5
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) July 31, 2003
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INERGY, L.P.
------------
(Exact name of registrant as specified in its charter)
Delaware 0-32453 43-1918951
-------- -------- ----------
(State or other (Commission File (I.R.S. Employer
jurisdiction of Number) Identification
incorporation) Number)
Two Brush Creek Boulevard, Suite 200, Kansas City, MO 64112
-----------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(816) 842-8181
--------------
Registrant's telephone number, including area code
(Former name or former address, if changed since last report.)
1
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Acquisition of Assets
---------------------
On July 31, 2003, Inergy Propane, LLC, a limited liability company that
is wholly owned by Inergy, L.P., acquired substantially all of the propane
assets of United Propane, Inc. ("United Propane"). In exchange for these
assets:
(a) Inergy, L.P. issued 889,906 common units and 254,259 senior
subordinated units to United Propane;
(b) Inergy Propane, LLC paid approximately $2.4 million in cash to
United Propane for inventory, accounts receivable and other current assets;
and
(c) Inergy Propane, LLC assumed approximately $5 million of United
Propane's liabilities.
Inergy Propane, LLC obtained the cash portion of the purchase price by
drawing on its existing credit facility with Wachovia Bank, National Association
and certain other lenders. Inergy Propane, LLC intends to utilize the acquired
United Propane assets in its existing retail propane business.
United Propane
--------------
United Propane was founded in 1943 and was the 24th largest retailer and
distributor of propane in the United States. During the twelve months ended June
30, 2003, United Propane delivered approximately 23 million gallons of propane
and served nearly 30,000 customers from twelve customer service centers in
Maryland, Delaware and West Virginia. United Propane had approximately 135
employees who are now employees of Inergy Propane, LLC.
Transactions Related to the United Propane Acquisition
------------------------------------------------------
Inergy, L.P. agreed that on or before August 30, 2003, it would use its
best efforts to file a shelf registration statement under the federal securities
laws to register the 889,906 common units issued to United Propane, plus 254,259
common units that may be issued as a result of the conversion of the senior
subordinated units issued to United Propane. Inergy, L.P. agreed to use its best
efforts to cause that registration statement to be declared effective by the SEC
within 90 days after filing and thereafter to keep it in effect until the
earlier of (i) the date on which all of the registered common units have been
sold, and (ii) the date on which all of the registered common units may be sold
without registration or restriction. On August 29, 2003, Inergy, L.P. filed a
registration statement on Form S-3 with the SEC to register the common units
referred to above. This registration statement was declared effective by the SEC
on September 12, 2003.
(a) Pursuant to a Unitholder Agreement entered into by Inergy, L.P. and United
Propane, United Propane agreed that for a period of three years it would
vote 508,518 of its common units issued in this acquisition in favor of and
in
2
accordance with any recommendation of the majority of the Board of
Directors of our managing general partner. United Propane further agreed
during this three year period to give Inergy, L.P. a right of first refusal
with respect to 508,518 of its common units.
Robert Pascal, the sole shareholder and chief executive officer of United
Propane, was appointed to the Board of Directors of our managing general partner
in July 2003.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
(i) Report of Independent Auditors.
(ii) Consolidated Balance Sheet as of June 30, 2003.
(iii) Consolidated Statement of Income for the year ended June 30, 2003.
(iv) Consolidated Statement of Stockholder's Equity for the year ended
June 30, 2003.
(v) Consolidated Statement of Cash Flows for the year ended June 30,
2003.
(vi) Notes to Consolidated Financial Statements.
(b) Pro Forma Financial Information.
(i) Introduction to Unaudited Pro Forma Consolidated Financial
Statements.
(ii) Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 2003.
(iii) Unaudited Pro Forma Consolidated Statement of Income for the year
ended September 30, 2002.
(iv) Unaudited Pro Forma Consolidated Statement of Income for the nine
months ended June 30, 2003.
(v) Notes to Unaudited Pro Forma Consolidated Financial Statements.
(c) Exhibits.
2.1. Asset Purchase Agreement, dated June 30, 2003, by and among Inergy,
L.P., Inergy Propane, LLC, United Propane, Inc. and Robert Pascal
(filed as Exhibit 2.1 to the Current Report on Form 8-K of Inergy,
L.P. filed with the SEC on August 15, 2003, and incorporated herein
by reference).
2.2. Registration Rights Agreement, dated July 31, 2003, by and among
Inergy, L.P., United Propane, Inc. and Robert Pascal (filed as
Exhibit 2.2
3
to the Current Report on Form 8-K of Inergy, L.P. filed with the
SEC on August 15, 2003, and incorporated herein by reference).
2.3. Unitholder Agreement, dated July 31, 2003, by and between Inergy,
L.P. and United Propane, Inc. (filed as Exhibit 2.3 to the Current
Report on Form 8-K of Inergy, L.P. filed with the SEC on August 15,
2003, and incorporated herein by reference).
