Prospectus Supplement to Prospectus Dated April 16, 1997
CORNERSTONE PROPANE PARTNERS, L.P.
On May 15, 1997, the Company filed with the Securities and
Exchange Commission its Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1997 (the "10-Q"). This Prospectus Supplement
contains the financial statements and management's discussion and
analysis of financial condition and results of operations for the
quarter ended March 31, 1997 contained in the 10-Q.
The date of this Prospectus Supplement is June 13, 1997.
<PAGE 2>
TABLE OF CONTENTS
FINANCIAL STATEMENTS
CORNERSTONE PROPANE PARTNERS, L.P.
Consolidated Balance Sheet as of March 31, 1997 . . 4
Consolidated Statement of Operations from
Commencement of Operations (on December 17, 1996) to
March 31, 1997, and for the three months ended
January 1, 1997, to March 31, 1997 . . . . . . . . 5
Consolidated Statement of Cash Flows from
Commencement of Operations (on December 17, 1996) to
March 31, 1997 . . . . . . . . . . . . . . . . . . 6
Consolidated Statement of Partners' Capital from
Commencement of Operations (on December 17, 1996) to
March 31, 1997 . . . . . . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . . . 8
CORNERSTONE PROPANE PARTNERS, L.P. (PRO FORMA)
Consolidated Statements of Operations for the
periods, July 1, 1996 to March 31, 1997, July 1,
1995 to March 31, 1996, January 1, 1997 to March 31,
1997 (Actual) and January 1, 1996 to March 31, 1996 9
Notes to Pro Forma Consolidated Financial
Information . . . . . . . . . . . . . . . . . . . . 20
SYN INC. (PREDECESSOR)
Consolidated Balance Sheet as of June 30, 1996 . . 22
Consolidated Statements of Operations for the
periods July 1, 1995 to August 14, 1995, August 15,
1995 to March 31, 1996, and January 1, 1996 to March
31, 1996 . . . . . . . . . . . . . . . . . . . . . 23
Consolidated Statement of Cash Flows for the period
July 1, 1995 to March 31, 1996 . . . . . . . . . . 24
Notes to Consolidated Financial Statements . . . . 25
<PAGE> 3
TABLE OF CONTENTS (Continued)
EMPIRE ENERGY CORPORATION (PREDECESSOR)
Consolidated Balance Sheet as of June 30, 1996 . . 27
Consolidated Statements of Operations for the
periods July 1, 1995 to March 31, 1996 and January
1, 1996 to March 31, 1996 . . . . . . . . . . . . . 29
Consolidated Statement of Cash Flows for the period
July 1, 1995 to March 31, 1996 . . . . . . . . . . 30
Notes to Consolidated Financial Statements . . . . 32
CGI HOLDINGS, INC. (PREDECESSOR)
Consolidated Balance Sheet as of July 31, 1996 . . 35
Consolidated Statements of Operations for the
periods August 1, 1995 to March 31, 1996 and
January 1, 1996 to March 31, 1996 . . . . . . . . . 37
Consolidated Statement of Cash Flows for the period
August 1, 1995 to March 31, 1996 . . . . . . . . . 38
Notes to Consolidated Financial Statements . . . . 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF CORNERSTONE
PROPANE PARTNERS, L.P. FOR THE THREE MONTHS ENDED
MARCH 31, 1997 (ACTUAL) TO THE THREE MONTHS ENDED
MARCH 31, 1996 (PRO FORMA) AND FOR THE NINE MONTHS
ENDED MARCH 31, 1997 (PRO FORMA) TO THE NINE MONTHS
ENDED MARCH 31, 1996 (PRO FORMA) . . . . . . . . . 41
<PAGE> 4
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION> March 31, 1997
--------------
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 23,115
Trade receivables, net 40,557
Inventories 19,539
Prepayments and other current assets 6,350
-----------
Total current assets 89,561
-----------
Property, plant and equipment, net of accumulated depreciation of
$3,274 240,550
Excess of cost over fair value, net 201,876
Other assets, net 11,572
----------_
Total assets $ 543,559
===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current portion of long-term debt $ 5,406
Trade accounts payable 33,444
Accrued liabilities 15,925
-----------
Total current liabilities 54,775
-----------
Long-term debt 224,135
Notes payable related party 2,353
Other non-current liabilities 14,663
-----------
Total liabilities 295,926
-----------
COMMITMENTS AND CONTINGENCIES (Note 6)
PARTNERS' CAPITAL
Common unitholders 143,232
Subordinated unitholders 99,351
General partners 5,050
-----------
Total partners' capital 247,633
-----------
Total liabilities and partners' capital $ 543,559
===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 5
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per Unit data)
(unaudited)
<TABLE>
<CAPTION>
From Commencement
of Operations
Three Months Ended (on December 17, 1996)
March 31, 1997 to March 31, 1997
------------------ ----------------------
<S> <C> <C>
REVENUE $220,566 $260,936
COST OF SALES 178,050 209,391
-------- --------
GROSS PROFIT 42,516 51,545
-------- --------
EXPENSES
Operating, general & administrative 23,590 27,968
Depreciation and amortization 3,819 4,394
-------- --------
27,409 32,362
-------- --------
OPERATING INCOME 15,107 19,183
--------
INTEREST EXPENSE (4,450) (5,228)
-------- --------
INCOME BEFORE INCOME TAXES 10,657 13,955
INCOME TAXES 20 25
-------- --------
NET INCOME $ 10,637 $ 13,930
======== ========
General partners' interest
in net income $ 213 $ 376
-------- --------
Limited partners' interest
in net income $ 10,424 $ 13,554
-------- --------
Net income per Unit $ 0.65 $ 0.85
-------- --------
Weighted average number of Units
outstanding $ 16,513 $ 16,513
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 6
