
Indebtedness is subordinated to the Notes at least to the extent provided
in the subordination provisions set forth in EXHIBIT C;
(j) the Restricted Subsidiaries may become and remain liable with
respect to unsecured Indebtedness owing to either General Partner or an
Affiliate of either General Partner; PROVIDED that (i) the aggregate
principal amount of such Indebtedness of the Restricted Subsidiaries
outstanding at any time shall not be in excess of $20,000,000, (ii) no
Event of Default or Potential Event of Default has occurred, is continuing
or results from such incurrence and (iii) such Indebtedness is created and
is outstanding under an agreement or instrument pursuant to which such
Indebtedness is subordinated to the Notes at least to the extent provided
in the subordination provisions set forth in EXHIBIT C;
(k) the Restricted Subsidiaries may remain liable with respect to the
Indebtedness (other than the OP Notes and the Bank Credit Facilities)
referred to in SCHEDULE 5.7; PROVIDED that the aggregate principal amount
of all such Indebtedness at the time outstanding shall not exceed
$21,425,000;
(l) the Operating Partnership or any of its Restricted Subsidiaries may
become and remain liable with respect to pre-existing Indebtedness relating
to any Person, business or assets acquired by the Operating Partnership or
such Restricted Subsidiary; PROVIDED that (1) no condition or event shall
exist or result from such incurrence which constitutes an Event of Default
or Potential Event of Default, (2) such Indebtedness was not incurred in
anticipation of the acquisition of such Person, business or assets and (3)
after giving effect to such Person becoming a Restricted Subsidiary, or the
acquisition of such business or assets, the Operating Partnership or such
Restricted Subsidiary could incur (without reflecting the Notes as
obligations of the Operating Partnership or its Subsidiaries) at least
$1.00 of additional Indebtedness in compliance with the requirements set
forth in clauses (i), (ii) and (iii) of SECTION 10.1(f) of the 1996 Note
Agreements and the 1998 Note Agreements (or the corresponding requirements,
if any, of any agreement included in the definition of such terms);
PROVIDED that for this purpose, and irrespective of any amendment or
elimination of such requirements after the date hereof, the incurrence test
of this subclause (3) shall always require that (A) the Consolidated Cash
Flow Coverage of Debt Service be at least 2.25 to 1.00, (B) the ratio of
Consolidated Cash Flow to Maximum Consolidated Pro Forma Debt Service be at
least 1.25 to 1.00, and (C) the ratio of Consolidated Funded Indebtedness
(including the Indebtedness to be incurred) to Consolidated Cash Flow be no
more than 5.25 to 1.00;
(m) the Operating Partnership may become and remain liable with respect
to any Interest Rate Agreement;
(n) the Operating Partnership may become and remain liable with respect
to any Commodity Hedging Agreement;
(o) so long as no Event of Default or Potential Event of Default has
occurred and is continuing, the Company or any Restricted Subsidiary may
become and remain liable with respect to Indebtedness incurred for any
extension, renewal, refunding or refinancing of its Indebtedness otherwise
permitted pursuant to this SECTION 10.2; PROVIDED that, in the case of any
extension, renewal, refunding or refinancing of such Indebtedness other
than the
<PAGE>
Indebtedness permitted by clause (c) of this SECTION 10.2 (i) the
principal amount of such Indebtedness shall not exceed the principal amount
of such Indebtedness being extended, renewed, refunded or refinanced
together with any accrued interest and Make Whole Amount, Premium Amount or
other premium with respect thereto and any costs and expenses related to
such extension, renewal, refunding or refinancing, (ii) the maturity date
of such Indebtedness shall not be sooner than the maturity date of such
Indebtedness being extended, renewed, refunded or refinanced, and (iii) the
average life to maturity of such Indebtedness shall be equal to or greater
than the remaining average life to maturity of such Indebtedness being
extended, renewed, refunded or refinanced; and
(p) any Qualifying Restricted Subsidiary may become and remain liable
with respect to Indebtedness evidenced by the Subsidiary Guarantee
Agreements or Guaranties of Parity Debt.
For the purpose of this SECTION 10.2, any Person becoming a Restricted
Subsidiary after the date of this Agreement shall be deemed to have become
liable with respect to all of its then outstanding Indebtedness at the time it
becomes a Restricted Subsidiary, and any Person extending, renewing or refunding
any Indebtedness shall be deemed to have become liable with respect to such
Indebtedness at the time of such extension, renewal or refunding. The Company or
any Restricted Subsidiary shall be deemed to have become liable with respect to
any Indebtedness secured by any real property acquired by the Company or such
Restricted Subsidiary, as the case may be, at the time of such acquisition.
10.3. LIENS, ETC. The Company will not create, incur, assume or permit
to exist any Lien on or with respect to any property or asset (including any
document or instrument in respect of goods or accounts receivable) of the
Company, whether now owned or held or hereafter acquired, or any income or
profits therefrom, except Liens for taxes, assessments or other governmental
charges the payment of which is not at the time required by SECTION 10.11.
10.4. INVESTMENTS, GUARANTIES, ETC. The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly (i) make or own any
Investment in any Person, or (ii) create or become liable with respect to any
Guaranty, except:
(a) the Company and any Restricted Subsidiary may make and own
Investments in any Restricted Subsidiary or the Company or Investments in
capital stock of, or other equity interests in, any Person which as a
result of such Investment becomes a Restricted Subsidiary;
(b) the Company or any Restricted Subsidiary may make and own
Investments (x) constituting trade credits or advances to any Person
incurred in the ordinary course of business, (y) arising out of loans and
advances to officers, directors and employees for travel, entertainment and
relocation expenses, in each case incurred in the ordinary course of
business or (z) acquired by reason of the exercise of customary creditors'
rights upon default or pursuant to the bankruptcy, insolvency or
reorganization of a debtor;
(c) the Company or any Restricted Subsidiary may create or become
liable with respect to any Guaranty (i) constituting an obligation,
warranty or indemnity, not guaranteeing Indebtedness of any Person, which
is undertaken or made in the ordinary course of business or (ii) permitted
under SECTION 10.2;
(d) the Operating Partnership may create and become liable with respect
to any Interest Rate Agreement;
(e) the Operating Partnership may create and become liable with respect
to any Commodity Hedging Agreement;
(f) the Company or any Restricted Subsidiary may make and own
Investments in
(1) marketable obligations issued or unconditionally
guaranteed by the United States of America, or issued by any
agency thereof and backed by the full
<PAGE>
faith and credit of the United States of America in each case
maturing within one year from the date of acquisition thereof,
(2) marketable direct obligations issued by any state
of the United States of America or any political subdivision
of any such state or any public instrumentality thereof
maturing within one year from the date of acquisition thereof
and having as at any date of determination the highest rating
obtainable from either Standard & Poor's Ratings Group or
Moody's Investors Service, Inc.,
(3) commercial paper maturing no more than 270 days
from the date of creation thereof and having as at any date of
determination one of the two highest ratings obtainable from
either Standard & Poor's Ratings Group or Moody's Investors
Service, Inc.,
(4) certificates of deposit maturing one year or less
from the date of acquisition thereof issued by commercial
banks incorporated under the laws of the United States of
America or any state thereof or the District of Columbia or
Canada, (A) the commercial paper or other short-term unsecured
debt obligations of which are rated either A-1 or better (or
comparably if the rating system is changed) by Standard &
Poor's Ratings Group or Prime-1 or better (or comparably if
the rating system is changed) by Moody's Investors Service,
Inc. or (B) the long-term debt obligations of which are rated
either AA- or better (or comparably if the rating system is
changed) by Standard & Poor's Ratings Group or Aa3 or better
(or comparably if the rating system is changed) by Moody's
Investors Service, Inc. ("PERMITTED BANKS"), or by any bank
party to the Bank Credit Facilities the long-term debt
obligations of which are rated either A or better (or
comparably if the rating system is changed) by Standard &
Poor's Rating Group or A or better (or comparably if the
rating system is changed) by Moody's Investors Service, Inc.,
(5) Eurodollar time deposits having a maturity of
less than 270 days from the date of acquisition thereof
purchased directly from any Permitted Bank,
(6) bankers' acceptances eligible for rediscount
under requirements of The Board of Governors of the Federal
Reserve System and accepted by Permitted Banks, and
(7) obligations of the type described in clause (1),
(2), (3) or (4) above purchased from a securities dealer
designated as a "primary dealer" by the Federal Reserve Bank
of New York or from a Permitted Bank as counterparty to a
written repurchase agreement obligating such counterparty to
repurchase such obligations not later than 14 days after the
purchase thereof and which provides that the obligations which
are the subject thereof are held for the benefit of the
Company or a Restricted Subsidiary by a custodian which is a
Permitted Bank; and
(g) the Company or any Restricted Subsidiary may make and own
Investments (other than those included in clause (a) above) in the capital
stock of, or joint venture, partnership or other equity interests in, or
the contributions to capital in the ordinary course of business of, any
Unrestricted Subsidiary if immediately after giving effect to the making of
any such Investment, (A) the aggregate amount of all such Investments made
and outstanding pursuant to this clause (g) shall not at any time exceed
20% of the Consolidated Net Worth of the Company and (B) the aggregate
amount of all Investments made and outstanding pursuant to this clause (g)
as at the end of any fiscal quarter of the Company shall not exceed by more
than $15,000,000 the amount of such Investments outstanding as at the end
of the corresponding fiscal quarter of the immediately preceding fiscal
year of the Company, and in the case of both subclauses (A) and (B) of this
clause (g), the amounts specified therein may be increased (without
duplication) by an amount equal to (i) the net cash proceeds received
<PAGE>
by the Company from the Managing General Partner or from other holders or
purchasers of the Company's partnership interests as a capital contribution
or as consideration for the issuance by the Company of additional
partnership interests for the sole purpose of making such Investment, net
of (ii) cash distributions received from all Unrestricted Subsidiaries for
such period.
10.5. RESTRICTED PAYMENTS. The Company will not, directly or
indirectly, nor will it permit any Subsidiary to, declare, order, pay, make or
set apart any sum for any Restricted Payment, except that (a) the Company may
declare, order, pay, make or set apart once during each calendar quarter a
Restricted Payment in cash if (i) prior to any such proposed action no condition
or event shall exist which constitutes a Potential Event of Default under
SECTION 11(b) or an Event of Default and immediately after giving effect to any
such proposed Restricted Payment no condition or event shall exist which
constitutes a Potential Event of Default or an Event of Default, (ii) the ratio
of Consolidated Cash Flow to Consolidated Interest Expense, as of the date of
such action, is greater than 1.75 to 1.00 (the "COVERAGE TEST") and (iii) the
Company shall have given to each holder of a Note written notice thereof on the
date such Restricted Payment is declared, which date shall be within 50 days of
the date on which the Coverage Test was satisfied and at least 10 days prior to
the date such Restricted Payment is made, (b) the Operating Partnership may
declare, order, pay, make or set apart a Restricted Payment needed to pay
pass-through taxes, and (c) any Subsidiary may make, pay or set apart dividends
and distributions so long as such dividends or distributions are made, paid or
set apart for each holder of such Person's capital stock or other equity on a
pro-rata basis. The Company will not, in any event, directly or indirectly
declare, order, pay or make any Restricted Payment except in cash. Upon
satisfaction of the Coverage Test by the Company, any Restricted Payment which
is a dividend shall be made within 60 days thereafter, and, notwithstanding any
other provision of this SECTION 10.5 (other than clause (i) of this SECTION 10.5
insofar as it relates to a Potential Event of Default under SECTION 11(b) or (h)
or an Event of Default), if the payment would have been permitted as of the date
of such declaration, such payment shall be permitted if made during such 60 day
period.
10.6. TRANSACTIONS WITH AFFILIATES. Except for the transactions or
conduct effected pursuant to the Operative Agreements as in effect on the date
of the Closing or any other transactions or conduct described or listed on
SCHEDULE 10.6, the Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, engage in any transaction with any
Affiliate of the Company, including, without limitation, the purchase, sale or
exchange of assets or the rendering of any service, to the Company's or such
Restricted Subsidiary's business except upon fair and reasonable terms that are
no less favorable to the Company or such Restricted Subsidiary, as the case may
be, than those which might be obtained in an arm's-length transaction at the
time such transaction is agreed upon from Persons which are not such an
Affiliate; PROVIDED that the foregoing limitations and restrictions shall not
apply to any transaction between the Company and any Restricted Subsidiary or
between Restricted Subsidiaries or to loans and advances to officers, directors
and employees made in the ordinary course of business.
10.7. LIMITATION ON RESTRICTIONS ON SUBSIDIARY DIVIDENDS, ETC. The
Company will not, and will not cause or permit any of the Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions on or in respect of its capital stock or partnership units, as the
case may be, or pay any Indebtedness owed to the Company or any Restricted
Subsidiary, (b) make loans or advances to the Company or any Restricted
Subsidiary or (c) transfer any of its properties or assets to the Company or any
Restricted Subsidiary, except for such encumbrances or restrictions existing
under or by reason of (i) customary non-assignment provisions in any lease
governing a
<PAGE>
leasehold interest or other contract entered into in the ordinary
course of business consistent with past practices, (ii) restrictions on the
payment of dividends and distributions pursuant to the terms of the Bank Credit
Facilities, the OP Note Agreements and any agreement relating to any Parity
Debt, in each case under this subclause (ii) containing provisions no more
restrictive than those contained in the Bank Credit Facilities or the OP Note
Agreements, as such provisions are in effect on the date hereof, or (iii) this
Agreement or any Other Agreement.
10.8. SUBSIDIARY STOCK AND INDEBTEDNESS. The Company will not:
(a) directly or indirectly sell, assign, pledge or otherwise dispose of
any Indebtedness of or any shares of stock or similar interests of (or
warrants, rights or options to acquire stock or similar interests of) any
Subsidiary, except, in the case of shares of stock or similar interests of
(or warrants, rights or options to acquire stock or similar interests of)
any Subsidiary (other than the Operating Partnership), to a Restricted
Subsidiary;
(b) permit any Restricted Subsidiary directly or indirectly to sell,
assign, pledge or otherwise dispose of any Indebtedness of (i) the Company
or (ii) any other Restricted Subsidiary, or any shares of stock or similar
interests of (or warrants, rights or options to acquire stock or similar
interests of) any other Subsidiary, except to, in the case of clause (i),
the Company or, in all other cases, the Company or a Restricted Subsidiary;
(c) permit any Restricted Subsidiary to have outstanding any shares of
stock or similar interests which are preferred over any other shares of
stock or similar interests owned by the Company unless such shares of
preferred stock or similar interests are owned by the Company; or
(d) permit any Restricted Subsidiary directly or indirectly to issue or
sell (including, without limitation, in connection with a merger or
consolidation of a Restricted Subsidiary otherwise permitted by SECTION
10.9(a)) any shares of its stock or similar interests (or warrants, rights
or options to acquire its stock or similar interests) except to the Company
or, in the case of shares of stock or similar interests of (or warrants,
rights or options to acquire stock or similar interests of) any Subsidiary
(other than the Operating Partnership), to a Restricted Subsidiary;
PROVIDED that, (i) any Restricted Subsidiary may sell, assign or otherwise
dispose of Indebtedness of the Company or a Restricted Subsidiary if, assuming
such Indebtedness were incurred immediately after such sale, assignment or
disposition, such Indebtedness would be permitted under SECTION 10.2 or (ii)
subject to compliance with SECTION 10.9(c), all Indebtedness and shares of stock
or partnership interests of any Restricted Subsidiary (other than the Operating
Partnership) owned by the Company or by another Restricted Subsidiary may be
simultaneously sold as an entirety for consideration at least equal to the fair
value thereof (as determined in good faith by the Managing General Partner) at
the time of such sale if such Restricted Subsidiary does not at the time own (A)
any Indebtedness of the Company (other than Indebtedness which, if incurred
immediately after such transaction, would be permitted under SECTION 10.2) or
(B) any Indebtedness, stock or other interest in any other Restricted Subsidiary
which is not also being simultaneously sold as an entirety in compliance with
this proviso or SECTION 10.9(b)(ii).
