<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-12499
CORNERSTONE PROPANE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 77-0439862
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
432 Westridge Drive, California 95076
- ------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 724-1921
NONE
----
(Former name, former address and former fiscal year, if changed
since last report.)
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 No X
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 31, 1996:
Cornerstone Propane Partners, L.P. 9,821,000 Common Units
6,597,619 Subordinated Units
<PAGE> 2
CORNERSTONE PROPANE PARTNERS, L.P.
TABLE OF CONTENTS
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PAGES
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Part I. Financial Information
<S> <C> <C>
Item 1. Financial Statements
Cornerstone Propane Partners, L.P.
Consolidated Balance Sheet as of December 31, 1996 1
Consolidated Statement of Operations from Commencement
of Operations (on December 17, 1996) to December 31, 1996 2
Consolidated Statement of Cash Flows from Commencement
of Operations (on December 17, 1996) to December 31, 1996 3 - 4
Consolidated Statement of Partners' Capital from Commencement
of Operations (on December 17, 1996) to December 31, 1996 5
Notes to Consolidated Financial Statements 6 - 15
Cornerstone Propane Partners, L.P. (Pro Forma)
Consolidated Statements of Operations for the periods 16
July 1, 1996 to December 31, 1996,
July 1, 1995 to December 31, 1995,
October 1, 1996 to December 31, 1996 and
October 1, 1995 to December 31, 1995
Notes to Pro Forma Consolidated Financial Information 17 - 18
SYN Inc. (Predecessor)
Consolidated Balance Sheet as of June 30, 1996 19 - 20
Consolidated Statements of Operations for the
periods July 1, 1996 to December 16, 1996, August 15, 1995
to December 31, 1995, July 1, 1995 to August 14, 1995,
October 1, 1996 to December 16, 1996 and October 1, 1995
to December 31, 1995 21
</TABLE>
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CORNERSTONE PROPANE PARTNERS, L.P.
TABLE OF CONTENTS (Continued)
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PAGES
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Part I. Financial Information (Continued)
SYN Inc. (Predecessor) (Continued)
Consolidated Statements of Cash Flows for the 22 - 23
the periods July 1, 1996 to December 16, 1996,
August 15, 1995 to December 31, 1995, and
July 1, 1995 to August 14, 1995
Notes to Consolidated Financial Statements 24 - 25
Empire Energy Corporation (Predecessor)
Consolidated Balance Sheet as of June 30, 1996 26 - 27
Consolidated Statements of Operations for the 28
periods July 1, 1996 to December 16, 1996, July 1, 1995
to December 31, 1995, October 1, 1996 to December 16, 1996,
and October 1, 1995 to December 31, 1995
Consolidated Statements of Cash Flows for the 29 - 30
periods July 1, 1996 to December 16, 1996 and July 1, 1995
to December 31, 1995
Notes to Consolidated Financial Statements 31 - 34
CGI Holdings, Inc. (Predecessor)
Consolidated Balance Sheet as of July 31, 1996 35 - 36
Consolidated Statements of Operations for the 37
periods August 1, 1996 to December 16, 1996, August 1,
1995 to December 31, 1995, November 1, 1996 to December
16, 1996 and November 1, 1995 to December 31, 1995
Consolidated Statements of Cash Flows for the 38 - 39
periods August 1, 1996 to December 16, 1996 and
August 1, 1995 to December 31, 1995
</TABLE>
ii
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CORNERSTONE PROPANE PARTNERS, L.P.
TABLE OF CONTENTS (Continued)
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Notes to Consolidated Financial Statements 40 - 41
Item 2. Management's Discussion and Analysis of Financial Condition 42 - 67
and Results of Operations of Cornerstone Propane Partners, L.P.,
SYN Inc., Empire Energy Corporation, and CGI Holdings, Inc.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 68
Signature 69
</TABLE>
<PAGE> 5
CORNERSTONE PROPANE PARTNERS, L.P.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
December 31,
1996
--------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 24,050
Trade receivables 76,204
Inventories 31,328
Prepayments and other current assets 2,942
--------
Total current assets 134,524
--------
Property, plant and equipment, net of accumulated depreciation of $350 243,004
Excess of cost over fair value, net 193,802
Other assets, net 5,810
Deferred costs 5,446
--------
Total assets $582,586
========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current portion of long-term debt $ 674
Trade accounts payable 82,856
Accrued liabilities 10,084
--------
Total current liabilities 93,614
--------
Notes payable 220,000
Long-term debt 10,445
Notes payable related party 2,074
Other non-current liabilities 22,590
--------
Total liabilities 348,723
--------
COMMITMENTS AND CONTINGENCIES (Note 6)
PARTNERS' CAPITAL
Common unitholders 137,090
Subordinated unitholders 92,096
General partners 4,677
--------
Total partners' capital 233,863
Total liabilities and partners' capital $582,586
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE> 6
CORNERSTONE PROPANE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per Unit data)
(unaudited)
<TABLE>
<CAPTION>
From Commencement
of Operations
(on December 17, 1996)
to December 31, 1996
--------------------
<S> <C>
REVENUE $ 40,370
COST OF SALES 31,341
--------
GROSS PROFIT 9,029
--------
EXPENSES
Operating 3,798
General and administrative 580
Depreciation and amortization 575
--------
4,953
--------
OPERATING INCOME 4,076
INTEREST EXPENSE (778)
--------
INCOME BEFORE INCOME TAXES 3,298
INCOME TAXES 5
--------
NET INCOME $ 3,293
========
General partners' interest in net income $ 66
--------
Limited partner's interest in net income $ 3,227
--------
Net income per Unit $ 0.20
--------
Weighted average number of Units outstanding 16,513
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 7
CORNERSTONE PROPANE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
From Commencement
of Operations
(on December 17, 1996)
to December 31, 1996
--------------------
<S> <C>
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES:
Net income $ 3,293
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 575
Changes in assets and liabilities, net
of acquisitions:
Trade receivables 2,275
Inventories (5,035)
Prepayments and other current assets (202)
Deferred costs and other assets 20
Trade accounts payable 3,710
Accrued liabilities (197)
Other non-current liabilities 50
---------
Net cash provided by operating activities 4,489
---------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (504)
---------
Net cash used for investing activities (504)
---------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES:
Net repayments on Working Capital Facility (2,355)
---------
Net cash used for financing activities (2,355)
---------
PARTNERSHIP FORMATION TRANSACTIONS:
Net proceeds from issuance of Common and Subordinated Units 191,804
Borrowings on Working Capital Facility 12,800
Issuance of long-term debt 220,000
Cash transfers from Predecessor Companies 22,418
Repayment of long-term debt and related interest (337,631)
Distribution to Special General Partner for the redemption
of preferred stock (61,196)
Distribution to Special General Partner (15,500)
Other fees and expenses (10,277)
---------
Net cash provided by partnership formation transactions 22,418
---------
Cash and cash equivalents increase $ 24,048
=========
</TABLE>
3
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<TABLE>
<S> <C>
CASH AND CASH EQUIVALENTS:
End of period $ 24,050
Beginning of period 2
---------
Increase $ 24,048
=========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE> 9
CORNERSTONE PROPANE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(Dollars in thousands, except Unit data)
(unaudited)
<TABLE>
<CAPTION>
Number of limited
partner Units Total
------------------------ 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 6,597,619 135,160 90,799 225,959
Issuance of 2% interest for
general partners contribution 4,611 4,611
Net income 1,930 1,297 66 3,293
--------- --------- --------- --------- --------- ---------
Balance December 31, 1996 9,821,000 6,597,619 $ 137,090 $ 92,096 $ 4,677 $ 233,863
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE> 10
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollars in thousands, except Unit data)
(unaudited)
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"), Myers Propane Gas Company ("Myers") and CGI Holdings, Inc. and
its subsidiaries ("Coast"). The principal predecessor entities, Synergy,
Empire and Coast are collectively referred to herein as the "Predecessor
Companies." The consolidated financial statements include the accounts of
Cornerstone Partners, the Operating Partnership and its corporate
subsidiary Cornerstone Sales & Service Corporation, a Delaware corporation,
collectively referred to herein as the Partnership. The Operating
Partnership is, and the Predecessor Companies were, principally engaged in
(i) the retail marketing and distribution of propane for residential,
commercial, industrial, agricultural and other retail uses, (ii) the
wholesale marketing and distribution of propane and natural gas liquids to
the retail propane industry, the chemical and petrochemical industries and
other commercial and agricultural markets, (iii) the repair and maintenance
of propane heating systems and appliances and (iv) the sale of
propane-related supplies, appliances and other equipment. Pursuant to a
Contribution, Conveyance and Assumption Agreement dated as of December 17,
1996, substantially all of the assets and liabilities of the Predecessor
Companies were contributed to the Operating Partnership (the "Conveyance").
As a result of the Conveyance, Cornerstone Propane GP, Inc., a Delaware
corporation and the managing general partner of Cornerstone Partners (the
"Managing General Partner") and SYN Inc., a Delaware corporation and the
special general partner (the "Special General Partner") received all of the
interests in the Operating Partnership, and the Operating Partnership
received substantially all of the assets and assumed substantially all of
the liabilities of the Predecessor Companies. Immediately after the
Conveyance, and in accordance with the Amended and Restated Agreement of
Limited Partnership of Cornerstone Partners (the "Partnership Agreement"),
the Managing General Partner and the Special General Partner conveyed their
limited partner interests in the Operating Partnership to Cornerstone
Partners in exchange for a 2% interest of Cornerstone Partners.
Following these transactions, on December 17, 1996, Cornerstone Partners
completed its initial public offering through underwriters of 9,821,000
Common Units (the "IPO") at a price to the public of $21.00 a unit. The net
proceeds of approximately $191,804 from the IPO, the proceeds from the
issuance of $220,000 aggregate principal amount of the Operating
Partnership's 7.53% first mortgage notes, and $12,800 borrowings under the
Working Capital Facility (as described in Note 3) were used to repay
$414,327 in liabilities assumed by the Operating Partnership (including
$141,799 paid to affiliates of the Managing General Partner) that were in
large part incurred in connection with the transactions entered into prior
to the offering. A portion of the funds were distributed to the Special
6
<PAGE> 11
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollars in thousands, except Unit data)
(unaudited)
General Partner to redeem its preferred stock ($61,196) and to provide net
worth to the Special General Partner ($15,500). The balance ($10,277) was
used to pay expenses.
Partners' capital of limited partners consists 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.
During the Subordination Period (see Note 5), 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 (i) employee benefit plans and (ii) the conversion of
Subordinated Units into Common Units, without the approval of a majority of
the Unitholders (see Note 5). 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 $75,000 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 General Partner in its sole discretion.
Cornerstone Partners and the Operating Partnership have no employees. The
Managing General Partner conducts, directs and manages all activities of
Cornerstone Partners and the Operating Partnership and is reimbursed on a
monthly basis for all direct and indirect expenses it incurs on their
behalf.
2. Basis of Presentation and Summary of Significant Accounting Policies
Nature of Operations. The Partnership is the fifth largest retail marketer
of propane in the United States in terms of volume, serving more than
360,000 residential, commercial, industrial and agricultural customers from
312 customer service centers in 26 states. The Partnership was recently
formed to own and operate the propane business and assets of Synergy,
Empire, Myers and Coast. The Partnership's operations are concentrated in
the east coast, south-central and west coast regions of the United States.
7
<PAGE> 12
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollars in thousands, except Unit data)
(unaudited)
Basis of Presentation. The consolidated financial statements include the
accounts of the Predecessor Companies and Myers. Historical financial
statements of Myers have not been separately presented based on the
Partnership's belief that the separate inclusion of Myers does not have a
material effect on the consolidated financial statements of the
Partnership. The acquisitions of the Predecessor Companies are accounted
for as purchase business combinations based on management's best estimate.
All purchase price allocations for the acquisition of the Predecessor
Companies are preliminary in nature and are subject to change within the
twelve months following the acquisitions based on refinements as actual
data becomes available. All significant inter-company transactions and
accounts have been eliminated. The accompanying consolidated financial
statements are unaudited and have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission. They
include all adjustments which the Partnership considers necessary for a
fair statement of the results for the interim periods presented. Such
adjustments consisted only of normal recurring items unless otherwise
disclosed. Due to the seasonal nature of the Partnership's propane
business, the results of operations for interim periods are not necessarily
indicative of the results to be expected for a full year.
Fiscal Year. The Partnership's fiscal year is July 1 to June 30.
Previously, Coast's fiscal year began on August 1 and ended on July 31,
while Empire's, Synergy's and Myers' fiscal years began on July 1 and ended
on June 30. Because the Partnership commenced operations upon completion of
the IPO, the accompanying consolidated statements of operations, cash flows
and partners' capital are for the period from commencement of operations on
December 17, 1996 to December 31, 1996.
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.
Futures contracts. The Partnership routinely uses commodity futures
contracts to reduce the risk of future price fluctuations for natural gas
and LPG inventories and contracts. Gains and losses on futures contracts
purchased as hedges are deferred and recognized in cost of sales as a
component of the product cost for the related hedged transaction. In the
statement of cash flows, cash flows from qualifying hedges are classified
in the same category as the cash flows from the items being hedged.
Contracts which do not qualify as hedges are marked to market, with the
resulting gains and losses charged to current operations. Net realized
gains and losses for the current fiscal year and unrealized gains, losses
on outstanding positions and open positions as of December 31, 1996 are not
material.
8
<PAGE> 13
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollars in thousands, except Unit data)
(unaudited)
Accounts Receivable. The outstanding balance is stated net of allowance of
doubtful accounts of $4,586 at December 31, 1996.
Revenue Recognition. Sales of natural gas, crude oil, natural gas liquids
and LPG and the related cost of product are recognized upon delivery of the
product.
Inventories. Inventories are stated at the lower of cost or market. The
cost of natural gas, crude oil, natural gas liquids and LPG is determined
using the first-in, first-out (FIFO) method. The cost of gas distribution
parts, appliances and equipment is determined using the weighted average
method. The major components of inventory consist of the following:
<TABLE>
<CAPTION>
December 31, 1996
(unaudited)
-------
<S> <C>
LPG and Other $22,553
Parts and Fittings 8,775
-------
$31,328
=======
</TABLE>
Property, Plant and Equipment. Property, plant 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 to 33 years; LPG storage and rental tanks, 40 to 50 years;
and office furniture, equipment and tank installation costs, 5 to 10 years.