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
From Commencement
of Operations
(on December 17, 1996)
to March 31, 1997
----------------------
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES:
<S> <C>
Net income $ 13,930
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization 4,394
Loss on sale of assets 26
Changes in assets and liabilities, net of acquisitions:
Trade receivables 37,922
Inventories 6,754
Prepayments and other current assets (3,583)
Trade accounts payable (46,923)
Accrued expenses 5,576
---------
Net cash provided by operating 18,096
activities ---------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES:
Proceeds from sale of assets 365
Expenditures for property, plant and equipment (2,075)
---------
Net cash used for investing activities (1,710)
---------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES:
Net repayments on Working Capital Facility (12,800)
Additional borrowings on mortgages 1,141
Payments on mortgages (683)
Net cash used for financing activities (12,342)
---------
PARTNERSHIP FORMATION TRANSACTIONS:
Net proceeds from issuance of Common and Subordinated Units 191,804
Borrowings on Working Capital Facility 12,800
Issuance of long-term debt 220,000
Cash transfers from Predecessor Companies 22,418
Repayment of long-term debt and related interest (337,631)
Distribution to Special General Partner for the redemption of
preferred stock (61,196)
Distribution to Special General Partner (15,500)
Other fees and expenses (13,626)
---------
Net cash provided by partnership 19,069
formation transactions ---------
Increase in Cash and cash equivalents 23,113
Cash and cash equivalents, Beginning of Period 2
---------
Cash and Cash Equivalents, End of Period $ 23,115
=========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 7
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(Dollars in thousands, except Unit data)
(unaudited)
<TABLE>
<CAPTION>
Number of limited
partner units
------------------------
Total
Subor- General Partners'
Common Subordinated Common dinated Partners Capital
------ ------------ ------ ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at
Commencement of
Operations (on
December 17, 1996 $ $ $ $
Contribution of
net assets of
predecessor
companies and
issuance of
Common Units 9,821,000 6,597,619 136,997 92,032 229,029
Issuance of 2%
interest for
general partners
contribution 4,674 4,674
Net income 6,235 7,319 376 13,930
--------- --------- -------- ------- ------ --------
Balance
March 31, 1997 9,821,000 6,597,619 $143,232 $99,351 $5,050 $247,633
========= ========= ======== ======= ====== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(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 and the Operating Partnership (the "Managing
General Partner") and SYN Inc., a Delaware corporation and the
special general partner of Cornerstone Propane and the Operating
Partnership (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 in Cornerstone
Partners, and the Operating Partnership.
<PAGE> 9
Following these transactions, on December 17, 1996, Cornerstone
Partners completed its initial public offering through
underwriters of 9,821,000 Common Units (the "IPO") at a price to
the public of $21.00 a unit. The net proceeds of approximately
$191,804 from the IPO, the proceeds from the issuance of $220,000
aggregate principal amount of the Operating Partnership's 7.53%
senior notes, and $12,800 borrowings under the Working Capital
Facility (as described in Note 3) were used to repay $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 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. In accordance
with the Offering Prospectus, 100% of the income for the fourteen
day period ended December 31, 1996 was allocated to the
Subordinated Unit holders and the General Partners. No income
from this period was allocated to the Common Unit holders.
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
<PAGE> 10
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 306 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.
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 of the fair value of the assets acquired. All purchase
price allocations for the acquisition of the Predecessor
Companies are preliminary in nature and are subject to change
within the twelve months following the acquisitions based on
refinements as actual data becomes available. All significant
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 believes necessary
for a fair presentation of the results for the interim periods
presented. Such adjustments consist only of normal recurring
items. 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 March 31, 1997.
Use of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
<PAGE> 11
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 March 31, 1997 were not material.
Accounts Receivable. The outstanding balance is stated net of
allowance of doubtful accounts of $5,406 at March 31, 1997.
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:
March 31, 1997
(unaudited)
--------------
LPG and Other $ 10,707
Parts and Fittings $ 8,832
--------
$ 19,539
========
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
<PAGE> 12
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 40 years. The related costs and
accumulated amortization were $203,376 and $1,500, respectively,
at March 31, 1997.