10.9. CONSOLIDATION, MERGER, SALE OF ASSETS, ETC. The Company will not,
and will not permit any Restricted Subsidiary to, directly or indirectly,
(a) consolidate with or merge into any other Person or permit any other
Person to consolidate with or merge into it, except that:
(i) any Restricted Subsidiary may consolidate with or merge
into another Restricted Subsidiary if, in the case of a
consolidation or merger involving the Operating Partnership, the
Operating Partnership shall be the surviving Person and if,
immediately after giving effect to such transaction, no condition
or event shall exist which constitutes an Event of Default or
Potential Event of Default; and
<PAGE>
(ii) any entity (other than a Restricted Subsidiary) may
consolidate with or merge into the Company or a Restricted
Subsidiary if the Company or a Restricted Subsidiary, as the case
may be, shall be the surviving Person and if, immediately after
giving effect to such transaction, (x) the Company and, in the
case of clause (2) below to the extent that such clause (2) limits
incurrence of any Indebtedness, such Restricted Subsidiary (1)
shall not have a Consolidated Net Worth (but without giving effect
to any write-up in assets or amounts attributable to goodwill
pursuant to purchase accounting methods) of less than the
Consolidated Net Worth of the Company immediately prior to the
effectiveness of such transaction, (2) shall not be liable with
respect to any Indebtedness or allow its property to be subject to
any Lien which it could not become liable with respect to or allow
its property to become subject to under this Agreement on the date
of such transaction, and (3) could incur, if the consolidating or
merging entity has outstanding Indebtedness, at least $1 of
additional Indebtedness in compliance with SECTION 10.2(h) after
giving effect to such transaction, (y) substantially all of the
assets of such entity shall be located and substantially all of
its business shall be conducted within the United States of
America, and (z) no condition or event shall exist which
constitutes an Event of Default or Potential Event of Default; and
(iii) the Company may consolidate with or merge into any other
entity if (w) the surviving entity is a corporation, limited
partnership, limited liability company or business trust organized
and existing under the laws of the United States of America or a
state thereof or the District of Columbia, with substantially all
of its properties located and its business conducted within the
United States of America, (x) such corporation, limited
partnership, limited liability company or business trust expressly
and unconditionally assumes the obligations of the Company under
this Agreement and each of the other Operative Agreements to which
it is a party and delivers to each holder of a Note at the time
outstanding in connection with such assumption an opinion of
counsel reasonably satisfactory to the Required Holders with
respect to such matters incident to such assumption as may be
reasonably requested by such holders, including, without
limitation, as to the due authorization and execution of the
related agreement of assumption and the enforceability of such
agreement against such corporation, limited partnership, limited
liability company or business trust, (y) immediately after giving
effect to such transaction, such corporation, limited partnership,
limited liability company or business trust (1) shall not have a
Consolidated Net Worth (but without giving effect to any write-up
in assets or amounts attributable to goodwill pursuant to purchase
accounting methods) of less than the Consolidated Net Worth of the
Company immediately prior to the effectiveness of such
transaction, (2) shall not be liable with respect to any
Indebtedness or allow its property to be subject to any Lien which
it could not become liable with respect to or allow its property
to become subject to under this Agreement on the date of such
transaction and (3) could incur, if the consolidating or merging
entity had outstanding Indebtedness, at least $1 of additional
Indebtedness in compliance with SECTION 10.2(h) after giving
effect to such transaction, and (z) immediately after giving
effect to such transaction no condition or event shall exist which
constitutes an Event of Default or a Potential Event of Default;
or
(b) sell, lease, abandon or otherwise dispose of all or substantially
all of its assets, except that:
(i) any Restricted Subsidiary (other than the Operating
Partnership) may sell, lease or otherwise dispose of all or
substantially all of its assets to the Company or to a Restricted
Subsidiary; and
<PAGE>
(ii) the Company may sell, lease or otherwise dispose of all
or substantially all of its assets to any corporation, limited
partnership, limited liability company or business trust into
which the Company could be consolidated or merged in connection
with a transaction permitted by clause (a)(iii) of this SECTION
10.9; PROVIDED that each of the conditions set forth in such
clause (a)(iii) shall have been fulfilled; or
(c) sell, lease, abandon or otherwise dispose of any property to any
Person other than the Company or any other Restricted Subsidiary (except
for (x) sales, leases or other dispositions of property in transactions
permitted by the foregoing clauses (a) or (b) of this SECTION 10.9, and (y)
sales or leasing of inventory in the ordinary course of business) unless
immediately before and after giving effect to such transaction, no Event of
Default or Potential Event of Default shall exist or be continuing and:
(i) at least 70% or more of the consideration (or 25% or more
in the event such consideration is less than $1,000,000) therefor
shall be in the form of cash consideration or marketable
securities; provided that the amount of (A) any liabilities (as
shown on the Company's or such Restricted Subsidiary's most recent
balance sheet or in the notes thereto) of the Company or any
Restricted Subsidiary (other than liabilities that are by their
terms subordinated in right of payment to the Notes) that are
assumed by the transferee of any such assets and (B) any notes or
other obligations received by the Company or any such Restricted
Subsidiary from such transferee that are promptly converted into
cash (to the extent of the cash received), shall be deemed to be
cash for the purposes of this SECTION 10.9(c)(i), and
(ii) either
(A) the aggregate net after-tax proceeds of all such
dispositions by the Company and all Restricted Subsidiaries
during the current fiscal year (including all proceeds under
title insurance policies with respect to real property and all
net insurance proceeds, self-insurance amounts and net awards
with respect to property lost as a result of damage,
destruction or a taking which have not been applied to the
cost of repairing or replacing any damaged or destroyed
assets), less the amount of all such net after-tax proceeds
previously applied in accordance with clause (ii)(B) of this
SECTION 10.9(c) and the amount of such net after-tax proceeds
equal to the purchase price of any assets acquired to the
extent that (1) such assets were acquired within 90 days prior
to the date of such disposal of property, (2) the purchase
price of such assets was not previously applied to reduce the
amount of net after-tax proceeds of property disposed of under
this SECTION 10.9(c), (3) such assets were acquired for
subsequent replacement of the property so disposed of or may
be productively used in the United States of America or Canada
in the conduct of the Business, and (4) to the extent such
assets were acquired (in whole or in part) with borrowed
money, such borrowing has been repaid in full, (x) shall not
exceed $7,500,000 during such fiscal year and (y) when
aggregated with such net after-tax proceeds of all prior
transactions under this SECTION 10.9(c), shall not exceed
$30,000,000; or
(B) in the event that such net after-tax proceeds (less
the amount thereof previously applied in accordance with this
clause (ii)(B) and the amount thereof equal to the purchase
price of any assets acquired to the extent that (1) such
assets were acquired within 90 days prior to the date of such
disposal of property, (2) the purchase price of such assets
was not previously applied to reduce the amount of net
after-tax proceeds of property disposed of under this SECTION
10.9(c), (3) such assets were acquired for subsequent
replacement of the property so disposed of or may be
productively used in the United States of America or Canada in
the conduct of the Business, and (4) to the extent such assets
were acquired (in whole
<PAGE>
or in part) with borrowed money, such borrowing has been
repaid in full) exceed $7,500,000 during the current
fiscal year or, when aggregated with such net
after-tax proceeds of all prior transactions under this
SECTION 10.9(c), exceed $30,000,000 (the larger amount of such
excess net after-tax proceeds actually realized being herein
called "EXCESS PROCEEDS"), the Company shall promptly pay over
to the trustee under the OP Notes such Excess Proceeds not at
the time held by such trustee for application by it (x) within
365 days of the date of the disposal of property to the
acquisition of assets in replacement of the property so
disposed of or of assets which may be used in the United
States of America or Canada in the conduct of the Business
(and if the assets so disposed were or should have been, then
such newly acquired assets shall be subjected to the Lien of
the security documents with respect to the OP Notes and the
Bank Credit Facilities) or to the cost of repairing or
replacing any damaged or destroyed assets, or (y) to the
extent of Excess Proceeds not applied pursuant to the
immediately preceding clause (x), to the payment and/or
prepayment of the OP Notes (with any applicable make whole
amount thereunder) and any Parity Debt, if any, pursuant to
the terms thereof, and each holder of any Note shall have
received an Officers' Certificate from the Managing General
Partner certifying that the consideration received for such
property is at least equal to its fair value (as determined in
good faith by the Managing General Partner) and that such
consideration has been applied in accordance with the terms of
this Agreement.
Notwithstanding the foregoing, any Restricted Subsidiary may sell or
dispose of (i) real property assets sold or disposed of within 12 months of the
acquisition of such assets, and (ii) all other assets sold or disposed of within
6 months of the acquisition of such assets, in each case constituting a portion
of an acquired business, if (y) such assets are specifically designated to the
holders of the Notes in writing at the time of such acquisition or within 30
Business Days thereafter as assets to be disposed of, and (z) each holder of the
Notes shall have received an Officers' Certificate from the Managing General
Partner certifying that the consideration received for such property is at least
equal to its fair value (as determined in good faith by the Managing General
Partner). Such sales under this paragraph will not be applied towards the annual
or cumulative limitations in clause (c) of this SECTION 10.9. In addition,
notwithstanding the foregoing, the Operating Partnership may, at any time,
exchange assets for other like assets which may be used in the conduct of the
Business; PROVIDED that (1) the fair value of the assets so acquired is
substantially equivalent to the fair value of the assets so exchanged (as
determined in good faith by the Managing General Partner), (2) if the assets
exchanged were or should have been, then such newly acquired assets shall be
subject to the Lien of the security documents with respect to the OP Notes and
the Bank Credit Facilities and (3) the total value of the assets so exchanged in
any twelve month period shall not in the aggregate exceed 15% of the total
assets of the Operating Partnership.
10.10. PARTNERSHIP OR CORPORATE EXISTENCE, ETC.; BUSINESS. (a) (i) The
Company will at all times preserve and keep in full force and effect its
partnership existence and its status as a partnership not taxable as a
corporation for federal income tax purposes; (ii) the Company will cause each
Restricted Subsidiary to keep in full force and effect its partnership or
corporate existence; and (iii) the Company will, and will cause each Restricted
Subsidiary to, at all times preserve and keep in full force and effect all of
its material rights and franchises (in each case except as otherwise
specifically permitted in SECTION 10.8 and SECTION 10.9; PROVIDED, HOWEVER, that
notwithstanding the preceding provisions of this SECTION 10.10 the partnership
or corporate existence of any Restricted Subsidiary (other than the Operating
Partnership), and any right or franchise of the Company or any Restricted
Subsidiary, may be terminated if, in the good faith judgment of the Managing
General Partner, such termination is in the best interest of the
<PAGE>
Company, is not disadvantageous to the holders of the Notes in any material
respect and would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect); and PROVIDED, FURTHER, that the
Company shall not be obligated to preserve its status as a partnership not
taxable as a corporation for federal income tax purposes if (i) the Company's
failure to preserve such status shall be the result of an amendment to the
tax laws enacted by the Congress of the United States and (ii) after giving
effect to the loss of such status the ratio of Consolidated Cash Flow to
Maximum Consolidated Pro Forma Debt Service, determined as of the date of the
loss of such status, would be greater than 1.10 to 1.00, assuming, for the
purposes of the computation of Consolidated Cash Flow, that Consolidated Cash
Flow would be reduced by taxes at the applicable tax rate of the Company for
such period had the Company been taxable as a corporation.
(b) The Company shall not engage in any business other than the
ownership of not less than a 98.9899% limited partnership interest in the
Operating Partnership.
(c) The Company will not, and will not permit the Operating Partnership
or any other Restricted Subsidiary to, engage in any material lines of business
other than the Business as described in the Memorandum and other activities
incidental or related to the Business; PROVIDED that, the Company will not
permit Cornerstone Sales & Service Corporation to exist for any purpose, or to
carry on any business, other than the ownership and operation of the Service
Assets (as defined in the Contribution, Conveyance and Assumption Agreement
dated as of December 17, 1996 among the Company, the Operating Partnership, the
General Partners and Empire Energy SC Corporation, a Delaware corporation) and
other assets of that type.
10.11. PAYMENT OF TAXES AND CLAIMS. The Company will, and will cause
each Subsidiary to, pay all taxes, assessments and other governmental charges or
levies imposed upon it or any of its properties or assets or in respect of any
of its franchises, business, income or profits when the same become due and
payable, but in any event before any penalty or interest accrues thereon, and
all claims (including, without limitation, claims for labor, services, materials
and supplies) for sums which have become due and payable and which by law have
or might become a Lien upon any of its properties or assets, and promptly
reimburse the holders of the Notes for any such taxes, assessments, charges or
claims paid by them; PROVIDED that no such tax, assessment, charge or claim need
be paid or reimbursed if it is being contested in good faith by appropriate
proceedings promptly initiated and diligently conducted and if such reserves or
other appropriate provision, if any, as shall be required by GAAP shall have
been made therefor and be adequate in the good faith judgment of the Managing
General Partner.
10.12. COMPLIANCE WITH ERISA. The Company will not, and will not permit
any Subsidiary or Related Person of the Company to:
(a) (i) engage in any transaction in connection with which the Company
or any Subsidiary could be subject to either a civil penalty assessed
pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the
Code, (ii) terminate (within the meaning of Title IV of ERISA) or withdraw
from any Plan in any manner, or take, or fail to take, any other action
with respect to any Plan (including, without limitation, a substantial
cessation of operations within the meaning of Section 4062(e) of ERISA),
(iii) establish, maintain, contribute to or become obligated to contribute
to any welfare benefit plan (as defined in Section 3(1) of ERISA) or other
welfare benefit arrangement which provides post-employment benefits, which
cannot be unilaterally terminated by the Company or the Operating
Partnership, (iv) fail to make full payment when due of all amounts which,
under the provisions of any Plan or applicable law, the Company or any
Subsidiary or Related Person of the Company is required to pay as
contributions or permit to exist any material accumulated funding
deficiency, whether or not waived, with respect to any Plan or (v) engage
in any transaction in connection with which the Company, any Subsidiary or
any Related Person of the Company could be subject to liability pursuant to
Section 4069(a) or
<PAGE>
4212(c) of ERISA, if any such event, condition or transaction described
in clauses (i) through (v) above, either individually or together with
any other such event, condition or transaction, could reasonably be
expected to result in (x) the imposition of a Lien in a material amount
on any assets or property of the Company or any Subsidiary of the
Company pursuant to Section 302(f) of ERISA or Section 412(n) of the
Code or (y) any liability to the Company, any Subsidiary of the Company
or any Related Person of the Company, which liability would,
individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect; or
(b) as of any date of determination (i) permit the amount of unfunded
benefit liabilities under any Plan (other than a Multiemployer Plan)
maintained at such time by the Company or any Subsidiary or Related Persons
of the Company to exceed the current value of the assets of any such Plan
by more than $1,000,000 or (ii) permit the aggregate liability incurred by
the Company and any Subsidiary of the Company and Related Persons of the
Company pursuant to Title IV of ERISA with respect to one or more
terminations of, or one or more complete or partial withdrawals from, any
Plan to exceed $1,000,000.
As used in this SECTION 10.12, the term "ACCUMULATED FUNDING DEFICIENCY" has the
meaning specified in Section 302 of ERISA and Section 412 of the Code, the term
"CURRENT VALUE" has the meaning specified in Section 3 of ERISA and the terms
"BENEFIT LIABILITIES" and "AMOUNT OF UNFUNDED BENEFIT LIABILITIES" have the
meanings specified in Section 4001 of ERISA.
10.13. MAINTENANCE OF PROPERTIES; INSURANCE. (a) The Company will cause
the Operating Partnership to maintain or cause to be maintained in working order
and condition, in accordance with normal industry standards, all material
properties used or useful in the business of the Company and the Restricted
Subsidiaries and from time to time to make or cause to be made all appropriate
repairs, renewals and replacements thereof.
(b) The Company will cause each of the Restricted Subsidiaries to keep
its insurable properties adequately insured at all times by financially sound
and reputable insurers and maintain such other insurance, to such extent and
against such risks, including fire and other risks insured against by extended
coverage, as is customary with companies in the same or similar businesses. The
Operating Partnership may maintain a system of self-insurance in an amount
customary for companies with established reputations engaged in the same or
similar business and owning similar properties as the Operating Partnership.
10.14. OPERATIVE AGREEMENTS. The Company and the General Partners shall
keep the MLP Agreement and the Operating Partnership Agreement in full force and
effect and will not amend, modify or supplement the MLP Agreement or the
Operating Partnership Agreement without the prior written consent of the
Required Holders; PROVIDED that the MLP Agreement and the Operating Partnership
Agreement may be amended, modified or supplemented without the prior written
consent of the Required Holders if such amendment, modification or supplement
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.
10.15. INFORMATION REQUIRED BY RULE 144A. The Company covenants that it
will, upon the prior written request of the holder of any Note, provide such
holder, and any qualified institutional buyer designated by such holder, such
financial and other information as such holder may reasonably determine to be
necessary in order to permit compliance with the information requirements of
Rule 144A under the Securities Act of 1933, as amended, in connection with the
resale of Notes, except at such times as the Company continues to be subject to
the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended. For the purpose of this SECTION 10.15, the term "QUALIFIED
INSTITUTIONAL BUYER" shall have the meaning specified in Rule 144A under the
Securities Act of 1933, as amended.
10.16. COMPLIANCE WITH LAWS. (a) The Company will, and will cause each
Subsidiary to, comply with all applicable statutes, rules, regulations, and
orders of, and all applicable
<PAGE>
restrictions imposed by, the United States of America, foreign countries,
states, provinces and municipalities, and of or by any governmental
department, commission, board, regulatory authority, bureau, agency and
instrumentality of the foregoing, and of or by any court, arbitrator or grand
jury, in respect of the conduct of their respective businesses and the
ownership of their respective properties or business (including, without
limitation, Environmental Laws), except (i) such as are being contested in
good faith by appropriate proceedings promptly initiated and diligently
conducted and if such reserve or other appropriate provision, if any, as
shall be required by GAAP shall have been made therefor or (ii) for any
failure to so comply which would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
(b) The Company will, and will cause each Restricted Subsidiary to,
comply with all Environmental Laws, other than noncompliance which would not,
individually or in the aggregate, reasonably be expected to result in a Material
Adverse Effect.