Leasehold improvements are amortized over the shorter of the estimated
useful life or the lease term. When property, plant or equipment is retired
or otherwise disposed, the cost and related accumulated depreciation is
removed from the accounts, and the resulting gain or loss is credited or
charged to operations. Maintenance and repairs are charged to earnings,
while replacements and betterments that extend estimated useful lives are
capitalized.
Excess of Cost Over Fair Value of Net Assets Acquired. The excess of
acquisition cost over the estimated fair market value of identifiable net
assets of acquired businesses is amortized on a straight-line basis over
forty years. The related costs and accumulated amortization were $193,977
and $175 respectively, at December 31, 1996.
It is the Partnership'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 Partnership's policy to reduce the carrying amount of such assets
to fair value.
Income Taxes. Neither Cornerstone Partners nor the Operating Partnership
are directly subject to federal and state income taxes. Instead, taxable
income or loss is allocated to the
9
<PAGE> 14
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollars in thousands, except Unit data)
(unaudited)
individual partners. As a result, no recognition of 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 Partnership has one subsidiary which operates in corporate
form and is subject to federal and state income taxes. Accordingly, the
Partnership's consolidated financial statements reflect income tax expense
related to the subsidiary's earnings.
Net 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.
Unit-Based Compensation. The Partnership accounts for unit-based
compensation as (a) deferred compensation for time-vesting units and (b)
contingent consideration for performance-vesting units. Compensation
expense for the time-vesting units is recognized over the vesting period.
Compensation expense for the performance-vesting units is recognized when
the units become issuable. Time vesting units are considered Common Unit
equivalents for the purpose of computing primary earnings per unit.
Performance-vesting units are considered for the purpose of computing fully
diluted earnings per unit.
3. Credit Facilities
Concurrently with the IPO, the Operating Partnership entered into a credit
agreement (the "Bank Credit Agreement") which consists of a Working Capital
Facility and an Acquisition Facility.
The Working Capital Facility provides for borrowings up to $50,000
(including a $30,000 sublimit for letters of credit through March 31, 1997
and $20,000 thereafter), and matures on December 31, 1999. The Bank Credit
Agreement provides that there must be no amount outstanding under the
Working Capital Facility (excluding letters of credit) in excess of $10,000
for at least 30 consecutive days during each fiscal year. Borrowings under
the Working Capital Facility totaled $10,445 at December 31, 1996. Issued
outstanding letters of credit totaled $18,425 at December 31, 1996.
The Acquisition Facility provides the Operating Partnership with the
ability to borrow up to $75,000 to finance propane business acquisitions.
The Acquisition Facility operates as a revolving facility through December
31, 1999, at which time any loans then outstanding may be converted to term
loans and be amortized quarterly for a period of four years thereafter. No
amounts were outstanding at December 31, 1996.
10
<PAGE> 15
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollars in thousands, except Unit data)
(unaudited)
The Operating Partnership's obligations under the Bank Credit Agreement are
secured, on an equal and ratable basis, with its obligations under the Note
Agreement (see Note 4), by a first priority security interest in the
Operating Partnership's inventory, accounts receivable and certain customer
storage tanks. Loans under the Bank Credit Agreement bear interest at a per
annum rate equal to either (at the Operating Partnership's option): (a) the
sum (the "Base Rate") of the applicable margin, and the higher of (i) the
agent bank's prime rate and (ii) the federal funds rate plus 1/2 of 1%,
and (b) the sum (the "Eurodollar Rate") of the applicable margin and the
rate offered by the agent bank to major banks in the offshore dollar market
(as adjusted for applicable reserve requirements, if any). The applicable
margin for Base Rate loans varies between 0% and .12%, and the applicable
margin for Eurodollar Rate loans varies between .25% and .80%, in each case
depending upon the Operating Partnership's ratio of consolidated "Debt" to
"Consolidated Cash Flow" (as such terms are defined in the Bank Credit
Agreement). At December 31, 1996, the applicable Base and Eurodollar Rates
were 8.275% and 6.2375%, respectively. In addition, an annual fee is
payable quarterly by the Operating Partnership (whether or not borrowings
occur) ranging from .125% to .325% depending upon the ratio referenced
above.
The Bank Credit Agreement contains customary representations, warranties,
events of defaults and covenants including limitations, among others, on
the ability of the Operating Partnership and its "Restricted Subsidiaries"
(as defined therein) to incur or maintain certain indebtedness or liens,
make investments and loans, enter into mergers, consolidations or sales of
all or substantially all of its assets and make assets sales. Generally, so
long as no default exists or would result, the Operating Partnership is
permitted to make any Restricted Payment (as defined in the Bank Credit
Agreement and including distributions to the Partnership) during each
fiscal quarter in amount not to exceed Available Cash with respect to the
immediately preceding quarter.
In addition, the Bank Credit Agreement provides that: (1) the Operating
Partnership not permit the ratio of its consolidated Debt (as defined in
the Bank Credit Agreement) less cash on hand (in excess of $1,000 up to
$10,000) to Consolidated Cash Flow (as defined in the Bank Credit
Agreement) to exceed 4.75:1.00 at any time on or before December 31, 1997,
4.50:1.00 at any time on or before December 31, 1998 and 4.25:1.00 at any
time thereafter; and (2) the Operating Partnership not permit the ratio of
its Consolidated Cash Flow to consolidated "Interest Expense" (as defined
therein) to be less than 2.00:1.00 prior to December 31, 1997, 2.25:1.00
any time thereafter on or before December 31, 1998 and 2.50:1.00 at any
time thereafter.
11
<PAGE> 16
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollars in thousands, except Unit data)
(unaudited)
4. Long-Term Debt
On the IPO date, the Operating Partnership issued $220,000 of Senior Notes
with an annual interest rate of 7.53% pursuant to note purchase agreements
with various investors (collectively, the "Note Agreement"). The Senior
Notes mature on December 30, 2010, and require semi-annual interest
payments commencing December 30, 1996. The Note Agreement requires that the
principal be paid in equal annual payments of $27,500 starting December 30,
2003.
The Operating Partnership's obligations under the Note Agreement are
secured, on an equal and ratable basis with its obligations under the Bank
Credit Agreement, by a first priority security interest in the Operating
Partnership's inventory, accounts receivable and certain customer storage
tanks. The Note Agreement contains customary representations, warranties,
events of defaults and covenants applicable to the Operating Partnership
and its "Restricted Subsidiaries" (as defined therein), including
limitations, among others, on the ability of the Operating Partnership and
its Restricted Subsidiaries to incur additional indebtedness, create liens,
make investments and loans, enter into mergers, consolidations or sales of
all or substantially all assets and make asset sales. Generally, so long as
no default exists or would result, the Operating Partnership is permitted
to make any Restricted Payment (as defined in the Note Agreement and
including distributions to the Partnership) during each fiscal quarter in
amount not in excess of Available Cash (see Note 5) with respect to the
immediately preceding quarter.
5. Quarterly Distributions of Available Cash
The Partnership will make distributions to its partners with respect to
each fiscal quarter of the Partnership approximately 45 days after the end
of each fiscal quarter in an aggregate amount equal to its Available Cash
for such quarter. Available Cash generally means, with respect to any
fiscal quarter of the Partnership, all cash on hand at the end of such
quarter less the amount of cash reserves established by the Managing
General Partner in its reasonable discretion for future cash requirements.
These reserves are retained to provide for the proper conduct of the
Partnership's business, the payment of debt principal and interest and to
provide funds for distribution during the next four quarters. The
Partnership has not made a distribution to holders of the Common Units and
Subordinated Units ("Unitholders") for the partial fiscal quarter ended
December 31, 1996. The Partnership expects to make a distribution with
respect to the fiscal quarter ending March 31, 1997 to holders of record on
the applicable record date. The Minimum Quarterly Distribution ($0.54 per
Unit) for said fiscal quarter is expected to be increased proportionately
to reflect the fact that a distribution was not made for the partial fiscal
quarter ended December 31, 1996.
12
<PAGE> 17
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollars in thousands, except Unit data)
(unaudited)
Distributions by the Partnership in an amount equal to 100% of its
Available Cash will generally be made 98% to all Unitholders and 2% to the
General Partners until there has been distributed in respect of each Unit
an amount equal to the Minimum Quarterly Distribution for such quarter.
With respect to each quarter 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 on the Minimum Quarterly Distribution ("Common Unit
Arrearages"), prior to the distribution of Available Cash to holders of
Subordinated Units. Common Units will not accrue arrearages with respect to
distributions for any quarter after the Subordination Period and
Subordinated Units will not accrue any arrearages with respect to
distributions for any quarter.
The Subordination Period will generally extend to the first day of any
quarter beginning after December 31, 2001 in respect of which (i)
distributions of Available Cash from Operating Surplus (generally defined
as $25,000 plus $22,420 cash on hand as of December 17, 1996 plus all
operating cash receipts less operating cash expenditures, debt service
payments, maintenance capital expenditures and cash reserves) on the Common
Units and the Subordinated Units with respect to each of the three
consecutive four-quarter periods immediately preceding such date equaled or
exceeded the sum of the Minimum Quarterly Distribution on all of the
outstanding Common Units and Subordinated Units during such periods, (ii)
the Adjusted Operating Surplus (generally defined as Operating Surplus
generated during such period (a) less (i) any net increase in working
capital borrowings during such period and (ii) any net reduction in cash
reserves for operating expenditures during such period not relating to an
operating expenditure made during such period, and (b) plus (i) any net
decrease in working capital borrowings during such period and (ii) any net
increase in cash reserves for operating expenditures during such period
required by any debt instrument for the repayment of principal, interest or
premium. Adjusted Operating Surplus does not include that portion of
Operating Surplus included in clause (a)(i) of the definition of Operating
Surplus) generated during each of the three consecutive four-quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the outstanding Common Units and
Subordinated Units and the related distribution on the general partner
interests in the Partnership during such periods, and (iii) there are no
outstanding Common Unit Arrearages.
6. 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. The 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.
The companies retained a significant portion of certain expected losses
related primarily to
13
<PAGE> 18
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollars in thousands, except Unit data)
(unaudited)
comprehensive general liability and vehicle liability. Provisions for
self-insured losses were recorded based upon the companies' estimates of
the aggregate self-insured liability for claims incurred, and totaled
$3,018 on December 31, 1996.
The Partnership leases certain property, plant and equipment for various
periods under noncancelable leases, including an office space agreement
with the previous owner of Empire for $175 each year over a period of ten
years. The annual rental payments may increase to $250, depending on
certain circumstances occurring after two years.
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 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.
7. Restricted Unit Plan
The Partnership adopted the 1996 Restricted Unit Award Plan (the
"Restricted Unit Plan") which authorizes the issuance of Common Units with
an aggregate value of $12,500 (595,238 Common Units valued at the initial
public offering price of $21.00 per Unit) to executives, managers and
elected 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, and in the same proportions as, the conversion of
Subordinated Units to Common Units. Restricted Unit Plan participants are
not eligible to receive quarterly distributions or vote their respective
Units until vested. Restrictions generally limit the sale or transfer of
the Units during the restricted periods. The value of the restricted Unit
is established by the market price of the Common Unit at the date of grant.
As of and for the fourteen-day period ended December 31, 1996, a total of
376,190 restricted Common Units were awarded. For the fourteen-day period
ended December 31, 1996, the Partnership recorded $20 of compensation
expense.
14
<PAGE> 19
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollars in thousands, except Unit data)
(unaudited)
8. Partners' Capital
A portion of the Subordinated Units will convert into Common Units on the
first day after the record date established for the distribution in respect
of any quarter ending on or after (a) December 31, 1999 (with respect to
one-quarter of the Subordinated Units) and (b) December 31, 2000 (with
respect to one-quarter of the Subordinated Units), in respect of which (i)
distributions of Available Cash from Operating Surplus on the Common Units
and the Subordinated Units with respect to each of the three consecutive
four-quarter periods immediately preceding such date equaled or exceeded
the sum of the Minimum Quarterly Distribution on all of the outstanding
Common Units and Subordinated Units during such periods, (ii) the Adjusted
Operating Surplus generated during each of the two consecutive four-quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the outstanding Common Units and
Subordinated Units and the related distribution on the general partner
interests in the Partnership during such periods, and (iii) there are no
outstanding Common Unit Arrearages; provided, however that the early
conversion of the second one-quarter of Subordinated Units may not occur
until at least one year following the early conversion of the first
one-quarter of Subordinated Units.
Upon expiration of the Subordination Period, all remaining Subordinated
Units will convert into Common Units on a one-for-one basis and will
thereafter participate pro rata with the other Common Units in
distributions of Available Cash.
9. Related Party Transactions
The Managing General Partner and its affiliates performing services for the
Partnership are entitled to reimbursement for all expenses incurred on
behalf of the Partnership, including the cost of compensation properly
allocable to the Partnership, and all other expenses necessary or
appropriate to the conduct of the business of, and allocable to, the
Partnership. These costs, which totaled $2,657 for the period December 17,
1996 to December 31, 1996, include employee compensation and benefit
expenses of employees of the Managing General Partner and its affiliates.
15
<PAGE> 20
CORNERSTONE PROPANE PARTNERS, L.P.
PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per Unit data)
(unaudited)
<TABLE>
<CAPTION>
July 1, 1996 July 1, 1995 October 1, 1996 October 1, 1995
to to to to
December 31, December 31, December 31, December 31,
1996 1995 1996 1995
------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
REVENUE $314,937 $253,787 $173,181 $137,470
COST OF SALES 250,909 192,162 133,390 97,931
-------- -------- -------- --------
GROSS PROFIT 64,028 61,625 39,791 39,539
-------- -------- -------- --------
EXPENSES
Operating 36,112 34,784 18,439 18,632
General and administrative 6,507 6,268 3,322 3,357
Depreciation and amortization 7,129 6,752 3,391 3,296
-------- -------- -------- --------
OPERATING INCOME 14,280 13,821 14,639 14,254
INTEREST EXPENSE, NET (9,049) (8,909) (4,582) (4,487)
-------- -------- -------- --------
INCOME BEFORE
INCOME TAXES 5,231 4,912 10,057 9,767
INCOME TAXES 50 50 25 25
-------- -------- -------- --------
NET INCOME $ 5,181 $ 4,862 $ 10,032 $ 9,742
======== ======== ======== ========
General partners' interest in net
income $ 104 $ 97 $ 201 $ 195
-------- -------- -------- --------
Limited partner's interest in net
income $ 5,077 $ 4,765 $ 9,831 $ 9,547
-------- -------- -------- --------
Net income per Unit $ 0.31 $ 0.29 $ 0.60 $ 0.58
-------- -------- -------- --------
Weighted average number of
Units outstanding 16,513 16,513 16,513 16,513
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
16
<PAGE> 21
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION
DECEMBER 31, 1996
(Dollars in thousands)
(unaudited)
1. Basis of Presentation
The unaudited pro forma consolidated statements of operations for the three
and six month periods ended December 31, 1996 and 1995 were derived from
the historical statements of operations of Empire Energy Corporation for
the periods October 1 through December 16, 1996, October 1 through December
31, 1995, July 1 through December 16, 1996 and July 1 through December 31,
1995, of SYN Inc. and Myers Propane Gas Company ("Myers") for the periods
October 1, 1996 to December 16, 1996, October 1, 1995 to December 31, 1995,
July 1, 1996 to December 16, 1996 and August 15, 1995 to December 31, 1995,
of Synergy Group Incorporated for the period July 1, 1995 to August 14,
1995, of CGI Holdings, Inc. for the periods November 1 through December 31,
1995, November 1 through December 16, 1996, August 1 through December 31,
1995 and August 1 through December 16, 1996, and the consolidated statement
of operations of the Partnership from December 17, 1996 through December
31, 1996. Historical financial statements of Myers have not been separately
presented based on the Partnership's belief that the separate inclusion of
Myers does not have a material effect on the pro forma consolidated
financial statements of the Partnership. The pro forma consolidated
statements of operations were prepared to reflect the effects of the IPO as
if it had been completed in its entirety as of the beginning of the periods
presented. However, these statements do not purport to present the results
of operations of the Partnership had the IPO actually been completed as of
the beginning of the periods presented. In addition, the pro forma
consolidated statements of operations are not necessarily indicative of the
results of future operations of the Partnership and should therefore be
read in conjunction with the historical consolidated financial statements
of the Predecessor Companies and the Partnership appearing elsewhere in
this Quarterly Report on Form 10-Q.
2. Pro Forma Adjustments
Significant pro forma adjustments reflected in the pro forma consolidated
statements of operations include the following:
Adjustments to reflect the full period effect of operating expense savings
resulting from the consolidation of certain operations that occurred
subsequent to July 1, 1995, as well as the elimination of certain operating
and general administrative expenses associated with the operation of the
Partnership. Operating expense adjustments for retail overlap
consolidations were $360 and $185 for the six and three months ended
December 31, 1995, respectively. General and administrative adjustments
relating to corporate overhead consolidation, the elimination of bank and
consulting fees and the estimated incremental general and
17
<PAGE> 22
CORNERSTONE PROPANE PARTNERS, L.P.
NOTES TO PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION
DECEMBER 31, 1996
(Dollars in thousands)
(unaudited)
administrative cost associated with the Partnership were $838 for each of
the six month periods ended December 31, 1996 and 1995, and $405 and $420
for the three month periods ended December 31, 1996 and 1995, respectively.
The pro forma adjustments do not include any amount for the incentive
compensation that might be paid to key employees.
Adjustments to reflect the additional depreciation and amortization expense
due to the increase in property and intangibles that result from applying
the purchase method of accounting to the Empire Energy and Coast
acquisitions. Depreciation and amortization adjustments were $40 for each
of the six month periods ended December 31, 1996 and 1995, and $20 for each
of the three month periods ended December 31, 1996 and 1995.
Adjustments to reflect interest expense applicable to the Partnership.
Interest expense adjustments relating to expense for the $220,000 first
mortgage notes at a rate of 7.53% per annum, expense attributable to the
working capital facility based on an average outstanding principal balance
of $2,000 at 6.5% per annum, expense attributable to debt assumed based on
an average outstanding principal balance of $9,500 at 8.5% per annum and
debt expense amortization based on $5,050 estimated debt issuance costs
were $180 for each for the six month periods ended December 31, 1996 and
1995 and $90 for each of the three month periods ended December 31, 1996
and 1995.
Adjustments to reflect the elimination of income tax related accounts
because income taxes will not be borne by the Partnership, except for
income taxes applicable to operations to be conducted by the Partnership's
wholly owned corporate subsidiary.
Net income per limited partner Unit is determined by dividing the net
income that would be allocated to the Unitholders, which is 98% of net
income, by the number of Units outstanding. The weighted average number of
Units outstanding, 16,513 were assumed to have been outstanding the entire
period.
18
<PAGE> 23
SYN Inc.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except share amounts)
ASSETS
<TABLE>
<CAPTION>
June 30, 1996
-------------
<S> <C>
CURRENT ASSETS:
Cash ........................................................................ $ 14
Trade receivables, less allowance for doubtful accounts of $1,505 ........... 9,195
Inventories ................................................................. 7,447
Prepaid expenses and other .................................................. 678
Deferred income tax benefit ................................................. 3,727
Due from Former Stockholders ................................................ 37,966
---------
Total current assets ...................................................... 59,027
---------
PROPERTY AND EQUIPMENT:
Land and buildings .......................................................... 6,420
Storage and consumer service facilities ..................................... 52,953
Transportation, office and other equipment .................................. 11,910
Less -- Accumulated depreciation ............................................ (2,592)
---------
Total property and equipment .............................................. 68,691
---------
OTHER ASSETS:
Investments and restricted cash deposits .................................... 3,025
Deferred income tax benefit ................................................. 4,849
Intangible assets, primarily the excess of cost over fair value of net assets 30,943
acquired, net of accumulated amortization ................................. 227
---------
Other ....................................................................... 39,044
---------
Total other assets ........................................................ $ 166,762
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ........................................ $ 1,025
Accounts payable ............................................................ 1,604
Accrued expenses ............................................................ 2,915
Acquisition related liabilities ............................................. 29,306
---------
Total current liabilities ................................................. 34,850
LONG-TERM DEBT ................................................................ 25,687
NOTE PAYABLE -- RELATED PARTY ................................................. 52,812
---------
Total liabilities ......................................................... 113,349
---------
</TABLE>
19
<PAGE> 24
<TABLE>
<S> <C>
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Cumulative preferred stock, $.01 par value; 70,500 shares authorized; 55,312
shares, issued and outstanding, at stated value of $1,000 per share ....... 55,312
Common stock; $0.01 par value; 100,000 shares authorized, issued and
outstanding ............................................................... 1
Additional paid-in capital .................................................. 99
Accumulated deficit ......................................................... (1,999)
---------
Total stockholders' equity ................................................ 53,413
---------
$ 166,762
=========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
20
<PAGE> 25
SYN Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the For the period For the
For the period from from July 1, period from For the period
period from August 15, 1995 to August October 1, from October
July 1, 1996 1995 to 14, 1995 1996 to 1, 1995 to
to December 31, (Predecessor December 16, December 31,
December 16, 1996 1995 Basis) 1996 1995
----------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES 44,066 38,589 7,568 26,183 28,024
COST OF PRODUCT SOLD 23,322 18,375 3,631 14,382 12,793
------- ------- -------- -------- --------
Gross profit 20,744 20,214 3,937 11,801 15,231
OPERATING EXPENSES:
Salaries and commissions 7,252 6,312 - 3,387 4,650
General and administrative 6,151 5,461 3,632 3,068 4,128
Depreciation and amortization 1,904 1,728 472 904 1,217
Related-party corporate
administration and
management fees 1,668 1,406 - 703 938
------- ------- -------- -------- --------
Total operating expenses 16,975 14,907 4,104 8,062 10,933
------- ------- -------- -------- --------
Operating income (loss) 3,769 5,307 (167) 3,739 4,298
INTEREST EXPENSE, including
$2,214, $2,228, $0, $1,010, $1,639
to related party 3,311 2,347 816 1,646 1,758
------- ------- -------- -------- --------
INCOME (LOSS) BEFORE
INCOME TAXES 458 2,960 (983) 2,093 2,540
PROVISION (BENEFIT) FOR
INCOME TAXES 298 1,350 (373) 842 1,262
------- ------- -------- -------- --------
Net income (loss) 160 1,610 (610) 1,245 1,278
DIVIDENDS ON
CUMULATIVE
PREFERRED STOCK (3,878) (3,111) - (1,805) (3,111)
------- ------- -------- -------- --------
Net loss applicable to common
stockholders $ (3,718) $ (1,501) $ (610) $ (560) $ (1,833)
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
21
<PAGE> 26
SYN Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the period
For the period For the period from July 1, 1995
from July 1, 1996 from August 15, to August 14,
to December 16, 1995 to 1995 (Predecessor
1996 December 31, 1995 Basis)
---------------- ----------------- ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 160 $ 1,610 (610)
Items not requiring (providing) cash--
Depreciation and amortization 1,904 1,728 472
Gain on sale of assets 233 - -
Deferred income taxes 298 3,734 -
Changes in operating items--
Trade receivables (1,991) (9,166) 4,897
Inventories (1,873) (226) 1,244
Prepaid expenses and other (569) (863) 345
Accounts payable 2,549 (1,655) (1,864)
Accrued expenses 3,602 3,121 -
--------- --------- ---------
Net cash provided by (used in) operating
activities 4,313 (1,717) 4,484
--------- --------- ---------
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
Sale of assets 129 - 1,880
Disposals of Companies 829 - -
Purchases of property and equipment (4,240) (4,497) -
Acquisition of Companies (469) - -
Change in investments and restricted cash
deposits - (270) -
--------- --------- ---------
Net cash provided by (used in)
investing activities (3,751) (119,709) 1,880
--------- --------- ---------
FINANCING ACTIVITIES:
Increase in credit facility 3,835 21,342 (6,965)
</TABLE>
22
<PAGE> 27
<TABLE>
<S> <C> <C> <C>
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 (242) (1,771) -
Preferred stock dividends paid (3,878) (3,111) -
--------- --------- ---------
Net cash provided by (used in)
financing activities (285) 122,184 (6,965)
--------- --------- ---------
Increase (decrease) in cash 277 758 (601)
CASH:
Beginning of period 14 - 5,323
--------- --------- ---------
End of period $ 291 $ 758 $ 4,722
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
23
<PAGE> 28
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIVE AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
FOUR AND ONE-HALF MONTHS ENDED DECEMBER 31, 1995,
ONE AND ONE-HALF MONTHS ENDED AUGUST 14, 1995 (PREDECESSOR),
TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996 AND
AND THREE MONTHS ENDED DECEMBER 31, 1995,
(Dollars in thousands)
(unaudited)
1. Basis of Presentation
In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
SYN Inc. and its subsidiaries ("Synergy") consolidated results of
operations and cash flows for the periods ended December 16, 1996, and
December 31, 1995. All such adjustments are of a normal recurring nature.
Synergy completed its acquisition of Synergy Group Incorporated ("SGI") on
August 14, 1995. The unaudited consolidated statement of operations and of
cash flows for the period ended August 14, 1995 are presented as a
predecessor entity of Synergy and contain all adjustments necessary to
present fairly SGI consolidated results of operations and cash flows for
the period then ended.
The accounting policies followed by Synergy are set forth in Note 1 to
Synergy's audited consolidated financial statements as of June 30, 1996,
which were included in the Form S-1 of Cornerstone Propane Partners, L.P
(Registration No. 333-13879). Other disclosures required by generally
accepted accounting principles are not included herein but are included in
the notes to the June 30, 1996, audited statements previously mentioned.
The results of operations for the two and one-half month and five and
one-half month periods ended December 16, 1996, are not necessarily
indicative of the results to be expected for the full year due to the
seasonal nature of Synergy's business.
2. Commitments and Contingencies
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 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.
24
<PAGE> 29
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIVE AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
FOUR AND ONE-HALF MONTHS ENDED DECEMBER 31, 1995,
ONE AND ONE-HALF MONTHS ENDED AUGUST 14, 1995 (PREDECESSOR),
TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996 AND
AND THREE MONTHS ENDED DECEMBER 31, 1995,
(Dollars in thousands)
(unaudited)
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.
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 form 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.
3. Subsequent Events
On December 17, 1996, substantially all of the assets and liabilities of
Synergy were contributed to Cornerstone Propane, L.P., a Delaware limited
partnership, a subsidiary of Cornerstone Propane Partners, L.P. Following
this transaction, on December 17, 1996, Cornerstone Propane Partners L.P.
completed its initial public offering (see Note 1 to the consolidated
financial statements of Cornerstone Propane Partners, L.P., included
herein).