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
individual partners. As a result, no income tax expense has
been reflected in the Partnership's consolidated financial
statements relating to the earnings of Cornerstone Partners or
the Operating Partnership. The 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.
<PAGE> 13
The Working Capital Facility provides for revolving borrowings up
to $50,000 (including a $30,000 sublimit for letters of credit
through March 31, 1997 and $20,000 thereafter), and matures on
December 31, 1999. The Bank Credit Agreement provides that
there must be less than $10,000 outstanding under the Working
Capital Facility (excluding letters of credit) for at least 30
consecutive days during each fiscal year. There were no
borrowings under the Working Capital Facility at March 31, 1997.
Outstanding letters of credit totaled $7,600 at March 31, 1997.
The Acquisition Facility provides the Operating Partnership with
the ability to borrow up to $75,000 to finance propane business
acquisitions. The Acquisition Facility operates as a revolving
facility through December 31, 1999, at which time any loans then
outstanding may be converted to term loans and be amortized
quarterly for a period of four years thereafter. No amounts
were outstanding at March 31, 1997.
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%, or (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 March 31, 1997, the applicable Base and Eurodollar Rates were
8.625% and 6.675%, 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 default 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
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 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.
<PAGE> 14
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.
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 each December 30
and June 30. The Note Agreement requires that the principal be
paid in equal annual payments of $27,500 starting December 30,
2003.
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 default 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 of its 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
<PAGE> 15
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 expects to make
a distribution with respect to the fiscal quarter ending March
31, 1997 to holders of record on the applicable record date.
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 ($.54 per unit) 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 $22,000 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. For the
period commencing December 17, 1996 and ending March 31, 1997,
the Partnership declared a Minimum Quarterly Distribution of
<PAGE> 16
$.63 per Common and Subordinated unit amounting to approximately
$10.6 million.
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 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 $1,365
on March 31, 1997.
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, 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.
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 $17,400 for the period December 17, 1996,
to March 31, 1997, include employee compensation and benefit
expenses of employees of the Managing General Partner and its
affiliates.
<PAGE> 17
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 three and one half month period ended March 31,
1997, a total of 376,190 restricted Common Units were awarded.
For the three and one half month period ended March 31, 1997,
the Partnership recorded $20 of compensation expense.
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.
<PAGE> 18
9. Subsequent Event
Effective April 16, 1997, the Partnership registered 750,000
additional units which are available to be used for future
acquisitions. On April 24, 1997 Cornerstone consummated the
acquisition of substantially all of the assets of American
Propane, Inc. The total consideration paid for this acquisition
was approximately $2.4 million, of which $1.9 million was in the
form of Cornerstone Common Units.
<PAGE> 19
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per Unit data)
(unaudited)
July 1, 1996 July 1, 1995 Jan. 1, 1997 Jan. 1, 1996
to to to to
Mar. 31, 1997 Mar. 31, 1996 Mar. 31, 1997 Mar. 31, 1996
(Pro Forma) (Pro Forma) (Pro Forma) (Pro Forma)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE $535,503 $452,477 $220,566 $198,690
COST OF SALES 428,959 336,311 178,050 144,149
-------- -------- -------- --------
GROSS PROFIT 106,544 116,166 42,516 54,541
-------- -------- -------- --------
EXPENSES
Operating, general
and 66,209 68,195 23,590 27,143
administrative
Depreciation and 10,948 10,169 3,819 3,417
amortization
OPERATING INCOME 29,387 37,802 15,107 23,981
INTEREST EXPENSE,
NET (13,499) (13,301) (4,450) (4,392)
-------- -------- -------- --------
INCOME BEFORE
INCOME TAXES 15,888 24,501 10,657 19,589
INCOME TAXES 70 75 20 25
-------- -------- -------- --------
NET INCOME $ 15,818 $ 24,426 $ 10,637 $ 19,564
======== ======== ======== ========
General partners' interest
in net income $413 $489 $213 $391
Limited partners' interest
in net income $ 15,405 $ 23,937 $ 10,424 $ 19,173
-------- -------- -------- --------
Net income per Unit $ 0.97 $ 1.48 $ 0.65 $ 1.18
-------- -------- -------- --------
Weighted average number
of Units 16,513 16,513 16,513 16,513
outstanding ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 20
NOTES TO PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION
MARCH 31, 1997
(Dollars in thousands)
(unaudited)
1. Basis of Presentation
The unaudited pro forma consolidated statements of operations for
the three month period ended March 31, 1996 and the nine month
periods ended March 31, 1997 and 1996 were derived from the
historical statements of operations of Empire Energy Corporation
for the periods January 1 through March 31, 1996, July 1 through
December 16, 1996, and July 1, 1995 through March 31, 1996; of
SYN Inc. and Myers Propane Gas Company ("Myers") for the periods
January 1 through March 31, 1996, July 1, through December 16,
1996 and August 15, 1995 to March 31, 1996; of Synergy Group
Incorporated for the period July 1, 1995 to August 14, 1995; of
CGI Holdings, Inc. for the periods February 1 through March 31,
1996 August 1, 1995 through March 31, 1996 and August 1, 1996
through December 16, 1996, and the consolidated statement of
operations of the Partnership from December 17, 1996 through
March 31, 1997. 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 Prospectus Supplement.