10.17. FURTHER ASSURANCES. At any time and from to time promptly, the
Company shall, at its expense, execute and deliver to each holder of a Note such
further instruments and documents, and take such further action, as the holders
of the Notes may from time to time reasonably request, in order to further carry
out the intent and purpose of this Agreement and to establish and protect the
rights, interests and remedies created, or intended to be created, in favor of
the holders of the Notes.
10.18. SUBSIDIARIES. (a) The Company may designate any Restricted
Subsidiary (other than the Operating Partnership) or newly acquired or formed
Subsidiary of the Company as an Unrestricted Subsidiary or any Unrestricted
Subsidiary or newly acquired or formed Subsidiary of the Company as a Restricted
Subsidiary, in each case subject to satisfaction of the following conditions:
(i) immediately before and after giving effect to such
designation no condition or event shall exist which constitutes an
Event of Default or Potential Event of Default;
(ii) immediately after giving effect to such designation, (1)
(other than in the case of a designation of an Unrestricted Subsidiary
that does not have any Indebtedness as a Restricted Subsidiary), the
Company would be permitted to incur at least $1 of additional
Indebtedness in compliance with SECTION 10.2(h), (2) the Company and
the Restricted Subsidiaries would not be liable with respect to
Indebtedness or any Guaranty, would not own any Investments and their
property would not be subject to any Lien which is not permitted by
this Agreement and (3) substantially all of the Company's and the
Restricted Subsidiaries' assets will be located, and substantially all
of the Company's and the Restricted Subsidiaries' business will be
conducted, in the United States of America or, in the case of
Restricted Subsidiaries of the Operating Partnership, Canada;
(iii) in the case of a designation as an Unrestricted
Subsidiary, if such designation (and all other prior designations of
Restricted Subsidiaries or newly acquired or formed Subsidiaries as
Unrestricted Subsidiaries during the current fiscal year) were deemed
to constitute an Investment by the Company in respect of all the assets
of the Subsidiary so designated, such Investment would be in compliance
with SECTION 10.4(g), with the amount of such Investment being deemed
to equal the net book value of such assets (as determined in good faith
by the Managing General Partner) in the case of a Restricted Subsidiary
or the cost of acquisition or formation in the case of a newly acquired
or formed Subsidiary; PROVIDED that this clause (iii) of this SECTION
10.18(a) shall not apply to an acquisition or formation by the
Operating Partnership or a Restricted Subsidiary of a newly acquired or
formed Unrestricted Subsidiary to the extent such acquisition or
formation (1) is funded solely by the net cash proceeds received by the
Company from either General Partner or from other holders or purchasers
of the
<PAGE>
Company's partnership interests as a capital contribution or as
consideration for the issuance by the Company of additional partnership
interests or (2) the assets involved in such acquisition are acquired
in exchange for additional partnership interests of the Company;
PROVIDED, FURTHER, the net book value of the Restricted Subsidiary
designated an Unrestricted Subsidiary and the cost (other than the
amount paid in cash) of the acquisition or formation of a newly
acquired or formed Subsidiary shall be deemed proceeds from the sale of
assets of the Company for purposes of SECTION 10.9;
(iv) in the case of a designation of a Restricted Subsidiary
as an Unrestricted Subsidiary, such Restricted Subsidiary shall not
have been an Unrestricted Subsidiary prior to being designated a
Restricted Subsidiary; and
(v) the Company shall deliver to each holder of Notes, within
20 Business Days after any such designation, an Officers' Certificate
stating the effective date of such designation and confirming
compliance with the provisions of this SECTION 10.18.
In the case of the designation of any Unrestricted Subsidiary as a
Restricted Subsidiary, such new Restricted Subsidiary shall be deemed to have
(a) made or acquired all Investments owned by it, and (b) incurred all
Indebtedness owing by it and all Liens to which any of its properties are
subject, on the date of such designation.
(b) The Company will not own any Unrestricted Subsidiaries other than
Wholly Owned Subsidiaries satisfying the requirements in clauses (a), (b) and
(c) of the definition of Restricted Subsidiary.
10.19. ACCOUNTING CHANGES. The Company will not, and will not suffer or
permit any Restricted Subsidiary to, make any significant change in accounting
treatment or reporting practices, except as required by GAAP or consented to by
the Company's independent public accountant. The Company will, and will cause
each Restricted Subsidiary to, cause its fiscal year to end on June 30 in each
year.
10.20. RESTRICTION ON GENERAL PARTNER. The Managing General Partner
shall not (i) exist for any purpose or engage in any business or business
activity except (a) to serve as the Managing General Partner of the Company and
the Operating Partnership, in the circumstances provided in the MLP Agreement
and the Operating Partnership Agreement, and (b) to own other wholly-owned
corporate Subsidiaries; PROVIDED that, each General Partner shall have agreed
(x) that it will not guaranty or, except with respect to Indebtedness assumed by
the Company or the Operating Partnership, otherwise agree to be liable with
respect to any Indebtedness incurred by such Subsidiary and at the time of
formation or acquisition thereof and in connection therewith, the assets of
either General Partner are not and will not be subject to any Liens relating to
any Indebtedness or other obligations of such Subsidiaries and (y) the General
Partners shall confirm with an Approved Rating Agency (as defined below) that
its rating on the Notes in effect at such time will not be downgraded solely as
a result thereof, or (ii) incur any Indebtedness or, other than with respect to
the activities described in clause (i)(a) above, other liabilities (other than
tax liabilities). "APPROVED RATING AGENCY" shall mean any of Fitch IBCA, Inc.,
Standard & Poor's Ratings Group, Moody's Investors Service, Inc. or Duff and
Phelps Credit Rating Co.
10.21. OPERATING PARTNERSHIP. Neither the Company nor either General
Partner shall take any action or permit any action to be taken which would
result in the Operating Partnership not being or remaining a Restricted
Subsidiary.
10.22. COVENANT TO SECURE NOTES EQUALLY. The Company covenants that, if
it shall create or assume any Lien upon any of its property or assets, whether
now owned or hereafter acquired, other than Liens permitted by the provisions of
SECTION 10.3 (unless prior written consent to the creation or assumption thereof
shall have been obtained pursuant to SECTION 18 and except any such Lien arising
by operation of law), it will make or cause to be made effective provision
whereby the Notes will be secured by such Lien equally and ratably with any and
all other
<PAGE>
Indebtedness thereby secured so long as any such other Indebtedness
shall be so secured, it being understood that the provision of such equal and
ratable security shall not constitute a cure or waiver of any related Event of
Default.
10.23. ACQUISITIONS. Except as otherwise permitted by SECTION 10.9, the
Company will not, and will not cause or permit any of the Restricted
Subsidiaries to, purchase, lease or otherwise acquire (in one transaction or a
series of transactions) all or any substantial part of the assets of any other
Person, except that (a) the Company and any of the Restricted Subsidiaries may
purchase inventory in the ordinary course of business and (b) the Company or any
Restricted Subsidiary may engage in any such acquisition if no Event of Default
or Potential Event of Default has occurred and is continuing at the time of any
such acquisition or would occur immediately after giving effect thereto.
10.24. FIXED PRICE SUPPLY CONTRACTS; CERTAIN POLICIES. (a) The Company
will not, and will not permit any of the Restricted Subsidiaries to, at any time
be a party or subject to any contract for the purchase or supply by such parties
of propane or other product except where (i) the purchase price is set with
reference to a spot index or indices substantially contemporaneously with the
delivery of such product or (ii) delivery of such propane or other product is to
be made no more than one year after the purchase price is agreed to.
(b) The Company will not, and will not permit any of the Restricted
Subsidiaries to, amend, modify or waive the trading policy or supply inventory
position policy existing as of the date of the Closing, except that the
Operating Partnership may amend its supply inventory position policy such that
such policy provides that neither it nor any of the other Restricted
Subsidiaries will hold on hand more than 90 days' of commodities inventory. The
Company will provide each holder of a Note with prompt written notice of any
such new commodity hedging agreement or any such change in such policy. Subject
to the foregoing exception, the Company and the Restricted Subsidiaries will
comply in all material respects with such policies at all times.
SECTION 11. EVENTS OF DEFAULT; ACCELERATION.
If any of the following conditions or events ("EVENTS OF DEFAULT")
shall occur and be continuing:
(a) the Company shall default in the payment of any principal of or
Make Whole Amount or Premium Amount, if any, on any Note when the same
becomes due and payable, whether at maturity or at a date fixed for
prepayment or by declaration or otherwise; or
(b) the Company shall default in the payment of any interest on any
Note or any amount due and payable under this Agreement or any Other
Agreement for more than 5 Business Days after the same becomes due and
payable; or
(c) the Company or any Restricted Subsidiary shall default in the
performance of or compliance with any term contained in SECTION 7(f), any
of SECTIONS 10.1 through 10.10 (other than SECTION 10.7, insofar as it
relates to Restricted Subsidiaries other than the Operating Partnership,
and SECTION 10.10(c)), inclusive, or SECTION 10.21; or
(d) the Company, either General Partner or any Restricted Subsidiary
shall default in the performance of or compliance with any other term
contained in this Agreement or any other Operative Agreement and such
default shall not have been remedied within 30 Business Days after the
earlier of the date such default shall first have become actually known to
any Responsible Officer of such Person or the date written notice thereof
shall have been received by the Company from any Note holder; or
(e) any material representation or warranty made in writing by or on
behalf of the Company or any of its Affiliates in this Agreement, any other
Operative Agreement or in any instrument furnished in connection with the
transactions contemplated by this Agreement
<PAGE>
shall prove to have been false or incorrect in any material respect on the
date as of which made or deemed made; or
(f) (i) the Company or any Restricted Subsidiary (as principal or
guarantor or other surety) shall default (after receiving notice, if any,
and/or the expiration of any applicable grace period) in the payment of any
amount of principal of or premium or interest on Indebtedness that is
outstanding in an aggregate amount at least equal to $10,000,000; or (ii)
any event shall occur or condition shall exist in respect of Indebtedness
that is outstanding in an aggregate principal amount of at least
$10,000,000 or under any evidence of any such Indebtedness or of any
mortgage, indenture or other agreement relating to such Indebtedness, the
effect of which is to cause such Indebtedness to become due before its
stated maturity or before its regularly scheduled dates of payment; or
(g) filing by or on the behalf of the Company or the Operating
Partnership of a voluntary petition or an answer seeking reorganization,
arrangement, readjustment of its debts or for any other relief under any
bankruptcy, reorganization, compromise, arrangement, insolvency,
readjustment of debt, dissolution or liquidation or similar act or law,
state or federal, now or hereafter existing ("BANKRUPTCY LAW"), or any
action by the Company or the Operating Partnership, or consent or
acquiescence to, the appointment of a receiver, trustee or other custodian
of the Company or the Operating Partnership, or of all or a substantial
part of its property; or the making by the Company or the Operating
Partnership of any assignment for the benefit of creditors; or the
admission by the Company or the Operating Partnership in writing of its
inability to pay its debts as they become due; or
(h) filing of any involuntary petition against the Company or the
Operating Partnership in bankruptcy or seeking reorganization, arrangement,
readjustment of its debts or for any other relief under any Bankruptcy Law
and an order for relief by a court having jurisdiction in the premises
shall have been issued or entered therein; or any other similar relief
shall be granted under any applicable Federal or state law; or a decree or
order of a court having jurisdiction in the premises for the appointment of
a receiver, liquidator, sequestrator, trustee or other officer having
similar powers over the Company or the Operating Partnership or over all or
a part of its property shall have been entered; or the involuntary
appointment of an interim receiver, trustee or other custodian of the
Company or the Operating Partnership or of all or a substantial part of its
property; or the issuance of a warrant of attachment, execution or similar
process against any substantial part of the property of the Company or the
Operating Partnership; and continuance of any such event for sixty (60)
consecutive days unless dismissed, bonded to the satisfaction of the court
having jurisdiction in the premises or discharged; or
(i) filing by or on the behalf of the Managing General Partner or any
Restricted Subsidiary (other than the Operating Partnership) of a voluntary
petition or an answer seeking reorganization, arrangement, readjustment of
its debts or for any other relief under any Bankruptcy Law, or any action
by the Managing General Partner or any such Restricted Subsidiary for, or
consent or acquiescence to, the appointment of a receiver, trustee or other
custodian of the Managing General Partner or such Restricted Subsidiary or
of all or a substantial part of its property; or the making by the Managing
General Partner or any such Restricted Subsidiary of any assignment for the
benefit of creditors; or the admission by the Managing General Partner or
any such Restricted Subsidiary in writing of its inability to pay its debts
as they become due; or
(j) filing of any involuntary petition against the Managing General
Partner or any Restricted Subsidiary (other than the Operating Partnership)
in bankruptcy or seeking reorganization, arrangement, readjustment of its
debts or for any other relief under any Bankruptcy Law and an order for
relief by a court having jurisdiction in the premises shall have been
issued or entered therein; or any other similar relief shall be granted
under any
<PAGE>
applicable Federal or state law; or a decree or order of a court
having jurisdiction in the premises for the appointment of a receiver,
liquidator, sequestrator, trustee or other officer having similar powers
over the Managing General Partner or any such Restricted Subsidiary or over
all or a part of its property shall have been entered; or the involuntary
appointment of an interim receiver, trustee or other custodian of the
Managing General Partner or any such Restricted Subsidiary or of all or a
substantial part of its property; or the issuance of a warrant of
attachment, execution or similar process against any substantial part of
the property of the Managing General Partner or any such Restricted
Subsidiary; and continuance of any such event for sixty (60) consecutive
days unless dismissed, bonded to the satisfaction of the court having
jurisdiction in the premises or discharged; or
(k) a final judgment or judgments (which is or are non-appealable or
which has or have not been stayed pending appeal or as to which all rights
to appeal have expired or been exhausted) shall be rendered against the
Company or any Restricted Subsidiary for the payment of money in excess of
$10,000,000 in the aggregate (net of any insurance coverage) and any one of
such judgments shall not be discharged or execution thereon stayed pending
appeal within sixty (60) days after the date due, or, in the event of such
a stay, such judgment shall not be discharged within sixty (60) days after
such stay expires or any action shall be legally taken by a judgment
creditor to levy upon the assets or properties of the Company or any
Restricted Subsidiary to enforce any such judgment; or
(l) any order, judgment or decree is entered in any proceedings against
the Company or the Operating Partnership decreeing a split-up or
divestiture of the Company or the Operating Partnership, and such order,
judgment or decree shall not be dismissed or execution thereon stayed
pending appeal or review within sixty (60) days after entry thereof, or in
the event of such a stay, such order, judgment or decree shall not be
dismissed within sixty (60) days after such stay expires;
then, (x) upon the occurrence of any Event of Default described in clause (g) or
(h) of this SECTION 11, the unpaid principal amount of and accrued interest on
the Notes shall automatically become due and payable (without any Make Whole
Amount), or, (y) upon the occurrence and continuance of any other Event of
Default, the Required Holders (including a single holder holding at least the
principal amount of Notes specified in the definition of "REQUIRED HOLDERS"),
may at any time (unless all defaults shall theretofore have been remedied in
accordance with the terms hereof) at its or their option, by written notice or
notices to the Company, declare all the Notes to be due and payable, whereupon
the same shall forthwith mature and become due and payable, together with
interest accrued thereon and, to the extent permitted by applicable law, the
applicable Make Whole Amount, if any, with respect to such Notes, all without
presentment, demand, protest or further notice, which are hereby waived;
PROVIDED that during the existence of an Event of Default described in clause
(a) or (b) (insofar as clause (b) relates to interest on any Note) of this
SECTION 11, any holder of the Notes at the time outstanding may, at its option,
by notice in writing to the Company, declare the Notes then held by such holder
to be due and payable, whereupon the Notes then held by such holder shall
forthwith mature and become due and payable, together with interest accrued
thereon and, to the extent permitted by applicable law, the applicable Make
Whole Amount with respect to such Notes, all without presentment, demand,
protest or further notice, which are hereby waived. The Company acknowledges,
and the parties hereto agree, that each holder of a Note has the right to
maintain its investment in the Notes free from repayment by the Company (except
as herein specifically provided for) and that the provision for payment of a
Make Whole Amount by the Company in the event that the Notes are prepaid or are
accelerated as a result of an Event of Default, is intended to provide
compensation for the deprivation of such right under such circumstances.