25
<PAGE> 30
EMPIRE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
June 30, 1996
-------------
<S> <C>
CURRENT ASSETS:
Cash ................................................................... $ 2,064
Trade receivables, less allowance for doubtful accounts of $1,262 ...... 5,724
Inventories ............................................................ 6,702
Prepaid expenses ....................................................... 103
Refundable income taxes ................................................ 457
Deferred income taxes .................................................. 996
---------
Current Assets ........................................................ 16,046
---------
DUE FROM SYN INC ......................................................... 7,978
---------
PROPERTY AND EQUIPMENT, at cost:
Land and buildings ..................................................... 8,903
Storage and consumer service facilities ................................ 80,615
Transportation, office and other equipment ............................. 18,702
---------
108,220
Less -- Accumulated depreciation ....................................... (28,686)
---------
79,534
---------
OTHER ASSETS:
Excess of cost over fair value of net assets acquired, at amortized cost 3,033
Other .................................................................. 511
---------
3,544
$ 107,102
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ................................... $ 6,019
Accounts payable ....................................................... 3,368
Accrued salaries ....................................................... 1,063
Accrued expenses ....................................................... 1,676
---------
Total current liabilities .......................................... 12,126
---------
LONG-TERM DEBT ........................................................... 25,442
---------
DEFERRED INCOME TAXES .................................................... 16,877
---------
ACCRUED SELF-INSURANCE LIABILITY ......................................... 2,424
---------
</TABLE>
26
<PAGE> 31
<TABLE>
<S> <C>
STOCKHOLDERS' EQUITY:
Common stock; $0.001 par value; authorized 17,500,000 shares, issued,
12,004,430 shares .................................................... 12
Additional paid-in capital ............................................. 46,099
Retained earnings ...................................................... 4,143
---------
50,254
---------
Treasury stock, at cost - 3,000 shares ................................. (21)
---------
50,233
---------
$ 107,102
=========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
27
<PAGE> 32
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the period For the period For the period For the period
from July 1, from July 1, from October 1, from October 1,
1996 to 1995 to 1996 to 1995 to
December 16, December 31, December 16, December 31,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUE $ 43,201 $ 44,035 $ 28,166 $ 31,812
COST OF PRODUCT SOLD 23,310 21,207 15,400 15,079
-------- -------- -------- --------
GROSS PROFIT 19,891 22,828 12,766 16,733
OPERATING COSTS AND
EXPENSES:
Provision for doubtful accounts 710 775 436 553
General and administrative 12,685 13,769 5,950 7,920
Depreciation and amortization 2,929 2,726 1,344 1,438
-------- -------- -------- --------
OPERATING INCOME 3,567 5,558 5,036 6,822
INTEREST EXPENSE (NET) 3,621 1,112 1,917 736
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES (54) 4,446 3,119 6,086
PROVISION FOR INCOME TAXES 32 1,900 1,197 2,450
-------- -------- -------- --------
NET INCOME (LOSS) $ (86) $ 2,546 $ 1,922 $ 3,636
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
28
<PAGE> 33
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the period from For the period from
July 1, 1996 to July 1, 1995 to
December 16, 1996 December 31, 1995
------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (86) $ 2,546
Items not requiring (providing) cash--
Depreciation 2,671 2,590
Amortization 258 136
Gain on sale of assets 4 7
Deferred income taxes (126) (218)
Changes in --
Trade receivables (8,352) (9,243)
Inventories (4,383) (7,032)
Accounts payable 1,616 3,009
Accrued expenses and self insurance 3,273 4,846
Prepaid expenses and other (2,313) (941)
Due from SYN Inc. (1,863) -
Income taxes payable (refundable) 457 619
-------- --------
Net cash used in operating activities (8,844) (3,681)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of assets 57 27
Purchases of property and equipment (2,823) (2,963)
Purchase of assets from SYN Inc. - (35,980)
Capitalized costs (242) -
-------- --------
Net cash used in investing activities (3,008) (38,916)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in credit facilities 9,606 7,800
Principal payments on purchase obligations (114) (98)
Proceeds from management buyout loan 94,000 -
Purchase of company stock in
management buyout (59,000) -
Payment of debt acquisition costs (3,100) -
Proceeds from (repayments of) acquisition
credit facility (31,100) 35,000
-------- --------
Net cash provided by financing activities 10,292 42,702
-------- --------
</TABLE>
29
<PAGE> 34
<TABLE>
<S> <C> <C>
Increase (decrease) in cash (1,560) 105
CASH:
Beginning of period 2,064 -
-------- --------
End of period $ 504 $ 105
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
30
<PAGE> 35
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIVE AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
SIX MONTHS ENDED DECEMBER 31, 1995,
TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996 AND
THREE MONTHS ENDED DECEMBER 31, 1995,
(Dollars in thousands)
(unaudited)
1. Basis of Presentation
In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
Empire Energy Corporation's ("Empire Energy") consolidated results of
operations and cash flows for the periods ended December 16, 1996, and
December 31, 1995. All such adjustments are of a normal recurring nature.
The accounting policies followed by Empire Energy are set forth in Note 1
to Empire Energy's audited consolidated financial statements as of June 30,
1996, which were included in the Form S-1 of Cornerstone Propane Partners,
L.P. (Registration No. 333-13879) Other disclosures required by generally
accepted accounting principles are not included herein but are included in
the notes to the June 30, 1996, audited statements previously mentioned.
The results of operations for the two and one-half month and five and
one-half month periods ended December 16, 1996, are not necessarily
indicative of the results to be expected for the full year due to the
seasonal nature of Empire Energy's business.
2. Company Formation
On August 1, 1996, members of management of Empire Energy purchased the
ownership (92.7% of the common stock) of Empire Energy from the principal
shareholder and certain other shareholders. Because of the change in
control of Empire Energy, the balance sheet accounts were adjusted at the
acquisition date to reflect new bases using the principles of purchase
accounting.
In connection with this transaction, the principal shareholder of Empire
Energy terminated employment as well as certain lease and use agreements.
The new entity was principally owned (71.3% of the common stock) by the son
of the former principal shareholder.
On October 7, 1996, Northwestern Growth Corporation purchased 100% of the
Empire Energy common stock. See Note 2 to Pro Forma Consolidated Financial
Information for Cornerstone Propane Partners, L.P. included herein. This
purchase also resulted in a change of control and purchase accounting
adjustments were reflected in the balance sheet as of the acquisition date.
31
<PAGE> 36
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIVE AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
SIX MONTHS ENDED DECEMBER 31, 1995,
TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996 AND
THREE MONTHS ENDED DECEMBER 31, 1995,
(Dollars in thousands)
(unaudited)
3. Commitments and Contingencies
Empire Energy reports the following contingencies. Except as noted, there
have been no significant changes in these items since reported in Empire
Energy's audited consolidated balance sheet as of June 30, 1996.
Under Empire Energy's current 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.
Empire Energy retains a significant portion of certain expected losses
related primarily to comprehensive general liability and vehicle liability.
Under these current insurance programs, Empire Energy self insures the
first $1 million of coverage (per incident) on general liability and on
vehicle liability. In addition, Empire Energy has a $100 deductible for
each and every liability claim. Empire Energy 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 Empire Energy's aggregate of self-insured losses to $1.5
million per policy period. Provisions for self-insured losses are recorded
based upon Empire Energy's estimates of the aggregate self-insured
liability for claims incurred.
Empire Energy self insures the first $250 of workers' compensation coverage
(per incident). Empire Energy purchased excess coverage from carriers for
workers' compensation claims in excess of the self-insured coverage.
Provisions for losses expected under this program are recorded based upon
Empire Energy's estimates of the aggregate liability for claims incurred.
Empire Energy currently self insures health benefits provided to the
employees of Empire Energy and its subsidiaries. Provisions for losses
expected under this program are recorded based upon Empire Energy's
estimate of the aggregate liability for claims incurred.
In conjunction with the restructuring that occurred in June 1994 (the
"Split Off Transaction") Empire Energy agreed to indemnify Empire Gas for
47.7% of the self-insured liabilities of Empire Gas incurred prior to June
30, 1994. Empire Energy has included in its self-insurance liability its
best estimate of the amount it will owe Empire Gas under this
indemnification agreement.
32
<PAGE> 37
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIVE AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
SIX MONTHS ENDED DECEMBER 31, 1995,
TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996 AND
THREE MONTHS ENDED DECEMBER 31, 1995,
(Dollars in thousands)
(unaudited)
Empire Energy 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 Empire Energy's financial
position or results of operations.
The state of Missouri has assessed Empire Gas approximately $1,400 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 Internal Revenue Service has begun a federal income tax audit of Empire
Gas for the year ended June 30, 1994. While the audit is still in process,
the audit has principally focused on the deductibility of certain
professional fees and travel and entertainment expenses as well as on the
tax-free treatment of the Split-Off Transaction.
As a former member of the Empire Gas controlled group and in connection
with a tax indemnity agreement with Empire Gas, Empire Energy agreed to
indemnify 47.7% of the total liabilities related to these tax audits of the
years ended June 30, 1994, and prior thereto.
The Split-Off Transaction was structured with the intent of qualifying for
tax-free treatment under Section 355 of the Internal Revenue Code and
Empire Energy, and Empire Gas, obtained a private letter ruling (the
"Letter Ruling") from the Internal Revenue Service confirming such
treatment, subject to certain representations and conditions specified in
the Letter Ruling. The Internal Revenue Service is currently conducting an
audit of empire Gas for the year in which the Split-Off Transaction
occurred. If the Internal Revenue Service were to reverse the position it
took in the Letter Ruling and prevail on a challenge to the tax-free
treatment of the Split-Off Transaction, Empire Energy would be liable for a
portion of any taxes, interest and penalties due, both as a former member
of the Empire Gas controlled group and under a tax indemnity agreement with
Empire Gas that was executed in connection with the Split-Off Transaction.
Empire Energy's liability in such circumstances could exceed the percentage
under the tax indemnity agreement if Empire Gas were unable to fund its
percentage share under that agreement. If Empire Energy were held liable
for any taxes, interest or penalties in connection with the above Split-Off
Transaction, the amount of this
33
<PAGE> 38
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIVE AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996,
SIX MONTHS ENDED DECEMBER 31, 1995,
TWO AND ONE-HALF MONTHS ENDED DECEMBER 16, 1996 AND
THREE MONTHS ENDED DECEMBER 31, 1995,
(Dollars in thousands)
(unaudited)
liability could be substantial and could adversely affect Empire Energy's
financial position and results of operations.
Empire Energy are presently included in various state tax audits which are
not expected to have a material, adverse effect on Empire Energy's
financial position or results of operations.
4. Subsequent Events
On December 17, 1996, substantially all of the assets and liabilities of
Empire Energy 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 herein).
34
<PAGE> 39
CGI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
July 31, 1996
-------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 1,519
Accounts and notes receivable .............................................. 23,664
Inventories ................................................................ 7,316
Prepaid expenses and deposits .............................................. 1,996
Deferred income tax benefit ................................................ 802
---------
Total current assets ..................................................... 35,297
---------
Property and equipment, at cost less accumulated depreciation .............. 51,495
Cost in excess of net assets acquired, net of amortization ................. 11,844
Notes receivable ........................................................... 1,357
Deferred charges and other assets .......................................... 6,186
---------
$ 106,179
=========
LIABILITIES, MANDATORILY REDEEMABLE SECURITIES
AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................................... 30,824
Accrued liabilities ........................................................ 3,101
Current maturities of long-term debt and capital lease obligations ......... 3,924
---------
Total current liabilities ................................................ 37,849
---------
Long-term debt and capital lease obligations ................................. 41,801
Deferred income taxes ........................................................ 10,777
Other liabilities ............................................................ 1,095
Commitments and contingencies (Note 2)
MANDATORILY REDEEMABLE SECURITIES:
Redeemable exchangeable preferred stock:
10% cumulative, $0.01 par value, 62,500 shares authorized, issued
and outstanding; at redemption value ................................... 8,559
</TABLE>
35
<PAGE> 40
<TABLE>
<S> <C>
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value, 6,515,000 shares authorized; 4,312,247 issued
and outstanding:
Class A voting common stock, $0.01 par value, 3,000,000
shares authorized; 2,789,784 issued and outstanding ...................... 28
Class B voting common stock, $0.01 par value, 200,000 shares
authorized; 149,485 issued and outstanding ............................. 1
Class C voting common stock, $0.01 par value, 3,000,000 shares
authorized; 1,343,831 issued and outstanding ........................... 13
Class D non-voting common stock, $0.01 par value, 250,000
shares authorized; 29,147 issued and outstanding ....................... -
Warrants outstanding ..................................................... 2,134
Additional paid-in capital ................................................. 8,945
Accumulated deficit ........................................................ (5,023)
---------
Total stockholders' equity ............................................... 6,098
---------
$ 106,179
=========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
36
<PAGE> 41
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
August 1, August 1, November 1, November 1,
1996 to 1995 to 1996 to 1995 to
December 16, 1996 December 31, December 16, December 31,
1995 1996 1995
----------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales and other revenue $ 182,029 $ 159,104 $ 73,854 $ 75,034
Costs and expenses:
Cost of sales, except for
depreciation and amortization 168,105 146,480 67,839 68,643
Operating expenses 8,181 8,257 2,980 3,284
Sale of partnership interest 660 - - -
General and administrative
expenses 1,738 1,354 647 428
Depreciation and amortization 1,604 1,672 537 689
Interest expense 2,002 2,364 708 979
--------- --------- --------- ---------
Income (loss) before income taxes (261) (1,023) 1,143 1,011
Income tax (provision) benefit 25 529 (466) (142)
--------- --------- --------- ---------
Net income (loss) $ (236) $ (494) $ 677 $ 869
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
37
<PAGE> 42
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
August 1, 1996 August 1, 1995
to to
December 16, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM (USED FOR)
OPERATING ACTIVITIES:
Net loss $ (236) $ (494)
Adjustments to reconcile net loss to net cash used
for operating activities
Depreciation and amortization 1,604 1,672
Deferred income taxes (476) (529)
Sale of partnership interest 202 -
Changes in assets and liabilities, net of acquisitions:
Accounts and notes receivable (6,922) (17,167)
Inventories 449 (1,727)
Prepaid expenses and deposits (628) (304)
Other assets (663) 45
Accounts payable (2,265) 20,762
Accrued liabilities 6,332 (477)
-------- --------
(2,603) 1,781
-------- --------
CASH FLOWS FROM (USED FOR) INVESTING
ACTIVITIES
Payments for acquisitions of retail outlets - (3,000)
Proceeds from sale of property and equipment 57 140
Purchases of and investments in property and
equipment (1,083) (1,556)
-------- --------
(1,026) (4,416)
-------- --------
CASH FLOWS FROM (USED FOR) FINANCING
ACTIVITIES:
Repayments of long-term debt (562) (625)
Borrowings on capital leases and other term loans - 997
Repayment of other notes payable (252) (497)
Principal payments under capital lease obligations (506) (548)
Borrowings (repayments) under acquisition line 5,998 2,806
-------- --------
4,678 2,133
-------- --------
</TABLE>
38
<PAGE> 43
<TABLE>
<S> <C> <C>
Net (decrease) increase in cash 1,049 (502)
Cash and cash equivalents, beginning of period 1,519 4,423
-------- --------
Cash and cash equivalents, end of period $ 2,568 $ 3,921
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
39
<PAGE> 44
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of CGI Holdings,
Inc. (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.