23.1. Consent of Independent Auditors.
4
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
United Propane, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of United Propane,
Inc. and Subsidiary (the Company) as of June 30, 2003, and the related
consolidated statements of income, stockholder's equity, and cash flows for the
year then ended. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United Propane,
Inc. and Subsidiary at June 30, 2003, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
September 5, 2003
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United Propane, Inc. and Subsidiary
Consolidated Balance Sheet
June 30, 2003
Assets
Current assets:
Cash and cash equivalents $ 12,300
Marketable securities (Note 2) 1,356,252
Accounts receivable, less allowance for
doubtful accounts of $92,083 1,139,702
Loans receivable from stockholder (Note 7) 653,160
Current portion of notes receivable from related
parties (Note 7) 187,984
Inventories (Notes 3 and 4) 1,091,200
Prepaid expenses and other current assets 86,364
------------
Total current assets 4,526,962
Property, plant, and equipment (Note 4):
Land 897,061
Buildings and improvements 1,920,086
Plant and equipment 15,149,562
Vehicles 4,849,323
Office furniture and equipment 1,146,398
------------
23,962,430
Less accumulated depreciation 13,122,705
------------
Property, plant, and equipment, net 10,839,725
Goodwill 400,619
Notes receivable from related parties, less current
portion (Note 7) 210,417
Other 494,076
------------
Total assets $16,471,799
============
6
Liabilities and stockholder's equity
Current liabilities:
Accounts payable $ 1,499,845
Accrued expenses 2,196,277
Customer security deposits 129,080
Other current liabilities 58,355
Current portion of long-term debt (Note 4) 902,003
------------
Total current liabilities 4,785,560
Long-term debt, less current portion (Note 4) 1,380,844
Other long-term liabilities (Note 4) 120,020
Stockholder's equity:
Common stock, $1 par value:
Authorized shares - 100,000
Issued and outstanding shares - 1,000 1,000
Additional paid-in capital 107,220
Retained earnings 10,208,580
Accumulated other comprehensive loss (Note 2) (131,425)
------------
Total stockholder's equity 10,185,375
------------
Total liabilities and stockholder's equity $16,471,799
============
See accompanying notes
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United Propane, Inc. and Subsidiary
Consolidated Statement of Income
Year Ended June 30, 2003
Revenue:
Propane (Note 1) $29,412,020
Other 3,479,868
------------
Total 32,891,888
Cost of product sold 17,339,048
------------
Gross profit 15,552,840
Expenses:
Operating and administrative 11,259,644
Depreciation 1,764,833
------------
Operating income 2,528,363
Other income (expense):
Interest expense (178,424)
Finance charge income 63,107
Loss on sale of marketable securities (Note 2) (121,003)
Other 81,052
------------
Net income $ 2,373,095
============
See accompanying notes.
8
United Propane, Inc. and Subsidiary
Consolidated Statement of Stockholder's Equity
Year Ended June 30, 2003
Common Stock Additional Retained Accumulated Total
Other
Paid-In Comprehensive Stockholders'
Capital Earnings Loss Equity
-------------------------------------------------------------------------------
Balances at June 30, 2002 $1,000 $107,220 $ 9,562,150 $(130,815) $ 9,539,555
Net income - - 2,373,095 - 2,373,095
Other comprehensive income:
Unrealized losses on marketable securities,
net of reclassification adjustment for losses
included in net income - - - (610) (610)
---------------
Comprehensive income 2,372,485
Dividends paid - - (1,726,665) - (1,726,665)
-------------------------------------------------------------------------------
Balances at June 30, 2003 $1,000 $107,220 $10,208,580 $(131,425) $10,185,375
===============================================================================
See accompanying notes.
9
United Propane, Inc. and Subsidiary
Consolidated Statement of Cash Flows
Year Ended June 30, 2003
Operating activities
Net income $ 2,373,095
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 1,764,833
Loss on sale of marketable securities 121,003
Provision for doubtful accounts 133,357
Unrealized loss on derivative instrument (23,180)
Increase in cash value of life insurance (29,780)
Changes in operating assets and liabilities:
Accounts receivable (376,713)
Inventories (42,956)
Prepaid expenses and other current assets 138,563
Accounts payable (939,571)
Accrued expenses 1,904,974
Other current liabilities 61,290
------------
Net cash provided by operating activities 5,084,915
Investing activities
Purchase of marketable securities (1,404,216)
Proceeds from sale of marketable securities 1,211,621
Purchases of property, plant, and equipment (2,112,970)
Purchases of other noncurrent assets (235,340)
Collection of notes receivable 9,704
Loans receivable from stockholder (1,513,493)
Collection of loans receivable from stockholder 982,333
------------
Net cash used in investing activities (3,062,361)
Financing activities
Principal payments on long-term debt (774,594)
Dividends paid (1,726,665)
------------
Net cash used in financing activities (2,501,259)
------------
Net decrease in cash and cash equivalents (478,705)
Cash and cash equivalents at beginning of year 491,005
------------
Cash and cash equivalents at end of year $ 12,300
============
Supplemental disclosure of cash flow information
Interest paid $ 155,560
============
Supplemental disclosure of noncash investing
activities
Unrealized loss on marketable securities $ 610
============
See accompanying notes
..