At any time after the principal of, and interest accrued on, all the
Notes are declared due and payable, the holders of at least 66-2/3% in principal
amount of the Notes at the time
<PAGE>
outstanding (exclusive of Notes then owned by the Company or any of its
Affiliates), by written notice to the Company, may rescind and annul any such
declaration and its consequences (other than in respect of any Note which has
been individually accelerated pursuant to the proviso contained in the
immediately preceding paragraph) if (x) the Company has paid all overdue
interest on the Notes, the principal of and Make Whole Amount, if any, on any
such Notes which have become due otherwise than by reason of such
declaration, and interest on such overdue principal and the applicable Make
Whole Amount and (to the extent permitted by applicable law) overdue
interest, at a rate per annum equal to the rate of interest stated on the
face of the Notes plus 2.0%, (y) all Events of Default, other than nonpayment
of amounts which have become due solely by reason of such declaration, and
all conditions and events which constitute Events of Default or Potential
Events of Default have been cured or waived, and (z) no judgment or decree
has been entered for the payment of any monies due pursuant to the Notes or
this Agreement; but no such rescission and annulment shall extend to or
affect any subsequent Event of Default or Potential Event of Default or
impair any right consequent thereon.
SECTION 12. REMEDIES ON DEFAULT; RECOURSE, ETC.
In case any one or more Events of Default or Potential Events of
Default shall occur and be continuing, the holder of any Note at the time
outstanding may proceed to protect and enforce the rights of such holder by an
action at law, suit in equity or other appropriate proceeding, whether for the
specific performance of any agreement contained herein or in such Note, or for
an injunction against a violation of any of the terms hereof or thereof, or in
aid of the exercise of any power granted hereby or thereby or by law or
otherwise. In case of a default in the payment or performance of any provision
hereof or of the Notes, the Company will pay to the holder of each Note such
further amount as shall be sufficient to cover the costs and expenses of
collection, including, without limitation, reasonable attorneys' fees, expenses
and disbursements, and any out-of-pocket costs and expenses of any such holder
incurred in connection with analyzing, evaluating, protecting, ascertaining,
defending or enforcing any of its rights as set forth herein. No course of
dealing and no delay on the part of any holder of any Note in exercising any
right, power or remedy shall, to the extent permitted by law, operate as a
waiver thereof or otherwise prejudice such holder's rights, powers or remedies.
No right, power or remedy conferred by this Agreement or by any Note upon any
holder thereof shall be exclusive of any other right, power or remedy referred
to herein or therein or now or hereafter available at law, in equity, by statute
or otherwise.
SECTION 13. DEFINITIONS.
As used herein the following terms have the following respective
meanings:
ACQUISITION FACILITY: that Acquisition Facility under the Bank
Credit Facilities which permits borrowings thereunder in an aggregate amount
at any time no greater than $35,000,000.
ADMINISTRATIVE AGENT: Bank of America National Trust and Savings
Association, in its capacity as administrative agent for the Banks under the
Bank Credit Facilities, and its successors in such capacity.
AFFILIATE: as applied to any Person, any other Person directly or
indirectly controlling or controlled by or under common control with such
Person; PROVIDED that (i) for purposes of this definition, "CONTROL" (including,
with correlative meanings, the terms "CONTROLLED BY" and "UNDER COMMON CONTROL
WITH") as used with respect to any Person shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether as a general partner or through the ownership
of voting securities or by contract or otherwise, (ii) as applied to the
Company, the term "AFFILIATE" shall include each General Partner and the
Operating Partnership, and (iii) neither you nor any other Person which is an
institution shall be deemed to be an Affiliate of the Company solely by reason
of ownership of
<PAGE>
the Notes or the OP Notes or other securities issued in exchange for the
Notes or the OP Notes or solely by reason of having the benefits of any
agreements or covenants contained in this Agreement, the other Operative
Agreements or the OP Note Agreements.
AGREEMENT: the meaning specified in SECTION 1.
APPROVED RATING AGENCY: the meaning specified in SECTION 10.20.
BANK CREDIT FACILITIES: that Credit Agreement, dated as of November
20, 1998, among the Operating Partnership, the Administrative Agent and the
Banks, pursuant to which the Acquisition Facility and the Working Capital
Facility have been made available to the Operating Partnership, and any
extension, renewal, refunding, refinancing or replacement thereof containing
terms no more restrictive than those contained therein on the date hereof and
otherwise permitted to be incurred and remain outstanding under SECTION
10.2(c).
BANKRUPTCY LAW: the meaning specified in SECTION 11(g).
BANKS: the financial institutions listed in the signature pages of the
Bank Credit Facilities, each assignee which becomes a lender under the Bank
Credit Facilities pursuant to the terms thereof and their respective successors.
BUSINESS: the operation by the Operating Partnership and its
Subsidiaries of the wholesale and retail sale, distribution and storage of
propane gas and related petroleum derivative products, the leasing of propane
storage tanks and the related retail sale of supplies, equipment and services,
including heating and HVAC home appliances, and such other businesses in which
the Restricted Subsidiaries were engaged on the date of Closing as may be
described in the Memorandum.
BUSINESS DAY: any day other than a Saturday, a Sunday or a day on which
commercial banks in New York City or San Francisco, California are required or
authorized by law to be closed.
CALLED PRINCIPAL: with respect to any Note, the principal of such Note
that is to be prepaid pursuant to SECTION 9.2 or becomes or is declared to be
immediately due and payable pursuant to SECTION 11, as the context requires.
CAPITAL LEASE: as applied to any Person, any lease of any property
(whether real, personal or mixed) by such Person (as lessee or guarantor or
other surety) which would, in accordance with GAAP, be required to be classified
and accounted for as a capital lease on a balance sheet of such Person.
CERCLA: the Federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended.
CHANGE OF CONTROL: any of the following:
(a) the liquidation or dissolution of the Managing General Partner;
(b) any merger or consolidation of the Managing General Partner with or
into any Person (other than a Permitted Holder) if the Managing General Partner
is not the surviving entity thereof, or any sale, whether direct or indirect, of
all or substantially all of the assets of the Managing General Partner to any
Person or "group" (as used in Section 13(d) and 14(d) of the Securities Exchange
Act of 1934, as amended), other than to a Permitted Holder;
(c) any Person (other than Permitted Holders) or "group" is or becomes,
directly or indirectly, the beneficial owner of more than 50% of the then
outstanding total voting power of all classes of stock (or other securities) of
the Managing General Partner, the holders of which are ordinarily, in the
absence of contingencies, entitled to elect a majority of the directors (or
Persons performing similar functions) of the Managing General Partner; or
(d) during any period of twelve consecutive months after the date of
Closing, individuals who at the beginning of such twelve month period (or
Persons nominated by such members of the board of directors of the Managing
General Partner to succeed them) constitute the board of directors of the
Managing General Partner cease, for any reason, to constitute a majority of the
board of directors of the general partner of the Company then in office or a
<PAGE>
majority of the board of directors of the general partner of the Operating
Partnership then in office.
CLOSING: the meaning specified in SECTION 3.
CODE: the Internal Revenue Code of 1986, as amended from time to time.
COMMODITY HEDGING AGREEMENT(S): any agreement or arrangement designed
solely to protect the Operating Partnership against fluctuations in the price of
propane or natural gas with respect to quantities of propane or natural gas that
the Operating Partnership reasonably expects to purchase from suppliers, sell to
its customers or need for its inventory during the period covered by such
agreement or arrangement.
COMPANY: the meaning specified in the Introduction.
COMPETITOR: any Person engaged primarily in the wholesale and retail
sale, distribution and storage of propane gas and related petroleum derivative
products.
CONFIDENTIAL INFORMATION: the meaning specified in SECTION 25.
CONSOLIDATED CASH FLOW: at any date of determination, for the period of
four consecutive fiscal quarters most recently completed at least 45 days
(except that, in connection with any calculation required pursuant to SECTION
10.2(c), SECTION 10.2(h) and SECTION 10.5 (insofar as it relates to the Coverage
Test), for the period of four consecutive fiscal quarters most recently
completed) prior to such date of determination,
(a) the sum of, without duplication, the amounts for such period, taken
as a single accounting period, (i) Consolidated Net Income and (ii) all
amounts deducted in the determination of such Consolidated Net Income for
such period in respect of (x) interest charges (including amortization of
debt discount and expense and imputed interest on Capital Lease
obligations), (y) provisions for all income taxes and reserves (including
reserves for deferred income taxes), and (z) all other non-cash items, LESS
(b) without duplication, all amounts added in the determination of such
Consolidated Net Income for such period in respect of non-cash items.
Consolidated Cash Flow shall be calculated after giving effect (without
duplication) on a PRO FORMA basis for the four consecutive fiscal quarters most
recently completed prior to such date of determination to any asset sales or
asset acquisitions (including, without limitation, any asset acquisition giving
rise to the need to make such calculation as a result of the Company or any
Restricted Subsidiary (including any Person who becomes a Restricted Subsidiary
as a result of such asset acquisition) incurring, assuming or otherwise being
liable for acquired Indebtedness) occurring during the period commencing on the
first day of such four fiscal quarter period to and including the date of
determination (the "REFERENCE PERIOD"), as if such asset sale or asset
acquisition occurred on the first day of the Reference Period; PROVIDED that
Consolidated Cash Flow generated by an acquired business or asset shall be
determined on the basis of, without duplication, (a) the actual gross profit
(revenues minus cost of goods sold) of the acquired business or asset during the
immediately preceding four full fiscal quarters), minus (b) the PRO FORMA
expenses that would have been incurred by the Company or such Restricted
Subsidiary in the operation of such acquired business or asset during such
period computed on the basis of personnel expenses for employees retained or to
be retained by the Company or such Restricted Subsidiary in the operation of
such acquired business or asset and non-personnel costs and expenses incurred by
the Company or the Managing General Partner in the operation of its business at
similarly situated Company facilities or Restricted Subsidiary facilities. If
the applicable Reference Period for any calculation of Consolidated Cash Flow
shall include a partial period occurring prior to the Closing, then such
Consolidated Cash Flow shall be calculated based upon the Consolidated Cash Flow
on a PRO FORMA basis for such portion of the Reference Period prior to the
Closing (giving effect to the transactions occurring on the date of Closing) and
the Consolidated Cash Flow for the remaining portion of the Reference Period
<PAGE>
occurring on and after the Closing, giving PRO FORMA effect, as described in the
preceding sentences, to all applicable transactions occurring on the date of
Closing or otherwise.
CONSOLIDATED CASH FLOW COVERAGE OF DEBT SERVICE: as of any date of
determination, the ratio of (a) Consolidated Cash Flow to (b) Consolidated Pro
Forma Debt Service.
CONSOLIDATED FUNDED INDEBTEDNESS: all Indebtedness of the Company and
its Restricted Subsidiaries, on a consolidated basis, which by its terms or by
the terms of any instrument or agreement relating thereto matures, or which is
otherwise payable or unpaid, one year or more from, or is directly or indirectly
renewable, extendible or refundable at the option of the obligor in respect
thereof to a date one year or more (including, without limitation, an option of
such obligor under a revolving credit or similar agreement obligating the lender
or lenders to extend credit over a period of one year or more) from, the date of
the creation thereof; provided that Consolidated Funded Indebtedness shall
include, as at any date of determination, the portion of any such Indebtedness
outstanding at such time which by the terms of such Indebtedness or the terms of
any instrument or agreement relating thereto is due on demand or within one year
from such time (whether by sinking fund, other required prepayment or final
payment at maturity) and is not directly or indirectly renewable, extendible or
refundable at the option of the obligor under an agreement or firm commitment in
effect at such time to a date one year or more from such time.
CONSOLIDATED INTEREST EXPENSE: as of any date of determination, the
total amount payable by the Company and the Restricted Subsidiaries on a
consolidated basis, during the period of twelve consecutive months immediately
following such date of determination in respect of all interest charges
(including amortization of debt discount and expense and imputed interest on
payments under Capital Lease obligations) with respect to Indebtedness of the
Company and the Restricted Subsidiaries outstanding on the date of
determination, assuming for such purpose (a) the amount of such Indebtedness is
not reduced or increased during such twelve month period, and (b) that interest
expense for such twelve month period with respect to Indebtedness of a revolving
nature shall equal the actual interest expense for Indebtedness of a revolving
nature during the most recently completed twelve month period.
CONSOLIDATED NET INCOME: with reference to any period, the net income
(or deficit) of the Company and the Restricted Subsidiaries for such period
(taken as a cumulative whole), after deducting all operating expenses,
provisions for all taxes and reserves (including reserves for deferred income
taxes) and all other proper deductions, all determined in accordance with GAAP
on a consolidated basis, after eliminating all intercompany transactions;
PROVIDED that there shall be excluded (a) the income (or deficit) of any Person
accrued prior to the date it becomes a Restricted Subsidiary or is merged into
or consolidated with the Company or a Restricted Subsidiary, (b) the income (or
deficit) of any Person (other than a Restricted Subsidiary) in which the Company
or any Restricted Subsidiary has an ownership interest, except to the extent
that any such income has been actually received by the Company or such
Restricted Subsidiary in the form of dividends or similar distributions, (c) the
undistributed earnings of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such Restricted
Subsidiary is not at the time permitted by the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary, (d) any restoration to
income of any contingency reserve, except to the extent that provision for such
reserve was made out of income accrued during such period, (e) any aggregate net
after-tax gain or net after-tax loss during such period arising from the sale,
exchange or other disposition of capital assets (such term to include all fixed
assets, whether tangible or intangible, all inventory sold in conjunction with
the disposition of fixed assets, and all securities), (f) any write-up of any
asset, (g) any net gain from the collection of the proceeds of life insurance
policies, (h) any gain arising from the acquisition of any securities, or the
extinguishment, under GAAP, of any Indebtedness, of the Company or any
<PAGE>
Restricted Subsidiary, (i) any after tax gain or loss during such period from
any change in accounting, from any discontinued operations or the disposition
thereof, from any extraordinary events or from any prior period adjustments, (j)
any deferred credit representing the excess of equity in any Restricted
Subsidiary at the date of acquisition over the cost of the investment in such
Restricted Subsidiary, and (k) in the case of a successor to the Company by
consolidation or merger or as a transferee of its assets, any earnings of the
successor corporation prior to such consolidation, merger or transfer of assets.
CONSOLIDATED NET WORTH: as to the Company, the amount by which
(i) the total assets of the Company and the Restricted Subsidiaries
appearing on a consolidated balance sheet of the Company and the Restricted
Subsidiaries prepared in accordance with GAAP as of the date of
determination exceeds
(ii) the total liabilities of the Company and the Restricted
Subsidiaries appearing on a consolidated balance sheet of the Company and
the Restricted Subsidiaries prepared in accordance with GAAP as of the date
of determination on a consolidated basis,
in each case after eliminating all intercompany transactions; and as to any
other Person, the amount by which
(i) the total assets of such Person and its Subsidiaries appearing on a
consolidated balance sheet of such Person and its Subsidiaries prepared in
accordance with GAAP as of the date of determination (after eliminating all
amounts properly attributable to minority interests in the stock and
surplus, if any, of its Subsidiaries) exceeds
(ii) the total liabilities of such Person and its Subsidiaries
appearing on a consolidated balance sheet of such Person and its
Subsidiaries prepared in accordance with GAAP as of the date of
determination on a consolidated basis,
in each case after eliminating all intercompany transactions.
CONSOLIDATED PRO FORMA DEBT SERVICE: as of any date of determination,
the total amount payable by the Company and the Restricted Subsidiaries on a
consolidated basis, during the four consecutive calendar quarters next
succeeding the date of determination, in respect of scheduled principal payments
and all cash interest charges with respect to Indebtedness of the Company and
the Restricted Subsidiaries outstanding on such date of determination, after
giving effect to any Indebtedness proposed to be incurred on such date (the
"INCURRENCE DATE") and to any Indebtedness proposed to be repaid from funds of
such newly incurred Indebtedness (x) within 30 days of the Incurrence Date, or
(y) within the twelve months following such Incurrence Date as to which funds
for such payments have been within 30 days of the Incurrence Date irrevocably
placed in escrow with an escrow agent with irrevocable instructions to such
escrow agent to make such repayments (such funds pursuant to clauses (x) and (y)
collectively, the "DEDICATED FUNDS") and (a) including actual payments under
Capital Lease obligations, (b) assuming, in the case of Indebtedness (other than
Indebtedness incurred under the Bank Credit Facilities) bearing interest at
fluctuating interest rates which cannot be determined in advance, that the rate
in effect on such date will remain in effect throughout such period, (c)
assuming in the case of Indebtedness incurred under the Bank Credit Facilities,
that (1) the interest payments payable during such four consecutive calendar
quarters next succeeding the date of determination will equal the actual
interest payments associated with the Bank Credit Facilities during the most
recent four fiscal quarters, (2) except for the twelve-month period immediately
prior to the termination or final maturity thereof (unless extended, renewed or
refinanced), no principal payments will be made under the Working Capital
Facility and (3) principal payments relating to the Acquisition Facility will
(unless already converted to a fixed amortization schedule) become due based on
the assumption that the conversion to the fixed amortization schedule pursuant
to SECTION 3.1(f) of the Bank Credit Facilities is effected on the dates set
forth therein, (d) treating the principal amount of all Indebtedness outstanding
as of such date of determination under a revolving credit or similar agreement
(other than the Bank
<PAGE>
Credit Facilities) as maturing and becoming due and payable on the scheduled
maturity date or dates thereof (including the maturity of any payment
required by any commitment reduction or similar amortization provision),
without regard to any provision permitting such maturity date to be extended
and (e) including any other designated repayments of Indebtedness due within
twelve months from such date of determination.