The accompanying consolidated financial statements are unaudited, except
for the consolidated balance sheet at July 31, 1996, and have been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission. They include all adjustments which the Company considers
necessary for a fair statement of the results for the interim periods
presented.
Such adjustments consisted only of normal recurring items unless otherwise
disclosed. Certain notes and other information have been condensed or
omitted from the interim financial statements presented in this Quarterly
Report on Form 10-Q. These financial statements should be read in
conjunction with the Company's financial statements contained in the
Partnership's Form S-1 Registration Statement (Registration No. 333-13879).
Due to the seasonal nature of the Company's propane business, the results
of operations for interim periods are not necessarily indicative of the
results to be expected for a full year.
2. COMMITMENTS AND CONTINGENCIES
The Company has contracts with various suppliers to purchase a portion of
its supply needs of LPG for future deliveries with terms ranging from one
to twelve months. The contracted quantities are not significant with
respect to the Company's anticipated total sales requirements and will
generally be acquired at prevailing market prices at the time of shipment.
Outstanding letters of credit issued in conjunction with product supply
contracts are a normal business requirement. There were no outstanding
letters of credit issued on behalf of the Company as of July 31, 1996 and
December 16, 1996 other than the $11.3 million and $13.0 million,
respectively, drawn against its credit guidance line.
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.
40
<PAGE> 45
CGI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. BUSINESS ACQUISITIONS
During the quarter ended October 31, 1995, 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
million from the increase in the Company's Working Capital/Acquisition bank
line. Goodwill resulting from the acquisition totaled $2.8 million.
4. SALE OF PARTNERSHIP INTEREST
Effective October 1, 1996, the Company terminated its participation and
interest in Coast Energy Investments, Inc., a limited partnership in which
Coast Energy Group, Inc. was a 50% limited partner. 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 net 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, non-compete agreements and other related expenses.
5. SUBSEQUENT EVENTS
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 herein).
41
<PAGE> 46
CORNERSTONE PROPANE PARTNERS, L.P.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
December 17, 1996
to December 31, 1996
--------------------
<S> <C>
Statement of Operations Data:
Revenues $40,370
Gross profit (a) 9,029
Depreciation and amortization 575
Operating income 4,076
Interest expense 778
Provision for income taxes 5
Net income 3,293
Operating Data:
EBITDA (b) $4,651
Capital expenditures (c) 504
Retail propane gallons sold 15,417
</TABLE>
- ----------
(a) Gross profit is computed by reducing total revenues by the direct cost of
the products sold.
(b) EBITDA is defined as operating income plus 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 (as a
measure of liquidity or ability to service debt obligations), but provides
additional information for evaluating the Partnership's ability to make the
Minimum Quarterly Distribution.
(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 includes
expenditures for repair and replacement of property, plant and equipment,
and (iii) acquisition capital expenditures.
42
<PAGE> 47
SYN Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
July 1, 1995
to August 14, August 15, October 1, October 1,
1995 1995 to July 1, 1996 1995 to 1996 to
(Predecessor December 31, to December 16, December 31, December 16,
Basis) 1995 1996 1995 1996
------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 7,568 $38,589 $44,066 $28,024 $26,183
Gross profit (a) 3,937 20,214 20,744 15,231 11,801
Depreciation and amortization 472 1,728 1,904 1,217 904
Operating income (loss) (167) 5,307 3,769 4,298 3,739
Interest expense 816 2,347 3,311 1,758 1,646
Provision for income taxes (373) 1,350 298 1,262 848
Net income (loss) (610) 1,610 160 1,278 1,245
Operating Data:
EBITDA (b) $ 305 $ 7,035 $ 5,673 $ 5,515 $ 4,643
Capital expenditures (c) - 4,497 4,709 695 3,138
Retail propane gallons sold 6,952 35,443 39,468 25,738 23,040
</TABLE>
- ----------
(a) Gross profit is computed by reducing total revenues by the direct cost of
the products sold.
(b) EBITDA is defined as operating income plus 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 (as a
measure of liquidity or ability to service debt obligations), but provides
additional information for evaluating the Partnership's ability to make the
Minimum Quarterly Distribution.
(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 includes
expenditures for repair and replacement of property, plant and equipment,
and (iii) acquisition capital expenditures.
43
<PAGE> 48
EMPIRE ENERGY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
October 1,
July 1, 1995 to July 1, 1996 1995 to October 1, 1996
December 31, to December 16, December 31, to December 16,
1995 1996 1995 1996
--------------- ------------ ----------- ----------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 44,035 $ 43,201 $ 31,812 $ 28,166
Gross profit (a) 22,828 19,891 16,733 12,766
Depreciation and amortization 2,726 2,929 1,438 1,344
Operating income 5,558 3,567 6,822 5,036
Interest expense 1,112 3,621 736 1,917
Provision for income taxes 1,900 32 2,450 1,197
Net income (loss) 2,546 (86) 3,636 1,922
Operating Data:
EBITDA (b) $ 8,284 $ 6,496 $ 8,260 $ 6,380
Capital expenditures (c) $ 3,110 $ 2,823 $ 2,705 $ 1,475
Retail propane gallons sold 49,249 40,847 34,640 24,700
</TABLE>
- ----------
(a) Gross profit is computed by reducing total revenues by the direct cost of
the products sold.
(b) EBITDA is defined as operating income plus 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 (as a
measure of liquidity or ability to service debt obligations), but provides
additional information for evaluating the Partnership's ability to make the
Minimum Quarterly Distribution.
(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 includes
expenditures for repair and replacement of property, plant and equipment,
and (iii) acquisition capital expenditures.
44
<PAGE> 49
CGI HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
November 1,
August 1, 1995 August 1, 1996 1995 to November 1, 1996
to December 31, to December 16, December 31, to December 16,
1995 1996 1995 1996
----------------- ---------------- -------------- -------------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 159,104 $ 182,029 $ 75,034 $ 73,854
Gross profit (a) 12,624 13,924 6,391 6,015
Depreciation and amortization 1,672 1,604 689 537
Operating income 1,341 1,741 1,990 1,851
Interest expense 2,364 2,002 979 708
Provision for income taxes (credit) (529) (25) 142 466
Net income (loss) (494) (236) 869 677
Operating Data:
EBITDA (b) $ 3,013 $ 3,345 $ 2,679 $ 2,388
Capital expenditures (c) $ 4,556 $ 1,083 $ 1,061 $ 489
Retail propane gallons sold 13,508 13,380 7,088 6,367
</TABLE>
- ----------
(a) Gross profit is computed by reducing total revenues by the direct cost of
the products sold, except for depreciation and amortization.
(b) EBITDA is defined as operating income plus 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 (as a
measure of liquidity or ability to service debt obligations), but provides
additional information for evaluating the Partnership's ability to make the
Minimum Quarterly Distribution.
(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 includes
expenditures for repair and replacement of property, plant and equipment,
and (iii) acquisition capital expenditures.
45
<PAGE> 50
CORNERSTONE PROPANE PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the historical financial condition and results of
operations for the Partnership and its principal predecessor entities, Synergy,
Empire Energy and Coast, should be read in conjunction with the Selected
Historical Financial and Operating Data and notes thereto and the historical and
pro forma financial statements and notes thereto included elsewhere in this Form
10-Q. No separate discussion of the historical financial condition and results
of operations of Myers has been included based on the Partnership's belief that
such information is not material to the Partnership.
GENERAL
The Partnership is a Delaware limited partnership recently formed to own and
operate the propane business and assets of Synergy, Empire Energy, Myers and
Coast. It is the fifth largest retail marketer of propane in the United States,
serving more than 360,000 residential, commercial, industrial and agricultural
customers from 312 customer service centers in 26 states.
Because a substantial portion of the Partnership's propane is used in the
weather-sensitive residential markets, the temperatures realized in the
Partnership's areas of operations, particularly during the six-month peak
heating season, have a significant effect on the financial performance of the
Partnership. In any given area, warmer-than-normal temperatures will tend to
result in reduced propane use. Therefore, information on normal temperatures is
used by the Partnership in understanding how historical results of operations
are affected by temperatures that are colder or warmer than normal and in
preparing forecasts of future operations, which are based on the assumption that
normal weather will prevail in each of the Partnership's regions.
In determining actual and normal weather for a given period of time, the
Partnership compares the actual number of Heating Degree Days for such period to
the average number of Heating Degree Days for a longer time period assumed to
more accurately reflect the average normal weather, in each case as such
information is published by the National Weather Service Climate Analysis
Center, for each measuring point in each of the Partnership's regions. Synergy
and Empire Energy have historically used the 30-year period from 1961-1990, and
Coast has historically used a 10-year rolling average. The Partnership then
calculates weighted averages, based on retail volumes attributable to each
measuring point, of actual and normal Heating Degree Days within each region.
Based on this information, the Partnership calculates a ratio of actual Heating
Degree Days to normal Heating Degree Days, first on a regional basis and then on
a Partnership-wide basis.
Although the Partnership believes that comparing temperature information for a
given period of time to "normal" temperatures is helpful for an understanding of
the Partnership's results of operations, when comparing variations in weather to
changes in total revenues or operating profit, attention is drawn to the fact
that a portion of the Partnership's total revenues is not weather-sensitive and
other factors such as price, competition, product supply costs and customer mix
also
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CORNERSTONE PROPANE PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
affect the results of operations. Furthermore, actual weather conditions in
the Partnership's regions can vary substantially from historical experience.
Gross profit margins are not only affected by weather patterns but also by
changes in customer mix. For example, sales to residential customers ordinarily
generate higher margins than sales to other customer groups, such as commercial
or agricultural customers. In addition, gross profit margins vary by geographic
region. Accordingly, profit margins could vary significantly from year to year
in a period of identical sales volumes.
The Partnership intends to purchase a portion of its propane (approximately 50%
to 60% of a given typical year's projected propane needs) pursuant to agreements
with terms of less than one year at market prices. The balance of its propane
needs for the year will be satisfied in the spot market. The Partnership
generally does not enter into supply contracts containing "take or pay"
provisions.
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 increased margins and is not considered to be
material to operations or liquidity for the fourteen-day period ended December
31, 1996.
ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS
During the fourteen-day period from commencement on December 17, 1996 to
December 31, 1996, the Partnership sold 15.4 million retail gallons and 18.6
million wholesale gallons. Retail operating revenues and wholesale revenues were
$17.8 million and $22.6 million, respectively, for the fourteen-day period.
Retail gross profit amounted to $8.0 million and gross profit per retail gallon
was approximately $0.52 per gallon for the fourteen-day period ended December
31, 1996. As a percentage of revenues, operating expenses were 9.4% and general
and administrative expenses were 1.4%. Total EBITDA was $4.7 million and
approximately $0.30 per retail gallon for the fourteen-day period. EBITDA
should not be considered as an alternative to net income (as an indicator of
operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations), but provides additional
information for evaluating the Partnership's ability to distribute the Minimum
Quarterly Distribution.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash provided by operating activities during the fourteen-day period ended
December 31, 1996 was $4.5 million. Cash flow from operations included a net
income of $3.3 million and non-cash charges of $0.6 million for the period,
comprised principally of depreciation and amortization
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CORNERSTONE PROPANE PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
expense. The impact of working capital changes increased cash flow by
approximately $0.6 million.
Cash used in investment activities for the fourteen-day period ended December
31, 1996 totaled $0.5 million, which was principally used for purchases of
property and equipment. Cash used in financing activities was $2.4 million for
the fourteen-day period ended December 17, 1996. This amount reflects net
repayments on the Working Capital Facility.
On December 17, 1996, Cornerstone Propane Partners, L.P. completed its initial
public offering, proceeds from which amounted to $191.8 million. Concurrently
with the IPO, Cornerstone Propane, L.P. (the "Operating Partnership") issued
$220.0 million of Senior Notes and borrowed $12.8 million on its Working Capital
Facility. Also on the IPO date, the Operating Partnership received cash of $22.4
million from the Predecessor Companies.
Proceeds from the IPO, Senior Notes and the Working Capital Facility were used
to repay liabilities assumed by the Operating Partnership ($337.6 million), to
make distributions to the Special General Partner to redeem its preferred stock
($61.2 million) and to provide net worth to the Special General Partner ($15.5
million). The balance ($10.3 million) was used to pay expenses of the
Partnership organization and formation.
FINANCING AND SOURCES OF LIQUIDITY
On December 17, 1996, the Operating Partnership issued $220.0 million of Senior
Notes with an annual interest rate of 7.53% pursuant to note purchase agreements
with various investors (collectively, the "Note Agreement"). The Senior Notes
mature on December 30, 2010, and require semi-annual interest payments
commencing December 30, 1996. The Note Agreement requires that the principal be
paid in equal annual payments of $27.5 million starting December 30, 2003.
The Operating Partnership's obligations under the Note Agreement are secured, on
an equal and ratable basis with its obligations under the Bank Credit Agreement,
by a first priority security interest in the Operating Partnership's inventory,
accounts receivable and certain customer storage tanks. The Note Agreement
contains customary representations, warranties, events of defaults and covenants
applicable to the Operating Partnership and its "Restricted Subsidiaries" (as
defined therein), including limitations, among others, on the ability of the
Operating Partnership and its Restricted Subsidiaries to incur additional
indebtedness, create liens, make investments and loans, enter into mergers,
consolidations or sales of all or substantially all assets and make asset sales.
Generally, so long as no default exists or would result, the Operating
Partnership is permitted to make any Restricted Payment (as defined in the Note
Agreement and including distributions to the Partnership) during each fiscal
quarter in amount not in excess of Available Cash with respect to the
immediately preceding quarter.
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CORNERSTONE PROPANE PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Also on the same date, the Operating Partnership entered a bank credit agreement
consisting of a working capital facility (the "Working Capital Facility") and an
acquisition facility (the "Acquisition Facility"). The Working Capital Facility
provides for borrowings up to $50 million (including a $30 million sublimit for
letters of credit through March 31, 1997 and $20 million thereafter), and
matures on December 31, 1999. The Bank Credit Agreement provides that there must
be no amount outstanding under the Working Capital Facility (excluding letters
of credit) in excess of $10 million for at least 30 consecutive days during each
fiscal year. Borrowings under the Working Capital Facility totaled $10.4 million
at December 31, 1996. Issued outstanding letters of credit totaled $18.4 million
at December 31, 1996. The Acquisition Facility provides the Operating
Partnership with the ability to borrow up to $75 million to finance propane
business acquisitions. The Acquisition Facility operates as a revolving facility
through December 31, 1999, at which time any loans then outstanding may be
converted to term loans and will amortize quarterly for a period of four years
thereafter. No amounts were outstanding at December 31, 1996. The Operating
Partnership's obligations under the Bank Credit Agreement are secured by a
security interest in the Operating Partnership's inventory, accounts receivable
and certain customer storage tanks.