10
United Propane, Inc. and Subsidiary
Notes to Consolidated Financial Statements
June 30, 2003
1. Summary of Significant Accounting Policies
United Propane, Inc. (the Company) is incorporated in the state of Maryland
and is engaged in the sale of propane, appliances, and fittings to
residential, commercial, and industrial customers. The Company extends credit
to its customers, who are primarily located in Maryland.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of United Propane,
Inc. and its wholly owned subsidiary, United Leasing, Inc. All significant
intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in United States requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
REVENUE RECOGNITION
The Company generally records revenue from sales at the time of delivery. In
some instances, customers are billed based upon usage.
CASH AND CASH EQUIVALENTS
The Company classifies all investments which are readily convertible to cash and
which have a maturity of three months or less when purchased as cash
equivalents.
MARKETABLE SECURITIES
Marketable securities, which consist of debt and equity securities, are
accounted for at fair value under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 115. See Note 2.
ACCOUNTS RECEIVABLE
Provision is made for doubtful accounts based on anticipated losses, determined
from historical collection experience and a review of outstanding accounts
receivable.
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United Propane, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost, using the first-in, first-out
(FIFO) method, or market.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is stated at cost. Depreciation is computed under
the straight-line method over the estimated useful lives of the assets, as
follows:
Buildings and improvement 15-40 years
Plant and equipment 7-15 years
Vehicles 5 years
Office furniture and equipment 5-10 years
Expenditures for maintenance and routine repairs are charged to expense as
incurred.
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of Accounting Principles Board (APB) Opinion No. 30,
Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring
Events and Transactions. This statement retains the fundamental provisions of
SFAS No. 121 for recognition and measurement of the impairment of long-lived
assets to be held and used and measurement of long-lived assets to be disposed
of by sale. This statement is effective for financial statements issued for
fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144
on July 1, 2002.
The Company reviews its long-lived assets in accordance with SFAS No. 144 for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If such events or changes in
circumstances are present, a loss is recognized if the carrying value of the
asset is in excess of the sum of the undiscounted cash flows expected to result
from the use of the asset and its eventual disposition. An impairment loss is
measured as the amount by which the carrying amount of the asset exceeds the
fair value of the asset. The Company has determined that no impairment exists as
of June 30, 2003.
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United Propane, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill represents the unamortized excess of cost over the fair value of net
assets acquired. Prior to the Company's adoption of SFAS No. 142, Goodwill and
Other Intangibles, on July 1, 2002, as discussed below, goodwill was amortized
using the straight-line method principally over 15 years.
Under SFAS No. 142, goodwill is no longer subject to amortization over its
estimated useful life. However, goodwill is subject to at least an annual
assessment for impairment by applying a fair-value-based test.
In accordance with the provisions of SFAS No. 142, the Company completed an
impairment analysis and determined no impairment existed as of the date of
adoption or June 30, 2003. The discontinuance of the amortization of goodwill is
not significant to the Company's results of operations.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses interest rate swap agreements to modify certain of its variable
rate obligations to fixed rate obligations, thereby reducing the exposure to
market rate fluctuations. The agreement involves the exchange of amounts based
on fixed interest rates for amounts based on variable interest rates over the
life of the agreement without an exchange of the notional amount upon which
payments are based. SFAS No. 133, as amended, establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The differential paid or received as interest rates change is recognized
currently as an adjustment to interest expense. The Company's derivative
instrument has not been designated as a hedge and, therefore, is not subject to
special hedge accounting under SFAS No. 133. See Notes 4 and 8.
ADVERTISING
Costs associated with advertising are expensed as incurred. For the year ended
June 30, 2003, advertising expenses totaling $253,294 are included in operating
and administrative expenses in the accompanying consolidated statement of
income.
SHIPPING AND HANDLING COSTS
Amounts charged to customers and costs incurred by the Company related to
shipping and handling are included in revenues and costs of product sold,
respectively.
13
United Propane, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company has elected to have its income taxed under the provisions of
Subchapter S of the Internal Revenue Code and, consequently, is not subject to
federal income tax. The Company's shareholder includes the Company's income in
his income tax returns. The Company intends to pay distributions in amounts
necessary to allow the shareholder to pay the income taxes as they become
payable.
COMPREHENSIVE INCOME
Accumulated other comprehensive loss, as defined in SFAS No. 130, consists
solely of the Company's net unrealized loss on marketable securities, as
reflected in the stockholder's equity section of the accompanying consolidated
balance sheet.
FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, including cash,
marketable securities, accounts receivable, notes receivable, accounts payable,
and long-term debt, approximates fair value.
