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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-2499
CORNERSTONE PROPANE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 77-0439862
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
432 Westridge Drive\Watsonville, California 95076
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(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code: (831) 724-1921
NONE
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 13, 1998: 13,314,444 - Common Units
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CORNERSTONE PROPANE PARTNERS, L.P.
TABLE OF CONTENTS
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PAGES
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Part I. Financial Information
Item 1. Financial Statements
CORNERSTONE PROPANE PARTNERS, L.P.
Consolidated Balance Sheets as of September 30, 1998 and 1997, 1
and June 30, 1998
Consolidated Statements of Operations for the Three Months Ended 2
September 30, 1998 and 1997
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 1998 and 1997 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations of Cornerstone Propane Partners, L.P.
for the Three Months Ended September 30, 1998 compared to the
Three Months Ended September 30, 1997 7
Part II. Other Information
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
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CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except unit data)
(Unaudited)
ASSETS
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<CAPTION>
September 30, June 30,
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1998 1997 1998
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Current assets:
Cash and cash equivalents $ 8,292 $ 8,593 $ 9,366
Trade receivables, net 25,501 46,391 18,467
Inventories 11,552 15,908 18,238
Prepaid expenses and other current assets 9,551 4,225 7,150
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Total current assets 54,896 75,117 53,221
Property, plant and equipment, net 278,479 250,300 275,288
Goodwill and other intangible assets, net 245,689 220,963 242,199
Other assets 1,847 2,404 1,803
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Total assets $580,911 $548,784 $572,511
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LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Current portion of long-term debt $ 2,822 $ 5,010 $ 3,800
Trade accounts payable 16,252 42,351 18,460
Accrued expenses 33,166 16,827 29,335
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Total current liabilities 52,240 64,188 51,595
Long-term debt, less current portion 260,321 251,155 237,138
Due to related party 1,813 740 1,684
Other noncurrent liabilities 2,500 5,895 2,500
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Total liabilities 316,874 321,978 292,917
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Commitments and contingencies
Partners' capital:
Common unitholders (13,283,980 units issued and
outstanding) 173,573 136,542 185,803
Subordinated unitholders (6,597,619 units issued and
outstanding) 85,101 85,636 88,117
General partners 5,363 4,628 5,674
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Total partners' capital 264,037 226,806 279,594
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Total liabilities and partners' capital $580,911 $548,784 $572,511
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The accompanying notes are an integral part of these consolidated
balance sheets.
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CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per unit data)
(Unaudited)
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Three Months Ended
September 30
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1998 1997
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Revenues $169,991 $152,157
Cost of sales 143,292 127,855
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Gross profit 26,699 24,302
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Expenses:
Operating, general and administrative 25,681 22,602
Depreciation and amortization 5,122 4,592
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30,803 27,194
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Operating loss (4,104) (2,892)
Interest expense 5,133 4,782
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Income before provision for income taxes (9,237) (7,674)
Provision for income taxes 29 20
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Net loss $ (9,266) $ (7,694)
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General partner's interest in net loss $ (185) $ (155)
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Limited partners' interest in net loss $ (9,081) $ (7,539)
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Net loss per unit $ (.46) $ (.44)
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Weighted average number of units outstanding 19,859 17,109
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</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
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Three Months Ended
September 30
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1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,266) $ (7,694)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 5,122 4,592
Loss on Sale of Assets 119 --
Changes in assets and liabilities, net of effect of
acquisitions:
Trade receivables (6,780) (4,467)
Inventories 6,782 (370)
Prepaid expenses and other current assets (2,397) 268
Trade accounts payable and accrued liabilities 1,575 3,658
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Net cash used in operating activities (4,845) (4,013)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (2,800) (4,522)
Acquisitions, net of cash received (6,640) (1,472)
Other Investments (43) --
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Net cash used in investing activities (9,483) (5,994)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on Working Capital Facility 21,780 19,600
Additional borrowings on purchase obligations -- 553
Advances from General Partners 129 --
Payments on purchase obligations (1,372) (530)
General Partners' contribution 20 --
Partnership distributions (7,303) (9,429)
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Net cash provided by financing activities 13,254 10,194
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,074) 187
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,366 8,406
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,292 $ 8,593
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for Interest $ 8,270 $ 944
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NON INVESTING & FINANCING ACTIVITIES
Assets acquired in exchange for Common Units $ 1,006 $ --
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Assets acquired in exchange for debt $ 1,782 $ 900
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</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Dollars in thousands, except unit data)
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Cornerstone
Propane Partners, L.P. ("Cornerstone Partners") and its subsidiary, Cornerstone
Propane L.P. (the "Operating Partnership") and the Operating Partnership's
corporate subsidiaries, Cornerstone Sales and Service Corporation ("Sales and
Service") and Flame, Inc., after elimination of all material intercompany
balances and transactions. Cornerstone Partners, the Operating Partnership,
Sales and Service and Flame, Inc. are collectively referred to as the
"Partnership."
The accompanying interim consolidated financial statements of the Partnership
are unaudited; however, in the opinion of management, all adjustments necessary
for a fair presentation of such consolidated financial statements have been
reflected in the interim periods presented. Such adjustments consisted only of
normal recurring items. The Partnership's business is seasonal and,
accordingly, interim results are not indicative of results for a full year. The
significant accounting policies and certain financial information which are
normally included in financial statements prepared in accordance with generally
accepted accounting principles, but which are not required for interim reporting
purposes, have been condensed or omitted. The accompanying consolidated
financial statements of the Partnership should be read in conjunction with the
consolidated financial statements and related notes included in the
Partnership's Annual Report on Form 10-K for the fiscal year ended June 30,
1998.