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 $535 and $175 for the nine and three months ended March 31,
1996, respectively. General and administrative adjustments
relating to corporate overhead consolidation, the elimination of
bank and consulting fees and the estimated incremental general
<PAGE> 21
and administrative cost associated with the Partnership were
$1,254 for each of the nine month periods ended March 31, 1997
and 1996, and $416 for the three month period ended March 31,
1996. 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 $60 for each of
the nine month periods ended March 31, 1997 and 1996, and $20
for the three month period ended March 31, 1996.
Adjustments to reflect interest expense applicable to the
Partnership. Interest expense adjustments relating to expense
for the $220,000 senior notes at a rate of 7.53% per annum,
expense attributable to the working capital facility based on an
average outstanding principal balance of $120 at 6.5% per annum,
expense attributable to debt assumed based on an average
outstanding principal balance of $7,000 at 8.5% per annum and
debt expense amortization based on $5,500 estimated debt issuance
costs were $270 for each for the nine month periods ended March
31, 1997 and 1996 and $90 for the three month period ended March
31, 1996.
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 (which includes
equivalent units issued under the restricted unit plan) totaling
16,513 were assumed to have been outstanding the entire period.
<PAGE> 22
SYN Inc.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS
June 30, 1996
-------------
CURRENT ASSETS:
<S> <C>
Cash $ 14
Trade receivables, less allowance for doubtful accounts of $1,505 9,195
Inventories 7,447
Prepaid expenses and other 678
Deferred income taxes 3,727
Due from Former Stockholders 37,966
---------
Current Assets 59,027
---------
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 6,420
Storage and consumer service facilities 52,953
Transportation, office and other equipment 11,910
Less Accumulated depreciation (2,592)
---------
Total property and equipment 68,691
---------
OTHER ASSETS:
Investments and restricted cash deposits 3,025
Deferred income tax benefit 4,849
Intangible assets, primarily the excess of cost over fair value
of net assets acquired, net of accumulated amortization 30,943
Other 227
---------
Total Other Assets 39,044
---------
$ 166,762
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,025
Accounts payable 1,604
Accrued expenses 2,915
Acquisition related liabilities 29,306
---------
Total current liabilities 34,850
LONG-TERM DEBT 25,687
NOTE PAYABLE - RELATED PARTY
52,812
---------
Total liabilities 113,349
---------
COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY:
Cumulative preferred stock, $.01 par value; 70,500 shares
authorized; 55,312 shares, issued and outstanding, at stated $ 55,312
value of $1,00 per share
Common stock; $0.001 par value; authorized 100,000 shares, 1
issued and outstanding 99
Additional paid-in capital (1,999)
Accumulated deficit ---------
Total stockholders' equity 53,413
---------
$ 166,762
=========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 23
SYN Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the period For the period For the period
from from from
July 1, 1995 August 15, 1995 January 1, 1996
to to to
August 14, 1995 March 31, 1996 March 31, 1996
---------------- ---------------- ---------------
<S> <C> <C> <C>
REVENUE $77,308 $7,568 $38,719
COST OF PRODUCT SOLD 37,199 3,631 18,824
------- ------ -------
Gross profit 40,109 3,937 19,895
OPERATING EXPENSES:
Salaries and commissions 10,864 - 4,552
General & administration 10,563 3,632 5,102
Depreciation and amortization 2,697 472 969
Related-party corporate
administration and
management fees 2,344 - 938
------- ------ -------
Total operating expenses 26,468 4,104 11,561
------- ------ -------
Operating income (loss) 13,641 (167) 8,334
------- ------ -------
INTEREST EXPENSE
including $0, $3,440, and
$1,212 to related party 3,918 816 1,571
------- ------ -------
INCOME (LOSS) BEFORE
INCOME TAXES 9,723 (983) 6,763
PROVISION (BENEFIT)
FOR INCOME TAXES 3,700 (373) 2,350
------- ------ -------
Net income (loss) 6,023 (610) 4,413
DIVIDENDS ON CUMULATIVE
PREFERRED STOCK (5,185) - (2,074)
------- ------ -------
Net loss applicable to
common stockholders $ 838 $ (610) $ 2,339
======= ====== =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 24
SYN Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the period
For the period from
from July 1, 1995 to
August 15, 1995 to August 14, 1995
March 31, 1996 (Predecessor Basis)
------------------ -------------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 6,023 $ (610)
Items not requiring (providing) cash
Depreciation and amortization 2,699 472
Gain on sale of assets (263)
Deferred income taxes 5,458
Changes in operating items
Trade receivables (7,151) 4,897
Inventories 1,053 1,244
Prepaid expenses and other (240) 345
Accounts payable (4,982) (1,864)
Accrued expenses (1,970) -
Net cash provided by operating activities -------- ---------
627 4,484
-------- ---------
INVESTING ACTIVITIES
Acquisition of assets of Synergy
Group Incorporated (150,922)
Proceeds from the sale of certain Synergy
Group assets to Empire Energy Corporation 35,980
Sale of assets 164 1,880
Purchases of property and equipment (4,663)
Change in investments and restricted cash deposits (270)
Net cash provided by (used in) investing --------
activities (119,711) 1,880
--------
FINANCING ACTIVITIES:
Increase in credit facility $ 23,323 $ (6,965)
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 (4,778) -
Preferred stock dividends paid (5,185) -
Net cash provided by (used in) -------- ---------
financing activities
Increase (decrease) in cash 119,084 (6,965)
-------- ---------
- (601)
CASH: - 5,323
Beginning of period -------- ---------
End of period
$ - $ 4,722
======== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 25
SYN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEVEN AND ONE-HALF MONTHS ENDED MARCH 31, 1996, ONE AND ONE-HALF
MONTHS ENDED AUGUST 15, 1995 (PREDECESSOR), AND THREE MONTHS ENDED
MARCH 31, 1996
(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 period ended March 31, 1996. 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.