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United Propane, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. MARKETABLE SECURITIES
Marketable securities, which consists of debt and equity securities, are
classified as available-for-sale under the provisions of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Marketable
securities classified as available-for-sale are required to be carried at fair
value, and the net unrealized gain or loss on those securities is required to be
reported as a separate component of stockholder's equity. The following table
presents information pertaining to marketable securities as of June 30, 2003:
Estimated Fair Gross Gross Net
Value (Carrying Unrealized Unrealized Unrealized
Value) Cost Gains Losses Loss
---------------------------------------------------------------------------
Municipal bonds (maturing at $1,300,000 $1,300,021 $ - $ (21) $ (21)
various dates from 2003 through
2029)
Equity securities (consisting of a
publicly-traded partnership) 56,252 187,656 - (131,404) (131,404)
---------------------------------------------------------------------------
$1,356,252 $1,487,677 $ - $(131,425) $(131,425)
===========================================================================
Realized gains and losses, which are included in the determination of net income
based on the specific identification method, were as follows:
Gross realized gains $ 35,774
(156,777)
----------
Net realized loss $(121,003)
==========
Reclassification of net losses out of accumulated other comprehensive income
into net income for the year ended June 30, 2003:
Unrealized holding losses during period $(121,613)
Less: reclassification adjustment
for losses included in net income 121,003
----------
Net unrealized losses on marketable securities $ (610)
==========
3. INVENTORIES
Inventories as of June 30, 2003 consist of the following:
Propane $ 392,066
Merchandise and parts 699,134
----------
$1,091,200
===========
15
United Propane, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT
Long-term debt as of June 30, 2003 consists of the following:
Notes payable to bank $1,611,745
Subordinated note payable to seller 618,857
Loan payable to stockholder, interest at 10.6%,
payable in monthly installments through June
2004 (Note 7) 39,854
Other 12,391
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2,282,847
Less current portion 902,003
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$1,380,844
==========
On May 1, 2000, the Company entered into a term loan agreement with Wachovia
Bank, N.A. in the amount of $1,500,000, the proceeds of which were used by the
Company to finance the acquisition of the assets of William T. Bowen Co., Inc.
(Bowen). This note payable bears interest at the lower of the one-month LIBOR
rate plus 1.3% or the bank's prime rate (2.36% at June 30, 2003) and is payable
in equal monthly principal installments of $17,857 plus interest through May
2007. The Company has granted the bank a security interest in its accounts
receivable, inventories, and equipment. In addition, the note is secured by a
purchase money deed of trust on real property owned by the Company located in
Maryland. The loan agreement imposes certain restrictions on the Company, among
which are the maintenance of certain specified financial ratios. The outstanding
balance under this note payable at June 30, 2003 was $821,429.
The Company also entered into an agreement with Wachovia Bank, N.A. on January
31, 1999 in connection with obtaining three different loan facilities.
Borrowings under the $5,000,000 equipment loan facility bear interest at the
one-month LIBOR rate plus 1.3% (2.48% at June 30, 2003), are payable in monthly
installments, and are due February 15, 2005. The outstanding borrowings under
this equipment loan facility as of June 30, 2003 were $708,939.
The line of credit facility, which was renewed in December 2002, provides for
total borrowings of $3,000,000. This line of credit facility bears interest at
the lower of LIBOR Market Index Rate plus 1.15% or the bank's prime rate and is
payable in monthly payments of accrued interest with all outstanding principal
and accrued interest due on December 31, 2003. As of June 30, 2003, there were
no borrowings outstanding on the line of credit facility. There is also a
standby term loan facility under which the bank will make advances to the
Company in the maximum aggregate principal amount of $700,000, which bears
interest at 7.4% per annum and is payable in monthly installments of principal
and interest. As of June 30, 2003, there were no amounts due under this standby
term loan facility.
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United Propane, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
In connection with these three loan facilities, the Company has granted the bank
a security interest in its accounts receivable, inventories, and equipment. The
loan agreement imposes certain restrictions on the Company, among which are the
maintenance of certain specified financial ratios. The Company was in compliance
with all applicable covenants as of June 30, 2003.
In March 2000, the Company entered into a promissory note payable with Wachovia
Bank, secured by certain personal property of the Company as described in the
related security agreement. The note bears interest at the lower of the bank's
prime rate or LIBOR plus 1.35% (2.53% at June 30, 2003) and is payable in
monthly installments of principal of $6,673 plus interest through March 2005.
This note is unconditionally guaranteed by an affiliated entity owned by the
Company's shareholder and an officer of the Company, to which the proceeds of
the borrowing were advanced. As such, the Company has a note receivable
agreement with the affiliated entity in the same amount and with the same
repayment terms. The outstanding balance of this note payable at June 30, 2003
was $81,377. See Note 7.
On May 1, 2000, the Company executed a note payable to Bowen in the amount of
$1,000,000 in connection with the purchase of its assets. The note payable bears
interest at the rate of 7% per annum and is payable in equal monthly payments
through May 2007. The note payable is secured by a second mortgage deed of trust
on real property owned by the Company located in Calvert County, Maryland. Under
the terms of a subordination agreement between Bowen and Wachovia Bank, N.A.,
Bowen has agreed to subordinate its security interest in the second mortgage in
favor of the bank. The outstanding balance under this note payable at June 30,
2003 was $618,857.