COVERAGE TEST: the meaning specified in SECTION 10.5.
DEDICATED FUNDS: the meaning specified in the definition of
"CONSOLIDATED PRO FORMA DEBT SERVICE."
DISCOUNTED VALUE: with respect to the Called Principal of any Note, the
amount obtained by discounting all Remaining Scheduled Payments with respect to
such Called Principal from their respective scheduled due dates to the
Settlement Date with respect to such Called Principal, in accordance with
accepted financial practice and at a discount factor (applied on the same
periodic basis as that on which interest on the Notes is payable) equal to the
Reinvestment Yield plus 100 basis points with respect to such Called Principal.
DOLLAR AND SIGN "$": lawful money of the United States of America.
ENVIRONMENTAL LAWS: applicable federal, state, local and foreign laws,
rules or regulations relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants, chemicals or industrial, toxic or
hazardous substances or wastes into the environment (including, without
limitation, air, surface water, ground water or land), or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants, chemicals or industrial,
toxic or hazardous substances or wastes.
ENVIRONMENTAL NOTICE: the meaning specified in SECTION 7(i).
ERISA: the Employee Retirement Income Security Act of 1974, as
amended from time to time.
EVENT OF DEFAULT: the meaning specified in SECTION 11.
EXCESS PROCEEDS: the meaning specified in SECTION 10.9(c).
FILINGS: the meaning specified in SECTION 5.4.
GAAP: generally accepted accounting principles in effect in the
United States from time to time.
GENERAL PARTNER(S): the meaning specified in the Introduction.
GUARANTY: as applied to any Person, any direct or indirect liability,
contingent or otherwise, of such Person with respect to any indebtedness, lease
(other than operating leases under which the Company or a Restricted Subsidiary
is the lessee), dividend or other obligation of another, including, without
limitation, any such obligation directly or indirectly guaranteed, endorsed
(otherwise than for collection or deposit in the ordinary course of business) or
discounted or sold with recourse by such Person, or in respect of which such
Person is otherwise directly or indirectly liable or any other obligation under
any contract which, in economic effect, is substantially equivalent to a
guaranty, including, without limitation, any such obligation of a partnership in
which such Person is a general partner or of a joint venture in which such
Person is a joint venturer, and any such obligation in effect guaranteed by such
Person through any agreement (contingent or otherwise) to purchase, repurchase
or otherwise acquire such obligation or any security therefor, or to provide
funds for the payment or discharge of such obligation (whether in the form of
loans, advances, stock purchases, capital contributions or otherwise), or to
maintain the solvency or any balance sheet or other financial condition of the
obligor of such obligation, or to make payment for any products, materials or
supplies or for any transportation or services regardless of the non-delivery or
nonfurnishing thereof, in any such case if the purpose or intent of such
agreement is to provide assurance that such obligation will be paid or
discharged, or that any agreements relating thereto will be complied with, or
that the holders of such obligation will be protected against loss in respect
thereof; PROVIDED that the term
<PAGE>
"GUARANTY" shall not include any guarantees in connection with the sale of
accounts and notes receivable arising in the ordinary course of business.
HAZARDOUS MATERIALS: any gasoline or petroleum (including crude oil or
any fraction thereof) or petroleum products, polychlorinated biphenyls,
urea-formaldehyde insulation, asbestos or asbestos-containing materials,
pollutants, contaminants, radioactivity, and any other materials or substances
of any kind, whether or not any such substance is defined as hazardous under any
Environmental Law, that is regulated pursuant to any Environmental Law or that
could give rise to liability under any Environmental Law.
HOLDER: the meaning specified in SECTION 14.1.
INCURRENCE DATE: the meaning specified in the definition of
"Consolidated Pro Forma Debt Service."
INDEBTEDNESS: as applied to any Person (without duplication):
(a) any indebtedness for borrowed money which such Person has
directly or indirectly created, incurred or assumed;
(b) any indebtedness, whether or not for borrowed money, with respect
to which such Person has become directly or indirectly liable and which
represents the deferred purchase price (or a portion thereof) or has been
incurred to finance the purchase price (or a portion thereof) of any
property or service or business acquired by such Person, whether by
purchase, consolidation, merger or otherwise;
(c) all obligations evidenced by notes, bonds, debentures or similar
instruments, including obligations so evidenced incurred in connection with
the acquisition of property, assets or businesses;
(d) all indebtedness created or arising under any conditional sale or
other title retention agreement, or incurred as financing, in either case
with respect to property acquired by the Person (even though the rights and
remedies of the seller or lender under such agreement in the event of
default are limited to repossession or sale of such property);
(e) any obligations under Capital Leases to the extent such obligations
would, in accordance with GAAP, appear on a balance sheet of such Person;
(f) any indebtedness, whether or not for borrowed money, secured by (or
for which the holder of such Indebtedness has an existing right, contingent
or otherwise, to be secured by) any Lien in respect of property owned by
such Person, whether or not such Person has assumed or become liable for
the payment of such indebtedness; PROVIDED that the amount of such
Indebtedness if not so assumed shall in no event be deemed to be greater
than the fair market value from time to time (as determined in good faith
by such Person) of the property subject to such Lien;
(g) all capital stock of such Person redeemable at the option of the
holder prior to the final maturity of the Notes or the OP Notes, valued at
the greater of its voluntary or involuntary maximum fixed repurchase price
or any mandatory redemption payment obligations in respect thereof plus, in
either case, accrued dividends thereon;
(h) any preferred stock of any Restricted Subsidiary of such Person
redeemable at the option of the holder prior to the final maturity of the
Notes or the OP Notes, valued at the sum of the liquidation preference
thereof or any mandatory redemption payment obligations in respect thereof
PLUS, in either case, accrued dividends thereon;
(i) all liabilities of such Person in respect of letters of credit or
instruments serving a similar function issued or accepted for its account
by banks and other financial institutions (whether or not representing
obligations for borrowed money);
(j) any indebtedness of the character referred to in clause (a) through
(i) of this definition deemed to be extinguished under GAAP but for which
such Person remains legally liable; and
<PAGE>
(k) any indebtedness of any other Person of the character referred to
in clause (a) through (j) of this definition with respect to which the
Person whose Indebtedness is being determined has become liable by way of a
Guaranty.
Notwithstanding the foregoing, in determining the Indebtedness of the Company
and the Restricted Subsidiaries, there shall be excluded all undrawn letters of
credit (not yet due and payable), all drawn letters of credit for which the
Company reimburses the issuer thereof in accordance with the terms of the
reimbursement agreement with respect thereto, trade accounts payable, accrued
interest and other accrued expenses and customer credit balances arising in the
ordinary course of business on ordinary terms.
INDEMNIFIED PARTY: meaning specified in SECTION 16(b).
INSTITUTIONAL INVESTOR: means (a) any original purchaser of a Note, (b)
any holder of a Note holding $1,000,000 or more of the aggregate principal
amount of the Notes then outstanding, and (c) any bank, trust company, savings
and loan association or other financial institution, any pension plan, any
investment company, any insurance company, any broker or dealer, or any other
similar financial institution or entity, regardless of legal form.
INTEREST RATE AGREEMENT: any interest rate swap agreement, interest
rate cap agreement, interest rate collar agreement or other similar agreement or
arrangement designed solely to protect the Operating Partnership against
fluctuations in interest rates on Indebtedness outstanding under the Bank Credit
Facilities entered into with one or more of the banks party to the Bank Credit
Facilities (or their affiliates).
INVESTMENT: All investments in any Person, computed in accordance with
GAAP, made by direct or indirect stock purchase, capital contribution, loan,
advance, extension of credit, or creation or assumption of any other contingent
liability or Guaranty in respect of any obligation of such Person or otherwise
and any other item which would be classified as an "investment" on a balance
sheet of such Person prepared in accordance with GAAP; PROVIDED, HOWEVER, that
in computing any Investment in any Person (i) all expenditures for such
Investments shall be taken into account at the actual amounts thereof in the
case of expenditures of cash and at the fair value thereof (as determined in
good faith by the board of directors of the Managing General Partner) or
depreciated cost thereof (in accordance with GAAP), whichever is greater, in the
case of expenditures of property, in each case, without regard to unrealized
increases or decreases in value, or write-ups, write-downs or write-offs of such
Investments and without regard to the existence of any undistributed earnings or
accrued interest with respect thereto accrued after the respective dates on
which such Investments were made, less any net return of capital realized during
any period upon the sale, repayment or other liquidation of such Investments
(determined in accordance with GAAP) without regard to any amounts received
during such period as earnings (in the form of dividends not constituting a
return of capital, interest or otherwise) on such Investments or as loans from
any Person in whom such Investments have been made, (ii) there shall not be
included any real property assets or any account or note receivable from such
Person arising from transactions in the ordinary course of business, and (iii) a
Guaranty or other contingent liability of any kind in respect of any
Indebtedness or other obligation of such Person shall be deemed an Investment
equal to the amount of such Indebtedness or obligation.
LIEN: as to any Person, any mortgage, lien (statutory or otherwise),
pledge, reservation, right of entry, encroachment, easement, right of way,
restrictive covenant, license, charge, security interest or other encumbrance in
or on, or any interest or title of any vendor, lessor under any lease not
intended to be an operating lease, lender or other secured party to or of such
Person under any conditional sale or other title retention agreement or Capital
Lease with respect to, any property or asset owned or held by such Person, or
the signing or filing of a financing statement with respect to any of the
foregoing which names such Person as debtor, or the signing of any security
agreement with respect to any of the foregoing authorizing any other party as
the secured party thereunder to file any financing statement or any other
agreement to give or grant
<PAGE>
any of the foregoing. Negative pledge agreements, however, shall not
constitute Liens for purposes of this Agreement or any other Operative
Agreement. For the purposes of this Agreement, a Person shall be deemed to be
the owner of any asset which it has placed in trust for the benefit of the
holders of Indebtedness of such Person and such trust shall be deemed to be a
Lien if such Person remains legally liable therefor, notwithstanding that
such Indebtedness is or may be deemed to be extinguished under GAAP.
MAKE WHOLE AMOUNT: with respect to any Note, an amount equal to the
excess, if any, of the Discounted Value of the Remaining Scheduled Payments of
the Called Principal of such Note over such Called Principal. The Make Whole
Amount shall in no event be less than zero.
MANAGING GENERAL PARTNER: Cornerstone Propane GP, Inc., a California
corporation, so long as it holds a general partner interest in the Company and
shall be the managing general partner as provided in the MLP Agreement, and any
successor to such position as managing general partner, so long as such
successor shall hold such position.
MATERIAL ADVERSE EFFECT: a material adverse effect on (a) the business,
operations, property, condition (financial or otherwise) or prospects (financial
or otherwise) of the Company and the Restricted Subsidiaries, taken a whole
(after giving effect to the transactions contemplated by the Operative
Agreements) or the Business, (b) the ability of the Company, either General
Partner or any Restricted Subsidiary to perform its obligations under this
Agreement or any other Operative Agreement to which it is a party, or (c) the
validity, enforceability or priority of this Agreement or any other Operative
Agreement or of the rights or remedies of the holder of any Notes.
MAXIMUM CONSOLIDATED PRO FORMA DEBT SERVICE: as of any date of
determination, the highest total amount payable by the Operating Partnership and
the other Restricted Subsidiaries on a consolidated basis, during any period of
four consecutive fiscal quarters, commencing with the fiscal quarter in which
such date of determination occurs and ending on the maturity date of the OP
Notes, in respect of scheduled principal payments and all cash interest charges
with respect to all Indebtedness of the Operating Partnership and the other
Restricted Subsidiaries outstanding or to be outstanding as a result of the
transactions occurring on such date of determination, after giving effect to any
Indebtedness to be incurred on the Incurrence Date and to any Indebtedness
proposed to be repaid from Dedicated Funds and (a) including actual payments
under Capital Lease obligations, (b) assuming, in the case of Indebtedness
(other than Indebtedness incurred under the Bank Credit Facilities) bearing
interest at fluctuating interest rates which cannot be determined in advance,
that the rate in effect on such date will remain in effect throughout such
period, (c) assuming in the case of Indebtedness incurred under the Bank Credit
Facilities, that (1) the interest payments payable during such four consecutive
calendar quarters will equal the actual interest payments associated with the
Bank Credit Facilities during the most recent four fiscal quarters, (2) except
for the twelve-month period immediately prior to the termination or final
maturity thereof (unless extended, renewed or refinanced) no principal payments
will be made under the Working Capital Facility and (3) principal payments
relating to the Acquisition Facility will (unless already converted to a fixed
amortization schedule) become due based on the assumption that the conversion to
the fixed amortization schedule pursuant to SECTION 3.1(f) of the Bank Credit
Facilities is effected on the dates set forth therein, (d) treating the
principal amount of all Indebtedness outstanding as of such date of
determination under a revolving credit or similar agreement (other than the Bank
Credit Facilities) as maturing and becoming due and payable on the scheduled
maturity date or dates thereof (including the maturity of any payment required
by any commitment reduction or similar amortization provision), without regard
to any provision permitting such maturity date to be extended and (e) including
any other designated repayments of Indebtedness.
MEMORANDUM: the meaning specified in SECTION 5.4.
<PAGE>
MLP AGREEMENT: the Amended and Restated Agreement of Limited
Partnership of the Company.
MULTIEMPLOYER PLAN: a Plan which is a "multiemployer plan" within
the meaning of Section 4001(a)(3) of ERISA.
NAIC ANNUAL STATEMENT: the meaning specified in SECTION 6.2(e).
1998 NOTE AGREEMENTS: the separate Note Agreements dated as of
December 11, 1998 among the Operating Partnership, the General Partners and the
purchasers listed in SCHEDULE A thereto and any agreement or agreements entered
into in connection with any extension, renewal, refunding, refinancing or
replacement of the 1998 Notes containing terms no more restrictive than those
contained in the 1998 Note Agreements and the 1998 Notes on the date hereof and
otherwise permitted to be incurred and remain outstanding under SECTION 10.2(o).
1998 NOTES: the 7.33% Senior Secured Notes due January 31, 2013, in the
aggregate original principal amount of $85,000,000 issued by the Operating
Partnership pursuant to the 1998 Note Agreements and any extension, renewal,
refunding, refinancing or replacement thereof containing terms no more
restrictive than those contained in the 1998 Notes and the 1998 Note Agreements
on the date hereof and otherwise permitted to be incurred and remain outstanding
under SECTION 10.2(o).
1996 NOTE AGREEMENTS: the separate Note Agreements dated as of December
11, 1996, as amended by First Amendment dated as of September 1, 1998 and Second
Amendment dated as of December 11, 1998, among the Operating Partnership, the
General Partners and the purchasers listed in SCHEDULE A attached thereto and
any agreement or agreements entered into in connection with any extension,
renewal, refunding, refinancing or replacement of the 1996 Notes containing
terms no more restrictive than those contained in the 1996 Note Agreements and
the 1996 Notes on the date hereof and otherwise permitted to be incurred and
remain outstanding under SECTION 10.2(o).
1996 NOTES: the 7.53% Senior Secured Notes due December 30, 2010, in
the aggregate original principal amount of $220,000,000, issued by the Operating
Partnership pursuant to the 1996 Note Agreements and any extension, renewal,
refunding, refinancing or replacement thereof containing terms no more
restrictive than those contained in the 1996 Notes and the 1996 Note Agreements
on the date hereof and otherwise permitted to be incurred and remain outstanding
under SECTION 10.2(o).
NOTES: the meaning specified in SECTION 1.
OFFICERS' CERTIFICATE: as to any corporation, a certificate executed on
its behalf by the Chairman of the board of directors (if an officer) or its
President or one of its Vice Presidents and its Treasurer, or Controller, or one
of its Assistant Treasurers or Assistant Controllers, and, as to any
partnership, a certificate executed on behalf of such partnership by its
managing general partner in a manner which would qualify such certificate as an
Officers' Certificate of such managing general partner hereunder.
OPERATING PARTNERSHIP: the meaning specified in SECTION 1.
OPERATING PARTNERSHIP AGREEMENT: the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership, as in effect on the date of
the Closing, and as the same may from time to time be amended, modified or
supplemented in accordance with the terms thereof and SECTION 10.14.
OPERATIVE AGREEMENTS: this Agreement, the Other Agreements, the
Notes, the MLP Agreement and the Operating Partnership Agreement.
OP NOTE AGREEMENTS: the 1996 Note Agreements and the 1998 Note
Agreements.
OP NOTES: the 1996 Notes and the 1998 Notes.
OTHER AGREEMENTS: the meaning specified in SECTION 2.
OTHER PURCHASERS: the meaning specified in SECTION 2.
<PAGE>
PARITY DEBT: secured Indebtedness of the Restricted Subsidiaries
which qualifies as "PARITY DEBT" under the OP Note Agreements.
PBGC: the Pension Benefit Guaranty Corporation or any governmental
authority succeeding to any of its functions.