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.
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.
<PAGE> 26
In conjunction with the acquisition of SGI, the former
stockholders of SGI are contractually liable for all insurance
claims and tax liabilities that relate to periods prior to the
acquisition date. Funds have been placed in escrow accounts to
provide for payment of these liabilities. In the event that the
escrow amount is insufficient to settle these liabilities,
Synergy could be obligated to fund any additional amounts due and
would have to seek reimbursement from the former stockholders for
such amounts. Synergy has recorded its best estimates of the
ultimate liabilities expected to arise from these matters and has
made claims against the former stockholders for reimbursement.
<PAGE> 27
EMPIRE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS
June 30, 1996
CURRENT ASSETS: -------------
<S> <C>
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
Less Accumulated depreciation --------
108,220
(28,686)
--------
79,534
--------
OTHER ASSETS:
Excess of cost over fair value of net assets 3,033
acquired, at amortized cost 511
Other --------
3,544
--------
$107,102
========
</TABLE>
<PAGE> 28
EMPIRE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET - Continued
(Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, 1996
-------------
CURRENT LIABILITIES:
<S> <C>
Current maturities of long-term debt $ 6,019
Accounts payable 3,368
Accrued salaries 1,063
Accrued expenses 1,676
-------
Total current liabilities 12,126
--------
LONG-TERM DEBT 25,442
--------
DEFERRED INCOME TAXES 16,877
--------
ACCRUED SELF-INSURANCE LIABILITY 2,424
--------
STOCKHOLDERS' EQUITY:
Common stock; $0.001 par value; authorized
17,500,000 shares, issued, 12
12,004,430 shares 46,099
Additional paid-in capital 4,143
Retained earnings 50,254
--------
Treasury stock, at cost - 3,000 shares (21)
--------
50,233
--------
$107,102
========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 29
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the period For the period
from July 1, from January 1,
1995 to 1996 to
March 31, 1996 March 31, 1996
-------------- ---------------
<S> <C> <C>
OPERATING REVENUE $ 88,233 $ 44,198
COST OF PRODUCT SOLD 44,518 23,311
GROSS PROFIT 43,715 20,887
---------- ----------
OPERATING COSTS AND EXPENSES:
Provision for doubtful accounts 1,024 249
General and administrative 22,654 8,885
Depreciation and amortization 4,433 1,707
---------- ----------
OPERATING INCOME 15,604 10,046
INTEREST EXPENSE (NET) 1,775 663
---------- ----------
INCOME BEFORE INCOME TAXES 13,829 9,383
PROVISION FOR INCOME TAXES 5,300 3,400
---------- ----------
NET INCOME $ 8,529 $ 5,983
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 30
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the period
from July 1, 1995 to
March 31, 1996
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net income $ 8,529
Items not requiring (providing) cash
Depreciation 4,201
Amortization 232
Gain on sale of assets (20)
Deferred income taxes 441
Changes in
Trade receivables (9,884)
Inventories (717)
Accounts payable 590
Accrued expenses and self insurance 2,902
Prepaid expenses and other (891)
Income taxes payable 2,662
-------
Net cash provided by operating activities 8,045
-------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of assets 76
Purchases of property and equipment (2,998)
Purchase of assets from SYN Inc. (35,980)
-------
Net cash used in investing activities (38,902)
-------
</TABLE>
<PAGE> 31
EMPIRE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the period
from July 1, 1995 to
March 31, 1996
---------------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C>
Decrease in credit facilities (3,600)
Principal payments on purchase obligations (98)
Checks in process of collection (158)
Proceeds from acquisition credit facility 35,000
------
Net cash provided by financing activities 31,144
------
Increase in cash 287
CASH:
Beginning of period -
------
End of period $ 287
======
</TABLE>
<PAGE> 32
EMPIRE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1996
AND THREE MONTHS ENDED MARCH 31, 1996
(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 period ended March 31, 1996. 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.