2. DISTRIBUTIONS OF AVAILABLE CASH
The Partnership will make distributions to its partners with respect to
each fiscal quarter of the Partnership within 45 days after the end of each
fiscal quarter in an aggregate amount equal to its Available Cash for such
quarter. The Partnership will distribute 100% of its Available Cash (98% to
Unitholders and 2% to the General Partners) until the Minimum Quarterly
Distribution ("MQD") ($.54 per unit) for such quarter has been met. The MQD
will be subject to the payment of incentive distributions in the event
Available Cash exceeds the MQD of $.54 on all units. During the
Subordination Period, to the extent there is sufficient Available Cash, the
holders of Common Units have the right to receive the MQD, plus any
arrearages, prior to the distribution of Available Cash to holders of
Subordinated Units. Subordinated Units do not accrue arrearages with respect
to distributions for any quarter.
The MQD for the three-month period from April 1, 1998 to June 30, 1998, of
$.54 per common unit totaling $7,303 was paid on August 14, 1998. On October
28, 1998, the MQD for the period July 1, 1998 to September 30, 1998 was declared
in the amount of $7,337 representing in the aggregate distributions to the
Common Unit Holders and General Partner at $.54 per
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CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Dollars in thousands, except unit data)
(Unaudited)
common unit. This distribution will be paid on November 13, 1998. No
distributions have been declared and subsequently paid on the Subordinated
Units for the period from October 1, 1997 to September 30, 1998.
3. ACQUISITIONS
The Partnership consummated five acquisitions during the three months ended
September 30, 1998. The total consideration for these acquisitions was
approximately $8.8 million of which approximately $.4 million was in the form of
Cornerstone Common Units, $6.6 million was paid in cash and $1.8 million was for
liabilities assumed. In addition, contingent consideration paid during the
quarter related to prior acquisitions was approximately $.6 million and was in
the form of Cornerstone Common Units. All acquisitions have been accounted for
using the purchase method of accounting.
4. NET LOSS PER UNIT
Basic net income per unit is computed by dividing net income, after
considering the General Partners 2% interest, by the weighted average number of
Common and Subordinated Units outstanding during the quarter.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information," was issued in June 1997 and
effective for fiscal years beginning after December 15, 1997. SFAS No. 131
introduces a new model for segment reporting called the "management approach"
that is based on the way that the chief operating decision maker organizes
segments within a company for making operating decisions and assessing
performance. The model is used for disclosures of each segment. The
Partnership is currently assessing its impact on disclosure requirements for
this fiscal year.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998. SFAS No. 133 provides a comprehensive standard for the
recognition and measurement of derivatives and hedging activities. The standard
requires all derivatives to be recorded on the balance sheet at fair value and
establishes special accounting for three types of hedges. The accounting
treatment for each of these three types of hedges is unique but results in
including the offsetting changes in fair values of cash flows of both the hedge
and hedged item in results of operations in the same period. Changes in fair
value of derivatives that do not meet the criteria of one of the aforementioned
categories of hedges are included in the results of operations.
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CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Dollars in thousands, except unit data)
(Unaudited)
SFAS No. 133 is effective for the Partnership's fiscal year beginning July 1,
1999. The Partnership is currently assessing its impact on the Partnership's
financial position and results of operations.
6. SUBSEQUENT EVENT
The Partnership entered into a definitive agreement on October 27, 1998 to
acquire the operations of Propane Continental, Inc. The price for the
transaction is expected to be approximately $110 to 120 million, including debt
to be refunded. It is anticipated that the acquisition will be financed
approximately 50% with common unit equity and 50% with long-term debt and that
this transaction will close prior to December 31, 1998. For the fiscal year
ended June 30, 1998, Propane Continental, Inc. reported annual sales totaling
$142.3 million.
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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
financial statements and notes thereto included elsewhere in this Quarterly
Report on Form 10-Q.
GENERAL
The Partnership is a Delaware limited partnership initially formed to own and
operate the propane business and assets of SYN Inc., Empire Energy Corporation
and CGI Holdings, Inc. The Partnership's management believes that it is the
fifth largest retail marketer of propane in the United States, serving more than
385,000 residential, commercial, industrial and agricultural customers from 281
customer service centers in 29 states.
Because a substantial portion of the Partnership's propane is used in the
weather-sensitive residential markets, the temperatures in the Partnership's
area 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, while sustained colder-than-normal temperatures will tend to result
in greater 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.
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.
7
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CORNERSTONE PROPANE PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS
The following discussion compares the results of operations and other data of
the Partnership for the three-month period ended September 30, 1998, to the
three-month period ended September 30, 1997.
VOLUME. During the three months ended September 30, 1998, the Partnership sold
39.4 million retail propane gallons, a decrease of 1.9 million gallons or 4.6%
from the 41.3 million retail propane gallons sold during the three months ended
September 30, 1997. Wholesale volumes were 59.8 million gallons and 140.9
million gallons, respectively, for the quarters ended September 30, 1998 and
1997, which represents a decrease of 81.1 million gallons or 57.6%. Sales
volumes have been adversely impacted for the quarter ending September 30, 1998
by record high national inventory levels of LPG and associated low product
values. Acquisitions of new propane businesses since October 1, 1997 accounted
for 2.7 million gallons sold during the three months ended September 30, 1998.
Based on the average number of heating degree days in the markets served by the
Partnership, for September, 1998, temperatures were approximately 30% warmer
than normal. While this indicator generally measures the impact of temperatures
on the Partnership's business, other factors such as geographic mix, magnitude
and duration of temperature and weather conditions can also impact sales
volumes. The overall impact of weather is believed by management to have had an
adverse impact on the Partnership's retail sales volume (excluding acquisitions)
and earnings compared to normal levels for the three months ended September 30,
1998. September historically accounts for substantially all of the
Partnership's first quarter earnings before interest, taxes, depreciation and
amortization ("EBITDA"). The three months ended September 30, historically
accounts for approximately 4% of the Partnership's annual EBITDA.