INTEREST RATE SWAP AGREEMENTS
The Company currently has two interest rate swap agreements with Wachovia Bank,
N.A., in which the Company is converting its variable rate debt to fixed rate
debt in an attempt to manage cash flow. Under the first swap agreement related
to the equipment loan facility maturing in February 2005, with a notional amount
of $744,856, the interest payable to Wachovia on the related debt is effectively
adjusted from a variable rate equal to the one-month LIBOR rate plus 1.3% to a
fixed rate of 7.81%. Under the second swap agreement related to $821,429 of the
term debt maturing in May 2007, of which $803,571 of the total debt is hedged by
the swap, the interest payable to Wachovia is effectively adjusted from a
variable rate on the one-month LIBOR rate plus 1.3% to a fixed ratio of 8.49%.
The swap agreements are stated at their fair values in the accompanying
consolidated balance sheet as other long-term liabilities at June 30, 2003. The
fair value is an estimate of the amount the Company would be required to pay on
June 30, 2003, if the Company terminated the swap agreements. Changes in the
fair value
17
United Propane, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
of the swap agreements are reflected in interest expense on the accompanying
consolidated statement of income as required under SFAS No. 133.
In August 2003, in connection with the Company being acquired, all of the
Company's debt outstanding as of June 30, 2003 was repaid and the related
interest rate swap agreements were terminated. See Note 8.
5. PROFIT-SHARING PLAN
The Company has a noncontributory profit-sharing plan covering substantially all
full-time employees. Company contributions are discretionary and determined
annually based upon the profits of the Company, not to exceed the maximum
allowable deduction under applicable provisions of the Internal Revenue Code. No
contributions were made to the plan during 2003.
6. COMMITMENTS
The Company occupies various facilities under noncancelable operating leases,
several of which are with related parties (see Note 7). Total rent expense for
the year ended June 30, 2003 was $563,928. Future minimum rental payments under
noncancelable leases having a remaining term in excess of one year as of June
30, 2003, for each of the next five fiscal years and in the aggregate, are as
follows:
Year ending June 30:
2004 $141,986
2005 86,432
2006 67,599
2007 22,344
2008 9,310
-----------
Total $327,671
===========
7. RELATED-PARTY TRANSACTIONS
LOANS RECEIVABLE FROM STOCKHOLDER
The Company has advanced funds to its sole stockholder. The loans, which are
unsecured and due on demand, accrue interest at approximately 8% per annum. The
outstanding indebtedness as of June 30, 2003 was $653,160, including accrued
interest of $26,235.
18
United Propane, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. RELATED-PARTY TRANSACTIONS (CONTINUED)
NOTE RECEIVABLE
The Company holds three unsecured notes receivable from a corporation which is
wholly owned by the Company's sole stockholder. The first note ($149,379 at June
30, 2003) bears interest at 6.02% and is payable in monthly installments of
principal and interest totaling $5,165 through January 2006. The second note
($93,329 at June 30, 2003) bears interest at 8% and is payable in monthly
installments of principal and interest totaling $2,855 through June 2006. The
third note ($74,316 at June 30, 2003) bears interest at 8% and is payable in
monthly installments of principal and interest totaling $2,548 through January
2006.
The Company also holds a note receivable from the affiliated entity referred to
in Note 4, which accrues interest at a variable rate consistent with the
Company's promissory note payable with Wachovia Bank and has an outstanding
balance of $81,377 at June 30, 2003. The note receivable is due in equal monthly
installments of $6,673 of principal plus interest and matures in March 2005.
The above related-party notes receivable mature in the following fiscal years
ending June 30:
2004 $187,984
2005 121,442
2006 88,975
-----------
$398,401
===========
Interest income on the above related-party notes receivable during the year
ended June 30, 2003 was $24,255.
LOAN PAYABLE TO STOCKHOLDER
As of June 30, 2003, there was a loan payable to the sole stockholder of the
Company in the amount of $39,854. See Note 4.
LEASES
The Company has various leases with related parties wholly or partially owned by
its stockholder. For the year ended June 30, 2003, lease payments to the related
parties totaled approximately $501,000.
19
United Propane, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
7. Related-party Transactions (Continued)
Propane Purchases
The Company purchases a majority of its propane from a corporation wholly owned
by the Company's sole stockholder. Purchases from this corporation totaled
$12,003,787 for the year ended June 30, 2003.
8. Subsequent Event
On July 31, 2003, Inergy Propane, LLC, a limited liability company that is
wholly owned by Inergy, L.P., acquired substantially all of the retail assets of
United Propane, Inc. in exchange for these assets: (a) Inergy, L.P. issued
889,906 common units and 254,259 senior subordinated units to United Propane,
Inc.'s shareholder; (b) Inergy Propane, LLC paid approximately $2.4 million in
cash to the Company for inventory, accounts receivable, and other current
assets; and (c) Inergy Propane, LLC assumed approximately $5 million of the
Company's liabilities, including its long-term debt.
20
Introduction to Unaudited Pro Forma Consolidated Financial Statements
The following Unaudited Pro Forma Consolidated Financial Statements of Inergy,
L.P. ("Inergy") give effect to the July 31, 2003 acquisition of certain assets
and assumption of certain liabilities of United Propane, Inc. ("United") under
the purchase method of accounting. The pro forma adjustments are based upon
available information and assumptions that management believes are reasonable.