PERMITS: the meaning specified in SECTION 5.8(a).
PERMITTED BANKS: the meaning specified in SECTION 10.4(f).
PERMITTED ENCUMBRANCES: the encumbrances and exceptions to title to
properties or assets existing on the date of Closing as permitted by the
applicable provisions hereof with respect to real property owned or leased by
the Operating Partnership.
PERMITTED EXCEPTIONS: the meaning specified in SECTION 5.8(a).
PERMITTED HOLDERS: Northwestern Corporation, a Delaware corporation,
and any Person directly or indirectly controlling or controlled by
Northwestern Corporation; PROVIDED that for purposes of this definition
"control" shall have the same meaning assigned to such term in the definition
of Affiliate.
PERSON: a corporation, a limited liability company, a firm, a joint
venture, an association, a partnership, an organization, a business, a trust or
other entity or enterprise, an individual, a government or political subdivision
thereof or a governmental agency, department or instrumentality.
PLAN: an "employee pension benefit plan" (as defined in Section 3(2) of
ERISA) which is or has been established or maintained, or to which contributions
are or have been made, by either General Partner, the Company or any Related
Person of the Company or either General Partner or to which either General
Partner, the Company or any Related Person of the Company or either General
Partner is or has been obligated to contribute, or an employee benefit plan as
to which either General Partner, the Company or any Related Person of the
Company or either General Partner could be treated as a contributory sponsor
under Section 4069 or Section 4212 of ERISA if such plan were terminated.
POTENTIAL EVENT OF DEFAULT: any condition or event which, with
notice or lapse of time or both, would become an Event of Default.
PREMIUM AMOUNT: the meaning specified in SECTION 9.3(d).
PROPOSED PREPAYMENT DATE: the meaning specified in SECTION 9.3(b).
QPAM EXEMPTION: the meaning specified in SECTION 6.2(c).
QUALIFYING RESTRICTED SUBSIDIARIES: the Restricted Subsidiaries
other than the Operating Partnership and Cornerstone Sale & Service
Corporation.
REFERENCE PERIOD: the meaning specified in the definition of
"CONSOLIDATED CASH FLOW."
RCRA: the Federal Resource Conservation and Recovery Act, as amended.
REINVESTMENT YIELD: with respect to the Called Principal of any Note,
the yield to maturity implied by (i) the yields reported, as of 10:00 a.m. (New
York City time) on the Business Day next preceding the Settlement Date with
respect to such Called Principal, on the display designated as "Page PX1" on the
Bloomberg Financial Markets Service (or such other display as may replace Page
PX1 on the Bloomberg Financial Markets Service) for actively traded U.S.
Treasury securities having a maturity equal to the Remaining Average Life of
such Called Principal as of such Settlement Date, or if such yields shall not be
reported as of such time or the yields reported as of such time shall not be
ascertainable, including by interpolation (ii) the Treasury constant maturity
series yields reported, for the latest day for which such yields shall have been
so reported as of the Business Day next preceding the Settlement Date with
respect to such Called Principal, in Federal Reserve Statistical Release H.15
(519) (or any comparable successor publication) for actively traded U.S.
Treasury securities having a constant maturity equal to the Remaining Average
Life of such Called Principal as of such Settlement Date. Such implied yield
shall be determined, if necessary, by (a) converting U.S. Treasury bill
quotations to bond-equivalent yields in accordance with accepted financial
practice and
<PAGE>
(b) interpolating linearly between (1) the actively traded U.S. Treasury
security with the maturity closest to and equal to or greater than the
Remaining Average Life and (2) the actively traded U.S. Treasury security
with the maturity closest to and equal to or less than the Remaining Average
Life.
RELATED PERSON: with respect to a Person, any trade or business,
whether or not incorporated, which, as of any date of determination, would be
treated as a single employer together with such Person under Section 414 of
the Code.
REMAINING AVERAGE LIFE: with respect to the Called Principal of any
Note, the number of years (calculated to the nearest one-twelfth year) obtained
by dividing (i) such Called Principal into (ii) the sum of the products obtained
by multiplying (a) each Remaining Scheduled Payment of such Called Principal
(but not of interest thereon) by (b) the number of years (calculated to the
nearest one-twelfth year) which will elapse between the Settlement Date with
respect to such Called Principal and the scheduled due date of such Remaining
Scheduled Payment.
REMAINING SCHEDULED PAYMENTS: with respect to the Called Principal of
any Note, all payments of such Called Principal and interest thereon that would
be due on or after the Settlement Date with respect to such Called Principal if
no payment of such Called Principal were made prior to its scheduled due date;
PROVIDED that if such Settlement Date is not a date on which interest payments
are due to be made under the terms of the Notes, then the amount of the next
succeeding scheduled interest payment will be reduced by the amount of interest
accrued to such Settlement Date and required to be paid on such Settlement Date
pursuant to SECTIONS 9.2 or 11.
REQUIRED HOLDERS: the holders of more than 50% in principal amount of
the Notes at the time outstanding (exclusive of Notes then owned by the
Company or any of its Affiliates).
RESPONSIBLE OFFICER: with respect to any Person, the President, any
Vice President, the Chief Financial Officer, the Treasurer and the Secretary of
such Person and any other officer of such Person who is responsible for
compliance with or performance of any obligation under this Agreement or the
other Operative Agreements; with respect to the Company or the Operating
Partnership, any such officer of the Managing General Partner and, in any case,
any employee of the Company or the Operating Partnership, as applicable,
performing any of the above functions.
RESTRICTED AFFILIATE: Northwestern Growth Corporation, a Delaware
corporation, or any of its Subsidiaries as long as any such Person would
otherwise be an Affiliate of the Company.
RESTRICTED PAYMENT: as to any Person, (a) any payment, dividend or
other distribution, direct or indirect, in respect of any partnership interest
(general or limited) in, or on account of any shares of any class of stock of,
such Person, except a distribution payable solely in additional partnership
interests in, or shares of stock of, such Person, and (b) any payment, direct or
indirect, on account of the redemption, retirement, purchase or other
acquisition of any partnership interest in, or any shares of any class of stock
of, such Person now or hereafter outstanding or of any warrants, rights or
options to acquire any such shares, except to the extent that the consideration
therefor consists of shares of stock or partnership interests in of such Person;
PROVIDED that payments by the Company or a Restricted Subsidiary of the Company
to either General Partner or any of its Affiliates for services rendered to or
on behalf of the Company or any Restricted Subsidiary of the Company or expenses
incurred in connection with the operation of the business of the Company or any
Restricted Subsidiary of the Company (including, without limitation,
reimbursement of expenses incurred under any employee benefit plan) including
plans providing for the issuance of limited partnership units or options to
acquire limited partnership units in the Company shall not be deemed to be
Restricted Payments.
RESTRICTED SUBSIDIARY: any Wholly Owned Subsidiary of the Company or
the Operating Partnership (a) organized under the laws of the United States of
America or any state thereof or the District of Columbia, (b) none of the
capital stock or ownership interests of which is owned by Unrestricted
Subsidiaries, (c) substantially all of the operating assets of which are located
in,
<PAGE>
and substantially all of the business of which is conducted within the
United States of America and the business of which consists principally of the
wholesale and retail sale, distribution and storage of propane gas and/or
natural gas and related petroleum derivative products and/or the related retail
sale of supplies and equipment, including home appliances, and for the provision
of related services and (d) designated by the Company as a Restricted
Subsidiary; PROVIDED that (i) to the extent a newly formed or acquired Wholly
Owned Subsidiary satisfying the requirements of the foregoing clauses (a), (b)
and (c) is not declared either a Restricted Subsidiary or an Unrestricted
Subsidiary within 90 days of its formation or acquisition, such Wholly Owned
Subsidiary shall be deemed a Restricted Subsidiary and (ii) a Restricted
Subsidiary may be designated as an Unrestricted Subsidiary in accordance with
the provisions of SECTION 10.18(a).
SETTLEMENT DATE: shall mean, with respect to the Called Principal of
any Note, the date on which such Called Principal is to be prepaid pursuant to
SECTION 9.2 or is declared to be or becomes immediately due and payable pursuant
to SECTION 11, as the context requires.
SOLVENT: the meaning specified in SECTION 5.21.
SPECIAL GENERAL PARTNER: SYN Inc., a Delaware corporation, so long as
it holds a general partner interest in the Company and shall be the special
general partner as provided in the MLP Agreement, and any successor to such
position as special general partner, so long as such successor shall hold such
position.
SUBSIDIARY: of any Person, means any corporation, limited liability
company, business trust, association, partnership, joint venture or other
business entity at least a majority (by number of votes) of the stock of any
class or classes (or equivalent interests) of which is at the time owned by such
Person or by one or more Subsidiaries of such Person or by such Person and one
or more Subsidiaries of such Person, if the holders of the stock of such class
or classes (or equivalent interests) (a) are ordinarily, in the absence of
contingencies, entitled to vote for the election of a majority of the directors
(or Persons performing similar functions) of such business entity, even though
the right so to vote has been suspended by the happening of such a contingency,
or (b) are at the time entitled, as such holders, to vote for the election of
the majority of the directors (or Persons performing similar functions) of such
business entity, whether or not the right so to vote exists by reason of the
happening of a contingency. Unless the context otherwise requires, any reference
to a Subsidiary shall mean a Subsidiary of the Company or the Operating
Partnership, as the case may be.
SUBSIDIARY GUARANTEE AGREEMENT: the meaning specified in the OP
Note Agreements.
UNIFORM COMMERCIAL CODE: the Uniform Commercial Code or similar
statute in effect from time to time in any jurisdiction.
UNRESTRICTED SUBSIDIARY: any Subsidiary other than a Restricted
Subsidiary which is organized under the laws of the United States of America
or any state thereof or the District of Columbia and substantially all of the
operating assets of which are located in, and substantially all of the
business of which is conducted within the United States of America and which
business consists principally of the distribution of propane gas or related
supplies and equipment.
WHOLLY OWNED: as applied to any Subsidiary (other than the Operating
Partnership), a Subsidiary all of the outstanding shares (other than
directors' qualifying shares, if required by law) of every class of stock or
other equity interests of which are at the time owned by the Company or by
one or more Wholly Owned Restricted Subsidiaries or by the Company and one or
more Wholly Owned Restricted Subsidiaries; PROVIDED that the Operating
Partnership shall be deemed to be Wholly Owned only if and for so long as all
equity interests (other than the general partnership interests not to exceed
1.1% of all partnership interests) of the Operating Partnership are owned
directly by the Company and all general partnership interests in the
Operating Partnership are owned by the General Partners.
<PAGE>
WORKING CAPITAL FACILITY: that Working Capital Facility under the Bank
Credit Facilities which shall permit borrowings and the issuance of letters of
credit for the Operating Partnership thereunder in an aggregate amount
outstanding at any time no greater than $75,000,000.
YEAR 2000 COMPLIANT: shall mean that neither performance nor
functionality of any of the Company's or its Subsidiaries' computer hardware or
software is materially affected by dates prior to, on, or after December 31,
1999. In particular: (a) no value for any current date will cause any material
interruption in operation; and (b) date based functionality must behave
consistently for dates prior to, on and after December 31, 1999 in all material
respects.
YEAR 2000 PROBLEM: means the risk that computer applications used by
the Company and its Subsidiaries may be unable to recognize and perform properly
date-sensitive functions involving any date prior to, on or after December 31,
1999.
SECTION 14. REGISTRATION, TRANSFER AND SUBSTITUTION OF NOTES.
14.1. NOTE REGISTER; OWNERSHIP OF NOTES. Any Notes issued in
substantially the form of EXHIBIT A are in "registered form". The Company will
keep at its principal office a register in which the Company will provide for
the registration of Notes in registered form and the registration of transfers
of Notes in registered form. The Company may treat the Person in whose name any
Note is registered on such register as the owner thereof for the purpose of
receiving payment of the principal of and the Make Whole Amount or premium, if
any, and interest on such Note and for all other purposes, whether or not such
Note shall be overdue, and the Company shall not be affected by any notice to
the contrary. All references in this Agreement or in a Note to a "HOLDER" of any
Note shall mean the Person in whose name such Note is at the time registered on
such register.
14.2. TRANSFER AND EXCHANGE OF NOTES. Upon surrender of any Note for
registration of transfer or for exchange to the Company at its principal office,
the Company at its expense will execute and deliver in exchange therefor a new
Note or Notes in denominations of at least $500,000 (except one Note may be
issued in a lesser principal amount if the unpaid principal amount of the
surrendered Note is not evenly divisible by, or is less than, $500,000), as
requested by the holder or transferee, which aggregate the unpaid principal
amount of such surrendered Note. Each such new Note shall be in registered form.
Each such Note shall be dated so that there will be no loss of interest on such
surrendered Note and otherwise of like tenor, and shall be registered in the
name or names of such Person as such holder or transferee may request. Any Note
in lieu of which any such new Note has been executed and delivered shall not be
deemed to be an outstanding Note for any purpose of this Agreement.
14.3. REPLACEMENT OF NOTES. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Note and, in the case of any such loss, theft or destruction of any Note, upon
delivery of an indemnity bond in such reasonable amount as the Company may
determine (or, in the case of any Note held by you or another Institutional
Investor holder or your or its nominee, of an unsecured indemnity agreement from
you or such other holder), or, in the case of any such mutilation, upon the
surrender of such Note for cancellation to the Company at its principal office,
the Company at its expense will execute and deliver, in lieu thereof, a new Note
in the unpaid principal amount of such lost, stolen, destroyed or mutilated
Note, dated so that there will be no loss of interest on such Note and otherwise
of like tenor. Any Note in lieu of which any such new Note has been so executed
and delivered by the Company shall not be deemed to be an outstanding Note for
any purpose of this Agreement.
14.4. NOTES HELD BY COMPANY, ETC. DEEMED NOT OUTSTANDING. For the
purposes of determining whether the holders of the Notes of the requisite
principal amount at the time outstanding have taken any action authorized by
this Agreement or any other Operative Agreement with respect to the giving of
consents or approvals or with respect to the acceleration
<PAGE>
upon an Event of Default, any Notes directly or indirectly owned by the
Company, the Operating Partnership, either General Partner or any of their
respective Affiliates shall be disregarded and deemed not to be outstanding.
SECTION 15. PAYMENTS ON NOTES.
15.1. PLACE OF PAYMENT. Payments of principal, Make Whole Amount,
Premium Amount or premium, if any, and interest becoming due and payable on the
Notes shall be made at the principal office of The Chase Manhattan Bank in the
Borough of Manhattan, the City and State of New York by 12:00 noon, unless the
Company, by written notice to each holder of any Notes, shall designate the
principal office of another bank or trust company in such Borough as such place
of payment, in which case the principal office of such other bank or trust
company shall thereafter be such place of payment.
15.2. HOME OFFICE PAYMENT. So long as you or your nominee shall be the
holder of any Note, and notwithstanding anything contained in SECTION 15.1 or in
such Note to the contrary, the Company will pay all sums becoming due on such
Note for principal, Make Whole Amount and Premium Amount, if any, and interest
no later than 12:00 noon (New York City time) and by the method and at the
address specified for such purpose in SCHEDULE A, or by such other reasonable
method or at such other address as you shall have from time to time specified to
the Company in writing for such purpose, without the presentation or surrender
of such Note or the making of any notation thereon, except that any Note paid or
prepaid in full shall, after such payment or prepayment in full, be surrendered
to the Company at its principal office or at the place of payment maintained by
the Company pursuant to SECTION 15.1 for cancellation. Prior to any sale or
other disposition of any Note held by you or your nominee you will, at your
election, either endorse thereon the amount of principal paid thereon and the
last date to which interest has been paid thereon or surrender such Note to the
Company in exchange for a new Note or Notes pursuant to SECTION 14.2. The
Company will afford the benefits of this SECTION 15.2 to any Institutional
Investor which is the direct or indirect transferee of any Note purchased by you
under this Agreement and which has made the same agreement relating to such Note
as you have made in this SECTION 15.2.
SECTION 16. EXPENSES, INDEMNIFICATION, ETC.