REVENUES. Revenues increased by $17.8 million or 11.7% to $170.0 million for
the three months ended September 30, 1998, as compared to $152.2 million for the
three months ended September 30, 1997. This increase was attributable to an
increase in wholesale revenues of $20.5 million or 18.6% to $130.8 million for
the three months ended September 30, 1998, as compared to $110.3 million for the
three months ended September 30, 1997. This increase was due primarily to the
increase in natural gas and crude oil sales. The revenues for the retail
business decreased by $2.7 million or 6.5% to $39.2 million for the three months
ended September 30, 1998, as compared to $41.7 million for the three months
ended September 30, 1997. This decrease was a result of the decrease in volume
described above coupled with a decrease in the average sales price per gallon of
propane.
8
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CORNERSTONE PROPANE PARTNERS, L.P.
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COST OF PRODUCT SOLD. Cost of product sold increased by $15.4 million or 12.0%
to $143.3 million for the three months ended September 30, 1998, as compared to
$127.9 million for the three months ended September 30, 1997. The increase in
cost of product sold was primarily due to the increased natural gas and crude
oil sales described above partially offset by lower propane cost per gallon. As
a percentage of revenues, cost of product sold increased to 84.3% for the three
months ended September 30, 1997, as compared to 84.0% for the three months ended
September 30, 1996.
GROSS PROFIT. Gross profit increased $2.4 million or 9.9% to $26.7 million for
the three months ended September 30, 1998, compared to $24.3 million for the
three months ended September 30, 1997. Retail per gallon margins for the three
months ended September 30, 1998 were 16% better than last year. This was
attributable to lower cost of product sold per gallon, partially offset by lower
revenue per gallon. As a percentage of revenues, gross profit decreased to
15.7% for the three months ended September 30, 1998, as compared to 16.0% for
the three months ended September 30, 1997. Gross profit from propane businesses
acquired since October 1, 1997 was $1.8 million for the three months ended
September 30, 1998.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and
administrative expenses increased by $3.1 million or 13.7% to $25.7 million for
the three months ended September 30, 1998, as compared to $22.6 million for
three months ended September 30, 1997. Approximately $1.6 million, or 52%, of
this increase was attributable to increases in salaries and other operating
expenses resulting from the acquisitions of new businesses and the
correspondingly increased sales volumes discussed above. As a percentage of
revenues, operating, general and administrative expenses increased to 15.1% for
the three months ended September 30, 1998, as compared to 14.8% for the three
months ended September 30, 1997.
9
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CORNERSTONE PROPANE PARTNERS, L.P.
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. Cash used for operating activities during the
three-month period ended September 30, 1998 was $4.8 million. Cash flow from
operations included a net loss of $9.3 million and non-cash charges of $5.2
million for the period, comprised of depreciation and amortization expense, and
loss on asset sales. The impact of working capital changes decreased cash flow
by approximately $.7 million.
INVESTING ACTIVITIES. Cash used in investment activities for the three-month
period ended September 30, 1998 totaled $9.4 million, which was principally
related to Partnership acquisitions and for purchases of plant and equipment.
FINANCING ACTIVITIES. Cash provided by financing activities was $13.3 million
for the three months ended September 30, 1998, which reflects the $21.8 million
proceeds received from borrowings on the working Capital Facility, offset by
repayments of purchase contract obligations of $1.4 million, and cash
distributions paid to Unitholders of $7.3 million.
FINANCING AND SOURCES OF LIQUIDITY
The Operating Partnership's obligations under the Note Agreement under
which its Senior Notes were issued and its Bank Credit Agreement are secured by
a security interest in the Operating Partnership's inventory, accounts
receivable and certain customer storage tanks. The Note and Bank Credit
Agreements contain various terms and covenants including financial ratio
covenants with respect to debt and interest coverage and limitations, among
others, on the ability of the Operating Partnership and its subsidiary to incur
additional indebtedness, create liens, make investments and loans, enter into
mergers, consolidations or sales of all or substantially all assets and sale
assets. Generally, so long as no default exists or would result, the
Partnership is permitted to make distributions during each fiscal quarter in an
amount not in excess of Available Cash with respect to the immediately preceding
quarter. The Operating Partnership was in compliance with all terms and
covenants at September 30, 1998.
10
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CORNERSTONE PROPANE PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue is the result of computer programs using only the last
two digits to indicate the year. If uncorrected, such computer programs will
not be able to interpret dates correctly beyond the year 1999 and, in some cases
prior to that time (as some computer experts believe), which could cause
computer system failures or other computer errors disrupting business
operations. Recognizing the potentially severe consequences of the failure to
be Year 2000 compliant, the Partnership's management has developed and
implemented a company-wide program to identify and remedy the Year 2000 issues.
A project team, consisting of the Partnership's Director of Information Systems
and the Partnership's key IS managers who supervise operations at each of the
Partnership's three main regional facilities in California, Missouri and Texas,
together with the Chief Information Officer of Northwestern Corporation, the
Partnership's parent corporation, was created to manage the company's Year 2000
problems, enabling a smooth transition into the Year 2000. The project team
reports directly to executive management who have assigned a high priority to
such efforts within the Partnership.