2. Commitments and Contingencies
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 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 purchases
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.
<PAGE> 33
Empire Energy 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 Corporation (now known as All Star Gas Corporation,
"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.
Empire Energy is presently a defendant 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
<PAGE> 34
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 liability could be substantial
and could adversely affect Empire Energy's financial position and
results of operations.
Empire Energy is 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.
<PAGE> 35
CGI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
July 31,1996
------------
CURRENT ASSETS:
<S> <C>
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
=========
</TABLE>
<PAGE> 36
LIABILITIES, MANDATORILY REDEEMABLE SECURITIES
AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CURRENT LIABILITIES: July 31, 1996
-------------
<S> <C>
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: 8,559
10% cumulative, $0.01 par value, 62,500 shares authorized,
issued and outstanding; at redemption value
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 28
shares authorized; 2,789,784 issued and outstanding
Class B voting common stock, $0.01 par value, 200,000 1
shares authorized; 149,485 issued and outstanding
Class C voting common stock, $0.01 par value, 13
3,000,000 shares authorized; 1,343,831 issued and outstanding
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
=========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 37
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
August 1, January 1,
1995 to 1996 to
March 31, 1996 March 31, 1996
-------------- --------------
<S> <C> <C>
Sales and other revenue $ 271,348 $ 112,244
Costs and expenses:
Cost of sales, except for depreciation and 246,554 100,074
amortization
Operating, general and administrative 16,929 7,317
Depreciation and amortization 2,742 1,071
Interest expense 3,781 1,417
---------- ----------
Income before income taxes 1,342 2,365
Income tax provision 601 1,130
---------- ----------
Net income $ 741 $ 1,235
========== =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 38
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
August 1, 1995
to
March 31, 1996
--------------
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES:
<S> <C>
Net income $ 741
Adjustments to reconcile net income to net
cash used for operating activities
Depreciation and amortization 2,742
Changes in assets and liabilities, net of acquisitions:
Accounts and notes receivable (8,163)
Inventories 1,673
Prepaid expenses and deposits (303)
Other assets (29)
Accounts payable 14,185
Accrued liabilities 370
------
Net Cash Provided from Operating Activities 11,216
------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES:
Payments for acquisitions of retail outlets (3,000)
Losses from sale of property and equipment (20)
Purchases of and investments in property and equipment (2,034)
------
Net Cash Used from Investment Activities (5,054)
------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES:
Repurchase of common stock (24)
Repayments of long-term debt (312)
Borrowings on capital leases and other term loans 647
</TABLE>
<PAGE> 39
CGI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
August 1, 1995
to
March 1, 1996
--------------
<S> <C>
Repayment of other notes payable (760)
Principal payments under capital lease obligations (455)
Repayments under acquisition line (1,530)
------
Net Cash Used in Financing Activities (2,434)
------
Net increase in cash 3,728
Cash and cash equivalents, beginning of period 4,423
------
Cash and cash equivalents, end of period $8,151
======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 40
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 Prospectus Supplement. 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, other than the $11.3 million, 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.
<PAGE> 41
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 should be read in
conjunction with the historical and pro forma financial statements and
notes thereto included elsewhere in this Prospectus Supplement.
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 306 customer
service centers in 26 states.
Because a substantial portion of the Partnership's propane is used in
the weather-sensitive residential markets, the Heating Degree Days in
the Partnership's areas of operations, particularly during the
six-month peak heating season, have a significant effect on the
financial performance of the Partnership. 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
<PAGE> 42
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 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 3 and one-half month period ended March 31, 1997.
Analysis of Historical Results of Operations
The following discussion compares the results of operations and other
data of Cornerstone Propane Partners, L.P. and its subsidiary
Cornerstone Propane, L.P. (collectively "Cornerstone") for the
three-month period ended March 31, 1997, to the pro forma three-month
period ended March 31, 1996, and the pro forma nine-month period ended
March 31, 1997, to the pro forma nine month period ended March 31,
1996.
Three months ended March 31, 1997, compared to pro forma three months
ended March 31, 1996.
Volume. During the three months ended March 31, 1997, Cornerstone
sold 75.0 million retail propane gallons, a decrease of 21.1 million
gallons or 22.0% from the 96.1 million retail propane gallons sold
during the pro forma three months ended March 31, 1996. The decrease
in retail volume was primarily attributable to national temperatures
that averaged 14% warmer than last year and 13% warmer than normal in
the markets served by Cornerstone. Additionally, record high costs of
propane resulted in customer energy conservation which adversely
impacted sales volume and gross profit. Wholesale volume sales were
81.4 million gallons and 83.0 million gallons respectively for the
quarter ended March 31, 1997 and 1996.
<PAGE> 43
Revenues. Revenues increased by $21.9 million or 11.0% to $220.6
million for the three months ended March 31, 1997, as compared to
$198.7 million for the pro forma three months ended March 31,1996.