(a) Whether or not the transactions contemplated hereby shall be
consummated, the Company will pay all reasonable expenses in connection with
such transactions and in connection with any amendments or waivers (whether or
not the same become effective) under or in respect of this Agreement, the other
Operative Agreements or the Notes, including, without limitation: (i) the cost
and expenses of preparing and reproducing this Agreement, the other Operative
Agreements and the Notes, of furnishing all opinions by counsel for the Company,
the Restricted Subsidiaries or the General Partners (including any opinions
requested by your special counsel, Fried, Frank, Harris, Shriver & Jacobson, as
to any legal matter arising hereunder) and all certificates on behalf of the
Company, either General Partner or any Restricted Subsidiary, and of the
Company's, either General Partner's or any Restricted Subsidiary's performance
of and compliance with all agreements and conditions contained herein on its
part to be performed or complied with; (ii) the cost of delivering to your
principal office, insured to your satisfaction, the Notes issued in exchange for
the Notes sold to you hereunder and any Notes delivered to you upon any
substitution thereof pursuant to SECTION 14 and of your delivering any Notes,
insured to your satisfaction, upon any such substitution; (iii) the reasonable
fees, expenses and disbursements of your special counsel, Fried, Frank, Harris,
Shriver & Jacobson (or such other counsel as may be selected by the Note
holders) and your local counsel in connection with such transactions and any
such amendments or waivers; (iv) the costs and expenses, including attorneys'
fees, incurred by you or any subsequent holder of a Note in enforcing (or
determining
<PAGE>
whether or how to enforce) any rights under this Agreement, any other
Operative Agreement or the Notes or in responding to any subpoena or other
legal process in connection with this Agreement, any other Operative
Agreement or the Notes or the transactions contemplated hereby or by reason
of you or any subsequent holder of Notes having acquired any Note, including
without limitation costs and expenses incurred in any bankruptcy case; (v)
the cost and expenses of obtaining a Private Placement Number for the Notes;
and (vi) the reasonable out-of-pocket expenses incurred by you in connection
with such transactions and any such amendments or waivers; PROVIDED that the
Company shall be required to pay the cost and expenses of only one firm (and
any local counsel) retained by the Note holders in connection with any
waivers or amendments. The Company also will pay, and will save you and each
holder of any Notes harmless from, all claims in respect of the fees, if any,
of brokers and finders (unless engaged by you) and any and all liabilities
with respect to any taxes (including interest and penalties) (other than
income taxes) which may be payable in respect of the execution and delivery
hereof, the issue of the Notes hereunder and any amendment or waiver under or
in respect hereof or of the Notes. In furtherance of the foregoing, on the
date of the Closing, the Company will pay the reasonable fees and
disbursements of your special counsel which are reflected as unpaid in the
statement of Fried, Frank, Harris, Shriver & Jacobson, your special counsel,
delivered to the Company prior to the date of the Closing; and thereafter the
Company will pay, promptly upon receipt of supplemental statements therefor
from time to time, additional fees, if any, and disbursements of your special
counsel in connection with the transactions hereby contemplated (including
unposted disbursements as of the date of the Closing).
(b) The Company will protect, indemnify and save harmless each present,
future and former holder of any Note and their respective officers, directors,
trustees, employees, agents and representatives (individually, an "INDEMNIFIED
PARTY" and collectively, the "INDEMNIFIED PARTIES") from and against all losses,
liabilities, obligations, claims, damages, penalties, causes of action, costs
and expenses (including, without limitation, attorneys' fees and expenses)
imposed upon or incurred by or asserted against any Indemnified Party by reason
of (i) any failure on the part of the Company, the Operating Partnership, either
General Partner or any of their respective Subsidiaries or Affiliates to perform
or comply with any of the terms of this Agreement or any other Operative
Agreement, (ii) any negligence or tortious act on the part of the Company, the
Operating Partnership, either General Partner, any of their respective
Subsidiaries or Affiliates or any of their respective agents, contractors,
sublessees, licensees or invitees, (iii) any other relationship that has arisen
or may arise between the Company, the Operating Partnership, either General
Partner or any of their respective Subsidiaries or Affiliates and the
Indemnified Parties as a result of the delivery or performance of this
Agreement, any other Operative Agreement or any action contemplated hereby or
thereby or by any other document executed in connection herewith or therewith,
or (iv) the holding of, or any interest in, any sum deposited or paid under this
Agreement, the Notes or any other Operative Agreement; PROVIDED that nothing
contained herein shall be deemed to require the Company to indemnify the
Indemnified Parties for their respective gross negligence or willful misconduct,
or for their breach of their respective obligations under this Agreement or the
other Operative Agreements.
In case any action, claim, suit or proceeding is brought against an
Indemnified Party by reason of any such occurrence, the Company may, and upon
the request of such Indemnified Party will, at the Company's expense resist and
defend such action, suit or proceeding or cause the same to be resisted and
defended by counsel for the insurer of the liability or by counsel designated by
the Company and reasonably satisfactory to the Indemnified Party, as the case
may be; PROVIDED that any Indemnified Party shall be entitled to participate in
any such action, suit or proceeding with counsel of its own choice but at its
own expense; and PROVIDED, FURTHER, that if any Indemnified Party reasonably
determines that a conflict of interest exists with respect to the representation
by such counsel of such Indemnified Party, the Company shall pay the fees
<PAGE>
and expenses of counsel selected by such Indemnified Party. In any event, if
the Company fails to assume the defense within a reasonable time after any
such request, the Indemnified Party may assume such defense or other
indemnification obligation and the fees and expenses of its attorney will be
paid by the Company. The obligations of the Company under this SECTION 16
shall survive any termination or satisfaction of this Agreement. Any amounts
payable to any Indemnified Party under this SECTION 16 which are not paid
within 15 days after written demand therefor by any Indemnified Party shall
bear interest at a rate per annum equal to the rate of interest stated on the
face of the Notes plus 2.0% from the date of such demand. In the event that
the Company shall be required to pay any indemnity under this SECTION 16, the
Company shall pay the Indemnified Party an amount which, after deduction of
all taxes required to be paid by such Indemnified Party in respect of the
receipt or accrual thereof (but not for any taxes payable with respect to
amounts received for the payment of income taxes), shall be equal to the
amount of such indemnity.
(c) In connection with the Closing, the Managing General Partner and
the Company are requesting that you make available for funding an amount equal
to the principal amount specified opposite your name in SCHEDULE A. If, for any
reason, on the date scheduled by the Managing General Partner and the Company as
the date for the Closing, you shall at their request have made such amount
available, and (i) the closing conditions are not satisfied by 11:00 a.m. on
such scheduled date, (ii) the Managing General Partner and the Company do not,
by 11:00 a.m. on such scheduled date reschedule such Closing for a subsequent
date, and (iii) the Closing in fact does not occur on such scheduled date, the
General Partners and the Company will protect, indemnify and hold you harmless
from and against any and all losses resulting from your failure or inability to
invest on the scheduled date for the Closing the purchase price of the Notes to
be purchased by you, for the period ending on the next following Business Day at
a rate of interest equal to or greater than the rate of interest on the Notes.
SECTION 17. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
All representations and warranties contained in this Agreement or the
other Operative Agreements, or made in writing by or on behalf of either General
Partner, the Company, any Restricted Subsidiary or any of their Affiliates in
connection with the transactions contemplated by this Agreement or the other
Operative Agreements, shall survive the execution and delivery of this Agreement
and the other Operative Agreements, any investigation at any time made by you or
on your behalf, the purchase of the Notes by you under this Agreement and any
disposition or payment of the Notes. All statements contained in any certificate
or other instrument delivered by or on behalf of the General Partners, the
Company or any Restricted Subsidiary pursuant to this Agreement and/or the other
Operative Agreements or in connection with any amendment, waiver or modification
of this Agreement or any of the other Operative Agreements shall be deemed
representations and warranties of the Company under this Agreement.
SECTION 18. AMENDMENTS AND WAIVERS.
Any term of this Agreement or of the Notes may be amended and the
observance of any term of this Agreement or of the Notes may be waived (either
generally or in a particular instance and either retroactively or prospectively)
only with the written consent of the Company and the Required Holders; PROVIDED
that, without the prior written consent of the holders of all the Notes at the
time outstanding, no such amendment or waiver shall (a) change the maturity or
the principal amount of, or change the rate of interest or the time of payment
of interest on, or change the amount or the time of payment of any principal or
Make Whole Amount or Premium Amount on any prepayment of, any Note, (b) reduce
the aforesaid percentage of the principal amount of the Notes the holders of
which are required to consent to any such amendment or
<PAGE>
waiver or change the rights of the holders of a Note with respect thereto,
(c) change the percentage of the principal amount of the Notes the holders of
which may declare the Notes to be due and payable as provided in SECTION 11
or change the rights of the holders of a Note with respect thereto, (d)
change the percentage of the principal amount of the Notes the holders of
which may rescind and annul any such declaration as provided in SECTION 11 or
(e) modify the provisions of SECTION 9.7 or this SECTION 18. Any amendment or
waiver effected in accordance with this SECTION 18 shall be binding upon each
holder of any Note at the time outstanding, each future holder of any Note,
either General Partner and the Company.
SECTION 19. NOTICES, ETC.
Except as otherwise provided in this Agreement, notices and other
communications under this Agreement shall be in writing and shall be delivered
by hand, by express courier service or by registered or certified mail, return
receipt requested, postage prepaid, addressed, (a) if to you, at the address set
forth in SCHEDULE A or at such other address as you shall have furnished to the
Company in writing, except as otherwise provided in SECTION 15.2 with respect to
payments on Notes held by you or your nominee, or (b) if to any other holder of
any Note, at such address as such other holder shall have furnished to the
Company in writing, or, until any such other holder so furnishes to the Company
an address, then to and at the address of the last holder of such Note who has
furnished an address to the Company, or (c) if to the Company or either General
Partner, at the address set forth at the beginning of this Agreement to the
attention of Senior Vice President and Chief Financial Officer, or at such other
address, or to the attention of such other officer, as the Company shall have
furnished to you and each such other holder in writing.
SECTION 20. REPRODUCTION OF DOCUMENTS.
This Agreement, each Operative Agreement and all documents relating
thereto, including, without limitation, (a) consents, waivers and notifications
which may hereafter be executed, (b) documents received by you at the Closing
(except the Notes themselves), and (c) financial statements, certificates and
other information previously or hereafter furnished to you, may be reproduced by
you by any photographic, photostatic, microfilm, microcard, miniature
photographic or other similar process and you may destroy any original document
so reproduced. Each General Partner and the Company agrees and stipulates that,
to the extent permitted by applicable law, any such reproduction shall be
admissible in evidence as the original itself in any judicial or administrative
proceeding (whether or not the original is in existence and whether or not such
reproduction was made by you in the regular course of business) and any
enlargement, facsimile or further reproduction of such reproduction shall
likewise be admissible in evidence.
SECTION 21. MISCELLANEOUS.
This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective successors and assigns of the parties hereto,
whether so expressed or not, and, in particular, shall inure to the benefit of
and be enforceable by any holder or holders at the time of the Notes or any part
thereof; PROVIDED that the benefits of SECTIONS 7, 14.3 and 15.2 shall be
limited as therein provided. Except as stated in SECTION 17, this Agreement
embodies the entire agreement and understanding among you, the General Partners
and the Company and supersedes all prior agreements and understandings relating
to the subject matter hereof. The headings in this Agreement are for purposes of
reference only and shall not limit or otherwise affect the meaning hereof. This
Agreement may be executed in any number of counterparts, each of which shall be
an original, but all of which together shall constitute one instrument.
SECTION 22. SUBMISSION TO JURISDICTION.
<PAGE>
For the purpose of assuring that any holder of Notes may enforce its
rights under this Agreement, the Notes and the other Operative Agreements, each
of the General Partners and the Company for itself and its successors and
assigns, hereby, to the fullest extent permitted by applicable law, irrevocably
(a) agrees that any legal or equitable action, suit or proceeding brought
against it arising out of or relating to this Agreement, any other Operative
Agreement and the Notes, or any transaction contemplated hereby or the subject
matter of any of the foregoing or for recognition or enforcement of any judgment
rendered in any such action, suit or proceeding may be instituted in any state
or federal court sitting in the Borough of Manhattan in the State of New York,
(b) waives any objection which it may now or hereafter have to the laying of
venue of any such action, suit or proceeding brought in any such court, and
hereby further irrevocably and unconditionally waives and agrees not to plead or
claim that any such action, suit or proceeding brought in any such court has
been brought in an inconvenient forum, or any right to require the proceeding to
be conducted in any other jurisdiction by reason of its present or future
domicile, (c) irrevocably submits itself to the non-exclusive jurisdiction of
any state or federal court of competent jurisdiction sitting in the Borough of
Manhattan in the State of New York for purposes of any such action, suit or
proceeding, and (d) irrevocably waives any immunity from jurisdiction to which
it might otherwise be entitled in any such action, suit or proceeding which may
be instituted in any state or federal court sitting in the Borough of Manhattan
in the State of New York, and irrevocably waives any immunity from, or objection
to, the maintaining of an action against it to enforce any judgment for money
obtained in any such action, suit or proceeding and any immunity from execution.
SECTION 23. WAIVER OF JURY TRIAL.
EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES THE
RIGHT TO TRIAL BY JURY IN ANY LEGAL OR EQUITABLE ACTION, SUIT OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTES OR ANY OTHER OPERATIVE
AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY OR THEREBY OR THE SUBJECT
MATTER OF ANY OF THE FOREGOING.
SECTION 24. GOVERNING LAW.
THIS AGREEMENT HAS BEEN EXECUTED AND DELIVERED IN THE CITY OF NEW YORK,
STATE OF NEW YORK, UNITED STATES OF AMERICA. THIS AGREEMENT AND (UNLESS
OTHERWISE EXPRESSLY PROVIDED) ALL AMENDMENTS AND SUPPLEMENTS TO, AND ALL
CONSENTS AND WAIVERS PURSUANT TO, THIS AGREEMENT SHALL IN ALL RESPECTS BE
GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE, WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF WHICH
WOULD REQUIRE APPLICATION OF THE LAWS OF A DIFFERENT STATE.
SECTION 25. CONFIDENTIAL INFORMATION.
For the purposes of this SECTION 25, "CONFIDENTIAL INFORMATION" means
information delivered to you by or on behalf of the Company or any Restricted
Subsidiary in connection with the transactions contemplated by or otherwise
pursuant to this Agreement that is proprietary in nature and that was clearly
marked or labeled or otherwise adequately identified when received by you as
being confidential information of the Company or such Restricted Subsidiary;
PROVIDED that such term does not include information that (a) was publicly known
or otherwise known to you prior to the time of such disclosure, (b) subsequently
becomes publicly known through no act or omission by you or any person acting on
your behalf, (c) otherwise becomes
<PAGE>
known to you other than through disclosure by the Company or any Restricted
Subsidiary or (d) constitutes financial statements delivered to you under
SECTION 7 that are otherwise publicly available. You will maintain the
confidentiality of such Confidential Information in accordance with
procedures adopted by you in good faith to protect confidential information
of third parties delivered to you; PROVIDED that you may deliver or disclose
Confidential Information to (i) your directors, trustees, officers,
employees, agents, attorneys and affiliates (to the extent such disclosure
reasonably relates to the administration of the investment represented by
your Notes), (ii) your financial advisors and other professional advisors who
agree to hold confidential the Confidential Information substantially in
accordance with the terms of this SECTION 25, (iii) any other holder of any
Note, (iv) any Institutional Investor to which you sell or offer to sell such
Note or any part thereof or any participation therein (if such Person has
agreed in writing prior to its receipt of such Confidential Information to be
bound by the provisions of this SECTION 25), (v) any Person from which you
offer to purchase any security of the Company (if such Person has agreed in
writing prior to its receipt of such Confidential Information to be bound by
the provisions of this SECTION 25), (vi) any federal or state regulatory
authority having jurisdiction over you, (vii) the National Association of
Insurance Commissioners or any similar organization, or any nationally
recognized rating agency that requires access to information about your
investment portfolio or (viii) any other Person to which such delivery or
disclosure may be necessary or appropriate (w) to effect compliance with any
law, rule, regulation or order applicable to you, (x) in response to any
subpoena or other legal process, (y) in connection with any litigation to
which you are a party or (z) if an Event of Default has occurred and is
continuing, to the extent you may reasonably determine such delivery and
disclosure to be necessary or appropriate in the enforcement or for the
protection of the rights and remedies under your Notes and this Agreement.
Each holder of a Note, by its acceptance of a Note, will be deemed to have
agreed to be bound by and to be entitled to the benefits of this SECTION 25
as though it were a party to this Agreement. On reasonable request by the
Company in connection with the delivery to any holder of a Note of
information required to be delivered to such holder under this Agreement or
requested by such holder (other than a holder that is a party to this
Agreement or its nominee), such holder will enter into an agreement with the
Company embodying the provisions of this SECTION 25.
<PAGE>
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart of this Agreement and return the same to
the undersigned, whereupon this Agreement shall become a binding agreement
between you and the undersigned.
Very truly yours,
CORNERSTONE PROPANE PARTNERS, L.P.
By: CORNERSTONE PROPANE GP, INC.,
as Managing General Partner
By
-------------------------------
Name:
Title:
CORNERSTONE PROPANE GP, INC.
By
------------------------------------
Name:
Title:
SYN INC.
By
------------------------------------
Name:
Title:
<PAGE>
EXHIBIT A
COAST ENERGY GROUP, INC.
STOCK APPRECIATION RIGHTS PLAN
This Stock Appreciation Rights Plan (this "PLAN") dated May 14, 1996,
amends and replaces the Coast Energy Group, Inc. Stock Appreciation Plan
dated January 31, 1996, and is hereby adopted by Coast Energy Group, Inc.
(the "COMPANY").
The Company desires to provide a cash incentive for certain of its key
employees to remain in the service of the Company.