The scope of the Partnership's Year 2000 readiness program includes the
review and evaluation of (i) the Partnership's information technology (IT) such
as hardware and software utilized in the operation of the Partnership's
business; (ii) the Partnership's non-IT systems or embedded technology such as
micro-controllers contained in various equipment and facilities; and (iii) the
readiness of third parties, including customers, suppliers and other key vendors
to the company, and the electronic data interchange (EDI) with those key third
parties. If needed modifications and conversions are not made on a timely
basis, the Year 2000 issue could have a material adverse effect on the
Partnership's operations.
The Partnership is currently using internal and external resources to
identify, correct and test large quantities of lines of application software
code for systems that were developed internally. Remediation of these systems
is expected to be completed by June 1999 except for the Partnership's Retail
Information System, consisting principally of its billing and accounts
receivable systems, which is already Year 2000 compliant. Since January 1997,
the Partnership has been converting its old billing system installed at each
customer service center to the new Retail Information System. Currently,
approximately one-half of the Partnership's customer service centers are running
the new system, with the roll-out to the balance of the centers schedule to be
completed by October 1999.
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CORNERSTONE PROPANE PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Software developed externally is being evaluated for Year 2000 compliance
and will be upgraded or replaced. In the case of the Partnership's existing
NT-platform-based financial systems and oil and gas applications, it is
anticipated that solutions will be acquired from third party vendors. In
addition, these systems are being evaluated for meeting current and future
business needs (which is an on-going process), and the Partnership is using this
process as an opportunity to upgrade and enhance its information systems. The
Partnership anticipates completing such upgrades and replacements as needed by
March 1999.
In addition to internal Year 2000 remediation activities, the Partnership
is in contact with key suppliers, vendors and customers to assure no
interruption from activities with important third parties. While none of the
Partnership's products are directly date sensitive, the supply and
transportation of propane gas products are dependent upon companies whose own
systems may need to be Year 2000 compliant. If third parties do not convert
their systems in a timely manner and in a way compatible with the Partnership's
systems, the arrival of the Year 2000 could have an adverse effect on the
company operations. The Partnership believes that its actions with key
suppliers, vendors and customers will minimize these risks. Furthermore, no
single customer accounts for more than 10% of the Partnership's consolidated
gross profits, thus mitigating the adverse risk to the Partnership's business if
some but not all customers are not Year 2000 compliant. Also, only a minimal
number of transactions are conducted through EDI, which reduces the risk.
The Partnership's primary focus has been directed at resolving the Year
2000 problem. While the Partnership expects its internal IT and non-IT systems
to be Year 2000 compliant by the dates specified, the Partnership will be
developing a contingency plan specifying what the Partnership will do if it or
important third parties are not Year 2000 compliant by the required dates. The
Partnership anticipates that a majority of such contingency plan will be based
on manual back-up systems, procedures and practices. The contingency plan is
estimated to be completed by December 1998.
Through September 1998, the Partnership estimates that incremental costs of
approximately $0.3 million have been incurred and expensed related to Year 2000
issues. Since many systems are being modified to provide significant enhanced
capabilities, the Year 2000 expenses have not been nor are planned to be
specifically tracked. The current estimated cost to complete remediation is
expected to be less than $1.0 million. The Partnership expects that a portion
of these costs will be capitalized, as they are principally related to adding
new software applications and functionality. Other costs will continue to be
expensed as incurred.
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The Partnership's current estimates of the amount of time and costs
necessary to remediate and test its computer systems are based on the facts and
circumstances existing at this time. The estimates were made using assumptions
of future events including the continued availability of existing resources,
Year 2000 modification plans, implementation success by third-parties, and other
factors. New developments may occur that could affect the Partnership's
estimates of the amount of time and costs necessary to modify and test its IT
and non-IT systems for Year 2000 compliance. These developments include, but
are not limited to: (i) the availability and cost of personnel trained in this
area, (ii) the ability to locate and correct all relevant computer codes and
equipment and (iii) the planning and Year 2000 compliance success that key
suppliers, vendors and customers attain.
In October, 1998, President Clinton signed into law the Year 2000 Readiness
Disclosure Act. The Partnership intends to obtain the benefits of the Act's
protections by implementing certain procedures described in that Act.
FORWARD-LOOKING STATEMENTS
The information presented herein may contain certain "forward-looking
statements" within the meaning of the federal securities laws. The
Partnership's actual future performance will be affected by a number of factors,
risks and uncertainties, including without limitation, weather conditions,
regulatory changes, competitive factors, the Partnership's success in dealing
with the Year 2000 issues and the operations of vendors, suppliers and
customers, many of which are beyond the Partnership's control. Future events
and results may vary substantially from what the Partnership currently foresees,
and there can be no assurance that the Partnership's actual results will not
differ materially from its expectations. The Partnership undertakes no
obligation to publicly release any revision to these forward-looking statements
to reflect events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events.
ITEM 5. OTHER INFORMATION
The Partnership previously disclosed information regarding its Year 2000
readiness program in its Form 10-K for the year ended June 30, 1998, as amended
(the "Form 10-K"). This disclosure, under the heading "Year 2000" contained in
the Management Discussion and Analysis of Financial Condition and Results of
Operations section of the Form 10-K, is attached as Exhibit 99.1 to the Form
10-Q and is incorporated herein by this reference. Pursuant to the Year 2000
Information and Readiness Disclosure Act recently signed into law by president
Clinton, the Partnership hereby designates this prior disclosure as a "Year 2000
Readiness Disclosure" under that Act.
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<PAGE>
CORNERSTONE PROPANE PARTNERS,L.P.
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
a) Exhibits:
(10.5) Form of Employment Agreements for Messrs. Baxter,
Kittrell, Goedde, DiCosimo and Woods, effective
as of July 1, 1998.
(27) Financial Data Schedule
(99.1) Year 2000 Readiness Disclosure from the Partnership's
Form 10-K for the year ended June 30, 1998, as amended.
b) Reports on Form 8-K:
None
14
<PAGE>
SIGNATURE
Pursuant to the requirements of Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cornerstone Propane Partners, L.P.