This increase was attributable to an increase in wholesale revenues of
$36.1 million or 37.3% to $132.9 million for the three months ended
March 31, 1997, as compared to $96.8 million for the pro forma three
months ended March 31, 1996, due primarily to higher product costs and
sales prices. This increase was offset by a reduction in revenues
from the Partnership's retail business. The revenues for the retail
business declined by $14.2 million or 13.9% to $87.6 million for the
three months ended March 31, 1997. as compared to $101.8 million for
the pro forma three months ended March 31, 1996. This decrease was a
result of the reduction in volume described above offset by an
increase in the average sales price per gallon of propane.
Cost of Product Sold. Cost of product sold increased by $33.9
million, or 21.4% to $178.0 million for the three months ended March
31, 1997, as compared to $144.1 million for the pro forma three months
ended March 31, 1996. The increase in cost of product sold was
primarily due to increased wholesale business described above combined
with an increase in the wholesale cost of propane, which increased
approximately 48.4% per gallon in the three months ended March 31,
1997, compared to the pro forma same period of the prior year. These
two increases were offset by the reduction in retail volume described
above.
As a percentage of revenues, cost of product sold increased to 80.7%
for the three months ended March 31, 1997, as compared to 72.5% for
the pro forma three months ended March 31, 1996.
Gross Profit. Gross profit decreased $12.0 million or 22.0% to $42.5
million for the three months ended March 31, 1997, as compared to
$54.5 million for the pro forma three months ended March 31, 1996.
Retail per gallon gross margins were slightly better than the same
period last year. The decrease in gross profits were primarily due to
the reduction in retail sales volume discussed above.
Operating, General and Administrative Expenses. Operating, general
and administrative expense decreased by $3.6 million or 13.2% to $23.6
million for the three months ended March 31, 1997, as compared to
$27.2 million for the pro forma three months ended March 31, 1996.
This decrease was primarily attributable to reductions in salaries and
insurance expense resulting principally from efficiencies in
operations.
As a percentage of revenues, operating, general and administrative
expenses decreased to 10.7% for the three months ended March 31, 1997,
as compared to 13.7% for the pro forma three months ended March 31,
1996.
Depreciation and Amortization. Depreciation and amortization
increased $.4 million or 11.8% to $3.8 million for the three months
<PAGE> 44
ended March 31, 1997, as compared to $3.4 million for the pro forma
three months ended March 31, 1996. This increase was primarily due to
the revaluation of assets in purchase accounting resulting from the
purchase of Empire Energy and Coast and to the amortization of
goodwill.
Operating Income. Operating income decreased $8.9 million, or 37.1%
to $15.1 million for the three months ended March 31, 1997, as
compared to $24.0 million for the pro forma three months ended March
31, 1996. This decrease was primarily the result of the decreased
gross profit described above, offset to some extent by the reduced
operating, general and administrative expenses also discussed above.
Interest Expense. Interest expense remained at $4.4 million for both
the three months ended March 31, 1997, and the pro forma three months
ended March 31, 1996, since the overall level of borrowings and
interest rates on debt were consistent between periods, although the
type of debt changed in conjunction with the Partnership formation.
Net Income. Net income decreased $8.9 million or 45.6% to $10.6
million for the three months ended March 31, 1997, as compared to
$19.5 million for the pro forma three months ended March 31, 1996.
This decrease reflects the decreased operating income discussed above.
EBITDA. Total EBITDA decreased by $8.5 million, or 31.0% to $18.9
million for the three months ended March 31, 1997, as compared to
$27.4 million for the pro forma three months ended March 31, 1996.
The decrease in EBITDA reflects the decreased operating income
discussed above. As a percentage of revenues, total EBITDA decreased
to 8.6% for the three months ended March 31, 1997, as compared to
13.8% for the pro forma three months ended March 31, 1996. 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 to evaluate the Partnership's ability
to distribute the Minimum Quarterly Distribution.
Pro forma nine months ended March 31, 1997, compared to pro forma nine
months ended March 31, 1996.
Volume. During the pro forma nine months ended March 31, 1997,
Cornerstone sold 186.2 million retail propane gallons, a decrease of
15.5 million gallons or 7.7% from the 201.7 million retail propane
gallons sold during the pro forma nine months ended March 31, 1996.
The decrease in retail volume was primarily attributable to the
decline in volume of sales in the three months ended March 31, 1997
compared to the three months ended March 31, 1996. Wholesale volume
sales were 266.0 million gallons and 264.3 million gallons for the
nine months ended March 31, 1997 and 1996, respectively.
Revenues. Revenues increased by $83.0 million or 18.3% to $535.5
million for the pro forma nine months ended March 31,1997, as compared
<PAGE> 45
to $452.5 million for the pro forma nine months ended March 31, 1996.
This increase was primarily attributable to an increase in wholesale
revenues of $91.7 million or 43.0% to $304.7 million for the pro forma
nine months ended March 31, 1997, as compared to $213.0 million for
the pro forma nine months ended March 31, 1996. This increase was
offset by a reduction in revenues from the Partnership's retail
business. The revenues for the retail business declined by $8.7
million or 3.6% to $230.8 million for the pro forma nine months ended
March 31, 1997, as compared to $239.5 million for the pro forma nine
months ended March 31, 1996. This decrease was a result of the
reductions in retail volume described above.