The final purchase price allocation and valuation has not been completed, thus
the pro forma adjustments are preliminary and have been made solely for purposes
of developing such pro forma combined financial statements. The Unaudited Pro
Forma Consolidated Financial Statements do not purport to represent what the
financial position or results of operations of Inergy would have been if the
purchase transaction had occurred on the dates indicated below, nor do they
purport to project the results of operations of Inergy for any future period.
The Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 2003 was
prepared by combining the unaudited consolidated balance sheet of Inergy as of
June 30, 2003 and the audited consolidated balance sheet of United as of June
30, 2003 included in this Current Report. The Unaudited Pro Forma Consolidated
Statements of Income for the periods presented were prepared by combining
Inergy's consolidated statement of income for fiscal year ended September 30,
2002, with United's unaudited consolidated statement of income for the fiscal
year ended June 30, 2002, and Inergy's consolidated statement of income for the
nine months ended June 30, 2003, with United's consolidated statement of income
for the nine months ended June 30, 2003, to give effect to the acquisition for a
twelve-month and nine-month periods, respectively. The Unaudited Pro Forma
Consolidated Statements of Income do not give effect to any savings or other
operating efficiencies that are expected to result from the integration of the
operations of United with Inergy other than the elimination of salary and
benefits of the former owner of United whose employment ceased following the
acquisition.
The historical consolidated statement of income of Inergy for the fiscal year
ended September 30, 2002, is derived from audited consolidated financial
statements included in the Form 10-K filed by Inergy on December 26, 2002, with
the SEC. The historical consolidated statement of income of Inergy for the nine
months ended June 30, 2003, is derived from the unaudited consolidated financial
statements included in the Form 10-Q filed by Inergy on August 13, 2003, with
the SEC. The historical consolidated statements of income of United for the
fiscal year ended June 30, 2002 and the nine months ended June 30, 2003 are
derived from United's accounting records.
You should read the Unaudited Pro Forma Consolidated Statements of Income along
with Inergy's consolidated financial statements and accompanying notes included
in its prior Securities and Exchange Commission filings and with United's
consolidated financial statements for the year ended June 30, 2003 and
accompanying notes included in this Current Report.
In preparing the Unaudited Pro Forma Consolidated Financial Statements of
Inergy, L.P., we have made adjustments to the historical financial statements
related to the acquisition in the purchase business combination of certain
assets of United Propane, Inc. in July 2003, including the financing in
connection with this acquisition. The pre-acquisition historical results of
operations for United are presented separately from acquisition adjustments. The
consideration paid and preliminary purchase price allocation of the acquisition
are as follows:
21
-----------
(in millions)
Cash............................................................... $ 2.5
Assumed liabilities................................................ 5.0
Common and senior subordinated units............................... 45.0
-----
$52.5
=====
Property, plant and equipment...................................... $19.1
Intangible assets (including customer accounts and
goodwill)......................................................... 31.1
Net current ssets................................................. 2.3
-----
$52.5
=====
22
Inergy, L.P. and Subsidiary
Unaudited Pro Forma Consolidated Balance Sheet
June 30, 2003
(Dollars in thousands)
Inergy, United Pro Forma Pro Forma
L.P. Propane Inc. Adjustments
------------------------------------- ------------
Assets
Current assets:
Cash $ 2,066 $ 12 $ (12) (a) $ 2,066
Marketable securities 1,356 (1,356) (b) -
Accounts receivable 20,179 1,232 21,411
Less allowance for doubtful accounts (1,222) (92) (1,314)
------------------------------------- ------------
Net accounts receivable -
18,957 1,140 20,097
Notes and loans receivable 841 (841) (c) -
Inventories 19,096 1,091 20,187
Prepaid expenses and other current assets 2,308 86 2,394
Assets from price risk management activities 6,265 6,265
------------------------------------- ------------
Total current assets (2,209)
48,692 4,526 51,009
Property, plant and equipment, at cost 155,407 23,963 (4,796) (d) 174,574
Less accumulated depreciation (20,027) (13,123) 13,123 (e) (20,027)
------------------------------------- ------------
------------
Property, plant and equipment, net 8,327
135,380 10,840 154,547
Intangible assets 109,221 401 30,710 (f) 140,332
Less accumulated amortization (12,967) - (12,967)
------------------------------------- ------------
------------
Intangible assets, net 96,254 401 30,710 127,365
Notes receivable from related parties, less
current portion 210 (210) (c) -
Other 2,393 494 (494) (g) 2,393
------------------------------------- ------------
Total assets $282,719 $16,471 $36,124 $335,314
===================================== ============
Liabilities and partners' capital/ shareholder's equity Current liabilities:
Accounts payable $ 12,144 $1,500 $ $13,644
Accrued expenses 7,941 2,196 (1,248) (h) 8,889
Customer deposits 3,386 129 3,515
Liabilities from price risk management
activities 6,442 - 6,442
Current portion of long-term debt 3,637 902 4,539
Other current liabilities 58 58
------------------------------------- ------------
Total current liabilities 33,550 4,785 (1,248) 37,087
Long-term debt, less current portion 103,081 1,381 2,557 (a) 107,019
Other long-term liabilities 120 120
Partners' capital and shareholder's equity:
Shareholder's equity 10,185 (10,185) (i) -
Partners' capital:
Common unitholders (4,632,505 units issued and
outstanding, actual, and 5,522,411 units, pro
forma) 100,935 - 35,000 (j) 135,935
Senior subordinated unitholders (3,313,367
units issued and outstanding, actual, and
3,567,626 units, pro forma) 41,860 - 10,000 (j) 51,860
Junior subordinated unitholders (572,542 units
issued and outstanding, actual and pro forma) 705 - - 705
Non-managing general partner (2% interest with
dilutive effect equivalent to 173,845 units
issued and outstanding) 2,588 - - 2,588
------------------------------------- ------------
Total partners' capital 146,088 10,185 34,815 191,088
------------------------------------- ------------
Total liabilities and partners' $282,719 $16,471 $36,124 $335,314
capital/shareholder's equity
===================================== ============
See accompanying notes.