Loans under the Bank Credit Agreement bear interest as a per annum rate equal to
either (at the Operating Partnership's option): (a) the sum (the "Base Rate") of
the applicable margin, and the higher of (i) the agent bank's prime rate and
(ii) the federal funds rate plus one-half of 1%, and (b) the sum (the
"Eurodollar Rate") of the applicable margin and the rate offered by the agent
bank to major banks in the offshore dollar market (as adjusted for applicable
reserve requirements, if any). The applicable margin for Base Rate loans varies
between 0% and .12%, and the applicable margin for Eurodollar Rate loans varies
between .25% and .80%, in each case depending upon the Operating Partnership's
ratio of consolidated "Debt" to "Consolidated Cash Flow" (as such terms are
defined in the Bank Credit Agreement). At December 31, 1996, the applicable Base
and Eurodollar Rates were 8.275% and 6.2375%, respectively. In addition, an
annual fee is payable quarterly by the Operating Partnership (whether or not
borrowings occur) ranging from .125% to .325% depending upon the ratio
referenced above.
The Bank Credit Agreement contains customary representations, warranties, events
of defaults and covenants including limitations, among others, on the ability of
the Operating Partnership and its "Restricted Subsidiaries" (as defined therein)
to incur or maintain certain indebtedness or liens, make investments and loans,
enter into mergers, consolidations or sales of all or substantially all of its
assets and make assets sales. Generally, so long as no default exists or would
result, the Operating Partnership is permitted to make any Restricted Payment
(as defined in the Bank Credit Agreement and including distributions to the
Partnership) during each fiscal quarter in amount not to exceed Available Cash
with respect to the immediately preceding quarter.
In addition, the Bank Credit Agreement provides that: (1) the Operating
Partnership not permit the ratio of its consolidated Debt (as defined in the
Bank Credit Agreement) less cash on hand (in
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CORNERSTONE PROPANE PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
excess of $1 million up to $10 million) to Consolidated Cash Flow (as defined in
the Bank Credit Agreement) to exceed 4.75:1.00 at any time on or before December
31, 1997, 4.50:1.00 at any time on or before December 31, 1998 and 4.25:1.00 at
any time thereafter; and (2) the Operating Partnership not permit the ratio of
its Consolidated Cash Flow to consolidated "Interest Expense" (as defined
therein) to be less than 2.00:1.00 prior to December 31, 1997, 2.25:1.00 any
time thereafter on or before December 31, 1998 and 2.50:1.00 at any time
thereafter.
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<PAGE> 55
SYN Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Analysis of Historical Results of Operations
The following discussion compares the results of operations and other data for
SYN Inc. ("Synergy") for the two and one-half month period ended December 16,
1996 to the three-month period ended December 31, 1995, and five and one-half
month period ended December 16, 1996 to the six-month period ended December 31,
1995.
Two and one-half months ended December 16, 1996 compared to three months ended
December 31, 1995
Volume. During the two and one-half months ended December 16, 1996, Synergy sold
23.0 million retail propane gallons, a decrease of 2.7 million gallons, or
10.5%, from the 25.7 million retail propane gallons sold during the three months
ended December 31, 1995. The decrease in retail volume was primarily
attributable to a reduction of 5.7 million gallons for the 14 days ended
December 31, 1996 offset by an increase of 3.0 million gallons due to
acquisitions and mergers since December 31, 1995. These acquisitions combined
with the completion by new management of new sales programs and activities
helped to increase volume despite slightly warmer weather in some regions served
by SYN Inc. in 1996 compared to 1995.
Revenues. Revenues decreased by $1.8 million, or 6.4%, to $26.2 million for the
two and one-half months ended December 16, 1996, as compared to $28.0 million
for the three months ended December 31, 1995. This decrease was primarily
attributable to a reduction in revenues of $7.1 million for the 14 days ended
December 31, 1996 offset by increased propane prices per gallon in the two and
one-half months ended December 16, 1996, resulting from increased costs during
that period as discussed below.
Cost of Product Sold. Cost of product sold increased by $1.6 million, or 12.5%,
to $14.4 million for the two and one-half months ended December 16, 1996, as
compared to $12.8 million for the three months ended December 31, 1995. The
increase in cost of product sold was primarily due to the increased sales volume
discussed above combined with an increase in the wholesale cost of propane,
which increased approximately 40% per gallon in the two and one-half months
ended December 16, 1996 compared to the same period of the prior year. This
increase was offset by a reduction of cost of product sold of $4.0 million for
the 14 days ended December 31, 1996. As a percentage of revenues, cost of
product sold increased to 55.0% for the two and one-half months ended December
16, 1996, as compared to 45.7% for the three months ended December 31, 1995.
Gross Profit. Gross profit decreased $3.4 million, or 22.4%, to $11.8 million
for the two and one-half months ended December 16, 1996, as compared to $15.2
million for the three months ended December 31, 1995. This decrease was
primarily due to a reduction of gross profit of $3.1 million for the 14 days
ended December 31, 1996.
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SYN Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General and Administrative Expenses. General and administrative expenses (which
include salaries and commissions and related party corporate administration
fees) decreased by $2.5 million, or 25.8%, to $7.2 million for the two and
one-half months ended December 16, 1996, as compared to $9.7 million for the
three months ended December 31, 1995. The majority of this decrease was
attributable to a reduction of expenses of $2.0 million for the 14 days ended
December 31, 1996 and reduced insurance expense. As a percentage of revenues,
general and administrative expenses decreased to 27.3% for the two and one-half
months ended December 16, 1996, as compared to 34.7% for the three months ended
December 31, 1995.
Depreciation and Amortization. Depreciation and amortization decreased $0.3
million, or 25.0%, to $0.9 million for the two and one-half months ended
December 16, 1996, as compared to $1.2 million for the three months ended
December 31, 1995. This decrease was primarily attributable to a slight timing
difference in computing amortization and depreciation on the assets acquired at
August 14, 1995 with the formation of Synergy and a reduction in depreciation
expense of $0.1 million for the 14 days ended December 31, 1996.
Operating Income (Loss). Operating income decreased $0.6 million, or 14%, to
$3.7 million for the two and one-half months ended December 16, 1996, as
compared to $4.3 million in the three months ended December 31, 1995. This
decrease was primarily due to the reduction of $1.0 million of operating income
for the fourteen days ended December 31, 1996 offset by reduced insurance
expense.
Interest Expense. Interest expense decreased by $0.1 million, or 5.6%, to $1.7
million for the two and one-half months ended December 16, 1996, as compared to
$1.8 million for the three months ended December 31, 1995. This decrease was
primarily due to the retirement of the debt effective December 17, 1996 with the
consummation of the Cornerstone Propane Partners, L.P. IPO.
Net Income. Synergy had a net income of $1.2 million for the two and one-half
months ended December 16, 1996, as compared to a net income of $1.3 million for
the three months ended December 31, 1995. This decrease was primarily
attributable to the decreased operating income offset by a lower provision for
income taxes.
EBITDA. Total EBITDA decreased by $0.9 million, or 16.4%, to $4.6 million for
the two and one-half months ended December 16, 1996, as compared to $5.5 million
for the three months ended December 31, 1995. The decrease in total EBITDA
reflects a reduction in EBITDA of $1.1 million for the 14 days ended December
31, 1996 offset by the reduction in operating and general and administrative
expenses discussed above. As a percentage of revenues, total EBITDA decreased to
17.7% for the two and one-half months ended December 16, 1996, as compared to
19.7% for the three months ended December 31, 1995. EBITDA should not be
considered as an alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow (as a measure of liquidity or
ability to service debt obligations), but provides additional information for
evaluating the Partnership's ability to distribute the Minimum Quarterly
Distribution.
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SYN Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Five and one-half Months ended December 16, 1996 compared to Six Months Ended
December 31, 1995
Volume. During the five and one-half months ended December 16, 1996, Synergy
sold 39.5 million retail propane gallons, a decrease of 2.9 million gallons, or
6.8%, compared to 42.4 million retail propane gallons sold during the six months
ended December 31, 1995. The decrease in retail volume was primarily
attributable to the longer sales period in fiscal 1995 offset by acquisitions
and mergers subsequent to December 31, 1995.
Revenues. Revenues decreased by $2.1 million, or 4.5%, to $44.1 million for the
five and one-half months ended December 16, 1996, as compared to $46.2 million
for the six months ended December 31, 1995. This decrease was primarily
attributable to the longer sales period in fiscal 1995 offset by increased
propane sales prices per gallon for the five and one-half months ended December
31, 1996.
Cost of Product Sold. Cost of product sold increased by $1.3 million, or 5.9%,
to $23.3 million for the five and one-half months ended December 16, 1996, as
compared to $22.0 million for the six months ended December 31, 1995. The
increase in cost of product sold was due to a higher wholesale cost of propane,
approximately 26% higher per gallon, partially offset by the exclusion of cost
of products sold during the fourteen-day period ended December 31, 1996.
Gross Profit. Gross profit decreased $3.4 million, or 14.0%, to $20.7 million
for the five and one-half months ended December 16, 1996, as compared to $24.1
million for the six months ended December 31, 1995. This decrease was primarily
due to the longer sales period in fiscal 1995.
General and Administrative Expenses. General and administrative expenses (which
include salaries and commissions and related party corporate administration
fees) decreased by $1.7 million, or 10.1%, to $15.1 million for the five and
one-half months ended December 16, 1996, as compared to $16.8 million for the
six months ended December 31, 1995. The majority of this decrease was
attributable to the longer sales period in fiscal 1995. As a percentage of
revenues, general and administrative expenses decreased to 34.2% for the five
and one-half months ended December 16, 1996, as compared to 36.4% for the six
months ended December 31, 1995.
Depreciation and Amortization. Depreciation and amortization decreased $0.3
million or 13.6% to $1.9 million for the five and one-half months ended December
16, 1996, as compared to $2.2 million for the six months ended December 31,
1995. This decrease was primarily attributable to the longer sales period in
fiscal 1995.
Operating Income. Operating income decreased $1.3 million, or 25.5%, to $3.8
million for the five and one-half months ended December 16, 1996, as compared to
$5.1 million in the four and
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SYN Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
one-half months ended December 31, 1995. This decrease was primarily due to the
longer sales period in fiscal 1995.
Interest Expense. Interest expense increased by $0.1 million or 3.1% to $3.3
million for the five and one-half months ended December 16, 1996, as compared to
$3.2 million for the six months ended December 31, 1995. This increase was
primarily due to the longer sales period in fiscal 1995.
Net Income. Synergy had a net income of $0.2 million for the five and one-half
months ended December 16, 1996, as compared to a net income of $1.0 million for
the six months ended December 31, 1995. This decrease was primarily attributable
to the longer sales period in fiscal 1995.
EBITDA. Total EBITDA decreased by $1.6 million, or 21.9%, to $5.7 million for
the five and one-half months ended December 16, 1996, as compared to $7.3
million for the six months ended December 31, 1995. The decrease in total EBITDA
reflects the effect of having 14 days less EBITDA in December 1996, when the
Company is more profitable. As a percentage of revenues, total EBITDA decreased
to 12.9% for the five and one-half months ended December 16, 1996, as compared
to 15.9% for the six months ended December 31, 1995. EBITDA should not be
considered as an alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow (as a measure of liquidity or
ability to service debt obligations), but provides additional information for
evaluating the Partnership's ability to distribute the Minimum Quarterly
Distribution.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash provided by operating activities during the five and one-half months ended
December 16, 1996 was $4.3 million. Cash flow from operations included a net
income of $0.2 million. Net income was reduced by non-cash charges of $2.4
million for the period, comprised principally of depreciation and amortization
expense. The impact of working capital changes increased cash flow by
approximately $1.7 million.
Cash used in investment activities for the five and one-half months ended
December 16, 1996 totaled $3.8 million, which was principally used to purchase
property and equipment. Cash used in financing activities was $0.3 million for
the five and one-half months ended December 16, 1996. This amount reflects
borrowings under Synergy's revolving credit line of $3.8 million, partially
offset by principal payments on other notes payable in the amount of $0.2
million and the payment of preferred stock dividends of $3.9 million.
Financing and Sources of Liquidity
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SYN Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On December 28, 1995, Synergy entered into a revolving credit agreement with
Bank of Boston, which was amended in August 1996. Synergy's revolving credit
facility consists of a revolving credit line of up to $30.0 million, including
up to $7.5 million for letters of credit. The revolving credit facility bears
interest at either the Eurodollar rate plus 2.0% or the prime rate plus .75%.
The obligations of Synergy under the revolving credit agreement are secured by
its accounts receivable, inventory, instruments and documents and a pledge of
the capital stock of its subsidiaries. The revolving credit agreement contains
customary operating and maintenance covenants. Synergy's obligations under the
revolving credit agreement have been jointly and severally guaranteed by each of
its subsidiaries. The revolving credit facility matures on December 31, 1997.
On July 31, 1996, Synergy entered into a term loan agreement with NPS in the
principal amount of approximately $52.8 million, secured by substantially all of
Synergy's personal property. The term loan bears interest at a rate of 9.12% per
annum. The debt and security interests under the term loan agreement are
subordinate to the debt owed to and security interests of Bank of Boston under
the revolving credit agreement. The term loan agreement contains customary
financial and performance covenants. No principal payments are due under the
term loan until it matures on August 1, 2005.
All of the above debt was repaid in full on December 17, 1996 with the proceeds
of the Cornerstone Propane Partners, L.P. public offering, the Cornerstone
Propane, L.P. Note Agreement and borrowings under the Cornerstone Propane, L.P.
Bank Credit Agreement.
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<PAGE> 60
EMPIRE ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Analysis of Historical Results of Operations
The following discussion compares the results of operations and other data for
Empire Energy Corporation ("Empire") for the two and one-half month period ended
December 16, 1996 to the three-month period ended December 31, 1995, and the
five and one-half month period ended December 16, 1996 to the six-month period
ended December 31, 1995.