Accordingly, the Company has adopted this Plan, as follows:
1. DEFINITIONS. The following definitions apply to this Plan:
ACCELERATION EVENT - any of the following:
(a) the sale by the Company to the general public of shares of
Common Stock, or limited partnership interests representing an equity
interest in the Company's business, pursuant to a registration statement
filed and declared effective under the Securities Act of 1933, as
amended, in which the Company or the issuer of limited partnership
interests receives net proceeds of at least $5 million (a "PUBLIC
OFFERING").
(b) a Sale, other than a Sale in which a majority of the
Senior Officers of the Company immediately prior to the consummation
thereof receive and accept, immediately after the consummation thereof,
equity interests in the surviving or acquiring Person, whether such
equity interests are represented by stock, partnership interests,
limited liability company interests or other equity interests, or by
options or other rights to acquire any of the foregoing, and whether or
not such interests are subject to vesting or any similar restriction or
limitation. The surviving or acquiring Person in a Sale which does not
constitute an Acceleration Event is herein called a "CONTINUING BUYER."
Following a Sale which does not constitute an Acceleration Event, all
references herein to "Company" shall instead refer to the Continuing
Buyer. "SENIOR OFFICERS" means the chief executive officer, any senior
vice president and the controller.
(c) any termination by the Company of the Holder's Employment,
other than (i) for Cause or (ii) as part of a reduction in force
approved by the Board of Directors or (iii) on account of the Holder's
death or disability.
(d) any termination by the Holder of his or her Employment
within 60 days after any significant reduction made by the Company in
the Holder's responsibilities or authority, other than in connection
with a reduction in force approved by the Board of Directors, without
the Holder's consent.
<PAGE>
APPRECIATION AMOUNT - (x) the excess, if any, of the Trigger Company
Valuation over the Base Company Value, divided by (y) the sum, immediately
prior to the Triggering Event, of the number of shares of Outstanding Common
Stock plus the number of Outstanding SARs plus the number of SAR's granted
under this Plan prior to the Triggering Event in question to which another
Triggering Event was applicable and which were Vested SARs at the time of the
other applicable Triggering Event.
BASE COMPANY VALUE - $6,000,000, which is the product of 5,000,000
shares of Outstanding Common Stock on the date of this Plan times a per-share
value of $1.20.
BOARD OF DIRECTORS - the Board of Directors of the Company or any
properly constituted committee thereof.
CAUSE - the occurrence of any of the following events: (a) substantial
failure to satisfactorily perform the material responsibilities of the
Holder's position; (b) conviction of a felony (other than a misdemeanor or
traffic-related offense) punishable by imprisonment; (c) continuing
intoxication or other physical impairment by means of alcohol, drugs or
otherwise during working hours; (d) theft or misappropriation of property or
funds of the Company; or (e) material acts of dishonesty, gross carelessness
or gross misconduct in the performance of the Holder's duties.
COMMON STOCK - the common stock of the Company.
COMPANY - see the introduction hereto.
DATE OF AWARD - the date stated in the Notice of Award.
EMPLOYMENT - employment on a substantially full-time basis by the
Company or any Subsidiary of the Company.
GAAP - generally accepted accounting principles.
HOLDER - an individual to whom an SAR was awarded pursuant to this Plan.
NOTICE OF AWARD - a notice in the form of Attachment 1 hereto, duly
completed and signed on behalf of the Company.
OUTSTANDING COMMON STOCK - the authorized, issued and outstanding shares
of Common Stock on the date of determination, together with shares of Common
Stock issuable pursuant to warrants, options, convertible securities or other
rights outstanding on the date of determination, but excluding the SARs. The
actual number of shares of Common Stock outstanding on the date of this Plan
is only 1,000; this small number reflects the Company's policy of minimizing
its annual Delaware franchise taxes. For all purposes of this Plan, however,
such 1,000 actual shares will be deemed to be 5,000,000 shares of Outstanding
Common Stock.
2
<PAGE>
OUTSTANDING SARs - all SARs issued under this Plan prior to the date of
determination, less all SARs to which any Triggering Event occurring prior to
the date of determination applied.
PERSON - an individual or a corporation, partnership, limited liability
company, trust or any other entity of any kind.
SALE - (a) the consummation of any merger, combination, consolidation or
similar business transaction involving the Company in which the holders of a
majority of the Outstanding Common Stock immediately prior to consummation of
such transaction (or their affiliates) do not have a majority equity
interest, individually or collectively, directly or indirectly ("CONTROL"),
in the surviving person in such transaction immediately after consummation of
such transaction; (b) the consummation of any sale or transfer of all or
substantially all of the Company's assets to an acquiring person in which the
holders of a majority of the Outstanding Common Stock immediately prior to
such sale or transfer (or their affiliates) do not have Control of the
acquiring person, individually or collectively, immediately after such sale
or transfer; (c) the consummation of any sale (other than in connection with
a Public Offering) of a majority of the Outstanding Common Stock immediately
prior to such sale to an acquiring person in which the holders of a majority
of the Outstanding Common Stock immediately prior to such sale (or their
affiliates) do not have Control of the acquiring person, individually or
collectively, immediately after such sale.
SAR - a unit of contingent cash consideration granted pursuant to this
Plan which entitles the holder thereof to receive, upon certain events in
accordance with the terms of this Plan, the Appreciation Amount as provided
in this Plan.
SUBSIDIARY - a Person which is a subsidiary under GAAP.
TRIGGER COMPANY VALUATION - (a) 3 times the Company's consolidated
earnings before interest, taxes, depreciation and amortization, all as
determined in accordance with GAAP, in the fiscal year most recently
completed before the Trigger Date in question, minus (b) the aggregate
principal amount, determined in accordance with GAAP, of the Company's
consolidated liabilities at the end of such fiscal year for borrowed money,
capitalized leases and the financing of the acquisition of property or
services over an original term of 1 year or more.
TRIGGERING EVENT - the first of the following to occur:
(a) a Public Offering, which will apply to all Outstanding
SARs as of the consummation thereof,
(b) the Holder's Employment ends for any reason, and whether
or not it constitutes an Acceleration Event, which will apply to all
Outstanding SARs then held by the Holder,
(c) the fifth anniversary of the Date of Grant, which will
apply to all Outstanding SARs as of such fifth anniversary, or
3
<PAGE>
(d) if the Board of Directors elects, in its sole discretion,
to treat it as a Triggering Event, the consummation of a Sale of the
Company, which will apply to all Outstanding SARs at the time of such
consummation. In the event the Board of Directors elects to treat the
consummation of a Sale as a Triggering Event, it shall also constitute
an Acceleration Event.
VESTED SARs - the applicable percentage stated below of all SARs
theretofore awarded to a Holder:
<TABLE>
<CAPTION>
APPLICABLE
DATE OF TRIGGERING EVENT PERCENTAGE
<S> <C>
Prior to 1st anniversary of Date of Award 0%
On or after 1st anniversary, but prior to 2d
anniversary, of Date of Award 20%
On or after 2d anniversary, but prior to 3d
anniversary, of Date of Award 40%
On or after 3d anniversary, but prior to 4th
anniversary, of Date of Award 60%
On or after 4th anniversary, but prior to 5th
anniversary, of Date of Award 80%
On or after 5th anniversary of Date of Award 100%
</TABLE>
provided, however, that if an Acceleration Event has occurred before the
Triggering Event, or if the Triggering Event is an Acceleration Event, the
applicable percentage will be 100%.
2. AUTHORIZED SARs; GRANT. Up to 5,000,000 SARs may be awarded, at the
sole discretion of the Board of Directors, under this Plan. The award of SARs
will be evidenced solely by the delivery of a Notice of Award. No Person will
have any rights or claims under or relating to this Plan or any SAR unless
and until a Notice of Award has been delivered.
3. OCCURRENCE OF A TRIGGERING EVENT. Within 30 days after a Triggering
Event, the Company shall give notice thereof to the Holder(s) of SARs to
which the Triggering Event applies (the "TRIGGERING NOTICE"). Within 90 days
after the Triggering Notice, the Company will pay the Holder(s) of SARs to
which the Triggering Event applies, for each Vested SAR to which the
Triggering Event applies, the Appreciation Amount, if any. The payment shall
be made in the form of cash and, at the Company's option, tender of its
promissory note. The portion payable by promissory note shall not, however,
exceed two-thirds of the total amount payable. If a promissory note is
issued, it will be payable in full on the fifth anniversary of its issuance,
will bear interest at the bond equivalent rate borne at the time of the
Triggering Event by U.S. Treasury obligations maturing 5 years after the
Triggering Event, will be prepayable by
4
<PAGE>
the Company's option at any time, in whole or in part, without premium or
penalty and all payments of principal and interest thereunder shall be
deferrable by the Company to the extent such payment would violate or cause a
default under any loan agreement, note purchase agreement, indenture, note,
bond, debenture or other instrument relating to indebtedness. Any deferred
amount shall bear interest at the same rate as specified in this Section 3.
All decisions regarding a Triggering Event, including timing, terms and
conditions and the consideration relating thereto, are at the sole and
absolute discretion of the Board of Directors.
4. TAXES; STATUS OF HOLDERS; UNFUNDED AND UNSECURED.
(a) Any taxes payable in connection with the SARs shall be the
responsibility of the Holders. All payments to the Holders of SARs shall be
subject to the withholding and payment of applicable payroll, withholding and
other taxes.
(b) The Holders shall not have any interest in any fund or specific
assets of the Company by reason of this Plan. Nothing contained herein shall
require the Company to segregate any monies from its general funds, to create
any trusts or to make any special deposits in connection with any of its
obligations hereunder. No Holder will have any rights of a shareholder on
account of any SARs held by him or her.
(c) All amounts payable to Holders under this Plan shall be paid from
the general funds of the Company, and no Holder shall be more than an
unsecured general creditor of the Company with no special or prior right to
any assets of the Company for payment of any obligations hereunder. Nothing
contained in this Agreement shall be deemed to create a trust of any kind for
the benefit of any Holder, or create any fiduciary relationship between the
Company and any Holder.
5. TRANSFERS, ETC. SARs shall not be transferable by the Holders
except by will or by the laws of descent and distribution. During the
lifetime of the Holders, SARs granted hereunder shall be exercisable only by
the Holders.
6. CHANGES IN COMMON STOCK. In the event of any stock dividend, split,
reverse split, recapitalization, exchange of shares or other similar
corporate change, the aggregate number of SARs granted under this Plan to the
Holders, or the terms thereof, shall be adjusted by the Board of Directors to
the extent necessary to preserve the benefits of this Plan to the Holders and
to the Company. The Company reserves the right to issue new SARs and new
shares of Common Stock in its sole discretion, without making any adjustment
of the SARs (except for the instances expressly provided for in the preceding
sentence), even though such additional issuances may have an a dilutive
economic effect on SARs.
7. HEIRS, ETC. This Plan shall be binding on the Holders and his heirs
and personal representatives, and on the Company and its successors and
assigns.
8. COUNTERPARTS. This Plan may be executed in two or more counterparts,
any one of which shall be deemed an original without reference to the others.
5
<PAGE>
9. EMPLOYMENT. This Plan is not, and shall not be construed as, an
employment agreement for the benefit of the Holders. The granting of SARs
hereunder shall not affect the Holder's status as an "at will" employee of
the Company or a Subsidiary thereof.
10. NOTICES. Notices given hereunder shall be in writing and
delivered either in person or by registered mail, return receipt requested, and
shall be deemed given on the third day after being personally delivered or
mailed, as the case may be. Notices shall be given to the parties at the
addresses set forth below their respective signatures.
11. BOARD OF DIRECTORS. The Board of Directors shall have the right to
determine all questions relating to the interpretation and enforcement of
this Agreement, and its determination will be final and binding on all
Holders. This Plan is subject to amendment and termination at any time at the
sole discretion of the Board of Directors, provided that no amendment or
termination of the Plan will materially adversely affect the rights of any
Holder of an Outstanding SAR at the time of such amendment or termination.
12. GOVERNING LAW. This Plan shall be a contract made under, governed
by and construed under, the laws of the state of Delaware, without regard to
its conflict of laws rules.
13. ARBITRATION. Any dispute arising under or relating to this Plan
which is not determined by the Board of Directors shall be determined
exclusively by arbitration before a single arbitrator in Los Angeles,
California. If the parties to the dispute cannot agree on the arbitrator
within 15 days of demand for arbitration, he or she will be selected by the
President of the Los Angeles chapter of the American Arbitration Association.
Each party to the dispute will bear his, her or its own expenses, including
without limitation the fees and expenses of its, his or her own counsel. The
fees and expenses of the arbitrator will be borne equally by all parties to
the dispute.
14. MISCELLANEOUS. The section headings contained in this Plan are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Plan. This Plan embodies the entire agreement and
understanding of the parties hereto in respect of the subject matter
contained herein. Neither the Plan nor any SAR may be modified orally, but
only by a writing subscribed by the party charged therewith. There are no
restrictions, promises, representations, warranties, covenants or
undertakings, other than those expressly set forth or referred to herein.
This Plan supersedes all prior agreements and understandings (whether oral or
written) between the parties with respect to such subject matter. Wherever
possible, each provision of this Plan shall be interpreted in such a manner
as to be effective and valid under applicable law, but if any provision of
this Plan shall be prohibited by or declared invalid under applicable law,
such provision shall be void and of no effect and the remaining provisions of
this Plan shall remain in full force and effect.
6
<PAGE>
ATTACHMENT 1
NOTICE OF AWARD
UNDER
COAST ENERGY GROUP, INC.
STOCK APPRECIATION RIGHTS PLAN
This Notice of Award confirms the award of the number of SARs stated
below to the person, and on the date, stated below, under the Stock
Appreciation Rights Plan (the "PLAN") dated May 14, 1996 (and possibly to be
amended and from time to time hereafter in accordance with its terms), which
amends and replaces the Coast Energy Group, Inc. Stock Appreciation Rights
Plan dated January 31, 1996 of Coast Energy Group, Inc., a Delaware
corporation (the "COMPANY").
This Notice of Award, and the SARs awarded hereby, are subject to all
the terms and conditions of the Plan, as it is in effect from time to time.
Possession of this Notice of Award does not evidence any title to or interest
in SARs. During the lifetime of the Awardee, all SARs can be exercised only
by the Awardee.
By his or her acceptance hereof, the Holder hereby acknowledges the
receipt of the Plan as currently in effect and that the SARs granted
hereunder have no independent value and are governed in full by the Plan.
1. Name of Awardee:
2. Number of SARs Awarded:
3. Date of Award: February 1, 1996
IN WITNESS WHEREOF, the Company has executed this Notice of Award,
effective on the Date of Award stated above.
COAST ENERGY GROUP, INC.
By
---------------------------------
Keith G. Baxter
Chief Executive Officer
Awardee acknowledges receipt and acceptance of the Amended Plan dated May 14,
1996.
---------------------------------
Name
Title
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
NAMES OF SUBSIDIARIES
Cornerstone Sales & Service Corporation, a Delaware Corporation
Cornerstone Propane, L.P., a Delaware limited partnership
Flame, Inc., an Arizona Corporation
Propane Continental, Inc., a Delaware Corporation
Cornerstone Holding Corporation, a Delaware Corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our reports in this Form 10-K into the Partnership's previously
filed Registration Statement File Nos. 333-24717, 333-34581, 333-40815,
333-46343 and 333-60931.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
September 28, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Cornerstone Propane Partners, L.P. (Nos. 333-60931, 333-46343, 333-40815,
333-34581 and 333-24717) of our report dated August 4, 1997, relating to the
Financial Statements of EMPIRE ENERGY CORPORATION and our report dated October
9, 1996, relating to the Financial Statements of SYNERGY GROUP INCORPORATED
appearing in the 1999 Cornerstone Propane Partners, L.P. Form 10-K.
BAIRD, KURTZ & DOBSON
September 28, 1999
Springfield, Missouri
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-1 (No. 333-24717), Form S-3 (Nos. 333-60931 and 333-34581),
Form S-4 (No. 333-46343) and Form S-8 (No. 333-40815) of Cornerstone Propane
Partners, L.P. of our report dated August 8, 1997 relating to the consolidated
financial statements of CGI Holdings, Inc., which appears in this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
San Francisco, California
September 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 9,229
<SECURITIES> 0
<RECEIVABLES> 30,997
<ALLOWANCES> 1,900
<INVENTORY> 42,629
<CURRENT-ASSETS> 91,089
<PP&E> 367,082
<DEPRECIATION> 30,262
<TOTAL-ASSETS> 781,244
<CURRENT-LIABILITIES> 71,063
<BONDS> 350,000
0
0
<COMMON> 0
<OTHER-SE> 315,527
<TOTAL-LIABILITY-AND-EQUITY> 781,244
<SALES> 1,154,608
<TOTAL-REVENUES> 1,154,608
<CGS> 973,367
<TOTAL-COSTS> 973,367
<OTHER-EXPENSES> 150,988
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,033
<INCOME-PRETAX> 5,220
<INCOME-TAX> 47
<INCOME-CONTINUING> 5,173
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,173
<EPS-BASIC> .23
<EPS-DILUTED> 0
</TABLE>