Cost of Product Sold. Cost of product sold increased by $92.7
million, or 27.6% to $429.0 million for the pro forma nine months
ended March 31, 1997, as compared to $336.3 million for the pro forma
nine months ended March 31, 1996. The increase in cost of product
sold was primarily due to the increased wholesale revenue described
above offset by the reduction in retail volume described above.
As a percentage of revenues, cost of product sold increased to 80.1%
for the pro forma nine months ended March 31, 1997, as compared to
74.3% for the pro forma nine months ended March 31, 1996.
Gross Profit. Gross profit decreased $9.7 million or 8.3% to $106.5
million for the pro forma nine months ended March 31, 1997, as
compared to $116.2 million for the pro forma nine months ended March
31, 1996. This decrease was primarily due to the reduction in retail
sales volume discussed above.
Operating, General and Administrative Expenses. Operating, general
and administrative expense decreased by $2.0 million or 2.9% to $66.2
million for the pro forma nine months ended March 31, 1997, as
compared to $68.2 million for the pro forma nine months ended March
31, 1996. This decrease was primarily attributable to reductions in
salaries and insurance expense resulting principally from efficiencies
in operations.
As a percentage of revenues, operating, general and administrative
expenses decreased to 12.4% for the pro forma nine months ended March
31, 1997, as compared to 15.1% for the pro forma nine months ended
March 31, 1996.
Depreciation and Amortization. Depreciation and amortization
increased $.8 million or 7.8% to $11.0 million for the pro forma nine
months ended March 31, 1997, as compared to $10.2 million for the pro
forma nine months ended March 31, 1996. This increase was primarily
due to the revaluation of assets in purchase accounting resulting from
the purchase of Empire Energy and Coast and to the amortization of
goodwill.
Operating Income. Operating income decreased $8.4 million, or 22.2%
to $29.4 million for the pro forma nine months ended March 31, 1997,
<PAGE> 46
as compared to $37.8 million for the pro forma nine months ended March
31, 1996. This decrease was primarily the result of the decreased
gross profit described above, offset by the reduced operating, general
and administrative expenses also discussed above.
Interest Expense. Interest expense increased by $.2 million or 1.5%
to $13.5 million for the pro forma nine months ended March 31, 1997,
as compared to $13.3 million for the pro forma nine months ended March
31, 1996. The increase is due to slightly larger borrowings in the
current pro forma period compared to the same period in the prior
year.
Net Income. Net income decreased $8.6 million or 35.2% to $15.8
million for the pro forma nine months ended March 31, 1997, as
compared to $24.4 million for the pro forma nine months ended March
31, 1996. This decrease reflects the decreased operating income
discussed above.
EBITDA. Total EBITDA decreased by $7.7 million, or 16.0% to $40.3
million for the pro forma nine months ended March 31, 1997, as
compared to $48.0 million for the pro forma nine months ended March
31, 1996. The decrease in EBITDA reflects the decreased operating
income discussed above. As a
percentage of revenues, total EBITDA decreased to 7.5% for the pro
forma nine months ended March 31, 1997, as compared to 10.6% for the
pro forma nine months ended March 31, 1996. EBITDA should not be
considered as an alternative to net income (as an indication of
operating performance) or as an alternative to cash flow (as a measure
of liquidity or ability to service debt obligations) but provides
additional information to evaluate the Partnership's ability to
distribute the Minimum Quarterly Distribution.
Liquidity and Capital Resources
Cash Flows
Cash provided by operating activities during the three and one-half
month period ended March 31, 1997, was $18.1 million. Cash flow from
operations included a net income of $13.9 million and noncash charges
of $4.4 million for the period comprised principally of depreciation
and amortization expense. The impact of working capital changes
decreased cash flow by approximately $.2 million.
Cash used in investment activities for the three and one-half month
period ended March 31, 1997, totaled $1.7 million, which was
principally used for purchases of property and equipment. Cash used
in financing activities was $12.3 million for the three and one-half
month period ended March 31, 1997. 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
<PAGE> 47
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 expense 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 default 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 an
amount not in excess of Available Cash with respect to the immediately
preceding quarter.
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 revolving
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 ofcredit) in excess of $10 million for at
<PAGE> 48
least 30 consecutive days during each fiscal year. No amounts were
outstanding under the Working Capital Facility at March 31, 1997.
Issued outstanding letters of credit totaled $7.6 million at March 31,
1997. 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 March 31, 1997. 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 rate offered by the agent 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 March 31, 1997.
the applicable Base and Eurodollar Rates were 8.625% and 6.675%,
respectively. In addition, an annual fee is payable quarterly by the
Operating Partnership (whether or not borrowing 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 in
mergers, consolidations or sales of all or substantially all of its
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 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 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 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.