----------------------------------
(Registrant)
By: Cornerstone Propane GP, Inc.
as Managing General Partner
Date: November 13, 1998 By: /s/ Ronald J. Goedde
--------------------------------
Name: Ronald J. Goedde
Title: Executive Vice President
and Chief Financial Officer
15
<PAGE>
Exhibit 10.5
CORNERSTONE PROPANE GP, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement"), effective July 1, 1998, is entered
into by and between ______________, an individual ("Executive"), and Cornerstone
Propane GP, Inc. ("Cornerstone") and supersedes any existing employment
agreements between the parties.
RECITALS:
A. The business purpose of Cornerstone is to serve as the managing
general partner of Cornerstone Propane Partners, L. P., a Delaware limited
partnership, and Cornerstone Propane, L. P., a Delaware limited partnership
(collectively the "Partnerships").
B. Executive will provide management services to Cornerstone and the
Partnerships, and, in addition, to all propane distribution and related
companies and businesses ("Additional Companies") in which Cornerstone or the
Partnerships may directly or indirectly hold a majority voting or equity
interest after the effective date of this Agreement.
C. It is contemplated, but not required, by Cornerstone and Executive
that Executive will also provide management services to propane distribution and
related companies and businesses purchased by Northwestern Corporation (the
"Parent") or Northwestern Growth Corporation ("NGC"), other than through
Cornerstone or a Partnership.
AGREEMENT:
1. Employment by Cornerstone and Duration.
a. Full Time and Best Efforts. Subject to the terms set forth
herein, Cornerstone agrees to employ Executive to provide management services
for the businesses conducted by Cornerstone, the Partnerships and the Additional
Companies, as:
[title]
and Executive hereby accepts such employment. During the duration of his
employment with Cornerstone, Executive will devote his best efforts and
substantially all of his business time and attention to the performance of his
duties hereunder, except for vacation periods as set forth herein and reasonable
absences due to injury, illness as permitted by Cornerstone's general policies
or serving on outside Boards of Directors and participating in normal civic
activities.
b. Duties. Executive shall serve in the position shown above for
Cornerstone and shall perform such duties as are customarily associated with
such title, consistent with the By-Laws of Cornerstone and as required by
Cornerstone's Board of Directors (the "Board").
c. Cornerstone Policies. The employment relationship between the
parties shall be governed by the general employment policies and practices of
Cornerstone, including, but not limited to, those relating to protection of
confidential information, except that when the terms of this Agreement differ
from or are in conflict with Cornerstone's general employment policies or
practices, this Agreement shall control.
d. Duration. The duration of employment hereunder shall commence
effective on the date hereof and end on June 30, 2002, subject to the provisions
for termination set forth herein.
e. Locations of Performance. Executive shall be domiciled in the
vicinity of:
Watsonville, California
The parties acknowledge, however, that the Executive will be required to
undertake reasonable
16
<PAGE>
travel to Cornerstone's, the Partnerships', and the Additional Companies'
market areas, including the Parent's facilities, in connection with the
performance of his duties hereunder and that Executive may be requested by
Cornerstone, with Executive's mutual consent, to move the domicile of
Executive's performance during the term of this Agreement.
2. Compensation and Benefits.
a. Salary. Executive shall receive for services to be rendered
hereunder annual base compensation included in schedule A hereto.
b. Bonus. Executive shall receive such discretionary bonuses, if
any, as the Board in its sole discretion and from time to time may deem
appropriate.
c. Annual Operating Performance Incentive Plan. Executive shall be
eligible to participate in the Annual Operating Performance Incentive Plan on
the terms and conditions set forth in Schedule B attached hereto.
d. New Acquisition Incentive Plan. Executive shall be eligible to
participate in the New Acquisition Incentive Plan on the terms and conditions
set forth in Schedule C attached hereto.
e. Long-Term Equity Incentive Plan. Executive shall be eligible to
participate in the Long-Term Equity Incentive Plan for Cornerstone on the terms
and conditions set forth in Schedule D attached hereto.
f. Restricted Unit Plan. Executive shall be eligible to participate
in Cornerstone's Restricted Unit Plan, and to receive grants thereunder as
approved by the Board of Directors, acting on the recommendation of its
Nomination and Compensation Committee.
g. Non-Qualified Plans. Executive shall be eligible to participate
in the Non-Qualified Plans of Cornerstone on the terms and conditions set forth
in Schedule E, attached hereto.
h. Participation in Benefit Plans. During the duration of
employment hereunder, Executive shall be entitled to participate in the plans
and programs as set forth in Schedule F attached hereto, or those established by
Cornerstone hereafter to the extent that he is eligible under the general
provisions thereof. (If any such hereafter-established plan is intended as a
substitute for or alternative to one or more Schedule F plans, Executive shall
be eligible to participate in only one, not both, of the plans in question.)
Cornerstone may, in its sole discretion and from time to time, establish
additional senior management benefit programs as it deems appropriate.
i. Life Insurance. Cornerstone will maintain life insurance in the
amount of __________ on the life of Executive, payable to such beneficiary or
beneficiaries as Executive may designate from time to time.
j. Vacation. Executive shall be entitled to an annual vacation of
three weeks (four weeks following 10 years of employment by Cornerstone or its
predecessors).
k. Participation in Change of Control Plan. Executive shall be
entitled to participate in Cornerstone's Change of Control Plan, set forth on
Schedule G attached hereto (herein referred to as Change of Control Agreement).
l. Withholding. All payments and benefits under this Section 2 for
which withholding is required under applicable law will be made subject to the
required withholding.