Two and one-half months ended December 16, 1996 compared to three months ended
December 31, 1995
Volume. During the two and one-half months ended December 16, 1996, Empire sold
24.7 million retail propane gallons, a decrease of 9.9 million gallons, or
28.6%, from the 34.6 million retail propane gallons sold during the three months
ended December 31, 1995. The decrease in retail volume was attributable to a
reduction in gallons of 5.8 million for the fourteen days ended December 31,
1996 and a decrease of 4.1 million gallons primarily due to warmer weather in
the Company's market area.
Revenues. Total operating revenues decreased $3.6 million, or 11.3%, to $28.2
million for the two and one-half months ended December 16, 1996, as compared to
$31.8 million for the three months ended December 31, 1995. This decrease was
attributable to a reduction in operating revenues of $7.4 million for the
fourteen days ended December 31, 1996 offset by an increase in revenues due to
higher propane prices in the Company's core market area in fiscal 1996.
Cost of Product Sold. Total cost of product sold increased by $0.3 million, or
2.0%, to $15.4 million for the two and one-half months ended December 16, 1996,
as compared to $15.1 million for the three months ended December 31, 1995. The
increase was attributable to the higher propane prices in fiscal 1996 offset by
a reduction of cost of product sold of $3.8 million for the fourteen days ended
December 31, 1996.
Gross Profit. Gross profit decreased by $3.9 million, or 23.4%, to $12.8 million
for the two and one-half months ended December 16, 1996, as compared to $16.7
million for the three months ended December 31, 1995. This decrease was
primarily due to a reduction in gross profit of $3.6 million for the fourteen
days ended December 31, 1996.
General and Administrative Expenses. General and administrative expenses (which
include allowance for doubtful accounts) decreased by $2.1 million, or 24.7%, to
$6.4 million for the two and one-half months ended December 16, 1996, as
compared to $8.5 million for the three months ended December 31, 1995. The
decrease was due primarily to a reduction in expenses of $1.5 million for the
fourteen days ended December 31, 1996 and a decrease in insurance expense. As a
percentage of revenues, general and administrative expenses decreased to 22.7%
for the two and one-half months ended December 16, 1996, as compared to 26.7%
for the three months ended December 31, 1995.
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EMPIRE ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depreciation and Amortization. Depreciation and amortization decreased $0.1
million, or 7.1%, to $1.3 million for the two and one-half months ended December
16, 1996, as compared to $1.4 million for the three months ended December 31,
1995. This decrease was largely the result of a reduction of $0.3 million in
depreciation for the fourteen days ended December 31, 1996, offset by an
increase due to the revaluation of assets for purchase accounting adjustments in
August 1996.
Operating Income. Operating income decreased $1.8 million, or 26.5%, to $5.0
million for the two and one-half months ended December 16, 1996, as compared to
$6.8 million in the three months ended December 31, 1995. This increase was
primarily due to the longer sales period in fiscal 1995.
Interest Expense. Interest expense increased by $1.2 million to $1.9 million for
the two and one-half months ended December 16, 1996, as compared to $0.7 million
for the three months ended December 31, 1995. This increase was a result of debt
incurred in connection with the Management Buyout which occurred in August of
1996.
Net Income. The Company had a net income of $1.9 million for the two and
one-half months ended December 16, 1996, as compared to a net income of $3.6
million for the three months ended December 31, 1995. This decrease was
principally the result of a reduction in net income of $1.8 million for the
fourteen days ended December 31, 1996, and the increased interest expense,
offset by a lower provision for income taxes.
EBITDA. Total EBITDA decreased by $1.9 million, or 22.9%, to $6.4 million for
the two and one-half months ended December 16, 1996, as compared to $8.3 million
for the three months ended December 31, 1995. The decrease in total EBITDA
reflects the longer sales period in fiscal 1995. As a percentage of revenues,
total EBITDA decreased to 22.6% for the two and one-half months ended December
16, 1996, as compared to 26.0% for the three months ended December 31, 1995.
EBITDA should not be considered as an alternative to net income (as an indicator
of operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations), but provides additional
information for evaluating the Partnership's ability to distribute the Minimum
Quarterly Distribution.
Five and one-half Months ended December 16, 1996 compared to Six Months Ended
December 31, 1995
Volume. During the five and one-half months ended December 16, 1996, the Company
sold 40.8 million retail propane gallons, a decrease of 8.4 million gallons, or
17.1%, from the 49.2 million retail propane gallons sold during the six months
ended December 31, 1995. The decrease in retail volume was primarily
attributable to a reduction in gallons of 5.8 million for the fourteen days
ended December 31, 1996 and to warmer weather in the Company's market area.
57
<PAGE> 62
EMPIRE ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Revenues. Total operating revenues decreased $0.8 million, or 1.8%, to
$43.2 million for the five and one-half months ended December 16, 1996, as
compared to $44 million for the six months ended December 31, 1995. This
decrease was attributable to a reduction in operating revenues of $7.4 million
for the fourteen days ended December 31, 1996 offset by an increase in revenues
due to higher propane prices in the Company's core market area in fiscal 1996.
Cost of Product Sold. Total cost of product sold increased by $2.1 million, or
9.9%, to $23.3 million for the five and one-half months ended December 16, 1996,
as compared to $21.2 million for the six months ended December 31, 1995. The
increase was primarily attributable to the higher propane prices in fiscal 1996
offset by a reduction of cost of product sold of $3.8 million for the fourteen
days ended December 31, 1996. As a percentage of revenues, cost of product sold
increased to 53.9% for the five and one-half months ended December 16, 1996, as
compared to 48.2% for the six months ended December 31, 1995.
Gross Profit. Gross profit decreased $2.9 million, or 12.7%, to $19.9 million
for the five and one-half months ended December 16, 1996, as compared to $22.8
million for the six months ended December 31, 1995. This decrease was primarily
due to reduced sales volume offset by a higher gross profit per gallon.
General and Administrative Expenses. General and administrative expenses (which
include allowance for doubtful accounts) decreased by $1.2 million, or 8.2%, to
$13.4 million for the five and one-half months ended December 16, 1996, as
compared to $14.5 million for the six months ended December 31, 1995. The
decrease was due primarily to a reduction in expense of $1.5 million for the
fourteen days ended December 31, 1996. As a percentage of revenues, general and
administrative expenses decreased to 31.0% for the five and one-half months
ended December 16, 1996, as compared to 33.0% for the six months ended December
31, 1995.
Depreciation and Amortization. Depreciation and amortization increased $0.2
million, or 7.4%, to $2.9 million for the five and one-half months ended
December 16, 1996, as compared to $2.7 million for the six months ended December
31, 1995. This increase was largely the result of the revaluation of the assets
for purchase accounting adjustments in August of 1996, offset by a reduction of
$0.3 million in depreciation for the fourteen days ended December 31, 1996.
Operating Income. Operating income decreased $2.0 million, or 35.7%, to $3.6
million for the five and one-half months ended December 16, 1996, as compared to
$5.6 million in the six months ended December 31, 1995. This decrease was
primarily due to the longer sales period in 1995.
Interest Expense. Interest expense increased $2.5 million to $3.6 million for
the five and one-half months ended December 16, 1996, as compared to $1.1
million for the six months ended
58
<PAGE> 63
EMPIRE ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31, 1995. This increase was a result of new debt for the Management
Buyout which occurred in August of 1996.
Net Loss. The Company had a net loss of $0.1 million for the five and one-half
months ended December 16, 1996, as compared to a net income of $2.5 million for
the six months ended December 31, 1995. This decrease was primarily the result
of a reduction in net income of $1.8 million for the fourteen days ended
December 31, 1996, and the increase in interest expense, offset by a lower
provision for income taxes.
EBITDA. Total EBITDA decreased by $1.8 million, or 21.7%, to $6.5 million for
the five and one-half months ended December 16, 1996, as compared to $8.3
million for the six months ended December 31, 1995. The decrease in total EBITDA
reflects the longer sales period in 1995. As a percentage of revenues, total
EBITDA decreased to 15% for the five and one-half months ended December 16,
1996, as compared to 18.8% for the six months ended December 31, 1995. EBITDA
should not be considered as an alternative to net income (as an indicator of
operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations), but provides additional
information for evaluating the Partnership's ability to distribute the Minimum
Quarterly Distribution.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash used in operating activities during the five and one-half months ended
December 16, 1996 was $8.8 million. Cash flow from operations included a net
loss of $0.1 million, largely offset by non-cash charges of $2.8 million for the
period, comprised principally of depreciation and amortization expense. The
impact of working capital changes decreased cash flow by approximately $11.5
million.
Cash used in investment activities for the five and one-half months ended
December 16, 1996 totaled $3.0 million, which was principally used for purchase
of property and equipment. Cash provided by financing activities was $10.3
million for the five and one-half months ended December 16, 1996. This amount
reflects borrowings under the Company's revolving credit line and funding from
the Management Buyout credit facilities of $10.4 million, partially offset by
principal payments on other notes payable in the amount of $0.1 million.
Financing and Sources of Liquidity
In connection with the Management Buyout on August 1, 1996, Empire Energy
obtained a new credit facility from Bank of Boston replacing its prior credit
facilities. The new credit facility
59
<PAGE> 64
EMPIRE ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
provides for loans of $124.0 million, including (i) a $42.0 million term loan,
which matures on December 31, 2002, (ii) a $52.0 million second term loan, which
matures on December 31, 2006, (iii) a $20.0 million working capital facility
which matures on June 30, 2001, and (iv) a $10.0 million acquisition credit
facility, which matures on December 30, 2002. These loans bear interest at rates
ranging from the Bank of Boston prime rate up to 3.25% plus the Eurodollar rate,
depending on the type of loan and the amount of debt outstanding. The new credit
facility includes working capital, cash flow and net worth requirements as well
as dividend and capital expenditure restrictions and is secured by all goods,
machinery, equipment and other personal property of Empire Energy. In addition,
Empire Energy's obligations under the credit facility have been jointly and
severally guaranteed by each of its subsidiaries.
All of the above debt was repaid in full on December 17, 1996 with the proceeds
of the Cornerstone Propane Partners, L.P. public offering, the Cornerstone
Propane, L.P. Note Agreement and borrowings under the Cornerstone Propane, L.P.
Bank Credit Agreement.
60
<PAGE> 65
CGI HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Analysis of Historical Results of Operations
The following discussion compares the results of operations and other data for
CGI Holdings, Inc. and its subsidiaries ("Coast") for the one and one-half month
period ended December 16, 1996 to the two-month period ended December 31, 1995,
and the four and one-half month period ended December 16, 1996 to the five-month
period ended December 31, 1995.
One and one-half months ended December 16, 1996 compared to two months ended
December 31, 1995
Volume. During the one and one-half months ended December 16, 1996, Coast sold
57.0 million wholesale propane gallons of natural gas liquids, a decrease of 9.4
million gallons, or 14.2%, from the 66.4 million gallons sold in the two months
ended December 31, 1995. The decrease in volume was primarily attributable to
the 1996 period having fourteen days less than the 1995, period offset by
increased demand due to cooler weather. In the fourteen-day period from December
17, 1996 to December 31, 1996, sales volume amounted to 18.6 million gallons.
During the one and one-half months ended December 16, 1996, Coast sold 6.4
million retail propane gallons, a decrease of 0.7 million gallons, or 10.2%,
from the 7.1 million retail propane gallons sold during the two months ended
December 31, 1995. The decrease in retail volume is primarily attributable to
the 1996 period having fourteen days less than the 1995 period offset by the
impact of cooler weather in some of the retail markets served by Coast in 1996.
Retail sales volume in the fourteen-day period from December 17, 1996 to
December 31, 1996 period amounted to 2.2 million gallons.
Revenues. Revenues decreased by $1.2 million, or 1.6%, to $73.9 million for the
one and one-half months ended December 16, 1996, as compared to $75.0 million
for the two months ended December 31, 1995. The decrease was primarily
attributable to the 1996 period having fourteen days less than the 1995 period
offset by increases in propane and natural gas sales prices. Revenue in the
fourteen-day period from December 17, 1996 to December 31, 1996 amounted to
$25.6 million. Retail operating revenues increased by $0.3 million, or 3.2%, to
$8.1 million for the one and one-half months ended December 16, 1996, as
compared to $7.9 million for the two months ended December 31, 1995. The
increase resulted from the impact of colder weather in many retail markets
served by Coast. This increase is offset by the 1996 period having fourteen days
less than the 1995 period. Retail operating revenues relating to the
fourteen-day period ended December 31, 1996 amounted to $3.0 million.
Cost of Product Sold. Cost of product sold decreased by $0.8 million, or 1.2%,
to $67.8 million for the one and one-half months ended December 16, 1996, as
compared to $68.6 million for the two months ended December 31, 1995. The
decrease in cost of product sold was primarily due to the 1996 period having
fourteen days less than the 1995 period offset by higher propane costs per
gallon. The cost of product sold in the fourteen-day period ended December 31,
1996 amounted to $23.3 million. Cost of retail product sold, primarily the cost
of propane, increased by $0.8
61
<PAGE> 66
CGI HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
million, or 21.1%, to $4.5 million for the one and one-half months ended
December 16, 1996, as compared to $3.7 million for the two months ended December
31, 1995. The cost per gallon of propane for the retail business increased from
$0.48 in the two months ended December 31, 1995 to $0.67 in the one and one-half
months ended December 16, 1996, reflecting heavier demand in 1996. As a
percentage of revenues, cost of product sold increased to 91.9% for the one and
one-half months ended December 16, 1996, as compared to 91.5% for the two months
ended December 31, 1995.
Gross Profit. Gross profit decreased $0.4 million, or 5.9%, to $6.0 million for
the one and one-half months ended December 16, 1996, as compared to $6.4 million
for the two months ended December 31, 1995. The decrease was primarily
attributable to the 1996 period having fourteen days less than the 1995 period
offset by increased margins due to inventory purchased at advantageous prices.