23
Inergy, L.P. and Subsidiary
Unaudited Pro Forma Consolidated Statement of Income
For the year ended September 30, 2002
(in thousands except per unit data)
United
Propane, Pro Forma
Inergy, L.P. Inc. Adjustments Pro Forma
--------------------------------------- ------------
Revenue:
Propane $ 192,122 $ 20,420 $ - $ 212,542
Other 16,578 3,338 - 19,916
--------------------------------------- ------------
208,700 23,758 - 232,458
Cost of product sold 134,242 11,233 - 145,475
--------------------------------------- ------------
Gross profit 74,458 12,525 - 86,983
Expenses:
Operating and administrative 46,057 8,463 (316)(k) 54,204
Depreciation and amortization 11,444 1,760 570 (f) 13,774
--------------------------------------- ------------
Operating income 16,957 2,302 (254) 19,005
Other income (expense):
Interest expense (8,950) (356) 31 (l) (9,275)
Gain on sale of property, plant and equipment 140 - - 140
Finance charges 115 55 - 170
Loss on sale of marketable securities - (1) 1 (m) -
Other 140 112 - 252
--------------------------------------- ------------
Income before income taxes 8,402 2,112 (222) 10,292
Provision for income taxes 93 - 93
--------------------------------------- ------------
Net income $ 8,309 $ 2,112 $ (222) $ 10,199
======================================= ============
Partners' interest information for the year ended
September 30, 2002:
Non-managing general partners' interest in
net income $ 166 $ 204
============== ============
Limited partners' interest in net income:
Common unit interest $ 3,391 $ 4,692
Senior subordinated interest 4,052 4,570
Junior subordinated unit interest 700 733
-------------- ------------
Total limited partners' interest in net income $ 8,143 $ 9,995
============== ============
Net income per limited partner unit - basic $ 1.22 $ 1.28
============== ============
Net income per limited partner unit - diluted $ 1.20 $ 1.26
============== ============
Weighted average limited partners' units outstanding:
Basic 6,658 1,144(j) 7,802
Diluted 6,760 1,144(j) 7,904
See accompanying notes.
24
Inergy, L.P. and Subsidiary
Unaudited Pro Forma Consolidated Statement of Income
For the Nine Months Ended June 30, 2003
(in thousands except per unit data)
United
Propane, Pro Forma
Inergy, L.P. Inc. Adjustments Pro Forma
--------------------------------------- ------------
Revenue:
Propane $ 292,823 $ 26,489 $ - $ 319,312
Other 14,998 2,693 - 17,691
------------------------------------- ------------
307,821 29,182 - 337,003
Cost of product sold 227,360 15,807 - 243,167
------------------------------------- ------------
Gross profit 80,461 13,375 - 93,836
Expenses:
Operating and administrative 44,159 9,291 (237)(k) 53,213
Depreciation and amortization 10,097 1,241 506(f) 11,844
------------------------------------- ------------
Operating income 26,205 2,843 (269) 28,779
Other income (expense):
Interest expense (7,399) (119) (87)(l) (7,605)
Loss on sale of property, plant and equipment (86) - - (86)
Finance charges 236 44 - 280
Loss on sale of marketable securities - (121) 121(m) -
Other 99 80 - 179
------------------------------------- ------------
Income before income taxes 19,055 2,727 (235) 21,547
Provision for income taxes 102 - - 102
------------------------------------- ------------
Net income $ 18,953 $ 2,727 $ (235) $ 21,445
===================================== ============
Partners' interest information for the nine-month period ended June 30, 2003:
Non-managing general partners' interest in net
income $ 379 $ 429
============ ============
Limited partners' interest in net income:
Common unit interest $ 9,576 $ 11,523
Senior subordinated interest 7,672 8,180
Junior subordinated unit interest 1,326 1,313
------------ ------------
Total limited partners' interest in net income $ 18,574 $ 21,016
============ ============
Net income per limited partner unit:
Basic $ 2.32 $ 2.29
============ ============
Diluted $ 2.28 $ 2.26
============ ============
Weighted average limited partners' units outstanding:
Basic 8,022 1,144(j) 9,166
============ ============
Diluted 8,138 1,144(j) 9,282
============ ============
See accompanying notes.