3. Reasonable Business Expenses and Support.
Executive shall be reimbursed for documented and reasonable business
expenses in connection with the performance of his duties hereunder.
4. Termination of Employment.
17
<PAGE>
The date on which Executive's employment by Cornerstone ceases, under
any of the following circumstances, shall be defined herein as the "Termination
Date".
a. Termination Without Cause.
i. Termination Payment. Upon notice to Executive,
Cornerstone's Board may terminate Executive's employment with Cornerstone at
will at any time for any reason and without "cause", as defined below. In the
event Executive's employment is terminated by Cornerstone without cause,
Executive shall receive payment for all accrued salary and vacation time through
the Termination Date, and Cornerstone shall pay Executive within 90 days of the
Termination Date as severance an amount that is equal to the sum of (1) the
compensation of Executive under this Agreement for the remaining term of
employment under this Agreement and (2) the then-current level of Executive's
salary and benefits (as calculated under Sections 1.a. and 2.h.) for a twelve
(12) month period. For purposes of this Section 4.a.(i) the term compensation
shall be defined to include (1) all then-current base compensation and benefits
to Executive provided in Section 2.a., 2.g. and 2.h. for the remaining term of
this agreement, (2) the most recent annual bonuses provided under Section 2.b.
and 2.c. for the remaining term of this agreement, and (3) the amount of all
long term equity incentive plan benefits, as if fully vested, provided under
Section 2.e.
ii. Fundamental Changes. In the event that Cornerstone makes a
fundamental change as defined herein below, Executive may at any time thereafter
terminate his employment, provided, however that Executive shall provide
Cornerstone ten (10) days notice prior to any such termination, and Cornerstone
shall have a reasonable period of time not to exceed thirty (30) days to cure
such fundamental change. "Fundamental change" shall be defined as any of the
following:
(a) Diminution in Executive's duties, authority,
responsibility and/or compensation;
(b) Cornerstone moves Executive's primary office more than
fifty (50) miles from the location shown above without Executive's consent; or
(c) A Change of Control or Major Transaction as defined in
the Change of Control Agreement.
A termination by Executive in the event of a fundamental change shall
be treated as a Cornerstone termination without cause, and Executive shall be
entitled to the termination payments as provided in Section 4.a.(i) of this
Agreement, or the payments provided in the Change of Control Agreement,
whichever is greater.
b. Termination for Cause.
i. Termination Payments. Cornerstone's Board may terminate
Executive's employment with Cornerstone at any time for "cause" as defined
below, immediately upon notice to Executive of the circumstances leading to such
termination for cause. In the event that Executive's employment is terminated
for cause, Executive shall receive payment for all accrued salary and vacation
time through the Termination Date, which in this event shall be the date upon
which notice of termination is given. Executive shall also receive any vested
compensation benefits or incentives as provided under the benefit plans included
in Section 2.h. Cornerstone shall pay all amounts due under this Section
4.b.(i) within 90 days of the Termination Date and shall have no further
obligation to pay severance of any kind nor to make any payment in lieu of
notice.
ii. Restitution. In the event that a majority of the Board of
Directors of Cornerstone determines that Executive has committed an act of
defalcation or other theft of
18
<PAGE>
property from Cornerstone, any Partnership or any Additional Company,
Cornerstone may retain any monies due Executive under this Agreement in an
amount necessary to satisfy any restitution obligation owed by Executive to
Cornerstone, any Partnership or any Additional Company, as the case may be.
iii. Definition of Cause. "Cause" means the occurrence or
existence of any of the following with respect to Executive, as determined by a
majority of the Directors of the Board: (a) any act of dishonesty,
misappropriation, embezzlement, intentional fraud or similar conduct involving
Cornerstone; (b) the conviction or the plea of nolo contendere or the equivalent
in respect to a felony involving moral turpitude; (c) any intentional damage of
a material nature to any property of Cornerstone; or (d) conduct by Executive
which demonstrates gross negligence in serving in his capacity as employee of
Cornerstone.
c. Termination Upon Disability. Cornerstone may terminate
Executive's employment in the event Executive suffers a disability that renders
Executive unable to perform the essential functions of his position, even with
reasonable accommodation, for nine (9) months within any twelve (12) month
period. Commencing on the Termination Date, which in this event shall be the
date upon which notice of termination is given, Cornerstone shall pay Executive
within 90 days of the Termination Date an amount that is equal to the
compensation of Executive under this Agreement for the remaining term of
employment under this Agreement in the same amounts as provided under Section
4.a.(i).
d. Benefits Upon Termination. All benefits provided under Section
2.h. hereof shall be extended, to the extent permitted by Cornerstone's
insurance policies and benefit plans, for one (1) year after Executive's
Termination Date, except (a) as required by law (e.g., COBRA health insurance
continuation election), or (b) in the event of a termination described in
Section 4.b. if Cornerstone does not decide to require the noncompetition
agreement as described in Section 6.
e. Termination Upon Death. If Executive dies prior to the
expiration of the duration of employment under this Agreement, Cornerstone shall
continue coverage of Executive's dependents (if any) under all benefit plans or
programs of the type listed above in Section 2.h. herein for a period of twelve
(12) months.
f. Incentive Plans. In the event Executive's employment terminates
for any reason, he (or his estate or heirs) will be entitled to the following
with respect to the incentive plans referred to in Sections 2.c., 2.d., 2.e. and
2.f.:
i. Annual Operating Performance Incentive Plan. A ratable
portion (based on the days in the fiscal year in which termination occurs on or
before its effective date and the total number of days in the fiscal year) of
the cash award to which Executive would have been entitled under the Plan for
the entire year, which shall be paid in cash no later than ninety (90) fiscal
days after the close of the fiscal year.
ii. New Acquisition Incentive Plan. The amount payable for any
addition to the propane operations as to which a letter of intent, memorandum of
understanding or similar document, or the definitive agreements, were entered
into prior to the Termination Date, which shall be payable if and when the
addition is consummated.
iii. Long Term Equity Incentive Plan. The amount payable in
accordance with the Plan's vesting provisions.
iv. Restricted Units Plan. The amount payable in accordance
with the Plan's vesting provisions.