Retail gross profits decreased by $0.6 million, or 13.2%, to $3.6 million for
the one and one-half months ended December 16, 1996, as compared to $4.2 million
for the two months ended December 31, 1995. This decrease was primarily due to
the 1996 period having fourteen days less than the 1995 period offset by an
increase in volumes. Gross profit per retail gallon decreased by $0.02, or
3.4%, to $0.57 per gallon for the one and one-half months ended December 16,
1996 from $0.59 per gallon for the two months ended December 31, 1995.
Operating Expenses. Operating expenses decreased $0.3 million, or 9.3%, to $3.0
million for the one and one-half months ended December 16, 1996, as compared to
$3.3 million for the two months ended December 31, 1995. The decrease was
primarily attributable to the 1996 period having fourteen days less than the
1995 period. Operating expenses for the fourteen-day period were $1.0 million.
Operating expenses for retail operations decreased by $0.4 million, or 18.5%, to
$1.8 million in the one and one-half months ended December 16, 1996, as compared
to $2.2 million in the two months ended December 31, 1995 due to the 1996 period
having fourteen days less than the 1995 period. As a percentage of revenues,
operating expenses decreased to 4.0% for the one and one-half months ended
December 16, 1996, as compared to 4.4% for the two months ended December 31,
1995.
General and Administrative Expenses. General and administrative expenses (which
include corporate administrative expenses) increased by $0.2 million, or 51.2%,
to $0.6 million for the one and one-half months ended December 16, 1996, as
compared to $0.4 million for the two months ended December 31, 1995. The
majority of this increase was attributable to an increase in salaries, travel
and relocation expenses in conjunction with acquisition matters offset by the
1996 period having fourteen days less than the 1995 period. General and
administrative expenses for the fourteen-day period amounted to $0.2 million. As
a percentage of revenues, general and administrative expenses increased to 0.9%
for the one and one-half months ended December 16, 1996, as compared to 0.6% for
the two months ended December 31, 1995.
62
<PAGE> 67
CGI HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depreciation and Amortization. Depreciation and amortization decreased $0.2
million, or 22.1%, to $0.5 million for the one and one-half months ended
December 16, 1996, as compared to $0.7 million for the two months ended December
31, 1995. This decrease was primarily attributable to the 1996 period having
fourteen days less than the 1995 period. Depreciation expense for the
fourteen-day period ended December 31, 1996 amounted to $0.2 million.
Operating Income. Operating income decreased $0.1 million, or 7.0%, to $1.9
million for the one and one-half months ended December 16, 1996, as compared to
$2.0 million in the two months ended December 31, 1995. This decrease was
primarily due the 1996 period having fourteen days less than the 1995 period.
Operating income for the fourteen-day period ended December 31, 1996 amounted to
$0.9 million.
Interest Expense. Interest expense decreased by $0.3 million, or 27.7%, to $0.7
million for the one and one-half months ended December 16, 1996, as compared to
$1.0 million for the two months ended December 31, 1995. This decrease was
primarily due to the retirement of debt effective December 17, 1996 with the
consummation of the Cornerstone Propane Partners, L.P. IPO. Interest expense for
the fourteen-day period ended December 31, 1996 was $0.1 million.
Net Income. Coast had a net income of $0.7 million for the one and one-half
months ended December 16, 1996, as compared to a net income of $0.9 million for
the two months ended December 31, 1995. This decrease was primarily attributable
to the 1996 period having fourteen days less than the 1995 period offset by both
higher wholesale and retail prices in 1996.
EBITDA. Total EBITDA decreased by $0.3 million, or 10.9%, to $2.4 million for
the one and one-half months ended December 16, 1996, as compared to $2.7 million
for the two months ended December 31, 1995. Coast's retail EBITDA decreased by
$0.2 million, or 7.6%, to $1.9 million for the one and one-half months ended
December 16, 1996, as compared to $2.0 million for two months ended December 31,
1995. The decrease in total EBITDA was due to the 1996 period having fourteen
days less than the 1995 period offset by both higher earnings from wholesale
operations and increased earnings from retail operations primarily due to
internal customer growth. As a percentage of revenues, total EBITDA decreased to
3.2% for the one and one-half months ended December 16, 1996, as compared to
3.6% for the two months ended December 31, 1995. EBITDA should not be considered
as an alternative to net income (as an indicator of operating performance) or as
an alternative to cash flow (as a measure of liquidity or ability to service
debt obligations), but provides additional information for evaluating the
Partnership's ability to distribute the Minimum Quarterly Distribution.
63
<PAGE> 68
CGI HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Four and One-Half Months ended December 16, 1996 compared to Five Months Ended
December 31, 1995
Volume. During the four and one-half months ended December 16, 1996, Coast sold
166.1 million wholesale propane gallons of natural gas liquids, a decrease of
15.2 million gallons, or 8.4%, from the 181.3 million gallons sold in the five
months ended December 31, 1995. The decrease in volume was primarily
attributable to the 1996 period having fourteen days less than the 1995 period.
Sales volume for the fourteen-day period ended December 31, 1996 amounted to
18.6 million gallons. During the four and one-half months ended December 16,
1996, Coast sold 13.4 million retail propane gallons, a decrease of 0.1 million
gallons, or 0.9%, from the 13.5 million retail propane gallons sold during the
five months ended December 31, 1995. The decrease in retail volume was primarily
attributable to the 1996 period having fourteen days less than the 1995 period
offset by the impact of colder weather this year in some of the retail markets
served by Coast in the 1996 period.
Revenues. Revenues increased by $23.0 million, or 14.4%, to $182.0 million for
the four and one-half months ended December 16, 1996, as compared to $159.1
million for the five months ended December 31, 1995. This increase was primarily
attributable to an increase in wholesale natural gas and propane prices. Retail
operating revenues increased by $1.7 million, or 11.7%, to $16.5 million for the
four and one-half months ended December 16, 1996, as compared to $14.8 million
for the five months ended December 31, 1995. This increase was attributable to
increases in propane prices offset by the 1996 period having fourteen days less
than the 1995 period.
Cost of Product Sold. Cost of product sold increased by $21.6 million, or 14.8%,
to $168.1 million for the four and one-half months ended December 16, 1996, as
compared to $146.5 million for the five months ended December 31, 1995. The
increase in cost of product sold was primarily due to the increase in the
wholesale cost of natural gas and propane, which increased by approximately
21.4% and 43.5%, respectively, in the four and one-half months ended December
16, 1996, as compared to the five months ended December 31, 1995. Cost of retail
product sold, increased by $1.7 million, or 25.5%, to $8.6 million for the four
and one-half months ended December 16, 1996, as compared to $6.8 million for the
five months ended December 31, 1995, as a result of the increase in propane
prices offset by the 1996 period having fourteen days less than the 1995 period.
The cost per gallon of propane for the retail business increased from $0.46 in
the five months ended December 31, 1995 to $0.59 in the four and one-half months
ended December 16, 1996, reflecting the increase in propane prices. As a
percentage of revenues, cost of product sold increased to 92.4% for the four and
one-half months ended December 16, 1996, as compared to 92.1% for the five
months ended December 31, 1995.
Gross Profit. Gross profit increased $1.3 million, or 10.3%, to $13.9 million
for the four and one-half months ended December 16, 1996, as compared to $12.6
million for the five months ended December 31, 1995. The increase was primarily
attributable to increased margins in Coast's wholesale business due to inventory
purchased at advantageous prices, offset by the 1996 period
64
<PAGE> 69
CGI HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
having fourteen days less than 1995. Retail gross profits remained constant at
$7.9 million for the four and one-half months ended December 16, 1996, and the
five months ended December 31, 1995. The decrease in gross profit due to
fourteen less days in the 1996 period is offset by increased profits resulting
from higher volumes sold. Gross profit per retail gallon remained constant at
$0.59 per gallon for the four and one-half months ended December 16, 1996 and
the five months ended December 31, 1995.
Operating Expenses. Operating expenses decreased $0.1 million, or 0.9%, to $8.2
million for the four and one-half months ended December 16, 1996, as compared to
$8.3 million for the five months ended December 31, 1995, primarily due to
fourteen less days in the 1996 period. Operating expenses during the fourteen
days ended December 31, 1996 were $1.0 million. Operating expenses for the
retail business decreased by $0.2 million, or 3.4%, to $4.9 million in the four
and one-half months ended December 16, 1996, as compared to $5.1 million in the
five months ended December 31, 1995, due to the 1996 period having fourteen days
less than the 1995 period. As a percentage of revenues, operating expenses
decreased to 4.5% for the five months ended December 31, 1995, as compared to
5.2% for the four and one-half months ended December 16, 1996.
Sale of Partnership Interest. Effective October 1, 1996, Coast terminated its
participation and interest in Coast Energy Investments, Inc., a limited
partnership in which Coast Energy Group, Inc., a wholly owned subsidiary of
Coast, had been a 50% limited partner. The original partnership agreement
provided for a minimum investment term through December 1997. The termination
resulted in the sale of Coast's partnership interest to its 50% partner and an
employee of the partnership. Coast recorded a net loss on the disposition of the
partnership interest of $0.7 million. This amount consisted of a $0.2 million
loss on the partnership investment and $0.5 million of termination costs
consisting of salary, consulting, non-compete agreements and other related
expenses.
General and Administrative Expenses. General and administrative expenses (which
include corporate administrative expenses) increased by $0.4 million, or 28.4%,
to $1.7 million for the four and one-half months ended December 16, 1996, as
compared to $1.4 million for the five months ended December 31, 1995. The
majority of this increase was attributable to outside services and travel
expenses in conjunction with acquisition matters, offset by the 1996 period
having fourteen days less than 1995. General and administrative expenses for the
fourteen-day period ended December 31, 1996 amounted to $0.2 million. As a
percentage of revenues, general and administrative expenses increased to 1.0%
for the four and one-half months ended December 16, 1996, as compared to 0.9%
for the five months ended December 31, 1995.
Depreciation and Amortization. Depreciation and amortization decreased $0.1
million, or 4.1%, to $1.6 million for the four and one-half months ended
December 16, 1996, as compared to $1.7 million for the five months ended
December 31, 1995. This decrease was primarily attributable to
65
<PAGE> 70
CGI HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the 1996 period having fourteen days less than the 1995 period. Depreciation
expense for the fourteen-day period ended December 31, 1996 totaled $0.2
million.
Operating Income. Operating income increased $0.4 million, or 29.8%, to $1.7
million for the four and one-half months ended December 16, 1996, as compared to
$1.3 million in the five months ended December 31, 1995. This increase was
primarily due to both higher retail and wholesale prices in 1996 offset by the
1996 period having fourteen days less than 1995. Operating income for the
fourteen-day period ended December 31, 1996 amounted to $0.9 million.
Interest Expense. Interest expense decreased by $0.4 million, or 15.3%, to $2.0
million for the four and one-half months ended December 16, 1996, as compared to
$2.4 million for the five months ended December 31, 1995. This decrease was
primarily due to the 1996 period having fourteen days less than the 1995 period
and relatively lower interest rates in the four and one-half month period ended
December 16, 1996 than in the five month period ended December 31, 1995.
Interest expense incurred in the fourteen-day period ended December 31, 1996 was
$0.1 million.
Net Loss. Coast had a net loss of $0.2 million for the four and one-half months
ended December 16, 1996, as compared to a net loss of $0.5 million for the five
months ended December 31, 1995. The change was primarily attributable to an
increase in wholesale sales and profits in 1996, offset by the 1996 period
having fourteen days less than the 1995 period.
EBITDA. Total EBITDA increased by $0.3 million, or 11.0%, to $3.3 million for
the four and one-half months ended December 16, 1996, as compared to $3.0
million for the five months ended December 31, 1995. Coast's retail EBITDA
increased by $0.2 million, or 5.3%, to $3.0 million for the four and one-half
months ended December 16, 1996, as compared to $2.9 million for the five months
ended December 31, 1995. The increase in total EBITDA reflects the impact of
higher earnings from wholesale operations and increased earnings from retail
operations primarily due to internal customer growth, offset by the 1996 period
having fourteen days less than the 1995 period. As a percentage of revenues,
total EBITDA decreased to 1.8% for the four and one-half months ended December
16, 1996, as compared to 1.9% for the five months ended December 31, 1995.
EBITDA should not be considered as an alternative to net income (as an indicator
of operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations), but provides additional
information for evaluating the Partnership's ability to distribute the Minimum
Quarterly Distribution.
66
<PAGE> 71
CGI HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash used in operating activities during the four and one-half months ended
December 16, 1996 was $2.6 million. Cash flow from operations included a net
loss of $0.2 million, largely offset by non-cash charges of $1.3 million for the
period, comprised principally of depreciation and amortization expense. The
impact of working capital changes decreased cash flow by approximately $3.7
million.
Cash used in investment activities for the four and one-half months ended
December 16, 1996 totaled $1.0 million, which was principally used in purchases
of property and equipment. Cash provided by financing activities was $4.7
million for the four and one-half months ended December 16, 1996. This amount
reflects borrowings under Coast's revolving credit line of $6.0 million,
partially offset by principal payments on existing bank notes, capital lease
obligations and other notes payable in the amount of $1.3 million.
Financing and Sources of Liquidity
As of December 16, 1996, the total outstanding indebtedness under Coast's credit
facility totaled $19.0 million. The outstanding balance under the credit
facility represents an increase of $5.9 million since July 31, 1996, primarily
due to purchases of customer tanks, capital expenditures, payments on term notes
and working capital charges.
The credit facility and subordinated notes were repaid in full on December 17,
1996, with the proceeds of Cornerstone Propane Partners, L.P. public offering,
the Cornerstone Propane, L.P. Note Agreement and borrowings under the
Cornerstone Propane, L.P. Bank Credit Agreement.
67
<PAGE> 72
CORNERSTONE PROPANE PARTNERS, L.P.
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
a) Exhibits:
(27) Financial Data Schedule
b) Reports on Form 8-K:
None
68
<PAGE> 73
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 thereunto duly authorized.
Cornerstone Propane Partners, L.P.
(Registrant)
By: Cornerstone Propane GP, Inc.
as Managing General Partner
Date: February 14, 1997 By: /s/ Ronald J. Goedde
-------------------------------------
Name: Ronald J. Goedde
Title: Executive Vice President
and Chief Financial Officer
69
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<PERIOD-START> DEC-17-1996
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