25
Inergy, L.P.
Notes to Unaudited Pro Forma Consolidated Financial Statements
Nine Months Ended June 30, 2003 and
Year ended September 30, 2002
(a) Reflects the gross proceeds of long-term borrowings of $2.5 million to
finance the acquisition, payment to the former owner of $2.5 million, and
the elimination of United cash of $12,000 not acquired in the acquisition.
(b) Reflects marketable securities not acquired in the acquisition.
(c) Reflects notes and loans receivable not acquired in the acquisition.
(d) Reflects elimination of $2.8 million of land and buildings, at cost, not
acquired in the acquisition, $12.4 million of accumulated depreciation
discussed in Note (e) and an increase of $10.4 million of United's
acquired property, plant and equipment to estimated fair value.
(e) Reflects accumulated depreciation of $0.7 million on buildings and
improvements not acquired in the acquisition and the elimination of
remaining accumulated depreciation against property, plant and equipment,
at cost.
(f) Reflects pro forma adjustment to amortizable intangible assets and pro
forma depreciation and amortization based on the portion of the purchase
price of United preliminarily allocated to property, plant and equipment
and intangible assets, as follows:
Depreciation and
Amortization
---------------------------
------------- -------------
Year Ended Nine Months
Composite September Ended June
Amount Life (a) 30, 30, 2003
2002
------------- ------------- ------------- -------------
(in thousands) (in years) (in thousands)
Property, plant and equipment (excluding land) $19,167 22.39 $856 $642
Amortizable intangible assets 22,115 15.00 1,474 1,105
------------- -------------
2,330 1,747
Historical depreciation and amortization
expense of United Propane, Inc. 1,760 1,241
------------- -------------
Pro forma adjustment to depreciation and
amortization expense $570 $506
============= =============
-------------
(a)The composite life is calculated by taking the weighted average lives of the
assets. Propane tanks, which were allocated $16.8 million of the $19.1
million allocated to property, plant and equipment, are depreciated over 30
years; and office furniture and equipment, vehicles and other plant equipment
are depreciated over five to eight years. Goodwill recorded in the amount of
$9.0 million in connection with this acquisition is not amortized in
accordance with SFAS No. 142.
(g) Reflects other assets not acquired in the acquisition.
(h) Reflects accrued expenses not assumed in the acquisition.
(i) Reflects the elimination of United's shareholder's equity of $10.2
million.
26
(j) Reflects the issuance of 889,906 Inergy, L.P. common units and 254,259
Inergy, L.P. senior subordinated units to United Propane, Inc. at an
average price of $39.33 per unit for a total of $45.0 million.
(k) Reflects reduction in operating costs of $0.3 million for the year ended
September 30, 2002 and $0.2 million for the nine months ended June 30,
2003 from the United acquisition consisting of eliminated salary and
benefits expenses of the former owner of the acquired business whose
employment ceased following the acquisition. No employees were hired and
no incremental costs were incurred to replace this individual or his
respective duties.
(l) Reflects the adjustment to interest expense resulting from borrowings
required to fund the cash portion of the purchase price and the financing
of payments made immediately after closing to retire United's long-term
debt and certain accrued expenses.
Year Ended Nine Months
September 30, Ended June 30,
2002 2003
------------------ -----------------
(in thousands)
Historical interest expense for United Propane, Inc. $(356) $(119)
Pro forma interest expense resulting from acquisition
borrowings based on LIBOR plus the applicable spreads
(3.87% to 4.75% for the year ended September 30, 2002
and 3.03% to 4.25% for the nine months ended June 30, 325 206
2003).
------------------ -----------------
Pro forma adjustment to interest expense $ (31) $ 87
================== =================
(m) Reflects elimination of loss on sale of marketable securities not
acquired in the acquisition.
27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INERGY, L.P.
By: INERGY GP, LLC, its Managing General
Partner
Dated: October 14, 2003 By: /s/ R. Brooks Sherman
-------------------------------
R. Brooks Sherman
Senior Vice President and Chief Financial
Officer
28
Exhibit Index
Exhibit Number Description
2.1. Asset Purchase Agreement, dated June 30, 2003, by and
among Inergy, L.P., Inergy Propane, LLC, United Propane,
Inc. and Robert Pascal (filed as Exhibit 2.1 to the
Current Report on Form 8-K of Inergy, L.P. filed with the
SEC on August 15, 2003, and incorporated herein by
reference).
2.2. Registration Rights Agreement, dated July 31, 2003, by
and among Inergy, L.P., United Propane, Inc. and Robert
Pascal (filed as Exhibit 2.2 to the Current Report on
Form 8-K of Inergy, L.P. filed with the SEC on August 15,
2003, and incorporated herein by reference).
2.3. Unitholder Agreement, dated July 31, 2003, by and between
Inergy, L.P. and United Propane, Inc. (filed as Exhibit
2.3 to the Current Report on Form 8-K of Inergy, L.P.
filed with the SEC on August 15, 2003, and incorporated
herein by reference).
23.1 Consent of Independent Auditors.