5. Proprietary Information Obligations. During the duration of employment
under this Agreement, Executive will have access to and become acquainted with
confidential and
19
<PAGE>
proprietary information of Cornerstone, the Partnerships and the Additional
Companies, including but not limited to information or plans regarding
customer relationships, personnel, sales, marketing, and financial operations
and methods, trade secrets, formulas, devices, secret inventions, processes,
and other compilations of information, records, and specifications
(collectively, except to the extent it was already known from other sources,
or is or becomes general knowledge, in each case without known violation of
any confidentiality obligation, "Proprietary Information"). Executive shall
not disclose any of the Proprietary Information directly or indirectly, or
use it in any way, either during the duration of this Agreement or at any
time thereafter, except as required in the course of his employment with
Cornerstone or as authorized in writing by Cornerstone. All files, records,
documents, computer-recorded information, drawings specifications, equipment
and similar items relating to the business of Cornerstone, whether prepared
by Executive or otherwise coming into his possession, shall remain the
exclusive property of Cornerstone, respectively, and shall not be removed
under any circumstances whatsoever without the prior written consent of the
Chairman of Cornerstone, except when (and only for the period) necessary to
carry out Executive's duties hereunder, and if removed shall be immediately
returned to Cornerstone upon any termination of his employment and no copies
thereof shall be kept by Executive; provided, however, that Executive shall
be entitled to retain documents that were personally owned or acquired.
6. Covenant Not to Compete, Noninterference. Executive shall be subject
to the covenant not to compete and noninterference terms as provided in the
noncompetition agreement set forth in Schedule H attached hereto.
7. Arbitration of Disputes.
a. Scope. Any disputes of any kind regarding this Agreement,
including, but not limited to, its termination shall be subject to final and
binding arbitration, to the extent permitted by law, pursuant to the Employment
Dispute Resolution Rules and Regulations of the American Arbitration
Association. Such disputes shall include, but are not limited to, claims for
breach of contract (express or implied), tort claims, claims for discrimination,
and claims for violation of any federal or state law or regulation.
b. Request. Any request for arbitration must be made in writing
within 365 calendar days of the occurrence giving rise to the dispute.
c. Applicable Law. The arbitrator shall apply the substantive law
(and the law of remedies, if applicable) of Delaware, or federal law, or both,
as applicable to the claim or claims asserted.
d. Final and Binding. The arbitration shall be final and binding
upon all of the parities and shall be enforceable to the extent permitted by
law.
8. Miscellaneous.
a. Notices. Any notices provided hereunder must be in writing and
shall be deemed effective upon the earlier of personal delivery (including
personal delivery by fax) or the third day after mailing by first class mail to
the recipient at the address indicated below:
To Executive:
_________________
_________________
_________________
_________________
To Cornerstone:
20
<PAGE>
Corporate Secretary
Cornerstone Propane GP, Inc.
432 Westridge Drive
Watsonville, California 95076
Voice: 831-724-1921
Fax: 831-724-4038
or to such other address or to the attention of such other person as the
recipient party shall have specified by prior written notice to the sending
party.
b. Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provisions had never been contained herein.
c. Entire Agreement. This document constitutes the final, complete,
and exclusive embodiment of the entire agreement and understanding between the
parties related to the subject matter hereof and supersedes and preempts any
prior or contemporaneous understandings, agreements, or representations by or
between the parties, written or oral.
d. Counterparts. This Agreement may be executed on separate
counterparts, any one of which need not contain signatures of more than one
party, but all of which taken together will constitute one and the same
agreement.
e. Successors and Assigns. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive and Cornerstone, and
their respective successors and assigns, except that Executive may not assign
any of his duties hereunder and he may not assign any of his rights hereunder
without the written consent of Cornerstone, which shall not be withheld
unreasonably.
f. Attorneys' Fees. If any legal proceeding is necessary to enforce
or interpret the terms of this Agreement, or to recover damages for breach
hereof, the prevailing party shall be entitled to reasonable attorneys' fees, in
an amount up to $50,000, as well as costs and disbursements, in addition to any
other relief to which he or it may be entitled.
g. Amendments. No amendments or other modifications to this
Agreement may be made except by a writing signed by both parties. Nothing in
this Agreement, express or implied, is intended to confer upon any third person
any rights or remedies under or by reason of this Agreement. No amendment or
waiver of this Agreement requires the consent of any individual, partnership,
corporation or other entity not a party to this Agreement.
h. Choice of Law. All questions concerning the construction,
validity and interpretation of this Agreement will be governed by the internal
law, and not the law of conflicts, of the State of Delaware.
9. Effective Date. This Agreement shall be effective at the commencement
of the duration hereof referred to in Section 1.d. hereof.
Cornerstone Propane GP, Inc.
-----------------------------
[name]
"Executive"
21
<PAGE>
By
----------------------------------------
President and Chief Executive Officer Date: , 1998
------------
Date: , 1998
------------
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 8,292
<SECURITIES> 0
<RECEIVABLES> 28,181
<ALLOWANCES> 2,680
<INVENTORY> 11,552
<CURRENT-ASSETS> 54,896
<PP&E> 296,031
<DEPRECIATION> 17,552
<TOTAL-ASSETS> 580,911
<CURRENT-LIABILITIES> 52,240
<BONDS> 220,000
0
0
<COMMON> 0
<OTHER-SE> 264,037
<TOTAL-LIABILITY-AND-EQUITY> 580,911
<SALES> 169,991
<TOTAL-REVENUES> 169,991
<CGS> 143,292
<TOTAL-COSTS> 143,292
<OTHER-EXPENSES> 30,803
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,133
<INCOME-PRETAX> (9,237)
<INCOME-TAX> 29
<INCOME-CONTINUING> (9,266)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,266)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> 0
</TABLE>
<PAGE>
Exhibit 99.1
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue is the result of computer programs using only the last
two digits to indicate the year. If uncorrected, such computer programs will
not be able to interpret dates correctly beyond the year 1999 and, in some cases
prior to that time (as some computer experts believe), which could cause
computer system failures or other computer errors disrupting business
operations. Recognizing the potentially severe consequences of the failure to
be Year 2000 compliant, the Partnership's management has developed and
implemented a company-wide program to identify and remedy the Year 2000 issues.
A project team, consisting of the Partnership's Director of Information Systems
and the Partnership's key IS managers who supervise operations at each of the
Partnership's three main regional facilities in California, Missouri and Texas,
together with the Chief Information Officer of Northwestern Corporation, the
Partnership's parent corporation, was created to manage the company's Year 2000
problems, enabling a smooth transition into the Year 2000. The project team
reports directly to executive management who have assigned a high priority to
such efforts within the Partnership.
The scope of the Partnership's Year 2000 readiness program includes the
review and evaluation of (i) the Partnership's information technology (IT) such
as hardware and software utilized in the operation of the Partnership's
business; (ii) the Partnership's non-IT systems or embedded technology such as
micro-controllers contained in various equipment and facilities; and (iii) the
readiness of third parties, including customers, suppliers and other key vendors
to the company, and the electronic data interchange (EDI) with those key third
parties. If needed modifications and conversions are not made on a timely
basis, the Year 2000 issue could have a material adverse effect on the
Partnership's operations.
The Partnership is currently using internal and external resources to
identify, correct and test large quantities of lines of application software
code for systems that were developed internally. Remediation of these systems
is expected to be completed by June 1999 except for the Partnership's Retail
Information System, consisting principally of its billing and accounts
receivable systems, which is already Year 2000 compliant. Since January 1997,
the Partnership has been converting its old billing system installed at each
customer service center to the new Retail Information System. Currently,
approximately one-half of the Partnership's customer service centers are running
the new system, with the roll-out to the balance of the centers schedule to be
completed by October 1999.
Software developed externally is being evaluated for Year 2000 compliance
and will be upgraded or replaced. In the case of the Partnership's existing
NT-platform-based financial systems and oil and gas applications, it is
anticipated that solutions will be acquired from third party vendors. In
addition, these systems are being evaluated for meeting current and future
business needs (which is an on-going process), and the Partnership is using this
process as an opportunity to upgrade and enhance its information systems. The
Partnership anticipates completing such upgrades and replacements as needed by
March 1999.
In addition to internal Year 2000 remediation activities, the Partnership
is in contact with key suppliers, vendors and customers to assure no
interruption from activities with important third
25
<PAGE>
parties. While none of the Partnership's products are directly date
sensitive, the supply and transportation of propane gas products are
dependent upon companies whose own systems may need to be Year 2000
compliant. If third parties do not convert their systems in a timely manner
and in a way compatible with the Partnership's systems, the arrival of the
Year 2000 could have an adverse effect on the company operations. The
Partnership believes that its actions with key suppliers, vendors and
customers will minimize these risks. Furthermore, no single customer
accounts for more than 10% of the Partnership's consolidated gross profits,
thus mitigating the adverse risk to the Partnership's business if some but
not all customers are not Year 2000 compliant. Also, only a minimal number
of transactions are conducted through EDI, which reduces the risk.
The Partnership's primary focus has been directed at resolving the Year
2000 problem. While the Partnership expects its internal IT and non-IT
systems to be Year 2000 compliant by the dates specified, the Partnership
will be developing a contingency plan specifying what the Partnership will do
if it or important third parties are not Year 2000 compliant by the required
dates. The Partnership anticipates that a majority of such contingency plan
will be based on manual back-up systems, procedures and practices. The
contingency plan is estimated to be completed by December 1998.
Through June 1998, the Partnership estimates that incremental costs of
approximately $0.2 million have been incurred and expensed related to Year
2000 issues. Since many systems are being modified to provide significant
enhanced capabilities, the Year 2000 expenses have not been nor are planned
to be specifically tracked. The current estimated cost to complete
remediation is expected to be less than $1.0 million. The Partnership
expects that a portion of these costs will be capitalized, as they are
principally related to adding new software applications and functionality.
Other costs will continue to be expensed as incurred.
The Partnership's current estimates of the amount of time and costs
necessary to remediate and test its computer systems are based on the facts
and circumstances existing at this time. The estimates were made using
assumptions of future events including the continued availability of existing
resources, Year 2000 modification plans, implementation success by
third-parties, and other factors. New developments may occur that could
affect the Partnership's estimates of the amount of time and costs necessary
to modify and test its IT and non-IT systems for Year 2000 compliance. These
developments include, but are not limited to: (i) the availability and cost
of personnel trained in this area, (ii) the ability to locate and correct all
relevant computer codes and equipment and (iii) the planning and Year 2000
compliance success that key suppliers, vendors and customers attain.
(From the Partnerships' Annual Report on Form 10-K for the year ended
June 30, 1998, as filed with the SEC on September 28, 1998 and amended on
October 8, 1998.)
26
